Annual Report and Accounts 2014

 

Notes to the Financial Statements

46. Financial Risk and Capital Management
47. Related Party Transactions
48. Events after the Balance Sheet Date
49. Approval of Financial Statements

46. Financial Risk and Capital Management

Capital risk management

The Group’s objectives when managing its capital structure are to safeguard the Group’s ability to continue as a going concern in order to provide returns to shareholders and benefits for other stakeholders, while maintaining a strong balance sheet to support the continued organic and acquisitive growth of its businesses and to maintain investor, creditor and market confidence.

Return on capital employed (‘ROCE’) is a key performance indicator for the Group. Further analysis of ROCE is included in the Financial Review on this page.

In order to maintain or adjust the capital structure, the Group may adjust the amount of dividends paid to shareholders, issue new shares or buy back existing shares, increase or reduce debt or sell assets.

The Group includes borrowings in its measure of capital. The Group’s borrowings are subject to covenants. Further details on this are outlined in the Liquidity Risk Management section of this note.

The policy for net debt is to ensure a structure of longer term debt funding and cash balances with deposit maturities up to three months.

The capital structure of the Group, which comprises capital and reserves attributable to the owners of the Parent, net debt and deferred and contingent acquisition consideration, may be summarised as follows:

 

Restated

 

2014

2013

Group

£’000

£’000

 

 

Capital and reserves attributable to the owners of the Parent

941,418

889,951

Net debt (note 30)

86,287

185,952

Deferred and contingent acquisition consideration (note 33)

53,323

75,959

At 31 March

1,081,028

1,151,862

 

 

 

Financial risk management

Group financial risk management is governed by policies and guidelines which are reviewed and approved annually by the Board of Directors, most recently in December 2013. These policies and guidelines primarily cover credit risk, liquidity risk, foreign exchange risk, interest rate risk and commodity price risk. The principal objective of these policies and guidelines is the minimisation of financial risk at reasonable cost. The Group does not trade in financial instruments nor does it enter into any leveraged derivative transactions. DCC’s Group Treasury function centrally manages the Group’s funding and liquidity requirements. Divisional and subsidiary management, in conjunction with Group Treasury, manage foreign exchange and commodity price exposures within approved policies and guidelines.

There are no significant concentrations of risk and there has been no significant change during the financial year, or since the end of the year, to the types of financial risks faced by the Group or the Group’s approach to the management of those risks.

(i) Credit risk management

Credit risk arises from credit exposure to trade receivables, cash and cash equivalents including deposits with banks and financial institutions and derivative financial instruments.

Trade receivables arise from a wide and varied customer base spread throughout the Group’s operations and as such there is no significant concentration of credit risk. The Group’s credit risk management policy in relation to trade receivables involves periodically assessing the financial reliability of customers, taking into account their financial position, past experience and other factors. The utilisation of credit limits is regularly monitored and a significant element of credit risk is covered by credit insurance.

Risk of counterparty default arising on cash and cash equivalents and derivative financial instruments is controlled within a framework of dealing with high quality institutions and, by policy, limiting the amount of credit exposure to any one bank or institution. DCC transacts with a variety of high credit quality financial institutions for the purpose of placing deposits and entering into derivative contracts. The Group actively monitors its credit exposure to each counterparty to ensure compliance with the counterparty risk limits of the Board approved treasury policy. Of the total cash and cash equivalents at 31 March 2014 of £963.144 million, 49.7% (£478.801 million) was with financial institutions with a minimum rating in the P-1 (short-term) category of Moody’s and 93.5% (£900.691 million) was with financial institutions with a minimum rating in the P-2 (short-term) category of Moody’s. In the normal course of business, the Group operates notional cash pooling systems, where a legal right of set-off applies. As at 31 March 2014 derivative transactions were with counterparties with ratings ranging from AA- to BB (long-term) with Standard and Poors or Aa2 to Ba3 (long-term) with Moody’s.

Management does not expect any significant counterparty to fail to meet its obligations. The maximum exposure to credit risk is represented by the carrying amount of each asset.

