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 September 30, 2007

¨ 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 is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act.

Large accelerated filer  x    Accelerated filer  ¨    Non-accelerated filer   ¨

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 November 7, 2007, there were 473,949,071 shares of our $0.01 par value common stock outstanding.

CHESAPEAKE ENERGY CORPORATION AND SUBSIDIARIES

INDEX TO FORM 10-Q FOR THE QUARTER ENDED SEPTEMBER 30, 2007

		Page
PART I.
Financial Information
Item 1.	Condensed Consolidated Financial Statements (Unaudited):
	Condensed Consolidated Balance Sheets as of September 30, 2007 and December 31, 2006	3
	Condensed Consolidated Statements of Operations for the Three and Nine Months Ended September 30, 2007 and 2006	5
	Condensed Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2007 and 2006	6
	Condensed Consolidated Statements of Stockholders’ Equity for the Nine Months Ended September 30, 2007 and 2006	8
	Condensed Consolidated Statements of Comprehensive Income for the Three and Nine Months Ended September 30, 2007 and 2006	9
	Notes to Condensed Consolidated Financial Statements	10
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	26
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	39
Item 4.	Controls and Procedures	45
PART II.
Other Information
Item 1.	Legal Proceedings	46
Item 1A.	Risk Factors	46
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	46
Item 3.	Defaults Upon Senior Securities	46
Item 4.	Submission of Matters to a Vote of Security Holders	46
Item 5.	Other Information	46
Item 6.	Exhibits	47

2

CHESAPEAKE ENERGY CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(Unaudited)

	September 30, 2007			December 31, 2006
	($ in millions)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents	$	2		$	3
Accounts receivable		876			845
Short-term derivative instruments		290			225
Inventory and other		112			81
Total Current Assets		1,280			1,154
PROPERTY AND EQUIPMENT:
Oil and natural gas properties, at cost based on full-cost accounting:
Evaluated oil and natural gas properties		27,226			21,949
Unevaluated properties		5,065			3,797
Less: accumulated depreciation, depletion and amortization of oil and natural gas properties		(6,595	)		(5,292	)
Total oil and natural gas properties, at cost based on full-cost accounting		25,696			20,454
Other property and equipment:
Natural gas gathering systems		922			552
Buildings and land		729			429
Drilling rigs		102			301
Natural gas compressors		42			127
Other		327			241
Less: accumulated depreciation and amortization of other property and equipment		(270	)		(200	)
Total Other Property and Equipment		1,852			1,450
Total Property and Equipment		27,548			21,904
OTHER ASSETS:
Investments		618			699
Long-term derivative instruments		75			339
Other assets		368			321
Total Other Assets		1,061			1,359
TOTAL ASSETS	$	29,889		$	24,417

3

CHESAPEAKE ENERGY CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS – (Continued)

(Unaudited)

	September 30, 2007			December 31, 2006
	($ in millions)
LIABILITIES AND STOCKHOLDERS’ EQUITY
CURRENT LIABILITIES:
Accounts payable	$	979		$	860
Accrued liabilities		706			419
Short-term derivative instruments		186			112
Revenues and royalties due others		367			318
Accrued interest		122			142
Deferred income taxes		30			39
Total Current Liabilities		2,390			1,890
LONG-TERM LIABILITIES:
Long-term debt, net		10,872			7,376
Deferred income tax liability		3,900			3,317
Asset retirement obligation		218			193
Long-term derivative instruments		228			160
Revenues and royalties due others		38			30
Other liabilities		239			200
Total Long-Term Liabilities		15,495			11,276
CONTINGENCIES AND COMMITMENTS (Note 3)
STOCKHOLDERS’ EQUITY:
Preferred Stock, $.01 par value, 20,000,000 shares authorized:
4.125% cumulative convertible preferred stock, 3,062 and 3,065 shares issued and outstanding as of September 30, 2007 and December 31, 2006, respectively, entitled in liquidation to $3 million		3			3
5.00% cumulative convertible preferred stock (series 2005), 4,600,000 shares issued and outstanding as of September 30, 2007 and December 31, 2006, entitled in liquidation to $460 million		460			460
4.50% cumulative convertible preferred stock, 3,450,000 shares issued and outstanding as of September 30, 2007 and December 31, 2006, entitled in liquidation to $345 million		345			345
5.00% cumulative convertible preferred stock (series 2005B), 5,750,000 shares issued and outstanding as of September 30, 2007 and December 31, 2006, entitled in liquidation to $575 million		575			575
6.25% mandatory convertible preferred stock, 2,300,000 shares issued and outstanding as of September 30, 2007 and December 31, 2006, respectively, entitled in liquidation to $575 million		575			575
Common Stock, $.01 par value, 750,000,000 shares authorized, 474,222,339 and 458,600,789 shares issued at September 30, 2007 and December 31, 2006, respectively		5			5
Paid-in capital		5,976			5,873
Retained earnings		3,892			2,913
Accumulated other comprehensive income, net of tax of ($108) million and ($319) million, respectively		179			528
Less: treasury stock, at cost; 501,334 and 1,167,007 common shares as of September 30, 2007 and December 31, 2006, respectively		(6	)		(26	)
Total Stockholders’ Equity		12,004			11,251
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY	$	29,889		$	24,417

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

4

CHESAPEAKE ENERGY CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

	Three Months Ended September 30,						Nine Months Ended September 30,
	2007			2006			2007			2006
	($ in millions except per share data)
REVENUES:
Oil and natural gas sales	$	1,492		$	1,493		$	4,164		$	4,190
Oil and natural gas marketing sales		501			398			1,446			1,170
Service operations revenue		34			38			101			98
Total Revenues		2,027			1,929			5,711			5,458
OPERATING COSTS:
Production expenses		165			124			461			364
Production taxes		56			41			151			130
General and administrative expenses		62			37			168			99
Oil and natural gas marketing expenses		483			384			1,394			1,132
Service operations expense		23			19			67			49
Oil and natural gas depreciation, depletion and amortization		479			344			1,314			977
Depreciation and amortization of other assets		44			27			120			74
Employee retirement expense		—			—			—			55
Total Operating Costs		1,312			976			3,675			2,880
INCOME FROM OPERATIONS		715			953			2,036			2,578
OTHER INCOME (EXPENSE):
Interest and other income		1			5			12			20
Interest expense		(116	)		(74	)		(279	)		(220	)
Gain on sale of investments		—			—			83			117
Total Other Income (Expense)		(115	)		(69	)		(184	)		(83	)
INCOME BEFORE INCOME TAXES		600			884			1,852			2,495
INCOME TAX EXPENSE:
Current		9			—			19			—
Deferred		219			335			685			963
Total Income Tax Expense		228			335			704			963
NET INCOME		372			549			1,148			1,532
PREFERRED STOCK DIVIDENDS		(26	)		(26	)		(77	)		(62	)
LOSS ON CONVERSION/EXCHANGE OF PREFERRED STOCK		—			—			—			(11	)
NET INCOME AVAILABLE TO COMMON SHAREHOLDERS	$	346		$	523		$	1,071		$	1,459
EARNINGS PER COMMON SHARE:
Basic	$	0.76		$	1.25		$	2.37		$	3.75
Assuming dilution	$	0.72		$	1.13		$	2.23		$	3.40
CASH DIVIDEND DECLARED PER COMMON SHARE	$	0.0675		$	0.06		$	0.195		$	0.17
WEIGHTED AVERAGE COMMON AND COMMON EQUIVALENT SHARES OUTSTANDING (in millions):
Basic		454			418			452			389
Assuming dilution		517			483			516			451

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

5

CHESAPEAKE ENERGY CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

	Nine Months Ended September 30,
	2007			2006
	($ in millions)
CASH FLOWS FROM OPERATING ACTIVITIES:
NET INCOME	$	1,148		$	1,532
ADJUSTMENTS TO RECONCILE NET INCOME TO CASH PROVIDED BY OPERATING ACTIVITIES:
Depreciation, depletion and amortization		1,422			1,041
Deferred income taxes		671			963
Unrealized (gains) losses on derivatives		126			(453	)
Amortization of loan costs and bond discount		19			15
Realized gains on financing derivatives		(76	)		(96	)
Stock-based compensation		59			78
Gain on sale of investments		(83	)		(117	)
Income from equity investments		(1	)		(9	)
Other		—			(4	)
Change in assets and liabilities		104			33
Cash provided by operating activities		3,389			2,983
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisitions of oil and natural gas companies, proved and unproved properties and leasehold, net of cash acquired		(2,331	)		(3,546	)
Exploration and development of oil and natural gas properties		(3,770	)		(2,128	)
Additions to drilling rig equipment		(112	)		(341	)
Additions to other property and equipment		(893	)		(407	)
Additions to investments		(7	)		(538	)
Acquisition of trucking company, net of cash acquired		—			(45	)
Proceeds from sale of investments		124			159
Proceeds from sale of drilling rigs and equipment		322			188
Proceeds from sale of compressors		147			—
Deposits for acquisitions		—			(12	)
Sale of non-oil and natural gas assets		32			2
Cash used in investing activities		(6,488	)		(6,668	)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from long-term borrowings		5,949			7,058
Payments on long-term borrowings		(4,177	)		(5,666	)
Proceeds from issuance of senior notes, net of offering costs		1,607			969
Proceeds from issuance of common stock, net of offering costs		—			804
Proceeds from issuance of preferred stock, net of offering costs		—			558
Cash paid for common stock dividends		(85	)		(62	)
Cash paid for preferred stock dividends		(78	)		(63	)
Purchase of treasury shares		—			(86	)
Derivative settlements		(65	)		(68	)
Net increase (decrease) in outstanding payments in excess of cash balance		(54	)		43
Cash received from exercise of stock options		8			71
Excess tax benefit from stock-based compensation		13			86
Other financing costs		(20	)		(18	)
Cash provided by financing activities		3,098			3,626
Net increase (decrease) in cash and cash equivalents		(1	)		(59	)
Cash and cash equivalents, beginning of period		3			60
Cash and cash equivalents, end of period	$	2		$	1

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

6

CHESAPEAKE ENERGY CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS – (Continued)

(Unaudited)

	Nine Months Ended September 30,
	2007		2006
	($ in millions)
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION OF CASH PAYMENTS FOR:
Interest, net of capitalized interest	$	274	$	245
Income taxes, net of refunds received	$	33	$	—

SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING AND FINANCING ACTIVITIES:

As of September 30, 2007 and 2006, dividends payable on our common and preferred stock were $56 million and $51 million, respectively.

For the nine months ended September 30, 2007 and 2006, oil and natural gas properties were adjusted by $130 million and $178 million, respectively, for net income tax liabilities related to acquisitions.

For the nine months ended September 30, 2007 and 2006, accrued exploration and development costs of $103 million and $73 million, respectively, were recorded as additions to oil and natural gas properties.

We recorded non-cash asset additions to oil and natural gas properties of $15 million and $14 million for the nine months ended September 30, 2007 and 2006, respectively, for asset retirement obligations.

For the nine months ended September 30, 2007, a holder of our 4.125% cumulative convertible preferred stock converted 3 shares into 180 shares of common stock, and for the nine months ended September 30, 2006, holders of our 4.125% preferred stock exchanged 2,750 shares for 172,594 shares of common stock in privately negotiated exchanges.

For the nine months ended September 30, 2006, holders of our 5.0% (Series 2003) cumulative convertible preferred stock exchanged 183,273 shares for 1,140,223 shares of common stock in privately negotiated exchanges.

For the nine months ended September 30, 2006, holders of our 6.0% cumulative convertible preferred stock converted 99,310 shares into 482,694 shares of common stock.

For the nine months ended September 30, 2006, holders of our 4.125% and 5.0% (Series 2003) cumulative convertible preferred stock exchanged 83,245 shares and 804,048 shares for 5,248,126 and 4,972,786 shares of common stock, respectively, in public exchange offers.

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

7

CHESAPEAKE ENERGY CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

(Unaudited)

	Nine Months Ended September 30,
	2007			2006
	($ in millions)
PREFERRED STOCK:
Balance, beginning of period	$	1,958		$	1,577
Issuance of 6.25% mandatory convertible preferred stock		—			575
Exchange of common stock for 3 and 85,995 shares of 4.125% preferred stock		—			(86	)
Exchange of common stock for 0 and 987,321 shares of 5.00% preferred stock (Series 2003)		—			(99	)
Exchange of common stock for 0 and 99,310 shares of 6.00% preferred stock		—			(5	)
Balance, end of period		1,958			1,962
COMMON STOCK:
Balance, beginning of period		5			4
Exchange of 180 and 12,016,423 shares of common stock for preferred stock		—			—
Issuance of 0 and 28,750,000 shares of common stock		—			—
Issuance of 0 and 1,375,989 shares of common stock for the purchase of Chaparral Energy, Inc. common stock		—			—
Balance, end of period		5			4
PAID-IN CAPITAL:
Balance, beginning of period		5,873			3,803
Issuance of 0 and 28,750,000 shares of common stock		—			835
Issuance of common stock for the purchase of Chaparral Energy, Inc. common stock		—			40
Exchange of 180 and 12,016,423 shares of common stock for preferred stock		—			189
Stock-based compensation		82			89
Adoption of SFAS 123(R)		—			(89	)
Offering expenses		—			(49	)
Exercise of stock options		8			71
Tax benefit from exercise of stock options and restricted stock		13			86
Release of 0 and 6,500,000 shares of treasury stock upon exercise of stock options		—			(75	)
Balance, end of period		5,976			4,900
RETAINED EARNINGS:
Balance, beginning of period		2,913			1,101
Net income		1,148			1,532
Dividends on common stock		(88	)		(69	)
Dividends on preferred stock		(77	)		(69	)
Adoption of FIN 48		(4	)		—
Balance, end of period		3,892			2,495
ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS):
Balance, beginning of period		528			(195	)
Hedging activity		(334	)		1,144
Marketable securities activity		(15	)		(87	)
Balance, end of period		179			862
UNEARNED COMPENSATION:
Balance, beginning of period		—			(89	)
Adoption of SFAS 123(R)		—			89
Balance, end of period		—			—
TREASURY STOCK - COMMON:
Balance, beginning of period		(26	)		(26	)
Release of 665,673 and 221,759 shares for company benefit plans		20			7
Purchase of 0 and 2,707,471 shares of treasury stock		—			(86	)
Release of 0 and 6,500,000 shares upon exercise of stock options		—			75
Balance, end of period		(6	)		(30	)
TOTAL STOCKHOLDERS’ EQUITY	$	12,004		$	10,193

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

8

CHESAPEAKE ENERGY CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(Unaudited)

	Three Months Ended September 30,						Nine Months Ended September 30,
	2007			2006			2007			2006
	($ in millions)
Net income	$	372		$	549		$	1,148		$	1,532
Other comprehensive income, net of income tax:
Change in fair value of derivative instruments, net of income taxes of $68 million, $452 million, $3 million and $1.084 billion		110			751			6			1,800
Reclassification of gain on settled contracts, net of income taxes of ($65) million, ($105) million, ($243) million and ($269) million		(106	)		(174	)		(398	)		(445	)
Unrealized gain (loss) on ineffective portion of derivatives qualifying for cash flow hedge accounting, net of income taxes of $11 million, ($64) million, $35 million and ($126) million		17			(108	)		57			(211	)
Unrealized loss on marketable securities, net of income taxes of ($8) million, ($2) million, ($9) million and ($8) million		(13	)		(4	)		(15	)		(14	)
Reclassification of gain on sales of investments, net of income taxes of $0, $0, $0 and ($46) million		—			—			—			(73	)
Comprehensive income	$	380		$	1,014		$	798		$	2,589

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

9

CHESAPEAKE ENERGY CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

1. Basis of Presentation and Summary of Significant Accounting Policies

Principles of Consolidation

The accompanying unaudited condensed consolidated financial statements of Chesapeake Energy Corporation and its subsidiaries have been prepared in accordance with the instructions to Form 10-Q as prescribed by the Securities and Exchange Commission. Chesapeake’s 2006 Annual Report on 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 three and nine months ended September 30, 2007 are not necessarily indicative of the results to be expected for the full year. This Form 10-Q relates to the three and nine months ended September 30, 2007 (the “Current Quarter” and the “Current Period”, respectively) and the three and nine months ended September 30, 2006 (the “Prior Quarter” and the “Prior Period”, respectively).

Stock-Based Compensation

Chesapeake’s stock-based compensation programs consist of restricted stock and stock options issued to employees and non-employee directors. To the extent compensation cost relates to employees directly involved in oil and natural gas exploration and development activities, such amounts are capitalized to oil and natural gas properties. Amounts not capitalized to oil and natural gas properties are recognized as general and administrative expenses, production expenses, oil and natural gas marketing expenses, service operations expense or employee retirement expense. We recorded the following stock-based compensation during the three and nine months ended September 30, 2007 and 2006, respectively ($ in millions):

For the three months ended September 30:	2007		2006
General and administrative expenses	$	19	$	8
Production expenses		7		3
Oil and natural gas marketing expenses		2		—
Service operations expense		1		—
Oil and natural gas properties		23		10
Total	$	52	$	21

For the nine months ended September 30:	2007		2006
General and administrative expenses	$	41	$	21
Production expenses		12		6
Oil and natural gas marketing expenses		3		—
Service operations expense		2		—
Employee retirement expense		—		51
Oil and natural gas properties		45		20
Total	$	103	$	98

Restricted Stock. Chesapeake regularly issues shares of restricted common stock to employees and to non-employee directors. The fair value of the awards issued is determined based on the fair market value of the shares on the date of grant. This value is amortized over the vesting period, which is generally four or five years from the date of grant for employees and three years for non-employee directors.

A summary of the unvested shares of restricted stock as of September 30, 2007, and changes during the Current Period, is presented below:

	Number of Unvested Restricted Shares		Weighted Average Grant-Date Fair Value
Unvested shares as of January 1, 2007	7,074,761		$	25.85
Granted	15,878,900		$	34.22
Vested	(2,203,735	)	$	24.23
Forfeited	(927,988	)	$	33.22
Unvested shares as of September 30, 2007	19,821,938		$	32.39

The aggregate intrinsic value of restricted stock vested during the Current Period was approximately $71 million.

10

CHESAPEAKE ENERGY CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

Included in the 15.9 million shares of restricted stock granted during the Current Period are 9.8 million shares of restricted stock granted to our employees (except our CEO and CFO, who did not participate in the stock awards) under a long-term stock incentive and retention program. These shares vest 50% in August 2009 with the remaining 50% vesting in August 2011.

As of September 30, 2007, there was $609 million of total unrecognized compensation cost related to unvested restricted stock. The cost is expected to be recognized over a weighted average period of 3.36 years.

The vesting of certain restricted stock grants results in state and federal income tax benefits related to the difference between the market price of the common stock at the date of vesting and the date of grant. During the Current Quarter, the Prior Quarter, the Current Period and the Prior Period, we recognized excess tax benefits related to restricted stock of $3 million, $1 million, $4 million and $4 million, respectively, which were recorded as adjustments to additional paid-in capital and deferred income taxes with respect to such benefits.

Stock Options. Prior to 2005, we granted stock options under several stock compensation plans. Outstanding options expire ten years from the date of grant and vest over a four-year period.

The following table provides information related to stock option activity during the Current Period:

	Number of Shares Underlying Options		Weighted Average Exercise Price Per Share		Weighted Average Contract Life in Years	Aggregate Intrinsic Value(a) ($ in millions)
Outstanding at January 1, 2007	6,605,703		$	7.43	5.36	$	143
Exercised	(1,272,751	)	$	6.54		$	33
Forfeited	(13,608	)	$	9.90
Outstanding at September 30, 2007	5,319,344		$	7.63	4.67	$	147
Exercisable at September 30, 2007	5,284,854		$	7.60	4.66	$	146

(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 September 30, 2007, there was a nominal amount of total unrecognized compensation cost related to unvested stock options.

During the Current Quarter, the Prior Quarter, the Current Period and the Prior Period, we recognized excess tax benefits related to stock options of $2 million, $3 million, $9 million and $81 million, respectively, which were recorded as adjustments to additional paid-in capital and deferred income taxes with respect to such benefits.

Income Taxes

In June 2006, the Financial Accounting Standards Board (FASB) issued FASB Interpretation (FIN) No. 48, Accounting for Uncertainty in Income Taxes - an interpretation of FASB Statement No. 109. FIN 48 provides guidance for recognizing and measuring uncertain tax positions, as defined in SFAS 109, Accounting for Income Taxes. FIN 48 prescribes a threshold condition that a tax position must meet for any of the benefit of the uncertain tax position to be recognized in the financial statements. Guidance is also provided regarding de-recognition, classification and disclosure of these uncertain tax positions. FIN 48 is effective for fiscal years beginning after December 15, 2006.

Chesapeake adopted the provisions of FIN 48 on January 1, 2007. As a result of the implementation of FIN 48, Chesapeake recognized a $7 million liability for accrued interest associated with uncertain tax positions which was accounted for as a reduction in the January 1, 2007 balance of retained earnings, net of tax. At the date of adoption, we had approximately $142 million of unrecognized tax benefits related to alternative minimum tax (AMT) associated with uncertain tax positions. As of September 30, 2007, the amount of unrecognized tax benefits related to AMT associated with uncertain tax positions was $84 million. These AMT liabilities can be utilized as credits against future regular tax liabilities. The uncertain tax positions identified would not have a material effect on the effective tax rate. At September 30, 2007, we had a liability of $7 million for interest related to these same uncertain tax positions. Chesapeake recognizes interest related to uncertain tax positions in interest expense. Penalties, if any, related to uncertain tax positions would be recorded in other expenses.

11

CHESAPEAKE ENERGY CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

Chesapeake files income tax returns in the U.S. federal jurisdiction and various state and local jurisdictions. With few exceptions, Chesapeake is no longer subject to U.S. federal, state and local income tax examinations by tax authorities for years prior to 2004. The Internal Revenue Service (IRS) completed an examination of Chesapeake’s U.S. income tax returns for 2003 and 2004 in September 2007. This examination resulted in additional AMT liabilities of $9 million. These AMT liabilities can be utilized as credits against future regular tax liabilities. The adjustments in the examination did not result in a material change to our financial position, results of operations or cash flows.

Oil and Natural Gas Properties – Impact of Cash Flow Hedges on Ceiling Test

We review the carrying value of our oil and natural gas properties under the full-cost accounting rules of the Securities and Exchange Commission (SEC) on a quarterly and annual basis. This review is referred to as a ceiling test. Under the ceiling test, capitalized costs, less accumulated amortization and related deferred income taxes, may not exceed an amount equal to the sum of the present value of estimated future net revenues (including the impact of cash flow hedges) less estimated future expenditures to be incurred in developing and producing the proved reserves, less any related income tax effects. Any excess of the net book value, less deferred income taxes, is generally written off as an expense.

In calculating future net revenues, prices and costs used are those as of the end of the appropriate quarterly period except where different prices are fixed and determinable from applicable contracts for the remaining term of those contracts, including the effects of derivatives qualifying as cash flow hedges. Our qualifying cash flow hedges as of September 30, 2007, which consisted of swaps and collars, covered 121 bcfe, 351 bcfe, 102 bcfe and 25 bcfe in 2007, 2008, 2009 and 2010, respectively. Our oil and natural gas hedging activities are discussed in Note 2 of these condensed consolidated financial statements and in Item 3. Quantitative and Qualitative Disclosures About Market Risk of Part I of this Form 10-Q. Based on spot prices for oil and natural gas as of September 30, 2007, these cash flow hedges increased the full cost ceiling by $1.182 billion, thereby reducing any potential ceiling test write-down by the same amount. Had the effects of our cash flow hedges not been considered in calculating the ceiling limitation, the impairment as of September 30, 2007 would have been approximately $916 million.

Critical Accounting Policies

We consider accounting policies related to hedging, oil and natural gas properties, income taxes and business combinations to be critical policies. These policies are summarized in Management’s Discussion and Analysis of Financial Condition and Results of Operations in our annual report on Form 10-K for the year ended December 31, 2006.

2. Financial Instruments and Hedging Activities

Oil and Natural Gas Hedging Activities

Our results of operations and operating cash flows are impacted by changes in market prices for oil and natural gas. To mitigate a portion of the exposure to adverse market changes, we have entered into various derivative instruments. As of September 30, 2007, our oil and natural gas derivative instruments were comprised of swaps, cap-swaps, knockout swaps, basis protection swaps, call options and collars. These instruments allow us to predict with greater certainty the effective oil and natural gas prices to be received for our hedged production. Although derivatives often fail to achieve 100% effectiveness for accounting purposes, we believe our derivative instruments continue to be highly effective in achieving the risk management objectives for which they were intended.

• For swap instruments, Chesapeake receives a fixed price for the hedged commodity and pays a floating market price to the counterparty. The fixed-price payment and the floating-price payment are netted, resulting in a net amount due to or from the counterparty.

• For cap-swaps, Chesapeake receives a fixed price and pays a floating market price. The fixed price received by Chesapeake includes a premium in exchange for a “cap” limiting the counterparty’s exposure. In other words, there is no limit to Chesapeake’s exposure but there is a limit to the downside exposure of the counterparty.

• For knockout swaps, Chesapeake receives a fixed price and pays a floating market price. The fixed price received by Chesapeake includes a premium in exchange for the possibility to reduce the counterparty’s exposure to zero, in any given month, if the floating market price is lower than certain pre-determined knockout prices.

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CHESAPEAKE ENERGY CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

• Basis protection swaps are arrangements that guarantee a price differential for oil or natural gas from a specified delivery point. For Mid-Continent basis protection swaps, which have negative differentials to NYMEX, Chesapeake receives a payment from the counterparty if the price differential is greater than the stated terms of the contract and pays the counterparty if the price differential is less than the stated terms of the contract. For Appalachian Basin basis protection swaps, which have positive differentials to NYMEX, Chesapeake receives a payment from the counterparty if the price differential is less than the stated terms of the contract and pays the counterparty if the price differential is greater than the stated terms of the contract.

• For call options, Chesapeake receives a premium from the counterparty in exchange for the sale of a call option. If the market price exceeds the fixed price of the call option, Chesapeake pays the counterparty such excess. If the market price settles below the fixed price of the call option, no payment is due from Chesapeake.

• Collars contain a fixed floor price (put) and ceiling price (call). If the market price exceeds the call strike price or falls below the put strike price, Chesapeake receives the fixed price and pays the market price. If the market price is between the call and the put strike price, no payments are due from either party.

Chesapeake enters into counter-swaps from time to time for the purpose of locking-in the value of a swap. Under the counter-swap, Chesapeake receives a floating price for the hedged commodity and pays a fixed price to the counterparty. The counter-swap is 100% effective in locking-in the value of a swap since subsequent changes in the market value of the swap are entirely offset by subsequent changes in the market value of the counter-swap. We refer to this locked-in value as a locked swap. Generally, at the time Chesapeake enters into a counter-swap, Chesapeake removes the original swap’s designation as a cash flow hedge and classifies the original swap as a non-qualifying hedge under SFAS 133. The reason for this new designation is that collectively the swap and the counter-swap no longer hedge the exposure to variability in expected future cash flows. Instead, the swap and counter-swap effectively lock-in a specific gain (or loss) that will be unaffected by subsequent variability in oil and natural gas prices. Any locked-in gain or loss is recorded in accumulated other comprehensive income and reclassified to oil and natural gas sales in the month of related production.

With respect to counter-swaps that are designed to lock-in the value of cap-swaps, the counter-swap is effective in locking-in the value of the cap-swap until the floating price reaches the cap (or floor) stipulated in the cap-swap agreement. The value of the counter-swap will increase (or decrease), but in the opposite direction, as the value of the cap-swap decreases (or increases) until the floating price reaches the pre-determined cap (or floor) stipulated in the cap-swap agreement. However, because of the written put option embedded in the cap-swap, the changes in value of the cap-swap are not completely effective in offsetting changes in value of the corresponding counter-swap. Changes in the value of cap-swaps and counter-swaps are recorded as adjustments to oil and natural gas sales.

In accordance with FASB Interpretation No. 39, to the extent that a legal right of set-off exists, Chesapeake nets the value of its derivative arrangements with the same counterparty in the accompanying condensed consolidated balance sheets.

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CHESAPEAKE ENERGY CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

Gains or losses from certain derivative transactions are reflected as adjustments to oil and natural gas sales on the condensed consolidated statements of operations. Realized gains (losses) are included in oil and natural gas sales in the month of related production. Pursuant to SFAS 133, certain derivatives do not qualify for designation as cash flow hedges. Changes in the fair value of these non-qualifying derivatives that occur prior to their maturity (i.e., temporary fluctuations in value) are reported currently in the condensed consolidated statements of operations as unrealized gains (losses) within oil and natural gas sales. Following provisions of SFAS 133, 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 other comprehensive income until the hedged item is recognized in earnings. Any change in fair value resulting from ineffectiveness is recognized currently in oil and natural gas sales as unrealized gains (losses). The components of oil and natural gas sales for the Current Quarter, the Prior Quarter, the Current Period and the Prior Period are presented below.

