TIDMSMS
RNS Number : 3722G
Smart Metering Systems PLC
17 March 2020
17 March 2020
Smart Metering Systems plc
Final results for the year ended 31 December 2019
Smart Metering Systems plc (AIM: SMS, "the Group"), which
installs and manages smart meters and carbon reduction assets
("CaRe") to facilitate effective energy management, has published
its final results for the 12 months to 31 December 2019.
The Group has also signed a partnership agreement with the
Columbia Threadneedle Sustainable Infrastructure Fund ("ESIF") to
develop SMS's pipeline of CaRe asset opportunities - see separate
announcement.
On 12 March 2020, SMS announced that it has conditionally sold a
minority of its meter assets to funds managed by Equitix Investment
Management for a total gross cash consideration of GBP291 million.
The disposal will enable the implementation of an enhanced
long-term, sustainable dividend payment policy and results in a
significant reshaping of SMS's capital structure.
2019 financial performance
GBP'000 2019 2018
Group revenue 114,281 98,492
Index-linked annualised recurring
revenue (ILARR)(1) 90,118 75,358
Pre-exceptional EBITDA(2) 58,897 51,619
EBITDA 50,370 35,478
Profit before taxation 5,463 5,351
Underlying profit before taxation(3) 15,577 25,085
Underlying basic EPS (p)(4) 11.30 18.46
Basic EPS (p) 3.56 3.97
Dividend per share (p) 6.88 5.98
Net debt 219,168 141,989
------------------------------------- ------- -------
1 ILARR is the revenue generated from meter rental and data
contracts at a point in time. Includes revenue from third-party
managed meters.
2 Pre-exceptional EBITDA is statutory EBITDA excluding
exceptional items.
3 Underlying profit before taxation is profit before taxation
excluding exceptional items and amortisation of intangibles.
4 Underlying basic EPS is underlying profit after taxation
divided by the weighted average number of ordinary shares for the
purpose of basic EPS.
A reconciliation between reported and underlying performance is
detailed in the Financial Review section below.
Highlights
-- Financial
-- Total ILARR increased 20% to GBP90.1m (2018: GBP75.3m)
-- Pre-exceptional EBITDA up 14% to GBP58.9m (2018: GBP51.6m)
-- Disposal - announced 12 March 2020
-- GBP291m gross proceeds from asset disposal
-- Cash consideration will result in positive net cash position for Group overall
-- Post the disposal, retained Group ILARR is GBP73.2m as at 29 February 2020
-- Partnership with ESIF
-- Funds SMS's pipeline of Carbon Reduction (CaRe) assets
-- CaRe assets developed within SMS's well-established energy management division
-- ESIF to fund and own the CaRe assets - SMS receives
incremental long-term asset management fees
-- Business positioning and opportunities
-- Smart meters
-- Growth in metering assets - total market c.36.5m meters to be exchanged
-- Existing SMS c.2m smart meter order book expected to add c.GBP40m ILARR
-- Existing SMS customers have additional c.4m to be exchanged
-- Dividend
-- Long-term sustainable growing dividends with upside potential
from existing and new meter assets
-- Proposed FY20 dividends increased to 25p - grow at least in line with RPI p.a. to 2024
-- Sustainability is at the heart of SMS' operations
-- Smart meters are integral part of a flexible, decentralised and decarbonised energy system
-- Well placed to originate CaRe assets in current and emerging
electricity generation, storage, heat, lighting and transportation
industry market segments
Alan Foy, Chief Executive Officer, commented:
"A 20% increase in our key financial metric - ILARR - and a 14%
increase in EBITDA in extremely challenging markets, is a testimony
to our market position and operational capabilities.
"Last week's transaction will not only realise considerable cash
returns and demonstrates the substantial value of our smart meter
portfolio but also will enable us to enhance greatly shareholder
value with a significant and sustainable increase in dividends.
"The UK is the first major economy to adopt net zero emissions
by 2050, mainly by electrification strategies. This will need the
establishment of a decentralised and decarbonised energy system as
well as substantial capital to meet that target.
"A combination of our strengthened balance sheet to support our
smart meter rollout programme, todays' partnership announcement
with ESIF and our energy management division's track record,
positions us extremely well to accelerate and rapid expand our CaRe
assets in the current and emerging electricity generation, storage,
lighting, heating and transportation markets."
There will be an analyst conference call at 9.00am today -
please contact sms@instinctif.com or telephone 020 7457 2077 for
details. The full year results presentation will be published on
the Group's website shortly.
For further information:
Smart Metering Systems plc 0141 249 3850
Alan Foy, Chief Executive Officer
David Thompson, Chief Financial
Officer
Tim Mortlock, Chief Operating Officer
Dilip Kejriwal, Head of Investor
Relations
Cenkos Securities plc (Nomad and 0131 220 6939 / 020 7397
Joint Broker) 8900
Neil McDonald / Pete Lynch
Investec Bank plc (Joint Broker) 020 7597 5970
Christopher Baird / Henry Reast
Instinctif Partners 020 7457 2077
Adrian Duffield / Kay Larsen /
Chantal Woolcock
Notes to editors
SMS plc (www.sms-plc.com) installs and manages smart meters and
carbon reduction assets ("CaRe") to facilitate effective energy
management. Established in 1995, SMS provides a full end-to-end
service for metering financing, installation, management and
maintenance, with a highly skilled workforce and deep engineering
expertise.
SMS had 3.73 million meter and data assets under management as
of 31 December 2019. SMS's smart meter expertise also enables the
Company to provide consultancy services that allow organisations
and corporates to enhance long term efficiency and effectiveness in
the management of energy.
SMS's energy management and asset installation services also
include infrastructure design, installation, consultancy and
project management services for new gas, electricity, water and
telecoms connections for licensed energy and telecoms suppliers,
end consumers and the UK's licensed electricity Distribution
Network Owners (DNOs).
SMS employs in excess of 1,200 people across the UK who support
the installation and ongoing management of metering assets.
SMS plc is headquartered in Glasgow with 12 locations across the
UK.
