Chesapeake Energy 2012 Annual Report Download - page 141

CHESAPEAKE ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
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mark-to-market amounts they owe to Chesapeake exceed defined thresholds. The maximum volume-based trading
capacity under the facility is governed by the expected production of the pledged reserve collateral, and volume-based
trading limits are applied separately to price and basis derivatives. In addition, there are volume-based sub-limits for
natural gas, oil and NGL derivative instruments. Chesapeake has significant flexibility with regard to releases and/or
substitutions of pledged reserves, provided that certain requirements are met including maintaining specified collateral
coverage ratios as well as maintaining credit ratings with either of the designated rating agencies at or above current
levels. The facility does not have a maturity date. Counterparties to the agreement have the right to cease entering
into derivative instruments with the Company on a prospective basis as long as obligations associated with any existing
transactions in the facility continue to be satisfied in accordance with the terms of the agreement.
Interest Rate Derivatives
To mitigate a portion of our exposure to volatility in interest rates related to our senior notes and bank credit
facilities, we enter into interest rate derivatives. As of December 31, 2012 and 2011, our interest rate derivative
instruments consisted of the following types of instruments:
• Swaps: Chesapeake enters into fixed-to-floating interest rate swaps (we receive a fixed interest rate and pay
a floating market rate) to mitigate our exposure to changes in the fair value of our senior notes. We enter into
floating-to-fixed interest rate swaps (we receive a floating market rate and pay a fixed interest rate) to manage
our interest rate exposure related to our bank credit facilities borrowings.
• Swaptions: Occasionally we sell an option to a counterparty for a premium which allows the counterparty to
enter into a pre-determined swap with us on a specific date.
The notional amount and the estimated fair value of our interest rate derivatives outstanding as of December 31,
2012 and 2011 are provided below.
December 31, 2012 December 31, 2011
Notional
Amount
Fair
Value
Notional
Amount
Fair
Value
($ in millions)
Interest rate:
Swaps ................................................ $ 1,050 $ (35) $ 1,050 $ (42)
Swaptions .......................................... — — 300 —
Totals ............................................. $ 1,050 $ (35) $ 1,350 $ (42)
Gains or losses from interest rate derivative transactions are reflected as adjustments to interest expense in the
consolidated statements of operations. The components of interest expense for the years ended 2012, 2011 and 2010
are presented below.
Years Ended December 31,
2012 2011 2010
($ in millions)
Interest expense on senior notes ............................................................. $ 732 $ 653 $ 718
Interest expense on credit facilities .......................................................... 70 70 61
Interest expense on term loans ................................................................ 173 — —
(Gains) losses on interest rate derivatives ............................................... (7) 14 (80)
Amortization of loan discount, issuance costs and other ......................... 89 39 36
Capitalized interest .................................................................................. (980) (732) (716)
Total interest expense........................................................................ $77$44$19
We have terminated certain fair value hedges related to senior notes. Gains and losses related to these terminated
hedges will be amortized as an adjustment to interest expense over the remaining term of the related senior notes.
Over the next eight years, we will recognize $20 million in net gains related to such transactions.