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Item 8. Financial Statements and Supplementary Data

2020-03-19 compared with 2019-03-22 · 43 added, 64 removed, 370 unchanged (22% of the section changed)

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Report of Independent Registered Public Accounting Firm

To the Unitholders of the Chesapeake Granite Wash Trust and The Bank of New York Mellon Trust Company, N.A., as Trustee:

To the Unitholders of Chesapeake Granite Wash Trust and The Bank of New York Mellon Trust Company, N.A., as Trustee

Opinion on the Financial Statements

We have audited the accompanying statements of assets, liabilities and trust corpus of the Chesapeake Granite Wash Trust (the “Trust”) as of December 31, 2018 and 2017, and the related statements of distributable income and changes in trust corpus for the years then ended, including the related notes (collectively referred to as the “financial statements”).

In our opinion, the financial statements present fairly, in all material respects, the assets, liabilities and trust corpus of the Trust as of December 31, 2018 and 2017, and its distributable income and its changes in trust corpus for the years then ended in conformity with the modified cash basis of accounting described in Note 2.

We have audited the accompanying statements of assets and trust corpus of Chesapeake Granite Wash Trust (the “Trust”) as of December 31, 2019 and 2018, and the related statements of distributable income and changes in trust corpus for the years then ended, including the related notes (collectively referred to as the “financial statements”).

In our opinion, the financial statements present fairly, in all material respects, the assets and trust corpus of the Trust as of December 31, 2019 and 2018, and its distributable income and its changes in trust corpus for the years then ended in conformity with the modified cash basis of accounting described in Note 2.

Basis for Opinion

These financial statements are the responsibility of the Trust’s management (the Trustee).

These financial statements are the responsibility of the Trust’s management.

Our responsibility is to express an opinion on the Trust’s financial statements based on our audits.

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Basis of Accounting

As described in Note 2, these financial statements were prepared on the modified cash basis of accounting, which is a comprehensive basis of accounting other than accounting principles generally accepted in the United States of America.

As described in Note 2, these financial statements were prepared on the modified cash basis of accounting, which is a comprehensive basis of accounting other than generally accepted accounting principles.

/s/ PricewaterhouseCoopers LLP

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CHESAPEAKE GRANITE WASH TRUST

STATEMENTS OF ASSETS, LIABILITIES AND TRUST CORPUS

STATEMENTS OF ASSETS AND TRUST CORPUS

($ in thousands)

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Net investment in royalty interests

LIABILITIES AND TRUST CORPUS:

Dividend payable to Chesapeake (1)

Total liabilities

TRUST CORPUS:

Trust corpus;

46,750,000 common units issued and outstanding

Total liabilities and Trust corpus

See Note 5 - Distributions to Unitholders.

Total Trust corpus

The accompanying notes are an integral part of these financial statements.

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Total expenses

Cash reserves withheld

Distributable income available to unitholders

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Beginning of period

Cash reserve surplus (deficit) (1)

Cash reserve surplus

Amortization of investment in royalty interests

Distributable income

Distributable income available to unitholders

Distributions paid to unitholders (1)

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Upon completion of these transactions, there were 46,750,000 Trust units issued and outstanding, consisting of 35,062,500 common units and 11,687,500 subordinated units.

The common units and subordinated units have identical rights and privileges, except with respect to their voting rights and rights to receive distributions as described below.

Prior to their conversion on June 30, 2017, the subordinated units were entitled to receive pro rata distributions from the Trust each quarter if and to the extent there was sufficient cash to provide a cash distribution on the common units that was no less than 80% of the target distribution set forth in the Trust Agreement for the corresponding quarter (the “subordination threshold”).

If there was insufficient cash to fund such a distribution on all of the Trust units, the distribution made with respect to the subordinated units was either 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.

Prior to the conversion of the subordinated units on June 30, 2017, Chesapeake was entitled to receive incentive distributions equal to 50% of the amount by which the cash available for distribution on all of the Trust units in any quarter was 20% greater than the target distribution for such quarter (the “incentive threshold”).

The remaining 50% of cash available for distribution in excess of the applicable incentive threshold, if any, was to be paid to Trust unitholders, including Chesapeake, on a pro rata basis.

