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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] Quarterly Report pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the quarterly period ended June 30, 2002
[ ] Transition Report pursuant to Section 13 or 15(d) of the
Securities Exchange 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 73118
OKLAHOMA CITY, OKLAHOMA (Zip Code)
(Address of principal executive offices)
(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 July 31, 2002, there were 166,122,358 shares of our $.01 par value common
stock outstanding.
CHESAPEAKE ENERGY CORPORATION AND SUBSIDIARIES
INDEX TO FORM 10-Q FOR THE QUARTER ENDED JUNE 30, 2002
PAGE
----
PART I.
FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements (Unaudited):
Consolidated Balance Sheets at December 31, 2001 and June 30, 2002 ............................ 3
Consolidated Statements of Operations for the Three Months and Six Months
Ended June 30, 2001 and 2002 .................................................................. 4
Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2001
and 2002 ...................................................................................... 5
Consolidated Statements of Comprehensive Income (Loss) for the Three Months and Six
Months Ended June 30, 2001 and 2002 ........................................................... 6
Notes to Consolidated Financial Statements .................................................... 7
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations............22
Item 3. Quantitative and Qualitative Disclosures About Market Risk.......................................31
PART II.
OTHER INFORMATION
Item 1. Legal Proceedings................................................................................36
Item 2. Changes in Securities and Use of Proceeds........................................................36
Item 3. Defaults Upon Senior Securities .................................................................36
Item 4. Submission of Matters to a Vote of Security Holders..............................................36
Item 5. Other Information................................................................................36
Item 6. Exhibits and Reports on Form 8-K.................................................................36
2
CHESAPEAKE ENERGY CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
DECEMBER 31, JUNE 30,
2001 2002
------------ -----------
($ IN THOUSANDS)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents ................................................................. $ 117,594 $ 6,296
Restricted cash ........................................................................... 7,366 131
Accounts receivable:
Oil and gas sales ....................................................................... 51,496 84,352
Joint interest, net of allowances of $947,000 and $1,093,000, respectively .............. 17,364 23,073
Short-term derivatives .................................................................. 34,543 16,069
Related parties ......................................................................... 9,896 7,250
Other ................................................................................... 14,951 17,877
Short-term derivative instruments ......................................................... 97,544 12,509
Inventory and other ....................................................................... 10,629 10,522
----------- -----------
Total Current Assets ................................................................ 361,383 178,079
----------- -----------
PROPERTY AND EQUIPMENT:
Oil and gas properties, at cost based on full-cost accounting:
Evaluated oil and gas properties ........................................................ 3,546,163 3,920,587
Unevaluated properties .................................................................. 66,205 59,907
Less: accumulated depreciation, depletion and amortization .............................. (1,902,587) (2,001,984)
----------- -----------
1,709,781 1,978,510
Other property and equipment .............................................................. 115,694 132,522
Less: accumulated depreciation and amortization ........................................... (39,894) (42,466)
----------- -----------
Total Property and Equipment ........................................................ 1,785,581 2,068,566
----------- -----------
OTHER ASSETS:
Long-term derivatives receivable .......................................................... 18,852 8,351
Deferred income tax asset ................................................................. 67,781 35,405
Long-term derivative instruments .......................................................... 6,370 515
Long-term investments ..................................................................... 29,849 25,089
Other assets .............................................................................. 16,952 14,223
----------- -----------
Total Other Assets .................................................................. 139,804 83,583
----------- -----------
TOTAL ASSETS ................................................................................ $ 2,286,768 $ 2,330,228
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Notes payable and current maturities of long-term debt .................................... $ 602 $ 154
Accounts payable .......................................................................... 79,945 80,871
Accrued interest .......................................................................... 26,316 26,023
Short-term derivative instruments ......................................................... -- 461
Other accrued liabilities ................................................................. 36,998 53,557
Revenues and royalties due others ......................................................... 29,520 36,592
----------- -----------
Total Current Liabilities ........................................................... 173,381 197,658
----------- -----------
LONG-TERM DEBT, NET ......................................................................... 1,329,453 1,326,351
----------- -----------
REVENUES AND ROYALTIES DUE OTHERS ........................................................... 12,696 12,948
----------- -----------
LONG-TERM DERIVATIVE INSTRUMENTS ............................................................ -- 52,016
----------- -----------
OTHER LIABILITIES ........................................................................... 3,831 7,833
----------- -----------
CONTINGENCIES AND COMMITMENTS (NOTE 3)
STOCKHOLDERS' EQUITY:
Preferred Stock, $.01 par value, 10,000,000 shares authorized; 3,000,000 shares and
2,998,000 of 6.75% cumulative convertible preferred stock, issued and outstanding
at December 31, 2001 and June 30, 2002, respectively, entitled in liquidation to
$150 million and $149.9 million ......................................................... 150,000 149,900
Common Stock, $.01 par value, 350,000,000 shares authorized, 169,534,991 and 170,911,163
shares issued at December 31, 2001 and June 30, 2002, respectively ...................... 1,696 1,709
Paid-in capital ........................................................................... 1,035,156 1,038,889
Accumulated deficit ....................................................................... (442,974) (453,173)
Accumulated other comprehensive income, net of tax of $29,000,000 and
$10,719,000, respectively ............................................................... 43,511 16,079
Less: treasury stock, at cost; 4,792,529 common shares at December 31, 2001
and June 30, 2002 ....................................................................... (19,982) (19,982)
----------- -----------
Total Stockholders' Equity .......................................................... 767,407 733,422
----------- -----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY .................................................. $ 2,286,768 $ 2,330,228
=========== ===========
The accompanying notes are an integral part of these consolidated
financial statements.
3
CHESAPEAKE ENERGY CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
---------------------- ----------------------
2001 2002 2001 2002
--------- --------- --------- ---------
($ IN THOUSANDS, EXCEPT PER SHARE DATA)
REVENUES:
Oil and gas sales ..................................................... $ 175,225 $ 152,009 $ 396,444 $ 293,980
Risk management income (loss) ......................................... 62,455 (481) 62,455 (79,949)
Oil and gas marketing sales ........................................... 38,001 42,785 94,166 70,118
--------- --------- --------- ---------
Total Revenues .................................................... 275,681 194,313 553,065 284,149
--------- --------- --------- ---------
OPERATING COSTS:
Production expenses ................................................... 18,842 24,242 36,630 46,302
Production taxes ...................................................... 9,991 7,911 24,286 13,127
General and administrative ............................................ 2,873 3,859 6,874 8,153
Oil and gas marketing expenses ........................................ 36,913 41,181 91,391 67,688
Oil and gas depreciation, depletion and amortization .................. 39,910 50,778 78,083 99,397
Depreciation and amortization of other assets ......................... 1,837 3,652 3,790 6,762
--------- --------- --------- ---------
Total Operating Costs ............................................. 110,366 131,623 241,054 241,429
--------- --------- --------- ---------
INCOME FROM OPERATIONS ................................................. 165,315 62,690 312,011 42,720
--------- --------- --------- ---------
OTHER INCOME (EXPENSE):
Interest and other income ............................................. 683 3,719 1,252 4,673
Interest expense ...................................................... (22,984) (24,690) (48,873) (51,650)
Gothic standby credit facility costs .................................. -- -- (3,392) --
--------- --------- --------- ---------
Total Other Income (Expense) ...................................... (22,301) (20,971) (51,013) (46,977)
--------- --------- --------- ---------
INCOME (LOSS) BEFORE INCOME TAX ........................................ 143,014 41,719 260,998 (4,257)
PROVISION (BENEFIT) FOR INCOME TAXES ................................... 57,529 16,686 105,225 (1,704)
--------- --------- --------- ---------
NET INCOME (LOSS) BEFORE EXTRAORDINARY ITEM ............................ 85,485 25,033 155,773 (2,553)
EXTRAORDINARY ITEM:
Loss on early extinguishment of debt, net of applicable income tax .... (46,000) -- (46,000) --
--------- --------- --------- ---------
NET INCOME (LOSS) ...................................................... 39,485 25,033 109,773 (2,553)
PREFERRED STOCK DIVIDENDS .............................................. (182) (2,530) (728) (5,062)
--------- --------- --------- ---------
NET INCOME (LOSS) AVAILABLE TO COMMON SHAREHOLDERS ..................... $ 39,303 $ 22,503 $ 109,045 $ (7,615)
========= ========= ========= =========
EARNINGS (LOSS) PER COMMON SHARE -- BASIC:
Income before extraordinary item ...................................... $ 0.52 $ 0.14 $ 0.97 $ (0.05)
Extraordinary item .................................................... (0.28) -- (0.29) --
--------- --------- --------- ---------
Net income (loss) ..................................................... $ 0.24 $ 0.14 $ 0.68 $ (0.05)
========= ========= ========= =========
EARNINGS (LOSS) PER COMMON SHARE -- ASSUMING DILUTION:
Income before extraordinary item ...................................... $ 0.50 $ 0.13 $ 0.91 $ (0.05)
Extraordinary item .................................................... (0.27) -- (0.27) --
--------- --------- --------- ---------
Net income (loss) ..................................................... $ 0.23 $ 0.13 $ 0.64 $ (0.05)
========= ========= ========= =========
WEIGHTED AVERAGE COMMON AND COMMON EQUIVALENT
SHARES OUTSTANDING :
Basic ................................................................. 162,588 165,963 160,161 165,669
========= ========= ========= =========
Assuming dilution ..................................................... 171,321 191,947 170,835 165,669
========= ========= ========= =========
The accompanying notes are an integral part of these consolidated
financial statements.
