Chesapeake Energy describes adjustment in royalty payments

BY ERIC HRIN (Staff Writer)
Published: February 8, 2012

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Chesapeake Energy has sent a letter to its royalty owners advising them of some adjustments in their royalty payments this year following a court decision.

"As a result of these adjustments, you will see a reduction in the amount you receive for your royalty share," Chesapeake wrote.

A copy of the correspondence was obtained by The Daily Review.

In the Jan. 24 letter, Chesapeake explained that the reason for the adjustments had to do with the fact that in 2008-09, several lawsuits were filed in Pennsylvania that sought to clarify whether royalty owners should share in the expense of post-production functions needed to get the gas to market.

Chesapeake wrote, "These are costs incurred beyond the wellhead after the gas is ready for sale or use. Opinions varied on this issue as it had never been decided in Pennsylvania."

The company noted that the Pennsylvania Supreme Court agreed to hear the case and in a ruling issued March 24, 2010, the court held in the case of Herbert Kilmer, et al. vs. Elexco Land Services, Inc. et al. that post-production costs such as gathering, compression and transportation are "properly shared" by royalty owners through proceeds deductions, unless the lease expressly provides otherwise.

Chesapeake noted it is complying with the decision.

The letter continues by noting that effective with the January 2012 checks, "Chesapeake will no longer absorb your share of these post-production costs and your payments will be reduced by these amounts."

Chesapeake also noted that it will also recoup the costs that have been suspended back to the date of the Kilmer decision, but not before, "which we believe is the fairest way to handle those deductions."

Currently, these costs are between 55 cents to 65 cents per Mmbtu, according to the letter.

"We know recouping past costs in a single month could create a hardship for some of our royalty owners," the letter continues. "We don't want that to happen, so we will spread the recouping of costs over a minimum of six months."

Chesapeake noted the deductions will be itemized on the check stub details.

"As a result of these adjustments, you will see a reduction in the amount you receive for your royalty share," the letter noted. "The reduction will be more significant until the past months' costs are recouped, but then should become less apparent in the future."

When asked for comment, Rory Sweeney, Media Relations Coordinator for Chesapeake, said that the company had nothing to add, noting the letter is self-explanatory.

Eric Hrin can be reached at (570) 297-5251; email: reviewtroy@thedailyreview.com.

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