What changed in this filing

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Item 1. Financial Statements

2020-08-14 compared with 2020-05-14 · 137 added, 102 removed, 270 unchanged (47% of the section changed)

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STATEMENTS OF ASSETS AND TRUST CORPUS

March 31, 2020

June 30, 2020

December 31, 2019

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Trust corpus;

46,750,000 common units issued and outstanding at March 31, 2020 and December 31, 2019

46,750,000 common units issued and outstanding

Total Trust corpus

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Three Months Ended

Six Months Ended

($ in thousands, except unit and per unit data)

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Three Months Ended

Six Months Ended

($ in thousands)

3 unchanged sentences

Amortization of Investment in Royalty Interests

Impairment of Investment in Royalty Interests

Distributable income available to unitholders

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The delisting was effective 10 days after the Form 25 was filed.

The deregistration of the Trust’s common units under Section 12(b) of the Exchange Act will become effective 90 days after the filing date of the Form 25.

The deregistration of the Trust’s common units under Section 12(b) of the Exchange Act became effective on June 16, 2020.

The OTC Pink is a significantly more limited market than the NYSE, and the quotation of the Trust's common units on the OTC Pink may result in a reduction in demand for and the market price of the Trust's common units, and could diminish interest in the Trust from investors, analysts and other market participants.

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Basis of Accounting .

The accompanying Statement of Assets and Trust Corpus as of March 31, 2020 and December 31, 2019 and the unaudited interim financial statements of the Trust as of and for the three months ended March 31, 2020 and 2019 have been presented in accordance with the rules and regulations of the SEC and include all adjustments which are, in the opinion of the Trustee, necessary to fairly state the Trust's financial position and results of operations for the periods presented.

The accompanying Statement of Assets and Trust Corpus as of June 30, 2020 and December 31, 2019 and the unaudited interim financial statements of the Trust as of and for the three and six months ended June 30, 2020 (the “Current Quarter” and the “Current Period”, respectively) and the three and six months ended June 30, 2019 (the “Prior Quarter” and the “Prior Period”, respectively) have been presented in accordance with the rules and regulations of the SEC and include all adjustments which are, in the opinion of the Trustee, necessary to fairly state the Trust's financial position and results of operations for the periods presented.

The accompanying unaudited interim financial statements should be read in conjunction with the December 31, 2019 audited financial statements and notes of the Trust, included in the Trust’s Annual Report on Form 10-K for the year ended December 31, 2019 .

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Risks and Uncertainties.

On March 11, 2020, the World Health Organization declared the ongoing coronavirus (COVID-19) outbreak a pandemic and recommended containment and mitigation measures worldwide.

The global spread of coronavirus (COVID-19) created significant volatility, uncertainty, and economic disruption during the first six months of 2020.

The pandemic has reached more than 200 countries and territories and has resulted in widespread adverse impacts on the global economy and on Chesapeake’s customers and other parties with whom it has business relations.

State and local authorities have also implemented multi-step policies with the goal of re-opening.

However, certain jurisdictions began re-opening only to return to restrictions in the face of increases in new COVID-19 cases.

To date, Chesapeake has experienced limited operational impacts as a result of the restrictions from working remotely or COVID-19 directly.

As an essential business under the guidelines issued by each of the states in which it operates, Chesapeake has been allowed to continue operations, although for the health and safety of its employees Chesapeake chose to have its non-essential personnel work remotely.

As a result, since mid-March, Chesapeake has restricted access to all of its offices and has directed employees to work remotely to the extent possible.

Those employees who are unable to work remotely are being closely monitored and are taking safety precautions to minimize the risk of exposure.

These restrictions have allowed Chesapeake to maintain the engagement and connectivity of its personnel, as well as minimize the number of employees required in the office and field.

However, the impact of the pandemic, including a resulting reduction in global demand for oil and, to a lesser extent, natural gas, coupled with a sharp decline in oil prices following the announcement of price reductions and production increases in March 2020 by members of OPEC+ has led to significant global economic contraction generally and in our industry in particular.

While an agreement to cut production has since been announced by OPEC+ and its allies, the situation, coupled with the impact of COVID-19, has continued to result in a significant downturn in the oil

As an essential business under the guidelines issued by each of the states in which it operates, Chesapeake has been allowed to continue operations.

