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This excerpt taken from the CHK 8-K filed Jul 9, 2008. VPP Transaction Agreements Not Material Contracts In considering whether to file any or all of the VPP transaction agreements as material contracts, we reviewed the exhibit filing requirements in Regulation S-K Item 601(b)(10). We concluded that the substance of the transaction was ordinary course business for us, even though the form of the transaction was out of the ordinary. Our business is, primarily, finding, producing and selling natural gas and oil. Through the VPP, we sold approximately 208 bcfe of our natural gas reserves. The buyers’ obligation to pay us has been fully performed. Our obligation to purchase any VPP production will be performed in the future in conjunction with our normal operations. We also concluded that the transaction was not material to us. The VPP represented only 2% of Chesapeake’s daily production and proved reserves at December 31, 2007. We further considered materiality in the context of Regulation S-K Item 601(b)(10)(ii)(B) and (C) and found those provisions inapplicable. Our business is not substantially dependent upon the VPP contracts, and the sale price of $1.1 billion is far less than 15% of our oil and natural gas properties at December 31, 2007 (15% of $26.185 billion = $3.928 billion).
Securities and Exchange Commission June 13, 2008 Page 9 of 14
For these reasons, we concluded the VPP transaction agreements were not “material contracts,” as contemplated in Regulation S-K Item 601(b)(10), and therefore did not file them as exhibits to our 2007 Form 10-K.
Response: We expect the VPP will have an immaterial impact on our liquidity in future periods. As noted in our response to comment #8, we used a volumetric production payment to sell a small portion of our proved reserves, quantified at approximately 208 bcfe with an initial production delivery rate of 55 mmcfe per day and representing approximately 2% of proved reserves and net production as of the sale date. Furthermore, the VPP sale was part of Chesapeake’s business strategy to fund its drilling program, as described on page 33 under “2008 – 2009 Financial Plan.” We are redeploying the VPP proceeds to develop new production that we expect will have a higher return to the company than the Appalachian production covered by the VPP. Although Chesapeake will bear the future operating expenses of the VPP, estimated to have a present value of approximately $90 million, such expenses on an annual basis will not significantly impact our liquidity. |
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