Chesapeake's Departing CEO (Another "shining" example of the 1%)

[No Elephants]

Aubrey McClendon, standard issue white collar scum

Chesapeake faces enduring entanglements with departing CEO



By Brian Grow and Anna Driver and Joshua Schneyer

Wed Jan 30, 2013 8:21pm EST

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America's second-largest natural-gas producer said on Tuesday that McClendon is stepping down as chief executive and a board member. He is leaving behind legal predicaments and intertwined personal and corporate interests that analysts say could linger for years.

Among the trickiest to unwind is his signature perk. McClendon controls interests of up to 2.5 percent in thousands of Chesapeake wells, according to an analysis of Chesapeake filings with the Securities and Exchange Commission. The company owns interests in 45,700 producing oil and gas wells, according to its most recent annual report.

McClendon's stakes are part of a controversial benefit, known as the Founder Well Participation Plan, which awarded him a stake in every well Chesapeake drilled since 1993, provided that he pay an equivalent share of the costs. He has participated in the plan every year since, with the exception of five quarters in 1999 and 2000, the SEC filings show.

McClendon began losing his grip on the company after Reuters reported last year that he had borrowed more than $1 billion against his well stakes from a firm that also invested in Chesapeake itself. That and other Reuters reports of potential conflicts of interest, coupled with a cash crunch amid weak gas prices and bloated spending, sparked an investor revolt and a board shakeup. Analysts said that while the unusual arrangements were part of his undoing, they will not be easy to unwind.

"I see his continued involvement as a negative. These things that he created, you can argue that they hurt the stock price," said Phil Weiss, oil and gas analyst at Argus Research in New York. "And they are not going away just because he is. That part of his legacy remains."

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The announcement followed a frenzied year in which a severe financial crunch and a governance crisis hammered Chesapeake. The Reuters stories triggered official probes and sparked shareholder lawsuits. The SEC, the U.S. Justice Department and the board are investigating whether McClendon blurred the line between his personal and corporate dealings, and into possible antitrust violations. The board said its review was not the trigger for McClendon's departure.

In June, Reuters reported that Chesapeake discussed with Encana Corp (ECA.TO), one of its top competitors, a plan to suppress land prices in Michigan. That matter is under investigation by the state of Michigan and the Department of Justice. Two weeks ago, Encana CEO Randy Eresman said he was stepping down. Earlier, Reuters reported that McClendon had arranged to personally borrow more than $1.3 billion from EIG Global Energy Partners, an investment-management firm that also is a big investor in Chesapeake. EIG has said the transactions were proper.

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McClendon "will continue to be an important partner with the company given his stock ownership, as well as his interests in certain of the company's wells," it said in a statement.

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A person familiar with the terms of the separation said it was being treated as "termination without cause," entitling the CEO to some of the most generous benefits laid out in his employment contract.

McClendon is entitled to total compensation of about $47 million. That includes $11.7 million in total cash compensation, based on McClendon's salary and bonus, to be paid out over four years.

It also includes restricted stock awards already given to McClendon that have a value of $33.5 million, the person familiar with the compensation package said.

He will also be entitled to CEO-style perks, including personal use of corporate jets that could be worth up to $1 million over four years, the person said.

Internal 2010 flight logs show the CEO took 155 business charters at a cost of $2.25 million and 75 personal flights worth an estimated $850,000, Reuters reported last year. These included family vacations to Europe and the Bahamas.

The contract also calls for McClendon to continue using Chesapeake accounting services. Reuters last year disclosed that a Chesapeake unit handling such services for McClendon had six company employees, occupying a building on the edge of the campus. Known as "AKM Operations," after his initials, it served as the hub for managing McClendon's personal interests in Chesapeake wells, from assessing their value to filing court paperwork documenting his ownership.

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The well stakes could make it harder to structure a deal, some analysts said.

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Since 2009, McClendon has pledged his Chesapeake well interests as collateral for more than $1.3 billion in financing from EIG, according to a Reuters review of loan agreements filed in five states. The loan proceeds have been used to pay McClendon's costs associated with his stakes in the wells.

The loan agreements provide EIG a claim on McClendon's interests in the Chesapeake wells should he default. Last March, McClendon arranged a new $450 million loan from EIG through a company called Pelican Energy to finance well interests that Chesapeake is obligated to transfer to him through June 30, 2014 - 15 months after he steps down as CEO.

EIG will retain rights to the well stakes even after McClendon departs.

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Chesapeake also must deal with the investigations and lawsuits McClendon that is leaving behind.

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Civil litigation also continues. More than a dozen Chesapeake shareholders have sued the company over alleged breaches of fiduciary duty related to McClendon's loans. Those lawsuits, some of which have been consolidated into class actions, are playing out in Oklahoma courts.

Separately, more than 100 landowners have filed suit in Michigan since 2010, alleging that Chesapeake breached contracts when it canceled leases in the state. Some of the cases, reviewed by Reuters, allege McClendon was the architect of a plan to cancel the agreements and thus deprived landowners of lease bonus payments.

Michigan attorney Susan Topp has filed more than 120 suits since 2010 against Chesapeake or its Michigan land brokers for allegedly backing out on land deals there. Most of the cases have been settled. But Topp said she is in the process of filing around 50 new ones.

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Through a firm called the Professional Basketball Club, McClendon owns a 19.2 percent interest in the NBA's Oklahoma City Thunder basketball team. According to SEC filings, Chesapeake has committed to pay at least $60 million over the next decade for naming rights at the Thunder's home stadium, the Chesapeake Energy Arena, and to sponsor the team.

A 10-year naming rights deal, signed in 2011, will cost Chesapeake between $3 million and $4 million annually. The company also agreed to pay an average of $3 million a year in Thunder sponsorship fees until 2023. The Thunder, valued by Forbes at $475 million, lost in the NBA finals last year to the Miami Heat.

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McClendon appeared to hint on Wednesday that his exit was unlikely to mark the end of his career. In his daily inspirational quote-of-the-day message to employees, he cited Albert Einstein: "In the middle of every difficulty comes opportunity."

http://www.reuters.com/article/2013/01/31/us-chesapeake-mcclendon-entangled-idUSBRE90U01M20130131

The more complex the corporate structure, the more complex the accounting, the more overlap between an executive and the corporation, the more it smells.

[Enthusiast]

1. It just plain stinks.

We need real regulations, real enforcement and a real IRS to tax these card carrying members of the new gilded age.

[No Elephants]

2. Agreed. I just have no idea how to help make that happen.