Chesapeake Energy 2000 Annual Report Download - page 101

directly identifiable general and administrative costs associated with such activities. Such costs do not include any
costs related to production, general corporate overhead, or similar activities.
Gothic's natural gas and oil reserves are estimated annually by independent petroleum engineers. Gothic's
calculation of depreciation, depletion and amortization ("DD&A") includes estimated future expenditures to be
incurred in developing proved reserves and estimated dismantlement and abandonment costs, net of salvage values.
The average composite rate used for DD&A of natural gas and oil properties was $0.91, $0.77 and $0.81 per mcfe in
1998, 1999 and 2000, respectively. DD&A of natural gas and oil properties amounted to $23.6 million, $20.4 million
and $21.9 million in 1998, 1999 and 2000, respectively.
In the event the unamortized cost of natural gas and oil properties being amortized exceeds the full-cost ceiling
as defined by the SEC, the excess is charged to expense in the period during which such excess occurs. The full-cost
ceiling is based principally on the estimated future discounted net cash flows from Gothic's natural gas and oil
properties. Gothic recorded a $76.0 million provision for impairment of natural gas and oil properties during the year
ended December 31, 1998. No such provision was recorded in 1999 or 2000. As discussed in Note 11, estimates of
natural gas and oil reserves are imprecise. Changes in the estimates or declines in natural gas and oil prices could
cause Gothic in the near-term to reduce the carrying value of its natural gas and oil properties.
Sales and abandonments of properties are accounted for as adjustments of capitalized costs with no gain or loss
recognized unless a significant amount ofreserves is involved. Since all of Gothic's natural gas and oil properties are
located in the United States, a single cost center is used.
Equipment, Furniture and Fixtures
Equipment, furniture and fixtures are stated at cost and are depreciated on the straight-line method over their
estimated useful lives which range from three to seven years.
Debt Issuance Costs
Debt issuance costs, including the original issue discount associated with Gothic's 111/8% Senior Secured Notes
Due 2005 and Gothic Energy's 14'/8% Senior Secured Discount Notes Due 2006, are amortized and included in
interest expense using the effective interest method over the term of the notes. The unamortized portion of debt
issuance costs associated with Gothic's credit facility is also included in other assets and amortized and included in
interest expense using the straight-line method over the term of the facility. Amortization of debt issuance costs for
the years ended December 31, 1998, 1999 and 2000 amounted to $2.0 million, $1.8 million and $1.8 million,
respectively. Unamortized debt issue costs at December 31, 1999 and 2000 were $9.9 million and $7.4 million,
respectively.
Natural Gas and Oil Sales and Natural Gas Balancing
Gothic uses the sales method for recording natural gas sales. Gothic's oil and condensate production is sold, the
title passes, and revenue is recognized at or near its wells under short-term purchase contracts at prevailing prices in
accordance with arrangements which are customary in the oil industry. Sales of gas applicable to Gothic's interest in
producing natural gas and oil leases are recorded as revenues when the gas is metered and title transferred pursuant
to the gas sales contracts covering its interest in gas reserves. During such times as Gothic's sales of gas exceed its
pro rata ownership in a well, such sales are recorded as revenues unless total sales from the well have exceeded
Gothic's share of estimated total gas reserves underlying the property at which time such excess is recorded as a gas
imbalance liability. At December 31, 1999, total sales exceeded Gothic's share of estimated total gas reserves on
32 wells by $2.8 million (1,449 mmcf), based on historical settlement prices. At December 31, 2000, total sales
exceeded Gothic's share of estimated total gas reserves on 27 wells by $2.2 million (1,233 mmcf). The gas
imbalance liability has been classified in the balance sheet as non-current, as Gothic does not expect to settle the
liability during the next twelve months.
Gothic has recorded deferred charges for estimated lease operating expenses incurred in connection with its
underproduced gas imbalance position. Cumulative total gas sales volumes for underproduced wells were less than
Gothic's pro-rata share of total gas production from these wells by 4,435 mmcf and 4,122 mmcf for 1999 and 2000,
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