SMS's shares are listed on AIM.
Chairman's statement
Introduction
I am pleased to report that we ended the year in line with our
expectations, and delivered continued growth in our ILARR, despite
various industry-wide challenges. The continued volatility in the
UK smart meter rollout has seen industry installation run rates lag
behind previously anticipated volumes, and technical issues, beyond
our control, have meant delays to certain customers getting "SMETS2
ready". As a result, we have had to navigate the knock-on effect of
this on our operational activity and financial results.
Despite these challenges, and the resulting impact on our
short-term profitability, it is important that we keep sight of the
long-term opportunities our business can address. The smart meter
rollout remains core to a lower carbon future for the UK. Further,
the strategic acquisition of Solo Energy has strengthened our
energy services platform to accelerate the delivery of extended
energy services to our customers.
We previously announced that we were exploring options to
monetise the value of a minority of the Group's meter assets. On 12
March 2020, the Group conditionally agreed to dispose of a minority
of the Group's meter assets for the gross consideration of GBP291m.
This represents GBP18.4m ILARR and SMS will continue to manage the
disposed assets for an RPI-linked management fee of c.GBP0.8m.
This transaction generates considerable cash returns and
demonstrates the substantial value of our smart meter portfolio.
The value that this transaction delivers enables the acceleration
of shareholder returns, with the proposal of a significant change
to our dividend policy, detailed further below.
We remain focused on securing long-term sustainable revenue
streams, supported by an efficient capital structure, and are
committed to seeking additional opportunities that enable the
fulfilment of our mission: to deliver the future of smart
energy.
Our results
Investment in our portfolio of revenue-generating assets has
remained strong, reflected in the 20% increase in our ILARR to
GBP90.1m and an overall increase in our assets under management to
3.7 million from 3.1 million at the end of 2018.
Our business delivered a resilient performance this year,
despite the challenges we faced with delays in the smart meter
rollout.
Whilst our statutory profitability after tax was lower than last
year, our pre-exceptional EBITDA of GBP58.9m continued to grow,
reflecting the strength of our index linked, recurring revenue base
together with the significant efforts of the management team to
manage our cost base in order to mitigate the impact of the rollout
delays on our near-term profitability.
Navigating the smart meter rollout and creating opportunities
for the future
The UK smart meter rollout continues to represent a core
opportunity for us over the next few years. With 16.5 million smart
and advanced meters operating as at 31 December 2019, there are
still c.36.5 million meters to be exchanged.
Our contracted c.2 million pipeline opportunity from existing
contracts with independent energy suppliers should add a further
c.GBP40m of ILARR. With the range of technical issues during 2019
now predominantly resolved, as further detailed in the Operational
review below, our focus for 2020 is to work closely with our
customers and help them deliver their smart meter installation
plans efficiently and effectively.
The energy market provides a wealth of opportunities for future
growth, especially as the UK continues its decarbonisation journey
with a legally binding net-zero carbon emission target by 2050. A
new market for the management and operation of carbon reduction
("CaRe") assets, including EV charging points and battery storage,
continues to evolve and developments in this space are
accelerating. We are already well positioned to respond with the
strategic acquisition of Solo Energy and its FlexiGrid platform,
which operates the integration of energy storage systems, renewable
generation and vehicle charging into the UK's energy systems and
builds out our energy management business.
Delivering our strategy
During 2019 we were focused on continued growth of our ILARR,
including preparations for the establishment of an asset base in
CaRe assets, and overall operational efficiency through careful
management of our installation capacity and engineering
productivity.
The smart meter rollout will remain the core focus in the
immediate future and with an increasing installed base of smart
meters we continue to progress the origination of new CaRe assets.
With the likely extended rollout period for smart meters, we will
ensure our resources and cost base are aligned with a strong focus
on operational efficiency.
Our strategic priority of capital efficiency has been the
subject of a comprehensive review by the Board, to ensure we are
optimising our capital structure in the face of changing markets
and opportunities. The recently announced disposal of a minority of
our I&C portfolio assists in the delivery of this. We have also
entered into a partnership with the Columbia Threadneedle
Sustainable Infrastructure Fund ("ESIF") to finance our pipeline of
CaRe assets. Further details are provided in the Chief Executive
Officer's statement.
Dividend
Over the last few years, we have aimed to provide a progressive,
through-cycle dividend that shares the rewards of our profitability
and growth with shareholders and provides a sustainable return. In
this context, the Board is proposing a final cash dividend of 4.58p
per ordinary share for the year ended 31 December 2019 (2018:
3.98p). In addition to the interim dividend of 2.30p (2018: 2.00p),
this will give a total ordinary dividend of 6.88p (2018: 5.98p), an
increase of 15% on last year.
Following the minority asset disposal, the business will be in a
net positive cash position on completion. This will allow us to
generate significant additional value for shareholders from our
existing asset base.
I am, therefore, pleased to announce an intended, new and
enhanced dividend policy of 25p per share per annum. Effective from
2020, this will be payable in quarterly instalments and will
increase with RPI through to 2024. Representing over three times
the dividend of 6.88p in 2019, this marks the start of returning
materially increased value through distribution to shareholders
over the medium term.
Continued investment in sustainability: the environment, our
people, and health and safety
With a core Group focus on investment in assets that help reduce
carbon, operating sustainably is a key focus area for us and we aim
to be transparent with our investors on the impact we are having on
both the environment and society around us, and our people.
In 2019, we developed a holistic view of our sustainability,
quantifying our positive impacts delivered through our services,
and negative impacts from our business estate and fleet. I am very
proud to confirm that, in 2019, the positive services we were able
to provide significantly outweighed the footprint we left behind,
supported by our products and services and efforts to reduce our
own footprint through fleet upgrades, property refurbishments and
procurement of renewable electricity.
The success of our business is undoubtedly reliant on the
continued support of our employees. We put our people first,
placing considerable value on their engagement. During 2019, we
refined our values and behaviours through a collaborative project,
with extensive involvement from employees at all levels. We now
have a clear set of values that align with our strategic objectives
and future focus. I would like to thank all our employees for their
hard work and commitment during the year.