	Three Months Ended September 30,					Nine Months Ended September 30,
	2007			2006		2007			2006
	($ in millions)
Oil and natural gas sales	$	1,161		$	953	$	3,361		$	2,930
Realized gains on oil and natural gas derivatives		286			301		916			807
Unrealized gains (losses) on non-qualifying oil and natural gas derivatives		73			67		(21	)		116
Unrealized gains (losses) on ineffectiveness of cash flow hedges		(28	)		172		(92	)		337
Total oil and natural gas sales	$	1,492		$	1,493	$	4,164		$	4,190

The estimated fair values of our oil and natural gas derivative instruments as of September 30, 2007 and December 31, 2006 are provided below. The associated carrying values of these instruments are equal to the estimated fair values.

	September 30, 2007			December 31, 2006
	($ in millions)
Derivative assets (liabilities):
Fixed-price natural gas swaps	$	(38	)	$	1
Natural gas basis protection swaps		180			187
Fixed-price natural gas knockout swaps		71			122
Fixed-price natural gas counter-swaps		—			(5	)
Natural gas call options(a)		(143	)		(5	)
Fixed-price natural gas collars		—			(7	)
Fixed-price oil swaps		(40	)		28
Fixed-price oil cap-swaps		—			24
Fixed-price oil knockout swaps		(17	)		—
Oil call options(b)		(36	)		—
Estimated fair value	$	(23	)	$	345

(a) After adjusting for $183 million and $15 million of unrealized premiums, the cumulative unrealized gain (loss) related to these call options as of September 30, 2007 and December 31, 2006 was $40 million and $10 million, respectively.

(b) After adjusting for $29 million of unrealized premiums, the cumulative unrealized loss related to these call options as of September 30, 2007 was ($7) million.

In 2006 and 2007, Chesapeake lifted a portion of its 2007, 2008 and 2009 hedges and as a result has approximately $435 million of deferred hedging gains as of September 30, 2007. These gains have been recorded in accumulated other comprehensive income or as an unrealized gain in oil and natural gas sales. For amounts originally recorded in other comprehensive income, the gain will be recognized in oil and natural gas sales in the month of the hedged production.

Based upon the market prices at September 30, 2007, we expect to transfer approximately $195 million (net of income taxes) of the gain included in the balance in accumulated other comprehensive income to earnings during the next 12 months in the related month of production. All transactions hedged as of September 30, 2007 are expected to mature by December 31, 2012.

We have six secured hedging facilities, each of which permits us to enter into cash-settled oil and natural gas commodity transactions, valued by the counterparty, for up to a maximum value. Outstanding transactions under each facility are collateralized by certain of our oil and natural gas properties that do not secure any of our other obligations. The hedging facilities are subject to a per annum exposure fee, which is assessed quarterly based on the

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CHESAPEAKE ENERGY CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

average of the daily negative fair value amounts of the hedges, if any, during the quarter. The hedging facilities contain the standard representations and default provisions that are typical of such agreements. The agreements also contain various restrictive provisions which govern the aggregate oil and natural gas production volumes that we are permitted to hedge under all of our agreements at any one time. The maximum permitted value of transactions under each facility, per annum exposure fees, scheduled maturity dates and the fair value of outstanding transactions are shown below.

	Secured Hedging Facilities (a)
	#1			#2			#3			#4			#5			#6
	($ in millions)
Maximum permitted value of transactions under facility	$	750		$	500		$	500		$	250		$	500		$	500
Per annum exposure fee		1	%		1	%		1	%		0.8	%		0.8	%		0.8	%
Scheduled maturity date		2010			2010			2011			2012			2012			2012
Fair value of outstanding transactions, as of September 30, 2007	$	22		$	(158	)	$	(33	)	$	(14	)	$	(1	)	$	(1	)

(a) Chesapeake Exploration, L.L.C. is the named party to the facilities numbered 1-3 and Chesapeake Energy Corporation is the named party to the facilities numbered 4-6.

We assumed certain liabilities related to open derivative positions in connection with our acquisition of Columbia Natural Resources, LLC in November 2005. In accordance with SFAS 141, these derivative positions were recorded at fair value in the purchase price allocation as a liability of $592 million. The recognition of the derivative liability and other assumed liabilities resulted in an increase in the total purchase price which was allocated to the assets acquired. Because of this accounting treatment, only cash settlements for changes in fair value subsequent to the acquisition date for the derivative positions assumed result in adjustments to our oil and natural gas revenues upon settlement. For example, if the fair value of the derivative positions assumed does not change, then upon the sale of the underlying production and corresponding settlement of the derivative positions, cash would be paid to the counterparties and there would be no adjustment to oil and natural gas revenues related to the derivative positions. If, however, the actual sales price is different from the price assumed in the original fair value calculation, the difference would be reflected as either a decrease or increase in oil and natural gas revenues, depending upon whether the sales price was higher or lower, respectively, than the prices assumed in the original fair value calculation. For accounting purposes, the net effect of these acquired hedges is that we hedged the production volumes at market prices on the date of our acquisition of CNR.

Pursuant to Statement of Financial Accounting Standards No. 149, Amendment of SFAS 133 on Derivative Instruments and Hedging Activities, the derivative instruments assumed in connection with the CNR acquisition are deemed to contain a significant financing element, and all cash flows associated with these positions are reported as financing activity in the statement of cash flows for the periods in which settlement occurs. The aggregate fair value of the remaining CNR derivatives as of September 30, 2007 was a liability of $204 million.

Interest Rate Derivatives

We use interest rate derivatives to mitigate our exposure to the volatility in interest rates. For interest rate derivative instruments designated as fair value hedges (in accordance with SFAS 133), changes in fair value are recorded on the condensed consolidated balance sheets as assets (liabilities), and the debt’s carrying value amount is adjusted by the change in the fair value of the debt subsequent to the initiation of the derivative. Changes in the fair value of derivative instruments not qualifying as fair value hedges are recorded currently as adjustments to interest expense.

Gains or losses from certain derivative transactions are reflected as adjustments to interest expense on the condensed consolidated statements of operations. Realized gains (losses) included in interest expense were $1 million, ($2) million, a nominal amount and $1 million in the Current Quarter, the Prior Quarter, the Current Period and the Prior Period, respectively. Pursuant to SFAS 133, certain interest rate derivatives do not qualify for designation as fair value hedges. Changes in the fair value of these non-qualifying derivatives that occur prior to their maturity (i.e., temporary fluctuations in value) are reported currently in the condensed consolidated statements of operations as unrealized gains (losses) within interest expense. Unrealized gains (losses) included in interest expense were ($19) million, $3 million, ($13) million and $1 million in the Current Quarter, the Prior Quarter, the Current Period and the Prior Period, respectively.

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CHESAPEAKE ENERGY CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

As of September 30, 2007, the following interest rate derivatives were outstanding:

	Notional Amount ($ in millions)		Weighted Average Fixed Rate	Weighted Average Floating Rate	Weighted Average Cap/Floor Rate	Fair Value Hedge	Net Premiums ($ in millions)		Fair Value ($ in millions)
Fixed to Floating Swaps:
July 2005 – November 2020	$	1,750	6.929%	6 month LIBOR plus 180 basis points	—	Yes	$	—	$	(17	)
September 2004 – July 2013	$	325	7.942%	6 month LIBOR plus 297 basis points	—	No		—		(1	)
Floating to Fixed Swaps:
August 2007 – August 2009	$	500	5.034%	3 month LIBOR	—	No		—		(4	)
Call Options:
June 2007 – February 2008	$	750	7.000%	—	—	No		5		(15	)
Collars:
August 2007 – August 2010	$	1,325	—	—	5.37% - 4.32%	No		—		(7	)
							$	5	$	(44	)

In the Current Period, we sold call options on five of our interest rate swaps and received $9 million in premiums. Two of the options expired unexercised in the Current Period.

In the Current Period, we closed eight interest rate swaps for gains totaling $9 million. These interest rate swaps were designated as fair value hedges, and the settlement amounts received will be amortized as a reduction to realized interest expense over the remaining term of the related senior notes.

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. Under the terms of the cross currency swap, on each semi-annual interest payment date, the counterparties will pay Chesapeake €19 million and Chesapeake will pay the counterparties $30 million, which will yield an annual dollar-equivalent interest rate of 7.491%. Upon maturity of the notes, the counterparties will pay Chesapeake €600 million and Chesapeake will pay the counterparties $800 million. The terms of the cross currency swap were based on the dollar/euro exchange rate on the issuance date of $1.3325 to €1.00. Through the cross currency swap, we have eliminated any potential variability in Chesapeake’s expected cash flows related to changes in foreign exchange rates and therefore the swap qualifies as a cash flow hedge under SFAS 133. The euro-denominated debt is recorded in notes payable ($853 million at September 30, 2007) using an exchange rate of $1.4219 to €1.00. The fair value of the cross currency swap is recorded on the condensed consolidated balance sheet as an asset of $17 million at September 30, 2007. The translation adjustment to notes payable is completely offset by the fair value of the cross currency swap and therefore there is no impact to the consolidated statement of operations. The remaining value of the cross currency swap related to future interest payments is reported in other comprehensive income.

Fair Value of Financial Instruments

The following disclosure of the estimated fair value of financial instruments is made in accordance with the requirements of Statement of Financial Accounting Standards No. 107, Disclosures About Fair Value of Financial Instruments. We have determined the estimated fair values by using available market information and valuation methodologies. Considerable judgment is required in interpreting market data to develop the estimates of fair value. The use of different market assumptions or valuation methodologies may have a material effect on the estimated fair value amounts.

The carrying values of financial instruments comprising current assets and current liabilities approximate the fair values due to the short-term maturities of these instruments. We estimate the fair value of our long-term fixed-rate debt and our convertible preferred stock using primarily quoted market prices. Our carrying amounts for such debt, excluding discounts or premiums related to interest rate derivatives, at September 30, 2007 and December 31, 2006 were $8.920 billion and $7.215 billion, respectively, compared to approximate fair values of $9.068 billion and $7.336 billion, respectively. The carrying amount for our convertible preferred stock as of September 30, 2007 and December 31, 2006 was $1.958 billion, compared to approximate fair values of $2.040 billion and $1.949 billion, respectively.

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CHESAPEAKE ENERGY CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

Concentration of Credit Risk

A significant portion of our liquidity is concentrated in derivative instruments that enable us to hedge a portion of our exposure to oil and natural gas price and interest rate volatility. These arrangements expose us to credit risk from our counterparties. Other financial instruments which potentially subject us to concentrations of credit risk consist principally of investments in equity instruments and accounts receivable. Our accounts receivable are primarily from purchasers of oil and natural gas products and exploration and production companies which own interests in properties we operate. This industry concentration has the potential to impact our overall exposure to credit risk, either positively or negatively, in that our customers may be similarly affected by changes in economic, industry or other conditions. We generally require letters of credit for receivables from customers which are judged to have sub-standard credit, unless the credit risk can otherwise be mitigated.

3. Contingencies and Commitments

Litigation

We are involved in various disputes incidental to our business operations, including claims from royalty owners regarding volume measurements, post-production costs and prices for royalty calculations. In Tawney, et al. v. Columbia Natural Resources, Inc., Chesapeake’s wholly owned subsidiary Chesapeake Appalachia, L.L.C., formerly known as Columbia Natural Resources, LLC (CNR), is a defendant in a class action lawsuit in the Circuit Court of Roane County, West Virginia filed in 2003 by royalty owners. The plaintiffs allege that CNR underpaid royalties by improperly deducting post-production costs, failing to pay royalty on total volumes of natural gas produced and not paying a fair value for the natural gas produced from their leases. The plaintiff class consists of West Virginia royalty owners receiving royalties after July 31, 1990 from CNR. Chesapeake acquired CNR in November 2005, and its seller acquired CNR in 2003 from NiSource Inc. NiSource, a co-defendant in the case, has managed the litigation and indemnified Chesapeake against underpayment claims based on the use of fixed prices for natural gas production sold under certain forward sale contracts and other claims with respect to CNR’s operations prior to September 2003.

On January 27, 2007, the Circuit Court jury returned a verdict against the defendants of $404 million, consisting of $134 million in compensatory damages and $270 million in punitive damages. Most of the damages awarded by the jury relate to issues not yet addressed by the West Virginia Supreme Court of Appeals, although in June 2006 that Court ruled against the defendants on two certified questions regarding the deductibility of post-production expenses. The jury found fraudulent conduct by the defendants with respect to the sales prices used to calculate royalty payments and with respect to the failure of CNR to disclose post-production deductions. On June 28, 2007, the Circuit Court sustained the jury verdict for punitive damages, and on September 27, 2007, it denied all post-trial motions, including defendants’ motion for judgment as a matter of law, or in the alternative, for a new trial. The defendants’ motion for stay pending appeal is set for hearing on November 16, 2007.

Chesapeake and NiSource maintain CNR acted in good faith and paid royalties in accordance with lease terms and West Virginia law, and will appeal the final judgment. Chesapeake has established an accrual for amounts it believes will not be indemnified. Should a final nonappealable judgment be entered, Chesapeake believes its share of damages will not have a material adverse effect on its results of operations, financial condition or liquidity.

Chesapeake is subject to other legal proceedings and claims which arise in the ordinary course of business. In our opinion, the final resolution of these proceedings and claims will not have a material effect on the company.

Employment Agreements with Officers

Chesapeake has employment agreements with its chief executive officer, chief operating officer, chief financial officer and other executive officers, which provide for annual base salaries, various benefits and eligibility for bonus compensation. The term of the agreement with the chief executive officer expires December 31, 2012 unless extended. The term is automatically extended for one additional year on each December 31 unless the company provides at least 30 days notice of non-extension. In the event of termination of employment without cause, the chief executive officer’s base compensation (defined as base salary plus bonus compensation received during the preceding 12 months) and benefits other than participation in any retirement or deferred compensation plan would continue during the remaining term of the agreement. The chief executive officer is entitled to receive a payment in the amount of three times his base compensation upon the happening of certain events following a change of control. Any stock-based awards and deferred compensation held by the chief executive officer will immediately become 100% vested upon termination of employment without cause, incapacity, death or retirement at or after age 55.

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CHESAPEAKE ENERGY CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

The agreements with the chief operating officer, chief financial officer and other executive officers expire on September 30, 2009. These agreements provide for the continuation of salary for one year in the event of termination of employment without cause and, in the event of a change of control, a payment in the amount of two times the executive officer’s annual base compensation. Any stock-based awards held by such executive officers will immediately become 100% vested upon termination of employment without cause, a change of control, death or retirement at or after age 55.

Environmental Risk

Due to the nature of the oil and natural gas business, Chesapeake and its subsidiaries are exposed to possible environmental risks. Chesapeake has implemented various policies and procedures to avoid environmental contamination and risks from environmental contamination. Chesapeake conducts periodic reviews, on a company-wide basis, to identify changes in our environmental risk profile. These reviews evaluate whether there is a contingent liability, its amount and the likelihood that the liability will be incurred. The amount of any potential liability is determined by considering, among other matters, incremental direct costs of any likely remediation and the proportionate cost of employees who are expected to devote a significant amount of time directly to any possible remediation effort. We manage our exposure to environmental liabilities on properties to be acquired by identifying existing problems and assessing the potential liability. Depending on the extent of an identified environmental problem, Chesapeake may exclude a property from the acquisition, require the seller to remediate the property to our satisfaction, or agree to assume liability for the remediation of the property. Chesapeake has historically not experienced any significant environmental liability, and is not aware of any potential material environmental issues or claims at September 30, 2007.

Rig Leases

In a series of transactions in 2006 and 2007, our drilling subsidiaries have sold 70 drilling rigs and related equipment for $565 million and entered into a master lease agreement under which they agreed to lease the rigs from the buyer for initial terms of seven to ten years for rental payments of approximately $80 million annually. The lease obligations are guaranteed by Chesapeake and its other material subsidiaries. These transactions were recorded as sales and operating leasebacks and any related gain or loss will be amortized to service operations expense over the lease term. Under the rig leases, we have the option to purchase the rigs in 2013 or on the expiration of the lease term for a purchase price equal to the then fair market value of the rigs. Additionally, we have the option to renew the rig lease for a negotiated renewal term at a periodic rental equal to the fair market rental value of the rigs as determined at the time of renewal. Commitments related to these lease payments are not recorded in the accompanying condensed consolidated balance sheets. As of September 30, 2007, the minimum aggregate future rig lease payments were approximately $591 million.

Compressor Leases

In September 2007, our wholly owned subsidiary, MidCon Compression, L.L.C., sold a significant portion of its existing compressor fleet, consisting of 1,085 compressors, for $161 million and entered into a master lease agreement. The term of the agreement varies by buyer ranging from seven to ten years for aggregate rental payments of approximately $18 million annually. MidCon’s lease obligations are guaranteed by Chesapeake and its other material subsidiaries. These transactions were recorded as sales and operating leasebacks and any related gain or loss will be amortized to oil and natural gas marketing expenses over the lease term. Under the leases, we can exercise an early purchase option after 72 to 109 months or we can purchase the compressors at expiration of the lease for the fair market value at the time. In addition, we have the option to renew the lease for negotiated new terms at the expiration of the lease. Over the next 18 months, approximately 400 new compressors are on order for $167 million and will be sold and leased back as the compressors are delivered. Commitments related to these lease payments are not recorded in the accompanying condensed consolidated balance sheets. As of September 30, 2007, the minimum aggregate future compressor lease payments were approximately $185 million.

Transportation Contracts

Chesapeake has various firm pipeline transportation service agreements with expiration dates ranging from one to 93 years. These commitments are not recorded in the accompanying condensed consolidated balance sheets. Under the terms of these contracts, we are obligated to pay demand charges as set forth in the transporter’s Federal Energy Regulatory Commission (FERC) gas tariff. In exchange, the company receives rights to flow natural gas production through pipelines located in highly competitive markets. As of September 30, 2007, the aggregate amount of such required demand payments was approximately $493 million (excluding demand charges for pipeline projects that are currently seeking regulatory approval).

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CHESAPEAKE ENERGY CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

Drilling Contracts

Currently, Chesapeake has contracts with various drilling contractors to use approximately 33 rigs with terms of one to three years. As of September 30, 2007, the aggregate drilling rig commitment was approximately $272 million.

As of September 30, 2007, Chesapeake’s service operations subsidiaries have contracted to acquire 3 rigs to be constructed during 2007. The total remaining cost of the rigs is estimated to be approximately $21 million.

Other Commitments

Chesapeake and a leading investment bank have an agreement to lend Mountain Drilling Company, of which Chesapeake is a 49% equity owner, up to $32 million each through December 31, 2009. At September 30, 2007, Mountain Drilling owes Chesapeake $28 million under this agreement.

Chesapeake has an agreement to lend Ventura Refining and Transmission LLC, of which Chesapeake is a 25% equity owner, up to $26 million through January 31, 2017. At September 30, 2007, there was $19 million outstanding under this agreement. Additionally, we have agreed to guarantee various commitments for Ventura, up to $75 million, to support their operating activities. At September 30, 2007, we had guaranteed $61 million of commitments.

4. Net Income Per Share

Statement of Financial Accounting Standards No. 128, Earnings Per Share, requires presentation of “basic” and “diluted” earnings per share, as defined, on the face of the statements of operations for all entities with complex capital structures. SFAS 128 requires a reconciliation of the numerator and denominator of the basic and diluted EPS computations.

For the Prior Quarter, outstanding options to purchase 0.1 million shares of common stock at a weighted average exercise price of $30.63 were not included in the calculation of diluted earnings per share. The effect was antidilutive because the exercise price was greater than the average market price of the common stock during the period.

Reconciliations for the three and nine months ended September 30, 2007 and 2006 are as follows:

	Income (Numerator)		Shares (Denominator)	Per Share Amount
	(in millions, except per share data)
For the Three Months Ended September 30, 2007:
Basic EPS:
Income available to common shareholders	$	346	454	$	0.76
Effect of Dilutive Securities
Assumed conversion as of the beginning of the period of preferred shares outstanding during the period:
Common shares assumed issued for 4.50% convertible preferred stock		—	8
Common shares assumed issued for 5.00% convertible preferred stock (Series 2005)		—	18
Common shares assumed issued for 5.00% convertible preferred stock (Series 2005B)		—	15
Common shares assumed issued for 6.25% mandatory convertible preferred stock		—	17
Employee stock options		—	3
Restricted stock		—	2
Preferred stock dividends		26	—
Diluted EPS Income available to common shareholders and assumed conversions	$	372	517	$	0.72

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CHESAPEAKE ENERGY CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

	Income (Numerator)		Shares (Denominator)	Per Share Amount
	(in millions, except per share data)
For the Three Months Ended September 30, 2006:
Basic EPS:
Income available to common shareholders	$	523	418	$	1.25
Effect of Dilutive Securities
Assumed conversion as of the beginning of the period of preferred shares outstanding during the period:
Common shares assumed issued for 4.50% convertible preferred stock		—	8
Common shares assumed issued for 5.00% convertible preferred stock (Series 2005)		—	18
Common shares assumed issued for 5.00% convertible preferred stock (Series 2005B)		—	15
Common shares assumed issued for 6.25% convertible preferred stock		—	19
Employee stock options		—	4
Restricted stock		—	1
Preferred stock dividends		26	—
Diluted EPS Income available to common shareholders and assumed conversions	$	549	483	$	1.13
For the Nine Months Ended September 30, 2007:
Basic EPS:
Income available to common shareholders	$	1,071	452	$	2.37
Effect of Dilutive Securities
Assumed conversion as of the beginning of the period of preferred shares outstanding during the period:
Common shares assumed issued for 4.50% convertible preferred stock		—	8
Common shares assumed issued for 5.00% convertible preferred stock (Series 2005)		—	18
Common shares assumed issued for 5.00% convertible preferred stock (Series 2005B)		—	15
Common shares assumed issued for 6.25% mandatory convertible preferred stock		—	17
Employee stock options		—	4
Restricted stock		—	2
Preferred stock dividends		77	—
Diluted EPS Income available to common shareholders and assumed conversions	$	1,148	516	$	2.23
For the Nine Months Ended September 30, 2006:
Basic EPS:
Income available to common shareholders	$	1,459	389	$	3.75
Effect of Dilutive Securities
Assumed conversion as of the beginning of the period of preferred shares outstanding during the period:
Common shares assumed issued for 4.50% convertible preferred stock		—	8
Common shares assumed issued for 5.00% convertible preferred stock (Series 2005)		—	18
Common shares assumed issued for 5.00% convertible preferred stock (Series 2005B)		—	15
Common shares assumed issued for 6.25% convertible preferred stock		—	6
Assumed conversion as of the beginning of the period of preferred shares outstanding prior to conversion:
Common stock equivalent of preferred stock outstanding prior to conversion,
4.125% convertible preferred stock		—	3
5.00% convertible preferred stock (Series 2003)		—	3
Employee stock options		—	7
Restricted stock		—	2
Loss on redemption of preferred stock		11	—
Preferred stock dividends		62	—
Diluted EPS Income available to common shareholders and assumed conversions	$	1,532	451	$	3.40

20

CHESAPEAKE ENERGY CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

5. Stockholders’ Equity

The following is a summary of the changes in our common shares outstanding for the nine months ended September 30, 2007 and 2006:

	2007	2006
	(in thousands)
Shares outstanding at January 1	458,601	375,511
Stock option exercises	1,254	6,676
Restricted stock issuances	14,367	13,530
Preferred stock conversions/exchanges	—	12,016
Common stock issuances	—	28,750
Common stock issued for the purchase of Chaparral Energy, Inc. common stock	—	1,376
Shares outstanding at September 30	474,222	437,859

The following is a summary of the changes in our preferred shares outstanding for the nine months ended September 30, 2007 and 2006:

	6.00%		5.00% (2003)		4.125%		5.00% (2005)	4.50%	5.00% (2005B)	6.25%
	(in thousands)
Shares outstanding at January 1, 2007	—		—		3		4,600	3,450	5,750	2,300
Conversion/exchange of preferred for common stock	—		—		—		—	—	—	—
Shares outstanding at September 30, 2007	—		—		3		4,600	3,450	5,750	2,300
Shares outstanding at January 1, 2006	99		1,026		89		4,600	3,450	5,750	—
Preferred stock issuances	—		—		—		—	—	—	2,300
Conversion/exchange of preferred for common stock	(99	)	(987	)	(86	)	—	—	—	—
Shares outstanding at September 30, 2006	—		39		3		4,600	3,450	5,750	2,300

In the Current Period, we issued 9.8 million shares of restricted stock to our employees (except for our CEO and CFO, who did not participate in the stock awards) under a long-term stock incentive and retention program. These shares vest 50% in August 2009 with the remaining 50% vesting in August 2011.

During the Current Period, a holder of our 4.125% cumulative convertible preferred stock converted 3 shares into 180 shares of common stock.

In the Prior Period, shares of our preferred stock were exchanged for or converted into common stock as follows:

• 183,273 shares of 5.0% (Series 2003) cumulative convertible preferred stock were exchanged for or converted into 1,140,223 shares of common stock in privately negotiated exchange transactions or pursuant to conversion rights;

• 804,048 shares of such 5.0% (Series 2003) cumulative convertible preferred stock were exchanged for 4,972,786 shares of common stock pursuant to a tender offer;

• 2,750 shares of 4.125% cumulative convertible preferred stock were exchanged for 172,594 shares of common stock in privately negotiated exchange transactions;

• 83,245 shares of such 4.125% cumulative convertible preferred stock were exchanged for 5,248,126 shares of common stock pursuant to a tender offer; and

• the remaining 99,310 shares of 6.0% cumulative convertible preferred stock were converted into 482,694 shares of common stock pursuant to conversion rights.

In connection with the exchanges noted above, we recorded a loss of $11 million in the Prior Period. In general, the losses are equal to the excess of the fair value of all common stock exchanged over the fair value of the securities issuable pursuant to the original conversion terms of the preferred stock.

21

CHESAPEAKE ENERGY CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

6. Senior Notes and Revolving Bank Credit Facility

Our long-term debt consisted of the following as of September 30, 2007 and December 31, 2006:

	September 30, 2007			December 31, 2006
	($ in millions)
7.5% Senior Notes due 2013	$	364		$	364
7.625% Senior Notes due 2013		500			500
7.0% Senior Notes due 2014		300			300
7.5% Senior Notes due 2014		300			300
7.75% Senior Notes due 2015		300			300
6.375% Senior Notes due 2015		600			600
6.625% Senior Notes due 2016		600			600
6.875% Senior Notes due 2016		670			670
6.5% Senior Notes due 2017		1,100			1,100
6.25% Euro-denominated Senior Notes due 2017(a)		853			792
6.25% Senior Notes due 2018		600			600
6.875% Senior Notes due 2020		500			500
2.75% Contingent Convertible Senior Notes due 2035(b)		690			690
2.5% Contingent Convertible Senior Notes due 2037(b)		1,650			—
Revolving bank credit facility		1,950			178
Discount on senior notes		(107	)		(101	)
Premium (discount) for interest rate derivatives(c)		2			(17	)
Total notes payable and long-term debt	$	10,872		$	7,376

(a) The principal amount shown is based on the dollar/euro exchange rate of $1.4219 to €1.00 and $1.3197 to €1.00 as of September 30, 2007 and December 31, 2006, respectively. See Note 2 for information on our related cross currency swap.

(b) The holders of our Contingent Convertible Senior Notes may require us to repurchase all or a portion of their notes 5, 10, 15 or 20 years prior to the maturity date, or upon a fundamental change, at 100% of the principal amount of the notes, payable in cash. The notes are convertible, at the holder’s option, prior to maturity under certain circumstances, into cash and, if applicable, shares of our common stock using a net share settlement process. In general, upon conversion of a 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 such principal amount. In addition, we will pay contingent interest on the convertible senior notes, beginning with the six-month interest period ending May 14, 2016 with respect to the 2.75% Contingent Convertible Senior Notes due 2035 and November 14, 2017 with respect to the 2.5% Contingent Convertible Senior Notes due 2037, under certain conditions. We may redeem the 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.

(c) See Note 2 for discussion related to these instruments.

No scheduled principal payments are required under our senior notes until 2013 when $864 million is due.