On June 30, 2017, the last day of the fourth full calendar quarter subsequent to Chesapeake's satisfaction of its drilling obligation under the development agreement, the subordinated units automatically converted into common units on a one-for-one basis and Chesapeake's right to receive incentive distributions with respect to quarters after the 2017 second quarter terminated.

All distributions made on common units after September 30, 2017 no longer have

CHESAPEAKE GRANITE WASH TRUST

NOTES TO FINANCIAL STATEMENTS – (Continued)

the benefit of the subordination threshold, nor are the common units subject to the incentive threshold, and all Trust unitholders share on a pro rata basis in the Trust's distributions.

The subordinated units were converted into common units on a one-for-one basis as of June 30, 2017.

All distributions made on common units after September 30, 2017 no longer have the benefit of the subordination threshold, and all Trust unitholders share on a pro rata basis in the Trust's distributions.

The Trust will dissolve and begin to liquidate on June 30, 2031, or earlier upon certain events (the “Termination Date”), and will soon thereafter wind up its affairs and terminate.

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This non-GAAP comprehensive basis of accounting corresponds to the accounting principles permitted for royalty trusts by the SEC as specified by Staff Accounting Bulletin Topic 12:E, Financial Statements of Royalty Trusts .

CHESAPEAKE GRANITE WASH TRUST

NOTES TO FINANCIAL STATEMENTS – (Continued)

Most accounting pronouncements apply to entities whose financial statements are prepared in accordance with GAAP, directing such entities to accrue or defer revenues and expenses in a period other than when such revenues were received or expenses were paid.

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See Note 5 for information regarding prior distributions paid and Note 6 for information regarding the distribution paid on March 2, 2020 .

During the years ended December 31, 2018 and 2017, the Trust recognized no impairments of the Royalty Interests.

See Investment in Royalty Interests below for further discussion of the impairment analysis.

Chesapeake’s ability to perform its obligations to the Trust will depend on its future results of operations, financial condition and liquidity, which in turn will depend upon the supply and demand for oil, natural gas and NGL, prevailing economic conditions and financial, business and other factors, many of which are beyond Chesapeake’s control.

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Chesapeake could also be unable to provide support to the Trust through loans and performance of its management duties.

CHESAPEAKE GRANITE WASH TRUST

NOTES TO FINANCIAL STATEMENTS – (Continued)

Cash and Cash Equivalents .

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During the years ended December 31, 2019 and 2018 there were no impairments to the carrying value of the Investment in Royalty Interests.

See Risks and Uncertainties above for further discussion.

Loan Commitment .

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A loan neither increases nor decreases distributions to unitholders;

however, no further distributions will be made to unitholders (except in respect of any previously determined quarterly cash distribution amount and unless Chesapeake agrees otherwise) until the loan is repaid.

however, no further distributions will be made to unitholders (except in respect of any previously determined quarterly

CHESAPEAKE GRANITE WASH TRUST

NOTES TO FINANCIAL STATEMENTS – (Continued)

cash distribution amount and unless Chesapeake agrees otherwise) until the loan is repaid.

There were no loans outstanding as of December 31, 2019 or December 31, 2018 .

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The administrative fee may be adjusted for inflation by no more than 3% in any calendar year beginning in 2015.

The Trustee's annual administrative fees were adjusted upward by 2.5% for the 2018 calendar year and 2.1% for the 2017 calendar year.

The Trustee's annual administrative fees were adjusted upward by 2.1% in 2017, 2.1% in 2018, and 1.9% in 2019 to the current amount of $185,893.

Agreements with Chesapeake.

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Chesapeake was paid approximately $164,000 and $270,000 in fees and reimbursements in 2019 and 2018, respectively.

The $106,000 decrease was primarily due to the timing of payments.

The administrative services agreement will terminate upon the earliest to occur of (a) the date the Trust shall have dissolved and wound up its business and affairs in accordance with the Trust Agreement, (b) the date that all of the Royalty Interests have been terminated or are no longer held by the Trust, (c) with respect to services to be provided with respect to any Underlying Properties being transferred by Chesapeake, the date that either Chesapeake or the Trustee may designate by delivering 90-days prior written notice, provided that Chesapeake’s drilling obligation has been completed and the transferee of such Underlying Properties assumes responsibility to perform the services in place of Chesapeake or (d) a date mutually agreed upon by Chesapeake and the Trustee.

