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Dispositions of oil and natural gas properties
are accounted for as adjustments to capitalized costs with no gain
or loss recognized, unless such adjustments would significantly
alter the relationship between capitalized costs and proved reserves.
The net capitalized costs of proved oil and
natural gas properties are subject to a "ceiling test," which limits
such costs to the estimated present value, discounted at a 10% interest
rate, of future net revenues from proved reserves, based on current
economic and operating conditions. If net capitalized costs exceed
this limit, the excess is charged to operations through depreciation,
depletion and amortization. No write-down of the Company's oil and
natural gas assets was necessary in 2000, 2001 or 2002. Based on
oil and natural gas prices in effect on December 31, 2001, the unamortized
cost of oil and natural gas properties exceeded the cost center
ceiling. As permitted by full cost accounting rules, improvements
in pricing subsequent to December 31, 2001 removed the necessity
to record a write-down. Using prices in effect on December 31, 2001
the pretax write-down would have been approximately $0.7 million.
Because of the volatility of oil and natural gas prices, no assurance
can be given that the Company will not experience a write-down in
future periods.
Depreciation of other property and
equipment is provided using the straight-line method based on estimated
useful lives ranging from five to 10 years.
OIL AND NATURAL GAS RESERVE ESTIMATES
The process of estimating quantities of proved
reserves is inherently uncertain, and the reserve data included
in this document are estimates prepared by Ryder Scott Company and
Fairchild & Wells, Inc., Independent Petroleum Engineers. Reserve
engineering is a subjective process of estimating underground accumulations
of hydrocarbons that cannot be measured in an exact manner. The
process relies on interpretation of available geologic, geophysical,
engineering and production data. The extent, quality and reliability
of this data can vary. The process also requires certain economic
assumptions regarding drilling and operating expense, capital expenditures,
taxes and availability of funds. The SEC mandates some of these
assumptions such as oil and natural gas prices and the present value
discount rate.
Proved reserve estimates prepared by others
may be substantially higher or lower than the Company's estimates.
Because these estimates depend on many assumptions, all of which
may differ from actual results, reserve quantities actually recovered
may be significantly different than estimated. Material revisions
to reserve estimates may be made depending on the results of drilling,
testing, and rates of production.
You should not assume that the present
value of future net cash flows is the current market value of the
Company's estimated proved reserves. In accordance with SEC requirements,
the Company based the estimated discounted future net cash flows
from proved reserves on prices and costs on the date of the estimate.
The Company's rate of recording depreciation,
depletion and amortization expense for proved properties is dependent
on the Company's estimate of proved reserves. If these reserve estimates
decline, the rate at which the Company records these expenses will
increase.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents include highly
liquid investments with maturities of three months or less when
purchased.
REVENUE RECOGNITION AND NATURAL GAS IMBALANCES
The Company follows the sales method of
accounting for revenue recognition and natural gas imbalances, which
recognizes over and under lifts of natural gas when sold, to the
extent sufficient natural gas reserves or balancing agreements are
in place. Natural gas sales volumes are not significantly different
from the Company's share of production.
FINANCING COSTS
Long-term debt financing costs of $0.8 million
and $0.8 million are included in other assets as of December 31,
2001 and 2002, respectively, are being amortized using the effective
yield method over the term of the loans (through January 31, 2005
for a credit facility and through December 15, 2007 for subordinated
notes payable).
F-10
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