Included in the Group’s trade and other receivables as at 31 March 2014 are balances of £87.420 million (2013: £112.191 million) which are past due at the reporting date but not impaired. The aged analysis of these balances is as follows:

 

Restated

 

2014

2013

Group

£’000

£’000

 

 

 

Less than 1 month overdue

61,188

83,885

1 - 3 months overdue

18,301

21,142

3 - 6 months overdue

6,272

5,179

Over 6 months overdue

1,659

1,985

 

87,420

112,191

 

 

 

Trade and other receivables which are not past due nor impaired at the reporting date are expected to be fully recoverable.

The movement in the provision for impairment of trade receivables during the year is as follows:

 

Restated

 

2014

2013

Group

£’000

£’000

 

 

 

At 1 April

20,782

21,862

Provision for impairment recognised in the year

4,904

3,390

Subsequent recovery of amounts previously provided for

(388)

(430)

Amounts written off during the year

(8,118)

(5,363)

Arising on acquisition

298

1,218

Exchange

(194)

105

At 31 March

17,284

20,782

 

 

 

The vast majority of the provision for impairment relates to trade and other receivables balances which are over 6 months overdue.

Company

There were no past due or impaired trade receivables in the Company at 31 March 2014 (31 March 2013: none).

(ii) Liquidity risk management

The Group maintains a strong balance sheet with long term debt funding and cash balances with deposit maturities up to three months. Wherever possible, surplus funds in the Group are transferred to the centralised treasury department through the repayment of borrowings, deposits and dividends. These are then lent to Group companies or contributed as equity to fund Group operations, used to retire external debt or invested externally. The Group does not use off-balance sheet special purpose entities as a source of liquidity or for other financing purposes. In addition, the Group maintains significant committed and uncommitted credit lines with its relationship banks. Compliance with the Group’s debt covenants is monitored continually based on the management accounts. Sensitivity analyses using various scenarios are applied to forecasts to assess their impact on covenants and net debt. During the year to 31 March 2014 all covenants have been complied with and based on current forecasts it is expected that all covenants will continue to be complied with for the foreseeable future. Further analysis of the Group’s debt covenants is included in the Financial Review on this page.

The tables below show the projected contractual undiscounted total cash outflows (principal and interest) arising from the Group’s trade and other payables, gross debt and derivative financial instruments. The tables also include the gross cash inflows projected to arise from derivative financial instruments. These projections are based on the interest and foreign exchange rates applying at the end of the relevant financial year.

Group

Less than

Between

Between

Over

 

1 year

1 and 2 years

2 and 5 years

5 years

Total

As at 31 March 2014

£’000

£’000

£’000

£’000

£’000

Financial liabilities - cash outflows

 

 

 

 

 

Trade and other payables

(1,492,968)

-

-

-

(1,492,968)

Interest bearing loans and borrowings

(315,617)

(14,058)

(139,619)

(995,485)

(1,464,779)

Interest payments on interest bearing loans and borrowings

(55,568)

(53,504)

(143,567)

(168,192)

(420,831)

Deferred and contingent acquisition consideration

(16,374)

(2,972)

(33,977)

-

(53,323)

Cross currency swaps - gross cash outflows

(177,859)

(39,289)

(173,238)

(976,035)

(1,366,421)

Other derivative financial instruments

(3,256)

-

-

-

(3,256)

 

(2,061,642)

(109,823)

(490,401)

(2,139,712)

(4,801,578)

Derivative financial instruments - cash inflows

Interest rate swaps - net cash inflows

6,189

5,909

13,550

13,224

38,872

Cross currency swaps - gross cash inflows

182,672

59,390

222,545

999,103

1,463,710

 

188,861

65,299

236,095

1,012,327

1,502,582

 

 

 

 

 

 

Group

Less than

Between

Between

Over

 

1 year

1 and 2 years

2 and 5 years

5 years

Total

As at 31 March 2013 (restated)

£’000

£’000

£’000

£’000

£’000

Financial liabilities - cash outflows

 

 

 

 

 

Trade and other payables

(1,463,330)

-

-

-

(1,463,330)

Interest bearing loans and borrowings

(152,959)

(180,524)

(163,750)

(593,670)

(1,090,903)

Interest payments on interest bearing loans and borrowings

(50,042)

(39,784)

(101,368)

(99,782)

(290,976)

Deferred and contingent acquisition consideration

(19,401)

(7,620)

(48,938)

-

(75,959)

Cross currency swaps - gross cash outflows

(74,113)

