<PAGE> 1
- --------------------------------------------------------------------------------
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
---------------
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1999
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES ACT
OF 1934
FOR THE TRANSITION PERIOD FROM____________TO____________
COMMISSION FILE NO. 1-13726
CHESAPEAKE ENERGY CORPORATION
(Exact name of registrant as specified in its charter)
OKLAHOMA 73-1395733
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
6100 NORTH WESTERN AVENUE
OKLAHOMA CITY, OKLAHOMA 73118
(Address of principal executive offices) (Zip Code)
(405) 848-8000
(Registrant's telephone number, including area code)
---------------
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
YES [X] NO [ ]
At November 8, 1999, there were 97,248,730 shares of the registrant's $.01
par value Common Stock outstanding.
- --------------------------------------------------------------------------------
<PAGE> 2
CHESAPEAKE ENERGY CORPORATION AND SUBSIDIARIES
INDEX TO FORM 10-Q FOR THE QUARTER ENDED SEPTEMBER 30, 1999
<TABLE>
<CAPTION>
PART I. FINANCIAL INFORMATION
PAGE
----
<S> <C>
Item 1. Consolidated Financial Statements:
Consolidated Balance Sheets at September 30, 1999 (Unaudited) and
December 31, 1998 3
Consolidated Statements of Operations for the Three and Nine Months
Ended September 30, 1999 and 1998 (Unaudited) 4
Consolidated Statements of Comprehensive Income (Loss) for the Three
and Nine Months Ended September 30, 1999 and 1998 (Unaudited) 5
Consolidated Statements of Cash Flows for the Nine Months Ended
September 30, 1999 and 1998 (Unaudited) 6
Notes to Consolidated Financial Statements (Unaudited) 7
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations 16
Item 3. Quantitative and Qualitative Disclosures About Market Risks 23
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 25
Item 2. Changes in Securities and Use of Proceeds 26
Item 3. Defaults Upon Senior Securities 26
Item 4. Submission of Matters to a Vote of Security Holders 26
Item 5. Other Information 26
Item 6. Exhibits and Reports on Form 8-K 28
</TABLE>
2
<PAGE> 3
CHESAPEAKE ENERGY CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
ASSETS
SEPTEMBER 30, DECEMBER 31,
1999 1998
------------- ----------------
(UNAUDITED)
($ IN THOUSANDS)
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents ........................................ $ 25,372 $ 29,520
Restricted cash .................................................. 4,544 5,754
------------ ------------
29,916 35,274
------------ ------------
Accounts receivable:
Oil and gas sales ............................................... 19,654 13,835
Oil and gas marketing sales ..................................... 20,764 19,636
Joint interest and other, net of allowance for doubtful
accounts of $3.2 million................. ..................... 8,063 27,373
Related parties ................................................. 12,619 15,455
Inventory ........................................................ 4,226 5,325
Other ............................................................ 2,600 1,101
------------ ------------
Total current assets .......................................... 97,842 117,999
------------ ------------
PROPERTY AND EQUIPMENT:
Oil and gas properties, at cost based on full-cost accounting:
Evaluated oil and gas properties ................................ 2,235,208 2,142,943
Unevaluated properties .......................................... 43,927 52,687
Less: accumulated depreciation, depletion and amortization ...... (1,645,285) (1,574,282)
------------ ------------
633,850 621,348
Other property and equipment ..................................... 66,671 79,718
Less: accumulated depreciation and amortization .................. (32,405) (37,075)
------------ ------------
Total property and equipment .................................. 668,116 663,991
------------ ------------
OTHER ASSETS ....................................................... 29,546 30,625
------------ ------------
TOTAL ASSETS .................................................. $ 795,504 $ 812,615
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
CURRENT LIABILITIES:
Notes payable .................................................... $ 681 $ 25,000
Accounts payable ................................................. 12,634 36,854
Accrued liabilities and other .................................... 44,021 46,572
Revenues and royalties due others ................................ 31,237 22,858
------------ ------------
Total current liabilities ..................................... 88,573 131,284
------------ ------------
LONG-TERM DEBT, NET ................................................ 920,838 919,076
------------ ------------
REVENUES AND ROYALTIES DUE OTHERS .................................. 10,830 10,823
------------ ------------
DEFERRED INCOME TAXES .............................................. 5,464 --
------------ ------------
STOCKHOLDERS' EQUITY (DEFICIT):
Preferred stock, $.01 par value, 10,000,000 shares
authorized; 4,600,000 shares of 7% cumulative convertible
stock issued at September 30, 1999 and December 31, 1998;
entitled in liquidation to $230 million plus earned but
unpaid dividends of $15.1 million and $2.7 million at
September 30, 1999 and December 31, 1998, respectively........... 230,000 230,000
Common stock, 250,000,000 shares authorized; $.01 par
value; 105,628,944 and 105,213,750 shares issued at
September 30, 1999 and December 31, 1998, respectively........... 1,056 1,052
Paid-in capital .................................................. 682,662 682,263
Accumulated deficit .............................................. (1,112,883) (1,127,195)
Accumulated other comprehensive income (loss) .................... (1,021) (4,726)
Less: treasury stock, at cost; 8,503,300 common shares
at September 30, 1999 and December 31, 1998, respectively ....... (29,962) (29,962)
Less: treasury stock, at cost; 3,600 and 0 preferred shares
at September 30, 1999 and December 31, 1998, respectively ....... (53) --
------------ ------------
Total stockholders' equity (deficit) .......................... (230,201) (248,568)
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT) ............... $ 795,504 $ 812,615
============ ============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
3
<PAGE> 4
CHESAPEAKE ENERGY CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
-------------------------- --------------------------
1999 1998 1999 1998
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
REVENUES:
Oil and gas sales ........................................... $ 78,521 $ 70,082 $ 198,599 $ 195,962
Oil and gas marketing sales ................................. 23,619 36,256 50,110 96,451
----------- ----------- ----------- -----------
Total revenues .......................................... 102,140 106,338 248,709 292,413
----------- ----------- ----------- -----------
OPERATING COSTS:
Production expenses ......................................... 11,747 14,208 36,922 36,775
Production taxes ............................................ 3,652 1,976 8,440 6,141
Oil and gas marketing expenses .............................. 22,851 34,720 47,809 94,686
Impairment of oil and gas properties ........................ -- -- -- 466,000
Impairment of other assets .................................. -- -- -- 10,000
Oil and gas depreciation, depletion and amortization ........ 22,816 34,069 70,202 109,311
Depreciation and amortization of other assets ............... 1,840 2,518 5,978 5,820
General and administrative .................................. 2,736 5,197 10,028 14,711
----------- ----------- ----------- -----------
Total operating costs ................................... 65,642 92,688 179,379 743,444
----------- ----------- ----------- -----------
INCOME (LOSS) FROM OPERATIONS ................................ 36,498 13,650 69,330 (451,031)
----------- ----------- ----------- -----------
OTHER INCOME (EXPENSE):
Interest and other income ................................... 2,686 778 6,526 3,573
Interest expense ............................................ (20,420) (18,577) (60,569) (47,930)
----------- ----------- ----------- -----------
(17,734) (17,799) (54,043) (44,357)
----------- ----------- ----------- -----------
INCOME (LOSS) BEFORE INCOME TAX AND EXTRAORDINARY ITEM ....... 18,764 (4,149) 15,287 (495,388)
INCOME TAX EXPENSE ........................................... 649 -- 975 --
----------- ----------- ----------- -----------
INCOME (LOSS) BEFORE EXTRAORDINARY ITEM ...................... 18,115 (4,149) 14,312 (495,388)
EXTRAORDINARY ITEM:
Loss on early extinguishment of debt ........................ -- -- -- (13,334)
----------- ----------- ----------- -----------
NET INCOME (LOSS) ............................................ 18,115 (4,149) 14,312 (508,722)
PREFERRED STOCK DIVIDENDS .................................... (4,381) (4,026) (12,433) (8,051)
----------- ----------- ----------- -----------
NET INCOME (LOSS) AVAILABLE TO COMMON SHAREHOLDERS ........... $ 13,734 $ (8,175) $ 1,879 $ (516,773)
=========== =========== =========== ===========
EARNINGS PER COMMON SHARE (BASIC)
Income (loss) before extraordinary item ..................... $ 0.14 $ (0.08) $ 0.02 $ (5.34)
Extraordinary item .......................................... -- -- -- (0.14)
----------- ----------- ----------- -----------
Net income (loss) ........................................... $ 0.14 $ (0.08) $ 0.02 $ (5.48)
=========== =========== =========== ===========
EARNINGS PER COMMON SHARE (ASSUMING DILUTION)
Income (loss) before extraordinary item ..................... $ 0.13 $ (0.08) $ 0.02 $ (5.34)
Extraordinary item .......................................... -- -- -- (0.14)
----------- ----------- ----------- -----------
Net income (loss) ........................................... $ 0.13 $ (0.08) $ 0.02 $ (5.48)
=========== =========== =========== ===========
WEIGHTED AVERAGE COMMON AND COMMON EQUIVALENT
SHARES OUTSTANDING
Basic ....................................................... 97,126 98,046 97,126 94,355
=========== =========== =========== ===========
Assuming dilution ........................................... 103,576 98,046 101,625 94,355
=========== =========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
4
<PAGE> 5
CHESAPEAKE ENERGY CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
----------------------- -----------------------
1999 1998 1999 1998
---------- ---------- ---------- ----------
($ IN THOUSANDS)
<S> <C> <C> <C> <C>
Net income (loss) ................................................ $ 18,115 $ (4,149) $ 14,312 $ (508,722)
Other comprehensive income (loss) - foreign currency
translation adjustments......................................... 80 (3,100) 3,705 (4,967)
---------- ---------- ---------- ----------
Comprehensive income (loss) ...................................... $ 18,195 $ (7,249) $ 18,017 $ (513,689)
========== ========== ========== ==========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
5
<PAGE> 6
CHESAPEAKE ENERGY CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
--------------------------
1999 1998
----------- -----------
($ IN THOUSANDS)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) .................................................. $ 14,312 $ (508,722)
Adjustments to reconcile net income (loss) to net cash provided by
operating activities:
Depreciation, depletion and amortization .......................... 73,673 113,389
Impairment of oil and gas assets .................................. -- 466,000
Impairment of other assets ........................................ -- 10,000
Deferred income taxes ............................................. 975 --
Amortization of goodwill .......................................... 62 60
Amortization of loan costs ........................................ 2,445 1,682
Amortization of bond discount ..................................... 63 77
Gain on sale of fixed assets and other ............................ (377) (142)
Extraordinary loss ................................................ -- 13,334
Equity in losses of equity investees .............................. 306 487
Bad debt expense .................................................. -- 516
----------- -----------
Cash provided by operating activities before changes
in current assets and liabilities ............................. 91,459 96,681
Changes in current assets and liabilities ......................... 2,682 (43,358)
----------- -----------
Cash provided by operating activities ........................... 94,141 53,323
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Exploration and development of oil and gas properties .............. (106,413) (140,821)
Oil and gas property acquisitions .................................. (11,077) (345,000)
Oil and gas property divestitures .................................. 36,365 10,541
Investment in preferred stock of Gothic ............................ -- (39,500)
Proceeds from sales of other assets ................................ 5,438 3,600
Long-term loans made to third parties .............................. (523) --
Other investments .................................................. (675) --
Repayment of long-term loan ........................................ -- 2,000
Additions to other property and equipment .......................... (475) (9,771)
----------- -----------
Cash used in investing activities ............................... (77,360) (518,951)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from long-term borrowings ................................. 29,000 658,750
Payments on long-term borrowings ................................... (54,000) (474,166)
Proceeds from issuance of preferred stock .......................... -- 222,760
Purchase of treasury stock ......................................... (53) (29,962)
Dividends paid on common stock ..................................... -- (5,592)
Dividends paid on preferred stock .................................. -- (4,025)
Cash received from exercise of stock options ....................... 419 131
----------- -----------
Cash provided by (used in) financing activities ................. (24,634) 367,896
----------- -----------
EFFECTS OF CHANGES IN EXCHANGE RATE ON CASH .......................... 3,705 (5,379)
----------- -----------
NET DECREASE IN CASH AND CASH EQUIVALENTS ............................ (4,148) (103,111)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD ....................... 29,520 123,860
----------- -----------
CASH AND CASH EQUIVALENTS, END OF PERIOD ............................. $ 25,372 $ 20,749
=========== ===========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
6
<PAGE> 7
CHESAPEAKE ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. ACCOUNTING PRINCIPLES
The accompanying unaudited consolidated financial statements of Chesapeake
Energy Corporation and subsidiaries (the "Company") have been prepared in
accordance with the instructions to Form 10-Q as prescribed by the Securities
and Exchange Commission. All material adjustments (consisting solely of normal
recurring adjustments) which, in the opinion of management, are necessary for a
fair presentation of the results for the interim periods have been reflected.
