1
- --------------------------------------------------------------------------------
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
---------------
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 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 May 9, 2000, there were 118,471,102 shares of the registrant's $.01 par
value Common Stock outstanding.
- --------------------------------------------------------------------------------
2
CHESAPEAKE ENERGY CORPORATION AND SUBSIDIARIES
INDEX TO FORM 10-Q FOR THE QUARTER ENDED MARCH 31, 2000
PART I. FINANCIAL INFORMATION
PAGE
----
Item 1. Consolidated Financial Statements:
Consolidated Balance Sheets at March 31, 2000 (Unaudited) and
December 31, 1999 3
Consolidated Statements of Operations for the Three Months Ended
March 31, 2000 and 1999 (Unaudited) 4
Consolidated Statements of Cash Flows for the Three Months Ended
March 31, 2000 and 1999 (Unaudited) 5
Condensed Consolidating Statements of Comprehensive Income (Loss) for
the Three Months Ended March 31, 2000 and 1999 (Unaudited) 6
Notes to Consolidated Financial Statements (Unaudited) 7
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations 16
Item 3. Quantitative and Qualitative Disclosures About Market Risks 20
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 22
Item 2. Changes in Securities and Use of Proceeds 22
Item 3. Defaults Upon Senior Securities 22
Item 4. Submission of Matters to a Vote of Security Holders 22
Item 5. Other Information 22
Item 6. Exhibits and Reports on Form 8-K 22
2
3
CHESAPEAKE ENERGY CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
MARCH 31, DECEMBER 31,
2000 1999
----------- ------------
(UNAUDITED)
($ IN THOUSANDS)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents .................................................. $ 26,231 $ 38,658
Restricted cash ............................................................ 3,073 192
Accounts receivable:
Oil and gas sales ........................................................ 20,790 17,045
Oil and gas marketing sales .............................................. 21,814 18,199
Joint interest and other, net of allowances of $3,249,000
and $3,218,000, respectively ........................................... 11,976 11,247
Related parties .......................................................... 3,805 4,574
Inventory .................................................................. 4,063 4,582
Other ...................................................................... 5,784 3,049
----------- -----------
Total Current Assets ................................................ 97,536 97,546
----------- -----------
PROPERTY AND EQUIPMENT:
Oil and gas properties, at cost based on full-cost accounting:
Evaluated oil and gas properties ......................................... 2,362,596 2,315,348
Unevaluated properties ................................................... 36,409 40,008
Less: accumulated depreciation, depletion and amortization ............... (1,694,927) (1,670,542)
----------- -----------
704,078 684,814
Other property and equipment ............................................... 68,724 67,712
Less: accumulated depreciation and amortization ............................ (34,325) (33,429)
----------- -----------
Total Property and Equipment ........................................ 738,477 719,097
----------- -----------
OTHER ASSETS ................................................................. 29,358 33,890
----------- -----------
TOTAL ASSETS ................................................................. $ 865,371 $ 850,533
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Notes payable and current maturities of long-term debt ..................... $ 781 $ 763
Accounts payable ........................................................... 22,346 24,822
Accrued liabilities and other .............................................. 38,260 34,713
Revenues and royalties due others .......................................... 24,756 27,888
----------- -----------
Total Current Liabilities ........................................... 86,143 88,186
----------- -----------
LONG-TERM DEBT, NET .......................................................... 960,416 964,097
----------- -----------
REVENUES AND ROYALTIES DUE OTHERS ............................................ 8,752 9,310
----------- -----------
DEFERRED INCOME TAXES ........................................................ 6,650 6,484
----------- -----------
STOCKHOLDERS' EQUITY (DEFICIT):
Preferred Stock, $.01 par value, 10,000,000 shares authorized;
3,921,400 and 4,596,400 shares of 7% cumulative convertible
stock issued and outstanding at March 31, 2000 and December 31,
1999, respectively, entitled in liquidation (including
dividends in arrears) to $216.4 million and
$249.1 million, respectively ............................................. 196,070 229,820
Common Stock, par value of $.01, 250,000,000 shares authorized;
108,561,616 and 105,858,580 shares issued at March 31, 2000 and
December 31, 1999, respectively .......................................... 1,086 1,059
Paid-in capital ............................................................ 684,755 682,905
Accumulated earnings (deficit) ............................................. (1,065,465) (1,093,929)
Accumulated other comprehensive income (loss) .............................. (282) 196
Less: treasury stock, at cost; 3,806,185 and 10,856,185 common shares at
March 31, 2000 and December 31, 1999, respectively ....................... (12,754) (37,595)
----------- -----------
Total Stockholders' Equity (Deficit) ................................ (196,590) (217,544)
----------- -----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT) ......................... $ 865,371 $ 850,533
=========== ===========
The accompanying notes are an integral part of these
consolidated financial statements.
