Action Examples: Weather Insurance, Atmos Energy Corporation
Introduction:
Atmos Energy Corporation distributes natural gas in 12 states. The winters of 1998 and 1999 were 15% warmer than normal, so the company’s sales dropped by 16% and their revenues fell by 24%. To protect their future bottom line, in 2000 the company began investing in weather insurance and weather hedges.
Analysis:
In July 2000, Atmos purchased weather hedges for their Texas and Louisiana operations for the 2000-2001 heating season. The following summer Atmos purchased a three year weather insurance policy for their Texas and Louisiana operations through the 2003-2004 heating season (October to March). These purchases help mitigate the effects of weather at least seven percent warmer than normal in both Texas and Louisiana, while preserving any upside (i.e., the company still sells more gas in winters cooler than normal). Thus over those four years Atmos expected the insurance cost to be less than the drop in revenues if winters continued to be unusually warm. However the 2002 winter was only six percent warmer than normal, so Atmos was not able to collect on the insurance that year.
To increase its cost savings, in 2002 the company tested a Weather Normalization Adjustment (WNA) in Louisiana to reduce the effects of weather on consumer bills and company revenues. The WNA has a downward shift in heating bills during an unusually cold winter and an upward shift in bills during a warm winter. Atmos claims that these upward and downward weather normalizations even out statistically. Contingent on the success of this scheme, Atmos will be able to save $4 million in insurance premiums.
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*All website references were accessed in April 2005.
