Chesapeake Energy 2012 Annual Report Download - page 38

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Our level of indebtedness may limit our financial flexibility.
As of December 31, 2012, we had long-term indebtedness of approximately $12.620 billion and unrestricted cash
of $287 million, and our net indebtedness represented 41% of our total book capitalization, which we define as the
sum of total equity and total current and long-term debt less unrestricted cash. We had $418 million of outstanding
borrowings drawn under our oilfield services revolving bank credit facility and no outstanding borrowings under our
corporate revolving bank credit facility as of December 31, 2012.
Our level of indebtedness affects our operations in several ways, including the following:
• a portion of our cash flows from operating activities must be used to service our indebtedness and is not
available for other purposes;
• we may be at a competitive disadvantage as compared to similar companies that have less debt;
• the covenants contained in the agreements governing our outstanding indebtedness and future indebtedness
may limit our ability to borrow additional funds, pay dividends and make certain investments and may also
affect our flexibility in planning for, and reacting to, changes in the economy and in our industry;
• the oilfield services revolving bank credit facility and the indenture governing the COO 6.625% Senior Notes
due 2019 restrict the payment of dividends or distributions to Chesapeake;
• additional financing in the future for working capital, capital expenditures, acquisitions, general corporate or
other purposes may have higher costs and more restrictive covenants; and
• a lowering of the credit ratings of our debt may negatively affect the cost, terms, conditions and availability
of future financing, and lower ratings will increase the interest rate we pay on our corporate revolving bank
credit facility.
The borrowing base of our corporate revolving bank credit facility is subject to periodic redetermination and is
based in part on natural gas and oil prices. A lowering of our borrowing base because of lower natural gas and oil
prices or for other reasons could require us to repay indebtedness in excess of the borrowing base, or we might need
to further secure the lenders with additional collateral. We may incur additional debt, including secured indebtedness,
in order to develop our properties and make future acquisitions. A higher level of indebtedness increases the risk that
we may default on our obligations. Our ability to meet our debt obligations and to reduce our level of indebtedness
depends on our future performance. General economic conditions, natural gas, oil and NGL prices and financial,
business and other factors affect our operations and our future performance and many of these factors are beyond
our control. Factors that will affect our ability to raise cash through an offering of our capital stock or a refinancing of
our debt include financial market conditions, the value of our assets and our performance at the time we need capital.
In addition, our failure to comply with the financial and other restrictive covenants relating to our indebtedness could
result in a default under that indebtedness. We would have been unable to meet the leverage ratio maintenance
covenant of our corporate revolving bank credit agreement at September 30, 2012 and had to obtain an amendment
of that covenant to remain in compliance. Our lenders may not agree to an amendment or waiver of any other potential
future covenant default. A default under the corporate revolving bank credit facility could result in acceleration of such
indebtedness and lead to cross defaults under our other indebtedness. In this circumstance, our ability to refinance
indebtedness may be limited.
We anticipate completing asset sales in 2013 and intend to apply a portion of the proceeds from such sales to
reduce our overall level of indebtedness. If we are unable to consummate such sales or if they do not generate the
proceeds we are anticipating, we would be required to reduce our capital spending, or seek to identify, pursue and
obtain funds from other sales transactions or other sources in order to meet our operating, capital spending and debt
reduction plans.
Declines in the prices of natural gas and oil could result in a write-down of our asset carrying values.
We utilize the full cost method of accounting for costs related to our natural gas and oil properties. Under this
method, all such costs (for both productive and nonproductive properties) are capitalized and amortized on an aggregate
basis over the estimated lives of the properties using the unit-of-production method. However, these capitalized costs
are subject to a ceiling test which limits such pooled costs to the aggregate of the present value of future net revenues
attributable to proved natural gas, oil and NGL reserves discounted at 10% plus the lower of cost or market value of
unproved properties. The full cost ceiling is evaluated at the end of each quarter using the unweighted arithmetic
average of the prices on the first day of each month within the 12-month period ending in the quarter, adjusted for the