Stockholders’ Equity, Restricted Stock, Stock Options and Noncontrolling Interests

Common Stock

The following is a summary of the changes in our common shares issued for 2012, 2011 and 2010:



	Years Ended December 31,
	2012	2011	2010
	(in thousands)
Shares issued at January 1	660,888	655,251	648,549
Restricted stock issuances (net of forfeitures)	5,038	4,961	5,924
Stock option exercises	542	565	458
Preferred stock conversion	—	111	21
Convertible note exchanges	—	—	299
Shares issued at December 31	666,468	660,888	655,251

In 2010, we privately exchanged approximately $11 million in aggregate principal amount of our 2.25% Contingent Convertible Senior Notes due 2038 for an aggregate of 298,500 shares of our common stock valued at approximately $9 million. The difference between the allocated debt value of the notes that were exchanged and the fair value of the common stock issued resulted in a $2 million loss (including a nominal amount of deferred charges associated with the exchanges).

Preferred Stock

Following is a summary of our preferred stock, including the primary conversion terms as of December 31, 2012:



Preferred Stock Series	Issue Date	Liquidation Preference per Share		Holder's Conversion Right	Conversion Rate		Conversion Price		Company's Conversion Right From	Company's Market Conversion Trigger^(a)
5.75% cumulative convertible non-voting	May and June 2010	$	1,000	Any time	$	37.0892	$	26.9620	May 17, 2015	$	35.0506

5.75% (series A) cumulative convertible non-voting	May 2010	$	1,000	Any time	$	35.8414	$	27.9007	May 17, 2015	$	36.2709

4.50% cumulative convertible	September 2005	$	100	Any time	$	2.2861	$	43.7429	September 15, 2010	$	56.8658

5.00% cumulative convertible (series 2005B)	November 2005	$	100	Any time	$	2.5876	$	38.6454	November 15, 2010	$	50.2390

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(a)	Convertible at the Company's option if the trading price of the Company's common stock equals or exceeds the trigger price for a specified time period or after the conversion date indicated if there are less than 250,000 shares of 4.50% or 5.00% (series 2005B) preferred stock outstanding or 25,000 shares of 5.75% or 5.75% (series A) preferred stock outstanding.

The following reflects our preferred shares outstanding for 2012, 2011 and 2010:



	5.75%		5.75% (A)	4.5%	5.00% (2005B)	5.00% (2005)
	(in thousands)
Shares outstanding at January 1, 2012 and December 31, 2012	1,497		1,100	2,559	2,096	—

Shares outstanding at January 1, 2011	1,500		1,100	2,559	2,096	—
Conversion of preferred shares into common stock	(3	)	—	—	—	—
Shares outstanding at December 31, 2011	1,497		1,100	2,559	2,096	—

Shares outstanding at January 1, 2010	—		—	2,559	2,096	5
Preferred stock issuances	1,500		1,100	—	—	—
Conversion of preferred shares into common stock	—		—	—	—	(5	)
Shares outstanding at December 31, 2010	1,500		1,100	2,559	2,096	—

In 2011 and 2010, shares of our cumulative convertible preferred stock were converted into shares of common stock as summarized below.



Year of Conversion	Cumulative Convertible Preferred Stock	Number of Preferred Shares	Number of Common Shares
		(in thousands)
2011	5.75%	3	111

2010	5% (series 2005)	5	21

There were no gains or losses associated with the conversions noted above.

Dividends

Dividends declared on our common stock and preferred stock are reflected as adjustments to retained earnings to the extent a surplus of retained earnings will exist after giving effect to the dividends. To the extent retained earnings are insufficient to fund the distributions, such payments constitute a return of contributed capital rather than earnings and are accounted for as a reduction to paid-in capital.

Dividends on our outstanding preferred stock are payable quarterly. We may pay dividends on our 5.00% Cumulative Convertible Preferred Stock (Series 2005B) and our 4.50% Cumulative Convertible Preferred Stock in cash, common stock or a combination thereof, at our option. Dividends on both series of our 5.75% Cumulative Convertible Non-Voting Preferred Stock are payable only in cash.