The results for the three and nine months ended September 30, 1999 are not
necessarily indicative of the results to be expected for the full fiscal year.
This Form 10-Q relates to the three and nine months ended September 30, 1999
(the "Current Quarter" and "Current Period", respectively) and September 30,
1998 (the "Prior Quarter" and "Prior Period", respectively).
2. LEGAL PROCEEDINGS
Chesapeake Securities Litigation
The Company and certain of its officers and directors are defendants in a
consolidated class action suit alleging violations of the Securities Exchange
Act of 1934. The plaintiffs, in suits first filed in August 1997, assert that
the defendants made material misrepresentations and failed to disclose material
facts about the success of the Company's exploration efforts in the Louisiana
Trend. As a result, the complaint alleges the price of the Company's common
stock was artificially inflated from January 25, 1996 until June 27, 1997, when
the Company issued a press release announcing disappointing drilling results in
the Louisiana Trend and a full-cost ceiling writedown to be reflected in its
June 30, 1997 financial statements. The plaintiffs further allege that certain
of the named individual defendants sold common stock during the class period
when they knew or should have known adverse nonpublic information. The
plaintiffs seek a determination that the suit is a proper class action and
damages in an unspecified amount, together with interest and costs of
litigation, including attorneys' fees. The Company and the individual defendants
believe that these claims are without merit, and intend to defend against them
vigorously. No estimate of loss or range of estimate of loss, if any, can be
made at this time.
Bayard Securities Litigation
A purported class action alleging violations of the Securities Act of 1933 and
the Oklahoma Securities Act was first filed in February 1998 against the Company
and others on behalf of investors who purchased common stock of Bayard Drilling
Technologies, Inc. ("Bayard") in, or traceable to, its initial public offering
in November 1997. Total proceeds of the offering were $254 million, of which the
Company received net proceeds of $90 million as a selling shareholder.
Plaintiffs allege that the Company, a major customer of Bayard's drilling
services and the owner of 30.1% of Bayard's common stock outstanding prior to
the offering, was a controlling person of Bayard. Alleged defective disclosures
are claimed to have resulted in a decline in Bayard's share price following the
public offering. Plaintiffs seek a determination that the suit is a proper class
action and damages in an unspecified amount or rescission, together with
interest and costs of litigation, including attorneys' fees.
On August 24, 1999, the court dismissed plaintiffs' claims against the Company
under Section 15 of the Securities Act of 1933 alleging that the Company was a
"controlling person" of Bayard. Claims under Section 11 of the Securities Act of
1933 and Section 408 of the Oklahoma Securities Act continue to be asserted
against the Company. The Company believes that it has meritorious defenses to
these claims and intends to defend this action vigorously. No estimate of loss
or range of estimate of loss, if any, can be made at this time. Bayard, which
was acquired by Nabors Industries, Inc. in April 1999, has been reimbursing the
Company for its costs of defense as incurred.
7
<PAGE> 8
CHESAPEAKE ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Patent Litigation
On September 21, 1999, judgment was entered in favor of the Company in a patent
infringement lawsuit tried to the U.S. District Court for the Northern District
of Texas, Fort Worth Division. Filed in October 1996, the lawsuit asserted that
the Company had infringed a patent belonging to Union Pacific Resources Company.
The court declared the patent invalid, held that the Company could not have
infringed the patent, dismissed all of UPRC's claims with prejudice and assessed
court costs against UPRC. The Company has filed a motion to amend final judgment
to make additional findings and has also applied for attorneys' fees which
total approximately $5 million.
West Panhandle Field Cessation Cases
A subsidiary of the Company, Chesapeake Panhandle Limited Partnership ("CP")
(f/k/a MC Panhandle, Inc.), and two subsidiaries of Kinder Morgan, Inc. are
defendants in 13 lawsuits filed in 1997 and 1998 by royalty owners seeking the
cancellation of oil and gas leases in the West Panhandle Field in Texas. The
Company acquired MC Panhandle, Inc. on April 28, 1998. MC Panhandle, Inc. has
owned the leases since January 1, 1997. Plaintiffs claim the leases terminated
upon the cessation of production for various periods between 1926 and 1997
and/or for failure to produce in paying quantities. In addition, plaintiffs seek
to recover conversion damages or, in the alternative, damages for the breach of
implied covenants of the leases, i.e., for failure to protect against drainage,
to maximize production, and to reasonably develop and market. Plaintiffs also
seek exemplary damages, attorneys' fees and interest. Defendants assert that any
cessation of production was excused by their timely commencement of operations
to restore production and assert affirmative defenses of limitations, waiver,
estoppel, laches and title by adverse possession.
The 13 pending cases were described in the Company's June 30, 1999 Form 10-Q. Of
the ten cases filed in the District Court of Moore County, Texas, 69th Judicial
District, three have been tried to a jury. One resulted in a verdict for CP and
its co-defendants, but judgment has not yet been entered. In the other two
cases, the court has entered judgment against CP and its co-defendants, although
the jury verdict in one of the cases was for defendants. The Company's liability
for these two judgments is $545,000 of actual damages and $1.2 million of
exemplary damages and, jointly and severally with the other two defendants, $1.5
million of actual damages, $175,000 of attorneys' fees in the event of an
appeal, $1,900 of sanctions, interest and court costs. The court also quieted
title to the leases in dispute in plaintiffs. CP and the other defendants have
each filed a notice of appeal and will post a supersedeas bond in both cases in
which judgment has been entered. There are three related cases pending in other
courts. In one, a jury trial in the U.S. District Court, Northern District of
Texas, Amarillo Division resulted in a verdict for CP and its co-defendants, but
judgment has not yet been entered. None of the other cases have been set for
trial.
The Company has previously established an accrued liability that management
believes will be sufficient to cover the estimated costs of litigation for each
of these cases. Because of the inconsistent verdicts reached by the juries in
the four cases tried to date and because the amount of damages sought is not
specified in all of the other cases, the outcome of the remaining trials and the
amount of damages that might ultimately be awarded could differ from
management's estimates. Management believes, however, that the leases are valid,
there is no basis for exemplary damages and that any findings of fraud or bad
faith will be overturned on appeal. CP and the other defendants intend to
vigorously defend against the plaintiffs' claims.
The Company is currently involved in various other routine disputes incidental
to its business operations. While it is not possible to determine the ultimate
disposition of these matters, management, after consultation with legal counsel,
is of the opinion that the final resolution of all such currently pending or
threatened litigation is not likely to have a material adverse effect on the
consolidated financial position or results of operations of the Company.
3. EARNINGS PER SHARE
Statement of Financial Accounting Standards No. 128, Earnings Per Share ("SFAS
128") requires presentation of "basic" and "diluted" earnings per share, as
defined, on the face of the statement of operations for all entities with
complex capital structures. SFAS 128 requires a reconciliation of the numerators
and denominators of the basic and diluted EPS computations. For the Prior
Quarter and the Prior Period, there was no difference between actual
8
<PAGE> 9
CHESAPEAKE ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
weighted average shares outstanding, which are used in computing basic EPS, and
diluted weighted average shares outstanding, which are used in computing diluted
EPS. Options to purchase 13.0 million and 10.6 million shares of common stock at
a weighted average exercise price of $1.74 and $3.88 were outstanding at
September 30, 1999 and 1998, respectively, but were not included in the
computation of diluted EPS in the Prior Quarter or Prior Period because the
effect of these outstanding options would be antidilutive. A reconciliation for
the Current Quarter and Current Period is as follows (in thousands, except per
share amounts):
<TABLE>
<CAPTION>
Income Shares Per Share
(Numerator) (Denominator) Amount
----------- ------------- -----------
<S> <C> <C> <C>
FOR THE QUARTER ENDED SEPTEMBER 30, 1999:
BASIC EPS
Income available to common shareholders ........ $ 13,734 97,126 $ 0.14
==========
EFFECT OF DILUTIVE SECURITIES
Employee stock options ......................... -- 6,450
---------- ----------
DILUTED EPS
Income available to common shareholders
and assumed conversions ..................... $ 13,734 103,576 $ 0.13
========== ========== ==========
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1999:
BASIC EPS
Income available to common shareholders ....... $ 1,879 97,126 $ 0.02
==========
EFFECT OF DILUTIVE SECURITIES
Employee stock options ........................ -- 4,499
---------- ----------
DILUTED EPS
Income available to common shareholders
and assumed conversions .................... $ 1,879 101,625 $ 0.02
========== ========== ==========
</TABLE>
4. SENIOR NOTES
7.875% Notes
The Company has outstanding $150.0 million in aggregate principal amount of
7.875% Senior Notes which mature March 15, 2004, and bear interest at the rate
of 7.875%, payable semiannually on each March 15 and September 15. The 7.875%
Notes are senior, unsecured obligations of the Company and are fully and
unconditionally guaranteed, jointly and severally, by the Guarantor
Subsidiaries.
9.625% Notes
The Company has outstanding $500.0 million in aggregate principal amount of
9.625% Senior Notes which mature May 1, 2005, and bear interest at the rate of
9.625%, payable semiannually on each May 1 and November 1. The 9.625% Notes are
senior, unsecured obligations of the Company and are fully and unconditionally
guaranteed, jointly and severally, by the Guarantor Subsidiaries.
9.125% Notes
The Company has outstanding $120.0 million in aggregate principal amount of
9.125% Senior Notes which mature April 15, 2006, and bear interest at an annual
rate of 9.125%, payable semiannually on each April 15 and October 15. The 9.125%
Notes are senior, unsecured obligations of the Company and are fully and
unconditionally guaranteed, jointly and severally, by the Guarantor
Subsidiaries.
