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Basis of Presentation and Summary of Significant Accounting Policies (Policies)
 9 Months Ended
Sep. 30, 2012
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Principles of Consolidation
Principles of Consolidation
The accompanying unaudited condensed consolidated financial statements of Chesapeake Energy Corporation (“Chesapeake” or the “Company”) and its subsidiaries have been prepared in accordance with the instructions to Form 10-Q as prescribed by the Securities and Exchange Commission (SEC). This Form 10-Q relates to the three and nine months ended September 30, 2012 (the “Current Quarter” and the “Current Period”, respectively) and three and nine months ended September 30, 2011 (the “Prior Quarter” and the “Prior Period”, respectively). Chesapeake’s annual report on Form 10-K for the year ended December 31, 2011 (2011 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 presentation of the results for the interim periods have been reflected. The accompanying condensed consolidated financial statements of Chesapeake include the accounts of our direct and indirect wholly owned subsidiaries and entities in which Chesapeake holds a controlling interest. All significant intercompany accounts and transactions have been eliminated. The results for the Current Quarter and the Current Period are not necessarily indicative of the results to be expected for the full year.
Critical Accounting Policies
Critical Accounting Policies
We consider accounting policies related to derivatives, variable interest entities, natural gas and oil properties and income taxes to be critical policies. These policies are summarized in Management’s Discussion and Analysis of Financial Condition and Results of Operations in our 2011 Form 10-K.
Risks and Uncertainties
Risks and Uncertainties
Our business strategy is to continue our reserves and production growth and transition our asset base from an exclusive focus on natural gas production to a focus that is, and in the future will remain, more balanced between natural gas and liquids production. This is a capital-intensive strategy, and we made capital expenditures in the Current Period that exceeded our cash flow from operations, filling this gap with borrowings and proceeds from sales of assets that we determined were non-core or did not fit our long-term plans. See Notes 8 and 16 for a description of our completed 2012 asset sales. We project that our capital expenditures will continue to exceed our operating cash flow through 2013; however, we expect to see a much smaller gap between our cash flow from operations and capital expenditures in 2013 than we have experienced in 2012.
As part of our asset sales planning and capital expenditure budgeting process, we closely monitor the resulting effects on the amounts and timing of our sources and uses of funds, particularly as they affect our ability to maintain compliance with the financial covenants of our corporate revolving bank credit facility. While asset sales enhance our ability to reduce debt, sales of producing natural gas and oil properties may adversely affect the amount of cash flow and earnings before interest, taxes, depreciation, depletion and amortization (EBITDA) we generate and reduce the amount and value of collateral available to secure our obligations, both of which can be exacerbated by low prices received for our production. Thus, the assets we select and schedule for sales, our budgeted capital expenditures and our natural gas, oil and NGL price forecasts are carefully considered as we project our future ability to comply with the financial covenant maintenance requirements of our corporate revolving bank credit facility. In September 2012, the existing leverage ratio covenant was increased through an amendment to the credit facility agreement. See Note 3 for discussion of the terms of the amendment. We would have been unable to meet the required ratio as of September 30, 2012 without this amendment primarily because the closing of asset sales transactions occurred in the fourth quarter and not in September as we had anticipated. As a result, without the amendment, we would have been unable to reduce our indebtedness sufficiently as of September 30, 2012 to maintain our covenant compliance. The amendment relaxes our required indebtedness to EBITDA ratio for the quarter ended September 30, 2012 and the four subsequent quarters. Failure to maintain compliance with the covenants of our revolving bank credit facility would, absent a waiver or amendment, allow lenders to declare an event of default and cause any outstanding indebtedness under the facility to become immediately due and payable. Such action could also lead to cross defaults under our senior note and contingent convertible senior note indentures. See Note 3 for further discussion of our debt instruments.
Based on ongoing reductions in our capital expenditures, expected commodity prices as reflected in futures prices and prices for our currently hedged production, our forecasted drilling and production, projected levels of indebtedness and certain asset sales presently being negotiated, we believe we will be in compliance with the financial maintenance covenants, including the amended leverage ratios, of our corporate revolving bank credit facility through 2013. We believe the assumptions underlying our budget for this period are reasonable and that we have adequate flexibility, including the ability to adjust discretionary capital expenditures, to adapt to potential negative developments if needed to maintain covenant compliance. Our ability to generate operating cash flow and close asset sales in order to manage debt, however, are subject to all the risks and uncertainties that exist in our industry, some of which we may not be able to anticipate at this time. We do not have binding agreements for all of our planned asset sales and our ability to consummate each of these transactions is subject to changes in market conditions and other factors beyond our control. If one or more of the transactions is not completed in the anticipated time frame, or at all, or for less proceeds than anticipated, our ability to fund budgeted capital expenditures, reduce our indebtedness as planned and maintain our compliance with revolving bank credit facility covenants could be adversely affected.
We have a material exposure to natural gas prices, which reached 10-year lows in the Current Period. Approximately 70% and 83% of our estimated proved reserves volumes as of September 30, 2012 and December 31, 2011, respectively, were natural gas, and natural gas represented approximately 80% and 84% of our natural gas, oil and NGL sales volumes for the Current Period and the full year 2011, respectively. Although our natural gas derivative arrangements serve to mitigate a portion of the effect of price volatility on our cash flows, none of our 2013 natural gas production is currently protected by derivative instruments against downward price movement. Sustained low natural gas prices, and volatile natural gas, oil and NGL prices in general could have a material adverse effect on our financial position, results of operations and cash flows. In addition, lower natural gas, oil and NGL prices could result in a further reduction in the estimated quantity of proved reserves we report and in the estimated future net cash flows expected to be generated from our proved reserves.
