Chesapeake Energy 2010 Annual Report Download - page 150

CHESAPEAKE ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
The estimated fair values of our natural gas and oil derivative instruments as of December 31, 2010 and
2009 are provided below. The associated carrying values of these instruments are equal to the estimated fair
values.
December 31, 2010 December 31, 2009
Volume Fair Value Volume Fair Value
($ in millions) ($ in millions)
Natural gas (bbtu):
Fixed-price swaps ....................... 1,035,134 $ 1,307 492,053 $ 662
Call options ............................ 1,477,742 (701) 996,750 (541)
Put options ............................. (51,220) (59) (69,620) (50)
Fixed-price knockout swaps ............... — — 38,370 17
Fixed-price collars ....................... — — 74,240 92
Basis protection swaps ................... 173,691 (55) 125,469 (50)
Total natural gas ....................... 2,635,347 492 1,657,262 130
Oil (mbbl):
Fixed-price swaps ....................... 4,385 (31) 5,475 3
Call options ............................. 64,226 (1,129) 14,975 (144)
Fixed-price knockout swaps ............... 1,827 19 6,572 32
Total oil .............................. 70,438 (1,141) 27,022 (109)
Total estimated fair value ................ $ (649) $ 21
Pursuant to accounting guidance for derivatives and hedging, certain derivatives qualify for designation as
cash flow hedges. Following this guidance, changes in the fair value of derivative instruments designated as
cash flow hedges, to the extent they are effective in offsetting cash flows attributable to the hedged risk, are
recorded in accumulated other comprehensive income until the hedged item is recognized in earnings as the
physical transactions being hedged occur. Any change in fair value resulting from ineffectiveness is currently
recognized in natural gas and oil sales. Changes in the fair value of non-qualifying derivatives that occur prior
to their maturity (i.e., temporary fluctuations in value) are reported currently in the consolidated statements of
operations within natural gas and oil sales.
The components of natural gas and oil sales for the years ended December 31, 2010, 2009 and 2008 are
presented below.
Years Ended December 31,
2010 2009 2008
($ in millions)
Natural gas and oil sales .................................... $ 4,248 $ 3,291 $ 7,069
Gains (losses) on natural gas and oil derivatives ................. 1,422 1,722 879
Gains (losses) on ineffectiveness of cash flow hedges ............ (23) 36 (90)
Total natural gas and oil sales .............................. $ 5,647 $ 5,049 $ 7,858
Based upon the market prices at December 31, 2010, we expect to transfer approximately $15 million (net
of income taxes) of gain included in accumulated other comprehensive income to net income (loss) during the
next 12 months in the related month of production. All transactions hedged as of December 31, 2010 are
expected to mature by December 31, 2022.
We have a multi-counterparty hedge facility with 12 counterparties that have committed to provide
approximately 5.6 tcfe of hedging capacity and an aggregate mark-to-market capacity of $15.0 billion under the
terms of the facility. In February 2011, we amended the agreement for the hedge facility primarily to allow us to
protect our natural gas liquids production from price volatility and to allow for greater flexibility when hedging
our anticipated production. As of December 31, 2010, we had hedged a total of 2.9 tcfe of our future production
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