Chesapeake Energy 2012 Annual Report Download - page 139

CHESAPEAKE ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
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of December 31, 2012 and 2011, the noncontrolling interest balances on the consolidated balance sheets associated
with the contributions from Total and CGAS were $0 and approximately $7 million, respectively.
Wireless Seismic, Inc. We have a controlling 57% equity interest in Wireless Seismic, Inc. (Wireless), a privately
owned company engaged in research, development and eventual production of wireless seismic systems and any
related technology that deliver seismic information obtained from standard geophones in real time to laptop and desktop
computers. As a result of our control, Wireless is included in our consolidated financial statements. As of December 31,
2012, $5 million was recorded as noncontrolling interests on our consolidated balance sheet representing third-party
investments in Wireless. For 2012, $4 million of Wireless' loss was attributable to noncontrolling interests of Wireless
in our consolidated statement of operations.
Big Star Crude Co., LLC. Oilfield Trucking Solutions, LLC, a wholly owned subsidiary of Chesapeake, entered
into a joint venture to form Big Star Crude Co., LLC, which engages in commercial trucking. We have determined that
Big Star is a VIE because our voting rights are disproportionate to our economic interests and the activities of the entity
involve and are conducted on our behalf. We have also determined that Chesapeake is the primary beneficiary, since
it has the power to direct the activities of this VIE, has the obligation to absorb losses and has the right to receive
benefits from the VIE. As a result, Big Star is included in our consolidated financial statements. As of December 31,
2012, $1 million was recorded as noncontrolling interests on our consolidated balance sheets representing our joint
venture partner's equity investment in Big Star. For 2012, a nominal amount of Big Star's loss was attributable to
noncontrolling interests of Big Star in our consolidated statement of operations.
9. Derivative and Hedging Activities
Natural Gas, Oil and NGL Derivatives
Our results of operations and cash flows are impacted by changes in market prices for natural gas, oil and NGL.
To mitigate a portion of the exposure to adverse market changes, we have entered into various derivative instruments.
These instruments allow us to predict with greater certainty the effective prices to be received for our production. We
believe our derivative instruments continue to be highly effective in achieving our risk management objectives. As of
December 31, 2012 and 2011, our natural gas, oil and NGL derivative instruments consisted of the following types of
instruments:
• Swaps: Chesapeake receives a fixed price and pays a floating market price to the counterparty for the hedged
commodity.
• Options: Chesapeake sells, and occasionally buys, call options in exchange for a premium. At the time of
settlement, if the market price exceeds the fixed price of the call option, Chesapeake pays the counterparty
such excess on sold call options, and Chesapeake receives such excess on bought call options. If the market
price settles below the fixed price of the call option, no payment is due from either party.
• Swaptions: Chesapeake sells call swaptions to counterparties that allow them, on a specific date, to extend
an existing fixed-price swap for a certain period of time.
• Knockout Swaps: Chesapeake receives a fixed price and pays a floating market price. The fixed price received
by Chesapeake includes a premium in exchange for the possibility to reduce the counterparty’s exposure to
zero, in any given month, if the floating market price is lower than a certain pre-determined knockout price.
• Basis Protection Swaps: These instruments are arrangements that guarantee a price differential to NYMEX
from a specified delivery point. Our natural gas basis protection swaps typically have negative differentials
to NYMEX. Chesapeake receives a payment from the counterparty if the price differential is greater than the
stated terms of the contract and pays the counterparty if the price differential is less than the stated terms of
the contract. Our oil basis protection swaps typically have positive differentials to NYMEX. Chesapeake
receives a payment from the counterparty if the price differential is less than the stated terms of the contract
and pays the counterparty if the price differential is greater than the stated terms of the contract.
All of our derivative instruments are net settled based on the difference between the fixed-price payment and
the floating-price payment, resulting in a net amount due to or from the counterparty.