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 September 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 November 4, 2002, there were 166,253,078 shares of our $.01 par value common stock outstanding.
CHESAPEAKE ENERGY CORPORATION AND SUBSIDIARIES INDEX TO FORM 10-Q FOR THE QUARTER ENDED SEPTEMBER 30, 2002
CHESAPEAKE ENERGY CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (UNAUDITED)
CHESAPEAKE ENERGY CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
CHESAPEAKE ENERGY CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
CHESAPEAKE ENERGY CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) (UNAUDITED)
CHESAPEAKE ENERGY CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS SEPTEMBER 30, 2002 (UNAUDITED) 1. BASIS OF PRESENTATION 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 nine months ended September 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 nine months ended September 30, 2001 (the "Prior Quarter" and "Prior Period", respectively) and the three and nine months ended September 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 September 30, 2002, our oil and gas 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. 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 7
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 September 30, 2002 are provided below. The associated carrying values of these instruments are equal to the estimated fair values.
Risk management income (loss) related to our oil and gas derivatives is comprised of the following ($ in thousands):
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:
Concentration of Credit Risk A significant portion of our liquidity is concentrated in cash and cash equivalents, 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 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 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 11
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 five class action suits filed against Chesapeake and others. No class has been certified in any of the cases in which Chesapeake is a named defendant. We believe the claims asserted 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 when we can reasonably estimate a liability. 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 No. 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 3.8 million, 7.8 million, 0.3 million and 0.5 million shares of common stock at a weighted average exercise price of $6.97, $6.56, $17.25 and $12.77, respectively, were antidilutive because the exercise prices of the options were greater than the average market price of the common stock. o Diluted shares in the Current Quarter and Current Period do not include the assumed conversion of the outstanding 6.75% preferred stock (convertible into 19.5 million common shares) and the Current Period does not include the common stock equivalent of preferred stock outstanding prior to conversion of 7,611 shares, as the effects were antidilutive. 12
A reconciliation for the periods presented is as follows:
During the Current Period, we purchased and subsequently retired $63.5 million of the 7.875% senior notes for total consideration of $66.3 million, including $0.9 million of accrued interest and $1.9 million of redemption premium. Subsequent to September 30, 2002, we purchased $25.6 million of the 7.875% senior notes for total consideration of $26.8 million, including $0.2 million in accrued interest and $1.0 million in redemption premium. In August 2002, we issued $250 million principal amount of 9% senior notes due 2012, which were subsequently exchanged on October 24, 2002 for substantially identical notes registered under the Securities Act of 1933. On September 30, 2002, we had a $225 million revolving bank credit facility (with a committed borrowing base of $225 million) which matures in September 2003. As of September 30, 2002, we had no outstanding borrowings under this facility and were using $25.5 million of the facility to secure various letters of credit. During November 2002, we increased the credit facility to $250 million (with a committed borrowing base of $225 million). We expect to increase the borrowing base to $250 million and to extend the term of the credit facility to June 2005 during the fourth quarter of 2002. 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 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 $10.0 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 $5.0 million. Our senior notes are unsecured senior obligations of Chesapeake and rank equally with all of our other unsecured indebtedness. The senior note indentures contain covenants limiting us and our guarantor subsidiaries with respect to asset sales; restricted payments; the incurrence of additional indebtedness and the issuance of preferred stock; liens; sale and leaseback transactions; lines of business; dividend and other payment restrictions affecting guarantor subsidiaries; mergers or consolidations; and transactions with affiliates. The senior note indentures also limit our ability to make restricted payments (as defined), including the payment of cash dividends, unless the debt incurrence and other tests are met. Chesapeake is a holding company and owns no operating assets and has no significant operations independent of its subsidiaries. Our obligations under all our senior notes have been fully and unconditionally guaranteed, on a joint and several basis, by each of our "restricted subsidiaries" (as defined in the respective indentures governing these notes) (collectively, the "guarantor subsidiaries"). Each guarantor subsidiary is a direct or indirect wholly-owned subsidiary. Set forth below are condensed consolidating financial statements of the guarantor subsidiaries and Chesapeake Energy Marketing, Inc, which is not a guarantor of the senior notes and was a non-guarantor subsidiary for all periods presented. All of our other wholly-owned subsidiaries were guarantor subsidiaries during all periods presented. 14
CONDENSED CONSOLIDATING BALANCE SHEET AS OF SEPTEMBER 30, 2002 ($ IN THOUSANDS)
CONDENSED CONSOLIDATING BALANCE SHEET AS OF DECEMBER 31, 2001 ($ IN THOUSANDS)
CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS ($ IN THOUSANDS)
CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS ($ IN THOUSANDS)
CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS ($ IN THOUSANDS)
CONDENSED CONSOLIDATING STATEMENTS OF COMPREHENSIVE INCOME (LOSS) ($ IN THOUSANDS)
6. SEGMENT INFORMATION Chesapeake has two reportable segments under SFAS No. 131, Disclosures about Segments of an Enterprise and Related Information. One segment is related to our exploration and production activities, and the other segment is related to oil and gas marketing activities. The reportable segment information can be derived from the condensed consolidating financial statements included in Note 5. The separate results and financial condition of Chesapeake Energy Marketing, Inc., our wholly owned subsidiary which conducts all our marketing activities, are reflected in the column captioned "Non-Guarantor Subsidiary." 7. RECENT ACCOUNTING PRONOUNCEMENTS In June 2001, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards Nos. 141 and 142. SFAS No. 141, Business Combinations, requires that the purchase method of accounting be used for all business combinations initiated after June 30, 2001. SFAS No. 142, Goodwill and Other Intangible Assets, changes the accounting for goodwill from an amortization method to an impairment-only approach and was effective in January 2002. We have adopted these new standards, which have not had a significant effect on our results of operations or our financial position. In June 2001, the FASB issued SFAS No. 143, Accounting for Asset Retirement Obligations. SFAS No. 143 is effective for fiscal years beginning after June 15, 2002 and establishes an accounting standard requiring the recording of the fair value of liabilities associated with the retirement of long-term assets (mainly plugging and abandonment costs for our depleted wells) in the period in which the liability is incurred (at the time the wells are drilled). We are currently evaluating our oil and natural gas properties to determine the impact of the adoption of SFAS 143 on our financial position and results of operations. In August 2001, the FASB issued SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets. SFAS 144 was effective January 1, 2002. This statement supersedes SFAS No. 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of, and amends Accounting Principles Board Opinion No. 30 for the accounting and reporting of discontinued operations, as it relates to long-lived assets. Our adoption of SFAS 144 did not affect our financial position or results of operations. In April 2002, the FASB issued SFAS No. 145, Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections. SFAS No. 145 is effective for fiscal years beginning after May 15, 2002. We have early adopted this standard and it did not have a significant effect on our results of operations or our financial position. In July 2002, the FASB issued SFAS No. 146, Accounting For Costs Associated with Exit or Disposal Activities. SFAS No. 146 is effective for exit or disposal activities initiated after December 31, 2002. We have no such activities, thus we do not believe the impact of the adoption of SFAS No. 146 will be material. 8. SUBSEQUENT EVENT On November 6, 2002, Chesapeake priced a private offering of $50 million principal amount of 9.0% senior notes due 2012. The net proceeds are expected to be approximately $51.3 million. The 9.0% senior notes will be issued as additional securities under the August 12, 2002 indenture pursuant to which our outstanding 9.0% senior notes were issued. Closing of the offering is expected to occur on November 13, 2002, and is subject to satisfaction of customary closing conditions. The net proceeds from this offering are expected to be used for repurchase of amounts currently outstanding under our 7.875% senior notes and under our revolving bank credit facility. The 9.0% senior notes to be issued will not be registered under the Securities Act of 1933 and may not be offered or sold in the United States absent registration or an applicable exemption from registration requirements. 21
PART I. FINANCIAL INFORMATION ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS OVERVIEW The following table sets forth certain information regarding the production volumes, oil and gas sales, average sales prices received and expenses for the periods indicated:
For the Current Quarter, we realized an average price of $3.49 per mcfe, compared to $4.36 per mcfe in the Prior Quarter, including in each case the effects of hedging. Our hedging activities resulted in increased oil and gas revenues of $22.2 million, or $0.47 per mcfe, in the Current Quarter, compared to an increase in oil and gas revenues of $64.4 million, or $1.58 per mcfe, in the Prior Quarter. The following table shows our production by region for the Prior Quarter and the Current Quarter:
production taxes are calculated using value-based formulas that produce higher per unit costs when oil and gas prices are higher. We expect production taxes for the remainder of 2002 to be approximately 6% - 7% of oil and gas sales revenues excluding any impact from hedging. General and Administrative. General and administrative expenses, which are net of capitalized internal costs, were $3.8 million in the Current Quarter compared to $3.2 million in the Prior Quarter. The increase in the Current Quarter is the result of Chesapeake's continued growth. Chesapeake follows the full-cost method of accounting under which all costs associated with property acquisition, exploration and development activities are capitalized. We capitalize internal costs that can be directly identified with our acquisition, exploration and development activities and do not include any costs related to production, general corporate overhead or similar activities. We capitalized $2.5 million and $2.1 million of internal costs in the Current Quarter and Prior Quarter, respectively, directly related to our oil and gas exploration and development efforts. We anticipate that general and administrative expenses for the remainder of 2002 will be between $0.10 and $0.11 per mcfe, which is approximately the same level as 2001 and the Current Quarter. Oil and Gas Depreciation, Depletion and Amortization. Depreciation, depletion and amortization of oil and gas properties for the Current Quarter was $58.3 million, compared to $46.8 million in the Prior Quarter. The DD&A rate per mcfe, which is a function of capitalized costs, future development costs and the related underlying reserves in the periods presented, increased from $1.15 in the Prior Quarter to $1.25 per mcfe in the Current Quarter. We expect the DD&A rate for the remainder of 2002 to be between $1.25 and $1.30 per mcfe. Depreciation and Amortization of Other Assets. Depreciation and amortization of other assets was $3.7 million in the Current Quarter, compared to $2.2 million in the Prior Quarter. The increase in the Current Quarter was primarily the result of higher depreciation recorded on recently acquired fixed assets. Other property and equipment costs are depreciated on both straight-line and accelerated methods. Buildings are depreciated on a straight-line basis over 31.5 years. Drilling rigs are depreciated on a straight-line basis over 12 years. All other property and equipment are depreciated over the estimated useful lives of the assets, which range from three to seven years. We expect depreciation and amortization of other assets to average between $0.08 and $0.10 per mcfe for the remainder of 2002 which approximates the current rate. Interest and Other Income. Interest and other income for the Current Quarter was $1.8 million compared to $0.1 million in the Prior Quarter. The increase was primarily the result of the recognition of a $1.0 million loss in the Prior Quarter which represented our share of the net loss of RAM Energy, Inc., and interest income recorded in the Current Quarter on our investment in senior secured notes issued by Seven Seas Petroleum Inc. Interest Expense. Interest expense increased to $28.3 million in the Current Quarter from $24.1 million in the Prior Quarter. The increase in the Current Quarter was due primarily to a $327 million increase in average long-term borrowings in the Current Quarter compared to the Prior Quarter, partially offset by income of $1.1 million earned on our interest rate swaps during the Current Quarter. In addition to the interest expense reported, we capitalized $1.3 million of interest during the Current Quarter, compared to $1.2 million capitalized in the Prior Quarter, on significant investments in unproved properties that were not being currently depreciated, depleted or amortized and on which exploration activities were in progress. Interest is capitalized using the weighted average interest rate of our outstanding borrowings. We anticipate that capitalized interest for the remainder of 2002 will be between $1.0 million and $1.5 million. Other. Chesapeake recorded a non-cash impairment of $4.8 million representing 100% of the cost allocated to our Seven Seas common stock warrants and also recorded a $0.5 million loss from the repurchase of debt. Provision (Benefit) for Income Taxes. Chesapeake recorded income tax expense of $11.1 million in the Current Quarter, compared to income tax expense of $43.4 million in the Prior Quarter. We anticipate that all 2002 income tax expense will be deferred. 24
