CHESAPEAKE GRANITE WASH TRUST 10-K/A

ITEM 5. Market for Units of the Trust, Related Unitholder Matters and Trust Purchases of Units Common Units Representing Beneficial Interests The common units representing beneficial interests in the Trust are listed and commenced trading on the New York Stock Exchange on November 11, 2011 under the symbol “CHKR.” As of March 18, 2020 , 46,750,000 common units representing beneficial interests in Chesapeake Granite Wash Trust were outstanding and held by 14 certified unitholders of record. Of such units, 35,062,500 were issued on November 16, 2011 and 11,687,500 of such units were subordinated units that were converted into common units on a one-for-one basis as of June 30, 2017. Pursuant to the Trust Agreement, if at any time the Trust's cash on hand (including cash reserves) is not sufficient to pay the Trust's ordinary course expenses as they become due, Chesapeake will loan funds to the Trust necessary to pay such expenses. Any funds loaned by Chesapeake pursuant to this commitment will be limited to the payment of current accounts payable or other obligations to trade creditors in connection with obtaining goods or services or the payment of other current liabilities arising in the ordinary course of the Trust's business, and may not be used to satisfy Trust indebtedness for borrowed money of the Trust. 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. As of December 31, 2019 and December 31, 2018 there were no loans outstanding. Equity Compensation Plans The Trust does not have any employees and, therefore, does not maintain any equity compensation plans. Recent Sales of Unregistered Securities None. Purchases of Equity Securities None. ITEM 6. Selected Financial Data Distributable Income The following is a summary of royalty income, interest income and distributable income for the years ended December 31, 2019, 2018, 2017, 2016, and 2015. Years Ended December 31, 2019 2018 2017 2016 2015 ($ in thousands, except per unit data) Royalty income $ 9,806 $ 13,504 $ 15,665 $ 12,431 $ 36,377 Distributable income $ 7,629 $ 11,296 $ 13,311 $ 12,485 $ 53,315 Distributable income per common unit $ 0.1632 $ 0.2416 $ 0.3577 $ 0.3561 $ 1.5206 Assets, Liabilities and Trust Corpus The following is the balance of total assets, total liabilities and trust corpus as of December 31, 2019, 2018, 2017, 2016, and 2015. 34 December 31, 2019 2018 2017 2016 2015 ($ in thousands, except per unit data) Total Assets $ 21,805 $ 24,378 $ 28,372 $ 31,938 $ 63,391 Total Liabilities $ — $ — $ 768 $ — $ 175 Trust Corpus $ 21,805 $ 24,378 $ 27,604 $ 31,938 $ 63,216 ITEM 7. Trustee's Discussion and Analysis of Financial Condition and Results of Operations Introduction The following discussion and analysis is intended to help the reader understand the Trust's financial condition and results of operations. This discussion and analysis should be read in conjunction with the audited financial statements and the accompanying notes relating to the Trust and the Underlying Properties included in Part II, Item 8 of this Annual Report and The Underlying Properties and the Royalty Interests and Discussion and Analysis of Results from the Underlying Properties included in Part I, Item 1 of this Annual Report. Overview The Trust is a statutory trust formed in June 2011 under the Delaware Statutory Trust Act. The business and affairs of the Trust are managed by the Trustee and, as necessary, the Delaware Trustee. The Trust does not conduct any operations or activities other than owning the Royalty Interests and activities related to such ownership. The Trust’s purpose is generally to own the Royalty Interests, to distribute to the Trust unitholders cash that the Trust receives in respect of the Royalty Interests and to perform certain administrative functions in respect of the Royalty Interests and the Trust units. The Trust derives all or substantially all of its income and cash flow from the Royalty Interests. The Trust is treated as a partnership for federal income tax purposes. Concurrent with the Trust's initial public offering in November 2011, Chesapeake conveyed the Royalty Interests to the Trust effective July 1, 2011, which included interests in (a) 69 Producing Wells in the Colony Granite Wash play and (b) 118 Development Wells that have since been drilled in the Colony Granite Wash play on properties within the AMI. Chesapeake was obligated to drill, cause to be drilled or participate as a non-operator in the drilling of the Development Wells from drill sites in the AMI on or prior to June 30, 2016. Additionally, based on Chesapeake’s assessment of the ability of a Development Well to produce in paying quantities, Chesapeake was obligated to either complete and tie into production or plug and abandon each Development Well. As of June 30, 2016, Chesapeake had fulfilled its drilling obligation under