Chesapeake Energy 2012 Annual Report Download - page 67

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Credit Risk
Derivative instruments that enable us to manage our exposure to natural gas, oil and NGL prices and interest
rate volatility expose us to credit risk from our counterparties. To mitigate this risk, we enter into derivative contracts
only with counterparties that are rated investment grade and 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, 2012, our
natural gas, oil and interest rate derivative instruments were spread among 12 counterparties. Additionally, the
counterparties under our multi-counterparty secured hedging facility are required to secure their obligations in excess
of defined thresholds. We use this facility for the majority of our natural gas, oil and NGL derivatives.
Our accounts receivable are primarily from purchasers of natural gas, oil and NGL ($1.457 billion at December 31,
2012) and exploration and production companies that own interests in properties we operate ($592 million at
December 31, 2012). This industry concentration has the potential to impact our overall exposure to credit risk, either
positively or negatively, in that our customers and joint working interest owners may be similarly affected by changes
in economic, industry or other conditions. We generally require letters of credit or parent guarantees for receivables
from parties which are judged to have sub-standard credit, unless the credit risk can otherwise be mitigated. During
2012, 2011 and 2010, we recognized nominal amounts of bad debt expense related to potentially uncollectible
receivables.
Conversions and Exchanges of Contingent Convertible Senior Notes and Preferred Stock
In 2010, holders of certain of our contingent convertible senior notes exchanged their notes for shares of common
stock in privately negotiated exchanges as summarized below.
Year
Contingent
Convertible
Senior Notes
Principal
Amount
Number of
Common
Shares
($ in millions) (in thousands)
2010 2.25% due 2038 $ 11 299
In 2011 and 2010, shares of our cumulative convertible preferred stock were converted into shares of common
stock as summarized below.
Year of Conversion
Contingent
Convertible
Preferred Stock
Number of
Preferred
Shares
Number of
Common
Shares
(in thousands)
2011 5.75% 3 111
2010 5.0% (series 2005) 5 21