CHK_(CEC)_401-K_12.31.12

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

FORM 11-K

ANNUAL REPORT PURSUANT TO SECTION 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934


For the fiscal year ended December 31, 2012

 
Commission File No. 1-13726
A.
Full title of the plan and the address of the plan, if different from that of the issuer named below:

CHESAPEAKE ENERGY CORPORATION
SAVINGS AND INCENTIVE STOCK BONUS PLAN

B.
Name of issuer of the securities held pursuant to the plan and the address of its principal executive office:

CHESAPEAKE ENERGY CORPORATION
6100 North Western Avenue
Oklahoma City, OK 73118

 


Chesapeake Energy Corporation
Savings and Incentive Stock Bonus Plan
Index


 
Page
Report of Independent Registered Public Accounting Firm   
Financial Statements:
 
   Statements of Net Assets Available for Benefits as of December 31, 2012 and 2011
   Statements of Changes in Net Assets Available for Benefits for the
Years Ended December 31, 2012 and 2011
   Notes to Financial Statements
Supplemental Schedules:
 
   Schedule H, line 4i-Schedule of Assets (Held at End of Year) as of December 31, 2012
   Schedule H, line 4j-Schedule of Reportable Transactions for the Year Ended
      December 31, 2012
Signatures   
Exhibit Index   

Note:
 
Other schedules required by section 2520-103.10 of the Department of Labor’s Rules and Regulations for Reporting and Disclosure under the Employee Retirement Income Security Act of 1974 (ERISA) have been omitted because they are not applicable.






Report of Independent Registered Public Accounting Firm
To the Participants and Administrator of the Chesapeake Energy Corporation Savings and Incentive Stock Bonus Plan and the Employee Compensation and Benefits Committee of Chesapeake Energy Corporation:
In our opinion, the accompanying statements of net assets available for benefits and the related statements of changes in net assets available for benefits present fairly, in all material respects, the net assets available for benefits of the Chesapeake Energy Corporation Savings and Incentive Stock Bonus Plan (the “Plan”) at December 31, 2012 and 2011, and the changes in net assets available for benefits for the years then ended in conformity with accounting principles generally accepted in the United States of America. These financial statements are the responsibility of the Plan's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
Our audits were conducted for the purpose of forming an opinion on the basic financial statements taken as a whole. The supplemental Schedule of Assets (Held at End of Year) are presented for the purpose of additional analysis and are not a required part of the basic financial statements but are supplementary information required by the Department of Labor's Rules and Regulations for Reporting and Disclosure under the Employee Retirement Income Security Act of 1974. These supplemental schedules are the responsibility of the Plan's management. The supplemental schedules have been subjected to the auditing procedures applied in the audits of the basic financial statements and, in our opinion, are fairly stated in all material respects in relation to the basic financial statements taken as a whole.
/s/ PricewaterhouseCoopers LLP
Tulsa, Oklahoma
June 28, 2013




1

Chesapeake Energy Corporation
Savings and Incentive Stock Bonus Plan
Statements of Net Assets Available for Benefits

 
 
December 31,
 
 
2012
 
2011
Assets:
 
 
 
 
   Investments, at fair value
 
$
640,908,206

 
$
544,839,981

   Receivables:
 
 
 
 
         Notes receivable from participants
 
15,557,401

 
12,967,488

         Employee contributions
 
11,981

 
1,288

         Employer contributions
 
(9,352
)
 
87,446

         Dividends
 
1,572,356

 
979,087

            Total assets
 
658,040,592

 
558,875,290

 
 
 
 
 
Liabilities:
 
 
 
 
   Accrued administrative expenses
 
51,944

 
—

            Total liabilities
 
51,944

 
—

Net assets available for benefits, at fair value
 
657,988,648

 
558,875,290

   Adjustment from fair value to contract value for fully
      benefit-responsive investment contracts
 
(251,618
)
 
(178,083
)
 Net assets available for benefits
 
$
657,737,030

 
$
558,697,207








The accompanying notes are an integral part of these financial statements.

