Chesapeake Energy 2010 Annual Report Download - page 99

The following table shows our production expenses by region and our ad valorem tax expenses for 2010,
2009 and 2008 ($ in millions, except per unit):
2010 2009 2008
Production
Expenses $/mcfe
Production
Expenses $/mcfe
Production
Expenses $/mcfe
Mid-Continent .......... $ 309 0.98 $ 300 $ 0.98 $ 362 1.01
Haynesville/Bossier
Shale ............... 65 0.27 33 0.39 37 1.33
Barnett Shale .......... 142 0.81 158 0.66 128 0.71
Fayetteville Shale ....... 40 0.29 23 0.25 13 0.24
Permian and Delaware
Basins .............. 94 1.54 112 1.52 134 1.67
Marcellus Shale ........ 37 1.08 24 1.10 4 1.63
Eagle Ford Shale ....... 3 1.50 — — — —
Rockies/Williston Basin . . 2 1.67 2 — — —
Other ................. 136 1.76 144 1.61 137 1.00
828 0.80 796 0.88 815 0.96
Ad valorem tax ......... 65 0.06 80 0.09 74 0.09
Total .............. $ 893 0.86 $ 876 0.97 $ 889 1.05
Production Taxes. Production taxes were $157 million in 2010 compared to $107 million in 2009 and $284
million in 2008. On a unit-of-production basis, production taxes were $0.15 per mcfe in 2010 compared to
$0.12 per mcfe in 2009 and $0.34 per mcfe in 2008. The $50 million increase in production taxes from 2009 to
2010 is due to an increase in the realized average sales price of natural gas and oil of $0.47 per mcfe
(excluding gains or losses on derivatives), and a production increase of 129.7 bcfe. The decrease in 2009 was
due to a decrease in the realized average sales price of natural gas and oil of $4.76 per mcfe (excluding gains
or losses on derivatives). In general, production taxes are calculated using value-based formulas that produce
higher per unit costs when natural gas and oil prices are higher.
General and Administrative Expense. General and administrative expenses, including stock-based
compensation but excluding internal costs capitalized to our natural gas and oil properties (see Note 10 of the
notes to our consolidated financial statements included in Item 8 of this report), were $453 million in 2010,
$349 million in 2009 and $377 million in 2008. General and administrative expenses were $0.44, $0.38 and
$0.45 per mcfe for 2010, 2009 and 2008, respectively. The increase in 2010 is the result of the company’s
continued growth resulting in higher payroll and associated costs. The decrease in 2009 was primarily the
result of decreased spending related to media relations. Included in general and administrative expenses is
stock-based compensation of $84 million in 2010, $83 million in 2009 and $85 million in 2008. Restricted stock
grants expense is based on the price of our common stock on the date of grant.
Our stock-based compensation for employees and non-employee directors is in the form of restricted
stock. Employee restricted stock awards generally vest over a period of four or five years. Our non-employee
director awards vest over a period of three years. The discussion of stock-based compensation in Note 1 and
Note 8 of the notes to our consolidated financial statements included in Item 8 of this report provides additional
detail on the accounting for and reporting of our stock-based compensation.
Chesapeake follows the full-cost method of accounting under which all costs associated with natural gas
and oil 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. In addition, we capitalize
internal costs that can be identified with construction of certain of our property, plant and equipment. We
capitalized $384 million, $359 million and $352 million of internal costs in 2010, 2009 and 2008, respectively,
directly related to our natural gas and oil property acquisition, exploration and development efforts and the
construction of our property, plant and equipment.
Natural Gas and Oil Depreciation, Depletion and Amortization. Depreciation, depletion and amortization of
natural gas and oil properties was $1.394 billion, $1.371 billion and $1.970 billion during 2010, 2009 and 2008,
respectively. The average DD&A rate per mcfe, which is a function of capitalized costs, future development
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