10-Q




UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-Q
[X]    Quarterly Report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the Quarterly Period Ended March 31, 2016
[  ]    Transition Report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the transition period from                      to                     
Commission File No. 1-13726

Chesapeake Energy Corporation
(Exact name of registrant as specified in its charter)


Oklahoma
 
73-1395733
(State or other jurisdiction of incorporation or organization)
 
(I.R.S. Employer Identification No.)
6100 North Western Avenue
 
 
Oklahoma City, Oklahoma
 
73118
(Address of principal executive offices)
 
(Zip Code)
(405) 848-8000
(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES [X]     NO [ ] 

 Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). YES [X]     NO [ ] 

 Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of "large accelerated filer", "accelerated filer" and "smaller reporting company" in Rule 12b-2 of the Exchange Act.
Large Accelerated Filer [X] Accelerated Filer [ ] Non-accelerated Filer [ ] Smaller Reporting Company [ ]

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). YES [ ]      NO [X]
As of April 27, 2016, there were 684,606,831 shares of our $0.01 par value common stock outstanding.





CHESAPEAKE ENERGY CORPORATION AND SUBSIDIARIES
INDEX TO FORM 10-Q FOR THE QUARTER ENDED MARCH 31, 2016


 
Page
Item 1.
 
Condensed Consolidated Balance Sheets as of March 31, 2016 and December 31, 2015
 
for the Three Months Ended March 31, 2016 and 2015
 
for the Three Months Ended March 31, 2016 and 2015
 
for the Three Months Ended March 31, 2016 and 2015
 
for the Three Months Ended March 31, 2016 and 2015
 
Item 2.
Item 3.
Item 4.
 
 
 
 
 
Item 1.
Item 1A.
Item 2.
Item 3.
Item 4.
Item 5.
Item 6.



PART I. FINANCIAL INFORMATION


Item 1.
Condensed Consolidated Financial Statements (Unaudited)
CHESAPEAKE ENERGY CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)

 
 
March 31,
2016
 
December 31,
2015
 
 
($ in millions)
CURRENT ASSETS:
 
 
 
 
Cash and cash equivalents ($1 and $1 attributable to our VIE)
 
$
16

 
$
825

Accounts receivable, net
 
937

 
1,129

Short-term derivative assets
 
350

 
366

Other current assets
 
189

 
160

Total Current Assets
 
1,492

 
2,480

PROPERTY AND EQUIPMENT:
 
 
 
 
Oil and natural gas properties, at cost based on full cost accounting:
 
 
 
 
Proved oil and natural gas properties
($488 and $488 attributable to our VIE)
 
64,305

 
63,843

Unproved properties
 
6,612

 
6,798

Other property and equipment
 
2,749

 
2,927

Total Property and Equipment, at Cost
 
73,666

 
73,568

Less: accumulated depreciation, depletion and amortization
(($445) and ($428) attributable to our VIE)
 
(60,506
)
 
(59,365
)
Property and equipment held for sale, net
 
131

 
95

Total Property and Equipment, Net
 
13,291

 
14,298

LONG-TERM ASSETS:
 
 
 
 
Long-term derivative assets
 
263

 
246

Other long-term assets
 
311

 
290

TOTAL ASSETS
 
$
15,357

 
$
17,314

 
 
 
 
 

The accompanying notes are an integral part of these condensed consolidated financial statements.
1

CHESAPEAKE ENERGY CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS – (Continued)
(Unaudited)


 
 
March 31,
2016
 
December 31,
2015
 
 
($ in millions)
CURRENT LIABILITIES:
 
 
 
 
Accounts payable
 
$
723

 
$
944

Current maturities of long-term debt, net
 
343

 
381

Accrued interest
 
137

 
101

Short-term derivative liabilities
 
86

 
40

Other current liabilities ($2 and $8 attributable to our VIE)
 
1,544

 
2,219

Total Current Liabilities
 
2,833

 
3,685

LONG-TERM LIABILITIES:
 
 
 
 
Long-term debt, net
 
10,062

 
10,311

Long-term derivative liabilities
 
12

 
60

Asset retirement obligations, net of current portion
 
453

 
452

Other long-term liabilities
 
426

 
409

Total Long-Term Liabilities
 
10,953

 
11,232

CONTINGENCIES AND COMMITMENTS (Note 4)
 
 
 
 
EQUITY:
 
 
 
 
Chesapeake Stockholders’ Equity:
 
 
 
 
Preferred stock, $0.01 par value, 20,000,000 shares authorized:
7,225,713 and 7,251,515 shares outstanding
 
3,036

 
3,062

Common stock, $0.01 par value, 1,000,000,000 shares authorized:
684,560,678 and 664,795,509 shares issued
 
7

 
7

Additional paid-in capital
 
12,521

 
12,403

Accumulated deficit
 
(14,123
)
 
(13,202
)
Accumulated other comprehensive loss
 
(99
)
 
(99
)
Less: treasury stock, at cost; 1,384,506 and 1,437,724 common shares
 
(31
)
 
(33
)
Total Chesapeake Stockholders’ Equity
 
1,311

 
2,138

Noncontrolling interests
 
260

 
259

Total Equity
 
1,571

 
2,397

TOTAL LIABILITIES AND EQUITY
 
$
15,357

 
$
17,314


The accompanying notes are an integral part of these condensed consolidated financial statements.
2

CHESAPEAKE ENERGY CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)



 
 
Three Months Ended March 31,
 
 
2016
 
2015
  
 
($ in millions except
per share data)
REVENUES:
 
 
 
 
Oil, natural gas and NGL
 
$
993

 
$
1,543

Marketing, gathering and compression
 
960

 
1,675

Total Revenues
 
1,953

 
3,218

OPERATING EXPENSES:
 
 
 
 
Oil, natural gas and NGL production
 
206

 
299

Oil, natural gas and NGL gathering, processing and transportation
 
482

 
458

Production taxes
 
18

 
28

Marketing, gathering and compression
 
942

 
1,700

General and administrative
 
48

 
56

Restructuring and other termination costs
 
—

 
(10
)
Provision for legal contingencies
 
22

 
25

Oil, natural gas and NGL depreciation, depletion and amortization
 
271

 
684

Depreciation and amortization of other assets
 
29

 
35

Impairment of oil and natural gas properties
 
853

 
4,976

Impairments of fixed assets and other
 
38

 
4

Net (gains) losses on sales of fixed assets
 
(4
)
 
3

Total Operating Expenses
 
2,905

 
8,258

LOSS FROM OPERATIONS
 
(952
)
 
(5,040
)
OTHER INCOME (EXPENSE):
 
 
 
 
Interest expense
 
(62
)
 
(51
)
Losses on investments
 
—

 
(7
)
Loss on sale of investment
 
(10
)
 
—

Gains on purchases or exchanges of debt
 
100

 
—

Other income
 
3

 
6

Total Other Income (Expense)
 
31

 
(52
)
LOSS BEFORE INCOME TAXES
 
(921
)
 
(5,092
)
INCOME TAX BENEFIT:
 
 
 
 
Current income taxes
 
—

 
—

Deferred income taxes
 
—

 
(1,372
)
Total Income Tax Benefit
 
—

 
(1,372
)
NET LOSS
 
(921
)
 
(3,720
)
Net income attributable to noncontrolling interests
 
—

 
(19
)
NET LOSS ATTRIBUTABLE TO CHESAPEAKE
 
(921
)
 
(3,739
)
Preferred stock dividends
 
(43
)
 
(43
)
NET LOSS AVAILABLE TO COMMON STOCKHOLDERS
 
$
(964
)
 
$
(3,782
)
LOSS PER COMMON SHARE:
 
 
 
 
Basic
 
$
(1.44
)
 
$
(5.72
)
Diluted
 
$
(1.44
)
 
$
(5.72
)
CASH DIVIDEND DECLARED PER COMMON SHARE
 
$
—

 
$
0.0875

WEIGHTED AVERAGE COMMON AND COMMON
EQUIVALENT SHARES OUTSTANDING (in millions):
 
 
 
 
Basic
 
668

 
661

Diluted
 
668

 
661


The accompanying notes are an integral part of these condensed consolidated financial statements.
3

CHESAPEAKE ENERGY CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(Unaudited)


 
 
Three Months Ended March 31,
 
 
2016
 
2015
 
 
($ in millions)
NET LOSS
 
$
(921
)
 
$
(3,720
)
OTHER COMPREHENSIVE INCOME (LOSS), NET OF INCOME TAX:
 
 
 
 
Unrealized gains (losses) on derivative instruments,
net of income tax expense (benefit) of ($3) and ($1)
 
(4
)
 
(1
)
Reclassification of (gains) losses on settled derivative instruments,
net of income tax expense (benefit) of $7 and $7
 
4

 
10

Other Comprehensive Income
 
—

 
9

COMPREHENSIVE LOSS
 
(921
)
 
(3,711
)
COMPREHENSIVE INCOME ATTRIBUTABLE TO
NONCONTROLLING INTERESTS
 
—

 
(19
)
COMPREHENSIVE LOSS ATTRIBUTABLE TO CHESAPEAKE
 
$
(921
)
 
$
(3,730
)



The accompanying notes are an integral part of these condensed consolidated financial statements.
4

CHESAPEAKE ENERGY CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)


 
 
Three Months Ended March 31,
 
 
2016
 
2015
 
 
($ in millions)
CASH FLOWS FROM OPERATING ACTIVITIES:
 
 
 
