UK’s Centrica signs five-year, £40 million weather hedge

British Gas Trading, a subsidiary of UK energy company Centrica, has concluded a £40 million weather hedge with Bermuda-based XL Capital. The multi-year deal may prove the largest in Europe this year.

A-rated Centrica finalised a five-year, zero-coupon hedge with AA-rated XL Capital, structured as a “fairly tight” collar, Geariod Lane, head of electricity supplies at Centrica Energy Management Group, told RiskNews. Centrica will pay out should the average daily temperature for any individual month between November and March inclusive fall below a pre-determined level, with XL Capital paying out should the average temperature be above another pre-determined level. But Lane refused to divulge these specific levels.

Lane said Centrica – an active participant in the weather markets that trades tens of million of pounds of weather contracts per year – had sought such a multi-year deal for the past two years, but the market, until now, had been unable to meet the company’s pricing terms.

He added that while Centrica had considered weather hedging by stripping out elements of other weather-dependent derivatives contracts, the company believed it was cheaper to use the weather markets directly.

No broker intermediary was involved in the deal. Trigger temperatures will be based on those monitored at a meteorological centre at London’s Heathrow Airport.