CHESAPEAKE ENERGY CORP

Results of Operations

Year ended December 31, 2023 compared to the year ended December 31, 2022

Below is a discussion of changes in our results of operations for the 2023 Successor Period compared to the 2022 Successor Period.

Natural Gas, Oil and NGL Production and Average Sales Prices

Natural Gas, Oil and NGL Sales

Natural gas, oil and NGL sales in the 2023 Successor Period decreased $6.345 billion compared to the 2022 Successor Period. The decrease in Marcellus and Haynesville of $4.739 billion was primarily due to a decrease in revenues from lower average prices received. Additionally, divestitures in Eagle Ford and Powder River Basin resulted in a decrease of $1.606 billion.

Production Expenses

Production expenses in the 2023 Successor Period decreased $119 million compared to the 2022 Successor Period. The decrease was primarily due to the Eagle Ford and Powder River Basin divestitures, partially offset by an increase of $30 million in Haynesville, primarily due to an increase in saltwater disposal expenses.

Gathering, Processing and Transportation Expenses (“GP&T”)

Gathering, processing and transportation expenses in the 2023 Successor Period decreased $206 million compared to the 2022 Successor Period. The decrease was primarily due to a $208 million decrease due to divestitures in Eagle Ford and Powder River Basin. Additionally, Haynesville decreased $50 million, primarily due to lower rates driven by decreased prices. These decreases were partially offset by a $52 million increase in Marcellus, primarily due to the Marcellus Acquisition in March 2022.

Severance and Ad Valorem Taxes

Severance and ad valorem taxes in the 2023 Successor Period decreased $75 million compared to the 2022 Successor Period. The decrease was primarily due to a $102 million decrease due to the Eagle Ford and Powder River Basin divestitures, partially offset by an increase of $30 million in Haynesville due to legislative action that led to changes in the Haynesville severance and ad valorem tax rates.

See Note 15 of the notes to our consolidated financial statements included in Item 8 of Part II of this report for a complete discussion of our derivative activity.

Marketing Revenues and Expenses

Marketing revenues and expenses decreased in the 2023 Successor Period as a result of decreased natural gas, oil and NGL prices received in our marketing operations. During the 2023 Successor Period, we continued to market production for a portion of the divested Eagle Ford assets pursuant to the transition services agreements.

Exploration Expenses

During the 2023 Successor Period, exploration expense charges of $27 million were primarily the result of $12 million of non-cash impairment charges in unproved properties and $11 million of geological and geophysical expense. During the 2022 Successor Period, exploration expense charges of $23 million were primarily the result of non-cash impairment charges in unproved properties of $8 million, $6 million of charges related to dry hole expense and $6 million of geological and geophysical expense.

General and Administrative Expenses

Total general and administrative expenses, net during the 2023 Successor Period decreased $15 million compared to the 2022 Successor Period, primarily due to a decrease in compensation and other corporate expenses.

Separation and Other Termination Costs

During both the 2023 and 2022 Successor Periods, we recognized $5 million of separation and other termination costs related to one-time termination benefits for certain employees.

Depreciation, Depletion and Amortization

The absolute and per Mcfe decreases in depreciation, depletion and amortization for the 2023 Successor Period compared to the 2022 Successor Period are primarily related to our Eagle Ford divestitures.

Other Operating Expense, Net

During the 2022 Successor Period, we recognized approximately $41 million of costs related to our Marcellus Acquisition, which included integration costs, consulting fees, financial advisory fees, legal fees and change in control expense in accordance with Chief’s existing employment agreements.

Interest Expense

The decrease in total interest expense in the 2023 Successor Period compared to the 2022 Successor Period, was primarily due to lower average debt outstanding during the 2023 Successor Period. Additionally, $12 million of interest expense was recorded during the 2022 Successor Period pertaining to a tax interest assessment.

Other Income

The increase in other income during the 2023 Successor Period compared to the 2022 Successor Period was primarily due to a $28 million increase in interest income, related to our higher average cash balance during the 2023 Successor Period, as well as a $24 million increase in deferred consideration amortization.

