Chesapeake Energy 1997 Annual Report Download - page 41

increase significantly in fiscal 1998 as compared to fiscal 1997 as aresult of the $300 million Senior Notes
issued in March 1997 and reduced levels of capitalized interest expected in fiscal 1998.
Provision (Benefit) for Income Taxes. The Company recorded an income tax benefit of $3.6 million for
fiscal 1997, before consideration of the $3.8 million tax benefit associated with the extraordinary loss from the
early extinguishment of debt, as compared to income tax expense of $12.9 million in 1996 and $6.3 million in
1995. All of the income tax expense in 1996 and 1995 was deferred due to tax net operating losses and
carryovers resulting from the Company's drilling program.
The Company's loss before income taxes and extraordinary item of $180.3 million created a tax benefit
for financial reporting purposes of $67.7 million. However, due to limitations on the recognition of deferred tax
assets, the total tax benefit was reduced to $3.6 million.
At June 30, 1997 the Company had a net operating loss carryforward of approximately $300 million for
regular federal income taxes which will expire in future years beginning in 2007. Management believes that it
cannot be demonstrated at this time that it is more likely than not that the deferred income tax assets,
comprised primarily of the net operating loss carryforward, will be. realizable in future years, and therefore a
valuation allowance of $64.1 million has been recorded in fiscal 1997. A deferred tax benefit related to the
exercise of employee stock options of approximately $4.8 million was allocated directly to additional paid-in
capital in 1997, compared to $7.9 million in 1996 and $1.2 million in fiscal 1995.
The Company does not expect to record any net income tax expense in fiscal 1998 based on information
available at this time.
Hedging. Periodically the Company utilizes hedging strategies to hedge the price of a portion of its future
oil and gas production. These strategies include (1) swap arrangements that establish an index-related price
above which the Company pays the counterparty and below which the Company is paid by the counterparty,
(2) the purchase of index-related puts that provide for a "floor" price below which the counterparty pays the
Company the amount by which the price of the commodity is below the contracted floor, (3) the sale of
index-related calls that provide for a "ceiling" price above which the Company pays the counterparty the
amount by which the price of the commodity is above the contracted ceiling, and (4) basis protection swaps.
Results from hedging transactions are reflected in oil and gas sales to the extent related to the Company's oil
and gas production. entered into hedging transactions unrelated to the Company's oil and gas production or
physical purchase or sale commitments.
As of June 30, 1997, the Company had the following oil swap arrangements for periods after June 1997:
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The Company entered into oil swap arrangements to cancel the effect of the swaps for the months of
August through December at an average price of $21.07 per Bbl.
Month Volume (Bbls)
NYMEX-tndex
Strike Price
(per Bbl)
July 1997 31,000 $ 18.60
August 1997 31,000 $ 18.43
September 1997 30,000 $ 18.30
October 1997 31,000 $ 18.19
November 1997 30,000 $ 18.13
December 1997 31,000 $ 18.08
January through June 1998 724,000 $ 19.82