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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended September 30, 2020
    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)
Securities Registered Pursuant to Section 12(b) of the Act:
Title of Each Class
 
Trading Symbol(1)
 
Name of Each Exchange on Which Registered
Common Stock, par value $0.01
 
CHKAQ
 
N/A
6.625% Senior Notes due 2020
 
*
 
N/A
6.875% Senior Notes due 2020
 
*
 
N/A
6.125% Senior Notes due 2021
 
*
 
N/A
5.375% Senior Notes due 2021
 
*
 
N/A
4.875% Senior Notes due 2022
 
*
 
N/A
5.75% Senior Notes due 2023
 
*
 
N/A
4.5% Cumulative Convertible Preferred Stock
 
*
 
N/A
 
(1) On June 29, 2020, our common stock was suspended from trading on the New York Stock Exchange (the “NYSE”). On June 30, 2020, our common stock began trading on the OTC Pink Marketplace maintained by the OTC Markets Group, Inc. under the symbol “CHKAQ.” On July 20, 2020, the NYSE filed a Form 25 delisting our common stock, senior notes and cumulative convertible preferred stock from trading on the NYSE, which delisting became effective 10 days after the filing of the Form 25. In accordance with Rule 12d2-2 of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), the de-registration of our common stock, senior notes and cumulative convertible preferred stock under Section 12(b) of the Exchange Act became effective on October 18, 2020.
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      No  
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted 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 such files). Yes       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   Accelerated Filer   Non-accelerated Filer  
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  
As of November 5, 2020, there were 9,780,371 shares of our $0.01 par value common stock outstanding.




CHESAPEAKE ENERGY CORPORATION AND SUBSIDIARIES (DEBTOR-IN-POSSESSION)
INDEX TO FORM 10-Q FOR THE QUARTER ENDED SEPTEMBER 30, 2020


 
PART I. FINANCIAL INFORMATION
Page
Item 1.
 
 
Condensed Consolidated Balance Sheets as of September 30, 2020 and December 31, 2019
 
for the Three and Nine Months Ended September 30, 2020 and 2019
 
for the Three and Nine Months Ended September 30, 2020 and 2019
 
for the Nine Months Ended September 30, 2020 and 2019
 
for the Three and Nine Months Ended September 30, 2020 and 2019
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Item 2.
 
 
Item 3.
Item 4.
 
PART II. OTHER INFORMATION
 
 
Item 1.
Item 1A.
Item 2.
Item 3.
Item 4.
Item 5.
Item 6.


PART I. FINANCIAL INFORMATION



ITEM 1.
Condensed Consolidated Financial Statements

CHESAPEAKE ENERGY CORPORATION AND SUBSIDIARIES (DEBTOR-IN-POSSESSION)
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
 
 
September 30,
2020
 
December 31,
2019
ASSETS
 
($ in millions)
CURRENT ASSETS:
 
 
 
 
Cash and cash equivalents ($2 and $2 attributable to our VIE)
 
$
306

 
$
6

Accounts receivable, net
 
676

 
990

Short-term derivative assets
 

 
134

Other current assets
 
90

 
121

Total Current Assets
 
1,072

 
1,251

PROPERTY AND EQUIPMENT:
 
 
 
 
Oil and natural gas properties, at cost based on successful efforts accounting:
 
 
 
 
Proved oil and natural gas properties
($755 and $755 attributable to our VIE)
 
31,511

 
30,765

Unproved properties
 
1,738

 
2,173

Other property and equipment
 
1,786

 
1,810

Total Property and Equipment, at Cost
 
35,035

 
34,748

Less: accumulated depreciation, depletion and amortization
(($748) and ($713) attributable to our VIE)
 
(29,399
)
 
(20,002
)
Property and equipment held for sale, net
 
10

 
10

Total Property and Equipment, Net
 
5,646

 
14,756

Other long-term assets
 
185

 
186

TOTAL ASSETS
 
$
6,903

 
$
16,193

 
 
 
 
 


The accompanying notes are an integral part of these condensed consolidated financial statements.
4

CHESAPEAKE ENERGY CORPORATION AND SUBSIDIARIES (DEBTOR-IN-POSSESSION)
CONDENSED CONSOLIDATED BALANCE SHEETS – (Continued)
(Unaudited)

 
 
September 30,
2020
 
December 31,
2019
LIABILITIES AND EQUITY (DEFICIT)
 
($ in millions)
CURRENT LIABILITIES:
 
 
 
 
Accounts payable
 
$
316

 
$
498

Current maturities of long-term debt, net
 
1,929

 
385

Accrued interest
 
2

 
75

Short-term derivative liabilities
 
105

 
2

Other current liabilities (nominal and $1 attributable to our VIE)
 
753

 
1,432

Total Current Liabilities
 
3,105

 
2,392

Long-term debt, net
 

 
9,073

Long-term derivative liabilities
 
61

 
2

Asset retirement obligations, net of current portion
 
212

 
200

Other long-term liabilities
 
16

 
125

Liabilities subject to compromise
 
8,428

 

Total Liabilities
 
11,822

 
11,792

CONTINGENCIES AND COMMITMENTS (Note 5)
 

 

EQUITY (DEFICIT):
 
 
 
 
Chesapeake Stockholders’ Equity (Deficit):
 
 
 
 
Preferred stock, $0.01 par value, 20,000,000 shares authorized: 5,563,458 shares outstanding
 
1,631

 
1,631

Common stock, $0.01 par value, 22,500,000 and 15,000,000 shares authorized: 9,780,371 and 9,772,793 shares issued(a)
 

 

Additional paid-in capital(a)
 
16,931

 
16,973

Accumulated deficit
 
(23,538
)
 
(14,220
)
Accumulated other comprehensive income
 
36

 
12

Less: treasury stock, at cost; 0 and 26,224 common shares(a)
 

 
(32
)
Total Chesapeake Stockholders’ Equity (Deficit)
 
(4,940
)
 
4,364

Noncontrolling interests
 
21

 
37

Total Equity (Deficit)
 
(4,919
)
 
4,401

TOTAL LIABILITIES AND EQUITY (DEFICIT)
 
$
6,903

 
$
16,193


____________________________________________
(a)
Amounts and shares have been retroactively adjusted to reflect a 1-for-200 (1:200) reverse stock split effective April 14, 2020. See Note 9 for additional information.


The accompanying notes are an integral part of these condensed consolidated financial statements.
5

CHESAPEAKE ENERGY CORPORATION AND SUBSIDIARIES (DEBTOR-IN-POSSESSION)
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)


 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
 
2020
 
2019
 
2020
 
2019
  
($ in millions except per share data)
REVENUES AND OTHER:
 
 
 
 
 
 
 
Oil, natural gas and NGL
$
511

 
$
1,170

 
$
2,579

 
$
3,553

Marketing
448

 
889

 
1,412

 
3,038

Total Revenues
959

 
2,059

 
3,991

 
6,591

Other
15

 
15

 
45

 
45

Gains on sales of assets
1

 
13

 
1

 
33

Total Revenues and Other
975

 
2,087

 
4,037

 
6,669

OPERATING EXPENSES:
 
 
 
 
 
 
 
Oil, natural gas and NGL production
82

 
135

 
295

 
394

Oil, natural gas and NGL gathering, processing and transportation
258

 
270

 
813

 
815

Severance and ad valorem taxes
37

 
55

 
116

 
168

Exploration
5

 
17

 
417

 
56

Marketing
450

 
901

 
1,438

 
3,071

General and administrative
52

 
66

 
229

 
258

Separation and other termination costs
16

 

 
43

 

Provision for legal contingencies, net
12

 

 
20

 
3

Depreciation, depletion and amortization
170

 
573

 
931

 
1,672

Impairments

 
9

 
8,522

 
11

Other operating expense
4

 
15

 
92

 
79

Total Operating Expenses
1,086

 
2,041

 
12,916

 
6,527

INCOME (LOSS) FROM OPERATIONS
(111
)
 
46

 
(8,879
)
 
142

OTHER INCOME (EXPENSE):

 
 
 

 
 
Interest expense
(25
)
 
(177
)
 
(307
)
 
