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Chesäeake
Natural Gas.
Natural Advantages.
2XX) ual Report

Table of contents

  • Page 1
    Chesäeake Natural Gas. Natural Advantages. 2XX) ual Report

  • Page 2
    ... Operations 6 Board of Directors 7 Employees 8 Chesapeake's New Logo To most ot our shareholders our 2000 Annual Report introduces Chesapeake's new logo 'Natural Gas, Natural Advantages" for the first time. These words convey the simple but powerful twin components of our image and message natural...

  • Page 3
    ...2.10 1.97 Includes Chesapeake and Gothic Energy Corporation on a combined basis at December31, 2000. Chesapeake acquired Gothic on January 16, 2001 **An independent appraisal of our oil and gas reserves was sot pen armed as sf December31, 1996, because our fiscal year-end at that time was June 30...

  • Page 4
    ... net income of $456 million, operating cash flow of $305 million and a $725 million increase in common equity. In addition, including our recently completed Gothic Energy acquisition, Chesapeake's proved reserves increased 37% to a record level of 1.7 trillion cubic feet of natural gas equivalent...

  • Page 5
    ... a change in investing preferences won't be easy, but we believe strategic repositioning had been well-executed and that a cyclical upturn in oil and natural gas prices was inevitable. The rest, as they say, is history. In early 1999 investors could have acquired all of Chesapeake's common stock as...

  • Page 6
    ...major core operating areas, with particular emphasis on the key MidContinent area. The combination of these efforts should enable us to achieve Chesapeake's goal of generating industry-leading returns. premium to competing fuels. By extension, we believe that over time natural gas producers' stock...

  • Page 7
    ...all of its Georgetown wells to be of this same quality, we believe the combination of our 100,000 leasehold acres in the Deep Giddings area and today's $5+ natural Aubrey K. McClendon gas prices mandate an acceleration of our Georgetown drilling. As ot this date, Chesapeake has decided to increase...

  • Page 8
    ... 2001. Proved Reserves by Area (rnmcfe Mid-Continent 74% Gulf Coast 9% Other Operating Area Saskatchewan In addition to the primary operating areas described above, which consist primarily of natural gas properties, Chesapeake maintains operations in the Williston Basin of North Dakota, Montana...

  • Page 9
    ... Maryland Accounting, Controller and, J. Mark Leste,r Senior Vice President Exploration Chief Accounting Officer Shannon 1. Self Partner James C. Johnson President Chesapeake Energy Commercial Law Group, PC. Oklahoma City, Oklahoma Henry J. Hood Senior Vice President Land and Legal Marketing...

  • Page 10
    ...Park Dawn Parker Sharon Patterson Mandy Pena Linda Peterburs Barbi Phelps Dianne Pickard Randy Pierce Pat Pops Rob Pope Catherine Stairs Jeff Stanford Krysta Starkey Linda Stoeo William Stitlwell Stan Stioneff Michael Stow Brenda Stremble John Stripllo Jerry Soblette lana Griggs Jennitor Grigsby...

  • Page 11
    ... Oklahoma City, Oklahoma (Address of principal executive offices) (I.R.S. Employer Identification No.) 73118 73-1395733 (Zip Code) (405) 848-8000 Registrant's telephone number, including area code Securities registered pursuant to Section 12(b) of the Act: Title of Each Class Common Stock...

  • Page 12
    .... Chesapeake began operations in 1989 and completed its initial public offering in 1993. Our common stock trades on the New York Stock Exchange under the symbol CHK. Our principal executive offices are located at 6100 North Western Avenue, Oklahoma City, Oklahoma 73118, and our main telephone number...

  • Page 13
    ... to continue concentrating our acquisition and drilling efforts in our four core operating areas, with particular emphasis on the Mid-Continent region where approximately 74% of our proved reserves, including Gothic's reserves, are located. Low-Cost Producer. Our high-quality asset base has enabled...

  • Page 14
    ... million in cash and our common stock. At the time of the acquisition, Gothic Production had $235 million of 11.125% senior secured notes due in 2005, including the $32 million of notes we purchased prior to closing. As of December 31, 2000, Gothic had proved reserves of 291 bcf of natural gas and...

  • Page 15
    ...very strong natural gas and oil prices. Our goals and the strategy to obtain those goals remain unchanged for 2001: replace production by more than 200% at a low reserve replacement cost, execute a capital expenditure plan balanced between drilling and acquisitions, funded with operating cash flow...

