SEC Filing - Expand Energy Corporation

SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q [X] Quarterly Report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the quarterly period ended March 31, 1997 [ ] Transition Report pursuant to Section 13 or 15(d) of the Securities Act of 1934 For the transition period from __________ to __________ COMMISSION FILE NO. 1-13726 CHESAPEAKE ENERGY CORPORATION (Exact name of registrant as specified in its charter) OKLAHOMA 73-1395733 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 6100 NORTH WESTERN AVENUE OKLAHOMA CITY, OKLAHOMA 73118 (Address of principal executive offices) (Zip Code) (405) 848-8000 (Registrant's telephone number, including area code) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES X NO At April 30, 1997, there were 69,709,906 shares of the registrant's $.01 par value Common Stock outstanding.

CHESAPEAKE ENERGY CORPORATION AND SUBSIDIARIES PART I. FINANCIAL INFORMATION INDEX TO FINANCIAL STATEMENTS AND MANAGEMENT'S DISCUSSION AND ANALYSIS PAGE Item 1. Consolidated Financial Statements (Unaudited): Consolidated Balance Sheets at March 31, 1997 and June 30, 1996 Consolidated Statements of Income for the Three and Nine Months Ended March 31, 1997 and 1996 Consolidated Statements of Cash Flows for the Nine Months Ended March 31, 1997 and 1996 Notes to Consolidated Financial Statements Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations

CHESAPEAKE ENERGY CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (UNAUDITED) ASSETS MARCH 31, JUNE 30, 1997 1996 --------- -------- ($ IN THOUSANDS) CURRENT ASSETS: Cash and cash equivalents $300,810 $ 51,638 Short-term investments 62,003 - Accounts receivable: Oil and gas sales 10,384 12,687 Oil and gas marketing sales 15,630 6,982 Joint interest and other, net of allowance for doubtful accounts of $182,000 and $340,000 25,273 27,661 Related parties 5,191 2,884 Inventory 7,454 5,163 Other 12,333 2,158 --------- --------- Total Current Assets 438,978 109,173 --------- --------- PROPERTY AND EQUIPMENT: Oil and gas properties, at cost based on full cost accounting: Evaluated oil and gas properties 653,400 363,213 Unevaluated properties 211,337 165,441 Less: accumulated depreciation, depletion and amortization (153,625) (92,720) --------- -------- 711,112 435,934 Other property and equipment 26,669 18,162 Less: accumulated depreciation and amortization ( 4,410) ( 2,922) --------- --------- Total Property and Equipment 733,371 451,174 --------- --------- OTHER ASSETS 17,697 11,988 --------- --------- TOTAL ASSETS $1,190,046 $572,335 ========== ========= LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES: Notes payable and current maturities of long-term debt $ 4,375 $ 6,755 Accounts payable 86,691 54,514 Accrued liabilities and other 15,716 14,062 Revenues and royalties due others 34,532 33,503 ---------- --------- Total Current Liabilities 141,314 108,834 ---------- --------- LONG-TERM DEBT, NET 508,961 268,431 ---------- --------- REVENUES AND ROYALTIES DUE OTHERS 6,928 5,118 ---------- --------- DEFERRED INCOME TAXES 29,787 12,185 ---------- --------- STOCKHOLDERS' EQUITY: Preferred Stock, $.01 par value, 10,000,000 shares authorized; none issued - - Common Stock, 100,000,000 shares authorized; $.01 par value at March 31, 1997, $.05 par value at June 30, 1996; 69,665,457 and 60,159,826 shares issued and outstanding at March 31, 1997, and June 30, 1996, respectively 697 3,008 Paid-in capital 429,976 136,782 Accumulated earnings 72,383 37,977 ---------- --------- Total Stockholders' Equity 503,056 177,767 ---------- --------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $1,190,046 $572,335 ========== ========= The accompanying notes are an integral part of these consolidated financial statements.

CHESAPEAKE ENERGY CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED) (in thousands, except per share data) THREE MONTHS ENDED NINE MONTHS ENDED MARCH 31, MARCH 31, ---------------------- ---------------------- 1997 1996 1997 1996 -------- -------- -------- ------- REVENUES: Oil and gas sales $57,399 $30,887 $147,566 $77,237 Oil and gas marketing sales 22,410 11,558 52,429 15,345 Oil and gas service operations - 1,700 - 5,317 Interest and other 3,277 250 5,793 2,041 -------- -------- -------- -------- Total revenues 83,086 44,395 205,788 99,940 -------- -------- -------- -------- COSTS AND EXPENSES Production expenses and taxes 4,308 2,136 10,182 5,839 Oil and gas marketing expenses 21,747 10,788 51,295 14,554 Oil and gas service operations - 1,244 - 4,263 Oil and gas depreciation, depletion and amortization 24,663 13,035 60,906 35,268 Depreciation and amortization of other assets 873 766 2,709 2,151 General and administrative 2,481 1,435 6,220 3,347 Interest 3,654 3,173 9,870 9,717 -------- -------- -------- -------- Total costs and expenses 57,726 32,577 141,182 75,139 -------- -------- -------- -------- INCOME BEFORE INCOME TAX AND EXTRAORDINARY ITEM 25,360 11,818 64,606 24,801 -------- -------- -------- -------- INCOME TAX EXPENSE Current - - - - Deferred 9,255 4,195 23,580 8,804 -------- -------- -------- -------- Total income tax expense 9,255 4,195 23,580 8,804 -------- -------- -------- -------- INCOME BEFORE EXTRAORDINARY ITEM 16,105 7,623 41,026 15,997 EXTRAORDINARY ITEM: Loss on early extinguishment of debt, net of applicable income tax of $101 and $3,804, respectively ( 177) - ( 6,620) - -------- -------- -------- -------- NET INCOME $15,928 $ 7,623 $34,406 $15,997 ======== ======== ======== ======== NET EARNINGS PER COMMON SHARE AND COMMON SHARE EQUIVALENT (PRIMARY) Income before extraordinary item $ .22 $ .13 $ .60 $ .28 Extraordinary item - - ( .10) - -------- -------- -------- -------- Net Income $ .22 $ .13 $ .50 $ .28 ======== ======== ======== ======== NET EARNINGS PER COMMON SHARE AND COMMON SHARE EQUIVALENT (FULLY DILUTED) Income before extraordinary item $ .22 $ .13 $ .60 $ .27 Extraordinary item - - ( .10) - -------- -------- -------- -------- Net Income $ .22 $ .13 $ .50 $ .27 ======== ======== ======== ======== WEIGHTED AVERAGE COMMON AND COMMON EQUIVALENT SHARES OUTSTANDING Primary 73,493 58,470 68,683 57,984 ======== ======== ======== ======== Fully-diluted 73,493 58,642 68,680 58,692 ======== ======== ======== ======== The accompanying notes are an integral part of these consolidated financial statements.

