UNITED STATES


SECURITIES AND EXCHANGE COMMISSION


Washington, D.C. 20549


FORM 10-Q


[X]    Quarterly Report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934


For the Quarterly Period Ended September 30, 2019


[ ]    Transition Report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934


For the transition period from  to .





Commission File No. 001-35343


Chesapeake Granite Wash Trust


(Exact name of registrant as specified in its charter)


Delaware45-6355635(State or other jurisdiction of incorporation or organization)(I.R.S. Employer Identification No.)The Bank of New York MellonTrust Company, N.A., TrusteeGlobal Corporate Trust601 Travis Street, Floor 16Houston, Texas77002(Address of principal executive offices)(Zip Code)


(512) 236-6555


(Registrant’s telephone number, including area code)


Title of each classTrading symbol(s)Name on each exchange of which registeredCommon UnitsCHKRNew York Stock Exchange


Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes [X] No [ ]


Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).  Yes [X] No [ ]


Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer," “accelerated filer,” “smaller reporting company” and "emerging growth company" in Rule 12b-2 of the Exchange Act.


Large accelerated filer [ ]Accelerated filer [ ]Non-accelerated filer [X]Smaller reporting company [X]Emerging growth company [ ]


If an emerging growth company indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13 (a) of the Exchange Act. [ ]


Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes [ ] No [X]


As of November 4, 2019 , 46,750,000 common units representing beneficial interests in Chesapeake Granite Wash Trust were outstanding.








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CHESAPEAKE GRANITE WASH TRUST


INDEX TO FORM 10-Q FOR THE QUARTER ENDED SEPTEMBER 30, 2019





PART I. FINANCIAL INFORMATIONPageItem 1.Financial Statements (Unaudited):Statements of Assets, Liabilities and Trust Corpus1Statements of Distributable Income2Statements of Changes in Trust Corpus2Notes to Financial Statements3Item 2.Trustee’s Discussion and Analysis of Financial Condition and Results of Operations9Item 3.Quantitative and Qualitative Disclosure About Market Risk14Item 4.Controls and Procedures14PART II. OTHER INFORMATIONItem 1.Legal Proceedings16Item 6.Exhibits17


All references to “we,” “us,” “our,” or the “Trust” refer to Chesapeake Granite Wash Trust. The royalty interests conveyed on November 16, 2011 by Chesapeake from its interests in certain properties in the Colony Granite Wash formation in Oklahoma and held by the Trust are referred to as the “Royalty Interests.” References to “Chesapeake” refer to Chesapeake Energy Corporation and, where the context requires, its subsidiaries.





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DISCLOSURES REGARDING FORWARD-LOOKING STATEMENTS


This Quarterly Report on Form 10-Q (“Quarterly Report”) includes “forward-looking statements” about the Trust and Chesapeake and other matters discussed herein that are subject to risks and uncertainties that are intended to qualify for the safe harbor from liability established by the Private Securities Litigation Reform Act of 1995 and Section 21E of the Securities Exchange Act of 1934, as amended (the "Exchange Act"). All statements other than statements of historical fact included in this document, including, without limitation, statements under “Trustee’s Discussion and Analysis of Financial Condition and Results of Operations” in Item 2 of Part I and elsewhere herein regarding the proved oil, natural gas and natural gas liquids ("NGL") reserves associated with the properties underlying the Royalty Interests, the Trust’s or Chesapeake’s future financial position, business strategy, budgets, projected costs and plans and objectives for future operations, information regarding target distributions, statements pertaining to future development activities and costs, information regarding production and reserve growth and future compliance with the listing requirements of the New York Stock Exchange (the "NYSE"), are forward-looking statements. Actual outcomes and results may differ materially from those projected. Our forward-looking statements are generally accompanied by words such as “estimate,” “project,” “predict,” “believe,” “expect,” “anticipate,” “potential,” “could,” “may,” “foresee,” “seek,”  “plan,” “goal,” “assume,” “target,” “should,” “intend,” “ability,” “will,” “would,” “forecast” or other words that convey the uncertainty of future events or outcomes. These statements are based on certain assumptions made by the Trust, and by Chesapeake, in light of its experience and perception of historical trends, current conditions and expected future developments, as well as other factors we believe are appropriate under the circumstances. However, whether actual results and developments will conform with such expectations and predictions is subject to a number of risks and uncertainties, including the risk factors discussed in Item 1A of Part I of the Trust’s Annual Report on Form 10-K for the year ended December 31, 2018 (the "2018 Form 10-K") and those set forth from time to time in the Trust’s filings with the United States Securities and Exchange Commission (the "SEC"), which could affect the future results of the energy industry in general, and the Trust and Chesapeake in particular, and could cause those results to differ materially from those expressed in such forward-looking statements. The actual results or developments anticipated may not be realized or, even if substantially realized, may not have the expected consequences to or effects on Chesapeake’s business and the Trust. Such statements are not guarantees of future performance and actual results or developments may differ materially from those projected in such forward-looking statements. These factors should not be construed as exhaustive, and there may also be other risks that we are unable to predict at this time. The Trustee relies on Chesapeake for information regarding the Royalty Interests, the Underlying Properties (as defined below) and Chesapeake itself. The Trust undertakes no obligation to publicly update or revise any forward-looking statements and expressly disclaims any obligation to do so, except as required by applicable law.




