(513
)
Losses on investments

 
(4
)
 
(23
)
 
(28
)
Gains on purchases or exchanges of debt

 
70

 
65

 
70

Other income
2

 
3

 
14

 
30

Reorganization items, net
(611
)
 

 
(217
)
 

Total Other Expense
(634
)
 
(108
)
 
(468
)
 
(441
)
LOSS BEFORE INCOME TAXES
(745
)
 
(62
)
 
(9,347
)
 
(299
)
Income tax benefit

 
(1
)
 
(13
)
 
(315
)
NET INCOME (LOSS)
(745
)
 
(61
)
 
(9,334
)
 
16

Net loss attributable to noncontrolling interests

 

 
16

 

NET INCOME (LOSS) ATTRIBUTABLE TO CHESAPEAKE
(745
)
 
(61
)
 
(9,318
)
 
16

Preferred stock dividends

 
(23
)
 
(22
)
 
(69
)
Loss on exchange of preferred stock

 
(17
)
 

 
(17
)
NET LOSS AVAILABLE TO COMMON STOCKHOLDERS
$
(745
)
 
$
(101
)
 
$
(9,340
)
 
$
(70
)
LOSS PER COMMON SHARE:(a)
 
 
 
 
 
 
 
Basic
$
(76.18
)
 
$
(11.89
)
 
$
(955.99
)
 
$
(8.92
)
Diluted
$
(76.18
)
 
$
(11.89
)
 
$
(955.99
)
 
$
(8.92
)
WEIGHTED AVERAGE COMMON AND COMMON EQUIVALENT SHARES OUTSTANDING (in thousands):(a)
Basic
9,780

 
8,492

 
9,770

 
7,848

Diluted
9,780

 
8,492

 
9,770

 
7,848


____________________________________________
(a)
All share and per share information has been retroactively adjusted to reflect a 1-for-200 (1:200) reverse stock split effective April 14, 2020. See Note 9 for additional information.

The accompanying notes are an integral part of these condensed consolidated financial statements.
6

CHESAPEAKE ENERGY CORPORATION AND SUBSIDIARIES (DEBTOR-IN-POSSESSION)
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited)



 
 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
 
 
2020
 
2019
 
2020
 
2019
 
 
($ in millions)
NET INCOME (LOSS)
 
$
(745
)
 
$
(61
)
 
$
(9,334
)
 
$
16

OTHER COMPREHENSIVE INCOME, NET OF INCOME TAX:
 
 
 
 
 
 
 
 
Reclassification of losses on settled derivative instruments(a)
 
7

 
8

 
24

 
26

Other Comprehensive Income
 
7

 
8

 
24

 
26

COMPREHENSIVE INCOME (LOSS)
 
(738
)
 
(53
)
 
(9,310
)
 
42

COMPREHENSIVE LOSS ATTRIBUTABLE TO NONCONTROLLING INTERESTS
 

 

 
16

 

COMPREHENSIVE INCOME (LOSS) ATTRIBUTABLE TO CHESAPEAKE
 
$
(738
)
 
$
(53
)
 
$
(9,294
)
 
$
42


___________________________________________
(a)
Deferred tax activity incurred in other comprehensive income was offset by a valuation allowance.

The accompanying notes are an integral part of these condensed consolidated financial statements.
7

CHESAPEAKE ENERGY CORPORATION AND SUBSIDIARIES (DEBTOR-IN-POSSESSION)
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)

 
 
Nine Months Ended
September 30,
 
 
2020
 
2019
 
 
($ in millions)
CASH FLOWS FROM OPERATING ACTIVITIES:
 
 
 
 
NET INCOME (LOSS)
 
$
(9,334
)
 
$
16

ADJUSTMENTS TO RECONCILE NET INCOME (LOSS) TO CASH PROVIDED BY OPERATING ACTIVITIES:
 
 
 
 
Depreciation, depletion and amortization
 
931

 
1,672

Deferred income tax benefit
 
(10
)
 
(314
)
Derivative gains, net
 
(573
)
 
(137
)
Cash receipts on derivative settlements, net
 
890

 
129

Stock-based compensation
 
16

 
24

Gains on sales of assets
 
(1
)
 
(33
)
Impairments
 
8,522

 
11

Non-cash reorganization items, net
 
(300
)
 

Exploration
 
409

 
35

Losses on investments
 
23

 
21

Gains on purchases or exchanges of debt
 
(65
)
 
(70
)
Other
 
(46
)
 
42

Changes in assets and liabilities
 
693

 
(214
)
Net Cash Provided By Operating Activities
 
1,155

 
1,182

CASH FLOWS FROM INVESTING ACTIVITIES:
 
 
 
 
Drilling and completion costs
 
(946
)
 
(1,640
)
Business combination, net
 

 
(353
)
Acquisitions of proved and unproved properties
 
(9
)
 
(31
)
Proceeds from divestitures of proved and unproved properties
 
10

 
110

Additions to other property and equipment
 
(18
)
 
(27
)
Proceeds from sales of other property and equipment
 
5

 
6

Net Cash Used In Investing Activities
 
(958
)
 
(1,935
)
CASH FLOWS FROM FINANCING ACTIVITIES:
 
 
 
 
Proceeds from pre-petition revolving credit facility borrowings
 
3,806

 
8,805

Payments on pre-petition revolving credit facility borrowings
 
(3,467
)
 
(7,495
)
Proceeds from DIP credit facility borrowings
 
60

 

Payments on DIP credit facility borrowings
 
(60
)
 

DIP credit facility and exit facilities financing costs
 
(109
)
 

Cash paid to purchase debt
 
(95
)
 
(457
)
Cash paid for preferred stock dividends
 
(22
)
 
(69
)
Other
 
(10
)
 
(21
)
Net Cash Provided By Financing Activities
 
103

 
763

Net increase in cash and cash equivalents
 
300

 
10

Cash and cash equivalents, beginning of period
 
6

 
4

Cash and cash equivalents, end of period
 
$
306

 
$
14

 
 
 
 
 
 


The accompanying notes are an integral part of these condensed consolidated financial statements.
8

CHESAPEAKE ENERGY CORPORATION AND SUBSIDIARIES (DEBTOR-IN-POSSESSION)
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS – (Continued)
(Unaudited)

Supplemental disclosures to the condensed consolidated statements of cash flows are presented below:
 
 
Nine Months Ended
September 30,
 
 
2020
 
2019
 
 
($ in millions)
SUPPLEMENTAL CASH FLOW INFORMATION:
 
 
 
 
Cash paid for reorganization items, net
 
$
118

 
$

Interest paid, net of capitalized interest
 
$
201

 
$
487

Income taxes paid, net of refunds received
 
$
1

 
$
(6
)
 
 
 
 
 
SUPPLEMENTAL DISCLOSURE OF SIGNIFICANT NON-CASH INVESTING AND FINANCING ACTIVITIES:
 
 
 
 
Change in accrued drilling and completion costs
 
$
(206
)
 
$
49

Put option premium on equity backstop agreement
 
$
60

 
$

Operating lease obligations recognized
 
$
32

 
$

Common stock issued for business combination
 
$

 
$
2,037

Debt exchanged for common stock
 
$

 
$
693

Preferred stock exchanged for common stock
 
$

 
$
40

Change in senior notes exchanged
 
$

 
$
35




The accompanying notes are an integral part of these condensed consolidated financial statements.
9

CHESAPEAKE ENERGY CORPORATION AND SUBSIDIARIES (DEBTOR-IN-POSSESSION)
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(Unaudited)




 
 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
 
 
2020
 
2019
 
2020
 
2019
 
 
($ in millions)
PREFERRED STOCK:
 
 
 
 
 
 
 
 
Balance, beginning of period
 
$
1,631

 
$
1,671

 
$
1,631

 
$
1,671

Exchange of 0, 40,000, 0, and 40,000 shares of preferred stock for common stock
 

 
(40
)
 

 
(40
)
Balance, end of period
 
1,631

 
1,631

 
1,631

 
1,631

COMMON STOCK:(a)
 
 
 
 
 
 
 
 
Balance, beginning of period
 

 

 

 

