Debt

Our long-term debt consisted of the following as of December 31, 2016 and 2015:



	December 31, 2016						December 31, 2015
	Principal Amount			Carrying Amount			Principal Amount			Carrying Amount
	($ in millions)
Term loan due 2021	$	1,500		$	1,500		$	—		$	—
3.25% senior notes due 2016	—			—			381			381
6.25% euro-denominated senior notes due 2017^(a)	258			258			329			329
6.5% senior notes due 2017	134			134			453			453
7.25% senior notes due 2018	64			64			538			538
Floating rate senior notes due 2019	380			380			1,104			1,104
6.625% senior notes due 2020	780			780			822			822
6.875% senior notes due 2020	279			279			304			304
6.125% senior notes due 2021	550			550			589			589
5.375% senior notes due 2021	270			270			286			286
4.875% senior notes due 2022	451			451			639			639
8.00% senior secured second lien notes due 2022^(b)	2,419			3,409			2,425			3,584
5.75% senior notes due 2023	338			338			384			384
8.00% senior notes due 2025	1,000			1,000			—			—
5.5% convertible senior notes due 2026^(c)(e)	1,250			811			—			—
2.75% contingent convertible senior notes due 2035^(d)	2			2			2			2
2.5% contingent convertible senior notes due 2037^(d)(e)	114			112			1,110			1,027
2.25% contingent convertible senior notes due 2038^(d)(e)	200			180			340			290
Revolving credit facility	—			—			—			—
Debt issuance costs	—			(64		)	—			(43		)
Discount on senior notes	—			(16		)	—			(4		)
Interest rate derivatives^(f)	—			3			—			7
Total debt, net	9,989			10,441			9,706			10,692
Less current maturities of long-term debt, net^(g)	(506		)	(503		)	(381		)	(381		)
Total long-term debt, net	$	9,483		$	9,938		$	9,325		$	10,311

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(a)	The principal and carrying amounts shown are based on the exchange rate of $1.0517 to €1.00 and $1.0862 to €1.00 as of December 31, 2016 and 2015, respectively. See Foreign Currency Derivatives in Note 11 for information on our related foreign currency derivatives.


(b)	The carrying amounts as of December 31, 2016 and 2015, include premium amounts of $990 million and $1.159 billion, respectively, associated with a troubled debt restructuring. The premium is being amortized based on an effective yield method.


(c)	The conversion and redemption provisions of our convertible senior notes are as follows:

Optional Conversion by Holders. At the holder’s option, prior to maturity under certain circumstances, the notes are convertible into cash, our common stock, or a combination of cash and common stock, at our election. One triggering circumstance is when the price of our common stock exceeds a threshold amount during a specified period in a fiscal quarter, beginning with the first quarter of 2017. Convertibility based on common stock price is measured quarterly. The notes are also convertible, at the holder’s option, during specified five-day periods if the trading price of the notes is below certain levels determined by reference to the trading price of our common stock. The notes were not convertible under this provision during the year ended December 31, 2016. Upon conversion of a convertible senior note, the holder will receive cash, common stock or a combination of cash and common stock, at our election, according to the conversion rate specified in the indenture.

The common stock price conversion threshold amount for the convertible senior notes is 130% of the conversion price.

Optional Redemption by the Company. We may redeem the convertible senior notes for cash on or after September 15, 2019 if the price of our common stock exceeds 130% of the conversion price during a specified period at a redemption price of 100% of the principal amount of the notes.


(d)	The repurchase, conversion, contingent interest and redemption provisions of our contingent convertible senior notes are as follows:

Holders’ Demand Repurchase Rights. The holders of our contingent convertible senior notes may require us to repurchase, in cash, all or a portion of their notes at 100% of the principal amount of the notes on any of four dates that are five, ten, fifteen and twenty years before the maturity date.

Optional Conversion by Holders. At the holder’s option, prior to maturity under certain circumstances, the notes are convertible into cash and, if applicable, our common stock using a net share settlement process. One triggering circumstance is when the price of our common stock exceeds a threshold amount during a specified period within a fiscal quarter. Convertibility based on common stock price is measured quarterly. During the specified period in the fourth quarter of 2016, the price of our common stock was below the threshold level for each series of the contingent convertible senior notes and, as a result, the holders do not have the option to convert their notes into cash or common stock in the first quarter of 2017 under this provision.

