Chesapeake Energy 2013 Annual Report Download - page 103

CHESAPEAKE ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
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On December 19, 2013, our subsidiary Chesapeake Appalachia, LLC (CALLC) entered into a consent decree
with the U.S. Environmental Protection Agency (EPA), the U.S. Department of Justice (DOJ) and the West Virginia
Department of Environmental Protection (WVDEP) to resolve alleged violations of the Clean Water Act (CWA) and the
West Virginia Water Pollution Control Act at 27 sites in West Virginia. In a complaint filed against CALLC the same day
in the U.S. District Court for the Northern District of West Virginia, the EPA and WVDEP alleged that CALLC impounded
streams and discharged sand, dirt, rocks and other fill material into streams and wetlands without a federal permit in
order to construct well pads, impoundments, road crossings and other facilities related to natural gas extraction. The
consent decree, also lodged on December 19, 2013, is subject to court approval.
The consent decree requires CALLC to pay a civil penalty of approximately $3 million, to be divided evenly between
the U.S. and the state of West Virginia. The consent decree settlement also requires that CALLC restore the affected
wetlands and streams in accordance with an agreed plan, monitor the restored sites for up to 10 years to assure the
success of the restoration, and implement a comprehensive compliance program to ensure future compliance with the
CWA and applicable West Virginia law. To offset the impacts to sites, CALLC is required by the consent decree to
perform compensatory mitigation, which will likely involve purchasing credits from a wetland mitigation bank located
in a local watershed. Eleven of the sites covered by the consent decree were subject to orders for compliance issued
by the EPA in 2010 and 2011. Since then, CALLC has been correcting the alleged violations and restoring those sites
in compliance with EPA’s orders. The settlement resolves alleged violations of both the CWA and state law.
In a related case, in December 2012, CALLC pled guilty to three misdemeanor violations of the CWA for
unauthorized discharge at one of the sites subject to the consent decree of crushed stone and gravel into a local stream
to create a roadway to improve access to a drilling site. CALLC paid a $600,000 penalty and has fully restored the
site. We believe that CALLC is in compliance with the terms of probation. By operation of law, a CWA conviction triggers
“disqualification”, by which the disqualified entity is prohibited from receiving federal contracts or benefits until the EPA
certifies that the conditions giving rise to the conviction have been corrected. Disqualification of CALLC has not had,
and we do not expect it to have, a material adverse impact on our business.
Commitments
Rig, Compressor and Other Operating Leases
As of December 31, 2013, we leased 45 rigs under master lease agreements with an aggregate undiscounted
future lease commitment of $76 million. The lease commitments are guaranteed by Chesapeake and certain of its
subsidiaries. Under the leases, we can exercise an early purchase option or we can purchase the rigs at the expiration
of the lease for the fair market value at the time. In addition, in most cases, we have the option to renew a lease for
negotiated new terms at the expiration of the lease. During 2013, we purchased 23 leased rigs from various lessors
for an aggregate purchase price of approximately $141 million and paid approximately $22 million in lease termination
costs. Through these transactions, we lowered our minimum aggregate undiscounted future rig lease payments by
approximately $142 million. See Note 23 for further discussion related to additional leased rigs purchased subsequent
to December 31, 2013.
As of December 31, 2013, we leased 1,781 compressors under master lease agreements with an aggregate
undiscounted future lease commitment of $260 million. The lease commitments are guaranteed by Chesapeake and
certain of its subsidiaries. Under the leases, we can exercise an early purchase option or we can purchase the
compressors at the expiration of the lease for the fair market value at the time. In addition, in most cases we have the
option to renew a lease for negotiated new terms at the expiration of the lease. During 2013, we purchased 541 leased
compressor units from various lessors for an aggregate purchase price of approximately $97 million, lowering our
minimum aggregate undiscounted future compressor lease payments by approximately $73 million. See Note 23 for
further discussion related to additional leased compressors purchased subsequent to December 31, 2013.