Stock-Based Compensation Plans

Under Chesapeake's Long Term Incentive Plan, restricted stock, stock options, stock appreciation rights, performance shares, performance share units and other stock awards may be awarded to employees, directors and consultants of Chesapeake. Subject to any adjustments as provided by the plan, the aggregate number of shares of common stock available for awards under the plan may not exceed 49,500,000 shares. The maximum period for exercise of an option or stock appreciation right may not be more than ten years from the date of grant and the exercise price may not be less than the fair market value of the shares underlying the option or stock appreciation right on the date of grant. Awards granted under the plan become vested at specified dates or upon the satisfaction of certain performance or other criteria determined by a committee of the Board of Directors. No awards may be granted under the plan after September 30, 2014. The plan has been approved by our shareholders. There were 170,151, 68,824 and 87,500 shares of restricted stock issued to our non-employee directors from the plan in 2012, 2011 and 2010, respectively. Additionally, there were 5.0 million, 4.5 million and 5.8 million restricted shares issued, net of forfeitures, to employees and consultants during 2012, 2011 and 2010, respectively, from the plan. As of December 31, 2012, there were 10.7 million shares remaining available for issuance under the plan.

Under Chesapeake's 2003 Stock Incentive Plan, restricted stock and incentive and nonqualified stock options to purchase our common stock may be awarded to employees and consultants of Chesapeake. Subject to any adjustments as provided by the plan, the aggregate number of shares available for awards under the plan may not exceed 10,000,000 shares. The maximum period for exercise of an option may not be more than ten years from the date of grant and the exercise price may not be less than the fair market value of the shares underlying the option on the date of grant. Restricted stock and options granted become vested at dates determined by a committee of the Board of Directors. No awards may be granted under the plan after April 14, 2013. The plan has been approved by our shareholders. There were a nominal amount, 0.4 million and 0.1 million restricted shares, net of forfeitures, issued during 2012, 2011 and 2010, respectively, from the plan. As of December 31, 2012, there were approximately 82,500 shares remaining available for issuance under the plan.

Under Chesapeake's 2003 Stock Award Plan for Non-Employee Directors, 10,000 shares of Chesapeake's common stock are awarded to each newly appointed non-employee director on his or her first day of service. Subject to any adjustments as provided by the plan, the aggregate number of shares which may be issued may not exceed 100,000 shares. This plan has been approved by our shareholders. In each of 2012, 2011 and 2010, 30,000, 10,000 and 10,000 shares of common stock were awarded to new directors from the plan, respectively. As of December 31, 2012, there were no shares remaining available for issuance under the plan.

In addition to the plans described above, we have stock options outstanding to employees under a number of employee stock option plans which are described below. All outstanding options under these plans were at-the-money when granted, with an exercise price equal to the closing price of our common stock on the date of grant and have a ten-year exercise period. These plans were terminated in prior years and therefore no shares remain available for stock option grants under the plans.



Name of Plan	Eligible Participants	Type of Options	Shares Covered	Shareholder Approved	Outstanding Options at December 31, 2012
2002 and 2001 Stock Option Plans	Employees and consultants	Incentive and nonqualified	3,000,000/ 3,200,000	Yes	84,584

2002 and 2001 Nonqualified Stock Option Plans	Employees and consultants	Nonqualified	4,000,000/ 3,000,000	No	175,466

2000 and 1999 Employee Stock Option Plans	Employees and consultants	Nonqualified	3,000,000(each Plan)	No	22,163

1996 and 1994 Stock Option Plans	Employees and consultants	Incentive and nonqualified	6,000,000/ 4,886,910	Yes	16,049

Restricted Stock

Chesapeake began issuing shares of restricted common stock to employees in January 2004 and to non-employee directors in July 2005. The fair value of the awards issued is determined based on the fair market value of the shares on the date of grant. This value is amortized over the vesting period, which is generally four years from the date of grant for employees and three years for non-employee directors. To the extent compensation cost relates to employees directly involved in natural gas and oil acquisition, exploration and development activities, such amounts are capitalized to natural gas and oil properties. Amounts not capitalized to natural gas and oil properties are recognized as general and administrative expense, natural gas, oil and NGL production expenses, marketing, gathering and compression expenses or oilfield services expense. Note 1 details the accounting for our stock-based compensation expense in 2012, 2011 and 2010.

