<PAGE> 1
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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 JUNE 30, 2000
[ ] 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 August 4, 2000, there were 144,712,453 shares of the registrant's $.01
par value Common Stock outstanding.
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<PAGE> 2
CHESAPEAKE ENERGY CORPORATION AND SUBSIDIARIES
INDEX TO FORM 10-Q FOR THE QUARTER ENDED JUNE 30, 2000
<TABLE>
<CAPTION>
PART I. FINANCIAL INFORMATION
PAGE
----
<S> <C> <C>
Item 1. Consolidated Financial Statements:
Consolidated Balance Sheets at June 30, 2000 and
December 31, 1999 (Unaudited) 3
Consolidated Statements of Operations for the Three Months and
Six Months Ended June 30, 2000 and 1999 (Unaudited) 4
Consolidated Statements of Cash Flows for the Six Months Ended
June 30, 2000 and 1999 (Unaudited) 5
Consolidated Statements of Comprehensive Income (Loss) for the Three
Months and Six Months Ended June 30, 2000 and 1999 (Unaudited) 6
Notes to Consolidated Financial Statements (Unaudited) 7
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations 19
Item 3. Quantitative and Qualitative Disclosures About Market Risks 25
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 28
Item 2. Changes in Securities and Use of Proceeds 28
Item 3. Defaults Upon Senior Securities or Dividend Arrearages 28
Item 4. Submission of Matters to a Vote of Security Holders 28
Item 5. Other Information 28
Item 6. Exhibits and Reports on Form 8-K 28
</TABLE>
2
<PAGE> 3
CHESAPEAKE ENERGY CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
2000 1999
----------- -----------
($ IN THOUSANDS)
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents ................................................................... $ 12,019 $ 38,658
Restricted cash ............................................................................. 4,754 192
Accounts receivable:
Oil and gas sales ......................................................................... 33,380 17,045
Oil and gas marketing sales ............................................................... 29,141 18,199
Joint interest and other, net of allowances of $1,714,000 and $3,218,000, respectively .... 14,399 11,247
Related parties ........................................................................... 3,455 4,574
Inventory ................................................................................... 3,596 4,582
Other ....................................................................................... 3,025 3,049
----------- -----------
Total current assets ................................................................. 103,769 97,546
----------- -----------
PROPERTY AND EQUIPMENT:
Oil and gas properties, at cost based on full-cost accounting:
Evaluated oil and gas properties .......................................................... 2,422,373 2,315,348
Unevaluated properties .................................................................... 32,146 40,008
Less: accumulated depreciation, depletion and amortization ................................ (1,719,259) (1,670,542)
----------- -----------
735,260 684,814
Other property and equipment ................................................................ 70,155 67,712
Less: accumulated depreciation and amortization ............................................. (35,099) (33,429)
----------- -----------
Total property and equipment ......................................................... 770,316 719,097
----------- -----------
INVESTMENT IN GOTHIC ENERGY CORPORATION ....................................................... 87,509 10,000
----------- -----------
OTHER ASSETS .................................................................................. 19,388 23,890
----------- -----------
TOTAL ASSETS .................................................................................. $ 980,982 $ 850,533
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Notes payable and current maturities of long-term debt ...................................... $ 799 $ 763
Accounts payable ............................................................................ 23,768 24,822
Accrued liabilities and other ............................................................... 43,103 34,713
Revenues and royalties due others ........................................................... 33,753 27,888
----------- -----------
Total current liabilities ............................................................ 101,423 88,186
----------- -----------
LONG-TERM DEBT, NET ........................................................................... 983,230 964,097
----------- -----------
REVENUES AND ROYALTIES DUE OTHERS ............................................................. 8,405 9,310
----------- -----------
DEFERRED INCOME TAXES ......................................................................... 7,904 6,484
----------- -----------
STOCKHOLDERS' EQUITY (DEFICIT):
Preferred Stock, $.01 par value, 10,000,000 shares authorized;
1,557,037 and 4,596,400 shares of 7% cumulative convertible stock
issued and outstanding at June 30, 2000 and December 31, 1999, respectively,
entitled in liquidation (including dividends in arrears) to $87.4 million
and $249.1 million, respectively .......................................................... 77,852 229,820
Common Stock, par value of $.01, 250,000,000 shares authorized;
143,297,346 and 105,858,580 shares issued at June 30, 2000 and
December 31, 1999, respectively ........................................................... 1,433 1,059
Paid-in capital ............................................................................. 862,230 682,905
Accumulated earnings (deficit) .............................................................. (1,045,984) (1,093,929)
Accumulated other comprehensive income (loss) ............................................... (2,757) 196
Less: treasury stock, at cost; 3,806,185 and 10,856,185 common shares at
June 30, 2000 and December 31, 1999, respectively ......................................... (12,754) (37,595)
----------- -----------
Total stockholders' equity (deficit) ................................................. (119,980) (217,544)
----------- -----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT) .......................................... $ 980,982 $ 850,533
=========== ===========
</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 SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------------ ------------------------
2000 1999 2000 1999
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
REVENUES:
Oil and gas sales ......................................... $ 100,221 $ 68,272 $ 187,514 $ 120,078
Oil and gas marketing sales ............................... 34,242 12,620 61,610 26,491
--------- --------- --------- ---------
Total revenues ........................................ 134,463 80,892 249,124 146,569
--------- --------- --------- ---------
OPERATING COSTS:
Production expenses ....................................... 12,581 11,183 25,126 25,175
Production taxes .......................................... 5,717 2,798 10,933 4,788
General and administrative ................................ 3,188 3,268 6,220 7,292
Oil and gas marketing expenses ............................ 33,122 11,673 59,666 24,958
Oil and gas depreciation, depletion and amortization ...... 24,877 24,233 49,360 47,386
Depreciation and amortization of other assets ............. 1,836 1,972 3,702 4,138
--------- --------- --------- ---------
Total operating costs ................................. 81,321 55,127 155,007 113,737
--------- --------- --------- ---------
INCOME FROM OPERATIONS ..................................... 53,142 25,765 94,117 32,832
--------- --------- --------- ---------
OTHER INCOME (EXPENSE):
Interest and other income ................................. 1,667 2,967 2,859 3,840
Interest expense .......................................... (21,813) (20,259) (42,677) (40,149)
--------- --------- --------- ---------
Total other income (expense) .......................... (20,146) (17,292) (39,818) (36,309)
--------- --------- --------- ---------
INCOME (LOSS) BEFORE INCOME TAXES .......................... 32,996 8,473 54,299 (3,477)
--------- --------- --------- ---------
INCOME TAX EXPENSE ......................................... 1,362 326 1,463 326
--------- --------- --------- ---------
NET INCOME (LOSS) .......................................... 31,634 8,147 52,836 (3,803)
Preferred stock dividends ................................. (2,907) (4,026) (6,949) (8,052)
Gain on redemption of preferred stock ..................... 1,481 -- 11,895 --
--------- --------- --------- ---------
NET INCOME (LOSS) AVAILABLE TO COMMON SHAREHOLDERS ......... $ 30,208 $ 4,121 $ 57,782 $ (11,855)
========= ========= ========= =========
EARNINGS (LOSS) PER COMMON SHARE:
Basic ..................................................... $ 0.26 $ 0.04 $ 0.53 $ (0.12)
========= ========= ========= =========
Assuming Dilution ......................................... $ 0.22 $ 0.04 $ 0.36 $ (0.12)
========= ========= ========= =========
WEIGHTED AVERAGE COMMON AND COMMON EQUIVALENT
SHARES OUTSTANDING:
Basic ..................................................... 116,466 97,049 108,196 97,049
========= ========= ========= =========
Assuming dilution ......................................... 146,113 101,450 146,285 97,049
========= ========= ========= =========
</TABLE>
The accompanying notes are an integral part of
these consolidated financial statements.
4
<PAGE> 5
CHESAPEAKE ENERGY CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
------------------------
2000 1999
--------- ---------
($ IN THOUSANDS)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) ........................................................ $ 52,836 $ (3,803)
Adjustments to reconcile net income (loss) to net cash provided by
operating activities:
Depreciation, depletion and amortization ................................ 51,258 49,923
Amortization of loan costs .............................................. 1,804 1,601
Amortization of bond discount ........................................... 42 35
(Gain) loss on sale of fixed assets and other ........................... (1) 98
Equity in losses (earnings) of equity investees ......................... 131 (35)
Bad debt expense ........................................................ 256 --
Other ................................................................... (36) --
Deferred income taxes ................................................... 1,463 326
--------- ---------
Cash provided by operating activities before changes in
current assets and liabilities ..................................... 107,753 48,145
Changes in current assets and liabilities ............................... (23,883) (579)
--------- ---------
Cash provided by operating activities ................................. 83,870 47,566
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Exploration and development of oil and gas properties .................... (78,947) (79,303)
Purchases of oil and gas properties ...................................... (24,981) (6,484)
Sales of oil and gas properties .......................................... 1,368 17,387
Sales of non-oil and gas assets .......................................... 835 1,306
Additions to other property and equipment ................................ (3,390) (65)
Long-term loans made to third parties .................................... -- (511)
Long-term investments .................................................... (2,000) --
Investment in Gothic senior discount notes ............................... (22,352) --
Other .................................................................... (1,102) 325
--------- ---------
Cash used in investing activities ..................................... (130,569) (67,345)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from long-term borrowings ....................................... 113,000 14,000
Payments on long-term borrowings ......................................... (93,500) --
Purchase of treasury stock ............................................... -- (53)
Cash received from exercise of stock options ............................. 764 240
--------- ---------
Cash provided by financing activities ................................. 20,264 14,187
--------- ---------
EFFECT OF CHANGES IN EXCHANGE RATE ON CASH ................................. (204) 3,625
--------- ---------
NET DECREASE IN CASH AND CASH EQUIVALENTS .................................. (26,639) (1,967)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD ............................. 38,658 29,520
--------- ---------
CASH AND CASH EQUIVALENTS, END OF PERIOD ................................... $ 12,019 $ 27,553
========= =========
</TABLE>
The accompanying notes are an integral part of
these consolidated financial statements.