RESULTS OF OPERATIONS -- NINE MONTHS ENDED SEPTEMBER 30, 2002 ("CURRENT PERIOD") VS. SEPTEMBER 30, 2001 ("PRIOR PERIOD") General. For the Current Period, Chesapeake had net income available to common shareholders of $6.5 million, or $0.04 per diluted common share, on total revenues of $482.3 million. This compares to net income available to common shareholders of $174.1 million, or $1.02 per diluted common share, on total revenues of $792.0 million during the Prior Period. The Current Period's net income included, on a pre-tax basis, a non-cash $87.0 million risk management loss, while the Prior Period's results included, on a pre-tax basis, non-cash risk management income of $94.7 million. Oil and Gas Sales. During the Current Period, oil and gas sales decreased 20% to $457.0 million from $574.2 million in the Prior Period. For the Current Period, we produced 132.0 bcfe, consisting of 2.5 mmbbl and 116.8 bcf of gas, compared to 2.1 mmbbl and 107.6 bcf, or 120.1 bcfe, in the Prior Period. The production increase is primarily the result of successful drilling results complemented with production from various acquisitions which occurred in late 2001 and 2002 partially offset by the sale of our Canadian reserves effective October 1, 2001. Average oil prices realized were $25.42 per bbl in the Current Period compared to $28.03 per bbl in the Prior Period, a decrease of 9%. Average gas prices realized were $3.36 per mcf in the Current Period compared to $4.79 per mcf in the Prior Period, a decrease of 30%. For the Current Period, we realized an average price of $3.46 per mcfe, compared to $4.78 per mcfe in the Prior Period, including in each case the effects of hedging. Our hedging activities resulted in increased oil and gas revenues of $84.1 million, or $0.64 per mcfe, in the Current Period, compared to increases in oil and gas revenues of $41.1 million, or $0.34 per mcfe, in the Prior Period. The following table shows our production by region for the Prior Period and the Current Period:
applicable, over the respective contract terms. Detailed information about our oil and gas hedging positions appears in Item 3 - Quantitative and Qualitative Disclosures About Market Risk. Oil and Gas Marketing Sales. We generated $112.3 million in oil and gas marketing sales for third parties in the Current Period, with corresponding oil and gas marketing expenses of $108.8 million, for a net margin of $3.5 million. This compares to sales of $123.1 million, expenses of $119.3 million, and a net margin of $3.8 million in the Prior Period. The decrease in marketing sales and cost of sales was due primarily to a decrease in oil and gas prices in the Current Period compared to the Prior Period, partially offset by an increase in volumes marketed by Chesapeake Energy Marketing, Inc. in the Current Period. Production Expenses. Production expenses, which include lifting costs and ad valorem taxes, increased to $71.3 million in the Current Period, a $15.4 million increase from the $55.9 million of production expenses incurred in the Prior Period. On a unit of production basis, production expenses were $0.54 and $0.47 per mcfe in the Current and Prior Periods, respectively. The increase in costs on a per unit basis in the Current Period is due primarily to increased field service costs, higher production costs associated with properties acquired in 2001 and 2002 and an increase in ad valorem taxes and insurance costs. We expect that lease operating expenses per mcfe for the remainder of 2002 will range from $0.53 to $0.57. Production Taxes. Production taxes were $19.9 million and $31.3 million in the Current and Prior Periods, respectively. On a per unit basis, production taxes were $0.15 per mcfe in the Current Period compared to $0.26 per mcfe in the Prior Period. The decrease in the Current Period was the result of decreased prices and the reinstatement of statutory exemptions on certain wells in Oklahoma. In general, production taxes are calculated using value-based formulas that produce higher per unit costs when oil and gas prices are higher. We expect production taxes for the remainder of 2002 to be approximately 6% - 7% of oil and gas sales revenues excluding any impact from hedging. General and Administrative. General and administrative expenses, which are net of capitalized internal costs, were $11.9 million in the Current Period compared to $10.1 million in the Prior Period. The increase in the Current Period is a result of Chesapeake's continued growth. Chesapeake follows the full-cost method of accounting under which all costs associated with property acquisition, exploration and development activities are capitalized. We capitalize internal costs that can be directly identified with our acquisition, exploration and development activities and do not include any costs related to production, general corporate overhead or similar activities. We capitalized $7.8 million and $6.0 million of internal costs in the Current Period and Prior Period, respectively, directly related to our oil and gas exploration and development efforts. We anticipate that general and administrative expenses for the remainder of 2002 will be between $0.10 and $0.11 per mcfe, which is approximately the same level as 2001 and the Current Period. Oil and Gas Depreciation, Depletion and Amortization. Depreciation, depletion and amortization of oil and gas properties for the Current Period was $157.7 million, compared to $124.9 million in the Prior Period. The DD&A rate per mcfe, which is a function of capitalized costs, future development costs and the related underlying reserves in the periods presented, increased from $1.04 in the Prior Period to $1.20 per mcfe in the Current Period. We expect the DD&A rate for the remainder of 2002 to be between $1.25 and $1.30 per mcfe. Depreciation and Amortization of Other Assets. Depreciation and amortization of other assets was $10.5 million in the Current Period, compared to $6.0 million in the Prior Period. The increase in the Current Period was primarily the result of higher depreciation recorded on recently acquired fixed assets. Other property and equipment costs are depreciated on both straight-line and accelerated methods. Buildings are depreciated on a straight-line basis over 31.5 years. Drilling rigs are depreciated on a straight-line basis over 12 years. All other property and equipment are depreciated over the estimated useful lives of the assets, which range from three to seven years. We expect depreciation and amortization of other assets to average between $0.08 and $0.10 per mcfe for the remainder of 2002 which approximates the current rate. Interest and Other Income. Interest and other income for the Current Period was $7.3 million compared to $1.4 million in the Prior Period. The increase was primarily the result of additional interest income from significantly higher cash balances held during the Current Period and an increase in interest income recorded on our investment 26
in senior secured notes issued by Seven Seas Petroleum Inc. The Prior Quarter included the recognition of a $1.3 million loss, representing our share of the net loss of RAM Energy, Inc. Interest Expense. Interest expense increased to $80.0 million in the Current Period from $73.0 million in the Prior Period. The increase in the Current Period was due to a $301 million increase in average long-term borrowings in the Current Period compared to the Prior Period, partially offset by income of $2.7 million earned on our interest rate swaps during the Current Period. In addition to the interest expense reported, we capitalized $3.6 million and $3.3 million of interest during the Current Period and Prior Period, respectively, on significant investments in unproved properties that were not being currently depreciated, depleted or amortized and on which exploration activities were in progress. Interest is capitalized using the weighted average interest rate of our outstanding borrowings. We anticipate that capitalized interest for the remainder of 2002 will be between $1.0 million and $1.5 million. Gothic Standby Credit Facility Costs. We recognized $3.4 million of costs incurred for a standby credit facility in the Prior Period in connection with our acquisition of Gothic Energy Corporation. We did not use the facility which was obtained and the commitment terminated in February 2001. Other. Chesapeake recorded a non-cash impairment of $4.8 million representing 100% of the cost allocated to our Seven Seas common stock warrants and also recorded a $0.5 million loss from the repurchase of debt. Provision (Benefit) for Income Taxes. Chesapeake recorded an income tax expense of $9.4 million in the Current Period, compared to income tax expense of $148.6 million in the Prior Period. Income tax expense for the Prior Period was comprised of $141.5 million related to our domestic operations and $7.1 million related to our Canadian operations which were sold on October 1, 2001. We anticipate that all 2002 income tax expense will be deferred. Extraordinary Item. The $46.0 million extraordinary loss in the Prior Period includes the payment of aggregate make-whole and redemption premiums related to debt repurchases and redemptions and the write-off of related unamortized debt issue costs and unamortized debt issue premium. CASH FLOWS FROM OPERATING, INVESTING, AND FINANCING ACTIVITIES Cash Flows from Operating Activities. Cash provided by operating activities decreased 19.8% to $353.7 million during the Current Period compared to $441.0 million during the Prior Period. The decrease was due primarily to lower oil and gas prices realized during the Current Period. Cash Flows from Investing Activities. Cash used in investing activities increased to $617.2 million during the Current Period from $454.2 million in the Prior Period. During the Current Period, we expended approximately $252.8 million to initiate drilling on 517 (204 net) wells and invested approximately $46.8 million in unproved properties. This compares to $263.7 million to initiate drilling on 409 (208 net) wells and $51.6 million to purchase unproved properties in the Prior Period. During the Current Period, we completed acquisitions of oil and gas companies and properties of $291.4 million and completed $1.2 million of divestitures of oil and gas properties. This compares to cash used in acquisitions of oil and gas companies and properties of $75.2 million and proceeds from divestitures of $1.4 million in the Prior Period. During the Current Period, we had additional investments in drilling rig equipment and other fixed assets of $29.3 million compared to $28.4 million in the Prior Period. The Current Period included additional investments in the common stock of two oil and gas companies totaling $2.4 million and $4.2 million in proceeds from the sale of RAM Energy, Inc. notes. Cash Flows from Financing Activities. There was $171.3 million of cash provided by financing activities in the Current Period, compared to cash provided by financing activities of $30.8 million in the Prior Period. During the Current Period, we borrowed $95.8 million under our bank credit facility and made repayments under this facility of $95.8 million. The activity in the Current Period includes the repurchase of $63.5 million of our 7.875% senior notes. We received $246.0 million from the issuance of $250 million of 9% senior notes, $2.1 million in cash from the exercise of stock options, $3.7 million was used to pay financing cost, and $7.6 million was used to pay dividends on our 6.75% preferred stock. The activity in the Prior Period included increased borrowings under our credit facility of $164.0 million, $786.7 million received from the issuance of $800.0 million of 8.125% senior 27