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Table of Contents





PART I. FINANCIAL INFORMATION


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|ITEM 1. | Financial Statements

CHESAPEAKE GRANITE WASH TRUSTSTATEMENTS OF ASSETS, LIABILITIES AND TRUST CORPUS(Unaudited)September 30, 2019December 31, 2018($ in thousands)ASSETS:Cash and cash equivalents$1,772$1,337Investment in Royalty Interests487,793487,793Less: accumulated amortization and impairment(466,966)(464,752)Net investment in Royalty Interests20,82723,041Total assets$22,599$24,378LIABILITIES AND TRUST CORPUS:Trust corpus; 46,750,000 common units issued and outstanding at September 30, 2019 and December 31, 201822,59924,378Total liabilities and Trust corpus$22,599$24,378



































The accompanying notes are an integral part of these financial statements.
 
 1


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CHESAPEAKE GRANITE WASH TRUSTSTATEMENTS OF DISTRIBUTABLE INCOME(Unaudited)Three Months EndedSeptember 30,Nine Months EndedSeptember 30,2019201820192018($ in thousands, except unit and per unit data)REVENUES:Royalty income$2,157$3,171$8,030$10,459EXPENSES:Production taxes(131)(212)(554)(664)Trust administrative expenses(445)(34)(1,349)(997)Cash reserves withheld(70)—(247)—Total expenses(646)(246)(2,150)(1,661)Distributable income available to unitholders$1,511$2,925$5,880$8,798Distributable income per common unit (46,750,000 common units)$0.0323$0.0626$0.1258$0.1882











CHESAPEAKE GRANITE WASH TRUSTSTATEMENTS OF CHANGES IN TRUST CORPUS(Unaudited)Three Months EndedSeptember 30,Nine Months EndedSeptember 30,2019201820192018($ in thousands)($ in thousands)TRUST CORPUS:Beginning of period$23,396$26,263$24,378$27,604Cash reserve surplus (deficit)(1)(329)435(7)Amortization of Investment in Royalty Interests(796)(761)(2,214)(2,424)Distributable income1,5112,9255,8808,798Distributions paid to unitholders(1,511)(2,925)(5,880)(8,798)TRUST CORPUS:End of period$22,599$25,173$22,599$25,173











The accompanying notes are an integral part of these financial statements.
 
 2


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CHESAPEAKE GRANITE WASH TRUST
 NOTES TO FINANCIAL STATEMENTS
 (Unaudited)





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|1. | Organization of the Trust

Chesapeake Granite Wash Trust (the “Trust”) is a statutory trust formed in June 2011 under the Delaware Statutory Trust Act pursuant to an initial trust agreement by and among Chesapeake Energy Corporation ("Chesapeake"), as Trustor, The Bank of New York Mellon Trust Company, N.A., as Trustee (the “Trustee”), and The Corporation Trust Company, as Delaware Trustee (the “Delaware Trustee” and, together with the Trustee, the "Trustees").