In the Current Period, we reduced our estimate of proved reserves by 5.5 tcfe primarily due to the impact of downward natural gas price revisions. Natural gas prices used in estimating proved reserves decreased by 31% from $4.12 per mcf for the 12 months ended December 31, 2011 to $2.83 per mcf for the 12 months ended September 30, 2012 using 12-month average prices required by the SEC. The reserve reductions primarily involved the loss of significant proved undeveloped reserves, largely in the Barnett Shale and the Haynesville Shale plays, for which future development is uneconomic at the natural gas prices used in the reserves estimates. As a result of lower estimated reserves, as of September 30, 2012, we were required to impair the carrying value of our natural gas and oil properties and, if the trailing 12-month average natural gas prices are lower in subsequent periods, we could have additional impairments in the future. See Natural Gas and Oil Properties below for further discussion of our impairment of the carrying value of our natural gas and oil properties as of September 30, 2012. An impairment of this type is a non-cash charge that does not impact our liquidity or our ability to comply with financial covenants.
Held for Sale Assets and Liabilities
Natural Gas and Oil Properties
On a quarterly basis, we analyze our unevaluated leasehold and transfer to evaluated properties leasehold that can be associated with reserves, leasehold that expired in the quarter or leasehold that is not a part of our development strategy and will be abandoned. As our strategic focus is shifting from a natural gas asset base to a more balanced natural gas and liquids asset base, and as our budgeted capital expenditures are being reduced in the Current Quarter, we identified undeveloped leasehold having a cost of $1.684 billion that would not be a part of our development strategy going forward. The acreage was primarily located in the Williston and DJ Basins, as well as other non-core leasehold located throughout our operating areas.
We also review, on a quarterly basis, the carrying value of our natural gas and oil properties under the full cost accounting rules of the SEC. This quarterly review is referred to as a ceiling test. Under the ceiling test, capitalized costs, less accumulated amortization and related deferred income taxes, may not exceed an amount equal to the sum of the present value of estimated future net revenues (adjusted for cash flow hedges) less estimated future expenditures to be incurred in developing and producing the proved reserves, less any related income tax effects. In the Current Quarter, capitalized costs of natural gas and oil properties exceeded the estimated present value calculation of future net revenues from our proved reserves, net of related income tax considerations, resulting in an impairment in the carrying value of natural gas and oil properties of $3.315 billion. For the ceiling test calculation, costs used are those as of the end of the appropriate quarterly period. In calculating estimated future net revenues, current prices are calculated as the unweighted arithmetic average of natural gas and oil prices on the first day of each month within the 12-month period prior to the ending date of the quarterly period. Such prices are utilized except where different prices are fixed and determinable from applicable contracts for the remaining term of those contracts, including the effects of derivatives designated as cash flow hedges. Cash flow hedges locked in prior to September 30, 2012 which relate to future production periods increased the ceiling test impairment by $279 million. As of September 30, 2012, none of our open derivative instruments were designated as cash flow hedges. Our natural gas and oil hedging activities are discussed in Note 7 of these condensed consolidated financial statements. See Risks and Uncertainties above for a discussion of the reduction in our estimated proved reserves in the Current Period and factors that could impact a future ceiling test impairment.
Held for Sale Assets and Liabilities
We are currently pursuing the sale of substantially all of our midstream business in order to narrow our strategic focus, and we expect to complete the sale in the 2012 fourth quarter. Substantially all of the associated assets and liabilities qualified as held for sale as of September 30, 2012 are reported under our marketing, gathering and compression operating segment. In addition, we are pursuing the sale within the next 12 months of various other property and equipment, including certain drilling rigs and land and buildings primarily in the Fort Worth, Texas area. The drilling rigs are reported under our oilfield services operating segment, and the land and buildings are reported under our other operating segment. Natural gas and oil properties that we intend to sell are not presented as held for sale pursuant to the rules governing oil and gas accounting. A summary of the assets and liabilities held for sale on our condensed consolidated balance sheet as of September 30, 2012 is detailed below. 
Cash and Cash Equivalents, Restricted Cash and Cash Equivalents, Policy [Policy Text Block]
Cash and Cash Equivalents and Restricted Cash
For purposes of the consolidated financial statements, Chesapeake considers investments in all highly liquid instruments with original maturities of three months or less at date of purchase to be cash equivalents. Restricted cash consists of balances required to be maintained by the terms of agreements governing the activities of CHK Utica, L.L.C. (CHK Utica) and CHK Cleveland Tonkawa, L.L.C. (CHK C-T). For CHK Utica, we must retain a minimum cash balance equal to two quarterly dividend payments. In addition, cash proceeds received from CHK Utica asset sales must be used to pay for CHK Utica's capital expenditures or to redeem its preferred shares. For CHK C-T, we must retain an amount of cash (remeasured quarterly) equal to (i) the next two quarters of preferred dividend payments plus (ii) the projected capital and operating expenditures for the next six months (net of its projected net revenues during such six-month period). See Note 6 for further discussion of these transactions.