notes, $830.4 million used to redeem various senior notes, $12.3 million was used for financing cost, and $2.9 million received from the exercise of stock options. LIQUIDITY AND CAPITAL RESOURCES Sources of Liquidity Chesapeake had a working capital deficit of $70.5 million at September 30, 2002, including $25.4 million in cash. On September 30, 2002, we had a $225 million revolving bank credit facility (with a committed borrowing base of $225 million) which was increased to $250 million (with a committed borrowing base of $225 million) in November 2002. As of September 30, 2002, we had no outstanding borrowings under the facility and were using $25.5 million of the facility to secure various letters of credit. As of November 5, 2002, borrowings under the credit facility had increased to $62.5 million, largely as a result of borrowings to fund acquisitions and note purchases which occurred subsequent to September 30, 2002. We believe we will have adequate resources, including operating cash flows, working capital and proceeds from our revolving bank credit facility, to fund our capital expenditure budget for exploration and development activities during the fourth quarter of 2002, which is currently estimated to be $90 to $100 million. Based on our current cash flow assumptions, we expect operating cash flow to be approximately $400 million during 2002. The 2003 budget includes $350 million for exploration and developmental activities and $50 million for acreage and seismic. Our drilling program is largely discretionary and can be adjusted to match changing circumstances. 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. 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. Our liquidity is not dependent on the use of off-balance sheet financing arrangements, such as the securitization of receivables or obtaining access to assets through special purpose entities. We have not relied on off-balance sheet financing arrangements in the past and we do not intend to rely on such arrangements in the future as a source of liquidity. We do not issue commercial paper. Contractual Obligations and Commercial Commitments On September 30, 2002, we had a $225 million revolving bank credit facility (with a committed borrowing base of $225 million) which was increased to $250 million (with a committed borrowing base of $225 million) in November 2002. We expect to increase the borrowing base to $250.0 million and to extend the term of the credit facility to June 2005 during the fourth quarter of 2002. As of September 30, 2002, we had no outstanding borrowings under this facility and were using $25.5 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 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 28
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. As of September 30, 2002, senior notes represented $1.5 billion of our long-term debt and consisted of the following: $800.0 million principal amount of 8.125% senior notes due 2011, $250.0 million principal amount of 9.0% senior notes due 2012, $250.0 million principal amount of 8.375% senior notes due 2008, $86.5 million principal amount of 7.875% senior notes due 2004 and $142.7 million principal amount of 8.5% senior notes due 2012. There are no scheduled principal payments required on any of the senior notes until March 2004, when $60.8 million is due, giving effect to the repurchase and retirement of $89.2 million of our 7.875% senior notes to date. Debt ratings for the senior notes are B1 by Moody's Investor Service, B+ by Standard & Poor's Ratings Services and BB- by Fitch Ratings. Debt ratings for our secured bank credit facility are Ba3 by Moody's Investor Service, BB by Standard & Poor's Ratings Services and BB+ by Fitch Ratings. Our senior notes are unsecured senior obligations of Chesapeake and rank equally with all of our other unsecured indebtedness. All of our wholly owned subsidiaries except Chesapeake Energy Marketing, Inc. guarantee the notes. We can acquire outstanding senior notes at either make-whole or redemption prices set forth in the respective indentures, and from time to time we acquire senior notes through market purchases. The indentures for the 8.125%, 8.375% and 9% senior notes contain covenants limiting our ability and our restricted subsidiaries' ability to incur additional indebtedness; pay dividends on our capital stock or redeem, repurchase or retire our capital stock or subordinated indebtedness; make investments and other restricted payments; create restrictions on the payment of dividends or other amounts to us from our restricted subsidiaries; incur liens; engage in transactions with affiliates; sell assets; and consolidate, merge or transfer assets. The debt incurrence covenants do not affect our ability to borrow under or expand our secured credit facility. As of September 30, 2002, we estimate that secured commercial bank indebtedness of approximately $381 million could have been incurred under the most restrictive indenture covenant. The indenture covenants do not apply to Chesapeake Energy Marketing, Inc., an unrestricted subsidiary. Some of our commodity price and interest rate risk management arrangements require us to deliver cash collateral or other assurances of performance to the counterparties in the event that our payment obligations under the arrangements exceed certain levels. At September 30, 2002, we posted $24.5 million of collateral with two of our counterparties through letters of credit secured under our bank credit facility. Future collateral requirements are uncertain and will depend on arrangements with our counterparties and the level of volatility in natural gas and oil prices and interest rates. Investing and Financing Transactions In the Current Period, we purchased and subsequently retired $63.5 million of our 7.875% senior notes due 2004 for total consideration of $66.3 million, including accrued interest of $0.9 million and $1.9 million of redemption premium. Subsequent to September 30, 2002, we purchased an additional $25.6 million of the 7.875% senior notes for total consideration of $26.8 million, including $0.2 million in accrued interest and $1.0 million in redemption premium. On June 28, 2002, we acquired Canaan Energy Corporation in a cash merger, adding an estimated 100 bcfe to our proved reserves. The aggregate net cash consideration for the merger was $120 million, including the retirement of Canaan's outstanding indebtedness of approximately $43 million. In July 2002, we filed a shelf registration statement with the Securities and Exchange Commission that permits us, over time, to sell up to $500 million of debt securities and common stock, in any combination. Net proceeds, terms and pricing of the offerings of securities issued under the shelf registration statement will be determined at the time of the offerings. 29
In July and August 2002, we completed four separate acquisitions of Mid-Continent oil and gas properties for an aggregate cash purchase price of $165 million. We estimate these acquisitions added approximately 125 bcfe of proved reserves. The acquisitions included privately-held Focus Energy, Inc. and related partnerships, the Mid-Continent assets of publicly-traded EnCana Corporation, the Mid-Continent assets of OGE Energy Corp. and the Anadarko Basin assets of The Williams Company. In August 2002, we issued $250 million principal amount of 9.0% senior notes due 2012. The net proceeds of this issuance were used to fund the acquisitions we completed in August 2002, to repay bank debt incurred to pay the purchase price of acquisitions earlier in the Current Quarter and to purchase outstanding senior notes. On September 20, 2002, our board of directors declared a $0.03 per share dividend on the company's common stock which was paid in October 2002. Chesapeake has not paid a dividend on its common stock since 1998. The annualized cost of the common stock dividend will be about $20 million. In September 2002, we announced our intention to dispose of our Permian Basin assets, preferably in a transaction involving the exchange of oil and gas assets in the Mid-Continent for ours in the Permian Basin. The Permian Basin accounted for approximately 5% of our proved reserves at September 30, 2002 and 2.4 bcfe, or 4%, of our production for the nine months ended September 30, 2002. On November 6 2002, Chesapeake priced a private offering of $50 million principal amount of 9.0% senior notes due 2012. The net proceeds are expected to be approximately $51.3 million. The 9.0% senior notes will be issued as additional securities under the August 12, 2002 indenture pursuant to which our outstanding 9.0% senior notes were issued. Closing of the offering is expected to occur on November 13, 2002, and is subject to satisfaction of customary closing conditions. The net proceeds from this offering are expected to be used for repurchase of amounts currently outstanding under our 7.875% senior notes and under our revolving bank credit facility. The 9.0% senior notes to be issued will not be registered under the Securities Act of 1933 and may not be offered or sold in the United States absent registration or an applicable exemption from registration requirements. CRITICAL ACCOUNTING POLICIES We consider certain accounting policies related to hedging, oil and gas properties, and income taxes to be critical policies. These policies and other significant accounting policies are summarized in our annual report on Form 10-K for the year ended December 31, 2001. RECENTLY ISSUED ACCOUNTING STANDARDS See Note 7 of the notes to the consolidated financial statements included in this report for a summary of recently issued accounting standards. FORWARD-LOOKING STATEMENTS This report includes "forward-looking statements" within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. Forward-looking statements give our current expectations 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 objectives for future operations, expected future expenses and assessments of pending litigation. Statements concerning the fair values of derivative contracts and their estimated contribution to our future results of operations are based upon market information as of a specific date. These market prices are subject to significant volatility. Although we believe the expectations and forecasts reflected in these and other forward-looking statements are reasonable, we can give no assurance they will prove to have been correct. They can be affected by inaccurate assumptions or by known or unknown risks and uncertainties. Factors that could cause actual results to differ 30
materially from expected results are described under "Risk Factors" in Item 1 of our Form 10-K for the year ended December 31, 2001. These factors include: o the volatility of oil and gas prices, o our substantial indebtedness, o the cost and availability of drilling and production services, o our commodity price risk management activities, including counterparty contract performance risk, o uncertainties inherent in estimating quantities of oil and gas reserves, projecting future rates of production and the timing of development expenditures, o our ability to replace reserves, o the availability of capital, o uncertainties in evaluating oil and gas reserves of acquired properties and associated potential liabilities, o drilling and operating risks, o our ability to generate future taxable income sufficient to utilize our federal and state income tax net operating loss (NOL) carryforwards before their expiration, o future ownership changes which could result in additional limitations to our NOLs, o adverse effects of governmental and environmental regulation, o losses possible from pending or future litigation, o the strength and financial resources of our competitors, and o the loss of officers or key employees. We caution you not to place undue reliance on these forward-looking statements, which speak only as of the date of this report, and we undertake no obligation to update this information. We urge you to carefully review and consider the disclosures made in this and our other reports filed with the Securities and Exchange Commission that attempt to advise interested parties of the risks and factors that may affect our business. 31
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK 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 September 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. 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, 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. 32
As of September 30, 2002, we had the following open oil and gas derivative instruments designed to hedge a portion of our gas production for periods after September 2002:
We have established the fair value of all derivative instruments using estimates of fair value reported by our counterparties. The actual contribution to our future results of operations will be based on the market prices at the time of settlement and may be more or less than the fair value estimates used at September 30, 2002. Additional information concerning the fair value of our oil and gas derivative instruments is as follows ($ in thousands):
million and $0.9 million were recognized in the Current Quarter and Current Period, respectively, and reduce the loss on repurchases of debt. In July 2002, we closed the above interest rate swap for a gain of $7.5 million. As of September 30, 2002, the remaining balance to be amortized as a reduction to interest expense was $4.1 million. During the Current Period, $2.5 million was recognized as a reduction to interest expense. In June 2002, we entered into an additional interest rate swap. The terms of this swap agreement are as follows:
The table below presents principal cash flows and related weighted average interest rates by expected maturity dates. The fair value of the fixed-rate long-term debt has been estimated based on quoted market prices.
