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Chapter 11 was Chesapeake Energy's only option, company tells bankruptcy court

Chesapeake Energy Corp.'s yearslong effort to clean up its balance sheet could not keep up with commodity price shocks and billions of dollars in debt, CFO Domenic Dell'Osso told a bankruptcy court.

About eight months after Chesapeake warned it was in danger of violating its credit agreements, the shale gas producer filed for Chapter 11 bankruptcy protection June 28 after exhausting a long list of debt and equity vehicles for deleveraging and improving profitability.

According to the first-day declaration Dell'Osso filed as part of the Chapter 11 case, Chesapeake began "comprehensive restructuring negotiations" with major creditors in late March, and by May, it was weighing two proposals as the COVID-19 pandemic destroyed demand for hydrocarbons. Even though the company had abandoned the "grow at any cost" culture when Doug Lawler replaced founder Aubrey McClendon as CEO in 2013, Chesapeake "requires a comprehensive deleveraging transaction to position the business for profitability in the current commodity price environment," Dell'Osso said. (U.S. Bankruptcy Court for the Southern District of Texas, Houston Division, docket 20-33233 (DRJ))

Chesapeake will reorganize under the restructuring support agreement to eliminate about $7 billion of debt with all of its lenders under its revolving credit facility and with holders of approximately 87% of the obligations under its term loan agreement, approximately 60% of its senior secured second-lien notes due 2025 and approximately 27% of its senior unsecured notes.

The company secured a new-money, $925 million, debtor-in-possession facility from certain of its existing revolving credit lenders. Chesapeake and certain lenders under its revolving credit facility also came to terms on $2.5 billion of exit financing, which consists of a $1.75 billion revolving credit facility and a $750 million term loan. The driller has $1.93 billion outstanding under the pre-petition revolver, inclusive of $74 million in letters of credit, Dell'Osso said.

"The restructuring support agreement delivers significant value to all stakeholders," Dell'Osso said. "This remarkable level of support and investment, achieved in the face of a global pandemic and an unprecedented downturn in the oil and gas industry, will position the debtors for long-term success."

However, the $750 million first-lien last out term loan facility depends on Chesapeake's ability to successfully cancel contracts with midstream providers. The driller has already requested authorization to do so from the U.S. Bankruptcy Court for the Southern District of Texas, Houston Division. Chesapeake specifically asked the court to void natural gas transportation contracts with Energy Transfer LP's ETC Tiger Pipeline LLC and Loews Corp.'s Gulf South Pipeline Co. LP to free up a combined $311 million in cash. About 23% of ETC Tiger's contracted gas transportation capacity is reserved for Chesapeake. Less than 1% of Gulf South's capacity belongs to the producer.

In response to a petition from ETC Tiger, the Federal Energy Regulatory Commission issued a declaratory order June 22 stating that while Chesapeake can move to reject a contract in bankruptcy court without commission approval, this rejection of contracts in bankruptcy does not alter regulatory obligations under FERC jurisdiction, per the Natural Gas Act. Stagecoach Pipeline & Storage Co. LLC, a joint venture between Crestwood Equity Partners LP and Consolidated Edison Inc., has also requested "expedited action so that the commission's authority is clarified prior to, or as soon as possible after the filing of, any bankruptcy proceeding" to protect 15% of its contracted capacity.

Chesapeake moved to counter the pipelines' positions. It told the court June 28 that the 5th U.S. Circuit Court of Appeals "has held that the bankruptcy code does not limit the bankruptcy court's authority to reject contracts that are subject to FERC regulation."

In Chesapeake's case specifically, the firm transportation agreements are "an unnecessary drain on its resources compared to any (theoretical) future benefits," the first-day motion said.