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CHK » Topics » Disclosure of Material Terms of VPP Transaction

This excerpt taken from the CHK 8-K filed Jul 9, 2008.

Disclosure of Material Terms of VPP Transaction

We believe the material terms of the December 2007 volumetric production payment (“VPP”) are disclosed on page 33 under “2008 - 2009 Financial Plan—Producing Property Sales” in Item 7 and on page 110 in note 13 of our financial statements. Our intention was to provide a plain-English description of the pertinent facts about this complex transaction, including the

 

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date of the transaction,

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essence of the transaction (sale of a portion of our proved reserves and production in certain Chesapeake-operated producing assets in Kentucky and West Virginia and assignment of hedges valued at approximately ($52) million),

 

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identity of the purchasers,

 

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sale proceeds,

 

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use of proceeds,

Securities and Exchange Commission

June 13, 2008

Page 8 of 14

 

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explanation of the VPP (entitles the purchaser to receive scheduled quantities of natural gas from Chesapeake’s interests in over 4,000 producing wells, free of all production costs and production taxes over a 15-year period),

 

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effect of the transaction on Chesapeake (operating and financial results will no longer reflect production (initial delivery rate of 55 mmcfe per day, or 2% of Chesapeake’s daily production at December 31, 2007) and proved reserve volumes (approximately 208 bcfe, or 2% of Chesapeake’s proved reserves at December 31, 2007) associated with the production volumes covered by the VPP transaction), and

 

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accounting treatment (proceeds from the sale were accounted for as a reduction of oil and natural gas properties and no gain or loss was recognized).

In your comment, you refer to the following disclosure that appears on page 110 in note 13 to our financial statements: “Associated with the transaction, we have committed to purchase the VPP production over the 15 year term at market prices at the time of production, and the purchased gas will be resold.” This arrangement was not a material term of the transaction and is economically immaterial to us. Our obligation is to buy the production at published index prices, less a market-based gathering fee adjusted annually for inflation. We do not believe this aspect of the transaction warrants further discussion as we expect to resell the purchased natural gas on similar market-based terms.

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