Report of Independent Registered Public Accounting Firm
To the Board of Directors and Stockholders of Chesapeake Energy Corporation
Opinion on the Financial Statements
We have audited the accompanying consolidated statements of operations, of comprehensive income (loss), of stockholders’ equity and of cash flows of Chesapeake Energy Corporation and its subsidiaries (Predecessor) (the “Company”) for the period from January 1, 2021 through February 9, 2021 and for the year ended December 31, 2020, including the related notes (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the results of operations and cash flows of the Company for the period from January 1, 2021 through February 9, 2021 and for the year ended December 31, 2020 in conformity with accounting principles generally accepted in the United States of America.
Basis of Accounting
As discussed in Note 2 to the consolidated financial statements, Chesapeake Energy Corporation and certain of its subsidiaries (collectively the “Debtors”) filed voluntary petitions on June 28, 2020 with the United States Bankruptcy Court for the Southern District of Texas for relief under the provisions of Chapter 11 of the Bankruptcy Code. The Bankruptcy Court confirmed the Debtors’ joint plan of reorganization on January 16, 2021 and the Debtors emerged from bankruptcy on February 9, 2021. In connection with its emergence from bankruptcy, the Company adopted fresh start accounting as of February 9, 2021.
Basis for Opinion
These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s consolidated financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits of these consolidated financial statements in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud.
Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion.
/s/ PricewaterhouseCoopers LLP
Oklahoma City, Oklahoma
February 24, 2022
We have served as the Company’s auditor since 1992.
CHESAPEAKE ENERGY CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
| | | | | | | | | | | | | | |
| | Successor |
| ($ in millions, except per share data) | | December 31, 2022 | | December 31, 2021 |
| Assets | | | | |
| Current assets: | | | | |
| Cash and cash equivalents | | $ | 130 | | | $ | 905 | |
| Restricted cash | | 62 | | | 9 | |
| Accounts receivable, net | | 1,438 | | | 1,115 | |
| Short-term derivative assets | | 34 | | | 5 | |
| Assets held for sale | | 819 | | | — | |
| Other current assets | | 215 | | | 69 | |
| Total current assets | | 2,698 | | | 2,103 | |
| Property and equipment: | | | | |
| Natural gas and oil properties, successful efforts method | | | | |
| Proved natural gas and oil properties | | 11,096 | | | 7,682 | |
| Unproved properties | | 2,022 | | | 1,530 | |
| Other property and equipment | | 500 | | | 495 | |
| Total property and equipment | | 13,618 | | | 9,707 | |
| Less: accumulated depreciation, depletion and amortization | | (2,431) | | | (908) | |
| Property and equipment held for sale, net | | — | | | 3 | |
| Total property and equipment, net | | 11,187 | | | 8,802 | |
| Long-term derivative assets | | 47 | | | — | |
| Deferred income tax assets | | 1,351 | | | — | |
| Other long-term assets | | 185 | | | 104 | |
| Total assets | | $ | 15,468 | | | $ | 11,009 | |
| | | | |
| Liabilities and stockholders' equity | | | | |
| Current liabilities: | | | | |
| Accounts payable | | $ | 603 | | | $ | 308 | |
| Accrued interest | | 42 | | | 38 | |
| Short-term derivative liabilities | | 432 | | | 899 | |
| Other current liabilities | | 1,627 | | | 1,202 | |
| Total current liabilities | | 2,704 | | | 2,447 | |
| Long-term debt, net | | 3,093 | | | 2,278 | |
| Long-term derivative liabilities | | 174 | | | 249 | |
| Asset retirement obligations, net of current portion | | 323 | | | 349 | |
| Other long-term liabilities | | 50 | | | 15 | |
| Total liabilities | | 6,344 | | | 5,338 | |
Contingencies and commitments (Note 7) | | | | |
| Stockholders' equity: | | | | |
Successor common stock, $0.01 par value, 450,000,000 shares authorized: 134,715,094 and 117,917,349 shares issued | | 1 | | | 1 | |
| Successor additional paid-in capital | | 5,724 | | | 4,845 | |
| Retained earnings | | 3,399 | | | 825 | |
| Total stockholders' equity | | 9,124 | | | 5,671 | |
| Total liabilities and stockholders' equity | | $ | 15,468 | | | $ | 11,009 | |
The accompanying notes are an integral part of these consolidated financial statements.
71
CHESAPEAKE ENERGY CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Successor | | | Predecessor |
| ($ in millions except per share data) | | Year Ended
December 31, 2022 | | Period from February 10, 2021 through
December 31, 2021 | | | Period from January 1, 2021 through February 9, 2021 | | Year Ended
December 31, 2020 |
| Revenues and other: | | | | | | | | | |
| Natural gas, oil and NGL | | $ | 9,892 | | | $ | 4,401 | | | | $ | 398 | | | $ | 2,745 | |
| Marketing | | 4,231 | | | 2,263 | | | | 239 | | | 1,869 | |
| Natural gas and oil derivatives | | (2,680) | | | (1,127) | | | | (382) | | | 596 | |
| Gains on sales of assets | | 300 | | | 12 | | | | 5 | | | 30 | |
| Total revenues and other | | 11,743 | | | 5,549 | | | | 260 | | | 5,240 | |
| Operating expenses: | | | | | | | | | |
| Production | | 475 | | | 297 | | | | 32 | | | 373 | |
| Gathering, processing and transportation | | 1,059 | | | 780 | | | | 102 | | | 1,082 | |
| Severance and ad valorem taxes | | 242 | | | 158 | | | | 18 | | | 149 | |
| Exploration | | 23 | | | 7 | | | | 2 | | | 427 | |
| Marketing | | 4,215 | | | 2,257 | | | | 237 | | | 1,889 | |
| General and administrative | | 142 | | | 97 | | | | 21 | | | 267 | |
| Separation and other termination costs | | 5 | | | 11 | | | | 22 | | | 44 | |
| Depreciation, depletion and amortization | | 1,753 | | | 919 | | | | 72 | | | 1,097 | |
| Impairments | | — | | | 1 | | | | — | | | 8,535 | |
| Other operating expense (income), net | | 49 | | | 84 | | | | (12) | | | 80 | |
| Total operating expenses | | 7,963 | | | 4,611 | | | | 494 | | | 13,943 | |
| Income (loss) from operations | | 3,780 | | | 938 | | | | (234) | | | (8,703) | |
| Other income (expense): | | | | | | | | | |
| Interest expense | | (160) | | | (73) | | | | (11) | | | (331) | |
| Gains (losses) on purchases, exchanges or extinguishments of debt | | (5) | | | — | | | | — | | | 65 | |
| Other income (expense) | | 36 | | | 31 | | | | 2 | | | (4) | |
| Reorganization items, net | | — | | | — | | | | 5,569 | | | (796) | |
| Total other income (expense) | | (129) | | | (42) | | | | 5,560 | | | (1,066) | |
| Income (loss) before income taxes | | 3,651 | | | 896 | | | | 5,326 | | | (9,769) | |
| Income tax benefit | | (1,285) | | | (49) | | | | (57) | | | (19) | |
| Net income (loss) | | 4,936 | | 945 | | | 5,383 | | (9,750) |
| Net loss attributable to noncontrolling interests | | — | | | — | | | | — | | | 16 | |
| Net income (loss) available to Chesapeake | | 4,936 | | 945 | | | 5,383 | | (9,734) |
| Deemed dividend on warrants | | (67) | | | — | | | | — | | | — | |
| Preferred stock dividends | | — | | | — | | | | — | | | (22) | |
| Net income (loss) available to common stockholders | | $ | 4,869 | | | $ | 945 | | | | $ | 5,383 | | | $ | (9,756) | |
| Earnings (loss) per common share: | | | | | | | | | |
| Basic | | $ | 38.71 | | | $ | 9.29 | | | | $ | 550.35 | | | $ | (998.26) | |
| Diluted | | $ | 33.36 | | | $ | 8.12 | | | | $ | 534.51 | | | $ | (998.26) | |
| Weighted average common shares outstanding (in thousands): | | | | | | | | | |
| Basic | | 125,785 | | 101,754 | | | 9,781 | | 9,773 |
| Diluted | | 145,961 | | 116,341 | | | 10,071 | | 9,773 |
The accompanying notes are an integral part of these consolidated financial statements.
72
CHESAPEAKE ENERGY CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Successor | | | Predecessor |
| ($ in millions) | | Year Ended
December 31, 2022 | | Period from February 10, 2021 through
December 31, 2021 | | | Period from January 1, 2021 through February 9, 2021 | | Year Ended
December 31, 2020 |
| Net income (loss) | | $ | 4,936 | | | $ | 945 | | | | $ | 5,383 | | | $ | (9,750) | |
Other comprehensive income, net of
income tax: | | | | | | | | | |
Reclassification of losses on settled derivative instruments(a) | | — | | | — | | | | 3 | | | 33 | |
| Other comprehensive income | | — | | | — | | | | 3 | | | 33 | |
| Comprehensive income (loss) | | 4,936 | | | 945 | | | | 5,386 | | | (9,717) | |
| Comprehensive loss attributable to noncontrolling interests | | — | | | — | | | | — | | | 16 | |
| Comprehensive income (loss) attributable to Chesapeake | | $ | 4,936 | | | $ | 945 | | | | $ | 5,386 | | | $ | (9,701) | |
___________________________________________
(a)Deferred tax activity incurred in other comprehensive income was offset by a valuation allowance.
The accompanying notes are an integral part of these consolidated financial statements.
73
CHESAPEAKE ENERGY CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Successor | | | Predecessor |
| ($ in millions) | | Year Ended
December 31, 2022 | | Period from February 10, 2021 through
December 31, 2021 | | | Period from January 1, 2021 through
February 9, 2021 | | Year Ended
December 31, 2020 |
| Cash flows from operating activities: | | | | | | | | | |
| Net income (loss) | | $ | 4,936 | | | $ | 945 | | | | $ | 5,383 | | | $ | (9,750) | |
| Adjustments to reconcile net income (loss) to net cash provided by operating activities: | | | | | | | | | |
| Depreciation, depletion and amortization | | 1,753 | | | 919 | | | | 72 | | | 1,097 | |
| Deferred income tax benefit | | (1,332) | | | (49) | | | | (57) | | | (10) | |
| Derivative (gains) losses, net | | 2,680 | | | 1,127 | | | | 382 | | | (596) | |
| Cash receipts (payments) on derivative settlements, net | | (3,561) | | | (1,142) | | | | (17) | | | 884 | |
| Share-based compensation | | 22 | | | 9 | | | | 3 | | | 21 | |
| Gains on sales of assets | | (300) | | | (12) | | | | (5) | | | (30) | |
| Impairments | | — | | | 1 | | | | — | | | 8,535 | |
| Non-cash reorganization items, net | | — | | | — | | | | (6,680) | | | (213) | |
| Exploration | | 14 | | | 2 | | | | 2 | | | 417 | |
| (Gains) losses on purchases, exchanges or extinguishments of debt | | 5 | | | — | | | | — | | | (65) | |
| Other | | 31 | | | 46 | | | | 45 | | | (41) | |
| Changes in assets and liabilities | | (123) | | | (37) | | | | 851 | | | 915 | |
| Net cash provided by (used in) operating activities | | 4,125 | | 1,809 | | | (21) | | 1,164 |
| Cash flows from investing activities: | | | | | | | | | |
| Capital expenditures | | (1,823) | | | (669) | | | | (66) | | | (1,142) | |
| Business combination, net | | (1,967) | | | (194) | | | | — | | | — | |
| Contributions to investments | | (18) | | | — | | | | — | | | — | |
| Proceeds from divestitures of property and equipment | | 407 | | | 13 | | | | — | | | 150 | |
| Net cash used in investing activities | | (3,401) | | (850) | | | (66) | | (992) |
| Cash flows from financing activities: | | | | | | | | | |
| Proceeds from New Credit Facility | | 1,600 | | | — | | | | — | | | — | |
| Payments on New Credit Facility | | (550) | | | — | | | | — | | | — | |
| Proceeds from Exit Credit Facility | | 9,583 | | | 30 | | | | — | | | — | |
| Payments on Exit Credit Facility | | (9,804) | | | (80) | | | | (479) | | | — | |
| Proceeds from pre-petition revolving credit facility borrowings | | — | | | — | | | | — | | | 3,656 | |
| Payments on pre-petition revolving credit facility borrowings | | — | | | — | | | | — | | | (3,317) | |
| Proceeds from DIP Facility borrowings | | — | | | — | | | | — | | | 60 | |
| Payments on DIP Facility borrowings | | — | | | — | | | | (1,179) | | | (60) | |
| Proceeds from issuance of senior notes, net | | — | | | — | | | | 1,000 | | | — | |
| Proceeds from issuance of common stock | | — | | | — | | | | 600 | | | — | |
| Proceeds from warrant exercise | | 27 | | | 2 | | | | — | | | — | |
| Debt issuance and other financing costs | | (17) | | | (3) | | | | (8) | | | (109) | |
| Cash paid to repurchase and retire common stock | | (1,073) | | | — | | | | — | | | — | |
| Cash paid to purchase debt | | — | | | — | | | | — | | | (94) | |
| Cash paid for common stock dividends | | (1,212) | | | (119) | | | | — | | | — | |
| Cash paid for preferred stock dividends | | — | | — | | | — | | (22) |
| Other | | — | | | (1) | | | | — | | | (13) | |
| Net cash provided by (used in) financing activities | | (1,446) | | | (171) | | | | (66) | | | 101 | |
| Net increase (decrease) in cash, cash equivalents and restricted cash | | (722) | | | 788 | | | | (153) | | | 273 | |
| Cash, cash equivalents and restricted cash, beginning of period | | 914 | | | 126 | | | | 279 | | | 6 | |
| Cash, cash equivalents and restricted cash, end of period | | $ | 192 | | | $ | 914 | | | | $ | 126 | | | $ | 279 | |
| | | | | | | | | |
The accompanying notes are an integral part of these consolidated financial statements.
74
CHESAPEAKE ENERGY CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS – (Continued)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Successor | | | Predecessor |
| ($ in millions) | | Year Ended
December 31, 2022 | | Period from February 10, 2021 through
December 31, 2021 | | | Period from January 1, 2021 through
February 9, 2021 | | Year Ended
December 31, 2020 |
| | | | | | | | | |
| Cash and cash equivalents | | $ | 130 | | | $ | 905 | | | | $ | 40 | | | $ | 279 | |
| Restricted cash | | 62 | | | 9 | | | | 86 | | | — | |
| Total cash, cash equivalents and restricted cash | | $ | 192 | | | $ | 914 | | | | $ | 126 | | | $ | 279 | |
| | | | | | | | | |
Supplemental disclosures to the consolidated statements of cash flows are presented below: | | | | |
| | | | | | | | | |
| | Successor | | | Predecessor |
| ($ in millions) | | Year Ended
December 31, 2022 | | Period from February 10, 2021 through
December 31, 2021 | | | Period from January 1, 2021 through
February 9, 2021 | | Year Ended
December 31, 2020 |
| Supplemental cash flow information: | | | | | | | | | |
| Cash paid for reorganization items, net | | $ | — | | | $ | 65 | | | | $ | 66 | | | $ | 140 | |
| Interest paid, net of capitalized interest | | $ | 146 | | | $ | 34 | | | | $ | 13 | | | $ | 224 | |
| Income taxes paid, net of refunds received | | $ | 193 | | | $ | (9) | | | | $ | — | | | $ | — | |
| | | | | | | | | |
Supplemental disclosure of significant
non-cash investing and financing activities: | | | | | | | | | |
| Change in accrued drilling and completion costs | | $ | 148 | | | $ | 30 | | | | $ | (5) | | | $ | (216) | |
| Put option premium on equity backstop agreement | | $ | — | | | $ | — | | | | $ | 60 | | | $ | 60 | |
| Common stock issued for business combination | | $ | 764 | | | $ | 1,232 | | | | $ | — | | | $ | — | |
| Operating lease obligations recognized | | $ | 120 | | | $ | — | | | | $ | — | | | $ | 32 | |
The accompanying notes are an integral part of these consolidated financial statements.
75
CHESAPEAKE ENERGY CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Attributable to Chesapeake | | | | |
| Preferred Stock | | Common Stock | | Additional Paid-in Capital | | Retained Earnings (Accumulated Deficit) | | Accumulated Other Comprehensive Income | | Treasury Stock | | Non-controlling Interest | | Total Stockholders’ Equity (Deficit) |
| ($ in millions) | Shares | | Amount | Shares | | Amount |
| Balance as of February 10, 2021 (Successor) | — | | | $ | — | | | 97,907,081 | | | $ | 1 | | | $ | 3,585 | | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | 3,586 | |
| Share-based compensation | — | | | — | | | 248,487 | | | — | | | 21 | | | — | | | — | | | — | | | — | | | 21 | |
| Issuance of common stock for Vine Acquisition | — | | | — | | | 18,709,399 | | | — | | | 1,237 | | | — | | | — | | | — | | | — | | | 1,237 | |
| Issuance of common stock for warrant exercise | — | | | — | | | 188,292 | | | — | | | 2 | | | — | | | — | | | — | | | — | | | 2 | |
| Issuance of reserved common stock and warrants | — | | | — | | | 864,090 | | | — | | | — | | | — | | | — | | | — | | | — | | | — | |
| Net income | — | | | — | | | — | | | — | | | — | | | 945 | | | — | | | — | | | — | | | 945 | |
| Dividends on common stock | — | | | — | | | — | | | — | | | — | | | (120) | | | — | | | — | | | — | | | (120) | |
| Balance as of December 31, 2021 (Successor) | — | | | $ | — | | | 117,917,349 | | | $ | 1 | | | $ | 4,845 | | | $ | 825 | | | $ | — | | | $ | — | | | $ | — | | | $ | 5,671 | |
| Issuance of common stock for Marcellus Acquisition | — | | | — | | | 9,442,185 | | | — | | | 764 | | | — | | | — | | | — | | | — | | | 764 | |
| Share-based compensation | — | | | — | | | 174,740 | | | — | | | 21 | | | — | | | — | | | — | | | — | | | 21 | |
| Issuance of common stock for warrant exchange offer | — | | | — | | | 16,305,984 | | | — | | | 67 | | | — | | | — | | | — | | | — | | | 67 | |
| Issuance of common stock for warrant exercise | — | | | — | | | 2,102,244 | | | — | | | 27 | | | — | | | — | | | — | | | — | | | 27 | |
| Issuance of reserved common stock and warrants | — | | | — | | | 439,370 | | | — | | | — | | | — | | | — | | | — | | | — | | | — | |
| Repurchase and retirement of common stock | — | | | — | | | (11,666,778) | | | — | | | — | | | (1,073) | | | — | | | — | | | — | | | (1,073) | |
| Net income | — | | | — | | | — | | | — | | | — | | | 4,936 | | | — | | | — | | | — | | | 4,936 | |
| Dividends on common stock | — | | | — | | | — | | | — | | | — | | | (1,222) | | | — | | | — | | | — | | | (1,222) | |
| Deemed dividend on warrants | — | | | — | | | — | | | — | | | — | | | (67) | | | — | | | — | | | — | | | (67) | |
| Balance as of December 31, 2022 (Successor) | — | | | $ | — | | | 134,715,094 | | | $ | 1 | | | $ | 5,724 | | | $ | 3,399 | | | $ | — | | | $ | — | | | $ | — | | | $ | 9,124 | |
The accompanying notes are an integral part of these consolidated financial statements.
76
CHESAPEAKE ENERGY CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY - (Continued)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | |
| | Attributable to Chesapeake | | | | |
| | Preferred Stock | | Common Stock | | Additional Paid-in Capital | | Retained Earnings (Accumulated Deficit) | | Accumulated Other Comprehensive Income | | Treasury Stock | | Non-controlling Interest | | Total Stockholders’ Equity (Deficit) |
| ($ in millions) | | Shares | | Amount | Shares | | Amount |
| Balance as of December 31, 2019 (Predecessor) | | 5,563,458 | | | $ | 1,631 | | | 9,772,793 | | | $ | — | | | $ | 16,973 | | | $ | (14,220) | | | $ | 12 | | | $ | (32) | | | $ | 37 | | | $ | 4,401 | |
| Share-based compensation | | — | | | — | | | 7,753 | | | — | | | (14) | | | — | | | — | | | — | | | — | | | (14) | |
| Dividends on preferred stock | | — | | | — | | | — | | | — | | | (22) | | | — | | | — | | | — | | | — | | | (22) | |
| Hedging activity | | — | | | — | | | — | | | — | | | — | | | — | | | 33 | | | — | | | — | | | 33 | |
| Net loss available to Chesapeake | | — | | | — | | | — | | | — | | | — | | | (9,734) | | | — | | | — | | | — | | | (9,734) | |
| Exchange of preferred stock into common stock | | (100) | | | — | | | 1 | | | — | | | — | | | — | | | — | | | — | | | — | | | — | |
| Purchase of shares for company benefit plans | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | (2) | | | — | | | (2) | |
| Release of shares for company benefit plans | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | 34 | | | — | | | 34 | |
| Net loss attributable to noncontrolling interests | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | (16) | | | (16) | |
| Divestiture of underlying assets | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | (21) | | | (21) | |
| Balance as of December 31, 2020 (Predecessor) | | 5,563,358 | | | $ | 1,631 | | | 9,780,547 | | | $ | — | | | $ | 16,937 | | | $ | (23,954) | | | $ | 45 | | | $ | — | | | $ | — | | | $ | (5,341) | |
| Share-based compensation | | — | | | — | | | 67 | | | — | | | 3 | | | — | | | — | | | — | | | — | | | 3 | |
| Hedging activity | | — | | | — | | | — | | | — | | | — | | | — | | | 3 | | | — | | | — | | | 3 | |
| Net income | | — | | | — | | | — | | | — | | | — | | | 5,383 | | | — | | | — | | | — | | | 5,383 | |
| Cancellation of Predecessor equity | | (5,563,358) | | | (1,631) | | | (9,780,614) | | | — | | | (16,940) | | | 18,571 | | | (48) | | | — | | | — | | | (48) | |
| Issuance of Successor common stock | | — | | | — | | | 97,907,081 | | | 1 | | | 3,330 | | | — | | | — | | | — | | | — | | | 3,331 | |
| Issuance of Successor Class A warrants | | — | | | — | | | — | | | — | | | 93 | | | — | | | — | | | — | | | — | | | 93 | |
| Issuance of Successor Class B warrants | | — | | | — | | | — | | | — | | | 94 | | | — | | | — | | | — | | | — | | | 94 | |
| Issuance of Successor Class C warrants | | — | | | — | | | — | | | — | | | 68 | | | — | | | — | | | — | | | — | | | 68 | |
| Balance as of February 9, 2021 (Predecessor) | | — | | | $ | — | | | 97,907,081 | | | $ | 1 | | | $ | 3,585 | | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | 3,586 | |
The accompanying notes are an integral part of these consolidated financial statements.