CHESAPEAKE ENERGY CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) NINE MONTHS ENDED MARCH 31, -------------------- 1997 1996 ------ ------ ($ in thousands) CASH FLOWS FROM OPERATING ACTIVITIES: NET INCOME $ 34,406 $ 15,997 ADJUSTMENTS TO RECONCILE NET INCOME TO NET CASH PROVIDED BY OPERATING ACTIVITIES: Depreciation, depletion and amortization 62,553 36,550 Deferred taxes 19,776 8,804 Amortization of loan costs 1,062 869 Amortization of bond discount 196 421 Gain on sale of fixed assets and other ( 504) ( 366) Extraordinary item before income tax benefit 10,424 - Equity in earnings of subsidiary ( 269) - Other adjustments - ( 129) Bad debt expense 88 - CHANGES IN CURRENT ASSETS AND LIABILITIES ( 46,145) 37,969 --------- --------- Cash provided by operating activities 81,587 100,115 --------- --------- CASH FLOWS FROM INVESTING ACTIVITIES: Exploration, development and acquisition of oil and gas properties (344,998) (171,523) Proceeds from sale of assets 15,124 9,149 Investment in gas marketing company, net of cash acquired - ( 363) Investment in service operations ( 3,048) - Long-term loan made to a third party ( 2,000) - Additions to property, equipment and other ( 9,334) ( 6,334) --------- --------- Cash used in investing activities (344,256) (169,071) --------- --------- CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from long-term borrowings 342,626 41,650 Payments on long-term borrowings (119,495) ( 3,267) Cash received from issuance of common stock 288,091 - Cash received from exercise of stock options 898 986 Other financing ( 279) - --------- --------- Cash provided by financing activities 511,841 39,369 --------- --------- NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 249,172 ( 29,587) CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 51,638 55,535 --------- --------- CASH AND CASH EQUIVALENTS, END OF PERIOD $300,810 $ 25,948 ========= ========= The accompanying notes are an integral part of these consolidated financial statements.

CHESAPEAKE ENERGY CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS MARCH 31, 1997 (Unaudited) 1. Accounting Principles The accompanying unaudited consolidated financial statements of Chesapeake Energy Corporation and Subsidiaries (the "Company") have been prepared in accordance with the instructions to Form 10-Q as prescribed by the Securities and Exchange Commission. All material adjustments (consisting solely of normal recurring adjustments) which, in the opinion of management, are necessary for a fair presentation of the results for the interim periods have been reflected. The results for the three months and nine months ended March 31, 1997, are not necessarily indicative of the results to be expected for the full fiscal year. 2. Recent Events On March 17, 1997, the Company issued in a private offering $150 million in 7-7/8% Senior Notes due 2004 and $150 million in 8-1/2% Senior Notes due 2012, which resulted in net proceeds to the Company of approximately $293 million. Using a portion of the proceeds from this offering the Company paid off all balances outstanding under its commercial bank credit facilities. On April 23, 1997, the Company commenced an offer to exchange all of the outstanding 7-7/8% and 8-1/2% Senior Notes for substantially identical notes registered under the Securities Act of 1933. The exchange offer is scheduled to expire on May 23, 1997. In February 1997, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 128, Earnings Per Share ("FAS 128"). FAS 128 will change the computation, presentation and disclosure requirements for earnings per share. FAS 128 requires presentation of "basic" and "diluted" earnings per share, as defined, on the face of the income statement for all entities with complex capital structures. FAS 128 is effective for financial statements issued for periods ending after December 15, 1997 and requires restatement of all prior period earnings per share amounts. The Company has not yet determined the impact that FAS 128 will have on its earnings per share when adopted. 3. Legal Proceedings As previously disclosed, on October 15, 1996, Union Pacific Resources Company ("UPRC") filed suit against the Company alleging patent infringement and tortious interference with contracts regarding confidentiality and proprietary information of UPRC. UPRC is seeking injunctive relief and damages in an unspecified amount, including actual, enhanced, consequential and punitive damages. The Company believes it has meritorious defenses to the allegations, including its belief that the subject patent is invalid. Given the subject of the claims, the Company is unable to predict the outcome of the matter or estimate a range of financial exposure. 4. Senior Notes 10-1/2% Notes The Company has outstanding $90 million in aggregate principal amount of 10-1/2% Senior Notes which mature June 1, 2002. The 10-1/2% Notes bear interest at an annual rate of 10-1/2%, payable semiannually on each June 1 and December 1. The 10-1/2% Notes are senior, unsecured obligations of the Company and are fully and unconditionally guaran- teed, jointly and severally, by certain subsidiaries of the Company (the "Guarantor Subsidiaries"). 9-1/8% Notes The Company has outstanding $120 million in aggregate principal amount of 9-1/8% Senior Notes which mature April 15, 2006. The 9-1/8% Notes bear interest at an annual rate of 9-1/8%, payable semiannually on each April 15 and October 15. The 9-1/8% Notes are senior, unsecured obligations of the Company and are fully and unconditionally guaran- teed, jointly and severally, by the Guarantor Subsidiaries. 7-7/8% Notes The Company has outstanding $150 million in aggregate principal amount of 7-7/8% Senior Notes which mature March 15, 2004. The 7-7/8% Notes bear interest at the rate of 7-7/8%, payable semiannually on each March 15 and September 15. The 7-7/8% Notes are senior, unsecured obligations of the Company and are fully and unconditionally guaranteed, jointly and severally, by the Guarantor Subsidiaries. 8-1/2% Notes The Company has outstanding $150 million in aggregate principal amount of 8-1/2% Senior Notes which mature March 15, 2012. The 8-1/2% Notes bear interest at the rate of 8-1/2%, payable semiannually on each March 15 and September 15. The 8-1/2% Notes are senior, unsecured obligations of the Company and are fully and unconditionally guaranteed, jointly and severally, by the Guarantor Subsidiaries.

CHESAPEAKE ENERGY CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS MARCH 31, 1997 (Unaudited) Set forth below are condensed consolidating financial statements of the Guarantor Subsidiaries, the Non-Guarantor Subsidiaries and the Company. Prior to fiscal 1997, the Guarantor Subsidiaries were Chesapeake Operating, Inc. ("COI") and Chesapeake Exploration Limited Partnership ("CELP"), as well as the Company's service company subsidiaries: Lindsay Oil Field Supply, Inc., Sander Trucking Company, Inc. and Whitmire Dozer Service, Inc. (collectively, the "Service Companies"). The assets of the Service Companies were sold effective June 30, 1996, and the Service Companies' operations ceased. Prior to fiscal 1997, Chesapeake Gas Development Corporation ("CGDC") was a Non-Guarantor Subsidiary. In conjunction with the issuance of the 7-7/8% Senior Notes and the 8-1/2% Senior Notes in March 1997, CGDC became a guaran- tor of all the Company's outstanding senior notes. As of March 31, 1997, the Guarantor Subsidiaries were COI, CELP and CGDC, and the Non- Guarantor Subsidiaries were Chesapeake Energy Marketing, Inc. and Chesapeake Canada Corporation, and the Company has reported the Guaran- tor and Non-Guarantor Subsidiaries accordingly in the following fiscal 1997 financial statements. Separate financial statements of each Guarantor Subsidiary have not been included because management has determined that they are not material to investors.

