Exhibit 10.1

Execution Version

TAX SHARING AGREEMENT

between

CHESAPEAKE ENERGY CORPORATION

and

CHESAPEAKE OILFIELD OPERATING, L.L.C.

dated as of

June 25, 2014

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Execution Version

 

TABLE OF CONTENTS

 

ARTICLE I DEFINITIONS AND EXAMPLES

     1     

Section 1.1

    

Definitions

     1     

Section 1.2

    

Examples

     6   

ARTICLE II ALLOCATION OF TAXES AND TAX ITEMS

     6     

Section 2.1

    

General Rules

     6      (a)     

Chesapeake Taxes

     6      (b)     

SSE Taxes

     6     

Section 2.2

    

Special Rules

     7      (a)     

Pro Forma Stand-Alone Basis

     7      (b)     

Rules for Determining from which Business a Tax Item Arises

     8      (c)     

Preparation of Pro Forma Calculations and Allocations

     8      (d)     

Differences Between Taxes Shown on Joint Return and Taxes Computed on a Pro
Forma Stand-Alone Basis

     8   

ARTICLE III PREPARATION AND FILING OF TAX RETURNS

     8     

Section 3.1

    

Joint Returns

     8     

Section 3.2

    

Separate Returns

     8     

Section 3.3

    

Rules Relating to the Preparation of Tax Returns

     8      (a)     

General Rule

     8      (b)     

Election to File Joint Returns

     9      (c)     

SSE Returns

     9      (d)     

Chesapeake Returns

     9      (e)     

Returns Affecting Liability of Other Party

     9      (f)     

Reimbursement for Costs Incurred by Preparer

     9      (g)     

Allocation of Tax Items Between Joint Return and Related Separate Return

     10      (h)     

Standard of Performance

     10   

ARTICLE IV TAX PAYMENTS AND INDEMNIFICATION PAYMENTS

     10     

Section 4.1

    

Payment of Taxes to Tax Authorities

     10     

Section 4.2

    

Indemnification Payments

     10      (a)     

Tax Payments Made by the SSE Group

     10      (b)     

Tax Payments Made by the Chesapeake Group

     10      (c)     

Credit for Prior Deemed Tax Payments

     10     

Section 4.3

    

Initial Determinations and Subsequent Adjustments

     10      (a)     

Initial Determinations of Payments

     10      (b)     

Redeterminations of Payments and Additional Payments

     11     

Section 4.4

    

Payments by or to Other Members of the Groups

     11     

Section 4.5

    

Late Payments

     11     

Section 4.6

    

Tax Consequences of Payments

     11     

Section 4.7

    

Payment Notices

     12   

 

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ARTICLE V TAX CONTESTS

     12     

Section 5.1

    

Notices

     12     

Section 5.2

    

Control of Tax Contests

     13      (a)       

General Rule

     13      (b)       

Tax Contests Involving Certain Taxes Reported on a Joint Return

     13      (c)       

Non-Controlling Party Participation Rights

     13   

ARTICLE VI ASSISTANCE AND COOPERATION

     14     

Section 6.1

    

Provision of Information

     14      (a)       

Information with Respect to Joint Returns

     14      (b)       

Information with Respect Tax Payments

     14      (c)       

Information with Respect to Separate Returns

     15      (d)       

Information with Respect to Pro Forma Stand-Alone Basis Computations and
Allocations

     15      (e)       

Information with Respect to Tax Contests

     15     

Section 6.2

    

Reliance on Exchanged Information

     15     

Section 6.3

    

Provision of Assistance and Cooperation

     16      (a)       

Assistance with Respect to Joint Returns

     16      (b)       

Assistance with Respect to Tax Contests

     16      (c)       

Cooperation

     16     

Section 6.4

    

Retention of Tax Records

     16     

Section 6.5

    

Supplemental Rulings and Supplemental Tax Opinions

     16     

Section 6.6

    

Withholding and Reporting

     17   

ARTICLE VII RESTRICTIONS ON CERTAIN ACTIONS

     17     

Section 7.1

    

General Restrictions

     17     

Section 7.2

    

Certain SSE Actions Beginning on the Spin-off Date

     18   

ARTICLE VIII GENERAL PROVISIONS

     18     

Section 8.1

    

Authority

     18     

Section 8.2

    

Termination

     19     

Section 8.3

    

Entire Agreement

     19     

Section 8.4

    

Binding Effect; No Third-Party Beneficiaries; Assignment

     19     

Section 8.5

    

Amendment

     19     

Section 8.6

    

Failure or Indulgence Not Waiver; Remedies Cumulative

     19     

Section 8.7

    

Notices

     19     

Section 8.8

    

Counterparts

     20     

Section 8.9

    

Severability

     20     

Section 8.10

    

Governing Law

     20     

Section 8.11

    

Specific Performance

     20     

Section 8.12

    

Construction

     20     

Section 8.13

    

Performance

     21     

Section 8.14

    

Change in Law

     21     

Section 8.15

    

Expenses

     21     

Section 8.16

    

Disputes

     21     

Section 8.17

    

Confidentiality

     21   

 

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TAX SHARING AGREEMENT

THIS TAX SHARING AGREEMENT (this “Agreement”) is entered into as of June 25,
2014, between Chesapeake Energy Corporation, an Oklahoma corporation
(“Chesapeake”), and Chesapeake Oilfield Operating, L.L.C., an Oklahoma limited
liability company. Unless otherwise indicated, all “Article” and “Section”
references in this Agreement are to articles and sections of this Agreement.

RECITALS

WHEREAS, SSE (as defined below) is an indirect wholly owned subsidiary of
Chesapeake that owns and operates the SSE Business (as defined below);

WHEREAS, the Board of Directors of Chesapeake has determined that it would be
appropriate and desirable for Chesapeake to separate (the “Separation”) the SSE
Business from the Chesapeake Business (as defined below);

WHEREAS, Chesapeake, in connection with the Separation, intends to distribute to
its shareholders all of the shares of SSE stock in a transaction (the
“Spin-off”) intended to qualify as a transaction described under Sections
368(a)(1)(D) and 355 of the Internal Revenue Code of 1986, as amended (the
“Code”);

WHEREAS, the Parties set forth in a Master Separation Agreement the principal
arrangements between them regarding the Separation and the Spin-off; and

WHEREAS, the Parties desire to provide for and agree upon the allocation between
the Parties of Taxes and Tax Items arising prior to, as a result of, and
subsequent to the Spin-off, and to provide for and agree upon other matters
relating to Taxes.

NOW, THEREFORE, in consideration of the foregoing and the covenants and
agreements set forth below, the Parties agree as follows:

ARTICLE I

DEFINITIONS AND EXAMPLES

Section 1.1 Definitions. For purposes of this Agreement, the following terms
have the following meanings:

“Agreement” has the meaning set forth in the preamble hereto.

“Chesapeake” has the meaning set forth in the recitals hereto.

“Chesapeake Business” has the meaning set forth in Section 1.1 of the Master
Separation Agreement.

 

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“Chesapeake Group” means Chesapeake and each Subsidiary of Chesapeake (but only
while such Subsidiary is a Subsidiary of Chesapeake) other than a Person that is
a member of the SSE Group.

“Chesapeake Taxes” has the meaning set forth in Section 2.1(a).

“Code” has the meaning set forth in the recitals hereto.

“Controlling Party” means the Party that has primary responsibility, control and
discretion in handling, settling, or conducting a Tax Contest pursuant to
Section 5.2.

“Effective Time” means the time at which the Spin-off is effected on the
Spin-off Date.

“Group” means the Chesapeake Group or the SSE Group, as the context requires.

“IRS” means the Internal Revenue Service.

“Joint Return” means any Tax Return that Chesapeake determines in its reasonable
discretion includes both a Tax Item attributable to the Chesapeake Business and
a Tax Item attributable to the SSE Business.

“Master Separation Agreement” means the Master Separation Agreement dated the
date hereof between Chesapeake and Chesapeake Oilfield Operating, L.L.C.

“Non-Controlling Party” means the Party that does not have primary
responsibility, control, and discretion in handling, settling, or conducting a
Tax Contest pursuant to Section 5.2.

“Non-Controlling Party Item” has the meaning set forth in Section 5.2(c).

“Non-Preparer” means the Party that is not responsible for the preparation or
filing of a Joint Return or a Separate Return, as applicable, pursuant to
Section 3.1 and Section 3.2.

“Party” or “Parties” means Chesapeake, SSE, or both, as the context requires.

“Payment Date” means (i) with respect to any U.S. federal income Tax Return, the
due date for any required installment of estimated taxes determined under Code
Section 6655, the due date (determined without regard to extensions) for filing
the return determined under Code Section 6072, and the date the return is filed,
and (ii) with respect to any other Tax Return, the corresponding dates
determined under the applicable Tax Law.

 

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“Person” means an individual, a partnership, a corporation, a limited liability
company, an association, a joint stock company, a trust, a joint venture, a
union, an unincorporated organization, or a governmental entity or any
department, agency, or political subdivision thereof.

“Preparer” means the Party that is responsible for the preparation and filing of
a Joint Return or a Separate Return, as applicable, pursuant to Section 3.1 and
Section 3.2.

“Requesting Party” has the meaning set forth in Section 6.5.

“Ruling” means PLR-137386-13 issued to Chesapeake on March 10, 2014.

“Ruling Request” means Chesapeake’s request for a ruling filed with the IRS,
dated August 23, 2013, and as supplemented on February 28, 2014, and March 6,
2014 (in each case, including all appendices, schedules, attachments, and
exhibits thereto), and any other correspondence (including by email) sent to the
IRS in connection with obtaining the Ruling.

“Separate Return” means any Tax Return that is not a Joint Return.

“Separation” has the meaning set forth in the recitals hereto.

“Separation Transactions” means the Spin-off and related transactions described
in Appendix A hereto.

“Spin-off” has the meaning set forth in the recitals hereto.

“Spin-off Date” means the date of the Spin-off.

“SSE” means (i) with respect to any Tax Year, or portion thereof, ending before
the date of the conversion of Chesapeake Oilfield Operating, L.L.C. into Seventy
Seven Energy Inc., Chesapeake Oilfield Operating, L.L.C., and (ii) with respect
to any Tax Year, or portion thereof, beginning on or after the date of the
conversion of Chesapeake Oilfield Operating, L.L.C. into Seventy Seven Energy
Inc., Seventy Seven Energy Inc.

