Chesapeake Energy 1998 Annual Report Download - page 26

If the swap arrangements listed above had been settled on December 31, 1998, the Company would have
incurred a loss of $0.8 million.
As of December 31, 1998, the Company had the following oil swap arrangements for periods after December
1998: NYMEX Heating Oil
Minus
Monthly NYMEX Crude Oil
Volume Index Strike Price
Months (Bbls) (per Bbfl
January 1999 217,000 $ 2.957
February 1999 196,000 2.957
March 1999 155,000 2.900
If the swap arrangements listed above had been settled on December 31, 1998, the Company would have
incurred a loss of $0.2 million Subsequent to December 31, 1998, the Company settled the swap arrangements
listed above for the periods of January 1999 and February 1999 resulting in a $0.4 million loss.
In addition to commodity hedging transactions related to the Company's oil and gas production, CEMI
periodically enters into various hedging transactions designed to hedge against physical purchase and sale
commitments made by CEMI. Gains or losses on these transactions are recorded as adjustments to oil and gas
marketing sales in the consolidated statements of operations and are not considered by management to be material.
The Company also utilizes hedging strategies to manage fixed-interest rate exposure. Through the use of a swap
arrangement, the Company believes it can benefit from stable or falling interest rates and reduce its current interest
expense. For the year ended December 31, 1998, the Company's interest rate swap resulted in a $0.7 million
reduction of interest expense.
Risk Factors
Substantial Debt Levels Could Affect Operations.
As of December 31, 1998, we had long-term indebtedness of $920 million and short-term bank indebtedness of
$25 million Additionally, the Company had a working capital deficit of $13 million and stockholders' equity was a
deficit of $249 million. Our ability to meet our debt service requirements throughout the life of the senior notes and
our ability to meet our preferred stock obligations will depend on our future performance, which will be subject to
oil and gas prices, our production levels of oil and gas, general economic conditions, and fmancial, business and
other factors affecting our operations. Our level of indebtedness may have the following effects on our future
operations:
a substantial portion of our cash flow from operations may be dedicated to the payment of interest
on indebtedness and will not be available for other purposes,
restrictions in our debt instruments limit our ability to borrow additional funds or to dispose of
assets and may affect our flexibility in planning for, and reacting to, changes in the energy
industry, and
our ability to obtain additional capital in the future may be impaired.
The short-term indebtedness described above was incurred under our commercial bank facility which matures in
August 1999. Although we believe this facility will be renewed, we can offer no assurances that we will be able to
renew the bank facility on favorable terms. As a result of our high level of indebtedness and poor conditions in the
energy industry, Standard & Poor's Corporation and Moody's Investors Service, in late 1998, reduced the credit
ratings on our senior notes to "B" and "B3", respectively. These ratings remain under credit review with negative
implications. Low credit ratings could negatively impact our ability to access capital markets.
6