UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM
8-K
CURRENT
REPORT
Pursuant
to Section 13 or 15(d) of the
Securities
Exchange Act of 1934
Date
of Report (Date of earliest event reported): December 31, 2008
CHESAPEAKE
ENERGY CORPORATION
(Exact
name of Registrant as specified in its Charter)
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Oklahoma
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1-13726
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73-1395733
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(State
or other jurisdiction of incorporation)
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(Commission
File No.)
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(IRS
Employer Identification No.)
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6100
North Western Avenue, Oklahoma City, Oklahoma
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73118
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(Address
of principal executive offices)
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(Zip
Code)
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(405)
848-8000
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(Registrant’s
telephone number, including area code)
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Check the
appropriate box below if the Form 8-K filing is intended to simultaneously
satisfy the filing obligation of the registrant under any of the following
provisions (see General Instruction A.2. below):
* Written
communications pursuant to Rule 425 under the Securities Act (17 CFR
230.425)
* Soliciting
material pursuant to Rule 14a-12 under the Exchange Act (17 CFR
240.14a-12)
* Pre-commencement
communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR
240.14d-2(b))
* Pre-commencement
communications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR
240.13e-4(c))
Item
5.02 Departure of Directors or Certain Officers; Election of Directors;
Appointment of Certain Officers; Compensatory Arrangements of Certain
Officers
On
December 31, 2008, Chesapeake Energy Corporation (the "Company") entered into a
new five-year
employment agreement with Aubrey K. McClendon, the Company’s Chief Executive
Officer, in recognition of Mr. McClendon’s leadership role in completing a
series of transactions in 2008 that were valuable to the Company and its
shareholders. The new employment agreement is evidenced by the Second Amended
and Restated Employment Agreement (the "Amended McClendon Agreement") which is
attached as Exhibit 10.2.1 to this filing. The material changes to
Mr. McClendon’s prior employment agreement made by the Amended McClendon
Agreement are described below and are qualified in their entirety by reference
to the Exhibit. The rationale for the changes to Mr. McClendon’s
employment agreement is also set forth below.
Material
Amendments
The
Amended McClendon Agreement contains the following provisions which materially
differ from Mr. McClendon's prior employment agreement:
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A
one-time $75 million incentive award that, after reduction by federal
withholding taxes, is structured as a net credit against future billings
from the Company for well costs owed by Mr. McClendon, with a five-year
clawback;
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A
five-year employment commitment by Mr.
McClendon;
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A
cap on cash salary and bonus compensation for the next five years at 2008
levels;
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An
extension of the non-competition period with respect to certain
terminations by the Company; and
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·
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A
reduced 2009 stock holding
requirement.
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Well Cost Incentive Award.
The Company made the incentive award to Mr. McClendon effective December
31, 2008. The total cost to the Company of the award is approximately
$75 million plus the employment taxes imposed on the Company by law in the
amount of $1.1 million. However, under GAAP accounting, the Company
is required to recognize the incentive award as general and administrative
expense over the five-year vesting period for the clawback described below,
resulting in an expense of approximately $15 million per year to the Company
beginning in 2009. In addition to state and federal income tax
withholding, similar employment taxes were imposed on Mr. McClendon and withheld
from the award. After deduction of the required federal and state tax
withholdings, the net incentive award was approximately $43.5
million.
The net
incentive award can only be utilized by Mr. McClendon or his family-owned
affiliates for application against costs (the “FWPP Credit”) attributable to
interests in the Company's wells, acquired by Mr. McClendon or Mr. McClendon’s
affiliates under the Founder Well Participation Program (the
"FWPP"). The FWPP was approved by the Company's shareholders in June
2005. Under the FWPP, Mr. McClendon has the right to elect to
participate with up to a 2.5% working interest in all of the Company's wells
drilled during a calendar year (except for individual wells where the election
would reduce the Company’s working interest to below 12.5%) and is required to
pay the drilling, completing, operating and leasehold costs attributable to his
working interest in each well ("Well Costs") on the same pro rata basis as the
Company or other third parties that own an interest in such
well. Based on the Company's current development plans and Mr.
McClendon’s election under the FWPP to participate with a 2.5% working interest
during 2009, the Well Costs under the FWPP are expected to exceed the
amount of the entire FWPP Credit during 2009. After December 31,
2014, Mr. McClendon may request payment in cash of the portion of the FWPP
Credit that has not been subject to the clawback or utilized to pay Well
Costs.