 
NET LOSS
 
$
(921
)
 
$
(3,720
)
ADJUSTMENTS TO RECONCILE NET LOSS TO CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES:
 
 
 
 
Depreciation, depletion and amortization
 
300

 
719

Deferred income tax expense (benefit)
 
—

 
(1,372
)
Derivative gains, net
 
(201
)
 
(172
)
Cash receipts on derivative settlements, net
 
267

 
408

Stock-based compensation
 
12

 
23

Impairment of oil and natural gas properties
 
853

 
4,976

Net (gains) losses on sales of fixed assets
 
(4
)
 
3

Impairments of fixed assets and other
 
33

 
2

Losses on investments
 
—

 
7

Loss on sale of investment
 
10

 
—

Gains on purchases or exchanges of debt
 
(100
)
 
—

Restructuring and other termination costs
 
—

 
(10
)
Provision for legal contingencies
 
22

 
25

Other
 
(8
)
 
(7
)
Changes in assets and liabilities
 
(684
)
 
(459
)
Net Cash Provided By (Used In) Operating Activities
 
(421
)
 
423

CASH FLOWS FROM INVESTING ACTIVITIES:
 
 
 
 
Drilling and completion costs
 
(265
)
 
(1,306
)
Acquisitions of proved and unproved properties
 
(67
)
 
(128
)
Proceeds from divestitures of proved and unproved properties
 
62

 
21

Additions to other property and equipment
 
(10
)
 
(58
)
Proceeds from sales of other property and equipment
 
9

 
2

Additions to investments
 
—

 
(1
)
Other
 
(2
)
 
(2
)
Net Cash Used In Investing Activities
 
(273
)
 
(1,472
)
CASH FLOWS FROM FINANCING ACTIVITIES:
 
 
 
 
Cash paid to purchase debt
 
(472
)
 
—

Proceeds from credit facilities borrowings
 
515

 
—

Payments on credit facilities borrowings
 
(148
)
 
—

Cash paid for common stock dividends
 
—

 
(59
)
Cash paid for preferred stock dividends
 
—

 
(43
)
Distributions to noncontrolling interest owners
 
(5
)
 
(29
)
Other
 
(5
)
 
(21
)
Net Cash Used In Financing Activities
 
(115
)
 
(152
)
Net decrease in cash and cash equivalents
 
(809
)
 
(1,201
)
Cash and cash equivalents, beginning of period
 
825

 
4,108

Cash and cash equivalents, end of period
 
$
16

 
$
2,907

 
 
 
 
 

The accompanying notes are an integral part of these condensed consolidated financial statements.
5
Table of Contents
CHESAPEAKE ENERGY CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS – (Continued)
(Unaudited)



Supplemental disclosures to the condensed consolidated statements of cash flows are presented below:
 
 
 
 
 
 
 
Three Months Ended March 31,
 
 
2016
 
2015
 
 
($ in millions)
SUPPLEMENTAL CASH FLOW INFORMATION:
 
 
 
 
Interest paid, net of capitalized interest
 
$
39

 
$
43

Income taxes paid, net of refunds received
 
$
(19
)
 
$
47

 
 
 
 
 
SUPPLEMENTAL DISCLOSURE OF SIGNIFICANT NON-CASH INVESTING AND FINANCING ACTIVITIES:
 
 
 
 
Change in accrued drilling and completion costs
 
$
(9
)
 
$
63

Change in divested proved and unproved properties
 
$
—

 
$
(53
)
Debt exchanged for common stock
 
$
77

 
$
—





The accompanying notes are an integral part of these condensed consolidated financial statements.
6

CHESAPEAKE ENERGY CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(Unaudited)



 
 
Three Months Ended
March 31,
 
 
2016
 
2015
 
 
($ in millions)
PREFERRED STOCK:
 
 
 
 
Balance, beginning of period
 
$
3,062

 
$
3,062

Conversions of 25,802 and 0 shares of preferred stock for common stock
 
(26
)
 
—

Balance, end of period
 
3,036

 
3,062

COMMON STOCK:
 
 
 
 
Balance, beginning and end of period
 
7

 
7

ADDITIONAL PAID-IN CAPITAL:
 
 
 
 
Balance, beginning of period
 
12,403

 
12,531

Stock-based compensation
 
16

 
12

Exchange of convertible notes for 14,699,368 and 0 shares of common stock
 
65

 
—

Exchange of senior notes for 2,555,979 and 0 shares of common stock
 
11

 
—

Conversion of preferred stock for 1,021,506 and 0 shares of common stock
 
26

 
—

Dividends on common stock
 
—

 
(59
)
Dividends on preferred stock
 
—

 
(43
)
Decrease in tax benefit from stock-based compensation
 
—

 
(5
)
Balance, end of period
 
12,521

 
12,436

RETAINED EARNINGS (ACCUMULATED DEFICIT):
 
 
 
 
Balance, beginning of period
 
(13,202
)
 
1,483

Net loss attributable to Chesapeake
 
(921
)
 
(3,739
)
Balance, end of period
 
(14,123
)
 
(2,256
)
ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS):
 
 
 
 
Balance, beginning of period
 
(99
)
 
(143
)
Hedging activity
 
—

 
9

Balance, end of period
 
(99
)
 
(134
)
TREASURY STOCK – COMMON:
 
 
 
 
Balance, beginning of period
 
(33
)
 
(37
)
Purchase of 10,100 and 12,401 shares for company benefit plans
 
—

 
—

Release of 63,318 and 41,046 shares from company benefit plans
 
2

 
—

Balance, end of period
 
(31
)
 
(37
)
TOTAL CHESAPEAKE STOCKHOLDERS’ EQUITY
 
1,311

 
13,078

NONCONTROLLING INTERESTS:
 
 
 
 
Balance, beginning of period
 
259

 
1,302

Net income attributable to noncontrolling interests
 
—

 
19

Distributions to noncontrolling interest owners
 
1

 
(26
)
Balance, end of period
 
260

 
1,295

TOTAL EQUITY
 
$
1,571

 
$
14,373


The accompanying notes are an integral part of these condensed consolidated financial statements.
7

CHESAPEAKE ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)






1.
Basis of Presentation and Summary of Significant Accounting Policies
Basis of Presentation
The accompanying unaudited condensed consolidated financial statements of Chesapeake Energy Corporation ("Chesapeake" or the "Company") and its subsidiaries were prepared in accordance with accounting principles generally accepted in the United States (U.S. GAAP) and include the accounts of our direct and indirect wholly owned subsidiaries and entities in which Chesapeake has a controlling financial interest. Intercompany accounts and balances have been eliminated. These financial statements were prepared in accordance with the instructions to Form 10-Q and, therefore, do not include all disclosures required for financial statements prepared in conformity with U.S. GAAP.
This Form 10-Q relates to the three months ended March 31, 2016 (the "Current Quarter") and the three months ended March 31, 2015 (the "Prior Quarter"). Chesapeake's annual report on Form 10-K for the year ended December 31, 2015 ("2015 Form 10-K") includes certain definitions and a summary of significant accounting policies and should be read in conjunction with this Form 10-Q. All material adjustments (consisting solely of normal recurring adjustments) which, in the opinion of management, are necessary for a fair statement of the results for the interim periods have been reflected. The results for the Current Quarter are not necessarily indicative of the results to be expected for the full year.
Risks and Uncertainties
Chesapeake’s strategy for 2016 is to focus on improving liquidity and generating cash. Our ability to grow, make capital expenditures and service our debt depends primarily upon the prices we receive for the oil, natural gas and natural gas liquids (NGL) we sell. Substantial expenditures are required to replace reserves, sustain production and fund our business plans. Historically, oil and natural gas prices have been very volatile, and may be subject to wide fluctuations in the future. The substantial decline in oil, natural gas and NGL prices from 2014 levels has negatively affected the amount of cash we have available for capital expenditures and debt service.
In the Current Quarter, our capitalized costs of oil and natural gas properties exceeded our full cost ceiling, resulting in a noncash impairment in the carrying value of our oil and natural gas properties of $853 million, which was the primary driver of our net loss in the Current Quarter of $921 million. Based on the first-day-of-the-month prices we have received over the 11 months ended May 1, 2016, as well as the current strip price for June 2016, we expect to record downward reserve revisions and another material write-down in the carrying value of our oil and natural gas properties in the second quarter of 2016. Further material write-downs in subsequent quarters will occur if the trailing 12-month commodity prices continue to fall as compared to the commodity prices used in prior quarters.
As of March 31, 2016, we had a cash balance of approximately $16 million compared to $825 million as of December 31, 2015, and we had a net working capital deficit of approximately $1.341 billion compared to a net working capital deficit of approximately $1.205 billion as of December 31, 2015. Based on our cash balance, forecasted cash flows from operating activities and availability under our revolving credit facility, we expect to be able to fund our planned capital expenditures budget, meet our debt service requirements and fund our other commitments and obligations for the next 12 months. Oil, natural gas and NGL prices have a material impact on our financial position, results of operations, cash flows and quantities of reserves that may be economically produced. If depressed prices persist throughout 2017 and we are unable to restructure or refinance our debt or generate additional liquidity through other actions, our ability to comply with the financial covenants under our revolving credit facility and make scheduled debt payments could be adversely impacted.
In April 2016, we further amended our revolving credit facility agreement. Pursuant to the amendment, our borrowing base was reaffirmed in the amount of $4.0 billion and our next scheduled borrowing base redetermination date was postponed until June 15, 2017, with the consenting lenders agreeing not to exercise their interim redetermination right prior to that date. The amendment also modifies the credit agreement to provide for, among other things, (i) the suspension or modification of certain financial covenants and (ii) the granting of liens and security interests on substantially all of our assets, including mortgages encumbering 90% of our proved oil and gas properties that constitute borrowing base properties, all hedge contracts and personal property, subject to certain agreed upon carve outs. See Note 3 for further discussion of our revolving credit facility.


