Chesapeake Energy 2000 Annual Report Download - page 40

Impairment of Oil and Gas Properties. We use the full-cost method to account for our investment in oil
and gas properties. Under this method, all costs of acquisition, exploration and development of oil and gas
reserves (including such costs as leasehold acquisition costs, geological and geophysical expenditures, certain
capitalized internal costs, dry hole costs and tangible and intangible development costs) are capitalized as
incurred. These oil and gas property costs, along with the estimated future capital expenditures to develop
proved undeveloped reserves, are depleted and charged to operations using the unit-of-production method
based on the ratio of current production to proved oil and gas reserves as estimated by our independent
engineering consultants and our internal reservoir engineers. Costs directly associated with the acquisition and
evaluation of unproved properties are excluded from the amortization computation until it is determined
whether or not proved reserves can be assigned to the property or whether impairment has occurred. The
excess of capitalized costs of oil and gas properties, net of accumulated depreciation, depletion and
amortization and related deferred income taxes, over the discounted future net revenues of proved oil and gas
properties is charged to operations.
We incurred an impairment of oil and gas properties charge of $826 million in 1998. No such charge was
incurred in 2000 or 1999. The 1998 writedown was caused primarily by the significant decreases in oil andgas
prices throughout 1998. Oil and gas prices used to value our proved reserves decreased from $17.62 per bbl of
oil and $2.29 per mcf of gas at December 31, 1997, to $10.48 per bbl of oil and $1.68 per mcf of gas at
December 31, 1998. Higher drilling and completion costs and the evaluation of certain leasehold, seismic and
other exploration-related costs that were previously unevaluated were additional factors which contributed to
the writedown in 1998.
Impairment of Other Assets. Chesapeake incurred a $55 million other asset impairment charge during
1998. Of this amount, $30 million related to our investment in preferred stock of Gothic Energy Corporation
and the remainder was related to certain of our gas processing and transportation assets located in Louisiana.
No such charge was recorded in 2000 or 1999.
Interest and Other Income. Interest and other income was $3.6 million, $8.6 million and $3.9 million in
2000, 1999 and 1998, respectively. The increase in 1999 was due primarily to gains on sales of various non-oil
and gas assets during 1999 which did not occur in 2000 and 1998.
Interest Expense. Interest expense increased to $86.3 million in 2000, compared to $81.1 million in 1999
and $68.2 million in 1998. The increase in 2000 is due to additional borrowings under our bank credit facility.
The increase in 1999 compared to 1998 is due primarily to a full year of interest on our $500 million senior
notes issued in April 1998. In addition to the interest expense reported, we capitalized $2.4 million of interest
during 2000, compared to $3.5 million capitalized in 1999, and $6.5 million capitalized in 1998. We anticipate
that capitalized interest for 2001 will be between $2.0 million and $3.0 million.
Provision (Benefit) for Income Taxes. Chesapeake recorded an income tax benefit of $259.4 million in
2000 compared to income tax expense of $1.8 million in 1999 and none in 1998. The income tax benefit was
comprised of $5.6 million of income tax expense related to our Canadian operations and the reversal of a $265
million deferred tax valuation allowance which was established in prior years. The valuation allowance had
been established due to uncertainty surrounding our ability to utilize extensive regular tax NOLs prior to their
expiration. Based upon our recent results of operations, the improved outlook for the natural gas industry and
our projected results of future operations, we believe it is more likely than not that Chesapeake will be able to
generate sufficient future taxable income to utilize our existing NOLs prior to their expiration. Consequently,
management has determined that a valuation allowance is no longer required. The income tax expense
recorded in 1999 is related entirely to our Canadian operations.
Liquidity and Capital Resources
Years Ended December 31, 1998, 1999 and 2000
Cash Flows from Operating Activities. Cash provided by operating activities (inclusive of changes in
working capital) was $314.6 million in 2000, compared to $145.0 million in 1999 and $94.6 million in 1998.
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