77
CHESAPEAKE ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
| | | | | |
| 1. | Basis of Presentation and Summary of Significant Accounting Policies |
Description of Company
Chesapeake Energy Corporation ("Chesapeake," “we,” “our,” “us” or the "Company") is a natural gas and oil exploration and production company engaged in the acquisition, exploration and development of properties for the production of natural gas, oil and NGL from underground reservoirs. Our operations are located onshore in the United States. As discussed in Note 2 below, we filed the Chapter 11 Cases on the Petition Date and subsequently operated as a debtor-in-possession, in accordance with applicable provisions of the Bankruptcy Code, until emergence on February 9, 2021. To facilitate our financial statement presentations, we refer to the post-emergence reorganized Company in these consolidated financial statements and footnotes as the “Successor” for periods subsequent to February 9, 2021, and to the pre-emergence Company as “Predecessor” for periods on or prior to February 9, 2021. Basis of Presentation
The accompanying consolidated financial statements of Chesapeake were prepared in accordance with GAAP and include the accounts of our direct and indirect wholly owned subsidiaries and entities in which Chesapeake has a controlling financial interest. Intercompany accounts and balances have been eliminated. All monetary values, other than per unit and per share amounts, are stated in millions of U.S. dollars unless otherwise specified.
This Annual Report on Form 10-K (this “Form 10-K”) relates to the financial position of the Successor as of December 31, 2022 and as of December 31, 2021, and the year ended December 31, 2022 (“2022 Successor Period”), the periods of February 10, 2021 through December 31, 2021 (“2021 Successor Period”), January 1, 2021 through February 9, 2021 (“2021 Predecessor Period”), and the year ended December 31, 2020 (“2020 Predecessor Period”).
Accounting During Bankruptcy
We have applied Accounting Standards Codification (ASC) 852, Reorganizations, in preparing the consolidated financial statements. ASC 852 requires that the financial statements, for periods subsequent to the filing of a petition of Chapter 11 Cases, distinguish transactions and events that are directly associated with the reorganization from the ongoing operations of the business. Accordingly, certain revenues, expenses, realized gains and losses and provisions for losses that were realized or incurred during the bankruptcy proceedings, including losses related to executory contracts that were approved for rejection by the Bankruptcy Court, and unamortized debt issuance costs, premiums and discounts associated with debt classified as liabilities subject to compromise, are recorded as reorganization items, net on our accompanying consolidated statements of operations. See Note 2 for more information regarding reorganization items. Accounting Estimates
The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the related disclosures in the financial statements. Management evaluates its estimates and related assumptions regularly, including those related to the impairment of natural gas and oil properties, natural gas and oil reserves, derivatives, income taxes, impairment of other property and equipment, environmental remediation costs, asset retirement obligations, litigation and regulatory proceedings and fair values. Changes in facts and circumstances or additional information may result in revised estimates, and actual results may differ significantly from these estimates.
CHESAPEAKE ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
Consolidation
We consolidate entities in which we have a controlling financial interest. We consolidate subsidiaries in which we hold, directly or indirectly, more than 50% of the voting rights and variable interest entities (“VIEs”) in which we are the primary beneficiary. We consolidate a VIE when we are the primary beneficiary, which is the party that has both (i) the power to direct the activities that most significantly impact the VIE’s economic performance and (ii) through its interests in the VIE, the obligation to absorb losses or the right to receive benefits from the VIE that could potentially be significant to the VIE. In order to determine whether we own a variable interest in a VIE, we perform a qualitative analysis of the entity’s design, organizational structure, primary decision makers and relevant agreements. See Note 12 for further discussion of our previous VIE. We use the equity method of accounting to record our net interests where we have the ability to exercise significant influence through our investment but lack a controlling financial interest. Under the equity method, our share of net income (loss) is included in our consolidated statements of operations according to our equity ownership or according to the terms of the applicable governing instrument. See Note 18 for further discussion of our investments. Undivided interests in natural gas and oil properties are consolidated on a proportionate basis. Segments
Operating segments are defined as components of an enterprise that engage in activities from which it may earn revenues and incur expenses for which separate operational financial information is available and is regularly evaluated by the chief operating decision maker for the purpose of allocating an enterprise’s resources and assessing its operating performance. We have concluded that we have only one reportable operating segment, due to the similar nature of the exploration and production business across Chesapeake and its consolidated subsidiaries and the fact that our marketing activities are ancillary to our operations.
Noncontrolling Interests
Noncontrolling interests represent third-party equity ownership in certain of our consolidated subsidiaries and are presented as a component of equity. See Note 12 for further discussion of noncontrolling interests. Cash and Cash Equivalents
For purposes of the consolidated financial statements, we consider investments in all highly liquid instruments with original maturities of three months or less at the date of purchase to be cash equivalents.
Restricted Cash
As of December 31, 2022, we had restricted cash of $62 million. Our restricted cash represents funds legally restricted for payment of certain convenience class unsecured claims following our emergence from bankruptcy, as well as for future payment of certain royalties.
Accounts Receivable
Our accounts receivable are primarily from purchasers of natural gas, oil and NGL and from exploration and production companies that own interests in properties we operate. This industry concentration could affect our overall exposure to credit risk, either positively or negatively, because our purchasers and joint working interest owners may be similarly affected by changes in economic, industry or other conditions. We monitor the creditworthiness of all our counterparties and we generally require letters of credit or parent guarantees for receivables from parties deemed to have sub-standard credit, unless the credit risk can otherwise be mitigated. We utilize an allowance method in accounting for bad debt based on historical trends in addition to specifically identifying receivables that we believe may be uncollectible. See Note 10 for additional information regarding our accounts receivable. Natural Gas and Oil Properties
We follow the successful efforts method of accounting for our natural gas and oil properties. Under this method, exploration costs such as exploratory geological and geophysical costs, expiration of unproved leasehold, delay rentals and exploration overhead are expensed as incurred. All costs related to production, general corporate overhead and similar activities are also expensed as incurred. All property acquisition costs and development costs are capitalized when incurred.
CHESAPEAKE ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
Exploratory drilling costs are initially capitalized, or suspended, pending the determination of proved reserves. If proved reserves are found, drilling costs remain capitalized and are classified as proved properties. Costs of unsuccessful wells are charged to exploration expense. For exploratory wells that find reserves that cannot be classified as proved when drilling is completed, costs continue to be capitalized as suspended exploratory drilling costs if there have been sufficient reserves found to justify completion as a producing well and sufficient progress is being made in assessing the reserves and the economic and operational viability of the project. If we determine that future appraisal drilling or development activities are unlikely to occur, associated suspended exploratory well costs are expensed. In some instances, this determination may take longer than one year. We review the status of all suspended exploratory drilling costs quarterly. Costs to develop proved reserves, including the costs of all development wells and related equipment used in the production of natural gas and oil are capitalized.
Costs of drilling and equipping successful wells, costs to construct or acquire facilities, and associated asset retirement costs are depreciated using the unit-of-production (“UOP”) method based on total estimated proved developed gas and oil reserves. Costs of acquiring proved properties, including leasehold acquisition costs transferred from unproved properties, are depleted using the UOP method based on total estimated proved developed and undeveloped reserves.
Proceeds from the sales of individual natural gas and oil properties and the capitalized costs of individual properties sold or abandoned are credited and charged, respectively, to accumulated depreciation, depletion and amortization, if doing so does not materially impact the depletion rate of an amortization base. Generally, no gain or loss is recognized until an entire amortization base is sold. However, a gain or loss is recognized from the sale of less than an entire amortization base if the disposition is significant enough to materially impact the depletion rate of the remaining properties in the amortization base.
When circumstances indicate that the carrying value of proved natural gas and oil properties may not be recoverable, we compare unamortized capitalized costs to the expected undiscounted pre-tax future cash flows for the associated assets grouped at the lowest level for which identifiable cash flows are independent of cash flows of other assets. If the expected undiscounted pre-tax future cash flows, based on our estimate of future natural gas and crude oil prices, operating costs, anticipated production from proved reserves and other relevant data, are lower than the unamortized capitalized costs, the capitalized costs are reduced to fair value. Fair value is generally estimated using the income approach described in the ASC 820, Fair Value Measurements. If applicable, we utilize prices and other relevant information generated by market transactions involving assets and liabilities that are identical or comparable to the item being measured as the basis for determining fair value. The expected future cash flows used for impairment reviews and related fair value measurements are typically based on judgmental assessments of commodity prices, pricing adjustments for differentials, operating costs, capital investment plans, future production volumes, and estimated proved reserves, considering all available information at the date of review. These assumptions are applied to develop future cash flow projections that are then discounted to estimated fair value, using a market-based weighted average cost of capital. We have classified these fair value measurements as Level 3 in the fair value hierarchy.
Other Property and Equipment
Other property and equipment consists primarily of buildings and improvements, computers and office equipment, land and other assets that support our operations. Major renewals and betterments are capitalized while the costs of repairs and maintenance are charged to expense as incurred. Other property and equipment costs, excluding land, are depreciated on a straight-line basis and recorded within depreciation, depletion and amortization in the consolidated statement of operations.
Realization of the carrying value of other property and equipment is reviewed for possible impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. Assets are determined to be impaired if a forecast of undiscounted estimated future net operating cash flows directly related to the asset, including any disposal value, is less than the carrying amount of the asset. If any asset is determined to be impaired, the loss is measured as the amount by which the carrying amount of the asset exceeds its fair value. An estimate of fair value is based on the best information available, including prices for similar assets and discounted cash flow. See Note 17 for further discussion of other property and equipment.
CHESAPEAKE ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
Assets Held for Sale
We may market certain non-core natural gas and oil assets or other properties for sale. At the end of each reporting period, we evaluate if these assets should be classified as held for sale. The held for sale criteria includes the following: management commits to a plan to sell, the asset is available for immediate sale, an active program to locate a buyer exists, the sale of the asset is probable and expected to be completed within a year, the asset is actively being marketed for sale and that it is unlikely that significant changes to the plan will be made. If each of the criteria are met, then the assets and associated liabilities are classified as held for sale. As of December 31, 2022, the asset and liabilities held for sale are in connection with the portion of the Eagle Ford assets for which we have entered into an agreement to sell to WildFire Energy I LLC. See Note 23 for further discussion. Capitalized Interest
Interest from external borrowings is capitalized on significant investments in major development projects until the asset is ready for service using the weighted average borrowing rate of outstanding borrowings. Capitalized interest is determined by multiplying our weighted average borrowing cost on debt by the average amount of qualifying costs incurred. Capitalized interest is depreciated over the useful lives of the assets in the same manner as the depreciation of the underlying asset.
Accounts Payable
Included in accounts payable as of December 31, 2022 and as of December 31, 2021 are liabilities of approximately $150 million and $23 million, respectively, representing the amount by which checks issued, but not yet presented to our banks for collection, exceeded balances in applicable bank accounts.
Debt Issuance Costs
Costs associated with the arrangement of our credit facilities are included in other long-term assets and are amortized over the life of the facility using the straight-line method. As of December 31, 2022, these costs were $24 million. Upon the termination of the Exit Credit Facility, we recognized $5 million of losses on purchases, exchanges or extinguishment of debt relating to lenders who had previously participated in the Exit Credit Facility that chose not to participate in the New Credit Facility. Costs associated with the issuance of the Successor senior notes are included in long-term debt and the remaining unamortized issuance costs are amortized over the life of the senior notes using the straight-line method. Unamortized issuance costs associated with the Successor senior notes as of December 31, 2022 totaled $7 million.
Costs associated with the issuance and amendments of our pre-petition revolving credit facility were included in other long-term assets and the remaining unamortized issuance costs were being amortized over the life of the facility using the straight-line method. Costs associated with the issuance of our Predecessor senior notes were included in long-term debt and the remaining unamortized issuance costs were being amortized over the life of the Predecessor senior notes using the effective interest method. In 2020, our Chapter 11 Cases constituted an event of default under our pre-petition revolving credit facility and our senior notes, and non-cash adjustments were made to write off all related unamortized debt issuance costs which are included in reorganization items, net in the accompanying consolidated statements of operations for the year ended December 31, 2020. See Note 2 and Note 6 herein for further discussion of our Chapter 11 Cases and debt issuance costs, respectively.
CHESAPEAKE ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
Litigation Contingencies
We are subject to litigation and regulatory proceedings, claims and liabilities that arise in the ordinary course of business. We accrue losses associated with litigation and regulatory claims when such losses are probable and reasonably estimable. If we determine that a loss is probable and cannot estimate a specific amount for that loss but can estimate a range of loss, our best estimate within the range is accrued. Estimates are adjusted as additional information becomes available or circumstances change. We do not reduce these liabilities for potential insurance or third-party recoveries. If applicable, we accrue receivables for probable insurance or third-party recoveries. Legal defense costs associated with loss contingencies are expensed in the period incurred. See Note 7 for further discussion of litigation contingencies. Environmental Remediation Costs
We record environmental reserves for estimated remediation costs related to existing conditions from past operations when the responsibility to remediate is probable and the costs can be reasonably estimated. Expenditures that create future benefits or contribute to future revenue generation are capitalized. See Note 7 for discussion of environmental contingencies. Asset Retirement Obligations
We recognize liabilities for obligations associated with the retirement of tangible long-lived assets that result from the acquisition, construction and development of the assets. We recognize the fair value of a liability for a retirement obligation in the period in which the liability is incurred. For natural gas and oil properties, this is the period in which a natural gas or oil well is acquired or drilled. The liability is then accreted each period until the liability is settled or the well is sold, at which time the liability is removed. The related asset retirement cost is capitalized as part of the carrying amount of our natural gas and oil properties. See Note 22 for further discussion of asset retirement obligations. Revenue Recognition
Revenue from the sale of natural gas, oil and NGL is recognized upon the transfer of control of the products, which is typically when the products are delivered to customers. Revenue is recognized net of royalties due to third parties in an amount that reflects the consideration we expect to receive in exchange for those products.
Revenue from contracts with customers includes the sale of our natural gas, oil and NGL production (recorded as natural gas, oil and NGL revenues in the consolidated statements of operations) as well as the sale of certain of our joint interest holders’ production which we purchase under joint operating arrangements (recorded in marketing revenues in the consolidated statements of operations). In connection with the marketing of these products, we obtain control of the natural gas, oil and NGL we purchase from other interest owners at defined delivery points and deliver the product to third parties, at which time revenues are recorded. See Note 10 for a presentation of the disaggregation of revenue. Payment terms and conditions vary by contract type, although terms generally include a requirement of payment within 30 days. There are no significant judgments that significantly affect the amount or timing of revenue from contracts with customers.
We also generate revenue from other sources, including from a variety of derivative and hedging activities to reduce our exposure to fluctuations in future commodity prices and to protect our expected operating cash flow against significant market movements or volatility, as well as a variety of natural gas, oil and NGL purchase and sale contracts with third parties for various commercial purposes, including credit risk mitigation and satisfaction of our pipeline delivery commitments (recorded within marketing revenues in the consolidated statements of operations). In circumstances where we act as an agent rather than a principal, our results of operations related to natural gas, oil and NGL marketing activities are presented on a net basis.
CHESAPEAKE ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
Fair Value Measurements
Certain financial instruments are reported on a recurring basis at fair value on our consolidated balance sheets. We also use fair value measurements on a nonrecurring basis when a qualitative assessment of our assets indicates a potential impairment. Under fair value measurement accounting guidance, fair value is defined as the amount that would be received from the sale of an asset or paid for the transfer of a liability in an orderly transaction between market participants (i.e., an exit price). To estimate an exit price, a three-level hierarchy is used. The fair value hierarchy prioritizes the inputs, which refer broadly to assumptions market participants would use in pricing an asset or a liability, into three levels. Level 1 inputs are unadjusted quoted prices in active markets for identical assets and liabilities and have the highest priority. Level 2 inputs are inputs other than quoted prices within Level 1 that are observable for the asset or liability, either directly or indirectly. Level 3 inputs are unobservable inputs for the asset or liability and have the lowest priority.
The valuation techniques that may be used to measure fair value include a market approach, an income approach and a cost approach. A market approach uses prices and other relevant information generated by market transactions involving identical or comparable assets or liabilities. An income approach uses valuation techniques to convert future amounts to a single present amount based on current market expectations, including present value techniques, option-pricing models and the excess earnings method. The cost approach is based on the amount that currently would be required to replace the service capacity of an asset (replacement cost).
The carrying values of financial instruments comprising cash and cash equivalents, accounts payable and accounts receivable approximate fair values due to the short-term maturities of these instruments. See Notes 6 and 15 for further discussion of fair value measurements. Derivatives
Derivative instruments are recorded at fair value, and changes in fair value are recognized currently in earnings unless specific hedge accounting criteria are followed. As of December 31, 2022, none of our open derivative instruments were designated as cash flow hedges.
Derivative instruments reflected as current in the consolidated balance sheets represent the estimated fair value of derivatives scheduled to settle over the next 12 months based on market prices/rates as of the respective balance sheet dates. Cash settlements of our derivative instruments are generally classified as operating cash flows unless the derivatives are deemed to contain, for accounting purposes, a significant financing element at contract inception, in which case these cash settlements are classified as financing cash flows in the accompanying consolidated statement of cash flows. All of our derivative instruments are subject to master netting arrangements by contract type which provide for the offsetting of asset and liability positions within each contract type, as well as related cash collateral if applicable, by counterparty. Therefore, we net the value of our derivative instruments by contract type with the same counterparty in the accompanying consolidated balance sheets.
We have established the fair value of our derivative instruments using established index prices, volatility curves and discount factors. These estimates are compared to our counterparty values for reasonableness. The values we report in our financial statements are as of a point in time and subsequently change as these estimates are revised to reflect actual results, changes in market conditions and other factors. Derivative transactions are subject to the risk that counterparties will be unable to meet their obligations. This non-performance risk is considered in the valuation of our derivative instruments, but to date has not had a material impact on the values of our derivatives. See Note 15 for further discussion of our derivative instruments. Share-Based Compensation
Our share-based compensation program consists of restricted stock and performance share units granted to employees and restricted stock granted to non-employee directors under our Long Term Incentive Plan. We recognize the cost of services received in exchange for restricted stock based on the fair value of the equity instruments as of the grant date. This value is amortized over the vesting period, which is generally three years from the grant date. Forfeitures on our share-based compensation awards are recognized as they occur. Because performance share units are settled in shares, they are classified as equity and are measured at fair value as of the grant date.
CHESAPEAKE ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
To the extent compensation expense relates to employees directly involved in the acquisition of natural gas and oil leasehold and development activities, these amounts are capitalized to natural gas and oil properties. Amounts not capitalized to natural gas and oil properties are recognized as general and administrative expense, production expense, exploration expense, or marketing expense, based on the employees involved in those activities. See Note 13 for further discussion of share-based compensation. On June 28, 2020 (the “Petition Date”), the Debtors filed voluntary petitions for relief under the Bankruptcy Code in the Bankruptcy Court. On June 29, 2020, the Bankruptcy Court entered an order authorizing the joint administration of the Chapter 11 Cases under the caption In re Chesapeake Energy Corporation, Case No. 20-33233. The Non-Filing Entities were not part of the Chapter 11 Cases. The Debtors and the Non-Filing Entities continued to operate in the ordinary course of business during the Chapter 11 Cases.
The Bankruptcy Court confirmed the Plan in a bench ruling on January 13, 2021 and entered the Confirmation Order on January 16, 2021. The Debtors emerged from bankruptcy on February 9, 2021 (the “Effective Date”). The Company’s bankruptcy proceedings and related matters have been summarized below.
Debtor-In-Possession
During the pendency of the Chapter 11 Cases, we operated our business as debtors-in-possession in accordance with the applicable provisions of the Bankruptcy Code. The Bankruptcy Court granted the first day relief we requested that was designed primarily to mitigate the impact of the Chapter 11 Cases on our operations, vendors, suppliers, customers and employees. As a result, we were able to conduct normal business activities and pay all associated obligations for the period following the Petition Date and were also authorized to pay mineral interest owner royalties, employee wages and benefits, and certain vendors and suppliers in the ordinary course for goods and services provided prior to the Petition Date. During the pendency of the Chapter 11 Cases, all transactions outside the ordinary course of business required the prior approval of the Bankruptcy Court.
Automatic Stay
Subject to certain specific exceptions under the Bankruptcy Code, the filing of the Chapter 11 Cases automatically stayed all judicial or administrative actions against us and efforts by creditors to collect on or otherwise exercise rights or remedies with respect to pre-petition claims. Absent an order from the Bankruptcy Court, substantially all of the Debtors’ pre-petition liabilities were subject to compromise and discharge under the Bankruptcy Code. The automatic stay was lifted on the Effective Date.
Plan of Reorganization
In accordance with the Plan confirmed by the Bankruptcy Court, the following significant transactions occurred upon the Company’s emergence from bankruptcy on February 9, 2021:
•On the Effective Date, we issued 97,907,081 shares of New Common Stock, reserved 2,092,918 shares of New Common Stock for future issuance to eligible holders of Allowed Unsecured Notes Claims and Allowed General Unsecured Claims and reserved 37,174,210 shares of New Common Stock for issuance upon exercise of the Warrants, which were the result of the transactions described below. We also entered into a registration rights agreement, warrant agreements and amended our articles of incorporation and bylaws for the authorization of the New Common Stock and to provide registration rights thereunder, among other corporate governance actions. See Note 12 for further discussion of our post-emergence equity. •Each holder of an equity interest in the Predecessor, including the Predecessor’s common and preferred stock, had such interest canceled, released, and extinguished without any distribution.
•Each holder of obligations under the pre-petition revolving credit facility received, at such holder's prior determined allocation, its pro rata share of either Tranche A Loans or Tranche B Loans, on a dollar for dollar basis.
•Each holder of obligations under the FLLO Term Loan Facility received its pro rata share of 23,022,420 shares of New Common Stock.