ITEM 4. CONTROLS AND PROCEDURES Within the 90-day period prior to the filing of this report, the company carried out an evaluation, under the supervision and with the participation of the company's management, including the Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of the company's disclosure controls and procedures (as defined in Rule 13a-14(c) under the Securities Exchange Act of 1934). Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the company's disclosure controls and procedures are effective in timely alerting them to material information relating to the company (including its consolidated subsidiaries) required to be included in the company's periodic SEC filings. There have been no significant changes in our internal controls or in other factors that could significantly affect these controls subsequent to the date of their evaluation. 37
PART II. OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS We are subject to ordinary routine litigation incidental to our business, none of which is expected to have a material adverse effect on Chesapeake. In addition, Chesapeake is a defendant in other pending actions which are described in Note 3 of the notes to the consolidated financial statements included in this report and Item 3 of our Annual Report on Form 10-K for the year ended December 31, 2001. ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS Not applicable ITEM 3. DEFAULTS UPON SENIOR SECURITIES Not applicable ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS Not applicable ITEM 5. OTHER INFORMATION Not applicable ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits The following exhibits are filed as a part of this report: EXHIBIT NUMBER DESCRIPTION 4.1.2 Tenth Supplemental Indenture dated as of June 28, 2002 to Indenture dated as of March 15, 1997 among Chesapeake, as issuer, its subsidiaries signatory thereto as Subsidiary Guarantors, and The Bank of New York (formerly United States Trust Company of New York), as Trustee, with respect to 7.875% Senior Notes due 2004. Incorporated herein by reference to Exhibit 4.1.2 to Chesapeake's registration statement on Form S-4 (No.333-99289). 4.1.3 Eleventh Supplemental Indenture dated as of July 8, 2002 to Indenture dated as of March 15, 1997 among Chesapeake, as issuer, its subsidiaries signatory thereto as Subsidiary Guarantors, and The Bank of New York (formerly United States Trust Company of New York), as Trustee, with respect to 7.875% Senior Notes due 2004. Incorporated herein by reference to Exhibit 4.1.3 to Chesapeake's registration statement on Form S-4 (No.333-99289). 4.2.2 Tenth Supplemental Indenture dated as of June 28, 2002 to Indenture dated as of March 15, 1997 among Chesapeake, as issuer, its subsidiaries signatory thereto as Subsidiary Guarantors, and The Bank of New York (formerly United States Trust Company of New York), as Trustee, with respect to 8.5% Senior Notes due 2012. Incorporated herein by reference to Exhibit 4.2.2 to Chesapeake's registration statement on Form S-4 (No.333-99289). 38
4.2.3 Eleventh Supplemental Indenture dated as of July 8, 2002 to Indenture dated as of March 15, 1997 among Chesapeake, as issuer, its subsidiaries signatory thereto as Subsidiary Guarantors, and The Bank of New York (formerly United States Trust Company of New York), as Trustee, with respect to 8.5% Senior Notes due 2012. Incorporated herein by reference to Exhibit 4.2.3 to Chesapeake's registration statement on Form S-4 (No.333-99289). 4.3.2 Fifth Supplemental Indenture dated as of June 28, 2002 to Indenture dated as of April 6, 2001 among Chesapeake, as issuer, its subsidiaries signatory thereto as Subsidiary Guarantors, and The Bank of New York (formerly United States Trust Company of New York), as Trustee, with respect to 8.125% Senior Notes due 2011. Incorporated herein by reference to Exhibit 4.3.2 to Chesapeake's registration statement on Form S-4 (No.333-99289). 4.3.3 Sixth Supplemental Indenture dated July 8, 2002 to Indenture dated as of April 6, 2001 among Chesapeake, as issuer, its subsidiaries signatory thereto as Subsidiary Guarantors, and The Bank of New York (formerly United States Trust Company of New York), as Trustee, with respect to 8.125% Senior Notes due 2011. Incorporated herein by reference to Exhibit 4.3.3 to Chesapeake's registration statement on Form S-4 (No.333-99289). 4.4.2 Second Supplemental Indenture dated as of June 28, 2002 to Indenture dated as of November 5, 2001 among Chesapeake, as issuer, its subsidiaries signatory thereto as Subsidiary Guarantors, and The Bank of New York (formerly United States Trust Company of New York), as Trustee, with respect to 8.375% Senior Notes due 2008. Incorporated herein by reference to Exhibit 4.4.2 to Chesapeake's registration statement on Form S-4 (No.333-99289). 4.4.3 Third Supplemental Indenture dated as of July 8, 2002 to Indenture dated as of November 5, 2001 among Chesapeake, as issuer, its subsidiaries signatory thereto as Subsidiary Guarantors, and The Bank of New York (formerly United States Trust Company of New York), as Trustee, with respect to 8.375% Senior Notes due 2008. Incorporated herein by reference to Exhibit 4.4.3 to Chesapeake's registration statement on Form S-4 (No.333-99289). 4.6.2 Consent and waiver letter dated August 2, 2002 with respect to $225,000,000 Second Amended and Restated Credit Agreement, dated as of June 11, 2001, among Chesapeake Energy Corporation, Chesapeake Exploration Limited Partnership, as Borrower, Bear Stearns Corporate Lending Inc., as Syndication Agent, Union Bank of California, N.A., as Administrative Agent and Collateral Agent, BNP Parabas and Toronto Dominion (Texas), Inc., as Co-Documentation Agents and other lenders party thereto. Incorporated herein by reference to Exhibit 4.6.2 to Chesapeake's registration statement on Form S-4 (No. 333-99289). 4.6.3 Third Amendment dated September 20, 2002 with respect to Second Amended and Restated Credit Agreement, dated as of June 11, 2001, among Chesapeake Energy Corporation, Chesapeake Exploration Limited Partnership, as Borrower, Bear Stearns Corporate Lending Inc., as Syndication Agent, Union Bank of California, N.A., as Administrative Agent and Collateral Agent, and other lenders party thereto. 4.6.4 Fourth Amendment dated November 4, 2002 with respect to Second Amended and Restated Credit Agreement, dated as of June 11, 2001, among Chesapeake Energy Corporation, Chesapeake Exploration Limited Partnership, as Borrower, Bear Stearns Corporate Lending Inc., as Syndication Agent, Union Bank of California, N.A., as Administrative Agent and Collateral Agent, and other lenders party thereto. 39
4.14 Indenture dated as of August 12, 2002 among Chesapeake, as issuer, its subsidiaries signatory thereto, as Subsidiary Guarantors and The Bank of New York, with respect to 9% Senior Notes due 2012. Incorporated herein by reference to Exhibit 4.14 to Chesapeake's registration statement on Form S-4 (No. 333-99289). 12.1 Computation of Ratios of Earnings to Combined Fixed Charges and Preferred Stock Dividends. 21 Subsidiaries of Chesapeake. Incorporated herein by reference to Exhibit 21 to Chesapeake's registration statement of Form S-4 (No. 333-99389). 99.1 Aubrey K. McClendon, Chairman and Chief Executive Officer, Certification Pursuant to 18 U.S.C. Section 1350, As Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. 99.2 Marcus C. Rowland, Executive Vice President and Chief Financial Officer, Certification Pursuant to 18 U.S.C Section 1350, As Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. (b) Reports on Form 8-K During the quarter ended September 30, 2002, we filed the following current reports on Form 8-K: On July 1, 2002, we filed a current report on Form 8-K reporting under Item 5 that we had issued a press release on June 28, 2002 announcing the completion of our acquisition of Canaan Energy Corporation and the declaration of a quarterly cash dividend on our preferred stock. Under Item 9, we furnished Comments of our Chairman and Chief Executive officer regarding the Canaan acquisition. On July 11, 2002, we filed a current report on Form 8-K furnishing under Item 9 that we had issued a press release on July 10, 2002 and furnishing the dates for our second quarter 2002 earnings release and conference call included in the press release. On July 22, 2002, we filed a current report on Form 8-K reporting under Item 5 that we had announced a significant gas discovery in the Greater Mayfield area of western Oklahoma's Anadarko Basin. We furnished under Item 9 additional information on the discovery well and area, a management summary and additional earnings release and conference call information. On July 25, 2002, we filed a current report on Form 8-K reporting under Item 5 that we had issued a press release on July 25, 2002 announcing second quarter 2002 earnings and including information on earnings, drilling, recent and pending acquisitions and the earnings conference call. Under Item 9, we furnished updated operational and financial guidance for 2002. On July 30, 2002, we filed a current report on Form 8-K/A, amending the Form 8-K we filed July 25, 2002, to restate certain disclosures reported under Item 5 as disclosures under Item 9. On July 31, 2002, we filed a current report on Form 8-K including as exhibits under Item 7 consents of reserve engineers. On August 6, 2002, we filed a current report on Form 8-K reporting under Item 5 that we had issued a press release on August 5, 2002 announcing the commencement of a private offering of $250 million senior notes due 2012 and stating the expected use of proceeds from the issuance. On August 7, 2002, we filed a current report on Form 8-K reporting under Item 5 that we had issued a press release on August 7, 2002 announcing the pricing of a private offering of $250 million senior notes due 2012 and stating the expected use of proceeds from the issuance. 40
On August 8, 2002, we filed a current report on Form 8-K/A amending the Form 8-K we filed August 7, 2002 to restate the use of proceeds from our offering of senior notes due 2012. On August 15, 2002, we filed a current report on Form 8-K furnishing under Item 9 certifications of our chief executive officer and chief financial officer required by Section 906 of the Sarbanes-Oxley Act of 2002, which certifications accompanied our Form 10-Q filed August 5, 2002. On September 3, 2002, we filed a current report on Form 8-K reporting under Item 9 that we had issued a press release on September 3, 2002 and furnishing information from the press release about our 2002 and 2003 hedging positions and increases in our proved reserves and production as a result of the completion of recent oil and gas acquisitions. On September 17, 2002, we filed a current report on Form 8-K reporting under Item 5 that we had issued a press release on September 17, 2002 announcing the election of Charles T. Maxwell to our board of directors. On September 20, 2002, we filed a current report on Form 8-K reporting under Item 5 that we had issued a press release on September 20, 2002 announcing that our board of directors had declared quarterly cash dividends on our common stock and preferred stock and the company's intention to dispose of its Permian Basin assets. The Form 8-K also furnished under Item 9 related comments of our chairman and chief executive officer. 41
SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. CHESAPEAKE ENERGY CORPORATION (Registrant) By: /s/ AUBREY K. MCCLENDON -------------------------------------- Aubrey K. McClendon Chairman and Chief Executive Officer By: /s/ MARCUS C. ROWLAND -------------------------------------- Marcus C. Rowland Executive Vice President and Chief Financial Officer Date: November 7, 2002 42
CERTIFICATION I, Aubrey K. McClendon, certify that: 1. I have reviewed this quarterly report on Form 10-Q of Chesapeake Energy Corporation; 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have: (a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; (b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and (c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent function): (a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and (b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Date: November 7, 2002 /s/ AUBREY K. MCCLENDON ----------------------------------------- Aubrey K. McClendon Chairman and Chief Executive Officer 43
CERTIFICATION I, Marcus C. Rowland certify that: 1. I have reviewed this quarterly report on Form 10-Q of Chesapeake Energy Corporation; 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have: (a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; (b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and (c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent function): (a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and (b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Date: November 7, 2002 /s/ MARCUS C. ROWLAND ----------------------------------------- Marcus C. Rowland Executive Vice President and Chief Financial Officer 44
INDEX TO EXHIBITS
EXHIBIT 4.6.3 THIRD AMENDMENT TO SECOND AMENDED AND RESTATED CREDIT AGREEMENT THIS THIRD AMENDMENT TO SECOND AMENDED AND RESTATED CREDIT AGREEMENT (herein called this "Amendment") made as of September 20, 2002 by and among Chesapeake Exploration Limited Partnership, an Oklahoma limited partnership ("Borrower"), Chesapeake Energy Corporation, an Oklahoma corporation ("Company"), Bear Stearns Corporate Lending Inc., as syndication agent ("Syndication Agent"), Union Bank of California, N.A., as administrative agent and collateral agent ("Administrative Agent"), and the several banks and other financial institutions or entities parties hereto ("Lenders"). WITNESSETH: WHEREAS, Borrower, Company, Syndication Agent, Administrative Agent and Lenders entered into that certain Second Amended and Restated Credit Agreement dated as of June 11, 2001 (as amended, supplemented, or restated to the date hereof, the "Original Agreement"), for the purpose and consideration therein expressed, whereby Lenders became obligated to make loans to Borrower as therein provided; and WHEREAS, Borrower, Company, Syndication Agent, Administrative Agent and Lenders desire to amend the Original Agreement as set forth herein; NOW, THEREFORE, in consideration of the premises and the mutual covenants and agreements contained herein and in the Original Agreement, in consideration of the loans which may hereafter be made by Lenders to Borrower, and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto do hereby agree as follows: ARTICLE I. Definitions and References Section 1.1. Terms Defined in the Original Agreement. Unless the context otherwise requires or unless otherwise expressly defined herein, the terms defined in the Original Agreement shall have the same meanings whenever used in this Amendment. Section 1.2. Other Defined Terms. Unless the context otherwise requires, the following terms when used in this Amendment shall have the meanings assigned to them in this Section 1.2. "Amendment" means this Third Amendment to Second Amended and Restated Credit Agreement.