4
CHESAPEAKE ENERGY CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
SIX MONTHS ENDED JUNE 30,
-------------------------
2001 2002
----------- ----------
($ IN THOUSANDS)
CASH FLOWS FROM OPERATING ACTIVITIES:
NET INCOME (LOSS) ......................................................... $ 109,773 $ (2,553)
ADJUSTMENTS TO RECONCILE NET INCOME (LOSS) TO NET
CASH PROVIDED BY OPERATING ACTIVITIES:
Depreciation, depletion and amortization ................................ 80,088 103,770
Risk management (income) loss ........................................... (62,455) 79,949
Extraordinary loss on early-extinguishment of debt ...................... 46,000 --
Deferred income taxes ................................................... 105,225 (1,702)
Write-off of credit facility cost ....................................... 3,392 --
Amortization of loan costs .............................................. 1,785 2,389
Amortization of bond discount ........................................... 349 510
Accretion of Gothic note premium ........................................ (750) --
Loss on sale/disposal of fixed assets and other ......................... 29 36
Equity in losses (earnings) of equity investees ......................... 260 --
Loss on repurchase of debt .............................................. -- 864
Gain on sale of RAM Energy notes ........................................ -- (461)
Bad debt expense ........................................................ -- 140
Other ................................................................... 85 (412)
---------- ----------
CASH PROVIDED BY OPERATING ACTIVITIES BEFORE CHANGES IN ASSETS
AND LIABILITIES ..................................................... 283,781 182,530
Changes in assets and liabilities ....................................... 13,221 32,295
---------- ----------
CASH PROVIDED BY OPERATING ACTIVITIES ................................. 297,002 214,825
---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Exploration and development of oil and gas properties ..................... (179,864) (176,386)
Acquisition of unproved properties ........................................ (48,533) (7,167)
Acquisition of oil and gas companies and proved properties, net of
cash acquired ........................................................... (53,103) (124,305)
Sales of oil and gas properties ........................................... 174 --
Sales of non-oil and gas assets ........................................... 159 62
Additions to buildings and other fixed assets ............................. (8,834) (16,066)
Additions to drilling rig equipment ....................................... (11,930) (2,506)
Additions to long-term investments ........................................ (591) (2,408)
Proceeds from sale of RAM Energy notes .................................... -- 4,215
Other ..................................................................... 480 (11)
---------- ----------
CASH USED IN INVESTING ACTIVITIES ..................................... (302,042) (324,572)
---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from revolving bank credit facility .............................. 273,000 45,000
Payments on revolving bank credit facility ................................ (138,000) --
Cash received from issuance of senior notes ............................... 786,664 --
Cash paid to repurchase senior notes ...................................... (830,382) (42,201)
Cash paid for premium on repurchase of senior notes ....................... (75,639) (1,019)
Cash paid for financing costs related to debt ............................. (12,214) (95)
Cash received from exercise of stock options .............................. 2,782 1,956
Cash paid for preferred stock dividend .................................... (1,092) (5,118)
Other ..................................................................... (11) (74)
---------- ----------
CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES ....................... 5,108 (1,551)
---------- ----------
Effect of changes in exchange rate on cash .................................. (68) --
---------- ----------
NET CHANGE IN CASH AND CASH EQUIVALENTS ..................................... -- (111,298)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD .............................. -- 117,594
---------- ----------
CASH AND CASH EQUIVALENTS, END OF PERIOD .................................... $ -- $ 6,296
========== ==========
The accompanying notes are an integral part of these consolidated
financial statements.
5
CHESAPEAKE ENERGY CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(UNAUDITED)
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------------- -------------------------
2001 2002 2001 2002
---------- ---------- ---------- ----------
($ IN THOUSANDS)
Net income (loss) ............................................ $ 39,485 $ 25,033 $ 109,773 $ (2,553)
Other comprehensive income (loss), net of income tax:
Foreign currency translation adjustments ................... 2,494 -- (725) --
Cumulative effect of accounting change for financial
derivatives .............................................. -- -- (53,580) --
Change in fair value of derivative instruments ............. 53,331 (2,242) 95,469 (12,972)
Reclassification of (gain) or loss on settled contracts .... (2,314) (1,683) 16,012 (15,769)
Ineffective portion of derivatives qualifying for cash
flow hedge accounting .................................... (576) 815 (576) 1,309
---------- ---------- ---------- ----------
Comprehensive income (loss) .................................. $ 92,420 $ 21,923 $ 166,373 $ (29,985)
========== ========== ========== ==========
The accompanying notes are an integral part of these consolidated
financial statements.
6
CHESAPEAKE ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2002
(UNAUDITED)
1. BASIS OF PRESENTATION AND ACCOUNTING POLICIES
Principles of Consolidation
The accompanying unaudited consolidated financial statements of Chesapeake
Energy Corporation and Subsidiaries have been prepared in accordance with the
instructions to Form 10-Q as prescribed by the Securities and Exchange
Commission. All material adjustments (consisting solely of normal recurring
adjustments) which, in the opinion of management, are necessary for a fair
presentation of the results for the interim periods have been reflected. The
results for the three and six months ended June 30, 2002 are not necessarily
indicative of the results to be expected for the full year. This Form 10-Q
relates to the three and six months ended June 30, 2001 (the "Prior Quarter" and
"Prior Period", respectively) and the three and six months ended June 30, 2002
(the "Current Quarter" and "Current Period", respectively).
2. HEDGING ACTIVITIES AND FINANCIAL INSTRUMENTS
Oil and Gas Hedging Activities
Our results of operations and operating cash flows are impacted by changes
in market prices for oil and gas. To mitigate a portion of the exposure to
adverse market changes, we have entered into various derivative instruments. As
of June 30, 2002, our derivative instruments were comprised of swaps, collars,
cap-swaps, straddles, strangles and basis protection swaps. These instruments
allow us to predict with greater certainty the effective oil and gas prices to
be received for our hedged production. Although derivatives often fail to
achieve 100% effectiveness for accounting purposes, our derivative instruments
continue to be highly effective in achieving the risk management objectives for
which they were intended.
o For swap instruments, we receive a fixed price for the hedged commodity
and pay a floating market price, as defined in each instrument, to the
counterparty. The fixed-price payment and the floating-price payment are
netted, resulting in a net amount due to or from the counterparty.
o Collars contain a fixed floor price (put) and ceiling price (call). If
the market price exceeds the call strike price or falls below the put
strike price, then we receive the fixed price and pay the market price.
If the market price is between the call and the put strike price, then
no payments are due from either party.
o For cap-swaps, we receive a fixed price for the hedged commodity and pay
a floating market price. The fixed price received by Chesapeake includes
a premium in exchange for a "cap" limiting the counterparty's exposure.
o For straddles, Chesapeake receives a premium from the counterparty in
exchange for the sale of a call and a put option at an established fixed
price. To the extent that the floating market price differs from the
established fixed price, Chesapeake pays the counterparty.
o For strangles, Chesapeake receives a premium from the counterparty in
exchange for the sale of a call and a put option. If the market price
exceeds the fixed price of the call option or falls below the fixed
price of the put option, then Chesapeake pays the counterparty. If the
market price settles between the fixed price of the call and put option,
no payment is due from Chesapeake.
o Basis protection swaps are arrangements that guarantee a price
differential of oil and gas from a specified delivery point. Chesapeake
receives a payment from the counterparty if the price differential is
greater than the stated terms of the contract and pays the counterparty
if the price differential is less than the stated terms of the contract.
7
From time to time, we close certain swap transactions designed to hedge a
portion of our oil and natural gas production by entering into a counter-swap
instrument. Under the counter-swap we receive a floating price for the hedged
commodity and pay a fixed price to the counterparty. To the extent the
counter-swap, which does not qualify for hedge accounting under SFAS 133, is
designed to lock the value of an existing SFAS 133 cash flow hedge, the net
value of the swap and the counter-swap is frozen and shown as a derivative
receivable or payable in the consolidated balance sheets. At the same time, the
original swap is designated as a non-qualifying cash flow hedge under SFAS 133.
