Reuters: The lavish and leveraged life of Aubrey McClendon

BY JOHN SHIFFMAN, ANNA DRIVER AND BRIAN GROW, Reuters Published: June 7, 2012
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Chesapeake executives, board members and their families also take what the company characterizes as “personal” flights. In 2010 the McClendons took at least 75 personal flights on Chesapeake-leased aircraft. The cost: an estimated $830,000 to $875,000. Although his contract affords him unlimited use of the jets for himself, his friends and his family, McClendon reimbursed the company $375,000 for personal flights that year, according to a proxy.

The McClendons took personal trips to Mexico, the Cayman Islands and New York. Bermuda, where the McClendons own vacation properties, was also a favored destination. One Friday in fall 2010, McClendon, his wife and a son flew to the island and flew back to Oklahoma City by Monday. Total cost: $34,000. The following weekend, his wife and daughter jetted there. Total cost: $27,000.

Personal use of corporate jets has abated since the SEC imposed stricter reporting rules in 2006. Travel by relatives in particular has declined, said Paul Hodgson, senior research associate at GMI Ratings, a corporate-governance ratings firm, “because the fierce light of disclosure is on them.” Chesapeake's use of the perk appears relatively heavy, some experts said.

The jet travel is an indicator of wider troubles at the company, said John Liu, the comptroller for New York City, which holds 1.9 million shares of Chesapeake stock.

“It's becoming clear that the excessive perks and problematic related-party deals that the company discloses, which have long caused concerns among investors, are only the tip of the iceberg,” Liu said. “But, at this point, it's no longer shocking given the company's pattern of behavior.”

AKM OPERATIONS

McClendon's personal business affairs are tracked in the low-slung building on the fringe of Chesapeake's corporate campus, where at least six company employees work.

This is AKM Operations.

Chesapeake regularly discloses that McClendon receives personal accounting and engineering support from company employees; his contract allows him to use company facilities for his “personal businesses, investments and activities.” But the scope and sophistication of the support, including AKM Operations, is not broken out in public disclosures.

In 2010, Chesapeake employees spent more than 15,000 hours working on McClendon's personal projects, according to internal records reviewed by Reuters. The cost: about $3 million.

In 2011 the documents projected that Chesapeake employees would do about $3.2 million in work for McClendon.

The company keeps detailed records because McClendon's contract calls for him to provide “a partial reimbursement” of the salaries, benefits and indirect costs of the Chesapeake employees who are “primarily designated to” work on his personal businesses. He does not reimburse the company for “secretarial or general administrative support,” according to his contract.

The agreement also calls for Chesapeake to pay a portion of the accounting and engineering work as part of McClendon's annual compensation. In 2008 he received $708,339 in both accounting and engineering support. In 2009 it totaled $685,669, according to the proxies.

In 2010 the company covered $250,000. Given that the accountants and engineers provided an estimated $3 million worth of personal work to the CEO, McClendon would have owed Chesapeake about $2.7 million for services that year. One Chesapeake document reviewed by Reuters showed McClendon reimbursed the company for the difference.

People familiar with the process said the arrangement could amount to a 12-month loan because McClendon does not need to reimburse the company until the end of the year.

Most of the accounting work is performed by the special AKM unit. Consider the job held by Bryan Ott, an accountant who earned $200,000 at Chesapeake last year. His job title is “Controller, AKM Business Operations,” but Ott does much more than manage McClendon's money.

When McClendon put a vast Oklahoma ranch up for auction, he had Ott handle the matter. When hail damaged a local home McClendon was buying, Ott coordinated the repair so the sale could be completed. Ott also is the registered website administrator for several McClendon personal projects, including one for a massive Lake Michigan resort that has drawn the ire of many townsfolk, and another for a McClendon holding company, Arcadia Resources.

Arcadia Resources also acts as a Chesapeake contractor. An Arcadia consultant, Scott Mueller, supervises Ott and at least five other Chesapeake employees working full-time for AKM Operations. Mueller reports directly to McClendon.

Until last year, Chesapeake employee John Garrison was the highest-paid person working with AKM Operations. He earned $800,000 in salary and bonuses, plus another $1 million in equity compensation.

Garrison played a variety of roles. He served as treasurer of the McClendon Family Foundation, a 501c3 charity. He also helped McClendon run the $200 million hedge fund from Chesapeake offices, a fund whose existence was disclosed by Reuters on May 2. Garrison retired late last year and is now a contractor for the AKM unit. His current compensation could not be learned.

The AKM unit is supplemented by scores of Chesapeake engineers who, among other duties, help calculate McClendon's reserve holdings in a special incentive program that gives him a chance to invest in every well the company drills. In 2010 at least 60 engineers spent on average six days each on McClendon-related projects, the records show. Some engineers spent mere hours; one logged more than 100 eight-hour days.

“Even if it's true that the executives are reimbursing for using company employees, having this kind of relationship with the company is treating it as a personal fiefdom,” said Hodgson of GMI Ratings.

WINE AND BURGERS

Separating McClendon's business interests in Oklahoma City from Chesapeake's isn't easy.

