Chesapeake Energy 1997 Annual Report Download - page 55

CHESAPEAKE ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
the contractual services provided. The Company's economic interest in its oil and gas properties is not affected
by the performance of these contractual services and all intercompany profits have been eliminated.
On June 30, 1996, Peak USA Energy Services, Ltd., a limited partnership ("Peak"), was formed by Peak
Oilfield Services Company (a joint venture between Cook Inlet Region, Inc. and Nabors Industries, Inc.) and
the Company for the purpose of purchasing the Company's oilfield service assets and providing rig moving,
transportation and related site construction services. The Company sold its service company assets to Peak for
$6.4 million, and simultaneously invested $2.5 million in exchange for a 33.3% partnership interest in Peak.
This transaction resulted in recognition of a $1.8 million pre-tax gain during the fourth fiscal quarter of 1996
reported in Interest and other. A deferred gain from the sale of service company assets of $0.9 million was
recorded as a reduction in the Company's investment in Peak and will be amortized to income over the
estimated useful lives of the Peak assets. The Company's investment in Peak is accounted for using the equity
method.
Income Taxes
The Company has adopted Statement of Financial Accounting Standards No. 109, Accounting for
Income Taxes ("SFAS 109"). SFAS 109 requires deferred tax liabilities or assets to be recognized for the
anticipated future tax effects of temporary differences that arise as a result of the differences in the carrying
amounts and the tax bases of assets and liabilities.
Net Income (Loss) Per Share
Primary and fully diluted earnings (loss) per share for all periods have been computed based upon the
weighted average number of shares of Common Stock outstanding after giving retroactive effect to all stock
splits and the issuance of common stock equivalents when their effect is dilutive. Dilutive options or warrants
which are issued during a period or which expire or are cancelled during a period are reflected in both primary
and fully diluted earnings per share computations for the time they were outstanding during the period being
reported upon.
In February 1997, the Financial Accounting Standards Board issued Statement of Financial Accounting
Standards No. 128, Earnings Per Share ("SFAS 128"). SFAS 128 requires presentation of "basic" and
"diluted" earnings per share, as defined, on the face of the statement of operations for all entities with complex
capital structures. SFAS 128 is effective for financial statements issued for periods ending after December 15,
1997 and requires restatement of all prior period earnings per share amounts. The Company does not believe
that SFAS 128 will have a material impact on its earnings per share when adopted.
Gas Imbalances Revenue Recognition
Revenues from the sale of oil and gas production are recognized when title passes, net of royalties. The
Company follows the "sales method" of accounting for its gas revenue whereby the Company recognizes sales
revenue on all gas sold to its purchasers, regardless of whether the sales are proportionate to the Company's
ownership in the property. A liability is recognized only to the extent that the Company has a net imbalance in
excess of the reserves on the underlying properties. The Company's net imbalance positions at June 30, 1997
and 1996 were not material.
Hedging
The Company periodically uses certain instruments to hedge its exposure to price fluctuations on oil and
natural gas transactions. Recognized gains and losses on hedge contracts are reported as a component of the
related transaction. Results for hedging transactions are reflected in oil and gas sales to the extent related to
the Company's oil and gas production (see Note 10).
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