Document



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X]    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended June 30, 2017
or
[  ]    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from                      to                     
Commission File No. 1-13726
CHESAPEAKE ENERGY CORPORATION
(Exact name of registrant as specified in its charter)
Oklahoma
 
73-1395733
(State or other jurisdiction of incorporation or organization)
 
(I.R.S. Employer Identification No.)
 
 
 
6100 North Western Avenue, Oklahoma City, Oklahoma
 
73118
(Address of principal executive offices)
 
(Zip Code)
 
 
 
(405) 848-8000
(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
YES [X] NO [ ]
 
 
 
 
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). YES [X] NO [ ]
 
 
 
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of "large accelerated filer", "accelerated filer", "smaller reporting company," and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large Accelerated Filer [X] Accelerated Filer [ ] Non-accelerated Filer [ ] (Do not check if a smaller reporting company) Smaller Reporting Company [ ] Emerging Growth Company [ ]
 
 
 
 
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. [ ]
 
 
 
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
YES [ ] NO [X]
As of July 31, 2017, there were 908,339,499 shares of our $0.01 par value common stock outstanding.



CHESAPEAKE ENERGY CORPORATION AND SUBSIDIARIES
INDEX TO FORM 10-Q FOR THE QUARTER ENDED JUNE 30, 2017

 
Page
Item 1.
 
 
June 30, 2017 and December 31, 2016
 
Condensed Consolidated Statements of Operations for the
Three and Six Months Ended June 30, 2017 and 2016
 
Condensed Consolidated Statements of Comprehensive Income (Loss) for the
Three and Six Months Ended June 30, 2017 and 2016
 
Condensed Consolidated Statements of Cash Flows for the
Six Months Ended June 30, 2017 and 2016
 
Condensed Consolidated Statements of Stockholders’ Equity for the
Six Months Ended June 30, 2017 and 2016
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Item 2.
Item 3.
Item 4.
 
Item 1.
Item 1A.
Item 2.
Item 3.
Item 4.
Item 5.
Item 6.


TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION



ITEM 1.
Condensed Consolidated Financial Statements (Unaudited)
CHESAPEAKE ENERGY CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)

 
 
June 30,
2017
 
December 31,
2016
 
 
($ in millions)
CURRENT ASSETS:
 
 
 
 
Cash and cash equivalents ($1 and $1 attributable to our VIE)
 
$
13

 
$
882

Accounts receivable, net
 
1,019

 
1,057

Short-term derivative assets
 
71

 
—

Other current assets
 
144

 
203

Total Current Assets
 
1,247

 
2,142

PROPERTY AND EQUIPMENT:
 
 
 
 
Oil and natural gas properties, at cost based on full cost accounting:
 
 
 
 
Proved oil and natural gas properties
($488 and $488 attributable to our VIE)
 
67,419

 
66,451

Unproved properties
 
4,096

 
4,802

Other property and equipment
 
2,020

 
2,053

Total Property and Equipment, at Cost
 
73,535

 
73,306

Less: accumulated depreciation, depletion and amortization
(($459) and ($458) attributable to our VIE)
 
(63,138
)
 
(62,726
)
Property and equipment held for sale, net
 
21

 
29

Total Property and Equipment, Net
 
10,418

 
10,609

LONG-TERM ASSETS:
 
 
 
 
Long-term derivative assets
 
14

 
—

Other long-term assets
 
241

 
277

TOTAL ASSETS
 
$
11,920

 
$
13,028

 
 
 
 
 

The accompanying notes are an integral part of these condensed consolidated financial statements.
1
TABLE OF CONTENTS
CHESAPEAKE ENERGY CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS – (Continued)
(Unaudited)

 
 
June 30,
2017
 
December 31,
2016
 
 
($ in millions)
CURRENT LIABILITIES:
 
 
 
 
Accounts payable
 
$
718

 
$
672

Current maturities of long-term debt, net
 
3

 
503

Accrued interest
 
137

 
113

Short-term derivative liabilities
 
3

 
562

Other current liabilities ($4 and $3 attributable to our VIE)
 
1,297

 
1,798

Total Current Liabilities
 
2,158

 
3,648

LONG-TERM LIABILITIES:
 
 
 
 
Long-term debt, net
 
9,850

 
9,938

Long-term derivative liabilities
 
1

 
15

Asset retirement obligations, net of current portion
 
221

 
247

Other long-term liabilities
 
374

 
383

Total Long-Term Liabilities
 
10,446

 
10,583

CONTINGENCIES AND COMMITMENTS (Note 4)
 

 

EQUITY:
 
 
 
 
Chesapeake Stockholders’ Equity:
 
 
 
 
Preferred stock, $0.01 par value, 20,000,000 shares authorized:
5,603,458 and 5,839,506 shares outstanding
 
1,671

 
1,771

Common stock, $0.01 par value,
2,000,000,000 and 1,500,000,000 shares authorized:
907,977,114 and 896,279,353 shares issued
 
9

 
9

Additional paid-in capital
 
14,458

 
14,486

Accumulated deficit
 
(16,969
)
 
(17,603
)
Accumulated other comprehensive loss
 
(75
)
 
(96
)
Less: treasury stock, at cost;
2,336,327 and 1,220,504 common shares
 
(32
)
 
(27
)
Total Chesapeake Stockholders’ Equity (Deficit)
 
(938
)
 
(1,460
)
Noncontrolling interests
 
254

 
257

Total Equity (Deficit)
 
(684
)
 
(1,203
)
TOTAL LIABILITIES AND EQUITY
 
$
11,920

 
$
13,028


The accompanying notes are an integral part of these condensed consolidated financial statements.
2
TABLE OF CONTENTS
CHESAPEAKE ENERGY CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)


 
 
Three Months Ended
June 30,
 
Six Months Ended
June 30,
 
 
2017
 
2016
 
2017
 
2016
  
 
($ in millions except per share data)
REVENUES:
 
 
 
 
 
 
 
 
Oil, natural gas and NGL
 
$
1,279

 
$
440

 
$
2,748

 
$
1,433

Marketing, gathering and compression
 
1,002

 
1,182

 
2,286

 
2,142

Total Revenues
 
2,281

 
1,622

 
5,034

 
3,575

OPERATING EXPENSES:
 
 
 
 
 
 
 
 
Oil, natural gas and NGL production
 
140

 
182

 
275

 
388

Oil, natural gas and NGL gathering, processing and transportation
 
357

 
481

 
712

 
963

Production taxes
 
21

 
19

 
43

 
37

Marketing, gathering and compression
 
1,027

 
1,207

 
2,355

 
2,149

General and administrative
 
70

 
61

 
135

 
109

Restructuring and other termination costs
 
—

 
3

 
—

 
3

Provision for legal contingencies
 
17

 
71

 
15

 
104

Oil, natural gas and NGL depreciation, depletion and amortization
 
202

 
277

 
399

 
540

Depreciation and amortization of other assets
 
21

 
29

 
42

 
58

Impairment of oil and natural gas properties
 
—

 
1,070

 
—

 
2,067

Impairments of fixed assets and other
 
26

 
6

 
417

 
44

Net (gains) losses on sales of fixed assets
 
1

 
(1
)
 
1

 
(5
)
Total Operating Expenses
 
1,882

 
3,405

 
4,394

 
6,457

INCOME (LOSS) FROM OPERATIONS
 
399

 
(1,783
)
 
640

 
(2,882
)
OTHER INCOME (EXPENSE):
 
 
 
 
 
 
 
 
Interest expense
 
(93
)
 
(62
)
 
(188
)
 
(124
)
Losses on investments
 
—

 
(2
)
 
—

 
(2
)
Loss on sale of investment
 
—

 
—

 
—

 
(10
)
Gains on purchases or exchanges of debt
 
191

 
68

 
184

 
168

Other income (expense)
 
(1
)
 
3

 
2

 
6

Total Other Income (Expense)
 
97

 
7

 
(2
)
 
38

INCOME (LOSS) BEFORE INCOME TAXES
 
496

 
(1,776
)
 
638

 
(2,844
)
Income Tax Expense
 
1

 
—

 
2

 
—

NET INCOME (LOSS)
 
495

 
(1,776
)
 
636

 
(2,844
)
Net income attributable to noncontrolling interests
 
(1
)
 
—

 
(2
)
 
