10-QPeriod: Q3 FY2001

EXPAND ENERGY Corp Quarterly Report for Q3 Ended Sep 30, 2001

Filed October 26, 2001For Securities:EXEEXEELEXEEWEXEEZ

Summary

Chesapeake Energy Corporation (EXE) reported significant growth in its third quarter and nine-month periods ending September 30, 2001. Total revenues surged by 43% in the quarter and 84% year-to-date, driven by increased oil and gas production, largely attributed to the acquisition of Gothic Energy Corporation, and a substantial rise in realized natural gas prices. Despite this revenue growth, the company's financial statements also reflect a complex picture involving substantial debt management, including refinancing efforts and significant premiums paid for early debt retirement, which resulted in an extraordinary loss for the nine-month period. The adoption of SFAS 133 for derivative accounting has led to significant changes in reported income and comprehensive income, with non-cash risk management gains impacting current period earnings. The company's balance sheet shows a considerable increase in total assets, primarily due to growth in property and equipment, alongside a corresponding rise in long-term debt. Investors should note the company's ongoing hedging activities and its significant capital expenditures aimed at future growth.

Key Highlights

  • 1Total revenues increased significantly, up 43% quarter-over-quarter and 84% year-to-date, driven by higher production volumes and increased natural gas prices.
  • 2The acquisition of Gothic Energy Corporation, completed in January 2001, significantly contributed to the growth in production and assets.
  • 3The company implemented SFAS 133 for derivative accounting, leading to a substantial increase in 'Risk Management Income' (non-cash gains) and impacting Other Comprehensive Income.
  • 4Significant debt refinancing activities occurred, including the issuance of new senior notes and redemption of existing ones, which resulted in an extraordinary loss of $46.0 million (after tax) for the nine-month period due to premiums paid.
  • 5Total assets grew substantially, from $1.44 billion at the end of 2000 to $2.09 billion by September 30, 2001, primarily due to increases in property and equipment.
  • 6Long-term debt increased from $0.94 billion to $1.27 billion, reflecting the financing activities undertaken during the period.
  • 7The company is actively engaged in hedging activities for its oil and gas production, with significant derivative assets recognized on its balance sheet.

Frequently Asked Questions

The primary drivers of revenue growth were increased oil and gas production, largely due to the acquisition of Gothic Energy Corporation, and a significant rise in the average realized price of natural gas, which increased by 23% in the third quarter and 67% year-to-date compared to the prior year.

The adoption of SFAS 133, Accounting for Derivative Instruments and Hedging Activities, required all derivative instruments to be recognized at fair value. This resulted in the recognition of 'Risk Management Income' (non-cash gains) in the statement of operations for derivatives not qualifying for hedge accounting, and significant changes in 'Other Comprehensive Income' related to fair value adjustments of qualifying hedges. The cumulative effect of the accounting change reduced accumulated other comprehensive income.

The extraordinary loss of $46.0 million (after tax) reported for the nine-month period relates to the company's significant debt refinancing activities. This includes the costs associated with repurchasing and redeeming various senior notes, which incurred substantial make-whole and redemption premiums and the write-off of unamortized debt costs.

The company has undertaken significant debt management activities, including issuing new senior notes and redeeming existing ones. Long-term debt increased from approximately $945 million at the end of 2000 to $1.27 billion by September 30, 2001. The company's senior notes and secured bank credit facility have received various credit ratings, reflecting its leverage.