Our outstanding senior notes are unsecured senior obligations of Chesapeake that rank equally in right of payment with all of our existing and future senior indebtedness and rank senior in right of payment to all of our future subordinated indebtedness. We may redeem the senior notes, other than the 2.75% Contingent Convertible Senior Notes due 2035 and the 2.5% Contingent Convertible Senior Notes due 2037, at any time at specified make-whole or redemption prices. Senior notes issued before July 2005 are governed by indentures containing covenants that limit our ability and our restricted subsidiaries’ ability to incur additional indebtedness; pay dividends on our capital stock or redeem, repurchase or retire our capital stock or subordinated indebtedness; make investments and other restricted payments; incur liens; enter into sale-leaseback transactions; create restrictions on the payment of dividends or other amounts to us from our restricted subsidiaries; engage in transactions with affiliates; sell assets; and consolidate, merge or transfer assets. Senior notes issued after June 2005 are governed by indentures containing covenants that limit our ability and our restricted subsidiaries’ ability to incur certain secured indebtedness; enter into sale-leaseback transactions; and consolidate, merge or transfer assets.

Chesapeake is a holding company and owns no operating assets and has no significant operations independent of its subsidiaries. Our obligations under our outstanding senior notes have been fully and unconditionally guaranteed, jointly and severally, by all of our wholly owned subsidiaries, other than minor subsidiaries, on a senior unsecured basis.

        On November 2, 2007, we amended and restated our syndicated revolving bank credit facility to increase the borrowing base to $3.5 billion (with commitments of $3.0 billion) and extended the maturity to November 2012. As of September 30, 2007, we had $1.950 billion in outstanding borrowings under our facility and utilized approximately $6 million of the facility for various letters of credit. Borrowings under our facility are secured

22

CHESAPEAKE ENERGY CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

by certain producing oil and natural gas properties and bear interest at either (i) the greater of the reference rate of Union Bank of California, N.A. or the federal funds effective rate plus 0.50% or (ii) the London Interbank Offered Rate (LIBOR), at our option, plus a margin that varies from 0.75% to 1.50% according to our senior unsecured long-term debt ratings. The collateral value and borrowing base are determined periodically. The unused portion of the facility is subject to a commitment fee that also varies according to our senior unsecured long-term debt ratings, from 0.125% to 0.30% per annum. Currently, the commitment fee rate is 0.20% per annum. Interest is payable quarterly or, if LIBOR applies, it may be payable at more frequent intervals.

The credit facility agreement contains various covenants and restrictive provisions which govern our ability to incur additional indebtedness, make investments or loans and create liens. The credit facility agreement requires us to maintain an indebtedness to total capitalization ratio (as defined) not to exceed 0.70 to 1 and an indebtedness to EBITDA ratio (as defined) not to exceed 3.75 to 1. As defined by the credit facility agreement, our indebtedness to total capitalization ratio was 0.48 to 1 and our indebtedness to EBITDA ratio was 2.28 to 1 at September 30, 2007. If we should fail to perform our obligations under these and other covenants, the revolving credit commitment could be terminated and any outstanding borrowings under the facility could be declared immediately due and payable. Such acceleration, if involving a principal amount of $10 million ($50 million in the case of our senior notes issued after 2004), would constitute an event of default under our senior note indentures, which could in turn result in the acceleration of a significant portion of our senior note indebtedness. The credit facility agreement also has cross default provisions that apply to other indebtedness we may have with an outstanding principal amount in excess of $75 million.

Two of our subsidiaries, Chesapeake Exploration, L.L.C. and Chesapeake Appalachia, L.L.C., are the borrowers under our revolving bank credit facility. The facility is fully and unconditionally guaranteed, on a joint and several basis, by Chesapeake and all of our other wholly owned subsidiaries except minor subsidiaries.

7. Segment Information

In accordance with Statement of Financial Accounting Standards No. 131, Disclosures about Segments of an Enterprise and Related Information, we have two reportable operating segments. Our exploration and production segment and oil and natural gas marketing segment are managed separately because of the nature of their products and services. The exploration and production segment is responsible for finding and producing oil and natural gas. The marketing segment is responsible for gathering, processing, compressing, transporting and selling oil and natural gas primarily from Chesapeake-operated wells. We also have drilling rig and trucking operations, which are responsible for providing drilling rigs primarily used on Chesapeake-operated wells and trucking services utilized in the transportation of drilling rigs on both Chesapeake-operated wells and wells operated by third parties.

Management evaluates the performance of our segments based upon income before income taxes. Revenues from the marketing segment’s sale of oil and natural gas related to Chesapeake’s ownership interests are reflected as exploration and production revenues. Such amounts totaled $843 million, $631 million, $2.441 billion and $1.919 billion for the Current Quarter, the Prior Quarter, the Current Period and the Prior Period, respectively. The following table presents selected financial information for Chesapeake’s operating segments. Our drilling rig and trucking service operations are presented in “Other Operations”.

	Exploration and Production		Marketing			Other Operations			Intercompany Eliminations			Consolidated Total
	($ in millions)
For the Three Months Ended September 30, 2007:
Revenues	$	1,492	$	1,344		$	133		$	(942	)	$	2,027
Intersegment revenues		—		(843	)		(99	)		942			—
Total revenues	$	1,492	$	501		$	34		$	—		$	2,027
Income before income taxes	$	586	$	11		$	38		$	(35	)	$	600
For the Three Months Ended September 30, 2006:
Revenues	$	1,493	$	1,029		$	98		$	(691	)	$	1,929
Intersegment revenues		—		(631	)		(60	)		691			—
Total revenues	$	1,493	$	398		$	38		$	—		$	1,929
Income before income taxes	$	867	$	9		$	34		$	(26	)	$	884

23

CHESAPEAKE ENERGY CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

	Exploration and Production		Marketing			Other Operations			Intercompany Eliminations			Consolidated Total
	(in millions)
For the Nine Months Ended September 30, 2007:
Revenues	$	4,164	$	3,887		$	357		$	(2,697	)	$	5,711
Intersegment revenues		—		(2,441	)		(256	)		2,697			—
Total revenues	$	4,164	$	1,446		$	101		$	—		$	5,711
Income before income taxes	$	1,813	$	29		$	104		$	(94	)	$	1,852
For the Nine Months Ended September 30, 2006:
Revenues	$	4,190	$	3,089		$	219		$	(2,040	)	$	5,458
Intersegment revenues		—		(1,919	)		(121	)		2,040			—
Total revenues	$	4,190	$	1,170		$	98		$	—		$	5,458
Income before income taxes	$	2,448	$	29		$	68		$	(50	)	$	2,495
As of September 30, 2007:
Total assets	$	28,723	$	1,182		$	619		$	(635	)	$	29,889
As of December 31, 2006:
Total assets	$	23,333	$	864		$	786		$	(566	)	$	24,417

8. Acquisitions and Investments

Oil and Natural Gas Properties

Through multiple acquisitions completed in the Current Period, we invested $623 million in proved properties and $1.885 billion in leasehold and unproved property acquisitions, including capitalized interest. Additionally, we recorded approximately $130 million of deferred income taxes to reflect the tax effect of the cost paid in excess of the tax basis acquired on certain corporate acquisitions.

Investments

In the Current Period, we sold our 33% limited partnership interest in Eagle Energy Partners I, L.P., which we first acquired in 2003, for proceeds of $126 million and a pre-tax gain of $83 million.

9. Recently Issued and Proposed Accounting Standards

The FASB recently issued the following standards which were reviewed by Chesapeake to determine the potential impact on our financial statements upon adoption.

In February 2006, the FASB issued SFAS No. 155, Accounting for Certain Hybrid Financial Instruments – an amendment of FASB Statements No. 133 and 140. SFAS 155 permits an entity to measure at fair value any financial instrument that contains an embedded derivative that otherwise would require bifurcation. This statement is effective for all financial instruments we acquire or issue after December 31, 2006. Adoption of SFAS 155 did not have a material effect on our financial position, results of operations or cash flows.

In September 2006, the FASB issued SFAS No. 157, Fair Value Measurements. This statement defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles (GAAP), and expands disclosures about fair value measurements. This statement is effective for financial statements issued for fiscal years beginning after November 15, 2007. We are currently assessing the impact, if any, the adoption of this statement will have on our financial position, results of operations or cash flows.

In February 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial Assets and Financial Liabilities. This statement permits entities to choose to measure many financial instruments and certain other items at fair value. This statement expands the use of fair value measurement and applies to entities that elect the fair value option. The fair value option established by this statement permits all entities to choose to measure eligible items at fair value at specified election dates. This statement is effective as of the beginning of the first fiscal year that begins after November 15, 2007. We are currently assessing the impact, if any, the adoption of this statement will have on our financial position, results of operations or cash flows.

The FASB has announced that it plans to issue proposed staff guidance on accounting for convertible debt instruments that may be settled in cash upon conversion, including partial cash settlements. This accounting could

24

CHESAPEAKE ENERGY CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

increase the amount of interest expense required to be recognized with respect to such instruments and, thus, lower reported net income and net income per share of issuers of such instruments. Issuers would have to account for the liability and equity components of the instrument separately and in a manner that reflects interest expense at the interest rate of similar nonconvertible debt. We have two debt series that would be affected by the guidance, our 2.75% Contingent Convertible Senior Notes due 2035 and our 2.5% Contingent Convertible Senior Notes due 2037. If the FASB adopts the guidance, it is expected to be effective for fiscal years starting after December 15, 2007. Companies would have to apply the guidance retrospectively to both existing and new instruments that fall within the scope of the guidance.

10. Subsequent Events

On October 23, 2007, we commenced offers to exchange common stock for any and all of the 4,600,000 outstanding shares of our 5% Cumulative Convertible Preferred Stock (Series 2005) and 2,300,000 outstanding shares of our 6.25% Mandatory Convertible Preferred Stock. The offers are scheduled to expire on November 20, 2007.

25

PART I. FINANCIAL INFORMATION

ITEM 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Overview

The following table sets forth certain information regarding the production volumes, oil and natural gas sales, average sales prices received, other operating income and expenses for the three and nine months ended September 30, 2007 (the “Current Quarter” and the “Current Period”) and the three and nine months ended September 30, 2006 (the “Prior Quarter” and the “Prior Period”):

	Three Months Ended September 30,						Nine Months Ended September 30,
	2007			2006			2007			2006
Net Production:
Oil (mbbls)		2,680			2,178			7,147			6,437
Natural gas (mmcf)		170,325			133,822			467,197			387,696
Natural gas equivalent (mmcfe)		186,405			146,890			510,079			426,318
Oil and Natural Gas Sales ($ in millions):
Oil sales	$	190		$	142		$	443		$	404
Oil derivatives – realized gains (losses)		(4	)		(10	)		26			(26	)
Oil derivatives – unrealized gains (losses)		(28	)		29			(55	)		25
Total oil sales		158			161			414			403
Natural gas sales		971			811			2,918			2,526
Natural gas derivatives – realized gains (losses)		290			311			890			833
Natural gas derivatives – unrealized gains (losses)		73			210			(58	)		428
Total natural gas sales		1,334			1,332			3,750			3,787
Total oil and natural gas sales	$	1,492		$	1,493		$	4,164		$	4,190
Average Sales Price (excluding all gains (losses) on derivatives):
Oil ($ per bbl)	$	70.76		$	65.05		$	61.91		$	62.85
Natural gas ($ per mcf)	$	5.71		$	6.06		$	6.25		$	6.52
Natural gas equivalent ($ per mcfe)	$	6.23		$	6.49		$	6.59		$	6.87
Average Sales Price (excluding unrealized gains (losses) on derivatives):
Oil ($ per bbl)	$	69.25		$	60.62		$	65.55		$	58.86
Natural gas ($ per mcf)	$	7.41		$	8.39		$	8.15		$	8.66
Natural gas equivalent ($ per mcfe)	$	7.76		$	8.54		$	8.39		$	8.77
Other Operating Income(a) ($ in millions):
Oil and natural gas marketing	$	18		$	14		$	52		$	38
Service operations	$	11		$	19		$	34		$	49
Other Operating Income ($ per mcfe):
Oil and natural gas marketing	$	0.10		$	0.09		$	0.10		$	0.09
Service operations	$	0.06		$	0.13		$	0.07		$	0.11
Expenses ($ per mcfe):
Production expenses	$	0.89		$	0.84		$	0.90		$	0.85
Production taxes	$	0.30		$	0.28		$	0.30		$	0.30
General and administrative expenses	$	0.33		$	0.25		$	0.33		$	0.23
Oil and natural gas depreciation, depletion and amortization	$	2.57		$	2.34		$	2.58		$	2.29
Depreciation and amortization of other assets	$	0.24		$	0.18		$	0.24		$	0.17
Interest expense(b)	$	0.52		$	0.52		$	0.52		$	0.52
Interest Expense ($ in millions):
Interest expense	$	98		$	75		$	266		$	222
Interest rate derivatives – realized (gains) losses		(1	)		2			—			(1	)
Interest rate derivatives – unrealized (gains) losses		19			(3	)		13			(1	)
Total interest expense	$	116		$	74		$	279		$	220
Net Wells Drilled		529			401			1,480			985
Net Producing Wells as of the End of the Period		20,932			18,511			20,932			18,511

(a) Includes revenue and operating costs.

(b) Includes the effects of realized gains (losses) from interest rate derivatives, but excludes the effects of unrealized gains (losses) and is net of amounts capitalized.

26

We believe we are the third largest producer of natural gas in the United States (first among independents). We own interests in approximately 37,500 producing oil and natural gas wells that are currently producing approximately 2.2 bcfe per day, 92% of which is natural gas. Our strategy is focused on discovering, acquiring and developing conventional and unconventional natural gas reserves onshore in the U.S., east of the Rocky Mountains.

Our most important operating area has historically been in various conventional plays in the Mid-Continent region of Oklahoma, Arkansas, southwestern Kansas and the Texas Panhandle. At September 30, 2007, 47% of our estimated proved oil and natural gas reserves were located in the Mid-Continent region. During the past five years, we have also built significant positions in various conventional and unconventional plays in the Fort Worth Basin in north-central Texas; the Appalachian Basin, principally in West Virginia, eastern Kentucky, eastern Ohio, Pennsylvania and southern New York; the Permian and Delaware Basins of West Texas and eastern New Mexico; the Ark-La-Tex area of East Texas and northern Louisiana; and the South Texas and Texas Gulf Coast regions. We have established a top-three position in nearly every major unconventional play onshore in the U.S. east of the Rockies, including the Fort Worth Barnett Shale, the Arkansas Fayetteville Shale, the Appalachian Basin Devonian and Marcellus Shales, the southeast Oklahoma Woodford Shale, the Delaware Basin Barnett and Woodford Shales and the Alabama Conasauga, Floyd and Chattanooga Shales.

Oil and natural gas production for the Current Quarter was 186.4 bcfe, an increase of 39.5 bcfe, or 27% over the 146.9 bcfe produced in the Prior Quarter. This growth was achieved despite the curtailment of approximately 3.0 bcfe of the company’s net production during September 2007. We have increased our production for 25 consecutive quarters. During these 25 quarters, Chesapeake’s U.S. production has increased 417% for an average compound quarterly growth rate of 7% and an average compound annual growth rate of 30%.

During the Current Period, Chesapeake continued the industry’s most active drilling program and drilled 1,523 gross (1,307 net) operated wells and participated in another 1,262 gross (173 net) wells operated by other companies. The company’s drilling success rate was 99% for company-operated wells and 97% for non-operated wells. Also during the Current Period, Chesapeake invested $3.1 billion in operated wells (using an average of 138 operated rigs) and $547 million in non-operated wells (using an average of 104 non-operated rigs). Total costs incurred in oil and natural gas acquisition, exploration and development activities during the Current Period, including seismic, unproved properties, leasehold, capitalized interest and internal costs, non-cash tax basis step-up and asset retirement obligations, were $6.5 billion.

Chesapeake began 2007 with estimated proved reserves of 8.956 tcfe and based on internal estimates ended the Current Quarter with 10.562 tcfe, an increase of 1.606 tcfe, or 18%. During the Current Period, we replaced our 510 bcfe of production with an estimated 2.116 tcfe of new proved reserves, for a reserve replacement rate of 415%. Reserve replacement through the drillbit was 1.761 tcfe, or 345% of production (including 859 bcfe of positive performance revisions and 79 bcfe of positive revisions resulting from oil and natural gas price increases between December 31, 2006 and September 30, 2007) and 83% of the total increase. Reserve replacement through the acquisition of proved reserves completed during the Current Period was 355 bcfe, or 70% of production and 17% of the total increase. Based on our current drilling schedule and budget, we expect that virtually all of the proved undeveloped reserves added in 2007 will begin producing within the next three to five years. Generally, proved developed reserves are producing at the time they are added or will begin producing within one year.

In order to execute our extensive exploration and development program, we have continued to significantly strengthen our technical capabilities by increasing our land, geoscience and engineering staff to more than 1,300 employees. Today, the company has approximately 6,000 employees, of whom approximately 60% work in the company’s E&P operations and approximately 40% work in the company’s oilfield service operations.

Since 2000, Chesapeake has invested $8.8 billion in new leasehold and 3-D seismic acquisitions and now owns the largest combined inventory of onshore leasehold (12.5 million net acres) and 3-D seismic (18.5 million acres) in the U.S. On this leasehold, the company has an estimated 28,000 net drilling locations, representing an approximate 10-year inventory of drilling projects.

As of September 30, 2007, the company’s debt as a percentage of total capitalization (total capitalization is the sum of debt and stockholders’ equity) was 48% compared to 40% as of December 31, 2006. The average maturity of our long-term debt is almost nine years and our average interest rate is approximately 5.8%.

Liquidity and Capital Resources

New Financing Plan

In early September 2007, we announced an enhanced financial plan designed to monetize unrecognized balance sheet value and to fully fund our planned capital expenditures through 2009 without accessing public capital markets. Since then, we have successfully implemented multiple aspects of the plan and anticipate further progress over the next two quarters. We believe our planned transactions described below will allow us to monetize over $4 billion of assets by the end of 2009.

Sale/Leasebacks. During the Current Quarter, we completed our third sale/leaseback transaction on 37 drilling rigs for net proceeds of approximately $235 million. We have now completed sale/leaseback transactions on a total of 70 rigs and anticipate completing similar transactions on our remaining 11 rigs during the fourth quarter of 2007, thereby completing the sale/leaseback of our entire fleet of 81 drilling rigs. Also during the Current Quarter, we completed a sale/leaseback facility for our natural gas compression assets. We received approximately $160 million for the sale/leaseback of our existing natural gas compression assets and we will finance up to $185 million of future natural gas compression assets under the same facility.

Producing Property Sales. We are currently in the process of monetizing certain Chesapeake-operated producing assets in Kentucky and West Virginia. The company intends to retain drilling rights on the properties below currently producing intervals and outside of existing producing wellbores. Chesapeake has received multiple attractive offers for the Appalachian assets with a variety of transaction structures. We anticipate completing a

27

monetization transaction by year-end 2007 for proceeds in excess of $1.0 billion. In addition, we also plan to pursue four more monetizations of similarly mature properties in 2008 and 2009 for further proceeds of approximately $2.0 billion.

The company is also currently in the process of selling non-core E&P assets in the Rocky Mountains and in the southeastern Oklahoma Woodford Shale play for expected proceeds in excess of $300 million. These sales are anticipated to close by the first quarter of 2008. In total, Chesapeake is anticipating receiving monetization and sale proceeds of approximately $3.3 billion by year-end 2009.

Midstream MLP. We are currently in the process of forming a private MLP to own a non-operating interest in our midstream natural gas assets outside of Appalachia, which consist primarily of gas gathering systems and processing assets. These assets, which are expected to grow substantially in future years, currently generate annualized cash flow from operating activities in excess of $100 million. We believe our MLP transaction will be valued at more than $1 billion and is anticipated to close in the first quarter of 2008.

Sources and Uses of Funds

Cash flow from operations is our primary source of liquidity to meet operating expenses and fund capital expenditures (other than for acquisitions outside our budgeted leasehold and property acquisitions). Cash provided by operating activities was $3.389 billion in the Current Period compared to $2.983 billion in the Prior Period. The $406 million increase in the Current Period was primarily due to higher oil and natural gas production. Changes in cash flow from operations are largely due to the same factors that affect our net income excluding non-cash items, such as depreciation, depletion and amortization ($1.422 billion and $1.041 billion during the Current Period and the Prior Period, respectively), deferred income taxes ($671 million and $963 million during the Current Period and the Prior Period, respectively) and unrealized gains and (losses) on derivatives (($126) million and $453 million during the Current Period and the Prior Period, respectively). Net income decreased to $1.148 billion in the Current Period from $1.532 billion in the Prior Period and is discussed below under Results of Operations.

Changes in market prices for oil and natural gas directly impact the level of our cash flow from operations. While a decline in oil or natural gas prices would affect the amount of cash flow that would be generated from operations, we currently have oil hedges in place covering 99% of our expected oil production in the fourth quarter of 2007 and in 2008, 98% of our expected natural gas production in the fourth quarter of 2007 and 85% of our expected natural gas production in 2008, thereby providing certainty for a substantial portion of our future cash flow. Our oil and natural gas hedges as of September 30, 2007 are detailed in Item 3 of Part I of this report. We have arrangements with our hedging counterparties that allow us to minimize the potential liquidity impact of significant mark-to-market fluctuations in the value of our oil and natural gas hedges by making collateral allocations from our bank credit facility or directly pledging oil and natural gas properties, rather than posting cash or letters of credit with the counterparties. Depending on changes in oil and natural gas futures markets and management’s view of underlying oil and natural gas supply and demand trends, we may increase or decrease our current hedging positions.

On November 2, 2007, we established a new five-year $3.0 billion committed senior secured revolving credit facility that replaced the company’s previous $2.5 billion facility. The new facility reflects the increased scale and scope of the company’s operations and will help accommodate timing differences between cash flow from operations, asset monetizations and planned capital expenditures. At November 7, 2007, there was $288 million of borrowing capacity available under the revolving bank credit facility. We use the facility to fund daily operating activities and acquisitions as needed. We borrowed $5.949 billion and repaid $4.177 billion in the Current Period, and we borrowed $7.058 billion and repaid $5.666 billion in the Prior Period under the credit facility.

We believe our cash flow from operations, in combination with the proceeds expected from our planned producing property monetizations and other asset sales and the $500 million increase in our bank credit facility borrowing ability will provide us sufficient liquidity to execute our business strategy without accessing the public capital markets for the foreseeable future. We intend to use any cash in excess of our operating and capital expenditure needs to pay down indebtedness under our revolving bank credit facility.

In the Current Period, we completed two public offerings of our 2.5% Contingent Convertible Senior Notes due 2037. In the first offering, in May 2007, we issued $1.150 billion of notes and in the second offering, in August 2007, we issued $500 million of notes. Net proceeds of approximately $1.124 billion and $483 million, respectively, were used to repay outstanding borrowings under our revolving bank credit facility. The following table reflects the proceeds from sales of securities we issued in the Current Period and the Prior Period ($ in millions):

	For the Nine Months Ended September 30,
	2007				2006
	Total Proceeds		Net Proceeds		Total Proceeds		Net Proceeds
Convertible preferred stock	$	—	$	—	$	575	$	558
Common stock		—		—		835		804
Contingent convertible unsecured senior notes		1,650		1,607		—		—
Unsecured senior notes guaranteed by subsidiaries		—		—		1,000		969
Total	$	1,650	$	1,607	$	2,410	$	2,331

Our primary use of funds is our capital expenditures for exploration, development and acquisition of oil and natural gas properties. We refer you to the table under Investing Activities below, which sets forth the components of our oil and natural gas investing activities for the Current Period and the Prior Period. Our drilling, land and seismic capital expenditures are currently budgeted at $5.7 billion to $6.2 billion in 2007 and $5.4 billion to $5.9

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billion in 2008. We believe this level of exploration and development will enable us to increase our proved oil and natural gas reserves by more than 20% in 2007 and 13% in 2008 and increase our total production by 21% to 23% in 2007 and 18% to 22% in 2008 (inclusive of acquisitions completed or scheduled to close in 2007 through the filing date of this report but without regard to any additional acquisitions that may be completed in 2007).

We retain a significant degree of control over the timing of our capital expenditures which permits us to defer or accelerate certain capital expenditures if necessary to address any potential liquidity issues. In addition, higher drilling and field operating costs, drilling results that alter planned development schedules, acquisitions or other factors could cause us to revise our drilling program, which is largely discretionary.

We paid dividends on our common stock of $85 million and $62 million in the Current Period and the Prior Period, respectively. The board of directors increased the quarterly dividend on common stock from $0.06 to $0.0675 per share beginning with the dividend paid in July 2007. We paid dividends on our preferred stock of $78 million and $63 million in the Current Period and the Prior Period, respectively. We received $8 million and $71 million from the exercise of employee and director stock options in the Current Period and the Prior Period, respectively. The Prior Period amount included $38 million paid by Tom L. Ward, our former President and Chief Operating Officer, to exercise all of his stock options following his resignation in February 2006.

In the Current Period and Prior Period, we paid $65 million and $68 million, respectively, to settle a portion of the derivative liabilities assumed in our November 2005 acquisition of Columbia Natural Resources, LLC.

On January 1, 2006, we adopted SFAS 123(R), which requires tax benefits resulting from stock-based compensation deductions in excess of amounts reported for financial reporting purposes to be reported as cash flows from financing activities. In the Current Period and the Prior Period, we reported a tax benefit from stock-based compensation of $13 million and $86 million, respectively.

Outstanding payments from certain disbursement accounts in excess of funded cash balances where no legal right of set-off exists decreased by $54 million in the Current Period and increased by $43 million in the Prior Period. All disbursements are funded on the day they are presented to our bank using available cash on hand or draws on our revolving bank credit facility.

Our accounts receivable are primarily from purchasers of oil and natural gas ($604 million at September 30, 2007) and exploration and production companies which own interests in properties we operate ($137 million at September 30, 2007). This industry concentration has the potential to impact our overall exposure to credit risk, either positively or negatively, in that our customers and joint working interest owners may be similarly affected by changes in economic, industry or other conditions. We generally require letters of credit for receivables from parties which are judged to have sub-standard credit, unless the credit risk can otherwise be mitigated.

Investing Activities

Cash used in investing activities decreased to $6.488 billion during the Current Period, compared to $6.668 billion during the Prior Period. Over the past year, we have accelerated our drilling program and shifted our acquisition strategy from significant stock and asset acquisitions to targeted leasehold and property acquisitions needed for planned oil and natural gas development. Our investing activities during the Current Period and the Prior Period reflect our increasing focus on converting our resource inventory into production as well as elements of our new financing plan. The following table shows our cash used in (provided by) investing activities during these periods ($ in millions):

	Nine Months Ended September 30,
	2007			2006
Oil and Natural Gas Investing Activities:
Acquisitions of oil and natural gas companies and proved properties, net of cash acquired	$	446		$	961
Acquisition of leasehold and unproved properties		1,703			2,470
Exploration and development of oil and natural gas properties		3,525			2,026
Geological and geophysical costs		245			102
Interest on leasehold and unproved properties		182			115
Total oil and natural gas investing activities		6,101			5,674
Other Investing Activities:
Additions to drilling rig equipment		112			341
Additions to other property and equipment		893			407
Proceeds from sale of drilling rigs and equipment		(322	)		(188	)
Proceeds from sale of compressors		(147	)		—
Additions to investments		7			538
Proceeds from sale of investments		(124	)		(159	)
Acquisition of trucking company, net of cash acquired		—			45
Deposits for acquisitions		—			12
Sale of non-oil and natural gas assets		(32	)		(2	)
Total other investing activities		387			994
Total cash used in investing activities	$	6,488		$	6,668

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Bank Credit and Hedging Facilities

On November 2, 2007, we amended and restated our syndicated revolving bank credit facility to increase the borrowing base to $3.5 billion (with commitments of $3.0 billion) and extended the maturity to November 2012. As of September 30, 2007, we had $1.950 billion in outstanding borrowings under this facility and had utilized approximately $6 million of the facility for various letters of credit. Borrowings under the facility are secured by certain producing oil and natural gas properties and bear interest at either (i) the greater of the reference rate of Union Bank of California, N.A., or the federal funds effective rate plus 0.50% or (ii) London Interbank Offered Rate (LIBOR), at our option, plus a margin that varies from 0.75% to 1.50% per annum according to our senior unsecured long-term debt ratings. The collateral value and borrowing base are redetermined periodically. The unused portion of the facility is subject to a commitment fee that also varies according to our senior unsecured long-term debt ratings, from 0.125% to 0.30% per annum. Currently the commitment fee is 0.20% per annum. Interest is payable quarterly or, if LIBOR applies, it may be payable at more frequent intervals. Our subsidiaries, Chesapeake Exploration, L.L.C. and Chesapeake Appalachia, L.L.C., are the borrowers under our revolving bank credit facility and Chesapeake and all its other wholly owned subsidiaries except minor subsidiaries are guarantors.