Income Tax Expense (Benefit)

We recorded income tax expense of $698 million in the 2023 Successor Period. Of this amount, $270 million is related to current federal and state income taxes, and the remainder is related to deferred federal and state income taxes. We recorded an income tax benefit of $1.3 billion in the 2022 Successor Period. Of the $1.3 billion of income tax benefit recorded in the 2022 Successor Period, $1.4 billion is related to the partial release of the valuation allowance, which is partially offset by $47 million in current federal and state income taxes. See Note 11 of the notes to our consolidated financial statements included in Item 8 of Part II of this report for a discussion of income tax expense (benefit).

Year ended December 31, 2022 compared to the period from February 10, 2021 through December 31, 2021

Below is a discussion of changes in our results of operations for the 2022 Successor Period compared to the 2021 Successor Period. Additionally, information is provided for the 2021 Predecessor Period. However, we are not able to compare the 40 days from January 1, 2021 through February 9, 2021 operating results to any previous periods reported in the consolidated financial statements and do not believe reviewing this period in isolation would be useful in identifying any trend in, or reaching any conclusions regarding, our overall operating performance.

Natural Gas, Oil and NGL Production and Average Sales Prices

Natural Gas, Oil and NGL Sales

Natural gas, oil and NGL sales in the 2022 Successor Period increased $5.49 billion compared to the 2021 Successor Period. The increase was attributable to a $2.343 billion increase in revenues from higher average prices received. Additionally, an increase of $3.147 billion was due to increased volumes in Marcellus and Haynesville, primarily due to the Marcellus Acquisition and the Vine Acquisition, respectively. These increases were partially offset by decreased volumes in Eagle Ford, which was primarily due to a natural decline in production, and the Powder River Basin, following the divestiture of the Powder River Basin assets in March 2022.

Production Expenses

Production expenses in the 2022 Successor Period increased $178 million as compared to the 2021 Successor Period. The increase was primarily due to the Vine Acquisition in November 2021 and the Marcellus Acquisition in March 2022. The increase was partially offset by the divestiture of the Powder River Basin in March 2022.

Gathering, Processing and Transportation Expenses (“GP&T”)

Gathering, processing and transportation expenses in the 2022 Successor Period increased $279 million compared to the 2021 Successor Period. Haynesville increased $195 million primarily due to the Vine Acquisition in November 2021. Marcellus increased $141 million, primarily due to the Marcellus Acquisition in March 2022, partially offset by a decrease of $47 million, primarily due to lower rates. Eagle Ford increased $53 million, primarily due to increased rates with higher commodity prices. Powder River Basin decreased by $63 million, primarily due to the divestiture in March 2022.

Severance and Ad Valorem Taxes

Severance and ad valorem taxes in the 2022 Successor Period increased $84 million as compared to the 2021 Successor Period. Higher commodity prices and increases to the Haynesville statutory severance tax rates in the 2022 Successor Period drove $58 million of the increase, and an additional $46 million increase was the result of the Vine Acquisition and Marcellus Acquisition. These increases were partially offset by a $20 million decrease attributable to the divestiture of the Powder River Basin in March 2022.

See Note 15 of the notes to our consolidated financial statements included in Item 8 of Part II of this report for a complete discussion of our derivative activity.

Marketing Revenues and Expenses

Marketing revenues and expenses increased in the 2022 Successor Period as a result of increased natural gas, oil and NGL prices received in our marketing operation. Additionally, during the 2022 Successor Period, marketing revenues and expenses increased due to increased volumes from the Vine Acquisition and Marcellus Acquisition.

Exploration Expenses

During the 2022 Successor Period, exploration expense charges of $23 million were primarily the result of non-cash impairment charges in unproved properties of $8 million, $6 million of charges related to dry hole expense and $6 million of geological and geophysical expense. We did not have material exploration expenses during the 2021 Successor Period or 2021 Predecessor Period.

General and Administrative Expenses

Total general and administrative expenses, net during the 2022 Successor Period increased $45 million compared to the 2021 Successor Period due to adjustments in employee benefits and increases in transaction-related fees, as well as increases in other corporate expenses.

Separation and Other Termination Costs

During the 2022 Successor Period, 2021 Successor Period and 2021 Predecessor Period, we recognized $5 million, $11 million and $22 million, respectively, of separation and other termination costs related to one-time termination benefits for certain employees.

Depreciation, Depletion and Amortization

The increase in depreciation, depletion and amortization for the 2022 Successor Period compared to the 2021 Successor Period is primarily the result of the Vine Acquisition and Marcellus Acquisition.

