Atmos Energy is considering purchasing heating degree day put options in order to hedge against the possibility of warm weather next winter. Laurie Sherwood, v.p., treasurer in Dallas, said the natural gas distribution company's success with hdd options last winter is spurring its shopping for similar coverage for next winter. She declined to elaborate on the precise positions Atmos is eyeing for next winter.
Atmos lowered its earnings volatility this past winter by purchasing heating degree day put options to protect against warm temperatures in two of its service areas, Texas and Louisiana, said Sherwood. The puts covered the heating season beginning in November and ending at the end of March, according to Sherwood. Warmer-than-expected winters result in less natural gas consumption, which hits the top line for Atmos. The options hedged against this exposure. Sherwood declined to detail the notional size or counterparties for the trades.
Sherwood said the options it purchased were designed to protect against temperatures at least 7% higher than average. The 7% figure was chosen because it offered a significant amount of weather protection at a price that was not too exorbitant. She added that the weather hedges covered sales to 36% of Atmos' total utility customer base, which represents about 390,000 users out of the company's total of around 1.1 million. Combined with temperatures in Texas and Louisiana that were slightly lower than normal, Atmos' five-month put options helped to decrease its earnings volatility last winter, she added.
Atmos decided to purchase short-dated puts last July because higher-than-normal temperatures had significantly cut into the company's natural gas sales in the previous two winters, according to Sherwood. The strategy paid off--when the company issued 6.7 million shares of stock last December in a secondary offering, many of the investors she spoke with said Atmos' strategy for weather hedging eased their concerns about earnings volatility.
Atmos looks for counterparties with significant market presence and experience, and with solid investment-grade ratings, said Sherwood. The company distributes and sells natural gas to residential, commercial, industrial, agricultural, and other customers in parts of 13 states in the South and Midwest.