The notes are also convertible, at the holder’s option, during specified five-day periods if the trading price of the notes is below certain levels determined by reference to the trading price of our common stock. The notes were not convertible under this provision during the years ended December 31, 2016, 2015 and 2014. In general, upon conversion of a contingent convertible senior note, the holder will receive cash equal to the principal amount of the note and common stock for the note’s conversion value in excess of the principal amount.

Contingent Interest. We will pay contingent interest on the contingent convertible senior notes after they have been outstanding at least ten years during certain periods if the average trading price of the notes exceeds the threshold defined in the indenture.

The holders’ demand repurchase dates, the common stock price conversion threshold amounts (as adjusted to give effect to cash dividends on our common stock) and the ending date of the first six-month period in which contingent interest may be payable for the contingent convertible senior notes are as follows:



Contingent Convertible Senior Notes	Holders' Demand Repurchase Dates	Common Stock Price Conversion Thresholds		Contingent Interest First Payable (if applicable)
2.75% due 2035	November 15, 2020, 2025, 2030	$	45.02	May 14, 2016
2.5% due 2037	May 15, 2017, 2022, 2027, 2032	$	59.44	November 14, 2017
2.25% due 2038	December 15, 2018, 2023, 2028, 2033	$	100.20	June 14, 2019

Optional Redemption by the Company. We may redeem the contingent convertible senior notes once they have been outstanding for ten years at a redemption price of 100% of the principal amount of the notes, payable in cash. In addition, we may redeem our 2.75% Contingent Convertible Senior Notes due 2035 at any time.


(e)	The carrying amounts as of December 31, 2016 and 2015 are reflected net of discounts of $461 million and $133 million, respectively, associated with the equity component of our convertible and contingent convertible senior notes. This amount is being amortized based on an effective yield method through the first demand repurchase date as applicable.


(f)	See Interest Rate Derivatives in Note 11 for further discussion related to these instruments.

(g)

As of December 31, 2016, current maturities of long-term debt, net includes our 6.25% Euro-denominated Senior Notes due 2017, 6.5% Senior Notes due 2017 and our 2.5% Contingent Convertible Senior Notes due 2037 (2037 Notes). As discussed in footnote (b) above, the holders of our 2037 Notes could exercise their individual demand repurchase rights on May 15, 2017, which would require us to repurchase all or a portion of the principal amount of the notes. As of December 31, 2016, there was $2 million associated with the equity component of the 2037 Notes.

Total principal amount of debt maturities, using the earliest demand repurchase date for contingent convertible senior notes, for the five years ended after December 31, 2016 and thereafter are as follows:



	Principal Amount of Debt Securities
	($ in millions)
2017	$	506
2018	264
2019	380
2020	1,061
2021	2,320
2022 and thereafter	5,458
Total	$	9,989

See Note 23 for discussion of debt that has been retired, repurchased and redeemed in 2017.

Term Loan Facility

In 2016, we entered into a secured five-year term loan facility in aggregate principal amount of $1.5 billion for net proceeds of approximately $1.476 billion. Our obligations under the new facility are unconditionally guaranteed on a joint and several basis by the same subsidiaries that guarantee our revolving credit facility, second lien notes and senior notes and are secured by first-priority liens on the same collateral securing our revolving credit facility (with a position in the collateral proceeds waterfall junior to the revolving credit facility). The term loan bears interest at a rate of London Interbank Offered Rate (LIBOR) plus 7.50% per annum, subject to a 1.00% LIBOR floor, or the Alternative Base Rate (ABR) plus 6.50% per annum, subject to a 2.00% ABR floor, at our option. The loan was made at par without original discount. We used the net proceeds to finance tender offers for our unsecured notes. The term loan matures in August 2021 and voluntary prepayments are subject to a make-whole premium prior to the second anniversary of the closing of the term loan, a premium to par of 4.25% from the second anniversary until but excluding the third anniversary, a premium to par of 2.125% from the third anniversary until but excluding the fourth anniversary and at par beginning on the fourth anniversary. The term loan may be subject to mandatory prepayments and offers to purchase with net cash proceeds of certain issuances of debt, certain asset sales and other dispositions of collateral and upon a change of control.