Other Operating Expense (Income), Net

During the 2022 Successor Period, we recognized approximately $41 million of costs related to our Marcellus Acquisition, which included integration costs, consulting fees, financial advisory fees, legal fees and change in control expense in accordance with Chief’s existing employment agreements. In the 2021 Successor Period we recognized approximately $59 million of costs related to the Vine Acquisition, which included consulting fees, financial advisory fees and legal fees. Additionally, we recognized approximately $36 million of severance expense as a result of the Vine Acquisition, which included $15 million of cash severance and $21 million of non-cash severance, primarily related to the issuance of New Common Stock for the acceleration of certain Vine restricted stock unit awards. A majority of Vine executives and employees were terminated on the date the Vine Acquisition was completed. These executives and employees were entitled to severance benefits in accordance with existing employment agreements.

Interest Expense

The increase in total interest expense in the 2022 Successor Period compared to the 2021 Successor Period was primarily due to the increase in outstanding debt obligations between periods. In November 2021, we assumed Vine’s $950 million of senior notes as part of the Vine Acquisition, and during the 2022 Successor Period, we had increased borrowings under our various credit agreements, compared to the 2021 Successor Period. During the 2022 Successor Period, borrowings under our credit agreements had an average interest rate of 8.7%. Additionally, $12 million of interest expense was recorded during the 2022 Successor Period pertaining to a tax interest assessment.

Reorganization Items, Net

In the 2021 Predecessor Period, we recorded a net gain of $5.569 billion in reorganization items, net related to the Chapter 11 Cases. See Note 2 and Note 3 of the notes to our consolidated financial statements included in Item 8 of Part II of this report for a discussion of the Chapter 11 Cases and for discussion of adoption of fresh start accounting. We did not have any reorganization items, net for the 2022 Successor Period or the 2021 Successor Period.

Income Tax Expense (Benefit). We recorded an income tax benefit of $1.3 billion in the 2022 Successor Period. In the 2021 Successor and Predecessor Periods, we recorded an income tax benefit of $49 million and $57 million, respectively. Of the $1.3 billion of income tax benefit recorded in the 2022 Successor Period, $1.4 billion is related to the partial release of the valuation allowance, which is partially offset by $47 million in current federal and state income taxes. The income tax benefit recorded in the 2021 Successor Period is related to a $49 million partial release of the valuation allowance maintained against our net deferred tax asset position. The partial release was a consequence of recording a net deferred tax liability of $49 million resulting from the business combination accounting for Vine. The $57 million income tax benefit for the 2021 Predecessor Period consists of the removal of the income tax effects in other comprehensive income related to hedging settlements due to the fair value adjustments made upon emergence from bankruptcy. See Note 11 of the notes to our consolidated financial statements included in Item 8 of Part II of this report for a discussion of income tax expense (benefit).

Critical Accounting Estimates

The preparation of financial statements in accordance with accounting principles generally accepted in the United States require us to make estimates and assumptions. The accounting estimates and assumptions that involve a significant level of estimation uncertainty and have or are reasonably likely to have a material impact on our financial condition or results of operations are discussed below. Our management has discussed each critical accounting estimate with the Audit Committee of our Board of Directors.

Natural Gas and Oil Reserves. Estimates of natural gas and oil reserves and their values, future production rates, future development costs and commodity pricing differentials are the most significant of our estimates. The accuracy of any reserve estimate is a function of the quality of data available and of engineering and geological interpretation and judgment. In addition, estimates of reserves may be revised based on actual production, results of subsequent exploration and development activities, recent commodity prices, operating costs and other factors. These revisions could materially affect our financial statements. The volatility of commodity prices results in increased uncertainty inherent in these estimates and assumptions. Changes in natural gas, oil or NGL prices could result in actual results differing significantly from our estimates. See Supplemental Disclosures About Natural Gas, Oil and NGL Producing Activities included in Item 8 of Part II of this report for further information.

Accounting for Business Combinations. We account for business combinations using the acquisition method, which is the only method permitted under FASB ASC Topic 805 – Business Combinations and involves the use of significant judgment. Under the acquisition method of accounting, a business combination is accounted for at a purchase price based on the fair value of the consideration given. The assets and liabilities acquired are measured at their fair values, and the purchase price is allocated to the assets and liabilities based upon these fair values. The excess, if any, of the consideration given to acquire an entity over the net amounts assigned to its assets acquired and liabilities assumed is recognized as goodwill. The excess, if any, of the fair value of assets acquired and liabilities assumed over the cost of an acquired entity is recognized immediately to earnings as a gain from bargain purchase.