CHESAPEAKE ENERGY CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS MARCH 31, 1997 (unaudited) CONDENSED CONSOLIDATING BALANCE SHEET AS OF MARCH 31, 1997 ($ IN THOUSANDS) GUARANTOR NON-GUARANTOR COMPANY SUBSIDIARIES SUBSIDIARIES (PARENT) ELIMINATIONS CONSOLIDATED ------------- -------------- -------- ------------ ------------ ASSETS ------ CURRENT ASSETS: Cash and cash equivalents $( 13,929) $ 6,662 $308,077 $ - $ 300,810 Short-term investments - - 62,003 - 62,003 Accounts receivable, net 46,771 15,632 100 ( 6,025) 56,478 Inventory 7,202 252 - - 7,454 Other 801 26 11,406 - 12,233 ----------- -------- -------- --------- ---------- Total Current Assets 40,845 22,572 381,586 ( 6,025) 438,978 ----------- -------- -------- --------- ---------- PROPERTY AND EQUIPMENT: Oil and gas properties 653,382 18 - - 653,400 Unevaluated leasehold 211,281 56 - - 211,337 Other property and equipment 12,592 109 13,968 - 26,669 Less: accumulated depreciation, depletion and amortization ( 157,367) - ( 668) - ( 158,035) ----------- -------- -------- -------- ---------- Total Property & Equipment 719,888 183 13,300 - 733,371 ----------- -------- -------- -------- ---------- INVESTMENTS IN SUBSIDIARIES AND INTERCOMPANY ADVANCES 403,106 - 577,241 (980,347) - ----------- -------- ------- -------- ---------- OTHER ASSETS 4,591 693 12,413 - 17,697 ----------- -------- ------- -------- ---------- TOTAL ASSETS $1,168,430 $ 23,448 $984,540 $(986,372) $1,190,046 =========== ======== ======== ========= ========== LIABILITIES AND STOCKHOLDERS' EQUITY ------------------------------------ CURRENT LIABILITIES: Notes payable and current maturities of long-term debt $ 4,375 $ - $ - $ - $ 4,375 Accounts payable and other 117,584 16,106 9,274 ( 6,025) 136,939 ----------- -------- -------- -------- ---------- Total Current Liabilities 121,959 16,106 9,274 ( 6,025) 141,314 ----------- -------- -------- -------- ---------- LONG-TERM DEBT 32 - 508,929 - 508,961 ----------- -------- -------- -------- ---------- REVENUES PAYABLE 6,928 - - - 6,928 ----------- -------- -------- -------- ---------- DEFERRED INCOME TAXES 24,708 890 4,189 - 29,787 ----------- -------- -------- -------- ---------- INTERCOMPANY PAYABLES 924,868 8 51,630 (976,506) - ----------- -------- -------- -------- ---------- STOCKHOLDERS' EQUITY: Common Stock 11 1 687 ( 2) 697 Other 89,924 6,443 409,831 ( 3,839) 502,359 ----------- -------- -------- -------- ---------- Total Stockholders' Equity 89,935 6,444 410,518 ( 3,841) 503,056 ----------- -------- -------- -------- ---------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $1,168,430 $ 23,448 $984,540 $(986,372) $1,190,046 =========== ======== ======== ========= ==========

CHESAPEAKE ENERGY CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS MARCH 31, 1997 (unaudited) CONDENSED CONSOLIDATING BALANCE SHEET AS OF JUNE 30, 1996 ($ IN THOUSANDS) GUARANTOR NON-GUARANTOR COMPANY SUBSIDIARIES SUBSIDIARIES (PARENT) ELIMINATIONS CONSOLIDATED ------------ ------------- ------- ------------ ------------ ASSETS ------ CURRENT ASSETS: Cash and cash equivalents $ 4,061 $ 2,751 $ 44,826 $ - $ 51,638 Accounts receivable, net 44,080 7,723 - ( 1,589) 50,214 Inventory 4,947 216 - - 5,163 Other 2,155 3 - - 2,158 ---------- -------- -------- --------- -------- Total Current Assets 55,243 10,693 44,826 ( 1,589) 109,173 ---------- -------- -------- --------- -------- PROPERTY AND EQUIPMENT: Oil and gas properties 338,610 24,603 - - 363,213 Unevaluated leasehold 165,441 - - - 165,441 Other property and equipment 9,608 61 8,493 - 18,162 Less: accumulated depreciation, depletion and amortization ( 87,193) ( 8,007) ( 442) - ( 95,642) ---------- -------- -------- --------- -------- Total Property & Equipment 426,466 16,657 8,051 - 451,174 ---------- -------- -------- --------- -------- INVESTMENTS IN SUBSIDIARIES AND INTERCOMPANY ADVANCES 519,386 8,132 382,388 (909,906) - ---------- -------- -------- --------- -------- OTHER ASSETS 2,310 940 8,738 - 11,988 ---------- -------- -------- --------- -------- TOTAL ASSETS $1,003,405 $ 36,422 $444,003 $(911,495) $572,335 ========== ======== ======== ========= ======== LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES: Notes payable and current maturities of long-term debt $ 3,846 $ 2,880 $ 29 $ - $ 6,755 Accounts payable and other 91,069 7,339 5,260 ( 1,589) 102,079 ---------- -------- -------- --------- -------- Total Current Liabilities 94,915 10,219 5,289 ( 1,589) 108,834 ---------- -------- -------- --------- -------- LONG-TERM DEBT 2,113 10,020 256,298 - 268,431 ---------- -------- -------- --------- -------- REVENUES PAYABLE 5,118 - - - 5,118 ---------- -------- -------- --------- -------- DEFERRED INCOME TAXES 23,950 1,335 ( 13,100) - 12,185 ---------- -------- -------- --------- -------- INTERCOMPANY PAYABLES 824,307 8,182 73,647 (906,136) - ---------- -------- -------- --------- -------- STOCKHOLDERS' EQUITY: Common Stock 117 2 2,891 ( 2) 3,008 Other 52,885 6,664 118,978 ( 3,768) 174,759 ---------- -------- ------- --------- -------- Total Stockholders' Equity 53,002 6,666 121,869 ( 3,770) 177,767 ---------- -------- ------- --------- -------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $1,003,405 $ 36,422 $444,003 $(911,495) $572,335 ========== ======== ======== ========= ========