8

CHESAPEAKE ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
(Unaudited)





As of March 31, 2016, we had approximately $9.425 billion principal amount of debt outstanding, of which $1.625 billion matures or can be put to us in 2017 (including $344 million of maturities in January 2017, $902 million which can be put to us in May 2017 and $379 million that matures in August 2017) and $878 million that matures or can be put to us in 2018. See Note 3 for further discussion of our debt obligations, including principal and carrying amounts of our notes. As of March 31, 2016, we had $367 million of outstanding borrowings under our revolving credit facility.
As operator of a substantial portion of our oil and natural gas properties under development, we have significant control and flexibility over the development plan and the associated timing, enabling us to reduce at least a portion of our capital spending as needed. We have reduced our budgeted 2016 capital expenditures, inclusive of capitalized interest, to $1.3 - $1.8 billion, a significant reduction from our 2015 capital spending level of $3.6 billion. We currently plan to use cash flows from operations, cash on hand and our revolving credit facility to fund our capital expenditures during 2016. We expect to generate additional liquidity with proceeds from potential sales of assets that we determine do not fit our strategic priorities. Management continues to review operational plans for the remainder of 2016 and beyond, which could result in changes to projected capital expenditures and revenues from sales of oil, natural gas and NGL. We closely monitor the amounts and timing of our sources and uses of funds, particularly as they affect our ability to maintain compliance with the financial covenants of our revolving credit facility.
Since December 2015, Moody’s Investor Services, Inc. has lowered our senior unsecured credit rating from “Ba3” to “Caa3”, and Standard & Poor’s Rating Services has lowered our senior unsecured credit rating from “BB-” to “CC”. Some of our counterparties have requested or required us to post collateral as financial assurance of our performance under certain contractual arrangements, such as gathering, processing, transportation and hedging agreements. As of May 3, 2016, we have received requests to post approximately $281 million in collateral under such arrangements, of which we have posted approximately $247 million (excluding the supersedeas bond with respect to the 6.775% Senior Notes due 2019 (the 2019 Notes) litigation discussed in Note 4). We have posted the required collateral, primarily in the form of letters of credit and cash, or are otherwise complying with these contractual requests for collateral. We may be requested or required by other counterparties to post additional collateral in an aggregate amount of approximately $696 million, which may be in the form of additional letters of credit, cash or other acceptable collateral. However, we have substantial long-term business relationships with each of these counterparties, and we may be able to mitigate any collateral requests through ongoing business arrangements and by offsetting amounts that the counterparty owes us. Any posting of additional collateral consisting of cash or letters of credit, which would reduce availability under our credit facility, will negatively impact our liquidity.
We may seek to access the capital markets to refinance a portion of our outstanding indebtedness and improve our liquidity. We have historically used the debt capital markets, our most efficient method of raising capital, to supplement our liquidity needs. However, access to funds obtained through the high-yield debt market, particularly in the energy sector, has been severely constrained by a variety of market factors that could hinder our ability to raise new capital. We do not believe the high-yield debt market is currently accessible to us at favorable terms, and our accessibility may not improve during the remainder of 2016.
We have taken measures to mitigate the risks and uncertainties facing us for the next 12 months, including mitigating a portion of our downside exposure to lower commodity prices through derivative contracts, the suspension of payment of dividends on our convertible preferred stock and the April 2016 amendment to our revolving credit facility; however, there can be no assurance that these measures will satisfy our needs. Further, our ability to generate operating cash flow in the current commodity price environment, sell assets, access capital markets or take any other action to improve our liquidity and manage our debt is subject to the risks discussed above and the other risks and uncertainties that exist in our industry, some of which we may not be able to anticipate at this time or control. If commodity prices decrease, or if we fail to complete significant asset sales, access the capital markets on favorable terms or take other actions to improve our liquidity, we may not be able to fund budgeted capital expenditures or meet our debt service requirements in 2017 or beyond.

9

CHESAPEAKE ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
(Unaudited)





Reclassifications
In April 2015, the Financial Accounting Standards Board (FASB) issued guidance that requires debt issuance costs to be presented in the balance sheet as a direct deduction from the associated debt liability. This standard requires retrospective application and is effective for annual reporting periods beginning after December 15, 2015. This change in accounting principle is preferable since it allows debt issuance costs and debt issuance discounts to be presented similarly in the consolidated balance sheets as a reduction to the face amount of our debt balances. A retrospective change to our consolidated balance sheet as of December 31, 2015, as previously presented, is required pursuant to the guidance. The retrospective adjustment to the December 31, 2015 consolidated balance sheet is shown below.
 
 
As Previously Reported
 
December 31, 2015 Adjustment Effect
 
As Adjusted
 
 
$ in millions
Other long-term assets
 
$
333

 
$
(43
)
 
$
290

Long-term debt, net
 
$
10,354

 
$
43

 
$
10,311

Beginning in the fourth quarter of 2015, we began presenting third party transportation and gathering costs as a component of operating expenses in the statement of operations. Previously, these costs were reflected as deductions to oil, natural gas and NGL sales. These costs have been reclassified in our condensed consolidated statement of operations for the Prior Quarter to conform to the presentation used for the Current Quarter. The net effect of this reclassification did not impact our previously reported net loss, stockholders’ equity or cash flows; however, previously reported oil, natural gas and NGL sales have increased from the amounts previously reported, and total operating expenses have increased by those same amounts.

10

CHESAPEAKE ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
(Unaudited)





2.
Earnings Per Share
Basic earnings per share (EPS) is calculated using the weighted average number of common shares outstanding during the period and includes the effect of any participating securities as appropriate. Participating securities consist of unvested restricted stock issued to our employees and non-employee directors that provide dividend rights.
Diluted EPS is calculated assuming the issuance of common shares for all potentially dilutive securities, provided the effect is not antidilutive. For the Current Quarter and the Prior Quarter, our contingent convertible senior notes did not have a dilutive effect and therefore were excluded from the calculation of diluted EPS. See Note 3 for further discussion of our contingent convertible senior notes.
For the Current Quarter and the Prior Quarter, shares of the following securities and associated adjustments to net income, representing dividends on preferred stock and allocated earnings on participating securities, were excluded from the calculation of diluted EPS as the effect was antidilutive.
 
 
Net Income
Adjustments
 
Shares
 
 
($ in millions)
 
(in millions)
Three Months Ended March 31, 2016
 
 
 
 
Common stock equivalent of our preferred stock outstanding:
 
 
 
 
5.75% cumulative convertible preferred stock
 
$
21

 
58

5.75% cumulative convertible preferred stock (series A)
 
$
16

 
42

5.00% cumulative convertible preferred stock (series 2005B)
 
$
3

 
6

4.50% cumulative convertible preferred stock
 
$
3

 
6

Participating securities
 
$
—

 
1

 
 
 
 
 
Three Months Ended March 31, 2015
 
 
 
 
Common stock equivalent of our preferred stock outstanding:
 
 
 
 
5.75% cumulative convertible preferred stock
 
$
21

 
59

5.75% cumulative convertible preferred stock (series A)
 
$
16

 
42

5.00% cumulative convertible preferred stock (series 2005B)
 
$
3

 
6

4.50% cumulative convertible preferred stock
 
$
3

 
6

Participating securities
 
$
—

 
2




11

CHESAPEAKE ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
(Unaudited)





3.
Debt
Our long-term debt consisted of the following as of March 31, 2016 and December 31, 2015:
 
 
March 31, 2016
 
December 31, 2015
 
 
Principal
Amount
 
Carrying
Amount
 
Principal
Amount
 
Carrying
Amount
 
 
($ in millions)
3.25% senior notes due 2016
 
$
—

 
$
—

 
$
381

 
381

6.25% euro-denominated senior notes due 2017(a)
 
344

 
344

 
329

 
329

6.5% senior notes due 2017
 
379

 
379

 
453

 
453

7.25% senior notes due 2018
 
538

 
538

 
538

 
538

Floating rate senior notes due 2019
 
1,104

 
1,104

 
1,104

 
1,104

6.625% senior notes due 2020
 
822

 
822

 
822

 
822

6.875% senior notes due 2020
 
304

 
304

 
304

 
304

6.125% senior notes due 2021
 
589

 
589

 
589

 
589

5.375% senior notes due 2021
 
286

 
286

 
286

 
286

4.875% senior notes due 2022
 
639

 
639

 
639

 
639

8.00% senior secured second lien notes due 2022
 
2,425

 
3,542

 
2,425

 
3,584

5.75% senior notes due 2023
 
384

 
384

 
384

 
384

2.75% contingent convertible senior notes due 2035(b)
 
2

 
2

 
2

 
2

2.5% contingent convertible senior notes due 2037(b)(c)
 
902

 
846

 
1,110

 
1,027

2.25% contingent convertible senior notes due 2038(b)(c)
 
340

 
293

 
340

 
290

Revolving credit facility
 
367

 
367

 
—

 
—

Debt issuance costs
 
—

 
(38
)
 
—

 
(43
)
Discount on senior notes
 
—

 
(3
)
 
—

 
(4
)
Interest rate derivatives(d)
 
—

 
7

 
—

 
7

Total debt, net
 
9,425

 
10,405

 
9,706

 
10,692

Less current maturities of long-term debt, net(e)
 
(344
)
 
(343
)
 
(381
)
 
(381
)
Total long-term debt, net
 
$
9,081

 
$
10,062

 
$
9,325

 
$
10,311

___________________________________________
(a)
The principal and carrying amounts shown are based on the exchange rate of $1.1380 to €1.00 and $1.0862 to €1.00 as of March 31, 2016 and December 31, 2015, respectively. See Foreign Currency Derivatives in Note 8 for information on our related foreign currency derivatives.
(b)
The repurchase, conversion, contingent interest and redemption provisions of our contingent convertible senior notes are as follows:
Holders’ Demand Repurchase Rights. The holders of our contingent convertible senior notes may require us to repurchase, in cash, all or a portion of their notes at 100% of the principal amount of the notes on any of four dates that are five, ten, fifteen and twenty years before the maturity date.