8.5% Notes
The Company has outstanding $150.0 million in aggregate principal amount of 8.5%
Senior Notes which mature March 15, 2012, and bear interest at the rate of 8.5%,
payable semiannually on each March 15 and September 15. The 8.5% Notes are
senior, unsecured obligations of the Company and are fully and unconditionally
guaranteed, jointly and severally, by the Guarantor Subsidiaries.
9
<PAGE> 10
CHESAPEAKE ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
The Company is a holding company and owns no operating assets and has no
significant operations independent of its subsidiaries. The Company's
obligations under its Senior Notes have been fully and unconditionally
guaranteed, on a joint and several basis, by each of the Company's "Restricted
Subsidiaries" (as defined in the respective indentures governing the Senior
Notes) (collectively, the "Guarantor Subsidiaries"). Each of the Guarantor
Subsidiaries is a direct or indirect wholly-owned subsidiary of the Company.
The Senior Note indentures contain certain covenants, including covenants
limiting the Company and the Guarantor Subsidiaries with respect to asset sales,
restricted payments, the incurrence of additional indebtedness and the issuance
of preferred stock, liens, sale and leaseback transactions, lines of business,
dividend and other payment restrictions affecting Guarantor Subsidiaries,
mergers or consolidations, and transactions with affiliates. The Company is
obligated to repurchase the 9.625% and 9.125% Senior Notes in the event of a
change of control or certain asset sales.
These Senior Note indentures also limit the Company's ability to make restricted
payments (as defined in the indentures), including the payment of preferred
stock dividends, unless certain tests are met. As of December 31, 1998, March
31, 1999, June 30, 1999 and September 30, 1999, the Company was unable to meet
the requirements to incur additional unsecured indebtedness, and consequently
was unable to pay the quarterly cash dividend of $4.025 million (before
compounding of dividends in arrears) on its 7% cumulative convertible preferred
stock on February 1, 1999, May 1, 1999, August 1, 1999 or November 1, 1999. As
of September 30, 1999, the cumulative earned but unpaid dividends on the
preferred stock were $15.1 million. Subsequent payments will be subject to the
same restrictions and are dependent upon variables, most particularly oil and
gas prices, that are beyond the Company's ability to predict. This restriction
does not affect the Company's ability to borrow under or expand its secured
commercial bank facility. If the Company fails to pay dividends for six
quarterly periods, the holders of preferred stock would be entitled to elect two
additional members to the Board.
Set forth below are condensed consolidating financial statements of the
Guarantor Subsidiaries, the Company's subsidiary which is not a guarantor of the
Senior Notes (the "Non-Guarantor Subsidiary") and the Company. As of and for the
three and nine months ended September 30, 1999 and 1998, Chesapeake Energy
Marketing, Inc. was the only Non-Guarantor Subsidiary. For these periods, all
other subsidiaries of the Company were Guarantor Subsidiaries. Separate
financial statements of each Guarantor Subsidiary have not been provided because
management has determined that they are not material to investors.
10
<PAGE> 11
CHESAPEAKE ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
CONDENSED CONSOLIDATING BALANCE SHEET
AS OF SEPTEMBER 30, 1999
($ IN THOUSANDS)
<TABLE>
<CAPTION>
ASSETS
GUARANTOR NON-GUARANTOR COMPANY
SUBSIDIARIES SUBSIDIARY (PARENT) ELIMINATIONS CONSOLIDATED
------------ ------------- ----------- ------------ ------------
<S> <C> <C> <C> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents ......................... $ (3,371) $ 18,811 $ 14,476 $ -- $ 29,916
Accounts receivable, net .......................... 46,657 29,145 192 (14,894) 61,100
Inventory ......................................... 4,052 174 -- -- 4,226
Other ............................................. 2,234 10 356 -- 2,600
----------- ----------- ----------- ----------- -----------
Total Current Assets ........................... 49,572 48,140 15,024 (14,894) 97,842
----------- ----------- ----------- ----------- -----------
PROPERTY AND EQUIPMENT:
Oil and gas properties ............................ 2,231,622 3,586 -- -- 2,235,208
Unevaluated leasehold ............................. 43,927 -- -- -- 43,927
Other property and equipment ...................... 45,935 2,887 17,849 -- 66,671
Less: accumulated depreciation,
depletion and amortization ...................... (1,675,473) (478) (1,739) -- (1,677,690)
----------- ----------- ----------- ----------- -----------
Total Property and Equipment ................... 646,011 5,995 16,110 -- 668,116
----------- ----------- ----------- ----------- -----------
INVESTMENTS IN SUBSIDIARIES AND
INTERCOMPANY ADVANCES ............................. 806,180 -- 493,738 (1,299,918) --
----------- ----------- ----------- ----------- -----------
OTHER ASSETS ........................................ 11,477 546 17,576 (53) 29,546
----------- ----------- ----------- ----------- -----------
TOTAL ASSETS ................................... $ 1,513,240 $ 54,681 $ 542,448 $(1,314,865) $ 795,504
=========== =========== =========== =========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
CURRENT LIABILITIES:
Notes payable and current maturities
of long-term debt ............................... $ -- $ 681 $ -- $ -- $ 681
Accounts payable and other ........................ 52,959 24,171 26,148 (15,386) 87,892
----------- ----------- ----------- ----------- -----------
Total Current Liabilities ...................... 52,959 24,852 26,148 (15,386) 88,573
----------- ----------- ----------- ----------- -----------
LONG-TERM DEBT ...................................... -- 1,699 919,139 -- 920,838
----------- ----------- ----------- ----------- -----------
REVENUES PAYABLE .................................... 10,830 -- -- -- 10,830
----------- ----------- ----------- ----------- -----------
DEFERRED INCOME TAXES ............................... 5,464 -- -- -- 5,464
----------- ----------- ----------- ----------- -----------
INTERCOMPANY PAYABLES ............................... 1,402,647 (5,167) (1,397,972) 492 --
----------- ----------- ----------- ----------- -----------
STOCKHOLDERS' EQUITY (DEFICIT):
Preferred Stock ................................... -- -- 230,000 -- 230,000
Common Stock ...................................... 27 1 1,045 (17) 1,056
Other ............................................. 41,313 33,296 764,088 (1,299,954) (461,257)
----------- ----------- ----------- ----------- -----------
Total Stockholders' Equity (Deficit) .......... 41,340 33,297 995,133 (1,299,971) (230,201)
----------- ----------- ----------- ----------- -----------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY (DEFICIT) ............... $ 1,513,240 $ 54,681 $ 542,448 $(1,314,865) $ 795,504
=========== =========== =========== =========== ===========
</TABLE>
11
<PAGE> 12
CHESAPEAKE ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
CONDENSED CONSOLIDATING BALANCE SHEET
AS OF DECEMBER 31, 1998
($ IN THOUSANDS)
<TABLE>
<CAPTION>
ASSETS
GUARANTOR NON-GUARANTOR COMPANY
SUBSIDIARIES SUBSIDIARY (PARENT) ELIMINATIONS CONSOLIDATED
------------ ------------- ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents ...................... $ (11,565) $ 7,000 $ 39,839 $ -- $ 35,274
Accounts receivable ............................ 54,384 29,641 270 (7,996) 76,299
Inventory ...................................... 4,919 406 -- -- 5,325
Other .......................................... 721 15 365 -- 1,101
------------ ------------ ------------ ------------ ------------
Total Current Assets ........................ 48,459 37,062 40,474 (7,996) 117,999
------------ ------------ ------------ ------------ ------------
PROPERTY AND EQUIPMENT:
Oil and gas properties ......................... 2,142,943 -- -- -- 2,142,943
Unevaluated leasehold .......................... 52,687 -- -- -- 52,687
Other property and equipment ................... 47,628 15,109 16,981 -- 79,718
Less: accumulated depreciation,
depletion and amortization ................... (1,601,931) (8,036) (1,390) -- (1,611,357)
------------ ------------ ------------ ------------ ------------
Total Property & Equipment .................. 641,327 7,073 15,591 -- 663,991
------------ ------------ ------------ ------------ ------------
INVESTMENTS IN SUBSIDIARIES AND
INTERCOMPANY ADVANCES .......................... 809,310 -- 481,150 (1,290,460) --
------------ ------------ ------------ ------------ ------------
OTHER ASSETS ..................................... 10,610 560 19,455 -- 30,625
------------ ------------ ------------ ------------ ------------
TOTAL ASSETS ................................ $ 1,509,706 $ 44,695 $ 556,670 $ (1,298,456) $ 812,615
============ ============ ============ ============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
CURRENT LIABILITIES:
Notes payable and current maturities
of long-term debt ............................ $ 25,000 $ -- $ -- $ -- $ 25,000
Accounts payable and other ..................... 80,786 15,992 17,529 (8,023) 106,284
------------ ------------ ------------ ------------ ------------
Total Current Liabilities ................... 105,786 15,992 17,529 (8,023) 131,284
------------ ------------ ------------ ------------ ------------
LONG-TERM DEBT ................................... -- -- 919,076 -- 919,076
------------ ------------ ------------ ------------ ------------
REVENUES PAYABLE ................................. 10,823 -- -- -- 10,823
------------ ------------ ------------ ------------ ------------
INTERCOMPANY PAYABLES ............................ 1,338,948 11,376 (1,350,351) 27 --
------------ ------------ ------------ ------------ ------------
STOCKHOLDERS' EQUITY (DEFICIT):
Preferred Stock ................................ -- -- 230,000 -- 230,000
Common Stock ................................... 26 1 1,042 (17) 1,052
Other .......................................... 54,123 17,326 739,374 (1,290,443) (479,620)
------------ ------------ ------------ ------------ ------------
Total Stockholders' Equity (Deficit) ....... 54,149 17,327 970,416 (1,290,460) (248,568)
------------ ------------ ------------ ------------ ------------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY (DEFICIT) ............ $ 1,509,706 $ 44,695 $ 556,670 $ (1,298,456) $ 812,615
============ ============ ============ ============ ============
</TABLE>
12
<PAGE> 13
CHESAPEAKE ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS
($ IN THOUSANDS)
<TABLE>
<CAPTION>
GUARANTOR NON-GUARANTOR COMPANY
SUBSIDIARIES SUBSIDIARY (PARENT) ELIMINATIONS CONSOLIDATED
------------ ------------- ---------- ------------ ------------
<S> <C> <C> <C> <C> <C>
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 1999
REVENUES:
Oil and gas sales .............................. $ 77,390 $ 594 $ -- $ 537 $ 78,521
Oil and gas marketing sales .................... -- 61,105 -- (37,486) 23,619
---------- ---------- ---------- ---------- ----------
Total Revenues .............................. 77,390 61,699 -- (36,949) 102,140
---------- ---------- ---------- ---------- ----------
OPERATING COSTS:
Production expenses and taxes .................. 15,156 243 -- -- 15,399
Oil and gas marketing expenses ................. -- 59,800 -- (36,949) 22,851
Oil and gas depreciation, depletion
and amortization ............................. 22,568 248 -- -- 22,816
Other depreciation and amortization ............ 1,005 20 815 -- 1,840
General and administrative ..................... 2,514 201 21 -- 2,736
---------- ---------- ---------- ---------- ----------
Total Operating Costs ....................... 41,243 60,512 836 (36,949) 65,642
---------- ---------- ---------- ---------- ----------
INCOME (LOSS) FROM OPERATIONS .................... 36,147 1,187 (836) -- 36,498
---------- ---------- ---------- ---------- ----------
OTHER INCOME (LOSS)
Interest and other income ...................... 1,487 935 29,789 (29,525) 2,686
Interest expense ............................... (29,376) (45) (20,524) 29,525 (20,420)
---------- ---------- ---------- ---------- ----------
(27,889) 890 9,265 -- (17,734)
---------- ---------- ---------- ---------- ----------
INCOME (LOSS) BEFORE INCOME TAXES