(171,151)

(157,501)

(619,769)

(1,022,534)

Other derivative financial instruments

(2,372)

-

-

-

(2,372)

 

(1,762,217)

(399,079)

(471,557)

(1,313,221)

(3,946,074)

Derivative financial instruments - cash inflows

 

 

 

 

 

Interest rate swaps - net cash inflows

3,109

1,829

3,868

-

8,806

Cross currency swaps - gross cash inflows

108,665

187,270

218,157

693,452

1,207,544

 

111,774

189,099

222,025

693,452

1,216,350

 

 

 

 

 

 

The Group has sufficient cash resources and liquid assets to enable it to meet its current borrowing obligations and trade and other payables. The Group has a well balanced profile of debt maturities over the coming years which will be serviced through a combination of cash and cash equivalents, cash flows, committed bank facilities and the raising of additional long term debt.

Company

Less than

Between

Between

Over

1 year

1 and 2 years

2 and 5 years

5 years

Total

As at 31 March 2014

£’000

£’000

£’000

£’000

£’000

Financial liabilities - cash outflows

 

 

 

 

 

Trade and other payables

279,825

-

36,976

-

316,801

 

 

 

 

 

 

Company

Less than

Between

Between

Over

 

1 year

1 and 2 years

2 and 5 years

5 years

Total

As at 31 March 2013 (restated)

£’000

£’000

£’000

£’000

£’000

Financial liabilities - cash outflows

 

 

 

 

 

Trade and other payables

238,818

-

36,948

-

275,766

 

 

 

 

 

 

The Company has sufficient cash resources and liquid assets to enable it to meet its trade and other payables.

(iii) Market risk management

Foreign exchange risk management

DCC’s reporting currency is sterling. Foreign exchange risk arises from future commercial transactions, recognised assets and liabilities and net investments in foreign operations giving rise to exposure to other currencies, primarily the euro and the US dollar.

Divisional and subsidiary management, in conjunction with Group Treasury, manage foreign currency exposures within approved policies and guidelines using forward currency contracts.

The Group does not hedge translation exposure on the translation of the profits of foreign currency subsidiaries on the basis that they are not intended to be repatriated.

The Group has investments in non-sterling, primarily euro denominated, operations which are cash generative and cash generated from these operations is reinvested in development activities rather than being repatriated into sterling. The Group seeks to manage the resultant foreign currency translation risk through borrowings denominated in or swapped (utilising currency swaps or cross currency interest rate swaps) into the relevant currency, although this hedge is offset by the strong ongoing cash flow generated from the Group’s non-sterling operations, leaving DCC with a net investment in non-sterling assets. The 2.1% strengthening in the value of sterling against the euro during the year ended 31 March 2014, referred to above, was the main element of the translation loss of £7.6 million arising on the translation of DCC’s non-sterling denominated net asset position at 31 March 2014 as set out in the Group Statement of Comprehensive Income in the financial statements.

The Group has a moderate level of transactional currency exposure arising from sales or purchases by operating units in currencies other than their functional currencies. Where sales or purchases are invoiced in other then the local currency and there is not a natural hedge with other activities within the Group, DCC generally hedges between 50% and 90% of those transactions for the subsequent two months. The Group also hedges a proportion of anticipated transactions in certain subsidiaries for periods ranging up to fifteen months with such transactions qualifying as ‘highly probable’ forecast transactions for IAS 39 hedge accounting purposes.

Sensitivity to currency movements

Group

A change in the value of other currencies by 10% against sterling would have a £0.7 million (2013: £2.2 million) impact on the Group’s profit before tax, would change the Group’s equity by £5.2 million and change the Group’s net debt by £21.9 million (2013: £15.1 million and £14.6 million respectively). These amounts include an insignificant amount of transactional currency exposure.

Company

The Company does not have any material assets or liabilities denominated in any currency other than euro at 31 March 2014 or at 31 March 2013 which would give rise to a significant transactional currency exposure. However, as the presentation currency for the Company is sterling, it is exposed to fluctuations in the sterling/euro exchange rate. A change in the value of euro by 10% against sterling would have a £1.1 million (2013: £3.8 million) impact on the Company’s profit before tax, would change the Company’s equity by £13.6 million and change the Company’s net cash by £0.3 million (2013: £18.3 million and £0.3 million respectively).

