Chesapeake Energy 2014 Annual Report Download - page 123

CHESAPEAKE ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
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We have terminated certain commodity derivative contracts that were previously designated as cash flow hedges
for which the hedged production is still expected to occur. See further discussion below under Effect of Derivative
Instruments - Accumulated Other Comprehensive Income (Loss).
Interest Rate Derivatives
As of December 31, 2014 and 2013, our interest rate derivative instruments consisted of swaps. We enter into
fixed-to-floating interest rate swaps (we receive a fixed interest rate and pay a floating market rate) to mitigate our
exposure to changes in the fair value of our senior notes. We enter into floating-to-fixed interest rate swaps (we receive
a floating market rate and pay a fixed interest rate) to manage our interest rate exposure related to our bank credit
facility borrowings.
The notional amount of our interest rate derivatives, associated with our long-term debt, as of December 31,
2014 and 2013 was $850 million and $2.250 billion, respectively. The estimated fair value of our interest rate derivative
liabilities as of December 31, 2014 and 2013 was $17 million and $98 million, respectively.
We have terminated certain fair value hedges related to senior notes. Gains and losses related to these terminated
hedges will be amortized as an adjustment to interest expense over the remaining term of the related senior notes.
Over the next six years, we will recognize $10 million in net gains related to these transactions.
Foreign Currency Derivatives
We are party to cross currency swaps to mitigate our exposure to foreign currency exchange rate fluctuations
that may result from the €344 million principal amount of our euro-denominated senior notes. The terms of the cross
currency swaps were based on the dollar/euro exchange rate on the issuance date of $1.3325 to €1.00. Under the
terms of the cross currency swaps we currently hold, on each semi-annual interest payment date, the counterparties
pay us €11 million and we pay the counterparties $17 million, which yields an annual dollar-equivalent interest rate
of 7.491%. Upon maturity of the notes, the counterparties will pay us €344 million and we will pay the counterparties
$459 million. The swaps are designated as cash flow hedges and, because they are entirely effective in having
eliminated any potential variability in our expected cash flows related to changes in foreign exchange rates, changes
in their fair value do not impact earnings. The fair values of the cross currency swaps are recorded on the consolidated
balance sheet as a liability of $53 million and an asset of $2 million as of December 31, 2014 and 2013, respectively.
The euro-denominated debt in long-term debt has been adjusted to $416 million as of December 31, 2014 using an
exchange rate of $1.2098 to €1.00.