  • Page 16
    ... 69% and increased the volume of our proved developed reserves to 70% of total proved reserves. Natural gas reserves accounted for 89% of proved reserves at December 31, 2000. As a result of the January 2001 acquisition of Gothic, Chesapeake acquired total proved reserves of 302 bcfe at December 31...

  • Page 17
    ...in price of $0.10 per mcf for natural gas and $1.00 per barrel for oil would result in: a change in our December 31, 2000 present value of proved reserve of $62 million and $13 million, respectively; and a change in the December 31, 2000 present value of proved reserves for us and Gothic combined of...

  • Page 18
    ... results of operations or our financial position. No other customer accounted for more than 10% of total oil and gas sales in 2000. Chesapeake Energy Marketing, Inc., a wholly-owned subsidiary, provides marketing services including commodity price structuring, contract administration and nomination...

  • Page 19
    ..., for the year ended December 31, 2000, approximately 22% of EBITDA (23% of EBITDA on a pro forma basis for the Gothic acquisition) was used to pay interest on our borrowings. We cannot assure you that our business will generate sufficient cash flows from operations to enable us to continue to...

  • Page 20
    ..., new sources of oil and natural gas. As an independent producer of oil and natural gas, we frequently compete against companies that are larger and financially stronger in acquiring properties suitable for exploration, in contracting for drilling equipment and other services and in securing trained...

  • Page 21
    ... production of oil and gas properties will affect both the timing of actual future net cash flows from proved reserves and their present value. In addition, the 10% discount factor, which is required by the SEC to be used in calculating discounted future net cash flows for reporting purposes, is not...

  • Page 22
    ... flows from operations, our bank credit facility, debt and equity issuances and the sale of non-core assets. Future cash flows are subject to a number of variables, such as the level of production from existing wells, prices of oil and gas, and our success in developing and producing new reserves...

  • Page 23
    ... problems, pressure or irregularities in formations, equipment failures or accidents, adverse weather conditions, compliance with environmental and other governmental requirements, and cost of, or shortages or delays in the availability of, drilling rigs and equipment. Canadian operations present...

  • Page 24
    ... 1, 2001. Transactions with executive officers may create conflicts of interest. Our chief executive officer and chief operating officer, Aubrey K. McClendon and Tom L. Ward, have the right to participate in wells we drill subject to limitations in their employment contracts. As a result of their...

  • Page 25
    ..., in some cases, third parties are authorized to take actions in response to threats to human health or the environment and to seek to recover from responsible classes of persons the costs of such action. Furthermore, certain wastes generated by our oil and natural gas operations that are currently...

  • Page 26
    ...Chesapeake. In the event of an ownership change, Section 382 of the Code imposes an annual limitation on the amount of a corporation's taxable income that can be offset by these carryforwards. The limitation is generally equal to the product of (i) the fair market value of the equity of the company...

  • Page 27
    ... 462 full-time employees as of December 31, 2000. No employees are represented by organized labor unions. We believe our employee relations are good. Facilities Chesapeake owns an office building complex in Oklahoma City and field offices in Lindsay and Waynoka, Oklahoma; Garden City, Kansas; and...

  • Page 28
    ..., net income or cash flows as determined in accordance with generally accepted accounting principles as an indicator of operating performance or liquidity. Exploratory Well. A well drilled to find and produce oil or gas in an unproved area, to find a new reservoir in a field previously found to be...

  • Page 29
    ... that can be expected to be recovered through existing wells with existing equipment and operating methods. Proved Reserves. The estimated quantities of crude oil, natural gas and natural gas liquids which geological and engineering data demonstrate with reasonable certainty to be recoverable in...

  • Page 30
    ... natural gas assets through exploratory and developmental drilling and by selectively acquiring strategic properties in our core operating areas. We have budgeted approximately $310 million for drilling, acreage acquisition, seismic and related capitalized internal costs, and based on our cash flow...

  • Page 31
    ... estimated total production for 2001. Permian Basin. Chesapeake's Permian Basin proved reserves, consisting primarily of the Lovington area in New Mexico, represented 21 bcfe, or 2% of our total proved reserves as of December 31, 2000. During 2000, the Permian assets produced 6.2 bcfe, or 5% of our...

  • Page 32
    ... by other parties to our farmout and participation agreements. The prices used in calculating the estimated future net revenue attributable to proved reserves do not reflect market prices for oil and gas production sold subsequent to December 31, 2000. There can be no assurance that all of...