CHESAPEAKE ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
•Each holder of an Allowed Second Lien Notes Claim received its pro rata share of 3,635,118 shares of New Common Stock, 11,111,111 Class A Warrants to purchase 11,111,111 shares of New Common Stock, 12,345,679 Class B Warrants to purchase 12,345,679 shares of New Common Stock, and 6,858,710 Class C Warrants to purchase 6,858,710 shares of New Common Stock.
•Each holder of an Allowed Unsecured Notes Claim received its pro rata share of 1,311,089 shares of New Common Stock and 2,473,757 Class C Warrants to purchase 2,473,757 shares of New Common Stock.
•Each holder of an Allowed General Unsecured Claim received its pro rata share of 231,112 shares of New Common Stock and 436,060 Class C Warrants to purchase 436,060 shares of New Common Stock; provided that to the extent such Allowed General Unsecured Claim is a Convenience Claim, such holder instead received its pro rata share of $10 million, which pro rata share shall not exceed five percent of such Convenience Claim.
•Participants in the rights offering extending to the applicable classes under the Plan received 62,927,320 shares of New Common Stock.
•In connection with the rights offering described above, the Backstop Parties under the Backstop Commitment Agreement received 6,337,031 shares of New Common Stock in respect to the Put Option Premium, and 442,991 shares of New Common Stock were issued in connection with the backstop obligation thereunder to purchase unsubscribed shares of the New Common Stock.
•2,092,918 shares of New Common Stock and 3,948,893 Class C Warrants were reserved for future issuance to eligible holders of Allowed Unsecured Notes Claims and Allowed General Unsecured Claims. The reserved New Common Stock and Class C Warrants will be issued on a pro rata basis upon the determination of the allowed portion of all disputed General Unsecured Claims and Unsecured Notes Claims.
•The 2021 Long Term Incentive Plan (the “LTIP”) was approved with a share reserve equal to 6,800,000 shares of New Common Stock.
•Each holder of an Allowed Other Secured Claim will receive, at the Company's option and in consultation with the Required Consenting Stakeholders (as defined in the Plan): (a) payment in full in cash; (b) the collateral securing its secured claim; (c) reinstatement of its secured claim; or (d) such other treatment that renders its secured claim unimpaired in accordance with Section 1124 of the Bankruptcy Code.
•Each holder of an Allowed Other Priority Claim (as defined in the Plan) will receive cash up to the allowed amount of its claim.
Additionally, pursuant to the Plan confirmed by the Bankruptcy Court, the Company’s post-emergence Board of Directors is comprised of seven directors, including the Company’s Chief Executive Officer, Domenic J. Dell’Osso Jr., the Company’s Chairman of the Board, Michael Wichterich, and five non-employee directors, Timothy S. Duncan, Benjamin C. Duster, IV, Sarah A. Emerson, Matthew M. Gallagher and Brian Steck.
CHESAPEAKE ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
Fresh Start Accounting
In connection with our emergence from bankruptcy and in accordance with ASC 852, we qualified for and applied fresh start accounting on the Effective Date. We were required to apply fresh start accounting because (i) the holders of existing voting shares of the Company prior to its emergence received less than 50% of the voting shares of the Company outstanding following its emergence from bankruptcy and (ii) the reorganization value of our assets immediately prior to confirmation of the Plan of approximately $6.8 billion was less than the post-petition liabilities and allowed claims of $13.2 billion.
In accordance with ASC 852, with the application of fresh start accounting, the Company allocated its reorganization value to its individual assets based on their estimated fair value in conformity with FASB ASC Topic 820 - Fair Value Measurements and FASB ASC Topic 805 - Business Combinations. Accordingly, the consolidated financial statements after February 9, 2021 are not comparable with the consolidated financial statements as of or prior to that date. The Effective Date fair values of the Successor’s assets and liabilities differ materially from their recorded values, as reflected on the historical balance sheet of the Predecessor.
Reorganization Value
Reorganization value is derived from an estimate of enterprise value, or fair value of the Company’s interest-bearing debt and stockholders’ equity. Under ASC 852, reorganization value generally approximates fair value of the entity before considering liabilities and is intended to approximate the amount a willing buyer would pay for the assets immediately after the effects of a restructuring. As set forth in the disclosure statement, amended for updated pricing, and approved by the Bankruptcy Court, the enterprise value of the Successor was estimated to be between $3.5 billion and $4.9 billion. With the assistance of third-party valuation advisors, we determined the enterprise value and corresponding implied equity value of the Successor using various valuation approaches and methods, including: (i) income approach using a calculation of present value of future cash flows based on our financial projections, (ii) the market approach using selling prices of similar assets and (iii) the cost approach. For GAAP purposes, the Company valued the Successor’s individual assets, liabilities and equity instruments and determined an estimate of the enterprise value within the estimated range. Management concluded that the best estimate of enterprise value was $4.85 billion. Specific valuation approaches and key assumptions used to arrive at reorganization value, and the value of discrete assets and liabilities resulting from the application of fresh start accounting, are described below in greater detail within the valuation process.
The enterprise value and corresponding implied equity value are dependent upon achieving the future financial results set forth in our valuation using an asset-based methodology of estimated proved reserves, undeveloped properties, and other financial information, considerations and projections, applying a combination of the income, cost and market approaches as of the fresh start reporting date of February 9, 2021. All estimates, assumptions, valuations and financial projections, including the fair value adjustments, the financial projections, the enterprise value and equity value projections, are inherently subject to significant uncertainties and the resolution of contingencies beyond our control. Accordingly, there is no assurance that the estimates, assumptions, valuations or financial projections will be realized, and actual results could vary materially.
The following table reconciles the enterprise value to the implied fair value of the Successor’s equity as of the Effective Date:
| | | | | | | | |
| | February 9, 2021 |
| Enterprise Value | | $ | 4,851 | |
Plus: Cash and cash equivalents(a) | | 48 | |
| Less: Fair value of debt | | (1,313) | |
| Successor equity value | | $ | 3,586 | |
____________________________________________
CHESAPEAKE ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
(a)Cash and cash equivalents includes $8 million that was initially classified as restricted cash as of the Effective Date but subsequently released from escrow and returned to the Successor. Restricted cash exclusive of the $8 million is not included in the table above.
The following table reconciles the enterprise value to the reorganization value as of the Effective Date:
| | | | | | | | |
| | February 9, 2021 |
| Enterprise value | | $ | 4,851 | |
Plus: Cash and cash equivalents(a) | | 48 | |
| Plus: Current liabilities | | 1,582 | |
| Plus: Asset retirement obligations (non-current portion) | | 236 | |
| Plus: Other non-current liabilities | | 97 | |
| Reorganization value of Successor assets | | $ | 6,814 | |
____________________________________________
(a)Cash and cash equivalents includes $8 million that was initially classified as restricted cash as of the Effective Date but subsequently released from escrow and returned to the Successor. Restricted cash exclusive of the $8 million is not included in the table above.
Valuation Process
The fair values of our natural gas and oil properties, other property and equipment, other long-term assets, long-term debt, asset retirement obligations and warrants were estimated as of the Effective Date.
Natural gas and oil properties. The Company’s principal assets are its natural gas and oil properties, which are accounted for under the successful efforts accounting method. The Company determined the fair value of its natural gas and oil properties based on the discounted future net cash flows expected to be generated from these assets. Discounted cash flow models by operating area were prepared using the estimated future revenues and operating costs for all proved developed properties and undeveloped properties comprising the proved and unproved reserves. Significant inputs associated with the calculation of discounted future net cash flows include estimates of (i) recoverable reserves, (ii) production rates, (iii) future operating and development costs, (iv) future commodity prices escalated by an inflationary rate after five years, adjusted for differentials, and (v) a market-based weighted average cost of capital by operating area. The Company utilized NYMEX strip pricing, adjusted for differentials, to value the reserves. The NYMEX strip pricing inputs used are classified as Level 1 fair value assumptions and all other inputs are classified as Level 3 fair value assumptions. The discount rates utilized were derived using a weighted average cost of capital computation, which included an estimated cost of debt and equity for market participants with similar geographies and asset development type by operating area.
Other property and equipment. The fair value of other property and equipment such as buildings, land, computer equipment, and other equipment was determined using the replacement cost method under the cost approach which considers historical acquisition costs for the assets adjusted for inflation, as well as factors in any potential obsolescence based on the current condition of the assets and the ability of those assets to generate cash flow.
Long-term debt. A market approach, based upon quotes from major financial institutions, was used to measure the fair value of the $500 million aggregate principal amount of 5.50% Senior Notes due 2026 (the “2026 Notes”) and $500 million aggregate principal amount of 5.875% Senior Notes due 2029 (the “2029 Notes” and, together with the 2026 Notes, the “Notes”). The carrying value of borrowings under our Exit Credit Facility approximated fair value as the terms and interest rates were based on prevailing market rates.
Asset retirement obligations. The fair value of the Company’s asset retirement obligations was revalued based upon estimated reclamation costs for our assets with reclamation obligations, an appropriate long-term inflation adjustment, and our revised credit adjusted risk-free rate. The credit adjusted risk-free rate was based on an evaluation of an interest rate that equates to a risk-free interest rate adjusted for the effect of our credit standing.
CHESAPEAKE ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
Warrants. The fair values of the Warrants issued upon the Effective Date were estimated using a Black-Scholes model, a commonly used option-pricing model. The Black-Scholes model was used to estimate the fair value of the warrants with an implied stock price of $20.52; initial exercise price per share of $27.63, $32.13 and $36.18 for Class A, Class B and Class C Warrants, respectively; expected volatility of 58% estimated using volatilities of similar entities; risk-free rate using a 5-year Treasury bond rate; and an expected annual dividend yield which was estimated to be zero.
Condensed Consolidated Balance Sheet
The following consolidated balance sheet is as of February 9, 2021. This consolidated balance sheet includes adjustments that reflect the consummation of the transactions contemplated by the Plan (reflected in the column “Reorganization Adjustments”) as well as fair value adjustments as a result of the adoption of fresh start accounting (reflected in the column “Fresh Start Adjustments”) as of the Effective Date. The explanatory notes following the table below provide further details on the adjustments, including the assumptions and methods used to determine fair value for its assets, liabilities and warrants.
| | | | | | | | | | | | | | | | | | | | | | | |
| Predecessor | | Reorganization Adjustments | | Fresh Start Adjustments | | Successor |
| | | | | | | |
| Assets | |
| Current assets: | | | | | | | |
| Cash and cash equivalents | $ | 243 | | | $ | (203) | | (a) | $ | — | | | $ | 40 | |
| Restricted cash | — | | | 86 | | (b) | — | | | 86 | |
| Accounts receivable, net | 861 | | | (18) | | (c) | — | | | 843 | |
| Short-term derivative assets | — | | | — | | | — | | | — | |
| Other current assets | 66 | | | (5) | | (d) | — | | | 61 | |
| Total current assets | 1,170 | | | (140) | | | — | | | 1,030 | |
| Property and equipment: | | | | | | | |
| Natural gas and oil properties, successful efforts method | | | | | | | |
| Proved natural gas and oil properties | 25,794 | | | — | | | (21,108) | | (o) | 4,686 | |
| Unproved properties | 1,546 | | | — | | | (1,063) | | (o) | 483 | |
| Other property and equipment | 1,755 | | | — | | | (1,256) | | (o) | 499 | |
| Total property and equipment | 29,095 | | | — | | | (23,427) | | (o) | 5,668 | |
| Less: accumulated depreciation, depletion and amortization | (23,877) | | | — | | | 23,877 | | (o) | — | |
| Property and equipment held for sale, net | 9 | | | — | | | (7) | | (o) | 2 | |
| Total property and equipment, net | 5,227 | | | — | | | 443 | | (o) | 5,670 | |
| Other long-term assets | 198 | | | — | | | (84) | | (p) | 114 | |
| Total assets | $ | 6,595 | | | $ | (140) | | | $ | 359 | | | $ | 6,814 | |
| | | | | | | |
| | | | | | | |
CHESAPEAKE ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
| | | | | | | | | | | | | | | | | | | | | | | |
| Predecessor | | Reorganization Adjustments | | Fresh Start Adjustments | | Successor |
| | | | | | | |
| | | | | | | |
| Liabilities and stockholders’ equity (deficit) | |
| Current liabilities: | | | | | | | |
Accounts payable | $ | 391 | | | $ | 24 | | (e) | $ | — | | | $ | 415 | |
Current maturities of long-term debt, net | 1,929 | | | (1,929) | | (f) | — | | | — | |
Accrued interest | 4 | | | (4) | | (g) | — | | | — | |
Short-term derivative liabilities | 398 | | | — | | | — | | | 398 | |
| Other current liabilities | 645 | | | 124 | | (h) | — | | | 769 | |
| Total current liabilities | 3,367 | | | (1,785) | | | — | | | 1,582 | |
Long-term debt, net | — | | | 1,261 | | (i) | 52 | | (q) | 1,313 | |
Long-term derivative liabilities | 90 | | | — | | | — | | | 90 | |
Asset retirement obligations, net of current portion | 139 | | | — | | | 97 | | (r) | 236 | |
| Other long-term liabilities | 5 | | | 2 | | (j) | — | | | 7 | |
Liabilities subject to compromise | 9,574 | | | (9,574) | | (k) | — | | | — | |
| Total liabilities | 13,175 | | | (10,096) | | | 149 | | | 3,228 | |
Contingencies and commitments (Note 7) | | | | | | | |
| Stockholders’ equity (deficit): | | | | | | | |
| Predecessor preferred stock | 1,631 | | | (1,631) | | (l) | — | | | — | |
| Predecessor common stock | — | | | — | | | — | | | — | |
| Predecessor additional paid-in capital | 16,940 | | | (16,940) | | (l) | — | | | — | |
| Successor common stock | — | | | 1 | | (m) | — | | | 1 | |
| Successor additional paid-in-capital | — | | | 3,585 | | (m) | — | | | 3,585 | |
| Accumulated other comprehensive income | 48 | | | — | | | (48) | | (s) | — | |
| Accumulated deficit | (25,199) | | | 24,941 | | (n) | 258 | | (t) | — | |
| Total stockholders’ equity (deficit) | (6,580) | | | 9,956 | | | 210 | | | 3,586 | |
| Total liabilities and stockholders’ equity (deficit) | $ | 6,595 | | | $ | (140) | | | $ | 359 | | | $ | 6,814 | |
CHESAPEAKE ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
Reorganization Adjustments
(a)The table below reflects the sources and uses of cash on the Effective Date from implementation of the Plan:
| | | | | |
| Sources: | |
| Proceeds from issuance of the Notes | $ | 1,000 | |
| Proceeds from Rights Offering | 600 | |
| Proceeds from refunds of interest deposit for the Notes | 5 | |
| Total sources of cash | $ | 1,605 | |
| Uses: | |
| Payment of roll-up of DIP Facility balance | $ | (1,179) | |
| Payment of Exit Credit Facility - Tranche A Loan | (479) | |
| Transfers to restricted cash for professional fee reserve | (76) | |
| Transfers to restricted cash for convenience claim distribution reserve | (10) | |
| Payment of professional fees | (31) | |
| Payment of DIP Facility interest and fees | (12) | |
| Payment of FLLO alternative transaction fee | (12) | |
| Payment of the Notes fees funded out of escrow | (8) | |
| Payment of RBL interest and fees | (1) | |
| Total uses of cash | $ | (1,808) | |
| Net cash used | $ | (203) | |
(b)Represents the transfer of funds to a restricted cash account for purposes of funding the professional fee reserve and the convenience claim distribution reserve.
(c)Reflects the removal of an insurance receivable associated with a discharged legal liability.
(d)Reflects the collection of an interest deposit for the senior unsecured notes.
(e)Changes in accounts payable include the following:
| | | | | |
| Accrual of professional service provider success fees | $ | 38 | |
| Accrual of convenience claim distribution reserve | 10 | |
| Accrual of professional service provider fees | 5 | |
| Reinstatement of accounts payable from liabilities subject to compromise | 2 | |
| Payment of professional fees | (31) | |
| Net impact to accounts payable | $ | 24 | |
(f)Reflects payment of the pre-petition credit facility for $1.179 billion and transfer of the Tranche A and Tranche B Loans to long-term debt for $750 million.
(g)Reflects payments of accrued interest and fees on the DIP Facility.
(h)Changes in other current liabilities include the following:
| | | | | |
| Reinstatement of other current liabilities from liabilities subject to compromise | $ | 191 | |
| Accrual of the Notes fees | 2 | |
| Settlement of Put Option Premium through issuance of Successor Common Stock | (60) | |
| Payment of DIP Facility fees | (9) | |
| Net impact to other current liabilities | $ | 124 | |
CHESAPEAKE ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
(i)Changes in long-term debt include the following:
| | | | | |
| Issuance of the Notes | $ | 1,000 | |
| Issuance of Tranche A and Tranche B Loans | 750 | |
| Payments on Tranche A Loans | (479) | |
| Debt issuance costs for the Notes | (10) | |
| Net impact to long-term debt, net | $ | 1,261 | |
(j) Reflects reinstatement of a long-term lease liability.
(k) On the Effective Date, liabilities subject to compromise were settled in accordance with the Plan as follows:
| | | | | |
| Liabilities subject to compromise pre-emergence | $ | 9,574 | |
| To be reinstated on the Effective Date: | |
| Accounts payable | $ | (2) | |
| Other current liabilities | (191) | |
| Other long-term liabilities | (2) | |
| Total liabilities reinstated | $ | (195) | |
| Consideration provided to settle amounts per the Plan or Reorganization: | |
| Issuance of Successor common stock associated with the Rights Offering and Backstop Commitment and settlement of the Put Option Premium | $ | (2,311) | |
| Proceeds from issuance of Successor common stock associated with the Rights Offering and Backstop Commitment | 600 | |
| Issuance of Successor common stock to FLLO Term Loan holders, incremental to the Rights Offering and Backstop Commitment | (783) | |
| Issuance of Successor common stock to Second Lien Note holders, incremental to the Rights Offering and Backstop Commitment | (124) | |
| Issuance of Successor common stock to unsecured note holders | (45) | |
| Issuance of Successor common stock to General Unsecured Claims | (8) | |
| Fair value of Class A Warrants | (93) | |
| Fair value of Class B Warrants | (94) | |
| Fair value of Class C Warrants | (68) | |
| Proceeds to holders of general unsecured claims | (10) | |
| Total consideration provided to settle amounts per the Plan | $ | (2,936) | |
| Gain on settlement of liabilities subject to compromise | $ | 6,443 | |
(l)Pursuant to the Plan, as of the Effective Date, all equity interests in Predecessor, including Predecessor’s common and preferred stock, were canceled without any distribution.
CHESAPEAKE ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
(m)Reflects the Successor equity including the issuance of 97,907,081 shares of New Common Stock, 11,111,111 shares of Class A Warrants, 12,345,679 shares of Class B Warrants and 9,768,527 shares of Class C Warrants pursuant to the Plan.
| | | | | |
| Issuance of Successor equity associated with the Rights Offering and Backstop Commitment | $ | 2,371 | |
| Issuance of Successor equity to holders of the FLLO Term Loan, incremental to the Rights Offering and Backstop Commitment | 783 | |
| Issuance of Successor equity to holders of the Second Lien Notes, incremental to the Rights Offering and Backstop Commitment | 124 | |
| Issuance of Successor equity to holders of the unsecured senior notes | 45 | |
| Issuance of Successor equity to holders of allowed general unsecured claims | 8 | |
| Fair value of Class A warrants | 93 | |
| Fair value of Class B warrants | 94 | |
| Fair value of Class C warrants | 68 | |
| Total change in Successor common stock and additional paid-in capital | 3,586 | |
| Less: par value of Successor common stock | (1) | |
| Change in Successor additional paid-in capital | $ | 3,585 | |
(n)Reflects the cumulative net impact of the effects on accumulated deficit as follows:
| | | | | |
| Gain on settlement of liabilities subject to compromise | $ | 6,443 | |
| Accrual of professional service provider success fees | (38) | |
| Accrual of professional service provider fees | (5) | |
| Surrender of other receivable | (18) | |
| Payment of FLLO alternative transaction fee | (12) | |
| Total reorganization items, net | 6,370 | |
| Cancellation of predecessor equity | 18,571 | |
| Net impact on accumulated deficit | $ | 24,941 | |
Fresh Start Adjustments
(o)Reflects fair value adjustments to our (i) proved natural gas and oil properties, (ii) unproved properties, (iii) other property and equipment and, (iv) property and equipment held for sale, and the elimination of accumulated depletion, depreciation and amortization.
(p)Reflects the fair value adjustment to record historical contracts at their fair values.
(q)Reflects the fair value adjustments to the 2026 Notes and 2029 Notes for $22 million and $30 million, respectively.
(r)Reflects the adjustment to our asset retirement obligations using assumptions as of the Effective Date, including an inflation factor of 2% and an average credit-adjusted risk-free rate of 5.18%.
(s)Reflects the fair value adjustment to eliminate the accumulated other comprehensive income of $9 million related to hedging settlements offset by the elimination of $57 million of income tax effects which has resulted in the recording of an income tax benefit of $57 million. See Note 11 for a discussion of income taxes.
CHESAPEAKE ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
(t)Reflects the net cumulative impact of the fresh start adjustments on accumulated deficit as follows:
| | | | | |
| Fresh start adjustments to property and equipment | $ | 443 | |
| Fresh start adjustments to other long-term assets | (84) | |
| Fresh start adjustments to long-term debt | (52) | |
| Fresh start adjustments to long-term asset retirement obligations | (97) | |
| Fresh start adjustments to accumulated other comprehensive income | (9) | |
| Total fresh start adjustments impacting reorganizations items, net | 201 | |
| Income tax effects on accumulated other comprehensive income | 57 | |
| Net impact to accumulated deficit | $ | 258 | |
Reorganization Items, Net
We incurred significant expenses, gains and losses associated with the reorganization, primarily the gain on settlement of liabilities subject to compromise, write-off of unamortized debt issuance costs and related unamortized premiums and discounts, debt and equity financing fees, provision for allowed claims and legal and professional fees incurred subsequent to the Chapter 11 filings for the restructuring process. The accrual for allowed claims primarily represents damages from contract rejections and settlements attributable to the midstream savings requirement as stipulated in the Plan. While the claims reconciliation process is ongoing, we do not believe any existing unresolved claims will result in a material adjustment to the financial statements. The amount of these items, which were incurred in reorganization items, net within our accompanying consolidated statements of operations, have significantly affected our statements of operations.
