This excerpt taken from the CHK 8-K filed Nov 1, 2005.
Derivatives are held as part of a formally documented risk management program. The Companys risk management activities are subject to the management, direction and control of the Companys Corporate Risk Management Committee (CRMC). The CRMC reports to the Companys Board of Directors.
The Companys risk management program includes the use of Over the Counter (OTC) swaps, options, collars, and exchange-traded natural gas future contracts to hedge exposures to fluctuations in natural gas prices. The Companys risk management program also includes the use of interest rate swap agreements to hedge exposure to fluctuations in interest rates. At contract inception, the Company designates its derivative instruments as cash flow hedges. The Company recognizes all derivative instruments either as assets or liabilities and measures the instruments at fair value. The measurement of fair value is based upon actively quoted market prices and independent valuations. An effectiveness test is performed at inception of each hedge and periodically thereafter throughout the life of the hedge.
The Company considers a hedge to be highly effective if the effectiveness ratio falls between .80 and 1.25. Every hedging relationship is measured by this standard and the measurement is performed on no less than a quarterly basis. To the extent that a derivative instrument has been designated and qualifies as a cash flow hedge, the effective portion of the change in fair value of the derivative instrument is reported as a component of accumulated other comprehensive
Columbia Energy Resources, LLC (a wholly owned
subsidiary of Triana Energy Holdings, LLC)
Notes to Consolidated Financial Statements (continued)
2. Critical Accounting Policies and Estimates (continued)
income and is reclassified into earnings in the same period or periods during which the hedged forecasted transaction affects earnings. The ineffective portion of the cash flow hedge is immediately recognized in operating revenues. Ineffectiveness recognized for the year ended December 31, 2004, was income of $949,990 compared to a loss of $1,615,622 for the four months ended December 31, 2003. If a cash flow hedge were to be terminated before the settlement date of the hedged item, the amount of accumulated other comprehensive income recorded up to that date would remain accrued provided that the forecasted transaction remains probable of occurring.