The health and safety of our employees and customers continues
to be a key priority. I am pleased to report that our performance
over the year remained stable, despite a significant increase in
our engineering workforce, with no notable detrimental changes to
our accident frequency rates.
Coronavirus
As the situation continues to evolve, our primary concern is for
the welfare of our people. We are following the development of the
coronavirus outbreak closely and have implemented several immediate
measures to both protect our employees and to prepare for possible
consequences of the virus. Whilst the outbreak has not yet had any
direct impact on our operations, it is unclear how it will develop.
It is currently difficult to assess the potential impact this could
have on our 2020 business activities and results, but we will
continue to follow developments closely and are prepared to take
further action as appropriate.
Current trading and outlook
We have demonstrated during the year our resilience in managing
the short-term challenges arising from the volatility of the smart
meter rollout, whilst addressing future market opportunities
through strategic investment and development of our carbon
reduction proposition. With the technical issues experienced during
2019 substantially behind us, and support from BEIS in the form of
a proposed extended rollout timescale to the end of 2024, we are
well placed to progressively deliver the rollout in an efficient
manner with our customers.
Capital efficiency remains a key strategic priority for us,
ensuring we can effectively respond to market developments, and
take advantage of additional opportunities, whilst also increasing
shareholder value.
The years ahead hold more exciting developments for our
business, with the ongoing smart meter rollout and growth in our
CaRe asset base. The Board remains confident in SMS's strength and
potential in the face of a transforming energy landscape.
The current year has started in line with the Board's
expectations and we continue to actively engage with both existing
and potential customers in securing our future order book.
Chief Executive Officer's statement
Net-zero carbon at the heart of our activities
The scale and urgency of global action required for climate
change to be addressed has undergone a step-change during 2019.
This has resulted in a governmental, business and consumer response
that is likely to bring significant market disruption with the UK
becoming the first major economy to legislate for net-zero carbon
emissions. The impact of this will be especially evident in the
energy industry, with long-term structural changes to how and where
energy is generated, stored and used.
The UK's net-zero target will continue to drive public policy
decisions in our industry, one of which is the need for smart
meters. Smart meters are an integral part of a flexible,
decentralised and decarbonised energy system - central to reducing
CO2 emissions and reliance on unsustainable energy sources.
Sustainability is therefore at the heart of our business.
Central to the government's decision to convert the UK to smart
meters is the clear impact that control over energy consumption has
on reducing carbon emissions. This macro trend provides substantial
opportunities for our business, and with 25 years' experience in
the energy industry and a well-established IT, data and engineering
platform, SMS is well positioned to take advantage of them and
contribute positively towards a sustainable future through the
development of CaRe assets that complement and are enabled by smart
meters.
Strategy
The industry trends provide a clear direction and substantial
opportunity for the continued long-term success of our business,
delivering and maintaining both meter and CaRe assets, which
provide high-quality and secure recurring revenue streams.
To deliver this, our focus remains on the following three
pillars of our strategy, on which we have made strong progress in
2019:
-- securing long-term index-linked sustainable revenue streams;
-- efficient operational delivery and customer excellence; and
-- efficient capital structure to assist in generating shareholder value.
Index-linked revenue streams
The core focus of the Group is securing long-term index-linked,
sustainable, recurring revenue streams.
We have clear visibility of our recurring revenue pipeline, with
substantial opportunities to grow this further given both the
continued growth in the independent energy retail sector to over
30% market share and the c.36.5million meters still to be exchanged
in the industry as a whole.
Operational efficiency and excellence
In 2019 we continued to invest in engineering capacity, meter
stock and IT infrastructure to support the transition to SMETS2 and
ensure continual improvement in the efficiency, customer service,
quality and health and safety standards with which we deliver our
services.
Our IT systems are increasingly integrated with our customers',
enabling growing numbers of end consumers to book meter
installation appointments through their energy suppliers' "apps"
and websites, or at any point in which they speak directly to their
energy supplier. We continue to implement innovations which
minimise and automate the touchpoints we have with end consumers
during our established customer journey processes, improving the
customer experience and reducing the volume of activity within our
contact centre as a result.
These integrations with our customers are also important to
co-ordinate customer engagement and conversion with the energy
suppliers, who are taking ever greater ownership of that process in
the context of regulatory targets for smart meter deployment.
The proposed extended delivery period through to the end of 2024
for the smart meter rollout will mean a smoother rollout profile
ahead of us, and we have already taken steps in H2 2019 to improve
productivity by increasing the amount of transactional,
revenue-generating "callout" activity we provide to energy
suppliers.
We will maintain a strong focus on engineering efficiency and
cost discipline in 2020, aligning our resource base to the longer
rollout profile, whilst ensuring we have the flexibility to ramp up
installation rates to meet the significant opportunities ahead.
Capital structure optimisation and shareholder value
Whilst we have sufficient funding to meet our immediate
contracted opportunity pipeline, with net debt of c.GBP220m at 31
December 2019 from a facility, at that time, of GBP420m, we
continually review our financing to ensure we are optimising our
capital structure.
We have successfully agreed the conditional disposal of a
minority of our I&C portfolio, consisting of GBP18.4m of
I&C ILARR for GBP291m gross proceeds to funds managed by
Equitix Investment Management Limited. SMS will continue to manage
the disposed assets with an average age of c.4.7 years for GBP0.8m
of RPI-linked management fees.
In addition, we have retained a portion of I&C assets and
will continue to participate in the I&C market through our
utilities connections business. At completion, the disposal
generates a net positive cash position for the Group, enables
acceleration in dividend policy, enhances ability to maximise
future meter ILARR opportunities, demonstrates value of meter
assets and provides additional funding flexibility. We are well
placed to accelerate both growth and dividends whilst maintaining
prudent leverage through the investment cycle.