3
4
CHESAPEAKE ENERGY CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
THREE MONTHS ENDED
MARCH 31,
------------------------
2000 1999
--------- ---------
REVENUES:
Oil and gas sales ....................................... $ 87,293 $ 51,806
Oil and gas marketing sales ............................. 27,368 13,871
--------- ---------
Total revenues ...................................... 114,661 65,677
--------- ---------
OPERATING COSTS:
Production expenses ..................................... 12,545 13,992
Production taxes ........................................ 5,216 1,990
General and administrative .............................. 3,032 4,024
Oil and gas marketing expenses .......................... 26,544 13,285
Oil and gas depreciation, depletion and amortization .... 24,483 23,153
Depreciation and amortization of other assets ........... 1,866 2,166
--------- ---------
Total operating costs ............................... 73,686 58,610
--------- ---------
INCOME FROM OPERATIONS ................................... 40,975 7,067
--------- ---------
OTHER INCOME (EXPENSE):
Interest and other income ............................... 1,192 873
Interest expense ........................................ (20,864) (19,890)
--------- ---------
Total other income (expense) ........................ (19,672) (19,017)
--------- ---------
INCOME (LOSS) BEFORE INCOME TAX .......................... 21,303 (11,950)
--------- ---------
INCOME TAX EXPENSE:
Current ................................................. -- --
Deferred ................................................ 101 --
--------- ---------
Total income tax expense ............................ 101 --
--------- ---------
NET INCOME (LOSS) ........................................ 21,202 (11,950)
Preferred stock dividends ............................... (4,042) (4,026)
Gain on redemption of preferred stock ................... 10,414 --
--------- ---------
NET INCOME (LOSS) AVAILABLE TO COMMON SHAREHOLDERS ....... $ 27,574 $ (15,976)
========= =========
EARNINGS (LOSS) PER COMMON SHARE:
Basic ................................................... $ 0.27 $ (0.17)
========= =========
Assuming Dilution ....................................... $ 0.15 $ (0.17)
========= =========
WEIGHTED AVERAGE COMMON AND COMMON EQUIVALENT
SHARES OUTSTANDING:
Basic ................................................... 101,681 96,710
========= =========
Assuming Dilution ....................................... 140,130 96,710
========= =========
The accompanying notes are an integral part of these
consolidated financial statements.
4
5
CHESAPEAKE ENERGY CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
THREE MONTHS ENDED
MARCH 31,
----------------------
2000 1999
-------- --------
($ IN THOUSANDS)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) ..................................................... $ 21,202 $(11,950)
Adjustments to reconcile net income (loss) to net cash provided by
operating activities:
Depreciation, depletion and amortization ............................. 25,420 24,550
Amortization of loan costs ........................................... 909 769
Amortization of bond discount ........................................ 21 21
(Gain) loss on sale of fixed assets and other ........................ (80) 78
Equity in losses of equity investees ................................. 119 --
Income tax expense ................................................... 101 --
-------- --------
Cash provided by operating activities before changes in
current assets and liabilities .................................. 47,692 13,468
Changes in current assets and liabilities ............................ (9,477) 12,830
-------- --------
Cash provided by operating activities .............................. 38,215 26,298
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Exploration and development of oil and gas properties ................. (40,252) (44,590)
Purchases of oil and gas properties ................................... (4,564) (3,988)
Sales of oil and gas properties ....................................... 985 2,070
Sales of non-oil and gas assets ....................................... 177 1,062
Additions to other property and equipment ............................. (1,191) (712)
Other ................................................................. (2,045) 327
-------- --------
Cash used in investing activities .................................. (46,890) (45,831)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from long-term borrowings .................................... 45,000 --
Payments on long-term borrowings ...................................... (48,500) --
Cash received from exercise of stock options .......................... 226 --
-------- --------
Cash used in financing activities .................................. (3,274) --
-------- --------
EFFECT OF CHANGES IN EXCHANGE RATE ON CASH .............................. (478) 816
-------- --------
NET DECREASE IN CASH AND CASH EQUIVALENTS ............................... (12,427) (18,717)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD .......................... 38,658 29,520
-------- --------
CASH AND CASH EQUIVALENTS, END OF PERIOD ................................ $ 26,231 $ 10,803
======== ========
The accompanying notes are an integral part of these
consolidated financial statements.
5
6
CHESAPEAKE ENERGY CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATING STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(UNAUDITED)
THREE MONTHS ENDED
MARCH 31,
----------------------
2000 1999
-------- --------
($ in thousands)
Net income (loss) .................................................... $ 21,202 $(11,950)
Other comprehensive income (loss) - foreign currency translation
adjustments .......................................................... (478) 816
-------- --------
Comprehensive income (loss) .......................................... $ 20,724 $(11,134)
======== ========
The accompanying notes are an integral part of these
consolidated financial statements.
6
7
CHESAPEAKE ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 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. 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 ended March 31, 2000 are not necessarily
indicative of the results to be expected for the full year.
This Form 10-Q relates to the three months ended March 31, 2000 (the "Current
Quarter") and March 31, 1999 (the "Prior Quarter").
2. LEGAL PROCEEDINGS
Bayard Securities Litigation
A purported class action alleging violations of the Securities Act of 1933 and
the Oklahoma Securities Act was first filed in February 1998 against the Company
and others on behalf of investors who purchased common stock of Bayard Drilling
Technologies, Inc. ("Bayard") in, or traceable to, its initial public offering
in November 1997. Total proceeds of the offering were $254 million, of which the
Company received net proceeds of $90 million as a selling shareholder.
Plaintiffs allege that the Company, a major customer of Bayard's drilling
services and the owner of 30.1% of Bayard's common stock outstanding prior to
the offering, was a controlling person of Bayard. Alleged defective disclosures
are claimed to have resulted in a decline in Bayard's share price following the
public offering. Plaintiffs seek a determination that the suit is a proper class
action and damages in an unspecified amount or rescission, together with
interest and costs of litigation, including attorneys' fees.
On August 24, 1999, the court dismissed plaintiffs' claims against the Company
under Section 15 of the Securities Act of 1933 alleging that the Company was a
"controlling person" of Bayard. Claims under Section 11 of the Securities Act of
1933 and Section 408 of the Oklahoma Securities Act continue to be asserted
against the Company. The Company believes that it has meritorious defenses to
these claims and intends to defend this action vigorously. No estimate of loss
or range of estimate of loss, if any, can be made at this time. Bayard, which
was acquired by Nabors Industries, Inc. in April 1999, has been reimbursing the
Company for its costs of defense as incurred.
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 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
7
8
CHESAPEAKE ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2000
(UNAUDITED)
of production for various periods 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.
