Chesapeake Energy 2015 Annual Report Download - page 124

CHESAPEAKE ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
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Interest Rate Derivatives
As of December 31, 2015, there were no interest rate derivatives outstanding. As of December 31, 2014, 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 revolving credit facility borrowings.
The notional amount of our interest rate derivatives associated with our long-term debt as of December 31, 2014
was $850 million. The estimated fair value of our interest rate derivative liabilities as of December 31, 2014 was $17
million.
We have terminated certain fair value hedges related to certain of our 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 $7 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.
In December 2015, we exchanged in privately negotiated transactions and subsequently retired €42 million in
aggregate principal amount of these senior notes, and we simultaneously unwound the cross currency swaps for the
same principal amount at a cost of $8 million. As a result, we realized a loss of $8 million which was included in losses
on purchases or exchanges of debt. Under the terms of the remaining cross currency swaps, on each semi-annual
interest payment date, the counterparties pay us €9 million and we pay the counterparties $15 million, which yields
an annual dollar-equivalent interest rate of 7.491%. Upon maturity of the notes, the counterparties will pay us €302
million and we will pay the counterparties $403 million. 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. 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 sheets as liabilities of $52 million and $53 million as of
December 31, 2015 and 2014, respectively. The euro-denominated debt in long-term debt has been adjusted to $329
million as of December 31, 2015, using an exchange rate of $1.0862 to €1.00.
Supply Contract Derivatives
From time to time and in the normal course of business, our marketing subsidiary enters into supply contracts
under which we commit to deliver a predetermined quantity of natural gas to certain counterparties in an attempt to
earn attractive margins. Under certain contracts, we receive a sales price that is based on the price of a product other
than natural gas, thereby creating an embedded derivative requiring bifurcation. In one of these supply contracts, we
are committed to supply a minimum of 90 bbtu per day of natural gas through March 2025. In 2015, we recorded
revenues of approximately $96 million for settlements of this embedded derivative. The bifurcated derivative was
measured at fair value resulting in an unrealized gain of $297 million in 2015. Both settlements and mark-to-market
gains (losses) are included in marketing, gathering and compression revenues in our consolidated statements of
operations.