Pursuant to SFAS 133, our cap-swaps, straddles, strangles, counter-swaps and
basis protection swaps do not qualify for designation as cash flow hedges.
Therefore, changes in the fair value of these instruments that occur prior to
their maturity, together with any changes in fair value of cash flow hedges
resulting from ineffectiveness, are reported in the consolidated statements of
operations as risk management income (loss). Amounts recorded in risk management
income (loss) do not represent cash gains or losses. Rather, these amounts are
temporary valuation swings in contracts or portions of contracts that are not
entitled to receive SFAS 133 cash flow hedge accounting treatment. All amounts
initially recorded in this caption related to commodity derivatives are
ultimately reversed within this same caption and included in oil and gas sales
over the respective contract terms.
The estimated fair values of our oil and gas derivative instruments as of
June 30, 2002 are provided below. The associated carrying values of these
instruments are equal to the estimated fair values.
JUNE 30,
2002
------------
($ IN THOUSANDS)
Derivative assets (liabilities):
Fixed-price gas swaps .................................... $ (1,486)
Fixed-price gas collars .................................. 4,206
Fixed-price gas cap-swaps ................................ 10,025
Gas basis protection swaps ............................... (6,116)
Gas straddles ............................................ (9,506)
Gas strangles ............................................ (29,278)
Fixed-price gas counter-swaps ............................ 6,239
Fixed-price gas locked swaps ............................. 24,224
Fixed-price crude oil swaps .............................. (19)
Fixed-price crude oil cap-swaps .......................... (1,779)
Fixed-price crude oil locked swaps ....................... 196
------------
Estimated fair value ................................... (3,294)
------------
Estimated fair value, as adjusted
for premiums received..................................... $ 31,170(a)
============
(a) After adjusting for the $34.5 million premium paid to Chesapeake by the
counterparty at the inception of the straddle and strangle contracts (which
is recorded in cash provided by operating activities on the accompanying
consolidated statements of cash flows), the net value of the combined
hedging portfolio at June 30, 2002 was $31.2 million.
Based upon the market prices at June 30, 2002, we would expect to transfer
approximately $11.3 million of the balance in accumulated other comprehensive
income to earnings during the next 12 months when the transactions actually
occur. All transactions hedged as of June 30, 2002 are expected to mature by
December 31, 2004, with the exception of the basis protection swaps which extend
to 2009.
Additional information concerning the fair value of our oil and gas
derivative instruments is as follows ($ in thousands):
Fair value of contracts outstanding at January 1, 2002 ............... $ 157,309
Change in fair value of contracts during period ...................... (55,623)
Contracts realized or otherwise settled during the period ............ (61,989)
Fair value of new contracts when entered into during the period ...... (42,991)
-------------
Fair value of contracts outstanding at June 30, 2002 ................. $ (3,294)
=============
8
Risk management income (loss) related to our oil and gas derivatives is
comprised of the following ($ in thousands):
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
---------------------------- ----------------------------
2001 2002 2001 2002
------------ ------------ ------------ ------------
Risk management income (loss):
Change in fair value of derivatives not qualifying for
hedge accounting ....................................... $ 61,495 $ 10,884 $ 61,495 $ (42,530)
Reclassification of (gain) or loss on settled contracts .. -- (10,630) -- (35,707)
Ineffective portion of derivatives qualifying for cash
flow hedge accounting .................................. 960 (1,358) 960 (2,182)
------------ ------------ ------------ ------------
Total .................................................. $ 62,455 $ (1,104) $ 62,455 $ (80,419)
============ ============ ============ ============
Interest Rate Risk
We also utilize hedging strategies to manage interest rate exposure. In
March 2002, we entered into an interest rate swap to convert a portion of our
fixed rate debt to floating rate debt. The terms of this swap agreement are as
follows:
TERM NOTIONAL AMOUNT FIXED RATE FLOATING RATE
---- --------------- ---------- -------------
March 2002 - March 2004 $200,000,000 7.875% U.S. six-month LIBOR in
arrears plus 298.25 basis
points
If the floating rate is less than the fixed rate, the counterparty will pay
us accordingly. If the floating rate exceeds the fixed rate, we will pay the
counterparty. Payments under the interest rate swap coincide with the
semi-annual interest payments on our 7.875% senior notes which are due September
15 and March 15 of each year beginning September 15, 2002.
A portion of the interest rate swap was originally entered into to convert
$129.0 million of the 7.875% senior notes from fixed rate debt to variable rate
debt. Under SFAS 133, a hedge of this interest rate risk in a recognized fixed
rate liability can be designated as a fair value hedge under which the
mark-to-market value of the swap is recorded on the consolidated balance sheets
as an asset or liability with a corresponding increase or decrease in the
carrying value of the debt. See Note 5 of the notes to consolidated financial
statements included in this report for the adjustments made to the carrying
value of the debt at June 30, 2002. During the Current Quarter, $21.2 million of
the 7.875% senior notes were purchased and subsequently retired resulting in a
$0.4 million gain on the repurchase of the debt related to the interest rate
swap. As a result of these repurchases, $107.8 million of the interest rate swap
was designated as a fair value hedge under SFAS 133 at June 30, 2002.
Results from interest rate hedging transactions are reflected as adjustments
to interest expense in the corresponding months covered by the swap agreement.
The remaining $92.2 million of the interest rate swap has not been
designated as a fair value hedge. The mark-to-market value of this portion of
the instrument is recorded as a derivative asset or liability on the
consolidated balance sheets with the offsetting amount reflected in risk
management income (loss) on the consolidated statements of operations. The
amount recorded in risk management income (loss) will be reversed and reflected
in interest expense over the term of the swap.
The estimated fair value of the interest rate swap at June 30, 2002 was an
asset of approximately $5.0 million comprised of $1.6 million reflected as risk
management income, $1.4 million reflected as an increase in the carrying value
of the long-term debt, $1.6 million reflected as a reduction in interest expense
and $0.4 reflected as other income related to the gain on the repurchase of
debt.
9
In June 2002, we entered into an additional interest rate swap. The terms of
this swap agreement are as follows:
TERM NOTIONAL AMOUNT FIXED RATE FLOATING RATE
---- --------------- ---------- -------------
July 2002 - July 2004 $100,000,000 4.000% U.S. six-month LIBOR in
arrears
If the floating rate is less than the fixed rate, the counterparty will pay
us accordingly. If the floating rate exceeds the fixed rate, we will pay the
counterparty. Payments under this interest rate swap are made on July 2 and
January 2 of each year beginning January 2, 2003. The estimated fair value of
the interest rate swap at June 30, 2002 was negligible.
In July 2002, we closed both interest rate swaps for a combined gain of $8.6
million. Gains totaling $6.6 million, in addition to the $2.0 million gain
already realized in the Current Quarter, will be recognized as reductions to
interest expense over the remaining terms of the swaps.
In April 2002, we entered into a swaption agreement in order to monetize the
embedded call option in the remaining $142.7 million of our 8.5% senior notes.
We received $7.8 million from the counterparty at the time we entered into this
agreement. The terms of the swaption are as follows:
TERM NOTIONAL AMOUNT FIXED RATE FLOATING RATE
---- --------------- ---------- -------------
March 2004 - March 2012 $142,665,000 8.500% U.S. six-month LIBOR plus
75 basis points
Under the terms of the swaption agreement, the counterparty will have the
option to initiate an interest rate swap on March 11, 2004 pursuant to the terms
shown above. If the counterparty chooses to initiate the interest rate swap, the
payments under the swap will coincide with the semi-annual interest payments on
our 8.5% senior notes which are paid on September 15 and March 15 of each year.
On each payment date, if the fixed rate exceeds the floating rate, we will pay
the counterparty, and if the floating rate exceeds the fixed rate, the
counterparty will pay us accordingly. If the counterparty does not choose to
initiate the interest rate swap, the swaption agreement will expire and no
future obligations will exist for either party.
According to SFAS 133, a fair value hedge relationship exists between the
embedded call option in the 8.5% senior notes and our swaption agreement.
Accordingly, the mark-to-market value of the swaption is recorded on the
consolidated balance sheets as an asset or liability with a corresponding
increase or decrease to the debt's carrying value. Any change in the fair value
of the swaption resulting from ineffectiveness is recorded currently in the
consolidated statements of operations as risk management income (loss).