“SSE Business” has the meaning set forth in Section 1.1 of the Master Separation
Agreement.

“SSE Group” means (i) with respect to any Tax Year, or portion thereof, ending
before the Spin-off Date, SSE and each other Subsidiary of Chesapeake that is a
Subsidiary of SSE on the Spin-off Date and (ii) with respect to any Tax Year, or
portion thereof, beginning on or after the Spin-off Date, SSE and each
Subsidiary of SSE (but only while such Subsidiary is a Subsidiary of SSE).

“SSE Taxes” has the meaning set forth in Section 2.1(b).

 

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“Subsidiary” means, with respect to any specified Person, any corporation,
partnership, limited liability company, joint venture or other organization,
whether incorporated or unincorporated, of which at least a majority of the
securities or interests having by the terms thereof ordinary voting power to
elect at least a majority of the board of directors or others performing similar
functions with respect to such corporation or other organization is directly or
indirectly owned or controlled by such specified Person or by any one or more of
its Subsidiaries, or by such specified Person and one or more of its
Subsidiaries.

“Supplemental IRS Submission” means any request for a Supplemental Ruling, each
supplemental submission, and any other correspondence or supplemental materials
submitted to the IRS in connection with obtaining any Supplemental Ruling.

“Supplemental Ruling” means any private letter ruling obtained by Chesapeake or
SSE from the IRS which supplements or otherwise modifies the Ruling.

“Supplemental Tax Opinion” means, with respect to a specified action, an opinion
(other than the Tax Opinion) from Tax Counsel to the effect that (subject to any
customary assumptions, qualifications, and limitations set forth therein)
(i) such action will not preclude the Spin-off from qualifying for U.S. federal
income tax purposes as a Tax-free transaction described under Sections
368(a)(1)(D) and 355 of the Code to Chesapeake, its shareholders, and SSE
(except to the extent such shareholders receive cash in lieu of fractional
shares or gain is required to be recognized by Chesapeake under Section 357(c)
of the Code) and (ii) such action will not increase the amount of Tax imposed on
any other part of the Separation Transactions.

“Tax” or “Taxes” means all forms of taxation imposed by any governmental entity
or political subdivision, agency, commission or authority thereof, whenever
created or imposed, and whether of the United States or elsewhere, and whether
imposed by a local, municipal, state, national, federal, or other body, and
without limiting the foregoing, shall include any income, gross income, gross
receipts, profits, capital stock, franchise, withholding, payroll, social
security, workers compensation, unemployment, disability, property, ad valorem,
stamp, excise, severance, occupation, service, sales, use, license, lease,
transfer, recording, import, export, value added, alternative minimum,
estimated, or other similar tax (including any fee, assessment, or other charge
in the nature of or in lieu of any tax), together with any interest, penalties,
additions to tax, or additional amounts in respect of the foregoing.

“Tax Authority” means, with respect to any Tax, the governmental entity or
political subdivision, agency, commission, or authority thereof that imposes
such Tax, or that is charged with the assessment, determination, or collection
of such Tax for such entity or subdivision.

“Tax Benefit” means any credit, deduction, or other attribute that may have the
effect of decreasing any Tax.

 

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“Tax Contest” means an audit, review, examination, or any other administrative
or judicial proceeding with the purpose or effect of examining, determining, or
redetermining Taxes of any member of either Group (including any administrative
or judicial review of any claim for a refund of any Tax).

“Tax Counsel” means (i) with respect to the Tax Opinion, Baker Botts L.L.P. or
(ii) with respect to a Supplemental Tax Opinion, a nationally recognized law
firm or accounting firm designated by the Party to whom such opinion is
delivered.

“Tax Detriment” means any income, gain, or other attribute that may have the
effect of increasing any Tax.

“Tax Item” means any Tax Benefit or Tax Detriment.

“Tax Law” means the law of any governmental entity or political subdivision
thereof, and any controlling judicial or administrative interpretations of such
law, relating to any Tax.

“Tax Materials” means (i) the Ruling, (ii) the Ruling Request, (iii) any
Supplemental IRS Submission, (iv) the representation letters delivered to Tax
Counsel in connection with the delivery of the Tax Opinion or the Supplemental
Tax Opinion, and (v) any other materials delivered or deliverable by Chesapeake,
SSE, or others in connection with the rendering by Tax Counsel of the Tax
Opinion or the Supplemental Tax Opinion or the issuance by the IRS of the Ruling
or any Supplemental Ruling.

“Tax Opinion” means the opinion to be delivered by Tax Counsel to Chesapeake in
connection with the Separation Transactions substantially to the effect that
(subject to the customary assumptions, qualifications, and limitations set forth
therein) for U.S. federal income tax purposes the Spin-off will qualify as a
Tax-free transaction described under Sections 368(a)(1)(D) and 355 of the Code
to Chesapeake, its shareholders, and SSE (except to the extent such shareholders
receive cash in lieu of fractional shares or gain is required to be recognized
by Chesapeake under Section 357(c) of the Code).

“Tax Records” means Tax Returns, Tax Return work papers, documentation relating
to any Tax Contests, and any books of account or records required to be
maintained under applicable Tax Laws (including but not limited to Section 6001
of the Code) or under any record retention agreement with any Tax Authority.

“Tax Return” means any report of Taxes due, any claims for refund of Taxes paid,
any information return with respect to Taxes, or any other similar report,
statement, declaration, election, notice, or other document required to be filed
under any applicable Tax Law (whether or not a payment is required to be made in
connection with such filing), including any attachments, exhibits, schedules, or
appendices or other materials submitted with any of the foregoing, and including
any amendments or supplements to any of the foregoing.

 

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“Tax Year” means, with respect to any Tax, the year, or other period, if
applicable, for which the Tax is reported as provided under applicable Tax Law.

“Treasury Regulations” means the regulations promulgated from time to time under
the Code as in effect for the relevant Tax Year.

Section 1.2 Examples. The operation of various provisions of this Agreement is
illustrated by examples in Appendix B hereto, and this Agreement shall be
interpreted in accordance with such examples.

ARTICLE II

ALLOCATION OF TAXES AND TAX ITEMS

Section 2.1 General Rules. Except as provided in Section 5.1 (Tax
Contests—Notices) and ARTICLE VI (Assistance and Cooperation), Taxes and Tax
Items shall be allocated as follows:

(a) Chesapeake Taxes. For any Tax Year, Chesapeake shall be liable for and
indemnify the SSE Group against Chesapeake’s allocable portion of Taxes imposed
on the Chesapeake Group and the SSE Group (“Chesapeake Taxes”). Chesapeake’s
allocable portion of such Taxes shall be determined by taking into account the
following Tax Items on a pro forma stand-alone basis (as determined pursuant to
Section 2.2(a)):

(i) Chesapeake Business Tax Detriments. Tax Detriments (other than Tax
Detriments resulting from the Separation Transactions) arising from the
operation or ownership of the Chesapeake Business,

(ii) Chesapeake Business Tax Benefits. Tax Benefits (other than Tax Benefits
resulting from the Separation Transactions) arising from the operation or
ownership of the Chesapeake Business,

(iii) Separation Transactions—Generally. Tax Items resulting from the Separation
Transactions, except those Tax Items that are taken into account by SSE pursuant
to Section 2.1(b)(iii), and

(iv) SSE Business Tax Benefits. Tax Benefits (other than Tax Benefits resulting
from the Separation Transactions) arising from the operation or ownership of the
SSE Business, but only to the extent such Tax Benefits are not taken into
account in calculating SSE Taxes under Section 2.1(b)(ii).

(b) SSE Taxes. For any Tax Year, SSE shall be liable for and indemnify the
Chesapeake Group against SSE’s allocable portion of Taxes imposed on the
Chesapeake Group and the SSE Group (“SSE Taxes”). SSE’s allocable portion of
such Taxes shall be determined by taking into account the following Tax Items on
a pro forma stand-alone basis (as determined pursuant to Section 2.2(a)):

(i) SSE Business Tax Detriments. Tax Detriments (other than Tax Detriments
resulting from the Separation Transactions) arising from the operation or
ownership of the SSE Business,

 

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(ii) SSE Business Tax Benefits. Tax Benefits (other than Tax Benefits resulting
from the Separation Transactions) arising from the operation or ownership of the
SSE Business, provided that such Tax Benefits may not be used to reduce any Tax
Detriments described in Section 2.1(b)(iii),

(iii) Separation Transactions—Breach of Covenants. Tax Items resulting from the
Separation Transactions, but only to the extent such Tax Items are attributable
to SSE’s breach of any covenant or representation under ARTICLE VII, and

(iv) Chesapeake Business Tax Benefits. Tax Benefits (other than Tax Benefits
resulting from the Separation Transactions) arising from the operation or
ownership of the Chesapeake Business, but only to the extent such Tax Benefits
are not taken into account in calculating Chesapeake Taxes under Section
2.1(a)(ii) and provided that such Tax Benefits may not be used to reduce any Tax
Detriments described in Section 2.1(b)(iii).

Section 2.2 Special Rules.

(a) Pro Forma Stand-Alone Basis. For purposes of computing Chesapeake Taxes and
SSE Taxes on a pro forma stand-alone basis, Tax Items shall be taken into
account:

(i) only to the extent required or allowable under applicable Tax Law on a pro
forma stand-alone basis for such Tax Year,

(ii) by assuming that the members of the SSE Group filed on a consolidated basis
with SSE as the common parent,

(iii) by using all applicable elections, accounting methods, and conventions
used on the Tax Return on which such Tax Items are actually reported,

(iv) by applying the average Tax rate on such Tax Return (i.e., the Tax rate,
expressed as a percentage, equal to the quotient of total Taxes shown on the Tax
Return with respect to a particular Tax base and such applicable Tax base),
provided, however, if any category of Tax Items is subject to a different rate
of Tax than other categories of Tax Items on such Tax Return, the average Tax
rate applicable to such category of Tax Items reported on the Tax Return shall
apply with respect to such Tax Items, and

(v) by treating Tax Benefits as used in the order specified under applicable Tax
Law or, to the extent that such Tax Law does not specify the order of use, as
used pro rata.

 

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(b) Rules for Determining from which Business a Tax Item Arises. For purposes of
ARTICLE II, Tax Items shall be deemed to arise from the operation or ownership
of the Business to which such items are more closely related. Notwithstanding
the foregoing, with respect to any Tax Year, Tax Items related to overhead costs
and similar expenses that do not directly relate to either Business shall be
allocated between the Businesses in a manner that is consistent with the
practice of the Groups that is reflected on the Tax Return relating to such Tax
Year.