12

CHESAPEAKE ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
(Unaudited)





Optional Conversion by Holders. At the holder’s option, prior to maturity under certain circumstances, the notes are convertible into cash and, if applicable, shares of our common stock using a net share settlement process. One triggering circumstance is when the price of our common stock exceeds a threshold amount during a specified period in a fiscal quarter. Convertibility based on common stock price is measured quarterly. During the specified period in the Current Quarter, the price of our common stock was below the threshold level for each series of the contingent convertible senior notes and, as a result, the holders do not have the option to convert their notes into cash and common stock in the second quarter of 2016 under this provision.
The notes are also convertible, at the holder’s option, during specified five-day periods if the trading price of the notes is below certain levels determined by reference to the trading price of our common stock. The notes were not convertible under this provision during the Current Quarter and the Prior Quarter. In general, upon conversion of a contingent convertible senior note, the holder will receive cash equal to the principal amount of the note and common stock for the note’s conversion value in excess of the principal amount.
Contingent Interest. We will pay contingent interest on the convertible senior notes after they have been outstanding at least ten years during certain periods if the average trading price of the notes exceeds the threshold defined in the indenture.
The holders’ demand repurchase dates, the common stock price conversion threshold amounts (as adjusted to give effect to cash dividends on our common stock) and the ending date of the first six-month period in which contingent interest may be payable for the contingent convertible senior notes are as follows:
    Contingent  
    Convertible  
    Senior  Notes    
 
Holders' Demand
Repurchase Dates
 
Common Stock
 Price Conversion 
Thresholds
 
 Contingent Interest
First Payable
(if applicable)
2.75% due 2035
 
November 15, 2020, 2025, 2030
 
$
45.02

 
May 14, 2016
2.5% due 2037
 
May 15, 2017, 2022, 2027, 2032
 
$
59.44

 
November 14, 2017
2.25% due 2038
 
December 15, 2018, 2023, 2028, 2033
 
$
100.20

 
June 14, 2019
Optional Redemption by the Company. We may redeem the contingent convertible senior notes once they have been outstanding for ten years at a redemption price of 100% of the principal amount of the notes, payable in cash. We may redeem our 2.75% Contingent Convertible Senior Notes due 2035 at any time.
(c)
Discount as of March 31, 2016 and December 31, 2015 included $103 million and $133 million, respectively, associated with the equity component of our contingent convertible senior notes. This discount is amortized based on an effective yield method.
(d)
See Interest Rate Derivatives in Note 8 for further discussion related to these instruments.
(e)
As of March 31, 2016, current maturities of long-term debt, net includes our 6.25% Euro-denominated Senior Notes due 2017.
Chesapeake Senior Notes and Contingent Convertible Senior Notes
In the Current Quarter, in addition to the repayment upon maturity of $259 million principal amount of our 3.25% Senior Notes due 2016 (together with $122 million principal amount repurchased in the open market for $115 million prior to maturity), we repurchased in the open market approximately $118 million principal amount of our outstanding 2.5% Contingent Convertible Senior Notes due 2037 (that could have been put to us in May 2017) for $63 million and $59 million principal amount of our outstanding 6.5% Senior Notes due 2017 for $36 million. Additionally, we privately negotiated an exchange of approximately $90 million principal amount of our outstanding 2.5% Contingent Convertible Senior Notes due 2037 for 14,699,368 common shares and $15 million principal amount of our outstanding 6.5% Senior Notes due 2017 for 2,555,979 common shares. We recorded an aggregate gain of approximately $100 million associated with the repurchases and exchanges.

13

CHESAPEAKE ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
(Unaudited)





Revolving Credit Facility
We have a $4.0 billion senior secured revolving credit facility that matures in December 2019. As of March 31, 2016, we had outstanding borrowings of $367 million under the credit facility and had used $619 million of the credit facility for various letters of credit (including the $461 million supersedeas bond with respect to the 2019 Notes litigation discussed in Note 4). The terms of the credit facility include covenants limiting, among other things, our ability to incur additional indebtedness, make investments or loans, create liens, consummate mergers and similar fundamental changes, make restricted payments, make investments in unrestricted subsidiaries and enter into transactions with affiliates. We were in compliance with all financial covenants under the agreement as of March 31, 2016.
In April 2016, we entered into the third amendment to our senior revolving credit facility. Pursuant to the amendment, our borrowing base was reaffirmed in the amount of $4.0 billion and the next scheduled borrowing base redetermination review was postponed until June 15, 2017, with the consenting lenders agreeing not to exercise their interim redetermination right prior to that date. The amendment also provides temporary financial covenant relief, with the credit facility’s existing first lien secured leverage ratio and net debt to capitalization ratio suspended until September 30, 2017 and the interest coverage ratio maintenance covenant was reduced as noted below. In addition, we agreed to grant liens and security interests on substantially all of our assets, as well as maintain a minimum liquidity amount (defined as cash and cash equivalents and availability under our revolving credit facility) of $500 million until the suspension of the existing maintenance covenants ends.
The amendment reduces the interest coverage ratio from 1.1 to 1.0 to 0.65 to 1.0 through the first quarter of 2017, after which it will increase to 0.70 to 1.0 through the second quarter of 2017, 1.2 to 1.0 through the third quarter of 2017 and 1.25 to 1.0 thereafter. The amendment also includes a collateral value coverage test whereby if the collateral value coverage ratio, tested as of December 31, 2016, falls below 1.1 to 1.0, the $500 million minimum liquidity covenant increases to $750 million, and if the collateral value coverage ratio, tested as of March 31, 2017, falls below 1.25 to 1.0, our borrowing ability will be reduced in order to satisfy such ratio. The amendment also gives us the ability to incur up to $2.5 billion of first lien indebtedness secured on a pari passu basis with the existing obligations under the credit agreement, subject to payment priority in favor of the existing lenders and the other limitations on junior lien debt set forth in the credit agreement.
Fair Value of Debt
We estimate the fair value of our exchange-traded debt using quoted market prices (Level 1). The fair value of all other debt, including borrowings under our revolving credit facility, 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. 
 
 
March 31, 2016
 
December 31, 2015
 
 
Carrying
Amount
 
Estimated
Fair Value
 
Carrying
Amount
 
Estimated
Fair Value
 
 
 
 
($ in millions)
 
 
Short-term debt (Level 1)
 
$
343

 
$
250

 
$
381

 
$
366

Long-term debt (Level 1)
 
$
9,688

 
$
4,029

 
$
10,347

 
$
3,735

Long-term debt (Level 2)
 
$
367

 
$
250

 
$
—

 
$
—


14

CHESAPEAKE ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
(Unaudited)





