Annual Report and Accounts 2008
31 Financial instruments (including cash, trade receivables and payables)
Fair values
The fair value of foreign exchange forward contracts, fuel price swaps and interest rate swaps has been determined by the third party financial institution with which the Group holds the instrument, in line with the market value of similar financial instruments.
The fair value of the Group's financial assets and liabilities is equal to the carrying value, except for available-for-sale investments where there is no active market. In the absence of any other reliable external information, these assets are carried at cost or amortised cost. The Group has no current plans to dispose of these assets.
| Classification of financial instruments As at 31 December 2008 | Loans and receivables £m |
Available-for-sale assets £m |
Derivatives used for hedging £m |
Liabilities measured at a mortised cost £m |
At fair value through profit or loss £m |
Total £m |
|---|---|---|---|---|---|---|
| Assets | ||||||
| Investments | – | 9.2 | – | – | – | 9.2 |
| Interest rate swaps | – | – | – | – | 3.0 | 3.0 |
| Fuel price swaps | – | – | 1.0 | – | – | 1.0 |
| Cash and cash equivalents | 105.9 | – | – | – | – | 105.9 |
| Trade and other receivables | 308.0 | – | – | – | – | 308.0 |
| 413.9 | 9.2 | 1.0 | – | 3.0 | 427.1 | |
| Liabilities | ||||||
| Loan notes | – | – | – | (0.8) | – | (0.8) |
| Bank loans | – | – | – | (1,150.8) | – | (1,150.8) |
| Finance lease obligations | – | – | – | (133.9) | – | (133.9) |
| Other debt payable | – | – | – | (1.1) | – | (1.1) |
| Interest rate swaps | – | – | (17.5) | – | (15.7) | (33.2) |
| Fuel price swaps | – | – | (80.2) | – | – | (80.2) |
| Foreign exchange forward contracts | – | – | (25.2) | – | – | (25.2) |
| Trade and other payables | – | – | – | (453.9) | – | (453.9) |
| ICRRL onerous contract obligation | – | – | – | (21.5) | – | (21.5) |
| – | – | (122.9) | (1,762.0) | (15.7) | (1,900.6) |
| Classification of financial instruments As at 31 December 2007 |
Loans and receivables £m |
Available-for-sale assets £m |
Derivatives used for hedging £m |
Liabilities measured at a mortised cost £m |
At fair value through profit or loss £m |
Total £m |
|---|---|---|---|---|---|---|
| Assets | ||||||
| Investments | – | 7.2 | – | – | – | 7.2 |
| Interest rate swaps | – | – | 3.2 | – | – | 3.2 |
| Fuel price swaps | – | – | 12.1 | – | – | 12.1 |
| Cash and cash equivalents | 157.2 | – | – | – | – | 157.2 |
| Trade and other receivables | 240.6 | – | – | – | – | 240.6 |
| 397.8 | 7.2 | 15.3 | – | – | 420.3 | |
| Liabilities | ||||||
| Loan notes | – | – | – | (0.8) | – | (0.8) |
| Bank loans | – | – | – | (947.4) | – | (947.4) |
| Finance lease obligations | – | – | – | (119.8) | – | (119.8) |
| Interest rate swaps | – | – | (7.7) | – | (0.9) | (8.6) |
| Foreign exchange forward contracts | – | – | (14.5) | – | – | (14.5) |
| Trade and other payables | – | – | – | (465.2) | – | (465.2) |
| ICRRL onerous contract obligation | – | – | – | (27.9) | – | (27.9) |
| – | – | (22.2) | (1,561.1) | (0.9) | (1,584.2) |
The financial liabilities at fair value through profit or loss are held for trading. There is no difference between the fair value and the amount that would be required to settle the liability.
Other receivables and other payables are to be settled in cash in the currency they are held in.
In accordance with IAS 39, "Financial Instruments: Recognition and Measurement", the Group has reviewed all contracts for embedded derivatives that are required to be separately accounted for. No embedded derivatives have been identified.
Hedging activities
The movement on derivative financial instruments is detailed below:
| Interest rate swaps £m |
Foreign exchange forward contracts £m |
Fuel swaps £m |
Total £m |
|
|---|---|---|---|---|
| Net (liability)/asset at 1 January 2008 | (5.4) | (14.5) | 12.1 | (7.8) |
| Cash settlements | 1.1 | 33.0 | (16.0) | 18.1 |
| Revaluation through income statement | (6.0) | – | – | (6.0) |
| Revaluation through SORIE | (19.0) | (0.2) | (63.8) | (83.0) |
| Exchange differences | (0.9) | (43.5) | (11.5) | (55.9) |
| Net (liability) at 31 December 2008 | (30.2) | (25.2) | (79.2) | (134.6) |
During the year a £2.1m finance charge was incurred on the close out of euro interest rate swaps. In addition, fuel swap put options were sold. The gain of £3.6m was recognised in the hedging reserve and will be transferred to the income statement in 2009.