-- Growth funding
We have several funding options which provide significant
flexibility to maximise opportunities in the smart metering space:
long-term cash generation from our mature meter portfolio (post
dividend payments), a revised GBP300m RCF on attractive terms,
incremental cash generated from deployment of new assets and
further capital optimisation opportunities.
We have originated a strong pipeline of opportunities in CaRe
assets and have partnered with ESIF to provide funds for the
development of these assets. SMS's revenues and cash flows from
these assets and services are expected to increase over time.
-- Sustainable and long-term dividend policy
As part of our recent announcement of a minority asset disposal,
we also proposed a revised, sustainable and long-term dividend
policy. This starts at 25p per share for 2020, payable quarterly
and with a partial scrip alternative, and then growing at least in
line with RPI per annum during the meter growth phase to 2024. The
dividends are covered by cash generated from our retained existing
meter and data assets, providing strong forward visibility.
The Board believes there is further dividend upside potential to
the dividend policy summarised above.
2019 performance
The business experienced challenges in 2019 during the market's
transition from SMETS1 to SMETS2, with industry installation run
rates remaining largely flat throughout the year as a consequence.
"Radio frequency" interference issues in the northern region of the
rollout proved a significant impediment to mobilisation of SMETS2
meter installations, whilst the end date for SMETS1 meter
installations meant there were no viable alternatives.
With these technical issues relating to radio frequency
interference now substantially resolved, SMETS2 meters are being
installed in increasing volumes. The solution continues to mature
as a result, with c.4m SMETS2 meters connected to the network
across the industry as of 27 February 2020, although these have
largely been fitted by the Big Six UK energy suppliers. The
government has consulted to extend the smart meter rollout to
December 2024, reflecting a more realistic and pragmatic approach.
We believe this provides greater certainty to plan and deliver the
rollout in an efficient manner with our customers and expect the
rollout profile to be more evenly spread through to 2024 as a
result. With compulsory annual installation targets and the
introduction of a stricter regulatory regime for energy suppliers,
we will continue to work closely with all our customers to mobilise
and deliver their rollout requirements.
Some independent energy suppliers are still finalising
integrations with the Data Communications Company (DCC) and
end-to-end testing, with their readiness to commence mass SMETS2
meter rollouts at varying stages of development.
The industry issues in 2019 led to engineer productivity related
challenges, particularly in H1, which had a short-term impact on
profitability. Nonetheless, careful management of our operational
activities and a strong focus on engineering efficiency enabled us
to significantly reduce the impact on profitability. This is a
testament to the strength and resilience of our business model
that, despite these challenges, the execution of our strategy
delivered a robust financial performance highlighted by a growth of
20% in our primary financial KPI - ILARR.
We ended 2019 with GBP90.1m of ILARR. This growth was primarily
driven by the smart meter exchange programme, with recurring
revenue from domestic smart meters increasing by 40% in 2019 from
GBP27.1m to GBP38.1m. We have also continued growth in all our
other segments with I&C meters GBP21.2m (2018: GBP19.0m) at 31
December 2019, of which GBP18.4m have been subsequently sold, data
assets GBP12.3m (2018: GBP12.2m) and traditional domestic meters
GBP18.6m (2018: GBP17.1m). As we continue to roll out smart meters,
recurring revenue from our traditional meters will steadily
reduce.
Continued growth and new opportunities
Domestic smart meters and data
We have a contracted order pipeline of c.2 million meters from
our independent energy supplier customers which will initially add
c.GBP40m to our ILARR. SMS is also well placed, operationally and
financially, to take advantage of additional opportunities which we
see beyond this pipeline. We continue to focus on leveraging our
valued turnkey services to originate long-term, index-linked return
on our capital investment in meter assets.
The rollout of smart meters has created additional data
opportunities for SMS. We are focused on growing our data services
by launching elective half-hourly settlement and SMETS2 firmware
management services for our energy supplier customers. We believe
this is a substantial market opportunity in its own right, and the
revenues originating from these activities are also index linked
and recurring in nature.
CaRe assets
We also see significant growth opportunities in CaRe assets from
within our energy management division. Established over the last 25
years, we have developed a strong IT, Data and Energy platform
which coupled with our end-to-end turnkey solution and
industry-wide partnerships provides us with significant
opportunities and competitive advantage.
SMS is well placed to support the UK government's net zero
ambition by 2050. We can do this by continuing to leverage our
well- established energy services business as the UK transitions to
a more sustainable and low-carbon economy. Our partnership with
ESIF provides capital support for SMS's identified pipeline and
future opportunities of CaRe assets. Such initial CaRe assets
include energy efficiency systems (such as LED lighting, data and
controls), energy storage, distributed generation, and EV charging
infrastructure.
This year marks our 25th anniversary, which is testament to our
secure business foundation and long-term business model. We are
committed to creating a resilient energy infrastructure for the
future, focused on delivering long-term value for all our
stakeholders.
Operational review
Asset management division
Summary 2019 2018 Growth
---------------- --------- --------- ------
ILARR GBP90.1m 75.3m +20%
---------------- --------- --------- ------
Revenue GBP82.9m GBP65.5m +27%
---------------- --------- --------- ------
Depreciation
adjusted cost
of sales(*) (GBP5.9m) (GBP5.4m) +10%
---------------- --------- --------- ------
Depreciation
adjusted gross
profit(*) GBP77.0m GBP60.1m +28%
---------------- --------- --------- ------
Depreciation
adjusted gross
margin(*) 93% 92% +1%
---------------- --------- --------- ------
Capex on meters GBP95.2m GBP128.2m -26%
---------------- --------- --------- ------
*Excludes depreciation on revenue-generating assets, recognised
within cost of sales. Refer to the Financial review for definitions
and details on the Group's alternative performance measures.
Our focus
The asset management division is focused on growing our secure,
long-term, index-linked and sustainable revenue streams. Our
primary strategic objectives are to:
-- grow our ILARR, focused on recurring rental from the UK smart metering market opportunity;
-- manage and track all assets through their life, controlling
capital deployment and return on investment; and
-- continually ensure a capital-efficient structure, to maximise
the opportunity available to us from the smart meter rollout.
