Chesapeake Energy 2014 Annual Report Download - page 70

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Due to the volatility of oil, natural gas and NGL prices and, to a lesser extent, interest rates and foreign exchange
rates, the Company's financial condition and results of operations can be significantly impacted by changes in the
market value of our derivative instruments. As of December 31, 2014, 2013 and 2012, the fair values of our derivatives
were assets of $652 million, liabilities of $649 million and liabilities of $979 million, respectively.
Income Taxes. The amount of income taxes recorded by the Company requires interpretations of complex rules
and regulations of both federal and state taxing jurisdictions. Income taxes are accounted for using the asset and
liability approach. The Company has recognized deferred tax assets and liabilities for temporary differences between
tax and book basis, tax credit carryforwards and net operating loss carryforwards. We routinely assess the realizability
of our deferred tax assets and reduce such assets by a valuation allowance if it is more likely than not that some portion
or all of the deferred tax assets will not be realized. In assessing the need for additional or adjustments to existing
valuation allowances, we consider the preponderance of evidence concerning the realization of the deferred tax asset.
Among the more significant types of evidence that we consider are:
• taxable income projections in future years;
• whether the carryforward period is so brief that it would limit realization of the tax benefit;
• future sales and operating cost projections that will produce more than enough taxable income to realize
the deferred tax asset based on existing sales prices and cost structures; and
• our earnings history exclusive of the loss that created the future deductible amount coupled with evidence
indicating that the loss is an aberration rather than a continuing condition.
Our judgments and assumptions in estimating future taxable income include such factors as future operating
conditions and commodity prices. As of December 31, 2014 and 2013, we had deferred tax assets of $1.687 billion
and $1.621 billion, respectively, upon which we had a valuation allowance of $222 million and $148 million, respectively,
for certain state net operating losses and tax credits that we have concluded are not more likely than not to be utilized
prior to expiration.
The Company routinely assesses potential uncertain tax positions and, if required, establishes accruals for such
amounts. Accounting guidance for recognizing and measuring uncertain tax positions prescribes a threshold condition
that a tax position must meet for any of the benefit of the uncertain tax position to be recognized in the financial
statements. Guidance is also provided regarding de-recognition, classification and disclosure of these uncertain tax
positions. Tax positions that do not meet or exceed this threshold condition are considered uncertain tax positions. We
accrue interest related to these uncertain tax positions which is recognized in interest expense. Penalties, if any, related
to uncertain tax positions would be recorded in other expenses. Additional information about uncertain tax positions
appears in Note 6 of the notes to our consolidated financial statements included in Item 8 of this report.
Disclosures About Effects of Transactions with Related Parties
Our equity method investees are considered related parties. See Note 7 of the notes to our consolidated financial
statements included in Item 8 of this report for further discussion of transactions with our equity method investees.
Forward-Looking Statements
This report includes “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933
and Section 21E of the Securities Exchange Act of 1934 (the Exchange Act). Forward-looking statements give our
current expectations or forecasts of future events. They include expected oil, natural gas and NGL production and
future expenses, estimated operating costs, assumptions regarding future oil, natural gas and NGL prices, planned
drilling activity, estimates of future drilling and completion and other capital expenditures (including the use of joint
venture drilling carries), potential future write-downs of our oil and natural gas assets, anticipated sales, and the
adequacy of our provisions for legal contingencies, as well as statements concerning anticipated cash flow and liquidity,
ability to comply with financial maintenance covenants and meet contractual cash commitments to third parties, stock
repurchases, operating and capital efficiencies, business strategy, and other plans and objectives for future operations.
Disclosures concerning the fair values of derivative contracts and their estimated contribution to our future results of
operations are based upon market information as of a specific date. These market prices are subject to significant
volatility.