(c) Preparation of Pro Forma Calculations and Allocations. Chesapeake shall be
responsible for preparing, in its reasonable discretion, all pro forma
stand-alone basis computations and allocations provided for in this ARTICLE II
(including, for the avoidance of doubt, the allocations provided for in
Section 2.2(b)). Chesapeake shall make available and provide to SSE a reasonable
opportunity to review all such pro forma stand-alone basis computations and
allocations and shall use its reasonable discretion in taking into account any
comments relating to such computations and allocations that are provided in
writing by SSE, which comments shall be provided no later than thirty days after
such computations and allocations are made available to SSE. Chesapeake shall
have no obligation to consider any comments that are provided more than thirty
days after such computations and allocations are made available to SSE.

(d) Differences Between Taxes Shown on Joint Return and Taxes Computed on a Pro
Forma Stand-Alone Basis. If the sum of Chesapeake Taxes and SSE Taxes relating
to a Joint Return is different from the amount of Tax shown on such Joint
Return, then the Tax shown on such Joint Return shall be allocated between the
Parties in the same proportion as the amount of Chesapeake Taxes or SSE Taxes,
as appropriate, bears to the sum of Chesapeake Taxes and SSE Taxes relating to
such Joint Return.

ARTICLE III

PREPARATION AND FILING OF TAX RETURNS

Section 3.1 Joint Returns. Chesapeake shall be responsible for preparing and
timely filing all Joint Returns.

Section 3.2 Separate Returns. Chesapeake shall be responsible for preparing and
timely filing all Tax Returns that it determines in its reasonable discretion
are Separate Returns including Tax Items attributable to the Chesapeake
Business. SSE shall be responsible for preparing and timely filing all other
Separate Returns.

Section 3.3 Rules Relating to the Preparation of Tax Returns.

(a) General Rule. Except as otherwise provided in this Agreement, the Preparer
of a Tax Return shall have the exclusive right, in its sole discretion, with
respect to such Tax Return to determine (i) the manner in which such Tax Return
shall be prepared and filed, including the elections, methods of accounting,
positions, conventions, and principles of taxation to be used and the manner in
which any

 

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Tax Item shall be reported, (ii) whether any extensions may be requested,
(iii) whether an amended Tax Return shall be filed, (iv) whether any claims for
refund shall be made, (v) whether any refunds shall be paid by way of refund or
credited against any liability for the related Tax, and (vi) whether to retain
outside firms to prepare or review such Tax Return.

(b) Election to File Joint Returns. Chesapeake shall have the sole discretion of
whether to file a Joint Return on a consolidated, combined, or joint basis, if
the filing of such consolidated, combined, or joint return is elective under the
relevant Tax Law.

(c) SSE Returns. Except as required by applicable Tax Law, with respect to any
Separate Return for which SSE is the Preparer, SSE shall not take any position
that it knows, or reasonably should know, would adversely affect any member of
the Chesapeake Group without the prior written consent of Chesapeake. Without
limiting the foregoing, SSE shall not elect under Section 172(b)(3) of the Code
to relinquish the carryback period with respect to a net operating loss if such
net operating loss could, absent such an election, be carried back to the
Chesapeake Group’s 2014 Joint Return.

(d) Chesapeake Returns. Except as required by applicable Tax Law, with respect
to any Separate Return for which Chesapeake is the Preparer, Chesapeake shall
not take any position that it knows, or reasonably should know, would adversely
affect any member of the SSE Group without the prior written consent of SSE.

(e) Returns Affecting Liability of Other Party. Insofar as a Tax Return prepared
by one Party may affect Taxes for which the other Party is liable pursuant to
this Agreement:

(i) Tax Accounting Practices. Except as required by applicable Tax Law, the Tax
Return shall be prepared in a manner that is consistent with the tax accounting
practice of the Groups in effect for such Tax Year.

(ii) Review Prior to Filing. The Preparer of such Tax Return shall make the Tax
Return or relevant portion thereof available to the Non-Preparer no later than
forty-five days before the Tax Return is due, taking into account any extensions
that the Preparer files, and shall use its reasonable discretion in taking into
account any comments on such Tax Return that are provided in writing by the
Non-Preparer, which comments shall be provided no later than thirty days after
such Tax Return is made available to the Non-Preparer. The Preparer shall have
no obligation to consider any comments that are provided more than thirty days
after such Tax Return is made available to the Non-Preparer.

(f) Reimbursement for Costs Incurred by Preparer. The Non-Preparer may request
that the Preparer amend any Tax Return for the benefit of the Non-Preparer. If
the Preparer agrees, in its sole discretion, to amend such Tax Return, it shall
be entitled to reimbursement from the Non-Preparer for any reasonable
third-party costs that are attributable to the Non-Preparer’s request.

 

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(g) Allocation of Tax Items Between Joint Return and Related Separate Return.
Notwithstanding Section 3.3(a), if Chesapeake allocates Tax Items between a
Joint Return and any related Separate Return for which SSE is the Preparer, SSE
shall prepare the related Separate Return in a manner that is consistent with
Chesapeake’s reporting of such Tax Items on the Joint Return.

(h) Standard of Performance. Chesapeake shall prepare Joint Returns with the
same general degree of care as it uses in preparing Separate Returns.

ARTICLE IV

TAX PAYMENTS AND INDEMNIFICATION PAYMENTS

Section 4.1 Payment of Taxes to Tax Authorities. Chesapeake shall be responsible
for remitting to the proper Tax Authority all Tax shown (including Taxes for
which SSE is wholly or partially liable pursuant to Section 2.1) on any Tax
Return for which it is the Preparer, and SSE shall be responsible for remitting
to the proper Tax Authority all Tax shown on any Tax Return for which it is the
Preparer.

Section 4.2 Indemnification Payments.

(a) Tax Payments Made by the SSE Group. If any member of the SSE Group remits a
payment to a Tax Authority for any Chesapeake Taxes, Chesapeake shall remit the
amount for which it is liable to SSE pursuant to Section 2.1(a) within thirty
days after receiving written notification requesting such amount.

(b) Tax Payments Made by the Chesapeake Group. If any member of the Chesapeake
Group remits a payment to a Tax Authority for any SSE Taxes, SSE shall remit the
amount for which it is liable to Chesapeake pursuant to Section 2.1(b) within
thirty days after receiving written notification requesting such amount.

(c) Credit for Prior Deemed Tax Payments. For purposes of Section 4.2(b), the
portion of Taxes paid by the Chesapeake Group to a Tax Authority for which SSE
is wholly or partially liable will be determined by assuming that SSE previously
paid the full amount of its allocable share of all Taxes shown on any Tax Return
filed before the Spin-off Date with respect to any Tax Year ending before the
Spin-off Date.

Section 4.3 Initial Determinations and Subsequent Adjustments.

(a) Initial Determinations of Payments. The initial determination of the amount
of any payment that one Party is required to make to the other Party under this
Agreement shall be made on the basis of the Tax Return to which the payment
relates as filed, or, if such Tax is not reported on a Tax Return, on the basis
of the amount of Tax initially paid to the Tax Authority.

 

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(b) Redeterminations of Payments and Additional Payments. The amounts paid under
this Agreement will be redetermined, and additional payments relating to such
redetermination will be made, as appropriate, if as a result of an audit by a
Tax Authority, an amended Tax Return, or for any other reason (i) additional
Taxes to which such redetermination relates are subsequently paid, (ii) a refund
of such Taxes is received, (iii) the Group to which a Tax Item is allocated
changes, or (iv) the amount or character of any Tax Item is adjusted or
redetermined. Each payment required by the immediately preceding sentence (i) as
a result of a payment of additional Taxes will be due thirty days after the date
on which the additional Taxes were paid or, if later, thirty days after the date
of a request from the other Party for the payment, (ii) as a result of the
receipt of a refund will be due thirty days after the refund was received,
(iii) as a result of a change in the allocation of a Tax Item will be due thirty
days after the date on which the final action resulting in such change is taken
by a Tax Authority or either Party or any member of its Group or (iv) as a
result of an adjustment or redetermination of the amount or character of a Tax
Item will be due thirty days after the date on which the final action resulting
in such adjustment or redetermination is taken by a Tax Authority or either
Party or any member of its Group.

Section 4.4 Payments by or to Other Members of the Groups. When appropriate
under the circumstances to reflect the underlying liability for a Tax or
entitlement to a Tax refund or Tax Benefit, a payment which is required to be
made by or to a Party may be made by or to another member of the Group to which
that Party belongs, but nothing in this Section 4.4 shall relieve any Party of
its other obligations under this Agreement.

Section 4.5 Late Payments. Payments pursuant to this Agreement that are not made
within the period prescribed in this Agreement or, if no period is prescribed,
within fifteen days after written demand for payment is made shall bear interest
for the period from and including the date immediately following the last date
of such payment period through and including the date of payment at a per annum
rate equal to the rate specified in Section 5.5 of the Master Separation
Agreement. Such interest will be payable at the same time as the payment to
which it relates and shall be calculated on the basis of a year of 365 days and
the actual number of days for which due. If the indemnifying party fails to make
a payment to the indemnified party within the time period set forth in this
ARTICLE IV, the indemnifying party shall pay to the indemnified party, in
addition to interest that accrues pursuant to this Section 4.5, any costs or
expenses incurred by the indemnified party to secure such payment or to satisfy
the indemnifying party’s portion of the obligation giving rise to the
indemnification payment.

Section 4.6 Tax Consequences of Payments. For all Tax purposes and to the extent
permitted by applicable Tax Law, the Parties shall characterize any payment made
pursuant to this Agreement in the same manner as if such payment were a capital
contribution or a distribution, as the case may be, immediately prior to the
Effective Time and, accordingly, as not includible in the taxable income of the
recipient. The amount of any payment made pursuant to this Agreement shall be
(i) grossed up to take into account any additional Taxes that may be owed by the
recipient (or any of the members of its Group) as a result of receiving such
payment and (ii) reduced to take into account any

 

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Tax Benefit realized by the recipient of such payment as a result of making any
payment giving rise to the obligation of the payor to pay the recipient, but
only to the extent that such Tax Benefit reduces the liability for Taxes
(whether payable to a Tax Authority or to the other Party under this Agreement)
of the recipient in the Tax Year during which such payment is received. If the
payor reduces any payment by the amount of any Tax Benefit pursuant to this
Section 4.6 and such Tax Benefit subsequently is denied or reduced by any Tax
Authority, then the payor shall pay the recipient an amount equal to such
reduction or denial. In the event that a Tax Authority asserts that Chesapeake’s
or SSE’s treatment of a payment pursuant to this Agreement should be other than
as required pursuant to this Section 4.6, Chesapeake or SSE, as appropriate,
shall use its commercially reasonable efforts to contest such assertion.

