Chesapeake Energy 2010 Annual Report Download - page 165

CHESAPEAKE ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
13. Restructuring Costs
In 2009, we restructured our Charleston, West Virginia-based Eastern Division from a regional corporate
headquarters to a regional field office consistent with the business model the company uses elsewhere in the
country. As a result, we consolidated the management of our Eastern Division land, legal, accounting,
information technology, geoscience and engineering departments into our corporate offices in Oklahoma City.
The costs of the reorganization include termination benefits, consolidating or closing facilities and relocating
employees. In addition, we had certain other workforce reductions that resulted in termination benefits. A
summary of Chesapeake’s restructuring costs is presented below:
Year Ended
December 31, 2009
($ in millions)
Termination and relocation costs ............................................ $ 22
Acceleration of restricted stock awards ....................................... 9
Other associated costs .................................................... 3
Total Restructuring Costs ................................................ $ 34
14. Fair Value Measurements
Certain financial instruments are reported at fair value on the consolidated balance sheets. Under fair
value measurement accounting guidance, fair value is defined as the amount that would be received from the
sale of an asset or paid for the transfer of a liability in an orderly transaction between market participants, i.e.,
an exit price. To estimate an exit price, a three-level hierarchy is used. The fair value hierarchy prioritizes the
inputs, which refer broadly to assumptions market participants would use in pricing an asset or a liability, into
three levels. Level 1 inputs are unadjusted quoted prices in active markets for identical assets and liabilities
and have the highest priority. Level 2 inputs are inputs other than quoted prices within Level 1 that are
observable for the asset or liability, either directly or indirectly. Level 3 inputs are unobservable inputs for the
financial asset or liability and have the lowest priority. Chesapeake uses a market valuation approach based on
available inputs and the following methods and assumptions to measure the fair values of its assets and
liabilities, which may or may not be observable in the market.
Cash Equivalents. The fair value of cash equivalents is based on quoted market prices.
Investments. The fair value of Chesapeake’s investment in Gastar Exploration Ltd. (NYSE Amex: GST)
common stock is based on a quoted market price.
Other Long-Term Assets and Liabilities. The fair value of other long-term assets and liabilities, consisting
of obligations under our Deferred Compensation Plan, is based on quoted market prices.
Derivatives. The fair values of our commodity derivatives are based on a third-party pricing model which
utilizes inputs that are either readily available in the public market, such as natural gas and oil forward curves
and discount rates, or can be corroborated from active markets or broker quotes. These values are then
compared to the values given by our counterparties for reasonableness. Since commodity swaps do not
include optionality and therefore have no unobservable inputs, they are classified as Level 2. All other
commodity derivatives have some level of unobservable input, such as volatility curves, and are therefore
classified as Level 3. For interest rate and foreign currency derivatives, we use the fair value estimates
provided by our respective counterparties, which are classified as Level 3 inputs. These values are reviewed
internally for reasonableness using future interest rate curves and time to maturity. Derivatives are also subject
to the risk that counterparties will be unable to meet their obligations. We factor in non-performance risk in the
valuation of our derivatives using current published credit default swap rates. To date this has not had a
material impact on the values of our derivatives.
Debt. The fair value of certain of our long-term debt is based on the face amount of that debt along with
the value of related interest rate swaps.
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