  • Page 33
    ... v. Chesapeake, et al., filed in October 1996 in the U.S. District Court for the Northern District of Texas, Fort Worth Division, Union Pacific Resources Company asserted that we had infringed UPRC's patent covering a "geosteering" method utilized in drilling horizontal wells. Following a trial in...

  • Page 34
    ... District Court, Northern District of Texas, Amarillo Division, Nos. 2:98-CV-012 and 2:98-CV-106, filed January 8, 1998 and March 18, 1998, respectively (actions consolidated), jury trial in May 1999, verdict for CP and co-defendants. The jury found plaintiffs' claims were barred by the payment of...

  • Page 35
    ... owners. Dividends We did not pay dividends on our common stock in 1999 or 2000. The payment of future cash dividends, if any, will depend upon, among other things, our financial condition, funds from operations, the level of our capital and development expenditures, our future business prospects...

  • Page 36
    ...the acquisitions was accounted for using the purchase method. The table should be read in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations" and our consolidated financial statements, including the notes, appearing in Items 7 and 8 of this report...

  • Page 37
    ...$ Earnings (loss) per common share - assuming dilution: Income (loss) before extraordinary item Extraordinary item Net income (loss) Cash dividends declared per common share Cash Flow Data: Cash provided by operating activities before changes in working capital Cash provided by operating activities...

  • Page 38
    ...reversal related to Chesapeake's ability to generate sufficient future taxable income to utilize net operating losses prior to their expiration. The loss in 1998 was caused primarily by an $826 million oil and gas property writedown recorded under the full-cost method of accounting and a $55 million...

  • Page 39
    ... actions taken to lower corporate overhead, including staff reductions and office closings which occurred in late 1998 and early 1999. We capitalized $7.0 million, $2.7 million and $5.3 million of internal costs in 2000, 1999 and 1998, respectively, directly related to our oil and gas exploration...

  • Page 40
    ... and charged to operations using the unit-of-production method based on the ratio of current production to proved oil and gas reserves as estimated by our independent engineering consultants and our internal reservoir engineers. Costs directly associated with the acquisition and evaluation of...

  • Page 41
    ...a new building at our Oklahoma City complex. We anticipate the availability of this additional office space will reduce our general and administrative costs in future years. In 1999, we invested $153.3 million for exploration and development drilling, $49.9 million for the acquisition of oil and gas...

  • Page 42
    ... to use our common stock to redeem any shares of the outstanding preferred stock that are not converted into common stock prior to the redemption date. During 2000, Chesapeake Energy Marketing, Inc. purchased 99.8% of Gothic Energy Corporation's $104 million 14.125% Series B senior secured discount...

  • Page 43
    ... States absent registration or an applicable exemption from registration requirements. Recently Issued Accounting Standards On June 15, 1998, the Financial Accounting Standards Board issued SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities. SFAS 133 establishes a new model...

  • Page 44
    ... or forecasts of future events. They include statements regarding oil and gas reserve estimates, planned capital expenditures, the drilling of oil and gas wells and future acquisitions, expected oil and gas production, cash flow and anticipated liquidity, business strategy and other plans and...

  • Page 45
    ...Quantitative and Qualitative Disclosures About Market Risk Commodity Price Risk Chesapeake's results of operations are highly dependent upon the prices received for oil and natural gas production. Hedging Activities Periodically Chesapeake utilizes hedging strategies to hedge the price of a portion...

  • Page 46
    ... exceed the Houston Ship Channel Beaumont/Texas Index for each month, we will pay the counterparty. Gains or losses on basis swap transactions are recognized as price adjustments in the month of related production. Subsequent to December 31, 2000, we settled the natural gas basis protection swaps...

  • Page 47
    ... commitments it makes. 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 material by management. Interest Rate Risk Chesapeake also utilizes hedging strategies to manage fixed-interest...

  • Page 48
    ... market prices for Chesapeake common stock, we expect the interest rate swap 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. December 31, 2000...

  • Page 49
    ... STATEMENTS CHESAPEAKE ENERGY CORPORATION Page Consolidated Financial Statements: Report of Independent Accountants Consolidated Balance Sheets at December 31, 1999 and 2000 Consolidated Statements of Operations for the Years Ended December 31, 1998, 1999 and 2000 Consolidated Statements of Cash...