2

Chesapeake Energy Corporation
Savings and Incentive Stock Bonus Plan
Statements of Changes in Net Assets Available for Benefits

 
 
Years Ended December 31,
 
 
2012
 
2011
Investment income (loss):
 
 
 
 
      Dividends
 
$
11,760,185

 
$
8,460,803

      Interest on notes receivable from participants
 
677,442

 
512,657

      Net appreciation (depreciation) in fair value of investments
 
(37,407,861
)
 
(54,338,963
)
         Total investment income (loss)
 
(24,970,234
)
 
(45,365,503
)
 
 
 
 
 
Contributions:
 
 
 
 
      Employer
 
87,861,427

 
69,677,405

      Participants
 
97,639,645

 
78,038,998

         Total contributions
 
185,501,072

 
147,716,403

         Total additions
 
160,530,838

 
102,350,900

 
 


 


Deductions:
 
 
 
 
Benefits paid to participants
 
(60,676,732
)
 
(35,354,272
)
Administrative expenses
 
(814,283
)
 
(418,669
)
Total deductions
 
(61,491,015
)
 
(35,772,941
)
 
 
 
 
 
Transfers (see Note 1):
 


 


Net transfers in/(out)
 
—

 
5,102,121

 
 
 
 
 
         Net increase in net assets available for benefits
 
99,039,823

 
71,680,080

 
 
 
 
 
Net assets available for benefits:
 
 
 
 
      Beginning of year
 
558,697,207

 
487,017,127

      End of year
 
$
657,737,030

 
$
558,697,207











The accompanying notes are an integral part of these financial statements.

3

Chesapeake Energy Corporation
Savings and Incentive Stock Bonus Plan
Notes to Financial Statements

1.
Description of the Plan
The following is a brief summary of the various provisions of the Chesapeake Energy Corporation Savings and Incentive Stock Bonus Plan (the "Plan").
General and Eligibility
The Plan is a defined contribution plan that covers all eligible employees of Chesapeake Energy Corporation (the “Company”) and its subsidiaries, except for hourly employees of Chesapeake Appalachia, L.L.C., a wholly owned subsidiary, that are members of the United Steel Workers of America Union. Any covered employee who is at least 18 years old and has completed three full months of employment with the Company is eligible to participate in the Plan. The Plan is subject to the provisions of the Employee Retirement Income Security Act of 1974, as amended ("ERISA"). Principal Trust Company, an affiliate of Principal Financial Group (“Principal”), serves as trustee and record keeper for the Plan.
Effective July 1, 2009, the Plan was amended to designate the employer stock option as an Employee Stock Ownership Plan ("ESOP"), now considered a subset of the Plan. Effective March 1, 2012, the Plan was amended to include in the Adopting Employers list PTL Prop Solutions, L.L.C., Chesapeake Land Development Company, L.L.C., and Nichols Hills Market, L.L.C. Effective September 27, 2012, October 31, 2012, November 5, 2012, and December 31, 2012, the Plan was amended to change the vesting percentage to 100 percent for those employees who became employed by companies that purchased assets sold by the Company. Participants should refer to the Plan agreement for a complete description of the Plan's provisions.
Transfers
Due to the Company's acquisition or divestiture activity as well as employee status changes, assets may transfer into or out of the Plan. These transfers, if any, are shown as Net transfers in/(out) on the Statements of Changes in Net Assets Available for Benefits. Effective October 2011, the Bronco Drilling 401(k) Plan merged into the Plan. All assets of the Bronco Drilling 401(k) Plan were transferred in to the Plan on October 7, 2011. The fair market value of assets transferred into the Plan was $5,102,121.
Contributions
Each year, participants may contribute up to 75% of pre-tax annual salary compensation and up to 100% of performance-related bonus compensation, as defined by the Plan, subject to certain limitations ($17,000 in 2012 and $16,500 in 2011). In addition, participants who are age 50 and above may elect to make “catch-up” contributions, limited to $5,500 in 2012 and 2011. Participants may also contribute amounts representing rollover distributions from other qualified plans.
The Company matches 100% of participant contributions up to 15% of eligible participant compensation. The Company's matching contributions of $87,861,427 and $69,677,405 for 2012 and 2011, respectively, were made in shares of the Company's common stock. Profit-sharing contributions may be made at the discretion of the Company. Contributions are subject to certain annual Internal Revenue Service limitations. No discretionary profit-sharing contributions were made in 2012 or 2011.
The Company’s matching contribution is invested in Company common stock. These contributions are made in cash, which is used to purchase shares of Company common stock on the open market, and shares of Company common stock previously forfeited by Plan participants. Participants may also elect to direct all or a portion of their contributions into Company common stock. Employees are allowed to direct the transfer of 100% of employer stock from Company matching contributions after:
(a)
reaching age 55, or
(b)
completing at least three years of vesting service.