5
<PAGE> 6
CHESAPEAKE ENERGY CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------- -------------------
2000 1999 2000 1999
-------- -------- -------- --------
($ IN THOUSANDS)
<S> <C> <C> <C> <C>
Net income (loss) .................................................................... $ 31,634 $ 8,147 $ 52,836 $ (3,803)
Other comprehensive income (loss) - foreign currency translation adjustments ......... (2,475) 2,813 (2,953) 3,625
-------- -------- -------- --------
Comprehensive income (loss) .......................................................... $ 29,159 $ 10,960 $ 49,883 $ (178)
======== ======== ======== ========
</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
JUNE 30, 2000
(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. This Form 10-Q should be read in conjunction with the
Company's December 31, 1999 Form 10-K. 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 six months ended June 30, 2000 are
not necessarily indicative of the results to be expected for the full year.
This Form 10-Q relates to the three and six months ended June 30, 2000 (the
"Current Quarter" and "Current Period," respectively) and June 30, 1999 (the
"Prior Quarter" and "Prior Period," respectively).
2. LEGAL PROCEEDINGS
Bayard Securities Litigation
This putative 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.
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. Appeals of the judgment by both the Company and UPRC
are pending in the Federal Circuit Court of Appeals. The Company has appealed
the trial court's ruling denying the Company's request for attorneys' fees.
Management is unable to predict the outcome of these appeals, but believes the
invalidity of the patent will be upheld on appeal.
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 between June 1997 and January 1999 by royalty
owners seeking the cancellation of oil and gas leases in the West Panhandle
Field in Texas. The Company
7
<PAGE> 8
CHESAPEAKE ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2000
(UNAUDITED)
acquired MC Panhandle, Inc. on April 28, 1998. MC Panhandle, Inc. has owned the
leases since January 1, 1997, and the co-defendants are prior lessees.
Plaintiffs claim the leases terminated upon the cessation of production for
various periods occurring primarily during the 1960s. In addition, plaintiffs
seek to recover conversion damages, exemplary damages, attorneys' fees and
interest. Defendants assert that any cessation of production was excused and
have pled affirmative defenses of limitations, waiver, temporary estoppel,
laches and title by adverse possession. Four of the 13 cases have been tried, no
trial dates have been set for the other cases.
Of the ten cases filed in the District Court of Moore County, Texas, 69th
Judicial District, three have been tried to a jury. Judgment has been entered
against CP and its co-defendants in all three cases, although there was
initially a jury verdict in two of the cases in favor of defendants. The
Company's aggregate liability for these judgments is $1.3 million 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 and $337,000 of
attorneys' fees in the event of an appeal, sanctions, interest and court costs.
The court also quieted title to the leases in dispute in plaintiffs. CP and the
other defendants have each appealed the judgments and posted supersedeas bonds
in all of these cases. There are three related cases pending in other courts.
One was tried in the U.S. District Court, Northern District of Texas, Amarillo
Division, and resulted in a jury verdict for CP and its co-defendants. Judgment
has not yet been entered in that case.
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. NET INCOME (LOSS) 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 statements of operations for all entities with
complex capital structures. SFAS 128 requires a reconciliation of the numerator
and denominators of the basic and diluted EPS computations.
The following weighted securities were not included in the calculation of
diluted earnings per share, as the effect was antidilutive:
o In the Prior Period, options to purchase 12.8 million shares of common
stock at a weighted average exercise price of $1.77 and the assumed
conversion of the outstanding preferred stock (convertible into 33.1
million common shares) were antidilutive as a result of the Company's loss
for the period.
o For the Prior Quarter, outstanding options to purchase 2.3 million shares
of common stock at a weighted average exercise price of $5.02 were
antidilutive because the exercise prices of the options were greater than
the average market price of the Company's common stock. Additionally, the
assumed conversion of the outstanding preferred stock (convertible into
33.1 million common shares) was not included.
8
<PAGE> 9
CHESAPEAKE ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2000
(UNAUDITED)
o In the Current Quarter and the Current Period, outstanding options to
purchase 0.7 million and 1.6 million shares of common stock, respectively,
at a weighted average exercise price of $10.57 and $6.76, respectively,
were antidilutive because the exercise prices of the options were greater
than the average market price of the Company's common stock.
A reconciliation for the Current Quarter, Prior Quarter and Current Period is as
follows:
<TABLE>
<CAPTION>
INCOME SHARES PER SHARE
(NUMERATOR) (DENOMINATOR) AMOUNT
----------- ------------- ---------
FOR THE QUARTER ENDED JUNE 30, 2000: (in thousands)
<S> <C> <C> <C>
BASIC EPS
Income available to common stockholders .......... $ 30,208 116,466 $ 0.26
========
EFFECT OF DILUTIVE SECURITIES
Assumed conversion of preferred stock at
beginning of period ......................... 2,907 21,797
Gain on redemption of preferred stock .......... (1,481) --
Employee stock options ......................... -- 7,850
-------- --------
DILUTED EPS
Income available to common stockholders
and assumed conversions ....................... $ 31,634 146,113 $ 0.22
======== ======== ========
FOR THE QUARTER ENDED JUNE 30, 1999:
BASIC EPS
Income available to common stockholders ........ $ 4,121 97,049 $ 0.04
========
EFFECT OF DILUTIVE SECURITIES
Employee stock options ......................... -- 4,401
-------- --------
DILUTED EPS
Income available to common stockholders
and assumed conversions ..................... $ 4,121 101,450 $ 0.04
======== ======== ========
FOR THE SIX MONTHS ENDED JUNE 30, 2000:
BASIC EPS
Income available to common stockholders .......... $ 57,782 108,196 $ 0.53
========
EFFECT OF DILUTIVE SECURITIES
Assumed conversion of preferred stock at
beginning of period ......................... 6,949 31,158
Gain on redemption of preferred stock .......... (11,895) --
Employee stock options ......................... -- 6,931
-------- --------
DILUTED EPS
Income available to common stockholders
and assumed conversions ....................... $ 52,836 146,285 $ 0.36
======== ======== ========
</TABLE>
In the Current Quarter, the Company engaged in a number of unsolicited stock
exchange transactions with institutional investors. The Company exchanged a
total of 24.7 million shares of common stock (newly issued shares), plus a cash
payment of $8.3 million, for 2,364,363 shares of its issued and outstanding
preferred stock with a liquidation value of $118.2 million plus dividends in
arrears of $13.6 million. All preferred shares acquired in these transactions
were cancelled and retired and have the status of authorized but unissued shares
of undesignated preferred stock. A gain on redemption of the preferred shares
equal to $1.5 million was recognized as an increase to net income available to
common shareholders in the Current Quarter in determining basic earnings per
share. The gain represented the excess of (i) the liquidation value of the
preferred shares that were retired plus dividends in arrears which had reduced
prior EPS over (ii) the market value of the common stock issued, and the cash
payment made, in exchange for the preferred shares.
9
<PAGE> 10
CHESAPEAKE ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2000
(UNAUDITED)
In the Current Period, a total of 34.2 million shares of common stock, plus a
cash payment of $8.3 million, were exchanged for 3,039,363 shares of preferred
stock. These transactions reduced (i) the number of preferred shares from 4.6
million to 1.6 million, (ii) the liquidation value of the preferred stock from
$229.8 million to $77.9 million, and (iii) dividends in arrears by $16.8 million
to $9.5 million. A gain on redemption of all preferred shares exchanged through
June 30, 2000 of $11.9 million ($1.5 million related to the Current Quarter) is
reflected in net income available to common shareholders in determining basic
earnings per share.
Subsequent to June 30, 2000, the Company engaged in additional transactions in
which 8.2 million shares of common stock (newly issued shares) were exchanged
for 823,500 shares of its issued and outstanding preferred stock with a
liquidation value of $41.2 million plus dividends in arrears of $5.3 million. A
$4.8 million loss on the redemption of these preferred shares will be reflected
in net income available to common shareholders in determining earnings per share
in the third quarter.
The Company may acquire additional shares of preferred stock in the future
through negotiations with individual holders and, beginning May 1, 2001, it may
redeem outstanding shares of preferred stock for $52.45 per share plus
accumulated and unpaid dividends in cash and/or common stock.
