Chesapeake Energy 1997 Annual Report Download - page 40

reserves. Similar factors combined with unfavorable drilling and production results eliminated approximately
93 Bcfe of proved reserves in the Giddings, and Louisiana Trend areas.
In the Independence area of the Giddings Field of Texas, a single well completed in late March 1997
which the Company had estimated to contain 15.7 Bcfe of Company reserves at March 31, 1997, was
significantly and adversely affected by another operator's offset well which damaged the reservoir and reduced
the Company's estimated ultimate recovery to 8.0 Bcfe of reserves.
In late June 1997, management reviewed its March 31, 1997 internal estimates of proved reserves and
related estimated discounted future net revenues from its proved reserves, and giving effect to fourth quarter
1997 drilling and production results, oil and gas prices, higher drilling and completion costs, and additional
leasehold acquisition costs and delay rentals incurred in areas subsequently determined to have less reserve
potential than had previously been estimated. After considering all of these factors, management estimated
that at June 30, 1997 it would have capitalized costs of oil and gas properties which would exceed its full cost
ceiling by approximately $150 million to $200 million and on June 27, 1997, issued a press release which
included this estimate. Subsequently, based on the Company's final year-end estimates of its proved reserves
and related estimated future net revenues, which took into account additional drilling and production results,
management determined that as of June 30, 1997, its capitalized costs exceeded its full cost ceiling by
approximately $236 million.
No such writedown was experienced by the Company in fiscal 1996 or fiscal 1995.
Oil and Gas Depreciation, Depletion and Amortization. Depreciation, depletion and amortization
("DD&A") of oil and gas properties for fiscal 1997 was $103.3 million, $52.4 million higher than fiscal 1996's
expense of $50.9 million, and $77.9 million higher than fiscal 1995's expense of $25.4 million. The expense in
fiscal 1997 excluded the effects of the asset writedown. The average DD&A rate per Mcfe, which is a function
of capitalized costs, future development costs, and the related underlying reserves in the periods presented,
increased to $1.31 in fiscal 1997 compared to $0.85 in fiscal 1996 and $0.80 in fiscal 1995. The Company's
DD&A rate in the future will be a function of the results of future acquisition, exploration, development and
production results, but the Company's rate is expected to trend upward in fiscal 1998 based on projected
higher finding costs for the Louisiana Trend and higher drilling, completing, and equipping expenses
throughout the oil and gas industry.
Depreciation and Amortization of Other Assets. Depreciation and amortization ("D&A") of other assets
increased to $3.8 million in fiscal 1997, compared to $3.2 million in fiscal 1996, and $1.8 million in fiscal 1995.
This increase in fiscal 1997 was caused by an increase in D&A as a result of increased investments in
depreciable buildings and equipment, and increased amortization of debt issuance costs as a result of the
issuance of Senior Notes in May 1995, April 1996 and March 1997. The Company anticipates an increase in
D&A in fiscal 1998 as a result of a full year of debt issuance cost amortization on the Senior Notes issued in
March 1997 and higher building depreciation expense on the Company's corporate offices.
General and Administrative. General and administrative ("G&A") expenses, which are net of capital-
ized internal payroll and non-payroll expenses (see Note 11 of Notes to Consolidated Financial Statements),
were $8.8 million in fiscal 1997, up 83% from $4.8 million in fiscal 1996, and up from $3.6 million in fiscal
1995. The increases in fiscal 1997 as compared to fiscal 1996 and 1995 result primarily from increased
personnel expenses required by the Company's growth and industry wage inflation. The Company capitalized
$3.9 million of internal costs in fiscal 1997 directly related to the Company's oil and gas exploration and
development efforts, as compared to $1.7 million in 1996 and $0.6 million in 1995. The Company anticipates
that G&A costs for fiscal 1998 will continue to increase as the result of wage inflation in the oil and gas
industry and legal fees associated with the UPRC and shareholder litigation.
Interest and Other. Interest and other expense increased to $18.6 million in fiscal 1997 as compared to
$13.7 million in 1996 and $6.6 million in fiscal 1995. Interest expense in the fourth quarter of fiscal 1997 was
$8.7 million, reflecting the issuance of the 7.875% Senior Notes and the 8.5% Senior Notes in March 1997. In
addition to the interest expense reported, the Company capitalized $12.9 million of interest during fiscal 1997,
as compared to $6.4 million capitalized in fiscal 1996 and $1.6 million in fiscal 1995. Interest expense will
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