Chesapeake Energy 1996 Annual Report Download - page 36

lion, $25.5 million higher than fiscal 1995's expense of
$25.4 million, and $42.8 million higher than fiscal 1994's
expense of $8.1 million. The average DD&A rate per
Mcfe, which is a function of capitalized costs, future de-
velopment costs, and the related underlying reserves in
the periods presented, increased to $0.85 in fiscal 1996
compared to $0.80 in fiscal 1995 and 1994. The
company's DD&A rate in the future will be a function
of the results of future acquisition, exploration, develop-
ment and production results. The company's rate will
increase in fiscal 1997 based on projected higher finding
costs for the Louisiana Trend.
Depreciation and Amortization
of Other Assets
Depreciation and amortization ("D&A") of other as-
sets increased to $3.2 million in fiscal 1996, compared
to $1.8 million in fiscal 1995, and $1.9 million in 1994.
This increase in fiscal 1996 was caused by an increase in
D&A as a result of increased investments in depreciable
buildings and equipment, and increased amortization of
debt issuance costs as a result of the issuance of the Se-
nior Notes in May 1995 and in April 1996. The com-
pany anticipates an increase in D&A in fiscal 1997 as a
result of a full year of debt issuance cost amortization on
the 9.125% Senior Notes issued in April 1996 and higher
building depreciation expense on the company's corpo-
rate offices, offset by a reduction in depreciation expense
associated with the sale of the service company assets.
General and Administrative
General and administrative ("G&A") expenses, which
are net of capitalized internal payroll and non-payroll ex-
penses (see Note 11 of Notes to Consolidated Financial
Statements), were $4.8 million in fiscal 1996, up 33%
from $3.6 million in fiscal 1995, and up from $3.1 mil-
lion in fiscal 1994. The increases in fiscal 1996 compared
to 1995 and 1994 result primarily from increased per-
sonnel expenses required by the company's growth. The
company capitalized $1.7 million of internal costs in fis-
cal 1996 directly related to the company's oil and gas
exploration and development efforts, as compared to $0.6
million in 1995 and $1.0 million in 1994. The com-
pany anticipates that G&A costs for fiscal 1997 will in-
crease by approximately 25% as a result of the company's
continued growth and increased budgets for exploration
and development activities, increasing operations activi-
ties, and attendant personnel and overhead requirements.
CHESAPEAKE ENERGY CORPORATION
Interest and Other
Interest and other expense increased to $13.7 million
in fiscal 1996 as compared to $6.6 million in 1995 and
$2.7 million in fiscal 1994. Interest expense in the fourth
quarter of fiscal 1996 was approximately $4 million, re-
flecting the issuance of $120 million of 9.125% Senior
Notes in April 1996. In addition to the interest expense
reported, the company capitalized $6.4 million of inter-
est during fiscal 1996, as compared to $1.6 million capi-
talized in 1995 and $0.4 million in 1994. Interest ex-
pense will increase significantly in fiscal 1997 as com-
pared to 1996 as a result of the 9.125% Senior Notes
issued in April 1996.
Income Tax Expense
The company recorded income tax expense of$12.9
million in fiscal 1996, as compared to $6.3 million in
fiscal 1995, and $1.3 million in 1994. All of the income
tax expense in 1996 was deferred due to a current year
tax net operating loss resulting from the company's ac-
tive drilling program. A substantial portion of the
company's drilling costs are currently deductible for in-
come tax purposes. The effective tax rate was approxi-
mately 35.5% in fiscal 1996 compared to a tax rate of
35% in 1995 and 24% in 1994. The company antici-
pates an effective tax rate of approximately 36.5% for
fiscal 1997 as a result of Louisiana state taxes and higher
activity levels in Louisiana. Based upon the anticipated
level of drilling activities in fiscal 1997, the company an-
ticipates that substantially all of its fiscal 1997 income
tax expense will be deferred.
Hedging
Periodically the company 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 the com-
pany pays the hedging partner and below which the com-
pany is paid by the hedging partner, the purchase of in-
dex-related puts that provide for a "floor" price to the
company to be paid by the counter-party to the extent
the price of the commodity is below the contracted floor,
and basis protection swaps. Recognized gains and losses
on hedge contracts are reported as a component of the
related transaction. Results from hedging transactions are
reflected in oil and gas sales to the extent related to the
company's oil and gas production.
As ofJune 30, 1996, the company had NYMF.X-based
MANAGEMENT'S DISCUSSION AND ANALYSIS