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On Brink Of Collapse, Fracking Giant Chesapeake Energy Slashed Royalties To Property Owners

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FRACKING PENNSYLVANIA
A soybean field lies in front of a natural gas drilling rig September 8, 2012 near Montoursville, Pennsylvania. | Robert Nickelsberg via Getty Images

ProPublica's Abrahm Lustgarten reports:

This story was co-published with The Daily Beast.

At the end of 2011, Chesapeake Energy, one of the nation’s biggest oil
and gas companies, was teetering on the brink of failure.

Its legendary chief executive officer, Aubrey McClendon, was being
pilloried for questionable deals, its stock price was getting hammered and the company
needed to raise billions of dollars quickly.

The money could be borrowed, but only on onerous terms. Chesapeake,
which had burned money on a lavish steel-and-glass office complex in Oklahoma
City even while the selling price for its gas plummeted, already had too much
debt.

In the months that followed, Chesapeake executed an adroit escape,
raising nearly $5 billion with a previously undisclosed twist: By gouging many rural
landowners out of royalty payments they were supposed to receive in exchange
for allowing the company to drill for natural gas on their property.

In lawsuits in state after state, private landowners have won cases
accusing the companies like Chesapeake of stiffing them on royalties they were
due. Federal investigators have repeatedly identified underpayments of
royalties for drilling on federal lands, including a case in which Chesapeake
was fined $765,000 for “knowing or willful submission of inaccurate
information” last year.

Last
month, Pennsylvania governor Tom Corbett, who is seeking reelection, sent a
letter to Chesapeake’s CEO
saying the company’s expense billing “defies logic”
and called for the state Attorney General to open an investigation.

McClendon, a swashbuckling executive and fracking pioneer, was
ultimately pushed out of his job. But the impact of the Financial Maneuvers that he made to save
the company will reverberate for years. The winners, aside from Chesapeake,
were a competing oil company and a New York private equity firm that fronted much
of the money in exchange for promises of double-digit returns for the next two
decades.

The losers were landowners in Pennsylvania and elsewhere who leased
their land to Chesapeake and saw their hopes of cashing in on the gas-drilling
boom vanish without explanation.

People like Joe Drake.

“I got the check out of the mail… I saw what the gross was,” said
Drake, a third-generation Pennsylvania farmer whose monthly royalty payments for
the same amount of gas plummeted from $5,300 in July 2012 to $541 last February.
 This sort of precipitous drop can reflect
gyrations in the 
price of gas. But in this case, Drake’s shrinking check resulted
from a corporate decision by Chesapeake to radically reinterpret the terms of
the deal it had struck to drill on his land. “If you or I did that we’d be in jail,” Drake said.

Chesapeake’s conduct is part of a larger national pattern in which many
giant energy companies have maneuvered to pay as little as possible to the
owners of the land they drill. Last year, a ProPublica investigation found that
Pennsylvania landowners were paying ever-higher fees to companies for transporting
their gas to market, and that Chesapeake was charging more than other companies
in the region. The question was “why”?

ProPublica pieced together the story of how Chesapeake shifted
borrowing costs to landowners from documents filed with the U.S. Securities and
Exchange Commission, interviews with landowners, people who worked for the
company and employees at other oil and gas concerns.  

The deals took advantage of a simple economic principle: Monopoly
power.

Boiled down to basics,
they worked like this: When energy companies lease land above the shale rock that contains
natural gas, they typically agree to
pay the owner the market price for any gas they find, minus certain expenses.  

Federal rules limit the tolls that can be charged on inter-state
pipelines to prevent gouging. But drilling companies like Chesapeake can levy any
fees they want for moving gas through local pipelines, known in the industry as
gathering lines, that link backwoods wells to the nation’s interstate
pipelines. Property owners have no alternative but to pay up. There’s no other practical
way to transport natural gas to market.