We have recorded a decrease in the carrying value of the debt of $7.8
million related to the swaption as of June 30, 2002. Of this amount, $8.9
million represents the mark-to-market valuation of the swaption offset by $1.1
million of estimated ineffectiveness of the swaption as determined under SFAS
133. See Note 5 of the notes to consolidated financial statements included in
this report for the adjustments made to the carrying value of the debt at June
30, 2002. Results of the swaption will be reflected as adjustments to interest
expense in the corresponding months covered by the swaption agreement.
Risk management income related to our fair value hedges is comprised of the
following ($ in thousands):
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, 2002 JUNE 30, 2002
----------------- ----------------
Risk management income:
Change in fair value of derivatives not qualifying for
fair value hedge accounting .................................... $ 2,454 $ 2,301
Reclassification of (gain) on settled contracts .................. (731) (731)
Ineffective portion of derivatives qualifying for fair value
hedge accounting ............................................... (1,100) (1,100)
------------ ------------
Total .......................................................... $ 623 $ 470
============ ============
10
Fair Value of Financial Instruments
The following disclosure of the estimated fair value of financial
instruments is made in accordance with the requirements of Statement of
Financial Accounting Standards No. 107, Disclosures About Fair Value of
Financial Instruments. We have determined the estimated fair value amounts by
using available market information and valuation methodologies. Considerable
judgment is required in interpreting market data to develop the estimates of
fair value. The use of different market assumptions or valuation methodologies
may have a material effect on the estimated fair value amounts.
The carrying values of items comprising current assets and current
liabilities approximate fair values due to the short-term maturities of these
instruments. We estimate the fair value of our long-term (including current
maturities), fixed-rate debt using primarily quoted market prices. Excluding the
impact of our fair value hedges, our carrying amount for such debt at December
31, 2001 and June 30, 2002 was $1,330.1 million and $1,287.9 million,
respectively, compared to approximate fair values of $1,343.0 and $1,297.3
million, respectively. The carrying value of other long-term debt, which
consists of amounts outstanding under our revolving bank credit facility,
approximates its fair value as interest rates on the facility are based on
prevailing market rates. The carrying amount for our 6.75% convertible preferred
stock at June 30, 2002 was $149.9 million, compared to the approximate fair
value of $173.9 million.
Concentration of Credit Risk
A significant portion of our liquidity is concentrated in cash and cash
equivalents, including restricted cash, and derivative instruments that enable
us to hedge a portion of our exposure to price volatility from producing oil and
natural gas and interest rate volatility. These arrangements expose us to credit
risk from our counterparties. Other financial instruments which potentially
subject us to concentrations of credit risk consist principally of investments
in debt instruments and accounts receivables. Our accounts receivable are
primarily from purchasers of oil and natural gas products and exploration and
production companies which own interests in properties we operate. The
concentration of these assets in the oil and gas industry has the potential to
impact our overall exposure to credit risk, either positively or negatively, in
that our customers may be similarly affected by changes in economic, industry or
other conditions. We generally require letters of credit for receivables from
customers which are judged to have sub-standard credit, unless the credit risk
can otherwise be mitigated. Cash and cash equivalents are deposited with major
banks or institutions with high credit ratings.
3. CONTINGENCIES AND COMMITMENTS
West Panhandle Field Cessation Cases. One of our subsidiaries, Chesapeake
Panhandle Limited Partnership ("CP") (f/k/a MC Panhandle, Inc.), and two
subsidiaries of Kinder Morgan, Inc. have been defendants in 16 lawsuits filed
between June 1997 and December 2001 by royalty owners seeking the cancellation
of oil and gas leases in the West Panhandle Field in Texas. MC Panhandle, Inc.,
which we acquired in April 1998, has owned the leases since January 1, 1997. The
co-defendants are prior lessees. The plaintiffs in these cases have claimed the
leases terminated upon the cessation of production for various periods,
primarily during the 1960s. In addition, the plaintiffs have sought to recover
conversion damages, exemplary damages, attorneys' fees and interest. The
defendants have asserted that any cessation of production was excused and have
pled affirmative defenses of limitations, waiver, temporary estoppel, laches and
title by adverse possession. Four of the 16 cases have been tried, and there
have been appellate decisions in three of them.
In January 2001, we settled the claims of the principal plaintiffs in eight
cases tried or pending in the District Court of Moore County, Texas, 69th
Judicial District. The settlement was not material to our financial condition or
results of operations. In December 2001, the Texas Supreme Court accepted for
review petitions we filed with respect to the claims of the non-settling
plaintiffs in two of the cases covered by the settlement. The Court heard oral
arguments in March 2002 and has not yet issued a decision.
There are eight other related West Panhandle cessation cases which are
pending, three in the District Court of Moore County, Texas, 69th Judicial
District, two in the District Court of Carson County, Texas, 100th Judicial
District, and three in the U.S. District Court, Northern District of Texas,
Amarillo Division. In one of the Moore County cases, CP and the other defendants
have appealed a January 2000 judgment notwithstanding verdict in favor
11
of plaintiffs. In addition to quieting title to the lease (including existing
gas wells and all attached equipment) in plaintiffs, the court awarded actual
damages against CP in the amount of $716,400 and exemplary damages in the amount
of $25,000. The court further awarded, jointly and severally from all
defendants, $160,000 in attorneys' fees and interest and court costs. On March
28, 2001, the Amarillo Court of Appeals reversed and rendered judgment in favor
of CP and the other defendants, finding that the subject leases had been revived
as a matter of law, making all other issues moot. Plaintiffs have filed
petitions requesting that the Texas Supreme Court accept the case for review. In
another of the Moore County, Texas cases, in June 1999, the court granted
plaintiffs' motion for summary judgment in part, finding that the lease had
terminated due to the cessation of production, subject to the defendants'
affirmative defenses. In February 2001, the court granted plaintiffs' motion for
summary judgment on defendants' affirmative defenses but reversed its ruling
that the lease had terminated as a matter of law. In one of the U.S. District
Court cases, after a trial in May 1999, the jury found plaintiffs' claims were
barred by the payment of shut-in royalties, laches and revivor. Plaintiffs have
moved for a new trial. There are motions pending in two other cases, and the
remaining three cases are in the pleading stage.
We have previously established an accrued liability we believe will be
sufficient to cover the estimated costs of litigation for each of the pending
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 pending cases, the outcome of any future trials and the amount of
damages that might ultimately be awarded could differ from management's
estimates. CP and the other defendants are vigorously defending against the
plaintiffs' claims.
Royalty. Owner Litigation. Recently royalty owners have commenced
litigation against a number of companies in the oil and gas production business
claiming that amounts paid for production attributable to the royalty owners'
interest violated the terms of the applicable leases and state law, that
deductions from the proceeds of oil and gas production were unauthorized under
the applicable leases and that amounts received by upstream sellers should be
used to compute the amounts paid to the royalty owners. In the course of our oil
and gas marketing activities, a portion of the foregoing litigation has been
commenced as class action suits including four class action suits filed against
Chesapeake and others which we believe do not represent valid claims or, if
valid, are not material. As new cases are decided and the law in this area
continues to develop, our liability relating to the marketing of oil and gas may
increase or decrease. We will continue to monitor the court decisions to ensure
that our operations and practices minimize any exposure and to recognize any
charges that may be appropriate.
Chesapeake is currently involved in various other routine disputes
incidental to its business operations. 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 Chesapeake.
Due to the nature of the oil and gas business, Chesapeake and its
subsidiaries are exposed to possible environmental risks. Chesapeake has
implemented various policies and procedures to avoid environmental contamination
and risks from environmental contamination. Chesapeake is not aware of any
potential material environmental issues or claims.
4. NET INCOME PER SHARE
Statement of Financial Accounting Standards No. 128, Earnings Per Share,
requires presentation of "basic" and "diluted" earnings per share, as defined,
on the face of the statements of operations for all entities with complex
capital structures. SFAS 128 requires a reconciliation of the numerator and
denominator of the basic and diluted EPS computations.
The following securities were not included in the calculation of diluted
earnings per share, as the effect was antidilutive:
o For the Prior Quarter, the Current Quarter, the Prior Period and the Current
Period, outstanding warrants to purchase 1.1 million shares of common stock
at a weighted average exercise price of $12.61 were antidilutive because the
exercise prices of the warrants were greater than the average price of the
common stock.
o For the Prior Quarter, the Current Quarter, the Prior Period and the Current
Period, outstanding options to purchase 0.3 million, 0.3 million, 0.2
million and 0.4 million shares of common stock at a weighted average
exercise price of $15.98, $15.30, $18.78 and $14.44, respectively, were
antidilutive because the exercise prices of the options were greater than
the average market price of the common stock.
o As a result of the Current Period's net loss to common shareholders, the
diluted shares do not include the effect of outstanding stock options to
purchase 5.9 million shares of common stock at a weighted average exercise
price of $3.90, the assumed conversion of the outstanding 6.75% preferred
stock (convertible into 19.5 million common shares), the common stock
equivalent of preferred stock outstanding prior to conversion (11,480
shares) or warrants to purchase 6,574 shares of common stock at a weighted
average exercise price of $0.05 as the effects were antidilutive.
