Chesapeake Energy 2010 Annual Report Download - page 141

CHESAPEAKE ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
unrecognized tax benefits related to regular tax liabilities and AMT associated with uncertain tax positions was
$231 million. Of this amount, $87 million was related to regular tax liabilities and $144 million was related to
AMT. If these unrecognized tax benefits are disallowed and we are required to pay additional AMT liabilities,
any payments can be utilized as credits against future regular tax liabilities. The uncertain tax positions
identified would not have a material effect on the effective tax rate. At December 31, 2010, we had an accrued
liability of $8 million for interest related to these uncertain tax positions. Chesapeake recognizes interest related
to uncertain tax positions in interest expense. Penalties, if any, related to uncertain tax positions would be
recorded in other expenses.
A reconciliation of the beginning and ending balances of unrecognized tax benefits is as follows:
2010 2009 2008
($ in millions)
Unrecognized tax benefits at beginning of period ................ $ 231 $ 60 $ 133
Additions based on tax positions related to the current year ....... — 171 48
Reductions for tax positions of prior years ...................... (197) — (120)
Settlements ............................................... — — (1)
Unrecognized tax benefits at end of period ..................... $ 34 $ 231 $ 60
Chesapeake files income tax returns in the U.S. federal jurisdiction and various state and local
jurisdictions. With few exceptions, Chesapeake is no longer subject to U.S. federal, state and local income tax
examinations by tax authorities for years prior to 2007. The Internal Revenue Service (IRS) is currently
examining Chesapeake’s 2007, 2008 and 2009 U.S. income tax returns.
6. Related Party Transactions
Chief Executive Officer
As of December 31, 2010, we had accrued accounts receivable from our Chief Executive Officer, Aubrey
K. McClendon, of $30 million representing joint interest billings from December 2010 which were invoiced and
timely paid in January 2011. Since Chesapeake was founded in 1989, Mr. McClendon has acquired working
interests in virtually all of our natural gas and oil properties by participating in our drilling activities under the
terms of the Founder Well Participation Program (FWPP) and predecessor participation arrangements provided
for in Mr. McClendon’s employment agreements. Under the FWPP, approved by our shareholders in June
2005, Mr. McClendon may elect to participate in all or none of the wells drilled by or on behalf of Chesapeake
during a calendar year, but he is not allowed to participate only in selected wells. A participation election is
required to be received by the Compensation Committee of Chesapeake’s Board of Directors not less than 30
days prior to the start of each calendar year. His participation is permitted only under the terms outlined in the
FWPP, which, among other things, limits his individual participation to a maximum working interest of 2.5% in a
well and prohibits participation in situations where Chesapeake’s working interest would be reduced below
12.5% as a result of his participation. In addition, the company is reimbursed for costs associated with
leasehold acquired by Mr. McClendon as a result of his well participation.
On December 31, 2008, we entered into a new five-year employment agreement with Mr. McClendon that
contained a one-time well cost incentive award to him. The total cost of the award to Chesapeake was $75
million plus employment taxes in the amount of approximately $1 million. We are recognizing the incentive
award as general and administrative expense over the five-year vesting period for the clawback described
below, resulting in an expense of approximately $15 million per year beginning in 2009. In addition to state and
federal income tax withholding, similar employment taxes were imposed on Mr. McClendon and withheld from
the award. The net incentive award of approximately $44 million was fully applied against costs attributable to
interests in company wells acquired by Mr. McClendon or his affiliates under the FWPP. The incentive award is
subject to a clawback equal to any unvested portion of the award if during the initial five-year term of the
employment agreement, Mr. McClendon resigns from the company or is terminated for cause by the company.
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