4. SENIOR NOTES
9.625% Notes
The Company has outstanding $500 million in aggregate principal amount of 9.625%
Senior Notes which mature May 1, 2005. The 9.625% Notes 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 million in aggregate principal amount of 9.125%
Senior Notes which mature April 15, 2006. The 9.125% Notes 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.
7.875% Notes
The Company has outstanding $150 million in aggregate principal amount of 7.875%
Senior Notes which mature March 15, 2004. The 7.875% Notes 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.
8.5% Notes
The Company has outstanding $150 million in aggregate principal amount of 8.5%
Senior Notes which mature March 15, 2012. The 8.5% Notes 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.
10
<PAGE> 11
CHESAPEAKE ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2000
(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), including the payment of preferred stock dividends,
unless certain tests are met. From December 31, 1998 through March 31, 2000, the
Company was unable to meet the requirements to incur additional unsecured
indebtedness, and consequently was not able to pay cash dividends on its 7%
cumulative convertible preferred stock. The Company had accumulated dividends in
arrears of $9.5 million related to its preferred stock as of June 30, 2000. This
restriction does not affect the Company's ability to borrow under or expand its
secured commercial bank facility. The Company was unable to pay a dividend on
the preferred stock on May 1, 2000, the sixth consecutive dividend payment date
on which dividends had not been paid. As a result of the Company's failure to
pay dividends for six quarterly periods, the holders of preferred stock are
entitled to elect two new directors to the Board. Based on the Current Quarter
financial results, the Company was able to pay a dividend on the preferred stock
on August 1, 2000, although the Board of Directors did not declare a dividend
that would have been payable on that date.
Set forth below are condensed consolidating financial statements of the
Guarantor Subsidiaries, the Company's subsidiaries which are not guarantors of
the Senior Notes (the "Non-Guarantor Subsidiaries") and the Company. Separate
financial statements of each Guarantor Subsidiary have not been provided because
management has determined that they are not material to investors.
Chesapeake Energy Marketing, Inc. ("CEMI") was the only Non-Guarantor Subsidiary
for all periods presented. All of the Company's other subsidiaries were
Guarantor Subsidiaries during all periods presented.
11
<PAGE> 12
CHESAPEAKE ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
CONDENSED CONSOLIDATING BALANCE SHEET
AS OF JUNE 30, 2000
($ IN THOUSANDS)
ASSETS
<TABLE>
<CAPTION>
GUARANTOR NON-GUARANTOR COMPANY
SUBSIDIARIES SUBSIDIARIES (PARENT) ELIMINATIONS CONSOLIDATED
------------ ------------- ----------- ------------ ------------
<S> <C> <C> <C> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents ............ $ (9,048) $ 5,057 $ 20,764 $ -- $ 16,773
Accounts receivable, net ............. 68,523 29,041 -- (17,189) 80,375
Inventory ............................ 3,375 221 -- -- 3,596
Other ................................ 2,456 28 541 -- 3,025
----------- ----------- ----------- ----------- -----------
Total current assets .............. 65,306 34,347 21,305 (17,189) 103,769
----------- ----------- ----------- ----------- -----------
PROPERTY AND EQUIPMENT:
Oil and gas properties ............... 2,422,373 -- -- -- 2,422,373
Unevaluated leasehold ................ 32,146 -- -- -- 32,146
Other property and equipment ......... 29,899 20,568 19,688 -- 70,155
Less: accumulated depreciation,
depletion and amortization ......... (1,734,280) (17,974) (2,104) -- (1,754,358)
----------- ----------- ----------- ----------- -----------
Net property and equipment ........ 750,138 2,594 17,584 -- 770,316
----------- ----------- ----------- ----------- -----------
INVESTMENTS IN SUBSIDIARIES AND
INTERCOMPANY ADVANCES ................ 922,163 -- 432,912 (1,355,075) --
----------- ----------- ----------- ----------- -----------
INVESTMENT IN GOTHIC ENERGY
CORPORATION .......................... 10,000 -- 77,509 -- 87,509
----------- ----------- ----------- ----------- -----------
OTHER ASSETS ........................... 1,438 8,496 17,266 (7,812) 19,388
----------- ----------- ----------- ----------- -----------
TOTAL ASSETS ........................... $ 1,749,045 $ 45,437 $ 566,576 $(1,380,076) $ 980,982
=========== =========== =========== =========== ===========
</TABLE>
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
<TABLE>
<S> <C> <C> <C> <C> <C>
CURRENT LIABILITIES:
Notes payable and current maturities
of long-term debt .................. $ 799 $ -- $ -- $ -- $ 799
Accounts payable and other ........... 61,540 30,312 26,087 (17,315) 100,624
----------- ----------- ----------- ----------- -----------
Total current liabilities ......... 62,339 30,312 26,087 (17,315) 101,423
----------- ----------- ----------- ----------- -----------
LONG-TERM DEBT, NET .................... 64,028 -- 919,202 -- 983,230
----------- ----------- ----------- ----------- -----------
REVENUES AND ROYALTIES DUE
OTHERS ............................... 8,405 -- -- -- 8,405
----------- ----------- ----------- ----------- -----------
DEFERRED INCOME TAXES .................. 7,904 -- -- -- 7,904
----------- ----------- ----------- ----------- -----------
INTERCOMPANY PAYABLES .................. 1,473,601 (1,531) (1,472,070) -- --
----------- ----------- ----------- ----------- -----------
STOCKHOLDERS' EQUITY (DEFICIT):
Common stock ......................... 26 1 1,424 (18) 1,433
Other ................................ 132,742 16,655 1,091,933 (1,362,743) (121,413)
----------- ----------- ----------- ----------- -----------
132,768 16,656 1,093,357 (1,362,761) (119,980)
----------- ----------- ----------- ----------- -----------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY (DEFICIT) ....... $ 1,749,045 $ 45,437 $ 566,576 $(1,380,076) $ 980,982
=========== =========== =========== =========== ===========
</TABLE>
12
<PAGE> 13
CHESAPEAKE ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
CONDENSED CONSOLIDATING BALANCE SHEET
AS OF DECEMBER 31, 1999
($ IN THOUSANDS)
ASSETS
<TABLE>
<CAPTION>
GUARANTOR NON-GUARANTOR COMPANY
SUBSIDIARIES SUBSIDIARIES (PARENT) ELIMINATIONS CONSOLIDATED
------------ ------------- ----------- ------------ ------------
<S> <C> <C> <C> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents ............ $ (6,964) $ 20,409 $ 25,405 $ -- $ 38,850
Accounts receivable .................. 45,170 18,297 73 (12,475) 51,065
Inventory ............................ 4,183 399 -- -- 4,582
Other ................................ 1,997 700 352 -- 3,049
----------- ----------- ----------- ----------- -----------
Total current assets ......... 44,386 39,805 25,830 (12,475) 97,546
----------- ----------- ----------- ----------- -----------
PROPERTY AND EQUIPMENT:
Oil and gas properties ............... 2,311,633 3,715 -- -- 2,315,348
Unevaluated leasehold ................ 40,008 -- -- -- 40,008
Other property and equipment ......... 29,088 20,521 18,103 -- 67,712
Less: accumulated depreciation,
depletion and amortization ........ (1,683,890) (18,205) (1,876) -- (1,703,971)
----------- ----------- ----------- ----------- -----------
Net property and equipment ... 696,839 6,031 16,227 -- 719,097
----------- ----------- ----------- ----------- -----------
INVESTMENTS IN SUBSIDIARIES AND
INTERCOMPANY ADVANCES ................ 806,180 -- 493,738 (1,299,918) --
----------- ----------- ----------- ----------- -----------
INVESTMENT IN GOTHIC ENERGY
CORPORATION .......................... 10,000 -- -- -- 10,000
OTHER ASSETS ........................... 6,402 8,409 16,765 (7,686) 23,890
----------- ----------- ----------- ----------- -----------
TOTAL ASSETS ........................... $ 1,563,807 $ 54,245 $ 552,560 $(1,320,079) $ 850,533
=========== =========== =========== =========== ===========
</TABLE>
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
<TABLE>
<S> <C> <C> <C> <C> <C>
CURRENT LIABILITIES:
Notes payable and current
maturities of long-term debt ...... $ -- $ 763 $ -- $ -- $ 763
Accounts payable and other ........... 63,194 19,265 17,466 (12,502) 87,423
----------- ----------- ----------- ----------- -----------
Total current liabilities .... 63,194 20,028 17,466 (12,502) 88,186
----------- ----------- ----------- ----------- -----------
LONG-TERM DEBT, NET .................... 43,500 1,437 919,160 -- 964,097
----------- ----------- ----------- ----------- -----------
REVENUES AND ROYALTIES DUE
OTHERS ............................... 9,310 -- -- -- 9,310
----------- ----------- ----------- ----------- -----------
DEFERRED INCOME TAXES .................. 6,484 -- -- -- 6,484
----------- ----------- ----------- ----------- -----------
INTERCOMPANY PAYABLES .................. 1,356,466 (2,450) (1,354,043) 27 --
----------- ----------- ----------- ----------- -----------
STOCKHOLDERS' EQUITY (DEFICIT):
Common stock ......................... 27 1 1,048 (17) 1,059
Other ................................ 84,826 35,229 968,929 (1,307,587) (218,603)