Interest rate risk management

On a net debt basis, the Group is exposed to changes in interest rates, primarily changes in EURIBOR and sterling LIBOR. Having borrowed at both fixed and floating rates of interest, DCC has swapped its fixed rate borrowings to a combination of fixed and floating interest rates, using interest rate and cross currency interest rate swaps. Overall interest rate risk on gross borrowings is mitigated by matching, to the extent possible, the maturity of its cash balances with the interest rate reset periods on the swaps related to its borrowings.

Sensitivity of interest charges to interest rate movements

Group

Based on the composition of net debt at 31 March 2014 a one percentage point (100 basis points) change in average floating interest rates would have a £4.1 million (2013: £5.8 million) impact on the Group’s profit before tax.

Further information on Group borrowings and the management of related interest rate risk is set out in notes 28 and 29.

Company

The Company holds negligible levels of cash and consequently the interest earned on cash at bank does not give rise to any significant market risk. Finance income principally comprises guarantee fees charged at fixed rates on intergroup loans. Finance costs comprise interest on intergroup loans payable at variable market rates.

Commodity price risk management

The Group is exposed to commodity cost price risk in its oil distribution and LPG businesses. Market dynamics are such that these commodity cost price movements are immediately reflected in oil commodity sales prices and, within a short period, in LPG commodity sales prices and in the resale prices of recycled oil products. Fixed price oil supply contracts are occasionally provided to certain customers for periods of less than one year. To manage this exposure, the Group enters into matching forward commodity contracts which are designated as hedges under IAS 39. The Group hedges a proportion of its anticipated LPG commodity exposure, with such transactions qualifying as ‘highly probable’ forecast transactions for IAS 39 hedge accounting purposes. In addition, to cover certain customer segments for which it is commercially beneficial to avoid price increases, a proportion of LPG commodity price and related foreign exchange exposure is hedged. All commodity hedging counterparties are approved by the Chief Executive and the Chief Financial Officer and are reviewed by the Board.

Sensitivity to commodity price movements

Group

Due to pricing dynamics in the oil distribution market and the recycled oil product market, an increase or decrease of 10% in the commodity cost price of oil would have a nil impact on the Group’s profit before tax (2013: nil) and a nil impact on the Group’s equity (2013: nil).

The impact on the Group’s profit before tax and on the Group’s equity of an increase or decrease of 10% in the commodity cost price of LPG would be dependent on seasonal variations, competitive pressures and the underlying absolute cost of the commodity at the time and, as such, is difficult to quantify but would not be material.

Company

The Company has no exposure to commodity price risk.

Fair values of financial assets and financial liabilities

The fair values of borrowings (none of which are listed) and derivative financial instruments are measured by discounting cash flows at prevailing interest and exchange rates. The fair values of expected future payments under deferred and contingent consideration arrangements are determined by applying a risk-adjusted discount rate to the future payments which are based on forecasted operating profits of the acquired entity over the relevant period. The carrying value of non-interest bearing financial assets and financial liabilities and cash and cash equivalents approximates their fair values, largely due to their short-term maturities. The following is a comparison by category of book values and fair values of the Group’s and Company’s financial assets and financial liabilities:

Group

2014

2013 (restated)

 

Book value

Fair value

Book value

Fair value

 

£’000

£’000

£’000

£’000

Financial assets

 

 

 

 

Derivative financial instruments

57,461

57,461

137,706

137,706

Trade and other receivables

959,655

959,655

1,139,266

1,139,266

Cash and cash equivalents

963,144

963,144

518,925

518,925

 

1,980,260

1,980,260

1,795,897

1,795,897

Financial liabilities

 

 

Borrowings

1,042,557

1,068,642

826,775

825,613

Derivative financial instruments

64,335

64,335

15,808

15,808

Deferred and contingent acquisition consideration

53,323

53,323

75,959

75,959

Trade and other payables

1,492,968

1,492,968

1,463,330

1,463,330

 

2,653,183

2,679,268

2,381,872

2,380,710

 

 

 

 

 

Company

2014

2013 (restated)

 

Book value

Fair value

Book value

Fair value

 

£’000

£’000

£’000

£’000

Financial assets

 

 

 

 