The Trust was created to own royalty interests (the “Royalty Interests”) for the benefit of Trust unitholders pursuant to a trust agreement dated as of June 29, 2011, and subsequently amended and restated as of November 16, 2011, by and among Chesapeake, Chesapeake Exploration, L.L.C., a wholly owned subsidiary of Chesapeake, and the Trustees (the “Trust Agreement”). The Royalty Interests are derived from Chesapeake’s interests in specified oil and natural gas properties located within an area of mutual interest (the "AMI") in the Colony Granite Wash play in Washita County in the Anadarko Basin of western Oklahoma (the “Underlying Properties”). Chesapeake conveyed the Royalty Interests to the Trust from (a) Chesapeake’s interests in 69 existing horizontal wells (the “Producing Wells”), and (b) Chesapeake’s interests in 118 horizontal development wells as calculated pursuant to the development agreement (the “Development Wells”), which Chesapeake was obligated to drill, cause to be drilled or participate as a non-operator in the drilling of, from drill sites in the AMI, on or prior to June 30, 2016. As of June 30, 2016, Chesapeake fulfilled its drilling obligation under the development agreement. Chesapeake retained an interest in each of the Producing Wells and Development Wells, and currently operates 96% of the Producing Wells and the completed Development Wells.


The business and affairs of the Trust are managed by the Trustee. The Trust Agreement limits the Trust’s business activities generally to owning the Royalty Interests and any activity reasonably related to such ownership, including activities required or permitted by the terms of the conveyances related to the Royalty Interests. The royalty interests in the Producing Wells entitle the Trust to receive 90% of the proceeds (exclusive of any production or development costs but 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 Producing Wells. The royalty interests in the Development Wells entitle the Trust to receive 50% of the proceeds (exclusive of any production or development costs but 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 Trust will dissolve and begin to liquidate on June 30, 2031, or earlier upon certain events (the “Termination Date”), and will soon thereafter wind up its affairs and terminate. At the Termination Date, (a) 50% of the total Royalty Interests conveyed by Chesapeake will revert automatically to Chesapeake and (b) 50% of the total Royalty Interests conveyed by Chesapeake (the “Perpetual Royalties”) will be retained by the Trust and thereafter sold. The net proceeds of the sale of the Perpetual Royalties, as well as any remaining Trust cash reserves, will be distributed to the unitholders on a pro rata basis. Chesapeake will have a right of first refusal to purchase the Perpetual Royalties retained by the Trust at the Termination Date.





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|2. | Basis of Presentation and Significant Accounting Policies

Basis of Accounting .  The accompanying Statement of Assets, Liabilities and Trust Corpus as of September 30, 2019 and December 31, 2018 and the unaudited interim financial statements of the Trust as of and for the three and nine months ended September 30, 2019 and 2018 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, 2018 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, 2018 . These financial statements have been prepared in accordance with the SEC instructions to Form 10-Q and, therefore, do not include all disclosures required for financial statements prepared in conformity with accounting principles generally accepted in the United States of America ("GAAP").


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 which 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 .





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CHESAPEAKE GRANITE WASH TRUST
 NOTES TO FINANCIAL STATEMENTS - (Continued)
 (Unaudited)





Most accounting pronouncements apply to entities whose financial statements are prepared in accordance with GAAP, directing such entities to accrue or defer revenues and expenses in a period other than when such revenues were received or expenses were paid. Because the Trust’s financial statements are prepared on the modified cash basis as described above, most accounting pronouncements are not applicable to the Trust’s financial statements.


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 the Investment in Royalty Interests (as defined in Investment in Royalty Interests below) and, as necessary, to evaluate potential impairments of Investment in Royalty Interests. Actual results could differ from those estimates.