12
A reconciliation for the three months ended June 30, 2001 and 2002 and the
six months ended June 30, 2001 is as follows:
INCOME SHARES PER SHARE
(NUMERATOR) (DENOMINATOR) AMOUNT
------------ ------------ ------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
FOR THE THREE MONTHS ENDED JUNE 30, 2001:
BASIC EPS
Income available to common shareholders ............................ $ 39,303 162,588 $ 0.24
============
EFFECT OF DILUTIVE SECURITIES
Assumed conversion at the beginning of the period of
Preferred shares exchanged during the period:
Common shares issued ............................................. -- 1,432
Preferred stock dividends ........................................ 182 --
Employee stock options ............................................. -- 7,294
Warrants assumed in Gothic acquisition ............................. -- 7
------------ ------------
DILUTED EPS
Income available to common shareholders and assumed
conversions ...................................................... $ 39,485 171,321 $ 0.23
============ ============ ============
INCOME SHARES PER SHARE
(NUMERATOR) (DENOMINATOR) AMOUNT
------------ ------------- ------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
FOR THE THREE MONTHS ENDED JUNE 30, 2002:
BASIC EPS
Income available to common shareholders ............................ $ 22,503 165,963 $ 0.14
============
EFFECT OF DILUTIVE SECURITIES
Preferred stock dividends .......................................... 2,530 --
Assumed conversion of 6.75% preferred stock at
beginning of period .............................................. -- 19,478
Employee stock options ............................................. -- 6,500
Warrants assumed in Gothic acquisition ............................. -- 6
------------ ------------
DILUTED EPS
Income available to common shareholders and assumed
conversions ...................................................... $ 25,033 191,947 $ 0.13
============ ============ ============
INCOME SHARES PER SHARE
(NUMERATOR) (DENOMINATOR) AMOUNT
------------ ------------- ------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
FOR THE SIX MONTHS ENDED JUNE 30, 2001:
BASIC EPS
Income available to common shareholders ............................ $ 109,045 160,161 $ 0.68
============
EFFECT OF DILUTIVE SECURITIES
Assumed conversion at the beginning of the period of
preferred shares exchanged during the period:
Common shares issued ............................................. -- 2,952
Preferred stock dividends ........................................ 728 --
Employee stock options ............................................. -- 7,715
Warrants assumed in Gothic acquisition ............................. -- 7
------------ ------------
DILUTED EPS
Income available to common shareholders and assumed
conversions ...................................................... $ 109,773 170,835 $ 0.64
============ ============ ============
In a private offering on November 13, 2001 we issued 3.0 million shares of
6.75% cumulative convertible preferred stock at a par value $0.01 per share with
a liquidation preference of $50 per share. We subsequently registered the shares
of the preferred stock and the underlying common stock for resale under the
Securities Act of 1933.
13
5. SENIOR NOTES AND REVOLVING CREDIT FACILITY
At June 30, 2002, our long-term debt, net of current maturities, consisted
of the following ($ in thousands):
7.875% senior notes, due 2004 ........................ $ 107,799
8.375% senior notes, due 2008 ........................ 250,000
8.125% senior notes, due 2011 ........................ 800,000
8.5% senior notes, due 2012 .......................... 142,665
Revolving bank credit facility ....................... 45,000
Discount on senior notes ............................. (12,697)
Discount for interest rate swap and swaption ......... (6,416)
-------------
Total .............................................. $ 1,326,351
=============
During the Current Period, we purchased and subsequently retired $42.2
million of the 7.875% senior notes for total consideration of $44.0 million,
including $0.8 million of accrued interest and $1.0 million of redemption
premium.
We have a $225 million revolving bank credit facility (with a committed
borrowing base of $225 million) which matures in September 2003. As of June 30,
2002, we had borrowed $45.0 million under this facility and were using $11.1
million of the facility to secure various letters of credit. Borrowings under
the facility are collateralized by certain producing oil and gas properties and
bear interest at either the reference rate of Union Bank of California, N.A., or
London Interbank Offered Rate (LIBOR), at our option, plus a margin that varies
according to total facility usage. The unused portion of the facility is subject
to an annual commitment fee of 0.50%. Interest is payable quarterly. The
collateral value and borrowing base are redetermined periodically. The maturity
of the bank credit facility can be extended at our option to June 2005 if we
satisfy certain conditions.
The credit facility contains various covenants and restrictive provisions
which restrict our ability to incur additional indebtedness, sell properties,
pay dividends, purchase or redeem our capital stock, make investments or loans,
purchase certain of our senior notes, create liens, and make acquisitions. The
credit facility requires us to maintain a current ratio of at least 1 to 1 (as
defined in the credit facility) and a fixed charge coverage ratio of at least
2.5 to 1. If we should fail to perform our obligations under these and other
covenants, the revolving credit commitment could be terminated and any
outstanding borrowings under the facility could be declared immediately due and
payable. If such an acceleration involved principal in excess of $10 million,
the acceleration would constitute an event of default under our senior note
indentures, which could in turn result in the acceleration of our senior note
indebtedness. The credit facility also has cross default provisions that apply
to other indebtedness we may have with an outstanding principal balance in
excess of $5.0 million.
Our senior notes are unsecured senior obligations of Chesapeake and rank
equally with all of our other unsecured indebtedness. The senior note indentures
contain covenants limiting us and the guarantor subsidiaries with respect to
asset sales; restricted payments; the incurrence of additional indebtedness and
the issuance of preferred stock; liens; sale and leaseback transactions; lines
of business; dividend and other payment restrictions affecting guarantor
subsidiaries; mergers or consolidations; and transactions with affiliates. The
senior note indentures also limit our ability to make restricted payments (as
defined), including the payment of cash dividends, unless the debt incurrence
and other tests are met.
Chesapeake is a holding company and owns no operating assets and has no
significant operations independent of its subsidiaries. Our obligations under
the 8.375% senior notes, the 8.125% senior notes, the 7.875% senior notes and
the 8.5% senior notes have been fully and unconditionally guaranteed, on a joint
and several basis, by each of our "restricted subsidiaries" (as defined in the
respective indentures governing these notes) (collectively, the "guarantor
subsidiaries"). Each guarantor subsidiary is a direct or indirect wholly-owned
subsidiary.
Set forth below are condensed consolidating financial statements of the
guarantor subsidiaries and Chesapeake Energy Marketing, Inc, which is not a
guarantor of the senior notes and was a non-guarantor subsidiary for all periods
presented. All of our other wholly-owned subsidiaries were guarantor
subsidiaries during all periods presented.