A summary of the status of the unvested shares of restricted stock and changes during 2012, 2011 and 2010 is presented below.



	Number of Unvested Restricted Shares		Weighted Average Grant-Date Fair Value
	(in thousands)
Unvested shares as of January 1, 2012	19,544		$	26.97
Granted	9,480		$	21.13
Vested	(8,620	)	$	28.08
Forfeited	(1,505	)	$	24.57
Unvested shares as of December 31, 2012	18,899		$	23.72

Unvested shares as of January 1, 2011	21,375		$	28.68
Granted	9,541		$	28.38
Vested	(10,401	)	$	31.76
Forfeited	(971	)	$	27.28
Unvested shares as of December 31, 2011	19,544		$	26.97

Unvested shares as of January 1, 2010	19,225		$	31.89
Granted	9,061		$	24.19
Vested	(5,900	)	$	31.99
Forfeited	(1,011	)	$	30.05
Unvested shares as of December 31, 2010	21,375		$	28.68

The aggregate intrinsic value of restricted stock vested during 2012 was approximately $174 million based on the stock price at the time of vesting.

As of December 31, 2012, there was $289 million of total unrecognized compensation cost related to unvested restricted stock. The cost is expected to be recognized over a weighted average period of approximately 2.4 years.

The vesting of certain restricted stock grants could result in state and federal income tax benefits related to the difference between the market price of the common stock at the date of vesting and the date of grant. During the years ended December 31, 2012, 2011 and 2010, we recognized reductions in tax benefits related to restricted stock of $32 million, $23 million, and $15 million, respectively, which were recorded as adjustments to additional paid-in capital and deferred income taxes.

Stock Options

We granted stock options prior to 2006 under several stock compensation plans. Outstanding options expire ten years from the date of grant and vest over a four-year period. As of December 31, 2012, all of our outstanding stock options were fully vested and exercisable.

The following table provides information related to stock option activity for 2012, 2011 and 2010:



	Number of Shares Underlying Options		Weighted Average Exercise Price Per Share		Weighted Average Contract Life in Years	Aggregate Intrinsic Value^(a)
	(in thousands)					($ in millions)
Outstanding at January 1, 2012	1,051		$	9.84	1.41	$	13
Exercised	(570	)	$	7.45		$	7
Outstanding and exercisable at December 31, 2012	481		$	12.69	0.96	$	2

Outstanding at January 1, 2011	1,808		$	8.90	2.03	$	31
Exercised	(757	)	$	7.59		$	15
Outstanding and exercisable at December 31, 2011	1,051		$	9.84	1.41	$	13

Outstanding at January 1, 2010	2,283		$	8.36	2.75	$	40
Exercised	(475	)	$	6.29		$	8
Outstanding and exercisable at December 31, 2010	1,808		$	8.90	2.03	$	31

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(a)	The intrinsic value of a stock option is the amount by which the current market value or the market value upon exercise of the underlying stock exceeds the exercise price of the option.

As of December 31, 2012, there was no remaining unrecognized compensation cost related to stock options.

During each of the years ended December 31, 2012 and 2010, we recognized excess tax benefits related to stock options of $2 million. During the year ended December 31, 2011, we recognized a reduction in tax benefits related to stock options of $3 million. All amounts were recorded as adjustments to additional paid-in capital and deferred income taxes.

The following table summarizes information about stock options outstanding and exercisable at December 31, 2012:



Range of Exercise Price					Number of Options	Weighted-Avg. Remaining Contractual Life in Years	Weighted-Avg. Exercise Price
					(in thousands)
$	7.80	—	$	9.57	43	0.04	$	7.83
10.08		—	10.08		195	0.47	10.08
10.10		—	12.83		58	0.79	11.79
13.35		—	13.35		23	1.25	13.35
13.37		—	13.37		23	1.01	13.37
13.58		—	13.58		1	1.00	13.58
15.06		—	15.06		25	1.50	15.06
15.47		—	15.47		38	2.01	15.47
16.08		—	16.08		25	1.75	16.08
22.49		—	22.49		50	2.25	22.49
$	7.80	—	$	22.49	481	0.96	$	12.69

Performance Share Units

In January 2012, we granted performance share units (PSUs) to senior management under our Long Term Incentive Plan that include both an internal performance measure and an external market condition and that vest over one-, two- and three-year performance periods. The internal performance measure is considered a performance condition with a fair value generally equal to the Company's stock price. The external market condition is considered a market condition and generally requires Monte Carlo simulation to determine the fair value. The latter calculation is based on the absolute total shareholder return (TSR) of Chesapeake common stock and the relative TSR of Chesapeake common stock compared to the TSR of certain peers.

