Chesapeake Energy Corp. CEO Aubrey McClendon’s cumulative spending under the company’s unique Founder Well Participation Program (FWPP) has “significantly exceeded cumulative production revenues to date” because the company’s capital spending also has been rising year-to-year, the latest annual proxy statement revealed.
The 2011 proxy statement, which includes items upon which shareholders may vote at the annual meeting on June 8 in Oklahoma City, was filed with the Securities and Exchange Commission (SEC) late Friday.
Last week the company’s chief and the share price came under fire following disclosures that McClendon had borrowed more than $1 billion in personal loans over the past three years from a big investor in the corporation: private equity firm EIG Global Energy Partners, as well as an EIG predecessor (see Daily GPI, April 19). The loans were taken against McClendon’s interest in equity held in company wells.
On Monday Chesapeake’s share price had recovered somewhat, gaining 56 cents, or 3.21%, to end the day at $18.00, from $17.44 on Friday. More than 31.7 million shares traded hands on Monday, versus average volume of 18.24 million.
The proxy acknowledged that McClendon is the only one at the company participating in the FWPP because of his “unique role as co-founder of the company.” Co-founder Tom Ward, who left in 2006 and went on to found SandRidge Energy Inc., also had participated in the FWPP.
The FWPP gives McClendon the opportunity to participate and invest 2.5% as a working interest owner in all — or none — of the new wells drilled during each calendar year, as long as Chesapeake’s interest in a well does not fall below 12.5%. McClendon has to notify the board about whether he is going to participate in all or none of the upcoming year’s wells before a calendar year begins, and his participation may not be on a well-by-well basis.
McClendon is to pay Chesapeake for lease operating expenses and capital expenditures related to his FWPP stakes “promptly” when he is invoiced, the proxy said.
According to the proxy statement, for 2011 McClendon paid about $457 million to participate in the FWPP, which was almost twice what he paid to participate in 2010. Over the past three years McClendon has spent about $661 million to participate in the FWPP. He also had to reimburse Chesapeake an estimated $315,000 to cover the cost of well services for 2011, the proxy said.
The CEO’s cumulative expenditures under the FWPP “have significantly exceeded cumulative production revenues to date because the company’s operated and nonoperated capital expenditures have generally increased from year to year,” according to the proxy.
Over the life of the FWPP, McClendon typically has “mortgaged his interests acquired under the FWPP with one or more lenders, some of which also have lending, investment or advisory relationships with the company.” The “mortgages with these lenders secure loans used in whole or in part to fund Mr. McClendon’s well costs. The company does not extend loans to Mr. McClendon for participation in the FWPP or any other purposes,” and it said it “does not review or approve financings” of his “personal assets, including his FWPP interests.”
In addition, Chesapeake also “has no obligation to repay any loans Mr. McClendon may obtain nor are any of the company’s interests in any assets exposed to such loans or the mortgages securing them.”
The proxy said McClendon received about 15% less in compensation in 2011 than the previous year. Compensation totaled about $17.87 million, versus $21.1 million in 2010, which reflected lower stock awards.
The proxy also detailed another item that some shareholders have questioned, the corporation’s funding in the Oklahoma City Thunder, a National Basketball Association franchise in which the McClendon has a 19.2% personal equity interest. According to the proxy statement, last year Chesapeake agreed to pay fees ranging from $2.9 million for the 2011-2012 season to $4.1 million in 2023 for arena naming rights and associated benefits for the former Ford Center arena in downtown Oklahoma City in which the Thunder plays.
The naming rights provide the company “with enhanced public awareness through recognition locally, nationally and internationally,” according to the proxy statement. “Mr. McClendon has committed to make annual charitable contributions for the benefit of Oklahoma schools equal to his percentage ownership of the Thunder times the fees paid by the company under the naming rights agreement for at least each of the first two seasons covered by the agreement.”
Chesapeake last year also agreed to a 12-year sponsorship with the Thunder, committing to pay an average annual fee of $3 million for advertising, use of an arena suite and other benefits. Chesapeake in 2011 paid about $1.4 million for home playoff game tickets and purchased tickets for the 2011-2012 regular season home games for about $3.2 million. In addition it is committed to purchase tickets for any 2012 home playoff games. The board’s audit committee “reviewed and approved the transactions…in accordance with its policy on transactions with related persons,” the proxy said.
Late last week The Deborah G. Mallow IRA SEP Investment Plan filed a lawsuit in U.S. District Court in Oklahoma City against McClendon, the board and the corporation, alleging that the board had not disclosed to shareholders all of the material facts about McClendon’s loans.
“The company’s proxy statements, its annual reports on Form 10-K and other SEC filings are required to detail all related party transactions, including all material details that may affect the FWPP, and all actual and potential conflicts of interest that may arise from McClendon’s participation in the FWPP,” the lawsuit stated. These types of loans “can easily cloud the CEO’s judgment on key issues.”
Several law firms also said they intend to file class-action lawsuits for shareholders.
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