We did not have any reorganization items, net for the 2022 Successor Period or the 2021 Successor Period. The following table summarizes the components in reorganization items, net included in our consolidated statements of operations:
| | | | | | | | | | | | | | |
| | Predecessor |
| | Period from January 1, 2021 through February 9, 2021 | | Year Ended
December 31, 2020 |
| Gains on the settlement of liabilities subject to compromise | | $ | 6,443 | | | $ | 12 | |
| Accrual for allowed claims | | (1,002) | | | (879) | |
| Write off of unamortized debt premiums (discounts) on Predecessor debt | | — | | | 518 | |
| Write off of unamortized debt issuance costs on Predecessor debt | | — | | | (61) | |
| Gain on fresh start adjustments | | 201 | | | — | |
| Gain from release of commitment liabilities | | 55 | | | — | |
| Debt and equity financing fees | | — | | | (145) | |
| Loss on divested assets | | — | | | (128) | |
| Professional service provider fees and other | | (60) | | | (113) | |
| Success fees for professional service providers | | (38) | | | — | |
| Surrender of other receivable | | (18) | | | — | |
| FLLO alternative transaction fee | | (12) | | | — | |
| Total reorganization items, net | | $ | 5,569 | | | $ | (796) | |
CHESAPEAKE ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
| | | | | |
| 4. | Natural Gas and Oil Property Transactions |
Marcellus Acquisition
On March 9, 2022, we completed the acquisition of Chief and associated non-operated interests held by affiliates of Tug Hill, Inc. of premium drilling locations in the Marcellus Shale in Northeast Pennsylvania (“Marcellus Acquisition”) for total consideration of approximately $2.77 billion, consisting of approximately $2 billion in cash, including working capital adjustments and approximately 9.4 million shares of our common stock, to acquire high quality producing assets and a deep inventory of premium drilling locations in the prolific Marcellus Shale in Northeast Pennsylvania. The Marcellus Acquisition was indebtedness free, effective as of January 1, 2022 and was subject to customary purchase price adjustments. We funded the cash portion of the consideration with cash on hand and $914 million of borrowings under the Company’s Exit Credit Facility. See Note 6 for further discussion of debt.
Marcellus Acquisition Purchase Price Allocation
We have accounted for the Marcellus Acquisition as a business combination, using the acquisition method. The following table represents the allocation of the total purchase price to the identifiable assets acquired and the liabilities assumed based on the fair values as of the acquisition date. We finalized the acquisition accounting for this transaction during the 2022 Successor Period, which resulted in measurement period adjustments of $39 million to both restricted cash and current liabilities, to reflect funds restricted for future payment of certain royalties.
| | | | | |
| Purchase Price Allocation |
| Consideration: | |
Cash | $ | 2,000 | |
Fair value of Chesapeake’s common stock issued in the merger (a) | 764 | |
| Working capital adjustments | 6 | |
Total consideration | $ | 2,770 | |
| |
| Fair Value of Liabilities Assumed: | |
Current liabilities | $ | 459 | |
| |
| |
Other long-term liabilities | 129 | |
Amounts attributable to liabilities assumed | $ | 588 | |
| |
| Fair Value of Assets Acquired: | |
| Cash, cash equivalents and restricted cash | $ | 39 | |
Other current assets | 218 | |
| Proved natural gas and oil properties | 2,309 | |
Unproved properties | 788 | |
Other property and equipment | 1 | |
Other long-term assets | 3 | |
Amounts attributable to assets acquired | $ | 3,358 | |
| |
Total identifiable net assets | $ | 2,770 | |
CHESAPEAKE ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
____________________________________________
(a)The fair value of our common stock is a Level 1 input, as our stock price is a quoted price in an active market as of the acquisition date.
Natural Gas and Oil Properties
For the Marcellus Acquisition, we applied applicable guidance, under which an acquirer should recognize the identifiable assets acquired and the liabilities assumed on the acquisition date at fair value. The fair value estimate of proved and unproved natural gas and oil properties as of the acquisition date was based on estimated natural gas and oil reserves and related future net cash flows discounted using a weighted average cost of capital, including estimates of future production rates and future development costs. We utilized NYMEX strip pricing adjusted for inflation to value the reserves. We then applied various discount rates depending on the classification of reserves and other risk characteristics. Management utilized the assistance of a third-party valuation expert to estimate the value of the natural gas and oil properties acquired. Additionally, the fair value estimate of proved and unproved natural gas and oil properties was corroborated by utilizing a market approach, which considers recent comparable transactions for similar assets.
The inputs used to value natural gas and oil properties require significant judgment and estimates made by management and represent Level 3 inputs.
Marcellus Acquisition Revenues and Expenses Subsequent to Acquisition
We included in our consolidated statements of operations natural gas, oil and NGL revenues of $1,331 million, marketing revenues of $20 million, net losses on natural gas and oil derivatives of $379 million, and direct operating expenses of $483 million, including depreciation, depletion and amortization, related to the Marcellus Acquisition businesses for the period from March 10, 2022 (the date immediately following the completion of the Marcellus Acquisition) through December 31, 2022.
Vine Acquisition
On November 1, 2021, we acquired Vine, an energy company focused on the development of natural gas properties in the over-pressured stacked Haynesville and Mid-Bossier shale plays in Northwest Louisiana pursuant to a definitive agreement with Vine dated August 10, 2021, for total consideration of approximately $1.5 billion, consisting of approximately 18.7 million shares of our common stock and $90 million in cash. In conjunction with the Vine Acquisition, Vine’s Second Lien Term Loan was repaid and terminated for $163 million inclusive of a $13 million make whole premium with cash on hand due to the agreement containing a change in control provision making the term loan callable upon closing. Vine’s reserve-based loan facility, which had no borrowings as of November 1, 2021, was terminated at the time of the acquisition. Additionally, Vine’s 6.75% Senior Notes, with a principal amount of $950 million were assumed by the Company. See Note 6 for additional discussion of the assumed debt. We funded the cash portion of the consideration with cash on hand. Vine Purchase Price Allocation
We have accounted for the Vine Acquisition as a business combination, using the acquisition method. The following table represents the allocation of the total purchase price of Vine to the identifiable assets acquired and the liabilities assumed based on the fair values as of the acquisition date. We finalized the acquisition accounting for this transaction during the 2022 Successor Period, which resulted in measurement period adjustments of $19 million to both deferred tax liabilities and unproved properties. See Note 11 for additional information regarding the change to deferred tax liabilities.
CHESAPEAKE ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
| | | | | |
| Purchase Price Allocation |
| Consideration: | |
Cash | $ | 253 | |
Fair value of Chesapeake’s common stock issued in the merger (a) | 1,231 | |
| Restricted stock unit replacement awards | 6 | |
Total consideration | $ | 1,490 | |
| |
| Fair Value of Liabilities Assumed: | |
Current liabilities | $ | 765 | |
Long-term debt | 1,021 | |
Deferred tax liabilities | 30 | |
Other long-term liabilities | 272 | |
Amounts attributable to liabilities assumed | $ | 2,088 | |
| |
| Fair Value of Assets Acquired: | |
Cash and cash equivalents | $ | 59 | |
Other current assets | 206 | |
| Proved natural gas and oil properties | 2,181 | |
Unproved properties | 1,099 | |
Other property and equipment | 1 | |
Other long-term assets | 32 | |
Amounts attributable to assets acquired | $ | 3,578 | |
| |
Total identifiable net assets | $ | 1,490 | |
____________________________________________
(a)The fair value of our common stock is a Level 1 input, as our stock price is a quoted price in an active market as of the acquisition date.
Natural Gas and Oil Properties
For the Vine Acquisition, we applied applicable guidance, under which an acquirer should recognize the identifiable assets acquired and the liabilities assumed on the acquisition date at fair value. The fair value estimate of proved and unproved natural gas and oil properties as of the acquisition date was based on estimated natural gas and oil reserves and related future net cash flows discounted using a weighted average cost of capital, including estimates of future production rates and future development costs. We utilized NYMEX strip pricing adjusted for inflation to value the reserves. We then applied various discount rates depending on the classification of reserves and other risk characteristics. Management utilized the assistance of a third-party valuation expert to estimate the value of the natural gas and oil properties acquired. Additionally, the fair value estimate of proved and unproved natural gas and oil properties was corroborated by utilizing a market approach, which considers recent comparable transactions for similar assets.
The inputs used to value natural gas and oil properties require significant judgment and estimates made by management and represent Level 3 inputs.
Financial Instruments and Other
The fair value measurements of long-term debt were estimated based on a market approach using estimates provided by an independent investment data services firm and represent Level 2 inputs.
CHESAPEAKE ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
Restricted Stock Unit Replacement Awards
Included in consideration for the Vine Acquisition is approximately $6 million related to pre-combination service recognized on Vine’s restricted stock unit awards. For restricted stock units that were accelerated or transitioned at the time of the merger, we recognized expense for the portion of the award that was accelerated and included in consideration the portion of the award related to pre-combination service.
Vine Revenues and Expenses Subsequent to Acquisition
We included in our consolidated statements of operations natural gas, oil and NGL revenues of $290 million, net gains on natural gas and oil derivatives of $144 million, direct operating expenses of $177 million, including depreciation, depletion and amortization, and other expense of $12 million related to the Vine business for the period from November 1, 2021 to December 31, 2021. We included in our consolidated statements of operations natural gas, oil and NGL revenues of $1,863 million, net losses on natural gas and oil derivatives of $624 million, direct operating expenses of $924 million, including depreciation, depletion and amortization, and other expense of $39 million related to the Vine business for the 2022 Successor Period.
Combined Pro Forma Financial Information
As the Vine Acquisition closed on November 1, 2021, all activity in 2022 is included in Chesapeake’s consolidated statements of operations for the 2022 Successor Period. The following unaudited pro forma financial information is based on our historical consolidated financial statements adjusted to reflect as if the Marcellus Acquisition and Vine Acquisition had each occurred on February 10, 2021, the date Chesapeake emerged from bankruptcy. See Note 2 for additional information on the bankruptcy. The information below reflects pro forma adjustments based on available information and certain assumptions that we believe are reasonable, including the estimated tax impact of the pro forma adjustments. | | | | | | | | | | | | | | |
| | Successor |
| | Year Ended
December 31, 2022 | | Period from February 10, 2021 through
December 31, 2021 |
| Revenues | | $ | 11,743 | | | $ | 5,891 | |
| Net income (loss) available to common stockholders | | $ | 4,765 | | | $ | (5) | |
| Earnings (loss) per common share: | | | | |
| Basic | | $ | 37.37 | | | $ | (0.04) | |
| Diluted | | $ | 32.26 | | | $ | (0.04) | |
Powder River Divestiture
On January 24, 2022, Chesapeake signed an agreement to sell its Powder River Basin assets in Wyoming to Continental Resources, Inc. for approximately $450 million, subject to customary closing adjustments. The divestiture, which closed on March 25, 2022, resulted in the recognition of a gain of approximately $293 million, which included $13 million of post-close adjustments, based on the difference between the carrying value of the assets and the cash received.
Mid-Continent Divestiture
On October 13, 2020, we filed a notice with the Bankruptcy Court that we reached an agreement with Tapstone Energy in a Section 363 transaction under the Bankruptcy Code. An auction supervised by the Bankruptcy Court was held on November 10, 2020 in which other pre-qualified buyers submitted bids for the asset. We presented the results of the auction process to the Bankruptcy Court and the sale was approved on November 13, 2020. On December 11, 2020, we closed the transaction with Tapstone Energy for $130 million, subject to post-closing adjustments which resulted in the recognition of a gain of approximately $27 million.
CHESAPEAKE ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
Haynesville Exchange
On November 22, 2020, we filed notice with the Bankruptcy Court that we had reached an agreement with Williams Companies to transfer certain Haynesville assets, including interests in 144 producing wells and approximately 50,000 net acres, in exchange for improved midstream contract terms with respect to assets we retained. On December 15, 2020, the Court approved the transaction with Williams Companies and the exchange resulted in the recognition of loss of approximately $128 million based on the difference between the carrying value of the assets and the fair value of the assets surrendered. The exchange was executed to obtain sufficient savings on midstream obligations as required by the Plan. Therefore, the loss was recorded to reorganization items, net in our consolidated statements of operations.
Basic earnings (loss) per common share is computed by dividing the net income (loss) available to common stockholders by the weighted average number of shares of common stock outstanding during the period. Diluted earnings (loss) per common share is calculated in the same manner, but includes the impact of potentially dilutive securities. Potentially dilutive securities during the Successor Period consist of issuable shares related to warrants, unvested restricted stock units, and unvested performance share units and during the Predecessor Period have historically consisted of unvested restricted stock units, contingently issuable shares related to preferred stock and convertible senior notes unless their effect was antidilutive.
The reconciliations between basic and diluted earnings (loss) per share are as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Successor | | | Predecessor |
| | Year Ended
December 31, 2022 | | Period from February 10, 2021 through
December 31, 2021 | | | Period from January 1, 2021 through February 9, 2021 | | Year Ended
December 31, 2020 |
| Numerator | | | | | | | | | |
| Net income (loss) available to common stockholders, basic and diluted | | $ | 4,869 | | | $ | 945 | | | | $ | 5,383 | | | $ | (9,756) | |
| | | | | | | | | |
| Denominator (in thousands) | | | | | | | | | |
| Weighted average common shares outstanding, basic | | 125,785 | | | 101,754 | | | | 9,781 | | | 9,773 | |
| Effect of potentially dilutive securities | | | | | | | | | |
| Preferred stock | | — | | | — | | | | 290 | | | — | |
| Warrants | | 19,734 | | | 14,376 | | | | — | | | — | |
| Restricted stock units | | 395 | | | 200 | | | | — | | | — | |
| Performance share units | | 47 | | | 11 | | | | — | | | — | |
| Weighted average common shares outstanding, diluted | | 145,961 | | | 116,341 | | | | 10,071 | | | 9,773 | |
| | | | | | | | | |
| Earnings (loss) per common share: | | | | | | | | | |
| Basic | | $ | 38.71 | | | $ | 9.29 | | | | $ | 550.35 | | | $ | (998.26) | |
| Diluted | | $ | 33.36 | | | $ | 8.12 | | | | $ | 534.51 | | | $ | (998.26) | |
CHESAPEAKE ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
Successor
During the 2022 and 2021 Successor Periods, the diluted earnings per share calculation excludes the effect of 789,458 and 1,228,828 reserved shares of common stock and 1,489,337 and 2,318,446 reserved Class C Warrants related to the settlement of General Unsecured Claims associated with the Chapter 11 Cases, as all necessary conditions had not been met for such shares to be considered dilutive shares during the 2022 and 2021 Successor Periods, respectively.
Predecessor
The diluted earnings (loss) per share calculation for the 2020 Predecessor Period excludes the antidilutive effect of 290,716 shares of common stock equivalent of our preferred stock.
We had the option to settle conversions of the 5.50% convertible senior notes due 2026 with cash, shares or common stock or any combination thereof. As the price of our common stock was below the conversion threshold level for any time during the conversion period, there was no impact to diluted earnings (loss) per share.
Our long-term debt consisted of the following as of December 31, 2022 and 2021:
| | | | | | | | | | | | | | | | | | | | | | | |
| Successor |
| December 31, 2022 | | December 31, 2021 |
| Carrying Amount | | Fair Value(a) | | Carrying Amount | | Fair Value(a) |
| New Credit Facility | $ | 1,050 | | | $ | 1,050 | | | $ | — | | | $ | — | |
| Exit Credit Facility - Tranche A Loans | — | | | — | | | — | | | — | |
| Exit Credit Facility - Tranche B Loans | — | | | — | | | 221 | | | 221 | |
5.50% senior notes due 2026 | 500 | | | 485 | | | 500 | | | 526 | |
5.875% senior notes due 2029 | 500 | | | 475 | | | 500 | | | 535 | |
6.75% senior notes due 2029(b) | 950 | | | 917 | | | 950 | | | 1,031 | |
| Premiums on senior notes | 100 | | | — | | | 116 | | | — | |
| Debt issuance costs | (7) | | | — | | | (9) | | | — | |
| Total long-term debt, net | $ | 3,093 | | | $ | 2,927 | | | $ | 2,278 | | | $ | 2,313 | |
____________________________________________
(a)The carrying value of borrowings under each respective Credit Facility approximates fair value as the interest rates are based on prevailing market rates; therefore, they are a Level 1 fair value measurement. For all other debt, a market approach, based upon quotes from major financial institutions, which are Level 2 inputs, is used to measure the fair value.
(b)On November 1, 2021, we acquired the debt of Vine, which consisted of 6.75% senior notes due 2029. See further discussion below.
CHESAPEAKE ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
The table below presents debt maturities as of December 31, 2022, excluding debt issuance costs and premiums:
| | | | | | | | |
| | Total |
| 2023 | | $ | — | |
| 2024 | | — | |
| 2025 | | — | |
| 2026 | | 500 | |
| 2027 | | 1,050 | |
| Thereafter | | 1,450 | |
| Total long-term debt, net | | $ | 3,000 | |
New Credit Facility. In December 2022, we entered into a senior secured reserve-based credit agreement (the “New Credit Agreement”) with the lenders and issuing banks party thereto (the “Lenders”), and JPMorgan Chase Bank, N.A., as administrative agent and collateral agent (in such capacity, the “Administrative Agent”), providing for a reserve-based credit facility (the “New Credit Facility”) with an initial borrowing base of $3.5 billion and aggregate commitments of $2.0 billion. The New Credit Facility matures in December 2027. The New Credit Facility provides for a $200.0 million sublimit available for the issuance of letters of credit and a $50.0 million sublimit available for swingline loans.
Initially, the obligations under the New Credit Facility are guaranteed by certain of Chesapeake’s subsidiaries (the “Guarantors”), and the New Credit Facility is secured by substantially all of the assets owned by the Company and the Guarantors (subject to customary exceptions), including mortgages on not less than 85% of the total PV-9 of the borrowing base properties evaluated in the most recent reserve report (where PV-9 is the net present value, discounted at 9% per annum, of the estimated future net revenues). The borrowing base will be redetermined semi-annually on or around April 15 and October 15 of each year, with one interim “wildcard” redetermination available to each of the Company and the Administrative Agent, the latter at the direction of the Required Lenders (as defined in the New Credit Agreement), between scheduled redeterminations. The next scheduled redetermination will be on or about April 15, 2023. The New Credit Agreement contains restrictive covenants that limit Chesapeake and its subsidiaries’ ability to, among other things but subject to exceptions customary to reserve-based credit facilities: (i) incur additional indebtedness, (ii) make investments, (iii) enter into mergers; (iv) make or declare dividends; (v) repurchase or redeem certain indebtedness; (vi) enter into certain hedges; (vii) incur liens; (viii) sell assets; and (ix) engage in certain transactions with affiliates. The New Credit Agreement requires Chesapeake to maintain compliance with the following financial ratios (“Financial Covenants”) beginning with the first quarter of 2023: (A) a current ratio, which is the ratio of Chesapeake’s and its restricted subsidiaries’ consolidated current assets (including unused commitments under the New Credit Facility but excluding certain non-cash assets) to their consolidated current liabilities (excluding the current portion of long-term debt and certain non-cash liabilities), of not less than 1.00 to 1.00; (B) a net leverage ratio, which is the ratio of total indebtedness (less unrestricted cash up to a specified threshold) to Consolidated EBITDAX (as defined in the Credit Agreement) for the prior four fiscal quarters, of not greater than 3.50 to 1.00 and (C) a PV-9 coverage ratio of the net present value, discounted at 9% per annum, of the estimated future net revenues expected in the proved reserves to Chesapeake’s and its restricted subsidiaries’ total indebtedness of not less than 1.50 to 1.00 (“PV-9 Coverage Ratio”).
Borrowings under the New Credit Agreement may be alternate base rate loans or term SOFR loans, at our election. Interest is payable quarterly for alternate base rate loans and at the end of the applicable interest period for term SOFR loans. Term SOFR loans bear interest at term SOFR plus an applicable rate ranging from 175 to 275 basis points per annum, depending on the percentage of the commitments utilized, plus an additional 10 basis points per annum credit spread adjustment. Alternate base rate loans bear interest at a rate per annum equal to the greatest of: (i) the prime rate; (ii) the federal funds effective rate plus 50 basis points; and (iii) the adjusted term SOFR rate for a one-month interest period plus 100 basis points, plus an applicable margin ranging from 75 to 175 basis points per annum, depending on the percentage of the commitments utilized. Chesapeake also pays a commitment fee on unused commitment amounts under the Credit Facility ranging from 37.5 to 50 basis points per annum, depending on the percentage of the commitments utilized.
CHESAPEAKE ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
The New Credit Facility is subject to customary events of default, remedies, and cure rights for credit facilities of this nature.
Exit Credit Facility. On the Effective Date, pursuant to the terms of the Plan, the Company, as borrower, entered into a reserve-based credit agreement (the “Credit Agreement”) providing for a reserve-based credit facility with an initial borrowing base of $2.5 billion. The aggregate initial elected commitments of the lenders under the Exit Credit Facility were $1.75 billion of Tranche A Loans and $221 million of fully funded Tranche B Loans.
The Exit Credit Facility provided for a $200 million sublimit of the aggregate commitments that was available for the issuance of letters of credit. The Exit Credit Facility bore interest at the ABR (alternate base rate) or LIBOR, at our election, plus an applicable margin (ranging from 2.25–3.25% per annum for ABR loans and 3.25–4.25% per annum for LIBOR loans, subject to a 1.00% LIBOR floor), depending on the percentage of the borrowing base then being utilized. The Tranche A Loans were due to mature three years after the Effective Date and the Tranche B Loans were due to mature four years after the Effective Date. The Company was required to pay a commitment fee of 0.50% per annum on the average daily unused portion of the current aggregate commitments under the Tranche A Loans.
The Credit Agreement was subject to various financial and other covenants and also contained customary affirmative and negative covenants, including, among other things, as to compliance with laws (including environmental laws and anti-corruption laws), delivery of quarterly and annual financial statements, conduct of business, maintenance of property, maintenance of insurance, restrictions on the incurrence of liens, indebtedness, asset dispositions, fundamental changes, restricted payments, and other customary covenants. In December 2022, the Tranche A Loans and Tranche B Loans were both repaid and the Exit Credit Facility was terminated.