  • Page 50
    ... in the accompanying index present fairly, in all material respects, the financial position of Chesapeake Energy Corporation and its subsidiaries (the "Company") at December 31, 1999 and 2000, and the results of their operations and their cash flows for each of the three years in the period ended...

  • Page 51
    CHESAPEAKE ENERGY CORPORATIONAND SUBSIDIARIES CONSOUDATED BALANCE SHEETS December 31, 1999 20(H) ($ in thousands) ASSETS CURRENT ASSETS: Cash and cash equivalents Restricted cash Accounts receivable: Oil and gas sales Oil and gas marketing sales Joint interest and other, net of allowances of $3,...

  • Page 52
    CHESAPEAKE ENERGY CORPORATION AND SUBSIDIARIES CONSOUDATED STATEMENTS OF OPERATIONS Years Ended December 31, 1998 1999 2000 in thousands, except per share data) REVENUES: Oil and gas sales Oil and gas marketing sales Total Revenues $ 256,887 121,059 377,946 51,202 8,295 19,918 119,008 146,644 ...

  • Page 53
    CHESAPEAKE ENERGY CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS Years Ended December 31, 1998 1999 2000 (S in thousands) CASH FLOWS FROM OPERATING ACTIVITIES: NET INCOME (LOSS) ADJUSTMENTS TO RECONCILE NET INCOME (LOSS) TO CASH PROVIDED BY OPERATING ACTIVITIES: Depreciation,...

  • Page 54
    ...million shares of Chesapeake common stock, plus a cash payment of $8.3 million, were exchanged for 3,972,363 shares of Chesapeake preferred stock. During 2000, Chesapeake Energy Marketing, Inc. purchased 99.8% of Gothic Energy Corporation's $104 million 14.125% Series B senior secured discount notes...

  • Page 55
    CHESAPEAKE ENERGY CORPORATION AND SUBSIDIARIES CONSOUDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT) AND COMPREHENSIVE INCOME (LOSS) Years Ended December 31, 1998 1999 2000 PREFERRED STOCK: Balance, beginning of period Exchange of common stock and cash for 3,972,363 shares of preferred stock ...

  • Page 56
    ... are located in Oklahoma, Texas, Arkansas, Louisiana, Kansas, Montana, Colorado, North Dakota, New Mexico and British Columbia and Saskatchewan, Canada. Principles of Consolidation The accompanying consolidated financial statements of Chesapeake Energy Corporation include the accounts of our direct...

  • Page 57
    ... $826 million. Other Property and Equipment Other property and equipment consists primarily of gas gathering and processing facilities, vehicles, land, office buildings and equipment, and software. Major renewals and betterments are capitalized while the costs of repairs and maintenance are charged...

  • Page 58
    ... and gas marketing sales to the extent related to our marketing activities, and in interest expense to the extent so related. On June 15, 1998, the Financial Accounting Standards Board issued SFAS No. 133, Accountingfor Derivative Instruments and Hedging Activities. SFAS 133 establishes a new model...

  • Page 59
    ... stockholders' equity, reported earnings (losses) and other comprehensive income. If we had adopted SFAS 133 on December 31, 2000, Chesapeake would have recorded an additional $9.3 million in current assets and $98.6 million in current liabilities related to our existing oil and gas hedges based on...

  • Page 60
    ... transactions; lines of business; dividend and other payment restrictions affecting guarantor subsidiaries; mergers or consolidations; and transactions with affiliates. We are obligated to repurchase the 9.625% and 9.125% Senior Notes in the event of a change of control or certain asset sales...

  • Page 61
    ...Subsidiary Parent Eliminations Consolidated CURRENT ASSETS: Cash and cash equivalents Restricted cash Accounts receivable Inventory Other ASSETS $ (7,156) 192 $ 20,409 45,170 4,183 1,997 18,297 399 700 - $ 25,405 $ $ 38,658 192 Total Current Assets PROPERTY AND EQUIPMENT: Oil and gas...

  • Page 62
    ... CONSOUDATING BALANCE SHEET As of December 31, 2000 ($ in thousands) NonGuarantor Guarantor Subsidiaries Subsidiary Parent Eliminations Consolidated ASSETS CURRENT ASSETS: Cash and cash equivalents Restricted cash Accounts receivable Deferred income tax asset Inventory $ (19,868) 3,500 91,903...