AND EXTRAORDINARY ITEM ......................... 8,258 2,077 8,429 -- 18,764
INCOME TAX EXPENSE ............................... 649 -- -- -- 649
---------- ---------- ---------- ---------- ----------
NET INCOME (LOSS) BEFORE
EXTRAORDINARY ITEM ............................. 7,609 2,077 8,429 -- 18,115
EXTRAORDINARY ITEM:
Loss on early extinguishment of debt,
net of applicable income tax .................. -- -- -- -- --
---------- ---------- ---------- ---------- ----------
NET INCOME ....................................... $ 7,609 $ 2,077 $ 8,429 $ -- $ 18,115
========== ========== ========== ========== ==========
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 1998
REVENUES:
Oil and gas sales .............................. $ 69,780 $ (187) $ -- $ 489 $ 70,082
Oil and gas marketing sales .................... 973 64,769 -- (29,486) 36,256
---------- ---------- ---------- ---------- ----------
Total Revenues .............................. 70,753 64,582 -- (28,997) 106,338
---------- ---------- ---------- ---------- ----------
OPERATING COSTS:
Production expenses and taxes .................. 16,184 -- -- -- 16,184
Oil and gas marketing expenses ................. 1,040 62,677 -- (28,997) 34,720
Impairment of oil and gas properties ........... -- -- -- -- --
Impairment of other assets ..................... -- -- -- -- --
Oil and gas depreciation, depletion
and amortization ............................. 34,069 -- -- -- 34,069
Other depreciation and amortization ............ 1,637 88 793 -- 2,518
General and administrative ..................... 4,514 636 47 -- 5,197
---------- ---------- ---------- ---------- ----------
Total Operating Costs ....................... 57,444 63,401 840 (28,997) 92,688
---------- ---------- ---------- ---------- ----------
INCOME (LOSS) FROM OPERATIONS .................... 13,309 1,181 (840) -- 13,650
---------- ---------- ---------- ---------- ----------
OTHER INCOME (LOSS)
Interest and other income ...................... 966 405 28,024 (28,617) 778
Interest expense ............................... (26,605) (4) (20,585) 28,617 (18,577)
---------- ---------- ---------- ---------- ----------
(25,639) 401 7,439 -- (17,799)
---------- ---------- ---------- ---------- ----------
INCOME (LOSS) BEFORE INCOME TAXES
AND EXTRAORDINARY ITEM ......................... (12,330) 1,582 6,599 -- (4,149)
INCOME TAX EXPENSE ............................... -- -- -- -- --
---------- ---------- ---------- ---------- ----------
NET INCOME (LOSS) BEFORE
EXTRAORDINARY ITEM ............................. (12,330) 1,582 6,599 -- (4,149)
EXTRAORDINARY ITEM:
Loss on early extinguishment of debt,
net of applicable income tax .................. -- -- -- -- --
---------- ---------- ---------- ---------- ----------
NET INCOME (LOSS) ................................ $ (12,330) $ 1,582 $ 6,599 $ -- $ (4,149)
========== ========== ========== ========== ==========
</TABLE>
13
<PAGE> 14
CHESAPEAKE ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS
($ IN THOUSANDS)
<TABLE>
<CAPTION>
GUARANTOR NON-GUARANTOR COMPANY
SUBSIDIARIES SUBSIDIARY (PARENT) ELIMINATIONS CONSOLIDATED
------------ ------------- ---------- ------------ ------------
<S> <C> <C> <C> <C> <C>
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1999
REVENUES:
Oil and gas sales .............................. $ 197,468 $ 594 $ -- $ 537 $ 198,599
Oil and gas marketing sales .................... -- 134,363 -- (84,253) 50,110
---------- ---------- ---------- ---------- ----------
Total Revenues .............................. 197,468 134,957 -- (83,716) 248,709
---------- ---------- ---------- ---------- ----------
OPERATING COSTS:
Production expenses and taxes .................. 45,119 243 -- -- 45,362
Oil and gas marketing expenses ................. -- 131,525 -- (83,716) 47,809
Oil and gas depreciation, depletion
and amortization ............................. 69,954 248 -- -- 70,202
Other depreciation and amortization ............ 3,481 60 2,437 -- 5,978
General and administrative ..................... 8,978 982 68 -- 10,028
---------- ---------- ---------- ---------- ----------
Total Operating Costs ....................... 127,532 133,058 2,505 (83,716) 179,379
---------- ---------- ---------- ---------- ----------
INCOME (LOSS) FROM OPERATIONS .................... 69,936 1,899 (2,505) -- 69,330
---------- ---------- ---------- ---------- ----------
OTHER INCOME (LOSS)
Interest and other income ...................... 2,194 3,780 88,117 (87,565) 6,526
Interest expense ............................... (86,791) (45) (61,298) 87,565 (60,569)
---------- ---------- ---------- ---------- ----------
(84,597) 3,735 26,819 -- (54,043)
---------- ---------- ---------- ---------- ----------
INCOME (LOSS) BEFORE INCOME TAXES
AND EXTRAORDINARY ITEM ......................... (14,661) 5,634 24,314 -- 15,287
INCOME TAX EXPENSE ............................... 975 -- -- -- 975
---------- ---------- ---------- ---------- ----------
NET INCOME (LOSS) BEFORE
EXTRAORDINARY ITEM ............................. (15,636) 5,634 24,314 -- 14,312
EXTRAORDINARY ITEM:
Loss on early extinguishment of debt,
net of applicable income tax .................. -- -- -- -- --
---------- ---------- ---------- ---------- ----------
NET INCOME (LOSS) ................................ $ (15,636) $ 5,634 $ 24,314 $ -- $ 14,312
========== ========== ========== ========== ==========
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1998
REVENUES:
Oil and gas sales .............................. $ 193,800 $ -- $ -- $ 2,162 $ 195,962
Oil and gas marketing sales .................... 973 173,405 -- (77,927) 96,451
---------- ---------- ---------- ---------- ----------
Total Revenues .............................. 194,773 173,405 -- (75,765) 292,413
---------- ---------- ---------- ---------- ----------
OPERATING COSTS:
Production expenses and taxes .................. 42,916 -- -- -- 42,916
Oil and gas marketing expenses ................. 1,040 169,411 -- (75,765) 94,686
Impairment of oil and gas properties ........... 466,000 -- -- -- 466,000
Impairment of other assets ..................... 10,000 -- -- -- 10,000
Oil and gas depreciation, depletion
and amortization ............................. 109,311 -- -- -- 109,311
Other depreciation and amortization ............ 3,698 142 1,980 -- 5,820
General and administrative ..................... 13,122 1,535 54 -- 14,711
---------- ---------- ---------- ---------- ----------
Total Operating Costs ....................... 646,087 171,088 2,034 (75,765) 743,444
---------- ---------- ---------- ---------- ----------
INCOME (LOSS) FROM OPERATIONS .................... (451,314) 2,317 (2,034) -- (451,031)
---------- ---------- ---------- ---------- ----------
OTHER INCOME (LOSS)
Interest and other income ...................... 1,471 685 72,007 (70,590) 3,573
Interest expense ............................... (67,704) (4) (50,812) 70,590 (47,930)
---------- ---------- ---------- ---------- ----------
(66,233) 681 21,195 -- (44,357)
---------- ---------- ---------- ---------- ----------
INCOME (LOSS) BEFORE INCOME TAXES
AND EXTRAORDINARY ITEM ......................... (517,547) 2,998 19,161 -- (495,388)
INCOME TAX EXPENSE ............................... -- -- -- -- --
---------- ---------- ---------- ---------- ----------
NET INCOME (LOSS) BEFORE
EXTRAORDINARY ITEM ............................. (517,547) 2,998 19,161 -- (495,388)
EXTRAORDINARY ITEM:
Loss on early extinguishment of debt,
net of applicable income tax .................. (2,164) -- (11,170) -- (13,334)
---------- ---------- ---------- ---------- ----------
NET INCOME (LOSS) ................................ $ (519,711) $ 2,998 $ 7,991 $ -- $ (508,722)
========== ========== ========== ========== ==========
</TABLE>
14
<PAGE> 15
CHESAPEAKE ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS
($ IN THOUSANDS)
<TABLE>
<CAPTION>
GUARANTOR NON-GUARANTOR COMPANY
SUBSIDIARIES SUBSIDIARY (PARENT) ELIMINATIONS CONSOLIDATED
------------ ------------- ----------- ------------ ------------
<S> <C> <C> <C> <C> <C>
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1999
CASH FLOWS FROM OPERATING ACTIVITIES ........... $ 55,261 $ 3,363 $ 35,517 $ -- $ 94,141
----------- ----------- ----------- ----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Oil and gas properties, net .................. (79,920) (1,205) -- -- (81,125)
Proceeds from sale of other assets ........... 1,990 3,448 -- -- 5,438
Other ........................................ (1,659) 1,208 (1,222) -- (1,673)
----------- ----------- ----------- ----------- -----------
(79,589) 3,451 (1,222) -- (77,360)
----------- ----------- ----------- ----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from borrowings ..................... 29,000 -- -- -- 29,000
Payments on borrowings ....................... (54,000) -- -- -- (54,000)
Cash paid for purchase of treasury stock ..... -- (53) -- -- (53)
Cash received from exercise of stock options . -- -- 419 -- 419
Intercompany advances, net ................... 55,027 5,050 (60,077) -- --
----------- ----------- ----------- ----------- -----------
30,027 4,997 (59,658) -- (24,634)
----------- ----------- ----------- ----------- -----------
EFFECT OF EXCHANGE RATE CHANGES
ON CASH ...................................... 3,705 -- -- -- 3,705
----------- ----------- ----------- ----------- -----------
Net increase (decrease) in cash .............. 9,404 11,811 (25,363) -- (4,148)
Cash, beginning of period .................... (17,319) 7,000 39,839 -- 29,520
----------- ----------- ----------- ----------- -----------
Cash, end of period .......................... $ (7,915) $ 18,811 $ 14,476 $ -- $ 25,372
=========== =========== =========== =========== ===========
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1998
CASH FLOWS FROM OPERATING ACTIVITIES ........... $ 32,384 $ (21,068) $ 42,007 $ -- $ 53,323
----------- ----------- ----------- ----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Oil and gas properties, net .................. (475,280) -- -- -- (475,280)
Proceeds from sale of assets ................. -- -- 3,600 -- 3,600
Investment in preferred stock of Gothic ...... (39,500) -- -- -- (39,500)
Repayment of long-term loans ................. 2,000 -- -- -- 2,000
Other additions .............................. (6,161) (1,343) (2,267) -- (9,771)
----------- ----------- ----------- ----------- -----------
(518,941) (1,343) 1,333 -- (518,951)
----------- ----------- ----------- ----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from borrowings ..................... -- -- 658,750 -- 658,750
Payments on borrowings ....................... -- -- (474,166) -- (474,166)
Cash received from issuance of preferred
stock....................................... -- -- 222,760 -- 222,760
Cash paid for purchase of treasury stock ..... -- -- (29,962) -- (29,962)
Cash received from exercise of stock options . -- -- 131 -- 131
Cash dividends paid on common
and preferred stock ....................... -- -- (9,617) -- (9,617)
Intercompany advances, net ................... 483,138 11,698 (494,836) -- --
----------- ----------- ----------- ----------- -----------
483,138 11,698 (126,940) -- 367,896
----------- ----------- ----------- ----------- -----------
EFFECT OF EXCHANGE RATE CHANGES
ON CASH ...................................... (5,379) -- -- -- (5,379)
----------- ----------- ----------- ----------- -----------
Net increase (decrease) in cash .............. (8,798) (10,713) (83,600) -- (103,111)
Cash, beginning of period .................... (284) 13,694 110,450 -- 123,860
----------- ----------- ----------- ----------- -----------
Cash, end of period .......................... $ (9,082) $ 2,981 $ 26,850 $ -- $ 20,749
=========== =========== =========== =========== ===========
</TABLE>
15
<PAGE> 16
PART I. FINANCIAL INFORMATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
RESULTS OF OPERATIONS
Three Months Ended September 30, 1999 vs. September 30, 1998
General. For the three months ended September 30, 1999 (the "Current Quarter"),
the Company had net income of $18.1 million, or $0.14 per common share after
deducting preferred dividends (including a 7% dividend on dividends in arrears)
of $4.4 million. This compares to a net loss of $4.1 million, or a loss of $0.08
per common share after deducting preferred dividends of $4.0 million, in the
three months ended September 30, 1998 (the "Prior Quarter").