As a result, since mid-March, Chesapeake has restricted access to all of its offices and for a period of time directed employees to work remotely to the extent possible.

Chesapeake began to re-open its offices in phases beginning mid-May and special precautions have been implemented to minimize the risk of exposure.

These actions have allowed Chesapeake to maintain the engagement and connectivity of its personnel.

However, due to the severe impacts from the global COVID-19 pandemic on the global demand for oil and natural gas, financial results may not necessarily be indicative of operating results for the entire year.

Moreover, future operations could be negatively affected if a significant number of Chesapeake employees are quarantined as a result of exposure to the virus.

CHESAPEAKE GRANITE WASH TRUST

NOTES TO FINANCIAL STATEMENTS - (Continued)

and gas industry.

Oil prices declined sharply in April 2020 and remain volatile.

Oil and natural gas prices are expected to continue to be volatile as a result of the near term production increases and the ongoing COVID-19 outbreak and as changes in oil and natural gas inventories, industry demand and national and economic performance are reported.

There is considerable uncertainty regarding the extent to which COVID-19 will continue to spread and the extent and duration of governmental and other measures implemented to try to slow the spread of the virus, such as large-scale travel bans and restrictions, border closures, quarantines, shelter-in-place orders and business and government shutdowns.

One of the largest impacts of the pandemic has been a significant reduction in global demand for oil and, to a lesser extent, natural gas.

This significant decline in demand has been met with a sharp decline in oil prices following the announcement of price reductions and production increases in March 2020 by members of the Organization of Petroleum Exporting Countries (OPEC+) and other foreign, oil exporting countries.

Further, in April 2020, OPEC+ finalized an agreement to cut oil production by 9.7 million barrels per day during May and June 2020.

On June 6, 2020, OPEC+ agreed to extend such production cuts until the end of July 2020.

However, prices in the oil and gas market have remained depressed, as the oversupply and lack of demand in the market persist.

Oil and natural gas prices are expected to continue to be volatile as a result of the near-term production instability and the ongoing COVID-19 outbreak and as changes in oil and natural gas inventories, industry demand and global and national economic performance are reported.

The Trust's reserves and quarterly cash distributions depend primarily upon the prices realized by Chesapeake from the sales of oil, natural gas and NGL.

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Moreover, future operations of Chesapeake could be negatively affected if a significant number of its employees are quarantined as a result of exposure to the virus, which in turn could negatively affect proceeds to the Trust and the Trust’s reserves and quarterly cash distributions to unitholders.

For additional discussion regarding risks associated with the COVID-19 pandemic, see Item 1A of Part II “Risk Factors” and Item 2 of Part I “Trustee’s Discussion and Analysis of Financial Condition and Results of Operations” in this Quarterly Report.

The Trust's revenues and distributable income available to unitholders have been adversely affected to date in 2020 and throughout 2019 due to natural declines in production and depressed commodity prices as a result of COVID-19 and the OPEC+ decisions discussed in the Quarterly Report.

The Trust's revenues and distributable income available to unitholders have been adversely affected to date in 2020 due to natural declines in production and depressed commodity prices as a result of COVID-19 and the OPEC+ decisions discussed above.

The Trust expects production to continue to decline and expects distributable income to continue to be adversely affected.

On May 5, 2020 , the Trust declared a cash distribution of $0.0291 per common unit (the "May 2020 Distribution"), consisting of proceeds attributable to production from December 1, 2019 to February 29, 2020 .

The distribution will be paid on June 1, 2020 to common unitholders of record as of May 20, 2020 .

See Note 5 for information regarding prior distributions paid and Note 6 for information on the May 2020 Distribution.

On August 5, 2020 , the Trust declared a cash distribution of $0.0053 per common unit (the "August 2020 Distribution"), consisting of proceeds attributable to production from March 1, 2020 to May 31, 2020 .

The distribution will be paid on August 31, 2020 to common unitholders of record as of August 19, 2020 .

See Note 5 for information regarding prior distributions paid and Note 6 for information on the August 2020 Distribution.

Chesapeake's ability to perform its obligations to the Trust depends on its future results of operations, financial condition and liquidity, which in turn 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.

In the event of a bankruptcy of Chesapeake or the wholly-owned subsidiaries of Chesapeake that conveyed the Royalty Interests to the Trust, the Trust could lose the value of all of the Royalty Interests if a bankruptcy court were to hold that the Royalty Interests constitute an asset of the bankruptcy estate.