  • Page 63
    ...,000 55,000 146,644 8,076 1,234,143 OPERATING COSTS: Production expenses and taxes General and administrative Oil and gas marketing expenses Impairment of oil and gas properties Impairment of other assets Oil and gas depreciation, depletion and amortization Other depreciation and amortization Total...

  • Page 64
    CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS ($ in thousands) Guarantor Subsidiaries For the Year Ended December 31, 2000: REVENUES: Oil and gas sales Oil and gas marketing sales Total Revenues NonGuarantor Subsidiary Parent Eliminations Consolidated $469,823 $ 347 361,023 $ $ $ 470,170...

  • Page 65
    ... STATEMENTS OF CASH FLOWS ($ in thousands) Guarantor Subsidiaries For the Year Ended December 31, 1998: CASH FLOWS FROM OPERATING ACTIVITIES CASH FLOWS FROM INVESTING ACTIVITIES: Oil and gas properties Proceeds from sale of assets Investment in preferred stock of Gothic Energy Corporation...

  • Page 66
    ...) 1,398 (279,364) CASH FLOWS FROM FINANCING AcTIvITIES: Proceeds from long-term borrowings Payments on long-term borrowings Cash paid for redemption of preferred stock Cash received on make whole provision Cash dividends paid on preferred stock Exercise of stock options Intercompany advances, net...

  • Page 67
    ... CONSOUDATING STATEMENTS OF COMPREHENSIVE INCOME (LOSS) ($ in thousands) Guarantor Subsidiaries For the Year Ended December 31, 1998: Net income (loss) Other comprehensive income (loss) - foreign currency translation Comprehensive income (loss) $(943,268) (4,689) Non-Guarantor Subsidiary $(5,964...

  • Page 68
    ... Chesapeake Panhandle Limited Partnership ("CP") (f/k/a MC Panhandle, Inc.), and two subsidiaries of Kinder Morgan, Inc. have been 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...

  • Page 69
    ... of operations of Chesapeake. Chesapeake has employment contracts with its chief executive officer, chief operating officer and chief financial officer and various other senior management personnel which provide for annual base salaries, bonus compensation and various benefits. The contracts provide...

  • Page 70
    ... "expected" federal income tax expense (benefit) on earnings before income taxes for the following reasons: Years Ended December 31, 1998 1999 2000 $ ($ in thousands) Computed "expected" income tax provision (benefit) Tax percentage depletion Change in valuation allowance State income taxes and...

  • Page 71
    ...a director is a member. Employee Benefit Plans We maintain the Chesapeake Energy Corporation Savings and Incentive Stock Bonus Plan, a 401(k) profit sharing plan. Eligible employees may make voluntary contributions to the plan which Chesapeake matches up to 10% of the employee's annual salary with...

  • Page 72
    ... chief executive officer and the chief operating officer of Chesapeake tendered 2,320,107 shares of Chesapeake common stock in full satisfaction of two notes payable to Chesapeake Energy Marketing, Inc. with a combined outstanding balance of $7.6 million. See note 6. During 2000, Chesapeake entered...

  • Page 73
    ... for make-whole provisions. Chesapeake Energy Marketing, Inc. received $6.1 million in cash and $7.2 million of Chesapeake common stock (982,562 shares) from the sellers of Gothic notes pursuant to make-whole provisions included in the purchase agreements. These provisions required payments to...

  • Page 74
    ... the grant date fair market value. Options granted become exercisable at dates determined by the Stock Option Committee of the Board of Directors. No options can be granted under this plan after April 25, 2010. Under Chesapeake's 2000 Executive Officer Stock Option Plan, nonqualified stock options...

  • Page 75
    ...61 $2.83 The exercise of certain stock options results in state and federal income tax benefits to us related to the difference between the market price of the common stock at the date of disposition and the option price. During 2000, we recognized a tax benefit of $3.8 million, which was recorded...

  • Page 76
    ... and natural gas. These arrangements may expose us to credit risk from our counterparties and to basis risk. We do not expect that the counterparties will fail to meet their obligations given their high credit ratings. Hedging Activities Periodically Chesapeake utilizes hedging strategies to hedge...

  • Page 77
    ... million. On June 2, 2000, we entered into a natural gas basis protection swap transaction for 13,500,000 mmbtu for the period of January 2001 through March 2001. This transaction requires that the counterparty pay us if the NYMEX price exceeds the Houston Ship Channel Beaumont/Texas Index by more...