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If Chesapeake loans funds pursuant to this commitment, unless Chesapeake agrees otherwise, no further distributions will be made to unitholders (except in respect of any previously determined quarterly cash distribution amount) until such loan is repaid.

In March 2019, the Trust's cash on hand (including cash reserves) was insufficient to pay the Trust's ordinary course expenses as they became due.

Chesapeake loaned $275,000 to the Trust necessary to pay such expenses and agreed to permit the Trust to continue making distributions while the loan was outstanding.

The Trust repaid the loan in the second quarter of 2019.

There were no loans outstanding as of December 31, 2019 or December 31, 2018 .

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Cash Distribution per

Cash Distribution

Subordinated Unit (1)

June 2019 – August 2019

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March 2, 2018

___________________________________________________

For the production periods from June 2013 through February 2017, the distribution per common unit was below the applicable subordination threshold, and no distribution was declared for the subordinated units.

On June 30, 2017, the subordinated units automatically converted into common units on a one-for-one basis.

Distributions made on common units no longer have the benefit of the subordination threshold, nor are the common units subject to the incentive threshold, and all Trust unitholders share on a pro rata basis in the Trust's distribution.

The Trust inadvertently failed to pay Chesapeake its quarterly distribution on November 30, 2017 with respect to Chesapeake's common units that converted from subordinated units on June 30, 2017.

As a result, the unpaid balance as of December 31, 2017 is reflected as “Dividend Payable to Chesapeake” on the Statement of Assets, Liabilities and Trust Corpus as of December 31, 2017.

The unpaid distribution was paid in full in February 2018.

Distributions paid to Trust unitholders and distributions paid to Chesapeake with respect to its common units for such period were calculated pursuant to the Trust Agreement.

Following the Trust's press release dated August 4, 2017, the Trust identified an additional $190,000 to be included in distributable income available to unitholders.

The Trust announced a revision to the distribution amount on August 11, 2017.

Based upon the revised sales volume and average pricing calculations, the distribution of $0.1003 per common unit, which was calculated on the basis of 35,062,500 common units and excluded the common units issued on June 30, 2017 upon conversion of the Trust's subordinated units, was paid on August 31, 2017.

CHESAPEAKE GRANITE WASH TRUST

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Subsequent Events

Subsequent Distribution.

The Trust's quarterly income available for distribution was $0.0371 per common unit for the production period from September 1, 2019 to November 30, 2019 .

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Net of certain post-production expenses.

Includes cash reserves withheld (used).

Commencing with the distribution to unitholders payable in first quarter 2019, the Trustee intends to begin withholding the greater of $70,000 or 3.5% of the funds otherwise available for distribution each quarter to gradually increase existing cash reserves by a total of approximately $850,000.

Includes the cash advance for administrative expenses.

Commencing with the distribution to unitholders payable in the first quarter of 2019, the Trustee began withholding the greater of $70,000 or 3.5% of the funds otherwise available for distribution each quarter to gradually increase existing cash reserves by a total of approximately $850,000.

The Trustee may increase or decrease the targeted amount at any time, and may increase or decrease the rate at which it is withholding funds to build the cash reserve at any time, without advance notice to the unitholders.

Cash held in reserve will be invested as required by the trust agreement.

Cash held in reserve for payment of the quarterly cash distribution or sales proceeds amounts or for the payment of any liabilities other than routine administrative costs will be invested as required by the Trust Agreement.

Any cash reserved in excess of the amount necessary to pay or provide for the payment of future known, anticipated or contingent expenses or liabilities eventually will be distributed to unitholders, together with interest earned on the funds.

In March 2019, the Trust's cash on hand (including cash reserves) was not sufficient to pay the Trust's ordinary course expenses as they became due.

Chesapeake loaned $275,000 to the Trust necessary to pay such expenses and agreed to permit the Trust to continue making distributions while the loan was outstanding.

The Trust intends to repay the loan in May 2019.

NYSE Delisting.

On August 28, 2019, the Trust received written notification from the NYSE that the Trust was not in compliance with the continued listing standards set forth in Rule 802.01C of the NYSE Listed Company Manual because the average closing price of the Trust’s common units was less than $1.00 over a consecutive 30 trading-day period.