For example, McClendon holds an interest in a local restaurant, Metro Wine Bar & Bistro, which occupies space owned by a Chesapeake subsidiary.

Across the street from the corporate campus, McClendon co-owns Irma's Burger Shack, often filled with Chesapeake employees during the lunch hour. According to a proxy, another restaurant McClendon co-owns, Deep Fork, catered Chesapeake events in 2007 and 2008 at a cost of $390,000.

As a co-owner of the Thunder basketball team, McClendon sits in the front row at games. As Chesapeake CEO he presides over a company that signed a $36 million, 12-year sponsorship deal with the team. This year the company pledged to buy $3 million worth of tickets, and many were distributed to employees and Chesapeake business associates.

Although McClendon's net worth is pegged by Forbes at $1.1 billion, he has mortgaged much of what he owns: the restaurants, the wine, the boats, the homes, proceeds from three accounts at Goldman Sachs, his stake in private companies and his stake in thousands of Chesapeake wells. The well financing from one backer alone, EIG Global Energy Partners, totals $1.3 billion, according to a person familiar with the deals.

McClendon has even mortgaged part of his stake in his beloved Thunder.

He holds 19 percent of a team valued at $350 million. But twice, McClendon has pledged his share of future proceeds from the Thunder as collateral for loans, from Bank of America in 2009 and Wells Fargo in 2010, according to records reviewed by Reuters. Neither loan has been previously disclosed.

Further particulars of the Thunder loans — the amount McClendon borrowed, whether they have been repaid or whether the NBA or his Thunder partners were notified — could not be determined.

Neither of the banks, nor McClendon and his spokesman, would elaborate on the Thunder loans.

THE MCCLENDON GARGOYLES

McClendon is generous with his money. He has donated roughly $15 million to Duke University, his and his wife's alma mater, and $12.5 million to the University of Oklahoma, his parents' alma mater. At Oklahoma, the McClendon Center for Intercollegiate Athletics is adjacent to the football stadium, and the McClendon Honors College is named after McClendon's parents.

At Duke, attended by all three McClendon children, a prominent dorm and visitors' center carry the family name. The chapel organ is named in honor of Katie McClendon.

So prolific were McClendon donations to Duke that the university once honored the couple by commissioning gargoyles in their likenesses, hanging them above an arch on the dorm, McClendon Tower. According to the artist, Katie McClendon found them too ostentatious; they were later removed.

Beginning about six or seven years ago, McClendon, through Chesapeake, helped lead a concerted effort to remake Oklahoma City. The company started buying land around its campus, including half of the neighborhood across the street. Chesapeake kept mum about its plans. Many outsiders expected more office buildings; they were wrong.

In late 2008, McClendon strolled into Balliets, the closest thing in Oklahoma City to Neiman Marcus. He approached the co-owner, Bob Benham.

“Aubrey came in with a picture of a dress that he had torn out of The New York Times magazine,” Benham recalled, “and he wanted to see if he could get it for his wife.”

Benham promised to try. “Then Aubrey spent the next 40 minutes asking me about my background and strategies for the store,” the owner remembered. “It struck me as odd, because here's a guy running a huge energy company. Why would he be interested?”

Benham found the dress in Japan — a Salvatore Ferragamo — and had it shipped to Katie McClendon within 48 hours. McClendon, it turns out, had been testing him, Benham said.

A few months later, a Chesapeake executive approached Benham and said, “Aubrey wants you to anchor Classen Curve,” a shopping center that McClendon envisioned, located steps from the Chesapeake campus.

A chic and sleek shopping venue, Classen Curve is owned by Chesapeake. It now includes stores with names such as On a Whim, Green Goodies and Uptown Kids. The gastro sports pub Republic serves smoked-salmon sliders. Matthew Kenney OKC offers gourmet raw vegan meals. Even the dumpsters are classy, camouflaged by high-end brick and steel.

“Aubrey saw it as a quality of life issue,” Benham said. “These things seem peripheral to Chesapeake but really aren't. You have to have the amenities to attract people.”

McClendon calls the amenities “the jewels” — and on campus they include a 72,000-square-foot fitness center, Olympic-sized swimming pool and health center that offers teeth whitening and Botox injections.

The Classen Curve project is not disclosed in any shareholder filings. Business does not appear brisk; parking lots were largely empty on recent weekdays and many of the shops were vacant.

Benham said Chesapeake is choosy. “They could fill the place up tomorrow,” he said, “but they want a certain type of tenant.”

LAND, LAND, LAND

Chesapeake's expansion in Oklahoma City stretches far beyond Classen Curve.

Since 2004 the company has purchased at least 108 local properties for at least $240 million, according to a Reuters analysis of Oklahoma land records. More than half were purchased at prices well above the assessed market value. The 108 tracts and buildings were valued by the Oklahoma County Assessor's Office at a total market value of $146 million at the time of the purchases. In Oklahoma City, “market value” is based on recent sales data, said Larry Stein, the county's chief deputy assessor.