14
CONDENSED CONSOLIDATED BALANCE SHEET
AS OF DECEMBER 31, 2001
($ IN THOUSANDS)
NON-
GUARANTOR GUARANTOR
SUBSIDIARY SUBSIDIARY PARENT ELIMINATIONS CONSOLIDATED
----------- ----------- ----------- ------------- -------------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents ....................... $ (7,905) $ 19,714 $ 113,151 $ -- $ 124,960
Accounts receivable ............................. 113,493 30,380 2,715 (18,338) 128,250
Short-term derivative instruments ............... 97,544 -- -- -- 97,544
Inventory and other ............................. 10,208 421 -- -- 10,629
----------- ----------- ----------- ------------- -------------
Total Current Assets .................... 213,340 50,515 115,866 (18,338) 361,383
----------- ----------- ----------- ------------- -------------
PROPERTY AND EQUIPMENT:
Oil and gas properties .......................... 3,546,163 -- -- -- 3,546,163
Unevaluated leasehold ........................... 66,205 -- -- -- 66,205
Other property and equipment .................... 53,681 23,537 38,476 -- 115,694
Less: accumulated depreciation, depletion
and amortization ............................. (1,920,613) (18,668) (3,200) -- (1,942,481)
----------- ----------- ----------- ------------- -------------
Net Property and Equipment .............. 1,745,436 4,869 35,276 -- 1,785,581
----------- ----------- ----------- ------------- -------------
OTHER ASSETS:
Investments in subsidiaries and
intercompany advances ........................ -- -- (21,054) 21,054 --
Long-term derivative receivable ................. 18,852 -- -- -- 18,852
Deferred income tax asset ....................... (218,596) (1,376) 287,753 -- 67,781
Long-term derivative instruments ................ 6,370 -- -- -- 6,370
Long-term investments ........................... -- -- 29,849 -- 29,849
Other assets .................................... 5,589 334 11,050 (21) 16,952
----------- ----------- ----------- ------------- -------------
Total Other Assets ...................... (187,785) (1,042) 307,598 21,033 139,804
----------- ----------- ----------- ------------- -------------
TOTAL ASSETS ...................................... $ 1,770,991 $ 54,342 $ 458,740 $ 2,695 $ 2,286,768
=========== =========== =========== ============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
CURRENT LIABILITIES:
Notes payable and current maturities of
long-term debt ............................... $ 602 $ -- $ -- $ -- $ 602
Accounts payable and other current liabilities .. 127,967 36,755 26,338 (18,281) 172,779
----------- ----------- ----------- ------------- -------------
Total Current Liabilities ............... 128,569 36,755 26,338 (18,281) 173,381
----------- ----------- ----------- ------------- -------------
LONG-TERM DEBT .................................... -- -- 1,329,453 -- 1,329,453
----------- ----------- ----------- ------------- -------------
REVENUES AND ROYALTIES DUE OTHERS ................. 12,696 -- -- -- 12,696
----------- ----------- ----------- ------------- -------------
OTHER LIABILITIES ................................. 3,831 -- -- -- 3,831
----------- ----------- ----------- ------------- -------------
INTERCOMPANY PAYABLES ............................. 1,664,517 19 (1,664,458) (78) --
----------- ----------- ----------- ------------- -------------
STOCKHOLDERS' EQUITY (DEFICIT):
Common Stock .................................... 66 1 1,686 (57) 1,696
Other ........................................... (38,688) 17,567 765,721 21,111 765,711
----------- ----------- ----------- ------------- -------------
Total Stockholders' Equity (Deficit) .... (38,622) 17,568 767,407 21,054 767,407
----------- ----------- ----------- ------------- -------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY ........ $ 1,770,991 $ 54,342 $ 458,740 $ 2,695 $ 2,286,768
=========== =========== =========== ============= =============
15
CONDENSED CONSOLIDATED BALANCE SHEET
AS OF JUNE 30, 2002
($ IN THOUSANDS)
GUARANTOR NON-GUARANTOR
SUBSIDIARIES SUBSIDIARY PARENT ELIMINATIONS CONSOLIDATED
------------ ------------- ----------- ------------- -------------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents ........................ $ 382 $ 6,043 $ 2 $ -- $ 6,427
Accounts receivable .............................. 100,967 54,915 5,610 (28,940) 132,552
Short-term derivative accounts receivable ........ 16,069 -- -- -- 16,069
Short-term derivative instruments ................ 8,033 -- 4,476 -- 12,509
Inventory and other .............................. 9,829 683 10 -- 10,522
----------- ----------- ----------- ------------- -------------
Total Current Assets ...................... 135,280 61,641 10,098 (28,940) 178,079
----------- ----------- ----------- ------------- -------------
PROPERTY AND EQUIPMENT:
Oil and gas properties ........................... 3,920,587 -- -- -- 3,920,587
Unevaluated leasehold ............................ 59,907 -- -- -- 59,907
Other property and equipment ..................... 58,441 26,929 47,152 -- 132,522
Less: accumulated depreciation,
depletion and amortization ..................... (2,021,415) (19,293) (3,742) -- (2,044,450)
----------- ----------- ----------- ------------- -------------
Net Property and Equipment ................ 2,017,520 7,636 43,410 -- 2,068,566
----------- ----------- ----------- ------------- -------------
OTHER ASSETS:
Investments in subsidiaries and
intercompany advances .......................... -- -- 232,526 (232,526) --
Long-term derivative receivable .................. 8,351 -- -- -- 8,351
Deferred income tax asset ........................ (91,989) (1,764) 129,158 -- 35,405
Long-term investments ............................ -- -- 25,089 -- 25,089
Long-term derivative instruments ................. -- -- 515 -- 515
Other assets ..................................... 3,992 193 10,064 (26) 14,223
----------- ----------- ----------- ------------- -------------
Total Other Assets ........................ (79,646) (1,571) 397,352 (232,552) 83,583
----------- ----------- ----------- ------------- -------------
TOTAL ASSETS ....................................... $ 2,073,154 $ 67,706 $ 450,860 $ (261,492) $ 2,330,228
=========== =========== =========== ============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Notes payable and current maturities
of long-term debt .............................. $ 154 $ -- $ -- $ -- $ 154
Accounts payable and other current liabilities ... 148,270 46,154 31,562 (28,943) 197,043
Short-term derivative instruments ................ 461 -- -- -- 461
----------- ----------- ----------- ------------- -------------
Total Current Liabilities ................. 148,885 46,154 31,562 (28,943) 197,658
----------- ----------- ----------- ------------- -------------
LONG-TERM DEBT ..................................... 45,000 -- 1,281,351 -- 1,326,351
----------- ----------- ----------- ------------- -------------
REVENUES AND ROYALTIES DUE OTHERS .................. 12,948 -- -- -- 12,948
----------- ----------- ----------- ------------- -------------
LONG-TERM DERIVATIVE INSTRUMENTS ................... 35,285 -- 16,731 -- 52,016
----------- ----------- ----------- ------------- -------------
OTHER LIABILITIES .................................. 7,833 -- -- -- 7,833
----------- ----------- ----------- ------------- -------------
INTERCOMPANY PAYABLES .............................. 1,613,348 (1,119) (1,612,206) (23) --
----------- ----------- ----------- ------------- -------------
STOCKHOLDERS' EQUITY:
Common Stock ..................................... 66 1 1,699 (57) 1,709
Other ............................................ 209,789 22,670 731,723 (232,469) 731,713
----------- ----------- ----------- ------------- -------------
Total Stockholders' Equity ................ 209,855 22,671 733,422 (232,526) 733,422
----------- ----------- ----------- ------------- -------------
TOTAL LIABILITIES AND STOCKHOLDERS'
EQUITY ........................................... $ 2,073,154 $ 67,706 $ 450,860 $ (261,492) $ 2,330,228
=========== =========== =========== ============= =============
16
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
($ IN THOUSANDS)
NON-
GUARANTOR GUARANTOR
SUBSIDIARIES SUBSIDIARY PARENT ELIMINATIONS CONSOLIDATED
------------- ---------- -------- ------------- -------------
FOR THE THREE MONTHS ENDED JUNE 30, 2001:
REVENUES:
Oil and gas sales ............................... $ 175,225 $ -- $ -- $ -- $ 175,225
Risk management income .......................... 62,455 -- -- -- 62,455
Oil and gas marketing sales ..................... -- 108,600 -- (70,599) 38,001
------------- --------- -------- ------------- -------------
Total Revenues ................................ 237,680 108,600 -- (70,599) 275,681
------------- --------- -------- ------------- -------------
OPERATING COSTS:
Production expenses and taxes ................... 28,833 -- -- -- 28,833
General and administrative ...................... 2,550 259 64 -- 2,873
Oil and gas marketing expenses .................. -- 107,512 -- (70,599) 36,913
Oil and gas depreciation, depletion and
amortization ............................. 39,910 -- -- -- 39,910
Other depreciation and amortization ............. 1,287 20 530 -- 1,837
------------- --------- -------- ------------- -------------
Total Operating Costs ......................... 72,580 107,791 594 (70,599) 110,366
------------- --------- -------- ------------- -------------
