Chesapeake Energy 1998 Annual Report Download - page 66

Oil and Gas Properties
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 11). Capitalized costs are amortized
on a composite unit-of-production method based on proved oil and gas reserves. As of December 31, 1998,
approximately 76% of the Company's proved reserve value (based on SEC PV1 0%) was evaluated by independent
petroleum engineers, with the balance evaluated by the Company's engineers. In addition, the company's engineers
evaluate all properties quarterly. The average composite rates used for depreciation, depletion and amortization
were $1.13 ($1.17 in U.S. and $0.43 in Canada) per equivalent Mcf in 1998, $1.57 per equivalent Mcf in the
Transition Period and $1.31 and $0.85 per equivalent Mcf in fiscal 1997 and 1996, 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. The costs of unproved properties are excluded from
amortization until the properties are evaluated. The Company reviews all of its unevaluated properties quarterly to
determine whether or not and to what extent proved reserves have been assigned to the properties, and otherwise if
impairment has occurred. Unevaluated properties are grouped by major producing area where individual property
costs are not significant, and assessed individually when individual costs are significant.
The Company reviews the carrying value of its oil and gas properties under the full-cost accounting rules of the
Securities and Exchange Commission on a quarterly basis. Under these rules, capitalized costs, less accumulated
amortization and related deferred income taxes, shall not exceed an amount equal to the sum of the present value of
estimated future net revenues less estimated future expenditures to be incurred in developing and producing the
proved reserves, less any related income tax effects. During 1998, capitalized costs of oil and gas properties
exceeded the estimated present value of future net revenues from the Company's proved reserves, net of related
income tax considerations, resulting in writedowns in the carrying value of oil and gas properties of $826 million
During the Transition Period, capitalized costs of oil and gas properties exceeded the estimated present value of
future net revenues from the Company's proved reserves, net of related income tax considerations, resulting in a
writedown in the carrying value of oil and gas properties of $110 million During fiscal 1997, capitalized costs of
oil and gas properties exceeded the estimated present value of future net revenues from the Company's proved
reserves, net of related income tax considerations, resulting in a writedown in the carrying value of oil and gas
properties of $236 million
Other Property and Equipment
Other property and equipment consists primarily of gas gathering and processing facilities, vehicles, land, 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.
Buildings are depreciated on a straight-line basis over 31.5 years. All other property and equipment are depreciated
over the estimated useful lives of the assets, which range from five to seven years.
Capitalized Interest
During 1998, the Transition Period and fiscal 1997 and 1996, interest of approximately $6.5 million, $5.1
million, $12.9 million and $6 4 million was capitalized on significant investments in unproved properties that were
not being currently depreciated, depleted, or amortized and on which exploration activities were in progress.
46