Trade and other receivables

335,662

335,662

315,632

315,632

Cash and cash equivalents

2,999

2,999

3,381

3,381

 

338,661

338,661

319,013

319,013

Financial liabilities

 

 

Trade and other payables

316,801

316,801

275,766

275,766

 

316,801

316,801

275,766

275,766

 

 

 

Group

The Group has adopted the following fair value measurement hierarchy in relation to its financial assets and financial liabilities that are carried in the Balance Sheet at fair value as at the year end:

- Level 1: quoted prices (unadjusted) in active markets for identical assets or liabilities;

- Level 2: inputs, other than quoted prices included within level 1, that are observable for the asset or liability either directly (as prices) or indirectly (derived from prices); and

- Level 3: inputs for the asset or liability that are not based on observable market data (unobservable inputs).

Group

Level 1

Level 2

Level 3

Total

Fair value measurement as at 31 March 2014

£’000

£’000

£’000

£’000

 

 

 

 

 

Financial assets

 

 

 

 

Derivative financial instruments

-

57,461

-

57,461

 

-

57,461

-

57,461

Financial liabilities

Deferred and contingent acquisition consideration

-

-

53,323

53,323

Derivative financial instruments

-

64,335

-

64,335

 

-

64,335

53,323

117,658

 

 

 

 

 

Group

Level 1

Level 2

Level 3

Total

Fair value measurement as at 31 March 2013 (restated)

£’000

£’000

£’000

£’000

 

 

 

 

 

Financial assets

 

 

 

 

Derivative financial instruments

-

137,706

-

137,706

 

-

137,706

-

137,706

Financial liabilities

 

 

 

Deferred and contingent acquisition consideration

-

-

75,959

75,959

Derivative financial instruments

-

15,808

-

15,808

 

-

15,808

75,959

91,767

 

 

 

 

 

Company

As at 31 March 2014 and 31 March 2013 the Company had no financial assets or financial liabilities which were carried at fair value.

Offsetting financial assets and financial liabilities

(i) Financial assets

The following financial assets are subject to offsetting, enforceable master netting arrangements or similar agreements:

Group

As at 31 March 2014

 

Gross amounts of recognised financial assets

Gross amounts of recognised financial liabilities set off in the Balance Sheet

Net amounts of financial assets presented in the Balance Sheet

Related amounts not set off in the Balance Sheet

Net amount

Financial liabilities

Cash collateral received

 

£’000

£’000

£’000

£’000

£’000

£’000

 

 

 

 

 

 

 

Derivative financial instruments

56,811

-

56,811

(16,885)

-

39,926

Cash and cash equivalents

226,255

-

226,255

(133,575)

-

92,680

 

283,066

-

283,066

(150,460)

-

132,606

 

 

 

 

 

 

 

Group

 

 

 

 

 

 

As at 31 March 2013 (restated)

 

 

 

 

 

 

 

Gross amounts of recognised financial assets

Gross amounts of recognised financial liabilities set off in the Balance Sheet

Net amounts of financial assets presented in the Balance Sheet

Related amounts not set off in the Balance Sheet

Net amount

Financial liabilities

Cash collateral received

 

£’000

£’000

£’000

£’000

£’000

£’000

 

 

 

 

 

 

 

Derivative financial instruments

135,666

-

135,666

(9,663)

-

126,003

Cash and cash equivalents

186,859

-

186,859

(74,933)

-

111,926

 

322,525

-

322,525

(84,596)

-

237,929

 

 

 

 

 

 

 

(ii) Financial liabilities

The following financial liabilities are subject to offsetting, enforceable master netting arrangements or similar agreements:

Group

As at 31 March 2014

 

Gross amounts of recognised financial liabilities

Gross amounts of recognised financial assets set off in the Balance Sheet

Net amounts of financial liabilities presented in the Balance Sheet

Related amounts not set off in the Balance Sheet

Net amount

 

Financial
assets

Cash collateral provided

 

£’000

£’000

£’000

£’000

£’000

£’000

 

 

 

 

 

 

 

Derivative financial instruments

60,429

-

60,429

(16,885)

-

43,544

Bank borrowings

133,575

-

133,575

(133,575)

-

-

 

194,004

-

194,004

(150,460)

-

43,544

 

 

 

 

 

 

 

Group

 

 

 

 

