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 December 31, 1996
[ ] 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 January 31, 1997, there were 69,562,725 shares of the registrant's $.01
par value Common Stock outstanding.
CHESAPEAKE ENERGY CORPORATION AND SUBSIDIARIES
PART I. FINANCIAL INFORMATION
Index to Financial Statements
and
Management's Discussion and Analysis
Page
Item 1. Consolidated Financial Statements:
Consolidated Balance Sheets at December 31, 1996
and June 30, 1996
Consolidated Statements of Income for the Three
and Six Months Ended December 31, 1996 and 1995
Consolidated Statements of Cash Flows for the
Six Months Ended December 31, 1996 and 1995
Notes to Consolidated Financial Statements
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations
CHESAPEAKE ENERGY CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Unaudited)
ASSETS
December 31, June 30,
1996 1996
------------ --------
($ in thousands)
CURRENT ASSETS:
Cash and cash equivalents $140,739 $ 51,638
Short-term investments 29,092 -
Accounts receivable:
Oil and gas sales 15,313 12,687
Oil and gas marketing sales 20,793 6,982
Joint interest and other, net of allowance for
doubtful accounts of $198,000 and $340,000 26,066 27,661
Related parties 4,000 2,884
Inventory 7,071 5,163
Other 7,199 2,158
-------- --------
Total Current Assets 250,273 109,173
======== ========
PROPERTY AND EQUIPMENT:
Oil and gas properties, at cost based on full
cost accounting:
Evaluated oil and gas properties 527,566 363,213
Unevaluated properties 181,774 165,441
Less: accumulated depreciation, depletion and
amortization (128,963) (92,720)
--------- --------
580,377 435,934
Other property and equipment 22,052 18,162
Less: accumulated depreciation and amortization (3,880) (2,922)
-------- --------
Total Property and Equipment 598,549 451,174
-------- -------
OTHER ASSETS 11,775 11,988
-------- -------
TOTAL ASSETS $860,597 $572,335
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Notes payable and current maturities of long-
term debt $ 6,718 $ 6,755
Accounts payable 72,256 54,514
Accrued liabilities and other 10,144 14,062
Revenues and royalties due others 37,974 33,503
-------- --------
Total Current Liabilities 127,092 108,834
-------- --------
LONG-TERM DEBT, NET 220,149 268,431
-------- --------
REVENUES AND ROYALTIES DUE OTHERS 6,126 5,118
-------- --------
DEFERRED INCOME TAXES 23,168 12,185
-------- --------
STOCKHOLDERS' EQUITY:
Preferred Stock, $.01 par value, 10,000,000
shares authorized; none issued - -
Common Stock, 100,000,000 shares authorized;
$.01 par value at December 31, 1996, $.10 par value
at June 30, 1996; 69,276,935 and 60,159,826 shares
issued and outstanding at December 31, 1996 and
June 30, 1996, respectively 693 3,008
Paid-in capital 426,914 136,782
Accumulated earnings 56,455 37,977
-------- --------
Total Stockholders' Equity 484,062 177,767
-------- --------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $860,597 $572,335
======== ========
The accompanying notes are an integral part of these consolidated financial
statements.
CHESAPEAKE ENERGY CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
(in thousands, except per share data)
Three Months Ended Six Months Ended
December 31, December 31,
------------------ ----------------
1996 1995 1996 1995
---- ---- ---- ----
REVENUES:
Oil and gas sales $53,414 $26,519 $90,167 $46,350
Oil and gas marketing sales 17,835 3,787 30,019 3,787
Oil and gas service opera-
tions - 1,460 - 3,618
Interest and other 1,668 277 2,516 1,791
-------- -------- -------- --------
Total revenues 72,917 32,043 122,702 55,546
-------- -------- -------- -------
COSTS AND EXPENSES
Production expenses and taxes 3,344 2,007 5,874 3,703
Oil and gas marketing expenses 17,682 3,766 29,548 3,766
Oil and gas service operations - 1,167 - 3,019
Oil and gas depreciation,
depletion and amortization 19,214 11,798 36,243 22,234
Depreciation and amortization
of other assets 884 689 1,836 1,384
General and administrative 2,068 971 3,739 1,912
Interest 3,399 3,181 6,216 6,544
-------- -------- -------- --------
Total costs and expenses 46,591 23,579 83,456 42,562
-------- -------- -------- --------
INCOME BEFORE INCOME TAX AND
EXTRAORDINARY ITEM 26,326 8,464 39,246 12,984
INCOME TAX EXPENSE
Current - - - -
Deferred 9,609 3,005 14,325 4,609
-------- -------- -------- --------
Total income tax expense 9,609 3,005 14,325 4,609
-------- -------- -------- --------
INCOME BEFORE EXTRAORDINARY
ITEM 16,717 5,459 24,921 8,375
EXTRAORDINARY ITEM:
Loss on early extinguishment
of debt, net of applicable
income tax of $3,703 ( 6,443) - ( 6,443) -
-------- -------- -------- --------
NET INCOME $10,274 $ 5,459 $18,478 $ 8,375
======== ======== ======== ========
NET EARNINGS PER COMMON SHARE AND
COMMON SHARE EQUIVALENT
(PRIMARY)
Income before extraordinary
item $ .25 $ .10 $ .38 $ .15
Extraordinary item ( .10) - ( .10) -
-------- -------- -------- --------
Net Income $ .15 $ .10 $ .28 $ .15
======== ======== ======== ========
NET EARNINGS PER COMMON SHARE AND
COMMON SHARE EQUIVALENT
(FULLY DILUTED)
Income before extraordinary
item $ .25 $ .09 $ .38 $ .14
Extraordinary item ( .10) - ( .10) -
-------- -------- -------- --------
Net Income $ .15 $ .09 $ .28 $ .14
======== ======== ======== ========
WEIGHTED AVERAGE COMMON AND COMMON
EQUIVALENT SHARES OUTSTANDING
Primary 68,108 57,454 66,300 57,148
======== ======== ======== ========
Fully-diluted 68,108 58,044 66,300 57,968
======== ======== ======== ========
The accompanying notes are an integral part of these consolidated financial
statements.