INCOME (LOSS) FROM OPERATIONS ..................... 165,100 809 (594) -- 165,315
------------- --------- -------- ------------- -------------
OTHER INCOME (EXPENSE):
Interest and other income ....................... 697 (101) 23,808 (23,721) 683
Interest expense ................................ (24,201) -- (22,504) 23,721 (22,984)
Equity in net earnings of subsidiaries .......... -- -- 76,888 (76,888) --
------------- --------- -------- ------------- -------------
Total Other Income (Expense) .................. (23,504) (101) 78,192 (76,888) (22,301)
------------- --------- -------- ------------- -------------
INCOME BEFORE INCOME TAXES
AND EXTRAORDINARY ITEMS ........................ 141,596 708 77,598 (76,888) 143,014
INCOME TAX EXPENSE ................................ 56,961 284 284 -- 57,529
------------- --------- -------- ------------- -------------
NET INCOME BEFORE EXTRAORDINARY ITEMS ............. 84,635 424 77,314 (76,888) 85,485
------------- --------- -------- ------------- -------------
EXTRA ORDINARY ITEMS:
Loss on early extinguishment of debt, net of
applicable income tax .................... (8,171) -- (37,829) -- (46,000)
------------- --------- -------- ------------- -------------
NET INCOME ........................................ $ 76,464 $ 424 $ 39,485 $ (76,888) $ 39,485
============= ========= ======== ============= =============
NON-
GUARANTOR GUARANTOR
SUBSIDIARIES SUBSIDIARY PARENT ELIMINATIONS CONSOLIDATED
------------- ------------ ------------ ------------- -------------
FOR THE THREE MONTHS ENDED JUNE 30, 2002:
REVENUES:
Oil and gas sales ............................ $ 152,009 $ -- $ -- $ -- $ 152,009
Risk management income (loss) ................ (1,103) -- 622 -- (481)
Oil and gas marketing sales .................. -- 138,964 -- (96,179) 42,785
------------- ------------ ------------ ------------- -------------
Total Revenues ............................. 150,906 138,964 622 (96,179) 194,313
------------- ------------ ------------ ------------- -------------
OPERATING COSTS:
Production expenses and taxes ................ 32,153 -- -- -- 32,153
General and administrative ................... 3,365 441 53 -- 3,859
Oil and gas marketing expenses ............... -- 137,360 -- (96,179) 41,181
Oil and gas depreciation, depletion and
amortization ............................ 50,778 -- -- -- 50,778
Other depreciation and amortization .......... 2,484 493 675 -- 3,652
------------- ------------ ------------ ------------- -------------
Total Operating Costs ...................... 88,780 138,294 728 (96,179) 131,623
------------- ------------ ------------ ------------- -------------
INCOME (LOSS) FROM OPERATIONS .................. 62,126 670 (106) -- 62,690
------------- ------------ ------------ ------------- -------------
OTHER INCOME (EXPENSE):
Interest and other income .................... 943 112 29,702 (27,038) 3,719
Interest expense ............................. (26,061) (8) (25,659) 27,038 (24,690)
Equity in net earnings of subsidiaries ....... -- -- 22,671 (22,671) --
------------- ------------ ------------ ------------- -------------
Total Other Income (Expense) ............... (25,118) 104 26,714 (22,671) (20,971)
------------- ------------ ------------ ------------- -------------
INCOME BEFORE INCOME TAXES ..................... 37,008 774 26,608 (22,671) 41,719
INCOME TAX EXPENSE ............................. 14,802 309 1,575 -- 16,686
------------- ------------ ------------ ------------- -------------
NET INCOME ..................................... $ 22,206 $ 465 $ 25,033 $ (22,671) $ 25,033
============= ============ ============ ============= =============
17
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
($ IN THOUSANDS)
NON-
GUARANTOR GUARANTOR
SUBSIDIARIES SUBSIDIARY PARENT ELIMINATIONS CONSOLIDATED
------------- ------------ ------------ ------------- -------------
FOR THE SIX MONTHS ENDED JUNE 30, 2001:
REVENUES:
Oil and gas sales ......................... $ 396,444 $ -- $ -- $ -- $ 396,444
Risk management income .................... 62,455 -- -- -- 62,455
Oil and gas marketing sales ............... -- 242,513 -- (148,347) 94,166
------------- ------------ ------------ ------------- -------------
Total Revenues .......................... 458,899 242,513 -- (148,347) 553,065
------------- ------------ ------------ ------------- -------------
OPERATING COSTS:
Production expenses and taxes ............. 60,916 -- -- -- 60,916
General and administrative ................ 6,093 609 172 -- 6,874
Oil and gas marketing expenses ............ -- 239,738 -- (148,347) 91,391
Oil and gas depreciation, depletion and
amortization ......................... 78,083 -- -- -- 78,083
Other depreciation and amortization ....... 2,349 40 1,401 -- 3,790
------------- ------------ ------------ ------------- -------------
Total Operating Costs ................... 147,441 240,387 1,573 (148,347) 241,054
------------- ------------ ------------ ------------- -------------
INCOME (LOSS) FROM OPERATIONS ............... 311,458 2,126 (1,573) -- 312,011
------------- ------------ ------------ ------------- -------------
OTHER INCOME (EXPENSE):
Interest and other income ................. 1,139 (26) 46,542 (46,403) 1,252
Interest expense .......................... (52,015) (1) (43,260) 46,403 (48,873)
Gothic standby credit facility costs ...... -- -- (3,392) -- (3,392)
Equity in net earnings of subsidiaries .... -- -- 148,612 (148,612) --
------------- ------------ ------------ ------------- -------------
Total Other Income (Expense) ............ (50,876) (27) 148,502 (148,612) (51,013)
------------- ------------ ------------ ------------- -------------
INCOME BEFORE INCOME TAXES
AND EXTRAORDINARY ITEMS ................... 260,582 2,099 146,929 (148,612) 260,998
INCOME TAX EXPENSE .......................... 105,058 840 (673) -- 105,225
------------- ------------ ------------ ------------- -------------
NET INCOME BEFORE EXTRAORDINARY ITEMS ....... 155,524 1,259 147,602 (148,612) 155,773
EXTRAORDINARY ITEMS:
Loss on early extinguishment of debt,
net of applicable income tax ..... (8,171) -- (37,829) -- (46,000)
------------- ------------ ------------ ------------- -------------
NET INCOME .................................. $ 147,353 $ 1,259 $ 109,773 $ (148,612) $ 109,773
============= ============ ============ ============= =============
NON-
GUARANTOR GUARANTOR
SUBSIDIARIES SUBSIDIARY PARENT ELIMINATIONS CONSOLIDATED
------------- ------------ ------------ ------------- -------------
FOR THE SIX MONTHS ENDED JUNE 30, 2002:
REVENUES:
Oil and gas sales ......................... $ 293,980 $ -- $ -- $ -- $ 293,980
Risk management income (loss) ............. (80,418) -- 469 -- (79,949)
Oil and gas marketing sales ............... -- 228,429 -- (158,311) 70,118
------------ ------------ ----------- ------------- -------------
Total Revenues .......................... 213,562 228,429 469 (158,311) 284,149
------------ ------------ ----------- ------------- -------------
OPERATING COSTS:
Production expenses and taxes ............. 59,429 -- -- -- 59,429
General and administrative ................ 6,995 892 266 -- 8,153
Oil and gas marketing expenses ............ -- 225,999 -- (158,311) 67,688
Oil and gas depreciation, depletion and
amortization ....................... 99,397 -- -- -- 99,397
Other depreciation and amortization ....... 4,655 770 1,337 -- 6,762
------------ ------------ ---------- ------------ -------------
Total Operating Costs ................... 170,476 227,661 1,603 (158,311) 241,429
------------ ------------ ---------- ------------ -------------
INCOME (LOSS) FROM OPERATIONS ............... 43,086 768 (1,134) -- 42,720
------------ ------------ ---------- ------------ -------------
OTHER INCOME (EXPENSE):
Interest and other income ................. 1,152 211 57,817 (54,507) 4,673
Interest expense .......................... (52,630) (8) (53,519) 54,507 (51,650)
Equity in net earnings of subsidiaries .... -- -- (4,451) 4,451 --
------------ ------------ ---------- ----------- -------------
Total Other Income (Expense) ............ (51,478) 203 (153) 4,451 (46,977)
------------ ------------ ---------- ----------- -------------
INCOME (LOSS) BEFORE INCOME TAXES ........... (8,392) 971 (1,287) 4,451 (4,257)
INCOME TAX EXPENSE (BENEFIT) ................ (3,358) 388 1,266 -- (1,704)
------------ ------------ ---------- ----------- -------------
NET INCOME (LOSS) ........................... $ (5,034) $ 583 $ (2,553) $ 4,451 $ (2,553)
============ ============ ========== =========== =============
18
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
($ IN THOUSANDS)
GUARANTOR NON-GUARANTOR
SUBSIDIARIES SUBSIDIARY PARENT ELIMINATIONS CONSOLIDATED
------------ ------------- ----------- ------------ ------------
FOR THE SIX MONTHS ENDED JUNE 30, 2001:
CASH FLOWS FROM OPERATING
ACTIVITIES ......................................... $ 286,797 $ 5,219 $ 94,153 $ (89,167) $ 297,002
------------ ----------- ----------- ------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Oil and gas properties, net ........................ (281,326) -- -- -- (281,326)
Proceeds from sale of assets ....................... 159 -- -- -- 159
Additions to other property and equipment .......... (14,712) (425) (5,627) -- (20,764)
Other additions .................................... 480 -- (591) -- (111)
------------ ----------- ----------- ------------ ------------
Cash (used in) provided by investing