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

In May 2020, Chesapeake disclosed that, if depressed commodity prices persist, combined with the scheduled reductions in the leverage ratio covenant and an expected significant reduction in Chesapeake's borrowing base in its scheduled determination, its liquidity and ability to comply with the leverage ratio covenant under its revolving credit facility during the next 12 months will be adversely affected, which raises substantial doubt about its ability to continue as a going concern.

Based on Chesapeake’s current forecast, it does not expect to be in compliance with its financial covenants beginning in the fourth quarter of 2020.

Failure to comply with these covenants, if not waived, would result in an event of default under Chesapeake’s revolving credit facility, the potential acceleration of outstanding debt thereunder and the potential foreclosure on the collateral securing such debt, and could cause a cross-default under its other outstanding indebtedness.

As a result, Chesapeake is evaluatng a number of strategic alternatives, which may include, but not be limited to, seeking a restructuring, amendment or refinancing of existing debt through a private restructuring or reorganization under Chapter 11 of the Bankruptcy Code.

However, there can be no assurances that Chesapeake will be able to successfully restructure its indebtedness, improve its financial position or complete any strategic transactions.

On June 28, 2020, Chesapeake and certain of its subsidiaries (collectively, the “Debtors”) filed voluntary petitions (the "Chapter 11 Cases") for reorganization (the “Bankruptcy Filing”) under Chapter 11 of Title 11 of the United States Code (the "Bankruptcy Code") in the United States Bankruptcy Court for the Southern District of Texas (the “Bankruptcy Court”).

On June 29, 2020, the Bankruptcy Court entered an order authorizing the joint administration of the Chapter 11 Cases under the caption In re Chesapeake Energy Corporation , Case No.

20-33233 (DRJ).

Subsidiaries with noncontrolling interests, consolidated variable interest entities and certain de minimis subsidiaries (collectively, the “Non-Filing Entities”) were not part of the Bankruptcy Filing.

The Non-Filing Entities and the Trust will continue to operate in the ordinary course of business.

The Debtors continue to operate the business as “debtors-in-possession” under the jurisdiction of the Bankruptcy Court and in accordance with the applicable provisions of the Bankruptcy Code and orders of the Bankruptcy Court.

Chesapeake’s ability to continue as a going concern is contingent on its ability to comply with the financial and other covenants set forth in the senior secured super-priority debtor-in-possession revolving credit facility provided to the Debtors by certain lenders (the “DIP Credit Facility”), the Bankruptcy Court’s approval of Chesapeake’s plan of reorganization (the “Plan”) and Chesapeake’s ability to successfully implement the Plan and obtain exit financing, among other factors.

As a result of the Bankruptcy Filing, the realization of assets and the satisfaction of liabilities are subject to uncertainty.

While operating as debtors-in-possession under Chapter 11, Chesapeake may sell or otherwise dispose of or liquidate assets or settle liabilities, subject to the approval of the Bankruptcy Court or as otherwise permitted in the ordinary course of business (and subject to restrictions contained in the DIP Credit Facility), for amounts other than those reflected in Chesapeake’s condensed consolidated financial statements.

Further, the Plan could materially change the amounts and classifications of assets and liabilities reported in Chesapeake’s condensed consolidated financial statements.

CHESAPEAKE GRANITE WASH TRUST

NOTES TO FINANCIAL STATEMENTS - (Continued)

The Trust is highly dependent on Chesapeake for multiple services, including the operation of wells, remittance of net proceeds generated by the interests in specified oil and natural gas properties located within the AMI and administrative services performed on behalf of the Trust.

The ability to operate the properties depends on Chesapeake’s future financial condition and economic performance, access to capital, and other factors, many of which are out of the control of Chesapeake.

The factors noted above raise substantial doubt about Chesapeake’s ability to continue as a going concern.

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

In addition, the Trust could lose the value of all of the Royalty Interests if the Bankruptcy Court were to hold that the Royalty Interests constitute an asset of the bankruptcy estate.

Cash and Cash Equivalents .

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Revisions to estimated future units-of-production are treated on a prospective basis beginning on the date such revisions are known.