4.
Contingencies and Commitments
Contingencies
Litigation and Regulatory Proceedings
The Company is involved in a number of litigation and regulatory proceedings (including those described below). Many of these proceedings are in early stages, and many of them seek or may seek damages and penalties, the amount of which is indeterminate. We estimate and provide for potential losses that may arise out of litigation and regulatory proceedings to the extent that such losses are probable and can be reasonably estimated. Significant judgment is required in making these estimates and our final liabilities may ultimately be materially different. Our total estimated liability in respect of litigation and regulatory proceedings is determined on a case-by-case basis and represents an estimate of probable losses after considering, among other factors, the progress of each case or proceeding, our experience and the experience of others in similar cases or proceedings, and the opinions and views of legal counsel. We account for legal defense costs in the period the costs are incurred.
2016 Shareholder Litigation. On April 19, 2016, a derivative action was filed in the U.S. District Court for the Western District of Oklahoma against the Company and current and former directors and officers of the Company alleging, among other things, violation of and conspiracy to violate the federal Racketeer Influenced and Corrupt Organizations Act, breach of fiduciary duties, waste of corporate assets, gross mismanagement and violations of Sections 10(b) and Rule 10b-5 of the Exchange Act related to actions allegedly taken by such persons since 2008. The lawsuit seeks certification as a class action, damages, attorneys’ fees and other costs.
Regulatory Proceedings. The Company has received, from the U.S. Department of Justice (DOJ) and certain state governmental agencies and authorities, subpoenas and demands for documents, information and testimony in connection with investigations into possible violations of federal and state antitrust laws relating to our purchase and lease of oil and natural gas rights in various states. The Company also has received DOJ, U.S. Postal Service and state subpoenas seeking information on the Company’s royalty payment practices. Chesapeake has engaged in discussions with the DOJ, U.S. Postal Service and state agency representatives and continues to respond to such subpoenas and demands.
Redemption of 2019 Notes. As previously disclosed in the 2015 Form 10-K, in connection with the litigation related to the Company’s notice issued on March 15, 2013 to redeem all of the 2019 Notes at par (plus accrued interest through the redemption date) pursuant to the special early redemption provision of the supplemental indenture governing the 2019 Notes, the Company filed a notice of appeal on July 27, 2015 of an amended judgment entered on July 17, 2015 by the U.S. District Court for the Southern District of New York awarding the Trustee for the 2019 Notes $380 million plus prejudgment interest in the amount of $59 million. The Company posted a supersedeas bond in the amount of $461 million (reflected as an outstanding letter of credit under the Company’s credit facility) to stay execution of the judgment while appellate proceedings are pending. We accrued a loss contingency of $100 million for this matter in 2014, and we accrued an additional $339 million in 2015.
Business Operations. Chesapeake is involved in various other lawsuits and disputes incidental to its business operations, including commercial disputes, personal injury claims, royalty claims, property damage claims and contract actions. With regard to contract actions, various mineral or leasehold owners have filed lawsuits against us seeking specific performance to require us to acquire their oil and natural gas interests and pay acreage bonus payments, damages based on breach of contract and/or, in certain cases, punitive damages based on alleged fraud. The Company has successfully defended a number of these failure-to-close cases in various courts, has settled and resolved other such cases and disputes and believes that its remaining loss exposure for these claims will not have a material adverse effect on the Company’s consolidated financial position, results of operations or cash flows.
Regarding royalty claims, Chesapeake and other natural gas producers have been named in various lawsuits alleging royalty underpayment. The suits against us allege, among other things, that we used below-market prices, made improper deductions, used improper measurement techniques and/or entered into arrangements with affiliates that resulted in underpayment of royalties in connection with the production and sale of natural gas and NGL. Plaintiffs have varying royalty provisions in their respective leases, oil and gas law varies from state to state, and royalty owners and producers differ in their interpretation of the legal effect of lease provisions governing royalty calculations. The Company has resolved a number of these claims through negotiated settlements of past and future royalties and has prevailed in various other lawsuits. We are currently defending lawsuits seeking damages with respect to royalty underpayment in various states, including, but not limited to, Texas, Pennsylvania, Ohio, Louisiana, Oklahoma and Arkansas. These lawsuits include cases filed by individual royalty owners and putative class actions, some of which seek to certify a statewide class. The Company also has received DOJ, U.S. Postal Service and state subpoenas seeking information on the Company’s royalty payment practices.
Chesapeake is defending numerous lawsuits filed by individual royalty owners alleging royalty underpayment with respect to properties in Texas. On April 8, 2015, Chesapeake obtained a transfer order from the Texas Multidistrict Litigation Panel to transfer a substantial portion of these lawsuits filed since June 2014 to the 348th District Court of Tarrant County for pre-trial purposes. On February 12, 2016, Chesapeake filed a motion to change venue for several other lawsuits to Harris County, or alternatively, to Tarrant County. The parties subsequently agreed to transfer such other lawsuits to Tarrant County, with Chesapeake reserving the right to request transfer of any other such lawsuits to Harris County. These lawsuits, which primarily relate to the Barnett Shale, generally allege that Chesapeake underpaid royalties by making improper deductions and using incorrect production volumes. In addition to allegations of breach of contract, a number of these lawsuits allege fraud, conspiracy, joint venture and antitrust violations by Chesapeake. We expect that additional lawsuits will be filed by new plaintiffs making similar allegations. The lawsuits seek direct damages in varying amounts, together with exemplary damages, attorneys’ fees, costs and interest.
On December 9, 2015, the Commonwealth of Pennsylvania, by the Office of Attorney General, filed a lawsuit in the Bradford County Court of Common Pleas related to royalty underpayment and lease acquisition and accounting practices with respect to properties in Pennsylvania. The lawsuit, which primarily relates to the Marcellus Shale and Utica Shale, alleges that Chesapeake violated the Pennsylvania Unfair Trade Practices and Consumer Protection Law (UTPCPL) by making improper deductions and entering into arrangements with affiliates that resulted in underpayment of royalties. The lawsuit seeks statutory restitution, civil penalties and costs, as well as temporary injunction from exploration and drilling activities in Pennsylvania until restitution, penalties and costs have been paid and permanent injunction from further violations of the UTPCPL. On February 8, 2016, the Office of Attorney General amended the complaint to, among other things, add an additional UTPCPL claim and antitrust claim alleging that a joint exploration agreement to which Chesapeake is a party established unlawful market allocation for the acquisition of leases. Chesapeake filed preliminary objections to the amended complaint on April 13, 2016.
Putative statewide class actions in Pennsylvania and Ohio and purported class arbitrations in Pennsylvania have been filed on behalf of royalty owners asserting various claims for damages related to alleged underpayment of royalties as a result of the Company’s divestiture of substantially all of its midstream business and most of its gathering assets in 2012 and 2013. These cases include claims for violation of and conspiracy to violate the federal Racketeer Influenced and Corrupt Organizations Act and one of the cases includes claims of intentional interference with contractual relations and violations of antitrust laws related to purported markets for gas mineral rights, operating rights and gas gathering sources. We have not accrued a loss contingency for any of the Pennsylvania and Ohio matters seeking class certification.
We believe losses are reasonably possible in certain of the pending royalty cases for which we have not accrued a loss contingency, but we are currently unable to estimate an amount or range of loss or the impact the actions could have on our future results of operations or cash flows. Uncertainties in pending royalty cases generally include the complex nature of the claims and defenses, the potential size of the class in class actions, the scope and types of the properties and agreements involved, and the applicable production years.
In March 2016, three putative class action lawsuits were filed in the United States District Court for the Western District of Oklahoma against the Company and other defendants. The lawsuits allege that, since December 2007, and continuing through March 2012, the defendants conspired to rig bids and depress the market for the purchases of oil and natural gas leasehold interests and properties in the Anadarko Basin containing producing oil and natural gas wells, in violation of the Sherman Antitrust Act. The lawsuits seek damages, attorney’s fees, costs and interest, as well as enjoinment from adopting practices or plans which would restrain competition in a similar manner as alleged in the lawsuits.
In April 2016, a class action lawsuit on behalf of holders of the Company’s 6.875% Senior Notes due 2020 (2020 Notes) and 6.125% Senior Notes due 2021 (2021 Notes) was filed in the U.S. District Court for the Southern District of New York relating to the Company’s December 2015 debt exchange, whereby the Company privately exchanged newly issued 8.00% Senior Secured Second Lien Notes due 2022 (Second Lien Notes) for certain outstanding senior unsecured notes and contingent convertible notes. The lawsuit alleges that the Company violated the Trust Indenture Act of 1939 and the implied covenant of good faith and fair dealing by benefiting themselves and a minority of noteholders who are qualified institutional buyers (QIBs). According to the lawsuit, as a result of the Company’s private debt exchange in which only QIBs (and non-U.S. persons under Regulation S) were eligible to participate, the Company unjustly enriched itself at the expense of class members by reducing indebtedness and reducing the value of the 2020 Notes and 2022 Notes. The lawsuit seeks damages and attorney’s fees, in addition to declaratory relief that the debt exchange and the liens created for the benefit of the Second Lien Notes are null and void and that the debt exchange effectively resulted in a default under the indentures for the 2020 Notes and 2021 Notes.
Based on management’s current assessment, we are of the opinion that no pending or threatened lawsuit or dispute relating to the Company’s business operations is likely to have a material adverse effect on its future consolidated financial position, results of operations or cash flows. The final resolution of such matters could exceed amounts accrued, however, and actual results could differ materially from management’s estimates.
Environmental Contingencies
The nature of the oil and gas business carries with it certain environmental risks for Chesapeake and its subsidiaries. Chesapeake has implemented various policies, programs, procedures, training and auditing to reduce and mitigate such environmental risks. Chesapeake conducts periodic reviews, on a company-wide basis, to assess changes in our environmental risk profile. Environmental reserves are established for environmental liabilities for which economic losses are probable and reasonably estimable. We manage our exposure to environmental liabilities in acquisitions by using an evaluation process that seeks to identify pre-existing contamination or compliance concerns and address the potential liability. Depending on the extent of an identified environmental concern, Chesapeake may, among other things, exclude a property from the transaction, require the seller to remediate the property to our satisfaction in an acquisition or agree to assume liability for the remediation of the property.

15

CHESAPEAKE ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
(Unaudited)





Commitments
Gathering, Processing and Transportation Agreements
We have contractual commitments with midstream service companies and pipeline carriers for future gathering, processing and transportation of oil, natural gas and NGL to move certain of our production to market. Working interest owners and royalty interest owners, where appropriate, will be responsible for their proportionate share of these costs. Commitments related to gathering, processing and transportation agreements are not recorded in the accompanying condensed consolidated balance sheets; however, they are reflected as adjustments to oil, natural gas and NGL sales prices used in our proved reserves estimates.
The aggregate undiscounted commitments under our gathering, processing and transportation agreements, excluding any reimbursement from working interest and royalty interest owners, credits for third-party volumes or future costs under cost-of-service agreements, are presented below.
 