Chesapeake took full advantage of this. In a series of deals, it sold off
the network of local pipelines it had built in Pennsylvania, Ohio, Louisiana,
Texas and the Midwest to a newly formed company that had evolved out of
Chesapeake itself, raising $4.76 billion in cash.  

In exchange, Chesapeake promised the new company, Access Midstream,
that it would send much of the gas it discovered for at least the next decade
through those pipes. Chesapeake pledged to pay Access enough in fees to repay the
$5 billion plus a 15 percent return on its pipelines.

That much profit was possible only if Access charged Chesapeake significantly
more for its services. And that’s exactly what appears to have happened: While
the precise details of Access’ pricing remains private, immediately after the
transactions Access reported to the SEC that it collected more money to move
each unit of gas, while Chesapeake reports that it also paid more to have that
gas moved. Access said that gathering fees are its predominant source of
income, and that Chesapeake accounts for 84 percent of the company’s business.

What’s more, SEC documents
show, Chesapeake retained a stake in the gathering process. While Chesapeake
collected fees from landowners like Drake to cover the costs of what it paid
Access to move the gas, Access in turn paid Chesapeake for equipment it used to
complete that process, circulating at least a portion of the money back to
Chesapeake.

ProPublica repeatedly
sought comment and explanations from both Chesapeake and Access Midstream over the course
of several months. Both companies declined to make executives available to
discuss the deals or to respond to written questions submitted by ProPublica.

Days after the last of the
deals closed, Drake and other landowners learned the expense of sending their gas
through Access’s pipelines would eat up nearly all of the money they had been
previously earning from their wells. Some saw their monthly checks fall by as
much as 94 percent.

An executive at a rival company who reviewed the deal at ProPublica’s request said it looked like Chesapeake had found
a way to make the landowners pay the principal and interest on what amounts to
a multi-billion loan to the company from Access Midstream.

 “They were trying to
figure out any way to raise money and keep their company alive,’’ said the
executive, who declined to be named because it would jeopardize his dealings
with Chesapeake. “I think they looked at it as an opportunity to effectively
get disguised financing…that is going to be repaid at a premium.’’

***

At 54, Joe Drake guns
his six-wheeler up a steep rock-rutted trail on the backwoods of his 494-acre
tract and points to his property line, marked by a large maple in a sea of
indistinguishable trees. He knows where it lies, because as a kid his father
made him walk that line to string barbed wire. The wire is long gone, but a
rusted snag remains entombed in the bark. Back then, the Drakes ran a dairy
farm in these pastures.

“It’s just something
you’ve got in your blood that you do,” Drake said. “But dairy farmers are a
dying breed… It was a good way of life.” 

Today, the milking
stalls have been ripped out of a long barn that still carries the stench of
their manure, but stores 20-foot stacks of bailed hay instead. Drake sold all
187 head of cattle two years ago, pinched by regulated milk prices and the
rising costs of independent farming. He took out a second mortgage to keep the
farm afloat.

Across the road, past
his house and just beyond a stand of Oak and Ash, the hillside’s natural shape
transitions to a steep slope of pushed dirt, capped by a 7-acre flat the size
of a large gravel parking lot. In the middle stands a 6-foot stack of steel
pipes and valves – a gas well.

When Chesapeake arrived
at Drake’s door, he was optimistic. Drake plastered a “Drill, baby, drill”
bumper sticker in the window of his Ford F-250 pickup. He welcomed the chance
to draw an easy income from his land, and was unswayed
when his neighbors raised questions about the environmental risks of drilling. Chesapeake
promised Drake one-eighth the value of whatever it made from his well.  It seemed like a fair deal.

If any driller was going
to make money for Drake, he thought, it would be Chesapeake. The company had built an empire off finding
and drilling natural gas discoveries as the fracking boom rolled across the
country. With uncanny foresight, its founder, McClendon, locked up exclusive
access to immense tracts of land across the country by promising property owners
that their lives would be transformed by the wealth the gas under it would
bring.