—

NET INCOME (LOSS) ATTRIBUTABLE TO CHESAPEAKE
 
494

 
(1,776
)
 
634

 
(2,844
)
Preferred stock dividends
 
(16
)
 
(42
)
 
(39
)
 
(85
)
Loss on exchange of preferred stock
 
—

 
—

 
(41
)
 
—

Earnings allocated to participating securities
 
(8
)
 
—

 
(7
)
 
—

NET INCOME (LOSS) AVAILABLE TO COMMON STOCKHOLDERS
 
$
470

 
$
(1,818
)
 
$
547

 
$
(2,929
)
EARNINGS (LOSS) PER COMMON SHARE:
 
 
 
 
 
 
 
 
Basic
 
$
0.52

 
$
(2.51
)
 
$
0.60

 
$
(4.21
)
Diluted
 
$
0.47

 
$
(2.51
)
 
$
0.59

 
$
(4.21
)
WEIGHTED AVERAGE COMMON AND COMMON
EQUIVALENT SHARES OUTSTANDING (in millions):
 
 
 
 
 
 
 
 
Basic
 
908

 
724

 
907

 
695

Diluted
 
1,114

 
724

 
1,053

 
695


The accompanying notes are an integral part of these condensed consolidated financial statements.
3
TABLE OF CONTENTS
CHESAPEAKE ENERGY CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(Unaudited)


 
 
Three Months Ended
June 30,
 
Six Months Ended
June 30,
 
 
2017
 
2016
 
2017
 
2016
 
 
($ in millions)
NET INCOME (LOSS)
 
$
495

 
$
(1,776
)
 
$
636

 
$
(2,844
)
OTHER COMPREHENSIVE INCOME (LOSS), NET OF INCOME TAX:
 
 
 
 
 
 
 
 
Unrealized gains (losses) on derivative instruments,
net of income tax expense (benefit)
of $0, $2, $0 and ($1)
 
—

 
(15
)
 
4

 
(19
)
Reclassification of losses on settled derivative instruments, net of income tax expense (benefit)
of $0, ($4), $0 and $3
 
7

 
10

 
17

 
14

Other Comprehensive Income (Loss)
 
7

 
(5
)
 
21

 
(5
)
COMPREHENSIVE INCOME (LOSS)
 
502

 
(1,781
)
 
657

 
(2,849
)
COMPREHENSIVE INCOME ATTRIBUTABLE TO
NONCONTROLLING INTERESTS
 
(1
)
 
—

 
(2
)
 
—

COMPREHENSIVE INCOME (LOSS) ATTRIBUTABLE TO CHESAPEAKE
 
$
501

 
$
(1,781
)
 
$
655

 
$
(2,849
)



The accompanying notes are an integral part of these condensed consolidated financial statements.
4
TABLE OF CONTENTS
CHESAPEAKE ENERGY CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)



 
 
Six Months Ended
June 30,
 
 
2017
 
2016
 
 
($ in millions)
CASH FLOWS FROM OPERATING ACTIVITIES:
 
 
 
 
NET INCOME (LOSS)
 
$
636

 
$
(2,844
)
ADJUSTMENTS TO RECONCILE NET INCOME (LOSS) TO CASH
PROVIDED BY (USED IN) OPERATING ACTIVITIES:
 
 
 
 
Depreciation, depletion and amortization
 
441

 
598

Derivative (gains) losses, net
 
(522
)
 
278

Cash receipts (payments) on derivative settlements, net
 
(66
)
 
386

Stock-based compensation
 
27

 
25

Impairment of oil and natural gas properties
 
—

 
2,067

Net (gains) losses on sales of fixed assets
 
1

 
(5
)
Impairments of fixed assets and other
 
1

 
34

Losses on investments
 
—

 
2

Loss on sale of investment
 
—

 
10

Gains on purchases or exchanges of debt
 
(185
)
 
(168
)
Restructuring and other termination costs
 
—

 
3

Provision for legal contingencies
 
15

 
104

Other
 
(59
)
 
(51
)
Changes in assets and liabilities
 
(347
)
 
(765
)
Net Cash Used In Operating Activities
 
(58
)
 
(326
)
CASH FLOWS FROM INVESTING ACTIVITIES:
 
 
 
 
Drilling and completion costs
 
(1,031
)
 
(609
)
Acquisitions of proved and unproved properties
 
(162
)
 
(426
)
Proceeds from divestitures of proved and unproved properties
 
951

 
964

Additions to other property and equipment
 
(7
)
 
(25
)
Proceeds from sales of other property and equipment
 
26

 
70

Cash paid for title defects
 
—

 
(69
)
Other
 
—

 
(4
)
Net Cash Used In Investing Activities
 
(223
)
 
(99
)
CASH FLOWS FROM FINANCING ACTIVITIES:
 
 
 
 
Proceeds from revolving credit facility borrowings
 
2,551

 
2,477

Payments on revolving credit facility borrowings
 
(1,976
)
 
(2,377
)
Proceeds from issuance of senior notes, net
 
742

 
—

Cash paid to purchase debt
 
(1,746
)
 
(472
)
Cash paid for preferred stock dividends
 
(137
)
 
—

Distributions to noncontrolling interest owners
 
(5
)
 
(6
)
Other
 
(17
)
 
(18
)
Net Cash Used In Financing Activities
 
(588
)
 
(396
)
Net decrease in cash and cash equivalents
 
(869
)
 
(821
)
Cash and cash equivalents, beginning of period
 
882

 
825

Cash and cash equivalents, end of period
 
$
13

 
$
4

 
 
 
 
 

The accompanying notes are an integral part of these condensed consolidated financial statements.
5
TABLE OF CONTENTS
CHESAPEAKE ENERGY CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS – (Continued)
(Unaudited)

Supplemental disclosures to the condensed consolidated statements of cash flows are presented below:
 
 
 
 
 
 
 
Six Months Ended
June 30,
 
 
2017
 
2016
 
 
($ in millions)
SUPPLEMENTAL CASH FLOW INFORMATION:
 
 
 
 
Interest paid, net of capitalized interest
 
$
217

 
$
154

Income tax refunds received, net
 
$
(14
)
 
$
(20
)
 
 
 
 
 
SUPPLEMENTAL DISCLOSURE OF SIGNIFICANT NON-CASH INVESTING AND FINANCING ACTIVITIES:
 
 
 
 
Change in accrued drilling and completion costs
 
$
87

 
$
(13
)
Change in accrued acquisitions of proved and unproved properties
 
$
4

 
$
—

Change in divested proved and unproved properties
 
$
16

 
$
2

Debt exchanged for common stock
 
$
—

 
$
471



The accompanying notes are an integral part of these condensed consolidated financial statements.
6
TABLE OF CONTENTS
CHESAPEAKE ENERGY CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(Unaudited)



 
 
Six Months Ended
June 30,
 
 
2017
 
2016
 
 
($ in millions)
PREFERRED STOCK:
 
 
 
 
Balance, beginning of period
 
$
1,771

 
$
3,062

Exchange/conversions of 236,048 and 25,802 shares of preferred stock for common stock
 
(100
)
 
(26
)
Balance, end of period
 
1,671

 
3,036

COMMON STOCK:
 
 
 
 
Balance, beginning of period
 
9

 
7

Exchange of senior notes and contingent convertible notes
 
—

 
1

Balance, end of period
 
9

 
8

ADDITIONAL PAID-IN CAPITAL:
 
 
 
 
Balance, beginning of period
 
14,486

 
12,403

Stock-based compensation
 
29

 
31

Exchange of contingent convertible notes for 0 and 55,427,782 shares of common stock
 
—

 
241

Exchange of senior notes for 0 and 53,923,925 shares of common stock
 
—

 
229

Exchange/conversion of preferred stock for 9,965,835 and 1,021,506
shares of common stock
 
100

 
26

Equity component of contingent convertible notes repurchased
 
(20
)
 
—

Dividends on preferred stock
 
(137
)
 
—

Balance, end of period
 
14,458

 
12,930

RETAINED EARNINGS (ACCUMULATED DEFICIT):
 
 
 
 
Balance, beginning of period
 
(17,603
)
 
(13,202
)
Net income (loss) attributable to Chesapeake
 
634

 
(2,844
)
Balance, end of period
 
(16,969
)
 
(16,046
)
ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS):
 
 
 
 
Balance, beginning of period
 
(96
)
 