CHESAPEAKE ENERGY CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Six Months Ended
December 31,
---------------------------------
1996 1995
-------- --------
($ in thousands)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $18,478 $ 8,375
Adjustments to reconcile net income
to ne cash provided by operating
activities:
Depreciation, depletion and amorti-
zation 37,317 23,044
Deferred taxes 10,622 4,609
Amortization of loan costs 762 574
Amortization of bond discount 191 280
Gain on sale of fixed assets and
other ( 522) ( 412)
Investments in securities, net ( 34,777) 406
Extraordinary item before income
tax benefit 10,146 -
Equity in earnings of subsidiary ( 178) -
Other adjustments - ( 130)
Changes in current assets and
liabilities ( 138) 10,383
--------- ---------
Cash provided by operating
activities 41,901 47,129
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Exploration, development and acqui-
sition of oil and gas properties (186,753) ( 91,160)
Proceeds from sale of assets 12,274 6,473
Investment in gas marketing company,
net of cash acquired - ( 320)
Investment in service operations ( 3,048) -
Long-term loan made to a third party ( 2,000) -
Additions to property, equipment and
other ( 4,622) ( 3,671)
--------- ---------
Cash used in investing activities (184,149) ( 88,678)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from long-term borrowings 50,000 16,650
Payments on long-term borrowings (106,831) ( 2,181)
Cash received from issuance of
common stock 288,091 -
Cash received from exercise of
stock options 273 458
Other financing ( 184) -
--------- ---------
Cash provided by financing
activities 231,349 14,927
-------- ---------
NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS 89,101 ( 26,622)
CASH AND CASH EQUIVALENTS, BEGINNING
OF PERIOD 51,638 55,535
--------- ---------
CASH AND CASH EQUIVALENTS, END OF
PERIOD $140,739 $ 28,913
========= =========
The accompanying notes are an integral part of these consolidated financial
statements.
CHESAPEAKE ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996
(Unaudited)
1. Accounting Principles
The accompanying unaudited consolidated financial statements of Chesapeake
Energy Corporation and Subsidiaries (the "Company") have been prepared in
accordance with the instructions to Form 10-Q as prescribed by the
Securities and Exchange Commission. All material adjustments (consisting
solely of normal recurring adjustments) which, in the opinion of management,
are necessary for a fair presentation of the results for the interim periods
have been reflected. The results for the three months and six months ended
December 31, 1996, are not necessarily indicative of the results to be
expected for the full fiscal year.
2. Recent Events
On November 25, 1996, the Company issued 8,000,000 shares of Common Stock in
a public offering at a price of $33.63 per share, which resulted in net
proceeds to the Company of approximately $256.9 million. On December 2,
1996, the underwriters of the Company's Common Stock offering exercised an
over-allotment option to purchase an additional 972,000 shares of Common
Stock at a price of $33.63 per share, resulting in additional net proceeds
to the Company of approximately $31.2 million, and total proceeds of $288.1
million.
Using a portion of the proceeds from the Common Stock offering, the Company
exercised its covenant defeasance rights under Section 8.03 of the Indenture
dated as of March 31, 1994 with respect to all of its outstanding $47.5
million of 12% Senior Notes. A combination of cash and non-callable U.S.
Government Securities in the amount of $55 million was irrevocably deposited
in trust to satisfy the Company's obligations, including accrued but unpaid
interest through the date of defeasance of $1.3 million. The Company also
repaid in full the outstanding balance of its revolving bank credit facility.
Effective December 31, 1996, the Company changed its state of incorporation
from Delaware to Oklahoma. As part of this transaction, the authorized
capital stock of the Company was increased to 100,000,000 shares of common
stock, par value $.01 per share, and 10,000,000 shares of preferred stock,
par value $.01 per share. Also effective December 31, 1996, the Company
effected a 2-for-1 split of its common stock. All par value, share and
per share information, common stock options and exercise prices included
in these consolidated financial statements and related footnotes have been
restated to reflect the stock split.
3. Legal Proceedings
On October 15, 1996, Union Pacific Resources Company ("UPRC") filed suit
against the Company alleging patent infringement and tortious interference
with contracts regarding confidentiality and proprietary information of
UPRC. UPRC is seeking injunctive relief and damages in an unspecified
amount, including actual, enhanced, consequential and punitive damages.
The Company believes it has meritorious defenses to the allegations,
including its belief that the subject patent is invalid. Given the
subject of the claims, the Company is unable to predict the outcome
of the matter or estimate a range of financial exposure.
4. Senior Notes
10 1/2% Notes
The Company has outstanding $90 million in aggregate principal amount of
10 1/2% Notes which mature June 2002. The 10 1/2% Notes bear interest at
an annual rate of 10 1/2%, payable semiannually on each June 1 and
December 1. The 10 1/2% Notes are senior, unsecured obligations of
the Company, and are fully and unconditionally guaranteed, jointly and
severally, by certain subsidiaries of the Company (the "Guarantor
Subsidiaries").
9 1/8% Notes
The Company has outstanding $120 million in aggregate principal amount of
9 1/8% Senior Notes due 2006 which mature April 15, 2006. The 9 1/8% Notes
bear interest at an annual rate of 9 1/8%, payable semiannually on each
April 15 and October 15. The 9 1/8% Notes are senior, unsecured obligations
of the Company, and are fully and unconditionally guaranteed, jointly and
severally, by the Guarantor Subsidiaries.
Set forth below are condensed consolidating financial statements of the
Guarantor Subsidiaries, the Non-Guarantor Subsidiaries and the Company.
Separate financial statements of each Guarantor Subsidiary have
not been included because management has determined that they are not
material to investors.