The credit facility agreement contains various covenants and restrictive provisions which limit our ability to incur additional indebtedness, make investments or loans and create liens. The credit facility agreement requires us to maintain an indebtedness to total capitalization ratio (as defined) not to exceed 0.70 to 1 and an indebtedness to EBITDA ratio (as defined) not to exceed 3.75 to 1. As defined by the credit facility, our indebtedness to total capitalization ratio was 0.48 to 1 and our indebtedness to EBITDA ratio was 2.28 to 1 at September 30, 2007. If we should fail to perform our obligations under these and other covenants, the revolving credit commitment could be terminated and any outstanding borrowings under the facility could be declared immediately due and payable. Such acceleration, if involving a principal amount of $10 million ($50 million in the case of our senior notes issued after 2004), would constitute an event of default under our senior note indentures which could in turn result in the acceleration of a significant portion of our senior note indebtedness. The credit facility agreement also has cross default provisions that apply to other indebtedness we may have with an outstanding principal amount in excess of $75 million.

We have six secured hedging facilities, each of which permits us to enter into cash-settled oil and natural gas commodity transactions, valued by the counterparty, for up to a maximum value. Outstanding transactions under each facility are collateralized by certain of our oil and natural gas properties that do not secure any of our other obligations. The hedging facilities are subject to an annual exposure fee, which is assessed quarterly based on the average of the daily negative fair value amounts of the hedges, if any, during the quarter. The hedging facilities contain the standard representations and default provisions that are typical of such agreements. The agreements also contain various restrictive provisions which govern the aggregate oil and natural gas production volumes that we are permitted to hedge under all of our agreements at any one time. The maximum permitted value of transactions under each facility and the fair value of outstanding transactions are shown below.

	Secured Hedging Facilities (a)
	#1			#2			#3			#4			#5			#6
	($ in millions)
Maximum permitted value of transactions under facility	$	750		$	500		$	500		$	250		$	500		$	500
Per annum exposure fee		1	%		1	%		1	%		0.8	%		0.8	%		0.8	%
Scheduled maturity date		2010			2010			2011			2012			2012			2012
Fair value of outstanding transactions, as of September 30, 2007	$	22		$	(158	)	$	(33	)	$	(14	)	$	(1	)	$	(1	)

(a) Chesapeake Exploration, L.L.C. is the named party to the facilities numbered 1-3 and Chesapeake Energy Corporation is the named party to the facilities numbered 4-6.

Our revolving bank credit facility and secured hedging facilities do not contain material adverse change or adequate assurance covenants. Although the applicable interest rates and commitment fees in our bank credit facility fluctuate slightly based on our long-term senior unsecured credit ratings, the bank facility and the secured hedging facilities do not contain provisions which would trigger an acceleration of amounts due under the facilities or a requirement to post additional collateral in the event of a downgrade of our credit ratings.

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Senior Note Obligations

In addition to outstanding revolving bank credit facility borrowings discussed above, as of September 30, 2007, senior notes represented approximately $8.922 billion of our long-term debt and consisted of the following ($ in millions):

7.5% Senior Notes due 2013	$	364
7.625% Senior Notes due 2013		500
7.0% Senior Notes due 2014		300
7.5% Senior Notes due 2014		300
7.75% Senior Notes due 2015		300
6.375% Senior Notes due 2015		600
6.625% Senior Notes due 2016		600
6.875% Senior Notes due 2016		670
6.5% Senior Notes due 2017		1,100
6.25% Euro-denominated Senior Notes due 2017 (a)		853
6.25% Senior Notes due 2018		600
6.875% Senior Notes due 2020		500
2.75% Contingent Convertible Senior Notes due 2035		690
2.5% Contingent Convertible Senior Notes due 2037		1,650
Discount on senior notes		(107	)
Premium for interest rate derivatives		2
	$	8,922

(a) The principal amount shown is based on the dollar/euro exchange rate of $1.4219 to €1.00 as of September 30, 2007. See Note 2 of our accompanying condensed consolidated financial statements for information on our related cross currency swap.

No scheduled principal payments are required under our senior notes until 2013, when $864 million is due. The holders of the 2.75% Contingent Convertible Senior Notes due 2035 may require us to repurchase, in cash, all or a portion of these notes on November 15, 2015, 2020, 2025 and 2030 at 100% of the principal amount of the notes. The holders of the 2.5% Contingent Convertible Senior Notes due 2037 may require us to repurchase, in cash, all or a portion of these notes on May 15, 2017, 2022, 2027 and 2032 at 100% of the principal amount of the notes.

As of September 30, 2007 and currently, debt ratings for the senior notes are Ba2 by Moody’s Investor Service (stable outlook), BB by Standard & Poor’s Ratings Services (positive outlook) and BB by Fitch Ratings (negative outlook).

Our senior notes are unsecured senior obligations of Chesapeake and rank equally in right of payment with all of our other existing and future senior indebtedness and rank senior in right of payment with all of our future subordinated indebtedness. All of our wholly-owned subsidiaries, except minor subsidiaries, fully and unconditionally guarantee the notes jointly and severally on an unsecured basis. Senior notes issued before July 2005 are governed by indentures containing covenants that limit our ability and our restricted subsidiaries’ ability to incur additional indebtedness; pay dividends on our capital stock or redeem, repurchase or retire our capital stock or subordinated indebtedness; make investments and other restricted payments; incur liens; enter into sale-leaseback transactions; create restrictions on the payment of dividends or other amounts to us from our restricted subsidiaries; engage in transactions with affiliates; sell assets; and consolidate, merge or transfer assets. Senior notes issued after June 2005 are governed by indentures containing covenants that limit our ability and our restricted subsidiaries’ ability to incur certain secured indebtedness; enter into sale-leaseback transactions; and consolidate, merge or transfer assets. The debt incurrence covenants do not presently restrict our ability to borrow under or expand our secured credit facility. As of September 30, 2007, we estimate that secured commercial bank indebtedness of approximately $3.9 billion could have been incurred under the most restrictive indenture covenant.

Other Contractual Obligations

Chesapeake has various financial obligations which are not recorded as liabilities in its condensed consolidated balance sheet at September 30, 2007. These include commitments related to drilling rig and compressor leases, transportation and drilling contracts and lending and guarantee agreements. These commitments are discussed in Note 3 of our condensed consolidated financial statements included in Part 1 of this report.

Union Contract

As a result of the CNR acquisition, we assumed a collective bargaining agreement with the United Steel Workers of America (“USWA”) which expired effective December 1, 2006, covering approximately 135 of our field employees in West Virginia and Kentucky. We have continued to operate under the terms of the collective

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bargaining agreement while negotiating with the USWA. Contract negotiations began in October 2006 and have been mediated by the Federal Mediation and Conciliation Service. On May 4, 2007, we presented the USWA leadership our “last, best and final offer”. There have been no strikes, work stoppages or slowdowns since the expiration of the contract, although no assurances can be given that such actions will not occur. On November 2, 2007, the Union Negotiating Team informed us that they will allow the Union membership to vote on our last offer. No date for the vote has been scheduled and we can provide no assurance that the vote, if taken, will pass.

Results of Operations - Three Months Ended September 30, 2007 vs. September 30, 2006

General. For the Current Quarter, Chesapeake had net income of $372 million, or $0.72 per diluted common share, on total revenues of $2.027 billion. This compares to net income of $549 million, or $1.13 per diluted common share, on total revenues of $1.929 billion during the Prior Quarter.

Oil and Natural Gas Sales. During the Current Quarter, oil and natural gas sales were $1.492 billion compared to $1.493 billion in the Prior Quarter. In the Current Quarter, Chesapeake produced 186.4 bcfe at a weighted average price of $7.76 per mcfe, compared to 146.9 bcfe produced in the Prior Quarter at a weighted average price of $8.54 per mcfe (weighted average prices exclude the effect of unrealized gains or (losses) on oil and natural gas derivatives of $45 million and $239 million in the Current Quarter and Prior Quarter, respectively). In the Current Quarter, the decrease in prices resulted in a decrease in revenue of $145 million and increased production resulted in a $338 million increase, for a total increase in revenues of $193 million (excluding unrealized gains or losses on oil and natural gas derivatives). The increase in production from the Prior Quarter to the Current Quarter is primarily generated from the drillbit.

For the Current Quarter, we realized an average price per barrel of oil of $69.25, compared to $60.62 in the Prior Quarter (weighted average prices for both quarters discussed exclude the effect of unrealized gains or losses on derivatives). Natural gas prices realized per mcf (excluding unrealized gains or losses on derivatives) were $7.41 and $8.39 in the Current Quarter and Prior Quarter, respectively. Realized gains or losses from our oil and natural gas derivatives resulted in a net increase in oil and natural gas revenues of $286 million, or $1.53 per mcfe, in the Current Quarter and $301 million, or $2.05 per mcfe, in the Prior Quarter.

Changes in oil and natural gas prices have a significant impact on our oil and natural gas revenues and cash flow. Assuming the Current Quarter production levels, a change of $0.10 per mcf of natural gas sold would have resulted in an increase or decrease in revenues and cash flow of approximately $17 million and $16 million, respectively, and a change of $1.00 per barrel of oil sold would have resulted in an increase or decrease in revenues and cash flow of approximately $3 million without considering the effect of derivative activities.

The following table shows our production by region for the Current Quarter and the Prior Quarter:

	For the Three Months Ended September 30,
	2007			2006
	Mmcfe	Percent		Mmcfe	Percent
Mid-Continent	97,775	52	%	80,946	55	%
Fort Worth Barnett Shale	23,960	13		11,557	8
South Texas and Texas Gulf Coast	19,582	10		19,421	13
Permian and Delaware Basins	18,322	10		11,687	8
Ark-La-Tex	14,492	8		11,529	8
Appalachian Basin	12,274	7		11,750	8
Total production	186,405	100	%	146,890	100	%

Natural gas production represented approximately 91% of our total production volume on a natural gas equivalent basis in both the Current Quarter and the Prior Quarter.

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Oil and Natural Gas Marketing Sales and Operating Expenses. Oil and natural gas marketing sales and operating expenses are from third parties who are owners in Chesapeake-operated wells. Chesapeake recognized $501 million in oil and natural gas marketing sales in the Current Quarter, with corresponding oil and natural gas marketing expenses of $483 million, for a net margin before depreciation of $18 million. This compares to sales of $398 million, expenses of $384 million and a net margin before depreciation of $14 million in the Prior Quarter. In the Current Quarter, Chesapeake realized an increase in oil and natural gas marketing sales volumes related to the increase in production on Chesapeake-operated wells.

Service Operations Revenue and Operating Expenses. Service operations revenue and expenses consist of third-party revenue and operating expenses related to our drilling and oilfield trucking operations. These operations have grown as a result of businesses we acquired and built in 2006 and 2007. Chesapeake recognized $34 million in service operations revenue in the Current Quarter with corresponding service operations expense of $23 million, for a net margin before depreciation of $11 million. This compares to revenue of $38 million, expenses of $19 million and a net margin before depreciation of $19 million in the Prior Quarter.

Production Expenses. Production expenses, which include lifting costs and ad valorem taxes, were $165 million in the Current Quarter compared to $124 million in the Prior Quarter. On a unit-of-production basis, production expenses were $0.89 per mcfe in the Current Quarter compared to $0.84 per mcfe in the Prior Quarter. The increase in the Current Quarter was primarily due to higher third-party field service costs, energy costs, fuel costs, ad valorem taxes and personnel costs. We expect that production expenses for 2007 will range from $0.90 to $1.00 per mcfe produced.

Production Taxes. Production taxes were $56 million in the Current Quarter compared to $41 million in the Prior Quarter. On a unit-of-production basis, production taxes were $0.30 per mcfe in the Current Quarter compared to $0.28 per mcfe in the Prior Quarter. The $15 million increase in production taxes in the Current Quarter is due primarily to an increase in production of 40 bcfe, which more than offset the price decrease of approximately $0.26 per mcfe (excluding gains or losses on derivatives).

In general, production taxes are calculated using value-based formulas that produce higher per unit costs when oil and natural gas prices are higher. We expect production taxes for the fourth quarter of 2007 to range from $0.35 to $0.40 per mcfe based on NYMEX prices of $79.84 per barrel of oil and natural gas wellhead prices ranging from $6.70 to $7.80 per mcf.

General and Administrative Expenses. General and administrative expenses, including stock-based compensation but excluding internal costs capitalized to our oil and natural gas properties, were $62 million in the Current Quarter and $37 million in the Prior Quarter. General and administrative expenses were $0.33 and $0.25 per mcfe for the Current Quarter and Prior Quarter, respectively. The increase in the Current Quarter was the result of the company’s overall growth as well as cost and wage inflation. Included in general and administrative expenses is stock-based compensation of $19 million and $8 million for the Current Quarter and Prior Quarter, respectively. This increase was mainly due to a higher number of unvested restricted shares outstanding during the Current Quarter. We anticipate that general and administrative expenses for the fourth quarter of 2007 will be between $0.33 and $0.40 per mcfe produced (including stock-based compensation ranging from $0.08 to $0.10 per mcfe).

Our stock-based compensation for employees and non-employee directors is in the form of restricted stock. Prior to 2004, stock-based compensation awards were only in the form of stock options. Employee stock-based compensation awards generally vest over a period of four or five years. Our non-employee director awards vest over a period of three years.

The discussion of stock-based compensation in Note 1 to the financial statements included in Part I of this report provides additional detail on the accounting for and reporting of our stock options and restricted stock.

Chesapeake follows the full-cost method of accounting under which all costs associated with oil and natural gas property acquisition, exploration and development activities are capitalized. We capitalize internal costs that can be directly identified with our acquisition, exploration and development activities and do not include any costs related to production, general corporate overhead or similar activities. We capitalized $76 million and $49 million of internal costs in the Current Quarter and the Prior Quarter, respectively, directly related to our oil and natural gas property acquisition, exploration and development efforts.

Oil and Natural Gas Depreciation, Depletion and Amortization. Depreciation, depletion and amortization of oil and natural gas properties was $479 million and $344 million during the Current Quarter and the Prior Quarter, respectively. The average DD&A rate per mcfe, which is a function of capitalized costs, future development costs and the related underlying reserves in the periods presented, was $2.57 and $2.34 in the Current Quarter and in the Prior Quarter, respectively. The $0.23 increase in the average DD&A rate is primarily the result of higher drilling costs and higher costs associated with acquisitions, including the recognition of the tax effect of acquisition costs in excess of the tax basis acquired in certain corporate acquisitions. We expect the DD&A rate for the fourth quarter of 2007 to be between $2.60 and $2.70 per mcfe produced.

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Depreciation and Amortization of Other Assets. Depreciation and amortization of other assets was $44 million in the Current Quarter, compared to $27 million in the Prior Quarter. Depreciation and amortization of other assets was $0.24 and $0.18 per mcfe for the Current Quarter and the Prior Quarter, respectively. The increase in the Current Quarter was primarily the result of higher depreciation costs resulting from the acquisition of various gathering facilities, compression equipment and drilling rig equipment, the construction of new buildings at our corporate headquarters complex and at various field office locations and the purchase of additional information technology equipment and software in 2006 and the Current Period. Property and equipment costs are depreciated on a straight-line basis. Buildings are depreciated over 15 to 39 years, gathering facilities are depreciated over seven to 20 years, drilling rigs are depreciated over 15 years and all other property and equipment are depreciated over the estimated useful lives of the assets, which range from two to seven years. To the extent company-owned drilling rigs are used to drill our wells, a substantial portion of the depreciation is capitalized in oil and natural gas properties as exploration or development costs. We expect the fourth quarter of 2007 depreciation and amortization of other assets to be between $0.18 and $0.20 per mcfe produced.

Interest and Other Income. Interest and other income was $1 million in the Current Quarter compared to $5 million in the Prior Quarter. The Current Quarter income consisted of $2 million of interest income, ($3) million related to losses of equity investees and $2 million of miscellaneous income. The Prior Quarter income consisted of $2 million of interest income, $2 million related to earnings of equity investees and $1 million of miscellaneous income.

Interest Expense. Interest expense increased to $116 million in the Current Quarter compared to $74 million in the Prior Quarter as follows:

	Three Months Ended September 30,
	2007			2006
	($ in millions)
Interest expense on senior notes and revolving bank credit facility	$	161		$	122
Capitalized interest		(67	)		(49	)
Realized (gain) loss on interest rate derivatives		(1	)		2
Unrealized (gain) loss on interest rate derivatives		19			(3	)
Amortization of loan discount and other		4			2
Total interest expense	$	116		$	74
Average long-term borrowings	$	8,724		$	6,525

Interest expense, excluding unrealized gains or losses on derivatives and net of amounts capitalized, was $0.52 per mcfe in both the Current Quarter and the Prior Quarter. We expect interest expense for the fourth quarter of 2007 to be between $0.55 and $0.60 per mcfe produced (before considering the effect of interest rate derivatives).

Income Tax Expense. Chesapeake recorded income tax expense of $228 million in the Current Quarter, compared to income tax expense of $335 million in the Prior Quarter. Our effective income tax rate was 38% in both the Current Quarter and the Prior Quarter. Most of our 2006 income tax expense was deferred, and we expect most of our fourth quarter 2007 income tax expense to be deferred.

Results of Operations - Nine Months Ended September 30, 2007 vs. September 30, 2006

General. For the Current Period, Chesapeake had net income of $1.148 billion, or $2.23 per diluted common share, on total revenues of $5.711 billion. This compares to net income of $1.532 billion, or $3.40 per diluted common share, on total revenues of $5.458 billion during the Prior Period.

Oil and Natural Gas Sales. During the Current Period, oil and natural gas sales were $4.164 billion compared to $4.190 billion in the Prior Period. In the Current Period, Chesapeake produced 510.1 bcfe at a weighted average price of $8.39 per mcfe, compared to 426.3 bcfe produced in the Prior Period at a weighted average price of $8.77 per mcfe (weighted average prices exclude the effect of unrealized gains or (losses) on oil and natural gas derivatives of ($113) million and $453 million in the Current Period and Prior Period, respectively). In the Current Period, the decrease in prices resulted in a decrease in revenue of $195 million and increased production resulted in a $735 million increase, for a total increase in revenues of $540 million (excluding unrealized gains or losses on oil and natural gas derivatives). The increase in production from the Prior Period to the Current Period is primarily generated from the drillbit.

For the Current Period, we realized an average price per barrel of oil of $65.55, compared to $58.86 in the Prior Period (weighted average prices for both quarters discussed exclude the effect of unrealized gains or losses on derivatives). Natural gas prices realized per mcf (excluding unrealized gains or losses on derivatives) were $8.15

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and $8.66 in the Current Period and Prior Period, respectively. Realized gains or losses from our oil and natural gas derivatives resulted in a net increase in oil and natural gas revenues of $916 million, or $1.80 per mcfe, in the Current Period and $807 million, or $1.89 per mcfe, in the Prior Period.

Changes in oil and natural gas prices have a significant impact on our oil and natural gas revenues and cash flow. Assuming the Current Period production levels, a change of $0.10 per mcf of natural gas sold would have resulted in an increase or decrease in revenues and cash flow of approximately $47 million and $45 million, respectively, and a change of $1.00 per barrel of oil sold would have resulted in an increase or decrease in revenues and cash flow of approximately $7 million without considering the effect of derivative activities.

The following table shows our production by region for the Current Period and the Prior Period:

	For the Nine Months Ended September 30,
	2007			2006
	Mmcfe	Percent		Mmcfe	Percent
Mid-Continent	270,655	53	%	233,078	55	%
Fort Worth Barnett Shale	59,162	12		30,035	7
South Texas and Texas Gulf Coast	58,609	11		59,040	14
Permian and Delaware Basins	45,529	9		36,487	8
Ark-La-Tex	41,279	8		34,410	8
Appalachian Basin	34,845	7		33,268	8
Total production	510,079	100	%	426,318	100	%

Natural gas production represented approximately 92% of our total production volume on a natural gas equivalent basis in the Current Period, compared to 91% in the Prior Period.

Oil and Natural Gas Marketing Sales and Operating Expenses. Oil and natural gas marketing sales and operating expenses are from third parties who are owners in Chesapeake-operated wells. Chesapeake recognized $1.446 billion in oil and natural gas marketing sales in the Current Period, with corresponding oil and natural gas marketing expenses of $1.394 billion, for a net margin before depreciation of $52 million. This compares to sales of $1.170 billion, expenses of $1.132 billion and a net margin before depreciation of $38 million in the Prior Period. In the Current Period, Chesapeake realized an increase in oil and natural gas marketing sales volumes related to the increase in production on Chesapeake-operated wells.

Service Operations Revenue and Operating Expenses. Service operations revenue and expenses consist of third-party revenue and operating expenses related to our drilling and oilfield trucking operations. These operations have grown as a result of businesses we acquired and built in 2006 and 2007. Chesapeake recognized $101 million in service operations revenue in the Current Period with corresponding service operations expense of $67 million, for a net margin before depreciation of $34 million. This compares to revenue of $98 million, expenses of $49 million and a net margin before depreciation of $49 million in the Prior Period.

Production Expenses. Production expenses, which include lifting costs and ad valorem taxes, were $461 million in the Current Period compared to $364 million in the Prior Period. On a unit-of-production basis, production expenses were $0.90 per mcfe in the Current Period compared to $0.85 per mcfe in the Prior Period. The increase in the Current Period was primarily due to higher third-party field service costs, energy costs, fuel costs, ad valorem taxes and personnel costs. We expect that production expenses for 2007 will range from $0.90 to $1.00 per mcfe produced.

Production Taxes. Production taxes were $151 million in the Current Period compared to $130 million in the Prior Period. On a unit-of-production basis, production taxes were $0.30 per mcfe in both the Current Period and the Prior Period. The Prior Period included a $2 million accrual for certain severance tax claims and then a subsequent reversal of the cumulative $12 million accrual for such severance tax claims as a result of their dismissal. After adjusting for these items, there was an increase of $11 million in production taxes from the Prior Period. The $11 million increase is due to an increase in production of 84 bcfe, which more than offset the price decrease of approximately $0.28 per mcfe (excluding gains or losses on derivatives) and the increase in qualified production tax exemptions in Texas.

In general, production taxes are calculated using value-based formulas that produce higher per unit costs when oil and natural gas prices are higher. We expect production taxes for 2007 to range from $0.35 to $0.40 per mcfe based on NYMEX prices of $69.90 per barrel of oil and natural gas wellhead prices ranging from $6.80 to $7.90 per mcf.

General and Administrative Expenses. General and administrative expenses, including stock-based compensation but excluding internal costs capitalized to our oil and natural gas properties, were $168 million in the Current Period and $99 million in the Prior Period. General and administrative expenses were $0.33 and $0.23 per

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mcfe for the Current Period and Prior Period, respectively. The increase in the Current Period was the result of the company’s overall growth as well as cost and wage inflation. Included in general and administrative expenses is stock-based compensation of $41 million and $21 million for the Current Period and Prior Period, respectively. This increase was mainly due to a higher number of unvested restricted shares outstanding during the Current Period. We anticipate that general and administrative expenses for 2007 will be between $0.33 and $0.40 per mcfe produced (including stock-based compensation ranging from $0.08 to $0.10 per mcfe).

Our stock-based compensation for employees and non-employee directors is in the form of restricted stock. Prior to 2004, stock-based compensation awards were only in the form of stock options. Employee stock-based compensation awards generally vest over a period of four or five years. Our non-employee director awards vest over a period of three years.

The discussion of stock-based compensation in Note 1 to the financial statements included in Part I of this report provides additional detail on the accounting for and reporting of our stock options and restricted stock.

Chesapeake follows the full-cost method of accounting under which all costs associated with oil and natural gas property acquisition, exploration and development activities are capitalized. We capitalize internal costs that can be directly identified with our acquisition, exploration and development activities and do not include any costs related to production, general corporate overhead or similar activities. We capitalized $186 million and $119 million of internal costs in the Current Period and the Prior Period, respectively, directly related to our oil and natural gas property acquisition, exploration and development efforts.

Oil and Natural Gas Depreciation, Depletion and Amortization. Depreciation, depletion and amortization of oil and natural gas properties was $1.314 billion and $977 million during the Current Period and the Prior Period, respectively. The average DD&A rate per mcfe, which is a function of capitalized costs, future development costs and the related underlying reserves in the periods presented, was $2.58 and $2.29 in the Current Period and in the Prior Period, respectively. The $0.29 increase in the average DD&A rate is primarily the result of higher drilling costs and higher costs associated with acquisitions, including the recognition of the tax effect of acquisition costs in excess of the tax basis acquired in certain corporate acquisitions. We expect the DD&A rate for 2007 to be between $2.50 and $2.70 per mcfe produced.

Depreciation and Amortization of Other Assets. Depreciation and amortization of other assets was $120 million in the Current Period, compared to $74 million in the Prior Period. Depreciation and amortization of other assets was $0.24 and $0.17 per mcfe for the Current Period and the Prior Period, respectively. The increase in the Current Period was primarily the result of higher depreciation costs resulting from the acquisition of various gathering facilities, compression equipment and drilling rig equipment, the construction of new buildings at our corporate headquarters complex and at various field office locations and the purchase of additional information technology equipment and software in 2006 and the Current Period. Property and equipment costs are depreciated on a straight-line basis. Buildings are depreciated over 15 to 39 years, gathering facilities are depreciated over seven to 20 years, drilling rigs are depreciated over 15 years and all other property and equipment are depreciated over the estimated useful lives of the assets, which range from two to seven years. To the extent company-owned drilling rigs are used to drill our wells, a substantial portion of the depreciation is capitalized in oil and natural gas properties as exploration or development costs. We expect depreciation and amortization of other assets for 2007 to be between $0.20 and $0.24 per mcfe produced.

Employee Retirement Expense. Our former President and Chief Operating Officer, Tom L. Ward, resigned as a director, officer and employee of the company effective February 10, 2006. Mr. Ward’s Resignation Agreement provided for the immediate vesting of all of his unvested equity awards, which consisted of options to purchase 724,615 shares of Chesapeake’s common stock at an average exercise price of $8.01 per share and 1,291,875 shares of restricted common stock. As a result of this vesting, we incurred an expense of $55 million in the Prior Period.

Interest and Other Income. Interest and other income was $12 million in the Current Period compared to $20 million in the Prior Period. The Current Period income consisted of $6 million of interest income, $2 million related to earnings of equity investees and $4 million of miscellaneous income. The Prior Period income consisted of $3 million of interest income, $9 million related to earnings of equity investees, a $4 million gain on sale of assets and $4 million of miscellaneous income.

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Interest Expense. Interest expense increased to $279 million in the Current Period compared to $220 million in the Prior Period as follows:

	Nine Months Ended September 30,
	2007			2006
	($ in millions)
Interest expense on senior notes and revolving bank credit facility	$	443		$	336
Capitalized interest		(192	)		(119	)
Realized (gain) loss on interest rate derivatives		—			(1	)
Unrealized (gain) loss on interest rate derivatives		13			(1	)
Amortization of loan discount and other		15			5
Total interest expense	$	279		$	220
Average long-term borrowings	$	7,999		$	6,125

Interest expense, excluding unrealized gains or losses on derivatives and net of amounts capitalized, was $0.52 per mcfe for both the Current Period and the Prior Period. We expect interest expense for 2007 to be between $0.55 and $0.60 per mcfe produced (before considering the effect of interest rate derivatives).

Gain on Sale of Investments. In the Current Period, we sold our 33% limited partnership interest in Eagle Energy Partners I, L.P., which we first acquired in 2003, for proceeds of $126 million and a gain of $83 million. In the Prior Period, Chesapeake sold its investment in publicly-traded Pioneer Drilling Company common stock, realizing proceeds of $159 million and a gain of $117 million. We owned 17% of the common stock of Pioneer, which we began acquiring in 2003.

Income Tax Expense. Chesapeake recorded income tax expense of $704 million in the Current Period, compared to income tax expense of $963 million in the Prior Period. Our effective income tax rate was 38% in the Current Period compared to 38.6% in the Prior Period. The Prior Period included a $15 million adjustment in additional deferred income taxes related to the effect of Texas House Bill 3 which was signed into law in May 2006. Excluding the effect of this adjustment, our effective income tax rate was 38% for the Prior Period. Most of our 2006 income tax expense was deferred, and we expect most of our 2007 income tax expense to be deferred.

Loss on Conversion/Exchange of Preferred Stock. Loss on conversion/exchange of preferred stock was $11 million in the Prior Period. The loss represented the excess of the fair value of the common stock issued over the fair value of the securities issuable pursuant to the original conversion terms.

Critical Accounting Policies

We consider accounting policies related to hedging, oil and natural gas properties, income taxes and business combinations to be critical policies. These policies are summarized in Management’s Discussion and Analysis of Financial Condition and Results of Operations in our annual report on Form 10-K for the year ended December 31, 2006.