Common shares issued for WildHorse Merger
 

 

 

 

Balance, end of period
 

 

 

 

ADDITIONAL PAID-IN CAPITAL:(a)
 
 
 
 
 
 
 
 
Balance, beginning of period
 
16,924

 
16,396

 
16,973

 
14,387

Common shares issued for WildHorse Merger
 

 

 

 
2,037

Exchange of preferred stock for 0, 51,839, 0 and 51,839 shares of common stock
 

 
40

 

 
40

Exchange of senior notes for 0, 1,177,817, 0 and 1,177,817 shares of common stock
 

 
440

 

 
440

Exchange of convertible senior notes for 0, 366,945, 0 and 366,945 shares of common stock
 

 
135

 

 
135

Equity component of convertible notes repurchases
 

 
(2
)
 

 
(2
)
Stock-based compensation
 
7

 
9

 
(20
)
 
27

Dividends on preferred stock
 

 
(23
)
 
(22
)
 
(69
)
Balance, end of period
 
16,931

 
16,995

 
16,931

 
16,995

ACCUMULATED DEFICIT:
 
 
 
 
 
 
 
 
Balance, beginning of period
 
(22,793
)
 
(13,835
)
 
(14,220
)
 
(13,912
)
Net income (loss) attributable to Chesapeake
 
(745
)
 
(61
)
 
(9,318
)
 
16

Balance, end of period
 
(23,538
)
 
(13,896
)
 
(23,538
)
 
(13,896
)
ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS):
 
 
 
 
 
 
 
 
Balance, beginning of period
 
29

 
(5
)
 
12

 
(23
)
Hedging activity
 
7

 
8

 
24

 
26

Balance, end of period
 
36

 
3

 
36

 
3

 
 
 
 
 
 
 
 
 


The accompanying notes are an integral part of these condensed consolidated financial statements.
10

CHESAPEAKE ENERGY CORPORATION AND SUBSIDIARIES (DEBTOR-IN-POSSESSION)
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY - (Continued)
(Unaudited)


 
 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
 
 
2020
 
2019
 
2020
 
2019
 
 
($ in millions)
TREASURY STOCK – COMMON:(a)
 
 
 
 
 
 
 
 
Balance, beginning of period
 

 
(36
)
 
(32
)
 
(31
)
Purchase of 0, 267, 17,901 and 13,369 shares for company benefit plans
 

 

 
(2
)
 
(7
)
Release of 0, 187, 44,126 and 1,484 shares from company benefit plans
 

 

 
34

 
2

Balance, end of period
 

 
(36
)
 

 
(36
)
TOTAL CHESAPEAKE STOCKHOLDERS’ EQUITY (DEFICIT)
 
(4,940
)
 
4,697

 
(4,940
)
 
4,697

NONCONTROLLING INTERESTS:
 
 
 
 
 
 
 
 
Balance, beginning of period
 
21

 
39

 
37

 
41

Net loss attributable to noncontrolling interests
 

 

 
(16
)
 

Distributions to noncontrolling interest owners
 

 

 

 
(2
)
Balance, end of period
 
21

 
39

 
21

 
39

TOTAL EQUITY (DEFICIT)
 
$
(4,919
)
 
$
4,736

 
$
(4,919
)
 
$
4,736


____________________________________________
(a)
Amounts and shares have been retroactively adjusted to reflect a 1-for-200 (1:200) reverse stock split effective April 14, 2020. See Note 9 for additional information.


The accompanying notes are an integral part of these condensed consolidated financial statements.
11

CHESAPEAKE ENERGY CORPORATION AND SUBSIDIARIES (DEBTOR-IN-POSSESSION)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)


1.
Chapter 11 Proceedings
Unless the context otherwise requires, references to “Chesapeake”, the “Company”, “us”, “we” and “our” in this report are to Chesapeake Energy Corporation together with its subsidiaries. On June 28, 2020, (the “Petition Date”) we and certain of our subsidiaries (collectively, the “Debtors”) filed voluntary petitions (the “Chapter 11 Cases”) for relief (the “Bankruptcy Filing”) under Chapter 11 of Title 11 of the United States Code (the “Bankruptcy Code”) in the United States Bankruptcy Court for the Southern District of Texas (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. Subsidiaries with noncontrolling interests, consolidated variable interest entities and certain de minimis subsidiaries (collectively, the “Non-Filing Entities”) were not part of the Bankruptcy Filing. The Non-Filing Entities will continue to operate in the ordinary course of business.
Debtor-In-Possession
We are currently operating 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, customers and employees. As a result, we are able to conduct normal business activities and pay all associated obligations for the period following the Bankruptcy Filing and are also authorized to pay owner royalties, employee wages and benefits, and certain vendors and suppliers in the ordinary course for goods and services provided prior to the Bankruptcy Filing. During the pendency of the Chapter 11 Cases, all transactions outside the ordinary course of business require 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 are subject to settlement under the Bankruptcy Code.
Restructuring Support Agreement
On June 28, 2020, the Debtors entered into a restructuring support agreement (the "RSA") with certain holders (collectively, the "Consenting Stakeholders") of (i) obligations under that certain Amended and Restated Credit Agreement, dated as of September 12, 2018, by and among Chesapeake, as borrower, the Debtor guarantors party thereto, MUFG Union Bank, N.A., as administrative agent, and the other lender, issuer, and agent parties thereto (the "pre-petition revolving credit facility"); (ii) obligations under that certain Term Loan Agreement, dated as of December 19, 2019, by and among Chesapeake, as borrower, the Debtor guarantors party thereto, GLAS USA LLC., as administrative agent, and the lender parties thereto (the "FLLO Term Loan"); and (iii) obligations under the 11.5% Senior Secured Second Lien Notes due 2025 (the "Second Lien Notes") issued pursuant to that certain indenture, dated as of December 19, 2019, by and among Chesapeake, as issuer, certain guarantors party thereto, and Deutsche Bank Trust Company Americas, as trustee and collateral trustee to support a restructuring (the "Restructuring") on the terms set forth in the RSA and the term sheet annexed to the RSA (the "Restructuring Term Sheet"). Certain Consenting Stakeholders also hold Unsecured Notes (as defined in the Restructuring Term Sheet) and their Unsecured Notes are also subject to the terms and obligations under the RSA. The RSA contemplates that the Company will implement the Restructuring through the Chapter 11 Cases pursuant to a consensual plan of reorganization (the "Plan") filed in the Chapter 11 proceedings as described further below.
The RSA contains certain covenants on the part of each of the Company and the Consenting Stakeholders, including limitations on the parties’ ability to pursue alternative transactions (subject to customary provisions regarding the ability of the Company’s Board of Directors to satisfy its fiduciary duties), commitments by the Consenting Stakeholders to vote in favor of the Plan and commitments of the Company and the Consenting Stakeholders to negotiate in good faith to finalize the documents and agreements contemplated by and required to implement the Plan. The RSA also provides for certain conditions to the obligations of the parties and for termination upon the occurrence of certain events, including, without limitation, the failure to achieve certain milestones and certain breaches by the parties under the RSA. One such condition is the requirement to obtain sufficient savings on certain midstream obligations (as determined by the required plan sponsors, defined in the RSA) through rejection of such contracts and/or renegotiation of their terms.

