Chesapeake Energy 2010 Annual Report Download - page 154

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CHESAPEAKE ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
The following table presents the pre-tax gain (loss) recognized in, and reclassified from, accumulated other
comprehensive income (AOCI) and recognized in net income (loss), including any hedge ineffectiveness, for
derivative instruments designated as cash flow derivatives:
Years Ended
December 31,
Cash Flow Derivatives Location of Gain (Loss) 2010 2009
($ in millions)
Gain (Loss) Recognized in
AOCI (Effective Portion)
Commodity contracts AOCI ..................... $ 386 $ 958
Foreign exchange contracts AOCI ..................... (22) 96
$ 364 $ 1,054
Gain (Loss) Reclassified from
AOCI (Effective Portion)
Commodity contracts Natural gas and oil sales ..... $ 789 $ 1,425
$ 789 $ 1,425
Gain (Loss) Recognized
(Ineffective Portion and
Amount Excluded from
Effectiveness Testing)(a)
Commodity contracts Natural gas and oil sales ..... $ (19) $ 193
$ (19) $ 193
(a) In the years ended December 31, 2010 and 2009, the amount of gain (loss) recognized in net income
(loss) represents ($23) million and $36 million related to the ineffective portion of our cash flow derivatives
and $4 million and $157 million, respectively, related to the amount excluded from the assessment of
hedge effectiveness.
The following table presents the gain (loss) recognized in net income (loss) for instruments not qualifying
as cash flow or fair value derivatives:
Years Ended
December 31,
Non-Qualifying Derivatives Location of Gain (Loss) 2010 2009
($ in millions)
Commodity contracts Natural gas and oil sales ..... $ 629 $ 139
Interest rate contracts Interest expense ............ 60 77
Total .................. $ 689 $ 216
Credit Risk
Derivative instruments that enable us to hedge a portion of our exposure to natural gas and oil prices and
interest rate volatility expose us to credit risk from our counterparties. To mitigate this risk, we enter into
derivative contracts only with investment-grade rated counterparties deemed by management to be competent
and competitive market makers, and we attempt to limit our exposure to non-performance by any single
counterparty. On December 31, 2010, our derivative instruments were spread among 14 counterparties.
Additionally, our multi-counterparty secured hedging facility described previously includes 12 of our
counterparties which are required to secure their natural gas and oil hedging obligations in excess of defined
thresholds. We use this facility for all of our commodity hedging.
108