From the perspective of the shipper, there are no noteworthy differences between a physical park and loan and a standard physical natural gas storage agreement, although the shipper may pay a lower fee for storage in exchange for loaning the natural gas. Therefore, in practice, the shipper’s accounting typically follows the physical storage accounting model described in UP 5.2.1.

The underlying substance of a park and loan agreement is similar to a standard physical storage agreement. Therefore, initial accounting for the arrangement also follows the model for physical storage arrangements outlined in UP 5.2.1, with no accounting for the agreement except for the recognition of storage fee revenue. However, if the transporter borrows the natural gas in storage, it has an obligation to return natural gas to the shipper at a future date. Therefore, at the time it borrows parked natural gas, the transporter would record a liability for the return of the natural gas to the shipper. This liability to deliver natural gas back to the shipper is not a derivative in its entirety. However, the value of the liability to return natural gas will fluctuate with changes in the price of natural gas. As a result, similar to the accounting for virtual storage discussed in UP 5.3, the liability is a hybrid instrument with an embedded derivative that should be recognized at fair value by the transporter. The following simplified example illustrates the journal entries for physical park and loan transactions by the transporter (as discussed above, the accounting by the shipper is the same as for standard natural gas storage described in UP 5.2.1).

EXAMPLE UP 5-5
Transporter’s accounting for a physical park and loan agreement

Effective April 1, 20X1, Ivy Power Producers enters into a natural gas park and loan agreement with Guava Gas Company. The storage location and other key terms are specified in the agreement. On May 1, 20X1, IPP purchases 10,000 MMBtus of natural gas for $4.00/MMBtu on the spot market and injects the natural gas into the GGC storage facility. IPP is required to withdraw the natural gas on December 1, 20X1. The storage facility’s total capacity is 100,000 MMBtus of natural gas. IPP pays a park and loan fee of $2,000 per month, regardless of the amount stored.

The spot and forward prices (forward price for delivery in December 20X1) of natural gas are as follows ($/MMBtu):

GGC initially receives the natural gas in the storage facility on May 1, 20X1. However, on June 1, 20X1, GGC identifies an opportunity to profit from changes in natural gas prices and it borrows the parked natural gas. As a result, GGC has a liability to return the natural gas, which includes an embedded derivative that requires separation from the host contract. The arrangement does not qualify for the normal purchases and normal sales scope exception because GGC is trading natural gas for profit.

How should GCC account for the arrangement, including the borrowed natural gas?

Similar to the accounting illustrated in Example UP 5-2, GCC would initially record no entries when the natural gas is injected into storage. However, once it borrows the natural gas, GCC should record a liability for the return of the natural gas and a related embedded derivative.

GGC would record the following journal entries to account for this agreement (amounts in $000s):

The example has been simplified to include only one sale into the market and one repurchase. In practice, GGC may have multiple trades prior to returning the natural gas to the shipper on December 1, 20X1. In addition, in many cases the transporter will hedge the open position for the return of natural gas. In a typical park and loan arrangement, the transporter profits from the storage fees while also benefiting from arbitraging the natural gas during the holding period.