12

CHESAPEAKE ENERGY CORPORATION AND SUBSIDIARIES (DEBTOR-IN-POSSESSION)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(Unaudited)

The RSA includes a hedging provision that authorizes the Debtors to enter into post-petition hedge agreements with the lenders under the DIP Credit Facility (as defined below). Beginning 30 days after the Petition Date, the Debtors are required to, at a minimum, hedge 50% of the anticipated projected monthly production from proved developed producing oil and natural gas reserves (in each case, calculated separately for (i) crude oil and (ii) natural gas and natural gas liquids, taken together) for a rolling 24-month period. The Debtors notional hedge volumes shall not exceed (a) for the 18-month period from the date such commodity hedge transaction is executed, the lesser of (x) 80% of forecasted production for such months and (y) 80% of the anticipated projected monthly production from proved oil and natural gas reserves, (b) for the 6-month period following, 90% of the anticipated projected monthly production from proved developed producing oil and natural gas reserves and (c) for the 24-month period thereafter, 80% of the anticipated projected monthly production from proved developed producing oil and natural gas reserves.
Although the Company intends to pursue the Restructuring in accordance with the terms set forth in the Plan, there can be no assurance that the Company will be successful in completing the Restructuring or any other similar transaction on the terms set forth in the Plan, on different terms, or at all.
Plan of Reorganization
On September 11, 2020, the Debtors filed the Plan and a related disclosure statement with the Bankruptcy Court. As is customary in bankruptcy proceedings, the Debtors subsequently filed with the Bankruptcy Court an amended plan and amended disclosure statement on October 8, 2020 and a seconded amended plan and second amended disclosure statement on October 30, 2020. The Plan is subject to approval by the Bankruptcy Court. If the Plan is confirmed by the Bankruptcy Court, the Debtors would exit Chapter 11 pursuant to the terms of the Plan. Under the Plan, the claims against and interests in the Debtors are organized into classes based, in part, on their respective priorities. Below is a summary of the treatment that the stakeholders of the Company would receive under the Plan upon the emergence from bankruptcy:
Holders of Other Secured Claims. Each holder of Other Secured Claims (as defined in the RSA) would receive, at the Company's option and in consultation with a requisite number of holders of claims who are backstopping a rights offering pursuant to 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 rendering its secured claim unimpaired in accordance with Section 1124 of the Bankruptcy Code.
Holders of Other Priority Claims. Each holder of Other Priority Claims (as defined in the RSA) would receive treatment in a manner consistent with Section 1129(a)(9) of the Bankruptcy Code.
Holders of Pre-Petition Revolving Credit Facility Claims. On the effective date of the Plan (the "Plan Effective Date"), each holder of obligations under the pre-petition revolving credit facility would receive, at such holder's option, its pro rata share of either Tranche A RBL Exit Facility Loans or Tranche B RBL Exit Facility Loans (each as defined in the Exit Facilities Term Sheet, defined below), each on a dollar for dollar basis.
Holders of FLLO Term Loan Facility Claims. On the Plan Effective Date, each holder of obligations under the FLLO Term Loan Facility would receive its pro rata share of (i) 76% of the reorganized Company's new common equity interests (the "New Common Stock"), subject to the terms set forth in the Restructuring Term Sheet and (ii) the right to participate in a rights offering on the terms set forth in the Restructuring Term Sheet.
Holders of Second Lien Notes Claims. On the Plan Effective Date, each holder of the Second Lien Notes would receive its pro rata share of (i) 12% of the New Common Stock, subject to the terms set forth in the Restructuring Term Sheet, (ii) the right to participate in a rights offering on the terms set forth in the Restructuring Term Sheet, and (iii) warrants to purchase 10% of the New Common Stock on certain terms set forth in the Restructuring Term Sheet, warrants to purchase another 10% of the New Common Stock on certain other terms set forth in the Restructuring Term Sheet, and 50% of warrants to purchase another 10% of the New Common Stock on certain other terms set forth in the Restructuring Term Sheet (the "New Class C Warrants").
Holders of Unsecured Notes Claims. On the Plan Effective Date, each holder of the Unsecured Notes (as defined in the RSA) would receive its pro rata share of (i) 12% of the New Common Stock, subject to the terms set forth in the Restructuring Term Sheet (the "Unsecured Notes Claims Recovery"), and (ii) 50% of the New Class C Warrants.

13

CHESAPEAKE ENERGY CORPORATION AND SUBSIDIARIES (DEBTOR-IN-POSSESSION)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(Unaudited)

Holders of General Unsecured Claims. On the Plan Effective Date, each holder of allowed general unsecured claims would receive its pro rata share of the General Unsecured Claims Recovery.
Equity Holders. Each holder of an equity interest in Chesapeake, including our common and preferred stock, would have such interest canceled, released, and extinguished without any distribution.
DIP Credit Facility
On June 28, 2020, prior to the commencement of the Chapter 11 Cases, the Company entered into a commitment letter (the “Commitment Letter”) with certain of the lenders under the pre-petition revolving credit facility and/or their affiliates (collectively, the “Commitment Parties”), pursuant to which, and subject to the satisfaction of certain customary conditions, including the approval of the Bankruptcy Court, the Commitment Parties agreed to provide the Debtors with a post-petition senior secured super-priority debtor-in-possession revolving credit facility in an aggregate principal amount of up to approximately $2.104 billion (the “DIP Credit Facility”), consisting of a revolving loan facility of new money in an aggregate principal amount of up to $925 million, which includes a sub-facility of up to $200 million for the issuance of letters of credit, and an up to approximately $1.179 billion term loan that reflects the roll-up of a portion of outstanding borrowings under the pre-petition revolving credit facility. Pursuant to the Commitment Letter, the Commitment parties have also committed to provide, subject to certain conditions, an up to $2.5 billion exit credit facility, consisting of an up to $1.75 billion revolving credit facility (the “Exit Revolving Facility”) and an up to $750 million senior secured term loan facility (the “Exit Term Loan Facility” and, together with the Exit Revolving Facility, the “Exit Credit Facilities”). The terms and conditions of the DIP Credit Facility are set forth in the Senior Secured Super-Priority Debtor-in-Possession Credit Agreement (the “DIP Credit Agreement”) attached to the Commitment Letter. The proceeds of the DIP Credit Facility may be used for, among other things, post-petition working capital, permitted capital investments, general corporate purposes, letters of credit, administrative costs, premiums, expenses and fees for the transactions contemplated by the Chapter 11 Cases, payment of court approved adequate protection obligations, and other such purposes consistent with the DIP Credit Facility. The terms and conditions of the Exit Credit Facilities are reflected in an exit facilities term sheet attached as an exhibit to the Restructuring Term Sheet (the “Exit Facilities Term Sheet”). The obligations of the lenders to provide the Exit Credit Facilities are subject to satisfaction of certain conditions set forth in the Exit Facilities Term Sheet, including conditions requiring (i) a minimum liquidity of $500 million, (ii) a leverage ratio no greater than 2.25:1.00 and (iii) asset coverage of credit facilities to PV-10 of at least 1.50:1.00. In the Current Period, we incurred $118 million of fees related to the arrangement and funding of the DIP Credit Facility and Exit Credit Facilities. The DIP Credit Facility was approved by the Bankruptcy Court on a final basis on July 31, 2020 and became effective as of July 1, 2020. See Note 4 for additional information.
Executory Contracts
Subject to certain exceptions, under the Bankruptcy Code, we may assume, assign, or reject certain executory contracts and unexpired leases subject to the approval of the Bankruptcy Court and certain other conditions. Generally, the rejection of an executory contract or unexpired lease is treated as a pre-petition breach of such executory contract or unexpired lease and, subject to certain exceptions, relieves us from performing our future obligations under such executory contract or unexpired lease but entitles the contract counterparty or lessor to a pre-petition general unsecured claim for damages caused by such deemed breach. Counterparties to rejected contracts or leases may assert unsecured claims in the Bankruptcy Court against our estate for such damages. Generally, the assumption of an executory contract or unexpired lease requires us to cure existing monetary defaults under such executory contract or unexpired lease and provide adequate assurance of future performance. Accordingly, any description of an executory contract or unexpired lease with us, including where applicable a quantification of our obligations under any such executory contract or unexpired lease of us, is qualified by any overriding rejection rights we have under the Bankruptcy Code.
Potential Claims
We have filed with the Bankruptcy Court schedules and statements setting forth, among other things, the assets and liabilities of us and each of our subsidiaries, subject to the assumptions filed in connection therewith. These schedules and statements may be subject to further amendment or modification after filing. Certain holders of pre-petition claims that are not governmental units were required to file proofs of claim by the deadline for general claims, (the “bar date”), which was set by the Bankruptcy Court as October 30, 2020. Governmental units are required to file proof of claims by December 28, 2020, the deadline that was set by the Bankruptcy Court.
As of November 5, 2020, the Debtors have received approximately 7,350 proofs of claim, approximately half of which represent general unsecured claims, for an aggregate amount of approximately $11.2 billion. We will continue