Through our industry accredited services, we continue to work
with energy suppliers to support them in managing the challenges
and opportunities smart metering brings. For example, by growing
our data and accredited industry settlement (half-hourly data)
services and providing firmware management test labs and services
for SMETS2 meters. These are opportunities for us to continue to
grow our ILARR, and to play a critical role in the realisation of
the smart energy grid, and a greener, low-carbon energy
network.
Performance summary
-- ILARR increased by GBP14.8m, a 20% increase, to GBP90.1m.
-- Our mature I&C and smart meter asset portfolios
contributed GBP59.2m to the ILARR, with our smart meter portfolio
growing 44% to over 1.2 million meters.
-- Further opportunity beyond this pipeline with contracted and potential customers.
-- Focus on capital efficient structures, ensuring sufficient
financial capacity to maximise opportunities in the smart meter
rollout whilst delivering secure and growing dividends for the long
term.
Our smart meter portfolio grew 44% to 1.2 million meters, adding
369,000 smart meters in the year (300,000 from our own installation
activity), and we expect installation run rates to be more evenly
spread following the BEIS extension of the smart meter rollout to
2024.
Data recurring revenue is in line with last year at GBP12.3m
(2018: GBP12.2m). This reflects the maturity of the I&C market
where we predominantly provide these services and our decision to
step back from some domestic data services, which require
low-margin transactional meter-read activity. We believe there is
still an opportunity for data services, both in the I&C and
Domestic markets, particularly in supporting energy suppliers with
the settlement of half-hourly data from smart meters (which does
not require manual meter readings).
Market conditions
Whilst there have been pressures on the deployment of smart
meters, the broader market continues to transform at a rapid pace,
with continued growth in the "independent" energy supplier market,
which now supplies over 30% of all customers. This was before the
recent acquisition of the SSE domestic retail business by Ovo
Energy, which had c. 12% market share. The independent market
segment with which SMS is most heavily engaged, benefits from our
turnkey approach including both installation and active asset
management. There are significant opportunities for us to grow our
market share beyond our contracted order book.
We have continued to see some smaller energy suppliers struggle
financially. In some cases, Ofgem's Supplier of Last Resort (SoLR)
has been implemented and, as a result, there has been further
consolidation in the market. This brings a small amount of risk to
SMS in respect of short-term credit risk to rental payments from
energy suppliers. However, the SoLR process has proven that, where
a more creditworthy supplier is appointed to take over a supplier
portfolio, then we have a standard industry process that transfers
our meter points to the new supplier and protects our rental
revenue streams going forward. Over the life of these long-term
assets and on a portfolio basis, this provides a secure backdrop to
the significant capital we deploy.
Our well-established turnkey integrated service remains unique
in the market and is a strong foundation for our continued growth.
We see competition in the market from other asset financing
businesses, and some energy suppliers using the smart meter rollout
extension to segregate some parts of the delivery process - most
notably taking greater ownership over the customer journey.
Asset installation division
Summary 2019 2018 Growth
-------------------------- ---------- ---------- ------
Revenue (external) GBP22.4m GBP26.6m -16%
-------------------------- ---------- ---------- ------
Cost of Sales (GBP28.0m) (GBP20.5m) -37%
-------------------------- ---------- ---------- ------
Gross profit (GBP5.6m) GBP6.1m -193%
-------------------------- ---------- ---------- ------
Gross margin (25%) 23% -48%
-------------------------- ---------- ---------- ------
Net portfolio additions -
smart and I&C meters* 313,000 449,000 -30%
-------------------------- ---------- ---------- ------
* Net portfolio additions include removals. 2019 net portfolio
additions of 313,000 exclude 69,000 smart meters acquired from a
customer during the year.
Our focus
The installation division is focused on operational excellence
and efficiency. Our primary strategic objectives are to:
-- safely deliver the installation of meter assets which provide
long-term recurring revenue to our business;
-- align our engineering capacity and installation profile over
the proposed, extended BEIS rollout period, using technology to
drive efficiency improvements and an improved customer experience
and appointment booking process; and
-- reduce the carbon footprint of our delivery - in particular,
from our vans by implementing more dynamic scheduling and
introducing electric vans where practical.
The installation division is working with our customers to trial
the installation of next-generation asset classes, in particular
smart home and domestic EV charging point devices which can be
installed at the same time as smart meter installations.
Performance summary
-- Completed operational, technology and supply chain transition
from SMETS1 to SMETS2 in 2019 and supported investment in capacity
platform.
-- Technology enhancements that provide online supplier booking
portals, to increase portfolio conversion and reduce operational
expenditure.
-- Successful navigation through third-party challenges e.g.
Radio Frequency interference issues in northern region resolved and
SMETS2 meters being deployed on a national basis.
-- Maintenance of a reliable engineering resource base, supported by in-house training academy.
-- Continual productivity improvements in H2, supported by
increase in chargeable transactional activity.
-- BEIS consultation, proposing an extension to 31 December 2024
means SMS expects a smoother installation profile, with engineering
business being sized accordingly and sufficient flexibility through
supply chain to manage peak demands.
-- Working closely with domestic and small I&C energy suppliers to meet rollout obligations.
2019 was a challenging year for the smart meter installation
market, with the government having mandated an end date for SMETS1,
effectively enforcing a transition to SMETS2. This was then
followed by a technical Radio Frequency interference issue with the
SMETS2 meter installations - which connect immediately to the
central DCC - leading to the inhibition of installations, most
notably in the north of England and Scotland.
In addition, each energy supplier's readiness for SMETS2 has
varied, in particular regarding their end-to-end connectivity to
the DCC to enable smart meters to be installed and commissioned.
The largest "Big Six" suppliers have typically been the most
advanced, with some independent energy suppliers, particularly the
small and medium-sized ones, still some way behind.
Overall, therefore, the industry has seen a slow-down in smart
meter installations in the year.