The payout for each PSU component can range from 0% to 125%, and therefore the range of payout under a PSU award is between 0% and 250%. Awards are payable in cash at the end of each performance period. We account for PSUs under FASB ASC Topic 718 because they include a market-based performance component. They are classified as a liability in our consolidated financial statements and are required to be measured at fair value as of the grant date, with such value re-measured at the end of each reporting period. Compensation expense is recognized over the vesting period with a corresponding adjustment to the liability. Because our PSUs vest over a three-year period, we have classified some of the liability as short-term and the rest as long-term on our consolidated balance sheet.

As of the grant date, the fair value of the 1,271,240 PSUs issued was $35 million. As of December 31, 2012, the fair value of the awards had decreased to $18 million. We have recorded $2 million of this value as a short-term liability for vested PSUs and $12 million as a long-term liability representing the portion of the award for which the requisite service period has been completed. The remaining $4 million relates to unvested PSUs for which the requisite service period has not been completed.

Noncontrolling Interests

Cleveland Tonkawa Financial Transaction. We formed CHK Cleveland Tonkawa, L.L.C. (CHK C-T) in March 2012 to continue development of a portion of our natural gas and oil assets in our Cleveland and Tonkawa plays. CHK C-T is an unrestricted subsidiary under our corporate credit facility agreement and is not a guarantor of, or otherwise liable for, any of our indebtedness or other liabilities, including under our indentures. In exchange for all of the common shares of CHK C-T, we contributed to CHK C-T approximately 245,000 net acres of leasehold and the existing wells within an area of mutual interest in the Cleveland and Tonkawa plays covering Ellis and Roger Mills counties in western Oklahoma. In March 2012, in a private placement, third-party investors contributed $1.25 billion in cash to CHK C-T in exchange for (i) 1.25 million preferred shares, and (ii) our obligation to deliver a 3.75% overriding royalty interest (ORRI) in the existing wells and up to 1,000 new net wells to be drilled on certain of our Cleveland and Tonkawa play leasehold. Subject to customary minority interest protections afforded the investors by the terms of the CHK C-T limited liability company agreement (the CHK C-T LLC Agreement), as the holder of all the common shares and the sole managing member of CHK C-T, we maintain voting and managerial control of CHK C-T and therefore include it in our consolidated financial statements. Of the $1.25 billion of investment proceeds, we allocated $225 million to the ORRI obligation and $1.025 billion to the preferred shares based on estimates of fair values. The ORRI obligation is included in other current and long-term liabilities and the preferred shares are included in noncontrolling interests on our consolidated balance sheet. Pursuant to the CHK C-T LLC Agreement, CHK C-T is currently required to retain an amount of cash (measured quarterly) equal to (i) the next two quarters of preferred dividend payments plus (ii) its projected operating funding shortfall for the next six months. The amount so retained, approximately $57 million as of December 31, 2012, is reflected as restricted cash on our consolidated balance sheet.