The term loan contains covenants limiting our ability to incur additional indebtedness, incur liens, consummate mergers and similar fundamental changes, make restricted payments, sell collateral and use proceeds from such sales, make investments, repay certain subordinate, unsecured or junior lien indebtedness, and enter into transactions with affiliates.

Events of default under the term loan include, among other things, nonpayment of principal, interest or other amounts; violation of covenants; incorrectness of representations and warranties in any material respect; cross-payment default and cross acceleration with respect to other indebtedness with an outstanding principal balance of $125 million or more; bankruptcy; judgments involving liability of $125 million or more that are not paid; and ERISA events. Many events of default are subject to customary notice and cure periods.

Senior Secured Second Lien Notes

In December 2015, we completed private offers to exchange newly issued 8.00% Senior Secured Second Lien Notes due 2022 (Second Lien Notes) for certain outstanding senior unsecured notes and contingent convertible senior notes (Existing Notes). The Second Lien Notes are secured second lien obligations and are effectively junior to our current and future secured first lien indebtedness, including indebtedness incurred under our revolving credit facility and our term loan facility, to the extent of the value of the collateral securing such indebtedness, effectively senior to all of our existing and future unsecured indebtedness, including our outstanding senior notes, to the extent of the value of the collateral, and senior to any future subordinated indebtedness that we may incur. We have the option to redeem the Second Lien Notes, in whole or in part, at specified make-whole or redemption prices. Our Second Lien Notes are governed by an indenture containing covenants that may limit our ability and our subsidiaries’ ability to create liens securing certain indebtedness, enter into certain sale-leaseback transactions, consolidate, merge or transfer assets and dispose of certain collateral and use proceeds from dispositions of certain collateral. As a holding company, Chesapeake owns no operating assets and has no significant operations independent of its subsidiaries. Chesapeake’s obligations under the Second Lien Notes are fully and unconditionally guaranteed, jointly and severally, by certain of our direct and indirect wholly owned subsidiaries.

Certain of the Existing Notes that were exchanged for the Second Lien Notes were accounted for as a troubled debt restructuring (TDR). For the exchanges classified as a TDR, if the future undiscounted cash flows of the newly issued debt are less than the net carrying value of the original debt, a gain is recorded for the difference and the carrying value of the newly issued debt is adjusted to the future undiscounted cash flow amount and no future interest expense is recorded. All future interest payments on the newly issued debt reduce the carrying value. Accordingly, we recognized a gain of $304 million in our 2015 consolidated statement of operations, and the remaining reduction in principal amount of Existing Notes ($990 million as of December 31, 2016) is included in the carrying value of our Second Lien Notes. As a result, our reported interest expense will be significantly less than the contractual interest payments throughout the term of the Second Lien Notes. For the remaining TDR exchanges, where the future undiscounted cash flows are greater than the net carrying value of the original debt, no gain is recognized and a new effective interest rate is established. For the other Existing Notes that were exchanged that did not qualify as a TDR, we accounted for these exchanges as either a modification or extinguishment. Direct costs incurred of $30 million in 2015 related to the notes exchange were expensed and are included within gains (losses) on purchases or exchanges of debt in our consolidated statement of operations.

Senior Notes, Contingent Convertible Senior Notes and Convertible Senior Notes

The senior notes and the convertible senior notes are unsecured senior obligations of Chesapeake and rank equally in right of payment with all of our other existing and future senior unsecured indebtedness and rank senior in right of payment to all of our future subordinated indebtedness. Chesapeake’s obligations under the senior notes and the convertible senior notes are fully and unconditionally guaranteed, jointly and severally, by certain of our direct and indirect wholly owned subsidiaries.

Chesapeake Energy Corporation is a holding company and has no independent assets or operations. Our obligations under our outstanding senior notes and convertible senior notes are fully and unconditionally guaranteed, jointly and severally, by certain of our 100% owned subsidiaries on a senior unsecured basis. Our non-guarantor subsidiaries are minor and, as such, we have not included condensed consolidating financial information in the notes to our consolidated financial statements.

We may redeem the senior notes, other than the convertible senior notes, at any time at specified make-whole or redemption prices. Our senior notes are governed by indentures containing covenants that may limit our ability and our subsidiaries’ ability to incur certain secured indebtedness, enter into sale-leaseback transactions, and consolidate, merge or transfer assets. The indentures governing the senior notes and the convertible senior notes do not have any financial or restricted payment covenants. Indentures for the Second Lien Notes, senior notes and convertible senior notes have cross default provisions that apply to other indebtedness the Company or any guarantor subsidiary may have from time to time with an outstanding principal amount of at least $50 million or $75 million, depending on the indenture.