CHESAPEAKE ENERGY CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS MARCH 31, 1997 (UNAUDITED) CONDENSED CONSOLIDATING STATEMENTS OF INCOME ($ IN THOUSANDS) GUARANTOR NON-GUARANTOR COMPANY SUBSIDIARIES SUBSIDIARIES (PARENT) ELIMINATIONS CONSOLIDATED ------------ ------------- -------- ------------ ------------ FOR THE THREE MONTHS ENDED MARCH 31, 1997: REVENUES: Oil and gas sales $ 56,795 $ - $ - $ 604 $ 57,399 Oil and gas marketing sales - 45,568 - (23,158) 22,410 Interest and other 177 197 2,903 - 3,277 -------- -------- -------- -------- -------- Total Revenues 56,972 45,765 2,903 (22,554) 83,086 -------- -------- -------- -------- -------- COSTS AND EXPENSES: Production expenses and taxes 4,308 - - - 4,308 Oil and gas marketing expenses - 44,301 - (22,554) 21,747 Oil and gas depreciation, depletion and amortization 24,663 - - - 24,663 Other depreciation and amortization 508 20 345 - 873 General and administrative 1,757 235 489 - 2,481 Interest 172 - 3,482 - 3,654 -------- -------- -------- -------- -------- Total Costs & Expenses 31,408 44,556 4,316 (22,554) 57,726 -------- -------- -------- -------- -------- INCOME (LOSS) BEFORE INCOME TAXES AND EXTRAORDINARY ITEM 25,564 1,209 ( 1,413) - 25,360 INCOME TAX EXPENSE (BENEFIT) 9,330 441 ( 516) - 9,255 -------- -------- -------- -------- -------- NET INCOME (LOSS) BEFORE EXTRAORDINARY ITEM 16,234 768 ( 897) - 16,105 -------- -------- -------- -------- -------- EXTRAORDINARY ITEM: Loss on early extinguishment of debt, net of applicable income tax ( 179) - 2 - ( 177) -------- -------- -------- -------- -------- NET INCOME (LOSS) $ 16,055 $ 768 $( 895) $ - $ 15,928 ======== ======== ======== ======== ======== FOR THE THREE MONTHS ENDED MARCH 31, 1996: REVENUES: Oil and gas sales $ 28,579 $ 2,308 $ - $ - $ 30,887 Oil and gas marketing sales - 13,594 - ( 2,036) 11,558 Oil and gas service operations 1,700 - - - 1,700 Interest and other 143 99 8 - 250 -------- -------- -------- -------- -------- Total revenues 30,422 16,001 8 ( 2,036) 44,395 -------- -------- -------- -------- -------- COSTS AND EXPENSES: Production expenses and taxes 1,929 207 - - 2,136 Oil and gas marketing expenses - 12,824 - ( 2,036) 10,788 Oil and gas service operations 1,244 - - - 1,244 Oil and gas depreciation, depletion and amortization 12,300 735 - - 13,035 Other depreciation and amortization 507 26 233 - 766 General and administrative 1,043 190 202 - 1,435 Interest 324 201 2,648 - 3,173 -------- -------- -------- -------- -------- Total Costs & Expenses 17,347 14,183 3,083 ( 2,036) 32,577 -------- -------- -------- -------- -------- INCOME (LOSS) BEFORE INCOME TAX 13,075 1,818 ( 3,075) - 11,818 -------- -------- --------- -------- -------- INCOME TAX EXPENSE 4,713 646 ( 1,164) - 4,195 -------- -------- --------- -------- -------- NET INCOME (LOSS) $ 8,362 $ 1,172 $( 1,911) $ - $ 7,623 ======== ======== ========= ======== ========

CHESAPEAKE ENERGY CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS MARCH 31, 1997 (UNAUDITED) CONDENSED CONSOLIDATING STATEMENTS OF INCOME ($ IN THOUSANDS) GUARANTOR NON-GUARANTOR COMPANY SUBSIDIARIES SUBSIDIARIES (PARENT) ELIMINATIONS CONSOLIDATED ------------ ------------- -------- ------------ ------------ FOR THE NINE MONTHS ENDED MARCH 31, 1997: REVENUES: Oil and gas sales $146,310 $ - $ - $ 1,256 $147,566 Oil and gas marketing sales - 104,175 - (51,746) 52,429 Interest and other 344 768 4,681 - 5,793 -------- -------- -------- -------- -------- Total Revenues 146,654 104,943 4,681 (50,490) 205,788 -------- -------- -------- -------- -------- COSTS AND EXPENSES: Production expenses and taxes 10,182 - - - 10,182 Oil and gas marketing expenses - 101,785 - (50,490) 51,295 Oil and gas depreciation, depletion and amortization 60,906 - - - 60,906 Other depreciation and amortization 1,582 60 1,067 - 2,709 General and administrative 4,370 660 1,190 - 6,220 Interest 707 - 9,163 - 9,870 -------- -------- -------- ------- -------- Total Costs & Expenses 77,747 102,505 11,420 (50,490) 141,182 -------- -------- -------- ------- -------- INCOME (LOSS) BEFORE INCOME TAXES AND EXTRAORDINARY ITEM 68,907 2,438 ( 6,739) - 64,606 INCOME TAX EXPENSE (BENEFIT) 25,150 890 ( 2,460) - 23,580 -------- -------- -------- ------- -------- NET INCOME (LOSS) BEFORE EXTRAORDINARY ITEM 43,757 1,548 ( 4,279) - 41,026 -------- -------- -------- ------- -------- EXTRAORDINARY ITEM: Loss on early extinguishment of debt, net of applicable income tax ( 769) - ( 5,851) - ( 6,620) -------- -------- -------- ------- -------- NET INCOME (LOSS) $ 42,988 $ 1,548 $( 10,130) $ - $ 34,406 ======== ======== ========= ======= ======== FOR THE NINE MONTHS ENDED MARCH 31, 1996: REVENUES: Oil and gas sales $ 72,112 $ 5,125 $ - $ - $ 77,237 Oil and gas marketing sales - 17,964 - ( 2,619) 15,345 Oil and gas service operations 5,317 - - - 5,317 Interest and other 1,379 105 557 - 2,041 -------- -------- -------- ------- -------- Total Revenues 78,808 23,194 557 ( 2,619) 99,940 -------- -------- -------- ------- -------- COSTS AND EXPENSES: Production expenses and taxes 5,321 518 - - 5,839 Oil and gas marketing expenses - 17,173 - ( 2,619) 14,554 Oil and gas service operations 4,263 - - - 4,263 Oil and gas depreciation, depletion and amortization 33,359 1,909 - - 35,268 Other depreciation and amortization 1,357 44 750 - 2,151 General and administrative 2,542 291 514 - 3,347 Interest 405 551 8,761 - 9,717 -------- -------- -------- ------- -------- Total Costs & Expenses 47,247 20,486 10,025 ( 2,619) 75,139 -------- -------- -------- ------- -------- INCOME (LOSS) BEFORE INCOME TAX 31,561 2,708 ( 9,468) - 24,801 INCOME TAX EXPENSE (BENEFIT) 11,275 962 ( 3,433) - 8,804 -------- -------- -------- ------- -------- NET INCOME (LOSS) $ 20,286 $ 1,746 $( 6,035) $ - $ 15,997 ======== ======== ======== ======= ========