Risks and Uncertainties. The Trust’s revenue and distributions are substantially dependent upon the prevailing and future prices for oil, natural gas and NGL, each of which depends on numerous factors beyond the Trust’s control such as economic conditions, regulatory developments and competition from other energy sources. Oil, natural gas and NGL prices historically have been volatile and may be subject to significant fluctuations in the future. The Trust does not have the ability to enter into derivative contracts to mitigate the effect of this price volatility.


The Trust's revenues and distributable income available to unitholders have been adversely affected to date in 2019 and throughout 2018 due to natural declines in production. The Trust expects production to continue to decline and expects distributable income to continue to be adversely affected. On November 5, 2019 , the Trust declared a cash distribution of $0.0374 per common unit (the "November 2019 Distribution"), consisting of proceeds attributable to production from June 1, 2019 to August 31, 2019 . The distribution will be paid on November 29, 2019 to common unitholders of record as of November 19, 2019 . See Note 5 for information regarding prior distributions paid and Note 6 for information on the November 2019 Distribution.


Chesapeake's ability to perform its obligations to the Trust depend 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 as a result of such bankruptcy proceedings. In November 2019, Chesapeake disclosed that, if depressed commodity prices persist or decline throughout 2020, its 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.  However, Chesapeake is actively pursuing a variety of transactions and cost-cutting measures and believes it is probable that those measures, as Chesapeake continues to implement them, will enable Chesapeake to comply with its leverage ratio covenant.


Cash and Cash Equivalents .  Cash equivalents include all highly-liquid instruments with maturities of three months or less at the time of acquisition. The Trustee maintains a minimum cash reserve of $1.0 million and may, at the Trustee’s discretion, reserve funds for future expected administrative expenses.


Investment in Royalty Interests .  The Investment in Royalty Interests 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 such revisions are known. 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.


On a quarterly basis, the Trust evaluates the carrying value of the Investment in Royalty Interests under the full cost accounting rules of 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 sum of the present value (using a 10% discount rate) of the estimated future net revenues from proved reserves. In the three and nine months ended September 30, 2019 and 2018, the Trust recognized no impairments of the Royalty Interests.





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CHESAPEAKE GRANITE WASH TRUST
 NOTES TO FINANCIAL STATEMENTS - (Continued)
 (Unaudited)





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. Such loans will be recorded as a liability on the Statements of Assets, Liabilities and Trust Corpus until repaid. A loan neither increases nor decreases distributions to unitholders; 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 September 30, 2019 and December 31, 2018.


Revenues and Expenses. Neither the Trust nor the Trustee is responsible for, or has any control over, any costs related to the drilling of the Development Wells or any other operating or capital costs of the Underlying Properties. The Trust’s revenues with respect to the Royalty Interests in the Underlying Properties are net of existing royalties and overriding royalties associated with Chesapeake's interests and are determined after deducting certain post-production expenses and any applicable taxes associated with the Royalty Interests. 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 affiliates of Chesapeake. Cash distributions to unitholders are reduced by the Trust’s general and administrative expenses.





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|3. | Income Taxes

The Trust is a Delaware statutory trust that is treated as a partnership for U.S. federal income tax purposes. The Trust is not required to pay federal or state income taxes. Accordingly, no provision for federal or state income tax has been made.


Trust unitholders are treated as partners of the Trust for U.S. federal income tax purposes. The Trust Agreement contains tax provisions that generally allocate the Trust’s income, deductions and credits among the Trust unitholders in accordance with their percentage interests in the Trust. The Trust Agreement also sets forth the tax accounting principles to be applied by the Trust.





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|4. | Related Party Transactions

Trustee Administrative Fee .  Under the terms of the Trust Agreement, the Trust is required to pay an annual administrative fee of $175,000 to the Trustee, paid in equal quarterly installments. 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.


Agreements with Chesapeake. In connection with the initial public offering and the conveyance of the Royalty Interests to the Trust, the Trust entered into an administrative services agreement, a development agreement and a registration rights agreement with Chesapeake.