We are required to account for the liability and equity components of our convertible debt instruments separately and to reflect interest expense through the first demand repurchase date, as applicable, at the interest rate of similar nonconvertible debt at the time of issuance. The applicable rates for our 2.5% Contingent Convertible Senior Notes due 2037, our 2.25% Contingent Convertible Senior Notes due 2038 and our 5.5% Convertible Senior Notes due 2026 are 8.0%, 8.0% and 11.5%, respectively.

During 2016, we issued in a private placement $1.0 billion principal amount of unsecured 8.00% Senior Notes due 2025 at a discount for net proceeds of approximately $975 million. Some or all of the notes may be redeemed at any time prior to January 15, 2020, subject to a make-whole premium. In addition, we may redeem some or all of the notes at any time on or after January 15, 2020, at the applicable redemption price in accordance with the terms of the notes and the indenture and supplemental indenture governing the notes. In addition, subject to certain conditions, Chesapeake may redeem up to 35% of the aggregate principal amount of the notes at any time prior to January 15, 2020, at a price equal to 108% of the principal amount of the notes to be redeemed using the net proceeds of certain equity offerings by Chesapeake.

During 2016, we issued in a private placement $1.25 billion principal amount of unsecured 5.5% Convertible Senior Notes due 2026 at par for net proceeds of approximately $1.235 billion. The notes are convertible, under certain specified circumstances, into cash, common stock, or a combination of cash and common stock, at our election. We accounted for the liability and equity components separately and reflected interest expense at the interest rate of similar nonconvertible debt at the time of issuance. The allocation to the equity component of the convertible notes was $445 million ($165 million tax expense). Additionally, debt issuance costs were allocated in proportion to the liability and equity components and accounted for as debt issuance costs and equity issuance costs, respectively. The accretion of the resulting discount on the debt is recognized through the convertible note’s maturity date as a component of interest expense, thereby increasing the amount of interest expense required to be recognized with respect to such instruments.

During 2016, we used the net proceeds from our term loan and convertible and senior notes issuances discussed above, together with cash on hand, to purchase and retire $1.451 billion principal amount of our outstanding senior notes and $708 million principal amount of our outstanding contingent convertible senior notes for an aggregate $2.078 billion pursuant to tender offers.

During 2016, in addition to the repayment upon maturity of $259 million principal amount of our 3.25% Senior Notes due 2016, we repurchased in the open market approximately $325 million principal amount of our outstanding senior notes for $300 million and $141 million principal amount of our outstanding contingent convertible senior notes for $86 million.

Additionally, we privately negotiated exchanges of approximately $290 million principal amount of our outstanding senior notes for 53,923,925 shares of common stock and $287 million principal amount of our outstanding contingent convertible senior notes for 55,427,782 shares of common stock.

For the year ended December 31, 2016, we recorded an aggregate net gain of approximately $236 million associated with the tender offers, debt repurchases and exchanges discussed above, which was net of $26 million ($10 million tax benefit) associated with the equity component of the retired contingent convertible senior notes.

During 2015, as required by the terms of the indenture for our 2.75% Contingent Convertible Senior Notes due 2035 (the 2035 Notes), the holders were provided the option to require us to purchase on November 15, 2015, all or a portion of the holders’ 2035 Notes at par plus accrued and unpaid interest up to, but excluding, November 15, 2015. On November 16, 2015, we paid an aggregate of approximately $394 million to purchase all of the 2035 Notes that were tendered and not withdrawn. An aggregate of $2 million principal amount of the 2035 Notes remains outstanding as of December 31, 2016.

During 2015, we repurchased in the open market approximately $119 million aggregate principal amount of our 3.25% Senior Notes due 2016 for cash. We recorded a gain of approximately $5 million associated with the repurchase.