| Interest rate swaps £m |
Foreign exchange forward contracts £m |
Fuel swaps £m |
Total £m |
|
|---|---|---|---|---|
| Net (liability)/asset at 1 January 2007 | (6.0) | 6.6 | (6.9) | (6.3) |
| Cash settlements | (0.2) | – | (0.8) | (1.0) |
| Revaluation through income statement | (0.9) | – | – | (0.9) |
| Revaluation through SORIE | 1.6 | 0.4 | 19.5 | 21.5 |
| Exchange differences | 0.1 | (21.5) | 0.3 | (21.1) |
| Net (liability)/asset at 31 December 2007 | (5.4) | (14.5) | 12.1 | (7.8) |
The movement on the hedging reserve is detailed below:
| 2008 £m |
2007 £m |
|
|---|---|---|
| At 1 January | 5.4 | (9.0) |
| Transferred to income statement – operating costs | (16.0) | (0.7) |
| Transferred to income statement – net finance costs | 6.8 | (0.3) |
| Revaluation, net of tax | (54.6) | 15.4 |
| At 31 December | (58.4) | 5.4 |
Interest hedges
The Group has a number of interest rate swaps in place to hedge the cash flow risk in relation to interest rates. These instruments are summarised below:
a) An interest rate swap of US$100m that was entered into in September 2000 fixed at 6.9% and a separate US$100m interest rate swap that has the effect of fixing the accrued loss on the first swap. These instruments do not qualify for hedge accounting. The cumulative fair value loss in the hedging reserve was transferred to the income statement.
b) A cash flow hedge with a total principal of US$100m that was entered into in September 2000 fixed at 6.8545% until September 2010. The underlying USD debt was exchanged into sterling debt during the year and this instrument ceased to qualify for hedge accounting on 15 December 2008. The cumulative fair value loss in the hedging reserve was transferred to the income statement.
The above financial instruments are classified as fair value through the profit or loss. A total loss of £9.4m was recognised in the income statement comprising £5.7m transferred from the hedging reserve and a £3.7m fair market value loss for the year. Any future impact on the income statement is expected to be immaterial.
c) A cash flow hedge with a principal of €300m that was entered into in November 2007 fixed at 4.26% until August 2010.
d) A cash flow hedge with a principal of €250m that was entered into in November 2007 fixed at 4.27% until May 2012.
The following swaps were closed out in 2008 with the fair market value of £2.1m being charged to the income statement.
- A cash flow hedge with a principal of €150m that was entered into in January 2008 fixed at 3.94%.
- A cash flow hedge with a principal of €150m that was entered into in December 2007 fixed at 4.24%.
The conditions of all swaps remaining in place at 31 December 2008 coincide with the material conditions of the underlying loans. The underlying cash flows are expected to take place periodically from 2009 to 2012 and will affect profit or loss over the same period of time.
The benchmark rate for floating rate financial liabilities is the relevant interbank borrowing rate.
During the year £6.8m (2007: £0.2m) has been transferred from the hedging reserve to the income statement in respect of interest rate swaps.
Hedge of net investments in foreign entities
Included in bank loans are borrowings of US$nil (£nil) (2007: US$150.0m (£75.6m)), CAN$nil (£nil) (2007: CAN$nil (£nil)) and €540m (£516.1m) (2007: €1,145.0m (£841.6m)) which have been designated as a hedge of net investments in the foreign currency denominated net assets of the Group and are being used to reduce the exposure to foreign exchange risk. In addition the Group has synthetic debt in the form of foreign exchange forward contracts in place split between US$85.0m (£56.7m) (2007: US$283.8m (£143.0m)), CAN$nil (£nil) (2007: CAN$192.1m (£97.1m)), and €nil (£nil) (2007: €160.0m (£117.6m)) to complete the post-tax hedge of the net investment in foreign entities. The portion of the gain or loss on the foreign exchange forward contracts that is determined to be an effective hedge is recognised directly in equity and, to this extent, offsets any gains or losses on translation of the net investments in the subsidiaries. No ineffectiveness has been recognised in the income statement.
Fuel price hedges
The Group has a number of fuel price swaps in place to hedge the different types of fuel used in each division. Ultra low sulphur diesel used in the UK Bus, UK Coach and European Coach & Bus divisions and gasoil as used in the UK Trains division are hedged by swaps in the same type of fuel. Diesel used in the North American division is hedged by heating oil swaps. The timing of the swap cash flows will match the underlying fuel purchases from 2009 through to 2011.
During the year £16.0m (2007: £0.7m) has been transferred from the hedging reserve, of which a £8.5m (2007: £4.3 m debit) was recognised in the hedging reserve at 1 January 2008 and the remainder was generated during the year due to the movement in market fuel prices.
Fuel price swaps can be analysed as follows:
| 31 December 2008 Fair value £m |
31 December 2007 Fair value £m |
31 December 2008 Volume million litres | 31 December 2007 Volume million litres | |
|---|---|---|---|---|
| Sterling denominated fuel swaps – UK Bus, UK Coach and UK Trains | (12.8) | 4.7 | 111.2 | 57.0 |
| US dollar denominated fuel swaps – North American Bus | (10.6) | 1.5 | 66.1 | 23.3 |
| Euro denominated fuel swaps – European Coach & Bus | (27.6) | 2.3 | 94.1 | 48.8 |
| Fuel price swaps included in current (liabilities)/assets | (51.0) | 8.5 | 271.4 | 129.1 |
| Sterling denominated fuel swaps – UK Bus, UK Coach and UK Trains | (2.8) | 1.7 | 32.4 | 24.0 |
| US dollar denominated fuel swaps – North American Bus | (16.5) | 0.4 | 45.4 | 11.4 |
| Euro denominated fuel swaps – European Coach & Bus | (8.9) | 1.5 | 48.0 | 34.5 |
| Fuel price swaps included in non-current (liabilities)/assets | (28.2) | 3.6 | 125.8 | 69.9 |
| Total fuel price swaps | (79.2) | 12.1 | 397.2 | 199.0 |
Interest swap at fair value through profit or loss
The Group has entered into a series of six month (2007: one year) basis swaps, where the Company pays six month EURIBOR less a margin and receives one month EURIBOR. These swaps were entered into in July 2008 (2007: November) and expire at various times in the first half of 2009 (2007: November 2008.) The Group did not apply hedge accounting for these instruments. The fair value at 31 December 2008 was a liability of £3.2m (2007: £0.9m).