Pursuant to the administrative services agreement, Chesapeake provides the Trust with certain accounting, tax preparation, bookkeeping and information services related to the Royalty Interests and the registration rights agreement. In return for the services provided by Chesapeake under the administrative services agreement, the Trust pays Chesapeake, in equal quarterly installments, an annual fee of $200,000, which will remain fixed for the life of the Trust. 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.


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”). Pursuant to the registration rights agreement, the Trust agreed to register the Trust units held by each such holder for resale under the Securities Act of 1933, as amended, under certain circumstances. In connection with the preparation and filing of any registration statement, Chesapeake will bear all costs and expenses incidental to such registration statement, excluding certain internal expenses of the Trust, which will be borne by the Trust, and any underwriting discounts and commissions, which will be borne by the seller of the Trust units.





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CHESAPEAKE GRANITE WASH TRUST
 NOTES TO FINANCIAL STATEMENTS - (Continued)
 (Unaudited)





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. 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 September 30, 2019 and December 31, 2018.





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CHESAPEAKE GRANITE WASH TRUST
 NOTES TO FINANCIAL STATEMENTS - (Continued)
 (Unaudited)





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|5. | Distributions to Unitholders

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 nine months ended September 30, 2019 and 2018, the Trust declared and paid the following cash distributions:


Production PeriodDistribution DateCash Distribution per Common UnitMarch 2019 - May 2019August 29, 2019$0.0323December 2018 - February 2019May 30, 2019$0.0303September 2018 - November 2018March 1, 2019$0.0631March 2018 - May 2018August 30, 2018$0.0626December 2017 - February 2018May 31, 2018$0.0469September 2017 - November 2017March 2, 2018$0.0787





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CHESAPEAKE GRANITE WASH TRUST
 NOTES TO FINANCIAL STATEMENTS - (Continued)
 (Unaudited)





6. Subsequent Events


The Trust's quarterly income available for distribution was $0.0374 per common unit for the production period from June 1, 2019 to August 31, 2019 . On November 5, 2019 , the Trust declared the November 2019 Distribution attributable to such production period. The distribution will be paid on November 29, 2019 to common unitholders of record as of November 19, 2019 . All Trust unitholders share on a pro rata basis in the Trust's distributable income.


Distributable income attributable to production from June 1, 2019 to August 31, 2019 was calculated as follows (in thousands, except for unit and per unit amounts):


REVENUES:Royalty income(a)$1,777EXPENSES:Production taxes(b)28Trust administrative expenses(c)14Total expenses42Cash withheld to increase cash reserves(d)(70)Distributable income available to common unitholders$1,749Distributable income per common unit(e)$0.0374


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|(a) | Net of certain post-production expenses.

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|(b) | Includes $129,156 of production taxes for current production offset by ($157,062) of prior period adjustments primarily related to tax refunds on taxes paid from 2010 to 2017.

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|(c) | Includes the cash advance for administrative expenses.  Negative expenses are primarily due to the cash advance in the prior quarter exceeding actual expenses incurred.

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|(d) | 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. 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.

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|(e) | Calculation of distributable income per common unit is based on 46,750,000 common units issued and outstanding as ofNovember 4, 2019.







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|ITEM 2. | 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 Trust’s unaudited interim financial statements and the accompanying notes relating to the Trust and the Underlying Properties included in Item 1 of Part I of this Quarterly Report as well as the Trust’s Annual Report on Form 10-K for the year ended December 31, 2018 .


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 U.S. 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 Chesapeake was obligated to drill, cause to be drilled or participate as a non-operator in the drilling of, from drill sites in the AMI, on or prior to June 30, 2016. As of June 30, 2016, Chesapeake fulfilled its drilling obligation under the development agreement. Chesapeake retained an interest in each of the Producing Wells and Development Wells, and currently operates 96% of the Producing Wells and the completed Development Wells.


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.