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 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 supersedes bonds in all of these cases. One of
the other Moore County, Texas cases has been set for trial in May 2000. There
are three related cases pending in other courts. One is set for trial in June
2000 in the U.S. District Court, Northern District of Texas, Amarillo Division.
The only other case pending in that court 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 statement of operations for all entities with
complex capital structures. SFAS 128 requires a reconciliation of the numerators
and denominators of the basic and diluted EPS computations. For the Prior
Quarter there was no difference between actual weighted average shares
outstanding, which are used in computing basic EPS, and diluted weighted average
shares, which are used in computing diluted EPS. Options to purchase 14.8
million shares and 13.7 million shares of common stock at a weighted average
exercise price of $1.83 and $1.71 were outstanding during the Current Quarter
and Prior Quarter, respectively. In the Prior Quarter the outstanding options
were not included in the computation of diluted EPS because the effect of those
outstanding options would be antidilutive. A reconciliation for the Current
Quarter is as follows:
8
9
CHESAPEAKE ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2000
(UNAUDITED)
INCOME SHARES PER SHARE
(NUMERATOR) (DENOMINATOR) AMOUNT
----------- ------------- ---------
FOR THE QUARTER ENDED MARCH 31, 2000:
BASIC EPS
Income available to common stockholders ......... $ 27,574 101,681 $ 0.27
========
EFFECT OF DILUTIVE SECURITIES
Assumed conversion of preferred stock at
beginning of period ........................ 4,042 32,951
Gain on redemption of preferred stock ......... (10,414) --
Employee stock options ........................ -- 5,498
-------- --------
DILUTED EPS
Income available to common stockholders
and assumed conversions ...................... $ 21,202 140,130 $ 0.15
======== ======== ========
In the Current Quarter, the Company engaged in a number of separate stock
exchange transactions with institutional investors. The Company exchanged a
total of 9.5 million shares of common stock (both newly issued and treasury
shares) for 675,000 shares of its issued and outstanding preferred stock with a
liquidation value of $33.8 million plus dividends in arrears of $3.2 million.
All preferred shares acquired in these transactions were cancelled and retired
and will have the status of authorized but unissued shares of undesignated
preferred stock. A gain on redemption of the preferred shares equal to $10.4
million was recognized as an increase to net income 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 in exchange for the preferred shares.
Between April 1 and May 9, 2000, the Company engaged in additional transactions
in which a total of 13.5 million shares of common stock were exchanged for
1,055,658 shares of its issued and outstanding preferred stock with a
liquidation value of $52.8 million plus dividends in arrears of $5.8 million.
Including the stock exchange transactions through May 9, 2000, a total of 23.0
million shares of common stock have been exchanged for 1,730,658 shares of
preferred stock. These transactions have reduced (i) the number of preferred
shares from 4.6 million to 2.9 million, (ii) the liquidation value of the
preferred stock from $229.8 million to $143.3 million, and (iii) dividends in
arrears from $25.0 million to $16.0 million. A gain on redemption of all
preferred shares exchanged through May 9, 2000 of $16.4 million ($10.4 million
related to the Current Quarter) will be reflected in net income available to
common shareholders in determining earnings per share.
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.
9
10
CHESAPEAKE ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2000
(UNAUDITED)
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.
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 $20.3 million related to its preferred stock as of March 31, 2000.
Including accrued dividends from April 1 through May 9, 2000, this amount has
subsequently been reduced to approximately $16.0 million as of May 9, 2000 as a
result of additional stock exchange transactions. This restriction does not
affect the Company's ability to borrow under or expand its secured commercial
bank facility. The Company was unable to pay a dividend on the preferred stock
on May 1, 2000, the sixth consecutive dividend payment date on which dividends
have not been paid. If the Company fails to pay dividends for six quarterly
periods, the holders of preferred stock are entitled to elect two new directors
to the Board. Based on current projections of cash flow and fixed charges, the
Company expects to be able to pay a dividend on the preferred stock on August 1,
2000, although there are no assurances the Board of Directors will declare a
dividend, even if the Company is able to resume paying dividends.
Set forth below are condensed consolidating financial statements of the
Guarantor Subsidiaries, the Company's subsidiaries which are not guarantors of
the Senior Notes (the "Non-Guarantor Subsidiaries") and the Company. Separate
financial statements of each Guarantor Subsidiary have not been provided because
management has determined that they are not material to investors.
Chesapeake Energy Marketing, Inc. ("CEMI") was a Non-Guarantor Subsidiary for
all periods presented. All of the Company's other subsidiaries were Guarantor
Subsidiaries during all periods presented.
