Chesapeake Energy 2000 Annual Report Download - page 79

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In addition to commodity hedging transactions related to our oil and gas production, our marketing subsidiary,
CEMI, periodically enters into various hedging transactions designed to hedge against physical purchase and sale
commitments it makes. Gains or losses on these transactions are recorded as adjustments to oil and gas marketing
sales in the consolidated statements of operations and are not considered by management to be material.
Interest Rate Risk
Chesapeake also utilizes hedging strategies to manage fixed-interest rate exposure. Through the use of a swap
arrangement, we reduced our interest expense by $2.6 million from May 1998 through December 2000. During
2000, our interest rate swap resulted in a $38,000 increase in interest expense. The terms of the swap agreement are
as follows:
Months Notional Amount
May 1998 April 2001 $230,000,000
May 2001 April 2008 $230,000,000
Fixed Rate Floating Rate
7% Average of three-month Swiss Franc LIBOR,
Deutsche Mark and Australian Dollar plus
300 basis points
7% U.S. three-month LIBOR plus 300 basis
points
If the floating rate is less than the fixed rate, the counterparty will pay us accordingly. If the floating rate
exceeds the fixed rate, we will pay the counterparty. The interest rate swap agreement contains a "knockout
provision" whereby the agreement will terminate on or after May 1, 2001 if the average closing price for the previous
twenty business days for shares of Chesapeake's common stock is greater than or equal to $7.50 per share. The
agreement also provides for a maximum floating rate of 8.5% from May 2001 through April 2008.
Based on current market prices for Chesapeake common stock, we expect the interest rate swap agreement will
terminate in May 2001 under the knockout provision of the agreement discussed above. The fair value of the swap
arrangement at December 31, 2000 was not material. Results from interest rate hedging transactions are reflected as
adjustments to interest expense in the corresponding months covered by the swap agreement.
Concentration of Credit Risk
Other financial instruments which potentially subject us to concentrations of credit risk consist principally of
cash, short-term investments in debt instruments and trade receivables. Our accounts receivable are primarily from
purchasers of oil and natural gas products and exploration and production companies which own interests in
-68-
Volume
NYMEX
Index
Strike Price
Capped
Low
Strike Price
Months (MMbtu) (per MMbtu) (per MMbtu)
May 2001 1,860,000 5.77 4.60
June 2001 1,800,000 5.81 4.64
July 2001 1,860,000 5.85 4.68
August 2001 1,860,000 5.87 4.70
September 2001 1,800,000 5.83 4.66
October 2001 1,860,000 5.83 4.66
November 2001 2,400,000 6.00 4.78
December 2001 2,480,000 6.10 4.88
January 2002 2,790,000 6.03 4.83
February 2002 2,520,000 5.82 4.62
March 2002 2,790,000 5.48 4.28
April 2002 5,700,000 4.85 3.85
May 2002 5,890,000 4.81 3.81
June 2002 5,700,000 4.80 3.80
July 2002 5,890,000 4.81 3.81
August 2002 5,890,000 4.81 3.81
September 2002 5,700,000 4.81 3.81
October 2002 5,890,000 4.80 3.80
November 2002 2,100,000 4.97 3.97
December 2002 2,170,000 5.06 4.06