Therefore, whilst SMS has had the engineering capacity to fulfil
initially forecasted customer demand during 2019, actual
installation numbers and hence productivity have proven to be
challenging. This resulted in smart meter installations remaining
relatively flat over the year.
Working closely with our customers and supply chain, these radio
frequency technical issues have been resolved. In addition, we,
have continued to collaborate with all our customers to ensure
their systems and DCC connectivity are fully operational for the
mass rollout. We have also taken steps throughout 2019 to address
the productivity challenges, particularly increasing the volume of
chargeable transactional activity in the second half of the
year.
Whilst some technical challenges remain, predominantly around
the use of SMETS2 meters in prepayment situations, firmware
versions and availability of meter variants, DCC and SMETS2 are
increasing in maturity and reliability. We are increasingly
optimistic regarding the continued deployment of these solutions
through the smart meter rollout - with c.36.5 million smart meters
still to be exchanged across the industry by 2024.
Market conditions
The BEIS consultation on the smart meter rollout proposed
extending the rollout to 31 December 2024 with a target of 85% of
all meters being exchanged by this point. It has also indicated an
intended stronger underlying regulatory regime.
Energy suppliers were initially obliged to take all reasonable
steps to offer and deliver smart meters to all customers by the end
of 2020, whereas now they have to meet annual compulsory targets in
order to adhere to the revised programme end date.
This proposed extension reaffirms the importance of the smart
meter rollout to the future of the UK energy system. We now expect
to see a smoother installation profile through the course of the
rollout and are sizing our engineering business accordingly to
deliver our contracted meter installation pipeline. This includes
allowing sufficient flexibility in our model to meet customer peak
demand and additional opportunities from existing and potential new
customers.
Through our accredited training academy, we are engaged in
industry-wide initiatives to continually improve health and safety
(H&S) performance, with smart meter installations providing an
ideal opportunity to identify any existing quality issues in the
meter or the incoming electrical/gas supply.
Energy management division
Summary 2019 2018 Growth
------------------- --------- --------- ------
Revenue GBP9.0m GBP6.5m +39%
------------------- --------- --------- ------
COS (GBP6.8m) (GBP5.1m) +35%
------------------- --------- --------- ------
Gross profit GBP2.2m GBP1.4m +58%
------------------- --------- --------- ------
Gross margin 24% 21% +3%
------------------- --------- --------- ------
Value of utilities
under management GBP320m GBP250m +28%
------------------- --------- --------- ------
Our focus
The well-established energy management division is focused on
deploying assets and solutions which help our customers reduce
their energy consumption and carbon footprints, thereby helping
them in their journey to net zero. Our primary strategic objectives
are to:
-- build and deliver a capital project pipeline to deploy
services and assets to reduce our customers' carbon footprints;
-- generate long-term, secure recurring returns from energy
efficiency, distributed generation, storage and EV charging
projects; and
-- partner with multiple distribution channels to maximise this project pipeline opportunity.
A strong pipeline of CaRe opportunities has been identified
based on ongoing trials and projects, which are at various stages
of discussions. Through our new funding partnership with ESIF, we
are able to deploy capital into these CaRe projects without
diverting the cash flows from our meter assets business, resulting
in cash positive returns to the Group.
SMS's revenues and cash flows from CaRe assets and services are
expected to increase over time, with no funding obligation and no
significant cost needed to accelerate growth. This provides an
additional lever for further rebasing of future dividends.
Performance summary
-- Revenue and gross profit increased in line with expectations
from delivery of energy efficiency strategies and energy management
services.
-- Strategic positioning to deliver capital projects which
improve energy efficiency and reduce carbon emissions, through
investment in new generation, storage, electric vehicle assets and
energy services projects.
-- Investment in Solo Energy, with "FlexiGrid" technology
platform which integrates distributed generation, battery storage
and EV chargers across domestic and commercial buildings to create
a virtual power plant (VPP).
-- This VPP enables SMS to control and manage the long-term
revenue streams from these new asset classes.
-- Industrial expertise, customer relationships and extensive,
highly skilled engineering base demonstrated through long-term
blue-chip customer relationships.
Our energy management division has performed well in 2019,
continuing to specialise in working with I&C customers,
particularly those with large, complex, multi-site portfolios. We
advise on and implement effective strategies that reduce both
energy costs and consumption, by providing a full range of energy
consultancy services, including bill investigation, bureau, energy
reduction and environmental management.
Our approach is built on data, using our data analytics
platforms and often working closely with our accredited industry
data services, to identify opportunities to reduce our customers'
carbon footprints.
We have continued in 2019 to deliver several capital projects,
funded by customers, which reduce energy intensity, such as an LED
lighting project and smart controls project for a major UK hotel
chain. We have a strong pipeline of activity and other similar
projects which have a positive outlook for the continued growth of
these services in coming years, intended to be funded through our
infrastructure fund partnership.
We have established a full turnkey end-to-end delivery,
supported by strong industry relationships. The increased urgency
to address net-zero greenhouse gas emissions provides substantial
opportunity for our business.
Market conditions
There are several factors driving the emergence of smart
technologies and a new way of delivering and using energy
including:
-- the ongoing digitisation of our energy system;
-- the introduction of the net-zero carbon target for 2050;
-- the resulting renewed public policy focus on the climate change agenda; and
-- the rapidly shifting business, consumer and investor sentiment.
Energy efficiency remains the first and most important step in
this hierarchy. However, this data-driven transformation is
expected to have a profound impact on how and where we generate,
store and use energy - making it more dynamic, connected and
sustainable. In particular, the necessity for increasing levels of
renewable generation and peak electric vehicle charging demand
(especially at the local level) requires new assets, capital
investment and software data controls platforms to respond to
energy and price signals.
Whilst smart meters are at the heart of this transformation, by
enabling two-way flow of energy and smart and dynamic time-of-use
tariffs, SMS has the proven knowledge and platform to work with end
customers and energy suppliers to deliver these new asset
classes.