4
 
Chesapeake Energy Corporation
Savings and Incentive Stock Bonus Plan
Notes to Financial Statements – (continued)

Participant Accounts
Each participant's account is credited with the participant's contribution and allocations of the Company's contribution and Plan investment income (loss). Allocations are based on participant investment income (loss) or account balances, as defined. The benefit to which a participant is entitled is the benefit that can be provided from the participant's vested account balance.
Vesting
Participants are immediately vested in their personal contributions plus actual earnings thereon. Vesting in the Company's matching and profit-sharing contributions plus actual earnings thereon is based on years of credited service or retirement at or after age 55. A participant becomes 100% vested after five years of credited service under a graded vesting schedule.
Participant Loans
Participants may borrow from their accounts a minimum of $1,000 up to a maximum equal to the lesser of $50,000 or 50% of their vested account balance. Loan terms range from one to five years or up to ten years for the purchase of a primary residence. The loans are collateralized by the balance in the participant's account and bear interest at a rate of prime plus 2% at the time of loan origination. The prime rate as of December 31, 2012 was 3.25%. Principal and interest are paid ratably through payroll deductions. Interest rates on loans outstanding at December 31, 2012 ranged from 3.25% to 10.5% with loans maturing at various dates through 2022.
Payment of Benefits
Upon termination of service due to death, retirement or separation from service, a participant may elect to receive either a lump-sum amount equal to the value of the participant's vested interest in his or her account, or have the value rolled over to another qualified plan or IRA. Participants may elect to have the value of investments vested in Company common stock paid in cash or shares of common stock.
Amounts Forfeited
Forfeited non-vested amounts are generally used to pay administrative expenses of the Plan or to reduce future Company contributions into the Plan. Unallocated forfeited non-vested accounts totaled $4,806,214 and $2,971,821 as of December 31, 2012 and 2011, respectively. During 2012 and 2011, administrative expenses were reduced by $253,691 and $122,192, respectively, and employer matching contributions were reduced by $2,617,697 and $2,106,820, respectively, from forfeited non-vested accounts.
2.    Summary of Significant Accounting Policies
Basis of Accounting
The financial statements of the Plan are prepared under the accrual method of accounting.
Use of Estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America ("U.S. GAAP") requires the plan administrator to make estimates and assumptions that affect the reported amounts of net assets available for benefits and, when applicable, disclosures of contingent assets and liabilities at the date of the financial statements and the reported amounts of changes in net assets available for benefits during the reporting period. Actual results could differ from those estimates.
Investment Valuation and Income Recognition
The Plan's investments are stated at fair value. Shares of mutual funds are valued at net asset value on the last business day of the year. Company common stock is valued at the closing market price on the last business day of the year, as reported by the New York Stock Exchange. Units of pooled separate accounts are recorded at estimated unit value based on the estimated market value of the underlying assets net of


5
 
Chesapeake Energy Corporation
Savings and Incentive Stock Bonus Plan
Notes to Financial Statements – (continued)