the development agreement. The Trust was not responsible for any costs related to the drilling of the Development Wells and is not responsible for any other operating or capital costs of the Underlying Properties, and Chesapeake was not permitted to drill and 35 complete any well in the Colony Granite Wash formation on acreage included within the AMI for its own account until it satisfied its drilling obligation to the Trust. The Royalty Interests entitle the Trust to receive 90% of the proceeds (after deducting certain post-production expenses and any applicable taxes) from the sales of production of oil, natural gas and NGL attributable to Chesapeake’s net revenue interest in the Producing Wells and 50% of the proceeds (after deducting certain post-production expenses and any applicable taxes) from the sales of oil, natural gas and NGL production attributable to Chesapeake’s net revenue interest in the Development Wells. Post-production expenses generally consist of costs incurred to gather, store, compress, transport, process, treat, dehydrate and market the oil, natural gas and NGL produced. However, the Trust is not responsible for costs of marketing services provided by Chesapeake or its affiliates. The Trust is required to make quarterly cash distributions of substantially all of its cash receipts, after deducting the Trust’s administrative expenses, on or about 60 days following the completion of each calendar quarter through (and including) the quarter ending June 30, 2031. During the year ended December 31, 2019 , four distributions were paid. See Liquidity and Capital Resources below and Note 5 to the financial statements contained in Part II, Item 8 of this Annual Report for more information regarding the distributions. The amount of Trust revenues and cash distributions to Trust unitholders fluctuates from quarter to quarter depending on several factors, including: • timing of initial production and sales from the Development Wells; • oil, natural gas and NGL prices received; • volumes of oil, natural gas and NGL produced and sold; • certain post-production expenses and any applicable taxes; and • the Trust’s expenses. Results of Trust Operations Below is a discussion of changes in our results of operations for 2019 compared to 2018. A discussion of changes in our results of operations for 2018 compared to 2017 has been omitted from this Annual Report, but may be found in Part II, Item 7. Trustee's Discussion and Analysis of Financial Condition and Results of Operations of our Form 10-K for the year ended December 31, 2018 as filed with the SEC on March 22, 2019. The quarterly payments to the Trust with respect to the Royalty Interests are based on the amount of proceeds actually received by Chesapeake during the preceding calendar quarter. Proceeds from production are typically received by Chesapeake approximately one month after the month of production. Due to the timing of the payment of production proceeds, quarterly distributions made by Chesapeake to the Trust generally include royalties attributable to sales of oil, natural gas and NGL for three months, comprised of the first two months of the quarter just ended and the last month of the quarter prior to that one. Chesapeake is required to make the Royalty Interest payments to the Trust within 35 days of the end of each calendar quarter. During the year ended December 31, 2019 , the Trust received payments on the Royalty Interests representing royalties attributable to proceeds from sales of oil, natural gas and NGL for September 1, 2018 through August 31, 2019 . During the year ended December 31, 2018 , the payments received by the Trust represented royalties attributable to proceeds from sales of oil, natural gas and NGL for September 1, 2017 through August 31, 2018. The Trust's revenues and distributable income available to unitholders have been adversely affected throughout 2018 and 2019 by a decline in production. Due to natural declines, the Trust expects production to decline further and expects distributable income to continue to be adversely affected. During the years ended December 31, 2019 and 2018, the Trust recognized no impairments of the Royalty Interests. If commodity prices do not improve going forward, the Trust may record an impairment in the future. See Note 2 to the financial statements contained in Part II, Item 8 of this Annual Report for further discussion of the impairment analysis. Distributable Income. The Trust's distributable income was $7.6 million for the year ended December 31, 2019 , compared to $11.3 million for the year ended December 31, 2018 . 