Chesapeake Energy 2015 Annual Report Download - page 33

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Our commodity price risk management activities may reduce the prices we receive for our oil, natural gas
and NGL sales, require us to provide collateral for derivative liabilities and involve risk that our counterparties
may be unable to satisfy their obligations to us.
In order to manage our exposure to price volatility in marketing our production, we enter into oil and natural gas
price derivative contracts for a portion of our expected production. Commodity price derivatives may limit the prices
we actually realize and therefore reduce oil, natural gas and NGL revenues in the future. Our commodity price risk
management activities will impact our earnings in various ways, including recognition of certain mark-to-market gains
and losses on derivative instruments. The fair value of our oil and natural gas derivative instruments can fluctuate
significantly between periods. In addition, our commodity price risk management transactions may expose us to the
risk of financial loss in certain circumstances.
Derivative transactions expose us to the risk that our counterparties, which are generally financial institutions,
may be unable to satisfy their obligations to us. During periods of declining commodity prices, such as the period
beginning in the fourth quarter of 2014 and continuing into 2016, our commodity price derivative asset positions increase,
which increases our counterparty exposure. Although the counterparties to our hedging arrangements are required to
secure their obligations to us under certain scenarios, if any of our counterparties were to default on its obligations to
us under the derivative contracts or seek bankruptcy protection, it could have an adverse effect on our ability to fund
our planned activities and could result in a larger percentage of our future production being exposed to commodity
price changes.
Most of our oil and natural gas derivative contracts are with eleven counterparties under bi-lateral hedging
arrangements. As of December 31, 2015, we had hedged under bi-lateral arrangements 164.0 mmboe of our future
production with price derivatives and 9.5 mmboe with basis derivatives. Under some of those arrangements, the
counterparties’ and our obligations under the bi-lateral hedging arrangements 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. Under certain
circumstances, the cash collateral value posted could fall below the coverage designated, and we would be required
to post additional cash or letter of credit collateral under our hedging arrangements. We are in the process of changing
the collateral provided for several of the counterparties, to provide that they will be secured by hydrocarbon interests.
Future collateral requirements are dependent to a great extent on oil and natural gas prices.
The ultimate outcome of pending legal and governmental proceedings is uncertain, and there are
significant costs associated with these matters.
We are defending against claims by royalty owners alleging, among other things, that we used below-market
prices, made improper deductions, used improper measurement techniques and/or entered into arrangements with
affiliates that resulted in underpayment of royalties in connection with the production and sales of natural gas and NGL.
Numerous cases, primarily in Texas, Pennsylvania and Ohio, are pending. The resolution of disputes regarding past
payments could cause our future obligations to royalty owners to increase and would negatively impact our future
results of operations.
In addition, there are ongoing governmental regulatory investigations and inquiries into such matters as our royalty
practices and possible antitrust violations. The outcome of any pending or future litigation or governmental regulatory
matter is uncertain and may adversely affect our results of operations. In addition, we have incurred substantial legal
expenses in the past three years, and such expenses may continue to be significant in the future. Further, attention to
these matters by members of our senior management has been required, reducing the time they have available to
devote to managing our business.
We may continue to incur cash and noncash charges that would negatively impact our future results of
operations and liquidity.
While executing our strategic priorities to reduce financial leverage and complexity and to lower our capital
expenditures in the face of lower commodity prices, we have incurred certain cash charges, including contract
termination charges, restructuring and other termination costs, financing extinguishment costs and charges for unused
natural gas transportation and gathering capacity. As we continue to focus on our strategic priorities, we may incur
additional cash and noncash charges in 2016 and in future years. If incurred, these charges could materially adversely
impact our future results of operations and liquidity.