December 01, 2020

Winter Arrives

Chapter 3: Snow's Impact on Cost & Revenue isn't Straightforward

Dominic Hernandez - Climate Resilience Analyst

30-inches of seasonal snowfall can accumulate an infinite number of ways.  Does it matter whether 30-inches falls in two big blizzards (but otherwise a snowless winter) or whether it falls in ten small storms equally distributed between November and March?  For MegaPlow Inc. (introduced in Chapter 1 and Chapter 2 of this series), it makes a huge difference!  Calibrating snowfall to revenue is more complicated than just averaging total snow across the number of locations in a customer’s territory and/or totaling snowfall across the full-winter.

The graph above (detailed in Chapter 2) illustrates MegaPlow’s revenue along-with Demex’s Revenue Protection plan. The green bars highlight protection payments made to MegaPlow in years where any property earned less than the pre-defined break-even amount. MegaPlow’s total revenue across all properties reaches at least $1.43M each and every year.

The intricate details of snowfall accumulation define the forefront of how The Demex Group protects customer revenue. Snowfall is a continuous variable, so 30-inches across the winter can accumulate in many ways. For example, it could fall in three 10-inch storms… or it could fall on thirty days where flurries added up to 1-inch on each day.  Most likely, it will fall thanks to a combination of big storms and days with light flurries. In Winter is Coming Chapter 2, we introduced MegaPlow Inc, to explain how we price a revenue protection plan for a hypothetical snow-removal company. With meteorological winter beginning today, December 1, we explain why the Demex Solutions Center creates 268 independent financial models each calibrated to one of MegaPlow’s 268 properties across their territory in New Jersey.

Client Calibrated Solutions

MegaPlow’s 268 properties in their New Jersey territory each come with their own service-contract accounting for differences in weather and property-specific economics. Each of the 268 properties has its own set of costs for differing amounts of snowfall. These expenses vary due to property-size, level of service urgency, and location. If a property is associated with a high litigation risk of slip & fall, the sense of urgency for deicing services is high and the base cost will reflect higher unit economics for the property. Demex leverages the location-specific economics and localizes the weather for each property to create precise protection for each property within the full portfolio.

Above is a screenshot from the Demex Solution Center showing Location AC4 in Atlantic City, New Jersey. There are 4 properties in AC4 (red dots). We calibrate each location’s revenue to the localized weather at that location and then scale this analysis across the full portfolio of 268 properties. Below is a table of AC4’s Snowfall revenue bands. Contracts at each property outline the revenue associated with different snowfall intervals.

For every property collecting less than its revenue threshold, MegaPlow receives a protection payment from the Demex network. For the four properties listed in the table above, you’ll notice that three of them are on the waterfront and have similar geography which is quite different from the property in Pleasantville. Modeling at each location more appropriately captures the true revenue generated at each property.

Above is a screenshot from the Demex Solution Center showing Location NEW8 in Newark, New Jersey. Location NEW8 is comprised of 8 property locations (red dots).  The properties of NEW8 (pictured above), differ just the same as properties in AC4 via their weather, location, and economics. NEW8 properties are located in Newark, NJ and Jersey City, NJ which straddle the Newark Bay. The table below illustrates the different revenue bands for each of the 8 properties in NEW8.

Revenue modeling is not a one-size-fits-all approach. Local property nuances impact costs, revenue, and profitability.  Jersey City 1 is larger than Newark 1 and also has a higher level of urgency because it is located in a high traffic retail district whereas Newark 1 is a lower traffic warehouse storage complex. The Demex Solutions Center models the local specificity for each revenue band and we curate a total protection program for each client.

Location Matters

New Jersey’s ‘Snowmageddon’ of February 2014, demonstrates why we cannot simply average snowfall across a region to create programs for revenue protection.

The map above demonstrates the largest snowfall of the winter of 2013-2014 which arrived in February. Here we can see that more snowfall occurred in the north vs the south. MegaPlow received more revenue in the north than they did in the south from this event.  (Map is courtesy of NJ Weather). Table 1 below demonstrates True Revenue which is calculated using the appropriate cost band for NEW8 properties and AC4 properties based on the February 12-14 2014 storm at those locations. Averaged Snow is calculated by averaging snow cost across all 10 cost-bands for the 12-different locations. Without modeling revenue at the location level, the outcome would be $8,120 too low for this single event, 36% below MegaPlow’s true revenue.

Table 2 below demonstrates a more extreme case of different modeling methods.  Averaging the snowfall in the North (22.8-inches) with the snowfall in the Southeast (1.0-inch) would lead us to estimate revenue within the 12.0” revenue band. Applying this method for AC4 and NEW8 alone would underestimate revenue by $12,927. These 12 properties alone (of 268 total properties) demonstrate why location-specific modeling is critical for creating the best possible financial protection.

This is the Demex Difference.  

Accumulation Matters

Revenue functions at each property are split up into separate bins, but they do not follow a linear pattern. When MegaPlow mobilizes and services a property, there is an upfront cost. Anything more than a trace accumulation may require deicing services that bring costs for deicing supplies. Employees, equipment, and supplies affect the associated expense for each specific location. MegaPlow accounts for these variables in its charges for each property. At AC4, the difference, on average, between no snow and 0.1″-0.99″ of snow is $316. However, servicing a 1.0″-2.99″ event is $379.

 

The image above shows MegaPlow’s snow-calibrated revenue at AC4 in Atlantic City, NJ overlayed with seasonal snowfall (Nov-Apr) in inches. As we can see, high snowfall does not always lead to high revenue. The disparity between years like 2002 and 2009 is due to the disparity in the frequency of storms and total accumulation for each snow storm within the season.

In 2002, AC4 accumulated 30.7-inches of seasonal snowfall with $35,300 in revenue. But in 2009, 56.3-inches of snow, (the highest seasonal accumulation in 40-years) created only $23,800 of revenue. Shouldn’t we expect a proportional increase to revenue because it snowed 25-inches more? Not necessarily, all snow accumulation isn’t equal – even when the seasonal total is!

Variation in the rate of snowfall, the temperature at various elevations off the ground, and ground surface temperature all affect accumulation. So why did less snow in 2002 bring in more revenue? It turns out, 2002 was a year with more frequent small snowstorms and 2009 was a year with a few big blizzards. MegaPlow worked more hours in 2002, deicing and plowing, as well as moving personnel and supplies.  More hours worked leads to higher revenue in the season with more small storms versus a few big ones.

The table above shows the revenue band difference between the frequency and amount of snowfall events. Although both seasons yielded 22.0″ of snow, the seasonal revenue at these two locations differed by $175,000.

Yes, accumulation matters!  22-inches of seasonal accumulation could be a result of 22 1-inch storms, or a single 22-inch storm, or any combination of storms.  If I were a MegaPlow investor, I’d much rather a season with 22 1-inch snow storms, instead of a single 22-inch blizzard!!

Locations AC4 and NEW8 represent just 12 of the 268 locations in MegaPlow’s New Jersey service territory.  Creating 268 financial models each for the 268 properties means we create the strongest possible protection program curated to each locale.

This is the Demex Difference.  

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