Then the company drilled furiously -- in Oklahoma, then Texas,
Louisiana and later in Pennsylvania’s Marcellus Shale – catapulting
itself to the rank of second-largest producer of natural gas in the United
States. It made McClendon – who snatched up a stake in the Oklahoma City Thunder
basketball team and moved into a stone mansion in the posh Oklahoma City suburb
of Nichols Hills -- one of the richest men in the world.

McClendon
– named by Forbes in 2011 as “America’s Most Reckless Billionaire” --
would find his way into plenty of personal trouble. He took a personal stake in
Chesapeake’s wells, and then liquidated his stock in the company in order to
cover his own losses, rattling investors and ringing corporate governance alarm
bells. He drew scrutiny for selling his $12 million antique map collection to
the company and ire for taking a $75 million bonus as Chesapeake struggled.

In
2012, he borrowed as much as a billion
dollars from the company’s private equity partners to fund his private
interests.  Separately, an investigation
by Reuters alleged Chesapeake had rigged land leasing
prices in Michigan, under McClendon’s direction, sparking a federal criminal
probe.  

But McClendon’s overarching
design for the business nonetheless made it a formidable player. Chesapeake
aggressively pursued business opportunities beyond its drilling. It created interlocking
businesses and took advantage of tax
breaks that deliver out-sized benefits to energy companies.

By structuring itself this
way, Chesapeake
earned a slice of profit from each step. Chesapeake’s subsidiaries trucked the
drilling materials, drilled the wells, fracked the
gas, gathered and piped it away to a hub, and then marketed the end product –
what economists call vertical integration. In fact, he built Chesapeake into a
powerhouse, an echo of the old Standard Oil empire,
positioned to control almost every variable and armed with the leverage to get
its way.

Neither
McClendon nor his staff responded to requests for comment for this article.

From
early on, the company viewed the local pipelines as a profit source.   Chesapeake formed subsidiaries to build and run
the lines, then spun them off into a separate,
publicly traded company. That company would eventually evolve into Access
Midstream, when Chesapeake sold its shares – one of the three deals
for $2 billion in 2012.

The
strategy paid dividends. At Chesapeake’s headquarters, a group of new, distinctively-designed office buildings
went up, with views south over the state capital and the city’s small skyline. The
company lavished its employees with perks, too. “They’ve
got a 72,000-square-foot gym, free trainers… free Thunder tickets,” said Andrea
Watiker, who scheduled pipeline capacity for gas traders
in one of the company’s new towers.

Confident he was in good
hands, Drake endured the trucks, dirt and noise that accompanied gas drilling
and signed agreements that allowed Chesapeake to run pipelines across his
fields. To transport the gas from Drake’s well, Chesapeake built a pipeline
that stretched south from within spitting distance of the New York border,
cutting a wide swath through the forest. Then it went down beyond the
white-spired church in Litchfield, and ran some 35 miles further to its handoff
at the Tennessee interstate pipeline near the Susquehanna River.

What Drake didn’t know at
the time was that the pipeline was more than a way to move his gas to market.
It would become part of a strategy to make more money off of Drake himself.

***

When the first gas flowed
from the well on Drake’s land in July 2012, it was abundant, and the royalty checks
were fat. “We was hoping to get these loans paid off…with the big money,” said
Drake, who earned more than $59,400 from the first few months of production,
referring to the mortgages on his farm.

That year, many
Pennsylvania landowners began receiving similarly sized payments as thousands
of new wells – many of them drilled by Chesapeake -- finally began
producing gas. Pennsylvania fast approached Texas as the largest source of
natural gas in the country, and with it, the prosperity long promised to this rural
part of the United States seemed about
to arrive.

But then, in January 2013,
without warning or explanation, the expenses withheld from Chesapeake’s royalty
checks for use of the gathering pipelines tripled. Drake’s income dwindled. His
contract with Chesapeake – and Pennsylvania law that sets a minimum
royalty share in the state – promised him at least 12.5 percent of the
value of the gas. Drake says the company led him to believe any expenses would
be negligible. “Well, they lied.”

