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Fair Value Measurements (Notes)
 6 Months Ended
Jun. 30, 2013
Text Block [Abstract]  
Fair Value Measurements
Fair Value Measurements
Certain financial instruments are reported at fair value on the condensed consolidated balance sheets. Under fair value measurement accounting guidance, fair value is defined as the amount that would be received from the sale of an asset or paid for the transfer of a liability in an orderly transaction between market participants, i.e., an exit price. To estimate an exit price, a three-level hierarchy is used. The fair value hierarchy prioritizes the inputs, which refer broadly to assumptions market participants would use in pricing an asset or a liability, into three levels. Level 1 inputs are unadjusted quoted prices in active markets for identical assets and liabilities and have the highest priority. Level 2 inputs are inputs other than quoted prices within Level 1 that are observable for the asset or liability, either directly or indirectly. Level 3 inputs are unobservable inputs for the financial asset or liability and have the lowest priority. Chesapeake uses a market valuation approach based on available inputs and the following methods and assumptions to measure the fair values of its assets and liabilities, which may or may not be observable in the market.
Recurring Fair Value Measurement
Other Assets. Assets related to forfeited Company matches of employee contributions to Chesapeake’s 401(k) plan and deferred compensation plan are included in other current assets. The fair value of these assets is determined using quoted market prices as they consist of exchange traded securities.
Investments. The fair value of Chesapeake’s investment in Clean Energy Fuels Corp. (NASDAQ:CLNE) common stock is based on a quoted market price.
Other Liabilities. Liabilities related to Chesapeake’s deferred compensation plan are included in other current liabilities. The fair values of these liabilities are determined using quoted market prices, as the plan consists of exchange-traded mutual funds.
Derivatives. The fair value of most of our derivatives is based on third-party pricing models which utilize inputs that are either readily available in the public market, such as natural gas and oil forward curves and discount rates, or can be corroborated from active markets or broker quotes. These values are then compared to the values given by our counterparties for reasonableness. Since natural gas, oil, NGL, interest rate and cross currency swaps do not include optionality and therefore generally have no unobservable inputs, they are classified as Level 2. All other derivatives have some level of unobservable input, such as volatility curves, and are therefore classified as Level 3. For interest rate swaptions, we use the fair value estimates provided by our respective counterparties. These values are reviewed internally for reasonableness using future interest rate curves and time to maturity. Derivatives are also subject to the risk that either party to a contract will be unable to meet its obligations. We factor non-performance risk into the valuation of our derivatives using current published credit default swap rates. To date, this has not had a material impact on the values of our derivatives.
The following table provides fair value measurement information for financial assets (liabilities) measured at fair value on a recurring basis as of June 30, 2013: 
 
 
Quoted
Prices in
Active
Markets
(Level 1)
 
Significant
Other
Observable
Inputs
(Level 2) 
 
Significant
Unobservable
Inputs
(Level 3)
 
Total
Fair Value
 
 
 
 
($ in millions)
 
 
Financial Assets (Liabilities):
 
 
 
 
 
 
 
 
Other current assets
 
$
84

 
$
—

 
$
—

 
$
84

Investments
 
13

 
—

 
—

 
13

Other current liabilities
 
(78
)
 
—

 
—

 
(78
)
Derivatives:
 
 
 
 
 
 
 
 
Commodity assets
 
—

 
209

 
11

 
220

Commodity liabilities
 
—

 
(40
)
 
(605
)
 
(645
)
Interest rate liabilities
 
—

 
(91
)
 
—

 
(91
)
Foreign currency liabilities
 
—

 
(27
)
 
—

 
(27
)
Total derivatives
 
—

 
51

 
(594
)
 
(543
)
Total
 
$
19

 
$
51

 
$
(594
)
 
$
(524
)
The following table provides fair value measurement information for financial assets (liabilities) measured at fair value on a recurring basis as of December 31, 2012: 
 
 
Quoted
Prices in
Active
Markets
(Level 1)
 
Significant
Other
Observable
Inputs
(Level 2) 
 
Significant
Unobservable
Inputs
(Level 3)
 
Total
Fair Value
 
 
 
 
($ in millions)
 
 
Financial Assets (Liabilities):
 
 
 
 
 
 
 
 
Other current assets
 
$
4

 
$
—

 
$
—

 
$
4

Investments
 
20

 
—

 
—

 
20

Other long-term assets
 
88

 
—

 
—

 
88

Other long-term liabilities
 
(87
)
 
—

 
—

 
(87
)
Derivatives:
 
 
 
 
 
 
 
 
Commodity assets
 
—

 
105

 
10

 
115

Commodity liabilities
 
—

 
(13
)
 
(1,026
)
 
(1,039
)
Interest rate liabilities
 
—

 
(35
)
 
—

 
(35
)
Foreign currency liabilities
 
—

 
(20
)
 
—

 
(20
)
Total derivatives
 
—

 
37

 
(1,016
)
 
(979
)
Total
 
$
25

 
$
37

 
$
(1,016
)
 
$
(954
)

A summary of the changes in Chesapeake’s financial assets (liabilities) classified as Level 3 measurements during the Current Period and the Prior Period is presented below. 
 