Borrowings under our credit agreements bore interest at an average interest rate of 8.7% during the 2022 Successor Period. The Company has no additional secured debt outstanding as of December 31, 2022.
Outstanding Senior Notes. On February 2, 2021, Chesapeake Escrow Issuer LLC, then an indirect wholly owned subsidiary of the Company, issued $500 million aggregate principal amount of its 2026 Notes and $500 million aggregate principal amount of its 2029 Notes. The Notes included a $52 million premium to reflect fair value adjustments at the date of emergence.
The Notes are guaranteed on a senior unsecured basis by each of the Company’s subsidiaries that guaranteed the Exit Credit Facility.
The Notes were issued pursuant to an indenture, dated as of February 5, 2021, among the Issuer, the guarantor party thereto and Deutsche Bank Trust Company Americas, as trustee.
Interest on the Notes is payable semi-annually, on February 1 and August 1 of each year to holders of record on the immediately preceding January 15 and July 15.
Vine Senior Notes
As a result of the completion of the Vine Acquisition, the Company and certain of its subsidiaries entered into a supplemental indenture pursuant to which the Company assumed the obligations under Vine’s $950 million aggregate principal amount of 6.75% senior notes due 2029 (the “Vine Notes”) issued under the indenture dated April 7, 2021 with Wilmington Trust, National Association, as Trustee (the “Vine Indenture”). The Vine Notes included a $71 million premium to reflect fair value adjustments at the date of acquisition.
The Company and certain of its subsidiaries have agreed to guarantee such obligations under the Vine Indenture. Additionally, certain subsidiaries of Vine entered into a supplemental indenture to the Company’s existing indenture, dated February 5, 2021, with Deutsche Bank Trust Company Americas as trustee (the “CHK Indenture”), pursuant to which such subsidiaries of Vine have agreed to guarantee obligations under the CHK Indenture.
Interest on the Vine Notes is payable semi-annually, on April 15 and October 15 of each year to holders of record on the immediately preceding April 1 and October 1.
CHESAPEAKE ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
The Notes and the Vine Notes are the Company’s senior unsecured obligations. Accordingly, they rank (i) equal in right of payment to all existing and future senior unsecured indebtedness, (ii) effectively subordinate in right of payment to all existing and future secured indebtedness, including indebtedness under the New Credit Facility, to the extent of the value of the collateral securing such indebtedness, (iii) structurally subordinate in right of payment to all existing and future indebtedness and other liabilities of any future subsidiaries that do not guarantee the Notes and any entity that is not a subsidiary that does not guarantee the Notes and (iv) senior in right of payment to all future subordinated indebtedness. Each guarantee of the Notes by a guarantor is a general, unsecured, senior obligation of such guarantor. Accordingly, the guarantees (i) rank equally in right of payment with all existing and future senior indebtedness of such guarantor (including such guarantor’s guarantee of indebtedness under the New Credit Facility), (ii) are subordinated to all existing and future secured indebtedness of such guarantor, including such guarantor’s guarantee of indebtedness under our New Credit Facility, to the extent of the value of the collateral of such guarantor securing such secured indebtedness, (iii) are structurally subordinated to all indebtedness and other liabilities of any future subsidiaries of such guarantor that do not guarantee the notes and (iv) rank senior in right of payment to all future subordinated indebtedness of such guarantor.
Phase-Out of LIBOR
In March 2020, the FASB issued ASU 2020-04, Reference Rate Reform (Topic 848). The purpose of ASU 2020-04 is to provide optional guidance to ease the potential effects on financial reporting of the market-wide migration away from Interbank Offered Rates such as LIBOR, which is expected to be phased out for most U.S. dollar settings on June 30, 2023, to alternative reference rates. ASU 2020-04 applies only to contracts, hedging relationships, debt arrangements and other transactions that reference a benchmark reference rate expected to be discontinued because of reference rate reform. The amendments in ASU 2020-04 are effective for all entities as of March 12, 2020 and can be applied prospectively to contract modifications through December 31, 2022. In December 2022, we terminated our only agreement that referenced LIBOR, the Exit Credit Facility, and entered into the New Credit Facility. We no longer have any arrangements that reference LIBOR and the adoption of this guidance did not have a material impact on our consolidated financial statements and related disclosures.
| | | | | |
| 7. | Contingencies and Commitments |
Contingencies
Chapter 11 Proceedings
Commencement of the Chapter 11 Cases automatically stayed the proceedings and actions against us that are described below, in addition to actions seeking to collect pre-petition indebtedness or to exercise control over the property of the Company’s bankruptcy estates. The Plan in the Chapter 11 Cases, which became effective on February 9, 2021, provided for the treatment of claims against the Company’s bankruptcy estates, including pre-petition liabilities that had not been satisfied or addressed during the Chapter 11 Cases. See Note 2 for additional information. Litigation and Regulatory Proceedings
We were involved in a number of litigation and regulatory proceedings as of the Petition Date. Many of these proceedings were in early stages, and many of them sought damages and penalties, the amount of which is indeterminate. Our total accrued liability in respect of litigation and regulatory proceedings is determined on a case-by-case basis and represents an estimate of probable losses after considering, among other factors, the progress of each case or proceeding, our experience and the experience of others in similar cases or proceedings, and the opinions and views of legal counsel. Significant judgment is required in making these estimates and our final liabilities may ultimately be materially different.
We are involved in, and expect to continue to be involved in, various lawsuits and disputes incidental to our business operations, including commercial disputes, personal injury claims, royalty claims, property damage claims and contract actions. The majority of the prepetition legal proceedings have been settled during the Chapter 11 Cases or will be resolved in connection with the claims reconciliation process before the Bankruptcy Court. Any allowed claim related to such prepetition litigation will be treated in accordance with the Plan.
Environmental Contingencies
The nature of the natural gas and oil business carries with it certain environmental risks for us and our subsidiaries. We have implemented various policies, programs, procedures, training and audits to reduce and mitigate such environmental risks. We conduct periodic reviews, on a company-wide basis, to assess changes in our environmental risk profile. Environmental reserves are established for environmental liabilities for which economic losses are probable and reasonably estimable. We manage our exposure to environmental liabilities in acquisitions by using an evaluation process that seeks to identify pre-existing contamination or compliance concerns and address the potential liability. Depending on the extent of an identified environmental concern, we may, among other things, exclude a property from the transaction, require the seller to remediate the property to our satisfaction in an acquisition or agree to assume liability for the remediation of the property.
Other Matters
Based on management’s current assessment, we are of the opinion that no pending or threatened lawsuit or dispute relating to our business operations is likely to have a material adverse effect on our future consolidated financial position, results of operations or cash flows. The final resolution of such matters could exceed amounts accrued, however, and actual results could differ materially from management’s estimates.
Commitments
Gathering, Processing and Transportation Agreements
We have contractual commitments with midstream service companies and pipeline carriers for future gathering, processing and transportation of natural gas, oil and NGL to move certain of our production to market. Working interest owners and royalty interest owners, where appropriate, will be responsible for their proportionate share of these costs. Commitments related to gathering, processing and transportation agreements are not recorded as obligations in the accompanying consolidated balance sheets; however, they are reflected in our estimates of proved reserves.
The aggregate undiscounted commitments under our gathering, processing and transportation agreements, excluding any reimbursement from working interest and royalty interest owners, credits for third-party volumes or future costs under cost-of-service agreements, are presented below:
| | | | | | | | |
| | Successor |
| | | December 31, 2022 |
| 2023 | | $ | 565 | |
| 2024 | | 555 | |
| 2025 | | 481 | |
| 2026 | | 442 | |
| 2027 | | 407 | |
| 2028-2036 | | 1,832 | |
| Total | | $ | 4,282 | |
In addition, we have long-term agreements for certain natural gas gathering and related services within specified acreage dedication areas in exchange for cost-of-service based fees redetermined annually, or tiered fees based on volumes delivered relative to scheduled volumes. Future gathering fees may vary with the applicable agreement.
CHESAPEAKE ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
Other Commitments
As part of our normal course of business, we enter into various agreements providing, or otherwise arranging for, financial or performance assurances to third parties on behalf of our wholly owned guarantor subsidiaries. These agreements may include future payment obligations or commitments regarding operational performance that effectively guarantee our subsidiaries’ future performance.
In connection with acquisitions and divestitures, our purchase and sale agreements generally provide indemnification to the counterparty for liabilities incurred as a result of a breach of a representation or warranty by the indemnifying party and/or other specified matters. These indemnifications generally have a discrete term and are intended to protect the parties against risks that are difficult to predict or cannot be quantified at the time of entering into or consummating a particular transaction. For divestitures of natural gas and oil properties, our purchase and sale agreements may require the return of a portion of the proceeds we receive as a result of uncured title or environmental defects.
While executing our strategic priorities, we have incurred certain cash charges, including contract termination charges, financing extinguishment costs and charges for unused natural gas transportation and gathering capacity.
Other current liabilities as of December 31, 2022 and 2021 are detailed below:
| | | | | | | | | | | | | | |
| | Successor |
| | December 31, 2022 | | December 31, 2021 |
| Revenues and royalties due others | | $ | 734 | | | $ | 617 | |
| Accrued drilling and production costs | | 253 | | | 142 | |
| Accrued hedging costs | | 109 | | | 113 | |
| Accrued compensation and benefits | | 72 | | | 91 | |
| Other accrued taxes | | 84 | | | 86 | |
| Operating leases | | 86 | | | 29 | |
| Joint interest prepayments received | | 34 | | | 14 | |
Current liabilities held for sale(a) | | 144 | | | — | |
| Other | | 111 | | | 110 | |
| Total other current liabilities | | $ | 1,627 | | | $ | 1,202 | |
_________________________________________
(a)As of December 31, 2022, certain liabilities associated with the sale of a portion of our Eagle Ford assets have been classified as current liabilities held for sale. See Note 23 for additional information.
CHESAPEAKE ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
We are a lessee under various agreements for drilling rigs, compressors, vehicles, office space and gas treating plants. As of December 31, 2022, these leases have remaining terms ranging from one month to three years. Certain of our lease agreements include options to renew the lease, terminate the lease early or purchase the underlying asset at the end of the lease. We determine the lease term at the lease commencement date as the non-cancelable period of the lease, including options to extend or terminate the lease when we are reasonably certain to exercise the option. The company’s vehicles are the only leases with renewal options that we are reasonably certain to exercise. The renewals are reflected in the right of use (“ROU”) asset and lease liability balances.
Our operating ROU assets are included in other long-term assets while operating lease liabilities are included in other current and other long-term liabilities on the consolidated balance sheet. Finance ROU assets are reflected in total property and equipment, net, while finance lease liabilities are included in other current and other long-term liabilities on the consolidated balance sheet.
On November 1, 2021, we acquired Vine and, as part of the purchase price allocation, we recognized additional operating lease liabilities of $32 million and a related ROU asset of $32 million related to drilling rig leases, an office space lease and gas treating plant leases.
The following table presents our ROU assets and lease liabilities as of December 31, 2022 and 2021. As of December 31, 2022 and 2021, we did not have any finance leases.
| | | | | | | | | | | | | | |
| | Successor |
| | Operating Leases |
| | | December 31, 2022 | | December 31, 2021 |
| ROU assets | | $ | 119 | | | $ | 38 | |
| | | | |
| Lease liabilities: | | | | |
| Current lease liabilities | | $ | 86 | | | $ | 29 | |
| Long-term lease liabilities | | 33 | | | 9 | |
| Total lease liabilities, net | | $ | 119 | | | $ | 38 | |
As of December 31, 2022, we had operating leases of $73 million related to drilling rig leases, which have been executed but not yet commenced. These operating leases are expected to commence in 2023 with lease terms expiring through 2025.
CHESAPEAKE ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
Additional information for the Company’s operating and finance leases is presented below:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Successor | | | Predecessor |
| | | Year Ended December 31, 2022 | | Period from February 10, 2021 through December 31, 2021 | | | Period from January 1, 2021 through February 9, 2021 | | Year Ended December 31, 2020 |
| Lease cost: | | | | | | | | | |
| Amortization of ROU assets | | $ | — | | | $ | — | | | | $ | 1 | | | $ | 9 | |
| Interest on lease liability | | — | | | — | | | | — | | | 1 | |
| Finance lease cost | | — | | | — | | | | 1 | | | 10 | |
| Operating lease cost | | 51 | | | 33 | | | | 3 | | | 17 | |
| Short-term lease cost | | 74 | | | 13 | | | | — | | | 32 | |
| Total lease cost | | $ | 125 | | | $ | 46 | | | | $ | 4 | | | $ | 59 | |
| | | | | | | | | |
| Other information: | | | | | | | | | |
| Operating cash outflows from finance lease | | $ | — | | | $ | — | | | | $ | — | | | $ | 1 | |
| Operating cash outflows from operating leases | | $ | 15 | | | $ | 7 | | | | $ | — | | | $ | 9 | |
| Investing cash outflows from operating leases | | $ | 110 | | | $ | 39 | | | | $ | 3 | | | $ | 40 | |
| Financing cash outflows from finance lease | | $ | — | | | $ | — | | | | $ | 1 | | | $ | 9 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Successor |
| | December 31, 2022 | | December 31, 2021 |
| Weighted average remaining lease term - operating leases | | 1.54 years | | 1.44 years |
| Weighted average discount rate - operating leases | | 6.64 | % | | 3.80 | % |
Maturity analysis of operating lease liabilities are presented below:
| | | | | | | | |
| | Successor |
| | December 31, 2022 |
| 2023 | | $ | 88 | |
| 2024 | | 38 | |
| 2025 | | — | |
| Total lease payments | | 126 | |
| Less imputed interest | | (7) | |
| Present value of lease liabilities | | 119 | |
| Less current maturities | | (86) | |
| Present value of lease liabilities, less current maturities | | $ | 33 | |
CHESAPEAKE ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
The following tables show revenue disaggregated by operating area and product type, for the periods presented:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Successor |
| | Year Ended December 31, 2022 |
| | Natural Gas | | Oil | | NGL | | Total |
| Marcellus | | $ | 4,041 | | | $ | — | | | $ | — | | | $ | 4,041 | |
| Haynesville | | 3,481 | | | — | | | — | | | 3,481 | |
| Eagle Ford | | 261 | | | 1,798 | | | 212 | | | 2,271 | |
| Powder River Basin | | 20 | | | 66 | | | 13 | | | 99 | |
| Natural gas, oil and NGL revenue | | $ | 7,803 | | | $ | 1,864 | | | $ | 225 | | | $ | 9,892 | |
| | | | | | | | |
| Marketing revenue | | $ | 2,455 | | | $ | 1,547 | | | $ | 229 | | | $ | 4,231 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Successor |
| | Period from February 10, 2021 through December 31, 2021 |
| | Natural Gas | | Oil | | NGL | | Total |
| Marcellus | | $ | 1,370 | | | $ | — | | | $ | — | | | $ | 1,370 | |
| Haynesville | | 998 | | | — | | | — | | | 998 | |
| Eagle Ford | | 179 | | | 1,354 | | | 179 | | | 1,712 | |
| Powder River Basin | | 75 | | | 202 | | | 44 | | | 321 | |
| Natural gas, oil and NGL revenue | | $ | 2,622 | | | $ | 1,556 | | | $ | 223 | | | $ | 4,401 | |
| | | | | | | | |
| Marketing revenue | | $ | 908 | | | $ | 1,158 | | | $ | 197 | | | $ | 2,263 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Predecessor |
| | Period from January 1, 2021 through February 9, 2021 |
| | Natural Gas | | Oil | | NGL | | Total |
| Marcellus | | $ | 119 | | | $ | — | | | $ | — | | | $ | 119 | |
| Haynesville | | 53 | | | — | | | — | | | 53 | |
| Eagle Ford | | 17 | | | 159 | | | 17 | | | 193 | |
| Powder River Basin | | 7 | | | 20 | | | 6 | | | 33 | |
| Natural gas, oil and NGL revenue | | $ | 196 | | | $ | 179 | | | $ | 23 | | | $ | 398 | |
| | | | | | | | |
| Marketing revenue | | $ | 78 | | | $ | 141 | | | $ | 20 | | | $ | 239 | |
CHESAPEAKE ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Predecessor |
| | Year Ended December 31, 2020 |
| | Natural Gas | | Oil | | NGL | | Total |
| Marcellus | | $ | 631 | | | $ | — | | | $ | — | | | $ | 631 | |
| Haynesville | | 362 | | | — | | | — | | | 362 | |
| Eagle Ford | | 129 | | | 1,202 | | | 97 | | | 1,428 | |
| Powder River Basin | | 41 | | | 170 | | | 20 | | | 231 | |
| Mid-Continent | | 25 | | | 55 | | | 13 | | | 93 | |
| Natural gas, oil and NGL revenue | | $ | 1,188 | | | $ | 1,427 | | | $ | 130 | | | $ | 2,745 | |
| | | | | | | | |
| Marketing revenue from contracts with customers | | $ | 494 | | | $ | 1,195 | | | $ | 110 | | | $ | 1,799 | |
| Other marketing revenue | | 3 | | | 67 | | | — | | | 70 | |
| Marketing revenue | | $ | 497 | | | $ | 1,262 | | | $ | 110 | | | $ | 1,869 | |
| | | | | | | | |
Major Customers
For the 2022 Successor Period, sales to Shell Energy North America and Valero Energy Corporation accounted for approximately 13% and 10%, respectively, of total revenues (before the effects of hedging). For the 2021 Successor Period, sales to Valero Energy Corporation and Energy Transfer Crude Marketing accounted for approximately 14% and 11%, respectively, of total revenues (before the effects of hedging). For the 2021 Predecessor Period and 2020 Predecessor Period, sales to Valero Energy Corporation accounted for approximately 19% and 17%, respectively, of total revenues (before the effects of hedging). No other purchasers accounted for more than 10% of our total revenues during the 2022 Successor Period, 2021 Successor Period, 2021 Predecessor Period or 2020 Predecessor Period.
Accounts Receivable
Accounts receivable as of December 31, 2022 and 2021 are detailed below:
| | | | | | | | | | | | | | |
| | Successor |
| | December 31, 2022 | | December 31, 2021 |
| Natural gas, oil and NGL sales | | $ | 1,171 | | | $ | 922 | |
| Joint interest | | 246 | | | 158 | |
| Other | | 24 | | | 38 | |
| Allowance for doubtful accounts | | (3) | | | (3) | |
| Total accounts receivable, net | | $ | 1,438 | | | $ | 1,115 | |
CHESAPEAKE ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
The components of the income tax expense (benefit) for each of the periods presented below are as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Successor | | | Predecessor |
| | Year Ended December 31, 2022 | | Period from February 10, 2021 through December 31, 2021 | | | Period from January 1, 2021 through February 9, 2021 | | Year Ended December 31, 2020 |
| Current | | | | | | | | | |
| Federal | | $ | 37 | | | $ | — | | | | $ | — | | | $ | (3) | |
| State | | 10 | | | — | | | | — | | | (6) | |
| Current Income Taxes | | 47 | | | — | | | | — | | | (9) | |
| Deferred | | | | | | | | | |
| Federal | | (1,112) | | | (45) | | | | (54) | | | — | |
| State | | (220) | | | (4) | | | | (3) | | | (10) | |
| Deferred Income Taxes | | (1,332) | | | (49) | | | | (57) | | | (10) | |
| Total | | $ | (1,285) | | | $ | (49) | | | | $ | (57) | | | $ | (19) | |
The income tax expense (benefit) reported in our consolidated statement of operations is different from the federal income tax expense (benefit) computed using the federal statutory rate for the following reasons:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Successor | | | Predecessor |
| | Year Ended December 31, 2022 | | Period from February 10, 2021 through December 31, 2021 | | | Period from January 1, 2021 through February 9, 2021 | | Year Ended December 31, 2020 |
| Income tax expense (benefit) at the federal statutory rate of 21% | | $ | 767 | | | $ | 188 | | | | $ | 1,119 | | | $ | (2,051) | |
| State income taxes (net of federal income tax benefit) | | 75 | | | (86) | | | | 238 | | | (41) | |
| Change in valuation allowance due to Acquisitions | | 19 | | | (49) | | | | — | | | — | |
| Change in valuation allowance excluding impact of Acquisitions | | (2,147) | | | (179) | | | | (1,191) | | | 2,010 | |
| Reorganization items | | — | | | 60 | | | | (173) | | | 41 | |
| Transaction costs | | 2 | | | 11 | | | | — | | | — | |
| Removal of stranded tax effects in accumulated other comprehensive income | | — | | | — | | | | (57) | | | — | |
| Other | | (1) | | | 6 | | | | 7 | | | 22 | |
| Total | | $ | (1,285) | | | $ | (49) | | | | $ | (57) | | | $ | (19) | |
We recognize certain permanent book-to-tax differences relating to reorganization items such as differences in the treatment of the extinguishment of liabilities, differences due to the non-deductibility of certain expenses associated with administering the plan of reorganization, and the adjustment to deferred tax assets which are subject to expiration before they are utilizable. In the Successor Period, we recognized a difference due to the non-deductibility of certain transaction costs and other post-combination expenses. Our state income tax provision can fluctuate as a result of changing state apportionment factors and state tax rates. The 2021 Successor Period resulted in a state tax benefit before valuation allowance. The shift of our state profile towards a higher overall state tax rate as a consequence of the Vine Acquisition caused an increase to our state deferred tax assets. Such increase was offset in full by an increase to our valuation allowance. The Marcellus Acquisition during the 2022 Successor Period resulted in a similar, but lessened effect.
