Chesapeake Energy 1996 Annual Report Download - page 47

celerated methods over the estimated useful lives of the
assets, which range from three to 30 years.
Leases
Included in other property and equipment in the con-
solidated balance sheets is computer equipment and soft-
ware held under capital leases. Minimum lease payments
under these capital leases and other operating leases are
as follows:
Capitalized Interest
During fiscal 1996, 1995 and 1994, interest of ap-
proximately $6,428,000, $1,574,000 and $356,000 was
capitalized on significant investments in unproved prop-
erties that are not being currently depreciated, depleted,
or amortized and on which exploration or development
activities are in progress.
Service Operations
Certain subsidiaries of the company performed con-
tractual services on wells the company operates as well as
for third parties until June 30, 1996. Oil and gas service
operations revenues and costs and expenses reflected in
the accompanying consolidated statements of income
include amounts derived from certain of the contractual
services provided. The company's economic interest in
its oil and gas properties is not affected by the perfor-
mance of these contractual services and all intercompany
profits have been eliminated.
On June 30, 1996, Peak USA Energy Services, Ltd., a
limited partnership ("Peak"), was formed by Peak Oilfield
Services Company (a joint venture between Cook Inlet
Region, Inc. and Nabors Industries, Inc.) and Chesapeake
for the purpose of purchasing the company's oilfield ser-
vice assets and providing rig moving, transportation and
related site construction services to the company and the
industry. The company sold its service company assets to
Peak for $6.4 million, and simultaneously invested $2.5
million in exchange for a 33.3% partnership interest in
Peak. This transaction resulted in recognition of a $1.8
million pre-tax gain during the fourth fiscal quarter of
1996 reported in Interest and other. A deferred gain from
the sale of service company assets of $0.9 million was
recorded as a reduction in the company's investment in
Peak and will be amortized to income over the estimated
useful lives of the Peak assets. The company's investment
in Peak will be accounted for using the equity method.
Income Taxes
The company has adopted Statement of Financial
Accounting Standards No. 109, "Accounting for Income
Taxes" ("SFAS 109"). SFAS 109 requires deferred tax li-
abilities or assets to be recognized for the anticipated fu-
ture tax effects of temporary differences that arise as a
result of the differences in the carrying amounts and the
tax bases of assets and liabilities.
Net Income Per Share
Primary and fully diluted earnings per share for all
periods have been computed based upon the weighted
average number of shares of Common Stock outstand-
ing after giving retroactive effect to all stock splits and
the issuance of common stock equivalents when their
effect is dilutive. Dilutive options or warrants which are
issued during a period or which expire or are cancelled
during a period are reflected in both primary and fully
diluted earnings per share computations for the time they
were outstanding during the period being reported upon.
Gas Imbalances
The company follows the "sales method" of account-
ing for its oil and gas revenue whereby the company rec-
ognizes sales revenue on all oil or gas sold to its purchas-
ers, regardless of whether the sales are proportionate to
the company's ownership in the property. A liability is
recognized only to the extent that the company has a net
imbalance in excess of the reserves on the underlying prop-
erties. The company's net imbalance positions at June
30, 1996 and 1995 were not material.
Hedging
The company periodically uses certain instruments to
hedge its exposure to price fluctuations on oil and natu-
ral gas transactions. Recognized gains and losses on hedge
contracts are reported as a component of the related trans-
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Capital
Leases
Operating
Leases
($ in thousands)
1997 $ 62 $133
1998 62 58
1999 15 53
2000 0 0
2001 00
Total minimum lease payments 139 $244
Less: amount relating to interest (20)
Present value of
minimum payments $119
CHESAPEAKE EN OR P0 RATION