Chesapeake Energy 1998 Annual Report Download - page 51

Depreciation and Amortization of Other Assets. D&A of other assets increased to $3 8 million in fiscal 1997,
compared to $3.2 million in fiscal 1996. This increase in fiscal 1997 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 senior notes in May 1995, April 1996 and March 1997.
General and Administrative. G&A expenses, which are net of capitalized internal payroll and non-payroll
expenses (see Note 11 of Notes to Consolidated Financial Statements), were $8.8 million in fiscal 1997, up 83%
from $4.8 million in fiscal 1996. The increase in fiscal 1997 compared to fiscal 1996 is due primarily to increased
personnel expenses required by the Company's growth and industiy wage inflation. The Company capitalized $3.9
million of internal costs in fiscal 1997 directly related to the Company's oil and gas exploration and development
efforts, compared to $1 7 million in 1996.
Interest and Other Income. Interest and other income for fiscal 1997 was $11.2 million compared to $3.8
million in fiscal 1996. During fiscal 1997, the Company realized $8.7 million in interest, $1 6 million of other
investment income, $0.5 million from its investment in Peak, and $0.4 million in other income. During fiscal 1996,
the Company realized $3 7 million of interest and other investment income and a $1 8 million gain related to the
sale of certain service company assets, offset by a $1.7 million loss due to natural gas basis changes in April 1996 as
a result of the Company's hedging activities.
Interest Expense. Interest expense increased to $18.6 million in fiscal 1997 as compared to $13.7 million in
1996. Interest expense in the fourth quarter of fiscal 1997 was $8 7 million, reflecting the issuance of $300 million
of senior notes in March 1997. In addition to the interest expense reported, the Company capitalized $12 9 million
of interest during fiscal 1997, compared to $6.4 million capitalized in fiscal 1996.
-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, compared to income tax expense of $12.9 million in 1996. All of the income tax expense in
1996 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
fmancial 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 believed that it could not be
demonstrated at that time that it was more likely than not that the deferred income tax assets, comprised primarily of
the net operating loss carryforward, would be realizable in future years, and therefore a valuation allowance of
$64.1 million was 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.
Liquidity and Capital Resources
For the Years Ended December 31, 1998 and 1997
Cash Flows from Operating Activities. Cash provided by operating activities (inclusive of changes in working
capital) decreased to $94.6 million in the Current Year, compared to $181 3 million in the Prior Year. This decrease
of $86 7 million was due primarily to reduced operating income resulting from significant decreases in average oil
and gas prices between periods, as well as significant increases in G&A expenses and interest expense.
Cash Flows from Investing Activities. Cash used in investing activities increased to $548.1 million in the
Current Year, compared to $476.2 million in the Prior Year. This increase was due primarily to the $279.9 million
31