"Credit Agreement" means the Original Agreement as amended hereby. ARTICLE II. Amendment Section 2.1. Restricted Payments. Paragraph (c) of Section 7.6 of the Original Agreement is hereby amended to replace the reference to "$10,000,000" with "$25,000,000". ARTICLE III. Conditions of Effectiveness Section 3.1. Effective Date. This Amendment shall become effective as of the date first above written when and only when: (a) Administrative Agent shall have received, at Administrative Agent's office, duly executed and delivered and in form and substance satisfactory to Administrative Agent, all of the following: (i) this Amendment; (ii) an "Omnibus Certificate" of the Secretary and of the Chairman of the Board or President of the general partner of Borrower, which shall contain the names and signatures of the officers of the general partner of Borrower authorized to execute Loan Documents and which shall certify to the truth, correctness and completeness of the following exhibits attached thereto: (1) a copy of resolutions attached thereto duly adopted by the Board of Directors of the general partner of Borrower and in full force and effect at the time this Amendment is entered into, authorizing the execution of this Amendment and the other Loan Documents delivered or to be delivered in connection herewith and the consummation of the transactions contemplated herein and therein, (2) a copy of the charter documents of Borrower and of the general partner of Borrower and all amendments thereto, certified by the appropriate official of the Borrower's state and general partner's state of organization, and (3) a copy of any bylaws of the general partner of Borrower previously delivered to Agent and Lenders in connection with the Original Agreement (which may, with respect to any such charter documents or bylaws, reference documents previously delivered in connection with the Original Agreement); (iii) a "Compliance Certificate" of the Chairman of the Board or President and of the chief financial officer of the Company, which shall contain (1) a certification by such officers as to the satisfaction of the conditions set out in subsections (a), (b), and (c) of Section 5.2 of the Original Agreement and (2) the calculations required to determine 2
the Senior Debt Limit (along with the supporting documentation described in Section 5.2(c) of the Original Agreement); (iv) documents similar to those specified in subsection (ii) of this Section with respect to each Subsidiary Guarantor (which may, with respect to charter documents or bylaws, reference documents previously delivered in connection with the Original Agreement); and (v) such other supporting documents as Administrative Agent may reasonably request. (b) Borrower shall have paid, in connection with such Loan Documents, all recording, handling, amendment and other fees required to be paid to Administrative Agent pursuant to any Loan Documents. (c) Borrower shall have paid, in connection with such Loan Documents, all other fees and reimbursements to be paid to Administrative Agent pursuant to any Loan Documents, or otherwise due Administrative Agent and including fees and disbursements of Administrative Agent's attorneys. ARTICLE IV. Representations and Warranties Section 4.1. Representations and Warranties of Borrower. In order to induce each Lender to enter into this Amendment, Borrower represents and warrants to each Lender that: (a) The representations and warranties contained in Section 4 of the Original Agreement are true and correct at and as of the time of the effectiveness hereof, except to the extent that the facts on which such representations and warranties are based have been changed by the extension of credit under the Credit Agreement. (b) The Company and Borrower are duly authorized to execute and deliver this Amendment and are and will continue to be duly authorized to borrow monies and to perform their respective obligations under the Credit Agreement. The Company and Borrower have duly taken all corporate or partnership action necessary to authorize the execution and delivery of this Amendment and to authorize the performance of the obligations of the Company and Borrower hereunder. (c) The execution and delivery by the Company and Borrower of this Amendment, the performance by the Company and Borrower of its obligations hereunder and the consummation of the transactions contemplated hereby do not and will not conflict with any provision of law, statute, rule or regulation or of the certificate of incorporation, bylaws, or agreement of limited partnership of the Company or Borrower (as applicable), or of any material agreement, judgment, license, order or permit applicable to or binding upon the Company or 3
Borrower, or result in the creation of any lien, charge or encumbrance upon any assets or properties of the Company or Borrower. Except for those which have been obtained, no consent, approval, authorization or order of any court or governmental authority or third party is required in connection with the execution and delivery by the Company and Borrower of this Amendment or to consummate the transactions contemplated hereby. (d) When duly executed and delivered, each of this Amendment and the Credit Agreement will be a legal and binding obligation of the Company and Borrower, enforceable in accordance with its terms, except as limited by bankruptcy, insolvency or similar laws of general application relating to the enforcement of creditors' rights and by equitable principles of general application. (e) The audited annual consolidated financial statements of the Company dated as of December 31, 2001 and the unaudited quarterly consolidated financial statements of the Company dated as of June 30, 2002 fairly present the consolidated financial position at such dates and the consolidated statement of operations and the changes in consolidated financial position for the periods ending on such dates for the Company. Copies of such financial statements have heretofore been delivered to each Lender. Since such dates no material adverse change has occurred in the financial condition or businesses or in the consolidated financial condition or businesses of the Company. ARTICLE V. Miscellaneous Section 5.1. Ratification of Agreements. The Original Agreement as hereby amended is hereby ratified and confirmed in all respects. Any reference to the Credit Agreement in any Loan Document shall be deemed to be a reference to the Original Agreement as hereby amended. The execution, delivery and effectiveness of this Amendment shall not, except as expressly provided herein, operate as a waiver of any right, power or remedy of Lenders under the Credit Agreement, the Notes, or any other Loan Document nor constitute a waiver of any provision of the Credit Agreement, the Notes or any other Loan Document. Section 5.2. Survival of Agreements. All representations, warranties, covenants and agreements of Borrower herein shall survive the execution and delivery of this Amendment and the performance hereof, including without limitation the making or granting of the Loans, and shall further survive until all of the Obligations are paid in full. All statements and agreements contained in any certificate or instrument delivered by the Company, Borrower or any Subsidiary Guarantor hereunder or under the Credit Agreement to any Lender shall be deemed to constitute representations and warranties by, and/or agreements and covenants of, such Loan Party under this Amendment and under the Credit Agreement. Section 5.3. Loan Documents. This Amendment is a Loan Document, and all provisions in the Credit Agreement pertaining to Loan Documents apply hereto. 4
Section 5.4. Governing Law. This Amendment shall be governed by and construed in accordance the laws of the State of New York and any applicable laws of the United States of America in all respects, including construction, validity and performance. Section 5.5. Counterparts; Fax. This Amendment may be separately executed in counterparts and by the different parties hereto in separate counterparts, each of which when so executed shall be deemed to constitute one and the same Amendment. This Amendment may be validly executed by facsimile or other electronic transmission. THIS AMENDMENT AND THE OTHER LOAN DOCUMENTS REPRESENT THE FINAL AGREEMENT BETWEEN THE PARTIES AND MAY NOT BE CONTRADICTED BY EVIDENCE OF PRIOR, CONTEMPORANEOUS, OR SUBSEQUENT ORAL AGREEMENTS OF THE PARTIES. THERE ARE NO UNWRITTEN ORAL AGREEMENTS OF THE PARTIES. [THE REMAINDER OF THIS PAGE HAS BEEN INTENTIONALLY LEFT BLANK.] 5
IN WITNESS WHEREOF, this Amendment is executed as of the date first above written. CHESAPEAKE EXPLORATION LIMITED PARTNERSHIP By: Chesapeake Operating, Inc., its general partner By: /s/ MARTHA A. BURGER ------------------------------------------- Name: Martha A. Burger Title: Treasurer & Sr. Vice President Human Resources CHESAPEAKE ENERGY CORPORATION By: /s/ MARTHA A. BURGER ------------------------------------------- Name: Martha A. Burger Title: Treasurer and Sr. Vice President Human Resources
UNION BANK OF CALIFORNIA, N.A. Administrative Agent, Collateral Agent, Issuing Lender and Lender By: /s/ JOHN A CLARK ------------------------------------------- Name: John A. Clark Title: Vice President By: /s/ SEAN MURPHY ------------------------------------------- Name: Sean Murphy Title: Assistant Vice President
BANK OF OKLAHOMA, N.A. By: /s/ JOHN N. HUFF -------------------------------------- Name: John N. Huff Title: Vice President BANK OF SCOTLAND By: /s/ JOSEPH FRATUS -------------------------------------- Name: Joseph Fratus Title: First Vice President BEAR STEARNS CORPORATE LENDING INC. By: /s/ KEITH C. BARNISH -------------------------------------- Name: Keith C. Barnish Title: Executive Vice President BNP PARIBAS By: /s/ DAVID DODD -------------------------------------- Name: David Dodd Title: Director By: /s/ BETSY JOCHER -------------------------------------- Name: Betsy Jocher Title: Vice President COMERICA BANK - TEXAS By: /s/ PETER L. SEFZIK -------------------------------------- Name: Peter L. Sefzik Title: Assistant Vice President COMPASS BANK By: /s/ KATHLEEN J. BOWEN -------------------------------------- Name: Kathleen J. Bowen Title: Vice President
CREDIT AGRICOLE INDOSUEZ By: ------------------------------------------- Name: Title: NATEXIS BANQUES POPULAIRES By: /s/ DONOVAN C. BROUSSARD ------------------------------------------- Name: Donovan C. Broussard Title: Vice President By: /s/ LOUIS P. LAVILLE, III ------------------------------------------- Name: Louis P. Laville, III Title: Vice President and Group Manager PNC BANK, NATIONAL ASSOCIATION By: /s/ DOUG CLARK ------------------------------------------- Name: Doug Clark Title: Vice President RZB FINANCE LLC By: /s/ JOHN A. VALISKA ------------------------------------------- Name: John A. Valiska Title: Group Vice President By: /s/ FRANK J. YAUTZ ------------------------------------------- Name: Frank J. Yautz Title: First Vice President
SUMITOMO MITSUI BANKING CORPORATION By: /s/ WILLIAM M. GINN ------------------------------------------- Name: William M. Ginn Title: General Manager TORONTO DOMINION (TEXAS), INC. By: /s/ ANN S. SLANIS ------------------------------------------- Name: Ann S. Slanis Title: Vice President WASHINGTON MUTUAL BANK, FA By: /s/ MARK ISENSEE ------------------------------------------- Name: Mark Isensee Title: Vice President CREDIT LYONNAIS NEW YORK BRANCH By: ------------------------------------------- Name: Title:
Third Amendment CONSENT AND AGREEMENT By its execution below, each Guarantor hereby (i) consents to the provisions of this Amendment and the transactions contemplated herein, (ii) ratifies and confirms the Guarantee Agreement dated as of June 11, 2001 made by it for the benefit of Administrative Agent and Lenders (as modified by certain Assumption Agreements) and the other Loan Documents executed pursuant to the Credit Agreement (or any prior amendment or supplement to the Credit Agreement), (iii) agrees that all of its respective obligations and covenants thereunder shall remain unimpaired by the execution and delivery of this Amendment and the other documents and instruments executed in connection herewith, and (iv) agrees that the Guarantee Agreement and such other Loan Documents shall remain in full force and effect. CHESAPEAKE ENERGY CORPORATION By: /s/ MARTHA A. BURGER ---------------------------------------- Name: Martha A. Burger Title: Treasurer and Sr. Vice President Human Resources THE AMES COMPANY, INC. By: /s/ MARTHA A. BURGER ---------------------------------------- Name: Martha A. Burger Title: Treasurer CHESAPEAKE ACQUISITION CORPORATION By: /s/ MARTHA A. BURGER ---------------------------------------- Name: Martha A. Burger Title: Treasurer
CHESAPEAKE ENERGY LOUISIANA CORPORATION By: /s/ MARTHA A. BURGER ---------------------------------------- Name: Martha A. Burger Title: Treasurer CHESAPEAKE OPERATING, INC. By: /s/ MARTHA A. BURGER ---------------------------------------- Name: Martha A. Burger Title: Treasurer and Sr. Vice President Human Resources CHESAPEAKE PANHANDLE LIMITED PARTNERSHIP By: CHESAPEAKE OPERATING, INC., its General Partner By: /s/ MARTHA A. BURGER ---------------------------------------- Name: Martha A. Burger Title: Treasurer and Sr. Vice President Human Resources CHESAPEAKE ROYALTY COMPANY By: /s/ MARTHA A. BURGER ---------------------------------------- Name: Martha A. Burger Title: Treasurer CHESAPEAKE-STAGHORN ACQUISITION L .P. By: CHESAPEAKE OPERATING, INC., its General Partner By: /s/ MARTHA A. BURGER ---------------------------------------- Name: Martha A. Burger Title: Treasurer and Sr. Vice President Human Resources
CHESAPEAKE LOUISIANA, L.P. By: CHESAPEAKE OPERATING, INC., its General Partner By: /s/ MARTHA A. BURGER ---------------------------------------- Name: Martha A. Burger Title: Treasurer and Sr. Vice President Human Resources GOTHIC ENERGY CORPORATION By: /s/ MARTHA A. BURGER ---------------------------------------- Name: Martha A. Burger Title: Treasurer GOTHIC PRODUCTION CORPORATION By: /s/ MARTHA A. BURGER ---------------------------------------- Name: Martha A. Burger Title: Treasurer NOMAC DRILLING CORPORATION By: /s/ MARTHA A. BURGER ---------------------------------------- Name: Martha A. Burger Title: Treasurer CARMEN ACQUISITION CORP. By: /s/ MARTHA A. BURGER ---------------------------------------- Name: Martha A. Burger Title: Treasurer
SAP ACQUISITION CORP. By: /s/ MARTHA A. BURGER ---------------------------------------- Name: Martha A. Burger Title: Treasurer CHESAPEAKE MOUNTAIN FRONT CORP. By: /s/ MARTHA A. BURGER ---------------------------------------- Name: Martha A. Burger Title: Treasurer CHESAPEAKE KNAN ACQUISITION CORPORATION By: /s/ MARTHA A. BURGER ---------------------------------------- Name: Martha A. Burger Title: Treasurer CHESAPEAKE FOCUS CORP. By: /s/ MARTHA A. BURGER ---------------------------------------- Name: Martha A. Burger Title: Treasurer CHESAPEAKE ENO ACQUISITION CORP. By: /s/ MARTHA A. BURGER ---------------------------------------- Name: Martha A. Burger Title: Treasurer
CHESAPEAKE BETA CORP. By: /s/ MARTHA A. BURGER ---------------------------------------- Name: Martha A. Burger Title: Treasurer CHESAPEAKE DELTA CORP. By: /s/ MARTHA A. BURGER ---------------------------------------- Name: Martha A. Burger Title: Treasurer CHESAPEAKE SIGMA, L.P. By: CHESAPEAKE OPERATING, INC., its General Partner By: /s/ MARTHA A. BURGER ---------------------------------------- Name: Martha A. Burger Title: Treasurer and Sr. Vice President Human Resources
EXHIBIT 4.6.4 FOURTH AMENDMENT TO SECOND AMENDED AND RESTATED CREDIT AGREEMENT THIS FOURTH AMENDMENT TO SECOND AMENDED AND RESTATED CREDIT AGREEMENT (herein called this "Amendment") is dated as of November 4, 2002 (but effective on the Effective Date, defined below in Section 3.1) by and among Chesapeake Exploration Limited Partnership, an Oklahoma limited partnership ("Borrower"), Chesapeake Energy Corporation, an Oklahoma corporation ("Company"), Bear Stearns Corporate Lending Inc., as syndication agent ("Syndication Agent"), Union Bank of California, N.A., as administrative agent and collateral agent ("Administrative Agent"), and the several banks and other financial institutions or entities parties hereto ("Lenders"). WITNESSETH: WHEREAS, Borrower, Company, Syndication Agent, Administrative Agent and Lenders entered into that certain Second Amended and Restated Credit Agreement dated as of June 11, 2001 (as amended, supplemented, or restated to the date hereof, the "Original Agreement"), for the purpose and consideration therein expressed, whereby Lenders became obligated to make loans to Borrower as therein provided; and WHEREAS, Borrower, Company, Syndication Agent, Administrative Agent and Lenders desire to amend the Original Agreement as set forth herein; NOW, THEREFORE, in consideration of the premises and the mutual covenants and agreements contained herein and in the Original Agreement, in consideration of the loans which may hereafter be made by Lenders to Borrower, and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto do hereby agree as follows: ARTICLE I. Definitions and References Section 1.1. Terms Defined in the Original Agreement. Unless the context otherwise requires or unless otherwise expressly defined herein, the terms defined in the Original Agreement shall have the same meanings whenever used in this Amendment. Section 1.2. Other Defined Terms. Unless the context otherwise requires, the following terms when used in this Amendment shall have the meanings assigned to them in this Section 1.2.
"Addendum" means an instrument, substantially in the form of Exhibit C, by which a Lender becomes a party to this Amendment as of the Effective Date. "Amendment" means this Fourth Amendment to Second Amended and Restated Credit Agreement. "Credit Agreement" means the Original Agreement as amended hereby. "Effective Date" has the meaning given to such term in Section 3.1. "Exiting Lenders" means the Lenders that have not executed and delivered to Administrative Agent an Addendum on or prior to the Effective Date. ARTICLE II. Amendments Section 2.1. Defined Terms. The definition of "Collateral Coverage Ratio" in Section 1.1 of the Original Agreement is hereby amended in its entirety to read as follows: " 'Collateral Coverage Ratio': at any time, the ratio of (a) the Collateral Value to (b) the greater of (i) the Borrowing Base and (ii) the Total Revolving Extensions of Credit then outstanding." Section 2.2. Revolving Commitments. The first sentence of paragraph (a) of Section 2.1 of the Original Agreement is hereby amended in its entirety to read as follows: "Subject to the terms and conditions hereof, each Lender severally agrees to make revolving credit loans ("Revolving Loans") to the Borrower from time to time during the Revolving Commitment Period in an aggregate principal amount at any one time outstanding which, when added to such Lender's Revolving Percentage of the L/C Obligations then outstanding, does not exceed such Lender's Revolving Commitment; provided, that, after giving effect thereto, the aggregate amount of Revolving Extensions of Credit then outstanding shall not exceed the lesser of (i) the Senior Debt Limit at such time and (ii) the Borrowing Base then in effect." Section 2.3. Termination or Reduction of Revolving Commitments. The first sentence of Section 2.4 of the Original Agreement is hereby amended in its entirety to read as follows: "The Borrower shall have the right, upon not less than three Business Days' notice to the Administrative Agent, to terminate the Revolving Commitments or, from time to time, to reduce the amount of the Revolving Commitments; provided that no such termination or reduction of Revolving Commitments shall be permitted if, after giving effect thereto and to any prepayments of the Revolving Loans made on the effective date thereof, the Total 2
Revolving Extensions of Credit would exceed the lesser of the Borrowing Base and the Total Revolving Commitments." Section 2.4. L/C Commitments. The first sentence of paragraph (a) of Section 2.5 of the Original Agreement is hereby amended in its entirety to read as follows: "Subject to the terms and conditions hereof, the Issuing Lender, in reliance on the agreements of the other Lenders set forth in Section 2.8(a), agrees to issue letters of credit ("Letters of Credit") for the account of the Borrower on any Business Day during the Revolving Commitment Period in such form as may be approved by the Issuing Lender; provided that the Issuing Lender shall have no obligation to issue any Letter of Credit if, after giving effect to such issuance, (i) the L/C Obligations would exceed the L/C Commitment or (ii) the Total Revolving Extensions of Credit then outstanding would exceed the lesser of (A) the Senior Debt Limit at such time, (B) the Borrowing Base then in effect and (c) the Total Revolving Commitments." Section 2.5. Procedure for Issuance of Letter of Credit. The second sentence of Section 2.6 of the Original Agreement is hereby amended to insert the word "and" immediately before clause (ii) thereof and to delete the phrase "and (iii) if (x) such issuance is requested on or after the Extension Date and (y) the Outstanding 7-7/8% Note Amount is greater than $10,000,000 at such time, the Outstanding 7/7/8% Note Amount shall not exceed the lesser of the Available Revolving Commitments of the Lenders and the Unused Borrowing Base" in its entirety. Section 2.6. Mandatory Prepayments. The first sentence of paragraph (b) of Section 3.2 of the Original Agreement is hereby amended to replace clause (A) with "(A) the Total Revolving Extensions of Credit". Section 2.7. New Lenders. The Original Agreement is hereby amended to add a new Section 10.6A thereto immediately following Section 10.6 thereof to read as follows: "Section 10.6A. Procedure for Increases and Addition of New Lenders. So long as no Default or Event of Default has occurred and is continuing Borrower shall have the right to increase the aggregate Revolving Commitment by obtaining additional Revolving Commitments without the consent of Lenders (the amount of such increase is herein called the "Increase"), either from one or more of the existing Lenders or another lending institution provided that (a) Borrower shall have notified Administrative Agent of the amount of the Increase at least three Business Days prior to the proposed effective date thereof, (b) if the Increase is provided by a lending institution that is not then an existing Lender, Administrative Agent shall have approved such new Lender, such approval not to be unreasonably withheld, (c) the resulting Total Revolving Commitments shall not exceed the amount of $250,000,000, (d) the procedure described below in this Section shall have been complied with, (e) Borrower shall be in compliance with the Collateral Coverage Ratio, and (f) Borrower shall pay any amounts owing under Section 3.11 in connection with the prepayment of Eurodollar Loans, if any, necessary to give effect to the Lenders' revised Revolving Percentages. It is expressly understood and agreed that 3