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 nine months ended September 30, 2019 , distributions were paid on March 1, 2019, May 30, 2019, and August 29, 2019. 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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The amount of Trust revenues and cash distributions to Trust unitholders fluctuates from quarter to quarter depending on several factors, including, but not limited to:





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|• | timing and amount of production and sales from the Development and Producing Wells;

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|• | oil, natural gas and NGL prices received;

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|• | volumes of oil, natural gas and NGL produced and sold;

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|• | certain post-production expenses and any applicable taxes; and

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|• | the Trust’s expenses.




Results of Trust Operations


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 in the month following 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 after the end of each calendar quarter. During the nine months ended September 30, 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 to May 31, 2019 .


The Trust's revenues and distributable income available to unitholders were adversely affected throughout 2018 and to date in 2019 by natural declines in production. The Trust expects production to decline further and expects distributable income to continue to be adversely affected.


The Trust's Investment in Royalty Interests is subject to a quarterly full cost ceiling test. In the three and nine months ended September 30, 2019 and 2018, 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 September 30,Nine Months Ended September 30,20192018Change20192018Change($ in thousands, except per unit data)Distributable income available to unitholders$1,511$2,925(48)%$5,880$8,798(33)%Distributable income per common unit(a)$0.0323$0.0626(48)%$0.1258$0.1882(33)%
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|(a) | See Notes 1 and 5 to the financial statements contained in Item 1 of Part I of this Quarterly Report.

The $1,414,000  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 March 1, 2019 to May 31, 2019 (current production quarter) as compared to the production period from March 1, 2018 to May 31, 2018 (prior production quarter).


The $2,918,000  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, 2018 to May 31, 2019 (current production period) as compared to the production period from September 1, 2017 to May 31, 2018 (prior production period).








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Royalty Income


Three Months Ended September 30,Nine Months Ended September 30,20192018Change20192018Change($ in thousands, except per unit data)Royalty income(a)$2,157$3,171(32)%$8,030$10,459(23)%Estimated production from trust properties:Oil sales volumes (MBbl)2226(15)%7075(7)%Natural gas sales volumes (MMcf)515610(16)%1,6791,893(11)%Natural gas liquids sales volumes (MBbl)4869(30)%143218(34)%Total sales volumes (Mboe)156197(21)%493608(19)%Average prices received for production(b):Oil ($/Bbl)$54.68$62.28(12)%$54.34$55.60(2)%Natural gas ($/Mcf)$0.47$0.58(19)%$0.98$0.8910%Natural gas liquids ($/Bbl)$14.49$17.47(17)%$18.09$21.16(15)%Total average price received ($/boe)$13.83$16.10(14)%$16.29$17.20(5)%


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|(a) | Net of certain post-production expenses.

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|(b) | Includes the impact of certain post-production expenses but excludes production taxes.

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 $354,000 in royalty income. Additionally, lower sales volumes in the current production quarter decreased royalty income by approximately $660,000 , for a total decrease in royalty income of approximately $1,014,000 . The 41 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 boe in the current production period compared to the prior production period resulted in a decrease of approximately $451,000 in royalty income. Additionally, lower sales volumes in the current production period decreased royalty income by approximately $1,978,000 , for a total decrease in royalty income of approximately $2,429,000 . The 115 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 from the Producing Wells and Development Wells.
































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Production Taxes


Three Months Ended September 30,Nine Months Ended September 30,20192018Change20192018Change($ in thousands, except per unit data)Production taxes$131$212(38)%$554$664(17)%Production taxes per boe$0.84$1.08(22)%$1.12$1.093%


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 and current period is primarily due to a decrease in volumes produced. The decrease in production taxes per boe in the current quarter is primarily due to tax refunds received in the current quarter related to taxes paid from 2010 to 2017.  The increase in production taxes per boe in the current period is primarily due to a legislative increase in the Oklahoma production tax rate in the third quarter of 2018.





Trust Administrative Expenses


Three Months Ended September 30,Nine Months Ended September 30,20192018Change20192018Change($ in thousands, except per unit data)Trust administrative expenses(a)$445$341,209%$1,349$99735%


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|(a) | Including cash advance 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 and current period is primarily due to the timing of cash advances and increases in expenses incurred.









































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Liquidity and Capital Resources


The Trust’s principal sources of liquidity and capital are cash flows generated from the Royalty Interests and the loan commitment as described below. 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 Trustees, 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 does not undertake or control any capital projects or capital expenditures. These capital expenditures, if any, are controlled and paid by Chesapeake.