CHESAPEAKE ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996
(unaudited)
CONDENSED CONSOLIDATING BALANCE SHEET
AS OF DECEMBER 31, 1996
($ in thousands)
Guarantor Non-Guarantor Company
Subsidiaries Subsidiaries (Parent) Eliminations Consolidated
------------ ------------- -------- ------------ ------------
ASSETS
CURRENT ASSETS:
Cash and cash equivalent $ 4,782 $ 6,182 $ 129,775 $ - $140,739
Accounts receivable, net 53,866 21,369 - ( 9,063) 66,172
Inventory 6,702 369 - - 7,071
Other 931 33 35,327 - 36,291
---------- ---------- --------- ----------- --------
Total Current Assets 66,281 27,953 165,102 ( 9,063) 250,273
---------- ---------- --------- ----------- --------
PROPERTY AND EQUIPMENT:
Oil and gas properties 502,928 24,638 - - 527,566
Unevaluated leasehold 181,774 - - - 181,774
Other property and equipment 10,824 103 11,125 - 22,052
Less: accumulated depreciation,
depletion and amortization ( 122,962) ( 9,287) ( 594) - (132,843)
--------- ---------- --------- ----------- --------
Total Property & Equipment 572,564 15,454 10,531 - 598,549
--------- ---------- --------- ----------- --------
INVESTMENTS IN SUBSIDIARIES
AND INTERCOMPANY ADVANCES 628,415 6,850 514,075 (1,149,340) -
--------- ---------- --------- ----------- --------
OTHER ASSETS 4,482 1,019 6,274 - 11,775
--------- ---------- --------- ----------- --------
TOTAL ASSETS $1,271,742 $ 51,276 $695,982 $(1,158,403) $860,597
========== ========== ========= =========== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Notes payable and current
maturities of long-term debt $ 4,268 $ 2,450 $ - $ - $ 6,718
Accounts payable and other 104,859 21,389 3,189 ( 9,063) 120,374
---------- -------- -------- ----------- --------
Total Current Liabilities 109,127 23,839 3,189 ( 9,063) 127,092
---------- -------- -------- ----------- --------
LONG-TERM DEBT 1,486 8,740 209,923 - 220,149
---------- -------- -------- ----------- --------
REVENUES PAYABLE 6,126 - - - 6,126
---------- -------- -------- ----------- --------
DEFERRED INCOME TAXES 14,916 1,014 7,238 - 23,168
---------- -------- -------- ----------- --------
INTERCOMPANY PAYABLES 1,057,860 7,917 79,793 (1,145,570) -
---------- -------- -------- ----------- --------
STOCKHOLDERS' EQUITY:
Common Stock 116 2 577 ( 2) 693
Other 82,111 9,764 395,262 ( 3,768) 483,369
---------- -------- -------- ----------- --------
Total Stockholders' Equity 82,227 9,766 395,839 ( 3,770) 484,062
---------- -------- -------- ----------- --------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $1,271,742 $ 51,276 $695,982 $(1,158,403) $860,597
========== ======== ======== ============ ========
CHESAPEAKE ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996
(unaudited)
CONDENSED CONSOLIDATING BALANCE SHEET
AS OF JUNE 30, 1996
($ in thousands)
Guarantor Non-Guarantor Company
Subsidiaries Subsidiaries (Parent) Eliminations Consolidated
------------ -------------- ----------- ------------ ------------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 4,061 $ 2,751 $ 44,826 $ - $ 51,638
Accounts receivable, net 44,080 7,723 - ( 1,589) 50,214
Inventory 4,947 216 - - 5,163
Other 2,155 3 - - 2,158
---------- ---------- ---------- ---------- ---------
Total Current Assets 55,243 10,693 44,826 ( 1,589) 109,173
---------- ---------- ---------- ---------- ---------
PROPERTY AND EQUIPMENT:
Oil and gas properties 338,610 24,603 - - 363,213
Unevaluated leasehold 165,441 - - - 165,441
Other property and equipment 9,608 61 8,493 - 18,162
Less: accumulated depreciation,
depletion and amortization ( 87,193) ( 8,007) ( 442) - ( 95,642)
---------- ---------- ---------- ---------- ---------
Total Property & Equipment 426,466 16,657 8,051 - 451,174
---------- ---------- ---------- ---------- ---------
INVESTMENTS IN SUBSIDIARIES
AND INTERCOMPANY ADVANCES 519,386 8,132 382,388 (909,906) -
---------- ---------- ---------- ---------- ---------
OTHER ASSETS 2,310 940 8,738 - 11,988
---------- ---------- ---------- ---------- ----------
TOTAL ASSETS $1,003,405 $ 36,422 $444,003 $(911,495) $572,335
========== ========== ========== ========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Notes payable and current
maturities of long-term debt $ 3,846 $ 2,880 $ 29 $ - $ 6,755
Accounts payable and other 91,069 7,339 5,260 ( 1,589) 102,079
---------- ---------- ---------- ---------- ----------
Total Current Liabilities 94,915 10,219 5,289 ( 1,589) 108,834
---------- ---------- ---------- ---------- ----------
LONG-TERM DEBT 2,113 10,020 256,298 - 268,431
---------- ---------- ---------- ---------- ----------
REVENUES PAYABLE 5,118 - - - 5,118
---------- ---------- ---------- ---------- -----------
DEFERRED INCOME TAXES 23,950 1,335 (13,100) - 12,185
---------- ---------- ---------- ---------- -----------
INTERCOMPANY PAYABLES 824,307 8,182 73,647 (906,136) -
---------- ---------- ---------- ---------- -----------
STOCKHOLDERS' EQUITY:
Common Stock 117 2 2,891 ( 2) 3,008
Other 52,885 6,664 118,978 ( 3,768) 174,759
---------- ---------- ---------- ---------- -----------
Total Stockholders' Equity 53,002 6,666 121,869 ( 3,770) 177,767
---------- ---------- ---------- ---------- -----------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $1,003,405 $ 36,422 $444,003 $(911,495) $572,335
========== ========== ========== ========== ===========
CHESAPEAKE ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996
(unaudited)
CONDENSED CONSOLIDATING STATEMENTS OF INCOME
($ in thousands)
Guarantor Non-Guarantor Company
Subsidiaries Subsidiaries (Parent) Eliminations Consolidated
------------ ------------- -------- ------------ ------------
For the Three Months Ended December 31, 1996:
REVENUES:
Oil and gas sales $ 51,147 $ 1,888 $ - $ 379 $ 53,414
Oil and gas marketing sales - 36,693 - (18,858) 17,835
Interest and other 52 162 1,454 - 1,668
-------- -------- -------- -------- --------
Total Revenues 51,199 38,743 1,454 (18,479) 72,917
-------- -------- -------- -------- --------
COSTS AND EXPENSES:
Production expenses and taxes 3,116 228 - - 3,344
Oil and gas marketing expenses - 36,161 - (18,479) 17,682
Oil and gas depreciation,
depletion and amortization 18,577 637 - - 19,214
Other depreciation and amortization 509 40 335 - 884
General and administrative 1,370 259 439 - 2,068
Interest 275 122 3,002 - 3,399
-------- -------- -------- -------- --------
Total Costs & Expenses 23,847 37,447 3,776 (18,479) 46,591
-------- -------- -------- -------- --------
INCOME (LOSS) BEFORE INCOME TAXES
AND EXTRAORDINARY ITEM 27,352 1,296 ( 2,322) - 26,326
INCOME TAX EXPENSE (BENEFIT) 9,983 474 ( 848) - 9,609
-------- -------- -------- -------- --------
NET INCOME (LOSS)
BEFORE EXTRAORDINARY ITEM 17,369 822 ( 1,474) - 16,717
-------- -------- -------- -------- --------
EXTRAORDINARY ITEM:
Loss on early extinguishment of debt,
net of applicable income tax ( 590) - ( 5,853) - ( 6,443)
-------- -------- -------- -------- --------
NET INCOME (LOSS) $ 16,779 $ 822 $( 7,327) $ - $ 10,274
======== ======== ======== ======== ========
For the Three Months Ended December 31, 1995:
REVENUES:
Oil and gas sales $ 24,925 $ 1,594 $ - $ - $ 26,519
Gas marketing sales - 4,370 - ( 583) 3,787
Oil and gas service operations 1,460 - - - 1,460