Dividends on the preferred shares are payable on a quarterly basis at a rate of 6% per annum based on $1,000 per share. This dividend rate is subject to increase in limited circumstances in the event that, and only for so long as, any dividend amount is not paid in full for any quarter. As the managing member of CHK C-T, we may, at our sole discretion and election at any time after March 31, 2014, distribute certain excess cash of CHK C-T, as determined in accordance with the CHK C-T LLC Agreement. Any such optional distribution of excess cash is allocated 75% to the preferred shares (which is applied toward redemption of the preferred shares) and 25% to the common shares unless we have not met our drilling commitment at such time, in which case an optional distribution would be allocated 100% to the preferred shares (and applied toward redemption thereof). We may also, at our sole discretion and election, in accordance with the CHK C-T LLC Agreement, cause CHK C-T to redeem all or a portion of the CHK C-T preferred shares for cash. The preferred shares will be redeemed at a valuation equal to the greater of a 9% internal rate of return or a return on investment of 1.35x, in each case inclusive of dividends paid through redemption at the rate of 6% per annum and optional distributions made through the applicable redemption date. In the event that redemption does not occur on or prior to March 31, 2019, the optional redemption valuation will increase to provide a 15% internal rate of return to the investors. The preferred shares are redeemed on a pro-rata basis in accordance with the then-applicable redemption valuation formula. As of December 31, 2012, the redemption price and the liquidation preference were each $1,305 per preferred share.

We have committed to drill, for the benefit of CHK C-T in the area of mutual interest, a minimum of 37.5 net wells per six-month period through 2013, inclusive of wells drilled in 2012, and 25 net wells per six-month period in 2014 through 2016, up to a minimum cumulative total of 300 net wells. If we fail to meet the then-current cumulative drilling commitment in any six-month period, any optional cash distributions would be distributed 100% to the investors. If we fail to meet the then-current cumulative drilling commitment in two consecutive six-month periods, the then-applicable internal rate of return to investors at redemption would increase by 3% per annum. In addition, if we fail to meet the then-current cumulative drilling commitment in four consecutive six-month periods, the then-applicable internal rate of return to investors at redemption would be increased by an additional 3% per annum. Any such increase in the internal rate of return would be effective only until the end of the first succeeding six-month period in which we have met our then-current cumulative drilling commitment. CHK C-T is responsible for all capital and operating costs of the wells drilled for the benefit of the entity.

The CHK C-T investors’ right to receive, proportionately, a 3.75% ORRI in up to 1,000 new net wells and the contributed wells, on our Cleveland and Tonkawa leasehold is subject to an increase to 5% on net wells drilled in any year following a year in which we do not meet our commitment to drill the wells subject to the ORRI obligation, which runs from 2012 through the first quarter of 2025. However, in no event would we deliver to investors more than a total ORRI of 3.75% in existing wells and 1,000 new net wells. If at any time we hold fewer net acres than would enable us to drill all then-remaining net wells on 160-acre spacing, the investors have the right to require us to repurchase their right to receive ORRIs in the remaining net wells at the then-current fair market value of such remaining net wells. We retain the right to repurchase the investors’ right to receive ORRIs in the remaining net wells at the then-current fair market value of such remaining net wells once we have drilled a minimum of 867 net wells. The obligation to deliver future ORRIs has been recorded as a liability which will be settled through the conveyance of the underlying ORRIs to the investors on a net-well basis, at which time the associated liability will be reversed and the sale of the ORRIs reflected as an adjustment to the capitalized cost of our natural gas and oil properties.

As of December 31, 2012, $1.015 billion was recorded as noncontrolling interests on our consolidated balance sheet representing the third-party investments in CHK C-T. For 2012, income of $57 million was attributable to the noncontrolling interests of CHK C-T. Under the development agreement, approximately 85 qualified net wells were added in 2012. Under the ORRI obligation, we delivered an ORRI in approximately 76 new net wells. For 2012, we met all commitments associated with the CHK C-T transaction.

