Chesapeake Energy 2010 Annual Report Download - page 136

CHESAPEAKE ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
company’s July 2008 common stock offering. Following the appointment of a lead plaintiff and counsel, the
plaintiff filed an amended complaint on September 11, 2009 alleging that the registration statement for the
offering contained material misstatements and omissions and seeking damages under Sections 11, 12 and 15
of the Securities Act of 1933 of an unspecified amount and rescission. The action was transferred to the U.S.
District Court for the Western District of Oklahoma on October 13, 2009. The defendants’ motion to dismiss
was denied on September 2, 2010. A derivative action was also filed in the District Court of Oklahoma County,
Oklahoma on March 10, 2009 against the company’s directors and certain of its officers alleging breaches of
fiduciary duties relating to the disclosure matters alleged in the securities case. The derivative action is stayed
pursuant to stipulation. We are currently unable to assess the probability of loss or estimate a range of potential
loss associated with the securities class action case, which is at an early stage.
Chesapeake is also involved in various other lawsuits and disputes incidental to its business operations,
including commercial disputes, personal injury claims, claims for underpayment of royalties, property damage
claims and contract actions. With regard to the latter, various mineral or leasehold owners have filed lawsuits
against us seeking specific performance to require us to acquire their oil and natural gas interests and pay
acreage bonus payments, damages based on breach of contract and/or, in certain cases, punitive damages
based on alleged fraud. The company believes that it has substantial defenses to the claims made in these
purchase and sale cases.
The company records an associated liability when a loss is probable and the amount is reasonably
estimable. Although the outcome of litigation cannot be predicted with certainty, management is of the opinion
that no pending or threatened lawsuit or dispute incidental to its business operations is likely to have a material
adverse effect on the company’s consolidated financial position, results of operations or cash flows. The final
resolution of such matters could exceed amounts accrued, however, and actual results could differ materially
from management’s estimates.
Environmental Risk
Due to the nature of the natural gas and oil business, Chesapeake and its subsidiaries are exposed to possible
environmental risks. Chesapeake has implemented various policies and procedures to avoid environmental
contamination and risks from environmental contamination. Chesapeake conducts periodic reviews, on a company-
wide basis, to identify changes in our environmental risk profile. These reviews evaluate whether there is a
contingent liability, its amount, and the likelihood that the liability will be incurred. The amount of any potential liability
is determined by considering, among other matters, incremental direct costs of any likely remediation and the
proportionate cost of employees who are expected to devote a significant amount of time directly to any possible
remediation effort. We manage our exposure to environmental liabilities on properties to be acquired by identifying
existing problems and assessing the potential liability. Depending on the extent of an identified environmental
problem, Chesapeake may exclude a property from the acquisition, require the seller to remediate the property to
our satisfaction, or agree to assume liability for the remediation of the property. Chesapeake has historically not
experienced any significant environmental liability and is not aware of any potential material environmental issues or
claims at December 31, 2010. There are currently enforcement actions pending against us related to alleged
methane migration in Pennsylvania and compliance with Clean Water Act permitting requirements in West Virginia.
While these actions may result in monetary sanctions, we do not expect that they will have a material adverse effect
on our operations.
Rig Leases
In a series of transactions since 2006, our drilling subsidiaries have sold 86 drilling rigs and related
equipment for $717 million and entered into a master lease agreement under which we agreed to lease the rigs
from the buyer for initial terms of seven to ten years. The lease obligations are guaranteed by Chesapeake and
certain of its subsidiaries. These transactions were recorded as sales and operating leasebacks and any
related gain or loss is amortized to service operations expense over the lease term. Under the rig leases, we
can exercise an early purchase option after five and one-half to seven years or on the expiration of the lease
term for a purchase price equal to the then fair market value of the rigs. Additionally, in most cases we have
the option to renew the rig lease for a negotiated renewal term at a periodic lease payment equal to the fair
market rental value of the rigs as determined at the time of renewal.
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