Interest and other 215 6 56 - 277
-------- -------- -------- -------- --------
Total revenues 26,600 5,970 56 ( 583) 32,043
-------- -------- -------- -------- --------
COSTS AND EXPENSES:
Production expenses and taxes 1,844 163 - - 2,007
Gas marketing expenses - 4,349 - ( 583) 3,766
Oil and gas service operations 1,167 - - - 1,167
Oil and gas depreciation 11,179 619 - - 11,798
Other depreciation and amortization 418 13 258 - 689
General and administrative 686 67 218 - 971
Interest 42 165 2,974 - 3,181
-------- -------- -------- -------- --------
Total Costs & Expenses 15,336 5,376 3,450 ( 583) 23,579
-------- -------- -------- -------- --------
INCOME (LOSS) BEFORE INCOME TAX 11,264 594 ( 3,394) - 8,464
-------- -------- -------- -------- --------
INCOME TAX EXPENSE 4,958 316 ( 2,269) - 3,005
-------- -------- -------- -------- --------
NET INCOME (LOSS) $ 6,306 $ 278 $( 1,125) $ - $ 5,459
======== ======== ======== ======== ========
CHESAPEAKE ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996
(unaudited)
CONDENSED CONSOLIDATING STATEMENTS OF INCOME
($ in thousands)
Guarantor Non-Guarantor Company
Subsidiaries Subsidiaries (Parent) Eliminations Consolidated
------------ ------------ -------- ------------ ------------
For the Six Months Ended December 31, 1996:
REVENUES:
Oil and gas sales $ 85,936 $ 3,579 $ - $ 652 $ 90,167
Oil and gas marketing sales - 58,607 - (28,588) 30,019
Interest and other 167 571 1,778 - 2,516
-------- -------- ------- -------- --------
Total Revenues 86,103 62,757 1,778 (27,936) 122,702
-------- -------- ------- -------- --------
COSTS AND EXPENSES:
Production expenses and taxes 5,463 411 - - 5,874
Oil and gas marketing expenses - 57,484 - (27,936) 29,548
Oil and gas depreciation,
depletion and amortization 34,950 1,293 - - 36,243
Other depreciation and amor-
tization 1,043 71 722 - 1,836
General and administrative 2,543 495 701 - 3,739
Interest 308 227 5,681 - 6,216
-------- -------- ------- -------- --------
Total Costs & Expenses 44,307 59,981 7,104 (27,936) 83,456
-------- -------- ------- -------- --------
INCOME (LOSS) BEFORE INCOME TAXES
AND EXTRAORDINARY ITEM 41,796 2,776 ( 5,326) - 39,246
INCOME TAX EXPENSE (BENEFIT) 15,255 1,014 ( 1,944) - 14,325
NET INCOME (LOSS) -------- -------- -------- -------- --------
BEFORE EXTRAORDINARY ITEM 26,541 1,762 ( 3,382) - 24,921
-------- -------- -------- -------- --------
EXTRAORDINARY ITEM:
Loss on early extinguishment of debt,
net of applicable income tax ( 590) - ( 5,853) - ( 6,443)
-------- -------- ------- ------- --------
NET INCOME (LOSS) $ 25,951 $ 1,762 $( 9,235) $ - $ 18,478
======== ======== ======== ======= ========
For the Six Months Ended December 31, 1995:
REVENUES:
Oil and gas sales $ 43,533 $ 2,817 $ - $ - $ 46,350
Gas marketing sales - 4,370 - ( 583) 3,787
Oil and gas service operations 3,618 - - - 3,618
Interest and other 1,236 6 549 - 1,791
-------- -------- ------- ------- --------
Total Revenues 48,387 7,193 549 ( 583) 55,546
-------- -------- ------- ------- --------
COSTS AND EXPENSES:
Production expenses and taxes 3,392 311 - - 3,703
Gas marketing expenses - 4,349 - ( 583) 3,766
Oil and gas service operations 3,019 - - - 3,019
Oil and gas depreciation,
depletion and amortization 21,059 1,175 - - 22,234
Other depreciation and amor-
tization 850 17 517 - 1,384
General and administrative 1,499 101 312 - 1,912
Interest 81 350 6,113 - 6,544
-------- -------- ------- ------- --------
Total Costs & Expenses 29,900 6,303 6,942 ( 583) 42,562
-------- -------- ------- ------- --------
INCOME (LOSS) BEFORE INCOME TAX 18,487 890 ( 6,393) - 12,984
INCOME TAX EXPENSE (BENEFIT) 6,562 316 ( 2,269) - 4,609
-------- -------- ------- ------- --------
NET INCOME (LOSS) $ 11,925 $ 574 $( 4,124) $ - $ 8,375
======== ======== ======= ======= ========
CHESAPEAKE ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996
(unaudited)
CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS
($ in thousands)
Guarantor Non-Guarantor Company
Subsidiaries Subsidiaries (Parent) Elimination Consolidated
------------ ------------- -------- ----------- ------------
For the Six Months Ended December 31, 1996:
CASH FLOWS FROM OPERATING
ACTIVITIES: $ 89,669 $( 5,642) $( 42,126) $ - $ 41,901
CASH FLOWS FROM INVESTING ACTIVITIES:
Oil and gas properties (186,718) ( 35) - - (186,753)
Proceeds from sale of assets 12,274 - - - 12,274
Investment in service opera-
tions ( 3,048) - - - ( 3,048)
Other additions ( 4,185) ( 204) ( 2,233) - ( 6,622)
-------- -------- -------- -------- --------
(181,677) ( 239) ( 2,233) - (184,149)
-------- -------- -------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from borrowings 50,000 - - - 50,000
Payments on borrowings ( 51,246) ( 1,710) ( 53,875) - (106,831)
Cash received from exercise
of stock options - - 273 - 273
Cash received from issuance
of common stock - - 288,091 - 288,091
Other financing - - ( 184) - ( 184)
Intercompany advances, net 93,975 11,022 (104,997) - -
-------- -------- -------- -------- --------
92,729 9,312 129,308 - 231,349
-------- -------- -------- -------- --------
Net increase (decrease) in cash 721 3,431 84,949 - 89,101
Cash, beginning of period 4,061 2,751 44,826 - 51,638
-------- -------- -------- -------- --------
Cash, end of period $ 4,782 $ 6,182 $129,775 $ - $140,739
======== ======== ======== ======== ========
For the Six Months Ended December 31, 1995:
CASH FLOWS FROM OPERATING
ACTIVITIES: $ 50,475 $ 599 $( 3,945) $ - $ 47,129
-------- -------- -------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Oil and gas properties (84,998) (11,462) - 5,300 (91,160)
Proceeds from sales 11,773 - - (5,300) 6,473
Investment in gas marketing
company - 256 ( 576) - (320)
Other additions ( 2,812) ( 25) ( 834) - ( 3,671)
-------- -------- -------- -------- --------
(76,037) (11,231) ( 1,410) - (88,678)
-------- -------- -------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from long-term
borrowings 11,350 5,300 - - 16,650
Payments on borrowings ( 582) ( 1,585) ( 14) - ( 2,181)
Cash received from exercise
of stock options - - 458 - 458
Intercompany advances, net (57,930) 9,738 48,192 - -
-------- -------- -------- -------- --------
(47,162) 13,453 48,636 - 14,927
-------- -------- -------- -------- --------
Net increase (decrease) in cash
and cash equivalents (72,724) 2,821 43,281 - (26,622)
Cash, beginning of period 53,227 5 2,303 - 55,535
-------- -------- -------- -------- --------
Cash, end of period $(19,497) $ 2,826 $ 45,584 $ - $ 28,913
======== ======== ======== ======== ========
PART I. FINANCIAL INFORMATION
ITEM 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
RECENT EVENTS
On November 25, 1996, the Company issued 8,000,000 shares of Common Stock in
a public offering at a price of $33.63 per share, which resulted in net
proceeds to the Company of approximately $256.9 million. On December 2,
1996, the underwriters of the Company's Common Stock offering exercised an
over-allotment option to purchase an additional 972,000 shares of Common
Stock at a price of $33.63 per share, resulting in additional net proceeds
to the Company of approximately $31.2 million, and total proceeds of $288.1
million.