The carrying value of the Trust’s Investment in Royalty Interests

CHESAPEAKE GRANITE WASH TRUST

NOTES TO FINANCIAL STATEMENTS - (Continued)

will not necessarily be indicative of the fair value of such Royalty Interests.

The carrying value of the Trust’s Investment in Royalty Interests will not necessarily be indicative of the fair value of such Royalty Interests.

The Trust is not burdened by development costs of the Royalty Interests.

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Under the ceiling test, the carrying value of the Investment in Royalty Interests may not exceed an amount equal to the sum of the present value (using a 10% discount rate) of the estimated future net revenues from proved reserves.

In the three months ended March 31, 2020 and 2019, the Trust recognized no impairments of the Royalty Interests.

As of June 30, 2020, the carrying amount exceeded the estimated future net revenues from proved reserves resulting in the Trust recognizing a $3.05 million impairment of the Royalty Interests in the Current Quarter.

In the three and six months ended June 30, 2019, the Trust recognized no impairments of the Royalty Interests.

Impairments do not impact royalty income or the cash distribution to unitholders.

Loan Commitment .

Pursuant to the Trust Agreement, if at any time the Trust’s cash on hand (including available cash reserves, if any) 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;

provided, however, that this obligation may not be fulfilled during the pendency of Chesapeake’s bankruptcy.

Such loans will be recorded as a liability on the Statements of Assets, Liabilities and Trust Corpus until repaid.

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

There were no loans outstanding as of March 31, 2020 and December 31, 2019.

There were no loans outstanding as of June 30, 2020 and December 31, 2019.

Revenues and Expenses.

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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 2.1% in 2017, 2.1% in 2018, and an additional 1.9% in 2019 to the current amount of $185,893.

To date, the Trustee's annual administrative fees have been adjusted upward by a total of 8.7% from the original fee including 2019 and 2020 increases of 1.9% and 2.3%, respectively, to the current annual amount of $190,169.

CHESAPEAKE GRANITE WASH TRUST

NOTES TO FINANCIAL STATEMENTS - (Continued)

Agreements with Chesapeake.

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Chesapeake is also entitled to receive reimbursement for its actual out-of-pocket fees, costs and expenses incurred in connection with the provision of any of the services under the administrative services agreement.

CHESAPEAKE GRANITE WASH TRUST

NOTES TO FINANCIAL STATEMENTS - (Continued)

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 transferred by Chesapeake to a third party, 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.

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 transferred by Chesapeake to a third party, 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.

The Trust also entered into a registration rights agreement for the benefit of Chesapeake and certain of its affiliates (each, a “holder”).

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provided, however, that this obligation may not be fulfilled during the pendency of Chesapeake’s bankruptcy.

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

There were no loans outstanding as of March 31, 2020 and December 31, 2019.

There were no loans outstanding as of June 30, 2020 and December 31, 2019.

CHESAPEAKE GRANITE WASH TRUST

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The Trust makes quarterly cash distributions of substantially all of its cash receipts, after deducting the Trust’s expenses, approximately 60 days following the completion of each quarter through (and including) the quarter ending June 30, 2031.

For the three months ended March 31, 2020 and 2019, the Trust declared and paid the following cash distributions:

For the six months ended June 30, 2020 and 2019, the Trust declared and paid the following cash distributions:

Production Period

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March 2, 2020

December 2019 - February 2020

September 2018 - November 2018

March 1, 2019

CHESAPEAKE GRANITE WASH TRUST

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December 2018 - February 2019

Subsequent Events

The Trust's quarterly income available for distribution was $0.0291 per common unit for the production period from December 1, 2019 to February 29, 2020 .

On May 5, 2020 , the Trust declared the May 2020 Distribution attributable to such production period.

The distribution will be paid on June 1, 2020 to common unitholders of record as of May 20, 2020 .

The Trust's quarterly income available for distribution was $0.0053 per common unit for the production period from March 1, 2020 to May 31, 2020 .

On August 5, 2020 , the Trust declared the August 2020 Distribution attributable to such production period.

The distribution will be paid on August 31, 2020 to common unitholders of record as of August 19, 2020 .

All Trust unitholders share on a pro rata basis in the Trust's distributable income.

Distributable income attributable to production from December 1, 2019 to February 29, 2020 was calculated as follows (in thousands, except for unit and per unit amounts):

Distributable income attributable to production from March 1, 2020 to May 31, 2020 was calculated as follows (in thousands, except for unit and per unit amounts):

Royalty income (a)

Production taxes (b)

Trust administrative expenses (c)

Production taxes

Trust administrative expenses (b)

Total expenses

Cash withheld to increase cash reserves (d)

Cash withheld to increase cash reserves (c)

Distributable income available to common unitholders

Distributable income per common unit (e)

Distributable income per common unit (d)

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Net of certain post-production expenses.

Includes $119,010 of production taxes for current production offset by ($72,832) of prior period adjustments primarily related to tax refunds on taxes paid from 2010 to 2017.

Royalty income decreased $1,411,000 in the production period from March 1, 2020 to May 31, 2020 (Subsequent Production Quarter) compared to the production period from December 1, 2019 to February 29, 2020 (Current Production Quarter) primarily due to a decrease in the average realized price per boe, resulting in a $903,000 decrease in the Subsequent Production Quarter compared to the Current Production Quarter and a 40 mboe decrease in sales volumes of oil, natural gas and NGL, resulting in a $508,000 decrease in the Subsequent Production Quarter compared to the Current Production Quarter.

Royalty income is net of certain post-production expenses.

Includes the cash advance for administrative expenses.

Commencing with the distribution to unitholders payable in first quarter 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.

Commencing with the distribution to unitholders payable in the first quarter 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.

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.

Calculation of distributable income per common unit is based on 46,750,000 common units issued and outstanding as of May 4, 2020 .

Any cash reserved in excess of the amount necessary to pay or provide for the payment of future

CHESAPEAKE GRANITE WASH TRUST

NOTES TO FINANCIAL STATEMENTS - (Continued)

known, anticipated or contingent expenses or liabilities eventually will be distributed to unitholders, together with interest earned on the funds.

Calculation of distributable income per common unit is based on 46,750,000 common units issued and outstanding as of August 14, 2020 .

Trustee's Discussion and Analysis of Financial Condition and Results of Operations

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COVID-19 Pandemic and Impact on Global Demand for Oil and Natural Gas

On March 11, 2020, the World Health Organization declared the ongoing coronavirus (COVID-19) outbreak a pandemic and recommended containment and mitigation measures worldwide.

The global spread of coronavirus (COVID-19) created significant volatility, uncertainty, and economic disruption during the first six months of 2020.

To date, Chesapeake has experienced limited operational impacts as a result of the work from home restrictions or COVID-19 directly.

As a result, since mid-March, Chesapeake has restricted access to all of its offices and has directed employees to work remotely to the extent possible.

Those employees who are unable to work from home are being closely monitored and are taking precautions to minimize the risk of exposure.

These restrictions have allowed Chesapeake to maintain the engagement and connectivity of its personnel, as well as minimize the number of employees required in the office and field.

However, future operations could be negatively affected if a significant number of Chesapeake’s employees are quarantined as a result of exposure to the virus.

State and local authorities have also implemented multi-step policies with the goal of re-opening.

However, certain jurisdictions began re-opening only to return to restrictions in the face of increases in new COVID-19 cases.

To date, Chesapeake has experienced limited operational impacts as a result of the restrictions from working remotely or COVID-19 directly.

As an essential business under the guidelines issued by each of the states in which it operates, Chesapeake has been allowed to continue operations.

As a result, since mid-March, Chesapeake has restricted access to all of its offices and for a period of time directed employees to work remotely to the extent possible.

Chesapeake began to re-open its offices in phases beginning mid-May and special precautions have been implemented to minimize the risk of exposure.

These actions have allowed Chesapeake to maintain the engagement and connectivity of its personnel.

However, due to severe impacts from the global COVID-19 pandemic on the global demand for oil and natural gas, financial results may not necessarily be indicative of operating results for the entire year.

Moreover, future operations could be negatively affected if a significant number of Chesapeake employees are quarantined as a result of exposure to the virus.

One of the largest impacts of the pandemic has been a significant reduction in global demand for oil and, to a lesser extent, natural gas.

This significant decline in demand has been met with a sharp decline in oil prices following the announcement of price reductions and production increases in March 2020 by members of the Organization of Petroleum Exporting Countries, or OPEC+, and other foreign, oil-exporting countries.

Further, in April 2020, OPEC+ finalized an agreement to cut oil production by 9.7 million barrels per day during May and June 2020.

