Chesapeake Energy 1993 Annual Report Download - page 27

CHESAPEAKE ENERGY CORPORATION AND SUBSIDIARIES
rotes to Consolidated Fmancial Statements
I BASIS OF PRPSFNTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Chesapeake Energy Corporation (the Company) a Delaware corporation was incorporated in
December 1991 for the purpose of combining (the Combination ) certain of the oil and gas exploration oil
and gas production and oil field service operations previously conducted by Chesapeake Operating Inc
( COl ) Chesapeake Exploration Company ( CEX) Lindsay Oil Field Supph Inc and subsidiaries of those
entities (collectively referred to as the Combined Entities ) along with certain office buildings interests in
oil and gas properties and related debt associated with these assets all of which were beneficially owned b
Aubrey K McClendon and Tom L Ward The Combination was effecti%e January 1 1992 and the Company
succeeded to all of the exploration and development operations and oil and gas assets of the Combined
Entities In addition on Ma) 1 1991 interests in certain oil and gas properties owned by Chesapeake
Investments ( CI ) which is sholly ovned b' Mr McClendon and his family and TLW Investments Inc
( TLW') which is wholl os ned b' Mr Ward were transferred (the Transfer ) to CEX CEX assumed
certain liabilities related to such properties The excess of historical net cost over the Cl and TLW current
payables relating to the assets transferred to CEX sas recorded as a contribution from owners in the
accompanying consolidated statements of stockholders' equity.
The Combination and Transfer were recorded on the basis of a reorganization of entities under common
control at historical cost in a manner similar to a pooling of intirests The accompaniing consolidated
financial statements give retroactie effect to the Combination and Transfer to reflect the historical results of
operations of the assets that were acquired and liabilities assumed by the Company The net income from the
interest in oil and gas properties prior to the Transfer is reflected in the accompanying consolidated
statements of operations with the offset reflected as capital withdrawals in the accompanying consolidated
statements of stockholders' equity.
Principles of Consolidation. The accompanying consolIdated financial statements inélude the
accounts of the Combined Entities as described above All significant intercompany accounts and transactions
have been eliminated. .:
Cash Equivalents. For purposes of the statements of cash flows, the Company considers investments.in.
all highly liquid debt Instruments purchased with original maturities of three months or less to be cash
equivalents. :'
Inventory. Inventory consists primarily of tubular goods and other lease and well equipment which the
Company plans to utilize in its ongoing exploration and development activities and is carried at the lower of
cost or market, on the specific identification method.
Property and Equipment. The Company follows the full cost method of accounting '(see Note 2) unde,r
which all costs, including direct general and administrative expenses associated with property acquisition,
exploration and 'development activities are capitalized and amortized on. a composite unit-of-production
method based on proed oil and gas reserves The Company s oil and gas reserves are estimated annually by
independent petroleum engineers The average composite rates used for depreciation depletion and
amortization were $097 $083 and $098 per equivalent Mcf in 1993 1992 and 1991 respectively Proceeds
from the sale of properties are accounted for as reductions to capitalized costs unless such sales involve a
significant change in the relationship between costs and the value of proved reserves or the underlying value
of unproved properties in which case a gain or loss is recognized Unamortized costs as reduced by related
deferred taxes are subject to a ceiling which limits such amounts to the estimated present value of oil and gas
reserves reduced by operating expenses, future development costs and income taxes The costs of unproved
properties are excluded from amortization until the properties are evaluated
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