Using a portion of the proceeds from the Common Stock offering, the Company
exercised its covenant defeasance rights under Section 8.03 of the Indenture
dated as of March 31, 1994, with respect to all of its outstanding $47.5
million of 12% Senior Notes. A combination of cash and non-callable U.S.
Government Securities in the amount of $55.0 million was irrevocably
deposited in trust to satisfy the Company's obligations, including accrued
but unpaid interest through the date of defeasance of $1.3 million. The
Company also repaid in full the outstanding balance of its revolving bank
credit facility.
Effective December 31, 1996, the Company changed its state of incorporation
from Delaware to Oklahoma. As part of this transaction, the authorized
capital stock of the Company was increased to 100,000,000 shares of common
stock, par value $.01 per share, and 10,000,000 shares of preferred stock,
par value $.01 per share. Also effective December 31, 1996, the Company
effected a 2-for-1 split of its common stock. All par value, share and
per share information, common stock options and exercise prices included
in these consolidated financial statements and related footnotes have
been restated to reflect the stock split.
RESULTS OF OPERATIONS
THREE MONTHS ENDED DECEMBER 31, 1996 VS. DECEMBER 31, 1995
Net income for the three months ended December 31, 1996 (the "Current Quarter")
was $10.3 million, a $4.8 million increase from net income of $5.5 million for
the quarter ended December 31, 1995 (the "Prior Quarter"), after giving effect
to an extraordinary loss of $6.4 million (net of income tax) incurred during
the Current Quarter. This increase in net income was caused primarily by the
Company's significantly higher oil and gas production and increases in oil
and gas sales prices.
Revenues from oil and gas sales for the Current Quarter were $53.4 million,
an increase of $26.9 million, or 101%, from the Prior Quarter. Gas pro-
duction increased to 14.8 billion cubic feet ("Bcf"), an increase of 2.5
Bcf, or 20%, compared to the Prior Quarter. Oil production increased 266
thousand barrels ("MBbls"), or 76%, from 352 MBbls to 618 MBbls. The
increase in oil and gas production was accompanied by increases in the
average oil and gas prices realized. In the Current Quarter, the Company
received an average oil price of $22.43 per barrel ("Bbl"), net of hedging
losses of $0.8 million. This was an increase of $5.15 per Bbl, or 30%,
from the $17.28 per Bbl realized in the Prior Quarter. Gas price realiza-
tions increased to $2.68 per thousand cubic feet ("Mcf") in the Current
Quarter, net of hedging losses of $0.8 million, an increase of 61% from the
$1.66 per Mcf realized in the Prior Quarter.
The following table sets forth oil and gas production for the Company's
primary operating areas during the Current Quarter.
Producing Oil Gas Total Percent
Operating Areas Wells<F1> (MBbls) (MMcf) (MMcfe) %
Giddings 195 158 9,475 10,423 56%
Southern Oklahoma 205 149 3,237 4,131 22%
Louisiana Trend 26 238 1,068 2,496 14%
All Other 115 73 991 1,429 8%
--- --- ------ ------ ----
Total 541 618 14,771 18,479 100%
=== === ====== ====== ====
<FN>
<F1> Includes wells being drilled at December 31, 1996
Revenues from the Company's oil and gas marketing operations in the Current
Quarter, which commenced in December 1995 with the purchase of Chesapeake
Energy Marketing, Inc. ("CEM"), were $17.8 million compared to $3.8 million
in the Prior Quarter. The Prior Quarter included only one month of
operations. Oil and gas marketing expenses were $17.7 million during the
Current Quarter, resulting in a gross profit margin of $0.1 million. In
the Prior Quarter the gross profit margin was $21,000.
The Company had no revenues or expenses for oil and gas service operations
in the Current Quarter, as a result of the sale of this business in June
1996 to Peak USA Energy Services, Ltd. ("Peak"). Peak is a limited
partnership formed by Peak Oilfield Services Company (a joint venture
between Cook Inlet Region, Inc. and Nabors Industries, Inc.) and the
Company.
Production expenses and taxes increased to $3.3 million in the Current
Quarter from $2.0 million in the Prior Quarter. This increase was the
result of a significant increase in oil and gas production volumes during
the Current Quarter, higher oil and gas prices which increased severance
taxes and slightly higher lifting costs per unit of production. On a gas
equivalent production unit ("Mcfe") basis, production expenses and taxes
were $0.18 per Mcfe in the Current Quarter compared to $0.14 per Mcfe in
the Prior Quarter. Much of the Company's gas production from wells
drilled before September 1996 in the downdip Giddings Field qualifies for
exemption from Texas state production taxes for production through August
31, 2001. Additionally, certain oil and gas production from the Company's
wells in the Knox and Sholem Alechem fields in Oklahoma and the Louisiana
Austin Chalk Trend qualifies for production tax exemption until well costs
are recovered. These exemptions, combined with the fact that many of the
Company's wells are high volume gas wells that tend to have lower operating
costs per Mcfe than lower volume wells, help generate the Company's
historically low production costs per Mcfe. The Company expects that
operating costs in fiscal 1997 will continue to increase because of the
Company's expansion of drilling efforts into the Louisiana Trend and the
Williston Basin, both of which are oil prone areas with significant
associated water production which results in higher operating costs than
gas prone areas, and because severance tax exemptions will be more
limited in these areas compared to existing exemptions in the Giddings
Field.