10
11
CHESAPEAKE ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
CONDENSED CONSOLIDATING BALANCE SHEET
AS OF MARCH 31, 2000
($ IN THOUSANDS)
ASSETS
GUARANTOR NON-GUARANTOR COMPANY
SUBSIDIARIES SUBSIDIARIES (PARENT) ELIMINATIONS CONSOLIDATED
------------ ------------- ----------- ------------ ------------
CURRENT ASSETS:
Cash and cash equivalents ................... $ (10,964) $ 23,031 $ 17,237 $ -- $ 29,304
Accounts receivable, net .................... 51,313 21,629 95 (14,652) 58,385
Inventory ................................... 3,917 146 -- -- 4,063
Other ....................................... 4,602 815 367 -- 5,784
----------- ----------- ----------- ----------- -----------
Total Current Assets ..................... 48,868 45,621 17,699 (14,652) 97,536
----------- ----------- ----------- ----------- -----------
PROPERTY AND EQUIPMENT:
Oil and gas properties ...................... 2,362,596 -- -- -- 2,362,596
Unevaluated leasehold ....................... 36,409 -- -- -- 36,409
Other property and equipment ................ 29,655 20,537 18,532 -- 68,724
Less: accumulated depreciation,
depletion and amortization ................ (1,709,363) (17,892) (1,997) -- (1,729,252)
----------- ----------- ----------- ----------- -----------
Net Property and Equipment ............... 719,297 2,645 16,535 -- 738,477
----------- ----------- ----------- ----------- -----------
INVESTMENTS IN SUBSIDIARIES AND
INTERCOMPANY ADVANCES ....................... 806,181 -- 493,738 (1,299,919) --
----------- ----------- ----------- ----------- -----------
OTHER ASSETS .................................. 10,699 8,389 17,956 (7,686) 29,358
----------- ----------- ----------- ----------- -----------
TOTAL ASSETS .................................. $ 1,585,045 $ 56,655 $ 545,928 $(1,322,257) $ 865,371
=========== =========== =========== =========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
CURRENT LIABILITIES:
Notes payable and current maturities
of long-term debt ......................... $ 781 $ -- $ -- $ -- $ 781
Accounts payable and other .................. 51,163 22,696 26,110 (14,607) 85,362
----------- ----------- ----------- ----------- -----------
Total Current Liabilities ................ 51,944 22,696 26,110 (14,607) 86,143
----------- ----------- ----------- ----------- -----------
LONG-TERM DEBT ................................ 41,235 -- 919,181 -- 960,416
----------- ----------- ----------- ----------- -----------
REVENUES AND ROYALTIES DUE
OTHERS ...................................... 8,752 -- -- -- 8,752
----------- ----------- ----------- ----------- -----------
DEFERRED INCOME TAXES ......................... 6,650 -- -- -- 6,650
----------- ----------- ----------- ----------- -----------
INTERCOMPANY PAYABLES ......................... 1,371,729 (2,773) (1,368,911) (45) --
----------- ----------- ----------- ----------- -----------
STOCKHOLDERS' EQUITY (DEFICIT):
Common Stock ................................ 26 1 1,076 (17) 1,086
Other ....................................... 104,709 36,731 968,472 (1,307,588) (197,676)
----------- ----------- ----------- ----------- -----------
104,735 36,732 969,548 (1,307,605) (196,590)
----------- ----------- ----------- ----------- -----------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY (DEFICIT) .............. $ 1,585,045 $ 56,655 $ 545,928 $(1,322,257) $ 865,371
=========== =========== =========== =========== ===========
11
12
CHESAPEAKE ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
CONDENSED CONSOLIDATING BALANCE SHEET
AS OF DECEMBER 31, 1999
($ IN THOUSANDS)
ASSETS
GUARANTOR NON-GUARANTOR COMPANY
SUBSIDIARIES SUBSIDIARIES (PARENT) ELIMINATIONS CONSOLIDATED
------------ ------------ ----------- ------------ ------------
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) --
----------- ----------- ----------- ----------- -----------
OTHER ASSETS .................................. 16,402 8,409 16,765 (7,686) 33,890
----------- ----------- ----------- ----------- -----------
TOTAL ASSETS .................................. $ 1,563,807 $ 54,245 $ 552,560 $(1,320,079) $ 850,533
=========== =========== =========== =========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
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 ................................ 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
=========== =========== =========== =========== ===========
12
13
CHESAPEAKE ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS
($ IN THOUSANDS)
GUARANTOR NON-GUARANTOR COMPANY
SUBSIDIARIES SUBSIDIARIES (PARENT) ELIMINATIONS CONSOLIDATED
------------ ------------- --------- ------------ ------------
FOR THE THREE MONTHS ENDED MARCH 31, 2000:
REVENUES:
Oil and gas sales ........................... $ 86,221 $ 347 $ -- $ 725 $ 87,293
Oil and gas marketing sales ................. -- 69,850 -- (42,482) 27,368
--------- --------- --------- --------- ---------
Total Revenues ........................... 86,221 70,197 -- (41,757) 114,661
--------- --------- --------- --------- ---------
OPERATING COSTS:
Production expenses and taxes ............... 17,681 80 -- -- 17,761
General and administrative .................. 2,720 291 21 -- 3,032
Oil and gas marketing expenses .............. -- 68,301 -- (41,757) 26,544
Oil and gas depreciation, depletion
and amortization .......................... 24,383 100 -- -- 24,483
Other depreciation and amortization ......... 1,026 20 820 -- 1,866
--------- --------- --------- --------- ---------
Total Operating Costs .................... 45,810 68,792 841 (41,757) 73,686
--------- --------- --------- --------- ---------
INCOME (LOSS) FROM OPERATIONS ................. 40,411 1,405 (841) -- 40,975
--------- --------- --------- --------- ---------
OTHER INCOME (LOSS):
Interest and other income ................... 798 336 20,967 (20,909) 1,192
Interest expense ............................ (20,955) (34) (20,784) 20,909 (20,864)
--------- --------- --------- --------- ---------
(20,157) 302 183 -- (19,672)
--------- --------- --------- --------- ---------
INCOME (LOSS) BEFORE INCOME TAXES ............. 20,254 1,707 (658) -- 21,303