----------- ----------- ----------- ----------- -----------
84,853 35,230 969,977 (1,307,604) (217,544)
----------- ----------- ----------- ----------- -----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY
(DEFICIT) .............................. $ 1,563,807 $ 54,245 $ 552,560 $(1,320,079) $ 850,533
=========== =========== =========== =========== ===========
</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 THREE MONTHS ENDED JUNE 30, 2000
REVENUES:
Oil and gas sales .............................. $ 100,221 $ -- $ -- $ -- $ 100,221
Oil and gas marketing sales .................... -- 79,973 -- (45,731) 34,242
--------- --------- --------- --------- ---------
Total revenues .............................. 100,221 79,973 -- (45,731) 134,463
--------- --------- --------- --------- ---------
OPERATING COSTS:
Production expenses and taxes .................. 18,298 -- -- -- 18,298
General and administrative ..................... 2,841 299 48 -- 3,188
Oil and gas marketing expenses ................. -- 78,853 -- (45,731) 33,122
Oil and gas depreciation, depletion
and amortization ............................. 24,876 1 -- -- 24,877
Other depreciation and amortization ............ 1,008 20 808 -- 1,836
--------- --------- --------- --------- ---------
Total operating costs ....................... 47,023 79,173 856 (45,731) 81,321
--------- --------- --------- --------- ---------
INCOME (LOSS) FROM OPERATIONS .................... 53,198 800 (856) -- 53,142
--------- --------- --------- --------- ---------
OTHER INCOME (EXPENSE):
Interest and other income ...................... 1,165 467 20,945 (20,910) 1,667
Interest expense ............................... (21,484) -- (21,239) 20,910 (21,813)
--------- --------- --------- --------- ---------
(20,319) 467 (294) -- (20,146)
--------- --------- --------- --------- ---------
INCOME (LOSS) BEFORE INCOME TAXES ................ 32,879 1,267 (1,150) -- 32,996
INCOME TAX EXPENSE ............................... 1,362 -- -- -- 1,362
--------- --------- --------- --------- ---------
NET INCOME (LOSS) ................................ $ 31,517 $ 1,267 $ (1,150) $ -- $ 31,634
========= ========= ========= ========= =========
FOR THE THREE MONTHS ENDED JUNE 30, 1999
REVENUES:
Oil and gas sales .............................. $ 68,272 $ -- $ -- $ -- $ 68,272
Oil and gas marketing sales .................... -- 38,420 -- (25,800) 12,620
--------- --------- --------- --------- ---------
Total revenues .............................. 68,272 38,420 -- (25,800) 80,892
--------- --------- --------- --------- ---------
OPERATING COSTS:
Production expenses and taxes .................. 13,981 -- -- -- 13,981
General and administrative ..................... 2,942 324 2 -- 3,268
Oil and gas marketing expenses ................. -- 37,473 -- (25,800) 11,673
Oil and gas depreciation, depletion
and amortization ............................. 24,233 -- -- -- 24,233
Other depreciation and amortization ............ 1,138 20 814 -- 1,972
--------- --------- --------- --------- ---------
Total operating costs ....................... 42,294 37,817 816 (25,800) 55,127
--------- --------- --------- --------- ---------
INCOME (LOSS) FROM OPERATIONS .................... 25,978 603 (816) -- 25,765
--------- --------- --------- --------- ---------
OTHER INCOME (EXPENSE):
Interest and other income ...................... 440 2,408 29,188 (29,069) 2,967
Interest expense ............................... (29,009) -- (20,319) 29,069 (20,259)
--------- --------- --------- --------- ---------
(28,569) 2,408 8,869 -- (17,292)
--------- --------- --------- --------- ---------
INCOME (LOSS) BEFORE INCOME TAXES ................ (2,591) 3,011 8,053 -- 8,473
INCOME TAX EXPENSE ............................... 326 -- -- -- 326
--------- --------- --------- --------- ---------
NET INCOME (LOSS) ................................ $ (2,917) $ 3,011 $ 8,053 $ -- $ 8,147
========= ========= ========= ========= =========
</TABLE>
14
<PAGE> 15
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 SIX MONTHS ENDED JUNE 30, 2000
REVENUES:
Oil and gas sales .............................. $ 187,167 $ 347 $ -- $ -- $ 187,514
Oil and gas marketing sales .................... -- 149,098 -- (87,488) 61,610
--------- --------- --------- --------- ---------
Total revenues .............................. 187,167 149,445 -- (87,488) 249,124
--------- --------- --------- --------- ---------
OPERATING COSTS:
Production expenses and taxes .................. 35,979 80 -- -- 36,059
General and administrative ..................... 5,561 590 69 -- 6,220
Oil and gas marketing expenses ................. -- 147,154 -- (87,488) 59,666
Oil and gas depreciation, depletion
and amortization ............................. 49,259 101 -- -- 49,360
Other depreciation and amortization ............ 2,034 40 1,628 -- 3,702
--------- --------- --------- --------- ---------
Total operating costs ....................... 92,833 147,965 1,697 (87,488) 155,007
--------- --------- --------- --------- ---------
INCOME (LOSS) FROM OPERATIONS .................... 94,334 1,480 (1,697) -- 94,117
--------- --------- --------- --------- ---------
OTHER INCOME (EXPENSE):
Interest and other income ...................... 1,963 803 41,912 (41,819) 2,859
Interest expense ............................... (42,439) (34) (42,023) 41,819 (42,677)
--------- --------- --------- --------- ---------
(40,476) 769 (111) -- (39,818)
--------- --------- --------- --------- ---------
INCOME (LOSS) BEFORE INCOME TAXES ................ 53,858 2,249 (1,808) -- 54,299
INCOME TAX EXPENSE ............................... 1,463 -- -- -- 1,463
--------- --------- --------- --------- ---------
NET INCOME (LOSS) ................................ $ 52,395 $ 2,249 $ (1,808) $ -- $ 52,836
========= ========= ========= ========= =========
FOR THE SIX MONTHS ENDED JUNE 30, 1999
REVENUES:
Oil and gas sales .............................. $ 120,078 $ -- $ -- $ -- $ 120,078
Oil and gas marketing sales .................... -- 73,258 -- (46,767) 26,491
--------- --------- --------- --------- ---------
Total revenues .............................. 120,078 73,258 -- (46,767) 146,569
--------- --------- --------- --------- ---------
OPERATING COSTS:
Production expenses and taxes .................. 29,963 -- -- -- 29,963
General and administrative ..................... 6,464 781 47 -- 7,292
Oil and gas marketing expenses ................. -- 71,725 -- (46,767) 24,958
Oil and gas depreciation, depletion
and amortization ............................. 47,386 -- -- -- 47,386
Other depreciation and amortization ............ 2,476 40 1,622 -- 4,138
--------- --------- --------- --------- ---------
Total operating costs ....................... 86,289 72,546 1,669 (46,767) 113,737
--------- --------- --------- --------- ---------
INCOME (LOSS) FROM OPERATIONS .................... 33,789 712 (1,669) -- 32,832
--------- --------- --------- --------- ---------
OTHER INCOME (EXPENSE):
Interest and other income ...................... 707 2,845 58,328 (58,040) 3,840
Interest expense ............................... (57,415) -- (40,774) 58,040 (40,149)
--------- --------- --------- --------- ---------
(56,708) 2,845 17,554 -- (36,309)
--------- --------- --------- --------- ---------
INCOME (LOSS) BEFORE INCOME TAXES ................ (22,919) 3,557 15,885 -- (3,477)
INCOME TAX EXPENSE ............................... 326 -- -- -- 326
--------- --------- --------- --------- ---------
NET INCOME (LOSS) ................................ $ (23,245) $ 3,557 $ 15,885 $ -- $ (3,803)
========= ========= ========= ========= =========
</TABLE>
15
<PAGE> 16
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 SIX MONTHS ENDED JUNE 30, 2000
CASH FLOWS FROM OPERATING ACTIVITIES .................. $ 88,395 $ (4,753) $ 228 $ -- $ 83,870
--------- --------- --------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Oil and gas properties .............................. (104,075) 1,515 -- -- (102,560)
Proceeds from sale of assets ........................ 835 -- -- -- 835
Investment in Gothic senior discount notes .......... -- (22,352) -- -- (22,352)
Other investments ................................... -- -- (2,000) -- (2,000)
Other additions ..................................... (2,570) (46) (1,876) -- (4,492)
--------- --------- --------- --------- ---------
(105,810) (20,883) (3,876) -- (130,569)
--------- --------- --------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from borrowings ............................ 113,000 -- -- -- 113,000
Payments on borrowings .............................. (93,500) -- -- -- (93,500)
Cash received from exercise of stock options ........ -- -- 764 -- 764
Intercompany advances, net .......................... (8,527) 10,284 (1,757) -- --
--------- --------- --------- --------- ---------
10,973 10,284 (993) -- 20,264
--------- --------- --------- --------- ---------
EFFECT OF EXCHANGE RATE CHANGES
ON CASH ............................................. (204) -- -- -- (204)
--------- --------- --------- --------- ---------
Net increase (decrease) in cash ..................... (6,646) (15,352) (4,641) -- (26,639)
Cash, beginning of period ........................... (7,156) 20,409 25,405 -- 38,658