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. 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 Trust's quarterly income available for distribution was $0.0374 per common unit consisting of proceeds attributable to production from June 1, 2019 to August 31, 2019 . On November 5, 2019 , the Trust declared the November 2019 Distribution , attributable to such production period. The distribution will be paid on November 29, 2019 to common unitholders of record as of November 19, 2019 . All Trust unitholders share on a pro rata basis in the Trust's distributable income.  Distributable income attributable to production from June 1, 2019 to August 31, 2019 was calculated as follows (in thousands, except for unit and per unit amounts):


REVENUES:Royalty income(a)$1,777EXPENSES:Production taxes(b)28Trust administrative expenses(c)14Total expenses42Cash withheld to increase cash reserves(d)(70)Distributable income available to common unitholders$1,749Distributable income per common unit(e)$0.0374


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|--- | ----------------------------------------
|(a) | Net of certain post-production expenses.

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|(b) | Includes $129,156 of production taxes for current production offset by ($157,062) of prior period adjustments primarily related to tax refunds on taxes paid from 2010 to 2017.

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|(c) | Includes the cash advance for administrative expenses. Negative expenses are primarily due to the cash advance in the prior quarter exceeding actual expenses incurred.

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|(d) | 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. 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.




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|(e) | Calculation of distributable income per common unit is based on 46,750,000 commons units issued and outstanding as ofNovember 4, 2019.

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, 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. 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 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 September 30, 2019 and December 31, 2018.





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.





Critical Accounting Policies and Estimates


Refer to Note 2 to the financial statements contained in Item 1 of Part I of this Quarterly Report for a discussion of significant accounting policies and estimates that impact the Trust's financial statements. Critical accounting policies and estimates relating to the Trust are contained in Item 7 of Part II of the 2018 Form 10-K.





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|ITEM 3. | Quantitative and Qualitative Disclosures about Market Risk

The Trust is a smaller reporting company as defined by Rule 12b-2 of the Exchange Act and is not required to provide the information under this item.





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|ITEM 4. | Controls and Procedures

Evaluation of Disclosure Controls and Procedures.


The Trust’s disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) of the Exchange Act are designed to ensure that the information required to be disclosed by the Trust in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include controls and procedures designed to ensure that information required to be disclosed by the Trust is accumulated and communicated by Chesapeake to The Bank of New York Mellon Trust Company, N.A., as the Trustee of the Trust, and its employees who participate in the preparation of the Trust’s periodic reports as appropriate to allow timely decisions regarding required disclosures. The Vice President of the Trustee has evaluated the effectiveness of the Trust’s disclosure controls and procedures pursuant to Exchange Act Rule 13a-15(b) as of the end of the period covered by this Quarterly Report. Based on her evaluation, as of September 30, 2019 , she has concluded that the Trust’s disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended) were effective.


Due to the nature of the Trust as a passive entity and in light of the contractual arrangements pursuant to which the Trust was created, including the provisions of (a) the Trust Agreement, (b) the administrative services agreement, (c) the development agreement and (d) the conveyances granting the Royalty Interests, the Trust’s disclosure controls and procedures necessarily rely on (i) information provided by Chesapeake, including information relating to results of operations, the costs and revenues attributable to the Trust’s interests under the conveyance and other operating and historical data, plans for future operating and capital expenditures, reserve information, information relating to projected production, and other information relating to the status and results of operations of the underlying properties





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and the Royalty Interests, and (ii) conclusions and reports regarding reserves by the Trust’s independent reserve engineers. Although the Trustee does rely on Chesapeake to perform certain functions and to provide certain information that impact the Trust’s financial statements, the Trustee remains responsible for evaluating, as appropriate, the Trust’s disclosure controls and procedures as well as its internal control over financial reporting.


Changes in Internal Control over Financial Reporting.


