Chesapeake Energy 1998 Annual Report Download - page 46

costs, and the related underlying reserves in the periods presented, decreased to $1.13 in the Current Year ($1.17 in
U.S. and $0.43 in Canada) compared to $1.59 in the Prior Year. The Company expects the 1999 DD&A rate to be
approximately $0.75 per Mcfe.
Depreciation and Amortization of Other Assets. Depreciation and amortization ("D&A") of other assets
increased to $8 I million in the Current Year, compared to $4.4 million in the Prior Year. This increase was caused
by increased investments in depreciable buildings and equipment and increased amortization of debt issuance costs
as a result of the issuance of senior notes in April 1998.
General and Administrative. General and administrative ("G&A") expenses, which are net of capitalized
internal payroll and non-payroll expenses (see Note 11 of Notes to Consolidated Financial Statements), were $19.9
million in the Current Year, up 83% from $10.9 million in the Prior Year. The increase in the Current Year
compared to the Prior Year is due primarily to increased personnel expenses required by the Company's growth and
industry wage inflation. The Company capitalized $5.3 million and $5 3 million of internal costs in the Current Year
and Prior Year, respectively, directly related to the Company's oil and gas exploration and development efforts. The
Company anticipates that G&A costs for 1999 will decline as a result of reduced staffmg levels.
Interest and Other Income. Interest and other income for the Current Year were $3 9 million compared to $87.7
million in the Prior Year. During the Prior Year, the Company realized a gain on the sale of its Bayard common
stock of $73.8 million, the most significant component of interest and other income.
Interest Expense. Interest expense increased to $68.2 million in the Current Year, compared to $29 8 million in
the Prior Year. The increase was due primarily to the issuance of $500 million of senior notes in April 1998. In
addition to the interest expense reported, the Company capitalized $6.5 million of interest during the Current Year,
compared to $10.4 million capitalized in the Prior Year. The Company anticipates that capitalized interest for 1999
will decrease to between $2 million and $3 million
Provision (Benefit) for Income Taxes. The Company recorded no income taxes in the Current Year compared to
an income tax benefit of $17 9 million in the Prior Year, before consideration of the $3 7 million tax benefit
associated with an extraordinary loss from the early extinguishment of debt.
At December 31, 1998, the Company had U.S. and Canadian net operating loss carryforwards of approximately
$571 million and $1 million, respectively, for regular federal income taxes which will expire in future years
beginning in 2007. Management believes that it cannot be demonstrated at this time that it is more likely than not
that the deferred income tax assets, comprised primarily of the net operating loss carryforward, will be realizable in
future years, and therefore a valuation allowance of $459 million has been recorded. No deferred tax benefit related
to the exercise of employee stock options was allocated to additional paid-in capital in the Current Year. The
Company does not expect to record any net income tax expense in 1999 based on information available at this time,
Six Months Ended December 31. 1997 and 1996
General. For the Transition Period, the Company realized a net loss of $31.6 million, or $0.45 per common
share, on total revenues of $232.9 million This compares to net income of $18.5 million, or $0.28 per common
share, on total revenues of $122 7 million in the six months ended December 31, 1996 (the 'Prior Period"). The
loss in the Transition Period was caused by a $110 0 million asset writedown recorded under the full-cost method of
accounting, partially offset by a gain of $73.8 million from the sale of Bayard stock. See "Impairment of Oil and
Gas Properties".
Oil and Gas Sales. During the Transition Period, oil and gas sales increased 6% to $95 7 million versus $90.2
million for the Prior Period. The increase in oil and gas sales resulted primarily from growth in production
volumes. For the Transition Period, the Company produced 38.5 Bcfe at a weighted average price of $2.49 per
Mcfe, compared to 36.8 Bcfe produced in the Prior Period at a weighted average price of $2.45 per Mcfe.
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