Star Group lifts weather derivative protection slightly for 2025

Having recorded a lower benefit from its weather derivatives for the last contract year, US energy company Star Group (formerly Star Gas Partners) has lifted the top-end of its protection from the weather hedges for its fiscal year 2025.

Star Group has been leveraging weather derivatives to hedge its 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.

The company had recorded a full recovery under the terms of the degree day contract it had in place for its fiscal year 2023, receiving positive income of $12.5 million from the weather derivatives arrangement.

Star Group has now reported that for its fiscal year 2024, the hedge period ran from November 2023 to March 31st 2024, the weather proved warmer than the strikes in the weather derivative contracts, resulting in it recording a receivable of $7.5 million.

So for the second year running the weather derivatives hedge has proved valuable to Star Group and the 2024 contract also came with an added benefit of Star Group not being obligated to make an annual payment that is capped at $5 million if degree days exceeded the Payment Threshold.

That annual payment obligation was in place for the 2023 contract, but was removed for the 2024 arrangement.

Now, for 2025, the energy company has entered into a similar weather derivative arrangement, for the same term from November this year to March 31st 2025.

This time the maximum that Star Group can receive under the weather hedge is $15 million annually, so the top of the cover has been increased, but for fiscal year 2025 the additional obligated annual payment capped at $5 million is back, should degree days exceed the Payment Threshold of the hedging contract.

Commenting on how the weather affected its business in the nine months to June 30th, so over the weather hedge contract term, Star Group said, “Temperatures in Star’s geographic areas of operation fiscal year-to-date were less than 0.1 percent warmer than during the prior-year period but 15.1 percent warmer than normal, as reported by the National Oceanic and Atmospheric Administration.”

Star Group enters into these weather derivatives contracts to protect its business against variability in temperatures that cause reduced usage of its energy products, and a positive payment under the parametric degree day derivatives benefited the energy company during the last year again.