(99
)
Hedging activity
 
21

 
(5
)
Balance, end of period
 
(75
)
 
(104
)
TREASURY STOCK – COMMON:
 
 
 
 
Balance, beginning of period
 
(27
)
 
(33
)
Purchase of 1,189,813 and 22,810 shares for company benefit plans
 
(6
)
 
—

Release of 73,990 and 157,514 shares from company benefit plans
 
1

 
4

Balance, end of period
 
(32
)
 
(29
)
TOTAL CHESAPEAKE STOCKHOLDERS’ EQUITY (DEFICIT)
 
(938
)
 
(205
)
NONCONTROLLING INTERESTS:
 
 
 
 
Balance, beginning of period
 
257

 
259

Net income attributable to noncontrolling interests
 
2

 
—

Distributions to noncontrolling interest owners
 
(5
)
 
2

Balance, end of period
 
254

 
261

TOTAL EQUITY (DEFICIT)
 
$
(684
)
 
$
56


The accompanying notes are an integral part of these condensed consolidated financial statements.
7
TABLE OF CONTENTS
CHESAPEAKE ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)


1.
Basis of Presentation
The accompanying condensed consolidated financial statements of Chesapeake Energy Corporation (“Chesapeake” or the “Company”) were prepared in accordance with accounting principles generally accepted in the United States (U.S. 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. These financial statements were prepared in accordance with the instructions to Form 10-Q and, therefore, do not include all disclosures required for financial statements prepared in conformity with U.S. GAAP.
This Form 10-Q relates to the three and six months ended June 30, 2017 (the “Current Quarter” and the “Current Period, respectively) and the three and six months ended June 30, 2016 (the “Prior Quarter” and the “Prior Period”, respectively). Chesapeake’s annual report on Form 10-K for the year ended December 31, 2016 (“2016 Form 10-K”) includes certain definitions and a summary of significant accounting policies and should be read in conjunction with this Form 10-Q. All material adjustments (consisting solely of normal recurring adjustments) which, in the opinion of management, are necessary for a fair statement of the results for the interim periods have been reflected. The results for the Current Quarter and the Current Period are not necessarily indicative of the results to be expected for the full year.
Risks and Uncertainties
Our ability to grow, make capital expenditures and service our debt depends primarily upon the prices we receive for the oil, natural gas and natural gas liquids (NGL) we produce and sell. Substantial expenditures are required to replace reserves, sustain production and fund our business plans. Historically, oil and natural gas prices have been very volatile, and may be subject to wide fluctuations in the future. The substantial decline in oil, natural gas and NGL prices from 2014 levels has negatively affected the amount of liquidity we have available for capital expenditures and debt service. A substantial or extended decline in oil, natural gas and NGL prices could have a material impact on our financial position, results of operations, cash flows and on the quantities of reserves that we may economically produce. Other risks and uncertainties that could affect us in a low commodity price environment include, but are not limited to, counterparty credit risk for our receivables, access to capital markets, regulatory risks and our ability to meet financial ratios and covenants in our financing agreements.

8
TABLE OF CONTENTS
CHESAPEAKE ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
(Unaudited)

Revision of Previously Reported Condensed Consolidated Financial Statements
During the fourth quarter of 2016, we identified certain errors to the basis price differentials used in calculating the impairment of oil and natural gas properties and oil, natural gas and NGL depreciation, depletion and amortization for each of the first three interim periods in 2016. As disclosed within our 2016 Form 10-K, it was determined that these errors were not material to our previously issued 2016 interim financial statements. Accordingly, the correction of these errors and another immaterial previously identified error was reflected in the quarterly unaudited financial data included within our 2016 Form 10-K. These revisions have been reflected in the comparative 2016 condensed consolidated financial statements presented herein. See Evaluation of Disclosure Controls and Procedures in Item 4 of this Form 10-Q. The following table reconciles the amounts as previously reported in the applicable financial statement to the corresponding revised amounts:
 
 
Three Months Ended June 30, 2016
CONDENSED CONSOLIDATED STATEMENTS
OF OPERATIONS
 
As Previously
Reported
 
Revision
Adjustment
 
As
Revised
 
 
($ in millions except per share data)
Provision for legal contingencies
 
$
82

 
$
(11
)
 
$
71

Oil, natural gas and NGL depreciation, depletion and amortization
 
$
265

 
$
12

 
$
277

Impairment of oil and natural gas properties
 
$
1,045

 
$
25

 
$
1,070

Total operating expenses
 
$
3,379

 
$
26

 
$
3,405

Loss from operations
 
$
(1,757
)
 
$
(26
)
 
$
(1,783
)
Loss before income taxes
 
$
(1,750
)
 
$
(26
)
 
$
(1,776
)
Net loss
 
$
(1,750
)
 
$
(26
)
 
$
(1,776
)
Net loss attributable to Chesapeake
 
$
(1,750
)
 
$
(26
)
 
$
(1,776
)
Net loss available to common stockholders
 
$
(1,792
)
 
$
(26
)
 
$
(1,818
)
Earnings (loss) per common share basic
 
$
(2.48
)
 
$
(0.03
)
 
$
(2.51
)
Earnings (loss) per common share diluted
 
$
(2.48
)
 
$
(0.03
)
 
$
(2.51
)
 
 
 
 
 
 
 
 
 
Six Months Ended June 30, 2016
CONDENSED CONSOLIDATED STATEMENTS
OF OPERATIONS
 
As Previously
Reported
 
Revision
Adjustment
 
As
Revised
 
 
($ in millions except per share data)
Provision for legal contingencies
 
$
104

 
$
—

 
$
104

Oil, natural gas and NGL depreciation, depletion and amortization
 
$
536

 
$
4

 
$
540

Impairment of oil and natural gas properties
 
$
1,898

 
$
169

 
$
2,067

Total operating expenses
 
$
6,284

 
$
173

 
$
6,457

Loss from operations
 
$
(2,709
)
 
$
(173
)
 
$
(2,882
)
Loss before income taxes
 
$
(2,671
)
 
$
(173
)
 
$
(2,844
)
Net loss
 
$
(2,671
)
 
$
(173
)
 
$
(2,844
)
Net loss attributable to Chesapeake
 
$
(2,671
)
 
$
(173
)
 
$
(2,844
)
Net loss available to common stockholders
 
$
(2,756
)
 
$
(173
)
 
$
(2,929
)
Earnings (loss) per common share basic
 
$
(3.97
)
 
$
(0.24
)
 
$
(4.21
)
Earnings (loss) per common share diluted
 
$
(3.97
)
 
$
(0.24
)
 
$
(4.21
)

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CHESAPEAKE ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
(Unaudited)

 
 
Three Months Ended June 30, 2016
CONDENSED CONSOLIDATED STATEMENTS
OF COMPREHENSIVE INCOME (LOSS)
 
As Previously
Reported
 
Revision
Adjustment
 
As
Revised
 
 
($ in millions)
Net loss
 
$
(1,750
)
 
$
(26
)
 
$
(1,776
)
Comprehensive loss
 
$
(1,755
)
 
$
(26
)
 
$
(1,781
)
Comprehensive loss attributable to Chesapeake
 
$
(1,755
)
 
$
(26
)
 
$
(1,781
)
 
 
 
 
 
 
 
 
 
Six Months Ended June 30, 2016
CONDENSED CONSOLIDATED STATEMENTS
OF COMPREHENSIVE INCOME (LOSS)
 
As Previously
Reported
 
Revision
Adjustment
 
As
Revised
 
 
($ in millions)
Net loss
 
$
(2,671
)
 
$
(173
)
 
$
(2,844
)
Comprehensive loss
 
$
(2,676
)
 
$
(173
)
 
$
(2,849
)
Comprehensive loss attributable to Chesapeake
 
$
(2,676
)
 
$
(173
)
 
$
(2,849
)
 
 
Six Months Ended June 30, 2016
CONDENSED CONSOLIDATED STATEMENTS
OF CASH FLOWS
 
As Previously
Reported
 
Revision
Adjustment
 
As
Revised
 
 
($ in millions)
Net loss
 
$
(2,671
)
 
$
(173
)
 
$
(2,844
)
Depreciation, depletion and amortization
 
$
594

 
$
4

 
$
598

Impairment of oil and natural gas properties
 
$
1,898

 
$
169

 
$
2,067

Provision for legal contingencies
 
$
104

 
$
—

 
$
104

Net cash used in operating activities
 
$
(326
)
 
$
—

 
$
(326
)

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
(Unaudited)

2.
Earnings Per Share
Basic earnings per share (EPS) is calculated using the weighted average number of common shares outstanding during the period and includes the effect of any participating securities as appropriate. Participating securities consist of unvested restricted stock issued to our employees and non-employee directors that provide dividend rights.
Diluted EPS is calculated assuming the issuance of common shares for all potentially dilutive securities, provided the effect is not antidilutive. For the Current Quarter, the Prior Quarter, the Current Period and the Prior Period, our contingent convertible senior notes did not have a dilutive effect and therefore were excluded from the calculation of diluted EPS. See Note 3 for further discussion of our convertible senior notes and contingent convertible senior notes.
For the Current Quarter, the Prior Quarter, the Current Period and the Prior Period, shares of common stock for the following dilutive securities were excluded from the calculation of diluted EPS as the effect was antidilutive.
 
