Chesapeake Energy 2000 Annual Report Download - page 100

Instruments." Gothic, using available market information, has determined the estimated fair value amounts.
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. Gothic estimates the fair value of Gothic Production's 111/8% Senior
Secured Notes and Gothic Energy's 141/8% Senior Secured Discount Notes using estimated market prices. Gothic's
carrying amount for such debt at December31, 1999 was $235.0 million and $75.9 million, respectively, compared
to approximate fair value of $197.4 million and $35.9 million, respectively. At December 31, 2000, the notes were
carried at $235.0 million and $86.7 million, respectively, compared to an approximate fair value of $249.1 million
and $80.1 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.
Hedging Activities
Gothic has involvement with derivative financial instruments, as defined in Statement of Financial Accounting
Standards No. 119 "Disclosure About Derivative Financial Instruments and Fair Value of Financial Instruments,"
and does not use them for trading purposes. Gothic's objective is to hedge a portion of its exposure to price volatility
from producing natural gas. These arrangements may expose Gothic to credit risk from its counterparty.
In July 1999, Gothic entered into a costless collar agreement with respect to the production of50,000 mmbtu
per day during the period of November 1999 through March 2000, which placed a floor of $2.30 per mmbtu and a
ceiling of $3.03 per mmbtu. Collar arrangements limit the benefits Gothic will realize if actual prices rise above the
ceiling price. These arrangements provide for Gothic to exchange a floating market price for a fixed range contract
price. Payments are made by Gothic when the floating price exceeds the fixed range for a contract month and
payments are received when the fixed range price exceeds the floating price. The commodity reference price for the
contract was the Panhandle Eastern Pipeline Company, Texas, and Oklahoma Mainline Index. In August 1999,
Gothic entered into a hedge agreement covering 10,000 barrels of oil per month at a price of $20.10 perbarrel. This
hedge was in effect from September 1999 through August 2000.
Additionally, in January 2000, Gothic entered into a hedge agreement covering 50,000 mmbtu per day at a
fixed price of $2.435 per mmbtu. This hedge was in effect from April 2000 through October 2000. In February 2000,
Gothic entered into a hedge agreement covering 20,000 mmbtu per day at a fixed price of $2.535 per mmbtu for
April 2000 and $2.555 per mmbtu for May 2000. This hedge was in effect for the months of April and May 2000.
The commodity price for both contracts was the Panhandle Eastern Pipeline Company, Texas, Oklahoma Mainline
Index.
In September 2000, Gothic entered into hedge contracts for the months of November and December 2000, for
60,000 mmbtu per day at a price of $4.88 and $5.00, respectively. The commodity price for both contracts was the
Panhandle Eastern Pipeline Company, Texas, Oklahoma Mainline Index.
Gains and losses on such natural gas and oil hedging contracts are reflected in revenues when the natural gas or
crude oil is sold. Hedging activities reduced 2000 realized prices by $0.65 per mcf and $5.79 per barrel, and reduced
natural gas and oil sales by $17.9 million. Gothic had no open commodity hedges at December 31, 2000. If the open
commodity hedges outstanding at December 31, 1999 had been settled at that date, Gothic would have realized a
gain of approximately $500,000.
Natural Gas and Oil Properties
Gothic accounts for its natural gas and oil exploration and development activities using the full-cost method of
accounting prescribed by the Securities and Exchange Commission ("SEC"). Accordingly, all productive and non-
productive costs incurred in connection with the acquisition, exploration and development of natural gas and oil
reserves are capitalized and depleted using the units-of-production method based on proved natural gas and oil
reserves. Gothic capitalizes costs, including salaries and related fringe benefits of employees and/or consultants
directly engaged in the acquisition, exploration and development of natural gas and oil properties, as well as other
-89-