Chesapeake Energy 1996 Annual Report Download - page 46

fA
CHESAPEAKE ENERCORPORATION
NOTE TO CONSOLIDATED FINANCIAL STATEMENTS
I. BASIS OF PRESENTATION AND
SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES
Principles of Consolidation
The accompanying consolidated financial statements
of Chesapeake Energy Corporation (the "company" or
"parent") include the accounts of Chesapeake Operat-
ing, Inc. ("COl"), Chesapeake Exploration Limited Part-
nership ("CEX"), a limited partnership, Chesapeake Gas
Development Corporation ("CGDC"), Chesapeake En-
ergy Marketing, Inc. ("CEMI"), Lindsay Oil Field Sup-
ply, Inc.("LOF"), Sander Trucking Company, Inc.
("STCO") and subsidiaries of those entities. All signifi-
cant intercompany accounts and transactions have been
eliminated.
In December 1995, the company entered into the gas
marketing business by acquiring all of the outstanding
stock of an Oklahoma City-based natural gas marketing
company for total consideration of $725,000. This sub-
sidiary was subsequently named Chesapeake Energy
Marketing, Inc. CEMI provides natural gas marketing
services including commodity price structuring, contract
administration and nomination services for the company,
its partners and other natural gas producers in the geo-
graphical areas in which the company is active.
Accounting Estimates
The preparation of financial statements in conformity
with generally accepted accounting principles requires
management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the dates
of the financial statements and the reported amounts of
revenues and expenses during the reporting periods. Ac-
tual results could differ from those estimates.
Cash Equivalents
For purposes of the consolidated financial statements,
the company considers investments in all highly liquid
debt instruments with maturities of three months or less
at date of purchase 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 ac-
tivities and is carried at the lower of cost or market using
the specific identification method.
Oil and Gas Properties
The company follows the full cost method of account-
ing under which all costs associated with property acqui-
sition, exploration and development activities are capi-
talized. 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 simi-
lar activities (see Note 11). Capitalized costs are amor-
tized 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 depre-
ciation, depletion and amortization were $0.85, $0.80
and $0.80 per equivalent Mcf in 1996, 1995, and 1994,
respectively. Proceeds from the sale of properties are ac-
counted for as reductions to capitalized costs unless such
sales involve a significant change in the relationship be-
tween costs and the value of proved reserves or the un-
derlying 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 un-
proved properties are excluded from amortization until
the properties are evaluated.
On April 30, 1996, the company purchased interests
in certain producing and non-producing oil and gas prop-
erties, including approximately 14,000 net acres of
unevaluated leasehold from Amerada Hess Corporation
for $35 million, subject to adjustment for activity after
the effective date of January 1, 1996. The properties are
located in the Knox and Golden Trend fields of southern
Oklahoma, most of which are operated by the company.
Other Property and Equipment
Other property and equipment primarily consists of
vehicles, office buildings and equipment, and software.
Major renewals and improvements are capitalized while
the costs of repairs and maintenance are charged to ex-
pense 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 equip-
ment costs are depreciated on both straight-line and ac-
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS