British Gas Trading, a subsidiary of Centrica, has entered a GBP40 million (USD62.5 million) multi-season winter weather hedge that uses a daily collar structure, rather than the more traditional heating degree-day index, to determine season-end payouts. Gearoid Lane, head of electricity supplies at Centrica, said the collar structure allowed coverage to be more concentrated in particular high-risk months, such as January. "We were able to sculpt the coverage much more to our risk," he added. One weather official said collar structures are gaining in popularity because of that flexibility.
The contract covers five winters and was executed for British Gas Trading by its wholesale trading affiliate, Accord Energy, with XL Trading Partners as the counterparty. The hedge is designed to protect the company against variability in the earnings of its gas retail business due to abnormal winter temperatures in the U.K.
British Gas has been an active player in the weather market for a number of years, but this is the first time it has been able to secure a multi-season hedge. Lane said spreads may have tightened a bit to encourage this sort of deal, but he argued a bigger factor is the confidence providers have after being in the market for a number of years. The company will use the agreement as a base and may add further protection in each season.