A few miles away, the same
month, his brother-in-law had 94 percent of his gas income withheld to pay for
what Chesapeake called “gathering fees.” Others across the northern part of the
state also saw their income slashed. “I’ve got a stack,” said Taunya
Rosenbloom, a lawyer representing Pennsylvania landowners
with natural gas leases. She pulled the statements of all of her Chesapeake
clients into an eight-inch pile on her desk. “Everyone is having this issue.”

Drake found the statements Chesapeake mailed him each month
mystifying. He pored over the papers, hired a lawyer, compared notes with his
neighbors, but couldn’t make sense of the charges.

(Click image to enlarge.)

Other Pennsylvanians were similarly baffled. Sometimes,
Chesapeake charged different fees to neighbors whose wells fed into the same
gathering line. Other times, companies that had partnered with Chesapeake on
the same well charged vastly less for expenses. No one at the Chesapeake could
seem to explain how the charges were set. 

“There is no rhyme or reason why one client would
have such an exorbitant amount taken out when another no more than 3 miles away
has only 20 percent of their royalty taken,” said Harold Moyer, an accountant
in Bradford County, Pa., who represents more than 150 landowners with royalty
rights. Moyer said he saw a dramatic difference between what Chesapeake usually
charged compared to other energy companies in the area.

Different contracts may entitle Chesapeake to charge varying amounts. Some
of the leases examined by ProPublica limit a landowner’s share of expenses to
12.5 percent – or the same as their share of the proceeds. Other
contracts prohibit Chesapeake from withholding any expenses at all. Drake’s
contract
appears to allow Chesapeake to recoup as much money as it wants; it stipulates
that he can be charged for the expense of gathering and transporting his gas
without specifying his share of such expenses.

Gas drillers differ significantly in how much they charge landowners for
expenses. The Norwegian energy company Statoil owns a portion of the gas
extracted from Drake’s well, as well as a portion of the gathering line that
moves the gas to an interstate pipeline. Yet Statoil rakes off virtually nothing
for its expenses, according to its statements. Statoil told ProPublica that it sells
its gas independently and makes decisions about billing separately from Chesapeake.

“When it comes to deciding which, if any, deductions are appropriate, we
make that assessment according to the terms of each lease and the applicable
laws,” wrote Ola Morten Aanestad, in an e-mailed
response to questions.

Neighboring workover rig in Sayre, PA (Abrahm Lustgarten for Propublica)

Drake peers out the window, over the hills that descend from his
porch into a valley brightening with the changing colors of fall, and scowls.
He can’t stand being indoors. He’s worried that he’ll spend most of next hunting
season here at this table, trying to decipher Chesapeake’s statements. His
monthly gas statements pile up, unorganized, on the kitchen table, below a rack
of deer antlers and beside two empty cans of Coors Light and a camouflage
baseball cap.

Drake’s gathering pipeline only extends a few dozen miles, far less
distance than the interstate pipeline it feeds into that carries his gas through
New Jersey towards White Plains, NY. Yet public documents filed with the
Federal Energy Regulatory Commission
show it only cost about $.38 – on
average -- to move a unit of gas on the interstate system – a fraction of
the $2.94 Chesapeake charged Drake to move a unit of gas a vastly shorter
distance that February.

“Nobody can tell you why or
how come,” Drake said. “They pass the buck, they tell you to call this person,
and you are lucky if you can even get an answering machine.”

Chesapeake declined to explain its charges to Drake or to ProPublica.
When a ProPublica reporter visited Chesapeake’s headquarters in Oklahoma City,
the company’s director of external communications sent a message that he was
“booked solid” and couldn’t talk.

***

There has long been dispute over how drilling companies calculate
royalty payments due landowners.