14

CHESAPEAKE ENERGY CORPORATION AND SUBSIDIARIES (DEBTOR-IN-POSSESSION)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(Unaudited)

to evaluate these claims throughout the Chapter 11 process and recognize or adjust amounts in future financial statements as necessary using the best information available at such time. Differences between amounts scheduled by us and claims by creditors will ultimately be reconciled and resolved in connection with the claims resolution process. In light of the expected number of creditors, the claims resolution process may take considerable time to complete and likely will continue after we emerge from bankruptcy.
Financial Statement Classification of Liabilities Subject to Compromise
The accompanying unaudited condensed consolidated balance sheet as of September 30, 2020, includes amounts classified as liabilities subject to compromise, which represent liabilities we anticipate will be allowed as claims in the Chapter 11 Cases. These amounts represent our current estimate of known or potential obligations to be resolved in connection with the Chapter 11 Cases, and may differ from actual future settlement amounts paid. Differences between liabilities estimated and claims filed, or to be filed, will be investigated and resolved in connection with the claims resolution process. We will continue to evaluate these liabilities throughout the Chapter 11 process and adjust amounts as necessary. Such adjustments may be material.
Liabilities subject to compromise includes amounts related to the rejection of various executory contracts and unexpired leases. Additional amounts may be included in liabilities subject to compromise in future periods if additional executory contracts and unexpired leases are rejected. The nature of many of the potential claims arising under our executory contracts and unexpired leases has not been determined at this time, and therefore, such claims are not reasonably estimable at this time and may be material.
The following table summarizes the components of liabilities subject to compromise included on our unaudited condensed consolidated balance sheet as of September 30, 2020:
 
 
September 30,
2020
 
 
($ in millions)
Debt
 
$
7,166

Accounts payable
 
148

Accrued interest
 
235

Other liabilities
 
879

Liabilities subject to compromise
 
$
8,428


Reorganization Items, Net
We have incurred and will continue to incur significant expenses, gains and losses associated with the reorganization, primarily the 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 amount of these items, which are being incurred in reorganization items, net within our accompanying unaudited condensed consolidated statements of operations, are expected to significantly affect our statements of operations. In future periods, we may also incur adjustments for allowable claims related to our legal proceedings and executory contracts approved for rejections by the Bankruptcy Court.

15

CHESAPEAKE ENERGY CORPORATION AND SUBSIDIARIES (DEBTOR-IN-POSSESSION)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(Unaudited)

The following table summarizes the components in reorganization items, net included in our unaudited condensed consolidated statements of operations for the three and nine months ended September 30, 2020:
 
 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
 
 
2020
 
2019
 
2020
 
2019
 
 
($ in millions)
Write off of unamortized debt premiums (discounts)
 
$

 
$

 
$
518

 
$

Write off of unamortized debt issuance costs
 

 

 
(61
)
 

Debt and equity financing fees
 
(115
)
 

 
(178
)
 

Provision for allowed claims
 
(465
)
 

 
(465
)
 

Legal and professional fees
 
(40
)
 

 
(40
)
 

Gain on settlement of pre-petition accounts payable
 
12

 

 
12

 

Loss on settlement of pre-petition revenues payable
 
(3
)
 

 
(3
)
 

Reorganization items, net
 
$
(611
)
 
$

 
$
(217
)
 
$


2.
Basis of Presentation and Summary of Significant Accounting Policies
Basis of Presentation
The accompanying unaudited condensed consolidated financial statements of Chesapeake were prepared in accordance with accounting principles generally accepted in the United States of America and the rules and regulations of the SEC. Pursuant to such rules and regulations, certain disclosures have been condensed or omitted.
This Quarterly Report on Form 10-Q (this “Form 10-Q”) relates to the three and nine months ended September 30, 2020 (the “Current Quarter” and the “Current Period”, respectively) and the three and nine months ended September 30, 2019 (the “Prior Quarter” and the “Prior Period”, respectively). Our annual report on Form 10-K for the year ended December 31, 2019 (“2019 Form 10-K”) should be read in conjunction with this Form 10-Q. The accompanying unaudited condensed consolidated financial statements reflect all normal recurring adjustments which, in the opinion of management, are necessary for a fair statement of our condensed consolidated financial statements and accompanying notes and include the accounts of our direct and indirect wholly owned subsidiaries and entities in which we have a controlling financial interest. Intercompany accounts and balances have been eliminated.
Going Concern
The accompanying unaudited condensed consolidated financial statements have been prepared assuming we will continue as a going concern and contemplate the realization of assets and satisfaction of liabilities in the normal course of business. Our ability to continue as a going concern is contingent on our ability to comply with the financial and other covenants contained in our DIP Credit Facility, the Bankruptcy Court’s approval of the Plan and our ability to successfully implement the Plan and obtain exit financing, among other factors. As a result of the Bankruptcy Filing, the realization of assets and the satisfaction of liabilities are subject to uncertainty. While operating as debtors-in-possession under Chapter 11, we may sell or otherwise dispose of or liquidate assets or settle liabilities, subject to the approval of the Bankruptcy Court or as otherwise permitted in the ordinary course of business (and subject to restrictions contained in the DIP Credit Facility), for amounts other than those reflected in the accompanying unaudited condensed consolidated financial statements. Further, the Plan could materially change the amounts and classifications of assets and liabilities reported in the condensed consolidated financial statements. The factors noted above raise substantial doubt about our ability to continue as a going concern. The accompanying unaudited condensed consolidated financial statements do not include any adjustments related to the recoverability and classification of assets or the amounts and classification of liabilities or any other adjustments that might be necessary should we be unable to continue as a going concern or as a consequence of the Bankruptcy Filing.
Accounting During Bankruptcy
We have applied Accounting Standards Codification (ASC) 852, Reorganizations, in preparing the unaudited condensed consolidated financial statements. ASC 852 requires that the financial statements, for periods subsequent to the Chapter 11 Cases, distinguish transactions and events that are directly associated with the reorganization from

16

CHESAPEAKE ENERGY CORPORATION AND SUBSIDIARIES (DEBTOR-IN-POSSESSION)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(Unaudited)

the ongoing operations of the business. Accordingly, certain revenues, expenses, realized gains and losses and provisions for losses that are realized or incurred during the bankruptcy proceedings, including losses related to executory contracts that have been approved for rejection by the Bankruptcy Court, and unamortized deferred financing costs, premiums and discounts associated with debt classified as liabilities subject to compromise, are recorded as reorganization items, net. In addition, pre-petition obligations that may be impacted by the Chapter 11 process have been classified on the unaudited condensed consolidated balance sheet as of September 30, 2020 as liabilities subject to compromise. These liabilities are reported at the amounts we anticipate will be allowed by the Bankruptcy Court, even if they may be settled for lesser amounts. See Note 1 for more information regarding reorganization items.
Risks and Uncertainties
The global spread of COVID-19 created significant volatility, uncertainty, and economic disruption during the first nine months of 2020. The pandemic has reached more than 200 countries and territories and has resulted in widespread adverse impacts on the global economy and on our customers and other parties with whom we have business relations. State and local authorities have also implemented multi-step policies with the goal of re-opening. However, certain jurisdictions began re-opening only to return to restrictions in the face of increases in new COVID-19 cases. To date, we have experienced limited operational impacts as a result of the restrictions from working remotely or COVID-19 directly. As an essential business under the guidelines issued by each of the states in which we operate, we have been allowed to continue operations. As a result, since mid-March, we have restricted access to all of our offices and for a period of time directed employees to work remotely to the extent possible. We began to re-open our offices in phases beginning mid-May and special precautions have been implemented to minimize the risk of exposure. These actions have allowed us to maintain the engagement and connectivity of our personnel. However, due to severe impacts from the global COVID-19 pandemic on the global demand for oil and natural gas, financial results may not be necessarily indicative of operating results for the entire year. Moreover, future operations could be negatively affected if a significant number of our employees are quarantined as a result of exposure to the virus.
There is considerable uncertainty regarding the extent to which COVID-19 will continue to spread and the extent and duration of governmental and other measures implemented to try to slow the spread of the virus, such as large-scale travel bans and restrictions, border closures, quarantines, shelter-in-place orders and business and government shutdowns. One of the largest impacts of the pandemic has been a significant reduction in global demand for oil and, to a lesser extent, natural gas. Prices in the oil and gas market have remained depressed, as the oversupply and lack of demand in the market persist. Oil and natural gas prices are expected to continue to be volatile as a result of the near-term production instability and the ongoing COVID-19 outbreaks and as changes in oil and natural gas inventories, industry demand and global and national economic performance are reported. The resulting supply/demand imbalance is having disruptive impacts on the oil and natural gas exploration and production industry and on other industries that serve exploration and production companies. We expect to see continued volatility in oil and natural gas prices for the foreseeable future, and such volatility, combined with the current depressed prices, has impacted and is expected to continue to adversely impact our business. The continued low level of demand and prices for oil and natural gas or otherwise has had and will continue to have a material adverse effect on our business, cash flows, liquidity, financial condition and results of operations.
We cannot predict the full impact that COVID-19 or the significant disruption and volatility currently being experienced in the oil and natural gas markets will have on our business, cash flows, liquidity, financial condition and results of operations at this time due to numerous uncertainties. The ultimate impacts will depend on future developments, including the ultimate geographic spread of the virus, the consequences of governmental and other measures designed to prevent the spread of the virus, the development of effective treatments, the duration of the outbreak, actions taken by members of Organization of Petroleum Exporting Countries (OPEC+) and other foreign, oil-exporting countries, governmental authorities, customers and other third parties, workforce availability, and the timing and extent to which normal economic and operating conditions resume.