Depreciation, depletion and amortization ("DD&A") of oil and gas properties
for the Current Quarter was $19.2 million, an increase of $7.4 million from
the Prior Quarter. The increase in DD&A expense for oil and gas properties
between quarters is the result of a 4.1 billion cubic feet equivalent
("Bcfe") increase in production volumes and an increase in the DD&A rate
per Mcfe. The average DD&A rate per Mcfe, a function of capitalized and
estimated future development costs and the related proved reserves, was
$1.04 for the Current Quarter and $0.82 for the Prior Quarter. The Company
believes the DD&A rate will continue to increase during fiscal 1997 based
on projected higher finding costs for wells drilled in the Louisiana Trend.
Depreciation and amortization of other assets increased to $0.9 million in
the Current Quarter compared to $0.7 million in the Prior Quarter. This
increase is primarily the result of higher amortization expense related to
debt issuance costs, and higher depreciation related to the Company's
acquisition of additional buildings and equipment in its Oklahoma City
headquarters complex to support the Company's growth.
General and administrative expenses increased to $2.1 million during the
Current Quarter, a $1.1 million, or 110%, increase from the Prior Quarter.
This increase is the result of the continued growth of the Company. General
and administrative expenses were $0.11 per Mcfe in the Current Quarter
as compared to $0.07 per Mcfe in the Prior Quarter. The Company capitalized
$0.4 million and $0.1 million of payroll and other internal costs directly
related to oil and gas exploration and development activities, net of
partner reimbursements, in the Current Quarter and Prior Quarter,
respectively.
Interest expense increased to $3.4 million during the Current Quarter, from
$3.2 million in the Prior Quarter, as a result of higher levels of interest
costs due to increased levels of total debt during the Current Quarter.
During the Current Quarter, the Company capitalized $3.4 million of interest
costs representing the estimated costs to carry its unevaluated leasehold
inventory, compared to the $1.1 million in the Prior Quarter. This increase
in capitalized interest costs is the result of larger investments being
carried during the Current Quarter in leasehold that have yet to be
evaluated than in the Prior Quarter.
Income tax expense increased to $9.6 million in the Current Quarter (before
giving effect to the income tax benefit applicable to the extraordinary
item) from $3.0 million in the Prior Quarter. The Company's estimated
effective income tax rate was 36.5% for the Current Quarter, compared to
35.5% for the Prior Quarter. The Company estimates its effective rate based
on anticipated levels of income for the year, estimated production in excess
of that allowed in computing statutory depletion for tax purposes, the
interplay between state location of production revenue and the related state
income tax, and other factors. The provision for income tax expense is
deferred because the Company is not currently a cash income taxpayer.
The Company has significant tax net operating loss carryforwards generated
from the intangible drilling cost deduction for income tax purposes
associated with the Company's drilling activities which are available to
offset regular taxable income in the future.
The Company recorded an extraordinary loss in the Current Quarter of $6.4
million, net of applicable income tax effect of $3.7 million. This loss
was the result of the Company retiring by defeasance all of its $47.5
million 12% Senior Notes and paying all amounts outstanding under the
Company's revolving bank credit facility from the proceeds of an equity
offering concluded during the Current Quarter.
SIX MONTHS ENDED DECEMBER 31, 1996 VS. DECEMBER 31, 1995
Net income for the six months ended December 31, 1996 (the "Current Period")
was $18.5 million, a $10.1 million increase from net income of $8.4 million
for the six months ended December 31, 1995 (the "Prior Period"), after
giving effect to an extraordinary loss of $6.4 million (net of income tax)
incurred in the Current Period. This increase was caused by the Company's
significantly higher oil and gas production and increases in oil and gas
sales prices.
Revenues from oil and gas sales for the Current Period were $90.2 million,
an increase of $43.8 million, or 94%, from the Prior Period. Gas production
increased to 30.1 Bcf, an increase of 7.1 Bcf, or 31%, compared to the Prior
Period. Oil production increased to 1,116 MBbls, an increase of 422 MBbls,
or 61%, compared to the Prior Period. In the Current Period the Company
realized an average gas price of $2.18 per Mcf, net of hedging losses of
$5.6 million. This was an increase of $0.67 per Mcf, or 44%, as compared
to the $1.51 per Mcf realized in the Prior Period. The Company realized an
average oil price of $21.88 per Bbl, net of hedging losses of $1.5 million.
This was an increase of $4.92 per Bbl, or 29%, compared to the $16.96 per
Bbl realized in the Prior Period.
Revenues from the Company's oil and gas marketing operations were $30.0
million in the Current Period compared to $3.8 million in the Prior Period,
which included only one month of operations. Oil and gas marketing expenses
were $29.5 million in the Current Period, resulting in a gross profit
margin of $0.5 million.
Production expenses and taxes increased to $5.9 million in the Current Period,
an increase of $2.2 million, or 59%, from $3.7 million incurred in the Prior
Period. This increase was the result of a significant increase in oil and
gas production volumes during the Current Period, higher oil and gas prices
which increase severance taxes, and slightly higher lifting costs per unit
of production. On an Mcfe basis, production expenses and taxes were $0.16
per Mcfe in the Current Period compared to $0.14 in the Prior Period. The
Company expects that production expenses will continue to increase in fiscal
1997 because of the Company's expansion of drilling efforts into the
Louisiana Trend and the Williston Basin, both of which are oil prone
areas with significant associated water production which results in higher
operating costs than gas prone areas. The Company expects that production
taxes will trend higher during fiscal 1997 due to higher taxes resulting
from higher oil and gas prices, and because severance tax exemptions will
be more limited in the Louisiana Trend compared to existing exemptions in
the Giddings Field.
DD&A of oil and gas properties in the Current Period was $36.2 million,
an increase of $14.0 million, or 63%, from $22.2 million expensed in the
Prior Period. The increase in DD&A expense is the result of a 9.7 Bcfe
increase in production volumes and an increase in the DD&A rate per Mcfe.
The average DD&A rate per Mcfe was $0.99 in the Current Period as compared
to $0.82 in the Prior Period. The Company believes the DD&A rate will
continue to trend higher in fiscal 1997 based on higher projected finding
costs for wells drilled in the Louisiana Trend which will represent a
significant portion of the Company's activities.
Depreciation and amortization of other assets increased to $1.8 in the
Current Period, a $0.4 million, or 29%, increase from the Prior Period.