INCOME TAX EXPENSE (BENEFIT) .................. 101 -- -- -- 101
--------- --------- --------- --------- ---------
NET INCOME (LOSS) ............................. $ 20,153 $ 1,707 $ (658) $ -- $ 21,202
========= ========= ========= --------- =========
FOR THE THREE MONTHS ENDED MARCH 31, 1999:
REVENUES:
Oil and gas sales ........................... $ 51,209 $ -- $ -- $ 597 $ 51,806
Oil and gas marketing sales ................. -- 35,435 -- (21,564) 13,871
--------- --------- --------- --------- ---------
Total Revenues ........................... 51,209 35,435 -- (20,967) 65,677
--------- --------- --------- --------- ---------
OPERATING COSTS:
Production expenses and taxes ............... 15,982 -- -- -- 15,982
General and administrative .................. 3,522 457 45 -- 4,024
Oil and gas marketing expenses .............. -- 34,252 -- (20,967) 13,285
Oil and gas depreciation, depletion
and amortization .......................... 23,153 -- -- -- 23,153
Other depreciation and amortization ......... 1,338 20 808 -- 2,166
--------- --------- --------- --------- ---------
Total Operating Costs .................... 43,995 34,729 853 (20,967) 58,610
--------- --------- --------- --------- ---------
INCOME (LOSS) FROM OPERATIONS ................. 7,214 706 (853) -- 7,067
--------- --------- --------- --------- ---------
OTHER INCOME (LOSS):
Interest and other income ................... 267 437 29,140 (28,971) 873
Interest expense ............................ (28,406) -- (20,455) 28,971 (19,890)
--------- --------- --------- --------- ---------
(28,139) 437 8,685 -- (19,017)
--------- --------- --------- --------- ---------
INCOME (LOSS) BEFORE INCOME TAXES ............. (20,925) 1,143 7,832 -- (11,950)
INCOME TAX EXPENSE (BENEFIT) .................. -- -- -- -- --
--------- --------- --------- --------- ---------
NET INCOME (LOSS) ............................. $ (20,925) $ 1,143 $ 7,832 $ -- $ (11,950)
========= ========= ========= --------- =========
13
14
CHESAPEAKE ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS
($ IN THOUSANDS)
GUARANTOR NON-GUARANTOR COMPANY
SUBSIDIARIES SUBSIDIARIES (PARENT) ELIMINATIONS CONSOLIDATED
------------ ------------- -------- ------------ ------------
FOR THE THREE MONTHS ENDED MARCH 31, 2000:
CASH FLOWS FROM OPERATING ACTIVITIES ........... $ 29,595 $ (289) $ 8,909 $ -- $ 38,215
-------- -------- -------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Oil and gas properties, net .................. (47,546) 3,715 -- -- (43,831)
Proceeds from sale of assets ................. 177 -- -- -- 177
Additions to other property and equipment .... (753) (16) (422) -- (1,191)
Other additions .............................. (35) -- (2,010) -- (2,045)
-------- -------- -------- -------- --------
(48,157) 3,699 (2,432) -- (46,890)
-------- -------- -------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES ........... 12,159 (788) (14,645) -- (3,274)
-------- -------- -------- -------- --------
EFFECT OF CHANGES IN EXCHANGE RATE ON CASH ..... (478) -- -- -- (478)
-------- -------- -------- -------- --------
NET INCREASE (DECREASE) IN CASH ................ (6,881) 2,622 (8,168) -- (12,427)
CASH, BEGINNING OF PERIOD ...................... (7,156) 20,409 25,405 -- 38,658
-------- -------- -------- -------- --------
CASH, END OF PERIOD ............................ $(14,037) $ 23,031 $ 17,237 $ -- $ 26,231
======== ======== ======== ======== ========
FOR THE THREE MONTHS ENDED MARCH 31, 1999:
CASH FLOWS FROM OPERATING ACTIVITIES ........... $ 1,617 $ 7,490 $ 17,191 $ -- $ 26,298
-------- -------- -------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Oil and gas properties, net .................. (46,508) -- -- -- (46,508)
Proceeds from sale of assets ................. 1,062 -- -- -- 1,062
Additions to other property and equipment .... 240 (195) (757) -- (712)
Other additions .............................. 327 -- -- -- 327
-------- -------- -------- -------- --------
(44,879) (195) (757) -- (45,831)
-------- -------- -------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES ........... 44,819 (2,888) (41,931) -- --
-------- -------- -------- -------- --------
EFFECT OF CHANGES IN EXCHANGE RATE ON CASH ..... 816 -- -- -- 816
-------- -------- -------- -------- --------
NET INCREASE (DECREASE) IN CASH ................ 2,373 4,407 (25,497) -- (18,717)
CASH, BEGINNING OF PERIOD ...................... (17,319) 7,000 39,839 -- 29,520
-------- -------- -------- -------- --------
CASH, END OF PERIOD ............................ $(14,946) $ 11,407 $ 14,342 $ -- $ 10,803
======== ======== ======== ======== ========
14
15
CHESAPEAKE ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
CONDENSED CONSOLIDATING STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
($ IN THOUSANDS)
GUARANTOR NON-GUARANTOR COMPANY
SUBSIDIARIES SUBSIDIARIES (PARENT) ELIMINATIONS CONSOLIDATED
------------ ------------- -------- ------------ ------------
FOR THE THREE MONTHS ENDED MARCH 31, 2000:
Net income (loss) ............................ $ 20,153 $1,707 $ (658) $ -- $ 21,202
Other comprehensive income (loss) -
foreign currency translation ............... (478) -- -- -- (478)
-------- ------ ------- -------- --------
Comprehensive income ......................... $ 19,675 $1,707 $ (658) $ -- $ 20,724
-------- ====== ======= ======== ========
FOR THE THREE MONTHS ENDED MARCH 31, 1999:
Net income (loss) ............................ $(20,925) $1,143 $ 7,832 $ -- $(11,950)
Other comprehensive income (loss) -
foreign currency translation ............... 816 -- -- -- 816
-------- ------ ------- -------- --------
Comprehensive income (loss) .................. $(20,109) $1,143 $ 7,832 $ -- $(11,134)
-------- ====== ======= ======== ========
15
16
PART I. FINANCIAL INFORMATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
RESULTS OF OPERATIONS - Three Months Ended March 31, 2000 vs. March 31, 1999
General. For the three months ended March 31, 2000 (the "Current Quarter"), the
Company realized net income of $21.2 million, or $0.15 per diluted common share.