 
Shares
 
 
(in millions)
Three Months Ended June 30, 2017
 
 
Participating securities
 
1

Three Months Ended June 30, 2016
 
 
Common stock equivalent of our preferred stock outstanding:
 
 
5.75% cumulative convertible preferred stock
 
58

5.75% cumulative convertible preferred stock (series A)
 
42

5.00% cumulative convertible preferred stock (series 2005B)
 
6

4.50% cumulative convertible preferred stock
 
6

Participating securities
 
1

Six Months Ended June 30, 2017
 
 
Common stock equivalent of our preferred stock outstanding:
 
 
5.75% cumulative convertible preferred stock
 
31

5.75% cumulative convertible preferred stock (series A)
 
18

5.00% cumulative convertible preferred stock (series 2005B)
 
5

4.50% cumulative convertible preferred stock
 
6

Participating securities
 
1

Common stock equivalent of our preferred stock outstanding prior to exchange:
 
 
5.75% cumulative convertible preferred stock exchanged
 
1

Six Months Ended June 30, 2016
 
 
Common stock equivalent of our preferred stock outstanding:
 
 
5.75% cumulative convertible preferred stock
 
58

5.75% cumulative convertible preferred stock (series A)
 
42

5.00% cumulative convertible preferred stock (series 2005B)
 
6

4.50% cumulative convertible preferred stock
 
6

Participating securities
 
1


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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
(Unaudited)

For the Current Quarter and the Current Period, outstanding stock options were included in the calculation of diluted EPS. A reconciliation of basic EPS and diluted EPS is as follows:
 
 
Income (Numerator)
 
Weighted
Average
Shares
(Denominator)
 
Per
Share
Amount  
 
 
(in millions, except per share data)
Three Months Ended June 30, 2017
 
 
 
 
 
 
Basic EPS
 
$
470

 
908

 
$
0.52

Effect of Dilutive Securities:
 
 
 
 
 
 
5.75% cumulative convertible preferred stock
 
11

 
31

 
 
5.75% cumulative convertible preferred stock
(series A)
 
7

 
18

 
 
5.00% cumulative convertible preferred stock
(series 2005B)
 
2

 
5

 
 
4.50% cumulative convertible preferred stock
 
3

 
6

 
 
5.5% convertible senior notes due 2026
 
36

 
146

 
 
Diluted EPS
 
$
529

 
1,114

 
$
0.47

 
 
 
 
 
 
 
Six Months Ended June 30, 2017
 
 
 
 
 
 
Basic EPS
 
$
547

 
907

 
$
0.60

Effect of Dilutive Securities:
 
 
 
 
 
 
5.5% convertible senior notes due 2026
 
72

 
146

 
 
Diluted EPS
 
$
619

 
1,053

 
$
0.59



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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
(Unaudited)

3.
Debt
Our long-term debt consisted of the following as of June 30, 2017 and December 31, 2016:
 
 
June 30, 2017
 
December 31, 2016
 
 
Principal
Amount
 
Carrying
Amount
 
Principal
Amount
 
Carrying
Amount
 
 
($ in millions)
Term loan due 2021
 
$
1,500

 
$
1,500

 
$
1,500

 
$
1,500

6.25% euro-denominated senior notes due 2017(a)
 
—

 
—

 
258

 
258

6.5% senior notes due 2017
 
—

 
—

 
134

 
134

7.25% senior notes due 2018
 
46

 
46

 
64

 
64

Floating rate senior notes due 2019
 
380

 
380

 
380

 
380

6.625% senior notes due 2020
 
572

 
572

 
780

 
780

6.875% senior notes due 2020
 
279

 
279

 
279

 
279

6.125% senior notes due 2021
 
550

 
550

 
550

 
550

5.375% senior notes due 2021
 
270

 
270

 
270

 
270

4.875% senior notes due 2022
 
451

 
451

 
451

 
451

8.00% senior secured second lien notes due 2022(b)
 
1,737

 
2,385

 
2,419

 
3,409

5.75% senior notes due 2023
 
338

 
338

 
338

 
338

8.00% senior notes due 2025
 
1,000

 
1,000

 
1,000

 
1,000

5.5% convertible senior notes due 2026(c)(e)
 
1,250

 
824

 
1,250

 
811

8.00% senior notes due 2027
 
750

 
750

 
—

 
—

2.75% contingent convertible senior notes due 2035(d)
 
2

 
2

 
2

 
2

2.5% contingent convertible senior notes due 2037(d)
 
1

 
1

 
114

 
112

2.25% contingent convertible senior notes due 2038(d)(e)
 
9

 
8

 
200

 
180

Revolving credit facility
 
575

 
575

 
—

 
—

Debt issuance costs
 
—

 
(65
)
 
—

 
(64
)
Discount on senior notes
 
—

 
(15
)
 
—

 
(16
)
Interest rate derivatives(f)
 
—

 
2

 
—

 
3

Total debt, net
 
9,710

 
9,853

 
9,989

 
10,441

Less current maturities of long-term debt, net(g)
 
(3
)
 
(3
)
 
(506
)
 
(503
)
Total long-term debt, net
 
$
9,707

 
$
9,850

 
$
9,483

 
$
9,938

___________________________________________
(a)
The principal and carrying amounts shown are based on the exchange rate of $1.0517 to €1.00 as of December 31, 2016. See Foreign Currency Derivatives in Note 8 for information on our related foreign currency derivatives.
(b)
The carrying amounts as of June 30, 2017 and December 31, 2016, include premium amounts of $648 million and $990 million, respectively, associated with a troubled debt restructuring. The premium is being amortized based on the effective yield method.
(c)
The conversion and redemption provisions of our convertible senior notes are as follows:
Optional Conversion by Holders. Prior to maturity under certain circumstances and at the holder’s option, the notes are convertible into cash, our common stock, or a combination of cash and common stock, at our election. One triggering circumstance is when the price of our common stock exceeds a threshold amount during

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
(Unaudited)

a specified period in a fiscal quarter. Convertibility based on common stock price is measured quarterly. During the second quarter of 2017, the price of our common stock was below the threshold level and, as a result, the holders do not have the option to convert their notes in the third quarter of 2017 under this provision. The notes are also convertible, at the holder’s option, during specified five-day periods if the trading price of the notes is below certain levels determined by reference to the trading price of our common stock. The notes were not convertible under this provision during the Current Quarter. Upon conversion of a convertible senior note, the holder will receive cash, common stock or a combination of cash and common stock, at our election, according to the conversion rate specified in the indenture.
The common stock price conversion threshold amount for the convertible senior notes is 130% of the conversion price.
Optional Redemption by the Company. We may redeem the convertible senior notes for cash on or after September 15, 2019, if the price of our common stock exceeds 130% of the conversion price during a specified period at a redemption price of 100% of the principal amount of the notes.
Holders’ Demand Repurchase Rights. The holders of our convertible senior notes may require us to repurchase, in cash, all or a portion of their notes at 100% of the principal amount of the notes upon certain fundamental changes.
(d)
The repurchase, conversion, contingent interest and redemption provisions of our contingent convertible senior notes are as follows:
Holders’ Demand Repurchase Rights. The holders of our contingent convertible senior notes may require us to repurchase, in cash, all or a portion of their notes at 100% of the principal amount of the notes on any of four dates that are five, ten, fifteen and twenty years before the maturity date and upon certain fundamental changes.
Optional Conversion by Holders. At the holder’s option, prior to maturity under certain circumstances, the notes are convertible into cash and, if applicable, our common stock using a net share settlement process. One triggering circumstance is when the price of our common stock exceeds a threshold amount during a specified period within a fiscal quarter. Convertibility based on common stock price is measured quarterly. During the specified period in the Current Quarter, the price of our common stock was below the threshold level for each series of the contingent convertible senior notes and, as a result, the holders do not have the option to convert their notes into cash or common stock in the third quarter of 2017 under this provision.
The notes are also convertible, at the holder’s option, during specified five-day periods if the trading price of the notes is below certain levels determined by reference to the trading price of our common stock. The notes were not convertible under this provision during the Current Quarter and the Prior Quarter. In general, upon conversion of a contingent convertible senior note, the holder will receive cash equal to the principal amount of the note and common stock for the note’s conversion value in excess of the principal amount.
Contingent Interest. We will pay contingent interest on the contingent convertible senior notes after they have been outstanding at least ten years during certain periods if the average trading price of the notes exceeds the threshold defined in the indenture.
The holders’ demand repurchase dates, the common stock price conversion threshold amounts (as adjusted to give effect to cash dividends on our common stock) and the ending date of the first six-month period in which contingent interest may be payable for the contingent convertible senior notes are as follows:
 
