Chesapeake Energy 2013 Annual Report Download - page 72

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64
As of December 31, 2013, our natural gas and oil derivative instruments consisted of the following:
• Swaps: Chesapeake receives a fixed price and pays a floating market price to the counterparty for the hedged
commodity.
• Collars: These instruments contain a fixed floor price (put) and ceiling price (call). If the market price exceeds
the call strike price or falls below the put strike price, Chesapeake receives the fixed price and pays the
market price. If the market price is between the put and the call strike prices, no payments are due from
either party. Three-way collars include an additional put option in exchange for a more favorable strike price
on the call option. This eliminates the counterparty’s downside exposure below the second put option.
• Options: Chesapeake sells, and occasionally buys, call options in exchange for a premium. At the time of
settlement, if the market price exceeds the fixed price of the call option, Chesapeake pays the counterparty
such excess on sold call options, and Chesapeake receives such excess on bought call options. If the market
price settles below the fixed price of the call options, no payment is due from either party.
• Swaptions: Chesapeake sells call swaptions in exchange for a premium that allows a counterparty, on a
specific date, to enter into a fixed-price swap for a certain period of time.
• Basis Protection Swaps: These instruments are arrangements that guarantee a price differential to NYMEX
from a specified delivery point. Our natural gas basis protection swaps typically have negative differentials
to NYMEX. Chesapeake receives a payment from the counterparty if the price differential is greater than
the stated terms of the contract and pays the counterparty if the price differential is less than the stated terms
of the contract. Our oil basis protection swaps typically have positive differentials to NYMEX. Chesapeake
receives a payment from the counterparty if the price differential is less than the stated terms of the contract
and pays the counterparty if the price differential is greater than the stated terms of the contract.
As of December 31, 2013, we had the following open natural gas and oil derivative instruments:
Weighted Average Price Fair Value
Volume Fixed Call Put Differential Asset
(Liability)
(tbtu) ($ per mmbtu) ($ in millions)
Natural Gas:
Swaps:
Short-term ................. 448 4.15 — — — $ (23)
3-Way Collars:
Short-term ................ 196 —4.38 3.58 / 4.13 — (9)
Long-term................. 92 — 4.45 3.38 / 4.24 — 2
Call Options (sold):
Short-term ................ 330 —6.43 — — (4)
Long-term................. 619 —7.34 — — (28)
Call Options (bought)(a):
Long-term................. (330)—6.43 — — (36)
Short-term ................ (426)—6.17 — — (142)
Swaptions:
Short-term ................ 12 4.80 — — — —
Basis Protection Swaps:
Short-term ................ 28 — — — (0.32) 1
Long-term................. 40 — — — (0.48) 2
Total Natural Gas ........................................................................................ $ (237)