Chesapeake Energy 1995 Annual Report Download - page 36

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION AND SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLI DATION The accompanying consolidated
financial statements of Chesapeake Energy Corporation (the
"Company") include the accounts of Chesapeake Operating,
Inc. ("COl"), Chesapeake Exploration Limited Partnership
("CEX"), alimited partnership, Chesapeake Gas
Development Corporation ("CGDC"), Lindsay Oil Field
Supply, Inc., Sander Trucking Company, Inc. and subsidiaries
of those entities. 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 does 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 $80, $80 and $.97 per equivalent Mcf in
1995, 1994, and 1993, 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 accelerated methods
over the estimated useful lives of the assets, which range from
three to 30 years.
LEASES The Company leases certain office facilities under an
operating lease expiring in August 1, 1996. Included in
service properties, equipment and other in the consolidated
balance sheets is computer equipment, software, and certain
other office equipment held under capital leases. Minimum
lease payments tinder these operating and capital leases are as
follows:
CAPITALIZED INTEREST During fiscal 1995, 1994 and 1993,
interest of approximately $1,574,000, $356,000 and
$192,000 was capitalized on significant investments in
unproved properties that are not being currently depreciated,
depleted, or amortized and on which exploration or
development activities are in progress.
CAPITAL LEASES OPERATING LEASES
1$ IN THOUSANDS)
1996 $ 77 $61
1997 68
1998 62
1999 15
2000
Total minimum
lease payments $222 $ 61
Less: amount
relating to interest 41
Present value of
minimum payments $181
34 CHESAPEAKE ENERGY CORPORATION