    Contingent  
    Convertible  
    Senior Notes    
 
Holders' Demand
Repurchase Dates
 
Common Stock
 Price Conversion 
Thresholds
 
 Contingent Interest
First Payable
(if applicable)
 
2.75% due 2035
 
November 15, 2020, 2025, 2030
 
$
45.02

 
May 14, 2016
 
2.5% due 2037
 
May 15, 2022, 2027, 2032
 
$
59.44

 
November 14, 2017
 
2.25% due 2038
 
December 15, 2018, 2023, 2028, 2033
 
$
100.20

 
June 14, 2019
Optional Redemption by the Company. We may redeem the contingent convertible senior notes once they have been outstanding for ten years at a redemption price of 100% of the principal amount of the notes, payable in cash. In July 2017, we redeemed our remaining 2.75% Contingent Convertible Senior Notes due 2035 and our 2.5% Contingent Convertible Senior Notes due 2037.

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
(Unaudited)

(e)
The carrying amounts as of June 30, 2017 and December 31, 2016, are reflected net of discounts of $427 million and $461 million, respectively, associated with the equity component of our convertible and contingent convertible senior notes. This amount is being amortized based on the effective yield method through the first demand repurchase date as applicable.
(f)
See Interest Rate Derivatives in Note 8 for further discussion related to these instruments.
(g)
As of June 30, 2017, current maturities of long-term debt, net includes our 2.75% Contingent Convertible Senior Notes due 2035 and our 2.5% Contingent Convertible Senior Notes due 2037. As discussed in footnote (d) above, we redeemed both series of these notes in July 2017.
Term Loan Facility
We have a secured five-year term loan facility in an aggregate principal amount of $1.5 billion. Our obligations under the facility are unconditionally guaranteed on a joint and several basis by the same subsidiaries that guarantee our revolving credit facility, second lien notes and senior notes and are secured by first-priority liens on the same collateral securing our revolving credit facility (with a position in the collateral proceeds waterfall junior to the revolving credit facility). The term loan bears interest at a rate of London Interbank Offered Rate (LIBOR) plus 7.50% per annum, subject to a 1.00% LIBOR floor, or the Alternative Base Rate (ABR) plus 6.50% per annum, subject to a 2.00% ABR floor, at our option. The term loan matures in August 2021 and voluntary prepayments are subject to a make-whole premium prior to the second anniversary of the closing of the term loan, a premium to par of 4.25% from the second anniversary until but excluding the third anniversary, a premium to par of 2.125% from the third anniversary until but excluding the fourth anniversary and at par beginning on the fourth anniversary. The term loan may be subject to mandatory prepayments and offers to purchase with net cash proceeds of certain issuances of debt, certain asset sales and other dispositions of collateral and upon a change of control.
Senior Secured Second Lien Notes
Our second lien notes are secured second lien obligations and are effectively junior to our current and future secured first lien indebtedness, including indebtedness incurred under our revolving credit facility and our term loan facility, to the extent of the value of the collateral securing such indebtedness, effectively senior to all of our existing and future unsecured indebtedness, including our outstanding senior notes, to the extent of the value of the collateral, and senior to any future subordinated indebtedness that we may incur. We have the option to redeem the second lien notes, in whole or in part, at specified make-whole or redemption prices. Our second lien notes are governed by an indenture containing covenants that may limit our ability and our subsidiaries’ ability to create liens securing certain indebtedness, enter into certain sale-leaseback transactions, consolidate, merge or transfer assets and dispose of certain collateral and use proceeds from dispositions of certain collateral. As a holding company, Chesapeake owns no operating assets and has no significant operations independent of its subsidiaries. Chesapeake’s obligations under the second lien notes are fully and unconditionally guaranteed, jointly and severally, by certain of our direct and indirect wholly owned subsidiaries.
In December 2015, certain of the existing notes that were exchanged for the second lien notes were accounted for as a troubled debt restructuring (TDR). For the exchanges classified as a TDR, if the future undiscounted cash flows of the newly issued debt are less than the net carrying value of the original debt, a gain is recorded for the difference and the carrying value of the newly issued debt is adjusted to the future undiscounted cash flow amount and no future interest expense is recorded. All future interest payments on the newly issued debt reduce the carrying value.
Senior Notes, Contingent Convertible Senior Notes and Convertible Senior Notes
Our obligations under our outstanding senior notes and convertible senior notes are fully and unconditionally guaranteed, jointly and severally, by certain of our 100% owned subsidiaries on a senior unsecured basis. Our non-guarantor subsidiaries are minor and, as such, we have not included condensed consolidating financial information in the notes to our condensed consolidated financial statements.
We are required to account for the liability and equity components of our convertible debt instruments separately and to reflect interest expense through the first demand repurchase date, as applicable, at the interest rate of similar nonconvertible debt at the time of issuance. The applicable rates for our 2.5% Contingent Convertible Senior Notes due 2037, our 2.25% Contingent Convertible Senior Notes due 2038 and our 5.5% Convertible Senior Notes due 2026 are 8.0%, 8.0% and 11.5%, respectively.

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
(Unaudited)

During the Current Quarter, we issued in a private placement $750 million aggregate principal amount of unsecured 8.00% Senior Notes due 2027 at par for net proceeds of approximately $742 million. Some or all of the notes may be redeemed at any time prior to June 15, 2022, subject to a make-whole premium. We also may redeem some or all of the notes at any time on or after June 15, 2022, at the applicable redemption price in accordance with the terms of the notes and the indenture and supplemental indenture governing the notes. In addition, subject to certain conditions, we may redeem up to 35% of the aggregate principal amount of the notes at any time prior to June 15, 2020, at a price equal to 108% of the principal amount of the notes to be redeemed using the net proceeds of certain equity offerings.
In the Current Period, we retired $1.604 billion principal amount of our outstanding senior notes, senior secured second lien notes and contingent convertible notes through purchases in the open market, tender offers or repayment upon maturity for $1.746 billion. Included in these retirements is the maturity of our 6.25% Euro-denominated Senior Notes due 2017, which were carried at $258 million based on the December 31, 2016 exchange rate of $1.0517 to €1.00 and the corresponding cross currency swap. See Foreign Currency Derivatives in Note 8 for further information. For the open market repurchases and tender offers, we recorded aggregate gains of approximately $191 million and $184 million in the Current Quarter and the Current Period, respectively.
In the Prior Period, we retired $558 million principal amount of our outstanding senior notes and contingent convertible senior notes through purchases in the open market or repayment upon maturity for $472 million. Additionally, we privately negotiated an exchange of approximately $577 million principal amount of our outstanding senior notes and contingent convertible senior notes for 109,351,707 common shares. We recorded an aggregate gain of approximately $168 million associated with these repurchases and exchanges, including $68 million in the Prior Quarter.
Revolving Credit Facility
We have a senior secured revolving credit facility currently subject to a $3.8 billion borrowing base that matures in December 2019. Our borrowing base may be reduced in certain circumstances, including if we dispose of a certain percentage of the value of collateral securing the revolving credit facility. As of June 30, 2017, we had outstanding borrowings of $575 million under the revolving credit facility and had used $100 million of the revolving credit facility for various letters of credit. The terms of the revolving credit facility include covenants limiting, among other things, our ability to incur additional indebtedness, make investments or loans, create liens, consummate mergers and similar fundamental changes, make restricted payments, make investments in unrestricted subsidiaries and enter into transactions with affiliates. We were in compliance with all applicable financial covenants under the agreement as of June 30, 2017. As of June 30, 2017, we were able to borrow the full availability under the revolving credit facility.
On June 15, 2017, we completed a scheduled borrowing base redetermination review and our lenders reaffirmed our $3.8 billion borrowing base. Our next scheduled borrowing base redetermination is scheduled for the second quarter of 2018. On May 19, 2017, we entered into the fourth amendment to our revolving credit facility. Among other things, the amendment removed the requirement that we must concurrently prepay, repurchase or redeem or otherwise defease at least an equal amount of other borrowed money indebtedness with a stated maturity prior to December 15, 2019, if we optionally prepay, repurchase or redeem or otherwise defease other borrowed money indebtedness with a stated maturity after December 15, 2019.
During 2016, we entered into the third amendment to our revolving credit facility. The amendment reaffirmed our borrowing base and granted temporary financial covenant relief, with the revolving credit facility’s existing first lien secured leverage ratio and net debt to capitalization ratio suspended until September 30, 2017 (at which point the maximum first lien secured leverage ratio will be 3.50 to 1.0 through the period ending December 31, 2017 and 3.00 to 1.0 thereafter and the maximum net debt to capitalization ratio for each period will be 65%) and the interest coverage ratio maintenance covenant reduced as noted below. In addition, we agreed to grant liens and security interests on a majority of our assets, as well as maintain a minimum liquidity amount (defined as cash and cash equivalents and availability under our revolving credit facility) of $500 million until the suspension of the existing maintenance covenants ends.
The third amendment reduced the interest coverage ratio to 0.70 to 1.0 for the second quarter of 2017, after which it will increase to 1.2 to 1.0 for the third quarter of 2017 and 1.25 to 1.0 thereafter. The amendment also gives us the ability to incur up to $2.5 billion of first lien indebtedness secured on a pari passu basis with the existing obligations under the credit agreement, subject to a position in the collateral proceeds waterfall in favor of the revolving lenders and affiliated hedge providers and the other limitations on junior lien debt set forth in the credit agreement. After taking

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
(Unaudited)

into account the term loan, the amount of additional first lien indebtedness permitted by the revolving credit facility is $1.0 billion.
Fair Value of Debt
We estimate the fair value of our senior notes based on the market value of our publicly traded debt as determined based on the yield of our senior notes (Level 1). The fair value of all other debt is based on a market approach using estimates provided by an independent investment financial data services firm (Level 2). Fair value is compared to the carrying value, excluding the impact of interest rate derivatives, in the table below. 
 
 
June 30, 2017
 
December 31, 2016
 
 
Carrying
Amount
 
Estimated
Fair Value
 
Carrying
Amount
 
Estimated
Fair Value
 
 
 
 
($ in millions)
 
 
Short-term debt (Level 1)
 
$
3

 
$
3

 
$
503

 
$
511

Long-term debt (Level 1)
 
$
2,876

 
$
2,791

 
$
3,271

 
$
3,216

Long-term debt (Level 2)
 
$
6,972

 
$
6,890

 
$
6,664

 
$
6,654

4.
Contingencies and Commitments
Contingencies
Litigation and Regulatory Proceedings
The Company is involved in a number of litigation and regulatory proceedings (including those described below). Many of these proceedings are in early stages, and many of them seek or may seek damages and penalties, the amount of which is indeterminate. We estimate and provide for potential losses that may arise out of litigation and regulatory proceedings to the extent that such losses are probable and can be reasonably estimated. Significant judgment is required in making these estimates and our final liabilities may ultimately be materially different. 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. We account for legal defense costs in the period the costs are incurred.
Regulatory and Related Proceedings. The Company has received, from the U.S. Department of Justice (DOJ) and certain state governmental agencies and authorities, subpoenas and demands for documents, information and testimony in connection with investigations into possible violations of federal and state antitrust laws relating to our purchase and lease of oil and natural gas rights in various states. The Company also has received DOJ, U.S. Postal Service and state subpoenas seeking information on the Company’s royalty payment practices. Chesapeake has engaged in discussions with the DOJ, U.S. Postal Service and state agency representatives and continues to respond to such subpoenas and demands.
In addition, the Company received a DOJ subpoena and a voluntary document request from the SEC seeking information on our accounting methodology for the acquisition and classification of oil and natural gas properties and related matters. On October 4, 2016, a securities class action was filed in the U.S. District Court for the Western District of Oklahoma against the Company and certain current directors and officers of the Company alleging, among other things, violations of federal securities laws for purported misstatements in the Company’s SEC filings and other public disclosures regarding the Company’s accounting for the acquisition and classification of oil and natural gas properties. On June 20, 2017, the DOJ orally advised Chesapeake that it was closing its investigation, and on July 17, 2017, the SEC indicated by letter that it had concluded its investigation and that it did not intend to recommend an enforcement action on the matter. The related securities class action was dismissed on March 14, 2017.
On July 10, 2017, Chesapeake, its Benefits Committee, its Investment Committee and certain employees were named as defendants in a purported Employee Retirement Income Security Act of 1974 (ERISA) class action filed in the United States District Court for the Western District of Oklahoma (the “ERISA Lawsuit”). The ERISA Lawsuit alleges violations of Sections 404, 405, 409 and 502 of ERISA with respect to the Company’s common stock held in its Savings and Incentive Stock Bonus Plan (the “Plan”). The plaintiffs seek to represent a class of persons who were participants in the Plan after June 1, 2014. The plaintiffs also seek damages, imposition of a constructive trust and other relief, including attorneys’ fees, based on allegations that the defendants breached their fiduciary duties by continuing to allow the Company’s common stock to remain as an investment option under the Plan during the class period.
Business Operations. Chesapeake is involved in various other lawsuits and disputes incidental to its business operations, including commercial disputes, personal injury claims, royalty claims, property damage claims and contract actions.
Regarding royalty claims, Chesapeake and other natural gas producers have been named in various lawsuits alleging royalty underpayment. The suits against us allege, among other things, that we used below-market prices, made improper deductions, used improper measurement techniques and/or entered into arrangements with affiliates that resulted in underpayment of royalties in connection with the production and sale of natural gas and NGL. Plaintiffs have varying royalty provisions in their respective leases, oil and gas law varies from state to state, and royalty owners and producers differ in their interpretation of the legal effect of lease provisions governing royalty calculations. The Company has resolved a number of these claims through negotiated settlements of past and future royalties and has prevailed in various other lawsuits. We are currently defending lawsuits seeking damages with respect to royalty underpayment in various states, including, but not limited to, Texas, Pennsylvania, Ohio, Oklahoma, Kentucky, Louisiana and Arkansas. These lawsuits include cases filed by individual royalty owners and putative class actions, some of which seek to certify a statewide class.
Chesapeake is defending numerous lawsuits filed by individual royalty owners alleging royalty underpayment with respect to properties in Texas. These lawsuits, organized for pre-trial proceedings with respect to the Barnett Shale and Eagle Ford Shale, respectively, generally allege that Chesapeake underpaid royalties by making improper deductions, using incorrect production volumes and similar theories. Chesapeake expects that additional lawsuits will continue to be pursued and that new plaintiffs will file other lawsuits making similar allegations.
On December 9, 2015, the Commonwealth of Pennsylvania, by the Office of Attorney General, filed a lawsuit in the Bradford County Court of Common Pleas related to royalty underpayment and lease acquisition and accounting practices with respect to properties in Pennsylvania. The lawsuit, which primarily relates to the Marcellus Shale and Utica Shale, alleges that Chesapeake violated the Pennsylvania Unfair Trade Practices and Consumer Protection Law (UTPCPL) by making improper deductions and entering into arrangements with affiliates that resulted in underpayment of royalties. The lawsuit includes other UTPCPL claims and antitrust claims, including that a joint exploration agreement to which Chesapeake is a party established unlawful market allocation for the acquisition of leases. The lawsuit seeks statutory restitution, civil penalties and costs, as well as temporary injunction from exploration and drilling activities in Pennsylvania until restitution, penalties and costs have been paid and permanent injunction from further violations of the UTPCPL.
Putative statewide class actions in Pennsylvania and Ohio and purported class arbitrations in Pennsylvania have been filed on behalf of royalty owners asserting various claims for damages related to alleged underpayment of royalties as a result of the Company’s divestiture of substantially all of its midstream business and most of its gathering assets in 2012 and 2013. These cases include claims for violation of and conspiracy to violate the federal Racketeer Influenced and Corrupt Organizations Act and for an unlawful market allocation agreement for mineral rights. One of the cases includes claims of intentional interference with contractual relations and violations of antitrust laws related to purported markets for gas mineral rights, operating rights and gas gathering sources.
We believe losses are reasonably possible in certain of the pending royalty cases for which we have not accrued a loss contingency, but we are currently unable to estimate an amount or range of loss or the impact the actions could have on our future results of operations or cash flows. Uncertainties in pending royalty cases generally include the complex nature of the claims and defenses, the potential size of the class in class actions, the scope and types of the properties and agreements involved, and the applicable production years.
The Company is also defending lawsuits alleging various violations of the Sherman Antitrust Act and state antitrust laws. In 2016, putative class action lawsuits were filed in the U.S. District Court for the Western District of Oklahoma and in Oklahoma state courts, and an individual lawsuit was filed in the U.S. District Court of Kansas, in each case against the Company and other defendants. The lawsuits generally allege that, since 2007 and continuing through April 2013, the defendants conspired to rig bids and depress the market for the purchases of oil and natural gas leasehold interests and properties in the Anadarko Basin containing producing oil and natural gas wells. The lawsuits seek damages, attorney’s fees, costs and interest, as well as enjoinment from adopting practices or plans that would restrain competition in a similar manner as alleged in the lawsuits.
Other Matters
Based on management’s current assessment, we are of the opinion that no pending or threatened lawsuit or dispute relating to the Company’s business operations is likely to have a material adverse effect on its 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.
Environmental Contingencies
The nature of the oil and gas business carries with it certain environmental risks for Chesapeake and its subsidiaries. Chesapeake has implemented various policies, programs, procedures, training and auditing to reduce and mitigate such environmental risks. Chesapeake conducts 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, Chesapeake 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.
Commitments
Gathering, Processing and Transportation Agreements
We have contractual commitments with midstream service companies and pipeline carriers for future gathering, processing and transportation of oil, natural gas 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 condensed consolidated balance sheets.
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.
 