The Company’s principal assets are its natural gas and oil properties, which are accounted for under the successful efforts accounting method. The Company determines the fair value of acquired natural gas and oil properties based on the discounted future net cash flows expected to be generated from these assets. Discounted cash flow models by operating area are prepared using the estimated future revenues and operating costs for all proved developed properties and undeveloped properties comprising the proved and unproved reserves. Significant inputs associated with the calculation of discounted future net cash flows include estimates of (i) recoverable reserves, (ii) production rates, (iii) future operating and development costs, (iv) future commodity prices escalated by an inflationary rate after five years, adjusted for differentials, and (v) a market-based weighted average cost of capital by operating area. The Company utilizes NYMEX strip pricing, adjusted for differentials, to value the reserves. The NYMEX strip pricing inputs used are classified as Level 1 fair value assumptions and all other inputs are classified as Level 3 fair value assumptions. The discount rates utilized are derived using a weighted average cost of capital computation, which includes an estimated cost of debt and equity for market participants with similar geographies and asset development type by operating area.

Income Taxes. Income taxes are accounted for using the asset and liability method as required by GAAP. Deferred tax assets and liabilities arise from temporary differences between the tax basis of assets and liabilities and their reported amounts in the financial statements. Deferred tax assets for tax attributes such as NOL carryforwards and disallowed business interest carryforwards are also recognized. Deferred tax assets represent potential future tax benefits and are reduced by a valuation allowance if it is more likely than not that such benefits will not be realized.

In assessing the need for a valuation allowance or adjustments to existing valuation allowances, one source of evidence is a projection of income exclusive of existing timing differences.

Our judgement regarding the realizability of deferred tax assets is thus partially affected by estimates of future financial condition.

We also routinely assess potential uncertain tax positions and, if required, establish accruals for such positions. Accounting guidance for recognizing and measuring uncertain tax positions requires that a more likely than not threshold condition be met on a tax position, based solely on its technical merits of being sustained, before any benefit of the uncertain tax position can be recognized in the financial statements. If it is more likely than not a tax position will be sustained, we measure and recognize the position following a cumulative probability estimate.

Impairments. Long-lived assets used in operations, including proved gas and oil properties, are assessed for impairment whenever changes in facts and circumstances indicate a possible significant deterioration in future cash flows expected to be generated by an asset group. Individual assets are grouped for impairment purposes based on a judgmental assessment of the lowest level for which there are identifiable cash flows that are largely independent of the cash flows of other groups of assets. If there is an indication the carrying amount of an asset may not be recovered, the asset is assessed by management through an established process in which changes to significant assumptions such as prices, volumes, and future development plans are reviewed. If, upon review, the sum of the undiscounted pre-tax cash flows is less than the carrying value of the asset group, the carrying value is written down to estimated fair value by discounting using a weighted average cost of capital. Because there usually is a lack of quoted market prices for long-lived assets, the fair value of impaired assets is assessed by management using the income approach. Level 3 inputs associated with the calculation of discounted cash flows used in the impairment analysis include our estimate of future natural gas and crude oil prices, production costs, development expenditures, anticipated production of proved reserves and other relevant data. Additionally, we utilize NYMEX strip pricing, adjusted for differentials, to value the reserves.

Reorganization and Fresh Start Accounting. Effective June 28, 2020, as a result of the filing of the Chapter 11 Cases we began accounting and reporting according to FASB ASC Topic 852 – Reorganizations (“ASC 852”), which specifies the accounting and financial reporting requirements for entities reorganizing through Chapter 11 bankruptcy proceedings. These requirements include distinguishing and presenting transactions associated with the reorganization and implementation of the plan of reorganization separately from activities related to ongoing operations of the business. Additionally, upon emergence from the Chapter 11 Cases, ASC 852 required us to allocate our reorganization value to our individual assets based on their estimated fair values, resulting in a new entity for financial reporting purposes. After the Effective Date, the accounting and reporting requirements of ASC 852 are no longer applicable and have no impact on the Successor periods.