Chesapeake Energy 2013 Annual Report Download - page 93

CHESAPEAKE ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
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We have elected not to designate any of our qualifying commodity and interest rate derivatives as cash flow or
fair value hedges. Therefore, changes in fair value of these derivatives that occur prior to their maturity (i.e., temporary
fluctuations in value) are recognized in the consolidated statements of operations within natural gas, oil and NGL sales
and interest expense, respectively. Derivative instruments reflected as current in the consolidated balance sheets
represent the estimated fair value of derivatives scheduled to settle over the next twelve months based on market
prices/rates as of the respective balance sheet dates. Cash settlements of our derivative instruments are generally
classified as operating cash flows unless the derivatives are deemed to contain, for accounting purposes, a significant
financing element at contract inception, in which case these cash settlements are classified as financing cash flows
in the accompanying consolidated statement of cash flows. All of our derivative instruments are subject to master
netting arrangements by contract type (i.e., commodity, interest rate and cross currency contracts) which provide for
offsetting of asset and liability positions within each contract type, as well as related cash collateral if applicable, by
counterparty. Therefore, we net the value of our derivative instruments by contract type with the same counterparty in
the accompanying consolidated balance sheets.
We have established the fair value of our derivative instruments using established index prices, volatility curves
and discount factors. These estimates are compared to our counterparty values for reasonableness. The values we
report in our financial statements are as of a point in time and subsequently change as these estimates are revised to
reflect actual results, changes in market conditions and other factors. Derivative transactions are subject to the risk
that counterparties will be unable to meet their obligations. Such non-performance risk is considered in the valuation
of our derivative instruments, but to date has not had a material impact on the values of our derivatives. See Note 11
for further discussion of our derivative instruments.
Share-Based Compensation
Chesapeake’s share-based compensation program consists of restricted stock, stock options and performance
share units granted to employees and restricted stock granted to non-employee directors under our Long Term Incentive
Plan. We recognize in our financial statements the cost of employee services received in exchange for restricted stock
and stock options based on the fair value of the equity instruments as of the grant date. For employees, this value is
amortized over the vesting period, which is generally three or four years from the grant date. For directors, although
restricted stock grants vest over three years, this value is recognized immediately as there is a non-substantive service
condition for vesting. Because performance share units can only be settled in cash, they are classified as a liability in
our consolidated financial statements and are measured at fair value as of the grant date and re-measured at fair value
at the end of each reporting period. These fair value adjustments are recognized as compensation expense in the
consolidated statements of operations.
To the extent compensation cost relates to employees directly involved in the acquisition of natural gas and oil
leasehold and exploration and development activities, such amounts are capitalized to natural gas and oil properties.
Amounts not capitalized to natural gas and oil properties are recognized as general and administrative expenses,
natural gas, oil and NGL production expenses, marketing, gathering and compression expenses or oilfield services
expenses, based on the employees involved in those activities.
Cash inflows resulting from tax deductions in excess of compensation expense recognized for stock options and
restricted stock are classified as financing cash inflows, while reductions in tax benefits are classified as operating
cash outflows in our consolidated statements of cash flows. See Note 9 for further discussion of share-based
compensation.
Reclassifications
Certain reclassifications have been made to the consolidated financial statements for 2012 and 2011 to conform
to the presentation used for the 2013 consolidated financial statements.