Recently Issued and Proposed Accounting Standards

The Financial Accounting Standards Board (FASB) recently issued the following standards which were reviewed by Chesapeake to determine the potential impact on our financial statements upon adoption.

In February 2006, the FASB issued SFAS No. 155, Accounting for Certain Hybrid Financial Instruments – an amendment of FASB Statements No. 133 and 140. SFAS 155 permits an entity to measure at fair value any financial instrument that contains an embedded derivative that otherwise would require bifurcation. This statement is effective for all financial instruments we acquire or issue after December 31, 2006. Adoption of SFAS 155 did not have a material effect on our financial position, results of operations or cash flows.

In September 2006, the FASB issued SFAS No. 157, Fair Value Measurements. This statement defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles (GAAP), and expands disclosures about fair value measurements. This statement is effective for financial statements issued for fiscal years beginning after November 15, 2007. We are currently assessing the impact, if any, the adoption of this statement will have on our financial position, results of operations or cash flows.

In February 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial Assets and Financial Liabilities. This statement permits entities to choose to measure many financial instruments and certain other items at fair value. This statement expands the use of fair value measurement and applies to entities that elect the fair value option. The fair value option established by this statement permits all entities to choose to measure eligible items at fair value at specified election dates. This statement is effective as of the beginning of the first fiscal year that begins after November 15, 2007. We are currently assessing the impact, if any, the adoption of this statement will have on our financial position, results of operations or cash flows.

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The FASB has announced that it plans to issue proposed staff guidance on accounting for convertible debt instruments that may be settled in cash upon conversion, including partial cash settlements. This accounting could increase the amount of interest expense required to be recognized with respect to such instruments and, thus, lower reported net income and net income per share of issuers of such instruments. Issuers would have to account for the liability and equity components of the instrument separately and in a manner that reflects interest expense at the interest rate of similar nonconvertible debt. We have two debt series that would be affected by the guidance, our 2.75% Contingent Convertible Senior Notes due 2035 and our 2.5% Contingent Convertible Senior Notes due 2037. If the FASB adopts the guidance, it is expected to be effective for fiscal years starting after December 15, 2007. Companies would have to apply the guidance retrospectively to both existing and new instruments that fall within the scope of the guidance.

Forward-Looking Statements

This report includes “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. Forward-looking statements give our current expectations or forecasts of future events. They include statements regarding oil and natural gas reserve estimates, planned capital expenditures, the drilling of oil and natural gas wells and future acquisitions, expected oil and natural gas production, cash flow and anticipated liquidity, business strategy and other plans and objectives for future operations and expected future expenses. Statements concerning the fair values of derivative contracts and their estimated contribution to our future results of operations are based upon market information as of a specific date. These market prices are subject to significant volatility.

Although we believe the expectations and forecasts reflected in these and other forward-looking statements are reasonable, we can give no assurance they will prove to have been correct. They can be affected by inaccurate assumptions or by known or unknown risks and uncertainties. Factors that could cause actual results to differ materially from expected results are described under “Risk Factors” in Item 1A of our annual report on Form 10-K for the year ended December 31, 2006 and include:

• the volatility of oil and natural gas prices,

• the availability of capital on an economic basis to fund our drilling program,

• our ability to replace reserves and sustain production,

• our level of indebtedness,

• the strength and financial resources of our competitors,

• uncertainties inherent in estimating quantities of oil and natural gas reserves and projecting future rates of production and the timing of development expenditures,

• uncertainties in evaluating oil and natural gas reserves of acquired properties and associated potential liabilities,

• inability to effectively integrate and operate acquired companies and properties,

• unsuccessful exploration and development drilling,

• declines in the value of our oil and natural gas properties resulting in ceiling test write-downs,

• lower prices realized on oil and natural gas sales and collateral required to secure hedging liabilities resulting from our commodity price risk management activities,

• lower oil and natural gas prices negatively affecting our ability to borrow,

• drilling and operating risks,

• adverse effects of governmental regulation, and

• losses possible from pending or future litigation.

We caution you not to place undue reliance on these forward-looking statements, which speak only as of the date of this report, and we undertake no obligation to update this information. We urge you to carefully review and consider the disclosures made in this report and our other filings with the Securities and Exchange Commission that attempt to advise interested parties of the risks and factors that may affect our business.

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ITEM 3. Quantitative and Qualitative Disclosures About Market Risk

Oil and Natural Gas Hedging Activities

Our results of operations and operating cash flows are impacted by changes in market prices for oil and natural gas. To mitigate a portion of the exposure to adverse market changes, we have entered into various derivative instruments. As of September 30, 2007, our oil and natural gas derivative instruments were comprised of swaps, knockout swaps, cap-swaps, basis protection swaps, call options and collars. These instruments allow us to predict with greater certainty the effective oil and natural gas prices to be received for our hedged production. Although derivatives often fail to achieve 100% effectiveness for accounting purposes, we believe our derivative instruments continue to be highly effective in achieving the risk management objectives for which they were intended.

• For swap instruments, Chesapeake receives a fixed price for the hedged commodity and pays a floating market price to the counterparty. The fixed-price payment and the floating-price payment are netted, resulting in a net amount due to or from the counterparty.

• For cap-swaps, Chesapeake receives a fixed price and pays a floating market price. The fixed price received by Chesapeake includes a premium in exchange for a “cap” limiting the counterparty’s exposure. In other words, there is no limit to Chesapeake’s exposure but there is a limit to the downside exposure of the counterparty.

• For knockout swaps, Chesapeake receives a fixed price and pays a floating market price. The fixed price received by Chesapeake includes a premium in exchange for the possibility to reduce the counterparty’s exposure to zero, in any given month, if the floating market price is lower than certain pre-determined knockout prices.

• Basis protection swaps are arrangements that guarantee a price differential for oil or natural gas from a specified delivery point. For Mid-Continent basis protection swaps, which have negative differentials to NYMEX, Chesapeake receives a payment from the counterparty if the price differential is greater than the stated terms of the contract and pays the counterparty if the price differential is less than the stated terms of the contract. For Appalachian Basin basis protection swaps, which have positive differentials to NYMEX, Chesapeake receives a payment from the counterparty if the price differential is less than the stated terms of the contract and pays the counterparty if the price differential is greater than the stated terms of the contract.

• For call options, Chesapeake receives a premium from the counterparty in exchange for the sale of a call option. If the market price exceeds the fixed price of the call option, Chesapeake pays the counterparty such excess. If the market price settles below the fixed price of the call option, no payment is due from Chesapeake.

• Collars contain a fixed floor price (put) and ceiling price (call). If the market price exceeds the call strike price or falls below the put strike price, Chesapeake receives the fixed price and pays the market price. If the market price is between the call and the put strike price, no payments are due from either party.

Chesapeake enters into counter-swaps from time to time for the purpose of locking-in the value of a swap. Under the counter-swap, Chesapeake receives a floating price for the hedged commodity and pays a fixed price to the counterparty. The counter-swap is 100% effective in locking-in the value of a swap since subsequent changes in the market value of the swap are entirely offset by subsequent changes in the market value of the counter-swap. We refer to this locked-in value as a locked swap. Generally, at the time Chesapeake enters into a counter-swap, Chesapeake removes the original swap’s designation as a cash flow hedge and classifies the original swap as a non-qualifying hedge under SFAS 133. The reason for this new designation is that collectively the swap and the counter-swap no longer hedge the exposure to variability in expected future cash flows. Instead, the swap and counter-swap effectively lock-in a specific gain (or loss) that will be unaffected by subsequent variability in oil and natural gas prices. Any locked-in gain or loss is recorded in accumulated other comprehensive income and reclassified to oil and natural gas sales in the month of related production.

With respect to counter-swaps that are designed to lock-in the value of cap-swaps, the counter-swap is effective in locking-in the value of the cap-swap until the floating price reaches the cap (or floor) stipulated in the cap-swap agreement. The value of the counter-swap will increase (or decrease), but in the opposite direction, as the value of the cap-swap decreases (or increases) until the floating price reaches the pre-determined cap (or floor) stipulated in the cap-swap agreement. However, because of the written put option embedded in the cap-swap, the changes in value of the cap-swap are not completely effective in offsetting changes in value of the corresponding counter-swap. Changes in the value of cap-swaps and counter-swaps are recorded as adjustments to oil and natural gas sales.

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In accordance with FASB Interpretation No. 39, to the extent that a legal right of set-off exists, Chesapeake nets the value of its derivative arrangements with the same counterparty in the accompanying condensed consolidated balance sheets.

Gains or losses from certain derivative transactions are reflected as adjustments to oil and natural gas sales on the condensed consolidated statements of operations. Realized gains (losses) are included in oil and natural gas sales in the month of related production. Pursuant to SFAS 133, certain derivatives do not qualify for designation as cash flow hedges. Changes in the fair value of these non-qualifying derivatives that occur prior to their maturity (i.e., temporary fluctuations in value) are reported currently in the condensed consolidated statements of operations as unrealized gains (losses) within oil and natural gas sales. Following provisions of SFAS 133, 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 other comprehensive income until the hedged item is recognized in earnings. Any change in fair value resulting from ineffectiveness is recognized currently in oil and natural gas sales as unrealized gains (losses). The components of oil and natural gas sales for the Current Quarter, the Prior Quarter, the Current Period and the Prior Period are presented below.

	Three Months Ended September 30,					Nine Months Ended September 30,
	2007			2006		2007			2006
	($ in millions)
Oil and natural gas sales	$	1,161		$	953	$	3,361		$	2,930
Realized gains on oil and natural gas derivatives		286			301		916			807
Unrealized gains (losses) on non-qualifying oil and natural gas derivatives		73			67		(21	)		116
Unrealized gains (losses) on ineffectiveness of cash flow hedges		(28	)		172		(92	)		337
Total oil and natural gas sales	$	1,492		$	1,493	$	4,164		$	4,190

As of September 30, 2007, we had the following open oil and natural gas derivative instruments (excluding derivatives assumed through our acquisition of CNR in November 2005) designed to hedge a portion of our oil and natural gas production for periods after September 2007:

	Volume	Weighted Average Fixed Price to be Received (Paid)		Weighted Average Put Fixed Price		Weighted Average Call Fixed Price		Weighted Average Differential			SFAS 133 Hedge	Net Premiums ($ in millions)		Fair Value at September 30, 2007 ($ in millions)
Natural Gas (mmbtu):
Swaps:
4Q 2007	99,340,000	$	7.49	$	—	$	—	$	—		Yes	$	—	$	41
1Q 2008	97,762,500		8.82		—		—		—		Yes		—		62
2Q 2008	57,102,500		7.99		—		—		—		Yes		—		21
3Q 2008	57,730,000		8.11		—		—		—		Yes		—		17
4Q 2008	57,730,000		8.70		—		—		—		Yes		—		22
1Q 2009	18,900,000		8.91		—		—		—		Yes		—		—
2Q 2009	19,110,000		7.89		—		—		—		Yes		—		1
3Q 2009	19,320,000		8.00		—		—		—		Yes		—		1
4Q 2009	19,320,000		8.41		—		—		—		Yes		—		1
1Q 2010	6,300,000		8.57		—		—		—		Yes		—		(2	)
2Q 2010	6,370,000		7.72		—		—		—		Yes		—		1
3Q 2010	6,440,000		7.80		—		—		—		Yes		—		—
4Q 2010	6,440,000		8.10		—		—		—		Yes		—		—
Basis Protection Swaps
(Mid-Continent):
4Q 2007	33,317,500		—		—		—		(0.26	)	No		—		24
1Q 2008	33,215,000		—		—		—		(0.30	)	No		—		28
2Q 2008	26,845,000		—		—		—		(0.25	)	No		—		24
3Q 2008	27,140,000		—		—		—		(0.25	)	No		—		21
4Q 2008	31,410,000		—		—		—		(0.28	)	No		—		32
1Q 2009	26,100,000		—		—		—		(0.32	)	No		—		19
2Q 2009	20,020,000		—		—		—		(0.28	)	No		—		12
3Q 2009	20,240,000		—		—		—		(0.28	)	No		—		10
4Q 2009	20,240,000		—		—		—		(0.28	)	No		—		12
2Q 2012	4,550,000		—		—		—		(0.34	)	No		—		1
3Q 2012	4,600,000		—		—		—		(0.34	)	No		—		1
4Q 2012	1,550,000		—		—		—		(0.34	)	No		—		—

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	Volume	Weighted Average Fixed Price to be Received (Paid)		Weighted Average Put Fixed Price		Weighted Average Call Fixed Price		Weighted Average Differential		SFAS 133 Hedge	Net Premiums ($ in millions)		Fair Value at September 30, 2007 ($ in millions)
Basis Protection Swaps
(Appalachian Basin):
4Q 2007	9,200,000	$	—	$	—	$	—	$	0.35	No	$	—	$	1
1Q 2008	10,920,000		—		—		—		0.35	No		—		(2	)
2Q 2008	10,920,000		—		—		—		0.35	No		—		—
3Q 2008	11,040,000		—		—		—		0.35	No		—		—
4Q 2008	11,040,000		—		—		—		0.35	No		—		—
1Q 2009	9,000,000		—		—		—		0.31	No		—		(1	)
2Q 2009	9,100,000		—		—		—		0.31	No		—		—
3Q 2009	9,200,000		—		—		—		0.31	No		—		—
4Q 2009	9,200,000		—		—		—		0.31	No		—		—
1Q 2010	7,200,000		—		—		—		0.31	No		—		(1	)
2Q 2010	7,280,000		—		—		—		0.31	No		—		—
3Q 2010	7,360,000		—		—		—		0.31	No		—		—
4Q 2010	7,360,000		—		—		—		0.31	No		—		—
1Q 2011	7,200,000		—		—		—		0.32	No		—		(1	)
2Q 2011	7,280,000		—		—		—		0.32	No		—		—
3Q 2011	7,360,000		—		—		—		0.32	No		—		—
4Q 2011	7,360,000		—		—		—		0.32	No		—		—
Other Swaps:
4Q 2007	16,350,000		7.19		—		—		—	No		—		8
1Q 2008	4,550,000		7.67		—		—		—	No		—		(1	)
2Q 2008	6,050,000		8.47		—		—		—	No		—		5
3Q 2008	4,600,000		8.73		—		—		—	No		—		4
4Q 2008	4,600,000		8.73		—		—		—	No		—		2
1Q 2009(a)	4,500,000		8.73		—		—		—	No		—		(13	)
1Q 2010(a)	—		—		—		—		—	No		—		(12	)
Knockout Swaps:
4Q 2007	17,210,000		9.13		5.79		—		—	No		—		32
1Q 2008	8,190,000		10.83		5.94		—		—	No		—		16
2Q 2008	60,380,000		9.15		6.21		—		—	No		—		26
3Q 2008	62,560,000		9.32		6.21		—		—	No		—		11
4Q 2008	55,240,000		9.91		6.20		—		—	No		—		6
1Q 2009	39,600,000		10.28		6.17		—		—	No		—		6
2Q 2009	37,310,000		8.73		6.18		—		—	No		—		(6	)
3Q 2009	37,720,000		8.83		6.05		—		—	No		—		(10	)
4Q 2009	37,720,000		9.41		6.11		—		—	No		—		(10	)
Call Options:
4Q 2007	15,700,000		—		—		9.06		—	No		19		(1	)
1Q 2008	32,760,000		—		—		10.20		—	No		22		(14	)
2Q 2008	31,850,000		—		—		10.25		—	No		21		(9	)
3Q 2008	32,200,000		—		—		10.25		—	No		21		(16	)
4Q 2008	30,980,000		—		—		10.26		—	No		20		(26	)
1Q 2009	31,500,000		—		—		11.11		—	No		19		(24	)
2Q 2009	29,120,000		—		—		11.13		—	No		18		(9	)
3Q 2009	29,440,000		—		—		11.13		—	No		18		(12	)
4Q 2009	29,440,000		—		—		11.13		—	No		18		(19	)
1Q 2010	1,800,000		—		—		11.00		—	No		—		(2	)
2Q 2010	1,820,000		—		—		11.00		—	No		—		(1	)
3Q 2010	1,840,000		—		—		11.00		—	No		1		(1	)
4Q 2010	1,840,000		—		—		11.00		—	No		1		(1	)
1Q 2011	1,800,000		—		—		11.00		—	No		—		(1	)
2Q 2011	1,820,000		—		—		11.00		—	No		1		(1	)
3Q 2011	1,840,000		—		—		11.00		—	No		1		(1	)
4Q 2011	1,840,000		—		—		11.00		—	No		—		(1	)
1Q 2012	1,820,000		—		—		11.00		—	No		—		(1	)
2Q 2012	1,820,000		—		—		11.00		—	No		1		(1	)
3Q 2012	1,840,000		—		—		11.00		—	No		1		(1	)
4Q 2012	1,840,000		—		—		11.00		—	No		1		(1	)

41

	Volume	Weighted Average Fixed Price to be Received (Paid)		Weighted Average Put Fixed Price		Weighted Average Call Fixed Price		Weighted Average Differential		SFAS 133 Hedge	Net Premiums ($ in millions)		Fair Value at September 30, 2007 ($ in millions)
Collars:
4Q 2007	5,810,000	$	—	$	7.26	$	9.06	$	—	Yes	$	—	$	3
1Q 2008	7,590,000		—		7.32		9.17		—	Yes		—		(1	)
2Q 2008	2,730,000		—		7.50		9.68		—	Yes		—		1
3Q 2008	2,760,000		—		7.50		9.68		—	Yes		—		1
4Q 2008	2,760,000		—		7.50		9.68		—	Yes		—		—
Other Collars:
4Q 2007	13,830,000		—		7.08/5.28		8.80		—	No		—		6
1Q 2008	10,920,000		—		7.40/5.46		9.35		—	No		—		—
1Q 2009	4,500,000		—		7.50/6.00		10.72		—	No		—		(2	)
2Q 2009	4,550,000		—		7.50/6.00		10.72		—	No		—		1
3Q 2009	4,600,000		—		7.50/6.00		10.72		—	No		—		—
4Q 2009	4,600,000		—		7.50/6.00		10.72		—	No		—		(1	)
Total Natural Gas												183		274
Oil (bbls):
Swaps:
4Q 2007	828,000		67.11		—		—		—	Yes		—		(10	)
1Q 2008	1,152,000		70.79		—		—		—	Yes		—		(9	)
2Q 2008	1,183,000		70.25		—		—		—	Yes		—		(7	)
3Q 2008	1,196,000		69.94		—		—		—	Yes		—		(6	)
4Q 2008	828,000		69.12		—		—		—	Yes		—		(4	)
1Q 2009	135,000		68.02		—		—		—	Yes		—		(1	)
2Q 2009	136,500		67.84		—		—		—	Yes		—		(1	)
3Q 2009	138,000		67.67		—		—		—	Yes		—		(1	)
4Q 2009	138,000		67.54		—		—		—	Yes		—		(1	)
Knockout Swaps:
4Q 2007	368,000		71.43		55.00		—		—	No		—		(3	)
1Q 2008	546,000		74.97		53.58		—		—	No		—		(2	)
2Q 2008	546,000		75.16		53.58		—		—	No		—		(2	)
3Q 2008	552,000		75.29		53.58		—		—	No		—		(2	)
4Q 2008	736,000		76.69		55.19		—		—	No		—		(2	)
1Q 2009	1,665,000		79.25		57.92		—		—	No		—		(1	)
2Q 2009	1,683,500		79.29		57.92		—		—	No		—		(2	)
3Q 2009	1,702,000		79.31		57.92		—		—	No		—		(1	)
4Q 2009	1,702,000		79.31		57.92		—		—	No		—		(2	)
Cap-Swaps:
4Q 2007	368,000		78.53		56.25		—		—	No		—		—
1Q 2008	273,000		77.60		55.00		—		—	No		—		—
2Q 2008	273,000		77.60		55.00		—		—	No		—		—
3Q 2008	276,000		77.60		55.00		—		—	No		—		—
4Q 2008	276,000		77.60		55.00		—		—	No		—		—
Call Options:
4Q 2007	920,000		—		—		79.85		—	No		1		(2	)
1Q 2008	455,000		—		—		81.00		—	No		2		(2	)
2Q 2008	455,000		—		—		81.00		—	No		2		(2	)
3Q 2008	460,000		—		—		81.00		—	No		2		(2	)
4Q 2008	644,000		—		—		79.29		—	No		2		(3	)
1Q 2009	540,000		—		—		75.00		—	No		3		(3	)
2Q 2009	546,000		—		—		75.00		—	No		3		(3	)
3Q 2009	552,000		—		—		75.00		—	No		3		(4	)
4Q 2009	552,000		—		—		75.00		—	No		3		(3	)
1Q 2010	450,000		—		—		75.00		—	No		2		(3	)
2Q 2010	455,000		—		—		75.00		—	No		2		(3	)
3Q 2010	460,000		—		—		75.00		—	No		2		(3	)
4Q 2010	460,000		—		—		75.00		—	No		2		(3	)
Total Oil												29		(93	)
Total Natural Gas and Oil											$	212	$	181

(a) These include options to extend an existing swap for an additional 12 months at 50,000 mmbtu/day at $8.73/mmbtu. The options are callable by the counterparty in March 2009 and March 2010.

42

In 2006 and 2007, Chesapeake lifted a portion of its 2007, 2008 and 2009 hedges and as a result has approximately $435 million of deferred hedging gains as of September 30, 2007. These gains have been recorded in accumulated other comprehensive income or as an unrealized gain in oil and natural gas sales. For amounts originally recorded in other comprehensive income, the gain will be recognized in oil and natural gas sales in the month of the hedged production.

We assumed certain liabilities related to open derivative positions in connection with our acquisition of Columbia Natural Resources, LLC in November 2005. In accordance with SFAS 141, these derivative positions were recorded at fair value in the purchase price allocation as a liability of $592 million. The recognition of the derivative liability and other assumed liabilities resulted in an increase in the total purchase price which was allocated to the assets acquired. Because of this accounting treatment, only cash settlements for changes in fair value subsequent to the acquisition date for the derivative positions assumed result in adjustments to our oil and natural gas revenues upon settlement. For example, if the fair value of the derivative positions assumed does not change, then upon the sale of the underlying production and corresponding settlement of the derivative positions, cash would be paid to the counterparties and there would be no adjustment to oil and natural gas revenues related to the derivative positions. If, however, the actual sales price is different from the price assumed in the original fair value calculation, the difference would be reflected as either a decrease or increase in oil and natural gas revenues, depending upon whether the sales price was higher or lower, respectively, than the prices assumed in the original fair value calculation. For accounting purposes, the net effect of these acquired hedges is that we hedged the production volumes at market prices on the date of our acquisition of CNR.

Pursuant to Statement of Financial Accounting Standards No. 149, Amendment of SFAS 133 on Derivative Instruments and Hedging Activities, the derivative instruments assumed in connection with the CNR acquisition are deemed to contain a significant financing element and all cash flows associated with these positions are reported as financing activity in the statement of cash flows for the periods in which settlement occurs.

The following details the assumed CNR derivatives remaining as of September 30, 2007:

	Volume	Weighted Average Fixed Price to be Received (Paid)		Weighted Average Put Fixed Price		Weighted Average Call Fixed Price		SFAS 133 Hedge	Fair Value at September 30, 2007 ($ in millions)
Natural Gas (mmbtu):
Swaps:
4Q 2007	10,580,000	$	4.82	$	—	$	—	Yes	$	(23	)
1Q 2008	9,555,000		4.68		—		—	Yes		(31	)
2Q 2008	9,555,000		4.68		—		—	Yes		(27	)
3Q 2008	9,660,000		4.68		—		—	Yes		(29	)
4Q 2008	9,660,000		4.66		—		—	Yes		(34	)
1Q 2009	4,500,000		5.18		—		—	Yes		(16	)
2Q 2009	4,550,000		5.18		—		—	Yes		(11	)
3Q 2009	4,600,000		5.18		—		—	Yes		(12	)
4Q 2009	4,600,000		5.18		—		—	Yes		(13	)
Collars:
1Q 2009	900,000		—		4.50		6.00	Yes		(2	)
2Q 2009	910,000		—		4.50		6.00	Yes		(2	)
3Q 2009	920,000		—		4.50		6.00	Yes		(2	)
4Q 2009	920,000		—		4.50		6.00	Yes		(2	)
Total Natural Gas									$	(204	)

We have established the fair value of all derivative instruments using estimates of fair value reported by our counterparties and subsequently evaluated internally using established index prices and other sources. The actual contribution to our future results of operations will be based on the market prices at the time of settlement and may be more or less than the fair value estimates used at September 30, 2007.

Based upon the market prices at September 30, 2007, we expect to transfer approximately $195 million (net of income taxes) of the gain included in the balance in accumulated other comprehensive income to earnings during the next 12 months in the related month of production. All transactions hedged as of September 30, 2007 are expected to mature by December 31, 2012.

43

Additional information concerning the fair value of our oil and natural gas derivative instruments, including CNR derivatives assumed, is as follows:

	2007
	($ in millions)
Fair value of contracts outstanding, as of January 1	$	345
Change in fair value of contracts		998
Fair value of contracts when entered into		(213	)
Contracts realized or otherwise settled		(916	)
Fair value of contracts when closed		(237	)
Fair value of contracts outstanding, as of September 30	$	(23	)

The change in the fair value of our derivative instruments since January 1, 2007 resulted from the settlement of derivatives for a realized gain, as well as an increase in natural gas prices. Derivative instruments reflected as current in the condensed consolidated balance sheet represent the estimated fair value of derivative instrument settlements scheduled to occur over the subsequent twelve-month period based on market prices for oil and natural gas as of the condensed consolidated balance sheet date. The derivative settlement amounts are not due and payable until the month in which the related underlying hedged transaction occurs.

Interest Rate Risk

The table below presents principal cash flows and related weighted average interest rates by expected maturity dates. As of September 30, 2007, the fair value of the fixed-rate long-term debt has been estimated based on quoted market prices.

	Years of Maturity
	2007		2008		2009		2010		2011			Thereafter			Total			Fair Value
	($ in billions)
Liabilities:
Long-term debt - fixed-rate(a)	$	—	$	—	$	—	$	—	$	—		$	9.027		$	9.027		$	9.068
Average interest rate		—		—		—		—		—			5.8	%		5.8	%		5.8	%
Long-term debt - variable rate	$	—	$	—	$	—	$	—	$	1.950		$	—		$	1.950		$	1.950
Average interest rate		—		—		—		—		6.6	%		—			6.6	%		6.6	%

(a) This amount does not include the discount included in long-term debt of ($107) million and the premium for interest rate swaps of $2 million.

Changes in interest rates affect the amount of interest we earn on our cash, cash equivalents and short-term investments and the interest rate we pay on borrowings under our revolving bank credit facility. All of our other long-term indebtedness is fixed rate and, therefore, does not expose us to the risk of earnings or cash flow loss due to changes in market interest rates. However, changes in interest rates do affect the fair value of our debt.

Interest Rate Derivatives

We use interest rate derivatives to mitigate our exposure to the volatility in interest rates. For interest rate derivative instruments designated as fair value hedges (in accordance with SFAS 133), changes in fair value are recorded on the condensed consolidated balance sheets as assets (liabilities), and the debt’s carrying value amount is adjusted by the change in the fair value of the debt subsequent to the initiation of the derivative. Changes in the fair value of derivative instruments not qualifying as fair value hedges are recorded currently as adjustments to interest expense.

Gains or losses from certain derivative transactions are reflected as adjustments to interest expense on the condensed consolidated statements of operations. Realized gains (losses) included in interest expense were $1 million, ($2) million, a nominal amount and $1 million in the Current Quarter, the Prior Quarter, the Current Period and the Prior Period, respectively. Pursuant to SFAS 133, certain interest rate derivatives do not qualify for designation as fair value hedges. Changes in the fair value of these non-qualifying derivatives that occur prior to their maturity (i.e., temporary fluctuations in value) are reported currently in the condensed consolidated statements of operations as unrealized gains (losses) within interest expense. Unrealized gains (losses) included in interest expense were ($19) million, $3 million, ($13) million and $1 million in the Current Quarter, the Prior Quarter, the Current Period and the Prior Period, respectively.

44

As of September 30, 2007, the following derivatives were outstanding:

	Notional Amount ($ in millions)		Weighted Average Fixed Rate		Weighted Average Floating Rate	Weighted Average Cap/Floor Rate	Fair Value Hedge	Net Premiums ($ in millions)		Fair Value ($ in millions)
Fixed to Floating Swaps:
July 2005 – November 2020	$	1,750	6.929	%	6 month LIBOR plus 180 basis points	—	Yes	$	—	$	(17	)
September 2004 – July 2013	$	325	7.942	%	6 month LIBOR plus 297 basis points	—	No		—		(1	)
Floating to Fixed Swaps:
August 2007 – August 2009	$	500	5.034	%	3 month LIBOR	—	No		—		(4	)
Call Options:
June 2007 – February 2008	$	750	7.000	%	—	—	No		5		(15	)
Collars:
August 2007 – August 2010	$	1,325	—		—	5.37% - 4.32%	No		—		(7	)
										$	(44	)

In the Current Period, we sold call options on five of our interest rate swaps and received $9 million in premiums. Two of the options expired unexercised in the Current Period.