On June 6, 2020, OPEC+ agreed to extend such production cuts until the end of July 2020.

However, prices in the oil and gas market have remained depressed, as the oversupply and lack of demand in the market persist.

The resulting supply/demand imbalance is having disruptive impacts on the oil and natural gas exploration and production industry and on other industries that serve exploration and production companies.

These industry conditions, coupled with those resulting from the COVID-19 pandemic, is expected to lead to significant global economic contraction generally and in our industry in particular.

Oil and natural gas prices have historically been volatile;

however, the volatility in the prices for these commodities has substantially increased as a result of COVID-19 and the OPEC+ decisions mentioned above.

While an agreement to cut production has since been announced by OPEC+ and its allies, the situation, coupled with the impact of COVID-19, has continued to result in a significant downturn in the oil and gas industry.

Oil prices declined sharply in April 2020 and remain volatile.

Strip pricing for natural gas has increased as a result of the oil price war;

however, the impact of these recent developments and our business are unpredictable.

We expect to see continued volatility in oil and natural gas prices for the foreseeable future, and such volatility, combined with the current depressed prices, has impacted and is expected to continue to adversely impact Chesapeake’s business, financial condition and results of operations and proceeds to the Trust and the Trust’s reserves and quarterly cash distributions to unitholders.

A continued low level of demand or prices for oil and natural gas or otherwise would have a continued material adverse effect on Chesapeake’s business, financial condition and results of operations and on proceeds to the Trust and the Trust’s reserves and quarterly cash distributions to unitholders.

I n May 2020, Chesapeake disclosed that, if depressed commodity prices persist, combined with the scheduled reductions in the leverage ratio covenant and an expected significant reduction in Chesapeake’s borrowing base in its scheduled determination, its liquidity and ability to comply with the leverage ratio covenant under its revolving credit facility during the next 12 months will be adversely affected, which raises substantial doubt about its ability to continue as a going concern.

Based on Chesapeake’s current forecast, it does not expect to be in compliance with its financial covenants beginning in the fourth quarter of 2020.

The continued low level of demand and prices for oil and natural gas or otherwise has had and will continue to have a material adverse effect on Chesapeake’s business, financial condition and results of operations and on proceeds to the Trust and the Trust’s reserves and quarterly cash distributions to unitholders.

We cannot predict the full impact that COVID-19 or the significant disruption and volatility currently being experienced in the oil and natural gas markets will have on Chesapeake’s business, cash flows, liquidity, financial condition and results of operations or on proceeds to the Trust and the Trust’s reserves and quarterly cash distributions to unitholders due to numerous uncertainties.

The ultimate impacts will depend on future developments, including, among others, the ultimate geographic spread of the virus, the consequences of governmental and other measures designed to prevent the spread of the virus, the development of effective treatments, the duration of the outbreak, actions taken by members of OPEC+ and other foreign, oil-exporting countries, governmental authorities, Chesapeake’s customers and other thirds parties, workforce availability, and the timing and extent to which normal economic and operating conditions resume.

The ultimate impacts will depend on future developments, including,

among others, the ultimate geographic spread of the virus, the consequences of governmental and other measures designed to prevent the spread of the virus, the development of effective treatments, the duration of the outbreak, actions taken by members of OPEC+ and other foreign, oil-exporting countries, governmental authorities, Chesapeake’s customers and other thirds parties, workforce availability, and the timing and extent to which normal economic and operating conditions resume.

For additional discussion regarding risks associated with the COVID-19 pandemic, see Item 1A “Risk Factors” in this Quarterly Report.

On June 29, 2020, the Bankruptcy Court entered an order authorizing the joint administration of the Chapter 11 Cases under the caption In re Chesapeake Energy Corporation , Case No.

20-33233 (DRJ).

The Non-Filing Entities and the Trust will continue to operate in the ordinary course of business.

The Trust is a statutory trust formed in June 2011 under the Delaware Statutory Trust Act.

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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 complete any well in the Colony Granite Wash formation on acreage included within the AMI for its own account until it had satisfied its drilling obligation to the Trust.

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.

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.

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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 three months ended March 31, 2020 , a distribution was paid on March 2, 2020.

During the six months ended June 30, 2020 , distributions were paid on March 2, 2020 and June 1, 2020.