36 The $3.7 million decrease from 2018 to 2019 was primarily due to a decrease in production volumes in the production period from September 1, 2018 to August 31, 2019 (the " 2019 production period ") as compared to the production period from September 1, 2017 to August 31, 2018 (the " 2018 production period "), and a decrease in the average realized prices received from sales of oil, natural gas and NGL. See Royalty Income below for information regarding average prices received and sales volumes. On a per unit basis, cash distributions during the year ended December 31, 2019 and attributable to the 2019 production period were $0.1632 per common unit as compared to $0.2416 per common unit for the year ended December 31, 2018 and attributable to the 2018 production period . Distributable income for the production periods described above was calculated as follows: Years Ended December 31, 2019 2018 2017 ($ in thousands, except per unit data) Revenues: Royalty income (1) $ 9,806 $ 13,504 $ 15,665 Interest income — — — Total revenues 9,806 13,504 15,665 Expenses: Production taxes (525 ) (878 ) (669 ) Trust administrative expenses (2) (1,335 ) (1,330 ) (1,685 ) Total expenses (1,860 ) (2,208 ) (2,354 ) Cash withheld to increase cash reserves (3) (317 ) — Distributable income available to unitholders $ 7,629 $ 11,296 $ 13,311 Distributable income per common unit (46,750,000 units) (4) $ 0.1632 $ 0.2416 $ 0.3577 _____________________________________________________ (1) Net of certain post-production expenses. (2) Includes cash reserves withheld (used). (3) 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 for a 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. (4) For the year ended December 31, 2017, no distribution was paid for the subordinated units during the year. The distributable income for the production periods from September 1, 2016 to May 31, 2017 was, in each case, below the applicable subordination threshold. The subordination threshold was not applicable to the distributable income for the production period from June 1, 2017 to August 31, 2017. The subordination and incentive thresholds terminated on June 30, 2017 and are no longer applicable for any future distribution. For more information, see Notes 1 and 5 to the financial statements contained in Part II, Item 8 of this Annual Report. Royalty Income. Royalty income to the Trust for the year ended December 31, 2019 , and attributable to the 2019 production period , totaled $9.8 million based upon sales of production attributable to the Royalty Interests of 91 mbbls of oil, 2,238 mmcf of natural gas and 186 mbbls of NGL. Total production attributable to the Royalty Interests for the 2019 production period was 650 mboe. Average prices received for oil, natural gas and NGL production, including the impact of certain post-production expenses and excluding production taxes, during the 2019 production period were $53.30 per bbl of oil, $0.87 per mcf of natural gas and $16.07 per bbl of NGL, respectively. 37 Royalty income to the Trust for the year ended December 31, 2018 , and attributable to the 2018 production period , totaled $13.5 million based upon sales of production attributable to the Royalty Interests of 97 mbbls of oil, 2,492 mmcf of natural gas and 265 mbbls of NGL. Total production attributable to the Royalty Interests for the 2018 production period was 777 mboe. Average prices received for oil, natural gas and NGL production, including the impact of certain post-production expenses and excluding production taxes, during the 2018 production period were $57.95 per bbl of oil, $0.89 per mcf of natural gas and $21.35 per bbl of NGL, respectively. The decrease in the average price received per boe in the 2019 production period compared to the 2018 production period resulted in a $1.5 million decrease in royalty income. Decreased sales volumes resulted in a $2.2 million decrease in royalty income, for a net decrease in royalty income of $3.7 million. Production Taxes . Production taxes are calculated as a percentage of oil, natural gas and NGL revenues, net of any applicable tax credits. Production taxes for the year ended December 31, 2019 , and attributable to the 2019 production period , totaled $0.5 million , or $0.81 per boe, or approximately 5.4% of royalty income, as compared to production taxes of $0.9 million , or $1.13 per boe, or approximately 6.5% of royalty income for the year ended December 31, 2018 , and attributable to the 2018 production period . The decrease in production taxes per boe from 2018 to 2019 was primarily due to prior period tax refunds recorded in 2019. Trust Administrative Expenses. Trust administrative expenses, including additional cash reserves, for the years ended December 31, 2019 and 2018 totaled $1.3 million . Trust administrative expenses primarily consist of the administrative fees paid to the Trustees and Chesapeake and costs for accounting and legal services. Liquidity and Capital Resources The Trust’s principal sources of liquidity and capital are cash flows generated from the Royalty Interests. The Trust’s primary uses of cash are distributions to Trust