Because the Trust was unable to regain compliance with the applicable standards within a six-month cure period concluded February 28, 2020, the NYSE announced the suspension of trading of the Trust's common units due to non-compliance with Rule 802.01C of the NYSE Listed Company Manual, effective as of the close of trading on February 28, 2020.

As a result of the suspension and delisting, the Trust's common units began trading on March 2, 2020 under the symbol "CHKR" on the OTC Pink.

CHESAPEAKE GRANITE WASH TRUST

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Distributable income per common unit

Distributable income per subordinated unit (1)

On June 30, 2017, the subordinated units automatically converted into common units on a one-for-one basis.

Supplemental Disclosures About Oil, Natural Gas and NGL Producing Activities (unaudited)

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Proved reserves, beginning of period

Extensions, discoveries and other additions

Revisions of previous estimates, price (3)

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During 2018, the Trust recorded upward reserve revisions of 190 mboe to the December 31, 2017 estimates of reserves resulting from changes in oil and natural gas prices.

Before basis differential adjustments, oil and natural gas prices used in estimating proved reserves increased as of December 31, 2018 compared to December 31, 2017 using the trailing 12-month average prices required by the SEC.

Oil prices increased by $14.22 per bbl, or 28%, to $65.56 per bbl from $51.34 per bbl.

Natural gas prices increased $0.12 per mcf, or 4%, to $3.10 per mcf from $2.98 per mcf.

During 2018, the Trust recorded downward reserve revisions of 331 mboe to the December 31, 2017 estimates of reserves resulting from changes to previous estimates.

These non-price related revisions were primarily attributable to lower production in forecasts.

During 2019, the Trust recorded downward reserve revisions of 761 mboe to the December 31, 2018 estimates of reserves resulting from changes in oil and natural gas prices.

Before basis differential adjustments, oil and natural gas prices used in estimating proved reserves decreased as of December 31, 2019 compared to December 31, 2018 using the trailing 12-month average prices required by the SEC.

Oil prices decreased by $9.87 per bbl, or 15%, to $55.69 per bbl from $65.56 per bbl.

Natural gas prices decreased $0.52 per mcf, or 17%, to $2.58 per mcf from $3.10 per mcf.

During 2019, the Trust recorded upward reserve revisions of 466 mboe to the December 31, 2018 estimates of reserves resulting from changes to previous estimates.

These non-price related revisions were primarily attributable to a positive production forecast revision and a reduction to future operating expenses.

During 2018, the Trust recorded upward reserve revisions of 190 mboe to the December 31, 2017 estimates of reserves resulting from changes in oil and natural gas prices.

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The limitations inherent in the reserve quantity estimation process, as discussed previously, are equally applicable to the standardized measure computation since these estimates reflect the valuation process.

CHESAPEAKE GRANITE WASH TRUST

SUPPLEMENTARY INFORMATION – (Continued)

The following summary sets forth the future net cash flows relating to proved oil, natural gas and NGL reserves based on the standardized measure:

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___________________________________________________

CHESAPEAKE GRANITE WASH TRUST

SUPPLEMENTARY INFORMATION – (Continued)

Calculated using prices of $ 3.10 per mcf of natural gas and $ 65.56 per bbl of oil and NGL, before field differentials.

Calculated using prices of $ 2.58 per mcf of natural gas and $ 55.69 per bbl of oil, before field differentials.

Including the effect of price differential adjustments, the prices used in computing the reserves attributable to the Royalty Interests as of December 31, 2019 were $0.14 per mcf of natural gas, $49.99 per barrel of oil and $12.28 per barrel of NGL.

Calculated using prices of $2.98 per mcf of natural gas and $51.34 per bbl of oil and NGL, before field differentials.

Calculated using prices of $3.10 per mcf of natural gas and $65.56 per bbl of oil, before field differentials.

Including the effect of price differential adjustments, the prices used in computing the reserves attributable to the Royalty Interests as of December 31, 2018 were $0.69 per mcf of natural gas, $61.61 per barrel of oil and $20.62 per barrel of NGL.

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Standardized measure, end of period

Changes in and Disagreements with Accountants on Accounting and Financial Disclosures

Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-K

Item 8. Financial Statements and Supplementary Data