Chesapeake paid $38 million for an office building valued at $27 million and $10 million for a church valued at $1.4 million. In 2006 it paid $16 million for Nichols Hills Plaza, a 50-year-old shopping center that was valued at $6.3 million. The company plans a major renovation, said Nichols Hills Mayor Sody Clements.

“We don't have the money to do it and he does,” the mayor said, interchanging, as many locals do, McClendon for Chesapeake. “He raises the bar on everything.”

From fashion shops to food, McClendon's vision is reshaping the area near Chesapeake and Nichols Hills. When he became frustrated that Oklahoma City lacked a Whole Foods Market, he persuaded the popular organic chain to bring one to his hometown — and then leased it space on land owned by Chesapeake, across the street from his office.

At Nichols Hills Plaza, the energy company is planning to go into the grocery business itself, internal records show. Chesapeake plans to reopen the shuttered Nichols Hills Market and recently put two grocery store managers on its payroll. Their combined salaries exceed $200,000.

“I think in another life he would have been a city planner or architect,” said the former employee, who worked closely with McClendon for years. “It's like playing with Legos for him, envisioning something in his mind, seeing it laid out. He wants to reshape things.”

MANY HOMES

Even at rest, McClendon remains competitive.

His wine collection, stored in cellars across three states and the Caribbean, exceeded 2,000 bottles, according to a 2009 inventory. It included a six-liter bottle of 1945 Mouton Rothschild, valued at about $100,000.

“This is not a particularly connoisseur-y cellar,” said Benjamin Wallace, the best-selling author of “The Billionaire's Vinegar,” who reviewed McClendon's wine roster. “It's pretty much exclusively big-name trophy vintages. Just eye-balling it, it's got to be worth millions.”

McClendon also owns a $12 million collection of antique maps that fill the walls of Chesapeake buildings.

“His collection of Oklahoma maps and nearby states would be the envy of the Library of Congress,” said Graham Arader, the broker who helped him acquire it. McClendon once angered some shareholders by selling the maps to Chesapeake to meet a margin call; he subsequently agreed to buy them back.

In 2005, McClendon set his sights on Bermuda's so-called billionaire's row, a neighborhood that included the vacation homes of Michael Bloomberg, Ross Perot and former Italian Prime Minister Silvio Berlusconi.

First, he bought an $8.6 million home and spent $12 million to renovate it. Next he bought the grandest property there for $20.8 million: an 8-acre tract once owned by industrialist Henry Clay Frick's descendants. McClendon gave the Frick site a makeover and sold it for a small profit. Last year his wife bought an $11 million house there, perched over a spectacular cliff.

In his Oklahoma neighborhood, McClendon and his wife live in a $4 million, 9,000-square-foot stone mansion in Nichols Hills, the tony enclave surrounded by Oklahoma City just a four-minute commute from the Chesapeake campus.

He also owns the house next door, purchased for $2.3 million, and the one behind that, which cost $700,000, records show. For a time, McClendon also owned yet another neighboring house.

'COMMIT TO THE LORD'

McClendon, an Episcopalian, sometimes invokes religious themes at work. Each day he helps select a quotation that is emailed to employees. Some are from the Bible.

A May 2 email quotes Proverbs 16:3: “Commit to the Lord whatever you do, and your plans will succeed.”

Chesapeake also has three “corporate chaplains” on staff. According to a 2011 job posting, the chaplains provide confidential career, marriage, parenting and substance-abuse counseling as well as “spiritual consultation.”

The chaplain positions are among Chesapeake jobs that reflect McClendon's passions. A keen student of history, he has a company historian on staff.

A proponent of good health for his employees, he also hired the 2006 winner of the World's Strongest Man contest, Phil Pfister, in part to promote exercise. On his website, Pfister says he's a man to whom “flipping cars, pulling two 18-wheelers or ‘toting tonnage' comes naturally.”

The historian and the World's Strongest Man, who each earn more than $100,000, have other duties at Chesapeake. The strongman, for example, promotes Chesapeake's development efforts in important drilling regions.

ROWING ALONG

McClendon has poured Chesapeake resources into another love: rowing.

In a remarkable feat, Oklahoma City transformed its dry and weed-choked riverbed — “nothing more than a big ditch,” says Mayor Mick Cornett — into an Olympic-class rowing venue.

Chesapeake built two of the venue's signature attractions, the sleek $3 million Chesapeake Boathouse and glass-sheathed $7 million Chesapeake Finish Line Tower.

McClendon also put 10 Olympic hopefuls on the Chesapeake payroll.

They earn modest salaries — $30,000 to $40,000, plus benefits — and are assigned to departments such as finance and community relations. Even so, according to Chesapeake documents, each of the 10 is officially classified the same way: “Rower.”

Some of the rowers McClendon hired have also flown with him aboard a Chesapeake-leased jet.

On December 12, 2010 — a Sunday — the CEO took five rowers on a one-day trip to San Diego, the flight logs show. McClendon brought a son along, too.

Total round-trip cost to shareholders: $34,000.

(Additional reporting by Robin Respaut, Jennifer Ablan and Joshua Schneyer in New York and Alexander Cohen in Washington; editing by Blake Morrison, Michael Williams and Prudence Crowther)