Chesapeake Energy 1998 Annual Report Download - page 85

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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 Bbl)
January 1999 217,000 $ 2957
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 period 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 or 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 during 1998.
Concentration of Credit Risk
Other fmancial instruments which potentially subject the Company to concentrations of credit risk consist
principally of cash, short-term investments in debt instruments and trade receivables. The Company's accounts
receivable are primarily from purchasers of oil and natural gas products and exploration and production companies
which own interests in properties operated by the Company. The industry concentration has the potential to impact
the Company's overall exposure to credit risk, either positively or negatively, in that the customers may be similarly
affected by changes in economic, industry or other conditions. The Company generally requires letters of credit for
receivables from customers which are judged to have sub-standard credit, unless the credit risk can otherwise be
mitigated. The cash and investments in debt securities are with major banks or institutions with high credit ratings.
Fair Value of Financial Instruments
The following disclosure of the estimated fair value of frnancial instruments is made in accordance with the
requirements of Statement Of Financial Accounting Standards No. 107, "Disclosures About Fair Value of Financial
Instruments". The estimated fair value amounts have been deternmied by the Company using available market
information and valuation methodologies. Considerable judgment is required in interpreting market data to develop
the estimates of fair value. The use of different market assumptions or valuation methodologies may have a
material effect on the estimated fair value amounts.
The carrying values of items comprising current assets and current liabilities approximate fair values due to the
short-term maturities of these instruments. The Company estimates the fair value of its long-term, fixed-rate debt
using quoted market prices. The Company's carrying amount for such debt at December 31, 1998 and 1997 and
June 30, 1997 was $919.1 million, $509.0 million and $508 9 million, respectively, compared to approximate fair
values of $654.7 million, $517.0 million and $514.1 million, respectively. The carrying value of other long-term
debt approximates its fair value as interest rates are primarily variable, based on prevailing market rates. The
Company estimates the fair value of its convertible preferred stock, which was issued in April 1998, using quoted
market prices. The Company's carrying amount for such preferred stock at December 31, 1998 was $230 million,
compared to an approximate fair value of $48.9 million.
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