In the Current Period, we closed eight interest rate swaps for a gain totaling $9 million. These interest rate swaps were designated as fair value hedges, and the settlement amounts received will be amortized as a reduction to realized interest expense over the remaining term of the related senior notes.

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. Under the terms of the cross currency swap, on each semi-annual interest payment date, the counterparties will pay Chesapeake €19 million and Chesapeake will pay the counterparties $30 million, which will yield an annual dollar-equivalent interest rate of 7.491%. Upon maturity of the notes, the counterparties will pay Chesapeake €600 million and Chesapeake will pay the counterparties $800 million. The terms of the cross currency swap were based on the dollar/euro exchange rate on the issuance date of $1.3325 to €1.00. Through the cross currency swap, we have eliminated any potential variability in Chesapeake’s expected cash flows related to changes in foreign exchange rates and therefore the swap qualifies as a cash flow hedge under SFAS 133. The euro-denominated debt is recorded in notes payable ($853 million at September 30, 2007) using an exchange rate of $1.4219 to €1.00. The fair value of the cross currency swap is recorded on the condensed consolidated balance sheet as an asset of $17 million at September 30, 2007. The translation adjustment to notes payable is completely offset by the fair value of the cross currency swap and therefore there is no impact to the consolidated statement of operations. The remaining value of the cross currency swap related to future interest payments is reported in other comprehensive income.

ITEM 4. Controls and Procedures

We maintain disclosure controls and procedures designed to ensure that information required to be disclosed by Chesapeake in reports filed or submitted by it under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission rules and forms, and that such information is accumulated and communicated to management, including our principal executive and principal financial officers, as appropriate to allow timely decisions regarding required disclosure. At the end of the period covered by this report, we carried out an evaluation, under the supervision and with the participation of Chesapeake management, including Chesapeake’s Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of Chesapeake’s disclosure controls and procedures pursuant to Securities Exchange Act Rule 13a-15(b). Based upon that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures are effective.

No changes in Chesapeake’s internal control over financial reporting occurred during the Current Quarter that have materially affected, or are reasonably likely to materially affect, Chesapeake’s internal control over financial reporting.

45

PART II. OTHER INFORMATION

Item 1. Legal Proceedings

Chesapeake is currently involved in various disputes incidental to its business operations. Certain legal actions brought by royalty owners are discussed in Item 3 of our annual report on Form 10-K for the year ended December 31, 2006. Reference also is made to “Litigation” in Note 3 of the notes to the condensed consolidated financial statements included in Part I, Item 1 of this Form 10-Q, which is incorporated herein by reference. Management is of the opinion that the final resolution of currently pending or threatened litigation is not likely to have a material adverse effect on our consolidated financial position, results of operations or cash flows.

Item 1A. Risk Factors

Our business has many risks. Factors that could materially adversely affect our business, financial condition, operating results or liquidity and the trading price of our common stock, preferred stock or senior notes are described under “Risk Factors” in Item 1A of our annual report on Form 10-K for the year ended December 31, 2006. This information should be considered carefully, together with other information in this report and other reports and materials we file with the Securities and Exchange Commission.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

The following table presents information about repurchases of our common stock during the three months ended September 30, 2007:

Period	Total Number of Shares Purchased(a)	Average Price Paid Per Share(a)		Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs	Maximum Number of Shares That May Yet Be Purchased Under the Plans or Programs(b)
July 1, 2007 through July 31, 2007	303,403	$	35.074	—	—
August 1, 2007 through August 31, 2007	13,531		33.117	—	—
September 1, 2007 through September 30, 2007	18,703		35.277	—	—
Total	335,637	$	35.006	—	—

(a) Includes the deemed surrender to the company of 9,979 shares of common stock to pay the exercise price in connection with the exercise of employee stock options and the surrender to the company of 325,658 shares of common stock to pay withholding taxes in connection with the vesting of employee restricted stock.

(b) We make matching contributions to our 401(k) plan and 401(k) make-up plan using Chesapeake common stock which is held in treasury or is purchased by the respective plan trustees in the open market. The plans contain no limitation on the number of shares that may be purchased for purposes of company contributions.

Item 3. Defaults Upon Senior Securities

Not applicable.

Item 4. Submission of Matters to a Vote of Security Holders

Not applicable.

Item 5. Other Information

Not applicable.

46

Item 6. Exhibits

The following exhibits are filed as a part of this report:

Exhibit Number	Description
3.1.1	Restated Certificate of Incorporation, as amended. Incorporated herein by reference to Exhibit 3.1.1 to Chesapeake’s quarterly report on Form 10-Q for the quarter ended June 30, 2006.
3.1.2	Certificate of Designation for Series A Junior Participating Preferred Stock, as amended. Incorporated herein by reference to Exhibit 3.1.2 to Chesapeake’s quarterly report on Form 10-Q for the quarter ended June 30, 2006.
3.1.3	Certificate of Designation of 4.125% Cumulative Convertible Preferred Stock, as amended. Incorporated herein by reference to Exhibit 3.1.3 to Chesapeake’s Form 10-Q for the quarter ended March 31, 2007.
3.1.4	Certificate of Designation of 5% Cumulative Convertible Preferred Stock (Series 2005B). Incorporated herein by reference to Exhibit 3.1 to Chesapeake’s current report on Form 8-K filed November 9, 2005.
3.1.5	Certificate of Designation of 5% Cumulative Convertible Preferred Stock (Series 2005), as amended. Incorporated herein by reference to Exhibit 3.1.6 to Chesapeake’s Form 10-Q for the quarter ended March 31, 2005.
3.1.6	Certificate of Designation of 4.5% Cumulative Convertible Preferred Stock. Incorporated herein by reference to Exhibit 3.1 to Chesapeake’s current report on Form 8-K filed September 15, 2005.
3.1.7	Certificate of Designation of 6.25% Mandatory Convertible Preferred Stock. Incorporated herein by reference to Exhibit 3.1 to Chesapeake’s current report on Form 8-K dated June 30, 2006.
3.2	Chesapeake’s Amended and Restated Bylaws. Incorporated herein by reference to Exhibit 3.1 to Chesapeake’s current report on Form 8-K filed June 13, 2007.
4.1	Seventh Amended and Restated Credit Agreement dated November 2, 2007 among Chesapeake Energy Corporation, Chesapeake Exploration Limited Partnership and Chesapeake Appalachia, L.L.C. as Co-Borrowers, Union Bank of California, N.A. as Administrative Agent, The Royal Bank of Scotland as Syndication Agent and Bank of America, N.A., SunTrust Bank and BNP Paribas as Co-Documentation Agents and the several lenders from time to time parties thereto. Incorporated herein by reference to Exhibit 4.1 to Chesapeake’s current report on Form 8-K dated November 8, 2007.
10.1.1†*	Chesapeake’s 2003 Stock Incentive Plan, as amended.
10.1.18†*	Chesapeake’s Amended and Restated Long Term Incentive Plan.
10.2.1†	Employment Agreement dated as of October 1, 2007 between Aubrey K. McClendon and Chesapeake Energy Corporation. Incorporated herein by reference to Exhibit 10.2.1 to Chesapeake’s current report on Form 8-K filed October 5, 2007.
12*	Computation of Ratios of Earnings to Fixed Charges and to Combined Fixed Charges and Preferred Stock Dividends.
31.1*	Aubrey K. McClendon, Chairman and Chief Executive Officer, Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2*	Marcus C. Rowland, Executive Vice President and Chief Financial Officer, Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1*	Aubrey K. McClendon, Chairman and Chief Executive Officer, Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2*	Marcus C. Rowland, Executive Vice President and Chief Financial Officer, Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

* Filed herewith.

† Management contract or compensatory plan or arrangement

47

SIGNATURES

Pursuant to the requirements of Section 13 or 15 (d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

CHESAPEAKE ENERGY CORPORATION
(Registrant)
By:	/s/ AUBREY K. MCCLENDON
	Aubrey K. McClendon
	Chairman of the Board and Chief Executive Officer
By:	/s/ MARCUS C. ROWLAND
	Marcus C. Rowland
	Executive Vice President and Chief Financial Officer

Date: November 9, 2007

48

INDEX TO EXHIBITS

Exhibit Number	Description
3.1.1	Restated Certificate of Incorporation, as amended. Incorporated herein by reference to Exhibit 3.1.1 to Chesapeake’s quarterly report on Form 10-Q for the quarter ended June 30, 2006.
3.1.2	Certificate of Designation for Series A Junior Participating Preferred Stock, as amended. Incorporated herein by reference to Exhibit 3.1.2 to Chesapeake’s quarterly report on Form 10-Q for the quarter ended June 30, 2006.
3.1.3	Certificate of Designation of 4.125% Cumulative Convertible Preferred Stock, as amended. Incorporated herein by reference to Exhibit 3.1.3 to Chesapeake’s Form 10-Q for the quarter ended March 31, 2007.
3.1.4	Certificate of Designation of 5% Cumulative Convertible Preferred Stock (Series 2005B). Incorporated herein by reference to Exhibit 3.1 to Chesapeake’s current report on Form 8-K filed November 9, 2005.
3.1.5	Certificate of Designation of 5% Cumulative Convertible Preferred Stock (Series 2005), as amended. Incorporated herein by reference to Exhibit 3.1.6 to Chesapeake’s Form 10-Q for the quarter ended March 31, 2005.
3.1.6	Certificate of Designation of 4.5% Cumulative Convertible Preferred Stock. Incorporated herein by reference to Exhibit 3.1 to Chesapeake’s current report on Form 8-K filed September 15, 2005.
3.1.7	Certificate of Designation of 6.25% Mandatory Convertible Preferred Stock. Incorporated herein by reference to Exhibit 3.1 to Chesapeake’s current report on Form 8-K dated June 30, 2006.
3.2	Chesapeake’s Amended and Restated Bylaws. Incorporated herein by reference to Exhibit 3.1 to Chesapeake’s current report on Form 8-K filed June 13, 2007.
4.1	Seventh Amended and Restated Credit Agreement dated November 2, 2007 among Chesapeake Energy Corporation, Chesapeake Exploration Limited Partnership and Chesapeake Appalachia, L.L.C. as Co-Borrowers, Union Bank of California, N.A. as Administrative Agent, The Royal Bank of Scotland as Syndication Agent and Bank of America, N.A., SunTrust Bank and BNP Paribas as Co-Documentation Agents and the several lenders from time to time parties thereto. Incorporated herein by reference to Exhibit 4.1 to Chesapeake’s current report on Form 8-K dated November 8, 2007.
10.1.1†*	Chesapeake’s 2003 Stock Incentive Plan, as amended.
10.1.18†*	Chesapeake’s Amended and Restated Long Term Incentive Plan.
10.2.1†	Employment Agreement dated as of October 1, 2007 between Aubrey K. McClendon and Chesapeake Energy Corporation. Incorporated herein by reference to Exhibit 10.2.1 to Chesapeake’s current report on Form 8-K filed October 5, 2007.
12*	Computation of Ratios of Earnings to Fixed Charges and to Combined Fixed Charges and Preferred Stock Dividends.
31.1*	Aubrey K. McClendon, Chairman and Chief Executive Officer, Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2*	Marcus C. Rowland, Executive Vice President and Chief Financial Officer, Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1*	Aubrey K. McClendon, Chairman and Chief Executive Officer, Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2*	Marcus C. Rowland, Executive Vice President and Chief Financial Officer, Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

* Filed herewith.

† Management contract or compensatory plan or arrangement

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EX-10.1.1

Exhibit 10.1.1

CHESAPEAKE ENERGY CORPORATION

2003 STOCK INCENTIVE PLAN

(as amended through October 1, 2007)

CHESAPEAKE ENERGY CORPORATION

2003 STOCK INCENTIVE PLAN

ARTICLE I PURPOSE		1
Section 1.1	Purpose	1
Section 1.2	Establishment	1
Section 1.3	Shares Subject to the Plan	1
Section 1.4	Shareholder Approval	1
ARTICLE II DEFINITIONS		1
ARTICLE III ADMINISTRATION		5
Section 3.1	Administration of the Plan; the Committee	5
Section 3.2	Committee to Make Rules and Interpret Plan	5
ARTICLE IV GRANT OF AWARDS		6
ARTICLE V STOCK OPTIONS		6
Section 5.1	Grant of Options	6
Section 5.2	Conditions of Options	6
Section 5.3	Options Not Qualifying as Incentive Stock Options	8
Section 5.4	Nonassignability	8
ARTICLE VI RESTRICTED STOCK AWARDS		9
Section 6.1	Grant of Restricted Stock Awards	9
Section 6.2	Conditions of Restricted Stock Awards	9
ARTICLE VII STOCK ADJUSTMENTS		10
ARTICLE VIII GENERAL		10
Section 8.1	Amendment or Termination of Plan	10
Section 8.2	Acceleration of Awards on Death, Disability or Other Special Circumstances	11
Section 8.3	Withholding Taxes	11
Section 8.4	Certain Additional Payments by the Company	11
Section 8.5	Regulatory Approval and Listings	11
Section 8.6	Right to Continued Employment	12
Section 8.7	Reliance on Reports	12
Section 8.8	Construction	12
Section 8.9	Governing Law	12
ARTICLE IX ACCELERATION OF AWARDS UPON CORPORATE EVENT		12

CHESAPEAKE ENERGY CORPORATION

2003 STOCK INCENTIVE PLAN

ARTICLE I

PURPOSE

Section 1.1 Purpose. This 2003 Stock Incentive Plan is established by Chesapeake Energy Corporation (the “Company”) to create incentives which are designed to motivate Employees and Consultants to put forth maximum effort toward the success and growth of the Company and to enable the Company to attract and retain experienced individuals who by their position, ability and diligence are able to make important contributions to the Company’s success. Toward these objectives, the Plan provides for the granting of Options and Restricted Stock Awards to Employees and Consultants on the terms and subject to the conditions set forth in the Plan. The Plan is designed to align the interests of participants with those of shareholders through the use of stock-based incentives.

Section 1.2 Establishment. The Plan is effective as of April 15, 2003 and for a period of 10 years from such date. The Plan will terminate on April 14, 2013; however, it will continue in effect until all matters relating to the exercise of Options, distribution of Awards and administration of the Plan have been settled.

Section 1.3 Shares Subject to the Plan. Subject to the limitations and adjustments set forth in this Plan, Awards may be made under this Plan for a total of 10,000,000 shares of Common Stock.

Section 1.4 Shareholder Approval. The Plan shall be subject to Shareholder Approval, which must occur within the period ending twelve months after the date the Plan is adopted by the Board. Pending such Shareholder Approval, Awards under the Plan may be granted, but Options may not be exercised nor may Restricted Stock Awards vest prior to receipt of such Shareholder Approval. In the event such Shareholder Approval is not obtained within such twelve-month period, all such Awards shall be void.

ARTICLE II

DEFINITIONS

Section 2.1 “Affiliated Entity” means any partnership or limited liability company in which a majority of voting power thereof is owned or controlled, directly or indirectly, by the Company or one or more of its Subsidiaries or Affiliated Entities or a combination thereof.

Section 2.2 “Award” means, individually or collectively, any Option or Restricted Stock Award granted under the Plan to an Eligible Person by the applicable Committee pursuant to such terms, conditions, restrictions, and/or limitations, if any, as the applicable Committee may establish by the Award Agreement or otherwise.

Section 2.3 “Award Agreement” means any written instrument that establishes the terms, conditions, restrictions, and/or limitations applicable to an Award in addition to those established by this Plan and by the Committee’s exercise of its administrative powers.

Section 2.4 “Board” means the Board of Directors of the Company.

Section 2.5 “Change of Control” means, for Participants other than Executive Officers, the occurrence of any of the following:

(i) the acquisition by any individual, entity or group (within the meaning of Section 13(d)(3) or 14(d)(2) of the Exchange Act) (a “Person”) of beneficial ownership (within the meaning of Rule 13d-3 promulgated under the Exchange Act) of 20% or more of either (A) the then outstanding shares of common stock of the Company (the “Outstanding Company Common Stock”) or (B) the combined voting power of the then outstanding voting securities of the Company entitled to vote generally in the election of directors (the “Outstanding Company Voting Securities”). For purposes of this paragraph 2.5 the following acquisitions by a Person will not constitute a Change of Control: (1) any acquisition directly from the Company; (2) any acquisition by the Company; (3) any acquisition by any employee benefit plan (or related trust) sponsored or maintained by the Company or any corporation controlled by the Company; or (4) any acquisition by any corporation pursuant to a transaction which complies with clauses (A), (B) and (C) of paragraph (iii) below;

(ii) the individuals who, as of the date hereof, constitute the board of directors (the “Incumbent Board”) cease for any reason to constitute at least a majority of the board of directors. Any individual becoming a director subsequent to the date hereof whose election, or nomination for election by the Company’s shareholders, is approved by a vote of at least a majority of the directors then comprising the Incumbent Board will be considered a member of the Incumbent Board as of the date hereof, but any such individual whose initial assumption of office occurs as a result of an actual or threatened election contest with respect to the election or removal of directors or other actual or threatened solicitation of proxies or consents by or on behalf of a Person other than the Incumbent Board will not be deemed a member of the Incumbent Board as of the date hereof;

(iii) the consummation of a reorganization, merger, consolidation or sale or other disposition of all or substantially all of the assets of the Company (a “Business Combination”), unless following such Business Combination: (A) all or substantially all of the individuals and entities who were the beneficial owners, respectively, of the Outstanding Company Common Stock and Outstanding Company Voting Securities immediately prior to such Business Combination beneficially own, directly or indirectly, more than 60% of, respectively, the then outstanding shares of common stock and the combined voting power of the then outstanding voting securities entitled to vote generally in the election of directors, as the case may be, of the corporation resulting from such Business Combination (including, without limitation, a corporation which as a result of such transaction owns the Company or all or substantially all of the Company’s assets either directly or through one or more subsidiaries) in substantially the same proportions as their ownership, immediately prior to such Business Combination of the Outstanding Company Common Stock and Outstanding Company Voting Securities, as the case may be, (B) no Person (excluding any corporation resulting from such Business Combination or any employee benefit plan (or related trust) of the Company or such corporation resulting from such Business Combination) beneficially owns, directly or indirectly, 20% or more of, respectively, the then outstanding shares of common stock of the corporation resulting from such Business Combination or the combined voting power of the then outstanding

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voting securities of such corporation except to the extent that such ownership existed prior to the Business Combination and (C) at least a majority of the members of the board of directors of the corporation resulting from such Business Combination were members of the Incumbent Board at the time of the execution of the initial agreement, or of the action of the Board, providing for such Business Combination; or

(iv) the approval by the shareholders of the Company of a complete liquidation or dissolution of the Company.

For Executive Officers, a Change of Control means the occurrence of any of the foregoing events or a change of control as defined in such Executive Officer’s employment agreement in force at the time of determination.

Section 2.6 “Code” means the Internal Revenue Code of 1986, as amended. Reference in the Plan to any Section of the Code shall be deemed to include any amendments or successor provisions to such Section and any regulations under such Section.

Section 2.7 “Committee” has the meaning set forth in Section 3.1.

Section 2.8 “Common Stock” means the common stock, par value $.01 per share, of the Company and, after substitution, such other stock as shall be substituted therefor as provided in Article VII or Article IX of the Plan.

Section 2.9 “Compensation Committee” means a committee designated by the Board which will consist of not less than two members of the Board who meet the definition of “non-employee directors” pursuant to Rule 16b-3, or any successor rule, promulgated under Section 16 of the Exchange Act unless another committee is designated by the Board of Directors.

Section 2.10 “Consultant” means any person who is engaged by the Company, a Subsidiary or an Affiliated Entity to render consulting or advisory services.

Section 2.11 “Date of Grant” means the date on which the grant of an Award is authorized by the Committee or such later date as may be specified by the Committee in such authorization.

Section 2.12 “Disability” has the meaning set forth in Section 22(e)(3) of the Code.

Section 2.13 “Eligible Person” means any Employee or Consultant.

Section 2.14 “Employee” means any employee of the Company, a Subsidiary or an Affiliated Entity.

Section 2.15 “Employee Compensation Committee” means the Employee Compensation and Benefits Committee (“ECBC”) designated by the Board which shall consist of not less than one member of the Board and may include officers of the Company. In the event the ECBC has both director and officer members, the director(s) serving on the ECBC shall constitute a separate committee for purposes of approving and authorizing the issuance of Common Stock pursuant to any Award recommended by the ECBC.

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Section 2.16 “Exchange Act” means the Securities Exchange Act of 1934, as amended.

Section 2.17 “Executive Officer Participants” means Participants who are subject to the provisions of Section 16 of the Exchange Act with respect to the Common Stock.

Section 2.18 “Fair Market Value” means, as of any date, (i) if the principal market for the Common Stock is a national securities exchange or the Nasdaq stock market, the closing price of the Common Stock on that date on the principal exchange on which the Common Stock is then listed or admitted to trading; or (ii) if sale prices are not available or if the principal market for the Common Stock is not a national securities exchange and the Common Stock is not quoted on the Nasdaq stock market, the average of the highest bid and lowest asked prices for the Common Stock on such day as reported on the Nasdaq OTC Bulletin Board Service or by the National Quotation Bureau, Incorporated or a comparable service. If the day is not a business day, and as a result, clauses (i) and (ii) are inapplicable, the Fair Market Value of the Common Stock shall be determined as of the last preceding business day. If clauses (i) and (ii) are otherwise inapplicable, the Fair Market Value of the Common Stock shall be determined in good faith by the Committee.

Section 2.19 “Incentive Stock Option” means an Option within the meaning of Section 422 of the Code.

Section 2.20 “Non-Executive Officer Participants” means Participants who are not subject to the provisions of Section 16 of the Exchange Act.

Section 2.21 “Nonqualified Stock Option” means an Option to purchase shares of Common Stock which is not an Incentive Stock Option within the meaning of Section 422(b) of the Code.

Section 2.22 “Option” means an Incentive Stock Option or Nonqualified Stock Option granted under Article V of the Plan.

Section 2.23 “Participant” means an Eligible Person to whom an Award has been granted by the Committee under the Plan.

Section 2.24 “Plan”“ means the Chesapeake Energy Corporation 2003 Stock Incentive Plan.

Section 2.25 “Restricted Stock Award” means an Award granted to an Eligible Person under Article VI of the Plan.

Section 2.26 “Shareholder Approval” means approval by the holders of a majority of the outstanding shares of Common Stock, present or represented and entitled to vote at a meeting called for such purposes.

Section 2.27 “Subsidiary” shall have the same meaning set forth in Section 424(f) of the Code.

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ARTICLE III

ADMINISTRATION

Section 3.1 Administration of the Plan; the Committee. The Employee Compensation Committee shall administer the Plan with respect to Non-Executive Officer Participants, including the grant of Awards, and the Compensation Committee shall administer the Plan with respect to Executive Officer Participants, including the grant of Awards. Accordingly, as used in the Plan, the term “Committee” shall mean the Employee Compensation Committee if it refers to Plan administration affecting Non-Executive Officer Participants or the Compensation Committee if it refers to Plan administration affecting Executive Officer Participants. Although the Committee is generally responsible for the administration of the Plan, the Board in its sole discretion may take any action under the Plan that would otherwise be the responsibility of the Committee.

Unless otherwise provided in the bylaws of the Company or resolutions adopted from time to time by the Board establishing the Committee, the Board may from time to time remove members from, or add members to, the Committee. Vacancies on the Committee, however caused, shall be filled by the Board. The Committee shall hold meetings at such times and places as it may determine. A majority of the Committee shall constitute a quorum, and the acts of a majority of the members present at any meeting at which a quorum is present shall be the valid acts of the Committee. Any action which may be taken at a meeting of the Committee may be taken without a meeting if all the members of the Committee consent to the action in writing.

Subject to the provisions of the Plan and review by the Board, the Committee shall have exclusive power to:

(a) Select the Eligible Persons to participate in the Plan.

(b) Determine the time or times when Awards will be granted.

(c) Determine the form of Award, whether an Incentive Stock Option, a Nonqualified Stock Option or a Restricted Stock Award, the number of shares of Common Stock subject to any Award, all the terms, conditions (including performance requirements), restrictions and/or limitations, if any, of an Award, including the time and conditions of exercise or vesting, and the terms of any Award Agreement, which may include the waiver or amendment of prior terms and conditions or acceleration of the vesting or exercise of an Award under certain circumstances determined by the Committee. However, the Committee will not reprice outstanding Awards.

(d) Determine whether Awards will be granted singly or in combination.

(e) Take any and all other action it deems necessary or advisable for the proper operation or administration of the Plan.

Section 3.2 Committee to Make Rules and Interpret Plan. The Committee in its sole discretion shall have the authority, subject to the provisions of the Plan and review by the Board, to establish, adopt, or revise such rules and regulations and to make all such determinations relating to the Plan as it may deem necessary or advisable for the administration of the Plan. The Committee’s interpretation of the Plan or any Awards granted pursuant hereto and all decisions and determinations by the Committee with respect to the Plan shall be final, binding, and conclusive on all parties unless otherwise determined by the Board.

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ARTICLE IV

GRANT OF AWARDS

The Committee may, from time to time, grant Awards to one or more Participants, provided, however, that:

(a) Any shares of Common Stock related to Awards which terminate by expiration, forfeiture, cancellation or otherwise shall be available again for grant under the Plan.

(b) Common Stock delivered by the Company upon exercise of an Option or upon payment of an Award under the Plan may be authorized and unissued Common Stock or Common Stock held in the treasury of the Company.

(c) The Committee shall, in its sole discretion, determine the manner in which fractional shares arising under this Plan shall be treated.

(d) Subject to Article VII, the aggregate number of shares of Common Stock made subject to Options and Restricted Stock Awards granted to any Employee in any calendar year may not exceed two million shares.

ARTICLE V

STOCK OPTIONS

Section 5.1 Grant of Options. The Committee may, from time to time, subject to the provisions of the Plan and such other terms and conditions as it may determine, grant Nonqualified Stock Options to any Eligible Persons and Incentive Stock Options to Employees. Subject to the limitations of Section 5.2(e), these Options may be Incentive Stock Options or Nonqualified Stock Options, or a combination of both. Each grant of an Option shall be evidenced by an Award Agreement executed by the Company and the Participant, and shall contain such terms and conditions and be in such form as the Committee may from time to time approve, subject to the requirements of Section 5.2.

Section 5.2 Conditions of Options. Each Option so granted shall be subject to the following conditions:

(a) Exercise Price. As limited by Section 5.2(e) below, the Award Agreement for each Option shall state the exercise price set by the Committee on the Date of Grant. No Option shall be granted at an exercise price which is less than the Fair Market Value of the Common Stock on the Date of Grant.

(b) Form of Payment. The payment of the exercise price of an Option shall be subject to the following:

(i) The full exercise price for shares of Common Stock purchased upon the exercise of any Option shall be paid at the time of such exercise.

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(ii) The exercise price shall be payable in cash (including a check acceptable to the Committee, bank draft or money order) or by tendering, by either actual delivery of shares or by attestation, shares of Common Stock acceptable to the Committee and valued at Fair Market Value as of the day of exercise, or any combination thereof, as determined by the Committee.

(iii) The Committee may permit an Option granted under the Plan to be exercised by a participant in conjunction with a broker-dealer acting on behalf of a Participant, such broker-dealer to remit the exercise price and any applicable withholding taxes directly to the Company, through procedures approved by the Committee.

(c) Exercise of Options. Options granted under the Plan shall be exercisable, in whole or in such installments and at such times, and shall expire at such time, as shall be provided by the Committee in the Award Agreement. Exercise of an Option shall be by written notice stating the election to exercise in the form and manner determined by the Committee. Every share of Common Stock acquired through the exercise of an Option shall be deemed to be fully paid at the time of exercise and payment of the exercise price. Upon the exercise of any Option, the Company shall issue and deliver to the Participant who exercised the Option a certificate representing the number of shares of Common Stock purchased thereby.