Lenders and Administrative Agent have no obligation to agree upon or designate the Borrowing Base at any particular amount after giving effect to any Increase. Any amendment hereto for such an Increase shall be in the form attached hereto as Exhibit J and shall only require the written signatures of Administrative Agent, Borrower and the Lender(s) being added or increasing their Revolving Commitment. In addition, within a reasonable time after the effective date of any Increase, the Administrative Agent shall, and is hereby authorized and directed to, revise Schedule 1.1A reflecting such Increase and shall distribute such revised Schedule 1.1A to each of the Lenders and Borrower, whereupon such revised Schedule 1.1A shall replace the old Schedule 1.1A and become part of this Agreement. On the Business Day following any such Increase, all outstanding Revolving Loans shall be reallocated among the Lenders (including any newly added Lenders) in accordance with the Lenders' respective revised Revolving Percentages." Section 2.8. Commitments. Schedule 1.1A to the Original Agreement is hereby amended in its entirety to read as set forth in Exhibit A attached hereto. Section 2.9. Joinder Agreement. The Original Agreement is hereby amended to add a new Exhibit J thereto immediately following Exhibit I thereof to read as set forth in Exhibit B attached hereto. Section 2.10. Redetermination of the Borrowing Base and Collateral Value. In accordance with Section 2.13 of the Credit Agreement, Borrower, Administrative Agent and Lenders hereby agree that from the date hereof: (a) until the next date hereafter as of which the Borrowing Base is redetermined, the Borrowing Base shall be $250,000,000; and (b) until the next date hereafter as of which the Collateral Value is redetermined, the Collateral Value shall be $500,849,800. ARTICLE III. Conditions of Effectiveness; Closing Section 3.1. Effective Date. This Amendment shall become effective on the date when all of the following conditions precedent have been satisfied (the "Effective Date"), provided that the Effective Date may occur no later than November 8, 2002 unless agreed to in writing by Administrative Agent and Borrower. (a) Administrative Agent shall have received, at Administrative Agent's office, duly executed and delivered and in form and substance satisfactory to Administrative Agent, all of the following: 4
(i) this Amendment duly executed by Borrower, Company and Administrative Agent; (ii) an Addendum duly executed by each Lender (other than the Exiting Lenders) and the aggregate Revolving Commitments of such executing Lenders must be at least equal to the amount of $210,000,000; (iii) the Consent Agreement attached hereto duly executed by all Subsidiary Guarantors; (iv) a favorable opinion of Commercial Law Group, counsel for the Company, Borrower and the Subsidiary Guarantors, substantially in the form set forth in Exhibit F of the Original Agreement; (v) an "Omnibus Certificate" of the Secretary and of the Chairman of the Board or President of the general partner of Borrower, which shall contain the names and signatures of the officers of the general partner of Borrower authorized to execute Loan Documents and which shall certify to the truth, correctness and completeness of the following exhibits attached thereto: (1) a copy of resolutions attached thereto duly adopted by the Board of Directors of the general partner of Borrower and in full force and effect at the time this Amendment is entered into, authorizing the execution of this Amendment and the other Loan Documents delivered or to be delivered in connection herewith and the consummation of the transactions contemplated herein and therein, (2) a copy of the charter documents of Borrower and of the general partner of Borrower and all amendments thereto, certified by the appropriate official of the Borrower's state and general partner's state of organization, and (3) a copy of any bylaws of the general partner of Borrower previously delivered to Agent and Lenders in connection with the Original Agreement (which may, with respect to any such charter documents or bylaws, reference documents previously delivered in connection with the Original Agreement); (vi) a "Compliance Certificate" of the Chairman of the Board or President and of the chief financial officer of the Company, which shall contain (1) a certification by such officers as to the satisfaction of the conditions set out in subsections (a), (b), and (c) of Section 5.2 of the Original Agreement and (2) the calculations required to determine the Senior Debt Limit (along with the supporting documentation described in Section 5.2(c) of the Original Agreement); (vii) documents similar to those specified in subsection (v) of this Section with respect to each Subsidiary Guarantor (which may, with respect to charter documents or bylaws, reference documents previously delivered in connection with the Original Agreement); and (viii) such other supporting documents as Administrative Agent may reasonably request. 5
(a) Borrower shall have paid, in connection with such Loan Documents, all recording, handling, amendment and other fees required to be paid to Administrative Agent pursuant to any Loan Documents. (b) Borrower shall have paid, in connection with such Loan Documents, all other fees and reimbursements to be paid to Administrative Agent pursuant to any Loan Documents, or otherwise due Administrative Agent and including fees and disbursements of Administrative Agent's attorneys. Section 3.2. Special Effective Date Provisions. (a) From and after the Effective Date, (i) each Exiting Lender shall cease to be a party to the Credit Agreement, (ii) no Exiting Lender shall have any obligations or liabilities under the Credit Agreement with respect to the period from and after the Effective Date and, without limiting the foregoing, no Exiting Lender shall have any Revolving Commitment under the Credit Agreement or any participation on any Letter of Credit outstanding thereunder and (iii) no Exiting Lender shall have any rights under the Credit Agreement or any other Loan Document (other than rights under the Credit Agreement expressly stated to survive the termination of the Credit Agreement and the repayment of amounts outstanding thereunder). (b) Lenders hereby authorize Administrative Agent and Borrower to request Revolving Loans from the Lenders (other than the Exiting Lenders), to make prepayments of Revolving Loans and to reduce commitments under the Credit Agreement among Lenders in order to ensure that, upon the effectiveness of this Amendment, the Revolving Loans of the Lenders shall be outstanding on a ratable basis in accordance with their respective Revolving Percentages and that the Revolving Commitments shall be as set forth on Schedule 1.1A of the Credit Agreement, as amended hereby, and no such borrowing, prepayment or reduction shall violate any provisions of the Credit Agreement. Lenders hereby confirm that, from and after the Effective Date, all participants of Lenders in respect of Letters of Credit outstanding under the Credit Agreement pursuant to subsection 2.8(a) thereof shall be based upon the Revolving Percentages of Lenders (after giving effect to this Amendment). (c) Lenders hereby waive any requirements for minimum amounts of prepayments of Revolving Loans, ratable reductions of the Revolving Commitments of Lenders under the Credit Agreement and ratable payments on account of the principal or interest of any Revolving Loan under the Credit Agreement to the extent such prepayment, reductions or payments are required pursuant to Section 3.2(b). (d) The Borrower hereby terminates, effective as of the Effective Date, in full the commitments under the Credit Agreement of the Exiting Lenders. Borrower and Lenders hereby authorize Administrative Agent to enter into appropriate documentation with the Exiting Lenders confirming such terminations. 6
ARTICLE IV. Representations and Warranties Section 4.1. Representations and Warranties of Borrower. In order to induce each Lender to enter into this Amendment, Borrower represents and warrants to each Lender that: (a) The representations and warranties contained in Section 4 of the Original Agreement are true and correct at and as of the time of the effectiveness hereof, except to the extent that the facts on which such representations and warranties are based have been changed by the extension of credit under the Credit Agreement. (b) The Company and Borrower are duly authorized to execute and deliver this Amendment and are and will continue to be duly authorized to borrow monies and to perform their respective obligations under the Credit Agreement. The Company and Borrower have duly taken all corporate or partnership action necessary to authorize the execution and delivery of this Amendment and to authorize the performance of the obligations of the Company and Borrower hereunder. (c) The execution and delivery by the Company and Borrower of this Amendment, the performance by the Company and Borrower of its obligations hereunder and the consummation of the transactions contemplated hereby do not and will not conflict with any provision of law, statute, rule or regulation or of the certificate of incorporation, bylaws, or agreement of limited partnership of the Company or Borrower (as applicable), or of any material agreement, judgment, license, order or permit applicable to or binding upon the Company or Borrower, or result in the creation of any lien, charge or encumbrance upon any assets or properties of the Company or Borrower. Except for those which have been obtained, no consent, approval, authorization or order of any court or governmental authority or third party is required in connection with the execution and delivery by the Company and Borrower of this Amendment or to consummate the transactions contemplated hereby. (d) When duly executed and delivered, each of this Amendment and the Credit Agreement will be a legal and binding obligation of the Company and Borrower, enforceable in accordance with its terms, except as limited by bankruptcy, insolvency or similar laws of general application relating to the enforcement of creditors' rights and by equitable principles of general application. (e) The audited annual consolidated financial statements of the Company dated as of December 31, 2001 and the unaudited quarterly consolidated financial statements of the Company dated as of June 30, 2002 fairly present the consolidated financial position at such dates and the consolidated statement of operations and the changes in consolidated financial position for the periods ending on such dates for the Company. Copies of such financial statements have heretofore been delivered to each Lender. Since such dates no material adverse change has occurred in the financial condition or businesses or in the consolidated financial condition or businesses of the Company. 7
ARTICLE V. Miscellaneous Section 5.1. Ratification of Agreements. The Original Agreement as hereby amended is hereby ratified and confirmed in all respects. Any reference to the Credit Agreement in any Loan Document shall be deemed to be a reference to the Original Agreement as hereby amended. The execution, delivery and effectiveness of this Amendment shall not, except as expressly provided herein, operate as a waiver of any right, power or remedy of Lenders under the Credit Agreement, the Notes, or any other Loan Document nor constitute a waiver of any provision of the Credit Agreement, the Notes or any other Loan Document. Section 5.2. Survival of Agreements. All representations, warranties, covenants and agreements of Borrower herein shall survive the execution and delivery of this Amendment and the performance hereof, including without limitation the making or granting of the Loans, and shall further survive until all of the Obligations are paid in full. All statements and agreements contained in any certificate or instrument delivered by the Company, Borrower or any Subsidiary Guarantor hereunder or under the Credit Agreement to any Lender shall be deemed to constitute representations and warranties by, and/or agreements and covenants of, such Loan Party under this Amendment and under the Credit Agreement. Section 5.3. Loan Documents. This Amendment is a Loan Document, and all provisions in the Credit Agreement pertaining to Loan Documents apply hereto. Section 5.4. Governing Law. This Amendment shall be governed by and construed in accordance with the laws of the State of New York and any applicable laws of the United States of America in all respects, including construction, validity and performance. Section 5.5. Counterparts; Fax. This Amendment may be separately executed in counterparts and by the different parties hereto in separate counterparts, each of which when so executed shall be deemed to constitute one and the same Amendment. This Amendment may be validly executed by facsimile or other electronic transmission. Section 5.6. Amendment Fee. In consideration of this Amendment, provided that all Lenders are signatory to this Amendment on or before 5:00 p.m., Dallas, Texas time on the date hereof, Borrower will pay to Administrative Agent, for the account of each Lender, an amendment fee determined by multiplying .50% times such Lender's Revolving Commitment, which shall be due and payable on the date hereof. 8