See Liquidity and Capital Resources below and Note 5 to the financial statements contained in Item 1 of Part I of this Quarterly Report for more information regarding these distributions.

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Chesapeake is required to make the Royalty Interest payments to the Trust within 35 days after the end of each calendar quarter.

During the three months ended March 31, 2020 , the Trust received payments on the Royalty Interests representing royalties attributable to proceeds from sales of oil, natural gas and NGL for September 1, 2019 to November 30, 2019 .

During the six months ended June 30, 2020 , the Trust received payments on the Royalty Interests representing royalties attributable to proceeds from sales of oil, natural gas and NGL for September 1, 2019 to February 29, 2020 .

The Trust's revenues and distributable income available to unitholders were adversely affected throughout 2019 and to date in 2020 by natural declines in production and depressed commodity prices including, with respect to the Current Quarter, as a result of COVID-19 and the OPEC+ decisions discussed in this Quarterly Report.

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The Trust's Investment in Royalty Interests is subject to a quarterly full cost ceiling test.

In the three months ended March 31, 2020 and 2019, the Trust recognized no impairments of the Royalty Interests.

In the Current Quarter, the Trust recognized a $3.05 million impairment of the Royalty Interests as a result of lower commodity prices.

In the three and six months ended 2019, the Trust recognized no impairments of the Royalty Interests.

See Investment in Royalty Interests in Note 2 to the financial statements contained in Item 1 of Part I of this Quarterly Report and Trust Operations for further discussion.

Distributable Income

Three Months Ended March 31,

Three Months Ended

Six Months Ended

($ in thousands, except per unit data)

2 unchanged sentences

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The $1,219,000 decrease in distributable income during the current quarter was primarily due to a decrease in sales volumes of oil, natural gas and NGL and the average realized price per boe in the production period from September 1, 2019 to November 30, 2019 (current production quarter) as compared to the production period from September 1, 2018 to November 30, 2018 (prior production quarter).

The $56,000 decrease in distributable income during the current quarter was primarily due to a decrease in sales volumes of oil, natural gas and NGL and the average realized price per boe in the production period from December 1, 2019 to February 29, 2020 (Current Production Quarter) as compared to the production period from December 1, 2018 to February 28, 2019 (Prior Production Quarter) resulting in a $721,000 decrease in distributable income in the Current Production Quarter compared to the Prior Production Quarter.

This decrease was partially offset by a $530,000 decrease in administrative expenses and a $136,000 decrease in production taxes in the Current Production Quarter compared to the Prior Production Quarter.

The $1,275,000 decrease in distributable income during the current period was primarily due to a decrease in sales volumes of oil, natural gas and NGL and the average realized price per boe in the production period from September 1, 2019 to February 29, 2020 (Current Production Period) as compared to the production period from September 1, 2018 to February 28, 2019 (Prior Production Period) resulting in a $2,068,000 decrease in distributable income in the Current Production Period compared to the Prior Production Period.

This decrease was partially offset by a $216,000 decrease in administrative expenses and a $541,000 decrease in production taxes in the Current Production Period compared to the Prior Production Period.

Royalty Income

Three Months Ended March 31,

Three Months Ended

Six Months Ended

($ in thousands, except per unit data)

13 unchanged sentences

The decrease in the average price received per barrel of oil equivalent (boe) in the Current Production Quarter compared to the Prior Production Quarter resulted in a decrease of approximately $484,000 in royalty income.

Additionally, lower sales volumes in the current production quarter decreased royalty income by approximately $594,000 , for a total decrease in royalty income of approximately $1,347,000 .

Additionally, lower sales volumes in the Current Production Quarter decreased royalty income by approximately $238,000 , for a total decrease in royalty income of approximately $722,000 in the Current Production Quarter compared to the Prior Production Quarter.

The 15 mboe decrease in total sales attributable to the Royalty Interests for the Current Production Quarter compared to the Prior Production Quarter is primarily due to natural declines in production from the Producing Wells and Development Wells.

The decrease in the average price received per barrel of oil equivalent (boe) in the Current Production Period compared to the Prior Production Period resulted in a decrease of approximately $1,250,000 in royalty income.

Additionally, lower sales volumes in the Current Production Period decreased royalty income by approximately $819,000 , for a total decrease in royalty income of approximately $2,069,000 in the Current Production Period compared to the Prior Production Period.

