Chesapeake Energy 2014 Annual Report Download - page 65

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See Note 18 of the notes to our consolidated financial statements included in Item 8 of this report for further discussion
of our restructuring and other termination costs.
Provision for Legal Contingencies. We are defending against claims by royalty owners alleging, among other
things, that we used below-market prices, made improper deductions, used improper measurement techniques and/
or entered into arrangements with affiliates that resulted in underpayment of royalties in connection with the production
and sales of natural gas and NGL. Adverse results in these matters would cause our obligations to royalty owners to
increase, which would result in a decrease in our future revenues. In 2014, we accrued $134 million of loss contingencies
related to royalty claims. See Note 4 of the notes to our consolidated financial statements included in Item 8 of this
report for further discussion of royalty claims. In 2014, we also accrued a $100 million loss contingency for litigation
regarding our early redemption of our 2019 Notes. See Notes 3 and 4 of the notes to our consolidated financial
statements included in Item 8 of this report for further discussion of this litigation.
Oil, Natural Gas and NGL Depreciation, Depletion and Amortization. Depreciation, depletion and amortization
(DD&A) of oil, natural gas and NGL properties was $2.683 billion, $2.589 billion and $2.507 billion in 2014, 2013 and
2012, respectively. The $94 million increase in 2014 and the $82 million increase in 2013 were driven by increases in
our production. The average DD&A rate per boe, which is a function of capitalized costs, future development costs
and the related underlying reserves in the periods presented, was $10.41, $10.59 and $10.58 in 2014, 2013 and 2012,
respectively.
Depreciation and Amortization of Other Assets. Depreciation and amortization of other assets was $232 million
in 2014 compared to $314 million in 2013 and $304 million in 2012. Property and equipment costs are depreciated on
a straight-line basis over the estimated useful lives of the assets. To the extent company-owned oilfield services
equipment was used to drill and complete our wells, a substantial portion of the depreciation (i.e., the portion related
to our utilization of the equipment) was capitalized in oil and natural gas properties as drilling and completion costs.
In June 2014, we completed the spin-off of our oilfield services business and, therefore, will not incur this expense in
future periods. The following table shows depreciation expense by asset class for 2014, 2013 and 2012 and the
estimated useful lives of these assets.
Years Ended December 31, Estimated
Useful
Life
2014 2013 2012
($ in millions) (in years)
Oilfield services equipment(a) $ 74 $ 122 $ 61 3 - 15
Buildings and improvements 42 47 42 10 - 39
Natural gas compressors(b) 37 35 26 3 - 20
Computers and office equipment 32 44 45 3 - 7
Vehicles 24 38 52 0 - 7
Natural gas gathering systems and treating plants(b) 12 13 46 20
Other 11 15 32 2 - 20
Total depreciation and amortization of other assets $ 232 $ 314 $ 304
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(a) Included in our former oilfield services operating segment.
(b) Included in our marketing, gathering and compression operating segment.
Impairment of Oil and Natural Gas Properties. In 2012, we reported a non-cash impairment charge on our oil and
natural gas properties of $3.315 billion, primarily resulting from a 10% decrease in trailing 12-month average first-day-
of-the-month natural gas prices as of September 30, 2012 compared to June 30, 2012, and the impairment of certain
undeveloped leasehold, primarily in the Williston and DJ Basins. We account for our oil and natural gas properties
using the full cost method of accounting, which limits the amount of costs we can capitalize and requires us to write
off these costs if the carrying value of oil and natural gas assets in the evaluated portion of our full cost pool exceeds
the sum of the present value of expected future net cash flows of proved reserves using a 10% pre-tax discount rate
based on pricing and cost assumptions prescribed by the SEC and the present value of oil and natural gas derivative
instruments designated as cash flow hedges. See Note 17 of the notes to our consolidated financial statements included
in Item 8 of this report for further discussion of our impairment of oil and natural gas properties.