A
2007 report
commissioned from a forensic oil and gas accountant by the National
Association of Royalty Owners (NARO) – an organization representing
landowners in their dealings with the oil and gas industry – found that
almost every company it examined had “used affiliates and subsidiaries to
reduce income to royalty owners and taxing authorities.”

Nine
out of 10 of the top producers in Colorado, Texas, Arkansas and Oklahoma
– including ConocoPhillips, Chevron, BP and Chesapeake -- had used
subsidiaries to sell their gas for significantly more than the amount they
reported to landowners, according to the report. They inflated their expenses,
too – at least according to the six companies that provided that level of
detail for the report -- charging landowners, on average, 43 percent more than
what they actually paid to handle the gas. (Neither Chevron nor Chesapeake
provided information about their expense deductions.)

ConocoPhillips
and BP declined to comment for this article. Chevron did not respond to a
request for comment.

Other
companies have been ensnared in similar controversies. The giant pipeline
company, Kinder Morgan, which also declined to speak to ProPublica, has been
accused by Montezuma County, Colo., of overstating its transportation and other
expenses, and underpaying $2 million in taxes as a result. (Kinder Morgan has
paid that bill, but is appealing the decision.) Chevron has faced multiple lawsuits for underpaying royalties and overstating
expense deductions because of alleged self-dealing through its affiliate
relationships, including a 2009 case the company settled with the U.S.
Department of Justice
for $45 million.

“Every company has been involved,” said Jeffrey Matthews, a vice
president and forensic accounting expert at Charles River Associates, a
consulting firm, in a lecture to landowners and oil and gas industry
accountants in Houston. “If you’re dealing with related parties,’’ the
technical term for the sort of inter-locking subsidiaries created by
Chesapeake, “the costs can be double, or triple. You don’t know if you are
paying for something two to three times over.”

Even so, Chesapeake stands
out among its peers and is widely known to interpret contracts to match its
strategies, executives in the oil and gas industry say.

The
company has faced numerous lawsuits – filed by the billionaire Ed Bass, and
the city of Fort Worth, among others -- claiming it misrepresented its
expenses. Chesapeake has paid hundreds of millions of dollars in settlements
and judgments in such cases, including a $7.5 million settlement with
Pennsylvania landowners last fall.

One Oklahoma lawsuit,
brought by other oil companies that had partnered with Chesapeake, alleged that
Chesapeake cheated them out of the final sales price of their gas and
artificially inflated its operating expenses, in part by folding in the
salaries of high-level management, the cost of seminars they attended, and rent
and office expenses for field offices. The suit was settled in late 2004 for $6.5
million.
Chesapeake denied any wrongdoing, and the settlement explicitly states
that Chesapeake did not agree to “change the practices complained of” in the
lawsuit.

Joe Drake surveys the well pad located on his property. (Abrahm Lustgarten for Propublica)

“They were making
excessive, unwarranted, and unauthorized charges,” said Charles Watson, an
Oklahoma attorney involved in the case. “I don’t think it’s mistaken
interpretation, I think it’s an intentional accounting maneuver to reduce the
amount of money going to the royalty owners and increase the amount of money
going to the operator.”

Chesapeake declined to
comment about the case.

For Drake to know how Chesapeake calculated his gathering costs, he
has to pay lawyers and accountants to audit the company, or take his grievance
to arbitration, a process that would cost him tens of thousands of dollars. In
either case, he would need to see the purchase agreements that describe the
company’s gas sales in detail. They list far more precisely than Drake’s own
statements exactly what costs were incurred, how much gas might have been lost
along the way or used by the company for its own purposes, what marketing fees
Chesapeake’s subsidiary charged, and the final, real price of the gas.

But Chesapeake isn’t required to share these agreements. They are
proprietary.

“When it comes to production expense,” said Charles River’s Matthews,
“you’re at their mercy.”

***

The
deals that led to much higher expense charges for Drake and his neighbors
involve some sophisticated financial engineering.