Section 4.7 Payment Notices. Any notice requesting payment to be made pursuant
to this Agreement shall (i) indicate the amount due and owing, (ii) set forth in
reasonable detail the calculation of such amount, and (iii) include any relevant
Tax Records, statement, bill, or invoice related to such Taxes, costs, expenses,
or other amounts due and owing. Payments shall be deemed made when received.

ARTICLE V

TAX CONTESTS

Section 5.1 Notices. Each Party shall provide prompt notice to the other Party
of any pending or threatened Tax Contest of which it becomes aware relating to
(i) Taxes for which it is or may be indemnified by the other Party hereunder,
(ii) the qualification of the Spin-off, for U.S. federal income tax purposes, as
a Tax-free transaction described under Sections 368(a)(1)(D) and 355 of the Code
to Chesapeake, its shareholders, and SSE (except to the extent such shareholders
receive cash in lieu of fractional shares or gain is required to be recognized
by Chesapeake under Section 357(c) of the Code), or (iii) any change in the Tax
treatment of any other part of the Separation Transactions. Such notice shall
contain factual information (to the extent known by the notifying party or its
agents or representatives) describing any threatened Tax Contest or asserted Tax
liability, if any, in reasonable detail and shall be accompanied by copies of
any notice and other documents received from any Tax Authority in respect of any
such matters. If (i) an indemnified Party has knowledge of an asserted Tax
liability with respect to a matter for which it is to be indemnified hereunder,
(ii) such Party fails to give the indemnifying Party prompt notice of such
asserted Tax liability, and (iii) the indemnifying Party has the right, pursuant
to Section 5.2, to control the Tax Contest relating to such Tax liability, then
(A) if the indemnifying Party is precluded from contesting the asserted Tax
liability in any forum as a result of the failure to give prompt notice, the
indemnifying Party shall have no obligation to indemnify the indemnified Party
for any Taxes arising out of such asserted Tax liability and (B) if the
indemnifying Party is not precluded from contesting the asserted Tax liability
in any forum, but such failure to give prompt notice results directly in a
monetary detriment to the indemnifying Party, then any amount which the
indemnifying Party is otherwise required to pay the indemnified Party pursuant
to this Agreement shall be reduced by the amount of such detriment.

 

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Section 5.2 Control of Tax Contests.

(a) General Rule. Except as otherwise provided in this Section 5.2, the Preparer
of any Tax Return shall be the Controlling Party with respect to any Tax Contest
involving a Tax reported on such Tax Return.

(b) Tax Contests Involving Certain Taxes Reported on a Joint Return. Chesapeake,
in its sole discretion, may allow SSE to be the Controlling Party with respect
to that portion of any Tax Contest that involves a Tax Item reported on a Joint
Return where SSE is liable for or entitled to take into account such Tax Item
under this Agreement and such Tax Item is separable from all other Tax Items
reported on such Joint Return.

(c) Non-Controlling Party Participation Rights. With respect to any Tax Contest
involving a Tax Item for which the Non-Controlling Party may be liable (either
as a result of an increase in a Tax Detriment or a reduction in a Tax Benefit)
or may be entitled to take into account under this Agreement (a “Non-Controlling
Party Item”), (i) the Non-Controlling Party shall, at its own cost and expense,
be entitled to participate in such Tax Contest, to the extent it relates to a
Non-Controlling Party Item, (ii) the Controlling Party shall keep the
Non-Controlling Party reasonably informed and consult in good faith with the
Non-Controlling Party and its Tax advisors with respect to any issue relating to
a Non-Controlling Party Item, (iii) the Controlling Party shall provide the
Non-Controlling Party with copies of all correspondence, notices, and other
written materials received from any Tax Authority and shall otherwise keep the
Non-Controlling Party and its Tax advisors advised of material developments in
the Tax Contest and of material communications involving representatives of the
Tax Authority, to the extent related to a Non-Controlling Party Item, (iv) the
Non-Controlling Party may request that the Controlling Party take a position
related to a Non-Controlling Party Item in respect of such Tax Contest, and the
Controlling Party shall do so provided that (A) there exists substantial
authority for such position (within the meaning of the accuracy-related penalty
provisions of Section 6662 of the Code), (B) the adoption of such position would
not reasonably be expected to increase the Taxes for which the Controlling Party
is liable, or decrease the Tax Benefits allocated to the Controlling Party under
this Agreement (unless the Non-Controlling Party agrees to indemnify and hold
harmless the Controlling Party from such increase in Taxes or reduction in Tax
Benefits), and (C) the Non-Controlling Party agrees to reimburse the Controlling
Party for any reasonable third-party costs that are attributable to the
Non-Controlling Party’s request, (v) the Controlling Party shall provide the
Non-Controlling Party with a copy of any written submission to be sent to a Tax
Authority to the extent related to a Non-Controlling Party Item prior to the
submission thereof and shall in its reasonable discretion consider any comments
or suggested revisions that the Non-Controlling Party or its Tax advisors may
have with respect thereto, and (vi) there will be no settlement, resolution or
closing or other agreement with respect thereto without the consent of the
Non-Controlling Party, which consent shall not be unreasonably withheld or
delayed.

 

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ARTICLE VI

ASSISTANCE AND COOPERATION

Section 6.1 Provision of Information.

(a) Information with Respect to Joint Returns. At the written request of
Chesapeake, SSE shall provide Chesapeake with all Tax Records or other
information then in the possession of the SSE Group that Chesapeake reasonably
requests in order for Chesapeake to properly and timely file all Joint Returns.
SSE shall provide such information no later than thirty days from the date of
Chesapeake’s written request. However, if Chesapeake requests any such
information within the thirty day period ending on the due date of such Joint
Return, taking into account applicable extensions, SSE shall provide such
information as soon as commercially reasonable. If SSE fails to satisfy the
obligation provided for in the preceding three sentences, then, notwithstanding
any other provision of this Agreement, SSE shall be liable for, and shall
indemnify and hold harmless each member of the Chesapeake Group from and
against, any penalties, interest or additional amounts in respect of Taxes (but
excluding any Taxes underlying such amounts) assessed against any member of
either Group by reason of any resulting delay in filing such return, to the
extent such penalties, interest or additional amounts in respect of Taxes are
directly attributable to the delay in providing such information. If SSE
provides such information within the time period described in this Section
6.1(a) in the form reasonably requested by Chesapeake to permit the timely
filing of a Joint Return (or if no such information was requested by Chesapeake
pursuant to this Section 6.1(a)), then, notwithstanding any other provision of
this Agreement, Chesapeake shall be liable for, and shall indemnify and hold
harmless each member of the SSE Group from and against, any penalties, interest,
or additional amounts in respect of Taxes (but excluding any Taxes underlying
such amounts) assessed against any member of either Group by reason of any delay
in filing such Joint Return, to the extent such penalties, interest, or
additional amounts in respect of Taxes are directly attributable to the delay in
filing.

(b) Information with Respect Tax Payments. At the written request of Chesapeake,
SSE shall provide Chesapeake with all Tax Records or other information then in
the possession of the SSE Group that Chesapeake reasonably requests in order to
determine the amount of Taxes due on any Payment Date with respect to a Joint
Return. SSE shall provide such information no later than thirty days from the
date of Chesapeake’s written request. However, if Chesapeake requests any such
information within the thirty day period ending on the Payment Date, SSE shall
provide such information as soon as commercially reasonable. If SSE fails to
satisfy the obligation provided for in the preceding three sentences, the
indemnification principles of Section 6.1(a) shall apply with respect to any
penalties, interest, or additional amounts in respect of Taxes (but excluding
any Taxes underlying such amounts) assessed against any member of either Group
by reason of any resulting delay in paying such Taxes, to the extent such
penalties, interest, or additional amounts in respect of Taxes are directly
attributable to the delay in providing such information.

 

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(c) Information with Respect to Separate Returns. At the written request of the
Preparer, the Non-Preparer shall provide the Preparer with all Tax Records or
other information then in the possession of the Non-Preparer’s Group that the
Preparer reasonably requests in order to properly and timely file all Separate
Returns for which the Preparer is responsible pursuant to Section 3.2. Such
information shall be provided within the time period prescribed by Section
6.1(a) for the provision of information for Joint Returns. If the Non-Preparer
fails to satisfy the obligation provided for in the preceding two sentences, the
indemnification principles of Section 6.1(a) shall apply with respect to any
penalties, interest, or additional amounts in respect of Taxes (but excluding
any Taxes underlying such amounts) assessed against any member of either Group
by reason of any resulting delay in filing such return, to the extent such
penalties, interest, or additional amounts in respect of Taxes are directly
attributable to the delay in providing such information.

(d) Information with Respect to Pro Forma Stand-Alone Basis Computations and
Allocations. At the written request of Chesapeake, SSE shall provide Chesapeake
with all Tax Records or other information then in the possession of the SSE
Group that Chesapeake reasonably requests in order for Chesapeake to prepare the
pro forma stand-alone basis computations and allocations provided for in Section
2.2(c). SSE shall provide such information no later than thirty days from the
date of Chesapeake’s written request.

(e) Information with Respect to Tax Contests. At the written request of the
Controlling Party, the Non-Controlling Party shall provide to the Controlling
Party any information then in its possession (including Tax Records) about
members of the Non-Controlling Party’s Group which is reasonably necessary in
order to handle, settle or conduct any Tax Contest. The Non-Controlling Party
shall provide such information no later than thirty days from the date of the
Controlling Party’s written request. If the Non-Controlling Party fails to
satisfy the obligation provided for in the preceding two sentences, the
Controlling Party shall have no obligation to indemnify the Non-Controlling
Party for any additional Taxes resulting from such Tax Contest, to the extent
such additional Taxes are directly attributable to the Non-Controlling Party’s
failure to provide such information.