 
March 31,
2016
 
 
($ in millions)
2016
 
$
1,383

2017
 
1,880

2018
 
1,676

2019
 
1,378

2020
 
1,051

2021 – 2099
 
6,696

Total
 
$
14,064

In addition, we have entered into long-term agreements for certain natural gas gathering and related services within specified acreage dedication areas in exchange for cost-of-service based fees redetermined annually or tiered fees based on volumes delivered relative to scheduled volumes. Future gathering fees vary with the applicable agreement. One of these agreements (in the Anadarko Basin in northwestern Oklahoma and the Texas panhandle) contains cost-of-service based fees that are redetermined annually through 2019. The annual upward or downward fee adjustment for this contract is capped at 15% of the then-current fees at the time of redetermination. To the extent the actual rate of return on capital expended by the counterparty over the term of the agreement differs from the applicable rate of return, a payment is due to (from) the midstream service company.
Drilling Contracts
We have contracts with various drilling contractors to utilize drilling services with terms ranging from three months to three years at market-based pricing. These commitments are not recorded in the accompanying condensed consolidated balance sheets. As of March 31, 2016, the aggregate undiscounted minimum future payments under these drilling service commitments were approximately $218 million.
Pressure Pumping Contracts
We have an agreement for pressure pumping services. Throughout the term of the agreement, which expires in June 2017, the services agreement requires us to utilize, at market-based pricing, the lesser of (i) five pressure pumping crews through June 30, 2016 and three pressure pumping crews through June 30, 2017 or (ii) 50% of the total number of all pressure pumping crews working for us in all of our operating regions during the respective year. We are also required to utilize the pressure pumping services for a minimum number of fracture stages as set forth in the agreement. We are entitled to terminate the agreement in certain situations, including if the contractor fails to provide the overall quality of service provided by similar service providers. As of March 31, 2016, the aggregate undiscounted minimum future payments under this agreement were approximately $161 million.

16

CHESAPEAKE ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
(Unaudited)





Drilling Commitments
We have committed to drill wells for the benefit of Chesapeake Granite Wash Trust (the Trust). In connection with the Trust’s initial public offering, we conveyed royalty interests to the Trust that entitle the Trust to receive (i) 90% of the proceeds (after deducting certain post-production expenses and any applicable taxes) that we receive from the production of hydrocarbons from 69 then-producing wells, and (ii) 50% of the proceeds (after deducting certain post-production expenses and any applicable taxes) in 118 development wells that have been or will be drilled on approximately 45,400 gross acres (29,000 net acres) in the Colony Granite Wash play in Washita County in the Anadarko Basin of western Oklahoma. Pursuant to the terms of a development agreement with the Trust, we are obligated to drill and complete, or cause to be drilled and completed, the development wells at our own expense prior to June 30, 2016, and the Trust is not responsible for any costs related to the drilling and completion of the development wells or any other operating or capital costs of the Trust properties. In addition, we granted to the Trust a lien on our remaining interests in the undeveloped properties that are subject to the development agreement in order to secure our drilling obligation to the Trust, although the maximum amount recoverable by the Trust under the lien was limited to $263 million initially and is proportionately reduced as we fulfill our drilling obligation over time. As of March 31, 2016, we had drilled and completed or caused to be drilled and completed approximately 106 development wells, as calculated under the development agreement, and the maximum amount recoverable under the drilling support lien was approximately $27 million. We anticipate that we will fulfill our drilling obligation on or before June 30, 2016. See Note 10 for further discussion of the Trust.
Oil, Natural Gas and NGL Purchase Commitments
We commit to purchase oil, natural gas and NGL from other owners in the properties we operate, including owners associated with our volumetric production payment (VPP) transactions. Production purchases under these arrangements are based on market prices at the time of production, and the purchased oil, natural gas and NGL are resold at market prices. See Volumetric Production Payments in Note 9 for further discussion of our VPP transactions.
Net Acreage Maintenance Commitments
Under the terms of our Utica Shale joint venture agreements with Total S.A., we are required to extend, renew or replace expiring joint leasehold, at our cost, to ensure that the net acreage is maintained in certain designated areas as of a future measurement date.
Other Commitments
As part of our normal course of business, we enter into various agreements providing, or otherwise arranging for, financial or performance assurances to third parties on behalf of our wholly owned guarantor subsidiaries. These agreements may include future payment obligations or commitments regarding operational performance that effectively guarantee our subsidiaries’ future performance.
In connection with acquisitions and divestitures, our purchase and sale agreements generally provide indemnification to the counterparty for liabilities incurred as a result of a breach of a representation or warranty by the indemnifying party and/or other specified matters. These indemnifications generally have a discrete term and are intended to protect the parties against risks that are difficult to predict or cannot be quantified at the time of entering into or consummating a particular transaction. For divestitures of oil and natural gas properties, our purchase and sale agreements may require the return of a portion of the proceeds we receive as a result of uncured title defects.
Certain of our oil and natural gas properties are burdened by non-operating interests such as royalty and overriding royalty interests, including overriding royalty interests sold through our VPP transactions. As the holder of the working interest from which these interests have been created, we have the responsibility to bear the cost of developing and producing the reserves attributable to these interests. See Volumetric Production Payments in Note 9 for further discussion of our VPP transactions.
While executing our strategic priorities, we have incurred certain cash charges, including contract termination charges, financing extinguishment costs and charges for unused natural gas transportation and gathering capacity. As we continue to focus on our strategic priorities, we may take certain actions that reduce financial leverage and complexity, and we may incur additional cash and noncash charges.

17

CHESAPEAKE ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
(Unaudited)





5.
Other Liabilities
Other current liabilities as of March 31, 2016 and December 31, 2015 are detailed below.
 
 
March 31,
2016
 
December 31,
2015
 
 
($ in millions)
Revenues and royalties due others
 
$
378

 
$
500

Accrued drilling and production costs
 
216

 
212

Joint interest prepayments received
 
103

 
169

Accrued compensation and benefits
 
151

 
264

Other accrued taxes
 
57

 
37

Bank of New York Mellon legal accrual
 
439

 
439

Minimum gathering volume commitment
 
4

 
201

Other
 
196

 
397

Total other current liabilities
 
$
1,544

 
$
2,219

Other long-term liabilities as of March 31, 2016 and December 31, 2015 are detailed below.
 
 
March 31,
2016
 
December 31,
2015
 
 
($ in millions)
CHK Utica ORRI conveyance obligation(a)
 
$
183

 
$
190

Financing obligations
 
29

 
29

Unrecognized tax benefits
 
68

 
64

Other
 
146

 
126

Total other long-term liabilities
 
$
426

 
$
409

____________________________________________
(a)
The CHK Utica, L.L.C. investors’ right to receive, proportionately, a 3% overriding royalty interest (ORRI) in the first 1,500 net wells drilled on our Utica Shale leasehold is subject to an increase to 4% on net wells earned in any year following a year in which we do not meet our net well commitment under the ORRI obligation, which runs through 2023. The liability represents the obligation to deliver future ORRIs. Approximately $25 million and $21 million of the total $208 million and $211 million obligations are recorded in other current liabilities as of March 31, 2016 and December 31, 2015, respectively.

18

CHESAPEAKE ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
(Unaudited)





6.
Equity
Common Stock
The following is a summary of the changes in our common shares issued for the Current Quarter and the Prior Quarter:
 
 
Three Months Ended
March 31,
 
 
2016
 
2015
 
 
(in thousands)
Shares issued as of January 1
 
664,796

 
664,944

Exchange of convertible notes
 
14,699

 
—

Exchange of senior notes
 
2,556

 
—

Conversion of preferred stock
 
1,022

 
—

Restricted stock issuances (net of forfeitures and cancellations)
 
1,488

 
151

Stock option exercises
 
—

 
14

Shares issued as of March 31
 
684,561

 
665,109

Preferred Stock
Outstanding shares of our preferred stock for the Current Quarter and the Prior Quarter are detailed below.
 
 
5.75%
 
5.75% (A)
 
4.50%
 
5.00%
(2005B)  
 
 
(in thousands)
Shares outstanding as of January 1, 2016
 
1,497

 
1,100

 
2,559

 
2,096

Preferred stock conversions(a)
 
(25
)
 
(1
)
 
—

 
—

Shares outstanding as of March 31, 2016
 
1,472

 
1,099

 
2,559

 
2,096

 
 
 
 
 
 
 
 
 
Shares outstanding as of January 1, 2015
and March 31, 2015
 
1,497

 
1,100

 
2,559

 
2,096

____________________________________________
(a)
In the Current Quarter, holders of our 5.75% Cumulative Convertible Preferred Stock converted 24,601 shares into 975,488 shares of common stock. Also, in the Current Quarter, holders of our 5.75% (Series A) Cumulative Convertible Preferred Stock converted 1,201 shares into 46,018 shares of common stock.
Dividends
In January 2016, we announced that we were suspending dividend payments on each series of our outstanding convertible preferred stock. Suspension of the dividends did not constitute an event of default under our revolving credit facility or bond indentures. Our preferred stock dividends in arrears for the Current Quarter are detailed below.
 
 
5.75%
 
5.75% (A)
 
4.50%
 
5.00%
(2005B)  
 
 
($ in millions)
Dividends in arrears
 
$
21

 
$
16

 
$
3

 
$
3


19

CHESAPEAKE ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
(Unaudited)





Accumulated Other Comprehensive Income (Loss)
For the Current Quarter and the Prior Quarter, changes in accumulated other comprehensive income (loss) by component, net of tax, are detailed below.
 