This increase is the result of higher amortization expense related to
debt issuance costs, and higher depreciation related to the Company's
acquisition of additional buildings and equipment in its Oklahoma City
headquarters complex to support the Company's growth.
General and administrative expenses increased to $3.7 million during the
Current Period, a $1.8 million, or 95%, increase from the Prior Period.
This increase is the result of the continued growth of the Company.
General and administrative expenses were $0.10 per Mcfe in the Current
Period, compared to $0.07 per Mcfe in the Prior Period. The Company
capitalized $1.1 million and $0.4 million of payroll and other internal
costs directly related to oil and gas exploration and development
activities, net of partner reimbursements, in the Current Period and Prior
Period, respectively.
Interest expense decreased to $6.2 million in the Current Period from $6.5
million in the Prior Period. This decrease occurred despite an increase
in total interest costs as a result of higher average long-term debt
levels in the Current Period compared to the Prior Period. However, the
increase was more than offset by the amount of interest capitalized by the
Company in the Current Period. During the Current Period the Company
capitalized $7.6 million of interest costs representing the estimated costs
to carry its unevaluated leasehold inventory, compared to $1.9 million in
the Prior Period.
Income tax expense increased to $14.3 million in the Current Period (before
giving effect to the income tax benefit applicable to the extraordinary item)
from $4.6 in the Prior Period. The Company's estimated effective income tax
rate was 36.5% for the Current Period, compared to 35.5% for the Prior
Period. The Company estimates its effective rate based on anticipated levels
of income for the year, estimated production in excess of that allowed in
computing statutory depletion for tax purposes, the interplay between state
location of production revenue and the related state income tax, and other
factors. The provision for income tax expense is deferred because the
Company is not currently a cash income taxpayer. The Company has significant
federal tax net operating loss carryforwards generated from the intangible
drilling cost deduction for income tax purposes associated with the
Company's drilling activities which are available to offset regular taxable
income in the future.
RISK MANAGEMENT ACTIVITIES
Periodically the Company utilizes hedging strategies to hedge the price of a
portion of its future oil and gas production. These strategies include swap
arrangements that establish an index-related price above which the Company
pays the hedging partner and below which the Company is paid by the hedging
partner, the purchase of index-related puts that provide for a "floor" price
to the Company to be paid by the counter-party to the extent the price of
the commodity is below the contracted floor, and basis protection swaps.
Results from hedging transactions are reflected in oil and gas sales to the
extent related to the Company's oil and gas production. The Company has not
entered into hedging transactions unrelated to the Company's oil and gas
production.
The Company has the following oil swap arrangements for periods after the
Current Quarter:
Monthly NYMEX-Index
Month Volume(Bbls) Strike Price (per Bbl)
- ------ ------------ ----------------------
January 1997 31,000 $20.01
January 1997 62,000 $23.27
February 1997 28,000 $19.72
February 1997 56,000 $22.74
March 1997 31,000 $19.46
April 1997 30,000 $19.22
May 1997 31,000 $18.97
June 1997 30,000 $18.79
July 1997 31,000 $18.60
August 1997 31,000 $18.43
September 1997 30,000 $18.30
October 1997 31,000 $18.19
November 1997 30,000 $18.13
December 1997 31,000 $18.08
The Company has entered into oil swap arrangements to cancel the effect
of the swaps for the months of August through December at an average price
of $22.10 per Bbl.
The Company has the following gas swap arrangements for periods after the
Current Quarter:
Monthly Houston Ship Channel
Months Volume (MMBtu) Index Strike Price (per MMBtu)
- ------ -------------- ------------------------------
March 1997 620,000 $2.222
April 1997 600,000 $2.022
May 1997 620,000 $1.937
The Company has the following gas floor arrangements for periods after the
Current Quarter:
Monthly Houston Ship Channel
Months Volume(MMBtu) Index Strike Price (per MMBtu)
- ------ ------------- ------------------------------
January 1997 620,000 $2.260
February 1997 560,000 $2.155
Gains or losses on the crude oil and natural gas hedging transactions are
recognized as price adjustments in the month of related production. The
Company estimates that had all of the crude oil and natural gas swap
agreements in effect for production periods beginning January 1, 1997
terminated on January 28, 1997, based on the closing prices for NYMEX futures
contracts as of that date, the Company would have paid the counterparty
approximately $1.8 million, which would have represented the "fair value"
at that date. These agreements were not terminated.
CAPITAL RESOURCES AND LIQUIDITY
During the Current Quarter the Company completed an offering of 8,972,000
shares of Common Stock at a price of $33.63 per share resulting in net
proceeds to the Company of approximately $288.1 million. The Company used
approximately $55.0 million to retire through convenant defeasance the
Company's $47.5 million 12% Senior Notes, including accrued but unpaid
interest through the date of defeasance of $1.3 million. The Company used
$50 million to repay all amounts outstanding under its revolving bank credit
facility. The balance of the net proceeds has been and will be used to fund
exploration and development capital expenditures and for general corporate
purposes.
As of December 31, 1996, the Company had working capital of $123.2 million.
Additionally, the Company had credit availability of $68 million under its
$125 million revolving credit facility, with no amounts outstanding. The
Company has estimated that its capital expenditures for fiscal 1997 will
be approximately $360 million, including approximately $265 million for
drilling, completion and production expenditures, $30 million for pipeline
and gathering facilities, and the balance for acreage acquisition, seismic
programs and general corporate purposes. The capital expenditure budget
is largely discretionary, and can be adjusted by the Company based on
operating results or other factors. The Company believes it has sufficient
capital resources, including expected cash flow from operations, to fund its
capital program for the foreseeable future.
During the Current Quarter, and as a result of its Common Stock offering
and subsequent reduction of debt levels, the Company received a senior
debt credit rating increase from Standard & Poor's Rating Services to BB.
Additionally, the Company has been placed on Credit Watch with positive
implications by Moody's Investors Service, which has currently rated the
Company's senior debt as Ba3. The Company's long-term debt to total book
capitalization had been reduced to approximately 32% as of December 31, 1996.
The Company is negotiating with its commercial bank group to obtain a $100
million unsecured credit facility with the Company as the sole direct
borrower. This would replace its existing $125 million secured credit
facility under which a subsidiary of the Company is the borrower and the
Company is the guarantor. While the successful negotiation of this facility
is not assured, the Company believes the facility will be put in place during
the third fiscal quarter with financial terms substantially similar to the
existing revolving credit facility.
The Company's cash provided by operating activities decreased to $42 million
during the Current Period, compared to $47 million during the Prior Period.