unitholders, payments of production taxes, payments of Trust administrative expenses, including any reserves established by the Trustee for future liabilities and repayment of loans and payments of expense reimbursements to Chesapeake for out-of-pocket expenses incurred on behalf of the Trust. Administrative expenses include payments to the Trustee and the Delaware Trustee as well as a quarterly fee of $50,000 to Chesapeake pursuant to an administrative services agreement. Each quarter, the Trustee determines the amount of funds available for distribution. Available funds are the excess cash, if any, received by the Trust from the sales of oil, natural gas and NGL production attributable to the Royalty Interests during the quarter, over the Trust’s expenses for the quarter and any cash reserve for the payment of liabilities of the Trust. The Trust is required to make quarterly cash distributions of substantially all of its cash receipts, after deducting the Trust’s administrative expenses, on or about 60 days following the completion of each calendar quarter through (and including) the quarter ending June 30, 2031. During the year ended December 31, 2019 , four distributions were paid. The 2019 first quarter distribution of $0.0631 per common unit to common unitholders consisting of proceeds attributable to production from September 1, 2018 through November 30, 2018, was made on March 1, 2019 to record unitholders as of February 19, 2019. The 2019 second quarter distribution of $0.0303 per common unit, consisting of proceeds attributable to production from December 1, 2018 through February 28, 2019, was made on May 30, 2019 to record unitholders as of May 20, 2019. The 2019 third quarter distribution of $0.0323 per common unit, consisting of proceeds attributable to production from March 1, 2019 through May 31, 2019, was made on August 29, 2019 to record unitholders as of August 19, 2019. The 2019 fourth quarter distribution of $0.0374 per common unit, consisting of proceeds attributable to production from June 1, 2019 through August 31, 2019, was made on November 29, 2019 to record unitholders as of November 19, 2019. The following is a summary of distributable income and distributable income per common unit by quarter for the years ended December 31, 2019 , 2018, and 2017 (in thousands except per unit amounts): 2019 Q1 Q2 Q3 Q4 Total Distributable income $ 2,952 $ 1,417 $ 1,511 $ 1,749 $ 7,629 Distributable income per common unit $ 0.0631 $ 0.0303 $ 0.0323 $ 0.0374 $ 0.1632 38 2018 Q1 Q2 Q3 Q4 Total Distributable income $ 3,680 $ 2,193 $ 2,925 $ 2,498 $ 11,296 Distributable income per common unit $ 0.0787 $ 0.0469 $ 0.0626 $ 0.0534 $ 0.2416 2017 Q1 Q2 Q3 Q4 Total Distributable income $ 3,197 $ 3,523 $ 3,518 $ 3,073 $ 13,311 Distributable income per common unit $ 0.0912 $ 0.1005 $ 0.1003 $ 0.0657 $ 0.3577 Distributable income per subordinated unit (1) $ — $ — $ — $ — $ — (1) 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. On February 5, 2020 , the Trust announced that a cash distribution of $0.0371 per common unit consisting of proceeds attributable to production from September 1, 2019 to November 30, 2019 , to common unitholders of record, as of February 19, 2020 would be paid on March 2, 2020 . See Note 6 to the financial statements contained in Part II, Item 8 of this Annual Report for additional information regarding the distribution paid on March 2, 2020 to record unitholders as of February 19, 2020 . 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 withholds funds to build the cash reserve at any time, without advance notice to the unitholders. 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 will eventually be distributed to unitholders, together with interest earned on the funds. As of December 31, 2019, $317,075 has been withheld to increase cash reserves. The Trustee can authorize the Trust to borrow money to pay Trust expenses that exceed cash held by the Trust. The Trustee may authorize the Trust to borrow from the Trustee as a lender provided the terms of the loan are fair to the Trust unitholders. The Trustee may also deposit funds awaiting distribution in an account with itself, if the interest paid to the Trust at least equals amounts paid by the Trustee on similar deposits, and make other short-term investments with the funds distributed to the Trust. The Trustee may also hold funds awaiting distribution in a non-interest bearing account. Pursuant to the Trust Agreement, if at any time the Trust’s cash on hand (including cash reserves) is not sufficient to pay the Trust’s ordinary course expenses as they become due, Chesapeake will loan funds to the Trust necessary to pay such expenses. Any funds loaned by Chesapeake pursuant to this commitment will be limited to the payment of current accounts payable or other obligations to trade creditors in connection with obtaining goods or services or the payment of other current liabilities arising in the ordinary course of the Trust’s business, and may not be used to satisfy Trust indebtedness for borrowed money of the Trust. 