Deferred income taxes are provided to reflect temporary differences in the tax basis of assets and liabilities and their reported amounts in the financial statements. The tax-effected temporary differences, net operating loss (“NOL”)
CHESAPEAKE ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
carryforwards and excess business interest expense carryforwards that comprise our deferred income taxes are as follows:
| | | | | | | | | | | | | | |
| | Successor |
| | December 31, 2022 | | December 31, 2021 |
| Deferred tax liabilities: | | | | |
| Property, plant and equipment | | $ | (253) | | | $ | — | |
| Other | | (5) | | | (3) | |
| Deferred tax liabilities | | (258) | | | (3) | |
| | | | |
| Deferred tax assets: | | | | |
| Property, plant and equipment | | — | | | 340 | |
| Net operating loss carryforwards | | 870 | | | 784 | |
| Carrying value of debt | | 29 | | | 31 | |
| Excess business interest expense carryforward | | 665 | | | 684 | |
| Asset retirement obligations | | 91 | | | 86 | |
| Investments | | 11 | | | 66 | |
| Accrued liabilities | | 21 | | | 38 | |
| Derivative instruments | | 137 | | | 289 | |
| Other | | 130 | | | 68 | |
| Deferred tax assets | | 1,954 | | | 2,386 | |
| Valuation allowance | | (345) | | | (2,383) | |
| Deferred tax assets after valuation allowance | | 1,609 | | | 3 | |
| Net deferred tax asset | | $ | 1,351 | | | $ | — | |
As of December 31, 2022, and 2021, we had deferred tax assets of $1.954 billion and $2.386 billion, respectively, upon which we had a valuation allowance of $345 million and $2.383 billion, respectively. Of the net change in the valuation allowance of $2.038 billion, $1.351 billion was attributable to the valuation allowance release during the fourth quarter of 2022 and $687 million was associated primarily with pre-tax income for the year.
A valuation allowance against deferred tax assets, including NOL carryforwards and disallowed business interest carryforwards, is recognized when it is more likely than not that all or some portion of the benefit from the deferred tax assets will not be realized. To assess that likelihood, we use estimates and judgment regarding our future taxable income, and we consider the tax consequences in the jurisdiction where such taxable income is generated, to determine whether a valuation allowance is required. Such evidence can include our current financial position, our results of operations, both actual and forecasted, the reversal of existing taxable temporary differences, tax planning strategies, as well as the current and forecasted business economics of our industry. Management assesses all available evidence, both positive and negative, to estimate whether sufficient future taxable income will be generated to permit the use of deferred tax assets.
For the years ended December 31, 2021 and 2020, we maintained a full valuation allowance against our deferred tax assets based upon the conclusion that it was more likely than not that the deferred tax assets would not be realized. An item of negative evidence consisted of the cumulative pre-tax book losses over rolling three-year periods, primarily due to recurring operational losses and $8.446 billion of impairments of proved natural gas and oil properties recorded in the quarter ended March 31, 2020 (see Note 19). For the cumulative three-year period ended December 31, 2022, we are in a cumulative loss position, but given the magnitude of the 2020 losses rolling off relative to the 2021 and 2022 positive pre-tax book income, we anticipate a return to cumulative pre-tax income during 2023. The expectation of future earnings along with reversals of existing taxable timing differences provide us with sufficient positive evidence to conclude that $1.351 billion of our federal and state deferred tax assets are more likely than not to be realized. Accordingly, we have released the valuation allowance for this amount during 2022. We continue to maintain a partial valuation allowance of $345 million against the portion of our federal and state deferred tax assets such as NOLs, credit carryovers, and capital losses, which may expire before we are able to utilize those due to the application of the limitations under Section 382 and the ordering in which such attributes may be applied.
CHESAPEAKE ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
Our ability to utilize NOL carryforwards, disallowed business interest carryforwards, tax credits and possibly other tax attributes to reduce future taxable income and federal income tax is subject to various limitations under Section 382 of the Code. The utilization of such attributes may be subject to an annual limitation under Section 382 of the Code should transactions involving our equity result in a cumulative shift of more than 50% in the beneficial ownership of our stock during any three-year testing period (an “Ownership Change”).
As a result of emergence from bankruptcy on February 9, 2021, the Company did experience an Ownership Change. We did not qualify for the exception under Section 382(l)(5) of the Code, and therefore an annual limitation was determined under Section 382(l)(6) of the Code, which is based on the post-emergence value of our equity multiplied by the adjusted federal long-term rate in effect for the month in which the ownership change occurred. The amount of the annual limitation has been computed to be $54 million. The limitation applies to our NOL carryforwards, disallowed business interest carryforwards and general business credits until such attributes expire or are fully utilized. As we were in an overall net unrealized built-in loss position at the Effective Date, the limitation also applies to any recognized built-in losses incurred for a period of five years but only to the extent of the overall net unrealized built-in loss. Recognized built-in losses include a portion of our tax depreciation, depletion, and amortization deductions along with a portion of our realized hedging losses. We incurred sufficient recognized built-in losses during the 2021 tax year such that we have no further restriction on the company’s deduction for such items. Some states impose similar limitations on tax attribute utilization upon experiencing an Ownership Change.
In Chapter 11 bankruptcy cases, the cancellation of debt income (“CODI”) realized upon emergence from bankruptcy is excludible from taxable income but results in a reduction of tax attributes in accordance with the attribute reduction and ordering rules of Section 108 of the Code. The amount of our CODI was $5 billion, all of which reduced our NOL carryforwards. As a result of the Section 382 limitation, $307 million of federal NOLs remaining after the CODI reduction were estimated to expire before they would become utilizable and, as such, were removed from our deferred tax assets. The states we operate in generally have similar rules for attribute reduction and Section 382 limitation which resulted in the reduction of certain of our state NOL carryforwards.
On November 1, 2021, we completed the acquisition of Vine. For federal income tax purposes, the transaction qualified as a tax-free merger under Section 368 of the Code and, as a result, we acquired carryover tax basis in Vine’s assets and liabilities. In the 2021 Successor Period, we recorded a $49 million net deferred tax liability determined through business combination accounting. Upon the completion of Vine’s tax returns in the 2022 Successor Period, the net deferred tax liability was adjusted to $30 million. As a result of this adjustment to the deferred tax liability, we increased our valuation allowance and recorded $19 million of income tax expense in the 2022 Successor Period. Additionally, we acquired NOL and interest expense carryforwards which are subject to a base annual Section 382 limitation of approximately $2 million. The base annual limitation is estimated to be increased over the first five years for recognized built-in gains of approximately $12 million per year resulting in approximately $14 million per year of available utilization in those years.
The Marcellus Acquisition during the 2022 Successor Period was treated as a taxable asset acquisition with no tax carryovers acquired.
As of December 31, 2022, we have an income tax receivable of $168 million included in other current assets within our consolidated balance sheets.
As of December 31, 2022, and after taking into account each of the foregoing matters, the federal NOLs and excess business interest attributes are as follows:
CHESAPEAKE ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
| | | | | | | | | | | | | | | | | | | | |
| Attributes subject to Section 382 base annual limitation | | | Attributes not subject to Section 382 limitation |
| $54 million | | $2 million | | |
| Net operating losses, by year of expiration: | | | | | | |
| 2037 | $ | 814 | | | $ | 24 | | | | $ | — | |
| Indefinitely lived | 2,265 | | | 102 | | | | — | |
| Total federal net operating losses | $ | 3,079 | | | $ | 126 | | | | $ | — | |
| | | | | | |
| Excess business interest expense (indefinitely lived) | $ | 1,435 | | | $ | 90 | | | | $ | 1,368 | |
We had state NOL carryforwards of approximately $3.901 billion. Several states adopt the federal NOL carryforward period such that our more recent state NOLs do not expire. The state NOL carryforwards are subject to apportioned amounts of the federal Section 382 limitations.
On August 16, 2022, the President of the United States signed into law the Inflation Reduction Act of 2022 (“IRA”) which, among other things, includes provisions for a 15% corporate alternative minimum tax on book income for companies whose average book income exceeds $1 billion for any three consecutive years preceding the tax year and a 1% excise tax on stock buybacks. These changes are generally in effect for tax years beginning after December 31, 2022. Based on our book income in the past three years, we do not believe we will be subject to the corporate alternative minimum tax in 2023. However, we may become subject to the corporate alternative minimum tax in future years. It is our policy that we view the alternative minimum tax as an excess tax over regular income tax and therefore, our deferred tax assets will continue to be assessed for realizability on the basis of whether they reduce a regular tax liability. Should we pay alternative minimum tax in the future and thus acquire credit carryovers related thereto, such deferred tax assets on these will be separately evaluated for valuation allowance purposes.
Accounting guidance for recognizing and measuring uncertain tax positions requires a more likely than not threshold condition be met on a tax position, based solely on the technical merits of being sustained, before any benefit of the tax position can be recognized in the financial statements. Guidance is also provided regarding recognition, classification and disclosure of uncertain tax positions. As of December 31, 2022, and 2021, the amount of unrecognized tax benefits related to NOL carryforwards, tax credit carryforwards, and tax liabilities associated with uncertain tax positions was $69 million and $74 million, respectively. As of December 31, 2022, $29 million is related to state tax receivables not expected to be recovered, $4 million is related to tax credit carryforwards, and the remainder is related to NOL carryforwards. As of December 31, 2021, $29 million is related to state tax receivables not expected to be recovered and the remainder is related to NOL carryforwards. If recognized, $33 million of the uncertain tax positions identified would have an effect on the effective tax rate. As of December 31, 2022, and 2021, we had no amounts accrued for interest related to these uncertain tax positions. We recognize interest related to uncertain tax positions as a component of interest expense. Penalties, if any, related to uncertain tax positions would be recorded in other expenses. $24 million of the state tax receivable relates to claims for refund of Pennsylvania income taxes. During the fourth quarter of 2021, a court case with similar claims as ours was decided in favor of the taxpayer. We considered this information and determined that we had no change to our assessment of the recognition and measurement of our position. Should the state exhaust its appeals so that the taxpayer ultimately prevails we may be successful in applying that precedent to our claims. As such, it is possible that we may reassess that refund claim in the next 12 months and ascertain it to be more likely than not to be sustained. Should this occur, we will record a current tax benefit and income tax receivable for the amount we determine we are likely to sustain.
CHESAPEAKE ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
A reconciliation of the beginning and ending balances of unrecognized tax benefits is as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Successor | | | Predecessor |
| | Year Ended December 31, 2022 | | Period from February 10, 2021 through December 31, 2021 | | | Period from January 1, 2021 through February 9, 2021 | | Year Ended December 31, 2020 |
| | | | | |
| | | | | |
| Unrecognized tax benefits at beginning of period | | $ | 74 | | | $ | 74 | | | | $ | 74 | | | $ | 74 | |
| Additions based on tax positions related to the current year | | 2 | | | — | | | | — | | | — | |
| Additions to tax positions of prior years | | 2 | | | — | | | | — | | | — | |
| Settlements | | — | | | — | | | | — | | | — | |
| Expiration of the applicable statute of limitations | | — | | | — | | | | — | | | — | |
| Reductions to tax positions of prior years | | (9) | | | — | | | | — | | | — | |
| Unrecognized tax benefits at end of period | | $ | 69 | | | $ | 74 | | | | $ | 74 | | | $ | 74 | |
Our federal and state income tax returns are subject to examination by federal and state tax authorities. Our tax years 2019 through 2022 remain open for all purposes of examination by the IRS as do the WildHorse short period return for January 1, 2019, through February 1, 2019, the Vine 2019 and 2020 federal income tax returns and the Vine short period return for January 1, 2021 through November 1, 2021. However, certain earlier tax years remain open for adjustment to the extent of their NOL carryforwards available for future utilization.
In addition, tax years 2019 through 2022 as well as certain earlier years remain open for examination by state tax authorities. Currently, several state examinations are in progress of various years. We do not anticipate that the outcome of any federal or state audit will have a significant impact on our financial position or results of operations.
CHESAPEAKE ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
New Common Stock.
As discussed in Note 2, on the Effective Date, we issued an aggregate of 97,907,081 shares of New Common Stock, par value $0.01 per share, to the holders of allowed claims, and 2,092,918 shares of New Common Stock were reserved for future distributions under the Plan. During the 2022 and 2021 Successor Periods, 439,370 and 864,090 reserved shares, respectively, were issued to resolve allowed General Unsecured Claims. On November 1, 2021, we completed the Vine Acquisition and issued 18,709,399 shares of New Common Stock. On March 9, 2022, we completed the Marcellus Acquisition and issued 9,442,185 shares of New Common Stock. See further discussion of both acquisitions in Note 4. Dividends
In May 2021, we initiated a new annual dividend on our shares of common stock, expected to be paid quarterly. We declared the first quarterly dividend on our New Common Stock in the second quarter of 2021, which consisted of a base dividend per share. In March 2022, we adopted a variable return program that resulted in the payment of an additional variable dividend equal to the sum of Adjusted Free Cash Flow from the prior quarter less the base quarterly dividend, multiplied by 50%. The following table summarizes our dividend payments in the 2022 and 2021 Successor Periods:
| | | | | | | | | | | | | | | | | | | | |
| Payment Date | | Stockholders of Record Date | | Dividend Payment | | Rate Per Share |
| June 10, 2021 | | May 24, 2021 | | $ | 34 | | | $ | 0.34375 | |
| September 9, 2021 | | August 24, 2021 | | 33 | | | $ | 0.34375 | |
| December 9, 2021 | | November 24, 2021 | | 52 | | | $ | 0.43750 | |
| Total dividends paid 2021 | | | | $ | 119 | | | |
| | | | | | |
| Payment Date | | Stockholders of Record Date | | Dividend Payment | | Rate Per Share |
| March 22, 2022 | | March 7, 2022 | | $ | 210 | | | $ | 1.7675 | |
| June 2, 2022 | | May 19, 2022 | | 298 | | | $ | 2.34 | |
| September 1, 2022 | | August 17, 2022 | | 280 | | | $ | 2.32 | |
| December 1, 2022 | | November 15, 2022 | | 424 | | | $ | 3.16 | |
| Total dividends paid 2022 | | | | $ | 1,212 | | | |
On February 21, 2023, we declared a quarterly dividend payable of $1.29 per share, which will be paid on March 23, 2023 to stockholders of record at the close of business on March 7, 2023. The dividend consists of a base quarterly dividend in the amount of $0.55 per share and a variable quarterly dividend in the amount of $0.74 per share.
Share Repurchase Program
As of December 2, 2021, the Company was authorized to purchase up to $1.0 billion of the Company’s common stock and/or warrants under a share repurchase program. In June 2022, our Board of Directors authorized an expansion of the share repurchase program by $1.0 billion, bringing the total authorized share repurchase amount to $2.0 billion for stock and/or warrants. The share repurchase program will expire on December 31, 2023.
In March 2022, we commenced our share repurchase program and throughout the 2022 Successor Period, we repurchased 11.7 million shares of common stock for an aggregate price of $1.1 billion. The shares of common stock that were repurchased during the 2022 Successor Period were retired and recorded as a reduction to common stock and retained earnings.
CHESAPEAKE ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
Warrants | | | | | | | | | | | | | | | | | |
| Class A Warrants | | Class B Warrants | | Class C Warrants(a) |
| Outstanding as of February 10, 2021 | 11,111,111 | | | 12,345,679 | | | 9,768,527 | |
| Converted into New Common Stock | (254,259) | | | (32,406) | | | (10,603) | |
| Issued for General Unsecured Claims | — | | | — | | | 1,630,447 | |
| Outstanding as of December 31, 2021 | 10,856,852 | | | 12,313,273 | | | 11,388,371 | |
Converted into New Common Stock(b) | (1,609,641) | | | (29,679) | | | (959,247) | |
Converted in warrant exchange offer(b) | (4,752,207) | | | (7,879,030) | | | (7,252,004) | |
| Issued for General Unsecured Claims | — | | | — | | | 829,109 | |
| Outstanding as of December 31, 2022 | 4,495,004 | | | 4,404,564 | | | 4,006,229 | |
_________________________________________ (a)As of December 31, 2022, we had 1,489,337 of reserved Class C Warrants.
(b)During the 2022 Successor Period, we issued 18,408,228 common shares as a result of Warrant exercises, inclusive of the shares issued as part of the Warrant exchange offers described below.
As discussed in Note 2, on the Effective Date, we issued Class A, Class B and Class C Warrants that were initially exercisable for one share of New Common Stock per Warrant at initial exercise prices of $27.63, $32.13 and $36.18 per share, respectively, subject to adjustments pursuant to the terms of the Warrants. The Warrants are exercisable from the Effective Date until February 9, 2026. The Warrants contain customary anti-dilution adjustments in the event of any stock split, reverse stock split, reclassification, stock dividend or other distributions. The exercise prices of the Warrants were adjusted to prevent the dilution of rights for the effects of the quarterly dividend distribution on December 1, 2022, and the adjusted exercise prices are $24.32, $28.28, and $31.84 per share for the Class A, Class B and Class C Warrants, respectively. Additionally, we have recalculated the number of shares of New Common Stock issuable upon the exercise of each of the Class A, Class B and Class C Warrants, respectively, and as a result, 1.12 shares are issuable upon the exercise of a Class A, Class B or Class C Warrant. On August 18, 2022, we announced exchange offers relating to our outstanding Class A Warrants, Class B Warrants and Class C Warrants. The exchange offers expired on October 7, 2022 and resulted in the issuance of 16,305,984 shares of our New Common Stock in exchange for the cancellation of (i) 4,752,207 Class A Warrants, (ii) 7,879,030 Class B Warrants and (iii) 7,252,004 Class C Warrants. Under the exchange offers, the Warrants were exchanged in a cashless transaction and were converted to shares of our New Common Stock at a ratio of 0.8636 for Class A Warrants, 0.8224 for Class B Warrants and 0.7890 for Class C Warrants, respectively. As the fair value of the New Common Stock issued was greater than the fair value of the Warrants tendered in the exchange offers due to stated exchange premiums, we recorded a non-cash deemed dividend of $67 million. Such fair values were determined using our stock price that is considered a Level 1 input.
Chapter 11 Proceedings
Upon our emergence from Chapter 11 on February 9, 2021, as discussed in Note 2, Predecessor common stock and preferred stock were canceled and released under the Plan without receiving any recovery on account thereof. Noncontrolling Interests
During part of the 2020 Predecessor Period, we owned 23,750,000 common units in the Chesapeake Granite Wash Trust (the “Trust”) representing a 51% beneficial interest. We determined that the Trust was a VIE and that we were the primary beneficiary. As a result, the Trust was included in our consolidated financial statements. In the 2020 Predecessor Period, we sold our interests in the Mid-Continent operating area and the units we owned in the Trust. See Note 4 for additional discussion.
CHESAPEAKE ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
| | | | | |
| 13. | Share-Based Compensation |
As discussed in Note 2, on the Effective Date, our Predecessor common stock was canceled and New Common Stock was issued. Accordingly, our then existing share-based compensation awards were also canceled, which resulted in the recognition of any previously unamortized expense related to the canceled awards on the date of cancellation. Share-based compensation for the Predecessor and Successor Periods is not comparable. Successor Share-Based Compensation
As of the Effective Date, the Board adopted the LTIP with a share reserve equal to 6,800,000 shares of New Common Stock. The LTIP provides for the grant of restricted stock units (“RSUs”), restricted stock awards, stock options, stock appreciation rights, performance awards and other stock awards to the Company’s employees and non-employee directors.
Restricted Stock Units. In the 2022 and 2021 Successor Periods, we granted RSUs to employees and non-employee directors under the LTIP, which will vest over a three-year to five-year period and one-year period, respectively. The fair value of RSUs is based on the closing sales price of our common stock on the date of grant, and compensation expense is recognized ratably over the requisite service period. A summary of the changes in unvested RSUs is presented below:
| | | | | | | | | | | | | | |
| |
Unvested
Restricted Stock Units | | Weighted Average
Grant Date
Fair Value Per Share |
| | (in thousands) | | |
| Unvested as of February 10, 2021 | | — | | | $ | — | |
Granted (a) | | 1,202 | | | $ | 52.60 | |
Vested (a) | | (377) | | | $ | 65.66 | |
| Forfeited | | (50) | | | $ | 44.37 | |
| Unvested as of December 31, 2021 | | 775 | | | $ | 46.77 | |
| Granted | | 666 | | | $ | 81.87 | |
| Vested | | (300) | | | $ | 48.11 | |
| Forfeited | | (184) | | | $ | 56.54 | |
| Unvested as of December 31, 2022 | | 957 | | | $ | 68.91 | |
_________________________________________ (a)Due to the Vine Acquisition, each Vine restricted stock unit was converted into a Company restricted stock unit. As a result, approximately 430 thousand Vine restricted stock units were converted to Company restricted stock units, of which approximately 375 thousand restricted stock units were accelerated. We recognized accelerated share-based compensation expense in other operating expense on our consolidated statement of operations.
The aggregate intrinsic value of restricted stock units that vested during the 2022 and 2021 Successor Periods was approximately and $26 million and $25 million based on the stock price at the time of vesting, respectively.
As of December 31, 2022, there was approximately $50 million of total unrecognized compensation expense related to unvested restricted stock units. The expense is expected to be recognized over a weighted average period of approximately 2.71 years.
CHESAPEAKE ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
Performance Share Units. In the 2022 and 2021 Successor Periods, we granted performance share units (“PSUs”) to senior management under the LTIP, which will generally vest over a three-year period and will be settled in shares. The performance criteria include total shareholder return (“TSR”) and relative TSR (“rTSR”), and could result in a total payout between 0% - 200% of the target units. For the PSUs granted in 2021, the performance criteria also include share price hurdles which could result in a total payout between 0% - 100% of the target units. The fair value of the PSUs was measured on the grant date using a Monte Carlo simulation, and compensation expense is recognized ratably over the requisite service period because these awards depend on a combination of service and market criteria.
The following tables present the assumptions used in the valuation of the PSUs granted in the 2022 and 2021 Successor Periods.
| | | | | | | | | | | |
| 2022 PSU Awards | | | |
| Assumption | TSR, rTSR | | |
| Risk-free interest rate | 2.00 | % | | |
| Volatility | 70.2 | % | | |
| | | |
| 2021 PSU Awards | | | |
| Assumption | TSR, rTSR | | Share Price Hurdle |
| Risk-free interest rate | 0.23 | % | | 0.30 | % |
| Volatility | 71.4 | % | | 68.4 | % |
A summary of the changes in unvested PSUs is presented below:
| | | | | | | | | | | | | | |
| | Unvested Performance Share Units | | Weighted Average
Grant Date
Fair Value Per Share |
| | (in thousands) | | |
| Unvested as of February 10, 2021 | | — | | | $ | — | |
| Granted | | 201 | | | $ | 64.41 | |
| Vested | | (9) | | | $ | 38.95 | |
| Forfeited | | (9) | | | $ | 55.42 | |
| Unvested as of December 31, 2021 | | 183 | | | $ | 66.12 | |
| Granted | | 133 | | | $ | 109.65 | |
| Vested | | — | | | $ | — | |
| Forfeited | | (40) | | | $ | 57.48 | |
| Unvested as of December 31, 2022 | | 276 | | | $ | 88.28 | |
The aggregate intrinsic value of PSUs that vested during the 2021 Successor Period was approximately $0.6 million based on the stock price at the time of vesting.