This compares to a net loss of $12.0 million, or a loss of $0.17 per diluted
common share, in the three months ended March 31, 1999 (the "Prior Quarter").
The loss in the Prior Quarter was primarily caused by low oil and gas prices.
Oil and Gas Sales. During the Current Quarter, oil and gas sales increased 69%
to $87.3 million from $51.8 million in the Prior Quarter. For the Current
Quarter, the Company produced 33.9 billion cubic feet equivalent ("bcfe"),
consisting of 0.9 million barrels of oil ("mmbo") and 28.7 billion cubic feet of
natural gas ("bcf"), compared to 1.3 mmbo and 25.7 bcf, or 33.3 bcfe, in the
Prior Quarter. Average oil prices realized were $24.58 per barrel of oil ("bo")
in the Current Quarter compared to $10.92 per bo in the Prior Quarter, an
increase of 125%. Average gas prices realized were $2.30 per thousand cubic feet
("mcf") in the Current Quarter compared to $1.48 per mcf in the Prior Quarter,
an increase of 55%.
For the Current Quarter, the Company realized an average price of $2.57 per
thousand cubic feet equivalent ("mcfe"), compared to $1.56 per mcfe in the Prior
Quarter. The Company's hedging activities resulted in decreased oil and gas
revenues of $2.2 million, or $0.06 per mcfe, in the Current Quarter, compared to
increases in oil and gas revenues of $0.3 million, or $0.01 per mcfe, in the
Prior Quarter.
The following table shows the Company's production by region for the Current
Quarter and the Prior Quarter:
FOR THE THREE MONTHS ENDED MARCH 31,
-------------------------------------------
2000 1999
------------------- -------------------
OPERATING AREAS (mmcfe) PERCENT (mmcfe) PERCENT
- --------------------- ------ ------- ------ -------
Mid-Continent ....... 18,772 55% 16,184 49%
Gulf Coast .......... 10,182 30 11,400 34
Canada .............. 2,925 9 2,431 7
Other Areas ......... 2,052 6 3,297 10
------ --- ------ ---
Total .......... 33,931 100% 33,312 100%
====== === ====== ===
Natural gas production represented approximately 85% of the Company's total
production volume on an equivalent basis in the Current Quarter, compared to 77%
in the Prior Quarter.
Oil and Gas Marketing Sales. The Company realized $27.4 million in oil and gas
marketing sales for third parties in the Current Quarter, with corresponding oil
and gas marketing expenses of $26.5 million, for a margin of $0.9 million. This
compares to sales of $13.9 million, expenses of $13.3 million, and a margin of
$0.6 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.
Production Expenses. Production expenses decreased to $12.5 million in the
Current Quarter, a $1.5 million decrease from the $14.0 million of production
expenses incurred in the Prior Quarter. On a unit of production basis,
production expenses were $0.37 and $0.42 per mcfe in the Current and Prior
Quarters, respectively. The decrease in production expenses between periods is
due primarily to the sale of certain oil and gas properties with high per-unit
operating costs as well as other cost cutting measures such as staff reductions
and office closings. The Company anticipates production expenses will not vary
significantly from current levels during the remainder of 2000.
16
17
Production Taxes. Production taxes, which consist primarily of wellhead
severance taxes, were $5.2 million and $2.0 million in the Current and Prior
Quarters, respectively. On a per unit basis, production taxes were $0.15 per
mcfe in the Current Quarter compared to $0.06 per mcfe in the Prior Quarter. The
increase in the Current Quarter is 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
$24.5 million, compared to $23.2 million in the Prior Quarter. The DD&A rate per
mcfe increased from $0.70 in the Prior Quarter to $0.72 in the Current Quarter.
The Company expects DD&A will increase moderately from current levels during the
remainder of 2000.
Depreciation and Amortization of Other Assets. Depreciation and amortization of
other assets ("D&A") was $1.9 million in the Current Quarter compared to $2.2
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 $3.0
million in the Current Quarter compared to $4.0 million in the Prior Quarter.
The decrease was due primarily to various actions taken to lower corporate
overhead, including staff reduction and office closings, which occurred
throughout 1999, and an increase in capitalized internal costs between periods.
The Company capitalized $1.9 million of internal costs in the Current Quarter
directly related to the Company's oil and gas exploration and development
efforts, compared to $1.2 million in the Prior Quarter. 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
$1.2 million compared to $0.9 million in the Prior Quarter.
Interest Expense. Interest expense increased to $20.9 million in the Current
Quarter from $19.9 million in the Prior Quarter. In addition to the interest
expense reported, the Company capitalized $0.7 million of interest during the
Current Quarter compared to $1.1 million capitalized in the Prior Quarter.
Provision for Income Taxes. The Company recorded income tax expense of $0.1
million for the Current Quarter and none in the Prior Quarter. The income tax
expense recorded in the Current Quarter is related to the Company's Canadian
operations. At March 31, 2000, the Company had a net operating loss carryforward
of approximately $636 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 generated for U.S. income tax purposes, comprised primarily of
the net operating loss carryforward, will be realizable in future years, and
therefore a valuation allowance of $434 million has been recorded.
RISK MANAGEMENT ACTIVITIES
See Item 3 - "Quantitative and Qualitative Disclosures About Market Risks".
LIQUIDITY AND CAPITAL RESOURCES
The Company had working capital of $11.4 million at March 31, 2000 and a cash
balance of $29.3 million. The Company has a $50 million revolving bank credit
facility, which matures in July 2002, with a committed borrowing base of $50
million. As of March 31, 2000, the Company had borrowed $40.0 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 9.4% per
annum as of March 31, 2000.
