Basis of Presentation

The accompanying unaudited condensed consolidated financial statements of Chesapeake Energy Corporation ("Chesapeake" or the "Company") and its subsidiaries were prepared in accordance with accounting principles generally accepted in the United States (U.S. GAAP) and include the accounts of our direct and indirect wholly owned subsidiaries and entities in which Chesapeake has a controlling financial interest. Intercompany accounts and balances have been eliminated. These financial statements were prepared in accordance with the instructions to Form 10-Q and, therefore, do not include all disclosures required for financial statements prepared in conformity with U.S. GAAP.

This Form 10-Q relates to the three and six months ended June 30, 2016 (the "Current Quarter" and the “Current Period”, respectively) and the three and six months ended June 30, 2015 (the "Prior Quarter" and the “Prior Period”, respectively). Chesapeake's annual report on Form 10-K for the year ended December 31, 2015 ("2015 Form 10-K") includes certain definitions and a summary of significant accounting policies that 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 statement of the results for the interim periods have been reflected. The results for the Current Quarter and the Current Period are not necessarily indicative of the results to be expected for the full year.

Risks and Uncertainties

Our ability to grow, make capital expenditures and service our debt depends primarily upon the prices we receive for the oil, natural gas and natural gas liquids (NGL) we sell. Substantial expenditures are required to replace reserves, sustain production and fund our business plans. Historically, oil and natural gas prices have been very volatile, and may be subject to wide fluctuations in the future. The substantial decline in oil, natural gas and NGL prices from 2014 levels has negatively affected the amount of cash we have available for capital expenditures and debt service.

We face other significant risks to our business, including:

•

In the Current Quarter, the Prior Quarter, the Current Period and the Prior Period, capitalized costs of oil and natural gas properties exceeded our full cost ceiling, resulting in an impairment in the carrying value of our oil and natural gas properties of $1.045 billion, $5.015 billion, $1.898 billion and $9.991 billion, respectively. Based on the first-day-of-the-month prices we have received over the 11 months ended August 1, 2016, as well as the current strip price for September 2016, we expect to record downward reserve revisions and another write-down in the carrying value of our oil and natural gas properties in the third quarter of 2016, although the amount of impairment could be mitigated by the impact of anticipated divestitures in the third quarter of 2016 or other factors.

•

Oil, natural gas and NGL prices have a material impact on our financial position, results of operations, cash flows and quantities of reserves that may be economically produced. If depressed prices persist throughout 2017 and we are unable to restructure or refinance our debt or generate additional liquidity through other actions, our ability to comply with the financial covenants under our revolving credit facility and to make scheduled debt payments could be adversely impacted.

•

As of June 30, 2016, we had approximately $8.679 billion principal amount of debt outstanding, of which $1.382 billion matures or can be put to us in 2017 (including $337 million of maturities in January 2017, $730 million which can be put to us in May 2017 and $315 million that matures in August 2017) and $846 million that matures or can be put to us in 2018. See Note 3 for further discussion of our debt obligations, including principal and carrying amounts of our notes. As of June 30, 2016, we had $100 million of outstanding borrowings under our revolving credit facility and $3.087 billion of borrowing capacity available under our revolving credit facility.

•

Since December 2015, Moody’s Investor Services, Inc. and Standard & Poor’s Rating Services have significantly lowered our credit ratings. Some of our counterparties have requested or required us to post collateral as financial assurance of our performance under certain contractual arrangements, such as gathering, processing, transportation and hedging agreements. As of August 1, 2016, we have received requests and posted approximately $274 million in collateral under such arrangements (excluding the supersedeas bond with respect to the 6.775% Senior Notes due 2019 (the 2019 Notes) litigation discussed in Note 4). We may be requested or required by other counterparties to post additional collateral in an aggregate amount of approximately $664 million, which may be in the form of additional letters of credit, cash or other acceptable collateral. Any posting of additional collateral consisting of cash or letters of credit, which would reduce availability under our revolving credit facility, will negatively impact our liquidity.


•	We may seek to access the capital markets or otherwise incur debt to refinance a portion of our outstanding indebtedness and improve our liquidity.

We have taken measures to mitigate the risks and uncertainties facing us for the next 12 months, including mitigating a portion of our downside exposure to lower commodity prices through derivative contracts, the suspension of dividend payments on our convertible preferred stock, the April 2016 amendment to our revolving credit facility (discussed in Note 3) and divesting assets to increase our liquidity; however, there can be no assurance that these measures will satisfy our needs.

Reclassifications

In April 2015, the Financial Accounting Standards Board (FASB) issued guidance that requires debt issuance costs related to term debt to be presented in the balance sheet as a direct deduction from the associated debt liability. This standard requires retrospective application and is effective for annual reporting periods beginning after December 15, 2015. This change in accounting principle is preferable since it allows debt issuance costs and debt issuance discounts to be presented similarly in the consolidated balance sheets as a reduction to the face amount of our debt balances. A retrospective change to our consolidated balance sheet as of December 31, 2015, as previously presented, is required pursuant to the guidance. The retrospective adjustment to the December 31, 2015 consolidated balance sheet is shown below.



	As Previously Reported		December 31, 2015 Adjustment Effect			As Adjusted
	$ in millions
Other long-term assets	$	333	$	(43	)	$	290
Long-term debt, net	$	10,354	$	(43	)	$	10,311

Beginning in the fourth quarter of 2015, we began presenting third party transportation and gathering costs as a component of operating expenses in our statement of operations. Previously, these costs were reflected as deductions to oil, natural gas and NGL sales. These costs have been reclassified in our condensed consolidated statement of operations for the Prior Quarter and the Prior Period to conform to the presentation used for the Current Quarter and the Current Period. The net effect of this reclassification did not impact our previously reported net loss, stockholders’ equity or cash flows; however, previously reported oil, natural gas and NGL sales have increased from the amounts previously reported, and total operating expenses have increased by those same amounts.