--------- --------- --------- --------- ---------
Cash, end of period ................................. $ (13,802) $ 5,057 $ 20,764 $ -- $ 12,019
========= ========= ========= ========= =========
FOR THE SIX MONTHS ENDED JUNE 30, 1999
CASH FLOWS FROM OPERATING ACTIVITIES .................. $ 22,128 $ 8,119 $ 17,319 $ -- $ 47,566
--------- --------- --------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Oil and gas properties .............................. (68,400) -- -- -- (68,400)
Proceeds from sale of other assets .................. 1,306 -- -- -- 1,306
Other additions ..................................... 427 308 (986) -- (251)
--------- --------- --------- --------- ---------
(66,667) 308 (986) -- (67,345)
--------- --------- --------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from borrowings ............................ 14,000 -- -- -- 14,000
Cash paid for purchase of treasury stock ............ -- (53) -- -- (53)
Cash received from exercise of stock options ........ -- -- 240 -- 240
Intercompany advances, net .......................... 33,665 2,217 (35,882) -- --
--------- --------- --------- --------- ---------
47,665 2,164 (35,642) -- 14,187
--------- --------- --------- --------- ---------
EFFECT OF EXCHANGE RATE CHANGES
ON CASH ............................................. 3,625 -- -- -- 3,625
--------- --------- --------- --------- ---------
Net increase (decrease) in cash ..................... 6,751 10,591 (19,309) -- (1,967)
Cash, beginning of period ........................... (17,319) 7,000 39,839 -- 29,520
--------- --------- --------- --------- ---------
Cash, end of period ................................. $ (10,568) $ 17,591 $ 20,530 $ -- $ 27,553
========= ========= ========= ========= =========
</TABLE>
16
<PAGE> 17
CHESAPEAKE ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
CONDENSED CONSOLIDATING STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
($ IN THOUSANDS)
<TABLE>
<CAPTION>
GUARANTOR NON-GUARANTOR COMPANY
SUBSIDIARIES SUBSIDIARIES (PARENT) ELIMINATIONS CONSOLIDATED
------------ ------------- --------- ------------ ------------
<S> <C> <C> <C> <C> <C>
FOR THE THREE MONTHS ENDED JUNE 30, 2000:
Net income (loss) .............................. $ 31,517 $ 1,267 $ (1,150) $ -- $ 31,634
Other comprehensive income (loss) -
foreign currency translation ................. (2,475) -- -- -- (2,475)
--------- --------- --------- --------- ---------
Comprehensive income ........................... $ 29,042 $ 1,267 $ (1,150) $ -- $ 29,159
========= ========= ========= ========= =========
FOR THE THREE MONTHS ENDED JUNE 30, 1999:
Net income (loss) .............................. $ (2,917) $ 3,011 $ 8,053 $ -- $ 8,147
Other comprehensive income (loss) -
foreign currency translation ................. 2,813 -- -- -- 2,813
--------- --------- --------- --------- ---------
Comprehensive income (loss) .................... $ (104) $ 3,011 $ 8,053 $ -- $ 10,960
========= ========= ========= ========= =========
FOR THE SIX MONTHS ENDED JUNE 30, 2000:
Net income (loss) .............................. $ 52,395 $ 2,249 $ (1,808) $ -- $ 52,836
Other comprehensive income (loss) -
foreign currency translation ................. (2,953) -- -- -- (2,953)
--------- --------- --------- --------- ---------
Comprehensive income ........................... $ 49,442 $ 2,249 $ (1,808) $ -- $ 49,883
========= ========= ========= ========= =========
FOR THE SIX MONTHS ENDED JUNE 30, 1999:
Net income (loss) .............................. $ (23,245) $ 3,557 $ 15,885 $ -- $ (3,803)
Other comprehensive income (loss) -
foreign currency translation ................. 3,625 -- -- -- 3,625
--------- --------- --------- --------- ---------
Comprehensive income (loss) .................... $ (19,620) $ 3,557 $ 15,885 $ -- $ (178)
========= ========= ========= ========= =========
</TABLE>
17
<PAGE> 18
CHESAPEAKE ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
5. INVESTMENT IN GOTHIC ENERGY CORPORATION ("GOTHIC")
On June 27, 2000, CEMI purchased in a series of private transactions 96% of
Gothic's $104 million of 14.125% Series B Senior Secured Discount Notes for
consideration of $77.5 million, comprised of $22.4 million in cash and $55.2
million of Chesapeake common stock (9,468,985 shares valued at $5.825 per
share), subject to adjustment. The acquired discount notes accrete at a rate per
annum of 14.125%, compounded semi-annually to an aggregate principal amount of
$99.7 million at May 1, 2002. Thereafter, the discount notes accrue interest at
the rate of 14.125% per annum, payable in cash semi-annually in arrears on May 1
and November 1 of each year commencing November 1, 2002. The discount notes
mature on May 1, 2006.
On June 30, 2000, the Company entered into a letter of intent to acquire the
common stock of Gothic for 4.0 million shares of Chesapeake common stock. Upon
the closing of the transaction, Gothic's shareholders will own approximately
2.7% of Chesapeake's common stock. The total acquisition cost to Chesapeake will
be approximately $345 million, including $235 million of Senior Secured Notes
issued by Gothic's operating subsidiary. The Gothic acquisition is subject to
the completion of definitive documentation and approval by Gothic's
shareholders. Completion of the transaction is expected by year-end 2000.
Also included in the Company's investment in Gothic is the Company's April 1998
investment in Gothic's 12% Preferred Stock with a carrying value of $10.0
million.
6. REVOLVING CREDIT FACILITY
At June 30, 2000, the Company had a $75 million revolving bank credit facility,
maturing in July 2002, with a committed borrowing base of $75 million. As of
June 30, 2000, the Company had borrowed $63.0 million under this facility.
Borrowings under the facility are secured by certain producing oil and gas
properties and bear interest at variable rates, which averaged 10.0% per annum
as of June 30, 2000. On August 1, 2000, the revolving bank credit facility and
the borrowing base were increased to $100 million.
7. 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
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 and FAS 138) 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 (i) whether the derivative is designated and qualifies as a
hedge, and (ii) 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 that its commodity derivatives will be
designated as hedges in accordance with the relevant accounting criteria.
18
<PAGE> 19
PART I. FINANCIAL INFORMATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
RESULTS OF OPERATIONS
Three Months Ended June 30, 2000 vs. June 30, 1999
General. For the three months ended June 30, 2000 (the "Current Quarter"), the
Company realized net income of $31.6 million, or $0.22 per diluted common share.
This compares to net income of $8.1 million, or $0.04 per diluted common share,
in the three months ended June 30, 1999 (the "Prior Quarter").
Oil and Gas Sales. During the Current Quarter, oil and gas sales increased 47%
to $100.2 million from $68.3 million in the Prior Quarter. For the Current
Quarter, the Company produced 34.1 billion cubic feet equivalent ("bcfe"),
consisting of 0.8 million barrels of oil ("mmbo") and 29.3 billion cubic feet of
natural gas ("bcf"), compared to 1.1 mmbo and 27.0 bcf, or 33.6 bcfe, in the
Prior Quarter. Average oil prices realized were $24.46 per barrel of oil ("bo")
in the Current Quarter compared to $16.01 per bo in the Prior Quarter, an
increase of 53%. Average gas prices realized were $2.76 per thousand cubic feet
("mcf") in the Current Quarter compared to $1.88 per mcf in the Prior Quarter,
an increase of 47%.
For the Current Quarter, the Company realized an average price of $2.94 per
thousand cubic feet equivalent ("mcfe"), compared to $2.03 per mcfe in the Prior
Quarter. The Company's hedging activities resulted in decreased oil and gas
revenues of $11.0 million, or $0.32 per mcfe, in the Current Quarter, compared
to increased oil and gas revenues of $2.9 million, or $0.09 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 JUNE 30,
--------------------------------------------
2000 1999
------------------- -------------------
OPERATING AREAS MMCFE PERCENT MMCFE PERCENT
--------------- ------- ------- ------- -------
<S> <C> <C> <C> <C>
Mid-Continent ...... 19,265 57% 17,520 52%
Gulf Coast ......... 8,650 25 10,683 32
Canada ............. 3,579 10 3,134 9
Other Areas ........ 2,591 8 2,229 7
------- ------- ------- -------
Total ......... 34,085 100% 33,566 100%
======= ======= ======= =======
</TABLE>
Natural gas production represented approximately 86% of the Company's total
production volume on an equivalent basis in the Current Quarter, compared to 81%
in the Prior Quarter.
Oil and Gas Marketing Sales. The Company realized $34.2 million in oil and gas
marketing sales to third parties in the Current Quarter, with corresponding oil
and gas marketing expenses of $33.1 million, for a margin of $1.1 million. This
compares to sales of $12.6 million, expenses of $11.7 million, and a margin of
$0.9 million in the Prior Quarter. The increase in marketing sales and cost of
sales was due primarily to higher oil and gas prices in the Current Quarter as
compared to the Prior Quarter and the Company's initial marketing of oil which
began in June 1999.