17

CHESAPEAKE ENERGY CORPORATION AND SUBSIDIARIES (DEBTOR-IN-POSSESSION)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(Unaudited)

3.    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 all periods presented, our convertible senior notes did not have a dilutive effect and, therefore, were excluded from the calculation of diluted EPS.
Shares of common stock for the following securities were excluded from the calculation of diluted EPS as the effect was antidilutive:
 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
 
2020
 
2019
 
2020
 
2019
 
(in thousands)
Common stock equivalent of our preferred stock outstanding(a)
290

 
290

 
290

 
290

Common stock equivalent of our convertible senior notes outstanding(a)

 
621

 
621

 
621

Common stock equivalent of our preferred stock outstanding prior to exchange(a)

 
5

 

 
5

Participating securities(a)

 
1

 

 
2


____________________________________________
(a)
Amount has been retroactively adjusted to reflect a 1-for-200 (1:200) reverse stock split effective April 14, 2020. See Note 9 for additional information.
As a result of the Company’s reverse stock split effective on April 14, 2020, proportionate adjustments were made to the conversion price of Chesapeake’s outstanding 5.5% Convertible Senior Notes due 2026, 4.5% Cumulative Convertible Preferred Stock, 5.00% Cumulative Convertible Preferred Stock (Series 2005B), 5.75% Cumulative Convertible Non-Voting Preferred Stock (Series A) and 5.75% Cumulative Non-Voting Convertible Preferred Stock and to the outstanding awards and number of shares issued and issuable under the Company's equity compensation plans. See Note 9 for additional information.

18

CHESAPEAKE ENERGY CORPORATION AND SUBSIDIARIES (DEBTOR-IN-POSSESSION)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(Unaudited)

4.
Debt
Our long-term debt consisted of the following as of September 30, 2020 and December 31, 2019:
 
September 30, 2020
 
December 31, 2019
 
Principal
Amount
 
Carrying
Amount
 
Principal
Amount
 
Carrying
Amount
 
($ in millions)
DIP credit facility
$

 
$

 
$

 
$

Pre-petition revolving credit facility
1,929

 
1,929

 
1,590

 
1,590

Term loan due 2024
1,500

 
1,500

 
1,500

 
1,470

11.5% senior secured second lien notes due 2025
2,330

 
2,330

 
2,330

 
3,248

6.625% senior notes due 2020
176

 
176

 
208

 
208

6.875% senior notes due 2020
73

 
73

 
93

 
93

6.125% senior notes due 2021
167

 
167

 
167

 
167

5.375% senior notes due 2021
127

 
127

 
127

 
127

4.875% senior notes due 2022
272

 
272

 
338

 
338

5.75% senior notes due 2023
167

 
167

 
209

 
209

7.00% senior notes due 2024
624

 
624

 
624

 
624

6.875% senior notes due 2025
2

 
2

 
2

 
2

8.00% senior notes due 2025
246

 
246

 
246

 
245

5.5% convertible senior notes due 2026
1,064

 
1,064

 
1,064

 
765

7.5% senior notes due 2026
119

 
119

 
119

 
119

8.00% senior notes due 2026
46

 
46

 
46

 
44

8.00% senior notes due 2027
253

 
253

 
253

 
253

Debt issuance costs

 

 

 
(44
)
Total debt, net
9,095

 
9,095

 
8,916

 
9,458

Less current maturities of long-term debt
(1,929
)
 
(1,929
)
 
(385
)
 
(385
)
Less amounts reclassified to liabilities subject to compromise
(7,166
)
 
(7,166
)
 

 

Total long-term debt, net
$

 
$

 
$
8,531

 
$
9,073


Chapter 11 Proceedings
Filing of the Chapter 11 Cases constituted an event of default with respect to certain of our secured and unsecured debt obligations. As a result of the Chapter 11 Cases, the principal and interest due under these debt instruments became immediately due and payable. However, Section 362 of the Bankruptcy Code stays the creditors from taking any action as a result of the default.
The principal amounts outstanding under the FLLO Term Loan, Second Lien Notes and all of our other unsecured senior and convertible senior notes have been reclassified as liabilities subject to compromise on the accompanying unaudited condensed consolidated balance sheet as of September 30, 2020. Additionally, non-cash adjustments were made to write off all of the related unamortized debt issuance costs and associated discounts and premiums of approximately $457 million, which are included in reorganization items, net in the accompanying unaudited condensed consolidated statements of operations for the Current Period, as discussed in Note 1.
The agreements for our FLLO Term Loan, Second Lien Notes, and unsecured senior and convertible senior notes contain provisions regarding the calculation of interest upon default. Upon default, the interest rate on the FLLO Term Loan increases from LIBOR plus 8.00% to alternative base rate (ABR) (3.25% during the third quarter) plus Applicable Margin (7.00% during the third quarter) plus 2.00%. For the Second Lien Notes and all of our other unsecured senior and convertible senior notes, the interest rate remains the same upon default. However, interest accrues on the amount

19

CHESAPEAKE ENERGY CORPORATION AND SUBSIDIARIES (DEBTOR-IN-POSSESSION)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(Unaudited)

