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effects, totaled ($156) million, $94 million and $386 million as of December 31, 2010, 2009 and 2008,
respectively. Based upon the market prices at December 31, 2010, we expect to transfer to earnings
approximately $15 million of net gain included in accumulated other comprehensive income during the next 12
months. A detailed explanation of accounting for natural gas and oil derivatives appears under Application of
Critical Accounting Policies – Hedging elsewhere in this Item 7.
Interest Rate Derivatives
To mitigate our exposure to volatility in interest rates related to our senior notes and credit facilities, we
enter into interest rate derivatives.
For interest rate derivative contracts designated as fair value hedges, changes in fair values of the
derivatives are recorded on the consolidated balance sheets as assets or (liabilities), with corresponding
offsetting adjustments to the debt’s carrying value. Changes in the fair value of non-qualifying derivatives that
occur prior to their maturity (i.e., temporary fluctuations in value) are reported currently in the consolidated
statements of operations as interest expense and characterized as unrealized gains (losses).
Gains or losses from interest rate derivative contracts are reflected as adjustments to interest expense on
the consolidated statements of operations. The components of interest expense for the years ended
December 31, 2010, 2009 and 2008 are presented below.
Years Ended December 31,
2010 2009 2008
($ in millions)
Interest expense on senior notes ................................... $ 718 $ 765 $ 637
Interest expense on credit facilities .................................. 61 60 117
Capitalized interest ............................................... (716) (633) (585)
Realized (gains) losses on interest rate derivatives ..................... (14) (23) (6)
Unrealized (gains) losses on interest rate derivatives ................... (66) (91) 85
Amortization of loan discount and other .............................. 36 35 23
Total interest expense .......................................... $ 19 $ 113 $ 271
A detailed explanation of accounting for interest rate derivatives appears under Application of Critical
Accounting Policies – Hedging elsewhere in this Item 7.
Foreign Currency Derivatives
On December 6, 2006, we issued €600 million of 6.25% Euro-denominated Senior Notes due 2017.
Concurrent with the issuance of the Euro-denominated senior notes, we entered into a cross currency swap to
mitigate our exposure to fluctuations in the euro relative to the dollar over the term of the notes. A detailed
explanation of accounting for foreign currency derivatives appears under Application of Critical Accounting
Policies – Hedging elsewhere in this Item 7.
Results of Operations
General. For the year ended December 31, 2010, Chesapeake had net income of $1.774 billion, or $2.51
per diluted common share, on total revenues of $9.366 billion. This compares to a net loss of $5.830 billion, or
$9.57 per diluted common share, on total revenues of $7.702 billion during the year ended December 31, 2009,
and net income of $604 million, or $0.93 per diluted common share, on total revenues of $11.629 billion during
the year ended December 31, 2008.
Natural Gas and Oil Sales. During 2010, natural gas and oil sales were $5.647 billion compared to $5.049
billion in 2009 and $7.858 billion in 2008. In 2010, Chesapeake produced and sold 1.035 tcfe of natural gas
and oil at a weighted average price of $6.09 per mcfe, compared to 905.5 bcfe in 2009 at a weighted average
price of $6.22 per mcfe, and 842.7 bcfe in 2008 at a weighted average price of $8.38 per mcfe (weighted
average prices for all years discussed exclude the effect of unrealized gains or (losses) on derivatives of ($657)
million, ($588) million and $797 million in 2010, 2009 and 2008, respectively). The decrease in prices in 2010
resulted in a decrease in revenue of $138 million and increased production resulted in a $807 million increase,
for a total increase in revenues of $669 million (excluding unrealized gains or losses on natural gas and oil
derivatives). The increase in production from period to period was primarily generated from the drillbit.
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