The
incentive award, consisting of the FWPP Credit and Mr. McClendon’s associated
tax withholdings, is subject to a clawback if, during the initial five-year term
of the Amended McClendon Agreement, Mr. McClendon resigns from the Company or is
terminated for cause by the Company. The amount of the incentive
award not subject to the clawback (the "Vested Amount") increases on a pro rata
basis each calendar month that a triggering resignation or termination for cause
does not occur. Thus, the amount of the clawback reduces by $1.25
million per month over the initial five-year term of the Amended McClendon
Agreement. In the event that Mr. McClendon resigns or is terminated
for cause during this period, the unused portion of the FWPP Credit is
immediately forfeited for no consideration to Mr. McClendon. In
addition, Mr. McClendon is obligated to repay to the Company within 180 days the
amount by which the sum of the associated tax withholdings from the incentive
award plus the amount of the FWPP Credit applied against Well Costs exceeds the
Vested Amount. The clawback provision does not apply if Mr. McClendon's
employment is terminated (i) by the Company without cause, (ii) by Mr. McClendon
if the Company defaults under a material provision of the Amended McClendon
Agreement, (iii) as a result of Mr. McClendon’s death or disability, or (iv)
after a change of control of the Company in certain circumstances.
Five-Year Employment Commitment and
Cap on Future Cash Compensation. Mr. McClendon agreed that, absent a
material breach by the Company of the Amended McClendon Agreement, he would not
resign from his position for the initial five-year term of the Amended McClendon
Agreement. Mr. McClendon also agreed that for the five years ending
December 31, 2013, his annual salary would not exceed its 2008 level of $975,000
and his annual cash bonuses would not exceed the amount awarded to him during
2008 of $1.95 million.
No Lump Sum Payment upon Termination
without Cause; Extension of Non-Competition Period. Mr. McClendon agreed
that any compensation due as a result of a termination by the Company without
cause would be paid out over the then remaining term of the Amended McClendon
Agreement. The effect of such provision is to extend the covenant not
to compete applicable against Mr. McClendon through the term of such payment,
plus six months.
Stock Holding
Requirement. Mr. McClendon's prior employment agreement
required Mr. McClendon to hold shares of the Company's common stock with an
investment value (as defined in the prior employment agreement) equal to 500% of
Mr. McClendon's annual salary and annual cash bonuses. As a result of the forced
liquidation of a substantial portion of Mr. McClendon's stock holdings in the
Company during October 2008, Mr. McClendon’s stock ownership fell below the
required amount. The Amended McClendon Agreement reduces the required percentage
to 200% for 2009 in order to provide Mr. McClendon time to acquire additional
shares of the Company's common stock. The required percentage reverts
to 500% beginning in 2010. Part of the consideration for the
foregoing reduction was the fact that the short swing profit rules under Section
16 of the Securities Exchange Act of 1934, as amended, may effectively preclude
Mr. McClendon’s purchases of the Company's common stock through April
2009.
Rationale for Incentive
Award and Structure
The
Compensation Committee considered a number of factors in determining the amount
and the form of the incentive award to Mr. McClendon and the amendments to Mr.
McClendon’s prior employment agreement. The Compensation Committee
determined that the restrictions agreed to by Mr. McClendon, the requirement
that Mr. McClendon use the FWPP Credit to invest on an at-risk basis in the
Company's wells and the imposition of the clawback would align Mr. McClendon’s
economic interests with the Company's long-term business plan and the
shareholders’ interests while rewarding him for the leadership role he played in
negotiating the 2008 transactions described below:
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Initial
Payment
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Drilling
Credit
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Total
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Implied
Value - Remaining Properties
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(in
millions)
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Plains
Exploration (20% of the Haynesville)
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$ |
1,650 |
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$ |
1,650 |
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$ |
3,300 |
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$ |
13,200 |
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BP
America (100% of the Woodford)
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1,694 |
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- |
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1,694 |
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- |
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BP
America (25% of the Fayetteville)
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1,100 |
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800 |
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1,900 |
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5,700 |
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StatoilHydro
USA (32.5% of the Marcellus)
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1,250 |
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2,125 |
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3,375 |
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7,000 |
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Total
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$ |
5,694 |
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$ |
4,575 |
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$ |
10,269 |
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$ |
25,900 |
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The
Compensation Committee considered the substantial value the 2008 transactions
created for the Company and its shareholders. The initial cash
payment under the 2008 transactions permitted the Company to recoup the cost
basis of the assets sold in the 2008 transactions (book basis of approximately
$1.7 billion) as well as all or virtually all of the cost basis of the interests
in the Haynesville, Fayetteville and Marcellus plays retained by the
Company. In addition, the $4.6 billion drilling credit provides a tax
efficient funding source for the development of the Company's retained acreage
position, and the participation of the joint venturers in future leasing will
provide material subsidies for the Company's ongoing leasing efforts in each of
the co-development areas. In total, the Company received
consideration in the amount of $10.3 billion, generated a (non-GAAP) profit of
$8.6 billion through the four transactions and retained majority ownership
positions in the co-development areas valued at $25.9 billion on a pro-rata
basis. The Company believes these transactions should result in peer-group
leading finding and development costs and superior financial performance by the
Company over the next several years, although many factors such as the risks
related to the Company's business described under "Risk Factors" in the
prospectus filed by the Company with the Securities and Exchange Commission on
December 15, 2008 could cause actual results to differ materially from
anticipated results.