CHESAPEAKE ENERGY CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS MARCH 31, 1997 (UNAUDITED) CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS ($ IN THOUSANDS) GUARANTOR NON-GUARANTOR COMPANY SUBSIDIARIES SUBSIDIARIES (PARENT) ELIMINATIONS CONSOLIDATED ------------ ------------- -------- ------------ ------------ FOR THE NINE MONTHS ENDED MARCH 31, 1997: CASH FLOWS FROM OPERATING ACTIVITIES: $ 160,431 $( 3,557) $( 75,287) $ - $ 81,587 --------- ---------- ---------- ----------- ---------- CASH FLOWS FROM INVESTING ACTIVITIES: Oil and gas properties (344,998) - - - (344,998) Proceeds from sale of assets 15,124 - - - 15,124 Investment in service operations ( 3,048) - - - ( 3,048) Long-term loan to third party ( 2,000) - - - ( 2,000) Other additions ( 3,044) ( 204) ( 6,086) - ( 9,334) ---------- --------- --------- ---------- -------- (337,966) ( 204) ( 6,086) - (344,256) ---------- --------- --------- ---------- -------- CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from borrowings 50,000 - 292,626 - 342,626 Payments on borrowings (118,815) - ( 680) - (119,495) Cash received from exercise of stock options - - 898 - 898 Cash received from issuance of common stock - - 288,091 - 288,091 Other financing - - ( 279) - ( 279) Intercompany advances, net 228,277 7,755 (236,032) - - ---------- --------- --------- ---------- -------- 159,462 7,755 344,624 - 511,841 ---------- --------- --------- ---------- -------- Net increase (decrease) in cash (18,073) 3,994 263,251 - 249,172 Cash, beginning of period 4,144 2,668 44,826 - 51,638 --------- --------- --------- ---------- -------- Cash, end of period $( 13,929) $ 6,662 $ 308,077 $ - $300,810 ========= ========= ========= ========== ======== FOR THE NINE MONTHS ENDED MARCH 31, 1996: CASH FLOWS FROM OPERATING ACTIVITIES: $ 103,967 $ 2,877 $( 6,729) $ - $100,115 --------- --------- --------- ---------- -------- CASH FLOWS FROM INVESTING ACTIVITIES: Oil and gas properties (164,843) ( 11,980) - 5,300 (171,523) Proceeds from sales 14,449 - - ( 5,300) 9,149 Investment in gas marketing company - 266 ( 629) - ( 363) Other additions ( 3,400) ( 40) ( 2,894) - ( 6,334) --------- --------- --------- ---------- -------- (153,794) ( 11,754) ( 3,523) - (169,071) --------- --------- --------- ---------- -------- CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from long-term borrowings 31,350 10,300 - - 41,650 Payments on borrowings ( 753) ( 2,494) ( 20) - ( 3,267) Cash received from exercise of stock options - - 986 - 986 Intercompany advances, net ( 21,705) 2,461 19,244 - - --------- --------- ---------- ---------- -------- 8,892 10,267 20,210 - 39,369 --------- --------- ---------- ---------- -------- Net increase (decrease) in cash and cash equivalents ( 40,935) 1,390 9,958 - ( 29,587) Cash, beginning of period 53,227 5 2,303 - 55,535 --------- --------- ---------- ---------- -------- Cash, end of period $ 12,292 $ 1,395 $ 12,261 $ - $ 25,948 ========= ========= ========== ========== ========