Section 6.2 Reliance on Exchanged Information. If a member of the SSE Group
supplies Tax Records or other information to a member of the Chesapeake Group,
or a member of the Chesapeake Group supplies Tax Records or other information to
a member of the SSE Group, and an officer of the requesting Group member intends
to sign a statement or other document under penalties of perjury in reliance
upon the accuracy of such Tax Records or other information, then a duly
authorized officer of the Group member supplying such Tax Records or other
information shall certify, to such officer’s knowledge and belief, the accuracy
and completeness of the Tax Records or other information so supplied.

 

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Section 6.3 Provision of Assistance and Cooperation.

(a) Assistance with Respect to Joint Returns. At the written request of
Chesapeake, SSE shall take any action (e.g., filing a ruling request with the
relevant Tax Authority or executing a power of attorney) that is reasonably
necessary in order for Chesapeake to prepare, file, amend or take any other
action with respect to any Joint Return. If SSE fails to take any such requested
action, the indemnification principles of Section 6.1(a) shall apply with
respect to any penalties, interest, or additional amounts in respect of Taxes
(but excluding any Taxes underlying such amounts) assessed against any member of
either Group by reason of a failure to take any such requested action, to the
extent such penalties, interest, or additional amounts in respect of Taxes are
directly attributable to the failure to take such action.

(b) Assistance with Respect to Tax Contests. At the written request of the
Controlling Party, the Non-Controlling Party shall take any action (e.g.,
executing a power of attorney) that is reasonably necessary in order for the
Controlling Party to handle, settle or conduct a Tax Contest. Each Party shall
assist the other Party in taking any remedial actions that are necessary or
desirable to minimize the effects of any adjustment made by a Tax Authority. The
Controlling Party shall reimburse the Non-Controlling Party for any reasonable,
third-party, out-of-pocket costs and expenses incurred in connection with this
Section 6.3(b). If the Non-Controlling Party fails to provide assistance in
accordance with this Section 6.3(b), the Controlling Party shall have no
obligation to indemnify the Non-Controlling Party for any additional Taxes
resulting from the Tax Contest, to the extent such additional Taxes are directly
attributable to the Non-Controlling Party’s failure to provide such assistance.

(c) Cooperation. In addition to the obligations enumerated elsewhere in this
ARTICLE VI, Chesapeake and SSE shall cooperate with each other and with each
other’s agents and representatives, including their respective accounting firms
and legal counsel, in connection with Tax matters, including, making available
to each other, as reasonably requested and available, personnel (including
officers, employees and agents of the Parties or their Subsidiaries) responsible
for preparing, maintaining, and interpreting information and documents relevant
to Taxes, and personnel reasonably required as witnesses or for purposes of
providing information or documents in connection with any Tax Contest.

Section 6.4 Retention of Tax Records. Each Party shall preserve, and shall cause
other members of its Group to preserve, all Tax Records that are in such
member’s possession and that could affect the Tax liability of any member of the
other Group, for so long as the contents thereof may become material in the
administration of any matter under applicable Tax Law, but in any event until
the later of (i) the expiration of any applicable statutes of limitation, as
extended, and (ii) seven years after the Spin-off Date.

Section 6.5 Supplemental Rulings and Supplemental Tax Opinions. Each of the
Parties agrees that at the reasonable request of the other Party (the
“Requesting Party”), such Party shall cooperate and use reasonable efforts to
(and shall

 

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cause its Subsidiaries to cooperate and use reasonable efforts to) assist the
Requesting Party in obtaining, as expeditiously as reasonably practicable, a
Supplemental Ruling from the IRS and/or a Supplemental Tax Opinion from Tax
Counsel. Within thirty days after receiving an invoice from the other Party
therefor, the Requesting Party shall reimburse such Party for all reasonable
costs and expenses incurred by such Party and the members of its Group in
connection with assisting the Requesting Party in obtaining any Supplemental
Ruling or Supplemental Tax Opinion. Notwithstanding the foregoing, no Party
shall be required to file any Supplemental IRS Submission unless the other Party
represents to the filing Party that (i) it has reviewed the Supplemental IRS
Submission and (ii) all information and representations, if any, relating to any
member of the other Party’s Group contained in the Supplemental IRS Submissions
are true, correct and complete in all material respects.

Section 6.6 Withholding and Reporting. With respect to any stock of Chesapeake
delivered to any Person, Chesapeake and SSE shall cooperate (and shall cause
their respective Subsidiaries to cooperate) so as to permit Chesapeake to
discharge any applicable Tax withholding and Tax reporting obligations,
including the appointment of SSE or one or more of its Subsidiaries as the
withholding and reporting agent if Chesapeake or one or more of its Subsidiaries
is not otherwise required or permitted to withhold and report under applicable
Tax Law.

ARTICLE VII

RESTRICTIONS ON CERTAIN ACTIONS

Section 7.1 General Restrictions. Following the Effective Time, SSE shall not
take any action that, or fail to take any action the failure of which to take,
(i) would be inconsistent with or preclude the Spin-off from qualifying, for
U.S. federal income tax purposes, as a Tax-free transaction described under
Sections 368(a)(1)(D) and 355 of the Code to Chesapeake, its shareholders, and
SSE (except to the extent such shareholders receive cash in lieu of fractional
shares or gain is required to be recognized by Chesapeake under Section 357(c)
of the Code) or (ii) reasonably could be expected to increase the amount of Tax
imposed on any other part of the Separation Transactions, or (iii) would be
reasonably likely to be inconsistent with, or cause any Person to be in breach
of, any representation or covenant, or any material statement, made in the Tax
Materials.

 

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Section 7.2 Certain SSE Actions Beginning on the Spin-off Date. Without limiting
the other provisions of this ARTICLE VII, during the two-year period beginning
on the Spin-off Date, SSE shall not take, nor enter into a binding agreement to
take, any of the following actions:

(i) liquidate or sell all or substantially all of the assets that constitute the
SSE Business as of the Spin-off Date to any Person other than SSE or an entity
which is and will be wholly-owned, directly or indirectly, by SSE;

(ii) transfer any assets of SSE or any Subsidiary of SSE in a transaction
described in subparagraphs (A), (C), (D), (F), or (G) of Section 368(a)(1) of
the Code to another entity, other than SSE or an entity which is and will be
wholly-owned, directly or indirectly, by SSE;

(iii) transfer all or substantially all of the assets that constitute the SSE
Business as of the Spin-off Date in a transaction described in Sections 351 or
721 of the Code other than a transfer to a corporation or partnership which is
and will be wholly-owned, directly or indirectly, by SSE;

(iv) issue stock of SSE or any Subsidiary of SSE (or any instrument that is
convertible or exchangeable into any such stock) other than an issuance to which
Treasury Regulations Section 1.355-7(d)(8) or (9) applies;

(v) facilitate or otherwise participate in any acquisition (or deemed
acquisition) of stock of SSE that would result in any shareholder owning (or
being deemed to own after applying the rules of Sections 355(e)(4)(C) and
355(e)(3)(B) of the Code) forty percent (40%) or more (by vote or value) of the
outstanding stock of SSE; or

(vi) redeem or otherwise repurchase any stock of SSE other than pursuant to open
market stock repurchase programs meeting the requirements of Section 4.05(1)(b)
of Rev. Proc. 96-30, 1996-1 C.B. 696, as in effect prior to its amendment by
Rev. Proc. 2003-48;

in each case, without first obtaining and delivering to Chesapeake, at SSE’s own
expense, a Supplemental Tax Opinion with respect to such action that is
reasonably satisfactory to Chesapeake.

ARTICLE VIII

GENERAL PROVISIONS

Section 8.1 Authority. Each of the Parties represents to the other that (a) it
has the corporate or other requisite power and authority to execute, deliver and
perform this Agreement, (b) the execution, delivery and performance of this
Agreement by it have been duly authorized by all necessary corporate or other
actions, (c) it has duly and validly executed and delivered this Agreement to be
executed and delivered on or prior to the Spin-off Date, and (d) this Agreement
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enforceable against it in accordance with its terms subject to applicable
bankruptcy, insolvency, reorganization, moratorium, or other similar laws
affecting creditors’ rights generally and general equity principles.

Section 8.2 Termination. This Agreement may be terminated at any time prior to
the Effective Time by and in the sole discretion of Chesapeake without the
approval of SSE. In the event of termination pursuant to this Section 8.2,
neither Party shall have any liability of any kind to the other Party by reason
of this Agreement or such termination.

Section 8.3 Entire Agreement. This Agreement, together with the Master
Separation Agreement, the Ancillary Agreements (as defined in the Master
Separation Agreement), and the Schedules referenced therein or attached thereto,
constitutes the entire agreement and understanding between the Parties with
respect to the subject matter hereof and shall supersede all prior written and
oral and all contemporaneous oral agreements and understandings with respect to
the subject matter hereof.

Section 8.4 Binding Effect; No Third-Party Beneficiaries; Assignment. This
Agreement shall inure to the benefit of and be binding upon the Parties and
their respective successors and permitted assigns and nothing in this Agreement,
express or implied, is intended to confer upon any Person except the Parties and
their respective Subsidiaries any rights, benefits or remedies of any nature
whatsoever under or by reason of this Agreement. This Agreement may not be
assigned by either Party, except with the prior written consent of the other
Party.

Section 8.5 Amendment. No change or amendment may be made to this Agreement
except by an instrument in writing signed on behalf of both of the Parties.

Section 8.6 Failure or Indulgence Not Waiver; Remedies Cumulative. No failure or
delay on the part of either Party in the exercise of any right hereunder shall
impair such right or be construed to be a waiver of, or acquiescence in, any
breach of any representation, warranty, covenant, or agreement contained herein,
nor shall any single or partial exercise of any such right preclude other or
further exercise thereof or of any other right. All rights and remedies existing
under this Agreement are cumulative to, and not exclusive of, any rights or
remedies otherwise available.

Section 8.7 Notices. All notices, claims, certificates, requests, demands, and
other communications hereunder shall be in writing and shall be deemed to be
duly given (i) when personally delivered, (ii) if mailed by registered or
certified mail, postage prepaid, return receipt requested, on the date the
return receipt is executed or the letter is refused by the addressee or its
agent, (iii) if sent by overnight courier which delivers only upon the signed
receipt of the addressee, on the date the receipt acknowledgment is executed or
refused by the addressee or its agent, or (iv) if sent by facsimile or
electronic mail, on the date confirmation of transmission is received (provided
that a copy of any notice delivered pursuant to this clause (iv) shall also be
sent pursuant to clause (i), (ii), or (iii)), addressed to the attention of the
addressee’s General Counsel at the address of its principal executive office or
to such other address or facsimile number for a Party as it shall have specified
by like notice.