Oil and Gas Sales. During the Current Quarter, oil and gas sales increased to
$78.5 million from $70.1 million, an increase of $8.4 million, or 12%. This
increase was the result of higher oil and gas prices, partially offset by lower
production volumes during the Current Quarter. Oil and gas production volumes
decreased from 36.3 billion cubic feet equivalent of natural gas ("bcfe") in the
Prior Quarter to 32.7 bcfe in the Current Quarter, a decrease of 3.6 bcfe, or
10%. The decrease in production volumes was primarily the result of asset
divestitures of non-core properties completed during the fourth quarter of 1998
and throughout 1999. For the Current Quarter, the Company produced 0.9 million
barrels of oil ("mmbo") and 27.4 billion cubic feet of natural gas ("bcf"),
compared to 1.6 mmbo and 26.8 bcf in the Prior Quarter. Average oil prices
realized were $18.90 per barrel of oil in the Current Quarter compared to $12.41
per barrel in the Prior Quarter, an increase of 52%. Average gas prices realized
were $2.26 per thousand cubic feet ("mcf") in the Current Quarter compared to
$1.88 per mcf in the Prior Quarter, an increase of 20%.
For the Current Quarter, the Company realized an average price of $2.40 per
thousand cubic feet equivalent of natural gas ("mcfe"), compared to $1.93 per
mcfe in the Prior Quarter. The Company's hedging activities resulted in
decreased oil and gas revenues of $2.0 million, or $(0.06) per mcfe, in the
Current Quarter, compared to increases in oil and gas revenues of $6.2 million,
or $0.17 per mcfe, in the Prior Quarter.
The following table shows the Company's production by region for the Current
Quarter and the Prior Quarter:
<TABLE>
<CAPTION>
FOR THE THREE MONTHS ENDED SEPTEMBER 30,
--------------------------------------------------
1999 1998
----------------------- -----------------------
OPERATING AREAS MMCFE PERCENT MMCFE PERCENT
--------------------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Mid-Continent ........... 15,860 49% 19,050 53%
Gulf Coast .............. 11,205 34 13,511 37
Canada .................. 3,039 9 2,533 7
Other areas ............. 2,558 8 1,174 3
---------- ---------- ---------- ----------
Total .............. 32,662 100% 36,268 100%
========== ========== ========== ==========
</TABLE>
Natural gas production represented approximately 84% of the Company's total
production volume on a gas equivalent basis in the Current Quarter, compared to
74% in the Prior Quarter. The Company anticipates natural gas will represent
approximately 87% of 2000 production. As of September 30, 1999, natural gas
represented approximately 87% of the Company's proved reserves.
Oil and Gas Marketing Sales. The Company realized $23.6 million in oil and gas
marketing sales to third parties in the Current Quarter, with corresponding oil
and gas marketing expenses of $22.9 million. This compares to sales of $36.3
million and expenses of $34.7 million in the Prior Quarter. The decrease in
marketing sales and cost of sales was due primarily to a reduction in marketing
efforts in the Current Quarter for third parties on wells where the Company is
not the operator, as compared to the Prior Quarter, and the sale of certain gas
gathering, transportation and marketing assets in June 1999, partially offset by
higher oil and gas prices during the Current Quarter.
16
<PAGE> 17
Production Expenses and Taxes. Production expenses decreased to $11.7 million in
the Current Quarter, a $2.5 million decrease from $14.2 million incurred in the
Prior Quarter. The decrease was due primarily to the Company's divestiture of
higher cost oil and gas properties, the closing of various field offices and
reduced production. On a production unit basis, production expenses were $0.36
and $0.39 per mcfe in the Current and Prior Quarters, respectively. The Company
anticipates that production expenses will average $0.36 per mcfe for 2000.
Production taxes, which consist primarily of wellhead severance taxes, were $3.7
million and $2.0 million in the Current and Prior Quarters, respectively. On a
per unit basis, production taxes were $0.11 per mcfe in the Current Quarter
compared to $0.05 per mcfe in the Prior Quarter. The per unit increase in
production taxes is the result of the higher oil and gas prices during the
Current Quarter.
Oil and Gas Depreciation, Depletion and Amortization. Depreciation, depletion
and amortization of oil and gas properties ("DD&A") for the Current Quarter was
$22.8 million, compared to $34.1 million in the Prior Quarter. This decrease was
caused by a decrease in the DD&A rate per mcfe from $0.94 to $0.70 in the Prior
and Current Quarters, respectively, and reduced production. The decrease in the
DD&A rate per mcfe is due primarily to the impairment of oil and gas properties
recorded during 1998 and the Company's lower finding and development costs to
date in 1999.
Depreciation and Amortization of Other Assets. Depreciation and amortization of
other assets ("D&A") decreased to $1.8 million in the Current Quarter compared
to $2.5 million in the Prior Quarter. This decrease was due to the lower D&A
recorded on certain gas processing assets that were sold during the Current
Quarter. The Company anticipates D&A expense throughout the remainder of 1999
and 2000 to remain at approximately the same level as in the Current Quarter.
General and Administrative. General and administrative expenses ("G&A"), which
are net of capitalized internal payroll and non-payroll expenses, were $2.7
million in the Current Quarter compared to $5.2 million in the Prior Quarter.
This decrease was primarily caused by various actions taken to lower corporate
overhead, including staff reductions and office closings which occurred
subsequent to September 30, 1998. The Company capitalized $0.3 million of
internal costs in the Current Quarter directly related to the Company's oil and
gas exploration and development efforts, compared to $0.8 million in the Prior
Quarter. The Company anticipates that G&A costs for the remainder of 1999 and
2000 will remain at generally the same level as in the Current Quarter.
Interest and Other Income. Interest and other income for the Current Quarter was
$2.7 million compared to $0.8 million in the Prior Quarter. Included in the
Current Quarter's results is a $0.5 million gain from the sale of the Company's
interest in a gas processing plant plus income earned on various investments.
Interest. Interest expense increased to $20.4 million in the Current Quarter
from $18.6 million in the Prior Quarter. This increase was primarily due to
lower capitalized interest in the Current Quarter. The Company capitalized $0.8
million of interest during the Current Quarter compared to $2.0 million
capitalized in the Prior Quarter. The Company anticipates that interest expense
will remain at generally the same level as in the Current Quarter during the
remainder of 1999 and 2000.
Provision for Income Taxes. The Company recorded $0.6 million of income tax
expense for the Current Quarter, compared to none in the Prior Quarter. The
income tax expense in the Current Quarter is entirely related to the Company's
operations in Canada. At September 30, 1999, the Company had a net operating
loss carryforward of approximately $615 million for regular U.S. federal income
taxes which will expire in future years beginning in 2007. Management believes
that it cannot be demonstrated at this time that it is more likely than not that
its domestic deferred income tax assets, comprised primarily of the net
operating loss carryforward generated in the United States, will be realizable
in future years, and therefore a valuation allowance of $448 million has been
recorded. Consequently, there was no income tax expense or benefit related to
the Company's domestic operations during the Current and Prior Quarters.
17
<PAGE> 18
Nine Months Ended September 30, 1999 vs. September 30, 1998
General. For the nine months ended September 30, 1999 (the "Current Period"),
the Company realized net income of $14.3 million, or net income of $0.02 per
common share after deducting preferred dividends (including a 7% dividend on
dividends in arrears) of $12.4 million. This compares to a net loss of $508.7
million, or a net loss of $5.48 per common share after deducting preferred
dividends of $8.1 million, in the nine months ended September 30, 1998 (the
"Prior Period"). The loss in the Prior Period was primarily caused by a $466.0
million asset writedown recorded under the full-cost method of accounting, a
$10.0 million impairment related to certain of the Company's gas processing and
transportation assets located in Louisiana, a $13.3 million extraordinary loss
on the early extinguishment of debt, and a $19.4 million loss from recurring
operations. The asset writedown was partially caused by acquisitions completed
during the Prior Period for consideration in excess of the present value (10%
discount) of the future net revenues of the proved reserves acquired as of June
30, 1998. See "- Impairment of Oil and Gas Properties".
Oil and Gas Sales. During the Current Period, oil and gas sales increased to
$198.6 million from $196.0 million, an increase of $2.6 million, or 1%. This
increase resulted from an increase in oil and gas production volumes from 96.5
bcfe in the Prior Period to 99.5 bcfe in the Current Period, an increase of 3.0
bcfe, or 3%. For the Current Period, the Company produced 3.2 mmbo and 80.1 bcf,
compared to 4.6 mmbo and 69.0 bcf in the Prior Period. Average oil prices
realized were $14.79 per barrel in the Current Period compared to $13.21 per
barrel in the Prior Period, an increase of 12%. Average gas prices realized were
$1.88 per mcf in the Current Period compared to $1.96 per mcf in the Prior
Period, a decrease of 4%.
For the Current Period, the Company realized an average price of $2.00 per mcfe,
compared to $2.03 per mcfe in the Prior Period. The Company's hedging activities
resulted in increased oil and gas revenues of $1.2 million, or $0.01 per mcfe,
in the Current Period, compared to increases in oil and gas revenues of $10.5
million, or $0.11 per mcfe, in the Prior Period.