PART I. FINANCIAL INFORMATION ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS RECENT EVENTS On March 17, 1997, the Company issued through a private offering $150 million in 7-7/8% Senior Notes due 2004 and $150 million in 8-1/2% Senior Notes due 2012, which resulted in net proceeds to the Company of approximately $293 mil- lion. Using a portion of the proceeds from this offering, the Company repaid all balances outstanding under its commercial bank credit facilities. On April 23, 1997, the Company commenced an offer to exchange all of the outstanding 7-7/8% and 8-1/2% Senior Notes for substantially identical notes registered under the Securities Act of 1933. The exchange offer is scheduled to expire on May 23, 1997. RESULTS OF OPERATIONS THREE MONTHS ENDED MARCH 31, 1997 VS. MARCH 31, 1996 Net income for the three months ended March 31, 1997 (the "Current Quarter") was $15.9 million, an $8.3 million increase from net income of $7.6 million for the quarter ended March 31, 1996 (the "Prior Quarter"), after giving effect to an extraordinary loss of $0.2 million (net of income tax) incurred during the Current Quarter. This increase in net income was caused primarily by the Company's significantly higher oil and gas production and increases in oil and gas sales prices. Revenues from oil and gas sales for the Current Quarter were $57.4 million, an increase of $26.5 million, or 86%, from the Prior Quarter. Gas production increased to 15.7 billion cubic feet ("Bcf"), an increase of 2.2 Bcf, or 16%, compared to the Prior Quarter. Oil production increased 459 thousand barrels ("MBbls"), or 134%, from 342 MBbls to 801 MBbls. The increase in oil and gas production was accompanied by increases in the average oil and gas prices realized. In the Current Quarter, the Company received an average oil price of $21.55 per barrel ("Bbl"). This was an increase of $3.11 per Bbl, or 17%, from the $18.44 per Bbl realized in the Prior Quarter. Gas price realizations increased to $2.55 per thousand cubic feet ("Mcf") in the Current Quarter, an increase of 39% from the $1.83 per Mcf realized in the Prior Quarter. The following table sets forth oil and gas production for the Company's primary operating areas during the Current Quarter. Producing Oil Gas Total Percent OPERATING AREAS WELLS (MBBLS) (MMCF) (MMCFE) (%) --------------- --------- -------- ------- -------- ------- Giddings 206 106 10,389 11,025 54% Louisiana Trend 37 414 1,550 4,034 20% Southern Oklahoma 211 147 2,729 3,611 17% All Other 133 134 1,074 1,878 9% ------- ------- ------- ------- ------- Total 587 801 15,742 20,548 100% ======= ======= ======= ======= ======= Includes producing wells as of March 31, 1997 and wells being drilled as of that date. Revenues from the Company's oil and gas marketing operations in the Current Quarter, which commenced in December 1995 with the purchase of Chesapeake Energy Marketing, Inc. ("CEM"), were $22.4 million compared to $11.6 million in the Prior Quarter. Oil and gas marketing expenses were $21.7 million during the Current Quarter, resulting in a gross profit margin of $0.7 million. In the Prior Quarter, the gross profit margin was $0.8 million. The Company had no revenues or expenses for oil and gas service operations in the Current Quarter as a result of the sale of this business in June 1996 to Peak USA Energy Services, Ltd. ("Peak"). Peak is a limited partnership formed by Peak Oilfield Services Company (a joint venture between Cook Inlet Region, Inc. and Nabors Industries, Inc.) and the Company. The Company's investment in Peak is accounted for using the equity method. The Company had interest and other revenues of $3.3 million in the Current Quarter compared to $0.3 million in the Prior Quarter. This significant increase resulted from the Company's large cash balances that are invested in short term interest and dividend earning investments until needed for the Company's oil and gas exploration and development activities. The Company expects this revenue to decrease through fiscal 1998 as cash balances decrease. Production expenses and taxes increased to $4.3 million in the Current Quarter from $2.1 million in the Prior Quarter. This increase was the result of a significant increase in oil and gas production volumes during the Current Quarter, higher oil and gas prices which increased severance taxes and slightly higher lifting costs per unit of production. On a gas equivalent production unit ("Mcfe") basis, production expenses and taxes were $0.21 per Mcfe in the Current Quarter compared to $0.14 per Mcfe in the Prior Quarter. Much of the Company's gas production from wells drilled before September 1996 in the downdip Giddings Field qualifies for exemption from Texas state production taxes for production through August 31, 2001. Additionally, certain oil and gas production from the Company's wells in the Knox and Sholem Alechem fields in Oklahoma and the Louisiana Austin Chalk Trend qualifies for production tax exemption until well costs are recovered. These exemptions, combined with the fact that many of the Company's wells are high volume gas wells that tend to have lower operating costs per Mcfe than lower volume wells, help generate the Company's historically low production costs per Mcfe. The Company expects that production expenses and taxes in fiscal 1997 will continue to increase because of the Company's expansion of drilling efforts in the Louisiana Trend which is an oil prone area with significant associated water production which results in higher operating costs than gas prone areas, and because severance tax exemptions will be more limited in the Louisiana Trend compared to existing exemptions in the Giddings Field. Depreciation, depletion and amortization ("DD&A") of oil and gas properties for the Current Quarter was $24.7 million, an increase of $11.7 million from the Prior Quarter. The increase in DD&A expense for oil and gas properties between quarters is the result of a 32% increase in production volumes and an increase in the DD&A rate per Mcfe. The average DD&A rate per Mcfe, a function of capitalized and estimated future development costs and the related proved reserves, was $1.20 for the Current Quarter and $0.84 for the Prior Quarter. The Company believes the DD&A rate will continue to increase during fiscal 1997 and into fiscal 1998 based on projected higher finding costs for wells drilled in the Louisiana Trend and as a result of increasing drilling costs throughout the industry. Depreciation and amortization of other assets increased to $0.9 million in the Current Quarter compared to $0.8 million in the Prior Quarter. This increase is primarily the result of higher amortization expense related to debt issuance costs, and higher depreciation related to the Company's acquisition of additional buildings and equipment in its Oklahoma City headquarters complex to support the Company's growth. General and administrative expenses increased to $2.5 million during the Current Quarter, a $1.1 million, or 79%, increase from the Prior Quarter. This increase is the result of the continued growth of the Company. General and administrative expenses were $0.12 per Mcfe in the Current Quarter as compared to $0.09 per Mcfe in the Prior Quarter. The Company capitalized $1.4 million and $0.4 million of payroll and other internal costs directly related to oil and gas exploration and development activities, net of partner reimbursements, in the Current Quarter and Prior Quarter, respectively. Interest expense increased to $3.7 million during the Current Quarter, from $3.2 million in the Prior Quarter, as a result of higher levels of total debt during the Current Quarter. During the Current Quarter, the Company capitalized $2.7 million of interest costs representing the estimated costs to carry its unevaluated leasehold inventory, compared to $1.6 million in the Prior Quarter. This increase in capitalized interest costs is the result of larger investments being carried during the Current Quarter in leasehold that have yet to be evaluated than in the Prior Quarter. Income tax expense increased to $9.3 million in the Current Quarter (before giving effect to the income tax benefit applicable to the extraordinary item) from $4.2 million in the Prior Quarter. The Company's estimated effective income tax rate was 36.5% for the Current Quarter, compared to 35.5% for the Prior Quarter. The Company estimates its effective rate based on anticipated levels of income for the year, estimated production in excess of that allowed in computing statutory depletion for tax purposes, the interplay between state location of production revenue and the related state income tax, and other factors. The provision for income tax expense is deferred in its entirety because the Company is not currently a cash income taxpayer. The Company has a significant tax net operating loss carryforward generated from the intangible drilling cost deduction for income tax purposes associated with the Company's drilling activities which are available to offset regular taxable income in the future. The Company recorded an extraordinary loss in the Current Quarter of $0.2 million, net of applicable income tax effect. This loss was the result of the Company paying all amounts outstanding under the Company's term bank credit facility from the proceeds of the senior note offerings during the Current Quarter, and terminating its commercial bank credit facilities. NINE MONTHS ENDED MARCH 31, 1997 VS. MARCH 31, 1996 Net income for the nine months ended March 31, 1997 (the "Current Period") was $34.4 million, an $18.4 million increase from net income of $16 million for the nine months ended March 31, 1996 (the "Prior Period"), after giving effect to an extraordinary loss of $6.6 million (net of income tax) incurred in the Current Period. This increase was caused by the Company's significantly higher oil and gas production and increases in oil and gas sales prices. Revenues from oil and gas sales for the Current Period were $147.6 million, an increase of $70.4 million, or 91%, from the Prior Period. Gas production increased to 45.8 Bcf, an increase of 9.4 Bcf, or 26%, compared to the Prior Period. Oil production increased to 1,917 MBbls, an increase of 881 MBbls, or 85%, compared to the Prior Period. In the Current Period the Company realized an average gas price of $2.31 per Mcf. This was an increase of $0.69 per Mcf, or 43%, as compared to the $1.62 per Mcf realized in the Prior Period. The Company realized an average oil price of $21.74 per Bbl. This was an increase of $4.28 per Bbl, or 25%, compared to the $17.46 per Bbl realized in the Prior Period. The following table sets forth oil and gas production for the Company's primary operating areas during the Current Period. Producing Oil Gas Total Percent OPERATING AREAS WELLS (MBBLS) (MMCF) (MMCFE) (%) --------------- ---------- ------- ------ ------- ------- Giddings 206 399 31,021 33,415 58% Southern Oklahoma 211 445 8,929 11,599 20% Louisiana Trend 37 865 3,362 8,552 15% All Other 133 208 2,525 3,773 7% ------- ------- ------- ------- ------- Total 587 1,917 45,837 57,339 100% ======= ======= ======= ======= ======= Includes producing wells as of March 31, 1997 and wells drilled as of that date. Revenues from the Company's oil and gas marketing operations were $52.4 million in the Current Period compared to $15.3 million in the Prior Period, which included only four months of operation. Oil and gas marketing expenses were $51.3 million in the Current Period, resulting in a gross profit margin of $1.1 million. The Company had no revenues or expenses for oil and gas service operations in the Current Period as a result of the sale of this business in June 1996 to Peak. The Company had interest and other investment revenues of $5.8 million in the Current Period compared to $2 million in the Prior Period. This significant increase resulted from the Company's large cash balances that are invested in short term interest and dividend earning investments until needed for the Company's oil and gas exploration and development activities. The Company expects this revenue to decrease through fiscal 1998 as cash balances decrease. Production expenses and taxes increased to $10.2 million in the Current Period, an increase of $4.4 million, or 76%, from $5.8 million incurred in the Prior Period. This increase was the result of a significant increase in oil and gas production volumes during the Current Period, higher oil and gas prices which increase severance taxes, and slightly higher lifting costs per unit of production. On an Mcfe basis, production expenses and taxes were $0.18 per Mcfe in the Current Period compared to $0.14 in the Prior Period. The Company expects that production expenses will continue to increase in fiscal 1997 and throughout fiscal 1998 because of the Company's expansion of drilling efforts in the Louisiana Trend which is an oil prone area with significant associated water production which results in higher operating costs than gas prone areas, and because severance tax exemptions will be more limited in the Louisiana Trend compared to existing exemptions in the Giddings Field. DD&A of oil and gas properties in the Current Period was $60.9 million, an increase of $25.6 million, or 73%, from $35.3 million expensed in the Prior Period. The increase in DD&A expense is the result of a 35% increase in production volumes and an increase in the DD&A rate per Mcfe. The average DD&A rate per Mcfe was $1.06 in the Current Period as compared to $0.83 in the Prior Period. The Company believes the DD&A rate will continue to trend higher during fiscal 1997 and fiscal 1998 based on higher projected finding costs for wells drilled in the Louisiana Trend and as a result of increasing drilling costs throughout the industry. Depreciation and amortization of other assets increased to $2.7 in the Current Period, a $0.5 million, or 23%, increase from the Prior Period. This increase is the result of higher amortization expense related to debt issuance costs, and higher depreciation related to the Company's acquisition of additional buildings and equipment in its Oklahoma City headquarters complex to support the Company's growth. General and administrative expenses increased to $6.2 million during the Current Period, a $2.9 million, or 88%, increase from the Prior Period. This increase is the result of the continued growth of the Company. General and administrative expenses were $0.11 per Mcfe in the Current Period, compared to $0.08 per Mcfe in the Prior Period. The Company capitalized $2.5 million and $0.8 million of payroll and other internal costs directly related to oil and gas exploration and development activities, net of partner reimbursements, in the Current Period and Prior Period, respectively. Interest expense increased to $9.9 million in the Current Period from $9.7 million in the Prior Period as a result of higher levels of total debt during the Current Period compared to the Prior Period. During the Current Period, the Company capitalized $10.4 million of interest costs representing the estimated costs to carry its unevaluated leasehold inventory, compared to $3.5 million in the Prior Period. Income tax expense increased to $23.6 million in the Current Period (before giving effect to the income tax benefit applicable to the extraordinary item) from $8.8 in the Prior Period. The Company's estimated effective income tax rate was 36.5% for the Current Period, compared to 35.5% for the Prior Period. The Company estimates its effective rate based on anticipated levels of income for the year, estimated production in excess of that allowed in computing statutory depletion for tax purposes, the interplay between state location of production revenue and the related state income tax, and other factors. The provision for income tax expense is deferred in its entirety because the Company is not currently a cash income taxpayer. The Company has a significant federal tax net operating loss carryforward generated from the intangible drilling cost deduction for income tax purposes associated with the Company's drilling activities which are available to offset regular taxable income in the future. The Company expects its effective tax rate to remain between 36.5% and 37.5% for the foreseeable future. RISK MANAGEMENT ACTIVITIES Periodically the Company utilizes hedging strategies to hedge the price of a portion of its future oil and gas production. These strategies include swap arrangements that establish an index-related price above which the Company pays the hedging partner and below which the Company is paid by the hedging partner, the purchase of index-related puts that provide for a "floor" price to the Company to be paid by the counterparty to the extent the price of the commodity is below the contracted floor, and basis protection swaps. Results from hedging transactions are reflected in oil and gas sales to the extent related to the Company's oil and gas production. The Company has not entered into hedging transactions unrelated to the Company's oil and gas production. The Company has the following oil swap arrangements for periods after the Current Quarter: Monthly NYMEX-Index MONTH VOLUME(BBLS) STRIKE PRICE (PER BBL) ----- ------------ ---------------------- April 1997 30,000 $19.22 May 1997 31,000 $18.97 June 1997 30,000 $18.79 July 1997 31,000 $18.60 August 1997 31,000 $18.43 September 1997 30,000 $18.30 October 1997 31,000 $18.19 November 1997 30,000 $18.13 December 1997 31,000 $18.08 January through June 1998 124,000 $19.72 The Company has entered into oil swap arrangements to cancel the effect of the swaps for the months of August through December at an average price of $22.10 per Bbl. The Company has the following gas swap arrangements for periods after the Current Quarter: Monthly Houston Ship Channel MONTHS VOLUME (MMBTU) INDEX STRIKE PRICE (PER MMBTU) ------ -------------- ------------------------------ April 1997 600,000 $2.022 May 1997 620,000 $1.937 Gains or losses on the crude oil and natural gas hedging transactions are recognized as price adjustments in the month of related production. The Company estimates that had all of the crude oil and natural gas swap agreements in effect for production periods beginning April 1, 1997 terminated on March 31, 1997, based on the closing prices for NYMEX futures contracts as of that date, the Company would have paid the counterparty approximately $0.4 million, which would have represented the "fair value" at that date. These agreements were not terminated. CAPITAL RESOURCES AND LIQUIDITY During the Current Quarter the Company completed an offering of $300 million in senior notes resulting in net proceeds to the Company of approximately $293 million. The Company used approximately $11 million to repay and terminate the Company's commercial bank credit facilities. The Company used approximately $2 million to repay other debt outstanding. The balance of the net proceeds has been and will be used to fund oil and gas exploration and development expenditures and for general corporate purposes. As of March 31, 1997, the Company had working capital of $297.7 million. The Company has estimated that its capital expenditures for fiscal 1997 will be approximately $425 million, including approximately $320 million for drilling, completion and production expenditures, $30 million for pipeline and gathering facilities, and the balance for acreage acquisition, seismic programs and general corporate purposes. The capital expenditure budget is largely discretionary, and can be adjusted by the Company based on operating results or other factors. The Company believes it has sufficient capital resources, including expected cash flow from operations, to fund its capital program for the foreseeable future. During the Current Quarter, the Company received a senior debt credit rating increase from Moody's Investors Service to Ba2. Standard & Poor's Rating Services has currently rated the Company's senior debt as BB. The Company's long-term debt to total book capitalization is approximately 50% as of March 31, 1997. The Company's cash provided by operating activities decreased to $81.6 million during the Current Period, compared to $100.1 million during the Prior Period. The decrease of $18.5 million is the result of additional investments in short- term marketable securities during the Current Period partially offset by increases in net income, adjusted for non-cash charges (such as DD&A and deferred income taxes), and cash provided by changes in current assets and current liabilities between the two periods. Cash used in investing activities increased to $344.3 million in the Current Period, up from $169.1 million in the Prior Period. The $175.2 million increase is a result of the Company's increased drilling activity and increased investment in leasehold during the Current Period. Cash provided by financing activities was $511.8 million during the Current Period, as compared to consolidated cash provided by financing activities of $39.4 million during the Prior Period. The increase resulted primarily from the Company's issuance of $300 million in senior notes and 8,972,000 shares of common stock offset by the repayment of balances outstanding on the Company's commercial bank credit facilities. The Company is subject to certain routine legal proceedings, none of which are expected to have a material adverse effect upon the Company's financial condition or operations. The Company is also involved in certain litigation that the Company is unable to predict the ultimate financial impact (see Part II, Item 1). FORWARD LOOKING STATEMENTS All statements other than statements of historical fact contained in this Form 10-Q, including statements in "Management's Discussion and Analysis of Financial Condition and Results of Operations" are forward-looking statements. When used herein, the words "budget", "budgeted", "anticipate", "expects", "believes", "seeks", "goals", "intends", or "projects" and similar expressions are intended to identify forward-looking statements. It is important to note that the Company's actual results could differ materially from those projected by such forward-looking statements. Although the Company believes that the expectations reflected in such forward-looking statements are reasonable, no assurance can be given that such expectations will prove correct. Factors that could cause the Company's results to differ materially from the results discussed in such forward-looking statements include but are not limited to the following: production variances from expectations, volatility of oil and gas prices, the need to develop and replace its reserves, the substantial capital expenditures required to fund its operations, environmental risks, drilling and operating risks, risks related to exploration and development drilling, uncertainties about estimates of reserves, competition, government regulation, and the ability of the Company to implement its business strategy. All forward-looking statements in this document are expressly qualified in their entirety by the cautionary statements in this paragraph.