At March 31, 2000, the Company's senior notes represented $919.2 million of its
$960.4 million of long-term debt. Debt ratings for the senior notes are B2 by
Moody's Investors Service and B by Standard & Poor's Corporation as
17
18
of May 1, 2000. 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 March 31, 2000, the Company estimates that
secured commercial bank indebtedness of $149 million could have been incurred
under the indentures. The indenture restrictions do not apply to borrowings
incurred by CEMI, an unrestricted subsidiary.
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 $20.3 million related to its preferred stock as of March 31, 2000.
Including accrued dividends from April 1 through May 9, 2000, this amount has
subsequently been reduced to approximately $16.0 million as of May 9, 2000 as a
result of stock exchange transactions described below. 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 have not been paid. If the Company
fails to pay dividends for six quarterly periods, the holders of preferred stock
are entitled to elect two new directors to the Board. Based on current
projections of cash flow and fixed charges, the Company expects to be able to
pay a dividend on the preferred stock on August 1, 2000, although there are no
assurances the Board of Directors will declare a dividend, even if the Company
is able to resume paying dividends.
In the Current Quarter, the Company engaged in a number of separate stock
exchange transactions with institutional investors. The Company exchanged a
total of 9.5 million shares of common stock (both newly issued and treasury
shares) for 675,000 shares of its issued and outstanding preferred stock with a
liquidation value of $33.8 million plus dividends in arrears of $3.2 million.
All preferred shares acquired in these transactions were cancelled and retired
and will have the status of authorized but unissued shares of undesignated
preferred stock.
Between April 1 and May 9, 2000, the Company engaged in additional transactions
in which a total of 13.5 million shares of common stock were exchanged for
1,055,658 shares of its issued and outstanding preferred stock with a
liquidation value of $52.8 million plus dividends in arrears of $5.8 million.
Including the stock exchange transactions through May 9, 2000, a total of 23.0
million shares of common stock have been exchanged for 1,730,658 shares of
preferred stock. These transactions have reduced (i) the number of preferred
shares from 4.6 million to 2.9 million, (ii) the liquidation value of the
preferred stock from $229.8 million to $143.3 million, and (iii) dividends in
arrears from $25.0 million to $16.0 million. A gain on redemption of all
preferred shares exchanged through May 9, 2000 of $16.4 million ($10.4 million
related to the Current Quarter) will be reflected in net income available to
common shareholders in determining earnings per share.
The Company believes it has adequate resources, including cash on hand, budgeted
cash flow from operations and proceeds from miscellaneous asset sales, to more
than fund its capital expenditure budget for exploration and development
activities during 2000, which are currently estimated to be approximately
$130-$140 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, or a combination of the above.
The Company's cash provided by operating activities increased 45% to $38.2
million during the Current Quarter compared to $26.3 million during the Prior
Quarter. The increase was due primarily to higher oil and gas prices realized
during the Current Quarter.
Cash used in investing activities increased to $46.9 million during the Current
Quarter from $45.8 million in the Prior Quarter. During the Current Quarter the
Company expended approximately $34.8 million to initiate drilling
18
19
on 51 gross (27.7 net) wells and invested approximately $5.4 million in
leasehold acquisitions. This compares to $40.2 million to initiate drilling on
41 gross (25.6 net) wells and $4.4 million to purchase leasehold in the Prior
Quarter. During the Current Quarter, the Company had acquisitions of oil and
properties of $4.6 million and divestitures of oil and gas properties of $1.0
million. This compares to acquisitions of $4.0 million and divestitures of $2.1
million in the Prior Quarter.
There was $3.3 million of cash used in financing activities in the Current
Quarter, compared to none in the Prior Quarter. The activity in the Current
Quarter reflects the net reduction in borrowings under the Company's commercial
bank credit facility of $3.5 million, partially offset by 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) 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.
FORWARD LOOKING STATEMENTS
This Form 10-Q includes "forward-looking statements" within the meaning of
Section 27A of the Securities Act of 1933 and Section 21E of the Securities
Exchange Act of 1934. All statements other than statements of historical facts
included in this Form 10-Q, including, without limitation, statements regarding
oil and gas reserve estimates, planned capital expenditures, expected oil and
gas production, the Company's financial position, business strategy and other
plans and objectives for future operations, expected future expenses and
preferred stock dividend payments, and realization of deferred tax assets, are
forward-looking statements. Although the Company believes that the expectations
reflected in such forward-looking statements are reasonable, it can give no
assurance that such expectations will prove to have been correct. Factors that
could cause actual results to differ materially from those expected by the
Company, including, without limitation, factors discussed under Risk Factors in
the Company's Form 10-K for the period ended December 31, 1999, are substantial
indebtedness, impairment of asset value, need to replace reserves, substantial
capital requirements, ability to supplement capital resources with asset sales,
fluctuations in the prices of oil and gas, uncertainties inherent in estimating
quantities of oil and gas reserves, projecting future rates of production and
the timing of development expenditures, competition, operating risks,
restrictions imposed by lenders, liquidity and capital requirements, the effects
of governmental and environmental regulation, pending litigation, and adverse
changes in the market for the Company's oil and gas production. Readers are
cautioned not to place undue reliance on these forward-looking statements, which
speak only as of the date hereof. The Company undertakes no obligation to
release publicly the result of any revisions to these forward-looking statements
that may be made to reflect events or circumstances after the date hereof,
including, without limitation, changes in the Company's business strategy or
planned capital expenditures, or to reflect the occurrence of unanticipated
events.
19
20
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.
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 March 31, 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 March 2000:
NYMEX-INDEX
VOLUME STRIKE PRICE
MONTHS (MMBtu) (PER MMBtu)
- ------ --------- ------------
April 2000....................................... 8,900,000 $ 2.59
May 2000......................................... 3,410,000 2.74
June 2000........................................ 3,300,000 2.74
July 2000........................................ 3,410,000 2.74
August 2000...................................... 3,410,000 2.74
September 2000................................... 2,100,000 2.70
October 2000..................................... 2,170,000 2.70
If the swap arrangements listed above had been settled on March 31, 2000, the
Company would have incurred a loss of $7.0 million. Subsequent to March 31, 2000
the Company settled the natural gas swaps for April and May 2000. A loss of $2.7
million and $1.2 million will be recognized as price adjustments in April and
May, respectively. Additionally, the Company has closed certain of its natural
gas swaps that were open at March 31, 2000. The Company has closed hedges on
5,530,000 MMBTU and will recognize a loss of $1.8 million, which will be
recognized as price adjustments, from June through October, 2000.
As of March 31, 2000, the Company had the following open crude oil swap
arrangement designed to hedge a portion of the Company's domestic crude oil
production for periods after March 2000:
MONTHLY NYMEX-INDEX
VOLUME STRIKE PRICE
MONTHS (Bbls) (PER Bbl)
- ------ ------- ------------
April 2000........................................ 89,000 $27.251
If the swap arrangement listed above had been settled on March 31, 2000, the
Company would have incurred a loss of $67,000.
20
21
The Company has also closed transactions designed to hedge a portion of the
Company's domestic oil and natural gas production. The net unrecognized losses
resulting from these transactions, $1.7 million as of March 31, 2000, will be
recognized as price adjustments in the months of related production. These
hedging gains and losses are set forth below ($ in thousands):
HEDGING GAINS (LOSSES)
-------------------------------------
MONTH GAS OIL TOTAL
- ----- ------- ------- -------
April 2000 ......... $ 71 $ (647) $ (576)
May 2000 ........... 73 (668) (595)
June 2000 .......... 71 (647) (576)
July 2000 .......... 73 (231) (158)
August 2000 ........ 73 -- 73
September 2000 ..... 71 -- 71
October 2000 ....... 73 -- 73
------- ------- -------
$ 505 $(2,193) $(1,688)
======= ======= =======
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 December 1999. During the
Current Quarter, the Company's interest rate swap resulted in a $147,000
reduction of interest expense. The terms of the swap agreement are as follows:
Months Notional Amount Fixed Rate Floating Rate
------ --------------- ---------- -------------
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
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.
If the interest rate swap agreement listed above had been settled on March 31,
2000, the Company would have been required to pay the counterparty approximately
$16.7 million. However, because of the knock-out provision discussed above and
the volatility of interest rates, the Company does not believe that this
worst-case scenario is a fair measure of the market value of the swap agreement
and, therefore, would not pay this amount to cancel the transaction. Results
from interest rate hedging transactions are reflected as adjustments to interest
expense in the corresponding months covered by the swap agreement.
The table below presents principal cash flows and related weighted average
interest rates by expected maturity dates. The fair value of the long-term debt
has been estimated based on quoted market prices.
MARCH 31, 2000
------------------------------------------------------------------------------------------
YEARS OF MATURITY
------------------------------------------------------------------------------------------
2000 2001 2002 2003 2004 THEREAFTER TOTAL FAIR VALUE
------ ------ ------ ------ ------ ---------- ------ ----------
LIABILITIES: ($ IN MILLIONS)
Long-term debt, including
current portion - fixed rate ..... $ 0.6 $ 0.8 $ 0.6 $ -- $150.0 $770.0 $922.0 $827.4
Average interest rate ............ 9.1% 9.1% 9.1% -- 7.9% 9.3% 9.1% --
Long-term debt - variable rate ..... $ -- $ -- $ 40.0 $ -- $ -- $ -- $ 40.0 $ 40.0
Average interest rate ............ -- -- 9.4% -- -- -- 9.4% --
21
22
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 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 March 31, 2000, the Company exchanged 9,493,750 shares
of common stock for 675,000 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
May 1, 2000 was the sixth 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 2,865,742 shares
outstanding as of May 15, 2000 were $16.2 million. Additional information on
preferred stock dividends is provided in Part I, Item 2 under "Liquidity and
Capital Resources", the third paragraph of which is incorporated herein by
reference.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
- - Not applicable
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.
-----------
10.1.6 Chesapeake Energy Corporation 2000 Employee Stock
Option Plan
10.1.7 Chesapeake Energy Corporation 2000 Executive Officer
Stock Option Plan
12 Schedule of Ratios
27 Financial Data Schedule
(b) Reports on Form 8-K
During the quarter ended March 31, 2000, the Company filed the
following Current Reports on Form 8-K:
22
23
On February 28, 2000, the Company filed a current report on Form 8-K
reporting under Item 5 that the Company issued a press release
announcing record financial results and proved reserve levels.
On March 9, 2000, the Company filed a current report on Form 8-K
reporting under Item 5 that the Company issued a press release
announcing the dismissal of 1997 securities litigation against the
Company.
On March 16, 2000, the Company filed a current report on Form 8-K
reporting under Item 5 that the Company issued a press release
announcing a restructured joint venture agreement with Gothic Energy
Corporation.
23
24
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)
May 15, 2000 /s/ Aubrey K. McClendon
- --------------------------- -----------------------------------
Date Aubrey K. McClendon
Chairman and
Chief Executive Officer
May 15, 2000 /s/ Marcus C. Rowland
- --------------------------- -----------------------------------
Date Marcus C. Rowland
Executive Vice President and
Chief Financial Officer
24
25
INDEX TO EXHIBITS
EXHIBIT NO. DESCRIPTION
- ----------- -----------
10.1.6 Chesapeake Energy Corporation 2000 Employee Stock Option Plan
10.1.7 Chesapeake Energy Corporation 2000 Executive Officer Stock Option Plan
12 Schedule of Ratios
27 Financial Data Schedule