 
Cash Flow
Hedges
 
Net Change
 
 
($ in millions)
Balance, December 31, 2015
 
$
(99
)
 
$
(99
)
Other comprehensive income before reclassifications
 
(4
)
 
(4
)
Amounts reclassified from accumulated other comprehensive income
 
4

 
4

Net other comprehensive income
 
—

 
—

Balance, March 31, 2016
 
$
(99
)
 
$
(99
)
 
 
 
 
 
Balance, December 31, 2014
 
$
(143
)
 
$
(143
)
Other comprehensive income before reclassifications
 
(1
)
 
(1
)
Amounts reclassified from accumulated other comprehensive income
 
10

 
10

Net other comprehensive income
 
9

 
9

Balance, March 31, 2015
 
$
(134
)
 
$
(134
)
For the Current Quarter and the Prior Quarter, amounts reclassified from accumulated other comprehensive income (loss), net of tax, into the condensed consolidated statements of operations are detailed below.
Details About Accumulated
Other Comprehensive
Income (Loss) Components
 
Affected Line Item
in the Statement
Where Net Income is Presented
 
Amounts Reclassified
 
 
 
 
($ in millions)
Three Months Ended March 31, 2016
 
 
 
 
Net losses on cash flow hedges:
 
 
 
 
Commodity contracts
 
Oil, natural gas and NGL revenues
 
$
4

Total reclassifications for the period, net of tax
 
$
4

 
 
 
 
 
Three Months Ended March 31, 2015
 
 
 
 
Net losses on cash flow hedges:
 
 
 
 
Commodity contracts
 
Oil, natural gas and NGL revenues
 
$
10

Total reclassifications for the period, net of tax
 
$
10


20

CHESAPEAKE ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
(Unaudited)





7.
Share-Based Compensation
Chesapeake’s share-based compensation program consists of restricted stock, stock options and performance share units (PSUs) granted to employees and common stock and restricted stock granted to non-employee directors under our long term incentive plans. The restricted stock and stock options are equity-classified awards and the PSUs are liability-classified awards.
Equity-Classified Awards
Restricted Stock. We grant restricted stock units to employees and non-employee directors. Prior to 2014, we also granted restricted stock awards as equity compensation. We refer to both types of awards as restricted stock. A summary of the changes in unvested restricted stock during the Current Quarter is presented below.
 
 
Shares of
Unvested
Restricted Stock
 
Weighted Average
Grant Date
Fair Value
 
 
(in thousands)
 
 
Unvested restricted stock as of January 1, 2016
 
10,455

 
$
17.31

Granted
 
2,728

 
$
3.76

Vested
 
(3,392
)
 
$
17.55

Forfeited
 
(141
)
 
$
16.48

Unvested restricted stock as of March 31, 2016
 
9,650

 
$
13.41

The aggregate intrinsic value of restricted stock that vested during the Current Quarter was approximately $14 million based on the stock price at the time of vesting.
As of March 31, 2016, there was approximately $99 million of total unrecognized compensation expense related to unvested restricted stock. The expense is expected to be recognized over a weighted average period of approximately 1.76 years.
Stock Options. In the Current Quarter and the Prior Quarter, we granted members of senior management stock options that vest ratably over a three-year period. In January 2013, we also granted retention awards of stock options to certain officers that vest one-third on each of the third, fourth and fifth anniversaries of the grant date. Each stock option award has an exercise price equal to the closing price of the Company’s common stock on the grant date. Outstanding options expire seven to ten years from the date of grant.
We utilize the Black-Scholes option pricing model to measure the fair value of stock options. The expected life of an option is determined using the simplified method. Volatility assumptions are estimated based on an average of historical volatility of Chesapeake stock over the expected life of an option. The risk-free interest rate is based on the U.S. Treasury rate in effect at the time of the grant over the expected life of the option. The dividend yield is based on an annual dividend yield, taking into account the Company's dividend policy, over the expected life of the option. The Company used the following weighted average assumptions to estimate the grant date fair value of the stock options granted in the Current Quarter:
Expected option life – years
 
6.0

Volatility
 
46.07
%
Risk-free interest rate
 
1.70
%
Dividend yield
 
—
%

21

CHESAPEAKE ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
(Unaudited)





The following table provides information related to stock option activity in the Current Quarter: 
 
 
Number of
Shares
Underlying  
Options
 
Weighted
Average
Exercise
Price
Per Share
 
Weighted  
Average
Contract
Life in
Years
 
Aggregate  
Intrinsic
Value(a)
 
 
(in thousands)
 
 
 
 
 
($ in millions)
Outstanding as of January 1, 2016
 
5,377

 
$
19.37

 
5.80
 
$
—

Granted
 
4,932

 
$
3.71

 
 
 
 
Exercised
 
—

 
$
—

 
 
 
$
—

Expired
 
(176
)
 
$
18.42

 
 
 
 
Forfeited
 
(945
)
 
$
5.66

 
 
 
 
Outstanding as of March 31, 2016
 
9,188

 
$
12.39

 
7.47
 
$
2

 
 
 
 
 
 
 
 
 
Exercisable as of March 31, 2016
 
3,208

 
$
19.57

 
4.93
 
$
—

___________________________________________
(a)
The intrinsic value of a stock option is the amount by which the current market value or the market value upon exercise of the underlying stock exceeds the exercise price of the option.
As of March 31, 2016, there was $14 million of total unrecognized compensation expense related to stock options. The expense is expected to be recognized over a weighted average period of approximately 2.13 years.
Restricted Stock and Stock Option Compensation. We recognized the following compensation costs related to restricted stock and stock options for the Current Quarter and the Prior Quarter:
 
 
Three Months Ended March 31,
 
 
2016
 
2015
 
 
($ in millions)
General and administrative expenses
 
$
8

 
$
12

Oil and natural gas properties
 
4

 
7

Oil, natural gas and NGL production expenses
 
3

 
4

Marketing, gathering and compression expenses
 
1

 
1

Total
 
$
16

 
$
24


22

CHESAPEAKE ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
(Unaudited)





Liability-Classified Awards
Performance Share Units. We granted PSUs to senior management that vest ratably over a three-year term and are settled in cash on the third anniversary of the awards. The ultimate amount earned is based on achievement of performance metrics established by the Compensation Committee of the Board of Directors, which include total shareholder return (TSR) and, for certain of the awards, operational performance goals such as finding and development costs and production levels.
For PSUs granted in 2016, the TSR component can range from 0% to 100% and the operational component can range from 0% to 100%, resulting in a maximum payout of 200%. The payout percentage of these PSUs is capped at 100% if the Company's absolute TSR is less than zero. For PSUs granted in 2015, the TSR component can range from 0% to 100%, and each of the two operational components can range from 0% to 50% resulting in a maximum total payout of 200%. The payout percentage for these PSUs is capped at 100% if the Company’s absolute TSR is less than zero. For PSUs granted in 2014, the TSR component can range from 0% to 200%, with no operational components. Compensation expense associated with PSU grants is recognized over the service period based on the graded-vesting method. The number of units settled is dependent upon the Company’s estimates of the underlying performance measures. The Company utilized the Monte Carlo simulation for the TSR performance measure and the following assumptions to determine the grant date fair value of the PSUs:
Volatility
 
69.41
%
Risk-free interest rate
 
0.84
%
Dividend yield for value of awards
 
—
%
The following table presents a summary of our 2016, 2015 and 2014 PSU awards:
 
 
 
 
Grant Date
Fair Value
 
March 31, 2016
 
 
Units
 
 
Fair Value
 
Vested Liability
 
 
 
 
($ in millions)
 
 
 
 
2016 Awards:
 
 
 
 
 
 
 
 
Payable 2019
 
2,348,893

 
$
10

 
$
11

 
$
2

2015 Awards:
 
 
 
 
 
 
 
 
Payable 2018
 
629,694

 
$
13

 
$
2

 
$
1

2014 Awards:
 
 
 
 
 
 
 
 
Payable 2017
 
561,215

 
$
16

 
$
1

 
$
1

PSU Compensation. We recognized the following compensation costs (credits) related to PSUs for the Current Quarter and the Prior Quarter:
 
 
Three Months Ended March 31,
 
 
2016
 
2015
 
 
($ in millions)
General and administrative expenses
 
$
2

 
$
(10
)
Restructuring and other termination costs
 
1

 
(10
)
Oil and natural gas properties
 
—

 
(1
)
Total
 
$
3

 
$
(21
)

23

CHESAPEAKE ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
(Unaudited)





8.
Derivative and Hedging Activities
Chesapeake uses commodity derivative instruments to secure attractive pricing and margins on its share of expected production, to reduce its exposure to fluctuations in future commodity prices and to protect its expected operating cash flow against significant market movements or volatility. Chesapeake also uses derivative instruments to mitigate a portion of its exposure to foreign currency exchange rate fluctuations. All of our commodity derivative instruments are net settled based on the difference between the fixed-price payment and the floating-price payment, resulting in a net amount due to or from the counterparty.
Oil and Natural Gas Derivatives
As of March 31, 2016 and December 31, 2015, our oil and natural gas derivative instruments consisted of the following types of instruments:
•
Swaps: Chesapeake receives a fixed price and pays a floating market price to the counterparty for the hedged commodity. In exchange for higher fixed prices on certain of our swap trades, we granted options that allow the counterparty to double the notional amount.
•
Options: Chesapeake sells, and occasionally buys, call options in exchange for a premium. At the time of settlement, if the market price exceeds the fixed price of the call option, Chesapeake pays the counterparty the excess on sold call options and Chesapeake receives the excess on bought call options. If the market price settles below the fixed price of the call option, no payment is due from either party.
•
Basis Protection Swaps: These instruments are arrangements that guarantee a fixed price differential to NYMEX from a specified delivery point. Chesapeake receives the fixed price differential and pays the floating market price differential to the counterparty for the hedged commodity.
The estimated fair values of our oil and natural gas derivative instrument assets (liabilities) as of March 31, 2016 and December 31, 2015 are provided below. 
 