of unpaid interest in addition to the principal balance. We will not pay or recognize interest on the FLLO Term Loan, Second Lien Notes, or unsecured senior and convertible senior notes during the Chapter 11 process.
Debtor-in-Possession Credit Agreement
On June 28, 2020, prior to the commencement of Chapter 11 Cases, the Company entered into a commitment letter with certain of the lenders (“New Money Lenders”) under the pre-petition revolving credit facility and/or their affiliates to provide the Debtors with a DIP Credit Facility in an aggregate principal amount of up to approximately $2.104 billion in commitments and loans from the New Money Lenders. The DIP Credit Facility consists of a revolving loan facility of new money in an aggregate principal amount of up to $925 million (the “New Money Facility”), which includes a sub-facility of up to $200 million for the issuance of letters of credit, and a $1.179 billion term loan that reflects the roll-up of a portion of outstanding borrowings under the pre-petition revolving credit facility: (i) a $925 million term loan reflecting the roll-up of a portion of outstanding existing borrowings made by the New Money Lenders under the existing revolving credit agreement (the “New Money Roll-Up Loans”) and (ii) an up to approximately $254 million term loan reflecting the roll-up or a portion of outstanding existing borrowings made by certain other lenders under the pre-petition revolving credit facility agreement (the “Incremental Roll-Up Loans”). The $750 million of outstanding borrowings under the pre-petition revolving credit facility that were not rolled up (the “Stub Loans”) will remain outstanding throughout the Chapter 11 Cases but will accrue interest at a lower rate than the rolled-up loans. The proceeds of the DIP Credit Facility may be used for, among other things, post-petition working capital, permitted capital investments, general corporate purposes, letters of credit, administrative costs, premiums, expenses and fees for the transactions contemplated by the Chapter 11 Cases, payment of court approved adequate protection obligations and other such purposes consistent with the DIP Credit Facility. The DIP Credit Facility was approved by the Bankruptcy Court on a final basis on July 31, 2020 and became effective as of July 1, 2020.
Borrowings under the DIP Credit Facility will mature, and the lending commitments thereunder will terminate, upon the earliest to occur of: (a) March 28, 2021 (the 9-month anniversary of the Petition Date); (b) the date of the termination of the commitments and/or the acceleration of all of obligations following the occurrence and continuance of an event of default defined the DIP Credit Facility; (c) the first business day on which the interim order, as defined in the DIP Credit Facility, expires or is terminated; (d) the conversion of any of Chapter 11 Cases to a case under Chapter 7 of the Bankruptcy Code; (e) the dismissal of any of the Chapter 11 Cases; (f) the closing of a sale of all or substantially all of the equity or assets of the Debtors; (g) the date of the payment in full in cash of all obligations and termination of all the commitments of the Debtors and; (h) the effective date of any of the Debtors’ approved plan of reorganization.
Borrowings under the DIP Credit Facility bear interest at an ABR or LIBOR, at our election, plus an applicable margin of 5.00% per annum for ABR loans and 6.00% per annum for LIBOR loans for the New Money Facility and bear interest at an ABR or LIBOR, at our election, plus an applicable margin of 4.50% per annum for ABR loans and 5.50% per annum for LIBOR loans for the New Money Roll-Up Loans and Incremental Roll-up Loans. The Stub Loans bear interest at LIBOR plus an applicable margin of 3.50% per annum.
In addition to paying interest on outstanding principal under the DIP Credit Facility, we are required to pay a commitment fee of 0.50% per annum to the lenders of the DIP Credit Facility in respect of the unutilized revolving commitments thereunder and a letter of credit fee equal to 0.125% per annum.
The DIP Credit Facility includes negative covenants that, subject to significant exceptions, limit our ability and the ability of our restricted subsidiaries to, among other things, (i) incur additional indebtedness, (ii) create liens on assets, (iii) engage in mergers, consolidations, liquidations and dissolutions, (iv) sell assets, (v) make investments, loans or advances, except as described in the DIP Credit Facility, (vi) pay dividends and distributions or repurchase capital stock, (vii) engage in certain transactions with affiliates and (viii) change lines of business. The DIP Credit Facility includes certain customary representations and warranties, affirmative covenants and events of default, including but not limited to defaults on account of nonpayment, breaches of representations and warranties and covenants, certain bankruptcy-related events, certain events under ERISA, material judgments and a change in control. If an event of default occurs, the lenders under the DIP Credit Facility will be entitled to take various actions, including the acceleration of all amounts due under the DIP Credit Facility and all actions permitted to be taken under the loan documents or application of law. In addition, the DIP Credit Facility is subject to various other financial performance covenants, including compliance with certain financial metrics to an approved budget and a required Asset Coverage Ratio (as defined in the DIP Credit Agreement) of not less than 1.25:1.00. On September 15, 2020, we entered into the first amendment to the DIP Credit Agreement. The amendment, among other things, amends the maximum hedging

20

CHESAPEAKE ENERGY CORPORATION AND SUBSIDIARIES (DEBTOR-IN-POSSESSION)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(Unaudited)

covenant to allow the Debtors to enter into additional non-speculative hedge agreements based on forecasted production.
Senior Notes
In the Current Period, we repurchased approximately $160 million aggregate principal amount of the following senior notes for $95 million and recorded an aggregate gain of approximately $65 million.
 
 
Notes Repurchased
 
 
($ in millions)
6.625% senior notes due 2020
 
$
32

6.875% senior notes due 2020
 
20

4.875% senior notes due 2022
 
66

5.75% senior notes due 2023
 
42

Total
 
$
160


In the Prior Quarter, we privately negotiated exchanges of approximately $507 million principal amount of our outstanding senior notes for 235,563,519 shares of common stock and $186 million principal amount of our outstanding convertible senior notes for 73,389,094 shares of common stock. We recorded an aggregate net gain of approximately $64 million associated with the exchanges.
In the Prior Quarter, we repurchased approximately $82 million principal amount of our 6.875% Senior Notes due 2025 for $76 million and recorded a $6 million gain.
Phase-Out of LIBOR
In July 2017, the UK's Financial Conduct Authority, which regulates LIBOR, announced that it intends to phase out LIBOR as a benchmark by the end of 2021. At the present time, our pre-petition revolving credit facility and our term loan have terms that extend beyond 2021. Our pre-petition revolving credit facility and our term loan each provide for a mechanism to amend the underlying agreements to reflect the establishment of an alternate rate of interest upon the occurrence of certain events related to the phase-out of LIBOR. However, we have not yet pursued any technical amendment or other contractual alternative to our pre-petition revolving credit facility or term loan to address this matter. We are currently evaluating the potential impact of the eventual replacement of the LIBOR interest rate.
Fair Value of Debt
We estimate the fair value of our Level 1 debt based on the market value of our publicly traded debt as determined based on the yield of our senior notes. The fair value of our Level 2 debt is based on a market approach using estimates provided by an independent investment financial data services firm. Upon emergence from the Chapter 11 Cases, the pre-petition revolving credit facility will be paid in full with proceeds from our exit financing and, therefore, the estimated fair value equals the carrying value and is excluded from the table below.
 
 
September 30, 2020
 
December 31, 2019
 
 
Carrying
Amount
 
Estimated
Fair Value
 
Carrying
Amount
 
Estimated
Fair Value
 
 
 
 
($ in millions)
 
 
Short-term debt (Level 1)
 
$

 
$

 
$
385

 
$
360

Long-term debt (Level 1)
 
$

 
$

 
$
753

 
$
622

Long-term debt (Level 2)
 
$

 
$

 
$
8,320

 
$
6,085

Liabilities subject to compromise (Level 1)
 
$
982

 
$
38

 
$

 
$

Liabilities subject to compromise (Level 2)
 
$
6,184

 
$
1,475

 
$

 
$



21

CHESAPEAKE ENERGY CORPORATION AND SUBSIDIARIES (DEBTOR-IN-POSSESSION)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(Unaudited)