(d) Other Terms and Conditions. Among other conditions that may be imposed by the Committee, if deemed appropriate, are those relating to (i) the period or periods and the conditions of exercisability of any Option; (ii) the minimum periods during which Participants must be employed by the Company, a Subsidiary or Affiliated Entity, or must hold Options before they may be exercised; (iii) the minimum periods during which shares acquired upon exercise must be held before sale or transfer shall be permitted; (iv) the maximum period that Participants will be allowed to be inactively employed or on a leave of absence before their vesting is suspended until they return to active employment; (v) conditions under which such Options or shares may be subject to forfeiture; (vi) the frequency of exercise or the minimum or maximum number of shares that may be acquired at any one time; (vii) the achievement by the Company of specified performance criteria; and (viii) protection of business matters.

(e) Special Restrictions Relating to Incentive Stock Options. Options issued in the form of Incentive Stock Options shall only be granted to Employees of the Company or a Subsidiary and not to Employees of an Affiliated Entity unless such entity is classified as a “disregarded entity” of the Company or the applicable Subsidiary under the Code. In addition to being subject to all applicable terms, conditions, restrictions and/or limitations established by the Committee, Options issued in the form of Incentive Stock Options shall comply with the requirements of Section 422 of the Code (or any successor Section thereto), including, without limitation, the requirement that the exercise price of an Incentive Stock Option not be less than 100% of the Fair Market Value of the Common Stock on the Date of Grant, the requirement that each Incentive Stock Option, unless sooner exercised, terminated or canceled, expire no later than 10 years from its Date of

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Grant, and the requirement that the aggregate Fair Market Value (determined on the Date of Grant) of the Common Stock with respect to which Incentive Stock Options are exercisable for the first time by a Participant during any calendar year (under this Plan or any other plan of the Company or any Subsidiary) not exceed $100,000. Incentive Stock Options which are in excess of the applicable $100,000 limitation will be automatically recharacterized as Nonqualified Stock Options as provided under Section 5.3 of this Plan. No Incentive Stock Options shall be granted to any Employee if, immediately before the grant of an Incentive Stock Option, such Employee owns more than 10% of the total combined voting power of all classes of stock of the Company or its Subsidiaries (as determined in accordance with the stock attribution rules contained in Sections 422 and 424(d) of the Code). Provided, the preceding sentence shall not apply if, at the time the Incentive Stock Option is granted, the exercise price is at least 110% of the Fair Market Value of the Common Stock subject to the Incentive Stock Option, and such Incentive Stock Option by its terms is exercisable no more than five years from the date such Incentive Stock Option is granted.

(f) Application of Funds. The proceeds received by the Company from the sale of Common Stock issued upon the exercise of Options will be used for general corporate purposes.

(g) Shareholder Rights. No Participant shall have any rights as a shareholder with respect to any share of Common Stock subject to an Option prior to the purchase of such share of Common Stock by exercise of the Option.

Section 5.3 Options Not Qualifying as Incentive Stock Options. With respect to all or any portion of any Option granted under this Plan not qualifying as an “incentive stock option” under Section 422 of the Code, such Option shall be considered a Nonqualified Stock Option granted under this Plan for all purposes. Further, this Plan and any Incentive Stock Options granted hereunder shall be deemed to have incorporated by reference all the provisions and requirements of Section 422 of the Code (and the Treasury Regulations issued thereunder) necessary to ensure that all Incentive Stock Options granted hereunder shall be “incentive stock options” described in Section 422 of the Code. Further, in the event that the $100,000 limitation contained in Section 5.2(e) herein is exceeded in any Incentive Stock Option granted under this Plan, the portion of the Incentive Stock Option in excess of such limitation shall be treated as a Nonqualified Stock Option under this Plan subject to the terms and provisions of the applicable Award Agreement, except to the extent modified to reflect recharacterization of the Incentive Stock Option as a Nonqualified Stock Option.

Section 5.4 Nonassignability. Options are not transferable otherwise than by will or the laws of descent and distribution. Any attempted transfer, assignment, pledge, hypothecation or other disposition of, or the levy of execution, attachment or similar process upon, any Option contrary to the provisions hereof shall be void and ineffective, shall give no right to any purported transferee, and may, at the sole discretion of the Committee, result in forfeiture of the Option involved in such attempt.

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ARTICLE VI

RESTRICTED STOCK AWARDS

Section 6.1 Grant of Restricted Stock Awards. The Committee may, from time to time, subject to the provisions of the Plan and such other terms and conditions as it may determine, grant a Restricted Stock Award to any Eligible Person. Restricted Stock Awards shall be awarded in such number and at such times during the term of the Plan as the Committee shall determine. Each Restricted Stock Award may be evidenced in such manner as the Committee deems appropriate, including, without limitation, a book-entry registration or issuance of a stock certificate or certificates into escrow until the restrictions associated with such Award are satisfied, and by an Award Agreement setting forth the terms of such Restricted Stock Award.

Section 6.2 Conditions of Restricted Stock Awards. The grant of a Restricted Stock Award shall be subject to the following:

(a) Restriction Period. Each Restricted Stock Award shall require the holder to remain in the employment of the Company, a Subsidiary, or an Affiliated Entity for a prescribed period (a “Restriction Period”). The Committee shall determine the Restriction Period or Periods that shall apply to the shares of Common Stock covered by each Restricted Stock Award or portion thereof. In addition to any time vesting conditions determined by the Committee, Restricted Stock Awards may be subject to the achievement by the Company of specified performance criteria based upon the Company’s achievement of target levels of earnings per share, share price, net income, cash flows, reserve additions or replacements, production volume, finding and operating costs, drilling results, acquisitions and divestitures, risk management activities, return on equity, and/or total or comparative shareholder return, or other individual criteria as determined by the Committee. At the end of the Restriction Period, assuming the fulfillment of any other specified vesting conditions, the restrictions imposed by the Committee shall lapse with respect to the shares of Common Stock covered by the Restricted Stock Award or portion thereof.

(b) Restrictions. The holder of a Restricted Stock Award may not sell, transfer, pledge, exchange, hypothecate, or otherwise dispose of the shares of Common Stock represented by the Restricted Stock Award during the applicable Restriction Period. The Committee shall impose such other restrictions and conditions on any shares of Common Stock covered by a Restricted Stock Award as it may deem advisable including, without limitation, restrictions under applicable Federal or state securities laws, and may legend the certificates representing the shares of Common Stock subject to the Restricted Stock Award to give appropriate notice of such restrictions.

(c) Shareholder Rights. During any Restriction Period, the Committee may, in its discretion, grant to the holder of a Restricted Stock Award all or any of the rights of a shareholder with respect to the shares, including, but not by way of limitation, the right to vote such shares and to receive dividends. If any dividends or other distributions are paid in shares of Common Stock, all such shares shall be subject to the same restrictions on transferability as the shares of Common Stock subject to the Restricted Stock Award with respect to which they were paid.

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ARTICLE VII

STOCK ADJUSTMENTS

Subject to the provisions of Article IX of this Plan, in the event that the shares of Common Stock, as presently constituted, shall be changed into or exchanged for a different number or kind or shares of stock or other securities of the Company or of another corporation (whether by reason of merger, consolidation, recapitalization, reclassification, stock split, combination of shares or otherwise), or if the number of such shares of Common Stock shall be increased through the payment of a stock dividend, then there shall be substituted for or added to each share available under and subject to the Plan as provided in Section 1.3 hereof, and each share then subject or thereafter subject or which may become subject to Awards under the Plan, the number and kind of shares of stock or other securities into which each outstanding share of Common Stock shall be so changed or for which each such share shall be exchanged or to which each such share shall be entitled, as the case may be, on a fair and equivalent basis in accordance with the applicable provisions of Section 424 of the Code; provided, however, in no such event will such adjustment result in a modification of any Award as defined in Section 424(h) of the Code. In the event there shall be any other change in the number or kind of the outstanding shares of Common Stock, or any stock or other securities into which the Common Stock shall have been changed or for which it shall have been exchanged, then if the Committee shall, in its sole discretion, determine that such change equitably requires an adjustment in the shares available under and subject to the Plan, or in any Award theretofore granted or which may be granted under the Plan, such adjustments shall be made in accordance with such determination, except that no adjustment of the number of shares of Common Stock available under the Plan or to which any Award relates that would otherwise be required shall be made unless and until such adjustment either by itself or with other adjustments not previously made would require an increase or decrease of at least 1% of the number of shares of Common Stock available under the Plan or to which any Award relates immediately prior to the making of such adjustment (the “Minimum Adjustment”). Any adjustment representing a change of less than such minimum amount shall be carried forward and made as soon as such adjustment together with other adjustments required by this Article VII and not previously made would result in a Minimum Adjustment. Notwithstanding the foregoing, any adjustment required by this Article VII which otherwise would not result in a Minimum Adjustment shall be made with respect to shares of Common Stock relating to any Award immediately prior to exercise or settlement of such Award.

No fractional shares of Common Stock or units of other securities shall be issued pursuant to any such adjustment, and any fractions resulting from any such adjustment shall be eliminated in each case by rounding downward to the nearest whole share.

ARTICLE VIII

GENERAL

Section 8.1 Amendment or Termination of Plan. The Board may suspend or terminate the Plan at any time. In addition, the Board may, from time to time, amend the Plan in any manner, but may not adopt any amendment without Shareholder Approval if (i) the amendment relates to Incentive Stock Options and Section 422 of the Code requires Shareholder Approval of such amendment, or (ii) in the opinion of counsel to the Company, Shareholder Approval is required by any federal or state laws or regulations or the rules of any stock exchange on which the common stock may be listed.

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Section 8.2 Acceleration of Awards on Death, Disability or Other Special Circumstances. With respect to (i) a Participant who terminates employment due to a Disability, (ii) the personal representative of a deceased Participant, or (iii) any other Participant who terminates employment upon the occurrence of special circumstances (as determined by the Committee), the Committee, in its sole discretion, may permit the purchase of all or any part of the shares subject to any unvested Option or waive the vesting requirements of a Restricted Stock Award on the date of the Participant’s termination of employment due to a Disability, death or special circumstances, or as the Committee otherwise so determines. With respect to Options which have already vested at the date of such termination or the vesting of which is accelerated by the Committee in accordance with the foregoing provision, the Participant or the personal representative of a deceased Participant shall have the right to exercise such vested Options within such period(s) as the Committee shall determine.

Section 8.3 Withholding Taxes. A Participant must pay in cash to the Company the amount of taxes required to be withheld by law upon the exercise of an Option. Required withholding taxes associated with a Restricted Stock Award must also be paid in cash unless the Committee permits a Participant to pay the amount of taxes required by law to be withheld from a Restricted Stock Award by directing the Company to withhold from any Award the number of shares of Common Stock having a Fair Market Value on the date of vesting equal to the amount of required withholding taxes.

Section 8.4 Certain Additional Payments by the Company. The Committee may, in its sole discretion, provide in any Award Agreement for certain payments by the Company in the event that acceleration of vesting of any Award under the Plan is subject to the excise tax imposed by Section 4999 of the Code or any interest or penalties with respect to such excise tax (such excise tax, interest and penalties, collectively, the “Excise Tax”). An Award Agreement may provide that the Participant shall be entitled to receive a payment (a “Gross-Up Payment”) in an amount such that after payment by the Participant of all taxes (including any interest or penalties imposed with respect to such taxes), including any Excise Tax, imposed upon the Gross-Up Payment, the Participant retains an amount of the Gross-Up Payment equal to the Excise Tax imposed upon such acceleration of vesting of any Award.

Section 8.5 Regulatory Approval and Listings. The Company shall use its best efforts to file with the Securities and Exchange Commission as soon as practicable following the date this Plan is effective, and keep continuously effective and usable, a Registration Statement on Form S-8 with respect to shares of Common Stock subject to Awards hereunder. Notwithstanding anything contained in this Plan to the contrary, the Company shall have no obligation to issue or deliver certificates representing shares of Common Stock evidencing Awards prior to:

(a) the obtaining of any approval from, or satisfaction of any waiting period or other condition imposed by, any governmental agency which the Committee shall, in its sole discretion, determine to be necessary or advisable;

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(b) the listing of such shares on any exchange on which the Common Stock may be listed; and

(c) the completion of any registration or other qualification of such shares under any state or federal law or regulation of any governmental body which the Committee shall, in its sole discretion, determine to be necessary or advisable.

Section 8.6 Right to Continued Employment. Participation in the Plan shall not give any Participant any right to remain in the employ of the Company, a Subsidiary or an Affiliated Entity. Further, the adoption of this Plan shall not be deemed to give any Employee or Consultant or any other individual any right to be selected as a Participant or to be granted an Award.

Section 8.7 Reliance on Reports. Each member of the Committee and each member of the Board shall be fully justified in relying or acting in good faith upon any report made by the independent public accountants of the Company and its Subsidiaries and upon any other information furnished in connection with the Plan by any person or persons other than the Committee or Board member. In no event shall any person who is or shall have been a member of the Committee or the Board be liable for any determination made or other action taken or any omission to act in reliance upon any such report or information or for any action taken, including the furnishing of information, or failure to act, if in good faith.

Section 8.8 Construction. The titles and headings of the sections in the Plan are for the convenience of reference only, and in the event of any conflict, the text of the Plan, rather than such titles or headings, shall control.

Section 8.9 Governing Law. The Plan shall be governed by and construed in accordance with the laws of the State of Oklahoma except as superseded by applicable federal law.

ARTICLE IX

ACCELERATION OF AWARDS UPON CORPORATE EVENT

If the Company shall, pursuant to action by the Board, at any time propose to dissolve or liquidate or merge into, consolidate with, or sell or otherwise transfer all or substantially all of its assets to another corporation and provision is not made pursuant to the terms of such transaction for the assumption by the surviving, resulting or acquiring corporation of outstanding Options under the Plan, or for the substitution of new awards therefor, the Committee shall cause written notice of the proposed transaction to be given to each Participant no less than forty days prior to the anticipated effective date of the proposed transaction, and the Participant’s Award shall become 100% vested. Prior to a date specified in such notice, which shall be not more than 10 days prior to the anticipated effective date of the proposed transaction, each Participant shall have the right to exercise his or her Option to purchase any or all of the Common Stock then subject to such Option or to receive the shares subject to any unvested Restricted Stock Award, free of any restrictions. Each Participant, by so notifying the Company in writing, may, in exercising his or her Option, condition such exercise upon, and provide that such exercise shall become effective immediately prior to the consummation of the transaction, in which event such

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Participant need not make payment for the Common Stock to be purchased upon exercise of such Option until five days after receipt of written notice by the Company to such Participant that the transaction has been consummated. If the transaction is consummated, each Option, to the extent not previously exercised prior to the date specified in the foregoing notice, shall terminate on the effective date such transaction is consummated. If the transaction is abandoned, (i) any Common Stock not purchased upon exercise of such Option shall continue to be available for purchase in accordance with the other provisions of the Plan and (ii) to the extent that any Option not exercised prior to such abandonment and any Restricted Stock Award shall have vested solely by operation of this Article IX, such vesting shall be deemed voided as of the time such acceleration otherwise occurred pursuant to Article IX, and the vesting schedule set forth in the Participant’s Award Agreement shall be reinstituted as of the date of such abandonment.

Upon the occurrence of a Change of Control, in the event that the provisions of the foregoing paragraph are not already invoked, each Participant shall have the right to exercise his or her Option to purchase any or all of the Common Stock then subject to such Option or to receive the shares subject to any unvested Restricted Stock Award, free of any restrictions. Each Participant, by so notifying the Company in writing, may, in exercising his or her Option, condition such exercise upon, and provide that such exercise shall become effective immediately prior to the Change of Control, in which event such Participant need not make payment for the Common Stock to be purchased upon exercise of such Option until five days after receipt of written notice by the Company to such Participant that the Change of Control has occurred. If the Change of Control has occurred, each Option, to the extent not previously exercised prior to the date specified in the foregoing notice, shall terminate on the effective date of such Change of Control. If the Change of Control is abandoned, (i) any Common Stock not purchased upon exercise of such Option shall continue to be available for purchase in accordance with the other provisions of the Plan and (ii) to the extent that any Option not exercised prior to such abandonment and any Restricted Stock Award shall have vested solely by operation of this Article IX, such vesting shall be deemed voided as of the time such acceleration otherwise occurred pursuant to Article IX, and the vesting schedule set forth in the Participant’s Award Agreement shall be reinstituted as of the date of such abandonment.

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EX-10.1.18

Exhibit 10.1.18

CHESAPEAKE ENERGY CORPORATION

AMENDED AND RESTATED LONG TERM INCENTIVE PLAN

1. PURPOSE

Section 1.1 Background. The original Long Term Incentive Plan was approved by shareholders on June 10, 2005 (the “Initial Plan”) and is being amended and restated to increase the number of common shares authorized for issuance and to make other changes as provided herein. The Initial Plan, as amended and restated, is called the Plan.

Section 1.2 Purpose. This Long Term Incentive Plan is established by Chesapeake Energy Corporation (the “Company”) to foster and promote the sustained progress, growth and profitability of the Company by:

(a) Attracting, retaining and motivating Employees, Non-Employee Directors and Consultants;

(b) allowing Employees, Non-Employee Directors and Consultants to acquire a proprietary and vested interest in the growth and performance of the Company;

(c) providing incentives and rewards to Employees, Non-Employee Directors and Consultants who are in a position to contribute materially to the success and long-term objectives of the Company; and

(d) aligning the financial interests of Employees, Non-Employee Directors and Consultants with those of the Company’s shareholders.

Section 1.3 Effective Date. The Initial Plan was effective as of October 1, 2004, and the modifications provided for herein will be effective on the date of Shareholder Approval. The authority to issue Awards under the Plan will terminate on September 30, 2014 and the remaining terms the Plan will continue in effect thereafter until all matters relating to the exercise and settlement of Awards and administration of the Plan have been completed.

Section 1.4 Shareholder Approval. The Initial Plan received Shareholder Approval on June 10, 2005 and June 9, 2006. The modifications provided herein to the Initial Plan shall be submitted for Shareholder Approval at the annual meeting of shareholders to be held on June 8, 2007 or any adjournment thereof. Unless and until such Shareholder Approval is obtained, the Initial Plan will continue in effect unchanged by the modification provided herein.

2. DEFINITIONS

Section 2.1 “Affiliated Entity” means any partnership or limited liability company in which a majority of voting power thereof is owned or controlled, directly or indirectly, by the Company or one or more of its Subsidiaries or Affiliated Entities or a combination thereof.

Section 2.2 “Appreciation” means, with respect to a SAR (as hereafter defined), the amount by which the Fair Market Value of a share of Common Stock on the date of exercise of the SAR exceeds either (i) the exercise price of the Option to which a tandem SAR relates, in the case of a tandem SAR, or (ii) the Fair Market Value of a share of Common Stock on the Date of Grant of the SAR, in the case of a stand-alone SAR.

Section 2.3 “Award” means, individually or collectively, any Option, SAR, Performance Share, Restricted Stock, Other Stock Award or Cash Award granted under the Plan to an Eligible Person pursuant to such terms, conditions, restrictions, and/or limitations, if any, as the applicable Committee may establish by the Award Agreement or otherwise.

Section 2.4 “Award Agreement” means any written or electronic instrument that establishes the terms, conditions, restrictions, and/or limitations applicable to an Award in addition to those established by this Plan and by the Committee’s exercise of its administrative powers.

Section 2.5 “Board” means the Board of Directors of the Company.

Section 2.6 “Cash Award” means a cash bonus granted by the Committee to a Participant pursuant to Section 8.

Section 2.7 “Change of Control” means the occurrence of any of the following:

(i) the acquisition by any individual, entity or group (within the meaning of Section 13(d)(3) or 14(d)(2) of the Exchange Act) (a “Person”) of beneficial ownership (within the meaning of Rule 13d-3 promulgated under the Exchange Act) of 30% or more of either (A) the then outstanding shares of common stock of the Company (the “Outstanding Company Common Stock”) or (B) the combined voting power of the then outstanding voting securities of the Company entitled to vote generally in the election of directors (the “Outstanding Company Voting Securities”). For purposes of this Section 2.7 the following acquisitions by a Person will not constitute a Change of Control: (1) any acquisition directly from the Company; (2) any acquisition by the Company; (3) any acquisition by any employee benefit plan (or related trust) sponsored or maintained by the Company or any corporation controlled by the Company; or (4) any acquisition by any corporation pursuant to a transaction which complies with clauses (A), (B) and (C) of paragraph (iii) below;

(ii) the individuals who, as of the date hereof, constitute the board of directors (the “Incumbent Board”) cease for any reason to constitute at least a majority of the board of directors. Any individual becoming a director subsequent to the date hereof whose election, or nomination for election by the Company’s shareholders, is approved by a vote of at least a majority of the directors then comprising the Incumbent Board will be considered a member of the Incumbent Board as of the date hereof, but any such individual whose initial assumption of office occurs as a result of an actual or threatened election contest with respect to the election or removal of directors or other actual or threatened solicitation of proxies or consents by or on behalf of a Person other than the Incumbent Board will not be deemed a member of the Incumbent Board as of the date hereof;

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(iii) the consummation of a reorganization, merger, consolidation or sale or other disposition of all or substantially all of the assets of the Company (a “Business Combination”), unless following such Business Combination: (A) all or substantially all of the individuals and entities who were the beneficial owners, respectively, of the Outstanding Company Common Stock and Outstanding Company Voting Securities immediately prior to such Business Combination beneficially own, directly or indirectly, more than 60% of, respectively, the then outstanding shares of common stock and the combined voting power of the then outstanding voting securities entitled to vote generally in the election of directors, as the case may be, of the corporation resulting from such Business Combination (including, without limitation, a corporation which as a result of such transaction owns the Company or all or substantially all of the Company’s assets either directly or through one or more subsidiaries) in substantially the same proportions as their ownership, immediately prior to such Business Combination of the Outstanding Company Common Stock and Outstanding Company Voting Securities, as the case may be, (B) no Person (excluding any corporation resulting from such Business Combination or any employee benefit plan (or related trust) of the Company or such corporation resulting from such Business Combination) beneficially owns, directly or indirectly, 30% or more of, respectively, the then outstanding shares of common stock of the corporation resulting from such Business Combination or the combined voting power of the then outstanding voting securities of such corporation except to the extent that such ownership existed prior to the Business Combination and (C) at least a majority of the members of the board of directors of the corporation resulting from such Business Combination were members of the Incumbent Board at the time of the execution of the initial agreement, or of the action of the Board, providing for such Business Combination; or

(iv) the approval by the shareholders of the Company of a complete liquidation or dissolution of the Company.

For Executive Officers, a Change of Control means the occurrence of any of the foregoing events; provided, however, if a change of control is defined in any Executive Officer’s employment agreement with the Company, a Change of Control with respect to any Award granted to such Executive Officer under the Plan shall mean any of the events described in the definition of change of control in such Executive Officer’s employment agreement in force at the time of determination.

Section 2.8 “Code” means the Internal Revenue Code of 1986, as amended. Reference in the Plan to any Section of the Code shall be deemed to include any amendments or successor provisions to such Section and any regulations under such Section.

Section 2.9 “Committee” means the Compensation Committee of the Board (or any successor committee) or any other committee designated by the Board.

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Section 2.10 “Common Stock” means the common stock, par value $.01 per share, of the Company and, after substitution, such other stock as shall be substituted therefor as provided in Section 3.3(b) of the Plan.

Section 2.11 “Consultant” means any person who is engaged by the Company, a Subsidiary or an Affiliated Entity to render consulting or advisory services.

Section 2.12 “Date of Grant” means the date on which the grant of an Award is made by the Committee.

Section 2.13 “Disability” has the meaning set forth in Section 409(A)(a)(2)(C) of the Code.

Section 2.14 “Eligible Person” means any Employee, Non-Employee Director, or Consultant.

Section 2.15 “Employee” means any employee of the Company, a Subsidiary or an Affiliated Entity or any person to whom an offer of employment with the Company, a Subsidiary or an Affiliated Entity is extended, as determined by the Committee.

Section 2.16 “Exchange Act” means the Securities Exchange Act of 1934, as amended.

Section 2.17 “Executive Officer Participants” means Participants who are subject to the provisions of Section 16 of the Exchange Act with respect to the Common Stock.

Section 2.18 “Fair Market Value” means, as of any day, the closing price of the Common Stock on such day (or on the next preceding business day, if such day is not a business day or if no trading occurred on such day) as reported on the New York Stock Exchange or on such other securities exchange or reporting system as may be designated by the Committee. In the event that the price of a share of Common Stock shall not be so reported, the Fair Market Value of a share of Common Stock shall be determined by the Committee in its absolute discretion.

Section 2.19 “Incentive Stock Option” means an Option within the meaning of Section 422 of the Code.

Section 2.20 “Non-Executive Officer Participants” means Participants who are not subject to the provisions of Section 16 of the Exchange Act.

Section 2.21 “Non-Employee Director” shall have the meaning set forth in Rule 16b-3, or any successor rule, promulgated under Section 16 of the Exchange Act.

Section 2.22 “Nonqualified Stock Option” means an Option to purchase shares of Common Stock which is not an Incentive Stock Option within the meaning of Section 422(b) of the Code.

Section 2.23 “Option” means an Incentive Stock Option or Nonqualified Stock Option.

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Section 2.24 “Other Stock Award” means any right granted to a Participant by the Committee under Section 7 of the Plan.

Section 2.25 “Participant” means an Eligible Person to whom an Award has been granted by the Committee under the Plan.

Section 2.26 “Performance Award” means any award of Performance Shares granted by the Committee under Section 6 of the Plan.

Section 2.27 “Performance Measures” means the Company’s achievement of target levels of earnings per share, share price, net income, cash flows, reserve additions or replacements, production volume, finding costs, operating costs, overhead or other costs, drilling results, acquisitions and divestitures, risk management activities, return on equity, total or comparative shareholder return, a combination of or interrelationship among any of the foregoing, or other criteria, as determined by the Committee.

Section 2.28 “Performance Share” means the Common Stock subject to a Performance Award granted under Section 6 of the Plan, which may be delivered to the Participant upon the achievement of such performance goals during the Performance Period as specified by the Committee.

Section 2.29 “Plan”“ means the Chesapeake Energy Corporation Long Term Incentive Plan.

Section 2.30 “Restricted Stock” means the Common Stock issued under Section 5 which is subject to any restrictions that the Committee, in its discretion, may impose.

Section 2.31 “SAR” means a Stock Appreciation Right.

Section 2.32 “Shareholder Approval” means approval by the holders of a majority of the outstanding shares of Common Stock, present or represented and entitled to vote at a meeting called for such purposes.

Section 2.33 “Stock Appreciation Right” means a right, granted under Section 4, to an amount in Common Stock equal to any increase in the Fair Market Value of the Common Stock between the date on which the Stock Appreciation Right is granted and the date on which the right is exercised.

Section 2.34 “Subsidiary” shall have the same meaning set forth in Section 424(f) of the Code.

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3. ADMINISTRATION

Section 3.1 Administration of the Plan; the Committee. The Compensation Committee shall have overall authority to administer the Plan. The Board may designate another committee or committees to administer the Plan with respect to Non-Executive Officer Participants, subject to any terms or conditions established by the Committee. Hereafter, “Committee” shall mean the Compensation Committee, except when used in reference to Awards granted to Non-Executive Officer Participants, “Committee shall mean any applicable committee designated by the Board.

Unless otherwise provided in the bylaws of the Company or resolutions adopted from time to time by the Board establishing the Committee, the Board may from time to time remove members from, or add members to, the Committee. Vacancies on the Committee, however caused, shall be filled by the Board. The Committee shall hold meetings at such times and places as it may determine. A majority of the Committee shall constitute a quorum, and the acts of a majority of the members present at any meeting at which a quorum is present shall be the valid acts of the Committee. Any action which may be taken at a meeting of the Committee may be taken without a meeting if all the members of the Committee consent to the action in writing. Although the Committee is generally responsible for the administration of the Plan, the Board in its sole discretion may take any action under the Plan that would otherwise be the responsibility of the Committee, except as such action pertains to the administration of Awards to Non-Employee Directors.

Subject to the provisions of the Plan, the Committee shall have the authority to:

(a) Select the Eligible Persons to participate in the Plan.

(b) Determine the time or times when Awards will be granted.

(c) Determine the form of Award, the number of shares of Common Stock subject to any Award, all the terms, conditions (including performance requirements), restrictions and/or limitations, if any, of an Award, including the time and conditions of exercise or vesting, and the terms of any Award Agreement, which may include the waiver or amendment of prior terms and conditions or acceleration of the vesting or exercise of an Award under certain circumstances determined by the Committee (subject to Section 10.2 of the Plan). However, nothing in this Section 3.1 shall be construed to permit the repricing of any outstanding Award in violation of Section 4.3.

(d) Determine whether Awards will be granted singly or in combination.

(e) Determine whether, to what extent and under what circumstances Awards may be settled in cash or Common Stock.

(f) Determine whether any conditions applicable to an Award have been met and whether an Award will be paid at the end of a Performance Period.

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(g) Employ attorneys, consultants, accountants and other advisors as deemed necessary or appropriate by the Committee.