Utica Financial Transaction. We formed CHK Utica, L.L.C. (CHK Utica) in October 2011 to develop a portion of our Utica Shale natural gas and oil assets. CHK Utica is an unrestricted subsidiary under our corporate credit facility agreement and is not a guarantor of, or otherwise liable for, any of our indebtedness or other liabilities, including under our indentures. In exchange for all of the common shares of CHK Utica, we contributed to CHK Utica approximately 700,000 net acres of leasehold and the existing wells within an area of mutual interest in the Utica Shale play covering 13 counties located primarily in eastern Ohio. During November and December 2011, in private placements, third-party investors contributed $1.25 billion in cash to CHK Utica in exchange for (i) 1.25 million preferred shares, and (ii) our obligation to deliver a 3% ORRI in 1,500 net wells to be drilled on certain of our Utica Shale leasehold. Subject to customary minority interest protections afforded the investors by the terms of the CHK Utica limited liability company agreement (the CHK Utica LLC Agreement), as the holder of all the common shares and the sole managing member of CHK Utica, we maintain voting and managerial control of CHK Utica and therefore include it in our consolidated financial statements. Of the $1.25 billion of investment proceeds, we allocated $300 million to the ORRI obligation and $950 million to the preferred shares based on estimates of fair values. The ORRI obligation is included in other current and long-term liabilities and the preferred shares are included in noncontrolling interests on our consolidated balance sheets. Pursuant to the CHK Utica LLC Agreement, CHK Utica is required to retain a cash balance equal to the next two quarters of preferred dividend payments. The amount reserved for paying such dividends, approximately $44 million, is reflected as restricted cash on our consolidated balance sheet as of December 31, 2012. In addition, pursuant to the CHK Utica LLC Agreement, with respect to any sales proceeds as defined by the agreement, CHK Utica is required to separately account for, and dedicate all of such sales proceeds to either (i) capital expenditures made by CHK Utica in connection with its assets or (ii) the redemption of CHK Utica preferred shares. As a result of the sale of non-core Utica Shale assets in 2012, the amount reserved for paying capital expenditures, approximately $155 million, is reflected as restricted cash in other long-term assets on our consolidated balance sheet as of December 31, 2012. See Note 11 for further discussion of the sale of non-core Utica Shale assets.

Dividends on the preferred shares are payable on a quarterly basis at a rate of 7% per annum based on $1,000 per share. This dividend rate is subject to increase in limited circumstances in the event that, and only for so long as, any dividend amount is not paid in full for any quarter. If we fail to meet the then-current drilling commitment in any year, we must pay CHK Utica $5 million for each well we are short of such drilling commitment. As the managing member of CHK Utica, we may, at our sole discretion and election at any time after December 31, 2013, distribute certain excess cash of CHK Utica, as determined in accordance with the CHK Utica LLC Agreement. Any such optional distribution of excess cash is allocated 70% to the preferred shares (which is applied toward redemption of the preferred shares) and 30% to the common shares unless we have not met our drilling commitment during a liquidated damages period, in which case an optional distribution would be allocated 100% to the preferred shares (and applied toward redemption thereof). We may also, at our sole discretion and election, in accordance with the CHK Utica LLC Agreement, cause CHK Utica to redeem the CHK Utica preferred shares for cash, in whole or in part. The preferred shares will be redeemed at a valuation equal to the greater of a 10% internal rate of return or a return on investment of 1.4x, in each case inclusive of dividends paid at the rate of 7% per annum and optional distributions made through the applicable redemption date. In the event that redemption does not occur on or prior to October 31, 2018, the optional redemption valuation will increase to the greater of a 17.5% internal rate of return or a return on investment of 2.0x. The preferred shares are redeemed on a pro-rata basis in accordance with the then-applicable redemption valuation formula. As of December 31, 2012, the redemption price and the liquidation preference were each approximately $1,322 per preferred share.

We have committed to drill, for the benefit of CHK Utica in the area of mutual interest, a minimum of 50 net wells per year from 2012 through 2016, up to a minimum cumulative total of 250 net wells. CHK Utica is responsible for all capital and operating costs of the wells drilled for the benefit of the entity. CHK Utica also receives its proportionate share of the benefit of the drilling carry associated with our joint venture with Total in the Utica Shale. See Note 11 for further discussion of the joint venture.

The CHK Utica investors’ right to receive, proportionately, a 3% ORRI in the first 1,500 net wells drilled on our Utica Shale leasehold is subject to an increase to 4% on net wells drilled in any year following a year in which we do not meet our commitment to drill the wells subject to the ORRI obligation, which runs from 2012 through 2023. However, in no event would we deliver to investors more than a total ORRI of 3% in 1,500 net wells. If at any time we hold fewer net acres than would enable us to drill all then-remaining net wells on 150-acre spacing, the investors have the right to require us to repurchase their right to receive ORRIs in the remaining net wells at the then-current fair market value of such remaining net wells. We retain the right to repurchase the investors’ right to receive ORRIs in the remaining net wells at the then-current fair market value of such remaining net wells once we have drilled a minimum of 1,300 net wells. The obligation to deliver future ORRIs has been recorded as a liability which will be settled through the future conveyance of the underlying ORRIs to the investors on a net-well basis, at which time the associated liability will be reversed and the sale of the ORRIs reflected as an adjustment to the capitalized cost of our natural gas and oil properties.