  • Page 78
    ...5.38 5.38 5.38 5.38 5.75 5.75 Subsequent to December 31, 2000, we entered into natural gas cap-swaps designed to hedge a portion of our domestic gas production for periods after December 2000. This transaction requires that we pay the counterparty if the NYMEX price exceeds an average NYMEX-defined...

  • Page 79
    ... commitments it makes. 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 Chesapeake also utilizes hedging strategies to manage fixed...

  • Page 80
    ...was issued in April 1998, using quoted market prices. Our carrying amount for such preferred stock at December 31, 1999 and 2000 was $229.8 million and $31.2 million, compared to an approximate fair value of $119.0 million and $49.6 million, respectively. 11. Disclosures About Oil And Gas Producing...

  • Page 81
    ...leasehold costs Exploration costs Acquisition costs: Proved Unproved Sales of oil and gas properties Capitalized internal costs Total $138,285 24,648 75,285 3,625 (1,529) 6,958 $151,844 24,658 75,285 3,625 (1,529) 6,958 $247,272 $13,569 $260,841 Results of Operations from Oil and Gas Producing...

  • Page 82
    ... reserve information presented below is based upon reports prepared by independent petroleum engineers and Chesapeake's petroleum engineers. As of December 31, 1998, Williamson Petroleum Consultants, Inc., Ryder Scott Company L.P., H,J. Gruy and Associates, Inc. and our internal reservoir engineers...

  • Page 83
    ...from known reservoirs under existing economic and operating conditions. Proved developed oil and gas reserves are those expected to be recovered through existing wells with existing equipment and operating methods. Presented below is a summary of changes in estimated reserves of Chesapeake for 1998...

  • Page 84
    ...from higher natural gas prices at December 31, 2000, as well as lower estimates on various Statement of Financial Accounting Standards No. 69 prescribes guidelines for computing a standardized measure of future net cash flows and changes therein relating to estimated proved reserves. Chesapeake has...

  • Page 85
    ... spot price for natural gas and oil at December 31, 2000. These prices are significantly higher than the prices received in 2000. In January 2001, Chesapeake acquired Gothic Energy Corporation. Gothic reported $858 million as its standardized measure of discounted future net cash flows and $1.27...

  • Page 86
    ... standardized measure of discounted future net cash flows are as follows: December 31, 1998 U.S. Combined Canada (S in thousands) $ Standardized measure, beginning of period Sales of oil and gas produced, net of production costs Net changes in prices and production costs Extensions and discoveries...

  • Page 87
    ... are secured by Gothic's oil and gas properties. Chesapeake has not assumed any payment obligations with respect to the notes. The parties executed a definitive merger agreement on September 8, 2000, as amended on October 1, 2000, and Gothic's shareholders approved the merger at a special meeting on...

  • Page 88
    Schedule II CHESAPEAKE ENERGY CORPORATION AND SUBSIDIARIES VALUATION AND QUALIFYING ACCOUNTS ($ in thousands) Balance at Beginning of Period $ Description December 31, 1998: Allowance for doubtful accounts Valuation allowance for deferred tax assets December 31, 1999: Allowance for doubtful ...

  • Page 89
    ...'s 14.125% senior secured discount notes for total consideration valued at $80.8 million in cash and Chesapeake common stock. We also purchased prior to the merger $31.6 million principal amount of 11.125% senior secured notes due 2005 issued by Gothic's operating subsidiary and guaranteed by Gothic...

  • Page 90
    CHESAPEAKE ENERGY CORPORATION UNAUDITED PRO FORMA COMBINED BALANCE SHEET as of December 31, 2000 ($ in thousands) Historical Gothic Chesapeake Pro Forma As Adjusted Adjustments ASSETS Current assets Property, plant and equipment: Proved properties Unproved properties Accumulated DD&A $ 166,926 ...

  • Page 91
    CHESAPEAKE ENERGY CORPORATION UNAUDITED PRO FORMA COMBINED STATEMENT OF OPERATIONS Year Ended December 31, 2000 (in thousands, except per share data) Historical Chesapeake Gothic Revenues: Pro Forma Adjustments As Adjusted $ Oil and gas sales Oil and gas marketing sales Well operations Total ...

  • Page 92
    ... secured discount notes Investment in Gothic Production senior secured notes Other acquisition costs Purchase price Gothic Book Value $ 28,000 10,000 1,500 80,761 34,760 12,000 $167,021 Estimated Fair Value $ Pro Forma Adjustment $ 58 Current assets Property and equipment - proved properties...

