Chesapeake Energy 1996 Annual Report Download - page 38

rures contain certain covenants, including covenants lim-
iting the company and the guaranteeing subsidiaries with
respect to asset sales, restricted payments, the incurrence
of additional indebtedness and the issuance of preferred
stock, liens, sale and leaseback transactions, lines of busi-
ness, dividend and other payment restrictions affecting
guaranteeing subsidiaries, mergers or consolidations, and
transactions with affiliates. The company is obligated to
repurchase the Senior Notes in the event of a change of
control, the sale of certain assets or failure to maintain a
specified ratio of assets to debt.
Financial Flexibility and Liquidity
The company had working capital of approximately
$0.3 million at June 30, 1996. Additionally, the com-
pany has unused revolving credit facility commitments
that have been increased to $75 million. The total facil-
ity size has been set at $125 million, subject to certain
borrowing base and Senior Note Indentures limitations.
This facility provides for interest at the Union Bank ref-
erence rate (8.25% at June 30, 1996), or at the option of
the company the Eurodollar rate pius 1.375% to 1.875%,
depending on the ratio of the amount outstanding to the
borrowing base. Although the Senior Note Indentures
contain various restrictions on additional indebtedness,
based on asset values as of June 30, 1996 the company
estimates it could borrow up to $106 million within these
restrictions.
The company also maintains a limited recourse bank
facility with an amount outstanding of$ 12.9 million as
of June 30, 1996 secured by producing oil and gas prop-
erties owned by the company's wholly-owned subsidiary
CGDC. This facility provides for interest at the Union
Bank reference rate (8.25% at June 30, 1996). The facil-
ity has not been guaranteed by the company or any of its
other subsidiaries and is recourse only to the assets of
CGDC. CGDC used proceeds borrowed under this fa-
cility to acquire producing oil and gas properties from
Chesapeake Exploration Limited Partnership. The terms
of the facility prohibit the payment of dividends by
CGDC.
Debt ratings for the Senior Notes are Ba3 by Moody's
Investors Service and B+ by Standard & Poors Corpora-
tion. Both Moody's and S&P upgraded their ratings dur-
ing the year. The company's long-term debt represented
60% of total capital at June 30, 1996. The company's
goal is to over time achieve an investment grade senior
CHESAPEAKE ENERGY CORPORATION
debt rating.
Operating Cash Flows
Cash provided by operating activities was $121 mil-
lion in fiscal 1996, as compared to $54.7 million in 1995,
and $19.4 million in 1994. Operating cash flows for 1996
include enhanced earnings primarily as a result of in-
creased oil and gas production. Other major factors af-
fecting cash flows for 1996, 1995 and 1994 were increases
in non-cash charges and cash flows provided by changes
in the components of assets and liabilities. Cash provided
by operating activities is expected to be the primary source
for meeting forecasted cash requirements in 1997.
Investing Cash Flows
Significantly higher cash was used in fiscal 1996 for
development, exploration and acquisition of oil and gas
properties as compared to fiscal 1995 and 1994. Approxi-
mately $336 million was expended by the company in
1996 (net of proceeds from sales of leasehold and equip-
ment, and from providing certain oilfield services), as
compared to $106 million in 1995, an increase of $230
million, or approximately 216%. In fiscal 1994, the com-
pany expended $27 million (net of proceeds from sale of
leasehold, equipment and other) for development and
exploration activities. Net cash proceeds received by the
company for sales of oil and gas equipment, leasehold
and other services decreased to approximately $11 mil-
lion in fiscal 1996 as compared to $15 million in 1995.
In fiscal 1996, other property and equipment additions
were $8.8 million, primarily as a result of the purchase of
additional office buildings in the company's headquar-
ters complex in Oklahoma City.
The company's capital spending is largely discretion-
ary. The company has established a fiscal 1997 capital
expenditure budget of approximately $300 million, of
which $80 million is budgeted to fund drilling and
completion requirements for the development of a por-
tion of its proved undeveloped reserves during fiscal 1997.
The company expects to spend approximately $155 mil-
lion for drilling and completion of non-proved reserves,
$10 million for seismic programs and $55 million for
acreage acquisition and other corporate purposes. Ab-
sent a significant increase in the company's drilling sched-
ule, the company's internally generated cash flow, exist-
ing cash resources and credit facilities should be suffi-
cient to fund its operating activities, budgeted capital ex-
penditures, and its debt service obligations in fiscal 1997.
MANAGEMENT'S DISCUSSION AND ANALYSIS