Chesapeake Energy 2013 Annual Report Download - page 58

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The estimated fair values of our natural gas and oil derivative contracts as of December 31, 2013 and 2012 are
provided below. See Item 7A. Quantitative and Qualitative Disclosures About Market Risk for additional information
concerning the fair value of our natural gas and oil derivative instruments.
December 31,
2013 2012
($ in millions)
Derivative assets (liabilities):
Fixed-price natural gas swaps ...................................................................................... $ (23) $ 24
Natural gas three-way collars ....................................................................................... (7) —
Natural gas call options ................................................................................................ (210) (240)
Natural gas basis protection swaps .............................................................................. 3 (15)
Fixed-price oil swaps .................................................................................................... (50) 68
Oil call options .............................................................................................................. (265) (748)
Oil call swaptions ......................................................................................................... — (13)
Oil basis protection swaps ............................................................................................ 1 —
Estimated fair value ................................................................................................. $ (551) $ (924)
Changes in the fair value of natural gas and oil derivative instruments designated as cash flow hedges, to the
extent effective in offsetting cash flows attributable to the hedged commodities, and locked-in gains and losses of
settled designated derivative contracts are recorded in accumulated other comprehensive income and are transferred
to earnings in the month of related production. As of December 31, 2013, 2012 and 2011, accumulated other
comprehensive income included unrealized losses, net of related tax effects, totaling $159 million, $179 million and
$162 million, respectively, associated with commodity derivative contracts. Based upon the market prices at
December 31, 2013, we expect to transfer to earnings approximately $23 million of net loss included in accumulated
other comprehensive income during the next 12 months. A detailed explanation of accounting for natural gas, oil and
NGL derivatives appears under Application of Critical Accounting Policies – Derivatives elsewhere in this Item 7.
Interest Rate Derivatives
To mitigate a portion of our exposure to volatility in interest rates related to our senior notes and credit facilities,
we enter into interest rate derivatives.
For interest rate derivative contracts designated as fair value hedges, changes in fair values of the derivatives
are recorded on the consolidated balance sheets as assets or (liabilities), with corresponding offsetting adjustments
to the debt's carrying value. Changes in the fair value of derivatives not designated as fair value hedges, which occur
prior to their maturity (i.e., temporary fluctuations in mark-to-market values), are reported currently in the consolidated
statements of operations as interest expense.
Gains or losses from interest rate derivative contracts are reflected as adjustments to interest expense on the
consolidated statements of operations. The components of interest expense for the years ended December 31, 2013,
2012 and 2011 are presented below in Results of Operations - Interest Expense, and a detailed explanation of accounting
for interest rate derivatives appears under Application of Critical Accounting Policies - Derivatives elsewhere in this
Item 7.
Foreign Currency Derivatives
On December 6, 2006, we issued €600 million of 6.25% Euro-denominated Senior Notes due 2017. Concurrent
with the issuance of the euro-denominated senior notes, we entered into cross currency swaps to mitigate our exposure
to fluctuations in the euro relative to the dollar over the term of the notes. In May 2011, we purchased and subsequently
retired €256 million in aggregate principal amount of these senior notes following a tender offer, and we simultaneously
unwound the cross currency swaps for the same principal amount. A detailed explanation of accounting for foreign
currency derivatives appears under Application of Critical Accounting Policies - Derivatives elsewhere in this Item 7.