Chesapeake Energy 2015 Annual Report Download - page 75

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From time to time, we enter into interest rate derivatives, including 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 and 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. As of December 31, 2015, there were no
interest rate derivatives outstanding.
As of December 31, 2015, we had $39 million of net gains related to settled derivative contracts that will be
recorded within interest expense as realized gains or losses once they are transferred from our senior note liability or
within interest expense as unrealized gains or losses over the remaining eight-year term of our related senior notes.
Realized and unrealized (gains) or losses from interest rate derivative transactions are reflected as adjustments
to interest expense on the consolidated statements of operations.
Foreign Currency Derivatives
In December 2006, we issued €600 million of 6.25% Euro-denominated Senior Notes due 2017. Concurrent with
the issuance of the euro-denominated senior notes, we entered into cross currency swaps to mitigate our exposure
to fluctuations in the euro relative to the dollar over the term of the notes. In May 2011, we purchased and subsequently
retired €256 million in aggregate principal amount of these senior notes following a tender offer, and we simultaneously
unwound the cross currency swaps for the same principal amount. In December 2015, we exchanged 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. 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. Through the cross currency swaps, we have
eliminated any potential variability in our expected cash flows related to changes in foreign exchange rates and therefore
the swaps are designated as cash flow hedges. 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
As discussed in Note 11 of the notes to our consolidated financial statements included in Item 8 of this report, we
enter into supply contracts in the normal course of business 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.
The prices of the products other than natural gas are unobservable. We engage an independent third-party valuation
firm to value these supply contracts. The products being valued other than natural gas are sensitive to pricing fluctuations
and some of these fluctuations could be material. Changes to the value of these contracts are recorded as mark-to-
market adjustments to marketing, gathering and compression revenues in our consolidated financial statements.