
	Basis of Presentation and Summary of Significant Accounting Policies

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 six months ended June 30, 2013 (the “Current Quarter” and the “Current Period”, respectively) and the three and six months ended June 30, 2012 (the “Prior Quarter” and the “Prior Period”, respectively). Chesapeake’s annual report on Form 10-K for the year ended December 31, 2012 (“2012 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 Current Period are not necessarily indicative of the results to be expected for the full year.

Critical Accounting Policies

We consider accounting policies related to variable interest entities, natural gas and oil properties, derivatives and income taxes to be critical policies. These policies are summarized in Note 1 to our consolidated financial statements included in Item 8 of our 2012 Form 10-K.

Risks and Uncertainties

Our business strategy is to continue growing our reserves and production while transitioning from an asset base primarily focused on natural gas to an asset base more balanced between natural gas and liquids production. This is a capital-intensive strategy, and we made capital expenditures historically and in the Current Period that exceeded our cash flow from operations, supplementing such cash flows with borrowings and proceeds from a strategic joint venture and asset sales that we determined were noncore or did not fit our long-term plans. We project that our capital expenditures will continue to exceed our operating cash flow in the 2013 second half, although the gap in 2013 is expected to be significantly smaller than in 2012. Our 2013 capital expenditure budget is approximately 45% less than our 2012 capital expenditures, and proceeds from asset sales completed in 2013 through August 1 are sufficient to make up the difference between our budgeted capital expenditures and operating cash flow in 2013. Additional asset sales contemplated for the 2013 second half may reduce our long-term debt and further enhance our financial liquidity.

We continue to have significant exposure to natural gas prices. Approximately 70% of our estimated proved reserve volumes as of December 31, 2012 were natural gas, and natural gas represented approximately 75% and 80% of our natural gas, oil and NGL sales volumes for the Current Quarter and the year ended December 31, 2012, respectively. To add certainty to future estimated cash flows, we currently have downside price protection, in the form of over-the-counter derivative contracts, on approximately 79% of our remaining 2013 estimated natural gas production at an average price of $3.70 per mcf and 94% of our remaining 2013 estimated oil production at an average price of $95.64 per bbl. Our use of derivative contracts allows us to reduce our exposure to price volatility on our cash flows and EBITDA (defined as earnings before interest, taxes, depreciation, depletion and amortization), but the amount of production subject to derivative contracts for any period depends on our outlook about future prices and risk assessment. Low natural gas prices can reduce our estimate of proved reserves, potentially resulting in a future write-down of the carrying value of our natural gas and oil properties. In 2012, when natural gas prices reached 10-year lows, we reduced our estimate of proved reserves by 3.1 tcfe, or 17%, primarily due to the impact of downward natural gas price revisions, and incurred a write-down of the carrying value of our natural gas and oil properties.

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 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. See Note 3 for discussion of our debt instruments, including the terms of an amendment to our corporate revolving bank credit facility that increased the required indebtedness to EBITDA ratio as of September 30, 2012 and for the two subsequent quarters.

We believe we have taken appropriate measures to mitigate the risks and uncertainties facing us in 2013. Nevertheless, our ability to generate operating cash flow and complete asset sales is 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 are not completed in the anticipated time frame, or at all, or for less proceeds than anticipated, our ability to reduce our indebtedness could be adversely affected. Finally, future impairments of the carrying value of our natural gas and oil properties, if any, will be dependent on many factors, including natural gas, oil and NGL prices, production rates, levels of reserves, the evaluation of costs excluded from amortization, the timing and impact of asset sales, future development costs and service costs.

Assets and Liabilities Held for Sale

As of June 30, 2013, we had entered into contracts to sell the majority of our remaining natural gas gathering business which we anticipate completing in the 2013 third quarter. The natural gas gathering business qualified as held for sale as of June 30, 2013 and December 31, 2012 and is reported under our marketing, gathering and compression operating segment. In addition, in the Current Quarter we determined we would sell certain of our buildings and land (other than our core campus) in the Oklahoma City area. These assets are being actively marketed, and we believe it is probable they will be sold over the next 12 months. As a result, these assets qualified as held for sale as of June 30, 2013. In addition, as of June 30, 2013, we were continuing to pursue the sale, within the next 12 months, of various land and buildings located in the Fort Worth, Texas area. The land and buildings in both the Oklahoma City and Fort Worth areas are reported under our other operations segment. Natural gas and oil properties that we intend to sell are not presented as held for sale pursuant to the rules governing full cost accounting for oil and gas properties. A summary of the assets and liabilities held for sale on our condensed consolidated balance sheets as of June 30, 2013 and December 31, 2012 is detailed below.



	June 30, 2013		December 31, 2012
	($ in millions)
Accounts receivable	$	2	$	4
Current assets held for sale	$	2	$	4

Natural gas gathering systems and treating plants, net of accumulated depreciation^(a)	$	205	$	352
Oilfield services equipment, net of accumulated depreciation^(b)	1		27
Other property and equipment, net of accumulated depreciation	305		255
Property and equipment held for sale, net	$	511	$	634

Accounts payable	$	1	$	4
Accrued liabilities	17		17
Current liabilities held for sale	$	18	$	21

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(a)	In the Current Quarter, we sold gas gathering systems classified as held for sale as of December 31, 2012 for proceeds of approximately $245 million and recorded a $106 million gain. See Note 11 for further discussion of this transaction.


(b)	In the Current Period, we sold eight rigs classified as assets held for sale as of December 31, 2012 for proceeds of approximately $27 million.

Accumulated Other Comprehensive Income (Loss)

For the Current Period, changes in accumulated other comprehensive income (loss) by component, net of tax, are detailed below.



	Net Gains (Losses) on Cash Flow Hedges			Net Gains (Losses) on Investments			Total
	($ in millions)
Balance, December 31, 2012	$	(189	)	$	7		$	(182	)
Other comprehensive income before reclassifications	—			(5		)	(5		)
Amounts reclassified from accumulated other comprehensive income	11			6			17
Net current period other comprehensive income	11			1			12
Balance, June 30, 2013	$	(178	)	$	8		$	(170	)

For the Current Quarter and the Current Period, amounts reclassified from accumulated other comprehensive income (loss), net of tax, into the condensed consolidated statement of operations are detailed below.



Details About Accumulated Other Comprehensive Income Components	Affected Line Item in the Statement Where Net Income is Presented	Three Months Ended June 30, 2013			Six Months Ended June 30, 2013
		($ in millions)
Net losses on cash flow hedges:
Commodity contracts	Natural gas, oil and NGL revenues	$	(1	)	$	11
Investments:
Impairment of investment	Impairment of investment	—			6
Total reclassifications for the period, net of tax		$	(1	)	$	17