 

 

As at 31 March 2013 (restated)

 

 

 

 

 

 

 

Gross amounts of recognised financial liabilities

Gross amounts of recognised financial assets set off in the Balance Sheet

Net amounts of financial liabilities presented in the Balance Sheet

Related amounts not set off in the Balance Sheet

Net amount

 


Financial
assets

Cash collateral provided

 

£’000

£’000

£’000

£’000

£’000

£’000

Derivative financial instruments

13,436

-

13,436

(9,663)

-

3,773

Bank borrowings

74,933

-

74,933

(74,933)

-

-

 

88,369

-

88,369

(84,596)

-

3,773

 

 

 

 

 

 

 

For the financial assets and liabilities subject to enforceable master netting arrangements or similar arrangements above, each agreement between the Group and the counterparty allows for net settlement of the relevant financial assets and liabilities when both elect to settle on a net basis. In the absence of such an election, financial assets and liabilities will be settled on a gross basis however each party to the master netting agreement or similar agreement will have the option to settle all such amounts on a net basis in the event of default of the other party. Per the terms of each agreement, an event of default includes failure by a party to make payment when due, failure by a party to perform any obligation required by the agreement (other than payment) if such a failure is not remedied within periods of 15 to 30 days after notice of such failure is given to the party or bankruptcy.

47. Related Party Transactions

The principal related party relationships requiring disclosure in the consolidated financial statements of the Group under IAS 24 Related Party Disclosures relate to the existence of subsidiaries, joint ventures and associates and transactions with these entities entered into by the Group and the identification and compensation of key management personnel as addressed in more detail below:

Group

Subsidiaries, joint ventures and associates

The consolidated financial statements include the financial statements of the Company and its subsidiaries, joint ventures and associates as documented in the accounting policies on this page. A listing of the principal subsidiaries, joint ventures and associates is provided in the Group Directory on this page of this Annual Report.

Transactions are entered into in the normal course of business on an arm’s length basis.

Sales to and purchases from, together with outstanding payables and receivables to and from subsidiaries and joint ventures are eliminated in the preparation of the consolidated financial statements.

Compensation of key management personnel

For the purposes of the disclosure requirements under IAS 24, the term ‘key management personnel’ (i.e. those persons having authority and responsibility for planning, directing and controlling the activities of the Company) comprises the Board of Directors which manages the business and affairs of the Company. Key management remuneration amounted to:

 

Restated

 

2014

2013

 

£’000

£’000

 

 

 

Short-term benefits

2,721

2,573

Post-employment benefits

609

562

Share-based payment (calculated in accordance with the principles disclosed in note 10)

404

390

At 31 March

3,734

3,525

 

 

 

Company

Subsidiaries, joint ventures and associates

The Company’s Income Statement includes dividends of £29.476 million from its subsidiary DCC Corporate Funding and £14,000 from its subsidiary Minsley Limited. Details of loan balances to/from subsidiaries are provided in the Company Balance Sheet on page 125, in note 24 ‘Trade and Other Receivables’ and in note 25 ‘Trade and Other Payables’.

48. Events after the Balance Sheet Date

On 9 May 2014 the Group acquired 100% of Qstar Försäljning AB, a Swedish unmanned retail petrol station company, along with its related fuel distribution and fuel card businesses (‘Qstar’). The consideration, inclusive of deferred consideration, was £40 million. The initial assignment of fair values to identifiable net assets acquired has been performed on a provisional basis given the timing of closure of the transaction. The carrying amounts of the assets and liabilities acquired, determined in accordance with IFRS, before completion of the combination together with the adjustments made to those carrying values disclosed above were as follows:

 

Book

Fair value

Fair

 

value

adjustments

value

Qstar

£’000

£’000

£’000

 

 

 

 

Non-current assets (excluding goodwill)

27,703

6,983

34,686

Current assets

34,975

-

34,975

Non-current liabilities

(5,732)

(12,144)

(17,876)

Current liabilities

(37,549)

-

(37,549)

Identifiable net assets acquired

19,397

(5,161)

14,236

Goodwill arising on acquisition

20,966

5,161

26,127

Total consideration (enterprise value)

40,363

-

40,363

 

49. Approval of Financial Statements

The financial statements were approved by the Board of Directors on 20 May 2014.