Chesapeake Energy 2015 Annual Report Download - page 90

CHESAPEAKE ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
86
The table below sets forth the cost of unproved properties excluded from the amortization base as of December 31,
2015 and the year in which the associated costs were incurred.
Year of Acquisition
2015 2014 2013 Prior Total
($ in millions)
Leasehold cost................................................. $ 121 $ 651 $ 200 $ 4,304 $ 5,276
Exploration cost ............................................... 68 13 15 58 154
Capitalized interest .......................................... 331 303 259 475 1,368
Total ........................................................... $ 520 $ 967 $ 474 $ 4,837 $ 6,798
We also review, on a quarterly basis, the carrying value of our oil and natural gas properties under the full cost
accounting rules of the Securities and Exchange Commission (SEC). 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 oil and
natural gas derivatives designated as cash flow hedges) less estimated future expenditures to be incurred in developing
and producing the proved reserves, less any related income tax effects. The ceiling test calculation uses costs as of
the end of the applicable quarterly period and the unweighted arithmetic average of oil, natural gas and NGL prices
on the first day of each month within the 12-month period prior to the ending date of the quarterly period. These 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 designated as cash flow hedges. As of December 31, 2015, none
of our open derivative instruments were designated as cash flow hedges. Our oil and natural gas hedging activities
are discussed in Note 11.
Two primary factors impacting the ceiling test are reserves levels and oil, natural gas and NGL prices, and their
associated impact on the present value of estimated future net revenues. Revisions to estimates of oil and natural gas
reserves and/or an extended increase or decrease in prices can have a material impact on the present value of our
estimated future net revenues. Any excess of the net book value over the ceiling is written off as an expense.
We account for seismic costs as part of our oil and natural gas properties. Exploration costs may be incurred both
before acquiring the related property and after acquiring the property. Further, exploration costs include, among other
things, geological and geophysical studies and salaries and other expenses of geologists, geophysical crews and
others conducting those studies. These costs are capitalized as incurred. The Company reviews its unproved properties
and associated seismic costs quarterly to determine whether impairment has occurred. To the extent that seismic costs
cannot be directly associated with specific unproved properties, they are included in the amortization base as incurred.
Other Property and Equipment
Other property and equipment consists primarily of natural gas compressors, buildings and improvements, land,
vehicles, computer and office equipment, oil and natural gas gathering systems and treating plants. We have no
remaining oilfield services equipment as a result of the spin-off of our oilfield services business in 2014, as discussed
in Note 13. 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 operating costs. See Note 16 for further
discussion of our gains and losses on the sales of other property and equipment for the years ended 2015, 2014 and
2013 and a summary of our other property and equipment held for sale as of December 31, 2015 and 2014. Other
property and equipment costs, excluding land, are depreciated on a straight-line basis.
Realization of the carrying value of other property and equipment is reviewed for possible impairment whenever
events or changes in circumstances indicate that the carrying amount may not be recoverable. Assets are determined
to be impaired if a forecast of undiscounted estimated future net operating cash flows directly related to the asset,
including disposal value, if any, is less than the carrying amount of the asset. If any asset is determined to be impaired,
the loss is measured as the amount by which the carrying amount of the asset exceeds its fair value. An estimate of
fair value is based on the best information available, including prices for similar assets and discounted cash flow. During
2015, 2014 and 2013, we determined that certain of our property and equipment was being carried at values that were
not recoverable and in excess of fair value. See Note 17 for further discussion of these impairments.