The directors present the strategic report for the year ended 31 July 2017.
The principal activity of the company was the supply of energy to business customers.
The company is an independent UK-owned utilities supplier, offering highly competitive products, with the opportunity for every new electricity customer to have a Smart Meter installed. This enables thousands of SME businesses across the UK to exercise greater control over their costs and save on their energy bills.
Business review and financial performance
Dual Energy Direct Limited had grown substantially through the 2015/16 year, with profit before tax increasing by 317% compared to the previous year. At the beginning of the 2016/17 year, the directors and shareholders took the decision to retain this profit within the company and to continue to invest in growing the customer base. There was an acceptance that profit margins would be impacted in the short term during this growth phase, but the strategy was to create scale and promote the long-term value of the business.
The company’s hedging strategy requires two principal risks to be balanced: margin risk resulting from rising markets and mark-to-market risk from falling markets. The company therefore forward hedges a proportion of its contracted energy volumes, accepting that this strategy will lead to strong profits in some years, which are retained to protect against losses in periods with rising costs.
From July 2016 to November 2016, the number of customers grew by 27% in line with delivering the growth strategy. However, this rapid growth in volume coincided with extremely volatile wholesale energy prices during the winter of 2016, when tight electricity system margins in the UK were compounded by French nuclear outages. Therefore, whilst the company had anticipated making losses over the winter months, the actual level of losses was higher than planned. The directors could have taken the decision to mitigate these losses by breaking customer contracts and increasing prices. However, focus was maintained on the long-term size and value of the customer base, and the financial losses were funded through the previous year’s retained earnings.
The challenge faced during the year with respect to wholesale cost volatility, is a common one amongst independent suppliers. The requirement to collateralise forward hedged positions, and manage the risk of mark-to-market movements puts pressure on liquidity and can inhibit growth. The directors anticipate that future wholesale cost surges are becoming more likely, as reliable sources of power continue to be replaced with intermittent low-carbon generation. As such, the company is actively engaged in discussions to explore a revised trading credit arrangement, which would provide the opportunity to forward hedge a higher proportion of contracted volumes, as well as enable a more productive use of capital.
Dual Energy Direct Limited has constantly sought to innovate, through its products and sales partner programmes. The company is now actively promoting its Dual Gas business, and continues to be at the forefront of the Smart Meter rollout. Further product development and technological innovation will be delivered in 2018 to ensure customers continue to benefit from competitive prices and superior products and service.
The directors are confident that the company will return to profit in 2018, strengthening its balance sheet and cash generation, and starting to reap the benefits of the scale that has been built during 2017.
The principal risks and uncertainties facing the company relate to volatility in wholesale energy costs, bad debt risk and competitive price pressure.
The company seeks to mitigate the risk of volatility in wholesale energy costs by securing electricity under forward contracts. This requires the management of the two conflicting risks of prices increasing and impacting on profitability, and of prices decreasing and leading to mark-to-market calls. The tension between these risks is best managed through a structured trading arrangement, and the company has initiated an exercise to explore the options available in this respect.
The risk of bad debt is managed in a variety of ways that are integrated within the business model. Smart meter readings reduce the likelihood of estimates and inaccuracies, which can lead to higher levels of default. Dual Energy Direct Limited adopts a ‘direct debit only’ policy to reduce the lead time between billing and payment, and has also invested in an industry leading pre-pay system to counter the potential for growing debtor balances.
The business energy market is very competitive and Dual Energy Direct Limited seeks to offer highly attractive prices to new and existing customers. In addition to competitive prices, the company offers further benefits to its customers, such as fixed payment plans, price guarantees, UK Customer Services, and is leading the way in providing free Smart Meters to all customers.
In addition to profitability measures, the directors monitor the following KPIs:
Turnover – increased by 67% compared to last year.
Customer numbers – the number of energy supply points increased by 28% over the year.
Credit control – the bad and doubtful debt charge was 1.2% of revenue for the year.
On behalf of the board
The directors present their annual report and financial statements for the year ended 31 July 2017.
The directors who held office during the year and up to the date of signature of the financial statements were as follows:
The results for the year are set out on page 8.
No ordinary dividends were paid. The directors do not recommend payment of a final dividend.
The company conducts research and development in relation to computer software development.
This information has been included in the Strategic Report as allowable in the Companies Act 2006.
The auditor, MHA Carpenter Box, is deemed to be reappointed under section 487(2) of the Companies Act 2006.