The following table shows the Company's production by region for the Current
Period and the Prior Period:
<TABLE>
<CAPTION>
FOR THE NINE MONTHS ENDED SEPTEMBER 30,
------------------------------------------------------
1999 1998
------------------------- -------------------------
OPERATING AREAS MMCFE PERCENT MMCFE PERCENT
--------------------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Mid-Continent ........... 51,733 52% 43,571 45%
Gulf Coast .............. 33,921 34 40,599 42
Canada .................. 8,602 9 5,677 6
Other areas ............. 5,284 5 6,615 7
----------- ----------- ----------- -----------
Total .............. 99,540 100% 96,462 100%
=========== =========== =========== ===========
</TABLE>
Natural gas production represented approximately 80% of the Company's total
production volume on an equivalent basis in the Current Period, compared to 72%
in the Prior Period.
Oil and Gas Marketing Sales. The Company realized $50.1 million in oil and gas
marketing sales to third parties in the Current Period, with corresponding oil
and gas marketing expenses of $47.8 million. This compares to sales of $96.5
million and expenses of $94.7 million in the Prior Period. The decrease in
marketing sales and cost of sales was due primarily to a reduction in marketing
efforts in the Current Period for third parties on wells where the Company is
not the operator and the sale of certain gas gathering, transportation and
marketing assets in June 1999.
Production Expenses and Taxes. Production expenses increased to $36.9 million in
the Current Period, a $0.1 million increase from $36.8 million incurred in the
Prior Period. On a production unit basis, production expenses were $0.37 and
$0.38 per mcfe in the Current and Prior Periods, respectively.
Production taxes, which consist primarily of wellhead severance taxes, were $8.4
million and $6.1 million in the Current and Prior Periods, respectively. On a
per unit basis, production taxes were $0.08 per mcfe in the Current Period
compared to $0.06 per mcfe in the Prior Period.
18
<PAGE> 19
Impairment of Oil and Gas Properties. The Company utilizes the full-cost method
to account for its investment in oil and gas properties. Under this method, all
costs of acquisition, exploration and development of oil and gas reserves
(including such costs as leasehold acquisition costs, geological and geophysical
expenditures, certain capitalized internal costs, dry hole costs and tangible
and intangible development costs) are capitalized as incurred. These oil and gas
property costs, including the estimated future capital expenditures to develop
proved undeveloped reserves, are depleted and charged to operations using the
unit-of-production method based on the ratio of current production to proved oil
and gas reserves as estimated by the Company's independent engineering
consultants and in-house engineers. Costs directly associated with the
acquisition and evaluation of unproved properties are excluded from the
amortization computation until it is determined whether or not proved reserves
can be assigned to the property or whether impairment has occurred. The excess
of capitalized costs of oil and gas properties, net of accumulated depreciation,
depletion and amortization and related deferred income taxes, over the
discounted future net revenues of proved oil and gas properties is charged to
operations.
The Company incurred an impairment of oil and gas properties charge of $466.0
million in the Prior Period, compared to no impairment charge in the Current
Period. The writedown in the Prior Period was caused by a combination of several
factors, including acquisitions completed by the Company during the Prior
Period, which were accounted for using the purchase method. The most significant
factors were the acquisitions of Hugoton Energy Corporation ("Hugoton") and DLB
Oil & Gas, Inc. ("DLB"). Higher drilling and completion costs, the evaluation of
certain leasehold, seismic and other exploration-related costs that were
previously unevaluated, together with decreases in oil and gas prices from
December 31, 1997 to June 30, 1998 were the remaining contributing factors which
led to the writedown in the Prior Period.
Impairment of Other Assets. In the Prior Period, the Company incurred an
impairment charge of $10.0 million related to certain of the Company's gas
processing and transportation assets located in Louisiana. No such charge was
recorded in the Current Period.
Oil and Gas Depreciation, Depletion and Amortization. DD&A for the Current
Period was $70.2 million, compared to $109.3 million in the Prior Period. This
decrease was caused by a decrease in the DD&A rate per mcfe from $1.13 to $0.71
in the Prior and Current Periods, respectively, partially offset by increased
production in the Current Period. The decrease in the DD&A rate per mcfe is due
primarily to the impairment of oil and gas properties recorded during 1998 and
the Company's lower finding and development costs to date in 1999.
Depreciation and Amortization of Other Assets. D&A increased to $6.0 million in
the Current Period compared to $5.8 million in the Prior Period. This increase
in D&A was caused by a full nine months of amortization of debt issuance costs
during the Current Period related to the issuance of senior notes in April 1998.
General and Administrative. G&A, which is net of capitalized internal payroll
and non-payroll expenses, was $10.0 million in the Current Period compared to
$14.7 million in the Prior Period. This decrease was primarily caused by various
actions taken to lower corporate overhead, including staff reductions and office
closings which occurred subsequent to September 30, 1998. The Company
capitalized $2.3 million of internal costs in the Current Period directly
related to the Company's oil and gas exploration and development efforts,
compared to $4.0 million in the Prior Period.
Interest and Other Income. Interest and other income for the Current Period was
$6.5 million compared to $3.6 million in the Prior Period. This increase is due
primarily to a $1.7 million gain on the sale of certain marketing assets located
in the Mid-Continent, as well as a $0.5 million gain from the sale of the
Company's interest in a gas processing plant.
Interest. Interest expense increased to $60.6 million in the Current Period from
$47.9 million in the Prior Period. This increase was a result of the issuance of
the 9.625% senior notes in April 1998 as well as lower capitalized interest in
the Current Period. The Company capitalized $2.7 million of interest during the
Current Period compared to $5.8 million capitalized in the Prior Period.
19
<PAGE> 20
Provision for Income Taxes. The Company recorded income tax expense of $1.0
million for the Current Period, compared to none in the Prior Period. The income
tax expense in the Current Period is entirely related to the Company's
operations in Canada. At September 30, 1999, the Company had a net operating
loss carryforward of approximately $615 million for regular U.S. federal income
taxes which will expire in future years beginning in 2007. Management believes
that it cannot be demonstrated that it is more likely than not that its domestic
deferred income tax assets will be realizable in future years, and therefore a
valuation allowance of $448 million has been recorded. Consequently, there was
no income tax expense or benefit related to the Company's domestic operations
during the Current and Prior Periods.
RISK MANAGEMENT ACTIVITIES
See Item 3 - "Quantitative and Qualitative Disclosures About Market Risks".
LIQUIDITY AND CAPITAL RESOURCES
As of September 30, 1999, the Company had working capital of approximately $9.3
million. The Company has a $50 million revolving bank credit facility with a
committed borrowing base of $50 million which matures January 2001. As of
September 30, 1999, the Company had no outstanding borrowings under the
facility. Borrowings under the facility are secured by certain producing oil and
gas properties. The interest rate at September 30, 1999 was 8.75% per annum.
Two of the Company's senior note indentures contain financial covenants which
restrict the ability of the Company and its restricted subsidiaries to incur
additional indebtedness and to make restricted payments, such as paying cash
dividends and repurchasing Company stock. These restrictions do not affect the
Company's ability to borrow under or expand its secured commercial bank
facility. The Company estimates that it could have incurred up to $125 million
of secured commercial bank indebtedness as of September 30, 1999 under the most
restrictive of its indenture debt incurrence tests.
As of December 31, 1998 and March 31, June 30, and September 30, 1999, the
Company was unable to meet the restricted payment test under these indentures,
including the requirement that the Company be able to incur additional unsecured
indebtedness. As a result, the Company was not able to pay cash dividends on its
7% cumulative convertible preferred stock on February 1, May 1, August 1, or
November 1, 1999. As of September 30, 1999, the cumulative earned but unpaid
dividends on the preferred stock was $15.1 million. Subsequent dividend payments
will be subject to the same restrictions and are dependent upon variables that
are beyond the Company's ability to predict. If the Company fails to pay
dividends for six quarterly periods, the holders of preferred stock would be
entitled to elect two additional members to the board.
None of the senior note indenture covenants apply to Chesapeake Energy
Marketing, Inc. ("CEMI"), an unrestricted subsidiary of the Company. The
Company's Board of Directors has authorized CEMI to purchase up to $10.0 million
of the Company's senior notes and preferred stock in open market transactions or
otherwise. In April 1999, CEMI purchased 3,600 shares of preferred stock for an
aggregate purchase price of $53,000, or $14.63 per share, in an open market
transaction.
Debt ratings for the senior notes are B3 by Moody's Investors Service and B by
Standard & Poor's Corporation as of November 12, 1999. Recently Standard &
Poor's confirmed its rating and removed the Company from credit watch. Moody's
is presently reviewing the Company's ratings. There are no scheduled principal
payments required on any of the Company's senior notes until March 2004, when
$150.0 million is due.
The Company believes it has adequate resources, including cash on hand, budgeted
cash flow from operations and proceeds from miscellaneous asset sales, to fund
its exploration, development and acquisition capital expenditure budget for the
remainder of 1999 and throughout the year 2000. The budget for 2000 has
tentatively been established at $185 million, which includes up to $50 million
for property acquisitions. The Company has largely completed its property
divestiture program for 1999, and through October total sales were approximately
$50
20
<PAGE> 21
million. Changes in oil and gas prices or drilling results different from
expectations could cause the Company to alter its drilling program, or the
amount of anticipated property acquisitions and/or asset sales.
The Company's cash provided by operating activities before changes in current
assets and liabilities decreased 5% to $91.5 million during the Current Period
compared to $96.7 million during the Prior Period. The decrease was due
primarily to reduced operating income as a result of a decrease in gas prices
between periods, and an increase in interest expense during the Current Period.
Cash used in investing activities decreased to $77.4 million during the Current
Period from $519.0 million in the Prior Period. The Company completed several
acquisitions requiring cash in the Prior Period which totaled $345.0 million,
compared to $11.1 million in the Current Period. The Company also significantly
decreased its drilling activity and leasehold acquisitions in the Current Period
compared to the Prior Period. During the Current Period, the Company expended
approximately $90.0 million to initiate drilling on 142 gross (83.8 net) wells
and invested approximately $16.4 million in leasehold acquisitions. This
compares to $129.7 million to initiate drilling on 166 gross (91.5 net) wells
and $11.1 million to purchase leasehold in the Prior Period. The Company also
completed several divestitures resulting in sales proceeds of $36.4 million and
$10.5 million in the Current Period and Prior Period, respectively.
Cash used in financing activities was $24.6 million in the Current Period,
compared to cash provided by financing activities of $367.9 million in the Prior
Period. During the Current Period, the Company expanded its borrowings under its
commercial bank facility by $29 million and subsequently retired all outstanding
borrowings under the facility. During the Prior Period, the Company retired
$465.0 million in debt consisting of $85.0 million in debt assumed at the
completion of the DLB acquisition, $120.0 million in debt assumed at the
completion of the Hugoton acquisition, $90.0 million in senior notes, and $170.0
million in borrowings made under its commercial bank credit facilities. Also
during the Prior Period, the Company issued $500.0 million in senior notes and
$230.0 million in preferred stock.
YEAR 2000
Project. The Company has placed a high priority on proactively resolving
computer or embedded chip problems related to the "Year 2000" problem which may
have adverse material effects on its continuing operations or cash flow. These
problems would be caused by the inability of a component (software, hardware or
equipment with embedded microprocessors) to correctly process date data in and
between the 20th and 21st centuries and therefore fail to properly perform in
its intended functions, and/or to exchange correct date data with other
components. This problem would most typically be caused by erroneous date
calculations, which results from using two digits to signify a year (century
implied), handling leap years incorrectly or the use of "special" values that
can be confused with legitimate calendar dates. The scope of the Year 2000
project included conducting an inventory of the Company's software, hardware and
"embedded systems" equipment, assessing potential for failure and the associated
risk, prioritizing the need for remedial actions, identifying an appropriate
action, then implementing and testing. In addition, the Company has taken a
similar approach to mitigating risks associated with the Year 2000 readiness of
material business partners (vendors, suppliers, customers, etc.). The project is
identifying contingency plans to cope with unexpected events resulting from Year
2000 issues.