Our investment in Solo Energy also provides us with a
cloud-based energy flexibility IT platform - FlexiGrid - to control
and aggregate data and revenue from generation and battery storage
assets. This fully integrated platform enhances our ability to
provide a comprehensive end-to-end service proposition to our
established industrial, domestic and energy services customer
base.
By integrating energy storage, renewable generation and vehicle
charging into the UK energy system, FlexiGrid can help shape
consumer demand to follow renewable energy supply and operate as a
VPP. This fully integrated platform enhances our ability to provide
a comprehensive end-to-end service proposition to our established
industrial, domestic and energy services customer base and will
address the market disruption affecting the UK and global energy
system. Crucially, it provides the technology platform to support
the deployment of these new infrastructure CaRe asset classes.
We continue to fully integrate the Solo Energy platform with our
wider energy services and leverage our well-established energy
services foundations to remain at the centre of the energy system
as we transition to a more sustainable and low-carbon economy.
Financial review
Given the challenges we have faced during 2019, primarily driven
by the continued industry-wide issues and delays surrounding the
smart meter rollout, I am very pleased to be able to present a set
of financial results that are in line with market expectations.
Whilst our statutory profit from operations indicates modest
growth, the continued significant investment in our portfolio of
revenue-generating assets is driving a 20% increase in our key
performance measure, ILARR, to GBP90.1m. Our underlying
performance, as measured by pre-exceptional EBITDA, has increased
by 14% against a backdrop of the volatility of the smart meter
rollout and lower installation volumes, highlighting the strength
of our underlying business model in investing in assets that
generate recurring revenue.
We fundamentally manage the business on a long-term basis, in
line with our strategic priorities, and focus on delivering secure
returns for our shareholders. We exit the year comfortable with our
results and performance.
Well placed for the next phase of our growth and development,
the conditional disposal of a minority of our meter asset portfolio
on 12 March 2020 realises significant value for the Group and there
is a fundamental positive impact on our future strategy, as
discussed further within this report.
Reconciliation of reported to underlying results
SMS uses alternative performance measures, defined at the end of
the Financial Review, to present a clear view of what the Group
considers to be the results of its underlying, sustainable business
operations. By excluding certain items, this enables consistent
year-on-year comparisons and aids with a better understanding of
our business performance.
A reconciliation of these performance measures is disclosed
below:
Year ended Year ended
31 December 31 December
2019 2018 Percentage
GBPm GBPm change
------------------------------------------- ------------ ------------ ----------
Annualised recurring revenue 90.1 75.3 20%
------------------------------------------- ------------ ------------ ----------
Group revenue 114.3 98.5 16%
Statutory profit from operations 13.8 11.1
------------------------------------------- ------------ ------------ ----------
Amortisation of intangibles 1.5 2.6
Depreciation 35.1 21.8
------------------------------------------- ------------ ------------ ----------
Statutory EBITDA 50.4 35.5 42%
Exceptional items (EBITDA related) 8.5 16.1
------------------------------------------- ------------ ------------ ----------
Pre-exceptional EBITDA 58.9 51.6 14%
Net interest (excl. exceptional) (8.2) (4.7)
Depreciation (35.1) (21.8)
------------------------------------------- ------------ ------------ ----------
Underlying profit before taxation 15.6 25.1 (38%)
Exceptional items (EBITDA) (8.5) (16.1)
Exceptional items (interest) (0.1) (1.0)
Amortisation of intangibles (1.5) (2.6)
------------------------------------------- ------------ ------------ ----------
Statutory profit before taxation 5.5 5.4 2%
Taxation (1.5) (0.9)
------------------------------------------- ------------ ------------ ----------
Statutory profit after taxation 4.0 4.5 (11%)
Amortisation of intangibles 1.5 2.6
Exceptional items (EBITDA and interest) 8.6 17.1
Tax effect of adjustments (1.4) (3.4)
------------------------------------------- ------------ ------------ ----------
Underlying profit after taxation 12.7 20.8 (39%)
Weighted average number of ordinary shares
(basic) 112,446,154 112,408,338
Underlying basic EPS (pence) 11.30 18.46
Weighted average number of ordinary shares
(diluted) 113,269,412 113,465,235
Underlying diluted EPS (pence) 11.22 18.29
------------------------------------------- ------------ ------------ ----------
Revenue
31 December 31 December
2019 2018 Percentage
GBPm GBPm change
------------------- ----------- ----------- ----------
Asset management 82.9 65.5 27%
Asset installation 22.4 26.6 (16%)
Energy management 9.0 6.5 39%
------------------- ----------- ----------- ----------
Group revenue 114.3 98.5 16%
------------------- ----------- ----------- ----------
Total ILARR increased by 20% to GBP90.1m as at 31 December 2019
compared to 31 December 2018, in line with our expectations.
Consistent with the prior year, most of the growth was seen in the
electricity meter division, with an increase in ILARR to GBP28.1m
at 31 December 2019 (31 December 2018: GBP20.3m). The installation
of dual fuel meters as part of the smart meter rollout favours
higher growth in our younger electricity portfolio, when compared
with our historical gas-weighted portfolio.
The overall growth in ILARR reflects the flow through impact of
new contract wins from 2018 and the first quarter of 2019, and
growth in the meter estate, together with the combined effect of
increases in RPI and rental rates for deemed non-contracted
customers. We continue to actively engage with both existing and
potential customers in securing our future order book.
Group revenue rose 16%, driven primarily by continued growth in
the asset management and energy management divisions, offset by a
decline in asset installation revenues. Whilst installation run
rates were slower than anticipated through the year, for us and the
wider market, our domestic smart meter portfolio has still
increased, generating additional revenue.
Together with a favourable increase in the RPI in April 2019,
and a pricing increase on deemed non-contracted customers, revenue
has increased by 27% in the asset management division to GBP82.9m
(2018: GBP65.5m).
Energy management revenue has increased 39% to GBP9.0m (2018:
GBP6.5m), which continues to be attributable to the capital
projects in progress for a large hotel chain. Over 190 sites were
completed in 2019 as part of the ongoing energy-efficient lighting
project; and, towards the end of the year, we embarked on a second
significant project for the same hotel chain, delivering smart
heating controls.
