Chesapeake Energy 2012 Annual Report Download - page 127

CHESAPEAKE ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
117
A reconciliation of the beginning and ending balances of unrecognized tax benefits is as follows:
2012 2011 2010
($ in millions)
Unrecognized tax benefits at beginning of period .................................... $ 369 $ 34 $ 231
Additions based on tax positions related to the current year .................... 134 135 —
Additions to tax positions of prior years .................................................... 96 200 (197)
Settlements .............................................................................................. — — —
Unrecognized tax benefits at end of period .............................................. $ 599 $ 369 $ 34
Chesapeake's federal and state income tax returns are routinely audited by federal and state fiscal authorities.
The Internal Revenue Service (IRS) is currently auditing our federal income tax returns for 2007 through 2011.
6. Related Party Transactions
Chief Executive Officer
As of December 31, 2012 and 2011, we had accrued accounts receivable from our Chief Executive Officer,
Aubrey K. McClendon, of $23 million and $45 million, respectively, representing joint interest billings from December
2012 and 2011 related to Mr. McClendon's participation in Company wells pursuant to the Founder Well Participation
Program (FWPP). These amounts were invoiced and timely paid in the following month. Since Chesapeake was
founded in 1989, Mr. McClendon has acquired working interests in virtually all of our natural gas and oil properties
by participating in our drilling activities under the terms of his employment agreement and the FWPP and predecessor
participation arrangements provided for in Mr. McClendon's employment agreements. On April 30, 2012, the
Company's Board of Directors and Mr. McClendon agreed to the early termination of the FWPP on June 30, 2014,
18 months before the end of the 10-year term approved by our shareholders in June 2005. Under the FWPP, Mr.
McClendon may elect to participate in all or none of the wells drilled by or on behalf of Chesapeake during a calendar
year, but he is not allowed to participate only in selected wells. A participation election is required to be received by
the Compensation Committee of Chesapeake's Board of Directors not less than 30 days prior to the start of each
calendar year. His participation is permitted only under the terms outlined in the FWPP, which, among other things,
limits his individual participation to a maximum working interest of 2.5% in a well and prohibits participation in situations
where Chesapeake's working interest would be reduced below 12.5% as a result of his participation. In addition, the
Company is reimbursed for costs associated with leasehold acquired by Mr. McClendon as a result of his well
participation. In conjunction with certain sales of natural gas and oil properties by the Company, affiliates of Mr.
McClendon have sold interests in the same properties and on the same terms as those that applied to the interests
sold by the Company, and the proceeds were paid to the sellers based on their respective ownership.
On December 31, 2008, we entered into a new five-year employment agreement with Mr. McClendon that
contained a one-time well cost incentive award to him. The total cost of the award to Chesapeake was $75 million
plus employment taxes in the amount of approximately $1 million. The incentive award was subject to a clawback
equal to any unvested portion of the award if during the initial five-year term of the employment agreement, Mr.
McClendon resigned from the Company or was terminated for cause by the Company. We are recognizing the
incentive award as general and administrative expense over the five-year vesting period for the clawback resulting
in an expense of approximately $15 million per year beginning in 2009. The net incentive award, after deduction of
applicable withholding and employment taxes, of approximately $44 million was fully applied against costs attributable
to interests in Company wells acquired by Mr. McClendon or his affiliates under the FWPP. On January 29, 2013,
the Company announced that Mr. McClendon had agreed to retire from the Company on the earlier to occur of April
1, 2013 or the time at which his successor is appointed. Mr. McClendon's participation rights under the FWPP will
continue through the expiration of the FWPP on June 30, 2014, and the incentive award clawback applicable to 2013
will not apply. See Note 21 for additional information on the terms of his separation from the Company.
In 2011, Chesapeake entered into a license and naming rights agreement with The Professional Basketball
Club, LLC (PBC) for the arena in downtown Oklahoma City. PBC is the owner of the Oklahoma City Thunder basketball
team, a National Basketball Association franchise and the arena's primary tenant. Mr. McClendon has a 19.2% equity
interest in PBC. Under the terms of the agreement, Chesapeake has committed to pay fees ranging from $3 million
to $4 million per year through 2023 for the arena naming rights and other associated benefits. In addition, since
2008, Chesapeake has been a founding sponsor of the Oklahoma City Thunder, initially under successive one-year
contracts. In 2011, it entered into a 12-year sponsorship agreement, committing to pay an average annual fee of $3