 
Derivatives
 
 
Commodity
 
Interest Rate
 
 
($ in millions)
Beginning Balance as of January 1, 2013
 
$
(1,016
)
 
$
—

Total gains (losses) (realized/unrealized):
 
 
 
 
Included in earnings(a)
 
362

 
(1
)
Total purchases, issuances, sales and settlements:
 
 
 
 
Sales
 
—

 
1

Settlements
 
60

 
—

Ending Balance as of June 30, 2013
 
$
(594
)
 
$
—

 
 
 
 
 
Beginning Balance as of January 1, 2012
 
$
(1,654
)
 
$
—

Total gains (losses) (realized/unrealized):
 
 
 
 
Included in earnings(a)
 
548

 
2

Total purchases, issuances, sales and settlements:
 
 
 
 
Sales
 
—

 
(2
)
Settlements
 
42

 
—

Ending Balance as of June 30, 2012
 
$
(1,064
)
 
$
—

___________________________________________
(a)
 
Natural Gas, Oil and
NGL Sales
 
Interest Expense
 
 
 
2013
 
2012
 
2013
 
2012
 
 
($ in millions)
Total gains (losses) included in earnings for the
period
 
$
362

 
$
548

 
$
(1
)
 
$
2

Change in unrealized gains (losses) relating
to assets still held at reporting date
 
$
353

 
$
430

 
$
—

 
$
—


Qualitative Disclosures about Unobservable Inputs for Level 3 Fair Value Measurements
The significant unobservable inputs for Level 3 derivative contracts include unpublished forward prices of natural gas and oil, market volatility and credit risk of counterparties. Changes in these inputs will impact the fair value measurement of our derivative contracts. For example, an increase (decrease) in the forward prices and volatility of natural gas and oil prices will decrease (increase) the fair value of natural gas and oil derivatives and adverse changes to our counterparties’ creditworthiness will decrease the fair value of our derivatives.
Quantitative Disclosures about Unobservable Inputs for Level 3 Fair Value Measurements
Instrument
Type
 
Unobservable
Input
 
Range
 
Weighted
Average
 
Fair Value
June 30, 2013
 
 
 
 
 
 
 
 
($ in millions)
Oil Trades(a)
 
Oil price volatility curves
 
10.94% - 24.33%
 
17.22
%
 
$
(365
)
Oil Basis Swaps(b)
 
Physical pricing point forward
curves
 
$6.03 - $7.07
 
$
6.55

 
$
3

Natural Gas Trades(a)
 
Natural gas price volatility
curves
 
20.25% - 37.87%
 
22.94
%
 
$
(225
)
Natural Gas Basis Swaps(b)
 
Physical pricing point forward
curves
 
($1.68) - ($0.04)
 
$
(0.28
)
 
$
(7
)

____________________________________________
(a)
Fair value is based on an estimate derived from option models.
(b)
Fair value is based on an estimate of discounted cash flows.
Nonrecurring Fair Value Measurements
In the Current Quarter, we determined we would sell certain of our buildings and land (other than our core campus) in the Oklahoma City area. Fair value measurements were applied with respect to these non-financial assets, measured on a nonrecurring basis, to determine impairments. We used the income approach, specifically discounted cash flows, for income-producing assets and the market approach for the remaining assets. As the fair values estimated using the market approach were based on recent prices from orderly sales transactions for comparable properties between market participants, the values of these properties are classified as Level 2. The discounted cash flow method includes the development of both current operating metrics as well as assumptions pertaining to the subsequent change of such metrics, including rent growth, operating expense growth and absorption. These assumptions are applied to a specified period to develop future cash flow projections that are then discounted to estimate fair value. Due to these assumptions, the values of these properties are classified as Level 3. See Note 12 for further discussion of the impairments recorded.
Fair Value of Other Financial Instruments
The following disclosure of the estimated fair value of financial instruments is made in accordance with accounting guidance for financial instruments. The carrying values of financial instruments comprising cash and cash equivalents, restricted cash, accounts payable and accounts receivable approximate fair values due to the short-term maturities of these instruments. We estimate the fair value of our exchange-traded debt using quoted market prices (Level 1). The fair value of all other debt, which consists of our credit facilities and our term loans, is estimated using our credit default swap rate (Level 2). Fair value is compared to the carrying value, excluding the impact of interest rate derivatives, in the table below. 
 
 
June 30, 2013
 
December 31, 2012
 
 
Carrying
Amount
 
Estimated
Fair Value
 
Carrying
Amount
 
Estimated
Fair Value
 
 
 
 
($ in millions)
 
 
Current maturities of long-term debt (Level 1)
 
$
—

 
$
—

 
$
463

 
$
480

Long-term debt (Level 1)
 
$
10,678

 
$
11,479

 
$
9,759

 
$
10,457

Long-term debt (Level 2)
 
$
2,363

 
$
2,337

 
$
2,378

 
$
2,284