  • Page 93
    ... stock held by Chesapeake. To eliminate interest expense related to the Gothic senior discount notes and Gothic Production senior secured notes acquired by Chesapeake. To reclassify overhead reimbursements recognized by Gothic as operator of certain oil and gas properties and reported as well...

  • Page 94
    REPORT OF INDEPENDENT ACCOUNTANTS To the Board of Directors and Stockholder of Gothic Energy Corporation In our opinion, the accompanying consolidated balance sheets and the related consolidated statements of operations, stockholders' equity (deficit) and cash flows present fairly, in all material ...

  • Page 95
    GOTIIIC ENERGY CORPORATION AND SUBSIDIARY CONSOUDATED BALANCE SHEETS December 31, 1999 2000 ($ in thousands) CURRENT ASSETS: Cash and cash equivalents Natural gas and oil receivables Receivable from officers and employees Other Total Current Assets PROPERTY AND EQUIPMENT: Natural gas and oil ...

  • Page 96
    GOTHIC ENERGY CORPORATION AND SUBSIDIARY CONSOUDATED STATEMENT OF OPERATIONS Years Ended December 31, 1998 1999 2000 ($ in thousands, except per share data) REVENUES: Natural gas and oil sales Well operations Total revenues $ 50,714 2,319 53,033 12,129 24,001 3,823 $52,967 2,657 $ 83,065 2,680...

  • Page 97
    GOTHIC ENERGY CORPORATION AND SUBSIDIARY CONSOUDATED STATEMENT OF STOCKHOLDERS' EQUITY (DEFICIT) Years Ended December 31, 1998 1999 2000 ($ in thousands) PREFERRED STOCK: Balance beginning of period Preferred stock dividend Series B Preferred dividend amortization of discount Issuance of Series...

  • Page 98
    GOTHIC ENERGY CORPORATION AND SUBSIDIARY CONSOUDATED STATEMENT OF CASH FLOWS Years Ended December 31, 1998 1999 2000 ($ in thousands) CASH FLOWS FROM OPERATING ACTIVITIES: Net income (loss) ADJUSTMENTS TO RECONCILE NET LOSS TO NET CASH PROVIDED BY OPERATING ACTIVITIES: Depreciation, depletion and...

  • Page 99
    ... energy company engaged in the business of acquiring, developing and exploiting natural gas and oil reserves in Oklahoma, Texas, New Mexico and Kansas. On January 16, 2001, Gothic Energy Corporation merged with Chesapeake Merger 2000 Corp., a wholly owned subsidiary of Chesapeake Energy Corporation...

  • Page 100
    ... using the units-of-production method based on proved natural gas and oil reserves. Gothic capitalizes costs, including salaries and related fringe benefits of employees and/or consultants directly engaged in the acquisition, exploration and development of natural gas and oil properties, as well...

  • Page 101
    ... amount of reserves is involved. Since all of Gothic's natural gas and oil properties are located in the United States, a single cost center is used. Equipment, Furniture and Fixtures Equipment, furniture and fixtures are stated at cost and are depreciated on the straight-line method over their...

  • Page 102
    ... than the market price of the stock on the date of grant. Accordingly, based on Gothic's grants in 1998 and 1999 no compensation expense has been recognized. Recently Issued Financial Accounting Pronouncements In June 1998, the FASB issued Statement No. 133, "Accounting for Derivative Instruments...

  • Page 103
    ... and other restricted payments, including the payment of dividends and distributions to Gothic Energy and Chesapeake, the sale of assets, creating, assuming or permitting to exist any liens (with certain exceptions) on its assets, mergers and consolidations (subject to meeting certain conditions...

  • Page 104
    ... the registration requirements of the Securities Act of 1933, as amended, afforded by section 4(2) thereof. In July 2000, Gothic Energy issued 225,000 shares of its common stock to one director and certain employees upon their exercise of stock options. In July 2000, Gothic Energy issued 233,000...

  • Page 105
    ...the Merger, the terms of the Series B Preferred Stock were amended to provide for noncumulative cash dividends of $80 per share per annum if, as and when declared by the Board of Directors, optional redemption rights permitting Gothic Energy to redeem the shares at any time or from time to time, and...

  • Page 106
    ..., 2000, all options granted under the Omnibus Incentive Plan had been exercised. Non-Employee Stock Option Plan The 1996 Non-Employee Stock Option Plan provides a means by which non-employee directors of Gothic and consultants to Gothic can be given an opportunity to purchase stock in Gothic Energy...