As of December 31, 2022, there was approximately $16 million of total unrecognized compensation expense related to unvested PSUs. The expense is expected to be recognized over a weighted average period of approximately 1.99 years.
Predecessor Share-Based Compensation
Our Predecessor share-based compensation program consisted of restricted stock, stock options and PSUs granted to employees and restricted stock granted to non-employee directors under our long-term incentive plans. The restricted stock and stock options were equity-classified awards and the PSUs were liability-classified awards.
CHESAPEAKE ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
Restricted Stock Units. We granted restricted stock units to employees and non-employee directors. The following table provides information related to restricted stock units activity for the Predecessor periods presented:
| | | | | | | | | | | | | | |
| | Unvested
Restricted Stock Units | | Weighted Average
Grant Date
Fair Value Per Share |
| | (in thousands) | | |
| Unvested as of January 1, 2021 | | 1 | | | $ | 616.57 | |
| Granted | | — | | | $ | — | |
| Vested | | — | | | $ | — | |
| Forfeited/canceled | | (1) | | | $ | 611.47 | |
| Unvested as of February 9, 2021 | | — | | | $ | — | |
| | | | |
| Unvested as of January 1, 2020 | | 52 | | | $ | 709.85 | |
| Granted | | 68 | | | $ | 60.00 | |
| Vested | | (21) | | | $ | 791.69 | |
| Forfeited | | (98) | | | $ | 243.13 | |
| Unvested as of December 31, 2020 | | 1 | | | $ | 616.57 | |
The aggregate intrinsic value of restricted stock units that vested during the 2020 Predecessor Period was approximately $1 million based on the stock price at the time of vesting.
Stock Options. In the 2020 Predecessor Period, we granted members of management stock options that vested ratably over a three-year period. Each stock option award had an exercise price equal to the closing price of our common stock on the grant date. Outstanding options expired seven years to ten years from the date of grant.
We utilized the Black-Scholes option-pricing model to measure the fair value of stock options. The expected life of an option was determined using the simplified method. Volatility assumptions were estimated based on the average historical volatility of Chesapeake stock over the expected life of an option. The risk-free interest rate was based on the U.S. Treasury rate in effect at the time of the grant over the expected life of the option. The dividend yield was based on an annual dividend yield, taking into account our dividend policy, over the expected life of the option.
CHESAPEAKE ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
The following table provides information related to stock option activity for the Predecessor periods presented:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Number of Shares Underlying Options | | Weighted Average Exercise Price Per Share | | Weighted Average Contract Life in Years | | Aggregate Intrinsic Value(a) |
| | (in thousands) | | | | | | ($ in millions) |
| Outstanding as of January 1, 2021 | | 20 | | | $ | 1,429.11 | | | 4.27 | | $ | — | |
| Granted | | — | | | $ | — | | | | | |
Exercised | | — | | | $ | — | | | | | $ | — | |
Expired | | (1) | | | $ | 741.86 | | | | | |
| Forfeited/canceled | | (19) | | | $ | 1,452.40 | | | | | |
| Outstanding as of February 9, 2021 | | — | | | $ | — | | | — | | | $ | — | |
| Exercisable as of February 9, 2021 | | — | | | $ | — | | | — | | | $ | — | |
| | | | | | | | |
| Outstanding as of January 1, 2020 | | 90 | | | $ | 1,420.90 | | | 5.70 | | $ | — | |
| Granted | | — | | | $ | — | | | | | |
Exercised | | — | | | $ | — | | | | | $ | — | |
Expired | | (23) | | | $ | 914.50 | | | | | |
Forfeited | | (47) | | | $ | 1,666.21 | | | | | |
| Outstanding as of December 31, 2020 | | 20 | | | $ | 1,429.11 | | | 4.27 | | $ | — | |
| Exercisable as of December 31, 2020 | | 19 | | | $ | 1,439.55 | | | 4.35 | | $ | — | |
___________________________________________
(a)The intrinsic value of a stock option is the amount by which the current market value or the market value upon exercise of the underlying stock exceeds the exercise price of the option.
Restricted Stock, Stock Option, and PSU Compensation.
We recognized the following compensation costs, net of actual forfeitures, related to RSUs, stock options, and PSUs for the periods presented:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Successor | | | Predecessor |
| | Year Ended
December 31, 2022 | | Period from February 10, 2021 through
December 31, 2021 | | | Period from January 1, 2021 through February 9, 2021 | | Year Ended
December 31, 2020 |
| General and administrative expenses | | $ | 19 | | | $ | 7 | | | | $ | 3 | | | $ | 20 | |
| Natural gas and oil properties | | 4 | | | 2 | | | | — | | | 1 | |
| Production expense | | 3 | | | 2 | | | | — | | | 1 | |
| Total RSU, stock option and PSU compensation | | $ | 26 | | | $ | 11 | | | | $ | 3 | | | $ | 22 | |
| Related income tax benefit | | $ | 6 | | | $ | — | | | | $ | — | | | $ | — | |
CHESAPEAKE ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
| | | | | |
| 14. | Employee Benefit Plans |
Our qualified 401(k) profit sharing plan (“401(k) Plan”) is the Chesapeake Energy Corporation Savings and Incentive Stock Bonus Plan, which is open to employees of Chesapeake and all our subsidiaries. Eligible employees may elect to defer compensation through voluntary contributions to their 401(k) Plan accounts, subject to plan limits and those set by the IRS. We match employee contributions dollar for dollar (subject to a maximum contribution of 6% of an employee's base salary and performance bonus) in cash. In April 2021, the 401(k) match was changed from 15% to 6%. In addition to our employer match contributions, in 2022 we commenced a discretionary fixed dollar contribution benefit for all employees, paid quarterly, which is based upon a calculation of 1% of Adjusted Free Cash Flow less the base quarterly dividend. This discretionary fixed dollar contribution is subject to an annual maximum contribution of $15,000 per employee. We contributed $22 million, $8 million, $2 million and $24 million to the 401(k) Plan in the 2022 Successor Period, 2021 Successor Period, 2021 Predecessor Period and 2020 Predecessor Period, respectively.
| | | | | |
| 15. | Derivative and Hedging Activities |
We use derivative instruments to reduce our exposure to fluctuations in future commodity prices and to protect our expected operating cash flow against significant market movements or volatility. All of our natural gas and oil derivative instruments are net settled based on the difference between the fixed-price payment and the floating-price payment, resulting in a net amount due to or from the counterparty. None of our open natural gas and oil derivative instruments were designated for hedge accounting as of December 31, 2022 and 2021.
As of December 31, 2022, we reclassified $65 million of derivative liabilities (notional volume of 9.6 bcf of natural gas and notional volume of 4.8 mmbbls of oil) to liabilities held for sale, as these open hedge positions will be novated to WildFire Energy I LLC upon completion of the sale of a portion of our Eagle Ford assets. See Note 23 for more details. Natural Gas and Oil Derivatives
As of December 31, 2022 and 2021, our natural gas and oil derivative instruments consisted of the following types of instruments:
•Swaps: We receive a fixed price and pay a floating market price to the counterparty for the hedged commodity. In exchange for higher fixed prices on certain of our swap trades, we may sell call options and swap options.
•Options: We sell, and occasionally buy, call options in exchange for a premium. At the time of settlement, if the market price exceeds the fixed price of the call option, we pay the counterparty the excess on sold call options and we receive the excess on bought call options. If the market price settles below the fixed price of the call option, no payment is due from either party.
•Collars: These instruments contain a fixed floor price (put) and ceiling price (call). If the market price exceeds the call strike price or falls below the put strike price, we receive the fixed price and pay the market price. If the market price is between the put and the call strike prices, no payments are due from either party. Three-way collars include the sale by us of an additional put option in exchange for a more favorable strike price on the call option. This eliminates the counterparty’s downside exposure below the second put option strike price.
•Basis Protection Swaps: These instruments are arrangements that guarantee a fixed price differential to NYMEX from a specified delivery point. We receive the fixed price differential and pay the floating market price differential to the counterparty for the hedged commodity.
CHESAPEAKE ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
The estimated fair values of our natural gas and oil derivative instrument assets (liabilities) as of December 31, 2022 and 2021 are provided below:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Successor |
| | | December 31, 2022 | | December 31, 2021 |
| | Notional Volume | | Fair Value | | Notional Volume | | Fair Value |
| Natural gas (Bcf): | | | | | | | | |
| Fixed-price swaps | | 382 | | | $ | (494) | | | 637 | | | $ | (675) | |
| Collars | | 721 | | | 49 | | | 205 | | | (82) | |
| Three-way collars | | 4 | | | (2) | | | — | | | — | |
| Call options | | 18 | | | (22) | | | 18 | | | (17) | |
| Basis protection swaps | | 652 | | | (32) | | | 252 | | | (11) | |
| Total natural gas | | 1,777 | | | (501) | | | 1,112 | | | (785) | |
| Oil (MMBbls): | | | | | | | | |
| Fixed-price swaps | | 1 | | | (32) | | | 13 | | | (356) | |
| Collars | | 2 | | | 7 | | | — | | | — | |
| Basis protection swaps | | 6 | | | 1 | | | 9 | | | (2) | |
| Total oil | | 9 | | | (24) | | | 22 | | | (358) | |
| Total estimated fair value | | | | $ | (525) | | | | | $ | (1,143) | |
In prior periods we had terminated certain commodity derivative contracts that were previously designated as cash flow hedges for which the original contract months were yet to occur. See further discussion below under Effect of Derivative Instruments – Accumulated Other Comprehensive Income (Loss).
Effect of Derivative Instruments – Consolidated Balance Sheets
The following table presents the fair value and location of each classification of derivative instrument included in the consolidated balance sheets as of December 31, 2022 and 2021 on a gross basis and after same-counterparty netting:
| | | | | | | | | | | | | | | | | | | | |
| | Gross Fair Value(a) | | Amounts Netted in the Consolidated Balance Sheets | | Net Fair Value Presented in the Consolidated Balance Sheets |
| Successor | | | | | | |
| As of December 31, 2022 | | | | | | |
| Commodity Contracts: | | | | | | |
| Short-term derivative asset | | $ | 200 | | | $ | (166) | | | $ | 34 | |
| Long-term derivative asset | | 87 | | | (40) | | | 47 | |
| Short-term derivative liability | | (598) | | | 166 | | | (432) | |
| Long-term derivative liability | | (214) | | | 40 | | | (174) | |
| Total derivatives | | $ | (525) | | | $ | — | | | $ | (525) | |
| | | | | | |
| As of December 31, 2021 | | | | | | |
| Commodity Contracts: | | | | | | |
| Short-term derivative asset | | $ | 56 | | | $ | (51) | | | $ | 5 | |
| Short-term derivative liability | | (950) | | | 51 | | | (899) | |
| Long-term derivative liability | | (249) | | | — | | | (249) | |
| Total derivatives | | $ | (1,143) | | | $ | — | | | $ | (1,143) | |
CHESAPEAKE ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
___________________________________________
(a)These financial assets (liabilities) are measured at fair value on a recurring basis utilizing significant other observable inputs; see further discussion on fair value measurements below.
Fair Value
The fair value of our derivatives is based on third-party pricing models, which utilize inputs that are either readily available in the public market, such as natural gas, oil and NGL forward curves and discount rates, or can be corroborated from active markets or broker quotes, and, as such, are classified as Level 2. These values are compared to the values given by our counterparties for reasonableness. Derivatives are also subject to the risk that either party to a contract will be unable to meet its obligations. We factor non-performance risk into the valuation of our derivatives using current published credit default swap rates. To date, this has not had a material impact on the values of our derivatives.
Credit Risk Considerations
Our derivative instruments expose us to our counterparties’ credit risk. To mitigate this risk, we enter into derivative contracts only with counterparties that are highly rated or deemed by us to have acceptable credit strength and deemed by management to be competent and competitive market-makers, and we attempt to limit our exposure to non-performance by any single counterparty. As of December 31, 2022, our natural gas and oil derivative instruments were spread among 12 counterparties.
Hedging Arrangements
Certain of our hedging arrangements are with counterparties that were also lenders (or affiliates of lenders) under our New Credit Facility. The contracts entered into with these counterparties are secured by the same collateral that secures the revolving credit facility. The counterparties’ obligations must be secured by cash or letters of credit to the extent that any mark-to-market amounts owed to us exceed defined thresholds. As of December 31, 2022, we did not have any cash or letters of credit posted as collateral for our commodity derivatives.
Effect of Derivative Instruments – Accumulated Other Comprehensive Income (Loss)
A reconciliation of the changes in accumulated other comprehensive income (loss) in our consolidated statements of stockholders’ equity related to our cash flow hedges is presented below:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Predecessor |
| | Period from January 1, 2021 through February 9, 2021 | | Year Ended December 31, 2020 |
| | Before
Tax | | After
Tax | | Before
Tax | | After
Tax |
| Balance, beginning of period | | $ | (12) | | | $ | 45 | | | $ | (45) | | | $ | 12 | |
Losses reclassified to income(a) | | 3 | | | 3 | | | 33 | | | 33 | |
| Fresh start adjustments | | 9 | | | 9 | | | — | | | — | |
| Elimination of tax effects | | — | | | (57) | | | — | | | — | |
| Balance, end of period | | $ | — | | | $ | — | | | $ | (12) | | | $ | 45 | |
___________________________________________
(a)These losses were included as a component of total natural gas and oil derivatives.
Our accumulated other comprehensive loss balance represented the net deferred loss associated with commodity derivative contracts that were previously designated as cash flow hedges for which the original contract months are yet to occur. The remaining deferred gain or loss amounts were to be recognized in earnings in the month for which the original contract months were to occur. In connection with our adoption of fresh start accounting, we recorded a fair value adjustment to eliminate the accumulated other comprehensive income related to hedging settlements including the elimination of tax effects. See Note 3 for a discussion of fresh start accounting adjustments. We did not have any changes or items impacting other comprehensive income for the 2022 Successor Period or the 2021 Successor Period.
CHESAPEAKE ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
| | | | | |
| 16. | Capitalized Exploratory Well Costs |
A summary of the changes in our capitalized exploratory well costs for the periods presented is detailed below. Additions pending the determination of proved reserves excludes amounts capitalized and subsequently charged to expense within the same year.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Successor | | | Predecessor |
| | Year Ended
December 31, 2022 | | Period from February 10, 2021 through
December 31, 2021 | | | Period from January 1, 2021 through February 9, 2021 | | Year Ended
December 31, 2020 |
| Balance, beginning of period | | $ | 14 | | | $ | — | | | | $ | — | | | $ | 7 | |
| Additions pending the determination of proved reserves | | 1 | | | 24 | | | | — | | | — | |
| Divestitures and other | | — | | | — | | | | — | | | — | |
| Reclassifications to proved properties | | — | | | (10) | | | | — | | | — | |
| Charges to exploration expense | | (5) | | | — | | | | — | | | (7) | |
Balance, end of period(a) | | $ | 10 | | | $ | 14 | | | | $ | — | | | $ | — | |
___________________________________________(a)Our capitalized exploratory well costs balance as of December 31, 2022, consisted of one project for which we had suspended exploratory well costs capitalized for a period greater than one year. As of December 31, 2022, we are currently evaluating the project.
We had no projects with suspended exploratory well costs capitalized for a period greater than one year as of both December 31, 2021 and 2020.
| | | | | |
| 17. | Other Property and Equipment |
A summary of other property and equipment held for use and the estimated useful lives thereof is as follows:
| | | | | | | | | | | | | | | | | | | | |
| | Successor | | Estimated Useful Life |
| | December 31, 2022 | | December 31, 2021 | |
| | | | | | (in years) |
| Buildings and improvements | | $ | 325 | | | $ | 330 | | | 10 - 39 |
| Computer equipment | | 92 | | | 87 | | | 5 |
| Land | | 32 | | | 37 | | | |
Sand mine(a) | | — | | | 2 | | | 10 - 30 |
| Other | | 51 | | | 39 | | | 5 - 20 |
| Total other property and equipment, at cost | | 500 | | | 495 | | | |
| Less: accumulated depreciation | | (58) | | | (26) | | | |
| Total other property and equipment, net | | $ | 442 | | | $ | 469 | | | |
___________________________________________
(a) These assets were transferred to assets held for sale as of December 31, 2022.
CHESAPEAKE ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
Momentum Sustainable Ventures LLC. During the fourth quarter of 2022, Chesapeake entered into an agreement with Momentum Sustainable Ventures LLC to build a new natural gas gathering pipeline and carbon capture and sequestration project, which will gather natural gas produced in the Haynesville Shale for re-delivery to Gulf Coast markets, including LNG export. The pipeline is expected to have an initial capacity of 1.7 Bcf/d expandable to 2.2 Bcf/d. The carbon capture portion of the project anticipates capturing and permanently sequestering up to 2.0 million tons per annum of CO2. The natural gas gathering pipeline in-service is projected for the fourth quarter of 2024, and the carbon sequestration portion of the project is subject to regulatory approvals. We have a 35% interest in the project and have committed approximately $330 million to the project through the end of 2024. We have accounted for this investment as an equity method investment and its carrying value as of December 31, 2022 was $18 million.
FTS International, Inc. (FTSI). In the 2020 Predecessor Period, FTSI filed for Chapter 11 bankruptcy and we recognized an impairment of our entire investment of $23 million. FTSI emerged from bankruptcy on November 19, 2020, and this restructuring resulted in a reduction of the common stock we owned in FTSI from 20% to less than 2%. The decreased ownership percentage and the loss of significant influence required us to measure the investment at fair value as of December 31, 2020. In the 2021 Successor Period, FTSI announced it would be acquired in an all cash deal that closed during 2022.
CHESAPEAKE ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
Impairments of Natural Gas and Oil Properties
During the 2020 Predecessor Period we recognized $8.446 billion of impairments related to our natural gas and oil properties. In the 2020 Predecessor Period, the decrease in demand for crude oil primarily due to the combined impacts of COVID-19 and the OPEC+ production increases resulted in decreases in then current and then expected long-term crude oil and NGL sale prices. These conditions resulted in reductions to the market capitalization of peer companies in the energy industry. We determined these adverse market conditions represented a triggering event to perform an impairment assessment of our long-lived assets used in, and in support of, our operations, including proved natural gas and oil properties, and our sand mine assets.
Proved Gas and Oil Properties
Our impairment test involved a Step 1 assessment to determine if the net book value of our proved natural gas and oil properties was expected to be recovered from the estimated undiscounted future cash flows.
•We calculated the expected undiscounted future net cash flows of our long-lived assets using management’s assumptions and expectations of (i) commodity prices, which are based on the NYMEX strip pricing escalated by an inflationary rate (ii) pricing adjustments for differentials, (iii) operating costs, (iv) capital investment plans, (v) future production volumes, and (vi) estimated proved reserves.
•Unprecedented volatility in the price of oil due to the decrease in demand led us to rely on NYMEX strip pricing, which represented a Level 1 input.
Certain natural gas and oil properties in our Eagle Ford, Powder River Basin, and Mid-Continent and other non-core operating areas failed the Step 1 assessment. For these assets, we used a discounted cash flow analysis to estimate fair value. The expected future net cash flows were discounted using a rate of 11%, which we believe represents the estimated weighted average cost of capital of a theoretical market participant. Based on Step 2 of our long-lived assets impairment test, we recognized an $8.446 billion impairment because the carrying value exceeded estimated fair market value as of March 31, 2020.
•Significant inputs associated with the calculation of discounted future net cash flows include estimates of (i) recoverable reserves, (ii) production rates, (iii) future operating and development costs, (iv) future commodity prices escalated by an inflationary rate, adjusted for differentials, and (v) a market-based weighted average cost of capital. We utilized NYMEX strip pricing, adjusted for differentials, to value the reserves. The NYMEX strip pricing inputs used are classified as Level 1 fair value assumptions and all other inputs are classified as Level 3 fair value assumptions.
Impairments of Fixed Assets
In the 2020 Predecessor Period, we recorded a $76 million impairment of our sand mine assets that support our Eagle Ford operating area for the difference between the fair value and carrying value of the assets as well as a $13 million impairment of compressor inventory due to a lack of a current market for compressors.
During the 2022 Successor Period, 2021 Successor Period and 2021 Predecessor Period, we did not have any material impairments of our natural gas and oil properties or fixed assets.
During the 2022 Successor Period, exploration expense charges of $23 million were primarily the result of non-cash impairment charges in unproved properties of $8 million, $6 million of charges related to dry hole expense and $6 million of geological and geophysical expense. We did not have material exploration expenses during the 2021 Successor Period or 2021 Predecessor Period. The exploration expense charges of $427 million during the 2020 Predecessor Period were primarily the result of non-cash impairment charges in unproved properties of $411 million, primarily in our Eagle Ford, Haynesville, Powder River Basin and Mid-Continent operating areas.
CHESAPEAKE ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
Unproved natural gas and oil properties are periodically assessed for impairment by considering future drilling and exploration plans, results of exploration activities, commodity price outlooks, planned future sales and expiration of all or a portion of the projects.
| | | | | |
| 21. | Other Operating Expense (Income), Net |
In the 2022 Successor Period, we recognized approximately $41 million of costs related to our Marcellus Acquisition, which included integration costs, consulting fees, financial advisory fees, legal fees and change in control expense in accordance with Chief’s existing employment agreements.
In the 2021 Successor Period, we recognized approximately $59 million of costs related to our acquisition of Vine, which included consulting fees, financial advisory fees, and legal fees. Additionally, we recognized approximately $36 million of severance expense as a result of the Vine Acquisition, which included $15 million of cash severance and $21 million of non-cash severance, primarily related to the issuance of New Common Stock for the acceleration of certain Vine restricted stock unit awards. A majority of Vine executives and employees were terminated on the date of the acquisition. These executives and employees were entitled to severance benefits in accordance with existing employment agreements.
In the 2020 Predecessor Period, we terminated certain gathering, processing and transportation contracts and recognized a non-recurring $80 million expense related to the contract terminations. The contract terminations removed approximately $169 million of future commitments related to gathering, processing and transportation agreements. Additionally, we recognized $9 million of expense related to the impairment of sand mine inventory and $42 million of other operating expense primarily related to royalty settlements and other legal matters offset by $51 million of income from the amortization of VPP deferred revenue. In the 2020 Predecessor Period, we sold the assets related to our remaining volumetric production payment and extinguished the liability related to the production volume delivery obligation.