5.
Contingencies and Commitments
There have been no material developments in previously reported legal or environmental contingencies or commitments other than the items discussed below.
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 contemplated by the RSA, if confirmed, will provide for the treatment of claims against the Company’s bankruptcy estates, including pre-petition liabilities that have not been satisfied or addressed during the Chapter 11 Cases. See Note 1 for additional information.
Litigation and Regulatory Proceedings
We are 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. 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.
Business Operations. We are 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.
We and other natural gas producers have been named in various lawsuits alleging underpayment of royalties and other shares of the proceeds of production. The lawsuits against us allege, among other things, that we used below-market prices, made improper deductions, utilized improper measurement techniques, entered into arrangements with affiliates that resulted in underpayment of amounts owed in connection with the production and sale of natural gas and NGL, or similar theories. These lawsuits include cases filed by individual royalty owners and putative class actions, some of which seek to certify a statewide class. The lawsuits seek compensatory, consequential, treble, and punitive damages, restitution and disgorgement of profits, declaratory and injunctive relief regarding our payment practices, pre-and post-judgment interest, and attorney’s fees and costs. Royalty plaintiffs have varying 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. We have resolved a number of these claims through negotiated settlements of past and future royalty obligations and have prevailed in various other lawsuits. We are currently defending numerous lawsuits seeking damages with respect to underpayment of royalties or other shares of the proceeds of production in multiple states where we have operated, including those discussed below.
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 we 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 we are a party established unlawful market allocation for the acquisition of leases. The lawsuit seeks statutory restitution, civil penalties and costs, as well as a temporary injunction from exploration and drilling activities in Pennsylvania until restitution, penalties and costs have been paid, and a permanent injunction from further violations of the UTPCPL. We intend to vigorously defend these claims.
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 divestiture of substantially all of our midstream business and most of our 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, intentional interference with contractual relations, and violations of antitrust laws related to purported markets for gas mineral rights, operating rights and gas gathering sources. These lawsuits seek in aggregate compensatory, consequential, treble, and punitive damages, restitution and disgorgement of profits, declaratory and injunctive relief regarding our royalty payment practices, pre-and post-judgment interest, and attorney’s fees and costs. On December 20, 2017 and August 9, 2018, we reached tentative settlements to resolve all Pennsylvania civil royalty cases for a total at that time of approximately $36 million. In light of our Bankruptcy Filing, the parties have reopened settlement discussions.
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.
On July 24, 2018, HOOPP filed a demand for arbitration with the American Arbitration Association regarding HOOPP’s purchase of our interest in Chaparral Energy, Inc. stock for $215 million on January 5, 2014. HOOPP claims that we engaged in material misrepresentations and fraud, and that we violated the Securities Exchange Act of 1934 (the “Exchange Act”) and Oklahoma Uniform Securities Act. HOOPP seeks either rescission or $215 million in monetary damages, and in either case, interest, attorney’s fees, disgorgement and punitive damages. We intend to vigorously defend these claims.
On January 29, 2020, a well control incident occurred at one of our wellsites in Burleson County, Texas, causing the deaths of three of our contractors’ employees and injuring a fourth. In connection with this incident, eleven lawsuits have been brought against us and our contractors alleging negligence, gross negligence, and breach of contract, and seeking wrongful death damages, survival statute damages, exemplary damages, and interest. Ten of the suits have been filed in Dallas County, Texas. A joint motion to consolidate filed by all the parties in nine of the ten Dallas County lawsuits is currently pending before the Texas Multidistrict Litigation Panel. The eleventh suit is pending in Burleson County, Texas. The proceedings are in their early stages and are all stayed due to the pending bankruptcy. Our general and excess liability insurance policies provide coverage for third party bodily injury and wrongful death claims, and the contracts between us and our contractors with respect to the well contain customary cross-indemnification provisions. The well control incident liability was not reduced for the potential insurance recovery. A receivable for the probable recovery was accrued.
Environmental Contingencies
The nature of the oil and gas 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.
We are named as a defendant in numerous lawsuits in Oklahoma alleging that we and other companies have engaged in activities that have caused earthquakes. These lawsuits seek compensation for injury to real and personal property, diminution of property value, economic losses due to business interruption, interference with the use and enjoyment of property, annoyance and inconvenience, personal injury and emotional distress.  In addition, they seek the reimbursement of insurance premiums and the award of punitive damages, attorneys’ fees, costs, expenses and interest. We intend to vigorously defend these claims.
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.

22

CHESAPEAKE ENERGY CORPORATION AND SUBSIDIARIES (DEBTOR-IN-POSSESSION)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(Unaudited)

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; 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:
 
 
September 30,
2020
 
 
($ in millions)
Remainder of 2020
 
$
255

2021
 
872

2022
 
804

2023
 
671

2024
 
597

2025 – 2034
 
3,051

Total
 
$
6,250


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 may vary with the applicable agreement.

23

CHESAPEAKE ENERGY CORPORATION AND SUBSIDIARIES (DEBTOR-IN-POSSESSION)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(Unaudited)

6.
Other Liabilities
Other current liabilities as of September 30, 2020 and December 31, 2019 are detailed below:
 
 
September 30,
2020
 
December 31,
2019
 
 
($ in millions)
Revenues and royalties due others
 
$
235

 
$
516

Accrued drilling and production costs
 
88

 
326

Debt and equity financing fees
 
69

 

Joint interest prepayments received
 
27

 
52

Operating leases(a)
 
23

 
9

Accrued reorganization professional fees
 
23

 

VPP deferred revenue(b)
 
22

 
55

Accrued compensation and benefits(c)
 
61

 
156

Other accrued taxes
 
123

 
150

Other
 
82

 
168

Total other current liabilities
 
$
753

 
$
1,432


Other long-term liabilities as of September 30, 2020 and December 31, 2019 are detailed below:
 
 
September 30,
2020
 
December 31,
2019
 
 
($ in millions)
VPP deferred revenue(b)
 
$

 
$
9

Other
 
16

 
116

Total other long-term liabilities
 
$
16

 
$
125

____________________________________________
(a)
In the Current Quarter, we entered into a drilling rig contract that extends through 2021 and recorded an operating lease liability and right-of-use asset.
(b)
At the inception of our volumetric production payment (VPP) agreements, we (i) removed the proved reserves associated with the VPP, (ii) recognized VPP proceeds as deferred revenue which are being amortized on a unit-of-production basis to other revenue over the term of the VPP, (iii) retained responsibility for the production costs and capital costs related to VPP interests and (iv) ceased recognizing production associated with the VPP volumes. The remaining deferred revenue balance will be recognized in other revenues in the consolidated statement of operations through 2021, assuming the related VPP production volumes are delivered as scheduled.
(c)
In the Current Period, we terminated our nonqualified deferred compensation plan. Accordingly, we derecognized the asset associated with the plan after the participants’ investments were liquidated. The cash was distributed to the participants, and we extinguished the corresponding $43 million accrued liability.

24

CHESAPEAKE ENERGY CORPORATION AND SUBSIDIARIES (DEBTOR-IN-POSSESSION)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(Unaudited)

7.
Revenue
The following table shows revenue disaggregated by operating area and product type, for the Current Quarter the Prior Quarter, the Current Period and the Prior Period:
 
 
Three Months Ended September 30, 2020
 
 
Oil
 
Natural Gas
 
NGL
 
Total
 
 
($ in millions)
Marcellus
 
$

 
$
137

 
$

 
$
137

Haynesville
 

 
92

 

 
92

Eagle Ford
 
189

 
26

 
26

 
241

Brazos Valley
 
127

 
3

 
3

 
133

Powder River Basin
 
36

 
7

 
4

 
47

Mid-Continent
 
14

 
5

 
3

 
22

Revenue from contracts with customers
 
366

 
270

 
36

 
672

Losses on oil, natural gas and NGL derivatives
 
(2
)
 
(159
)
 

 
(161
)
Oil, natural gas and NGL revenue
 
$
364

 
$
111

 
$
36

 
$
511

 
 
 
 
 
 
 
 
 
Marketing revenue
 
$
301

 
$
116

 
$
31

 
$
448

 
 
 
 
 
 
 
 
 
 
 
Three Months Ended September 30, 2019
 
 
Oil
 
Natural Gas
 
NGL
 
Total
 
 
($ in millions)
Marcellus
 
$

 
$
158

 
$

 
$
158

Haynesville
 

 
129

 

 
129

Eagle Ford
 
282

 
32

 
22

 
336

Brazos Valley
 
194

 
10

 
5

 
209

Powder River Basin
 
97

 
16

 
5

 
118

Mid-Continent
 
40

 
8

 
5

 
53

Revenue from contracts with customers
 
613

 
353

 
37

 
1,003

Gains on oil, natural gas and NGL derivatives
 
124

 
43

 

 
167

Oil, natural gas and NGL revenue
 
$
737

 
$
396

 
$
37

 
$
1,170

 
 
 
 
 
 
 
 
 
Marketing revenue from contracts with customers
 
$
603

 
$
165

 
$
37

 
$
805

Other marketing revenue
 
80

 
4

 

 
84

Marketing revenue
 
$
683

 
$
169

 
$
37

 
$
889

 
 
 
 
 
 
 
 
 


25

CHESAPEAKE ENERGY CORPORATION AND SUBSIDIARIES (DEBTOR-IN-POSSESSION)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(Unaudited)

 
 
Nine Months Ended September 30, 2020
 
 
Oil
 
Natural Gas
 
NGL
 
Total
 
 
($ in millions)
Marcellus
 
$

 
$
445

 
$

 
$
445

Haynesville
 

 
245

 

 
245

Eagle Ford
 
539

 
77

 
59

 
675

Brazos Valley
 
375

 
10

 
9

 
394

Powder River Basin
 
133

 
28

 
14

 
175<