As of December 31, 2012 and 2011, $950 million was recorded as noncontrolling interests on our consolidated balance sheets representing the third-party investments in CHK Utica. For 2012 and 2011, income of approximately $88 million and $10 million was attributable to the noncontrolling interests of CHK Utica. Under the development agreement, approximately 66 qualified net wells were added in 2012. Under the ORRI obligation, we delivered an ORRI in approximately 34 new net wells. For 2012, we met our drilling commitment associated with the CHK Utica transaction, but did not meet our ORRI commitment. The ORRI will increase to 4% for wells drilled in 2013, and the ultimate number of wells in which we must assign an interest will be reduced accordingly.

Chesapeake Granite Wash Trust. In November 2011, Chesapeake Granite Wash Trust (the Trust) sold 23,000,000 common units representing beneficial interests in the Trust at a price of $19.00 per common unit in its initial public offering. The common units are listed on the New York Stock Exchange and trade under the symbol “CHKR”. We own 12,062,500 common units and 11,687,500 subordinated units, which in the aggregate represent an approximate 51% beneficial interest in the Trust. The Trust has a total of 46,750,000 units outstanding.

In connection with the initial public offering of the Trust, we conveyed royalty interests to the Trust that entitle the Trust to receive (i) 90% of the proceeds (after deducting certain post-production expenses and any applicable taxes) that we receive from the production of hydrocarbons from 69 producing wells, and, (ii) 50% of the proceeds (after deducting certain post-production expenses and any applicable taxes) in 118 development wells that have been or will be drilled on approximately 45,400 gross acres (29,000 net acres) in the Colony Granite Wash play in Washita County in the Anadarko Basin of western Oklahoma. Pursuant to the terms of a development agreement with the Trust, we are obligated to drill, or cause to be drilled, the development wells at our own expense prior to June 30, 2016, and the Trust will not be responsible for any costs related to the drilling of the development wells or any other operating or capital costs of the Trust properties. In addition, we granted to the Trust a lien on our remaining interests in the undeveloped properties that are subject to the development agreement in order to secure our drilling obligation to the Trust, although the maximum amount that may be recovered by the Trust under such lien could not exceed $263 million initially and is proportionately reduced as we fulfill our drilling obligation over time. As of December 31, 2012, we had drilled or caused to be drilled 55 development wells, as calculated under the development agreement, and the maximum amount recoverable under the drilling support lien was approximately $140 million.

The subordinated units we hold in the Trust are entitled to receive pro rata distributions from the Trust each quarter if and to the extent there is sufficient cash to provide a cash distribution on the common units that is not less than the applicable subordination threshold for such quarter. If there is not sufficient cash to fund such a distribution on all of the Trust units, the distribution to be made with respect to the subordinated units will be reduced or eliminated for such quarter in order to make a distribution, to the extent possible, of up to the subordination threshold amount on the common units. In exchange for agreeing to subordinate a portion of our Trust units, and in order to provide additional financial incentive to us to satisfy our drilling obligation and perform operations on the underlying properties in an efficient and cost-effective manner, Chesapeake is entitled to receive incentive distributions equal to 50% of the amount by which the cash available for distribution on the Trust units in any quarter exceeds the applicable incentive threshold for such quarter. The remaining 50% of cash available for distribution in excess of the applicable incentive threshold will be paid to Trust unitholders, including Chesapeake, on a pro rata basis. At the end of the fourth full calendar quarter following our satisfaction of our drilling obligation with respect to the development wells, the subordinated units will automatically convert into common units on a one-for-one basis and our right to receive incentive distributions will terminate. After such time, the common units will no longer have the protection of the subordination threshold, and all Trust unitholders will share in the Trust’s distributions on a pro rata basis.

