Chesapeake raises $6.4 billion with complex financing plan

One of Chesapeake's most controversial finance structures is the Volumetric production payment, or VPP.
by Adam Wilmoth Published: May 13, 2012
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Clouse and Argus Research analyst Philip Weiss have said Chesapeake should count the proceeds from the VPPs as unearned revenue — a liability on the company's balance sheet — until the fuel is delivered.

Clouse compared the transaction to consumers who pay their cable bill a month in advance. The cable company treats that payment as a liability until the cable service is delivered. Clouse said that in the same way, Chesapeake should list the revenue received from the future sale of natural gas in a VPP as a liability until the commodity is delivered.

In his April 20 Argus report, Weise said he does not consider Chesapeake's VPPs when calculating its financial strength.

“In our view, VPPs are similar to loans. The only difference is that repayment is in the form of future hydrocarbon volumes rather than cash,” the report stated.

Bullock, however, said Chesapeake is accounting for the VPPs properly.

“I have always thought of it as a non-operating asset, somewhat like a royalty payment system,” he said. “Because you have sold in effect a portion of that well to somebody else, then you don't book it as part of your operating earnings. Therefore, that portion of the production is not considered an operating asset on your balance sheet either.”

The Wall Street Journal reported last week that Chesapeake's 10 existing VPPs will cost the company $1.4 billion over the next decade in costs associated with the wells included in the plan.

The Journal said Chesapeake had not publicly disclosed the full cost, but research firm Bernstein Research on Friday defended the Oklahoma City company.

“We do not believe these quoted amounts were ‘previously unreported,' and, in fact, we already include an estimate of the costs in our models,” the Bernstein report stated. “These costs are already reflected in (Chesapeake's) guidance.”

Because the $1.4 billion cost is included in the company's income and cash flow estimates, counting it as a liability “is double-counting in our view,” the statement continued.

CONTRIBUTING:

PAUL MONIES, BUSINESS WRITER

by Adam Wilmoth
Energy Editor
Adam Wilmoth returned to The Oklahoman as energy editor in 2012 after working for four years in public relations. He previously spent seven years as a business reporter at The Oklahoman, including five years covering the state's energy sector....
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