(h) Take any and all other action it deems necessary or advisable for the proper operation or administration of the Plan.

Section 3.2 Committee to Make Rules and Interpret Plan. The Committee in its sole discretion shall have the authority, subject to the provisions of the Plan, to establish, adopt, or revise such rules and regulations and to make all such determinations relating to the Plan as it may deem necessary or advisable for the administration of the Plan. The Committee’s interpretation of the Plan or any Awards granted pursuant hereto and all decisions and determinations by the Committee with respect to the Plan shall be final, binding, and conclusive on all parties, unless otherwise determined by the Board.

Section 3.3 Shares Subject to the Plan. Subject to adjustment as provided in paragraph (b) below and subject to Section 3.4, the aggregate number of shares of Common Stock which are available for Awards under the Plan will not exceed seventeen (17) million shares. Any of the authorized shares of Common Stock may be used for any of the types of Awards described in the Plan, except that no more than 3,000,000 shares of Common Stock may be issued pursuant to Incentive Stock Options. Common Stock delivered pursuant to an Award under the Plan may consist, in whole or in part, of authorized and unissued shares or treasury shares. The Committee, in its sole discretion, shall determine the manner in which fractional shares arising under this Plan are treated. Additional restrictions or adjustments with respect to shares subject to the Plan are as follows:

(a) Subject to (b) below, the aggregate number of shares of Common Stock pursuant to Options and SARs granted to any Employee or Non-Employee Director in any calendar year under this Plan may not exceed 750,000 shares and the aggregate number of shares of Common Stock pursuant to Restricted Stock, Performance Awards and Other Stock Awards granted to any Employee or Non-Employee Director in any calendar year may not exceed 750,000 shares.

(b) In the event that the shares of Common Stock, as presently constituted, shall be changed into or exchanged for a different number or kind or shares of stock or other securities of the Company or of another corporation (whether by reason of merger, consolidation, recapitalization, reclassification, stock split, combination of shares or other corporate event of similar nature), or if the number of such shares of Common Stock shall be increased through the payment of a stock dividend, then there shall be substituted for or added to each share available under and subject to the Plan as provided herein, the number and kind of shares of stock or other securities into which each outstanding share of Common Stock shall be so changed or for which each such share shall be exchanged or to which each such share shall be entitled, as the case may be, to reflect any increase or decrease in the number of, or change in the kind or value of, issued shares of Common Stock to preclude, to the extent practicable, the enlargement or dilution of rights under such Awards. In the event there shall be

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any other change in the number or kind of the outstanding shares of Common Stock, or any stock or other securities into which the Common Stock shall have been changed or for which it shall have been exchanged, then if the Committee shall, in its sole discretion, determine that such change equitably requires an adjustment in the shares available under and subject to the Plan, or in any Award theretofore granted or which may be granted under the Plan, such adjustments shall be made in accordance with such determination.

No fractional shares of Common Stock or units of other securities shall be issued pursuant to any such adjustment, and any fractions resulting from any such adjustment shall be eliminated in each case by rounding downward to the nearest whole share.

Section 3.4 Share Counting. The following shares of Common Stock related to Awards will be available for issuance again under the Plan:

(a) Common Stock related to Awards paid in cash;

(b) Common Stock related to Awards that expire, are forfeited or cancelled or terminate for any other reason without the delivery of the Common Stock;

(c) Common Stock equal in number to the shares of Common Stock surrendered in payment of the exercise price of an Option; and

(d) Common Stock tendered or withheld in order to satisfy withholding tax obligations.

4. STOCK OPTIONS AND STOCK APPRECIATION RIGHTS

Section 4.1 Grant of Options and SARs. The Committee may, from time to time, subject to the provisions of the Plan and such other terms and conditions as it may determine, grant Nonqualified Stock Options and Stock Appreciation Rights (SARs) to Eligible Persons and Incentive Stock Options to Employees. SARs may be granted either alone or in tandem with concurrently or previously issued Options. Each grant of an Option or SAR shall be evidenced by an Award Agreement executed by the Company and the Participant, and shall contain such terms and conditions and be in such form as the Committee may from time to time approve, subject to the requirements of Section 4.2.

Section 4.2 Conditions of Options and SARs. Each Option and SAR so granted shall be subject to the following conditions:

(a) Exercise Price. As limited by Section 4.2(e) below, the Award Agreement for each Option and SAR shall state the exercise price set by the Committee on the Date of Grant. No Option or SAR shall be granted at an exercise price which is less than the Fair Market Value of the Common Stock on the Date of Grant.

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(b) Exercise of Options and SARs. Options and SARs granted under the Plan shall be exercisable, in whole or in such installments and at such times, and shall expire at such time, as shall be provided by the Committee in the Award Agreement. An SAR issued in tandem with an Option is only exercisable to the extent the related Option is exercisable and is subject to the conditions applicable to such Option. When a tandem SAR is exercised, the Option to which it relates shall cease to be exercisable to the extent of the number of shares with respect to which the tandem SAR is exercised. Similarly when the Option is exercised, the tandem SARs relating to the shares covered by such Option exercise shall terminate.

(c) Form of Payment. The payment of the exercise price of an Option by the Participant shall be made in cash, shares of Common Stock, a combination thereof or in such other manner as the Committee may specify in the applicable Award Agreement. The payment of the Appreciation associated with the exercise of a SAR shall be made by the Company in shares of Common Stock.

(d) Term of Option or SAR. The term of an Option or SAR shall be determined by the Committee and specified in the applicable Award Agreement, except that no Option or SAR shall be exercisable after the expiration of ten years from the Date of Grant.

(e) Special Restrictions Relating to Incentive Stock Options. Options issued in the form of Incentive Stock Options shall only be granted to Employees of the Company or a Subsidiary and not to Employees of an Affiliated Entity unless such entity is classified as a “disregarded entity” of the Company or the applicable Subsidiary under the Code. In addition to being subject to all applicable terms, conditions, restrictions and/or limitations established by the Committee, Options issued in the form of Incentive Stock Options shall comply with the requirements of Section 422 of the Code (or any successor Section thereto), including, without limitation, the requirement that the exercise price of an Incentive Stock Option not be less than 100% of the Fair Market Value of the Common Stock on the Date of Grant, the requirement that each Incentive Stock Option, unless sooner exercised, terminated or canceled, expire no later than ten years from its Date of Grant, and the requirement that the aggregate Fair Market Value (determined on the Date of Grant) of the Common Stock with respect to which Incentive Stock Options are exercisable for the first time by a Participant during any calendar year (under this Plan or any other plan of the Company or any Subsidiary) not exceed $100,000. Incentive Stock Options which are in excess of the applicable $100,000 limitation will be automatically recharacterized as Nonqualified Stock Options. No Incentive Stock Options shall be granted to any Employee if, immediately before the grant of an Incentive Stock Option, such Employee owns more than 10% of the total combined voting power of all classes of stock of the Company or its Subsidiaries (as determined in accordance with the stock attribution rules contained in Sections 422 and 424(d) of the Code) unless the exercise price is at least 110% of the Fair Market Value of the Common Stock subject to the Incentive Stock Option, and such Incentive Stock Option by its terms is exercisable no more than five years from the date such Incentive Stock Option is granted.

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(f) Shareholder Rights. No Participant shall have any rights as a shareholder with respect to any share of Common Stock subject to an Option or SAR prior to the purchase or receipt of such share of Common Stock by exercise of the Option or SAR. In addition, no Option or SAR granted under the Plan shall include any dividend equivalents.

Section 4.3 No Repricing. Except for adjustments made pursuant to Section 3.3(b), in no event will the Committee, without first obtaining Shareholder Approval, (i) decrease the exercise price of an Option or SAR after the Date of Grant; (ii) accept for surrender to the Company any outstanding Option or SAR granted under the Plan as consideration for the grant of a new Option or SAR with a lower exercise price; or (iii) repurchase from Participants any outstanding Options or SARs that have an exercise price per share less than the then current Fair Market Value of a Share.

5. RESTRICTED STOCK AWARDS

Section 5.1 Grant of Restricted Stock. The Committee may, from time to time, subject to the provisions of the Plan and such other terms and conditions as it may determine, grant Restricted Stock to any Eligible Person. Restricted Stock shall be awarded in such number, for such purchase price (if any) and at such times during the term of the Plan as the Committee shall determine. Each grant of Restricted Stock shall be evidenced by an Award Agreement executed by the Company and the Participant, and shall contain such terms and conditions and be in such form as the Committee may from time to time approve, subject to the requirements of Section 5.2. Restricted Stock issued pursuant to a Restricted Stock Award may be evidenced in such manner as the Committee deems appropriate, including, without limitation, a book-entry registration or issuance of a stock certificate or certificates into escrow until the restrictions associated with such Award are satisfied.

Section 5.2 Conditions of Restricted Stock Awards. The grant of Restricted Stock shall be subject to the following:

(a) Restriction Period. Each Restricted Stock Award shall require the holder to remain in the employment or otherwise be classified as an Eligible Person (or in the case of a Non-Employee Director, remain a director or consultant or be classified as another category of Eligible Person) of the Company, a Subsidiary, or an Affiliated Entity for a prescribed period (the “Restriction Period”). The Committee shall determine the Restriction Period or Periods that shall apply to the shares of Common Stock covered by each Award or portion thereof. In addition to any time vesting conditions determined by the Committee, Restricted Stock may be subject to the achievement by the Company of specified Performance Measures or other individual criteria as determined by the Committee. At the end of the Restriction Period, assuming the fulfillment of any other specified vesting conditions, the restrictions imposed by the Committee shall lapse with respect to the shares of Common Stock covered by the Award or portion thereof.

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(b) Code Section 162(m). If the Committee intends for a Restricted Stock Award to be granted and administered in a manner designed to preserve the deductibility of the resulting compensation in accordance with Section 162(m) of the Code, then Performance Measures applicable to such Award shall be established in writing by the Committee no later than the earlier of (i) 90 days after the commencement of the relevant Performance Period and (ii) the date as of which 25% of the Performance Period has elapsed. The Committee’s discretion to modify or waive the Performance Measures related to the vesting of the Award may be restricted in order to comply with Section 162(m).

(c) Forfeiture. Except as otherwise determined by the Committee, upon termination of service or employment during the Restriction Period, all shares of Restricted Stock still subject to forfeiture shall be forfeited by the Participant and any purchase price paid by the Participant shall be returned to such Participant.

(d) Shareholder Rights. During any Restriction Period, the Committee may, in its discretion, grant to or withhold from the holder of Restricted Stock all or any of the rights of a shareholder with respect to the shares, including, but not by way of limitation, the right to vote such shares or to receive dividends. If any dividends or other distributions are paid in shares of Common Stock and distributed to the holder of Restricted Stock, all such shares shall be subject to the same restrictions on transferability as the shares of Common Stock subject to the Award with respect to which they were paid.

(e) Minimum Vesting Condition. The minimum Restriction Period applicable to any Restricted Stock that is not subject to performance criteria restricting the vesting of the Award shall be three years from the Date of Grant (subject to the provisions of Section 10.2).

6. PERFORMANCE AWARDS

Section 6.1 Grant of Performance Shares. The Committee may, from time to time, subject to the provisions of the Plan and such other terms and conditions as it may determine, grant Performance Shares to any Eligible Person. Performance Shares shall be awarded in such number and at such times during the term of the Plan as the Committee shall determine. Each Performance Award shall be evidenced by an Award Agreement executed by the Company and the Participant, and shall contain such terms and conditions and be in such form as the Committee may from time to time approve, subject to the requirements of Section 6.2.

Section 6.2 Conditions of Performance Awards. The grant of Performance Shares shall be subject to the following:

(a) Performance Period. Performance Shares will be subject to the achievement of one or more performance goals by the Company or the Participant individually, measured for a prescribed period (the “Performance

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Period”), as specified by the Committee, such Performance Period to be not less than one year in duration. Such performance goals may be based upon the Company’s achievement of Performance Measures or other individual criteria.

(b) Code Section 162(m). If the Committee intends for a Performance Award to be granted and administered in a manner designed to preserve the deductibility of the resulting compensation in accordance with Section 162(m) of the Code, then the Performance Measures applicable to such Award shall be established in writing by the Committee no later than the earlier of (i) 90 days after the commencement of the relevant Performance Period and (ii) the date as of which 25% of the Performance Period has elapsed. The Committee’s discretion to modify or waive the Performance Measures to the vesting of the Award may be restricted in order to comply with Section 162(m).

(c) Payment Respecting Performance Shares. Performance Shares shall be earned to the extent that their terms and conditions are met, as certified by the Committee. The form and timing of payment for Performance Shares earned shall be determined by the Committee and specified in the Award Agreement; however, in no event shall the payment for Performance Shares earned be made on a date that is later than 60 days after the vesting of such Performance Shares.

(d) Termination of Employment. The Committee, in its sole discretion, may (i) permit a Participant who ceases to be an Eligible Person before the end of any Performance Period, or the personal representative of a deceased Participant, to continue to be subject to a Performance Award relative to the current Performance Period until such Awards are forfeited or earned pursuant to their terms and conditions or (ii) authorize the payment to such Participant, or the personal representative of a deceased Participant, of the Performance Shares which would have been paid to the Participant had the Participant remained an Eligible Person to the end of the Performance Period. In the absence of such permission by the Committee, any unvested Performance Shares shall be forfeited when a Participant ceases to be an Eligible Person.

7. OTHER STOCK AWARDS

Section 7.1 Grant of Other Stock Awards. The Committee may, from time to time, subject to the provisions of the Plan and such other terms and conditions as it may determine, specify the terms and provisions of other forms of equity-based or equity-related awards not described above which the Committee determines to be consistent with the purpose of the Plan and the interests of the Company, which awards may provide for cash payments based in whole or in part on the value or future value of Common Stock, for the acquisition or future acquisition of Common Stock, or any combination thereof. Each Other Stock Award shall be evidenced by an Award Agreement executed by the Company and the Participant, and shall contain such terms and conditions and be in such form as the Committee may from time to time approve, subject to the requirements of Section 7.2.

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Section 7.2 Minimum Vesting Condition. Other Stock Awards subject to performance criteria shall not vest in less than one year and Other Stock Awards which are subject to time vesting shall not vest in less than three years.

8. CASH AWARDS

The Committee may, from time to time, subject to the provisions of the Plan and such other terms and conditions as it may determine, grant to an Eligible Person a Cash Award (including without limitation, discretionary Awards, Awards based on objective performance criteria or Awards based on subjective performance criteria). Cash Awards shall be awarded in such amount and at such times during the term of the Plan as the Committee shall determine, provided however that the total amount of all Cash Awards made under the Plan, in the aggregate, will not exceed $10 million. Each Cash Award shall be evidenced by an Award Agreement executed by the Company and the Participant, and shall contain such terms and conditions and be in such form as the Committee may from time to time approve.

9. FUNDAMENTAL TRANSACTION; CHANGE OF CONTROL

Section 9.1 Fundamental Transaction. If the Company merges with another entity in a transaction in which the Company is not the surviving entity or if, as a result of a merger, other business combination or any other transaction or event, other securities are substituted for the Common Stock or the Common Stock may no longer be issued (each, a “Fundamental Transaction”), then notwithstanding any other provisions of the Plan, (i) all outstanding Options and SARs shall be fully exercisable and any unexercised Options and SARs shall terminate upon the closing of the Fundamental Transaction, (ii) restrictions on outstanding Restricted Stock, Other Stock Awards and Cash Awards shall lapse; and (iii) each outstanding Performance Award shall be deemed to have achieved a level of performance that would cause all of the Performance Shares to become payable.

Section 9.2 Change of Control. Notwithstanding any other provisions of the Plan to the contrary, upon the occurrence of a Change of Control, (i) all outstanding Options and SARs shall be fully exercisable and any unexercised Options and SARs shall terminate upon the closing of the Change of Control, (ii) restrictions on outstanding Restricted Stock, Other Stock Awards and Cash Awards shall lapse; and (iii) each outstanding Performance Award shall be deemed to have achieved a level of performance that would cause all of the Performance Shares to become payable.

10. GENERAL

Section 10.1 Amendment or Termination of Plan. The Board may suspend or terminate the Plan at any time. In addition, the Board may, from time to time, amend the Plan in any manner, but may not adopt any amendment without Shareholder Approval if (i) such approval is necessary or desirable to qualify or comply with any tax or regulatory requirement for which or with which the Board deems it necessary or desirable to qualify or comply, or (ii) in the opinion of counsel to the Company, Shareholder Approval is required by any federal or state laws or regulations or the rules of any stock exchange on which the common stock may be listed.

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Section 10.2 Acceleration of Awards on Disability, Death, Retirement or Involuntary Termination. With respect to (i) a Participant who ceases to be an Eligible Person due to a Disability, (ii) the personal representative of a deceased Participant, or (iii) any other Participant who ceases to be an Eligible Person due to the Participant’s retirement or involuntary termination (as defined by the Committee), the Committee, in its sole discretion, may permit the purchase of all or any part of the shares subject to any unvested Option or waive the vesting requirements of any Award on the date the Participant ceases to be an Eligible Person due to a Disability, death, retirement or involuntary termination. With respect to Options which have already vested at such date or the vesting of which is accelerated by the Committee in accordance with the foregoing provision, the Participant or the personal representative of a deceased Participant shall have the right to exercise such vested Options within such period(s) as the Committee shall determine.

Section 10.3 Withholding Taxes. A Participant must pay in cash to the Company the amount of taxes required to be withheld by law upon the exercise of an Option. Required withholding taxes associated with Restricted Stock, Performance Shares, Cash or Other Stock Awards must also be paid in cash unless the Committee requires a Participant to pay the amount of taxes required by law to be withheld from such Awards by directing the Company to withhold from any Award the number of shares of Common Stock having a Fair Market Value on the date of vesting equal to the amount of required withholding taxes.

Section 10.4 Code Section 83(b) Elections. The Company, its Subsidiaries and Affiliated Entities have no responsibility for a Participant’s election, attempt to elect or failure to elect to include the value of an Award subject to Section 83 in the Participant’s gross income for the year of grant pursuant to Section 83(b) of the Code. Any Participant who makes an election pursuant to Section 83(b) will promptly provide the Committee with a copy of the election form.

Section 10.5 Code Section 162(m). It is the intent of the Company that the Plan comply in all respects with Section 162(m) of the Code and that any ambiguities or inconsistencies in construction of the Plan be interpreted to give effect to such intention.

Section 10.6 Code Section 409A. It is the intent of the Company that no Award under the Plan be subject to Section 409A of the Code. The Committee shall design and administer the Awards under the Plan so that they are not subject to Section 409A of the Code.

Section 10.7 Certain Additional Payments by the Company. The Committee may, in its sole discretion, provide in any Award Agreement for certain payments by the Company in the event that acceleration of vesting of any Award under the Plan is subject to the excise tax imposed by Section 4999 of the Code or any interest or penalties with respect to such excise tax (such excise tax, interest and penalties, collectively, the “Excise Tax”). An Award Agreement may provide that the Participant shall be entitled to

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receive a payment (a “Gross-Up Payment”) in an amount such that after payment by the Participant of all taxes (including any interest or penalties imposed with respect to such taxes), including any Excise Tax imposed upon the Gross-Up Payment, the Participant retains an amount of the Gross-Up Payment equal to the Excise Tax imposed upon such acceleration of vesting of any Award.

Section 10.8 Non-Transferability. Subject to other provisions of the Plan and any applicable Award Agreement, Awards are not transferable other than by will or the laws of descent and distribution. Any attempted sale, transfer, assignment, pledge, hypothecation or other disposition of, or the levy of execution, attachment or similar process upon, any Award contrary to the provisions hereof shall be void and ineffective, shall give no right to any purported transferee, any may, at the sole discretion of the Committee, result in forfeiture of the Award involved in such attempt. The Committee shall impose such other restrictions and conditions on any shares of Common Stock covered by an Award as it may deem advisable including, without limitation, restrictions under applicable Federal or state securities laws, and may legend the certificates representing the shares of Common Stock subject to the Award to give appropriate notice of such restrictions. Notwithstanding the foregoing, an Award held by a Non-Employee Director may be transferable under certain circumstances as specified by the Committee in the Award Agreement.

Section 10.9 Non-Uniform Determinations. The Committee’s determinations under the Plan, including without limitation, (i) the determination of the Eligible Persons to receive Awards, (ii) the form, amount and timing of such Awards, (iii) the terms and provisions of such Awards, (iv) minimum employment or service periods, and (v) agreements evidencing the same, need not be uniform and, subject to any restrictions set forth in the Plan, may be made by the Committee selectively among Participants who receive, or who are eligible to receive, Awards under the Plan, whether or not such Participants are similarly situated.

Section 10.10 Leaves of Absence, Suspensions. The Committee shall be entitled to make such rules, regulations and determinations as it deems appropriate under the Plan in respect of any suspension of employment or leave of absence from the Company granted to a Participant whether such suspension or leave is paid or unpaid and whether due to a Disability or otherwise. Without limiting the generality of the foregoing, the Committee shall be entitled to determine (i) whether or not any such suspension or leave of absence shall be treated as if the Participant ceased to be an employee of the Company and (ii) the impact, if any, of any such suspension or leave of absence on Awards under the Plan.

Section 10.11 Participant Misconduct. Notwithstanding anything in the Plan to the contrary, the Committee shall have the authority under the Plan to determine that in the event of serious misconduct by the Participant (including violations of employment agreements, confidentiality or other proprietary matters) or any activity of a Participant in competition with the business of the Company or any Subsidiary or Affiliated Entity, any outstanding Award granted to such Participant may be cancelled, in whole or in part, whether or not vested. The determination of whether a Participant has engaged in a serious breach of conduct or any activity in competition with the business of the Company or any Subsidiary or Affiliated Entity shall be determined by the Committee in good faith and in its sole discretion. This Section 10.11 shall have no effect and be deleted from the Plan following a Change of Control.

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Section 10.12 Regulatory Approval and Listings. The Company shall use its best efforts to file with the Securities and Exchange Commission as soon as practicable following the date this Plan is effective, and keep continuously effective and usable, a Registration Statement on Form S-8 with respect to shares of Common Stock subject to Awards hereunder. Notwithstanding anything contained in this Plan to the contrary, the Company shall have no obligation to issue or deliver certificates representing shares of Common Stock evidencing Awards prior to:

(a) the obtaining of any approval from, or satisfaction of any waiting period or other condition imposed by, any governmental agency which the Committee shall, in its sole discretion, determine to be necessary or advisable;

(b) the listing of such shares on any exchange on which the Common Stock may be listed; and

(c) the completion of any registration or other qualification of such shares under any state or federal law or regulation of any governmental body which the Committee shall, in its sole discretion, determine to be necessary or advisable.

Section 10.13 Right to Continued Employment or Board Membership. Participation in the Plan shall not give any Participant any right to remain in the employ of the Company, a Subsidiary or an Affiliated Entity or any right to remain on the Board of the Company. Further, the adoption of this Plan shall not be deemed to give any Employee, Non-Employee Director or Consultant or any other individual any right to be granted an Award.

Section 10.14 Other Compensation Programs. The existence and terms of the Plan shall not limit the authority of the Board in compensating Employees and Non-Employee Directors in such other forms and amounts, including compensation pursuant to any other plans as may be currently in effect or adopted in the future, as it may determine from time to time.

Section 10.15 Reliance on Reports. Each member of the Committee and each member of the Board shall be fully justified in relying or acting in good faith upon any report made by the independent public accountants of the Company and its Subsidiaries and upon any other information furnished in connection with the Plan by any person or persons other than the Committee or Board member. In no event shall any person who is or shall have been a member of the Committee or the Board be liable for any determination made or other action taken or any omission to act in reliance upon any such report or information, including the furnishing of information, or failure to act, if in good faith.

Section 10.16 Construction. The titles and headings of the sections in the Plan are for the convenience of reference only, and in the event of any conflict, the text of the Plan, rather than such titles or headings, shall control.

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Section 10.17 Governing Law, Severability. The Plan shall be governed by and construed in accordance with the laws of the State of Oklahoma except as superseded by applicable federal law. If any provision of the Plan is held unlawful or otherwise invalid or unenforceable in whole or in part, the unlawfulness, invalidity or unenforceability will not affect any other parts of the Plan, which will remain in full force and effect.

Section 10.18 Supersession. Upon receipt of Shareholder Approval pursuant to Section 1.4, this Plan supersedes and replaces in all respects the Initial Plan and any Award Agreement issued pursuant to the Plan after the effective date of this Plan will be governed by the terms of this Plan and not by the Initial Plan or any other plans or agreements, oral or otherwise.

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EX-12

EXHIBIT 12

CHESAPEAKE ENERGY CORPORATION

RATIOS OF EARNINGS TO FIXED CHARGES AND COMBINED FIXED CHARGES AND PREFERRED DIVIDENDS

($ in millions)

	Year Ended December 31, 2002		Year Ended December 31, 2003		Year Ended December 31, 2004			Year Ended December 31, 2005		Year Ended December 31, 2006			Nine Months Ended September 30, 2007
EARNINGS:
Income before income taxes and cumulative effect of accounting change	$	67	$	501	$	805		$	1,493	$	3,255		$	1,852
Interest expense (a)		111		148		162			221		299			276
(Gain)/loss on investment in equity investees in excess of distributed earnings		—		—		(1	)		1		(3	)		19
Amortization of capitalized interest		2		3		5			10		19			26
Bond discount amortization (b)		—		—		—			—		—			—
Loan cost amortization		5		4		6			9		13			13
Earnings	$	185	$	656	$	977		$	1,734	$	3,583		$	2,186
FIXED CHARGES:
Interest expense	$	111	$	148	$	162		$	221	$	299		$	276
Capitalized interest		5		13		36			79		179			191
Bond discount amortization (b)		—		—		—			—		—			—
Loan cost amortization		5		4		6			9		13			13
Fixed Charges	$	121	$	165	$	204		$	309	$	491		$	480
Preferred Stock Dividends
Preferred Dividend Requirements	$	10	$	22	$	39		$	42	$	89		$	78
Ratio of income before provision for taxes to net income (c)		1.67		1.61		1.56			1.57		1.62			1.61
Subtotal – Preferred Dividends	$	17	$	36	$	61		$	66	$	144		$	126
Combined Fixed Charges and Preferred Dividends	$	138	$	201	$	265		$	375	$	635		$	606
Ratio of Earnings to Fixed Charges		1.5		4.0		4.8			5.6		7.3			4.6
Insufficient coverage	$	—	$	—	$	—		$	—	$	—		$	—
Ratio of Earnings to Combined Fixed Charges and Preferred Dividends		1.3		3.3		3.7			4.6		5.6			3.6
Insufficient coverage	$	—	$	—	$	—		$	—	$	—		$	—

(a) Excludes the effect on unrealized gains or losses on interest rate derivatives.

(b) Amortization of bond discount is excluded since it is included in interest expense.

(c) Amounts of income before provision for taxes and of net income exclude the cumulative effect of accounting change.

EX-31.1

Exhibit 31.1

CERTIFICATION

I, Aubrey K. McClendon, certify that:

1. I have reviewed this quarterly report on Form 10-Q of Chesapeake Energy Corporation;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

(a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

(b) designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

(c) evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

(d) disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

(a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

(b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: November 9, 2007	/s/ AUBREY K. MCCLENDON
	Aubrey K. McClendon
	Chairman of the Board and Chief Executive Officer

EX-31.2

Exhibit 31.2

CERTIFICATION

I, Marcus C. Rowland, certify that:

1. I have reviewed this quarterly report on Form 10-Q of Chesapeake Energy Corporation;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

(a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

(b) designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

(c) evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

(d) disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

(a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

(b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: November 9, 2007	/s/ MARCUS C. ROWLAND
	Marcus C. Rowland
	Executive Vice President and Chief Financial Officer

EX-32.1

Exhibit 32.1

CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350,

AS ADOPTED PURSUANT TO SECTION 906

OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Quarterly Report of Chesapeake Energy Corporation (the “Company”) on Form 10-Q for the period ended September 30, 2007 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Aubrey K. McClendon, Chairman and Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C § 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:

1. The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

2. The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

/s/ AUBREY K. MCCLENDON

Aubrey K. McClendon

Chairman of the Board and Chief Executive Officer

Date: November 9, 2007

EX-32.2

Exhibit 32.2

CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350,

AS ADOPTED PURSUANT TO SECTION 906

OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Quarterly Report of Chesapeake Energy Corporation (the “Company”) on Form 10-Q for the period ended September 30, 2007 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Marcus C. Rowland, Executive Vice President and Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C § 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:

1. The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

2. The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

/s/ MARCUS C. ROWLAND

Marcus C. Rowland

Executive Vice President and Chief Financial Officer

Date: November 9, 2007