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 $275,000 to the Trust necessary to pay such expenses and agreed to permit the Trust to continue making distributions while the loan was outstanding. The Trust repaid the loan in the second quarter of 2019. As of December 31, 2019 and December 31, 2018 , there were no loans outstanding. Off-Balance Sheet Arrangements The Trust has no off-balance sheet arrangements. The Trust has not guaranteed the debt of any other party, nor does the Trust have any other arrangements or relationships with other entities that could potentially result in unconsolidated debt, losses or contingent obligations. 39 Contractual Obligations As of December 31, 2019 , the Trust had no obligations or commitments to make future contractual payments other than the Trustee administrative fee, administrative services fee and the Delaware Trustee administrative fee payable to the Trustee, Chesapeake and the Delaware Trustee, respectively. The table below summarizes the Trust's contractual obligations as of December 31, 2019. Total Less than 1 Year 1-3 Years 3-5 Years More than 5 Years ($ in thousands) Contractual Obligations: Trustee administrative fee $ 2,138 $ 186 $ 372 $ 372 $ 1,208 Chesapeake administrative fee 2,300 200 400 400 1,300 Delaware Trustee administrative fee 26 2 5 5 14 Total contractual obligations $ 4,464 $ 388 $ 777 $ 777 $ 2,522 The Trust is obligated to make quarterly cash distributions of substantially all of its cash receipts, after deducting the Trust's expenses, approximately 60 days following the completion of each calendar quarter through, and including, the quarter ending June 30, 2031. Critical Accounting Policies and Estimates Basis of Accounting . Financial statements of the Trust differ from financial statements prepared in accordance with GAAP as the Trust records revenues when received and expenses when paid and may also establish certain cash reserves for contingencies that would not be accrued in financial statements prepared in accordance with GAAP. 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. The Trust's financial statements for all periods presented have been prepared by the Trust in accordance with the accounting policies noted below. Investment in Royalty Interests . The conveyance of the Royalty Interests to the Trust was accounted for as a transfer of properties between entities under common control and recorded at the historical cost of Chesapeake (“Investment in Royalty Interests”), which was based on an allocation of the historical net book value of Chesapeake's full cost pool according to the fair value of the Royalty Interests relative to the fair value of Chesapeake's proved reserves. The carrying value of the Trust's Investment in Royalty Interests will not necessarily be indicative of the fair value of such Royalty Interests. This investment is amortized as a single cost center on a units-of-production basis over total proved reserves. Such amortization does not reduce distributable income, rather it is charged directly to Trust corpus. Revisions to estimated future units-of-production are treated on a prospective basis beginning on the date significant revisions are known. On a quarterly basis, the Trust evaluates the carrying value of the Investment in Royalty Interests under the full cost accounting method prescribed by the SEC. This quarterly review is referred to as a ceiling test. Under the ceiling test, the carrying value of the Investment in Royalty Interests may not exceed an amount equal to the PV-10 for the Trust's proved reserves. Any write-downs resulting from the ceiling test will be non-cash charges to Trust corpus and will not affect distributable income. Use of Estimates. The preparation of financial statements requires the Trust to make estimates and assumptions that affect the reported amounts of assets, liabilities and Trust corpus during the reporting period. Significant estimates that impact the Trust's financial statements include estimates of proved oil, natural gas and NGL reserves, which are used to compute the Trust's amortization of Investment in Royalty Interests and, as necessary, to evaluate potential impairment of Investment in Royalty Interests. Actual results could differ from those estimates. Revenues and Expenses. Revenues received by the Trust are net of existing royalties and overriding royalties associated with Chesapeake's interests and are reduced by certain post-production expenses, production taxes and other allowable expenses, such as the Trust's administrative expenses, in order to determine distributable income. The Royalty Interests are not burdened by field and lease operating expenses.