The 47 mboe decrease in total sales attributable to the Royalty Interests for the Current Production Period compared to the Prior Production Period is primarily due to natural declines in production and shut-in wells from the Producing Wells and Development Wells.

Production Taxes

Three Months Ended March 31,

Three Months Ended

Six Months Ended

($ in thousands, except per unit data)

2 unchanged sentences

Production taxes are calculated as a percentage of oil, natural gas and NGL revenues, net of any applicable tax credits.

The decrease in production taxes in the current quarter is primarily due to a decrease in volumes produced and tax refunds received in the current quarter related to taxes paid from 2010 to 2017.

The decrease in production taxes in the Current Quarter is primarily due to the tax refunds received in the Current Quarter related to taxes paid from 2010 to 2017.

The decrease in production taxes in the Current Period is primarily due to a decrease in volumes produced and tax refunds received in the Current Period related to taxes paid from 2010 to 2017.

Trust Administrative Expenses

Three Months Ended March 31,

Three Months Ended

Six Months Ended

($ in thousands, except per unit data)

1 unchanged sentence

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Including cash advance for administrative expenses.

Includes cash advances for administrative expenses.

Trust administrative expenses primarily consist of the administrative fees paid to the Trustees and Chesapeake as well as costs for accounting and legal services.

The increase in expenses in the current quarter is primarily due to the timing of cash advances and increases audit fees incurred.

The decrease in expenses in the Current Quarter and Current Period is primarily due to the timing and amount of cash advances.

Liquidity and Capital Resources

12 unchanged sentences

The 2020 first quarter distribution of $0.0371 per common unit, consisting of proceeds attributable to production from September 1, 2019 through November 30, 2019 , was made on March 2, 2020 to record unitholders as of February 19, 2020.

The Trust's quarterly income available for distribution was $0.0291 per common unit consisting of proceeds attributable to production from December 1, 2019 to February 29, 2020 .

On May 5, 2020 , the Trust declared the May 2020 Distribution , attributable to such production period.

The distribution will be paid on June 1, 2020 to common unitholders of record as of May 20, 2020 .

The 2020 second quarter distribution of $0.0291 per common unit, consisting of proceeds attributable to production from December 1, 2019 through February 29, 2020 , was made on June 1, 2020 to record unitholders as of May 20, 2020.

The Trust's quarterly income available for distribution was $0.0053 per common unit consisting of proceeds attributable to production from March 1, 2020 to May 31, 2020 .

On August 5, 2020 , the Trust declared the August 2020 Distribution , attributable to such production period.

The distribution will be paid on August 31, 2020 to common unitholders of record as of August 19, 2020 .

All Trust unitholders share on a pro rata basis in the Trust's distributable income.

Distributable income attributable to production from December 1, 2019 to February 29, 2020 was calculated as follows (in thousands, except for unit and per unit amounts):

Distributable income attributable to production from March 1, 2020 to May 31, 2020 was calculated as follows (in thousands, except for unit and per unit amounts):

Royalty income (a)

Production taxes (b)

Trust administrative expenses (c)

Production taxes

Trust administrative expenses (b)

Total expenses

Cash withheld to increase cash reserves (d)

Cash withheld to increase cash reserves (c)

Distributable income available to common unitholders

Distributable income per common unit (e)

Distributable income per common unit (d)

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Net of certain post-production expenses.

Includes $119,010 of production taxes for current production offset by ($72,832) of prior period adjustments primarily related to tax refunds on taxes paid from 2010 to 2017.

Includes the cash advance for administrative expenses.

1 unchanged sentence

As of March 31, 2020, $387,075 has been withheld to increase cash reserves.

Calculation of distributable income per common unit is based on 46,750,000 commons units issued and outstanding as of May 4, 2020 .

As of June 30, 2020, $457,075 has been withheld to increase cash reserves.

Calculation of distributable income per common unit is based on 46,750,000 commons units issued and outstanding as of August 14, 2020 .

The Trustee can authorize the Trust to borrow money to pay Trust expenses that exceed cash held by the Trust.

5 unchanged sentences

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

There were no loans outstanding as of March 31, 2020 and December 31, 2019.

There were no loans outstanding as of June 30, 2020 and December 31, 2019.

Off-Balance Sheet Arrangements

5 unchanged sentences

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-Q

Item 1. Financial Statements