DOW JONES NEWSWIRES Standard & Poor's Ratings Services moved Chesapeake Energy Corp.'s (CHK) rating a step further into junk territory, citing revelations of potential conflicts of interest by Chairman and Chief Executive Aubrey K. McClendon, revised production expectations and higher funding needs. Reports last month suggested McClendon borrowed as much as $1.1 billion over the last three years, pledging some of the company's oil and gas wells as collateral. Chesapeake initially rebuffed the notion that its CEO's borrowing against some of its assets raised a conflict of interest. But earlier this month, Chesapeake's board and McClendon agreed to terminate the controversial contract 18 months before it had been scheduled to end. S&P lowered its ratings on Chesapeake Energy a notch to double-B-minus from double-B, leaving it three steps below investment grade. The outlook is negative. "The downgrade reflects mounting turmoil stemming from revelations that underscore shortcomings in Chesapeake's corporate governance practices, covenant concerns, and the likelihood Chesapeake will face an even wider gap between its operating cash flow and planned capital expenditures than we had previously anticipated," said credit analyst Scott Sprinzen. The ratings company said the recent turmoil could hamper Chesapeake's ability to meet its external funding requirements amid weak operating cash flow and aggressive ongoing capital spending. Chesapeake recently reported its first-quarter loss narrowed as the natural-gas producer reported a smaller derivative loss from the year-ago period and as production increased. But company has said it expects a significant decrease from the first-quarter's peak capital expenditure levels during the remainder of 2012 and in 2013 as its further reduces drilling activity in dry natural gas plays and reduce spending on new leasehold. Last week, Moody's Investors Service lowered its outlook on Chesapeake to negative from stable, saying the company's recent operating results revealed a large capital spending funding gap this year. Moody's still rates Chesapeake at Ba2, two steps into junk territory. -By Melodie Warner, Dow Jones Newswires; 212-416-2283; melodie.warner@dowjones.com
