Chesapeake Energy 2013 Annual Report Download - page 145

CHESAPEAKE ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
137
Qualitative Disclosures about Unobservable Inputs for Level 3 Fair Value Measurements
The significant unobservable inputs for Level 3 derivative contracts include unpublished forward prices of natural
gas and oil, market volatility and credit risk of counterparties. Changes in these inputs impact the fair value measurement
of our derivative contracts. For example, an increase (decrease) in the forward prices and volatility of natural gas and
oil prices decreases (increases) the fair value of natural gas and oil derivatives and adverse changes to our
counterparties’ creditworthiness decreases the fair value of our derivatives.
Quantitative Disclosures about Unobservable Inputs for Level 3 Fair Value Measurements
Instrument
Type Unobservable Input Range Weighted Average
Fair Value
December 31,
2013
($ in millions)
Oil trades(a) ............................... Oil price volatility curves 0% - 23.65% 13.62% $ (265)
Oil basis swaps(b) ..................... Physical pricing point forward
curves $3.51 - $4.41 $ 3.74 $ 1
Natural gas trades(a) ................ Natural gas price volatility
curves 17.75% - 60.88% 22.49% $ (217)
Natural gas basis swaps(b)...... Physical pricing point forward
curves ($1.03) - ($0.11) $ (0.46) $ 3
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(a) Fair value is based on an estimate derived from option models.
(b) Fair value is based on an estimate of discounted cash flows.
Nonrecurring Fair Value Measurements
In 2013, we determined we would sell certain of our buildings and land (other than our core campus) in the
Oklahoma City area. Fair value measurements were applied with respect to these non-financial assets, measured on
a nonrecurring basis, to determine impairments. We used the income approach, specifically discounted cash flows,
for income-producing assets and the market approach for the remaining assets. As the fair values estimated using the
market approach were based on recent prices from orderly sales transactions for comparable properties between
market participants, the values of these properties are classified as Level 2. The discounted cash flow method includes
the development of both current operating metrics as well as assumptions pertaining to the subsequent change of
such metrics, including rent growth, operating expense growth and absorption. These assumptions are applied to a
specified period to develop future cash flow projections that are then discounted to estimate fair value. Due to these
assumptions, the values of these properties are classified as Level 3.
Due to a decrease in the estimated market prices of certain surface land classified as held for sale in the Fort
Worth, Texas area, we recognized an additional impairment loss in 2013. Fair value measurements were applied with
respect to these non-financial assets, measured on a nonrecurring basis, to determine impairments. We measured
the fair value of these assets by obtaining the current list price, if marketed for sale, or comparable list prices from
similar properties in the area. The list prices were based on and adjusted for review of market data for comparable
properties, where available, review of aerial or survey information, and assessment of other property and market-
related factors. These list prices are estimates and are subject to changing market conditions. Should market conditions
change adversely in the future, this could result in additional impairment or result in proceeds received upon sale to
materially differ from the current estimate. See Note 16 for further discussion of the impairments recorded.