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Abnormally warm weather during the recent winter has encouraged US
heating oil company Petro to buy more extensive weather risk
management protection. It has bought a four-year, US$40mn weather
programme from Swiss Re Financial Products to take effect next year
when its current protection ends.
The Swiss Re protection is derivative-based and provides protection
of up to US$12.5mn for each of the four years starting in November
2003. The deal includes a floating strike price.
Petro is the largest heating oil distributor in North America and
operates as a subsidiary of Star Gas Partners. The company was hit
badly by the year's warm weather, leading it to buy more protection.
It has bought US$20mn of weather insurance for the forthcoming
2002-2003 winter season in advance of the Swiss Re protection for
the four subsequent winters.
Irik Sevin, chairman and chief executive of Star Gas, said the
recent winter was the warmest in 107 years and the company wanted to
guard against similar events. 'Our new weather insurance is a
virtually seamless financial instrument that will help protect
future cash flows," he said. 'The insurance is based on
normalized weather conditions over the last 10 years, and it covers
weather that is up to approximately 20% warmer than normal, which
would include last winter's aberrational warm temperatures'.
As a result of the weather risk management programme and other
action taken by Star Gas, rating agency Fitch reaffirmed the BBB
rating of Petro's senior secured notes.
For the nine months ended 30 June 2002, Star Gas recorded net
proceeds of US$7.1mn from weather insurance.
This article was published with permission
from Informa UK Ltd. It originally appeared in
Alternative Insurance Capital - September 2002 - Issue 133.
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