annual expense charges divided by the beginning units. The pooled separate accounts are redeemable daily without restrictions. The assets held in self-directed brokerage accounts consist of stocks and bonds that are valued using quoted market prices.
Effective January 1, 2007, the Plan entered into a benefit-responsive investment contract, referred to as the Principal Fixed Income Option 401(a)(k), with Principal. Principal maintains the contributions in a general account. The account is credited with earnings on the underlying investments and charged for participant withdrawals and administrative expenses. Participants may ordinarily direct the withdrawal or transfer of all or a portion of their investment at the contract value. However, the Company will be assessed a penalty of 5% of the contract value if it were to discontinue the investment contract without a 12-month notification to Principal. As of December 31, 2012, the Company did not intend to discontinue the investment contract with Principal. This investment is presented at fair value with an adjustment to contract value in the Statements of Net Assets Available for Benefits. Contract value is equal to the principal balance plus accrued interest. Fair value is the present value of the expected principal balance and interest cash flows over the remaining term of the investment contract through June 30, 2021, discounted at the risk-free rate of return for this period. There are no reserves against the contract value for credit risk of the contract issuer or otherwise. The crediting interest rates are reset every January 1 and July 1 as determined by Principal, and were 2.5% and 2.35% for interest rate periods January 1, 2012 through June 30, 2012 and July 1, 2012 through December 31, 2012, respectively, compared to interest rates of 2.75% and 2.7% for interest rate periods January 1, 2011 through June 30, 2011 and July 1, 2011 through December 31, 2011, respectively. The average yield for 2012 was 2.60% compared to 3.27% in 2011.
Purchases and sales of securities are recorded on a trade-date basis. Investment income is recorded on an accrual basis. Dividends are recorded on the ex-dividend date. The Statements of Changes in Net Assets Available for Benefits present the net appreciation (depreciation) in the fair value of investments, reflecting the realized gains and losses and the unrealized appreciation (depreciation) of those investments during the years presented.
Fair Value Measurements
Assets and liabilities that are required to be measured at fair value are categorized based upon the levels of judgment associated with the inputs used to measure their fair value. See Note 4 for the fair value measurement disclosures associated with the Plan’s investments.
Payment of Benefits
Benefits are recorded when paid.
Risks and Uncertainties
Investment securities are exposed to various risks, such as interest rate, market and credit risk. Due to the level of risk associated with certain investment securities, it is at least reasonably possible that changes in the value of investment securities will continue to occur in the near term and that such changes could materially affect participants’ account balances and the amounts reported in the Statements of Net Assets Available for Benefits and the Statements of Changes in Net Assets Available for Benefits.
Plan Expenses
Trustee and recordkeeper fees are paid by the Plan. Certain Plan expenses, such as annual audit fees, are paid by the Plan sponsor and are not included in these financial statements.
New Accounting Pronouncements
In May 2011, the FASB issued an update to improve the comparability of fair value measurements presented and disclosed in financial statements prepared in accordance with U.S. GAAP and International Financial Reporting Standards ("IFRS"). The amendments are of two types: (i) those that clarify the Board’s intent about the application of existing fair value measurement and disclosure requirements and (ii) those that change a particular principle or requirement for measuring fair value or for disclosing information about fair


6
 
Chesapeake Energy Corporation
Savings and Incentive Stock Bonus Plan
Notes to Financial Statements – (continued)

value measurements. This guidance required additional disclosures around the Plan's Level 3 assets that are reported at fair value. The update was effective for annual periods beginning after December 15, 2011 and was adopted by us on January 1, 2012. The adoption of this update did not have a material impact on the Plan’s financial statements.
3.    Investments
The following presents investments that represented 5% or more of the Plan’s net assets as of December 31, 2012 and 2011:
 
 
2012
 
2011
 
Chesapeake Energy Corporation common stock
 
$
242,204,090

*
$
246,005,310

*
Principal Fixed Income Option 401(a)(k)
 
$
34,208,203

 
$
30,114,924

 
Vanguard Target Retirement 2020 Fund
 
$
33,766,270

 
$
25,973,779

**
___________________________________________
* Balances include non-participant directed investments.
** Investment balance did not represent 5% or more of the Plan's assets as of December 31, 2011; presented for comparable purposes only.
For the years ended December 31, 2012 and 2011, the Plan's investments (including gains and losses on investments bought and sold, as well as held during the year) appreciated (depreciated) in value as follows:
 
 
2012
 
2011
 
Common stock
 
$
(72,823,958
)
 
$
(45,298,460
)
 
Mutual funds
 
34,618,674

 
(12,364,722
)
 
Government securities
 
62

 
3,425

 
Pooled separate accounts
 
—

 
2,560,849

 
Investment contract
 
797,361

 
759,945

 
Total
 
$
(37,407,861
)
 
$
(54,338,963
)
 

4.    Fair Value Measurements
The authoritative guidance for fair value measurements establishes a framework for measuring fair value of assets and liabilities. The guidance defines fair value as the amount that would be received from the sale of an asset or paid for the transfer of a liability in an orderly transaction between market participants, i.e., an exit price. To estimate an exit price, a three-level hierarchy is used. The fair value hierarchy prioritizes the inputs, which refer broadly to assumptions market participants would use in pricing an asset or a liability, into three levels:
Level 1:
Quoted prices (unadjusted) for identical assets or liabilities in active markets that the Plan has the ability to access at the measurement date.
Level 2:
Significant observable inputs other than Level 1 prices such as quoted prices for similar assets or liabilities, quoted prices in markets that are not active, or other inputs that are observable or can be corroborated by observable market data.
Level 3:
Significant unobservable inputs that reflect the Plan’s own assumptions about the assumptions that market participants would use in pricing an asset or a liability.
In many cases, a valuation technique used to measure fair value includes inputs from multiple levels of the fair value hierarchy. The lowest level of significant input determines the placement of the entire fair value measurement in the hierarchy.