 
March 31, 2016
 
December 31, 2015
 
 
Volume
 
Fair Value
 
Volume
 
Fair Value
 
 
 
 
($ in millions)  
 
 
 
($ in millions)  
Oil (mmbbl):
 
 
 
 
 
 
 
 
Fixed-price swaps
 
21.2

 
$
78

 
13.5

 
$
144

Call options
 
15.7

 
(4
)
 
19.2

 
(7
)
Total oil
 
36.9

 
74

 
32.7

 
137

 
 
 
 
 
 
 
 
 
Natural gas (tbtu):
 
 
 
 
 
 
 
 
Fixed-price swaps
 
438

 
241

 
500

 
229

Call options
 
250

 
(65
)
 
295

 
(99
)
Basis protection swaps
 
40

 
(9
)
 
57

 
—

Total natural gas
 
728

 
167

 
852

 
130

Total estimated fair value
 
 
 
$
241

 
 
 
$
267

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).

24

CHESAPEAKE ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
(Unaudited)





Interest Rate Derivatives
As of March 31, 2016 and December 31, 2015, there were no interest rate derivatives outstanding.
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 6.25% Euro-denominated Senior Notes due 2017, 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 in 2015 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 condensed consolidated balance sheets as liabilities of $43 million and $52 million as of March 31, 2016 and December 31, 2015, respectively. The euro-denominated debt in long-term debt has been adjusted to $344 million as of March 31, 2016, using an exchange rate of $1.1380 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. The bifurcated derivative is measured at fair value on a quarterly basis resulting in an unrealized gain of $20 million in the Current Quarter. Both settlements and mark-to-market gains (losses) are included in marketing, gathering and compression revenues in our condensed consolidated statements of operations.

25

CHESAPEAKE ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
(Unaudited)





Effect of Derivative Instruments – Condensed Consolidated Balance Sheets
The following table presents the fair value and location of each classification of derivative instrument included in the condensed consolidated balance sheets as of March 31, 2016 and December 31, 2015 on a gross basis and after same-counterparty netting: 
Balance Sheet Classification
 
Gross
Fair Value
 
Amounts Netted
in Condensed
Consolidated
Balance Sheet
 
Net Fair Value Presented
in Condensed Consolidated
Balance Sheet
 
 
($ in millions)
As of March 31, 2016
 
 
 
 
 
 
Commodity Contracts:
 
 
 
 
 
 
Short-term derivative asset
 
$
345

 
$
(49
)
 
$
296

Short-term derivative liability
 
(92
)
 
49

 
(43
)
Long-term derivative liability
 
(12
)
 
—

 
(12
)
Total commodity contracts
 
241

 
—

 
241

Foreign Currency Contracts:(a)
 
 
 
 
 
 
Short-term derivative liability
 
(43
)
 
—

 
(43
)
Total foreign currency contracts
 
(43
)
 
—

 
(43
)
Supply Contracts:
 
 
 
 
 
 
Short-term derivative asset
 
54

 
—

 
54

Long-term derivative asset
 
263

 
—

 
263

Total supply contracts
 
317

 
—

 
317

Total derivatives
 
$
515

 
$
—

 
$
515

 
 
 
 
 
 
 
As of December 31, 2015
 
 
 
 
 
 
Commodity Contracts:
 
 
 
 
 
 
Short-term derivative asset
 
$
381

 
$
(66
)
 
$
315

Short-term derivative liability
 
(106
)
 
66

 
(40
)
Long-term derivative liability
 
(8
)
 
—

 
(8
)
Total commodity contracts
 
267

 
—

 
267

Foreign Currency Contracts:(a)
 
 
 
 
 
 
Long-term derivative liability
 
(52
)
 
—

 
(52
)
Total foreign currency contracts
 
(52
)
 
—

 
(52
)
Supply Contracts:
 
 
 
 
 
 
Short-term derivative asset
 
51

 
—

 
51

Long-term derivative asset
 
246

 
—

 
246

Total supply contracts
 
297

 
—

 
297

Total derivatives
 
$
512

 
$
—

 
$
512

____________________________________________
(a)
Designated as cash flow hedging instruments.
As of March 31, 2016 and December 31, 2015, we did not have any cash collateral balances for these derivatives.

26

CHESAPEAKE ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
(Unaudited)





Effect of Derivative Instruments – Condensed Consolidated Statements of Operations
The components of oil, natural gas and NGL revenues for the Current Quarter and the Prior Quarter are presented below. 
 
 
Three Months Ended March 31,
 
 
2016
 
2015
 
 
($ in millions)
Oil, natural gas and NGL revenues
 
$
812

 
$
1,382

Gains (losses) on undesignated oil and natural gas derivatives
 
192

 
178

Losses on terminated cash flow hedges
 
(11
)
 
(17
)
Total oil, natural gas and NGL revenues
 
$
993

 
$
1,543

The components of marketing, gathering and compression revenues for the Current Quarter and the Prior Quarter are presented below.
 
 
Three Months Ended March 31,
 
 
2016
 
2015
 
 
($ in millions)
Marketing, gathering and compression revenues
 
$
940

 
$
1,675

Gains on undesignated supply contract derivatives
 
20

 
—

Total marketing, gathering and compression revenues
 
$
960

 
$
1,675

The components of interest expense for the Current Quarter and the Prior Quarter are presented below. 
 
 
Three Months Ended March 31,
 
 
2016
 
2015
 
 
($ in millions)
Interest expense on senior notes
 
$
115

 
$
171

Amortization of loan discount, issuance costs and other
 
10

 
11

Interest expense on credit facilities
 
5

 
3

Gains on terminated fair value hedges
 
—

 
(1
)
(Gains) losses on undesignated interest rate derivatives
 
—

 
(10
)
Capitalized interest
 
(68
)
 
(123
)
Total interest expense
 
$
62

 
$
51


27

CHESAPEAKE ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
(Unaudited)





Effect of Derivative Instruments – Accumulated Other Comprehensive Income (Loss)
A reconciliation of the changes in accumulated other comprehensive income (loss) in our condensed consolidated statements of stockholders’ equity related to our cash flow hedges is presented below. 
 
 
Three Months Ended March 31,
 
 
2016
 
2015
 
 
Before 
Tax  
 
After 
Tax  
 
Before 
Tax  
 
After 
Tax  
 
 
($ in millions)
Balance, beginning of period
 
$
(160
)
 
$
(99
)
 
$
(231
)
 
$
(143
)
Net change in fair value
 
(7
)
 
(4
)
 
(2
)
 
(1
)
Losses reclassified to income
 
11

 
4

 
17

 
10

Balance, end of period
 
$
(156
)
 
$
(99
)
 
$
(216
)
 
$
(134
)
Approximately $109 million of the $99 million of accumulated other comprehensive loss as of March 31, 2016 represented the net deferred loss associated with commodity derivative contracts that were previously designated as cash flow hedges for which the hedged production is still expected to occur. Deferred gain or loss amounts will be recognized in earnings in the month in which the originally forecasted hedged production occurs. As of March 31, 2016, we expect to transfer approximately $21 million of net loss included in accumulated other comprehensive income to net income (loss) during the next 12 months. The remaining amounts will be transferred by December 31, 2022.
Credit Risk Considerations
Over-the-counter traded derivative instruments and our supply contracts expose us to our counterparties’ credit risk. To mitigate this risk, we enter into derivative contracts only with counterparties that are rated investment grade and deemed by management to be competent and competitive market makers, and we attempt to limit our exposure to non-performance by any single counterparty. As of March 31, 2016, our oil, natural gas, foreign currency and supply contract derivative instruments were spread among 13 counterparties.
Hedging Arrangements
In 2015, we began entering into bilateral hedging agreements. The counterparties’ and our obligations under certain of the bilateral hedging agreements must be secured by cash or letters of credit to the extent that any mark-to-market amounts owed to us or by us exceed defined thresholds. Our obligations under other bilateral hedging agreements are secured by the same collateral securing our revolving credit facility. As of March 31, 2016, we had hedged under bilateral agreements 152.5 mmboe of our future production with price derivatives and 6.5 mmboe with basis derivatives.

28

CHESAPEAKE ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
(Unaudited)





Fair Value
The fair value of our derivatives is based on third-party pricing models which utilize inputs that are either readily available in the public market, such as oil and natural gas forward curves and discount rates, or can be corroborated from active markets or broker quotes. These values are compared to the values given by our counterparties for reasonableness. Since oil, natural gas, 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. 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 information for financial assets (liabilities) measured at fair value on a recurring basis as of March 31, 2016 and December 31, 2015: 
 
 
Quoted
Prices in
Active
Markets
(Level 1)
 
Significant
Other
Observable
Inputs
(Level 2) 
 
Significant
Unobservable
Inputs
(Level 3)
 
Total
Fair Value
 
 
 
 
($ in millions)
 
 
As of March 31, 2016
 
 
 
 
 
 
 
 
Derivative Assets (Liabilities):
 
 
 
 
 
 
 
 
Commodity assets
 
$
—

 
$
325