On November 7, 2012, the Trust declared a cash distribution of $0.63 per common unit and $0.22 per subordinated unit for the three-month period ended September 30, 2012 and covering production for the period from June 1, 2012 to August 31, 2012. The distribution paid to third-party unitholders on November 29, 2012 was approximately $15 million.

On August 10, 2012, the Trust declared a cash distribution of $0.61 per common unit and $0.48 per subordinated unit for the three-month period ended June 30, 2012 and covering production for the period from March 1, 2012 to May 31, 2012. The distribution paid to third-party unitholders on August 30, 2012 was approximately $14 million.

On May 10, 2012, the Trust declared a cash distribution of $0.66 per unit for the three-month period ended March 31, 2012 and covering production for the period from December 1, 2011 to February 29, 2012. The distribution paid to third-party unitholders on May 31, 2012 was approximately $15 million.

On February 8, 2012, the Trust declared a cash distribution of $0.73 per unit for the three-month period ended December 31, 2011 and covering production for the period from September 1, 2011 to November 30, 2011. The distribution paid to third-party unitholders on March 1, 2012 was approximately $17 million.

We have determined that the Trust constitutes a VIE and that Chesapeake is the primary beneficiary. As a result, the Trust is included in our consolidated financial statements. As of December 31, 2012 and 2011, $356 million and $381 million, respectively, were recorded as noncontrolling interests on our consolidated balance sheets representing the public unitholders’ investment in common units of the Trust. For 2012 and 2011, approximately $35 million and $5 million of income was attributable to the Trust’s noncontrolling interests in our consolidated statement of operations. See Note 13 for further discussion of VIEs.

Cardinal Gas Services, L.L.C. Cardinal Gas Services, L.L.C. (Cardinal), an unrestricted, non-guarantor consolidated subsidiary, was formed in December 2011 to acquire, develop, operate and own midstream assets in the Utica Shale. In exchange for the contribution of approximately $14 million in midstream assets to Cardinal, we received 66% of the outstanding membership units of Cardinal. In exchange for approximately $5 million, Total E&P USA, Inc. (Total) received 25% of the outstanding membership units and in exchange for approximately $2 million, CGAS Properties, L.P. (CGAS), an affiliate of EnerVest, Ltd., received 9% of the membership units. Each member was responsible for its proportionate share of capital costs. We determined that Cardinal constituted a VIE and that Chesapeake was the primary beneficiary. As a result, Cardinal was included in our consolidated financial statements until December 2012, and the contributions from Total and CGAS were recorded as noncontrolling interests. In December 2012, we sold our interest in this consolidated entity in connection with the sale of CMO. See Note 11. As of December 31, 2012 and 2011, the noncontrolling interest balances on the consolidated balance sheets associated with the contributions from Total and CGAS were $0 and approximately $7 million, respectively.

Wireless Seismic, Inc. We have a controlling 57% equity interest in Wireless Seismic, Inc. (Wireless), a privately owned company engaged in research, development and eventual production of wireless seismic systems and any related technology that deliver seismic information obtained from standard geophones in real time to laptop and desktop computers. As a result of our control, Wireless is included in our consolidated financial statements. As of December 31, 2012, $5 million was recorded as noncontrolling interests on our consolidated balance sheet representing third-party investments in Wireless. For 2012, $4 million of Wireless' loss was attributable to noncontrolling interests of Wireless in our consolidated statement of operations.

Big Star Crude Co., LLC. Oilfield Trucking Solutions, LLC, a wholly owned subsidiary of Chesapeake, entered into a joint venture to form Big Star Crude Co., LLC, which engages in commercial trucking. We have determined that Big Star is a VIE because our voting rights are disproportionate to our economic interests and the activities of the entity involve and are conducted on our behalf. We have also determined that Chesapeake is the primary beneficiary, since it has the power to direct the activities of this VIE, has the obligation to absorb losses and has the right to receive benefits from the VIE. As a result, Big Star is included in our consolidated financial statements. As of December 31, 2012, $1 million was recorded as noncontrolling interests on our consolidated balance sheets representing our joint venture partner's equity investment in Big Star. For 2012, a nominal amount of Big Star's loss was attributable to noncontrolling interests of Big Star in our consolidated statement of operations.