Beginning in mid-1997, the Company began an assessment of its core financial and
operational software systems. Three critical systems were identified with date
sensitivities: oil and gas financial accounting, production accounting, and
land/lease administration. A Year 2000 compliant release of the oil and gas
financial accounting package was implemented at the beginning of September 1999.
The Year 2000-ready version of the production accounting system was successfully
implemented during June 1999. The timing of remaining upgrades has been
scheduled to be concurrent with the respective vendors' support requirements and
to take advantage of additional features or performance enhancements. A project
has been underway since early 1997 to implement a completely revamped version of
the land/lease administration package in use at the Company to provide
significantly increased functionality and reliability. All Year 2000-related
issues in this application have been satisfactorily resolved and a full roll-out
of the software is proceeding.
Other activities, either already underway or scheduled, include assessment of
material business partners and assessment of embedded systems in field
locations. The following table summarizes the current overall status of the
project with anticipated completion dates:
21
<PAGE> 22
<TABLE>
<CAPTION>
PHASE
--------------------------------------------------------
ASSESSMENT/ REMEDIATION/
COMPONENT INVENTORY PRIORITIZATION CONTINGENCY
-------------------------------------- --------- -------------- --------------
<S> <C> <C> <C>
Software Completed Completed Completed
Hardware Completed Completed Completed
Business partners Completed November 1999 November 1999
Embedded systems (non-IT systems) Completed November 1999 November 1999
</TABLE>
The following schedule changes were made in the Current Quarter:
- Delays in the embedded systems and business partner schedules result
from a later than planned start. To mitigate the effect of the late
start, the inventory and assessment/prioritization phases of each were
run concurrently.
- The field inventory has been completed, with approximately half of the
unique device types researched. To-date, no required device upgrades
have been identified.
- Information has been gathered from several of the most critical
business partners, all of which indicate readiness in areas of concern
to on-going Company operations.
Cost. Expenses to date have totaled $140,000, composed of $39,000 for software
and $101,000 for consulting. For currently identified software systems requiring
a Year 2000 upgrade, the vendor is providing that upgrade under the terms of
existing maintenance agreements, and thus no additional license or upgrade fees
are required. In all cases these upgrades had been previously scheduled to
maintain desired vendor support. No upgrade project schedule has been
accelerated to achieve Year 2000 compliance, nor has any project been deferred
because of Year 2000 concerns or efforts. An accurate cost cannot be determined
prior to conclusion of the Assessment/Prioritization phase, but it is expected
total project expenditures, including the use of outside consultants, should not
exceed $300,000. This does not include any costs which may be assessed by joint
venture partners on properties not operated by the Company.
Risks/Contingency. The failure to remediate critical systems (software, hardware
or embedded systems), or the failure of a material business partner to resolve
critical Year 2000 issues could have a serious adverse impact on the ability of
the Company to continue operations and meet obligations. At the current time, it
is believed that the most likely worst case scenario would involve a failure in
the infrastructure, specifically, an electrical outage of at most a few days. It
is expected that any interruption in operation will be minor and short-lived and
will pose no safety or environmental risks. Should the most likely worst case
scenario occur, the Company has identified and is currently testing emergency
response procedures. In addition, the proper operation of safety equipment is
being verified, and various pre-cautionary measures are being implemented.
RECENTLY ISSUED ACCOUNTING STANDARDS
On June 15, 1998, the Financial Accounting Standards Board issued FAS No. 133,
Accounting for Derivative Instruments and Hedging Activities ("FAS 133"). FAS
133 establishes a new model for accounting for derivatives and hedging
activities and supersedes and amends a number of existing standards. FAS 133 (as
amended by FAS 137) is effective for all fiscal quarters of fiscal years
beginning after June 15, 2000.
FAS 133 standardizes the accounting for derivative instruments by requiring that
all derivatives be recognized as assets and liabilities and measured at fair
value. The accounting for changes in the fair value of derivatives (gains and
losses) depends on whether the derivative is designated and qualifies as a
hedge, and the type of hedging relationship that exists. Changes in the fair
value of derivatives that are not designated as hedges or that do not meet the
hedge accounting criteria in FAS 133 are required to be reported in earnings. In
addition, all hedging relationships must be designated, reassessed and
documented pursuant to the provisions of FAS 133. The Company has not yet
determined the impact that adoption of FAS 133 will have on the financial
statements. However, the Company believes all of its derivative instruments will
be designated as hedges in accordance with the relevant
22
<PAGE> 23
accounting criteria, and therefore the impact of the adoption of FAS 133 is not
expected to have a material effect on the Company's financial statements.
FORWARD LOOKING STATEMENTS
This Form 10-Q includes "forward-looking statements" within the meaning of
Section 27A of the Securities Act of 1933 and Section 21E of the Securities
Exchange Act of 1934. All statements other than statements of historical facts
included in this Form 10-Q, including, without limitation, statements regarding
oil and gas reserve estimates, planned capital expenditures, expected oil and
gas production, the Company's financial position, business strategy and other
plans and objectives for future operations, expected future expenses,
realization of deferred tax assets, and Year 2000 compliance efforts, are
forward-looking statements. Although the Company believes that the expectations
reflected in such forward-looking statements are reasonable, it can give no
assurance that such expectations will prove to have been correct. Factors that
could cause actual results to differ materially from those expected by the
Company, including, without limitation, factors discussed under Risk Factors in
the Company's Form 10-K for the year ended December 31, 1998, are substantial
indebtedness, impairment of asset value, need to replace reserves, substantial
capital requirements, ability to supplement capital resources with asset sales,
fluctuations in the prices of oil and gas, uncertainties inherent in estimating
quantities of oil and gas reserves, projecting future rates of production and
the timing of development expenditures, competition, operating risks, risks
associated with foreign operations, restrictions imposed by lenders, liquidity
and capital requirements, the effects of governmental and environmental
regulation, pending patent, securities and lease cancellation litigation,
adverse changes in the market for the Company's oil and gas production and the
Company's ability to successfully address Year 2000 issues. Readers are
cautioned not to place undue reliance on these forward-looking statements, which
speak only as of the date hereof. The Company undertakes no obligation to
release publicly the result of any revisions to these forward-looking statements
that may be made to reflect events or circumstances after the date hereof,
including, without limitation, changes in the Company's business strategy or
planned capital expenditures, or to reflect the occurrence of unanticipated
events.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS
COMMODITY PRICE RISK
Periodically the Company utilizes hedging strategies to hedge the price of a
portion of its future oil and gas production. These strategies include (i) swap
arrangements that establish an index-related price above which the Company pays
the counterparty and below which the Company is paid by the counterparty, (ii)
the purchase of index-related puts that provide for a "floor" price below which
the counterparty pays the Company the amount by which the price of the commodity
is below the contracted floor, (iii) the sale of index-related calls that
provide for a "ceiling" price above which the Company pays the counterparty the
amount by which the price of the commodity is above the contracted ceiling, and
(iv) basis protection swaps, which are arrangements that guarantee the price
differential of oil or gas from a specified delivery point or points. Results
from hedging transactions are reflected in oil and gas sales to the extent
related to the Company's oil and gas production. The Company only enters into
hedging transactions related to the Company's oil and gas production volumes or
physical purchase or sale commitments of its oil and gas marketing subsidiary.
Gains or losses on crude oil and natural gas hedging transactions are recognized
as price adjustments in the months of related production.
As of November 11, 1999, the Company had closed transactions designed to hedge a
portion of the Company's domestic oil and gas production. The net unrecognized
losses resulting from these transactions, $5.8 million, will be recognized as
price adjustments in the months of related production. These hedging gains and
losses are set forth below ($ in thousands):
23
<PAGE> 24
<TABLE>
<CAPTION>
HEDGING GAINS (LOSSES)
--------------------------------------
MONTH GAS OIL TOTAL
--------------- ----------- ----------- ---------
<S> <C> <C> <C>
October 1999....... 421 (72) 349
November 1999...... 102 (69) 33
December 1999...... -- (1,066) (1,066)
January 2000....... -- (995) (995)
February 2000...... -- (931) (931)
March 2000......... -- (851) (851)
April 2000......... (25) (647) (672)
May 2000........... (26) (668) (694)
June 2000.......... (25) (647) (672)
July 2000.......... (26) (231) (257)
August 2000........ (26) -- (26)
September 2000..... (25) -- (25)
October 2000....... (26) -- (26)
-------- --------- ---------
$ 344 $ (6,177) $ (5,833)
======== ========= ========
</TABLE>
As of November 11, 1999, the Company had the following crude oil collar
transactions related to its domestic oil production which remain open:
<TABLE>
<CAPTION>
VOLUME NYMEX-DEFINED NYMEX-DEFINED
MONTHS (BBLS) HIGH STRIKE PRICE LOW STRIKE PRICE
--------------------------- --------- ----------------- ----------------
<S> <C> <C> <C>
October 1999............... 310,000 $ 20.255 $ 17.75
November 1999.............. 300,000 $ 20.255 $ 17.75
</TABLE>
The Company also entered into an additional transaction designed to hedge the
Company's Canadian gas production during October 1999. This transaction was
closed in May 1999. The net loss resulting from this transaction of $0.2 million
(in US $) will be recognized as a price adjustment in the month of related
production.
In addition to commodity hedging transactions related to the Company's oil and
gas production, CEMI periodically enters into hedging transactions designed to
hedge against physical purchase commitments made by CEMI. Gains or losses on
these transactions are recorded as adjustments to oil and gas marketing sales in
the consolidated statements of operations and are not considered by management
to be material.
INTEREST RATE RISK
The Company also utilizes hedging strategies to manage fixed-interest rate
exposure. Through the use of a swap arrangement, the Company believes it can
benefit from stable or falling interest rates and reduce its current interest
expense. During the Current Quarter, the Company's interest rate swap resulted
in a $0.4 million reduction of interest expense.
The table below presents principal cash flows and related weighted average
interest rates by expected maturity dates. The fair value of the long-term debt
has been estimated based on quoted market prices.
<TABLE>
<CAPTION>
SEPTEMBER 30, 1999
---------------------------------------------------------------------------------------
YEAR OF MATURITY
---------------------------------------------------------------------------------------
1999 2000 2001 2002 2003 THEREAFTER TOTAL FAIR.VALUE
-------- -------- -------- -------- ------- ---------- -------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
LIABILITIES: ($ IN MILLIONS)
Long-term debt, including current
portion - fixed rate............ $ -- $ -- $ -- $ -- $ -- $ 920 $ 920 $ 850
Average interest rate........... -- -- -- -- -- 9.1% -- --
</TABLE>
24
<PAGE> 25
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Company is subject to ordinary routine litigation incidental to its
business. In addition, the Company and certain of its officers and directors are
defendants in pending actions which are described in Item 3 of the Company's
annual report on Form 10-K for the year ended December 31, 1998 and its
quarterly report on Form 10-Q for the quarter ended June 30, 1999. Subsequent
developments are as follows:
Bayard Securities Litigation. A purported class action alleging violations of
Sections 11 and 12 of the Securities Act of 1933 and Section 408 of the Oklahoma
Securities Act was first filed in February 1998 against the Company and others
on behalf of investors who purchased common stock of Bayard Drilling
Technologies, Inc. ("Bayard") in, or traceable to, its initial public offering
in November 1997. The action, styled Yuan v. Bayard, et al., is pending in the
U.S. District Court for the Western District of Oklahoma. Total proceeds of the
offering were $254 million, of which the Company received net proceeds of $90
million as a selling shareholder. Plaintiffs allege that the Company, a major
customer of Bayard's drilling services and the owner of 30.1% of Bayard's common
stock outstanding prior to the offering, was a controlling person of Bayard.
