Chesapeake Energy 2013 Annual Report Download - page 57

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(c) See Note 6 of the notes to our consolidated financial statements included in Item 8 of this report for a description
of unrecognized tax benefits.
(d) This table does not include the estimated discounted liability for future dismantlement, abandonment and
restoration costs of natural gas and oil properties or derivative liabilities. See Notes 19 and 11, respectively, of
the notes to our consolidated financial statements included in Item 8 of this report for more information on our
asset retirement obligations and derivatives. This table also does not include our costs to produce reserves
attributable to non-expense-bearing royalty and other interests in our properties, including VPPs, which are
discussed below.
As the operator of the properties from which VPP volumes have been sold, we bear the cost of producing the
reserves attributable to such interests, which we include as a component of production expenses and production taxes
in our consolidated statements of operations in the periods such costs are incurred. As with all non-expense-bearing
royalty interests, volumes conveyed in a VPP transaction are excluded from our estimated proved reserves; however,
the estimated production expenses and taxes associated with VPP volumes expected to be delivered in future periods
are included as a reduction of the future net cash flows attributable to our proved reserves for purposes of determining
our full cost ceiling test for impairment purposes and in determining our standardized measure. The amount of these
VPP-related production expenses and taxes, based on cost levels as of December 31, 2013 pursuant to SEC reporting
requirements, was estimated to be approximately $799 million in total and $163 million for the next twelve months on
an undiscounted basis and approximately $648 million and $155 million, respectively, on a discounted basis using an
annual discount rate of 10%. Our commitment to bear the costs on any future production of VPP volumes is not reflected
as a liability on our balance sheet. The costs that will apply in the future will depend on the actual production volumes
as well as the production costs and taxes in effect during the periods in which such production actually occurs, which
could differ materially from our current and historical costs, and production may not occur at the times or in the quantities
projected, or at all. We have committed to purchase natural gas and liquids produced that are associated with our VPP
transactions. Production purchased under these arrangements is based on market prices at the time of production,
and the purchased natural gas and liquids are resold at market prices.
See Notes 4 and 12 of the notes to our consolidated financial statements included in Item 8 of this report for
further discussion of commitments and VPPs, respectively.
Derivative 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.
Executive management is involved in all risk management activities and the Board of Directors reviews the Company's
derivative program at its quarterly board meetings. We believe we have sufficient internal controls to prevent
unauthorized trading. As of December 31, 2013, our natural gas and oil derivative instruments consisted of swaps,
collars, options, swaptions and basis protection swaps. Item 7A. Quantitative and Qualitative Disclosures About Market
Risk contains a description of each of these instruments and gains and losses on natural gas, oil and NGL derivatives
during 2013, 2012 and 2011. Although derivatives often fail to achieve 100% effectiveness for accounting purposes,
we believe our derivative instruments continue to be highly effective in achieving our risk management objectives.
Our commodity derivative activities allow us to predict with greater certainty the effective prices we will receive
for our hedged production. We closely monitor the fair value of our derivative contracts and may elect to settle a contract
prior to its scheduled maturity date in order to lock in a gain or minimize a loss. Commodity markets are volatile and
Chesapeake's derivative activities are dynamic.
Mark-to-market positions under commodity derivative contracts fluctuate with commodity prices. As described
under Hedging Facility in Note 11 of the notes to our consolidated financial statements included in Item 8 of this report,
our secured multi-counterparty hedging facility allows us to minimize the potential liquidity impact of significant mark-
to-market fluctuations in the value of such derivatives by pledging our proved reserves.