During 2014, we issued $3.0 billion in aggregate principal amount of senior notes at par. The offering included two series of notes: $1.5 billion in aggregate principal amount of Floating Rate Senior Notes due 2019 and $1.5 billion in aggregate principal amount of 4.875% Senior Notes due 2022. We used a portion of the net proceeds of $2.966 billion to repay the borrowings under, and terminate, our then-existing term loan credit facility. We used the remaining proceeds along with cash on hand to redeem the remaining $97 million principal amount of the 6.875% Senior Notes due 2018 and to purchase and redeem the remaining $1.265 billion principal amount of the 9.5% Senior Notes due 2015 for $1.454 billion. We recorded a loss of approximately $6 million associated with the redemption of the 6.875% Senior Notes due 2018, which consisted of $5 million in premiums and $1 million of unamortized deferred charges. We recorded a loss of approximately $99 million associated with the purchase and redemption of the 9.5% Senior Notes due 2015, which consisted of $87 million in premiums, $9 million of unamortized discount and $3 million of unamortized deferred charges.

Revolving Credit Facility

We have a $4.0 billion senior secured revolving credit facility (currently subject to a $3.8 billion borrowing base) that matures in December 2019. As of December 31, 2016, we had no outstanding borrowings under the revolving credit facility and had used $1.036 billion of the revolving credit facility for various letters of credit (including the $461 million supersedeas bond with respect to the 2019 Notes litigation discussed in Note 4). The terms of the revolving credit facility include covenants limiting, among other things, our ability to incur additional indebtedness, make investments or loans, create liens, consummate mergers and similar fundamental changes, make restricted payments, make investments in unrestricted subsidiaries and enter into transactions with affiliates. We were in compliance with all applicable financial covenants under the agreement as of December 31, 2016.

During 2016, we entered into the third amendment to our revolving credit facility. Pursuant to the amendment, our borrowing base was reaffirmed in the amount of $4.0 billion and the next scheduled borrowing base redetermination review was postponed until June 15, 2017, with the consenting lenders agreeing not to exercise their interim redetermination right prior to that date. Our borrowing base may be reduced if we dispose of a certain percentage of the value of collateral securing the facility. As a result of certain asset sales discussed in Note 12 and certain other sales of collateral since the date of the most recent amendment, our borrowing base was reduced to $3.8 billion as of December 31, 2016. The amendment also provides temporary financial covenant relief, with the revolving credit facility’s existing first lien secured leverage ratio and net debt to capitalization ratio suspended until September 30, 2017 and the interest coverage ratio maintenance covenant reduced as noted below. In addition, we agreed to grant liens and security interests on a majority of our assets, as well as maintain a minimum liquidity amount (defined as cash and cash equivalents and availability under our revolving credit facility) of $500 million until the suspension of the existing maintenance covenants ends.

The amendment reduces the interest coverage ratio from 1.1 to 1.0 to 0.65 to 1.0 through the first quarter of 2017, after which it will increase to 0.70 to 1.0 for the second quarter of 2017, 1.2 to 1.0 for the third quarter of 2017 and 1.25 to 1.0 thereafter. The amendment also includes a collateral value coverage test whereby if the collateral value coverage ratio, tested as of December 31, 2016, falls below 1.1 to 1.0, the $500 million minimum liquidity covenant increases to $750 million, and if the collateral value coverage ratio, tested as of March 31, 2017, falls below 1.25 to 1.0, our borrowing ability will be reduced in order to satisfy such ratio. The amendment also gives us the ability to incur up to $2.5 billion of first lien indebtedness secured on a pari passu basis with the existing obligations under the credit agreement, subject to a position in the collateral proceeds waterfall in favor of the revolving lenders and affiliated hedge providers and the other limitations on junior lien debt set forth in the credit agreement. After taking into account the term loan, the amount of additional first lien indebtedness permitted by the revolving credit facility is $1.0 billion.

Fair Value of Debt

We estimate the fair value of our senior notes based on the market value of our publicly traded debt as determined based on the yield of our senior notes (Level 1). The fair value of all other debt is based on a market approach using estimates provided by an independent investment financial data services firm (Level 2). Fair value is compared to the carrying value, excluding the impact of interest rate derivatives, in the table below.



	December 31, 2016				December 31, 2015
	Carrying Amount		Estimated Fair Value		Carrying Amount		Estimated Fair Value
			($ in millions)
Short-term debt (Level 1)	$	503	$	511	$	381	$	366
Long-term debt (Level 1)	$	3,271	$	3,216	$	6,720	$	2,546
Long-term debt (Level 2)	$	6,664	$	6,654	$	3,584	$	1,189