 
June 30,
2017
 
 
($ in millions)
2017
 
$
664

2018
 
1,096

2019
 
1,061

2020
 
990

2021
 
894

2022 – 2035
 
5,213

Total
 
$
9,918

In addition, we have entered into 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 vary with the applicable agreement.
Drilling Contracts
We have contracts with various drilling contractors to utilize drilling services at market-based pricing. These commitments are not recorded as obligations in the accompanying condensed consolidated balance sheets. As of June 30, 2017, the aggregate undiscounted minimum future payments under these drilling service commitments were approximately $49 million.

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CHESAPEAKE ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
(Unaudited)

Oil, Natural Gas and NGL Purchase Commitments
We commit to purchase oil, natural gas and NGL from other owners in the properties we operate, including owners associated with our volumetric production payment (VPP) transactions. Production purchases under these arrangements are based on market prices at the time of production, and the purchased oil, natural gas and NGL are resold at market prices. See Volumetric Production Payments in Note 9 for further discussion of our VPP transactions.
Net Acreage Maintenance Commitments
Under the terms of our Utica Shale joint venture agreements with Total S.A., we are obligated to extend, renew or replace certain expiring joint leasehold, at our cost, to ensure that the net acreage maintenance level is met as of the December 31, 2017 measurement date.
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 oil and natural gas properties, our purchase and sale agreements may require the return of a portion of the proceeds we receive as a result of uncured title defects.
Certain of our oil and natural gas properties are burdened by non-operating interests, such as royalty and overriding royalty interests, including overriding royalty interests sold through our VPP transactions. As the holder of the working interest from which these interests have been created, we have the responsibility to bear the cost of developing and producing the reserves attributable to these interests. See Volumetric Production Payments in Note 9 for further discussion of our VPP transactions.
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. As we continue to focus on our strategic priorities, we may take certain actions that reduce financial leverage and complexity, and we may incur additional cash and noncash charges.

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CHESAPEAKE ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
(Unaudited)

5.
Other Liabilities
Other current liabilities as of June 30, 2017 and December 31, 2016 are detailed below.
 
 
June 30,
2017
 
December 31,
2016
 
 
($ in millions)
Revenues and royalties due others
 
$
481

 
$
543

Accrued drilling and production costs
 
259

 
169

Joint interest prepayments received
 
72

 
71

Accrued compensation and benefits
 
158

 
239

Other accrued taxes
 
58

 
32

Bank of New York Mellon legal accrual(a)
 
—

 
440

Other
 
269

 
304

Total other current liabilities
 
$
1,297

 
$
1,798

____________________________________________
(a)
In the Current Quarter, we received notice from the U.S. Supreme Court that it would not review our appeal of the decision by the U.S. District Court for the Southern District of New York regarding the redemption at par value of our 6.775% Senior Notes due 2019. As a result of the decision, we paid $441 million with cash on hand and borrowings under the credit facility, and the related supersedeas bond was released.
Other long-term liabilities as of June 30, 2017 and December 31, 2016 are detailed below.
 
 
June 30,
2017
 
December 31,
2016
 
 
($ in millions)
CHK Utica ORRI conveyance obligation(a)
 
$
164

 
$
160

Unrecognized tax benefits
 
98

 
97

Other
 
112

 
126

Total other long-term liabilities
 
$
374

 
$
383

____________________________________________
(a)
The CHK Utica L.L.C. investors’ right to receive proportionately a 3% overriding royalty interest (ORRI) in the first 1,500 net wells drilled on our Utica Shale leasehold is subject to an increase to 4% on net wells earned in any year following a year in which we do not meet our net well commitment under the ORRI obligation, which runs through 2023. The liability represents the obligation to deliver future ORRIs. As of June 30, 2017, and December 31, 2016, approximately $30 million and $43 million of the total ORRI obligations are recorded in other current liabilities.

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CHESAPEAKE ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
(Unaudited)

6.
Equity
Common Stock
A summary of the changes in our common shares issued for the Current Period and the Prior Period is detailed below.
 
 
Six Months Ended
June 30,
 
 
2017
 
2016
 
 
(in thousands)
Shares issued as of January 1
 
896,279

 
664,796

Exchange of convertible notes
 
—

 
55,428

Exchange of senior notes
 
—

 
53,924

Exchange/conversion of preferred stock
 
9,966

 
1,021

Restricted stock issuances (net of forfeitures and cancellations)
 
1,732

 
1,529

Shares issued as of June 30
 
907,977


776,698

During the Current Quarter, our shareholders approved an amendment to our certificate of incorporation to increase our authorized common stock to 2,000,000,000 shares, par value $0.01 per share.
Preferred Stock
Outstanding shares of our preferred stock for the Current Period and the Prior Period are detailed below.
 
 
5.75%
 
5.75% (A)
 
4.50%
 
5.00%
(2005B)  
 
 
(in thousands)
Shares outstanding as of January 1, 2017
 
843

 
476

 
2,559

 
1,962

Preferred stock conversions/exchanges(a)
 
(73
)
 
(13
)
 
—

 
(151
)
Shares outstanding as of June 30, 2017
 
770

 
463

 
2,559

 
1,811

 
 
 
 
 
 
 
 
 
Shares outstanding as of January 1, 2016
 
1,497

 
1,100

 
2,559

 
2,096

Preferred stock conversions/exchanges(b)
 
(25
)
 
(1
)
 
—

 
—

Shares outstanding as of June 30, 2016
 
1,472

 
1,099

 
2,559

 
2,096

____________________________________________
(a)
In the Current Period, holders of our 5.75% Cumulative Convertible Preferred Stock exchanged 72,600 shares into 7,442,156 shares of common stock, holders of our 5.75% (Series A) Cumulative Convertible Preferred Stock exchanged 12,500 shares into 1,205,923 shares of common stock and holders of our 5.00% (Series 2005B) Cumulative Convertible Preferred Stock exchanged 150,948 shares into 1,317,756 shares of common stock. In connection with the exchanges, we recognized a loss equal to the excess of the fair value of all common stock issued in exchange for the preferred stock over the fair value of the common stock issuable pursuant to the original terms of the preferred stock. The loss of $41 million is reflected as a reduction to net income available to common stockholders for the purpose of calculating earnings per common share.
(b)
In the Prior Period, holders of our 5.75% Cumulative Convertible Preferred Stock converted 24,601 shares into 975,488 shares of common stock and holders of our 5.75% (Series A) Cumulative Convertible Preferred Stock converted 1,201 shares into 46,018 shares of common stock.

