This excerpt taken from the CHK 8-K filed Jul 9, 2008.
Transfer of Derivatives
As part of the VPP transaction, Chesapeake entered into a Novation Agreement to transfer full ownership of certain derivative contracts to the buyers. These derivatives will mitigate commodity price risk of the buyers in connection with future deliveries of scheduled volumes of production. Although the buyers could have independently entered into similar derivatives to manage their price risk, the Novation Agreement simply facilitated this process, and the value of the novated hedges was a determinant in the calculation of the purchase price. The buyers
Securities and Exchange Commission
June 13, 2008
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have complete discretion over the derivatives. They could settle the contracts prior to maturity or hold them throughout the 15-year term of the VPP, and they have counterparty credit risk associated with the derivative positions. Chesapeake has provided no guarantee or commitment relating to the buyers VPP price risk.
The novated hedges were designated as cash flow hedges associated with Chesapeake production not part of the VPP transaction. Consequently, pursuant to SFAS 133, the associated fair value of the hedges (as of December 31, 2007) will be held in Other Comprehensive Income pending the respective months of related production pursuant to the original terms of the derivative contracts. The novated hedges had a net negative fair value of $52 million, which reduced the amount allocated to the properties sold.