Chesapeake Energy 2010 Annual Report Download - page 94

Contractual Obligations
The table below summarizes our cash contractual obligations as of December 31, 2010 ($ in millions):
Payments Due By Period
Total
Less Than
1 Year
1-3
Years
3-5
Years
More Than
5 Years
Long-term debt:
Principal ............................... $ 13,408 $ — $ 500 $ 5,131 $ 7,777
Interest ................................ 5,193 595 1,173 996 2,429
Financing lease obligations and other ......... 894 18 37 90 749
Operating lease obligations ................. 916 170 345 287 114
Asset retirement obligations(a) ............... 301 — 61 7 233
Purchase obligations(b) ..................... 5,054 930 874 797 2,453
Unrecognized tax benefits(c) ................. 34 34 — — —
Standby letters of credit .................... 13 13 — — —
Total contractual cash obligations ........ $ 25,813 $ 1,760 $ 2,990 $ 7,308 $ 13,755
(a) Asset retirement obligations represent estimated discounted costs for future dismantlement and
abandonment costs. These obligations are recorded as liabilities on our December 31, 2010 balance
sheet.
(b) See Note 4 of the notes to our consolidated financial statements in Item 8 of this report for a description of
transportation and drilling contract commitments.
(c) See Note 5 of the notes to our consolidated financial statements in Item 8 of this report for a description of
unrecognized tax benefits.
Chesapeake has commitments to purchase any natural gas and oil associated with certain volumetric
production payment transactions based on market prices at the time of production and the purchased gas will
be resold.
Under minimum volume throughput agreements, Chesapeake has agreed to move fixed volumes of
natural gas over certain time periods, usually multiple years, through certain midstream systems. At the end of
the term or annually, Chesapeake will be invoiced for any shortfalls in such volume commitments.
Hedging Activities
Natural Gas and Oil Hedging Activities
Our results of operations and cash flows are impacted by changes in market prices for natural gas and oil.
To mitigate a portion of the exposure to adverse market changes, we have entered into various derivative
instruments. Executive management is involved in all risk management activities and the Board of Directors
reviews the company’s hedging program at its quarterly Board meetings. We believe we have sufficient internal
controls to prevent unauthorized hedging. As of December 31, 2010, our natural gas and oil derivative
instruments were comprised of swaps, call options, put options, knockout swaps and basis protection swaps.
Item 7A – Quantitative and Qualitative Disclosures About Market Risk contains a description of each of these
instruments. Although derivatives often fail to achieve 100% effectiveness for accounting purposes, we believe
our derivative instruments continue to be highly effective in achieving our risk management objectives.
Hedging allows us to predict with greater certainty the effective prices we will receive for our natural gas
and oil production. We closely monitor the fair value of our derivative contracts and may elect to settle a
contract prior to its scheduled maturity date in order to lock in a gain or loss. Commodity markets are volatile
and Chesapeake’s hedging activities are dynamic.
Mark-to-market positions under natural gas and oil derivative contracts fluctuate with commodity prices. As
described above under Hedging Facility, our secured multi-counterparty hedging facility allows us to minimize
the potential liquidity impact of significant mark-to-market fluctuations in the value of our natural gas and oil
derivatives by pledging natural gas and oil proved reserves.
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