Reading the 10Q report from Star Gas Partners LP today leaves one with the impression that there is something wrong with their weather risk management cover. They mention the effects of weather on their bottom line both through adverse effects and changes in supply and demand so you’d assume they have a robust risk management program in place to negate the effects of the weather.
Read further down the (very long, as 10Q reports are) press release and you get to a section specifically about their weather insurance. They explain that they buy cover from November to the end of February in a policy based on degree day deviation from the 10 year average, suggesting this is not a simple insurance cover but rather something backed up by weather derivatives. They go on to state that they do not expect to realise any benefit from this cover in the fiscal year and that they do not have cover beyond 28th February 2009.
This suggests that their cover isn’t working for them. Given the weather in the U.S. this winter, from the ice storms to the unseasonable warmth in some areas, you’d expect them to have realised at least a little benefit as the weather fluctuations have to have had an effect on their sales. Do large companies such as Star Gas have too narrow a view when it comes to weather risk management and could they be doing better to protect themselves and their shareholders? I’d be very interested to hear any views on this topic so comment below.
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