Production Expenses. Production expenses increased to $12.6 million in the
Current Quarter, a $1.4 million increase from the $11.2 million of production
expenses incurred in the Prior Quarter. On a unit of production basis,
production expenses were $0.37 and $0.33 per mcfe in the Current and Prior
Quarters, respectively. The Company anticipates production expenses will not
vary significantly from current levels during the remainder of 2000.
Production Taxes. Production taxes, which consist primarily of wellhead
severance taxes, were $5.7 million and $2.8 million in the Current and Prior
Quarters, respectively. On a per unit basis, production taxes were $0.17 per
mcfe in the Current Quarter compared to $0.08 per mcfe in the Prior Quarter. The
increase in the Current Quarter is
19
<PAGE> 20
due to higher oil and gas prices. In general, production taxes are calculated
using value-based formulas that produce higher per unit costs when oil and gas
prices are higher.
Oil and Gas Depreciation, Depletion and Amortization. Depreciation, depletion
and amortization of oil and gas properties ("DD&A") for the Current Quarter was
$24.9 million, compared to $24.2 million in the Prior Quarter. The DD&A rate per
mcfe increased from $0.72 in the Prior Quarter to $0.73 in the Current Quarter.
The Company expects the DD&A rate will increase moderately from current levels
during the remainder of 2000 and is expected to increase further upon the
completion of the Gothic acquisition.
Depreciation and Amortization of Other Assets. Depreciation and amortization of
other assets ("D&A") was $1.8 million in the Current Quarter compared to $2.0
million in the Prior Quarter. The Company anticipates D&A will continue at
current levels during the remainder of 2000.
General and Administrative. General and administrative expenses ("G&A"), which
are net of capitalized internal payroll and non-payroll expenses, were $3.2
million in the Current Quarter compared to $3.3 million in the Prior Quarter.
The Company capitalized $1.5 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 increase in
capitalized internal costs is primarily due to the addition of technical
employees and other related costs. The Company anticipates that G&A costs during
the remainder of 2000 will remain at approximately the same level as the Current
Quarter.
Interest and Other Income. Interest and other income for the Current Quarter was
$1.7 million compared to $3.0 million in the Prior Quarter. The decrease is due
primarily to a $1.5 million gain on the sale of certain marketing assets located
in the Mid-Continent in the Prior Quarter.
Interest Expense. Interest expense increased to $21.8 million in the Current
Quarter from $20.3 million in the Prior Quarter as a result of lower capitalized
interest and higher amounts of indebtedness. In addition to the interest expense
reported, the Company capitalized $0.6 million of interest during the Current
Quarter compared to $1.0 million capitalized in the Prior Quarter.
Provision for Income Taxes. The Company recorded income tax expense of $1.4
million for the Current Quarter and $0.3 million in the Prior Quarter. The
income tax expense recorded in both the Current Quarter and Prior Quarter is
related to the Company's Canadian operations. At June 30, 2000, the Company had
a U.S. net operating loss carryforward of approximately $640 million for regular
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 the deferred income tax assets, comprised primarily of the
U.S. net operating loss carryforwards, will be realized in future years, and
therefore a valuation allowance of $424.3 million has been recorded. However,
management continues to evaluate the deferred tax assets. If oil and gas prices
as well as improvements in the Company's operating performance continue to
strengthen and stabilize in future periods, all or a portion of the valuation
allowance may be reversed.
Six Months Ended June 30, 2000 vs. June 30, 1999
General. For the six months ended June 30, 2000 (the "Current Period"), the
Company realized net income of $52.8 million, or $0.36 per diluted common share.
This compares to a net loss of $3.8 million, or a net loss of $0.12 per diluted
common share after deducting preferred dividends of $8.1 million, in the six
months ended June 30, 1999 (the "Prior Period").
Oil and Gas Sales. During the Current Period, oil and gas sales increased to
$187.5 million from $120.1 million, an increase of $67.4 million, or 56%. For
the Current Period, the Company produced 1.7 mmbo and 58.1 bcf, compared to 2.4
mmbo and 52.7 bcf in the Prior Period. Average oil prices realized were $24.52
per barrel in the Current Period compared to $13.27 per barrel in the Prior
Period, an increase of 85%. Average gas prices realized were $2.53 per mcf in
the Current Period compared to $1.68 per mcf in the Prior Period, an increase of
51%.
20
<PAGE> 21
For the Current Period, the Company realized an average price of $2.76 per mcfe,
compared to $1.80 per mcfe in the Prior Period. The Company's hedging activities
resulted in decreased oil and gas revenues of $13.2 million, or $0.19 per mcfe,
in the Current Period, compared to increased oil and gas revenues of $3.2
million 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 SIX MONTHS ENDED JUNE 30,
------------------------------------------------
2000 1999
--------------------- ---------------------
OPERATING AREAS MMCFE PERCENT MMCFE PERCENT
--------------- -------- -------- -------- --------
<S> <C> <C> <C> <C>
Mid-Continent ...... 38,294 56% 33,828 51%
Gulf Coast ......... 18,832 28 22,086 33
Canada ............. 6,504 10 5,564 8
Other areas ........ 4,386 6 5,400 8
-------- -------- -------- --------
Total ......... 68,016 100% 66,878 100%
======== ======== ======== ========
</TABLE>
Natural gas production represented approximately 85% of the Company's total
production volume on an equivalent basis in the Current Period, compared to 79%
in the Prior Period.
Oil and Gas Marketing Sales. The Company realized $61.6 million in oil and gas
marketing sales to third parties in the Current Period, with corresponding oil
and gas marketing expenses of $59.7 million for a margin of $1.9 million. This
compares to sales of $26.5 million and expenses of $25.0 million in the Prior
Period for a margin of $1.5 million. The increase in marketing sales and cost of
sales was due primarily to higher oil and gas prices in the Current Period as
compared to the Prior Period and the Company's initial marketing of oil which
began in June 1999.
Production Expenses. Production expenses decreased to $25.1 million in the
Current Period, a $0.1 million decrease from $25.2 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. Production taxes, which consist primarily of wellhead
severance taxes, were $10.9 million and $4.8 million in the Current and Prior
Periods, respectively. This increase was the result of increased natural gas
production and higher oil and gas prices. On a per unit basis, production taxes
were $0.16 per mcfe in the Current Period compared to $0.07 per mcfe in the
Prior Period.
Oil and Gas Depreciation, Depletion and Amortization. DD&A for the Current
Period was $49.4 million, compared to $47.4 million in the Prior Period. This
increase was caused by increased production as well as an increase in the DD&A
rate per mcfe from $0.71 to $0.73 in the Prior and Current Periods,
respectively.
Depreciation and Amortization of Other Assets. D&A decreased to $3.7 million in
the Current Period compared to $4.1 million in the Prior Period.
General and Administrative. G&A, which is net of capitalized internal payroll
and non-payroll expenses, was $6.2 million in the Current Period compared to
$7.3 million in the Prior Period. This decrease was primarily due to cost
efficiencies that were generated throughout 1999 and an increase in capitalized
internal costs between periods. The Company capitalized $3.4 million of internal
costs in the Current Period directly related to the Company's oil and gas
exploration and development efforts, compared to $2.0 million in the Prior
Period. The increase in capitalized internal costs is primarily due to the
addition of technical employees and other related costs.
Interest and Other Income. Interest and other income for the Current Period was
$2.9 million compared to $3.8 million in the Prior Period. This decrease is due
primarily to a $1.5 million gain on the sale of certain marketing assets located
in the Mid-Continent in the Prior Period.
21
<PAGE> 22
Interest. Interest expense increased to $42.7 million in the Current Period from
$40.1 million in the Prior Period as a result of lower capitalized interest and
higher amounts of indebtedness. The Company capitalized $1.3 million of interest
during the Current Period compared to $2.2 million capitalized in the Prior
Period.
Provision for Income Taxes. The Company recorded income tax expense of $1.5
million for the Current Period, compared to $0.3 million in the Prior Period.
The income tax expense in both Periods is entirely related to the Company's
operations in Canada. 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 $424.3
million has been recorded. However, management continues to evaluate the
deferred tax assets. If oil and gas prices as well as improvements in the
Company's operating performance continue to strengthen and stabilize in future
periods, all or a portion of the valuation allowance may be reversed.
RISK MANAGEMENT ACTIVITIES
See Item 3 - "Quantitative and Qualitative Disclosures About Market Risks."
LIQUIDITY AND CAPITAL RESOURCES
The Company had working capital of $2.3 million at June 30, 2000 and a cash
balance (including restricted cash) of $16.8 million. The Company has a $100
million revolving bank credit facility, which matures in July 2002, with a
committed borrowing base of $100 million. As of June 30, 2000, the Company had
borrowed $63.0 million under this facility. Borrowings under the facility are
secured by certain producing oil and gas properties and bear interest at
variable rates, which averaged 10.0% per annum as of June 30, 2000. On August 1,
2000, the borrowing base increased to $100 million from $75 million.