CHESAPEAKE ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
| | | | | |
| 22. | Asset Retirement Obligations |
The components of the change in our asset retirement obligations are shown below:
| | | | | | | | | | | | | | | | | | | | | | | |
| | Successor | | | Predecessor |
| | Year Ended December 31, 2022 | | Period from February 10, 2021 through December 31, 2021 | | | Period from January 1, 2021 through February 9, 2021 |
| Asset retirement obligations, beginning of period | | $ | 360 | | | $ | 241 | | | | $ | 144 | |
Additions(a) | | 53 | | | 48 | | | | — | |
Revisions(b) | | 16 | | | 63 | | | | — | |
Settlements and disposals(c) | | (54) | | | (3) | | | | (1) | |
Held for sale(d) | | (57) | | | — | | | | — | |
| Accretion expense | | 17 | | | 11 | | | | 1 | |
| Impact of fresh start accounting | | — | | | — | | | | 97 | |
| Asset retirement obligations, end of period | | 335 | | | 360 | | | | 241 | |
| Less current portion | | 12 | | | 11 | | | | 5 | |
| Asset retirement obligations, long-term | | $ | 323 | | | $ | 349 | | | | $ | 236 | |
___________________________________________
(a) During the 2022 Successor Period, approximately $27 million of additions relate to the Marcellus Acquisition. During the 2021 Successor Period, approximately $44 million of additions relate to the Vine Acquisition. See Note 4 for further discussion of these transactions. (b) Revisions primarily represent changes in the present value of liabilities resulting from changes in estimated costs and economic lives of producing properties.
(c) During the 2022 Successor Period, approximately $47 million of disposals related to our Powder River Basin assets. See Note 4 for further discussion of these transactions. (d) As of December 31, 2022, approximately $57 million of asset retirement obligations associated with the sale of a portion of our Eagle Ford assets have been reclassified as other current liabilities held for sale.
In January 2023, we entered into an agreement to sell a portion of our Eagle Ford assets to WildFire Energy I LLC for approximately $1.425 billion. This transaction, which is subject to certain customary closing conditions, including certain regulatory approvals, is expected to close in the first quarter of 2023. As of December 31, 2022, we ceased depreciation on the assets associated with the sale and classified approximately $811 million of property and equipment, net and $8 million of other assets as held for sale included within current assets held for sale on the consolidated balance sheets. Additionally, approximately $65 million of derivative liabilities, $57 million of asset retirement obligations liabilities and $22 million of other liabilities were classified as held for sale and included within other current liabilities on the consolidated balance sheets as of December 31, 2022.
In February 2023, we entered into an agreement to sell a portion of our remaining Eagle Ford assets to INEOS Energy for approximately $1.4 billion. This transaction, which is subject to certain customary closing conditions, including certain regulatory approvals, is expected to close in the second quarter of 2023.
CHESAPEAKE ENERGY CORPORATION AND SUBSIDIARIES
SUPPLEMENTARY INFORMATION
| | | | | |
| Supplemental Disclosures About Natural Gas, Oil and NGL Producing Activities (unaudited) | |
Certain reserves and production information was previously disclosed in a per barrel of oil equivalent. As the majority of our production profile consists of natural gas, we have converted this information, including prior periods, from a per barrel of oil equivalent, to a per one thousand cubic feet of natural gas equivalent, referred to, on such a converted basis, as per Mcfe.
Net Capitalized Costs
Capitalized costs related to our natural gas, oil and NGL producing activities are summarized as follows:
| | | | | | | | | | | | | | |
| | Successor |
| | December 31, 2022 | | December 31, 2021 |
| Natural gas and oil properties: | | | | |
| Proved | | $ | 11,096 | | | $ | 7,682 | |
| Unproved | | 2,022 | | | 1,530 | |
| Total | | 13,118 | | | 9,212 | |
| Less accumulated depreciation, depletion and amortization | | (2,373) | | | (882) | |
| Net capitalized costs | | $ | 10,745 | | | $ | 8,330 | |
Unproved properties as of December 31, 2022 and 2021, consisted mainly of leasehold acquired through our Vine Acquisition and Marcellus Acquisition. We will continue to evaluate our unproved properties, and although the timing of the ultimate evaluation or disposition of the properties cannot be determined, we can expect the majority of our unproved properties not held by production to be transferred into the amortization base over the next five years.
Costs Incurred in Natural Gas and Oil Property Acquisition, Exploration and Development
Costs incurred in natural gas and oil property acquisition, exploration and development, including capitalized interest and asset retirement costs, are summarized as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Successor | | | Predecessor |
| | Year Ended
December 31, 2022 | | Period from February 10, 2021 through
December 31, 2021 | | | Period from January 1, 2021 through February 9, 2021 | | Year Ended
December 31, 2020 |
Acquisition of properties(a): | | | | | | | | | |
| Proved properties | | $ | 2,321 | | | $ | 2,183 | | | | $ | — | | | $ | 3 | |
| Unproved properties | | 795 | | | 1,121 | | | | — | | | 6 | |
| Exploratory costs | | 15 | | | 31 | | | | — | | | 8 | |
| Development costs | | 1,918 | | | 717 | | | | 58 | | | 887 | |
| Costs incurred | | $ | 5,049 | | | $ | 4,052 | | | | $ | 58 | | | $ | 904 | |
___________________________________________
(a) Includes $2.31 billion and $0.79 billion of proved and unproved property acquisitions, respectively, related to our Marcellus Acquisition in 2022. Includes $2.18 billion and $1.10 billion of proved and unproved property acquisitions, respectively, related to our Vine Acquisition in 2021.
CHESAPEAKE ENERGY CORPORATION AND SUBSIDIARIES
SUPPLEMENTARY INFORMATION - (Continued)
Results of Operations from Natural Gas, Oil and NGL Producing Activities
The following table includes revenues and expenses associated directly with our natural gas, oil and NGL producing activities for the periods presented. It does not include any derivative activity, interest costs or indirect general and administrative costs and, therefore, is not necessarily indicative of the contribution to consolidated net operating results of our natural gas, oil and NGL operations.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Successor | | | Predecessor |
| | Year Ended
December 31, 2022 | | Period from February 10, 2021 through
December 31, 2021 | | | Period from January 1, 2021 through February 9, 2021 | | Year Ended
December 31, 2020 |
| Natural gas, oil and NGL sales | | $ | 9,892 | | | $ | 4,401 | | | | $ | 398 | | | $ | 2,745 | |
| Production expenses | | (475) | | | (297) | | | | (32) | | | (373) | |
| Gathering, processing and transportation expenses | | (1,059) | | | (780) | | | | (102) | | | (1,082) | |
| Severance and ad valorem taxes | | (242) | | | (158) | | | | (18) | | | (149) | |
| Exploration | | (23) | | | (7) | | | | (2) | | | (427) | |
| Depletion and depreciation | | (1,703) | | | (882) | | | | (64) | | | (1,014) | |
| Accretion of asset retirement obligations | | (17) | | | (11) | | | | (1) | | | (12) | |
| Impairment of natural gas and oil properties | | — | | | — | | | | — | | | (8,446) | |
Imputed income tax provision(a) | | (1,440) | | | (535) | | | | (42) | | | 1,988 | |
| Results of operations from natural gas, oil and NGL producing activities | | $ | 4,933 | | | $ | 1,731 | | | | $ | 137 | | | $ | (6,770) | |
___________________________________________
(a) The imputed income tax provision is hypothetical (at the statutory tax rate) and determined without regard to our deduction for general and administrative expenses, interest costs and other income tax credits and deductions, nor whether the hypothetical tax provision (benefit) will be payable (receivable).
Natural Gas, Oil and NGL Reserve Quantities
Our petroleum engineers and independent petroleum engineering firms estimated all of our proved reserves as of December 31, 2022, 2021 and 2020. Independent petroleum engineering firm Netherland, Sewell & Associates, Inc. estimated an aggregate of 92% of our estimated proved reserves (by volume) as of December 31, 2022.
Proved natural gas, oil and NGL reserves are those quantities of natural gas, oil and NGL which, by analysis of geoscience and engineering data, can be estimated with reasonable certainty to be economically producible – from a given date forward, from known reservoirs, and under existing economic conditions, operating methods, and government regulations – prior to the time at which contracts providing the right to operate expire, unless evidence indicates that renewal is reasonably certain, regardless of whether deterministic or probabilistic methods are used for the estimation. Existing economic conditions include prices and costs at which economic producibility from a reservoir is to be determined. Based on reserve reporting rules, the price is calculated using the average price during the 12-month period prior to the ending date of the period covered by the report, determined as an unweighted arithmetic average of the first-day-of-the-month price for each month within the period, unless prices are defined by contractual arrangements, excluding escalations based upon future conditions. A project to extract hydrocarbons must have commenced or the operator must be reasonably certain that it will commence the project within a reasonable time. The area of the reservoir considered as proved includes: (i) the area identified by drilling and limited by fluid contacts, if any, and (ii) adjacent undrilled portions of the reservoir that can, with reasonable certainty, be judged to be continuous with it and to contain economically producible natural gas or oil on the basis of available geoscience and engineering data. In the absence of data on fluid contacts, proved quantities in a reservoir are limited by the lowest known hydrocarbons as seen in a well penetration unless geoscience, engineering or performance data and reliable technology establish a lower contact with reasonable certainty. Where direct observation from well penetrations has defined a highest known oil elevation and the potential exists for an associated natural gas cap, proved oil reserves may be assigned in the structurally higher portions of the reservoir only if geoscience, engineering or performance data and reliable technology establish the higher contact with reasonable certainty. Reserves which can be produced economically through application of improved recovery
CHESAPEAKE ENERGY CORPORATION AND SUBSIDIARIES
SUPPLEMENTARY INFORMATION - (Continued)
techniques (including, but not limited to, fluid injection) are included in the proved classification when: (i) successful testing by a pilot project in an area of the reservoir with properties no more favorable than in the reservoir as a whole, the operation of an installed program in the reservoir or an analogous reservoir, or other evidence using reliable technology establishes the reasonable certainty of the engineering analysis on which the project or program was based; and (ii) the project has been approved for development by all necessary parties and entities, including governmental entities.
The information provided below on our natural gas, oil and NGL reserves is presented in accordance with regulations prescribed by the SEC. Our reserve estimates are generally based upon extrapolation of historical production trends, analogy to similar properties and volumetric calculations. Accordingly, these estimates will change as future information becomes available and as commodity prices change. These changes could be material and could occur in the near term.
Presented below is a summary of changes in estimated proved reserves for the periods presented: | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Natural Gas | | Oil | | NGL | | Total |
| | (bcf) | | (mmbbl) | | (mmbbl) | | (bcfe) |
| December 31, 2022 | | | | | | | | |
| Proved reserves, beginning of period (Successor) | | 7,824 | | | 209.7 | | | 82.0 | | | 9,573 | |
| Extensions, discoveries and other additions | | 60 | | | 2.1 | | | 1.5 | | | 82 | |
| Revisions of previous estimates | | 1,989 | | | 22.5 | | | 5.0 | | | 2,155 | |
| Production | | (1,308) | | | (19.4) | | | (6.0) | | | (1,461) | |
| Sale of reserves-in-place | | (122) | | | (16.5) | | | (8.6) | | | (273) | |
| Purchase of reserves-in-place | | 2,926 | | | — | | | — | | | 2,926 | |
| Proved reserves, end of period (Successor) | | 11,369 | | | 198.4 | | | 73.9 | | | 13,002 | |
| Proved developed reserves: | | | | | | | | |
| Beginning of period (Successor) | | 4,246 | | | 165.7 | | | 61.7 | | | 5,610 | |
| End of period (Successor) | | 7,385 | | | 157.2 | | | 58.9 | | | 8,681 | |
| Proved undeveloped reserves: | | | | | | | | |
| Beginning of period (Successor) | | 3,578 | | | 44.0 | | | 20.3 | | | 3,963 | |
End of period(a) (Successor) | | 3,984 | | | 41.2 | | | 15.0 | | | 4,321 | |
| | | | | | | | |
CHESAPEAKE ENERGY CORPORATION AND SUBSIDIARIES
SUPPLEMENTARY INFORMATION - (Continued)
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Natural Gas | | Oil | | NGL | | Total |
| | (bcf) | | (mmbbl) | | (mmbbl) | | (bcfe) |
| December 31, 2021 | | | | | | | | |
| Proved reserves, beginning of period (Predecessor) | | 3,530 | | | 161.3 | | | 52.0 | | | 4,809 | |
| Extensions, discoveries and other additions | | 1,744 | | | 41.0 | | | 16.9 | | | 2,091 | |
| Revisions of previous estimates | | 1,522 | | | 33.3 | | | 21.1 | | | 1,848 | |
| Production | | (807) | | | (25.9) | | | (8.0) | | | (1,010) | |
| Sale of reserves-in-place | | — | | | — | | | — | | | — | |
| Purchase of reserves-in-place | | 1,835 | | | — | | | — | | | 1,835 | |
| Proved reserves, end of period (Successor) | | 7,824 | | | 209.7 | | | 82.0 | | | 9,573 | |
| Proved developed reserves: | | | | | | | | |
| Beginning of period (Predecessor) | | 3,196 | | | 158.1 | | | 51.4 | | | 4,452 | |
| End of period (Successor) | | 4,246 | | | 165.7 | | | 61.7 | | | 5,610 | |
| Proved undeveloped reserves: | | | | | | | | |
| Beginning of period (Predecessor) | | 334 | | | 3.2 | | | 0.6 | | | 357 | |
End of period(a) (Successor) | | 3,578 | | | 44.0 | | | 20.3 | | | 3,963 | |
| | | | | | | | |
| December 31, 2020 | | | | | | | | |
| Proved reserves, beginning of period (Predecessor) | | 6,566 | | | 358.0 | | | 120.0 | | | 9,434 | |
| Extensions, discoveries and other additions | | 100 | | | 1.1 | | | 0.4 | | | 109 | |
| Revisions of previous estimates | | (2,326) | | | (148.2) | | | (50.6) | | | (3,519) | |
| Production | | (684) | | | (37.3) | | | (11.3) | | | (976) | |
| Sale of reserves-in-place | | (126) | | | (12.3) | | | (6.5) | | | (239) | |
| Purchase of reserves-in-place | | — | | | — | | | — | | | — | |
| Proved reserves, end of period (Predecessor) | | 3,530 | | | 161.3 | | | 52.0 | | | 4,809 | |
| Proved developed reserves: | | | | | | | | |
| Beginning of period (Predecessor) | | 3,377 | | | 201.4 | | | 82.1 | | | 5,078 | |
| End of period (Predecessor) | | 3,196 | | | 158.1 | | | 51.4 | | | 4,452 | |
| Proved undeveloped reserves: | | | | | | | | |
| Beginning of period (Predecessor) | | 3,189 | | | 156.6 | | | 37.9 | | | 4,356 | |
End of period(a) (Predecessor) | | 334 | | | 3.2 | | | 0.6 | | | 357 | |
___________________________________________(a) As of December 31, 2022, 2021 and 2020, there were no PUDs that had remained undeveloped for five years or more.
During 2022, we acquired 2,926 bcfe primarily related to the Marcellus Acquisition. We recorded extensions and discoveries of 82 bcfe primarily related to new PUDs and previously unproved producing wells in emerging plays. We recorded 2,155 bcfe of upward revisions of previous estimates, which consisted of 866 bcfe of revisions to PUDs primarily due to development plan optimization through prioritizing longer laterals and multi-well pad development in the Haynesville, 1,156 bcfe of revisions to existing or new proved developed properties primarily due to performance and 133 bcfe of revisions due to higher natural gas, oil and NGL prices in 2022. The natural gas, oil and NGL prices used in computing our reserves as of December 31, 2022, were $6.36 per mcf, $93.67 per bbl and $43.58 per bbl, respectively, before basis differential adjustments.
CHESAPEAKE ENERGY CORPORATION AND SUBSIDIARIES
SUPPLEMENTARY INFORMATION - (Continued)
During 2021, we acquired 1,835 bcfe primarily related to the Vine Acquisition. We recorded extensions and discoveries of 2,091 bcfe following our emergence from bankruptcy on February 9, 2021, and certainty regarding our ability to finance the development of our proved reserves over a five-year period. We recorded 1,848 bcfe of upward revisions of previous estimates, which consisted of 1,284 bcfe due to lateral length adjustments, performance and updates to our five-year development plan and 564 bcfe due to higher natural gas, oil and NGL prices in 2021. The natural gas, oil and NGL prices used in computing our reserves as of December 31, 2021, were $3.60 per mcf, $66.56 per bbl and $35.81 per bbl, respectively, before basis differential adjustments.
During 2020, we recorded extensions and discoveries of 109 bcfe primarily in the Marcellus and Haynesville primarily related to successfully drilled new well additions. We sold 239 bcfe of proved reserves for approximately $136 million primarily in the Mid-Continent. We recorded 3,519 bcfe of downward revisions of previous estimates consisting of 2,538 bcfe of downward revisions due to updates to our five-year development plan in contemplation of ongoing market conditions and uncertainty regarding our ability to finance the development of our proved reserves over a five-year period, downward revisions of 1,248 bcfe due to lower natural gas, oil and NGL prices in 2020, and upward revisions of 267 bcfe due to ongoing portfolio evaluation including performance adjustments. The natural gas, oil and NGL prices used in computing our reserves as of December 31, 2020, were $1.98 per mcf, $39.57 per bbl and $17.32 per bbl, respectively, before basis differential adjustments.
Standardized Measure of Discounted Future Net Cash Flows
Accounting Standards Codification Topic 932 prescribes guidelines for computing a standardized measure of future net cash flows and changes therein relating to estimated proved reserves. Chesapeake has followed these guidelines which are briefly discussed below.
Future cash inflows and future production and development costs as of December 31, 2022, 2021 and 2020 were determined by applying the average of the first-day-of-the-month prices for the 12 months of the year and year-end costs to the estimated quantities of natural gas, oil and NGL to be produced. Actual future prices and costs may be materially higher or lower than the prices and costs used. For each year, estimates are made of quantities of proved reserves and the future periods during which they are expected to be produced based on continuation of the economic conditions applied for that year. Estimated future income taxes are computed using current statutory income tax rates including consideration of the current tax basis of the properties and related carryforwards, giving effect to permanent differences and tax credits. The resulting future net cash flows are reduced to present value amounts by applying a 10% annual discount factor.
The assumptions used to compute the standardized measure are those prescribed by the Financial Accounting Standards Board and do not necessarily reflect our expectations of actual revenue to be derived from those reserves nor their present worth. The limitations inherent in the reserve quantity estimation process, as discussed previously, are equally applicable to the standardized measure computations since these estimates reflect the valuation process.
CHESAPEAKE ENERGY CORPORATION AND SUBSIDIARIES
SUPPLEMENTARY INFORMATION - (Continued)
The following summary sets forth our future net cash flows relating to proved natural gas, oil and NGL reserves based on the standardized measure:
| | | | | | | | | | | | | | | | | | | | | | | |
| | Years Ended December 31, | |
| | 2022 | | 2021 | | 2020 | |
| Future cash inflows | | $ | 76,626 | | (a) | $ | 33,700 | | (b) | $ | 8,247 | | (c) |
| Future production costs | | (10,177) | | | (6,735) | | | (2,963) | | |
| Future development costs | | (5,343) | | (d) | (3,687) | | (e) | (563) | | (f) |
| Future income tax provisions | | (10,440) | | | (2,254) | | | (9) | | |
| Future net cash flows | | 50,666 | | | 21,024 | | | 4,712 | | |
| Less effect of a 10% discount factor | | (24,361) | | | (8,737) | | | (1,626) | | |
| Standardized measure of discounted future net cash flows | | $ | 26,305 | | | $ | 12,287 | | | $ | 3,086 | | |
___________________________________________
(a) Calculated using prices of $6.36 per mcf of natural gas, $93.67 per bbl of oil and $43.58 per bbl of NGL, before basis differential adjustments.
(b) Calculated using prices of $3.60 per mcf of natural gas, $66.56 per bbl of oil and $35.81 per bbl of NGL, before basis differential adjustments.
(c) Calculated using prices of $1.98 per mcf of natural gas, $39.57 per bbl of oil and $17.32 per bbl of NGL, before basis differential adjustments.
(d) Included approximately $979 million of future plugging and abandonment costs as of December 31, 2022.
(e) Included approximately $846 million of future plugging and abandonment costs as of December 31, 2021.
(f) Included approximately $429 million of future plugging and abandonment costs as of December 31, 2020.
The principal sources of change in the standardized measure of discounted future net cash flows are as follows:
| | | | | | | | | | | | | | | | | | | | |
| | Years Ended December 31, |
| | 2022 | | 2021 | | 2020 |
Standardized measure, beginning of period(a) | | $ | 12,287 | | | $ | 3,086 | | | $ | 9,000 | |
Sales of natural gas and oil produced, net of production costs and gathering processing and transportation(b) | | (8,116) | | | (3,414) | | | (1,140) | |
| Net changes in prices and production costs | | 14,256 | | | 6,674 | | | (5,576) | |
Extensions and discoveries, net of production and
development costs | | 251 | | | 2,834 | | | 71 | |
| Changes in estimated future development costs | | (1,512) | | | (459) | | | 1,933 | |
| Previously estimated development costs incurred during the period | | 690 | | | 130 | | | 665 | |
| Revisions of previous quantity estimates | | 6,697 | | | 2,034 | | | (1,839) | |
| Purchase of reserves-in-place | | 7,047 | | | 2,807 | | | — | |
| Sales of reserves-in-place | | (402) | | | — | | | (112) | |
| Accretion of discount | | 1,371 | | | 309 | | | 902 | |
| Net change in income taxes | | (4,972) | | | (1,423) | | | 14 | |
| Changes in production rates and other | | (1,292) | | | (291) | | | (832) | |
Standardized measure, end of period(a) | | $ | 26,305 | | | $ | 12,287 | | | $ | 3,086 | |
___________________________________________
(a) The impact of cash flow hedges has not been included in any of the periods presented.
(b) Excludes gains and losses on derivatives. Production costs includes severance and ad valorem taxes.
| | | | | |
| Item 9. | Changes In and Disagreements with Accountants on Accounting and Financial Disclosure |
Not applicable.