Chesapeake Energy 2000 Annual Report Download - page 45

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ITEM 7A. Quantitative and Qualitative Disclosures About Market Risk
Commodity Price Risk
Chesapeake's results of operations are highly dependent upon the prices received for oil and natural gas
production.
Hedging Activities
Periodically Chesapeake utilizes hedging strategies to hedge the price of a portion of its future oil and gas
production. These strategies include:
swap arrangements that establish an index-related price above which we pay the counterparty and
below which we are paid by the counterparty (counterparty payments in some contracts are
subject to a cap),
the purchase of index-related puts that provide for a "floor" price below which the counterparty
pays us the amount by which the price of the commodity is below the contracted floor,
the sale of index-related calls that provide for a "ceiling" price above which we pay the
counterparty the amount by which the price of the commodity is above the contracted ceiling,
basis protection swaps, which are arrangements that guarantee the price differential of oil or gas
from a specified delivery point or points, and
collar arrangements that establish an index-related price below which the counterparty pays us
and a separate index-related price above which we pay the counterparty.
Commodity markets are volatile, and as a result, our hedging activity is dynamic. As market conditions
warrant, we may elect to settle a hedging transaction prior to its scheduled maturity date and, as a result,
realize a gain or loss on the transaction.
Results from commodity hedging transactions are reflected in oil and gas sales to the extent related to our
oil and gas production. We only enter into commodity hedging transactions related to our oil and gas
production volumes or physical purchase or sale commitments ofour marketing subsidiary. Gains or losses on
crude oil and natural gas hedging transactions are recognized as price adjustments in the months of related
production.
As of December 31, 2000, we had the following open natural gas swap arrangements designed to hedge a
portion of our domestic gas production for periods after December 2000:
NYMEX-Index
Volume Strike Price
Months (mmbtu) (per mmbtu)
January 2001 4,960,000 $6.03
February 2001 5,320,000 6.12
March 2001 4,650,000 5.11
April 2001 5,100,000 4.79
May 2001 5,270,000 4.63
June 2001 3,900,000 4.61
July 2001 4,030,000 4.59
August 2001 4,030,000 4.58
September 2001 3,900,000 4.57
October 2001 620,000 4.80
If the swap arrangements listed above had been settled on December 31, 2000, we would have incurred a
loss of $80.1 million. Subsequent to December 31, 2000, we settled the natural gas swaps for January,
February and March 2001. A loss of $18.6 million and $4.4 million and a gain of $0.1 million will be
recognized as price adjustments in January, February and March, respectively. Ifwe had settled the remaining
swaps (April through October) using March 21, 2001 prices, we would have incurred a loss of $13.5 million.
On June 2, 2000, we entered into a natural gas basis protection swap transaction for 13,500,000 mmbtu
for the period of January 2001 through March 2001. This transaction requires that the counterpartypay us if
the NYMEX price exceeds the Houston Ship Channel Beaumont/Texas Index by more than $0.0675 for each
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