Over 12 months, Chesapeake
sold off a significant portion of its nationwide system of gathering pipelines
in three separate transactions. By December 2012, almost all of the pipes were
controlled by a single company – Chesapeake's former affiliate, Access
Midstream. Taken together, the sales brought $4.76 billion in cash into
Chesapeake’s coffers.

The reason behind the
moves was simple: All that profligate spending – the Oklahoma City
offices, corporate jets and huge executive salaries -- had come at  roughly the
same time that the price of gas tumbled to historic lows, analysts at several
Wall Street investment firms told ProPublica. Chesapeake “desperately needed
cash,” observed Tony Say, who once headed Chesapeake’s Marketing division
– the same part of the company that now handles transportation for the
gas.

In its securities filings,
Chesapeake said that the deals brought the company $1.76 billion more than it
had invested to build and maintain its pipelines and the companies that ran
them, leaving the impression that the sales were an unqualified boon for Chesapeake.

But a look at an SEC
filing by Access Midstream tells a different story: Chesapeake was going to
have to give much of that money back.

On the same day as the last of the major sales, Chesapeake signed
long-term contracts
pledging to pay Access a minimum fee for transporting its
gas. In some cases, the fee held no matter what happened to the price of gas,
or even how little of it flowed out of Chesapeake’s wells.

Chesapeake also promised to connect every new well it drilled to
Access’s lines for the next 15 years in Ohio’s Utica Shale, a potentially
lucrative emerging drilling field, and made similar agreements elsewhere.

According to ProPublica projections based on figures disclosed by the
companies in late 2013, Chesapeake’s commitments would have it paying Access a
whopping $800 million each year. Over ten years, the contracts would generate nearly twice as much money as Access had paid Chesapeake for
its businesses in the first place.

(Abrahm Lustgarten for Propublica)

In plain words, Chesapeake and a company made up of its old
subsidiaries were passing money back-and-forth between each other, in a deal that
added little productive capacity but allowed both sides of the transaction to
rake in billions of dollars.

Access’ chief
executive, J. Mike Stice, told a group of investment
banking analysts last September that the deals amounted to a ”low-risk business
model” that “most people haven’t understood.”

“Nobody
really has the access to contractual growth that [Access Midstream] has,” Stice said.“It doesn’t get any better than this.”

The
SEC filings provide other detail about the ways that the two companies devised
to remain inextricably linked, even though Chesapeake has sold the stake it
once had in Access.

At the same time it signed its contracts, Access pledged to
subcontract a slice of its business back – again -- to companies still
owned by Chesapeake. It also agreed to buy industrial equipment used to
compress the gas for the pipelines from a company owned by Chesapeake. In
essence, Chesapeake would get a rebate on the fees it had guaranteed to Access.
Chesapeake never answered questions about whether that rebate was figured in to
the price it charged Joe Drake and his neighbors.

In its royalty statements to Joe Drake, Chesapeake says the expenses
it had deducted reflect what it costs the company to move his gas. The
company has said in public statements about the royalty disagreements in
Pennsylvania that it is merely recouping its costs.

But ProPublica’s projections drawn from figures
previously reported by both companies show that Chesapeake could earn back billions
of dollars of the transportation fees it is paying Access over the next 10 years.

There are other ties between the two companies. Access’s Chief
Executive, Stice, once worked for McClendon as the
chief operating officer of one of the companies that used to run the pipelines.
Chesapeake’s chief financial officer, Dominic del Osso,
sits on the board of Access Midstream Partners, and as of 2011, according to
SEC records, owned thousands of shares of Access stock.

The relationships raise questions about Chesapeake’s assertions that
its contracts are arm’s-length agreements, and that its expenses reflect its
true cost of operating.