 

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Section 8.8 Counterparts. This Agreement may be executed in multiple
counterparts, each of which when executed shall be deemed to be an original but
all of which together shall constitute one and the same agreement.

Section 8.9 Severability. If any term or other provision of this Agreement is
determined by a nonappealable decision by a court, administrative agency or
arbitrator to be invalid, illegal or incapable of being enforced by any rule of
law, or public policy, all other conditions and provisions of this Agreement
shall nevertheless remain in full force and effect so long as the economic or
legal substance of the transactions contemplated hereby is not affected in any
manner materially adverse to either Party. Upon such determination that any term
or other provision is invalid, illegal, or incapable of being enforced, the
court, administrative agency, or arbitrator shall interpret this Agreement so as
to effect the original intent of the Parties as closely as possible in an
acceptable manner to the end that transactions contemplated hereby are fulfilled
to the fullest extent possible. If any sentence in this Agreement is so broad as
to be unenforceable, the provision shall be interpreted to be only so broad as
is enforceable.

Section 8.10 Governing Law. This Agreement shall be governed by, and construed
and enforced in accordance with, the substantive laws of the State of Oklahoma,
without regard to conflicts of laws provisions thereof that would result in the
application of the laws of any other jurisdiction.

Section 8.11 Specific Performance. In the event of any actual or threatened
default in, or breach of, any of the terms, conditions, and provisions of this
Agreement, the Party or the Parties who are or are to be thereby aggrieved shall
have the right to specific performance and injunctive or other equitable relief
of their rights under this Agreement, in addition to any and all other rights
and remedies at law or in equity, and all such rights and remedies shall be
cumulative. The Parties agree that the remedies at law for any breach or
threatened breach, including monetary damages, are inadequate compensation for
any loss and that any defense in any action for specific performance that a
remedy at law would be adequate is waived. Any requirements for the securing or
posting of any bond with such remedy are waived.

Section 8.12 Construction. This Agreement shall be construed as if jointly
drafted by SSE and Chesapeake and no rule of construction or strict
interpretation shall be applied against either Party. The Parties represent that
this Agreement is entered into with full consideration of any and all rights
which the Parties may have. The Parties have relied upon their own knowledge and
judgment and upon the advice of the attorneys of their choosing. The Parties
have had access to independent legal advice, have conducted such investigations
they and their counsel thought appropriate, and have consulted with such other
independent advisors as they and their counsel deemed appropriate regarding this
Agreement and their rights and asserted rights in connection therewith. The
Parties are not relying upon any representations or statements made by any other
Party, or such other Party’s employees, agents, representatives, or attorneys,

 

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regarding this Agreement, except to the extent such representations are
expressly set forth or incorporated in this Agreement. The Parties are not
relying upon a legal duty, if one exists, on the part of the other Party (or
such other Party’s employees, agents, representatives, or attorneys) to disclose
any information in connection with the execution of this Agreement or its
preparation, it being expressly understood that neither Party shall ever assert
any failure to disclose information on the part of the other Party as a ground
for challenging this Agreement.

Section 8.13 Performance. Each Party shall cause to be performed, and hereby
guarantees the performance of, all actions, agreements and obligations set forth
herein to be performed by any Subsidiary of such Party.

Section 8.14 Change in Law. Any reference to a provision of the Code or any
other Tax Law shall include a reference to any applicable successor provision or
law.

Section 8.15 Expenses. Except as otherwise provided herein, each Party and its
Subsidiaries shall bear their own expenses incurred in connection with the
preparation of Tax Returns, Tax Contests, and other matters related to Taxes
under the provisions of this Agreement.

Section 8.16 Disputes. The procedures for discussion, negotiation and
arbitration set forth in ARTICLE V of the Master Separation Agreement shall
apply to all disputes, controversies, or claims (whether sounding in contract,
tort, or otherwise) that may rise out of or relate to, or arise under or in
connection with this Agreement, except that, with respect to such disputes,
controversies, or claims, the Applicable Deadline (as defined in Section 5.3(b)
of the Master Separation Agreement) shall be sixty days after the later of
(i) the applicable statute of limitations with respect to any Tax Item that is
the subject of such dispute, controversy, or claim and (ii) the date that final
action is taken by the applicable Tax Authority with respect to a Tax Contest
relating to any Tax Item that is the subject of such dispute, controversy, or
claim.

Section 8.17 Confidentiality. The provisions of Section 6.11 of the Master
Separation Agreement shall govern the confidentiality, disclosure, and use of
Confidential Information (as defined therein) relating to Taxes.

 

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IN WITNESS WHEREOF, the Parties have caused this Agreement to be executed by the
respective officers as of the date set forth above.

 

CHESAPEAKE ENERGY CORPORATION By:  

/s/ Domenic J. Dell’Osso, Jr.

Name:   Domenic J. Dell’Osso, Jr. Title:   Executive Vice President and Chief
Financial Officer CHESAPEAKE OILFIELD OPERATING, L.L.C. By:  

/s/ Jerry L. Winchester

Name:   Jerry L. Winchester Title:   Chief Executive Officer

 

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APPENDIX A

 

1. Chesapeake Oilfield Operating, L.L.C. (“COO”) will form a direct wholly-owned
Oklahoma limited liability company, Seventy Seven Operating LLC (“SSO”).

 

2. Chesapeake Operating, Inc. (“COI”) will form a new wholly-owned subsidiary,
Seventy Seven Land Company LLC (“SSLC”), and contribute thereto a receivable
owed to COI by Chesapeake Land Development Company, L.L.C. (“CLDC”) having a
fair market value equal to the fair market value of certain real property and
related improvements to be used in the business of SSE, all of which currently
is beneficially held by CLDC, but a portion of which may legally be held by
certain subsidiaries of COI or Chesapeake (the “CLDC Property”).

 

3. COO and certain direct and indirect subsidiaries will enter into a new $275
million ABL facility and SSO will enter into a new $400 million Term Loan B. SSO
will borrow $400 million under the Term Loan B and the relevant borrower
subsidiaries of COO will borrow approximately $100 million under the ABL
facility. COO will cause SSO and such other subsidiaries to use such proceeds to
repay all outstanding borrowings under COO’s current credit facility and
terminate COO’s current credit facility.

 

4. SSLC will purchase the CLDC Property from CLDC (i.e., the CLDC Property will
be transferred to SSLC in complete satisfaction of the receivable contributed to
SSLC in Step 2).

 

5. COI will contribute the stock of SSLC to COS Holdings, L.L.C. (“COSH”) and
COSH will contribute the stock of SSLC to COO.

 

6. A subsidiary of COI may distribute certain furniture, fixtures, and
intellectual property to COI, COI will contribute certain furniture, fixtures,
and intellectual property (including any furniture, fixtures, and intellectual
property received from such subsidiary) to COSH, and COSH will contribute such
assets to COO.

 

7. COI will convert from a corporation to a limited liability company (“CO
LLC”).

 

8. COO will distribute the equity interests of Compass Manufacturing, L.L.C. up
the ownership chain to CO LLC.

 

9. (i) Nomac Services, L.L.C. (“Nomac Services”) will distribute the assets
associated with its mud logging and directional drilling businesses to Nomac
Drilling, L.L.C. (“Nomac Drilling”) and then (ii) Nomac Drilling will distribute
the equity interests of Nomac Services (which will hold the assets associated
with its geosteering business) to COO and COO will distribute the equity
interests of Nomac Services up the ownership chain to CO LLC.

 

10. Oilfield Trucking Solutions L.L.C. (“OTS”) will distribute the consideration
received in the sale of its crude oil hauling business up the ownership chain to
CO LLC.

 

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11. Thunder Oilfield Services, L.L.C. (“Thunder”) will contribute OTS to Great
Plains Oilfield Rental, L.L.C.

 

12. COO will contribute all of its assets to SSO. SSO will become the issuer
obligor under the $650 million of senior notes issued by COO and due in 2019 and
COO will become a guarantor of such notes.

 

13. COO will issue $500 million aggregate principal amount of new senior notes
due 2022 with no guarantees. COO will distribute approximately $391 million of
the net proceeds to COSH, and COSH will use such proceeds to repay a loan owed
by COSH to CO LLC. COO will contribute the remaining net proceeds to SSO, and
SSO will use those proceeds to repay in full the ABL facility and for general
corporate purposes.

 

14. Thunder will merge with and into SSO.

 

15. COO will convert from a limited liability company to an Oklahoma corporation
(the “COO Conversion”), and issue to COSH the number of shares of SSE common
stock necessary to effect the distribution in Step 19, which will represent all
of the shares of SSE.

 

16. COSH will distribute all of the outstanding shares of SSE common stock to CO
LLC.

 

17. Chesapeake will provide a guarantee of the indebtedness of certain CO LLC
subsidiaries.

 

18. CO LLC will distribute all of the outstanding shares of SSE common stock to
Chesapeake.

 

19. Chesapeake will distribute all of the outstanding shares of SSE common stock
to Chesapeake’s shareholders on a pro rata basis.

 

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APPENDIX B

The following examples illustrate the operation of various provisions of this
Agreement. However, no example is intended to illustrate every provision of this
Agreement that may be relevant thereto.

Except as otherwise indicated, each example assumes:

(i) an average Tax rate of 35%,

(ii) Chesapeake Oilfield Operating, L.L.C. converts into SSE on June 29, 2014,

(iii) prior to the conversion Chesapeake Oilfield Operating, L.L.C. is a
disregarded entity for U.S. federal income Tax purposes,

(iv) the Spin-off Date is June 30, 2014,

(v) Chesapeake recognizes $100x of gain under Section 357(c) of the Code on the
Separation Transactions, and

(vi) for U.S. federal income Tax purposes the Spin-off qualifies as a Tax-free
transaction described under Sections 368(a)(1)(D) and 355 of the Code to
Chesapeake, its shareholders, and SSE (except to the extent such shareholders
receive cash in lieu of fractional shares or gain is required to be recognized
by Chesapeake under Section 357(c) of the Code).

Example 1. General Tax Allocation on Joint Return.

On its U.S. federal consolidated income Tax Return for the Tax Year that begins
on January 1, 2014, and ends on December 31, 2014, the Chesapeake consolidated
group reports $200x of consolidated net taxable income, no credits, and a Tax
liability of $70x (viz., (35%)($200x)). The $200x of consolidated net taxable
income reported on such Tax Return consists of $300x in Tax Detriments and $100x
in Tax Benefits.

