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ALBERTA NATURAL GAS

Producer Costless Collar

Description:

An Alberta natural gas costless collar is the combination of buying an Alberta natural gas put option and selling an Alberta natural gas call option. The premium required for buying the put option is offset by the premium that would have otherwise been received from selling the call option. In the money options are automatically exercised and generally settle 5 days after the index is published. However, the option settlement may be deferred 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 at least $700,000 per month and in exchange will be satisfied to receive no more than $925,000 per month. As a result, they enter into a costless collar with ATB, whereby each month they have the right, but not the obligation, to receive a fixed price of $7.00/GJ and pay the Alberta monthly index price mulitplied by 100,000 GJ’s. In exchange for this option they give ATB the option to receive the Alberta montly index price and to pay a fixed price of $9.25/GJ multiplied by 100,000 GJ’s. The premium required for buying the put option is offset by the premium that would have otherwise been received for selling the call option.

Risk Management Strategy

Graph: Distribution of Potential Revenue for the Next 12 Months

A costless collar is an effective risk management strategy when you are satisfied to have your future revenue fall within a certain range. In exchange for eliminating the potential downside below this range you forfeit the potential upside above this range. Using the same example as above, the following table and graph illustrate the impact of a costless collar 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 acual prices average $11.50/GJ. In other words, there is a 90% probability that the average forward price of the Alberta index for the next year will be between $5.00/GJ and $11.50/GJ.

Impact of Hedging Strategies on Potential Revenue for the Next 12 months

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 100% of Volume	$8.4M (100,000 GJ x $5.00 x 12mo. + net option value* (100,000 GJ x $2.00 x 12mo.))	$9.6M (100,000 GJ x $8.00 x 12mo. + net option value* (100,000 GJ x $0 x 12mo.))	$11.1M (100,000 GJ x $11.50 x 12mo. + net option value* (100,000 GJ x $2.25 x 12mo.))

* Net option value is the expected value of the put option less the expected value of the call option. The impact of the options is illustrative only.
Commonly used terms

(PDF - 472K)

To speak to our local traders directly, please contact:
	Rob Laird, Director	Corey (C.J.) Hilling, Associate Director
	403-974-3582	403-974-3582
	403-815-1911	403-804-9519

	Deborah Polny, Assistant General Counsel	Rimas Siulys, Managing Director Market Risk
	780-408-7320	780-408-1960

	Derivative Settlements
	780-408-6456