GXP » Topics » Derivative Instruments

This excerpt taken from the GXP 10-K filed Mar 7, 2005.

Derivative Instruments

The Company accounts for derivative instruments in accordance with Statement of Financial Accounting Standards (SFAS) No. 133, “Accounting for Derivative Instruments and Hedging Activities,” as amended. This statement generally requires derivative instruments to be recorded on the balance sheet at fair value and establishes criteria for designation and effectiveness of hedging relationships. The Company enters into derivative contracts to manage its exposure to commodity price fluctuations and interest rate risk. All derivative instruments are used solely for hedging purposes and are not issued or held for speculative reasons.

 

 

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The Company’s policy is to elect normal purchases and normal sales exception (NPNS), in accordance with SFAS No. 133, for derivative contracts that qualify for this accounting treatment. The appropriate accounting treatment for NPNS designation for derivative contracts is accrual accounting, which requires the effects of the derivative to be recorded when the derivative contract settles.

The Company records derivative instruments that are not accounted for as NPNS as assets or liabilities on the consolidated balance sheets at fair value. The fair value of derivative instruments is estimated using market quotes, over-the-counter forward price and volatility curves and correlation among power and fuel prices, net of estimated credit risk. Changes in the fair value of derivatives are recorded each period in net income unless specific hedge accounting criteria are met. Changes in the fair value of derivative instruments recorded to other comprehensive income (OCI) are reclassified to revenues and expenses in the period when the forecasted transaction occurs. The portion of the change in fair value of a derivative instrument determined to be ineffective is immediately recognized in net income. See Note 21 for additional information regarding derivative financial instruments and hedging activities.

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