Chesapeake Energy 1994 Annual Report Download - page 32

NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
NOTE 1. BASIS OF PRESENTATION 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 oii field service operations previously
conducted by Chesapeake Operating, Inc. ("COI"),
Chesapeake Exploration Company ("CEX"), a general
partnership, Lindsay Oil Field Supply, 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 by Aubrey K.
McClendon and Tom L. Ward. The Combination was
effective 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 May 1,
1991, interests in certain oil and gas properties owned by
Chesapeake Investments ("CI"), which is wholly owned by
Mr. McClendon and his family, and TLW Investments,
Inc. ("TLW"), which is wholly owned by Mr. Ward, were
transferred (the "Transfer") to CEX. CEX assumed certain
liabilities related to such properties. The excess of historical
net cost over the amounts then owed by CI and TLW
relating to the assets transferred to CEX was 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
interests. The accompanying consolidated financial
statements give retroactive 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 interests in oil and gas
roperties 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 include the accounts of
the Combined Entities as described above. All significant
intercompany accounts and transactions have been
eliminated.
CASH EQUIVALENTS For purposes of the consolidated
financial statements, 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 in its service operations 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 under which all costs associated
with property acquisition, exploration and development
activities are capitalized. The company capitalizes internal
costs that can be directly identified with its acquisition,
exploration and development activities and do not include
any costs related to production, general corporate overhead
or similar activities (see Note 10). Capitalized costs are
amortized on a composite unit-of-production method
based on proved 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 $0.80,
$0.97 and $0.83 per equivalent Mcf in 1994, 1993 and
1992, 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.
OTHER PROPERTY AND EQUIPMENT Other property and
equipment primarily consists of vehicles, oil and gas
servicing equipment, office buildings and equipment, and
software. Major renewals and betterments are capitalized
while the costs of repairs and maintenance are charged to
expense as incurred. The costs of assets retired or otherwise
disposed of and the applicable accumulated depreciation
are removed from the accounts, and the resulting gain or
loss is reflected in operations. Other property and
equipment costs are depreciated on both straight-line and
30 CHESAPEAKE ENERGY CORPORATION