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This excerpt taken from the CHK 8-K filed Nov 1, 2005. INFORMATION TO BE INCLUDED IN THE REPORT
On September 30, 2005, Chesapeake Energy Corporation entered into an agreement to acquire Columbia Energy Resources, LLC and its related subsidiaries including Columbia Natural Resources, LLC (“CER”), for $2.2 billion in cash, subject to closing adjustments. Through this transaction, we anticipate acquiring properties and assets principally located in the Appalachian Basin in West Virginia, Kentucky, Ohio, Pennsylvania and New York, including:
Based upon the estimated fair value of the probable and possible reserves and other associated leasehold, we estimate the fair value of unevaluated properties to be approximately $500 million and we estimate the fair value of the mid-stream assets to be $175 million. In addition, gas sold from the properties generally receives a $0.50 per mmbtu premium to NYMEX gas prices, compared to basis differential discounts that have recently ranged up to $3.00 per mmbtu in various southwestern and western U.S. natural gas supply basins. Adjusting further for the favorable BTU content, CER’s natural gas has recently received wellhead prices of up to $4.00 per mcfe more than typical southwestern and western U.S. natural gas production.
CER’s current daily net production is approximately 125 million cubic feet of natural gas equivalent (mmcfe), indicating a proved developed reserves-to-production index of 16.0 years, or about 9% of our current daily net production, giving pro forma effect to the acquisition. In addition to the significant number of undeveloped drilling locations with proved reserves, we believe the unevaluated properties offer considerable additional drilling and development potential for adding proved reserves. We intend to spend at least $200 million per year for the foreseeable future in further developing the CER properties with a goal of growing CER production by 5% to 10% per year.
We will acquire CER subject to liabilities, including an estimated $75 million working capital deficit and its prepaid sales agreement and hedging arrangements. As part of the acquisition, we expect to record a mark-to-market liability on the prepaid sales and hedging obligations when the transaction closes. The amount of the mark-to-market liability will be dependent on gas prices on the day of the closing. For example, using a flat $7.00 NYMEX gas strip through December 2008, the prepaid sales and hedging liabilities would be approximately $325 million. Using gas prices as of September 30, 2005, the prepaid sales and hedging liabilities would be approximately $775 million.
We expect to close the CER acquisition by December 1, 2005, subject to satisfaction of customary closing conditions. We are currently in the process of completing title and environmental review and resolving certain third party rights of first refusal on a minor portion of the CER assets, the outcome of some of which could have the effect of adjusting the purchase price and eliminating some of the properties. There is no assurance, however, that the CER acquisition will close, or close without material adjustment.
We intend to finance a portion of the CER acquisition cash purchase price from the net proceeds from three concurrent private placement offerings. The completion of each private placement offering is not conditioned on the completion of either of the concurrent offerings. We expect the remainder of the purchase price will be paid from available bank borrowings or, if needed, a bridge loan we have received commitments for.
2
We are filing herewith the following historical financial statements of CER and pro forma financial information:
The audited consolidated financial statements of CER for the year ended December 31, 2004 and the four months ended December 31, 2003 and the unaudited interim consolidated financial statements of CER for the nine months ended September 30, 2005 and 2004 are filed as Exhibits 99.1 and 99.2, respectively, to this report and incorporated herein by this reference.
The pro forma financial information with respect to the CER acquisition is filed as Exhibit 99.3 to this report and incorporated herein by this reference.
3
The exhibits listed below are filed with this report.
4
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