Oil and Energy Opportunities to hedge weather and commodity price exposure Brian O’Hearne Managing Director, Environmental and Commodity Markets 212-317-5516 email@example.com Weather Floor
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Opportunities to hedge weather and commodity price exposure
Managing Director, Environmental and Commodity Markets
FuelOil, Inc., a local distribution company, services mainly residential customers. With sales concentrated in the Northeastern United States, NatGas, Inc. is heavily affected by winter temperatures. The number of fuel oil gallons sold is highly correlated with Heating Degree Days (65 degrees minus average daily temp in the US, 18C as benchmark outside US).
FuelOil, Inc. will purchase a Weather Risk Management program to mitigate lost sales due to mild (warmer than normal) winter temperatures.
Structure: Heating Degree Day (“HDD”) Floor (“Put”)
Index: Cumulative HDDs
Term: November 1, 2005 – March 31, 2006
Stations: New York, LaGuardia – 57.20%,
Boston, MA – 14.5%,
Philadelphia, PA – 12.00%
Baltimore, MD – 6.30%,
Floor Strike: 3130 HDDs
Example – Winter Heating Oil Floor
Weather Strike: 3750 HDD
Tick Size: 10,000gallons/HDD
Commodity Index: NYMEX
Commodity Strike: $2.00/gal
Actual HDDs: 3350HDD
Commodity Settle: $1.50/gal
Payout = $2 million