Pursuant to Section 2.2(c), Chesapeake determines in its reasonable discretion
that the Tax Detriments consist of (i) $100x of gain recognized under section
357(c) and attributable to the Separation Transactions, (ii) $100x of income
more closely related to the Chesapeake Business, and (iii) $100x of income more
closely related to the SSE Business. Similarly, Chesapeake determines in its
reasonable discretion that the Tax Benefits consist of (i) $50x of deductions
more closely related to the Chesapeake Business and (ii) $50x of deductions more
closely related to the SSE Business.

Pursuant to Section 2.1, each of Chesapeake and SSE will be liable for its
allocable portion of the $70x of Tax shown on the U.S. federal consolidated
income Tax Return. Pursuant to Section 2.2(c), each Party’0s allocable portion
of such Tax is determined by Chesapeake, in its reasonable discretion, by taking
into account on a pro forma stand-alone basis the Tax Items shown on such Tax
Return and allocated to such Party pursuant to Section 2.1.

 

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Thus, Chesapeake determines in its reasonable discretion that its allocable
portion of such Tax is determined by taking into account on a pro forma
stand-alone basis:

(i) pursuant to Section 2.1(a)(iii), the $100x of Tax Detriments arising from
the Separation Transactions,

(ii) pursuant to Section 2.1(a)(i) and 2.2(b), the $100x of Tax Detriments more
closely related to the Chesapeake Business because they are deemed to arise from
the operation or ownership of the Chesapeake Business, and

(iii) pursuant to Section 2.1(a)(ii) and 2.2(b), the $50x of Tax Benefits more
closely related to the Chesapeake Business because they are deemed to arise from
the operation or ownership of the Chesapeake Business.

Taking into account such Tax Items on a pro forma stand-alone basis,
Chesapeake’s allocable portion of the $70x of Tax therefore is $52.5x (viz.,
(($100+$100-$50)(35%)).

In addition, Chesapeake determines in its reasonable discretion that SSE’s
allocable portion of such Tax is determined by taking into account:

(i) pursuant to Section 2.1(b)(i) and 2.2(b), the $100x of Tax Detriments more
closely related to the SSE Business because they are deemed to arise from the
operation or ownership of the SSE Business, and

(ii) pursuant to Section 2.1(b)(ii) and 2.2(b), the $50x of Tax Benefits more
closely related to the SSE Business because they are deemed to arise from the
operation or ownership of the SSE Business.

Taking into account such Tax Items on a pro forma stand-alone basis, SSE’s
allocable portion of the $70x of Tax therefore is $17.5x (viz.,
(($100-$50)(35%)).

Because Chesapeake determines in its reasonable discretion that the 2014 U.S.
federal consolidated income Tax Return includes Tax Items attributable to the
Chesapeake Business and Tax Items attributable to the SSE Business, it will be a
Joint Return. Pursuant to Section 3.1, Chesapeake is responsible for preparing
and timely filing the Joint Return. Chesapeake will have the right to make those
determinations described in Section 3.3(a) with respect to the Joint Return.
Pursuant to Section 3.3(e)(ii), Chesapeake must make the Joint Return available
to SSE no later than forty-five days before the Joint Return is due, taking into
account any applicable extensions. Further, Chesapeake must, in its reasonable
discretion, take into account any written comments provided by SSE, but only to
the extent such comments are provided no later than thirty days after the Joint
Return is made available to SSE.

 

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Pursuant to Section 4.1, Chesapeake must pay the $70x of Tax to the Tax
Authority. Pursuant to Section 2.2(c), Chesapeake must make available and
provide to SSE a reasonable opportunity to review the pro forma stand-alone
basis computations and allocations and use its reasonable discretion in taking
into account any written comments provided by SSE with respect to such
computations and allocations, but only to the extent such comments are provided
no later than thirty days after such computations and allocations have been made
available to SSE.

Pursuant to Section 4.2(b), SSE must remit the amount for which it is liable
(viz., $17.5x) to Chesapeake within thirty days after receiving written
notification requesting such amount. If payment is not made within thirty days,
SSE must pay interest thereafter on the amount past due at the rate and as
determined under Section 4.5.

Pursuant to Section 4.6, the Parties would ordinarily characterize SSE’s payment
of $17.5x in the same manner as if it were a distribution to Chesapeake
immediately prior to the Effective Time. However, under applicable Tax Law
(viz., Treasury Regulations Sections 1.1552-1(b)(2) and 1.1502-32(b)(3)(iv)(D)),
the Parties are required to treat a portion of such payment as a payment in
satisfaction of indebtedness owed by SSE to Chesapeake.

Example 2. Separate Return filed by SSE.

On its 2014 U.S. federal consolidated income Tax Return, the Chesapeake
consolidated group reports $200x of consolidated net taxable income, no credits,
and a Tax liability of $70x (viz., (35%)($200x)). Of the $200x of consolidated
net taxable income reported on such Tax Return, $150x consists of Tax Items that
are deemed to arise from the operation or ownership of the Chesapeake Business.
The remaining $50x of consolidated net taxable income consists of Tax Items that
are deemed to arise from the operation or ownership of the SSE. The SSE Group
had total consolidated net taxable income of $125x during the period beginning
January 1, 2014, and ending December 31, 2014. Because Chesapeake’s 2014 U.S.
federal consolidated income Tax Return includes Tax Items attributable to the
Chesapeake Business and Tax Items attributable to the SSE Business, it will be a
Joint Return.

Pursuant to Section 3.2, SSE is responsible for preparing and timely filing a
Separate Return for the SSE Group for the period beginning on July 1, 2014, and
ending on December 31, 2014. As a result, SSE will have the right to make those
determinations described in Section 3.3(a) with respect to the Separate Return,
subject to the limitations in Section 3.3(c), Section 3.3(e), and Section
3.3(g). SSE must, pursuant to Section 3.3(g), prepare its related Separate
Return so that its net income is allocated consistently with the Joint Return.

As a result, $50x of SSE’s 2014 net income is allocated to the Joint Return and
the remainder of SSE’s 2014 net income (viz., $75x) is allocated to its Separate
Return.

 

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Example 3. Separate Returns and State Taxes.

On a monthly Pennsylvania sales Tax Return during 2013, $50x of sales Tax must
be reported. For purposes of this example, it is assumed that such Tax Return
was not filed prior to the Effective Time of this Agreement. The $50x of sales
Tax reported on such Tax Return consists of Tax Detriments that are deemed to
arise from the operation or ownership of the SSE Business.

Because such Tax Return includes Tax Items attributable only to the SSE
Business, it will be a Separate Return. Pursuant to Section 3.2, SSE is
responsible for preparing and timely filing such Separate Return and will have
the right to make those determinations described in Section 3.3(a) with respect
to the Separate Return, subject to the limitations in Section 3.3(c) and Section
3.3(e). Pursuant to Section 4.1, SSE must pay the $50x of sales Tax shown on the
Separate Return to the proper Tax Authority. Furthermore, pursuant to Section
5.2(a), SSE will have primary responsibility, control and discretion in
handling, settling, or conducting any Tax Contest with respect to such Tax
Return, subject to the limitations in Section 5.2(c).

Alternatively, if the $50x of Taxes shown on the Pennsylvania sales Tax Return
described above consists of Tax Detriments arising from the operation or
ownership of the SSE Business and Tax Detriments arising from the operation or
ownership of the Chesapeake Business, such Tax Return will be a Joint Return. In
such case, pursuant to Section 3.1, Chesapeake will be responsible for preparing
and timely filing such Joint Return and will have the right to make those
determinations described in Section 3.3(a) with respect to the Joint Return,
subject to the limitations in Section 3.3(e) and Section 3.3(e). Pursuant to
Section 4.1, Chesapeake must pay the $50x of sales Tax shown on the Joint Return
to the proper Tax Authority, but will be entitled to reimbursement from SSE
pursuant to Section 4.2(b) to the extent that SSE is liable for any portion of
such Tax pursuant to Section 2.1.

Furthermore, pursuant to Section 5.2(a), Chesapeake will be the Controlling
Party with respect to any Tax Contest involving a Tax reported on such Tax
Return. However, SSE will have Non-Controlling Party participation rights
pursuant to Section 5.2(c) with respect to such Tax Contest if such Tax Context
could result in the increase of an SSE Tax Detriment or the reduction of an SSE
Tax Benefit.

 

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Example 4. NOL Carryback by SSE.

On its 2014 U.S. federal consolidated income Tax Return, the Chesapeake
consolidated group reports $200x of consolidated net taxable income, no credits,
and a Tax liability of $70x (viz., (35%)($200x)). Of the $200x of consolidated
net taxable income reported on such Tax Return, $190x consists of Tax Items that
are deemed to arise from the operation or ownership of the Chesapeake Business.
The remaining $10x of consolidated net taxable income consists of Tax Items that
are deemed to arise from the operation or ownership of the SSE Business.

In addition, $150x of consolidated net taxable income and no credits arise from
the operation or ownership of the SSE Business during the period beginning on
July 1, 2014, and ending on December 31, 2014, but, in 2015, a $150x net
operating loss (“NOL”) arises from the operation or ownership of the SSE
Business.

Under applicable Tax Law, SSE’s short Tax Year ending on the Spin-off Date will
be considered the same Tax Year as Chesapeake’s Tax Year ending on December 31,
2014 (and which includes SSE’s short Tax Year), but will be considered a
different Tax Year from SSE’s short Tax Year that begins after the Spin-off
Date. Under applicable Tax Law, the carryback period for the NOL includes
Chesapeake’s Tax Year ending on December 31, 2014 followed by SSE’s short Tax
Year beginning July 1, 2014 and ending on December 31, 2014. Pursuant to
Section 3.3(c), SSE is not permitted to make the election under
Section 172(b)(3) of the Code to relinquish the carryback period for the NOL.

