Chesapeake Energy Corp. agreed to end a four-year federal class-action battle over natural gas royalties with Pennsylvania leaseholders for $7.75 million but left the door open to walking away from the settlement if the state's attorney general does not drop an unfair-trade action in state court.
Chesapeake said it would set up a fund to pay an estimated 10,000 leaseholders to make up for deductions from their royalty checks for post-production processing and pipeline costs, deductions that in some months left the leaseholders with negative balances, according to the settlement filed in federal court Aug. 9. The fund, which would pay class action lawyers up to one-third of the settlement amount, would recoup an estimated 8% of post-production payments for the leaseholders if U.S. District Court Judge Malachy Mannion approves the deal.
The leaseholders, mostly landowners in northeast Pennsylvania's Marcellus Shale, claimed that Chesapeake and a then-affiliated midstream company, Access Midstream Partners LP, inflated the costs for gathering and transporting gas to market by sweetheart deals. Access was spun off before Williams Cos. Inc. bought it in 2014.
Chesapeake denied that claim and insisted in the settlement agreement that its payment practices were proper and met Pennsylvania's legal requirements. Chesapeake said it was settling the action to save money on legal fees.
The potential fly in the settlement's ointment is the state attorney general's office, which has torpedoed previous settlements by refusing to drop its case in state court, alleging "bait-and-switch" tactics by Chesapeake.
"The private class-action settlement does not impact our case at all," Joe Grace, spokesman for Pennsylvania Attorney General Josh Shapiro, told the Pittsburgh Post-Gazette in an Aug. 10 report. "Our claims against these energy companies are active and ongoing, and they are intended to protect all Pennsylvanians against this kind of corporate misconduct, not just one group of individuals in one case."
The attorney general's office did not reply to questions regarding the settlement Aug. 13.
The settlement would also give leaseholders an option to change their royalty agreements. Leaseholders can keep whatever agreement they have, with its post-production deductions, or change to an agreement to be paid a royalty as a percentage of the index price published by S&P Global Platts for Tennessee Gas Pipeline's Zone 4 Leg 300, a pricing point for gas delivered into the gigantic Tennessee Gas system in Tioga and Susquehanna counties.
"We are pleased to have reached this comprehensive agreement resolving the royalty claims of over two-thirds of our Pennsylvania royalty holders, and providing the unprecedented opportunity for our owners to alter the terms of their lease and elect their royalty formula moving forward," Chesapeake spokesman Gordon Pennoyer said in an email.
In essence, leaseholders could choose between accepting deductions and hoping the gas is sold in higher-priced markets in the Midwest and Gulf Coast or taking lower local prices but with no deductions. On Aug. 10, the midpoint for natural gas at the benchmark Henry Hub was $2.92/MMBtu, while gas sold at Tennessee's Zone 4 Leg 300 was $2.42/MMBtu, according to S&P Global Platts data. (Brown v. Access Midstream Partners LP et al, U.S. District Court for the Middle District of Pennsylvania 14-cv-00591-MEM; Commonwealth of Pennsylvania v. Chesapeake Energy Corp. et al., Bradford County Court of Common Pleas 2015 IR 0069).
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