This excerpt taken from the CHK 10-Q filed Nov 9, 2007.
Oil and Natural Gas Properties Impact of Cash Flow Hedges on Ceiling Test
We review the carrying value of our oil and natural gas properties under the full-cost accounting rules of the Securities and Exchange Commission (SEC) on a quarterly and annual basis. This review is referred to as a ceiling test. Under the ceiling test, capitalized costs, less accumulated amortization and related deferred income taxes, may not exceed an amount equal to the sum of the present value of estimated future net revenues (including the impact of cash flow hedges) less estimated future expenditures to be incurred in developing and producing the proved reserves, less any related income tax effects. Any excess of the net book value, less deferred income taxes, is generally written off as an expense.
In calculating future net revenues, prices and costs used are those as of the end of the appropriate quarterly period except where different prices are fixed and determinable from applicable contracts for the remaining term of those contracts, including the effects of derivatives qualifying as cash flow hedges. Our qualifying cash flow hedges as of September 30, 2007, which consisted of swaps and collars, covered 121 bcfe, 351 bcfe, 102 bcfe and 25 bcfe in 2007, 2008, 2009 and 2010, respectively. Our oil and natural gas hedging activities are discussed in Note 2 of these condensed consolidated financial statements and in Item 3. Quantitative and Qualitative Disclosures About Market Risk of Part I of this Form 10-Q. Based on spot prices for oil and natural gas as of September 30, 2007, these cash flow hedges increased the full cost ceiling by $1.182 billion, thereby reducing any potential ceiling test write-down by the same amount. Had the effects of our cash flow hedges not been considered in calculating the ceiling limitation, the impairment as of September 30, 2007 would have been approximately $916 million.