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CHESAPEAKE ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
(Unaudited)

Dividends
Dividends declared on our preferred stock are reflected as adjustments to retained earnings to the extent a surplus of retained earnings exists after giving effect to the dividends. To the extent retained earnings are insufficient to fund the distributions, payments constitute a return of contributed capital rather than earnings and are accounted for as a reduction to paid-in capital.
Dividends on our outstanding preferred stock are payable quarterly. We may pay dividends on our 5.00% Cumulative Convertible Preferred Stock (Series 2005B) and our 4.50% Cumulative Convertible Preferred Stock in cash, common stock or a combination thereof, at our option. Dividends on both series of our 5.75% Cumulative Convertible Non-Voting Preferred Stock are payable only in cash.
In the Prior Period, we suspended dividend payments on our convertible preferred stock to provide additional liquidity in the depressed commodity price environment. In the Current Period, we reinstated the payment of dividends on each series of our outstanding convertible preferred stock and paid our dividends in arrears.
Accumulated Other Comprehensive Income (Loss)
For the Current Period and the Prior Period, changes in accumulated other comprehensive income (loss) for cash flow hedges, net of tax, are detailed below.
 
 
Six Months Ended
June 30,
 
 
2017
 
2016
 
 
($ in millions)
Balance, as of January 1
 
$
(96
)
 
$
(99
)
Other comprehensive income (loss) before reclassifications
 
4

 
(19
)
Amounts reclassified from accumulated other comprehensive income
 
17

 
14

Net other comprehensive income (loss)
 
21

 
(5
)
Balance, as of June 30
 
$
(75
)
 
$
(104
)
For the Current Quarter, the Prior Quarter, the Current Period and the Prior Period, net losses on cash flow hedges for commodity contracts reclassified from accumulated other comprehensive income (loss), net of tax, to oil, natural gas and NGL revenues in the condensed consolidated statements of operations were $7 million, $10 million, $17 million and $14 million, respectively.

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CHESAPEAKE ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
(Unaudited)

7.
Share-Based Compensation
Chesapeake’s share-based compensation program consists of restricted stock, stock options and performance share units (PSUs) granted to employees and restricted stock granted to non-employee directors under our long term incentive plans. The restricted stock and stock options are equity-classified awards and the PSUs are liability-classified awards.
Equity-Classified Awards
Restricted Stock. We grant restricted stock units to employees and non-employee directors. A summary of the changes in unvested restricted stock during the Current Period is presented below.
 
 
Shares of
Unvested
Restricted Stock
 
Weighted Average
Grant Date
Fair Value
 
 
(in thousands)
 
 
Unvested restricted stock as of January 1, 2017
 
9,092

 
$
11.39

Granted
 
9,457

 
$
5.46

Vested
 
(3,547
)
 
$
14.33

Forfeited
 
(737
)
 
$
9.38

Unvested restricted stock as of June 30, 2017
 
14,265

 
$
6.83

The aggregate intrinsic value of restricted stock that vested during the Current Period was approximately $21 million based on the stock price at the time of vesting.
As of June 30, 2017, there was approximately $70 million of total unrecognized compensation expense related to unvested restricted stock. The expense is expected to be recognized over a weighted average period of approximately 2.09 years.
Stock Options. In the Current Period and the Prior Period, we granted members of management stock options that vest ratably over a three-year period. Each stock option award has an exercise price equal to the closing price of the Company’s common stock on the grant date. Outstanding options expire seven to ten years from the date of grant.
We utilize the Black-Scholes option pricing model to measure the fair value of stock options. The expected life of an option is determined using the simplified method. Volatility assumptions are estimated based on an average of historical volatility of Chesapeake stock over the expected life of an option. The risk-free interest rate is 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 is based on an annual dividend yield, taking into account the Company's dividend policy, over the expected life of the option. The Company used the following weighted average assumptions to estimate the grant date fair value of the stock options granted in the Current Period.
Expected option life – years
 
6.0

Volatility
 
62.42
%
Risk-free interest rate
 
2.17
%
Dividend yield
 
—
%

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
(Unaudited)

The following table provides information related to stock option activity in the Current Period. 
 
 
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, 2017
 
8,593

 
$
11.88

 
7.22
 
$
14

Granted
 
9,226

 
$
5.45

 
 
 
 
Exercised
 
—

 
$
—

 
 
 
$
—

Expired
 
(277
)
 
$
18.74

 
 
 
 
Forfeited
 
(806
)
 
$
10.45

 
 
 
 
Outstanding as of June 30, 2017
 
16,736

 
$
8.29

 
8.18
 
$
5

Exercisable as of June 30, 2017
 
4,738

 
$
15.37

 
5.44
 
$
2

___________________________________________
(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.
As of June 30, 2017, there was $29 million of total unrecognized compensation expense related to stock options. The expense is expected to be recognized over a weighted average period of approximately 2.50 years.
Restricted Stock and Stock Option Compensation. We recognized the following compensation costs related to restricted stock and stock options for the Current Quarter, the Prior Quarter, the Current Period and the Prior Period.
 
 
Three Months Ended
June 30,
 
Six Months Ended
June 30,
 
 
2017
 
2016
 
2017
 
2016
 
 
($ in millions)
General and administrative expenses
 
$
12

 
$
10

 
$
20

 
$
18

Oil and natural gas properties
 
3

 
5

 
7

 
9

Oil, natural gas and NGL production expenses
 
4

 
3

 
7

 
6

Marketing, gathering and compression expenses
 
—

 
—

 
—

 
1

Total restricted stock and stock option compensation
 
$
19

 
$
18

 
$
34

 
$
34

Liability-Classified Awards
Performance Share Units. We have granted PSUs to senior management that vest ratably over a three-year term and are settled in cash on the third anniversary of the awards. The ultimate amount earned is based on achievement of performance metrics established by the Compensation Committee of the Board of Directors, which include total shareholder return (TSR) and, for certain of the awards, operational performance goals, such as finding and development costs and production levels.
For PSUs granted, the TSR component can range from 0% to 100% and the operational component can range from 0% to 100%, resulting in a maximum payout of 200%. Compensation expense associated with PSU grants is recognized over the service period based on the graded-vesting method. The value of the PSU awards at the end of each reporting period is dependent upon the Company’s estimates of the underlying performance measures. The payout percentage for all PSU grants is capped at 100% if the Company’s absolute TSR is less than zero. The Company utilized a Monte Carlo simulation for the TSR performance measure and the following assumptions to determine the grant date fair value of the PSUs.
Volatility
 
83.94
%
Risk-free interest rate
 
1.47
%
Dividend yield for value of awards
 
—
%

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CHESAPEAKE ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
(Unaudited)

The following table presents a summary of our 2017, 2016 and 2015 PSU awards.
 
 
 
 
Grant Date
Fair Value
 
June 30, 2017
 
 
Units
 
 
Fair Value
 
Vested Liability
 
 
 
 
($ in millions)
 
($ in millions)
2017 Awards:
 
 
 
 
 
 
 
 
Payable 2020
 
1,217,774

 
$
8

 
$
7

 
$
2

2016 Awards:
 
 
 
 
 
 
 
 
Payable 2019
 
2,348,893

 
$
10

 
$
14

 
$
10

2015 Awards:
 
 
 
 
 
 
 
 
Payable 2018
 
629,694

 
$
13

 
$
2

 
$
1

PSU Compensation. We recognized the following compensation costs (credits) related to PSUs for the Current Quarter, the Prior Quarter, the Current Period and the Prior Period.
 
 
Three Months Ended
June 30,
 
Six Months Ended
June 30,
 
 
2017
 
2016
 
2017
 
2016
 
 
($ in millions)
General and administrative expenses
 
$
—

 
$
1

 
$
(2
)
 
$
3

Restructuring and other termination costs
 
—

 
—

 
—

 
1

Total PSU compensation
 
$
—