The decrease of $5 million is the result of additional investments in short-
term marketable securities during the Current Period partially offset by
increases in net income, adjusted for non-cash charges (such as DD&A and
deferred income taxes), and cash provided by changes in current assets and
current liabilities between the two periods.
Cash used in investing activities increased to $184 million in the Current
Period, up from $89 million in the Prior Period. The $95 million increase
is a result of the Company's increased drilling activity and increased
investment in leasehold during the Current Period.
Cash provided by financing activities was $231 million during the Current
Period, as compared to consolidated cash provided by financing activities
of $15 million during the Prior Period. The increase resulted primarily
from the Company's issuance of Common Stock reduced by $54 million for
the defeasance of the Company's $47.5 million 12% Senior Notes and $50
million for the repayment of the Company's revolving credit facility.
LEGAL PROCEEDINGS
On October 15, 1996, Union Pacific Resources Company ("UPRC") filed suit
against the Company alleging patent infringement and tortious interference
with contracts regarding confidentiality and proprietary information of UPRC.
UPRC is seeking injunctive relief and damages in an unspecified amount,
including actual, enhanced, consequential and punitive damages. The Company
believes it has meritorious defenses to the allegations, including its
belief that the subject patent is invalid. Given the subject of the claims,
the Company is unable to predict the outcome of the matter or estimate a
range of financial exposure.
FORWARD LOOKING STATEMENTS
All statements other than statements of historical fact contained in this
Form 10-Q, including statements in "Management's Discussion and Analysis of
Financial Condition and Results of Operations" are forward-looking
statements. When used herein, the words "budget", "budgeted",
"anticipate", "expects", "believes", "seeks", "goals", "intends", or
"projects" and similar expressions are intended to identify forward-looking
statements. It is important to note that the Company's actual results
could differ materially from those projected by such forward-looking
statements. Although the Company believes that the expectations reflected
in such forward-looking statements are reasonable, no assurance can be given
that such expectations will prove correct. Factors that could cause the
Company's results to differ materially from the results discussed in
such forward-looking statements include but are not limited to the
following: production variances from expectations, volatility of oil and
gas prices, the need to develop and replace its reserves, the substantial
capital expenditures required to fund its operations, environmental risks,
drilling and operating risks, risks related to exploration and development
drilling, uncertainties about estimates of reserves, competition, government
regulation, and the ability of the Company to implement its business
strategy. All forward-looking statements in this document are expressly
qualified in their entirety by the cautionary statements in this paragraph.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Reference is made to this item in the Company's quarterly report on Form 10-Q
for the three months ended September 30, 1996 for a description of a pending
legal proceeding.
ITEM 2. CHANGES IN SECURITIES
On December 31, 1996, the Company changed its state of incorporation from
Delaware to Oklahoma by the merger of Chesapeake Energy Corporation, a
Delaware corporation, with and into its newly formed wholly-owned
subsidiary, Chesapeake Oklahoma Corporation. The surviving corporation
changed its name to Chesapeake Energy Corporation. Each outstanding share
of Common Stock, par value $.10, of the merged Delaware corporation was
converted into one share of Common Stock, par value $.01, of the surviving
corporation. As a result of the merger, the surviving corporation succeeded
to all of the assets and is responsible for all of the liabilities of the
merged Delaware corporation. On matters of corporate governance, the
rights of the Company's security holders are now governed by Oklahoma
law, which is similar to the corporate law of Delaware.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
- - Not applicable
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company's annual meeting of shareholders was held on December 13, 1996.
In addition to electing two directors, shareholders voted to change the
Company's state of incorporation from Delaware to Oklahoma, which included
merging with and into Chesapeake Oklahoma Corporation, the Company's
wholly-owned subsidiary, and increasing the Company's authorized capital
stock to 100,000,000 shares of common stock, par value $.01 per share, and
10,000,000 shares of preferred stock, par value $.01 per share.
The shareholders also approved amendments to the Company's 1992 Nonstatutory
Stock Option Plan and its 1994 Stock Option Plan and adopted the Company's
1996 Stock Option Plan.
In the election of directors, Aubrey K. McClendon received 55,530,182 votes
for election, and 770 shares withheld from voting. Shannon T. Self received
55,011,352 votes for election, and 541,016 shares withheld from voting. The
proposal to change the Company's state of incorporation from Delaware to
Oklahoma was approved by a vote of 49,618,962 shares for, representing 82%
of the outstanding shares of common stock; 3,326,750 shares voted against
the proposal, 22,238 shares abstained from voting and 2,584,418 shares were
broker non-votes. The proposal to approve amendments to the Company's 1992
Nonstatutory Stock Option Plan and its 1994 Stock Option Plan and to adopt
the Company's 1996 Stock Option Plan was approved by a vote of 38,931,478
shares for, which represented 65% of the outstanding common stock;
13,782,600 shares voted against the proposal, 35,100 shares abstained from
voting and 2,803,190 shares were broker non-votes.
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:
Exhibit No.
- -----------
3.1 Registrant's Certificate of Incorporation.
3.2 Registrant's Bylaws. Incorporated herein by reference to
Exhibit 3.2 to Registrant's registration statement on Form 8-B.
10.1.2* Registrant's 1992 Nonstatutory Stock Option Plan, as amended.
10.1.3* Registrant's 1994 Stock Option Plan, as amended.
10.1.4* Registrant's 1996 Stock Option Plan. Incorporated herein by
reference to Registrant's Proxy Statement for its 1996
Annual Meeting of Shareholders.
11 Statement regarding computation of earnings
per common share
27 Financial Data Schedule
_______________________
* Management contract or compensatory plan or arrangement.
(b) Reports on Form 8-K
None
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)
February 14, 1997 AUBREY K. MCCLENDON
Date Aubrey K. McClendon
Chairman and
Chief Executive Officer
February 14, 1997 MARCUS C. ROWLAND
Date Marcus C. Rowland
Vice President and
Chief Financial Officer
INDEX TO EXHIBITS
Exhibit No. Description Method of Filing
- ----------- ----------- ----------------
3.1 Registrant's Certificate of Filed herewith electronically
Incorporation.
3.2 Registrant's Bylaws. Incorporated herein by
reference to Exhibit
3.2 to Registrant's
registration statement
on Form 8-B.
10.1.2 Registrant's 1992 Nonstatutory Filed herewith electronically
Stock Option Plan, as amended.
10.1.3 Registrant's 1994 Stock Option Filed herewith electronically
Plan, as amended.
10.1.4 Registrant's 1996 Stock Option Incorporated herein by
Plan reference to Registrant's
Proxy Statement for its 1996
Annual Meeting of Shareholders.
11 Statement regarding computation Filed herewith electronically
of earnings per common share
27 Financial Data Schedule Filed herewith electronically