Alleged defective disclosures are claimed to have resulted in a decline in
Bayard's share price following the public offering. Plaintiffs seek a
determination that the suit is a proper class action and damages in an
unspecified amount or rescission, together with interest and costs of
litigation, including attorneys' fees.
On August 24, 1999, the District Court entered an order granting in part and
denying in part defendants' motion to dismiss the action. The court dismissed
plaintiffs' claims against the Company under Section 15 of the Securities Act of
1933 alleging that Chesapeake was a "controlling person" of Bayard. The Court
denied that portion of defendants' motion seeking dismissal of plaintiffs'
claims under Sections 11 and 12(a)(2) of the Securities Act of 1933 and Section
408 of the Oklahoma Securities Act. Of these, only the Section 11 claim and the
Section 408 claim are asserted against the Company. The court has also entered
an order setting September 15, 2000 as the cutoff for merits discovery, November
1, 2000 for the filing of any dispositive motions and February 1, 2001 as the
trial date. The Company believes that it has meritorious defenses to these
claims and intends to defend this action vigorously. No estimate of loss or
range of estimate of loss, if any, can be made at this time. Bayard, which was
acquired by Nabors Industries, Inc. in April 1999, has been reimbursing the
Company for its costs of defense as incurred.
Patent Litigation. In Union Pacific Resources Company v. Chesapeake, et al., the
U.S. District Court for the Northern District of Texas, Fort Worth Division,
issued its ruling on September 21, 1999 that the patent claimed by UPRC covering
a "geosteering" method utilized in drilling horizontal wells was invalid. The
ruling was entered following a trial to the court in June 1999. Filed in October
1996, the lawsuit asserted that the Company had infringed UPRC's patent. Because
the patent was declared invalid, the court held that the Company could not have
infringed the patent, dismissed all of UPRC's claims with prejudice and assessed
court costs against UPRC. The court concluded that the UPRC patent was invalid
for failure to definitively describe the patented method in the patent claims
and for failure to provide sufficient disclosure in the patent to enable one of
ordinary skill in the art to practice the patented method. The Company has filed
a motion to amend final judgment to make additional findings and has also
applied for attorneys' fees which total approximately $5 million.
West Panhandle Field Cessation Cases. A subsidiary of the Company, Chesapeake
Panhandle Limited Partnership ("CP") (f/k/a MC Panhandle, Inc.), and two
subsidiaries of Kinder Morgan, Inc., are defendants in 13 lawsuits filed in 1997
and 1998 by royalty owners seeking the cancellation of oil and gas leases in the
West Panhandle Field in Texas. The Company acquired MC Panhandle, Inc. effective
on April 28, 1998; MC Panhandle, Inc. has owned the leases since January 1,
1997. Plaintiffs claim the leases terminated upon the cessation of production
for various periods between 1926 and 1997 and/or for failure to produce in
paying quantities. In addition, plaintiffs seek to recover conversion damages
or, in the alternative, damages for the breach of implied covenants of the
leases, i.e., for failure to protect against drainage, to maximize production,
and to reasonably develop and market. Plaintiffs also seek exemplary damages,
attorneys' fees and interest. Defendants assert that any cessation of production
was excused by their timely commencement of operations to restore production and
assert affirmative defenses of limitations, waiver, estoppel, laches and title
by adverse possession.
25
<PAGE> 26
The 13 pending cases were described in the Company's June 30, 1999 Form 10-Q.
There have been additional developments in the following three cases in the
District Court of Moore County, Texas, 69th Judicial District:
o A.C. Smith, et al. v. NGPL, et al., No. 98-47, first filed January 26,
1998 and refiled May 29, 1998. On June 18, 1999, the court granted
plaintiffs' motion for summary judgment in part, finding that the
lease had terminated due to the cessation of production, subject to
the defendants' affirmative defenses.
o Joseph H. Pool, et al. v. NGPL, et al., No. 98-30, first filed
December 17, 1997 and refiled May 11, 1998, jury trial in June 1999,
verdict for defendants. On September 28, 1999, the court granted
plaintiffs' motion for judgment notwithstanding verdict and entered
judgment in favor of plaintiffs. In addition to quieting title to the
lease (including existing gas wells and all attached equipment) in
plaintiffs, the court awarded actual damages as of June 28, 1999 of
$545,000 from CP and $235,000 jointly and severally from the other two
defendants. The court further awarded, jointly and severally from all
defendants, $77,500 of attorneys' fees in the event of an appeal,
$1,900 of sanctions, interest and court costs. CP and the other
defendants have each filed a notice of appeal and will post a
supersedeas bond.
o Joseph H. Pool, et al. v. NGPL, et al., No. 98-36, first filed
February 2, 1998 and refiled May 20, 1998, jury trial in July 1999,
verdict for plaintiffs. On September 28, 1999, the court entered final
judgment for plaintiffs terminating the lease, quieting title to the
lease (including existing gas wells and all attached equipment) in
plaintiffs as of June 1, 1999 and awarding actual damages of $1.5
million, attorneys' fees of $97,500 in the event of an appeal,
interest and court costs (CP's liability is joint and several with the
other two defendants). The court also awarded exemplary damages of
$1.2 million against each of CP and the other two defendants. The
three defendants have each filed a notice of appeal and will post a
supersedeas bond.
The Company has previously established an accrued liability that management
believes will be sufficient to cover the estimated costs of litigation for each
of these cases. Because of the inconsistent verdicts reached by the juries in
the four cases tried to date and because the amount of damages sought is not
specified in all of the other cases, the outcome of the remaining trials and the
amount of damages that might ultimately be awarded could differ from
management's estimates. Management believes, however, that the leases are valid,
there is no basis for exemplary damages and that any findings of fraud or bad
faith will be overturned on appeal. CP and the other defendants intend to
vigorously defend against the plaintiffs' claims.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
- - Not applicable
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
- - Not applicable
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
- - Not applicable
ITEM 5. OTHER INFORMATION
- - Not applicable
26
<PAGE> 27
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
The following exhibits are filed as a part of this report:
Exhibit No.
12 Computation of Ratios
27 Financial Data Schedule
(b) Reports on Form 8-K
During the quarter ended September 30, 1999, the Company filed the
following current reports on Form 8-K:
On July 29, 1999, the Company filed a current report on Form 8-K
reporting under Item 5 that the Company issued a press release
announcing the second quarter and first half 1999 results.
On August 17, 1999, the Company filed a current report on Form 8-K
reporting under Item 5 that the Company issued a press release
announcing the hiring of Douglas J. Jacobson as Senior Vice President -
Acquisitions and Divestitures.
On August 19, 1999, the Company filed a current report on Form 8-K
reporting under Item 5 that the Company issued a press release
announcing it had fully exercised a common stock purchase warrant
issued to it from Gothic Energy Corporation.
On September 17, 1999, the Company filed a current report on Form 8-K
reporting under Item 5 that the Company issued a press release
announcing the planned sale of Gothic Energy Corporation common stock.
On September 27, 1999, the Company filed a current report on Form 8-K
reporting under Item 5 that the Company issued a press release
announcing a significant legal victory in a patent infringement lawsuit
filed by Union Pacific Resources.
On September 28, 1999, the Company filed a current report on Form 8-K
reporting under Item 5 that the Company issued a press release to
provide the third quarter 1999 outlook.
27
<PAGE> 28
SIGNATURES
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 thereunto duly authorized.
CHESAPEAKE ENERGY CORPORATION
--------------------------------------
(Registrant)
November 12, 1999 /s/ Aubrey K. McClendon
- ------------------------------ --------------------------------------
Date Aubrey K. McClendon
Chairman and
Chief Executive Officer
November 12, 1999 /s/ Marcus C. Rowland
- ------------------------------ --------------------------------------
Date Marcus C. Rowland
Executive Vice President and
Chief Financial Officer
<PAGE> 29
Index to Exhibits
<TABLE>
<CAPTION>
Exhibit No. Description Page
- ----------- ----------- ----
<S> <C> <C>
12 Computation of Ratios
27 Financial Data Schedule
</TABLE>
<PAGE> 1
EXHIBIT 12
<TABLE>
<CAPTION>
3 Months 3 Months 9 Months 9 Months
Ended Ended Ended Ended
Sept. 30, Sept. 30, Sept. 30, Sept. 30,
1999 1998 1999 1998
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
RATIO OF EARNINGS TO FIXED CHARGES
Income before income taxes and extraordinary item 18,764 (4,149) 15,287 (495,388)
Interest 20,420 18,577 60,569 47,930
Preferred Stock Dividends 4,381 4,026 12,433 8,051
Bond discount amortization(a) -- -- -- --
Loan cost amortization 844 680 2,445 1,682
------------ ------------ ------------ ------------
Earnings 44,409 19,134 90,734 (437,725)
Interest expense 20,420 18,577 60,569 47,930
Capitalized interest 846 1,984 2,730 5,805
Preferred Stock Dividends 4,381 4,026 12,433 8,051
Bond discount amortization(a) -- -- -- --
Loan cost amortization 844 680 2,445 1,682
------------ ------------ ------------ ------------
Fixed Charges 26,491 25,267 78,177 63,468
Ratio 1.68 0.76 1.16 (6.90)
(A) Bond discount excluded since its included in interest expense
Insufficient coverage -- 6,133 -- 501,193
</TABLE>
Page 1
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM BALANCE
SHEET AS OF SEPTEMBER 30, 1999, AND STATEMENT OF INCOME FOR THE NINE MONTHS
ENDED SEPTEMBER 30, 1999.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> SEP-30-1999
<CASH> 29,916
<SECURITIES> 0
<RECEIVABLES> 64,650
<ALLOWANCES> 3,208
<INVENTORY> 4,226
<CURRENT-ASSETS> 97,842
<PP&E> 2,345,806
<DEPRECIATION> 1,677,690
<TOTAL-ASSETS> 795,504
<CURRENT-LIABILITIES> 88,573
<BONDS> 920,838
0
230,000
<COMMON> 1,056
<OTHER-SE> (461,257)
<TOTAL-LIABILITY-AND-EQUITY> 795,504
<SALES> 248,709
<TOTAL-REVENUES> 255,235
<CGS> 179,379
<TOTAL-COSTS> 239,948
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 13
<INTEREST-EXPENSE> 60,569
<INCOME-PRETAX> 15,287
<INCOME-TAX> 975
<INCOME-CONTINUING> 14,312
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 14,312
<EPS-BASIC> 0.02
<EPS-DILUTED> 0.02
</TABLE>
