Chesapeake Energy 2012 Annual Report Download - page 73

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increase in field rates and the lifting costs associated with VPP production for VPP #10 and #9 completed in March
2012 and May 2011, respectively. The per unit increase in 2011 was primarily the result of the sale of our Fayetteville
Shale producing wells, which were high volume wells with lower per unit costs. Production expenses in 2012, 2011
and 2010 included approximately $220 million, $234 million and $139 million, or $0.15, $0.20 and $0.13 per mcfe,
respectively, associated with VPP production volumes.
The following table shows our production expenses by operating division and our ad valorem tax expenses for
2012, 2011 and 2010:
2012 2011 2010
Production
Expenses $/mcfe
Production
Expenses $/mcfe
Production
Expenses $/mcfe
($ in millions, except per unit)
Southern .......................................... $ 375 0.59 $ 334 0.59 $ 262 0.62
Northern .......................................... 492 1.38 384 1.01 349 0.77
Eastern ............................................ 137 0.50 134 0.93 117 1.52
Western ........................................... 226 1.41 159 1.52 100 1.22
1,230 0.87 1,011 0.85 828 0.80
Ad valorem tax ................................ 74 0.05 62 0.05 65 0.06
Total........................................... $1,304 0.92 $ 1,073 0.90 $ 893 0.86
Production Taxes. Production taxes were $188 million in 2012 compared to $192 million in 2011 and $157 million
in 2010. On a unit-of-production basis, production taxes were $0.13 per mcfe in 2012 compared to $0.16 per mcfe in
2011 and $0.15 in 2010. In general, production taxes are calculated using value-based formulas that produce higher
per unit costs when natural gas, oil and NGL prices are higher. The $4 million decrease in production taxes in 2012
was primarily due to the decrease from 2011 to 2012 of the unhedged price of our production from $4.40 to $3.77 per
mcfe, offset by an increase in production of 228 bcfe. The $35 million increase in production taxes in 2011 was primarily
due to an increase in production of 159 bcfe and an increase in the unhedged price of our production from $4.10 to
$4.40 per mcfe. Production taxes in 2012, 2011 and 2010 included approximately $20 million, $34 million and $26
million, or $0.01, $0.03 and $0.02 per mcfe, respectively, associated with VPP production volumes.
General and Administrative Expenses. General and administrative expenses, including stock-based
compensation but excluding internal costs capitalized to our natural gas and oil properties and other property, plant
and equipment (see Note 10 of the notes to our consolidated financial statements included in Item 8 of this report),
were $535 million in 2012, $548 million in 2011 and $453 million in 2010. General and administrative expenses were
$0.38, $0.46 and $0.44 per mcfe for 2012, 2011 and 2010, respectively. The per unit expense decrease in 2012 was
primarily due to an increase in production of 228 bcfe. The actual and per unit expense increase in 2011 was primarily
due to the Company's continued growth resulting in higher payroll and associated costs. Included in general and
administrative expenses is stock-based compensation of $71 million in 2012, $92 million in 2011 and $84 million in
2010. Restricted stock expense is based on the price of our common stock on the grant date of the award.
Our stock-based compensation for employees and non-employee directors during 2012, 2011 and 2010 was in
the form of restricted stock. Equity compensation helps offset the fact that we do not have a pension plan. Employee
restricted stock awards generally vest over a period of four years. Our annual 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, divestiture, drilling and completion activities are capitalized. We capitalize internal costs that can
be directly identified with our acquisition, divestiture, drilling and completion 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 the construction of certain of our property, plant and equipment. We capitalized $434 million, $432
million and $378 million of internal costs in 2012, 2011 and 2010, respectively, directly related to our natural gas and
oil property acquisition, divestiture, drilling and completion efforts and the construction of our property, plant and
equipment.