Under applicable Tax Law, the NOL would be carried back to Chesapeake’s 2014
Joint Return and Chesapeake generally would be entitled to utilize that portion
of the NOL equal to the net income generated by the SSE Group during the period
SSE was considered a member of the Chesapeake consolidated group. See Treasury
Regulations Sections 1.1502-21(c) and 1.1502-21(c)(1)(iii), Example 3
(illustrating the SRLY limitations on NOL carrybacks from a separate return year
to a consolidated return year). Pursuant to Section 2.1(b)(ii) and
Section 2.2(a)(i), SSE would be entitled to take such portion of the NOL into
account in determining SSE Taxes for the 2014 Joint Return, but only to the
extent that SSE would be allowed to take such portion into account under
applicable Tax Law on a pro forma stand-alone basis for such Tax Year. Pursuant
to Section 2.1(a)(iv), Chesapeake would be entitled to take the remaining
portion of the NOL, as permitted under applicable Tax Law, into account in
determining Chesapeake Taxes and would not be required to compensate SSE
therefor.

Any portion of the NOL that was not used on the 2014 Joint Return would be
carried forward and utilized as a Tax Benefit by SSE on its 2014 Separate Return
(assuming such use was permitted under applicable Tax Law).

Example 5. NOL Carryforward as a Tax Benefit on Joint Return.

On its 2014 U.S. federal consolidated income Tax Return, and without taking into
account any NOL carryforwards or NOL carrybacks, the Chesapeake

 

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consolidated group reports $150x of consolidated net taxable income, no credits,
and a Tax liability of $52.5x (viz., (35%)($150x)). All $150x of consolidated
net taxable income reported on such Tax Return consists of Tax Items that are
deemed to arise from the operation or ownership of the Chesapeake Business. In
addition, a $200x NOL arose from the operation or ownership of the SSE Business
in 2013 and is carried forward to the 2014 Joint Return under applicable Tax
Law.

Pursuant to Section 2.1(a)(iv), Chesapeake is entitled to take the NOL
carryforward into account as a Tax Benefit in determining Chesapeake Taxes in
2014, and although the NOL arose from the operation or ownership of the SSE
Business, Chesapeake will not be required to compensate SSE therefor. Thus, in
2014, Chesapeake will be obligated to pay Tax of $0x (viz., (35%)($150x -
$150x)) to the Tax Authority and $0x to SSE.

Under applicable Tax Law, any remaining NOL carryforward may be utilized only by
Chesapeake because such NOL arose while SSE was disregarded as separate from
Chesapeake for U.S. federal income Tax purposes. Chesapeake will not be required
to compensate SSE for the use of any such NOL carryforward.

Example 6. Difference Between Tax Shown on Joint Return and Taxes Computed on a
Pro Forma Stand-Alone Basis.

On its 2014 U.S. federal consolidated income Tax Return, the Chesapeake
consolidated group reports a total Tax liability of $100x. On a pro forma
stand-alone basis, Chesapeake Taxes would equal $90x, which Taxes would be
composed of $70x of “regular tax” and $20x of “alternative minimum tax” imposed
under Section 55 of the Code. On a pro forma stand-alone basis, SSE Taxes would
equal $30x, which Taxes would be composed of $30x of “regular tax” and no
“alternative minimum tax.”

Pursuant to Section 2.2(d), because the sum of Chesapeake Taxes and SSE Taxes
(viz., $120x or ($90x + $30x)) is different from the amount of Tax shown on such
Joint Return (viz., $100x), the $100x of Tax shown on the Joint Return is
allocated $75x (viz., ($100x)($90x/$120x)) to Chesapeake and $25x (viz.,
($100x)($30x/$120x)) to SSE.

Example 7. Average Tax Rate.

On a 2014 Joint Return, Chesapeake reports $200x of net taxable income and no
credits. Assume that, under applicable Tax Law, the first $50x of net taxable
income is subject to a Tax rate of 10%, the next $50x of net taxable income is
subject to a Tax rate of 20%, and the remaining $100x of net taxable income is
subject to a Tax rate of 25%. As a result, the Joint Return reports a Tax
liability of $40x (viz., (10%)($50x) + (20%)($50x) + (25%)($100x)). The average
Tax rate on such Tax Return is 20% (viz., ($40x/$200x)). Accordingly, pursuant
to Section 2.2(a)(iv), a 20% Tax rate applies for purposes of computing Taxes on
a pro forma stand-alone basis.

 

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Example 8. Breach of Covenants.

After taking gain under Section 357(c) into account, Chesapeake held the SSE
stock with a fair market value of $300x and a basis of $0x immediately before
the Spin-off. In 2015, SSE enters into a merger whereby an acquiring corporation
acquires all of the assets and liabilities of SSE and SSE’s shareholders receive
stock in the acquiring corporation in exchange for all of their stock in SSE.
Assume that entering into the merger causes the Spin-off to be taxable to
Chesapeake under Section 355(e).

As a result of the application of Section 355(e), Chesapeake will be required to
recognize all of the realized gain on the Spin-off. Accordingly, ignoring any
available NOL, the Separation Transactions result in a net Tax liability of
$140x (viz., (35%)($300x gain on the Spin-off) + (35%)($100x gain under
Section 357(c)).

Pursuant to Section 2.1(b)(iii), all $105x of the Tax (viz.,
(35%)($300x)) resulting from the application of Section 355(e) would be
allocated to SSE because entering into the merger is a breach of covenant under
Article VII that causes Section 355(e) to apply to the Spin-off. However, the
$35x of Tax (viz., (35%)($100x)) resulting from the application of
Section 357(c) to the Separation Transactions is not attributable to SSE’s
breach and is therefore allocated to Chesapeake pursuant to Section 2.1(a)(iii).

Pursuant to Section 4.2(b), SSE must remit the $105x of Taxes related to
application of Section 355(e) to the Spin-off to Chesapeake within thirty days
after receiving written notification requesting such amount. Pursuant to
Section 2.1(b)(ii) and (iv), the result would be the same even if an NOL exists
that could offset any gain required to be recognized as a result of the merger.
Pursuant to Section 4.6, to the extent permitted by applicable Tax Law, the
Parties must characterize SSE’s payment of $105x in the same manner as if it
were a distribution to Chesapeake immediately prior to the Effective Time.
Section 4.6 also provides that SSE’s payment must be grossed up for any
additional Taxes that may be owed by Chesapeake as a result of such payment.

Example 9. Redetermination of Tax Detriments Allocated to Chesapeake.

On its 2014 U.S. federal consolidated income Tax Return, the Chesapeake
consolidated group reports no consolidated net taxable income, an NOL of $100x,
and no Tax liability. $50x of the NOL consists of Tax Items that are deemed to
arise from the operation or ownership of the Chesapeake Business and the
remaining $50x consists of Tax Items that are deemed to arise from the operation
or ownership of the SSE Business. Because no Tax is owed on the Joint Return, no
payments are required to be made under this Agreement.

In 2016, the Tax Authority initiates a Tax Contest with respect to the 2014
Joint Return. In the Tax Contest, the Tax Authority asserts that an additional
$100x of taxable income must be reported on the 2014 Joint Return. Such
additional taxable income arose from the Chesapeake Business. Pursuant to
Section 5.2(a), Chesapeake is the Controlling Party with respect to the Tax
Contest because it involves a Tax reported

 

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on a Tax Return for which Chesapeake is the Preparer. On December 31, 2016, a
date subsequent to the Spin-off Date, Chesapeake agrees to enter into a closing
agreement with the Tax Authority and recognize $100x of additional taxable
income in 2014 in settlement of the Tax Contest.

As a result of the closing agreement, Section 4.3(b) requires that the amounts
paid under this Agreement be redetermined. Under applicable Tax Law and pursuant
to Section 2.1(a)(ii) and Section 2.1(a)(iv), Chesapeake is entitled to use the
$100x NOL as a Tax Benefit to completely offset the additional taxable income
recognized as a result of the Tax Contest. Chesapeake is not required to
reimburse SSE for the use of the $50x portion of such NOL that arose from the
operation or ownership of the SSE Business.

Example 10. Redetermination of Tax Detriments Allocated to SSE.

On its 2013 U.S. federal consolidated income Tax Return, the Chesapeake
consolidated group reports no consolidated net taxable income, an NOL of $100x,
and no Tax liability. $50x of the NOL consists of Tax Items that are deemed to
arise from the operation or ownership of the Chesapeake Business and the
remaining $50x consists of Tax Items that are deemed to arise from the operation
or ownership of the SSE Business. Because no Tax is owed on the Joint Return, no
payments are required to be made under this Agreement.

In 2015, the Tax Authority initiates a Tax Contest with respect to the 2013
Joint Return. In the Tax Contest, the Tax Authority asserts that an additional
$100x of taxable income must be reported on the 2013 Joint Return. Such income
arose from the SSE Business. Pursuant to Section 5.2(b), Chesapeake may, in its
sole discretion, permit SSE to be the Controlling Party with respect to the Tax
Contest. In such case, pursuant to Section 5.2(c), Chesapeake would have
Non-Controlling Party participation rights with respect to the Tax Contest
because such Tax Contest may result in the reduction of a Chesapeake Tax
Benefit.

On December 31, 2015, a date subsequent to the Spin-off Date, SSE agrees, with
Chesapeake’s consent, to enter into a closing agreement with the Tax Authority
to recognize $100x of additional taxable income in 2013 in settlement of the Tax
Contest.

As a result of the closing agreement, Section 4.3(b) requires that the amounts
paid under this Agreement be redetermined. Under applicable Tax Law, SSE and
Chesapeake are entitled to use the $100x NOL to completely offset the additional
taxable income recognized as a result of the Tax Contest. Therefore, no
additional Tax is owed as a result of the closing agreement. Pursuant to Section
2.1(b)(ii) and Section 2.1(b)(iv), SSE is entitled to take the entire $100x NOL
into account as a Tax Benefit in calculating SSE Taxes, which results in SSE
Taxes of $0x (viz., $100x - $100x). SSE is not required to reimburse Chesapeake
for the use of the $50x portion of such NOL that arose from the operation or
ownership of the Chesapeake Business.

 

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Alternatively, assume that the 2013 Joint Return did not report an NOL. As a
result, the closing agreement results in $100x of consolidated net taxable
income, no credits, and a Tax liability of $35x (viz., (35%)($100x)). All $100x
of the consolidated net taxable income consists of Tax Items that are deemed to
arise from the operation or ownership of the SSE Business. Taking into account
such Tax Items on a pro forma stand-alone basis, SSE’s allocable portion of the
$35x of Tax is $35x (viz., ($100x)(35%)).

Pursuant to Section 4.1, Chesapeake must pay the $35x of Tax to the Tax
Authority. Pursuant to Section 4.2(b), SSE must remit the amount for which it is
liable (viz., $35x) to Chesapeake within thirty days after receiving written
notification requesting such amount.

 

B-9