The company operates management policies designed to minimise its exposure to financial risk.
Price risk
The company is exposed due to the volatile nature of the energy industry. This is mitigated through detailed analysis of expected energy usage along with the utilisation of forward contracts to fix the future costs of energy to the company.
Credit risk
The company operates a number of policies and procedures designed to mitigate credit risk. In particular, before entering into transactions with new customers a detailed credit review is undertaken to determine whether or not, in the opinion of the directors, the customer has the ability to meet its debts as they fall due. Security deposits are also taken where necessary.
Liquidity and cash flow risk
The company operates a range of policies to ensure there is sufficient liquidity and cash to meet its liabilities. Regular cash flow forecasts are prepared to ensure the company is able to pay its debts as they fall due.
This report is made solely to the company’s members, as a body, in accordance with Chapter 3 of Part 16 of the Companies Act 2006. Our audit work has been undertaken so that we might state to the company’s members those matters we are required to state to them in an auditor's report and for no other purpose. To the fullest extent permitted by law, we do not accept or assume responsibility to anyone other than the company and the company’s members as a body, for our audit work, for this report, or for the opinions we have formed.
Basis for opinion
We conducted our audit in accordance with International Standards on Auditing (UK) (ISAs (UK)) and applicable law. Our responsibilities under those standards are further described in the Auditor's responsibilities for the audit of the financial statements section of our report. We are independent of the company in accordance with the ethical requirements that are relevant to our audit of the financial statements in the UK, including the FRC’s Ethical Standard , and we have fulfilled our other ethical responsibilities in accordance with these requirements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our opinion.
Conclusions relating to going concern
We have nothing to report in respect of the following matters in relation to which the ISAs (UK) require us to report to you where:
the directors' use of the going concern basis of accounting in the preparation of the financial statements is not appropriate; or
the directors have not disclosed in the financial statements any identified material uncertainties that may cast significant doubt about the company’s ability to continue to adopt the going concern basis of accounting for a period of at least twelve months from the date when the financial statements are authorised for issue .
Other information
The directors are responsible for the other information. The other information comprises the information included in the annual report, other than the financial statements and our auditor’s report thereon. Our opinion on the financial statements does not cover the other information and, except to the extent otherwise explicitly stated in our report, we do not express any form of assurance conclusion thereon.
In connection with our audit of the financial statements, our responsibility is to read the other information and, in doing so, consider whether the other information is materially inconsistent with the financial statements or our knowledge obtained in the audit or otherwise appears to be materially misstated. If we identify such material inconsistencies or apparent material misstatements, we are required to determine whether there is a material misstatement in the financial statements or a material misstatement of the other information. If, based on the work we have performed, we conclude that there is a material misstatement of this other information, we are required to report that fact.
We have nothing to report in this regard.
Opinions on other matters prescribed by the Companies Act 2006
In our opinion, based on the work undertaken in the course of our audit :
the information given in the Strategic Report and the Directors' Report for the financial year for which the financial statements are prepared is consistent with the financial statements; and
the Strategic Report and the Directors' Report have been prepared in accordance with applicable legal requirements.
As explained more fully in the Directors' Responsibilities Statement, the directors are responsible for the preparation of the financial statements and for being satisfied that they give a true and fair view, and for such internal control as the directors determine is necessary to enable the preparation of financial statements that are free from material misstatement, whether due to fraud or error.
In preparing the financial statements, the directors are responsible for assessing the company’s ability to continue as a going concern, disclosing, as applicable, matters related to going concern and using the going concern basis of accounting unless the directors either intend to liquidate the company or to cease operations, or have no realistic alternative but to do so.
Our objectives are to obtain reasonable assurance about whether the financial statements as a whole are free from material misstatement, whether due to fraud or error, and to issue an auditor’s report that includes our opinion. Reasonable assurance is a high level of assurance, but is not a guarantee that an audit conducted in accordance with ISAs (UK) will always detect a material misstatement when it exists. Misstatements can arise from fraud or error and are considered material if, individually or in the aggregate, they could reasonably be expected to influence the economic decisions of users taken on the basis of these financial statements.
A further description of our responsibilities for the audit of the financial statements is located on the Financial Reporting Council’s website at: http://www.frc.org.uk/auditorsresponsibilities . This description forms part of our auditor’s report.
The statement of comprehensive income has been prepared on the basis that all operations are continuing operations.
Dual Energy Direct Limited is a private company limited by shares incorporated in England and Wales. The registered office is Premium House, The Esplanade, Worthing, West Sussex, BN11 2BJ.