7
 
Chesapeake Energy Corporation
Savings and Incentive Stock Bonus Plan
Notes to Financial Statements – (continued)

The following tables provide classification information for Plan assets measured at fair value on a recurring basis as of December 31, 2012 and 2011:
 
 
Quoted Prices
in
Active Markets
(Level 1)
 
Significant Other
Observable
Inputs
(Level 2)
 
Significant
Unobservable
Inputs
(Level 3)
 
Total Fair Value
December 31, 2012
 
 
 
 
 
 
 
 
Common Stock
 
 
 
 
 
 
 
 
Employer security
 
$
242,204,090

 
$
—

 
$
—

 
$
242,204,090

Mutual Funds
 
 
 
 
 
 
 
 
Balanced/asset
allocation
 
170,125,731

 
—

 
—

 
170,125,731

Fixed income
 
37,792,393

 
—

 
—

 
37,792,393

International equity
 
27,451,642

 
—

 
—

 
27,451,642

Large U.S. equity
 
62,771,351

 
—

 
—

 
62,771,351

Small/mid U.S.
equity
 
57,271,799

 
—

 
—

 
57,271,799

Investment Contracts
 
 
 
 
 
 
 
 
Short-term fixed
income
 
—

 
—

 
34,573,713

 
34,573,713

Self-Directed Brokerage Account
 
8,707,472

 
10,015

 
—

 
8,717,487

 
 
$
606,324,478

 
$
10,015

 
$
34,573,713

 
$
640,908,206

 
 
 
 
 
 
 
 
 
December 31, 2011
 
 
 
 
 
 
 
 
Common Stock
 
 
 
 
 
 
 
 
Employer security
 
$
246,005,310

 
$
—

 
$
—

 
$
246,005,310

Mutual Funds
 
 
 
 
 
 
 
 
Balanced/asset allocation
 
124,543,335

 
—

 
—

 
124,543,335

Fixed income
 
26,552,538

 
—

 
—

 
26,552,538

International equity
 
18,468,093

 
—

 
—

 
18,468,093

Large U.S. equity
 
47,027,387

 
—

 
—

 
47,027,387

Small/mid U.S. equity
 
43,452,943

 
—

 
—

 
43,452,943

Investment Contracts
 
 
 
 
 
 
 
 
Short-term fixed income
 
—

 
—

 
30,393,933

 
30,393,933

Self-Directed Brokerage Account
 
8,376,282

 
20,160

 
—

 
8,396,442

 
 
$
514,425,888

 
$
20,160

 
$
30,393,933

 
$
544,839,981




8
 
Chesapeake Energy Corporation
Savings and Incentive Stock Bonus Plan
Notes to Financial Statements – (continued)

Schedules of changes in the Plan’s assets classified as Level 3 measurements are presented below.
 
 
Principal
Fixed Income
Option
401(a)(k)
 
Allianz
Variable Annuity
 
Total
Balance of Level 3
as of January 1, 2012
 
$
30,293,007

 
$
100,926

 
$
30,393,933

Unrealized gains relating to instruments
still held at the reporting date*
 
73,534

 
—

 
73,534

Interest credited
 
781,802

 
12,966

 
794,768

Purchases
 
18,502,453

 
—

 
18,502,453

Settlements
 
(15,190,975
)
 
—

 
(15,190,975
)
Balance of Level 3
as of December 31, 2012
 
$
34,459,821

 
$
113,892

 
$
34,573,713

 
 
 
 
 
 
 
Balance of Level 3
as of January 1, 2011
 
$
19,386,759

 
$
98,255

 
$
19,485,014

Unrealized gains relating to instruments
still held at the reporting date*
 
2,085,597

 
2,671

 
2,088,268

Interest credited
 
696,265

 
—

 
696,265

Purchases
 
21,933,850

 
—

 
21,933,850

Settlements
 
(13,809,464
)
 
—

 
(13,809,464
)
Balance of Level 3
as of December 31, 2011
 
$
30,293,007

 
$
100,926

 
$
30,393,933

___________________________________________
* Unrealized gains are reported in the Statements of Net Assets Available for Benefits in Adjustment from fair value to contract value for the fully benefit-responsive investment contracts.
The valuation methods described above may produce a fair value calculation that is not indicative of net realizable value or reflective of future values. Furthermore, although the Plan believes its valuation methods are appropriate and consistent with other market participants, the use of different methodologies or assumptions to determine the fair value of certain financial instruments could result in a different fair value measurement at the reporting date.