  • Page 107
    ... years Gothic applies Accounting Principles Board Opinion No. 25 in accounting for stock options granted to employees, including directors, and Statement of Financial Accounting Standards No. 123 ("SFAS No. 123") for stock options and warrants granted to non-employees. No compensation cost has been...

  • Page 108
    ... In the event the employment agreement was terminated by Gothic (other than for cause, as defined), the President was entitled to receive a payment representing all salary due under the remaining full term of his agreement and Gothic was obligated to continue his medical insurance and other benefits...

  • Page 109
    ... Chesapeake Merger. The above employment agreements were amended in connection with the Merger whereby the executives each received a severance payment equal to their year 2000 base salary, and entered into consulting and non-compete agreements with Chesapeake. Gothic leases its corporate offices...

  • Page 110
    ... equal the annual earnings per share, which is based on the average shares outstanding during the year. 11. Supplementary Natural Gas and Oil Information The following supplemental historical and reserve information is presented in accordance with Financial Accounting Standards Board Statement No...

  • Page 111
    ... wells with existing equipment and operating methods. Proved undeveloped reserves are those reserves which are expected to be recovered from new wells on undrilled acreage or from existing wells where a relatively major expenditure is required. Estimates of natural gas and oil reserves require...

  • Page 112
    ... natural gas and oil reserves. The estimated future income taxes give effect to permanent differences and tax credits and allowances. Included in the estimated standardized measure of future cash flows are certain capital projects (future development costs). Gothic estimates the capital required...

  • Page 113
    ... Sales of natural gas and oil produced, net of operating expenses Purchases of reserves-in-place Sales of reserves-in-place Revisions of previous quantity estimates and changes in sales prices and production costs Accretion of discount Standardized measure of discounted future cash flows-end of...

  • Page 114
    ITEM 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure Not applicable. PART HI ITEM 10. Directors and Executive Officers of the Registrant The information called for by this Item 10 is incorporated herein by reference to the definitive Proxy Statement to be ...

  • Page 115
    ... statement schedules are applicable or required. Exhibits. Regulation S-K: The following exhibits are filed herewith pursuant to the requirements of Item 601 of Exhibit Number 2.1 Description Senior Secured Discount Notes Purchase Agreement dated June 23, 2000 between Chesapeake Energy Marketing...

  • Page 116
    ... Registrant, as issuer, Chesapeake Operating, Inc., Chesapeake Gas Development Corporation and Chesapeake Exploration Limited Partnership, as Subsidiary Guarantors, and United States Trust Company of New York, As Trustee, with respect to 8.5% Senior Notes due 2012. Incorporated herein by reference...

  • Page 117
    ... Registrant's quarterly report on Form 10-Q for the quarter ended March 31, 2000. l0.1.6t 10.l.7t 10.2.lt Amended and Restated Employment Agreement dated as of July 1, 1998, as amended by First Amendment thereto dated December 31, 1998 between Aubrey K. McClendon and Chesapeake Energy Corporation...

  • Page 118
    ...2000. Employment Agreement dated as of July 1, 2000 between Martha A. Burger and Chesapeake Energy Corporation. Incorporated herein by reference to Exhibit 10.2.9 to Registrant's quarterly report on Form 10-Q for the quarter ended June 30, 2000. Form of Indemnity Agreement for officers and directors...

  • Page 119
    ... had issued a press release reporting a major exploratory success, increased 2001 capital expenditure budget, higher production and cash flow forecasts and an update on the Gothic merger. On December 21, 2000, we filed a current report on Form 8-K providing under Item 9 guidance on future financial...

  • Page 120
    ... thereuntO duly authorized. CHESAPEAKE ENERGY CORPORATION By Is! AUBREY K. McCLENDON Aubrey K. McClendon Chairman of the Board and Chief Executive Officer Date: April 3, 2001 Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following...

  • Page 121
    ... speak only as of the date of our Internet Address Company financial information, public disclosures and other information are available at Chesapeake's website Stock Transfer Agent and Registrar UMB Bank, NA. 928 Grand Blvd. Kansas City, Missouri 64106 (816) 860-7760 Communication concerning the...

  • Page 122
    * Chesapeake Natural Gas. Natural Advantages. Chesapeake Energy Corporation 6100 North Western Avenue Oklahoma City, Oklahoma 73118 www.chkenergy.com