Chesapeake Energy 2013 Annual Report Download - page 65

57
2013, we completed tender offers to purchase $217 million in aggregate principal amount of our 7.625% Senior Notes
due 2013 for $221 million and $377 million in aggregate principal amount of our 6.875% Senior Notes due 2018 for
$405 million. We recorded a loss of approximately $37 million associated with the tender offers, including $32 million
in premiums and $5 million of unamortized deferred charges. In addition, we redeemed $1.3 billion in aggregate principal
amount of our 6.775% Senior Notes due 2019 at par pursuant to a notice of special early redemption. We recorded a
loss of approximately $33 million associated with the redemption, including $19 million of unamortized deferred charges
and $14 million of discount.
In 2012, we used proceeds from asset sales and our November 2012 term loan to fully repay our May 2012 term
loans. We recorded $200 million of losses associated with the repayment, including $86 million of deferred charges
and $114 million of debt discount.
In 2011, we completed tender offers to purchase $1.373 billion in aggregate principal amount of certain of our
senior notes and $531 million in aggregate principal amount of certain of our contingent convertible senior notes.
Associated with the tender offers, we recorded losses of approximately $166 million related to the senior notes and
$8 million related to the contingent convertible senior notes. Also during 2011, we purchased $140 million in aggregate
principal amount of our 2.25% Contingent Convertible Senior Notes due 2038 for approximately $128 million. Associated
with these purchases, we recognized a loss of $2 million in 2011.
Other Income. Other income was $26 million, $8 million and $23 million in 2013, 2012 and 2011, respectively.
The 2013 other income consisted of $5 million of interest income and $21 million of miscellaneous income. The 2012
income consisted of $1 million of interest income and $7 million of miscellaneous income. The 2011 income consisted
of $3 million of interest income and $20 million of miscellaneous income.
Income Tax Expense (Benefit). Chesapeake recorded income tax expense of $548 million in 2013 compared to
an income tax benefit of $380 million in 2012 and income tax expense of $1.123 billion in 2011. Our effective income
tax rate was 38% in 2013 and 39% in both 2012 and 2011. Our effective tax rate can fluctuate as a result of the impact
of state income taxes and permanent differences.
Net Income Attributable to Noncontrolling Interests. Chesapeake recorded net income attributable to
noncontrolling interests of $170 million, $175 million and $15 million in 2013, 2012 and 2011, respectively. Net income
attributable to noncontrolling interests is primarily driven by the dividends paid on our CHK Utica and CHK C-T preferred
stock in addition to income or loss related to the Chesapeake Granite Wash Trust. See Note 8 of the notes to our
consolidated financial statements included in Item 8 of this report for a discussion of these entities.
Application of Critical Accounting Policies
Readers of this report and users of the information contained in it should be aware that certain events may impact
our financial results based on the accounting policies in place. The three policies we consider to be the most significant
are discussed below. The Company's management has discussed each critical accounting policy with the Audit
Committee of the Company's Board of Directors.
The selection and application of accounting policies are an important process that changes as our business
changes and as accounting rules are developed. Accounting rules generally do not involve a selection among
alternatives, but involve an implementation and interpretation of existing rules and the use of judgment in the specific
set of circumstances existing in our business.
Natural Gas and Oil Properties. The accounting for our business is subject to special accounting rules that are
unique to the natural gas and oil industry. There are two allowable methods of accounting for natural gas and oil
business activities: the successful efforts method and the full cost method. Chesapeake follows the full cost method
of accounting under which all costs associated with property acquisition, exploration and development activities are
capitalized. We also capitalize internal costs that can be directly identified with our acquisition, exploration and
development activities and do not capitalize any costs related to production, general corporate overhead or similar
activities.
Under the successful efforts method, geological and geophysical costs and costs of carrying and retaining
undeveloped properties are charged to expense as incurred. Costs of drilling exploratory wells that do not result in
proved reserves are charged to expense. Depreciation, depletion, amortization and impairment of natural gas and oil
properties are generally calculated on a well by well or lease or field basis versus the aggregated "full cost" pool basis.
Additionally, gain or loss is generally recognized on all sales of natural gas and oil properties under the successful
efforts method. As a result, our financial statements differ from those of companies that apply the successful efforts