9
 
Chesapeake Energy Corporation
Savings and Incentive Stock Bonus Plan
Notes to Financial Statements – (continued)

5.    Non-participant Directed Investments
The Company’s discretionary contribution is automatically invested in Company common stock. Employees also have the option of investing their contributions, or a portion thereof, in Company common stock. Since the activity of the non-participant directed and participant-directed investments in the Company’s common stock is combined, the entire investment is considered non-participant directed for purposes of this disclosure. Information regarding the net assets available for benefits and the changes in net assets available for benefits for Company common stock is shown below:
 
 
2012
 
2011
Net assets, beginning balance:
 
 
 
 
   Chesapeake Energy Corporation common stock
 
$
246,005,310

 
$
236,427,190

Changes in net assets:
 
 
 
 
   Contributions
 
98,353,294

 
79,792,349

   Dividend income
 
4,428,141

 
3,179,872

   Net appreciation (depreciation)
 
(72,911,440
)
 
(44,896,597
)
   Benefits paid to participants
 
(16,463,078
)
 
(12,119,397
)
   Transfers to other investment options, net
 
(17,208,137
)
 
(16,378,107
)
Net increase (decrease) during the year
 
(3,801,220
)
 
9,578,120

Net assets, ending balance:
 
 
 
 
   Chesapeake Energy Corporation common stock
 
$
242,204,090

 
$
246,005,310

6.    Party-in-interest Transactions
The Plan invests in Company common stock. These transactions represent investments in the Company and, therefore, constitute party-in-interest transactions. During 2012 and 2011, there were 770 and 794 purchases of Company common stock for a total purchase price of $129,694,621 and $105,481,053, respectively, and 1,782 and 1,627 sales of Company common stock for a total selling price of $60,585,976 and $51,006,275, respectively. The market price for Chesapeake common stock as of December 31, 2012 and 2011 was $16.62 and $22.29, respectively. The closing market price as of June 27, 2013 was $20.58.
Certain Plan investments are units of pooled separate accounts or an investment contract managed by Principal, which served as the trustee and record keeper for the Plan in 2012 and 2011.
7.    Contingencies
On June 19, July 17 and July 20, 2012, putative class actions were filed in the U.S. District Court for the Western District of Oklahoma against the Company, Chesapeake Energy Savings and Incentive Stock Bonus Plan (the Plan), and certain of the Company’s officers and directors alleging breaches of fiduciary duties under the Employee Retirement Income Security Act (ERISA). The three cases have been consolidated, and the Plan is not named as a defendant in the consolidated amended complaint which was filed on February 21, 2013. The action is brought on behalf of participants and beneficiaries of the Plan, and alleges that as fiduciaries of the Plan, defendants owed fiduciary duties, which they purportedly breached by, among other things, failing to manage and administer the Plan’s assets with appropriate skill and care, and engaging in activities that were in conflict with the best interest of the Plan. The plaintiffs seek class certification, damages of an unspecified amount, equitable relief, and attorneys’ fees and other costs. The defendants filed a motion to dismiss on April 22, 2013, and the plaintiffs opposed on June 18, 2013. We are currently unable to assess the probability of loss or estimate a range of potential loss associated with this matter.


10
 
Chesapeake Energy Corporation
Savings and Incentive Stock Bonus Plan
Notes to Financial Statements – (continued)

