Chesapeake Energy 2010 Annual Report Download - page 86

The drilling and completion carries in our industry participation agreements create a significant cost
advantage that allows us to continue to lower finding costs. During 2010 and 2009, our drilling and completion
costs included the benefit of approximately $1.151 billion and $1.154 billion, respectively, of drilling and
completion carries. Our drilling and completion costs for 2011 through 2014 will continue to be partially offset
by the use of our remaining drilling and completion carries associated with our industry participation
agreements.
Volumetric Production Payments
We completed three volumetric production payments (VPPs) in 2010, bringing the total of such
transactions to eight. The company’s sixth VPP was completed in February 2010 for proceeds of approximately
$180 million, or $3.95 per mcfe. In June 2010, we completed our seventh VPP for proceeds of approximately
$335 million, or $8.73 per mcfe. In September 2010, we completed our eighth VPP for proceeds of
approximately $1.15 billion, or $2.93 per mcfe. The cash proceeds from these transactions are reflected as a
reduction of natural gas and oil properties with no gain or loss recognized.
Other Asset Sales
In 2010, we sold non-core proved and unproved properties for proceeds of approximately $355 million.
During 2010, as part of our industry participation agreements with Total, Statoil and PXP, we sold interests in
additional leasehold in the Barnett, Marcellus and Haynesville Shale plays for proceeds of approximately $440
million that had an estimated original cost to us of $220 million. The cash proceeds from these transactions are
reflected as a reduction of natural gas and oil properties with no gain or loss recognized.
Chesapeake Midstream Partners, L.P. IPO and Asset Sale
On August 3, 2010, Chesapeake Midstream Partners, L.P. (NYSE: CHKM), which we and GIP formed to
own, operate, develop and acquire midstream assets, completed an initial public offering of common units
representing limited partner interests and received net proceeds of approximately $475 million. In connection
with the closing of the offering and pursuant to the terms of our contribution agreement with GIP, CHKM
distributed to GIP the approximate $62 million of net proceeds from the exercise of the offering over-allotment
option, and Chesapeake and GIP contributed the interests of their midstream joint venture operating subsidiary
to CHKM. Chesapeake and GIP hold 42.3% and 40.0%, respectively, of all outstanding limited partner
interests, and Chesapeake and GIP each have a 50% interest in the general partner of CHKM. CHKM makes
quarterly distributions to its partners, and at the current annual rate of $1.35 per unit, Chesapeake receives
quarterly distributions of approximately $20 million in respect of its limited partner and general partner interests.
In 2010, we received cash distributions of $88 million from CHKM and its predecessor joint venture.
We account for our investment in CHKM under the equity method. During 2010, we recorded positive
equity method adjustments of $89 million for our share of CHKM’s income and recorded accretion adjustments
of $14 million for our share of equity in excess of cost. As a result of CHKM’s initial public offering, we
recognized a $90 million gain on our investment, which represented our proportionate share of the excess of
offering proceeds over the carrying value of our investment in CHKM and is reported in earnings (losses) from
equity investees on our consolidated statements of operations.
On December 21, 2010, we sold our Springridge natural gas gathering system and related facilities in the
Haynesville Shale to CHKM for $500 million and entered into ten-year gathering and compression agreements
with CHKM. Additional information on the transaction is included in Item 1 under Marketing, Gathering and
Compression - Midstream Gathering Operations.
Pending and Planned Asset Sales
Fayetteville Shale. On February 21, 2011, we entered into a purchase and sale agreement with a wholly
owned subsidiary of BHP Billiton to sell all of our Fayetteville Shale assets, including approximately 487,000
net acres of leasehold and producing natural gas properties and midstream assets with approximately 420
miles of pipeline, for $4.75 billion in cash before certain deductions and standard closing adjustments. In the
Fayetteville Shale, our current net production is approximately 415 mmcfe per day. Estimated proved reserves
attributable to the Fayetteville Shale as of December 31, 2010 were 2.4 tcfe, or approximately 14% of our total
proved reserves. As part of the transaction, we have agreed to provide essential services for up to one year for
BHP Billiton’s Fayetteville Shale properties for an agreed-upon fee. Closing of the transaction is subject to
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