Chesapeake Energy 2010 Annual Report Download - page 89

In 2010, we received cash distributions of $88 million from CHKM and its predecessor. In addition, we
received cash distributions of $58 million from our equity investee, Frac Tech Holdings, LLC. These cash
distributions were accounted for as a return on investment and reflected as cash flows from operating activities.
Our primary use of funds is for capital expenditures related to exploration, development and acquisition of
natural gas and oil properties. We refer you to the table under Investing Activities below, which sets forth the
components of our natural gas and oil investing activities and our other investing activities for 2010, 2009 and
2008. 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, changes in 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.
On June 21, 2010, we redeemed in whole for an aggregate redemption price of approximately $1.366
billion, plus accrued interest, approximately $364 million in principal amount of our outstanding 7.50% Senior
Notes due 2013, $300 million in principal amount of our 7.50% Senior Notes due 2014 and approximately $670
million in principal amount of our 6.875% Senior Notes due 2016. Associated with these redemptions, we
recognized a loss of $69 million in 2010.
On July 22, 2010, we redeemed in whole for a redemption price of approximately $619 million, plus
accrued interest, $600 million in principal amount of our 6.375% Senior Notes due 2015. Associated with the
redemption, we recognized a loss of $19 million in 2010.
On August 30, 2010, we completed tender offers to purchase for cash $245 million of 7.00% Senior Notes
due 2014, $567 million of 6.625% Senior Notes due 2016 and $582 million of 6.25% Senior Notes due 2018.
On September 16, 2010, we redeemed the remaining $55 million of 7.00% Senior Notes due 2014, $33 million
of 6.625% Senior Notes due 2016 and $18 million of 6.25% Senior Notes due 2018 based on the redemption
provisions in the indentures. Associated with the August 2010 tender offers and redemptions, we recognized a
loss of $40 million in 2010.
We paid dividends on our common stock of $189 million, $181 million and $148 million in 2010, 2009 and
2008, respectively. The Board of Directors increased the quarterly dividend of common stock from $0.0675 to
$0.075 per share beginning with the dividend paid in July 2008. We paid dividends on our preferred stock of
$92 million, $23 million and $35 million in 2010, 2009 and 2008, respectively. The increase in 2010 was due to
the issuance of 2.6 million shares of preferred stock and the decrease from 2008 to 2009 was a result of
conversions and exchanges of preferred stock into common stock during 2008 and 2009.
Credit Risk
Derivative instruments that enable us to hedge a portion of our exposure to natural gas and oil prices and
interest rate volatility expose us to credit risk from our counterparties. To mitigate this risk, we enter into
derivative contracts only with investment-grade rated counterparties deemed by management to be competent
and competitive market makers, and we attempt to limit our exposure to non-performance by any single
counterparty. During the more than 15 years we have engaged in hedging activities, we have experienced a
counterparty default only once (Lehman Brothers in September 2008), and the total loss recorded in that
instance was immaterial. On December 31, 2010, our commodity and interest rate derivative instruments were
spread among 14 counterparties. Our multi-counterparty secured hedging facility includes 12 of our
counterparties which are required to secure their natural gas and oil hedging obligations in excess of defined
thresholds. We use this facility for all of our commodity hedging.
Our accounts receivable are primarily from purchasers of natural gas and oil ($821 million at
December 31, 2010) and exploration and production companies which own interests in properties we operate
($977 million at December 31, 2010). 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 or parent guarantees for receivables from parties which are judged to have sub-standard credit, unless
the credit risk can otherwise be mitigated. During 2010 and 2008, we recognized nominal amounts of bad debt
expense related to potentially uncollectible receivables. During 2009, we recognized $13 million of bad debt
expense related to potentially uncollectible receivables.
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