PART II. OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS As previously disclosed in the Company's Form 10-Q for the quarter ended September 30, 1996, on October 15, 1996, Union Pacific Resources Company ("UPRC") filed suit against the Company alleging patent infringement and tortious interference with contracts regarding confidentiality and proprietary information of UPRC. UPRC is seeking injunctive relief and damages in an unspecified amount, including actual, enhanced, consequential and punitive damages. The Company believes it has meritorious defenses to the allegations, including its belief that the subject patent is invalid. Given the subject of the claims, the Company is unable to predict the outcome of the matter or estimate a range of financial exposure. ITEM 2. CHANGES IN SECURITIES - - 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 NO. ----------- 4.1 Indenture dated as of March 15, 1997 among the registrant, as issuer, Chesapeake Operating, Inc., Chesapeake Gas Development Corporation, and Chesapeake Exploration Limited Partnership, as Subsidiary Guarantors, and United States Trust Company of New York, as Trustee, with respect to 7-7/8% Senior Notes due 2004. Incorporated herein by reference to Exhibit 4.1 to registrant's registration statement on Form S-4 (No. 333-24995). 4.2 Indenture dated as of March 15, 1997 among the registrant, as issuer, Chesapeake Operating, Inc., Chesapeake Gas Development Corporation, and Chesapeake Exploration Limited Partnership, as Subsidiary Guarantors, and United States Trust Company of New York, as Trustee, with respect to 8-1/2% Senior Notes due 2012. Incorporated herein by reference to Exhibit 4.3 to registrant's registration statement on Form S-4 (No. 333-24995). 4.3 Registration Rights Agreement dated March 12, 1997 among the registrant, Chesapeake Operating, Inc., Chesapeake Gas Development Corporation, and Chesapeake Exploration Limited Partnership, and Donaldson, Lufkin & Jenrette Securities Corporation, Bear, Stearns & Co. Inc., J.P. Morgan Securities Inc. and Lehman Brothers Inc. Incorporated herein by reference to Exhibit 4.5 to registrant's registration statement on Form S-4 (No. 333-24995). 11 Statement regarding computation of earnings per common share 27 Financial Data Schedule _______________________ (b) Reports on Form 8-K The following reports on Form 8-K have been filed since January 1, 1997: On March 6, 1997, the Company filed a current report on Form 8-K reporting under Item 5 that the Company issued a press release on March 6, 1997 announcing its planned private offering of debt securities. On April 4, 1997, the Company filed a current report on Form 8-K reporting under Item 5 that the Company issued a press release on April 2, 1997 announcing the completion of its Brown #1-H in Washington County, Texas. On May 2, 1997, the Company filed a current report on Form 8-K reporting under Item 5 that the Company issued a press release on April 24, 1997, reporting third quarter and first nine months fiscal 1997 results.

SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. CHESAPEAKE ENERGY CORPORATION (Registrant) MAY 15, 1997 AUBREY K. MCCLENDON Date Aubrey K. McClendon Chairman and Chief Executive Officer MAY 15, 1997 MARCUS C. ROWLAND Date Marcus C. Rowland Vice President and Chief Financial Officer

INDEX TO EXHIBITS METHOD OF EXHIBIT NO. DESCRIPTION FILING - ----------- ----------- ------------- 4.1 Indenture dated as of March 15, 1997 among the Incorpora- registrant, as issuer, Chesapeake Operating, Inc., ted by Chesapeake Gas Development Corporation, and reference Chesapeake Exploration Limited Partnership, as Subsidiary Guarantors, and United States Trust Company of New York, as Trustee, with respect to 7-7/8% Senior Notes due 2004. Incorporated herein by reference to Exhibit 4.1 to registrant's registration statement on Form S-4 (No. 333-24995). 4.2 Indenture dated as of March 15, 1997 among the Incorpora- registrant, as issuer, Chesapeake Operating, Inc., ted by Chesapeake Gas Development Corporation, and reference Chesapeake Exploration Limited Partnership, as Subsidiary Guarantors, and United States Trust Company of New York, as Trustee, with respect to 8-1/2% Senior Notes due 2012. Incorporated herein by reference to Exhibit 4.3 to registrant's registration statement on Form S-4 (No. 333-24995). 4.3 Registration Rights Agreement dated March 12, 1997 Incopora- among the registrant, Chesapeake Operating, Inc., ted by Chesapeake Gas Development Corporation, and reference Chesapeake Exploration Limited Partnership, and Donaldson, Lufkin & Jenrette Securities Corporation, Bear, Stearns & Co. Inc., J.P. Morgan Securities Inc. and Lehman Brothers Inc. Incorporated herein by reference to Exhibit 4.5 to registrant's registration statement on Form S-4 (No. 333-24995). 11 Statement regarding computation of earnings per Filed common share herewith electronically 27 Financial Data Schedule Filed herewith electronically

EXHIBIT 11 CHESAPEAKE ENERGY CORPORATION AND SUBSIDIARIES STATEMENT OF NET INCOME PER SHARE (in thousands, except per share data) THREE MONTHS ENDED NINE MONTHS ENDED MARCH 31, MARCH 31, ------------------- ----------------- 1997 1996 1997 1996 ----- ------ ----- ------ PRIMARY INCOME PER SHARE Computation for statement of income Net income per statement of income Income before extraordinary item $ 16,105 $ 7,623 $ 41,026 $ 15,997 Extraordinary item (177) - (6,620) - -------- -------- -------- -------- Net income $ 15,928 $ 7,623 $ 34,406 $ 15,997 ======== ======== ======== ======== Weighted average Common shares outstanding 69,534 53,529 64,478 53,529 Adjustment to weighted average common shares outstanding: Add dilutive effect of: Employee Options 3,959 4,941 4,205 4,455 ------- -------- ------- -------- Weighted average common shares and common equivalent shares outstanding, as adjusted 73,493 58,470 68,683 57,984 ======= ======== ======= ======== Primary net income per common share: Income before extraordinary item $ .22 $ .13 $ .60 $ .28 Extraordinary item - - (.10) - -------- -------- -------- -------- Net income $ .22 $ .13 $ .50 $ .28 ======== ======== ======== ======== FULLY DILUTED INCOME PER SHARE Net income per statement of income Income before extraordinary item $ 16,105 $ 7,623 $ 41,026 $ 15,997 Extraordinary item (177) - (6,620) - -------- -------- -------- -------- Net income $ 15,928 $ 7,623 $ 34,406 $ 15,997 ======== ======== ======== ======== Weighted average Common shares outstanding 69,534 53,529 64,478 53,529 Adjustment to weighted average common shares outstanding: Add fully dilutive effect of: Employee Options 3,959 5,113 4,202 5,163 -------- -------- -------- -------- Weighted average common shares and common equivalent shares outstanding, as adjusted 73,493 58,642 68,680 58,692 ======== ======== ======== ======== Fully diluted net income per common share: Income before extraordinary item $ .22 $ .13 $ .60 $ .27 Extraordinary item - - (.10) - -------- -------- -------- --------- Net income $ .22 $ .13 $ .50 $ .27 ======== ======== ======== =========

5 This Schedule contains summary financial information extracted from (A) Balance Sheet as of March 31, 1997 and Statement of Income for nine months ended March 31, 1997 and is qualified in its entirety by reference to such (B) Form 10-Q dated March 31, 1997. 0000895126 CHESAPEAKE ENERGY CORPORATION 1,000 9-MOS JUN-30-1997 MAR-31-1997 300,810 62,003 56,660 182 7,454 438,978 891,406 158,035 1,190,046 141,314 508,961 0 0 697 502,359 1,190,046 199,995 205,788 131,312 141,182 0 88 9,870 64,606 23,580 41,026 0 (6,620) 0 34,406 0.50 0.50