In
addition to the success of the 2008 transactions and Mr. McClendon’s leadership
role in those transactions, the Compensation Committee also considered a number
of other factors in modifying his prior employment agreement. One such factor
was Mr. McClendon’s voluntary decision not to participate in the special
restricted stock grant in 2006 to the Company’s other employees and the
supplemental restricted stock grant in 2008 to the Company’s other
employees. Mr. McClendon’s decision not to participate in such equity
grants resulted in significant benefits to the Company and its shareholders
while representing substantial forgone value to Mr. McClendon.
The
Compensation Committee further determined that an award to Mr. McClendon in the
form of a drilling credit not only rewarded him for his role in the Company's
successful 2008 transactions, but also served to align his economic interests
with those of the Company. Under the terms of the Amended McClendon
Agreement, Mr. McClendon and his affiliates are required to use the FWPP Credit
to invest in the Company’s drilling program in accordance with the FWPP, thereby
exposing him to the same risks and benefits that accrue to the Company from its
drilling program. Mr. McClendon’s use of the FWPP Credit is also
anticipated to match the form and deferred timing of a significant portion of
the drilling credits received by the Company as part of the joint venture
transactions. In addition, by making the FWPP Credit award to Mr.
McClendon subject to a clawback, the Compensation Committee provided a simple
and direct incentive to Mr. McClendon to remain with the Company for at least
the next five years, which corresponds to the development of the properties
covered by the various joint venture transactions. Because of other
entrepreneurial opportunities that exist in the industry and Mr. McClendon's
reduced Company stock holdings, the Compensation Committee focused on providing
a retention incentive to Mr. McClendon that the Compensation Committee believed
would be effective for multiple years without issuing substantial equity awards
at current stock prices, which the Compensation Committee views as
depressed.
Section
7 – Regulation FD
Item
7.01 Regulation FD Disclosure
On
January 5, 2009, the Company issued a press release announcing that it has sold
certain Chesapeake-operated long-lived producing assets in the Anadarko and
Arkoma Basins in its fourth volumetric production payment transaction
(VPP). A copy of this press release is attached as Exhibit 99.1 to
this Current Report.
On
January 5, 2009, Jennifer M. Grigsby, Senior Vice President, Treasurer and
Corporate Secretary of the Company, entered into a sales trading plan pursuant
to Rule 10b5-1 of the Securities Exchange Act of 1934. The plan
expires on January 5, 2010 and has been approved by the Company in accordance
with its Insider Trading Policy. The plan is part of the executive’s
long-term strategy to diversify assets and provides for the sale of shares of
Chesapeake’s common stock in connection with vested employee stock
options. Other executives of the Company may enter into Rule 10b5-1
trading plans in the future, from time to time.
Section
9 – Financial Statements and Exhibits
Item
9.01 Financial Statements and Exhibits
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Exhibit
No.
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Document
Description
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10.2.1
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Employment
Agreement dated as of December 31, 2008, between
Aubrey
K. McClendon and Chesapeake Energy Corporation
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99.1
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Chesapeake
Energy Corporation press release dated January 5, 2009
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SIGNATURE
Pursuant
to the requirements of the Securities Exchange Act of 1934, the registrant has
duly caused this report to be signed on its behalf by the undersigned hereunto
duly authorized.
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CHESAPEAKE
ENERGY CORPORATION
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By:
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/s/
Jennifer M. Grigsby
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Jennifer
M. Grigsby
Senior
Vice President, Treasurer and Corporate
Secretary
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Date: January
7, 2009
EXHIBIT
INDEX
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Exhibit
No.
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Document
Description
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10.2.1
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Employment
Agreement dated as of December 31, 2008, between
Aubrey
K. McClendon and Chesapeake Energy Corporation
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99.1
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Chesapeake
Energy Corporation press release dated January 5, 2009
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