There were no changes in the Trust's internal control over financial reporting during the three months ended September 30, 2019 that materially affected, or were reasonably likely to materially affect, the Trust's internal control over financial reporting.








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PART II. OTHER INFORMATION





ITEM 1. Legal Proceedings


There are no legal proceedings to which the Trust is a named party. However, the Trustee has been advised by Chesapeake that the Trust may from time to time be subject to litigation in the ordinary course of business for certain matters that include the Royalty Interests. While Chesapeake has advised the Trustee that it does not presently believe any pending litigation will have a material adverse effect net to the Trust, in the event such matters are adjudicated or settled in a material amount and charges are made against royalty income, such charges could have a material impact on the Trust's future royalty income.


ITEM 1A. Risk Factors


Except as discussed below, there has been no material change in our risk factors as previously disclosed in Item 1A - “Risk Factors” of the 2018 Form 10-K.  In addition to the other factors set forth in this Form 10-Q, you should carefully consider the factors discussed in Item 1A - “Risk Factors” in our 2018 Form 10-K, which could materially affect our business, financial condition or future results.





If we cannot meet the continued listing requirements of the NYSE, the NYSE may delist our common units.


On August 28, 2019, the Trust was notified by the NYSE that it was not in compliance with the continued listing standards set forth in Section 802.01C of the NYSE Listed Company Manual because the average closing price of the Trust’s common units was less than $1.00 over a consecutive 30 trading-day period. The Trust's common units continue to be listed and traded on the NYSE, subject to the Trust's continued compliance with other listing standards, under the symbol “CHKR” with an added designation of “.BC” to indicate its status as below compliance.


The Trust has six months following receipt of the notification to regain compliance with the minimum unit price requirement. Neither the Trust nor the Trustee has any control over the trading price of the common units, and neither the Trust nor the Trustee intends to attempt to cause a reverse split of the common units or other action in an effort to affect the trading price of the common units at this time. Even if the Trust does regain compliance, it might be unable to maintain compliance, and would again become subject to the NYSE delisting procedures.


Delisting from the NYSE could negatively impact the Trust, and therefore an investment in the Trust, by: (i) reducing the demand for and the market price of the Trust’s common units; (ii) reducing the number of investors willing to hold or acquire the Trust’s common units; and (iii) diminishing interest in the Trust from investors, analysts and other market participants. Other markets on which our securities may trade are significantly more limited than the NYSE, and quotation on such other markets may result in a less liquid market available for existing and potential unitholders to trade the common units and could further depress the trading price of the common units.





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ITEM 6. Exhibits


The exhibits listed below in the Index of Exhibits are filed, furnished or incorporated by reference pursuant to the requirements of Item 601 of Regulation S-K.





INDEX OF EXHIBITS


Incorporated by ReferenceExhibitNumberExhibit DescriptionFormSEC FileNumberExhibitFiling DateFiled or                                                                                             Furnished Herewith3.1Certificate of Trust of Chesapeake Granite Wash Trust.S-1333-1753953.17/7/20113.2Amended and Restated Trust Agreement, dated as of November 16, 2011, by and among Chesapeake Energy Corporation, Chesapeake Exploration, L.L.C., The Bank of New York Mellon Trust Company, N.A., as Trustee, and The Corporation Trust Company, as Delaware Trustee.8-K001-353433.111/21/201131.1Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 – Trustee’s Vice President.X32.1Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 – Trustee’s Vice President.X





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SIGNATURES


Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.


Date: November 12, 2019





CHESAPEAKE GRANITE WASH TRUSTBy:THE BANK OF NEW YORK MELLONTRUST COMPANY, N.A, Trustee


By:/s/ Monika RusinMonika RusinVice President


The registrant, Chesapeake Granite Wash Trust, has no principal executive officer, principal financial officer, board of directors or persons performing similar functions. Accordingly, no additional signatures are available, and none have been provided. In signing the report above, the Trustee does not imply that it has performed any such function or that such function exists pursuant to the terms of the Trust Agreement under which it serves.