8.    Tax Status
The Plan is qualified under Section 401 of the IRC and is, therefore, considered to be exempt from federal income taxes under the provisions of Section 501(a). A tax qualification letter, dated April 1, 2013, was received from the Internal Revenue Service (IRS) noting a favorable determination on the Plan. This determination letter is applicable through the amended and restated Plan Document executed June 10, 2009. Subsequent to this determination by the IRS, the Plan was amended. Once qualified, the Plan is required to operate in conformity with the Code to maintain its qualification. The Plan's administrator believes the Plan is being operated in compliance with the applicable requirements of the Code and, therefore, believes that the Plan, as amended, is qualified and the related trust is tax-exempt. Therefore, no provision for income taxes has been included in the Plan's financial statements. In addition, the Plan has filed for a new favorable determination letter in May 2013, which encompasses all amendments executed subsequent to the amended and restated Plan Document.
U.S. GAAP requires plan management to evaluate tax positions taken by the Plan and recognize a tax liability (or asset) if the Plan has taken an uncertain position that more likely than not would not be sustained upon examination by the Internal Revenue Service. The plan administrator has analyzed the tax positions by the Plan and has concluded that as of December 31, 2012, there are no uncertain positions taken or expected to be taken that would require recognition of a liability (or asset) or disclosure in the financial statements. The Plan is subject to routine audits by taxing jurisdictions; however, there are currently no audits for any tax periods in progress. The plan administrator believes the Plan is no longer subject to income tax examinations for years prior to 2006.
9.    Plan Termination
Although the Company has not expressed any intent to do so, the Company reserves the right to change, amend or discontinue the Plan at any time, subject to the provisions of ERISA. In the event of discontinuance of the Plan, participants will become 100% vested in their accounts and participant account balances will be distributed to participants in accordance with the terms of the Plan.
10.
Concentration of Investments
As of December 31, 2012, the Plan held $242,204,090 of Company common stock, which was approximately 38% of total investments. Therefore, net assets available for benefits are particularly sensitive to changes in the value of Company common stock.
11.    Reconciliation of Financial Statements to Form 5500
The following is a reconciliation of net assets available for benefits as of December 31, 2012 and 2011, as reflected in the accompanying financial statements, to the Form 5500:
 
 
2012
 
2011
Net assets available for benefits per the financial
statements
 
$
657,737,030

 
$
558,697,207

Add: Accrued administrative expenses
 
51,944

 
—

Net assets available for benefits per the Form 5500
 
$
657,788,974

 
$
558,697,207

The following is a reconciliation of administrative expenses for the years ended December 31, 2012 and 2011, as reflected in the accompanying financial statements, to the Form 5500:
 
 
2012
 
2011
Administrative expenses per the financial statements
 
$
814,283

 
$
418,669

Add: Accrued administrative expenses
 
—

 
109,374

Less: Current year accrued administrative expenses
 
(51,944
)
 
—

Administrative expenses per the Form 5500
 
$
762,339

 
$
528,043



11
 
Chesapeake Energy Corporation
Savings and Incentive Stock Bonus Plan
Notes to Financial Statements – (continued)

Administrative expenses are recorded on the Form 5500 when paid.
12.    Subsequent Events
In December 2012, the Company's wholly owned midstream subsidiary, Chesapeake Midstream Development, L.L.C. (CMD), sold its wholly owned subsidiary, Chesapeake Midstream Operating, L.L.C. (CMO), to Access Midstream Partners, L.P. (ACMP). As a result of this sale, approximately 1,250 of the Company's employees became ACMP employees effective January 1, 2013. As a result, the assets of those employees were transferred out of the Plan in January 2013. The total value of those assets transferred totaled approximately $50,989,000 as of December 31, 2012.


12
 
Chesapeake Energy Corporation
Savings and Incentive Stock Bonus Plan
Schedule H, Line 4i-Schedule of Assets (Held at End of Year)
December 31, 2012                             

 
Identity of Issue,
Borrower, Lessor or Similar Party
 
Description of Investment
Including Maturity Date,
Rate of Interest, Collateral,
Par or Maturity Value
 