On June 27, 2000, CEMI purchased in a series of private transactions 96% of
Gothic's $104 million of 14.125% Series B Senior Secured Discount Notes for
consideration of $77.5 million, comprised of $22.4 million in cash and $55.2
million of Chesapeake common stock (9,468,985 shares valued at $5.825 per
share), subject to adjustment. The discount notes accrete at a rate per annum of
14.125%, compounded semi-annually to an aggregate principal amount of $99.7
million at May 1, 2002. Thereafter, the discount notes accrue interest at the
rate of 14.125% per annum, payable in cash semi-annually in arrears on May 1 and
November 1 of each year commencing November 1, 2002. The discount notes mature
on May 1, 2006.
On June 30, 2000, the Company entered into a letter of intent to acquire the
common stock of Gothic for 4.0 million shares of Chesapeake common stock. Upon
the closing of the transaction, Gothic's shareholders will own approximately
2.7% of Chesapeake's common stock. The total acquisition cost to Chesapeake will
be approximately $345 million, including $235 million of Senior Secured Notes
issued by Gothic's operating subsidiary. The Gothic acquisition is subject to
the completion of definitive documentation and approval by Gothic's
shareholders. Completion of the transaction is expected by year-end 2000.
At June 30, 2000, the Company's senior notes represented $919.2 million of its
$999.5 million of long-term liabilities. Debt ratings for the senior notes are
B2 by Moody's Investors Service and B by Standard & Poor's Corporation as of
August 1, 2000. On July 5, 2000, Standard & Poor's Corporation placed its
ratings on the Company on credit watch with positive implications. There are no
scheduled principal payments required on any of the senior notes until March
2004, when $150 million is due.
The senior note indentures restrict the ability of the Company and its
restricted subsidiaries to incur additional indebtedness. This restriction does
not affect the Company's ability to borrow under or expand its secured
commercial bank facility. As of June 30, 2000, the Company estimates that
secured commercial bank indebtedness of $152.2 million could have been incurred
under the indentures. The indenture restrictions do not apply to borrowings
incurred by CEMI, an unrestricted subsidiary.
22
<PAGE> 23
The senior note indentures also limit the Company's ability to make restricted
payments (as defined), including the payment of preferred stock dividends,
unless certain tests are met. From December 31, 1998 through March 31, 2000, the
Company was unable to meet the requirements to incur additional unsecured
indebtedness, and consequently was not able to pay cash dividends on its 7%
cumulative convertible preferred stock. The Company had accumulated dividends in
arrears of $9.5 million related to its preferred stock as of June 30, 2000. The
Company was unable to pay a dividend on the preferred stock on May 1, 2000, the
sixth consecutive dividend payment date on which dividends had not been paid. As
a result of the Company's failure to pay dividends for six quarterly periods,
the holders of preferred stock are entitled to elect two new directors to the
Board. Based on the Current Quarter financial results, the Company was able to
pay a dividend on the preferred stock on August 1, 2000, although the Board of
Directors did not declare a dividend that would have been payable on that date.
In the Current Quarter, the Company engaged in unsolicited transactions in which
a total of 24.7 million shares of common stock (newly issued shares), plus a
cash payment of $8.3 million, were exchanged for 2,364,363 shares of its issued
and outstanding preferred stock with a liquidation value of $118.2 million plus
dividends in arrears of $13.6 million. A total of 34.2 million shares of common
stock, plus a cash payment of $8.3 million, have been exchanged for 3,039,363
shares of preferred stock during the Current Period. These transactions have
reduced (i) the number of preferred shares from 4.6 million to 1.6 million, (ii)
the liquidation value of the preferred stock from $229.8 million to $77.9
million, and (iii) dividends in arrears by $16.8 million to $9.5 million. A gain
on redemption of all preferred shares exchanged through June 30, 2000 of $11.9
million ($1.5 million related to the Current Quarter) is reflected in net income
available to common shareholders in determining basic earnings per share.
Subsequent to June 30, 2000, the Company engaged in additional transactions in
which 8.2 million shares of common stock (newly issued shares) were exchanged
for 823,500 shares of its issued and outstanding preferred stock with a
liquidation value of $41.2 million plus dividends in arrears of $5.3 million. A
$4.8 million loss on the redemption of these preferred shares will be reflected
in net income available to common shareholders in determining earnings per share
in the third quarter.
The Company believes it has adequate resources, including cash on hand and
budgeted cash flow from operations, to fund its capital expenditure budget for
exploration and development activities during 2000, which are currently
estimated to be approximately $160 million. However, low oil and gas prices or
unfavorable drilling results could cause the Company to reduce its drilling
program, which is largely discretionary. Based on current oil and gas prices,
the Company expects to generate excess cash flow that will be available to fund
acquisitions, reduce debt, make preferred stock dividend payments, acquire
Gothic debt securities or a combination of the above.
If the Gothic merger is completed, the holders of $235 million principal amount
of 11.125% Senior Secured Notes issued by Gothic's operating subsidiary will
have the right, but not the obligation, to require the Company to redeem the
Senior Secured Notes at a purchase price equal to 101% of the principal amount
of the Senior Secured Notes, plus accrued and unpaid interest to the date of
repurchase.
The Company's cash provided by operating activities increased 76% to $83.9
million during the Current Period compared to $47.6 million during the Prior
Period. The increase was due primarily to higher oil and gas prices realized
during the Current Period.
Cash used in investing activities increased to $130.6 million during the Current
Period from $67.3 million in the Prior Period. During the Current Period the
Company expended approximately $68.3 million to initiate drilling on 66 gross
(35.6 net) wells and invested approximately $10.6 million in leasehold
acquisitions. This compares to $68.3 million to initiate drilling on 80 gross
(48.9 net) wells and $11.1 million to purchase leasehold in the Prior
23
<PAGE> 24
Period. During the Current Period, the Company had acquisitions of oil and gas
properties of $25.0 million, divestitures of oil and gas properties of $1.4
million, and a cash payment of $22.4 million related to the acquisition of the
Gothic Discount Notes. This compares to acquisitions of $6.5 million and
divestitures of $17.4 million in the Prior Period.
There was $20.3 million of cash provided by financing activities in the Current
Period, compared to $14.2 million in the Prior Period. The activity in the
Current Period and the Prior Period reflects the net increase in borrowings
under the Company's commercial bank credit facility of $19.5 million and $14.0
million in the Current and Prior Periods, respectively, and cash received
through the exercise of stock options.
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
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 and FAS 138) 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 (i) whether the derivative is designated and qualifies as a
hedge, and (ii) 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 that its commodity derivatives will be
designated as hedges in accordance with the relevant accounting criteria.
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. Forward-looking statements include 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 and
preferred stock dividend payments, realization of deferred tax assets, the
proposed acquisition of Gothic and the combined entity's financial operations.
Although the Company believes that the expectations reflected in these and other
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 period ended December 31, 1999, are substantial indebtedness,
impairment of asset value, need to replace reserves, substantial capital
requirements, 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, operating risks,
restrictions imposed by lenders, the effects of governmental and environmental
regulation, pending litigation, importance of our CEO and COO to Company
operations and shareholder votes and conflicts of interest they may have, and
uncertainties related to the business combination with Gothic. Readers are
cautioned not to place undue reliance on these forward-looking statements, which
speak only as of the date this report is filed, and the Company undertakes no
obligation to update this information.
24
<PAGE> 25
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS
COMMODITY PRICE RISK
The Company's results of operations are highly dependent upon the prices
received for oil and natural gas production.
COMMODITY HEDGING ACTIVITIES
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 commodity 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 commodity hedging transactions related to the Company's oil and gas
production volumes or CEMI's physical purchase or sale commitments. Gains or
losses on crude oil and natural gas hedging transactions are recognized as price
adjustments in the months of related production.
As of June 30, 2000, the Company had the following open natural gas swap
arrangements designed to hedge a portion of the Company's domestic gas
production for periods after June 2000:
<TABLE>
<CAPTION>
NYMEX-INDEX
VOLUME STRIKE PRICE
MONTHS (MMBTU) (PER MMBTU)
------ ------------- -------------
<S> <C> <C>
July 2000 .......... 2,790,000 3.03
August 2000 ........ 2,790,000 3.03
September 2000 ..... 2,100,000 3.07
October 2000 ....... 1,240,000 2.55
</TABLE>
If the swap arrangements listed above had been settled on June 30, 2000, the
Company would have incurred a loss of $13.2 million. Subsequent to June 30, 2000
the Company settled the July 2000 natural gas swaps for a loss of $4.5 million,
which will be recognized as a price adjustment in July. Additionally, the
Company has closed hedges on 920,000 MMBtu of the August through October swaps
which resulted in a loss of $0.6 million. This loss will be recognized as price
adjustments from August through October 2000.
On June 2, 2000, the Company entered into a natural gas basis protection swap
transaction for 13,500,000 MMBtu for the period of January 2001 through March
2001. This transaction requires that the counterparty pay the Company if the
NYMEX price exceeds the Houston Ship Channel Beaumont/Texas Index by more than
$0.0675 for each of the related months of production. If the NYMEX price less
$0.0675 does not exceed the Houston Ship Channel Beaumont/Texas Index for each
month, the Company will pay the counterparty. Gains or losses on basis swap
transactions are recognized as price adjustments in the month of related
production.
