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OUR SERVICES
DERIVATIVES
ALBERTA NATURAL GAS
Fixed Float Index Swap
Description:
The seller of a fixed-float Alberta index swap receives a negotiated fixed price based on current forward market prices from the buyer, and in return agrees to pay the future published Alberta index price to the buyer. The swap generally settles 5 days after the index is published, but the settlement day can be negotiated to match the cash flow from the physical sale of the natural gas.
Example
A natural gas producer has a contract to sell 100,000 GJ’s each month at the Alberta monthly index price. The producer wishes to guarantee their natural gas revenue from this volume for the next 12 months will be $800,000 per month. As a result, they enter into a fixed-float Alberta index swap with ATB whereby each month they receive a negotiated fixed price of $8.00/GJ multiplied by 100,00 GJ’s from ATB. In return, they agree to pay ATB the future Alberta monthly index price multiplied by 100,000 GJ’s.
Risk Management Strategy
Entering into a fixed-float index swap is an effective risk management strategy when you want to bring a higher level of certainty to future revenue. In exhange for this certainty and eliminating the potential downside, you forfeit the potential upside. Using the same example as above, the following table and graphy illustrate the impact of a fixed-float index swap hedging strategy on potential revenue for the next 12 months. In this example, we assume that the average forward price of the Alberta index for next year is currently $8.00/GJ. In addition, we have determined based on historical volatility and the current forward curve that the 5% worst case for next year is that actual prices average $5.00/GJ and the 5% best case is that actual prices average $11.50/GJ. In other words, there is a 90% probability that the average forward price of the Alberta index for next year will be between $5.00/GJ and $11.50/GJ.
Impact of Hedging Strategies on Potential Revenue for the Next 12mo.
| Hedging Strategy |
5% Worst Case Revenue |
Expected Revenue |
5% Best Case Revenue |
| No Hedges |
$6M
(100,000 GJ x $5.00 x 12mo.) |
$9.6M
(100,000 GJ x $8.00 x 12mo.) |
$13.8M
(100,000 GJ x $11.50 x 12mo.) |
Hedge 50%
of Volume |
$7.8M
(50,000 GJ x $5.00 x 12mo.
+50,000 GJ x $8.00 x 12mo.) |
$9.6M
(100,000 GJ x $8.00 x 12mo.) |
$11.7M
(50,000 GJ x $11.50 x 12mo.
+50,000 GJ x $8.00 x 12mo.) |
Hedge 100%
of Volume |
$9.6M
(100,000 GJ x $8.00 x 12mo.) |
$9.6M
(100,000 GJ x $8.00 x 12mo.) |
$9.6M
(100,000 GJ x $8.00 x 12mo.) |
Commonly used terms  (PDF - 472K)
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