Cost
 
Current
Value
*
Chesapeake Energy Corporation
 
Common Stock,
$0.01 par value
 
$
273,333,630

 
$
242,204,090

 
American Fnds Fundamental Investors R6 Fnd
 
Mutual Fund
 
**

 
20,613,878

 
American Fnds New Perspective R6 Fnd
 
Mutual Fund
 
**

 
3,427,699

 
Alger Small Cap Growth Inst I Fund
 
Mutual Fund
 
**

 
10,911,450

 
Heartland Value Plus Inst Fund
 
Mutual Fund
 
**

 
6,277,423

 
Munder Mid-Cap Core Growth Y Fund
 
Mutual Fund
 
**

 
10,089,441

 
PIMCO Real Return Instl Fund
 
Mutual Fund
 
**

 
7,302,703

 
PIMCO Total Return Instl Fund
 
Mutual Fund
 
**

 
30,489,690

*
Principal LargeCap S&P 500 Index Inst Fund
 
Mutual Fund
 
**

 
5,482,822

*
Principal MidCap Value I Inst Fund
 
Mutual Fund
 
**

 
18,471,388

*
Principal MidCap S&P 400 Index Inst Fund
 
Mutual Fund
 
**

 
3,677,597

*
Principal Real Estate Secs Inst Fund
 
Mutual Fund
 
**

 
4,631,597

*
Principal SmallCap S&P 600 Index Fund
 
Mutual Fund
 
**

 
3,212,903

*
Principal Capital Appreciation Inst Fund
 
Mutual Fund
 
**

 
12,518,903

*
Principal Diversified International Inst Fund
 
Mutual Fund
 
**

 
19,406,122

 
Vanguard Equity-Income Fund
 
Mutual Fund
 
**

 
5,191,375

 
Vanguard Growth Index Inst Fd
 
Mutual Fund
 
**

 
18,964,373

 
Vanguard Total Intl Stock Index Signal Fund
 
Mutual Fund
 
**

 
4,617,821

 
Vanguard Target Retirement Income Inv Fund
 
Mutual Fund
 
**

 
10,962,857

 
Vanguard Target Retirement 2015 Fund
 
Mutual Fund
 
**

 
3,888,671

 
Vanguard Target Retirement 2020 Fund
 
Mutual Fund
 
**

 
33,766,270

 
Vanguard Target Retirement 2025 Fund
 
Mutual Fund
 
**

 
9,808,165

 
Vanguard Target Retirement 2030 Fund
 
Mutual Fund
 
**

 
28,078,430

 
Vanguard Target Retirement 2035 Fund
 
Mutual Fund
 
**

 
8,805,348

 
Vanguard Target Retirement 2040 Fund
 
Mutual Fund
 
**

 
28,562,714

 
Vanguard Target Retirement 2045 Fund
 
Mutual Fund
 
**

 
15,322,468

 
Vanguard Target Retirement 2050 Fund
 
Mutual Fund
 
**

 
27,671,474

 
Vanguard Target Retirement 2055 Fund
 
Mutual Fund
 
**

 
3,103,122

 
Vanguard Target Retirement 2060 Fund
 
Mutual Fund
 
**

 
156,212

*
Principal Fixed Income 401(a)(k)
 
Investment Contract
 
**

 
34,208,203

*
Principal Self-Directed Brokerage Acct
 
Common Stock, Mutual Funds and Money Market
 
**

 
8,717,487

 
Allianz Life Variable Annuity
 
Investment Contract
 
**

 
113,892

 
      Total Investments
 
 
 
 
 
640,656,588

*
Participant Loans
 
Interest rates ranging from 3.25% to 10.5% due through December 2022
 
**

 
15,557,401

 
      Total
 
 
 
 
 
$
656,213,989

___________________________________________
* Identifies parties-in-interest.
** Identifies fully participant-directed investment options for which presentation of cost in the Schedule of Assets (Held at End of Year) is not required.


13

Chesapeake Energy Corporation
Savings and Incentive Stock Bonus Plan
Schedule H, Line 4j-Schedule of Reportable Transactions
Year Ended December 31, 2012                                


Description of Asset
 
Number
of
Purchases
 
Number
of
Sales
 
Total
Purchase
Price
 
Total
Selling
Price
 
Net Gain
(Loss)
 
 
 
 
 
 
 
 
 
 
 
Chesapeake Energy Corporation
   Common Stock
 
770

 
—

 
$
129,694,621

 
$
—

 
$
—

Chesapeake Energy Corporation
   Common Stock
 
—

 
1,782

 
$
—

 
$
60,585,976

 
$
(12,761,307
)

Note: All other columns are excluded as they are not applicable.




14



SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the Employee Compensation and Benefits Committee of Chesapeake Energy Corporation has duly caused this annual report to be signed on its behalf by the undersigned hereunto duly authorized.

CHESAPEAKE ENERGY CORPORATION
SAVINGS AND INCENTIVE STOCK BONUS PLAN


By: /s/ LISA PHELPS         

Lisa Phelps, Vice President Human Resources
and Plan Administrator


Date: June 28, 2013


15


EXHIBIT INDEX


Exhibit
 
 
  Description
23
 
Consent of PricewaterhouseCoopers LLP




16