Chesapeake Energy 2013 Annual Report Download - page 101

CHESAPEAKE ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
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investments or loans and create liens. The agreement requires maintenance of a leverage ratio based on the ratio of
lease-adjusted indebtedness to earnings before interest, taxes, depreciation, amortization and rent (EBITDAR), a
senior secured leverage ratio based on the ratio of secured indebtedness to EBITDA and a fixed charge coverage ratio
based on the ratio of EBITDAR to lease-adjusted interest expense, in each case as defined in the agreement. COO
was in compliance with all covenants under the agreement as of December 31, 2013. If COO or its restricted subsidiaries
should fail to perform their obligations under the agreement, the revolving credit commitment could be terminated and
any outstanding borrowings under the facility could be declared immediately due and payable. Such acceleration, if
involving a principal amount of $50 million or more, would constitute an event of default under our COO senior note
indenture, which could in turn result in the acceleration of the COO senior note indebtedness. The oilfield services
credit facility agreement also has cross default provisions that apply to other indebtedness COO and its restricted
subsidiaries may have from time to time with an outstanding principal amount in excess of $15 million.
4. Contingencies and Commitments
Contingencies
Litigation and Regulatory Proceedings
The Company is involved in a number of litigation and regulatory proceedings (including those described below).
Many of these proceedings are in early stages, and many of them seek an indeterminate amount of damages. We
estimate and provide for potential losses that may arise out of litigation and regulatory proceedings to the extent that
such losses are probable and can be reasonably estimated. Significant judgment is required in making these estimates
and our final liabilities may ultimately be materially different. Our total estimated liability in respect of litigation and
regulatory proceedings is determined on a case-by-case basis and represents an estimate of probable losses after
considering, among other factors, the progress of each case or proceeding, our experience and the experience of
others in similar cases or proceedings, and the opinions and views of legal counsel. We account for legal defense
costs in the period the costs are incurred.
July 2008 Common Stock Offering. On February 25, 2009, a putative class action was filed in the U.S. District
Court for the Southern District of New York against the Company and certain of its officers and directors along with
certain underwriters of the Company’s July 2008 common stock offering. 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. Chesapeake and the officer and director defendants moved for summary judgment on grounds of loss causation
and materiality on December 28, 2011, and the motion was granted as to all claims as a matter of law on March 29,
2013. Final judgment in favor of Chesapeake and the officer and director defendants was entered on June 21, 2013,
and the plaintiff filed a notice of appeal on July 19, 2013 in the U.S. Court of Appeals for the Tenth Circuit. We are
currently unable to assess the probability of loss or estimate a range of potential loss associated with this matter.
A derivative action relating to the July 2008 offering filed in the U.S. District Court for the Western District of
Oklahoma on September 6, 2011 is pending. Following the denial on September 28, 2012 of its motion to dismiss and
pursuant to court order, nominal defendant Chesapeake filed an answer in the case on October 12, 2012. By stipulation
between the parties, the case is stayed pending resolution of the Tenth Circuit appeal.
2012 Securities and Shareholder Litigation. A putative class action was filed in the U.S. District Court for the
Western District of Oklahoma on April 26, 2012 against the Company and its former Chief Executive Officer (CEO),
Aubrey K. McClendon. On July 20, 2012, the court appointed a lead plaintiff, which filed an amended complaint on
October 19, 2012 against the Company, Mr. McClendon and certain other officers. The amended complaint asserted
claims under Sections 10(b) (and Rule 10b-5 promulgated thereunder) and 20(a) of the Securities Exchange Act of
1934 based on alleged misrepresentations regarding the Company’s asset monetization strategy, including liabilities
associated with its volumetric production payment (VPP) transactions, as well as Mr. McClendon’s personal loans and
the Company’s internal controls. On December 6, 2012, the Company and other defendants filed a motion to dismiss
the action. On April 10, 2013, the Court granted the motion, and on April 16, 2013 entered judgment against the plaintiff
and dismissed the complaint with prejudice. The plaintiff filed a notice of appeal on June 14, 2013 in the U.S. Court of
Appeals for the Tenth Circuit. Briefing on the appeal was complete on August 2, 2013, and on November 18, 2013
argument was heard. We are currently unable to assess the probability of loss or estimate a range of potential loss
associated with this matter.