Chesapeake Energy 2010 Annual Report Download - page 125

CHESAPEAKE ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
Accounts receivable consists of the following components:
December 31,
2010 2009
($ in millions)
Natural gas and oil sales ................................................. $ 821 $ 743
Joint interest ........................................................... 977 394
Service operations ...................................................... 10 7
Related parties(a) ....................................................... 30 15
Other ................................................................. 154 190
Allowance for doubtful accounts ........................................... (18) (24)
Total accounts receivable .......................................... $ 1,974 $ 1,325
(a) See Note 6 for discussion of related party transactions.
Natural Gas and Oil Properties
Chesapeake follows the full-cost method of accounting under which all costs associated with property
acquisition, exploration and development activities are capitalized. We capitalize internal costs that can be
directly identified with our acquisition, exploration and development activities and do 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 natural gas and oil reserves. Estimates
of our proved reserves as of December 31, 2010 were prepared by both third-party engineering firms and
Chesapeake’s internal staff. Approximately 78% of these proved reserves estimates (by volume) at
December 31, 2010 were prepared by independent engineering firms. In addition, our internal engineers review
and update our reserves on a quarterly basis. The average composite rates used for depreciation, depletion
and amortization of natural gas and oil properties were $1.35 per mcfe in 2010, $1.51 per mcfe in 2009 and
$2.34 per mcfe in 2008.
Proceeds from the sale of properties are accounted for as reductions of capitalized costs unless such
sales involve a significant change in proved reserves and significantly alter the relationship between costs and
the value of proved reserves, in which case a gain or loss is recognized.
The costs of unproved properties are excluded from amortization until the properties are evaluated. We
review all of our 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 prospect area where individual property costs are not significant and are
assessed individually when individual costs are significant.
We review the carrying value of our natural gas and oil properties under the full-cost accounting rules of
the Securities and Exchange Commission on a quarterly basis. This quarterly review is referred to as a ceiling
test. Under the ceiling test, capitalized costs, less accumulated amortization and related deferred income taxes,
may not exceed an amount equal to the sum of the present value of estimated future net revenues (adjusted
for cash flow hedges) less estimated future expenditures to be incurred in developing and producing the proved
reserves, less any related income tax effects. In calculating estimated future net revenues, current prices are
calculated as the unweighted arithmetical average of natural gas and oil prices on the first day of each month
within the 12-month period ended. Costs used are those as of the end of the appropriate quarterly period. Such
prices are utilized except where different prices are fixed and determinable from applicable contracts for the
remaining term of those contracts, including the effects of derivatives qualifying as cash flow hedges. Based on
average prices on the first day of each month within the 12-month period ending December 31, 2010, these
cash flow hedges increased the full-cost ceiling by $176 million. Our qualifying cash flow hedges as of
December 31, 2010, which consisted of swaps, covered 450 bcfe and 13 bcfe in 2011 and 2012, respectively.
Our natural gas and oil hedging activities are discussed in Note 9 of these consolidated financial statements.
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