activities .................................. (295,399) (425) (6,218) -- (302,042)
------------ ----------- ----------- ------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from revolving bank credit facility ....... 273,000 -- -- -- 273,000
Payments on revolving bank credit facility ........ (138,000) -- -- -- (138,000)
Cash paid for financing costs related to debt ...... (5,636) -- (6,578) -- (12,214)
Cash dividends paid on preferred stock ............. -- -- (1,092) -- (1,092)
Cash paid for repurchase of senior notes ........... -- -- (830,382) -- (830,382)
Cash paid for repurchase premium on senior notes ... -- -- (75,639) -- (75,639)
Cash received on issuance of senior notes .......... -- -- 786,664 -- 786,664
Exercise of stock options .......................... -- -- 2,782 -- 2,782
Other .............................................. -- -- (11) -- (11)
Intercompany advances, net ......................... (124,937) (9,819) 45,589 89,167 --
------------ ----------- ----------- ------------ ------------
Cash (used in) provided by financing
activities .................................. 4,427 (9,819) (78,667) 89,167 5,108
------------ ----------- ----------- ------------ ------------
Effect of exchange rate changes on cash ............ (68) -- -- -- (68)
------------ ----------- ----------- ------------ ------------
NET INCREASE (DECREASE) IN CASH ...................... (4,243) (5,025) 9,268 -- --
CASH, BEGINNING OF PERIOD ............................ (19,868) 7,200 12,668 -- --
------------ ----------- ----------- ------------ ------------
CASH, END OF PERIOD .................................. $ (24,111) $ 2,175 $ 21,936 $ -- $ --
============ =========== =========== ============ ============
GUARANTOR NON-GUARANTOR
SUBSIDIARIES SUBSIDIARY PARENT ELIMINATIONS CONSOLIDATED
------------ ------------- ---------- ------------ ------------
FOR THE SIX MONTHS ENDED JUNE 30, 2002:
CASH FLOWS FROM OPERATING
ACTIVITIES ........................................ $ 213,416 $ (13,657) $ 10,615 $ 4,451 $ 214,825
------------ ------------ ---------- ------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Oil and gas properties, net ....................... (180,607) -- (127,251) -- (307,858)
Proceeds from sale of assets ...................... 62 -- -- -- 62
Additions to other property, plant and equipment
and other .................................. (6,499) (3,408) (8,676) -- (18,583)
Other investments, net ............................ -- -- 1,807 -- 1,807
------------ ------------ ---------- ------------ ------------
Cash (used in) provided by investing activities ... (187,044) (3,408) (134,120) -- (324,572)
------------ ------------ ---------- ------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from revolving bank credit facility ...... 45,000 -- -- -- 45,000
Cash paid for financing costs related to debt ..... -- -- (95) -- (95)
Cash paid for repurchase of senior notes .......... -- -- (42,201) -- (42,201)
Cash paid for repurchase premium on senior notes .. -- -- (1,019) -- (1,019)
Cash dividends paid on preferred stock ............ -- -- (5,118) -- (5,118)
Exercise of stock options ......................... -- -- 1,956 -- 1,956
Other ............................................. -- -- (74) -- (74)
Intercompany advances, net ........................ (59,808) 3,394 60,865 (4,451) --
------------ ------------ ---------- ------------ ------------
Cash (used in) provided by financing activities ... (14,808) 3,394 14,314 (4,451) (1,551)
------------ ------------ ---------- ------------ ------------
NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS ....................................... 11,564 (13,671) (109,191) -- (111,298)
CASH, BEGINNING OF PERIOD ........................... (11,313) 19,714 109,193 -- 117,594
------------ ------------ ---------- ------------ ------------
CASH, END OF PERIOD ................................. $ 251 $ 6,043 $ 2 $ -- $ 6,296
============ ============ ========== ============ ============
19
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
($ IN THOUSANDS)
GUARANTOR NON-GUARANTOR
SUBSIDIARIES SUBSIDIARY PARENT ELIMINATIONS CONSOLIDATED
------------ ------------- ----------- ------------- -------------
FOR THE THREE MONTHS ENDED JUNE 30, 2001:
Net income ......................................... $ 76,464 $ 424 $ 8,730 $ (46,133) $ 39,485
Other comprehensive income, net of income tax:
Foreign currency translation ...................... 2,494 -- -- -- 2,494
Change in fair value of derivative instruments .... 53,331 -- -- -- 53,331
Reclassification of (gain) or loss on settled
contracts ....................................... (2,314) -- -- -- (2,314)
Ineffective portion of derivatives qualifying
for cash flow hedge accounting .................. (576) -- -- -- (576)
Equity in net other comprehensive income
(loss) of subsidiaries ........................... -- -- 83,690 (83,690) --
------------ ----------- ----------- ------------- -------------
Comprehensive income ............................... $ 129,399 $ 424 $ 92,420 $ (129,823) $ 92,420
============ =========== =========== ============= =============
GUARANTOR NON-GUARANTOR
SUBSIDIARIES SUBSIDIARY PARENT ELIMINATIONS CONSOLIDATED
------------ ------------- ---------- ------------- -------------
FOR THE THREE MONTHS ENDED JUNE 30, 2002:
Net income ....................................... $ 22,206 $ 465 $ 25,033 $ (22,671) $ 25,033
Other comprehensive income (loss), net of
income tax:
Change in fair value of derivative instruments .. (2,242) -- -- -- (2,242)
Reclassification of (gain) or loss on settled
contracts ..................................... (1,683) -- -- -- (1,683)
Ineffective portion of derivatives qualifying
for cash flow hedge accounting ................ 815 -- -- -- 815
Equity in net other comprehensive income
(loss) of subsidiaries ......................... -- -- (3,110) 3,110 --
------------ ------------- ---------- ------------- -------------
Comprehensive income ............................. $ 19,096 $ 465 $ 21,923 $ (19,561) $ 21,923
============ ============= ========== ============= =============
GUARANTOR NON-GUARANTOR
SUBSIDIARIES SUBSIDIARY PARENT ELIMINATIONS CONSOLIDATED
------------ ------------- --------- ------------- -------------
FOR THE SIX MONTHS ENDED JUNE 30, 2001:
Net income ........................................ $ 147,353 $ 1,259 $ 50,328 $ (89,167) $ 109,773
Other comprehensive income (loss), net of
income tax:
Foreign currency translation ..................... (725) -- -- -- (725)
Cumulative effect of accounting change for
financial derivatives ......................... (53,580) -- -- -- (53,580)
Change in fair value of derivative instruments ... 95,469 -- -- -- 95,469
Reclassification of (gain) or loss on settled
contracts ...................................... 16,012 -- -- -- 16,012
Ineffective portion of derivatives qualifying
for cash flow hedge accounting ................. (576) -- -- -- (576)
Equity in net other comprehensive income
(loss) of subsidiaries .......................... -- -- 116,045 (116,045) --
------------ ------------- --------- ------------- -------------
Comprehensive income .............................. $ 203,953 $ 1,259 $ 166,373 $ (205,212) $ 166,373
============ ============= ========= ============= =============
GUARANTOR NON-GUARANTOR
SUBSIDIARIES SUBSIDIARY PARENT ELIMINATIONS CONSOLIDATED
------------- ------------- --------- ------------- -------------
FOR THE SIX MONTHS ENDED JUNE 30, 2002:
Net income (loss) ................................ $ (5,034) $ 583 $ (2,553) $ 4,451 $ (2,553)
Other comprehensive income (loss), net of
income tax:
Change in fair value of derivative instruments .. (12,972) -- -- -- (12,972)
Reclassification of (gain) or loss on settled
contracts ..................................... (15,769) -- -- -- (15,769)
Ineffective portion of derivatives qualifying
for cash flow hedge accounting ................ 1,309 -- -- -- 1,309
Equity in net other comprehensive income
(loss) of subsidiaries ......................... -- -- (27,432) 27,432 --
------------- ------------- --------- ------------- -------------
Comprehensive income (loss) ...................... $ (32,466) $ 583 $ (29,985) $ 31,883 $ (29,985)
============= ============= ========= ============= =============
20
6. SEGMENT INFORMATION
Chesapeake has two reportable segments under SFAS No. 131, Disclosures about
Segments of an Enterprise and Related Information. One segment relates to our
exploration and production activities, and the other segment relates to oil and
gas marketing activities. The reportable segment information can be derived from
Note 5 as Chesapeake Energy Marketing, Inc., is the only significant
non-guarantor subsidiary and the only entity conducting marketing activities for
all income statement periods presented.
7. ACQUISITIONS
On June 28, 2002, we acquired Canaan Energy Corporation in a cash merger
through a Chesapeake subsidiary. Under the agreement, all outstanding common
shares of Canaan, other than the Canaan shares already owned by Chesapeake, were
purchased at $18.00 per share in cash, and the outstanding options to acquire
Canaan common stock were converted into the right to receive, for each share of
Canaan common stock to be received upon exercise, the merger consideration less
the per share exercise price and withholding taxes. The aggregate net cash
consideration for the merger was $120 mil