“They had a lot of disguised
debt,” said Philip Weiss, a chief investment analyst with Baltimore Washington
Financial Advisors, who has covered Chesapeake over the years, and was often
concerned that the company has understated its financial obligations. In this
case, he said, Chesapeake’s expensive contracts with Access might not just be
the cost of operating, but another unusual long-term financial obligation that
would weigh down the company, but which wouldn’t be reflected in the normal
measures of debt. “The use of off-balance-sheet debt is often a way to try to
avoid getting as much investor scrutiny.”

For six months Chesapeake declined to answer questions about these discrepancies
posed by ProPublica. But in its latest annual financial filings made public just
two weeks ago, Chesapeake noted for the first time that it had $36 billion worth
of what it called “off-balance-sheet arrangements,” including $17 billion of
long-term commitments to buy gathering services. This appears to be the first
time the company has acknowledged that it owes more money than what has been
identified as debts in previous SEC filings.

In the filings, Chesapeake said that the $17 billion figure didn’t
include reimbursement from royalty owners, and that landowners and corporate
partners alike “where appropriate, will be responsible for their proportionate share
of these costs.”

In an earlier, September 2013 quarterly filing, there were hints of
the same activity, but with no disclosure of the salient details to
shareholders that might help them understand what was really going on. Chesapeake
reported that its expenses related to its pipeline and marketing business
roughly doubled in the months after it sold its pipelines, compared to the same
period a year earlier, and that its revenues for that part of its business also
increased accordingly, covering the new costs. Chesapeake told investors it had
cost the company more than $8 to transport a cubic foot of gas or its oil
equivalent – an astronomical amount unheard of in the energy industry.

“Something is wrong with this calculation,” said Fadel
Gheit, a seasoned industry analyst for the investment
firm Oppenheimer, who estimated the figure was off by a decimal point before
later confirming that it matched the numbers Chesapeake had reported to the
SEC. “It can’t be.”

In
fact, none of the financial analysts who cover Chesapeake that ProPublica spoke
with could explain the explosion in Chesapeake’s marketing and transportation
revenues and expenses using oil sales alone.

“The
change in marketing, gathering, compression revenue and expense is staggering,”
wrote Kevin Kaiser, a financial analyst with Hedgeye,
a private equity group in New York, in an email to ProPublica.

Neither Chesapeake’s investor relations group, nor its media staff
would comment on whether the deals amounted to disguised debt that landowners
would repay. In interviews, one former Chesapeake employee with knowledge of the
company’s operations dismissed the notion that Chesapeake was essentially
paying back an off-balance-sheet loan by paying unusually high fees for use of
the pipelines.

“The timing supports that
--- that Chesapeake got paid a lot of money and the gathering fees get paid
back over time, and it looks like a loan arrangement,” said the former
employee. “But to jump to the conclusion that the whole thing is a sham and a means
by which they are going to defraud royalty owners is not true.”

Only
in its latest filing at the end of February, after months of queries from
ProPublica, did Chesapeake add a note – two sentences in 299 pages
– stating that its contracts with Access and other companies played into
the rising figures. But the company did not specify how much.

And to the extent that the real costs of gathering and transporting
gas can be gleaned from securities reports and Joe Drake’s own statements, there’s
still a big gap between what Chesapeake reports it paid out, and what Access
reports it received for gathering services.

In the mean time, one thing is for sure: all the escalating costs,
side deals, and unexplained debt aside, Access is making more money than ever,
while Chesapeake – so recently fighting to stay alive -- has emerged from
its troubles and is turning a profit.

Joe Drake, on the other hand, is almost back to where he began.

He recently cancelled a fishing trip to Canada and doubled back on the
question of how to make a living from the farm. With his livestock gone he will
now focus on growing and bundling hay, which he will sell to other farms so
they can feed their animals. The natural gas boom has become little more than a
sideshow.

“We are surviving,” he
said. “But we learned that a good old handshake don’t cut it anymore."

For more from ProPublica on fracking, read about the latest health studies and our investigation on Native Americans being cheated out of $1 billion by schemes to buy drilling rights on their oil-rich reservation.

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