Star Group weather derivative pays out again on warm 2023 winter
US energy company Star Group (formerly Star Gas Partners) has benefitted from its weather derivative arrangements again in the first-quarter of 2023, recording a full recovery under the terms of the degree day contract it has in place.
Star Group has been utilising weather derivatives to hedge risk for well over a decade, benefiting from the arrangements at times when US weather conditions in the regions it operates were at levels that trigger the parametric derivative contracts.
In the first-quarter of 2023, Star Group said it experienced the “impact of extremely warm weather” across its operations.
Weather causes fluctuations in customer usage and as a result affects revenues, so Star Group uses the weather derivative degree day hedge to offset some of its weather risk exposure and smooth its revenues, when temperatures are warmer than normal.
Highlighting the unusual warmth experienced, Star Group said, “Temperatures (measured on a heating degree day basis) for the three months ended March 31, 2023 were the warmest in the last 123 years in the New York City metropolitan area.”
Over the six months to March 31st 2023, Star Group said that temperatures in New York were the fourth warmest in the last 123 years.
Additionally, Star Group explained that, “For the three months ended March 31, 2023 temperatures were 18.7% warmer than the three months ended March 31, 2022 and 21.6% warmer than normal, as reported by NOAA.”
Which is just the type of weather condition that Star Group enters into its weather derivatives to protect its business against, and a positive payment under the parametric degree day derivatives benefited the energy company during the last quarter.
“As the largest provider of home heating oil in the nation, our business is highly dependent on weather – which negatively impacted us this quarter,” Jeff Woosnam, Star Group’s President and Chief Executive Officer explained.
Continuing, “To put this in perspective, not only were temperatures 21.6 percent warmer than normal, but the period was also the warmest in New York City in 123 years; year-to-date, it was the fourth warmest period on record in this key market.
“While there is nothing we can do to influence mother nature, we are adept at mitigating, to the extent possible, unusual weather swings like this – managing costs and working capital and adjusting short-term investment decisions.
“At the same time, our weather hedge program has provided an important buffer under such conditions, as has our disciplined approach to controlling operating expenses even in the face of certain inflationary pressures. As we navigate through the remainder of fiscal 2023 I remain confident in our ability to provide the best possible customer experience and bottom line results.”
During the first-quarter of 2023, Star Group recorded a $14 million higher benefit recorded under its weather hedge program, than it did in the prior year when it incurred a $1.1 million charge for it.
In fact, Star Group recorded a full benefit under the weather derivative contract in Q1, of $12.9 million, the level the recovery from the derivative payout is capped at.
For the first-six months of Star Group’s financial year, the weather derivatives provided positive income of $12.5 million, compared to $1.1 million in the prior year.
Star Group can receive up to $12.5 million per-year from its weather hedge arrangement that runs from November through March each year, so covering it against the winter weather season, while the maximum it can pay for the hedge is $5 million over that term.
For the next winter season, Star Group said it has already renewed this derivative arrangement, with another $12.5 million in positive income available to it should the parametric trigger, based on degree days, be breached.
Star Group is hedging against weather being warmer than anticipated, as that affects its revenue flows as it customers use less heating oil during a warmer winter season.
We’re told there have been other weather derivative payouts after the northern hemisphere winter, in both the United States and Europe, as some countries experienced warmer weather and energy firms, who remain the main users of degree day hedging, benefited from the positive income inflows provided by weather hedges in recent months.
