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Chesapeake reaches $7.75 million deal in Pennsylvania royalty class-action suit, with a catch

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Chesapeake reaches $7.75 million deal in Pennsylvania royalty class-action suit, with a catch

Highlights

State attorney general could nix deal

Leaseholders could change royalty agreements

Arlington, Virginia — Chesapeake Energy has 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.

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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 last Thursday. 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 US 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, inflated the costs for gathering and transporting gas to market by sweetheart deals. Access was spun off before Williams 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 a Friday story. "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 Monday did not reply to questions regarding the settlement.

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 Pennsylvania's Tioga and Susquehanna counties.

--Bill Holland, S&P Global Market Intelligence, newsdesk@spglobal.com

--Edited by Kevin Saville, newsdesk@spglobal.com