As of June 30, 2000, the Company had the following open crude oil swap
arrangements designed to hedge a portion of the Company's domestic crude oil
production for periods after June 2000:
25
<PAGE> 26
<TABLE>
<CAPTION>
MONTHLY NYMEX-INDEX
VOLUME STRIKE PRICE
MONTHS (BBLS) (PER BBL)
------ ------- ------------
<S> <C> <C>
July 2000....................... 125,000 $28.420
August 2000..................... 125,000 28.420
September 2000.................. 125,000 28.420
October 2000.................... 125,000 28.420
November 2000................... 125,000 28.420
December 2000................... 125,000 28.420
</TABLE>
If the swap arrangements listed above had been settled on June 30, 2000, the
Company would have incurred a loss of $1.9 million.
The Company has also closed transactions designed to hedge a portion of the
Company's domestic oil and natural gas production as of June 30, 2000. The net
unrecognized losses resulting from these transactions, $1.4 million as of June
30, 2000, will be recognized as price adjustments in the months of related
production. These hedging losses are set forth below ($ in thousands):
<TABLE>
<CAPTION>
HEDGING GAINS (LOSSES)
---------------------------------
MONTHS GAS OIL TOTAL
------ ------- ------- -------
<S> <C> <C> <C>
July 2000 .......... $ (422) $ (231) $ (653)
August 2000 ........ (432) -- (432)
September 2000 ..... (149) -- (149)
October 2000 ....... (196) -- (196)
------- ------- -------
$(1,199) $ (231) $(1,430)
======= ======= =======
</TABLE>
In addition to commodity hedging transactions related to the Company's oil and
gas production, CEMI periodically enters into various hedging transactions
designed to hedge against physical purchase and sale 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 has reduced its
interest expense by $2.7 million from May 1998 through June 2000. During the
Current Quarter, the Company's interest rate swap resulted in a $36,000 increase
of interest expense. The terms of the swap agreement are as follows:
<TABLE>
<CAPTION>
Months Notional Amount Fixed Rate Floating Rate
------ --------------- ---------- -------------
<S> <C> <C> <C>
May 1998 - April 2001 $230,000,000 7% Average of three-month Swiss Franc LIBOR,
Deutsche Mark and Australian Dollar plus
300 basis points
May 2001 - April 2008 $230,000,000 7% Three-month LIBOR (USD) plus 300 basis points
</TABLE>
If the floating rate is less than the fixed rate, the counterparty will pay the
Company accordingly. If the floating rate exceeds the fixed rate, the Company
will pay the counterparty. The interest rate swap agreement contains a "knockout
provision" whereby the agreement will terminate on or after May 1, 2001 if the
average closing price for the previous twenty business days for the shares of
the Company's common stock is greater than or equal to $7.50 per share. The
agreement also provides for a maximum floating rate of 8.5% from May 2001
through April 2008.
As of June 30, 2000, based upon prevailing interest rates, the present value of
the Company's estimated future payments under the interest rate swap agreement,
without ascribing any value to the knock-out provision, was $17.7 million.
However, because of the knock-out provision discussed above and the volatility
of interest rates, the Company does not believe that this worst-case scenario is
a fair measure of the market value of the swap agreement and, therefore, would
not pay this amount to cancel the transaction. Results from interest rate
hedging transactions are reflected as adjustments to interest expense in the
corresponding months covered by the swap agreement.
26
<PAGE> 27
The table below presents principal cash flows and related weighted average
interest rates by expected maturity dates. The fair value of the long-term debt
has been estimated based on quoted market prices.
<TABLE>
<CAPTION>
JUNE 30, 2000
-----------------------------------------------------------------------------------------
YEARS OF MATURITY
-----------------------------------------------------------------------------------------
2000 2001 2002 2003 2004 THEREAFTER TOTAL FAIR VALUE
---- ---- ---- ---- ---- ---------- ----- ----------
LIABILITIES: ($ IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Long-term debt, including current
portion - fixed rate ............ $ 0.4 $ 0.8 $ 0.6 $ -- $150.0 $770.0 $921.8 $867.7
Average interest rate ........... 9.1% 9.1% 9.1% -- 7.9% 9.3% 9.1% --
Long-term debt - variable rate ....... $ -- $ -- $ 63.0 $ -- $ -- $ -- $ 63.0 $ 63.0
Average interest rate ........... -- -- 10.0% -- -- -- 10.0% --
</TABLE>
27
<PAGE> 28
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 other pending actions which are described in Part I, Item 3 of the
Company's Annual Report on Form 10-K for the year ended December 31, 1999.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
During the quarter ended June 30, 2000, the Company exchanged 24,711,906 shares
of common stock, plus a cash payment of $8.3 million, for 2,364,363 shares of
its outstanding preferred stock in private transactions with institutional
investors. The exchanges were exempt from registration under Section 3(a) (9) of
the Securities Act of 1933 inasmuch as the Company exchanged securities
exclusively with its existing shareholders and no commission or other
remuneration was paid with respect to the exchanges.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES OR DIVIDEND ARREARAGES
August 1, 2000 was the seventh consecutive payment date on which the Company
failed to pay dividends on its 7% cumulative convertible preferred stock.
Dividends accrue at the annual rate of $3.50 per share. Dividends which are not
declared and paid when due compound quarterly on each dividend payment date at
the dividend payment rate. Accrued and unpaid dividends on 1,557,037 shares
outstanding as of June 30, 2000 were $9.5 million. Additional information on
preferred stock dividends is provided in Part I, Item 2 under "Liquidity and
Capital Resources," the fourth and fifth paragraphs of which are incorporated
herein by reference.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company's annual meeting of shareholders was held on June 16, 2000. In the
election of directors, Breene M. Kerr received 95,879,326 votes for election,
and 459,350 shares were withheld from voting. There were no broker non-votes.
The other directors whose terms continued after the meeting are Edgar F. Heizer,
Jr., Aubrey K. McClendon, Shannon T. Self, Tom L. Ward and Frederick B.
Whittemore.
ITEM 5. OTHER INFORMATION
- Not applicable
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
The following exhibits are filed as a part of this report:
<TABLE>
<CAPTION>
Exhibit No. Description
----------- -----------
<S> <C>
4.7 Amended and Restated Credit Agreement among
Chesapeake Exploration Limited Partnership, as borrower;
Chesapeake Energy Corporation and certain of its
subsidiaries, as guarantors; and Union Bank of California,
N.A., as agent; and certain financial institutions, as
lenders, dated May 30, 2000
4.7.1 First Amendment to Amended and Restated Credit Agreement,
dated August 1, 2000
</TABLE>
28
<PAGE> 29
<TABLE>
<S> <C>
10.2.5 Employment Agreement between Steven C. Dixon and Chesapeake
Energy Corporation effective July 1, 2000
10.2.6 Employment Agreement between J. Mark Lester and Chesapeake
Energy Corporation effective July 1, 2000
10.2.7 Employment Agreement between Henry J. Hood and Chesapeake
Energy Corporation effective July 1, 2000
10.2.8 Employment Agreement between Michael A. Johnson and
Chesapeake Energy Corporation effective July 1, 2000
10.2.9 Employment Agreement between Martha A. Burger and Chesapeake
Energy Corporation effective July 1, 2000
27 Financial Data Schedule
</TABLE>
(b) Reports on Form 8-K
During the quarter ended June 30, 2000, the Company filed the
following Current Reports on Form 8-K:
On May 4, 2000, the Company filed a current report on Form 8-K reporting
under Item 5 that the Company issued a press release reporting record
earnings, cash flow and EBITDA for the first quarter of 2000.
On June 19, 2000, the Company filed a current report on Form 8-K reporting
under Item 5 that the Company issued a press release announcing three
Mid-Continent natural gas reserve purchases.
On June 30, 2000, the Company filed a current report on Form 8-K reporting
under Item 5 that the Company issued a press release announcing an
agreement to acquire Gothic Energy Corporation.
29
<PAGE> 30
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)
August 11, 2000
---------------------------- ---------------------------------
Date Aubrey K. McClendon
Chairman and
Chief Executive Officer
August 11, 2000
---------------------------- ---------------------------------
Date Marcus C. Rowland
Executive Vice President and
Chief Financial Officer
30
<PAGE> 31
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
----------- -----------
<S> <C>
4.7 Amended and Restated Credit Agreement by and between Chesapeake
Exploration Limited Partnership, as Borrower; Chesapeake Energy
Corporation and Certain of its Subsidiaries, as Guarantors; and Union
Bank of California, N.A., as Agent; and Certain Financial Institutions,
as Lenders, dated May 30, 2000
4.7.1 First Amendment to Amended and Restated Credit Agreement
10.2.5 Employment Agreement between Steven C. Dixon and Chesapeake Energy
Corporation effective July 1, 2000
10.2.6 Employment Agreement between J. Mark Lester and Chesapeake Energy
Corporation effective July 1, 2000
10.2.7 Employment Agreement between Henry J. Hood and Chesapeake Energy
Corporation effective July 1, 2000
10.2.8 Employment Agreement between Michael A. Johnson and Chesapeake Energy
Corporation effective July 1, 2000
10.2.9 Employment Agreement between Martha A. Burger and Chesapeake Energy
Corporation effective July 1, 2000
27 Financial Data Schedule
</TABLE>