THIS AMENDMENT AND THE OTHER LOAN DOCUMENTS REPRESENT THE FINAL AGREEMENT BETWEEN THE PARTIES AND MAY NOT BE CONTRADICTED BY EVIDENCE OF PRIOR, CONTEMPORANEOUS, OR SUBSEQUENT ORAL AGREEMENTS OF THE PARTIES. THERE ARE NO UNWRITTEN ORAL AGREEMENTS OF THE PARTIES. [THE REMAINDER OF THIS PAGE HAS BEEN INTENTIONALLY LEFT BLANK.] 9
IN WITNESS WHEREOF, this Amendment is executed as of the date first above written. CHESAPEAKE EXPLORATION LIMITED PARTNERSHIP By: Chesapeake Operating, Inc., its general partner By: /s/ MARTHA A. BURGER ---------------------------------------- Name: Martha A. Burger Title: Treasurer and Sr. Vice President Human Resources CHESAPEAKE ENERGY CORPORATION By: /s/ MARTHA A. BURGER ---------------------------------------- Name: Martha A. Burger Title: Treasurer and Sr. Vice President Human Resources
UNION BANK OF CALIFORNIA, N.A. Administrative Agent, Collateral Agent, Issuing Lender and Lender By: /s/ RANDALL OSTERBERG ------------------------------------------ Name: Randall Osterberg Title: Senior Vice President By: /s/ SEAN MURPHY ------------------------------------------ Name: Sean Murphy Title: Assistant Vice President
EXHIBIT A to Fourth Amendment to Second Amended and Restated Credit Agreement SCHEDULE 1.1A COMMITMENTS
EXHIBIT B to Fourth Amendment to Second Amended and Restated Credit Agreement EXHIBIT J FORM OF AMENDMENT FOR AN INCREASED OR NEW COMMITMENT This AMENDMENT is made as of the _____ day of __________, 200_ by and among Chesapeake Exploration Limited Partnership, an Oklahoma limited partnership ("Borrower"), Union Bank of California, N.A., as administrative agent and collateral agent ("Administrative Agent"), and _________________________ ("Supplemental Lender"). Borrower, Administrative Agent and certain other Lenders, as described therein, are parties to that certain Second Amended and Restated Credit Agreement dated as of June 11, 2001 (as amended, supplemented, or restated, the "Credit Agreement"). All terms used herein and not otherwise defined shall have the same meaning given to them in the Credit Agreement. Pursuant to Section 10.6A of the Credit Agreement, Borrower has the right to increase the aggregate Revolving Commitment by obtaining additional Revolving Commitments upon satisfaction of certain conditions. This Amendment requires only the signature of Borrower, Administrative Agent and Supplemental Lender so long as the Aggregate Commitment is not increased above the amount permitted by the Credit Agreement. Supplemental Lender is either (a) an existing Lender which is increasing its Revolving Commitment or (b) a new Lender which is a lending institution whose identity Administrative Agent will approve by its signature below. In consideration of the foregoing, such Supplemental Lender, from and after the date hereof shall have a **[Revolving Commitment of $_______________ and if it is a new Lender, Supplemental Lender hereby assumes all of the rights and obligations of a Lender under the Credit Agreement.]** Borrower has executed and delivered to Supplemental Lender as of the date hereof, if requested by Supplemental Lender, a new or amended and restated Note in the form attached to the Credit Agreement as Exhibit H to evidence the new or increased Revolving Commitment of Supplemental Lender.
IN WITNESS WHEREOF, Administrative Agent, Borrower and Supplemental Lender have executed this Amendment as of the date shown above. CHESAPEAKE EXPLORATION LIMITED PARTNERSHIP By: Chesapeake Operating, Inc., its general partner By: ---------------------------------------- Name: Title: [SUPPLEMENTAL LENDER] By: ---------------------------------------- Name: Title: UNION BANK OF CALIFORNIA, N.A., as Administrative Agent By: ---------------------------------------- Name: Title: By: ---------------------------------------- Name: Title:
EXHIBIT C to Fourth Amendment to Second Amended and Restated Credit Agreement LENDER ADDENDUM The undersigned Lender (i) consents to the Fourth Amendment to Second Amended and Restated Credit Agreement, dated as of November 4, 2002 (the "Amendment"), among Chesapeake Exploration Limited Partnership, an Oklahoma limited partnership (the "Borrower"), Chesapeake Energy Corporation, an Oklahoma corporation (the "Company"), and Union Bank of California, N.A., as administrative agent and collateral agent (in such capacities, the "Administrative Agent") and agrees to all of the provisions thereof and (ii) becomes a party thereto, as a Lender, with obligations applicable to such Lender thereunder, including, without limitation, the obligation to make extensions of credit to the Borrower in an aggregate principal amount not to exceed the amount of its Revolving Commitment, as the case may be, as set forth opposite the undersigned Lender's name in Schedule 1.1A to the Credit Agreement, as such amount may be changed from time to time as provided in the Credit Agreement. Unless otherwise defined herein, terms defined in the Credit Agreement and used herein shall have the meanings given to them in the Credit Agreement. ---------------------------------------- (Name of Lender) By: ---------------------------------------- Name: Title: Dated as of November 4, 2002
Fourth Amendment CONSENT AND AGREEMENT By its execution below, each Guarantor hereby (i) consents to the provisions of this Amendment and the transactions contemplated herein, (ii) ratifies and confirms the Guarantee Agreement dated as of June 11, 2001 made by it for the benefit of Administrative Agent and Lenders (as modified by certain Assumption Agreements) and the other Loan Documents executed pursuant to the Credit Agreement (or any prior amendment or supplement to the Credit Agreement), (iii) agrees that all of its respective obligations and covenants thereunder shall remain unimpaired by the execution and delivery of this Amendment and the other documents and instruments executed in connection herewith, and (iv) agrees that the Guarantee Agreement and such other Loan Documents shall remain in full force and effect. CHESAPEAKE ENERGY CORPORATION By: /s/ MARTHA A. BURGER ------------------------------------------------------ Name: Martha A. Burger Title: Treasurer and Sr. Vice President Human Resources THE AMES COMPANY, INC. By: /s/ MARTHA A. BURGER ---------------------------------------------- Name: Martha A. Burger Title: Treasurer CHESAPEAKE ACQUISITION CORPORATION By: /s/ MARTHA A. BURGER ------------------------------------------- Name: Martha A. Burger Title: Treasurer
CHESAPEAKE ENERGY LOUISIANA CORPORATION By: /s/ MARTHA A. BURGER -------------------------------------------- Name: Martha A. Burger Title: Treasurer CHESAPEAKE OPERATING, INC. By: /s/ MARTHA A. BURGER -------------------------------------------- Name: Martha A. Burger Title: Treasurer and Sr. Vice President Human Resources CHESAPEAKE PANHANDLE LIMITED PARTNERSHIP By: CHESAPEAKE OPERATING, INC., its General Partner By: /s/ MARTHA A. BURGER -------------------------------------------- Name: Martha A. Burger Title: Treasurer and Sr. Vice President Human Resources CHESAPEAKE ROYALTY COMPANY By: /s/ MARTHA A. BURGER -------------------------------------------- Name: Martha A. Burger Title: Treasurer CHESAPEAKE-STAGHORN ACQUISITION L .P. By: CHESAPEAKE OPERATING, INC., its General Partner By: /s/ MARTHA A. BURGER ----------------------------------------------- Name: Martha A. Burger Title: Treasurer and Sr. Vice President Human Resources 5
CHESAPEAKE LOUISIANA, L.P. By: CHESAPEAKE OPERATING, INC., its General Partner By: /s/ MARTHA A. BURGER ------------------------------------------------- Name: Martha A. Burger Title: Treasurer and Sr. Vice President Human Resources GOTHIC ENERGY CORPORATION By: /s/ MARTHA A. BURGER ------------------------------------------------- Name: Martha A. Burger Title: Treasurer GOTHIC PRODUCTION CORPORATION By: /s/ MARTHA A. BURGER ------------------------------------------------- Name: Martha A. Burger Title: Treasurer NOMAC DRILLING CORPORATION By: /s/ MARTHA A. BURGER ------------------------------------------------- Name: Martha A. Burger Title: Treasurer CARMEN ACQUISITION CORP. By: /s/ MARTHA A. BURGER ------------------------------------------------- Name: Martha A. Burger Title: Treasurer
SAP ACQUISITION CORP. By: /s/ MARTHA A. BURGER ------------------------------------------------- Name: Martha A. Burger Title: Treasurer CHESAPEAKE MOUNTAIN FRONT CORP. By: /s/ MARTHA A. BURGER ------------------------------------------------- Name: Martha A. Burger Title: Treasurer CHESAPEAKE KNAN ACQUISITION CORPORATION By: /s/ MARTHA A. BURGER ------------------------------------------------- Name: Martha A. Burger Title: Treasurer CHESAPEAKE FOCUS CORP. By: /s/ MARTHA A. BURGER ------------------------------------------------- Name: Martha A. Burger Title: Treasurer CHESAPEAKE ENO ACQUISITION CORP. By: /s/ MARTHA A. BURGER ------------------------------------------------- Name: Martha A. Burger Title: Treasurer
CHESAPEAKE BETA CORP. By: /s/ MARTHA A. BURGER ------------------------------------------------- Name: Martha A. Burger Title: Treasurer CHESAPEAKE DELTA CORP. By: /s/ MARTHA A. BURGER ------------------------------------------------- Name: Martha A. Burger Title: Treasurer CHESAPEAKE SIGMA, L.P. By: CHESAPEAKE OPERATING, INC., its General Partner By: /s/ MARTHA A. BURGER ------------------------------------------------- Name: Martha A. Burger Title: Treasurer and Sr. Vice President Human Resources
EXHIBIT 12.1 CHESAPEAKE ENERGY CORPORATION RATIOS OF EARNINGS TO COMBINED FIXED CHARGES AND PREFERRED DIVIDENDS (DOLLARS IN 000'S)
EXHIBIT 99.1 CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the Quarterly Report of Chesapeake Energy Corporation (the "Company") on Form 10-Q for the period ended September 30, 2002 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, Aubrey K. McClendon, Chairman and Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that to the best of my knowledge: 1. The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and 2. The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. /s/ AUBREY K. MCCLENDON ----------------------------------------- Aubrey K. McClendon Chairman and Chief Executive Officer Date: November 7, 2002
EXHIBIT 99.2 CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the Quarterly Report of Chesapeake Energy Corporation (the "Company") on Form 10-Q for the period ended September 30, 2002 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, Marcus C. Rowland, Executive Vice President and Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that to the best of my knowledge: 1. The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and 2. The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. /s/ MARCUS C. ROWLAND ----------------------------------------- Marcus C. Rowland Executive Vice President and Chief Financial Officer Date: November 7, 2002