Chesapeake Energy 2015 Annual Report Download - page 128

CHESAPEAKE ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
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Credit Risk Considerations
Over-the-counter traded derivative instruments and our supply contracts expose us to our counterparties’ credit
risk. 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. As of December 31, 2015, our oil, natural gas, foreign currency and
supply contract derivative instruments were spread among 16 counterparties.
Hedging Arrangements
As of December 31, 2015, our secured commodity hedging facility with three counterparties provided
approximately 94 mmboe of hedging capacity for oil, natural gas and NGL price derivatives and 94 mmboe for basis
derivatives with an aggregate mark-to-market capacity of $1.5 billion. The facility, which was terminated in February
2016, was secured by proved reserves, the value of which covered the fair value of the transactions outstanding under
the facility by at least 1.65 times at semi-annual collateral redetermination dates and 1.30 times in between those
dates, and guarantees by certain subsidiaries that also guarantee our revolving credit facility and indentures. The
counterparties’ obligations under the facility were required to be secured by cash or short-term U.S. treasury instruments
to the extent that any mark-to-market amounts owed to us exceed defined thresholds. As of December 31, 2015, we
had hedged under the facility 1.2 mmboe of our future production with price derivatives.
In 2015, we also began entering into bilateral hedging agreements with the intention of replacing and terminating
the respective counterparties’ positions in the secured hedging facility. We also entered into bilateral arrangements
that reduced the aggregate mark-to-market capacity under the secured hedging facility from $16.5 billion to $1.5 billion.
The counterparties’ and our obligations under certain of the bilateral hedging agreements must be secured by cash or
letters of credit to the extent that any mark-to-market amounts owed to us or by us exceed defined thresholds. Our
obligations under other bilateral hedging agreements are secured by the same collateral securing our revolving credit
facility. As of December 31, 2015, we had hedged under bilateral agreements 164.0 mmboe of our future production
with price derivatives and 9.5 mmboe with basis derivatives.