Weighing Weather

Over the years, producers have learned to expect the unexpected, like two inches of rain before a load of concrete is scheduled to arrive on site. Customers

Over the years, producers have learned to expect the unexpected, like two inches of rain before a load of concrete is scheduled to arrive on site. Customers cancelling or rejecting the load face expensive downtime waiting for the next delivery; keeping it, they stand to put quality on the line.

That’s how the rainy day scenario used to play out. But now, if there’s a chance of unexpected weather, producers are in a position to be compensated. That is the concept behind a new company called WeatherBill that allows business owners to create, price and purchase custom weather contracts online. These contracts, which are actually simplified, user-friendly weather futures, help the owner protect profits from the impact of severe weather. WeatherBill is the first company to make these user-defined contracts available to any size business in a variety of industries; however, it is not the first company to identify the need to protect against weather risk.

More than 10 years ago, Fortune 100 companies began using futures contracts to protect their profits from weather. The multi-billion dollar companies were essentially buying ideal weather conditions to ensure predictable profits. The need for futures was (and continues to be) prevalent in the energy industry, which used the two main types of futures: Cooling Degree Days (CDD) and heating Degree Days (HDD). These contracts helped cover revenue loss during unusually cool summers and unseasonably warm winters when customers would refrain from using their heating and cooling units. As more of these contracts were created, weather officially became a commodity that traded on the Chicago Mercantile Exchange.

Until recently, weather futures were extremely expensive and complicated, requiring a team of lawyers and large bank accounts to price and purchase. In the beginning, cost was not the only thing preventing smaller, weather-sensitive businesses from purchasing futures: contracts not being customizable was a major issue. In 2007, WeatherBill officially offered any business, regardless of size, the opportunity to create and purchase custom weather futures contracts. The complex, costly and opaque weather future is now a transparent, customizable and affordable tool for businesses to protect profits and prevent weather-driven costs from impacting revenue.

WeatherBill futures contracts are similar to insurance, since business owners pay a premium for protection. Beyond that similarity, WeatherBill and insurance are very different. Unlike insurance, proof of loss is not required for a WeatherBill to payout. When the time period defined in the contract expires, WeatherBill pays out based on weather data reported by a government-affiliated station. These stations are typically located in major cities and at airports, producing secure and accurate measurements. No claims process is involved with WeatherBill, so no waiting for payout occurs once the contract coverage period ends. WeatherBill payouts are based on absolute measurements, instead of human assessment.

WeatherBill contracts are custom-made, so the business owner determines coverage dates, risk location (from more than 550 locations in the U.S., Canada and Europe), type of weather that triggers payment (rain, drought, heat, cold or frost), payout amount, and any applicable deductible. The contracts can be priced and purchased instantly online or by phone up to four days before the desired protection period. The only purchasing requirement set by the U.S. government is that businesses must have $1 million or more net worth.

In addition to construction industry business owners, WeatherBill’s clients include carwash owners, citrus growers, professional golf tournaments, travel companies and ski areas. The company also offers concrete business owners a way to protect and stabilize revenue in the event of bad weather (rain, drought, heat and freezing temperatures). That’s important, because according to the Institutional Investors Group on Climate Change (IIGCC), the construction industry will be feeling the effects of global warming in the coming years (if not already). The IIGCC outlines three ways climate change will impact the industry: physical damage from extreme weather, the need for new materials and building techniques to protect projects from severe weather, and the additional cost of insuring against climate change (i.e., higher insurance premiums and new restrictions).

Climate change and severe weather in general also bring the potential risk of reduced or delayed raw materials, increased regulatory standards, higher energy prices, and higher costs resulting from weather delays. However, when it comes to climate change, it’s not all bad news for the construction industry. Warm winters are lengthening the construction season. Many projects are starting earlier in the spring than ever before, and others are lasting into winter months that were once off limits. According to WeatherBill, 57 percent of major U.S. cities are experiencing winter warming trends.

When it comes to climate change, the main problem facing the concrete industry is that business owners don’t know which side of the coin they are going to get. Will they get the warm season with great conditions or the season with unseasonably cold temperatures and pouring rain? That unpredictability is where the need for weather futures arises. Scientists believe that global warming will lead to more intense and unpredictable storms that can push back construction deadlines and increase costs.

One way WeatherBill can help protect concrete business profits is from record-setting summer temperatures. One city where this protection can be especially effective is Phoenix, where the average summer temperature is 92_F. Ordering concrete on days when the temperature exceeds 90_F can cause significant problems for pouring, finishing and curing fresh mixes. Hot weather increases the need for water in the water-cement ratio, which can reduce concrete strength. Other hot-weather issues include the loss of slump and entrained air. A WeatherBill contract designed to payout $5,000 each day the temperature in Phoenix exceeds 95_F between September 22nd and September 26th, for example, would cost a onetime premium of $650 with a $25,000 maximum payout.

Freezing temperatures pose another risk to the concrete industry. Fresh and newly hardened concrete can lose water and heat in cold weather, potentially reducing strength and hampering job progress. The average winter temperature in Syracuse, N.Y., is 29_F and freezing temperatures that can last through the spring. To get paid $5,000 for every day when temperatures fall below 30_F in Syracuse between April 21st and 25th, a concrete business owner would pay $200 for the contract with a maximum payout of $25,000. The owner could also protect against a single day of freezing weather or an entire season.

Rain on fresh or newly hardened concrete can wash some paste out of the mixture and weaken the surface. The problems are not always immediately obvious, but they can appear down the road (pun slightly intended). Replacing rained-on concrete is expensive and time consuming, but a WeatherBill contract can help cover the cost. Other types of concrete projects that WeatherBill can protect include concrete preparation, cover paint and sealant application. The company also offers good weather guarantees that can help promote a product (buy our concrete, and if it rains the day of the project, you’ll get a refund).

WeatherBill’s philosophy is Weather is unpredictable. Your bottom line doesn’t have to be. Achieving predictable profits is an essential business goal, WeatherBill officials note, and their futures aim to make that affordable, customizable and achievable.
Û www.weatherbill.com; 888/924-7475; 415/762-4378