These financial statements have been prepared in accordance with FRS 102 “The Financial Reporting Standard applicable in the UK and Republic of Ireland” (“FRS 102”) and the requirements of the Companies Act 2006.
The financial statements are prepared in sterling , which is the functional currency of the company. Monetary a mounts in these financial statements are rounded to the nearest £ 1 .
The financial statements have been prepared under the historical cost convention. The principal accounting policies adopted are set out below.
This company is a qualifying entity for the purposes of FRS 102, being a member of a group where the parent of that group prepares publicly available consolidated financial statements , including this company, which are intended to give a true and fair view of the assets, liabilities, financial position and profit or loss of the group . T he company has therefore taken advantage of e xemptions from the following disclosure requirements:
Section 7 ‘Statement of Cash Flows’ – Presentation of a statement of cash f low and related notes and disclosures ;
Section 11 ‘Basic Financial Instruments’ and Section 12 ‘Other Financial Instrument Issues’ – Carrying amounts, interest income/expense and net gains/losses for each category of financial instrument; basis of determining fair values; details of collateral, loan defaults or breaches, details of hedges, hedging fair value changes recognised in profit or loss and in other comprehensive income ;
Section 33 ‘Related Party Disclosures’ – Compensation for key management personnel .
The company has taken advantage of the exemption under section 400 of the Companies Act 2006 not to prepare consolidated accounts. The financial statements present information about the company as an individual entity and not about its group .
Despite the current statement of financial position of the company, the group has considerable balance sheet strength and cash reserves. The company has a fully tested risk mitigation strategy. The exceptional events of the winter in 2016 resulted in the company deploying its first line of defence, i.e. ensuring cash reserves were sufficient to withstand periods of high cost volatility. The next line of defence would be to increase customer contract prices, but this action was not necessary during the period under review. As a consequence, the directors believe that the company is well placed to manage its business risks successfully, even in the event of continued wholesale cost volatility.
The directors have assessed forecasts of reserves and future cash flows, and are confident that the company’s liabilities will continue to be paid when they become due. There is therefore a reasonable expectation that the company and the group have adequate resources to continue in operational existence for the foreseeable future. Accordingly, the directors continue to adopt the going concern basis in preparing the annual report and accounts.
Intangible assets acquired separately from a business are recognised at cost and are subsequently measured at cost less accumulated amortisation and accumulated impairment losses.
Amortisation is recognised so as to write off the cost or valuation of assets less their residual values over their useful lives on the following bases:
The gain or loss arising on the disposal of an asset is determined as the difference between the sale proceeds and the carrying value of the asset, and is credited or charged to profit or loss .
Interests in subsidiaries are initially measured at cost and subsequently measured at cost less any accumulated impairment losses. The investments are assessed for impairment at each reporting date and any impairment losses or reversals of impairment losses are recognised immediately in profit or loss.
A subsidiary is an entity controlled by the company . Control is the power to govern the financial and operating policies of the entity so as to obtain benefits from its activities.
At each reporting period end date, the company reviews the carrying amounts of its tangible and intangible assets to determine whether there is any indication that those assets have suffered an impairment loss. If any such indication exists, the recoverable amount of the asset is estimated in order to determine the extent of the impairment loss.
Recoverable amount is the higher of fair value less costs to sell and value in use. In assessing value in use, the estimated future cash flows are discounted to their present value using a pre-tax discount rate that reflects current market assessments of the time value of money and the risks specific to the asset for which the estimates of future cash flows have not been adjusted.
If the recoverable amount of an asset is estimated to be less than its carrying amount, the carrying amount of the asset is reduced to its recoverable amount. An impairment loss is recognised immediately in profit or loss, unless the relevant asset is carried at a revalued amount, in which case the impairment loss is treated as a revaluation decrease.
Equity instruments issued by the company are recorded at the proceeds received, net of direct issue costs. Dividends payable on equity instruments are recognised as liabilities once they are no longer at the discretion of the company.
In the application of the company’s accounting policies, the directors are required to make judgements, estimates and assumptions about the carrying amount of assets and liabilities that are not readily apparent from other sources. The estimates and associated assumptions are based on historical experience and other factors that are considered to be relevant. Actual results may differ from these estimates.
The estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to accounting estimates are recognised in the period in which the estimate is revised where the revision affects only that period, or in the period of the revision and future periods where the revision affects both current and future periods.
The following judgements (apart from those involving estimates) have had the most significant effect on amounts recognised in the financial statements.
The directors have reviewed the long term forward commercial agreements which the company has in place for the supply of electricity. It is considered that these contracts are held for the purpose of the delivery of electricity, which is a non-financial item, in accordance with the company's expected future purchase and sale requirements. These contracts are solely for the purchase of electricity for the company's own use to supply to its customers. Additionally the terms of these contracts state that the net settlement through the exchange of cash or another financial instrument is not permitted. As well as this the company has no prior history of settling these contracts in this manner. As a result all agreements result in the full delivery of electricity in accordance with the terms of the agreements in place.
On this basis the directors consider that these contracts fall outside the scope of Section 12 of FRS 102 and the ‘own use’ exemption has been applied. Therefore these contracts have not been treated as financial instruments and are not required to be fair valued at the statement of financial position date.
The estimates and assumptions which have a significant risk of causing a material adjustment to the carrying amount of assets and liabilities are as follows.
Revenue derived from the sale of energy includes an estimate of the value of electricity supplied to customers between the dates of the last meter reading and the end of the reporting period. Estimates of the number of units consumed but not yet processed through the settlement process are based on historic data until final reconciliation data is received.
Similarly purchase volumes are also subject to the same degree of estimation, with associated settlement costs dependant on the receipt of final reconciliation data.
The company operates in one principal area of activity, that of the rendering of services, which is undertaken in the United Kingdom. Revenue is therefore made up 100% by the fees receivable in relation to the rendering of these services.
The average monthly number of persons (including directors) employed by the company during the year was:
Their aggregate remuneration comprised:
The company operates a defined contribution pension scheme for all qualifying employees. The assets of the scheme are held separately from those of the company in an independently administered fund.
The actual (credit)/charge for the year can be reconciled to the expected (credit)/charge for the year based on the profit or loss and the standard rate of tax as follows:
At the statement of financial position date the company had taxable losses of £783,656 (2016 - £nil) carried forward.
On 9 August 2016 the subsidiary company, Dual Energy (Sales & Marketing) Limited, was dissolved.
Included within other receivables is £12,145,236 (2016 - £6,658,353) which is held as a deposit with the company's energy supplier.
Deferred tax assets and liabilities are offset where the company has a legally enforceable right to do so. The following is the analysis of the deferred tax balances (after offset) for financial reporting purposes:
The directors have considered the deferred tax assets and liabilities notes above and concluded that it is not possible to state the estimated assets and liabilities which will reverse within the next 12 months. This is due to the level of reversal being dependant on events which are not yet known.
Ordinary shares have attached to them full voting, dividend and capital distribution (including on winding up) rights.
The company is included in a joint security arrangement whereby all present and future indebtedness and liabilities owing to the bank are secured by a composite unlimited multilateral guarantee and a debenture given by a fellow group member, Dual Energy Group Limited and includes Dual Energy Direct Limited and Dual Energy Limited as well as a related party Symbiant Technologies Limited . At the balance sheet date there was no liability due under this arrangement.
At the balance sheet date the company has agreed forward contracts totalling £18,435,194 (2016 - £11,484,463) for the purchase of electricity to supply to its customers.
At the balance sheet date the company was committed to purchasing £2,279,000 (2016 - £nil) worth of Renewable Obligation Certificates (ROC's).
During the period charges of £107,200 (2016 - £105,600) were payable to Symbiant Technologies Limited, a fellow subsidiary of Dual Energy Group Limited. During the year charges totalling £4,837 (2016 - £1,236) were paid by Symbiant Technologies Limited. At the year end Symbiant Technologies Limited owed the company £nil (2016 - £11,220 included within trade creditors).
During the period charges of £1,442,378 (2016 - £1,300,402) were payable to Dual Energy Group Limited in respect of interest, wages and premises expenses. At the balance sheet date the company owed £2,175,000 (2016 - £nil) to Dual Energy Group Limited for amounts loaned to the company during the year.
At the balance sheet date the company owed £1,000,000 (2016 - £nil) to Dual Energy Group Holdings Limited for amounts loaned to the company during year.
The ultimate parent company is Dual Energy Group Holdings Limited, a company controlled by its directors and no one party has ultimate control.
Dual Energy Group Holdings Limited prepares consolidated financial statements and copies can be obtained from Companies House. The registered office of Dual Energy Group Holdings Limited is Amelia House, Crescent Road, Worthing, BN11 1QR.