Asset installation revenue was GBP22.4m (2018: GBP26.6m)
reducing largely due to legacy installation-only work for third
parties coming to an end in the first half of the year, in line
with the Group's decision to reallocate internal engineering
resource to fit the SMS portfolio of smart meters. The decline in
installation revenue has been partially offset by higher volumes of
emergency and transactional work on SMS's portfolio of traditional
meters, which have required direct replacement whilst energy
suppliers become SMETS2 ready.
Gross margins
Overall, the depreciation-adjusted gross margin at a Group level
remained broadly consistent at 64% (2018: 63%). SMS includes
depreciation on revenue-generating assets within cost of sales and
removing this from the margin analysis provides a better comparison
of underlying trading performance year on year.
Whilst the Group has experienced a higher than expected
proportion of installation costs that are unable to be capitalised,
revenues from transactional work have also been higher than
expected, providing an offset that has kept the overall
depreciation-adjusted gross margin steady.
The depreciation-adjusted gross margin for asset management has
also remained steady at 93% (2018: 92%), reflecting the growth in
the underlying asset base. The gross margin, including
depreciation, has decreased by 6% from 61% to 55%, primarily as a
result of a change to a depreciation related accounting estimate,
made with effect from 1 January 2019, in relation to SMS's
traditional meter assets. As a result, there is an additional
GBP7.3m recognised within depreciation in cost of sales on a
statutory basis - see note 1(a) to the financial statements for
further details.
The asset installation business reported a negative gross profit
margin of 25% (2018: positive 23%). This primarily reflects the
Group-wide strategy to focus its internal resources on the smart
meter rollout, with legacy external installation contracts coming
to an end at the beginning of the year, reducing external revenues
and removing the contribution to profitability seen in prior
years.
Through the first half of 2019 there was continued investment
made in retaining the Group's installation capacity to ensure the
business was appropriately positioned to benefit from the run rates
initially anticipated from progression to the main SMETS2 phase of
the smart meter rollout. Gross profit margin for the asset
installation business saw a significant reduction as a result to
negative 48% in H1. As initial installation targets in the market
started to look increasingly challenging, attention was turned to
controlling our operating cost base in order to increase efficiency
in the labour force. As a result, the gross profit margin improved
to negative 6% in H2. Cost control will be a key focus through 2020
and beyond. It remains key that our overall capacity is right sized
in order to meet customer demand efficiently. The full year
reported gross margin for the asset installation business, whilst
negative, thus reflects management's cost control in the latter
part of the year.
The energy management gross margin has increased to 24% (2018:
21%), supported by the commencement of a smart heating controls
project at slightly higher margins.
EBITDA
Pre-exceptional EBITDA increased to GBP58.9m (2018: GBP51.6m)
with statutory EBITDA increasing to GBP50.4m (2018: GBP35.5m). This
demonstrates that, whilst costs have been incurred to create
capacity to support future growth, our increase in revenue has been
high enough to offset this.
The Group's tactical retention of its internal engineering
workforce, the successful setting up of a dedicated contact centre
to help drive the business through the smart meter rollout and
ongoing development of key IT platforms that underpin the
end-to-end service offering, have increased cost of sales and
general overheads in 2019 as a result.
Other costs in the year which impacted our underlying
profitability include a GBP0.8m bad debt write off in relation to
smaller independent energy suppliers that have ceased trading and
been transferred to much larger energy suppliers under the SoLR
mechanism. The last two years have seen a large number of
independent energy suppliers enter administration, as a result of a
failure to settle their financial obligations with Ofgem. This
trend is not anticipated to continue to the same extent into 2020
and beyond. We have also incurred GBP3.8m of bad debt expense
arising from individually impaired trade receivable balances with
specific customers.
Despite these additional costs, pre-exceptional EBITDA continued
to grow as a result of the strength of our index linked, recurring
revenue base.
Statutory EBITDA has increased, due to a flow through of the
above points together with lower overall operating exceptional
costs of GBP8.5m, as compared with GBP16.1m in the prior year.
These are detailed further below.
Exceptional items
The operating charge to the income statement in respect of
exceptional items of GBP8.5m continues to be largely driven by net
losses on our meter portfolio of GBP6.0m, arising from the removal
of traditional meters and a proportion of SMETS1 compliant smart
meters.
Technical communication issues for some SMETS1 meters on
supplier churn have continued through 2019, with the enrolment and
adoption process into the DCC delayed into 2020. As a result, the
Group has continued to see a very small proportion of SMETS1 meters
removed from the wall. As these removals are attributable to the
temporary industry transition period, management has taken the
judgement to recognise losses arising on the disposal of these
meters as exceptional.
In the prior year, we incurred an exceptional charge of GBP5.6m
in relation to the impairment of the traditional meter portfolio,
reflecting a higher volume of removals than anticipated and a
reduction in future rental income from the reducing portfolio of
meters remaining on the wall. There was no similar impairment
charge in 2019.
Of the remaining exceptional cost, GBP2.0m relates to legal and
professional costs incurred in the reported sale process of a
minority of the Group's meter assets, detailed further below.
Operational and pre-tax profits
Depreciation costs on general property, plant and equipment,
excluding meter assets, have increased by GBP2.2m to GBP3.6m (2018:
GBP1.4m). This is largely driven by the decision to purchase the
Group's fleet of vans, previously leased on an operating basis.
GBP0.9m of additional depreciation has also been recognised as a
result of the implementation of IFRS 16; see note 29 to the
financial statements for details.
The BEIS consultation, that proposed a new monitoring framework
for the smart meter rollout through to 31 December 2024, was still
outstanding at the balance sheet date and, therefore, no change to
the useful economic life of the traditional meter portfolio has
been made in 2019. Upon ratification of the consultation in 2020,
management intends to revise the useful economic life through to 31
December 2024 to align with the market. This will be applied
prospectively and will see the annual depreciation charge on the
traditional meter portfolio decrease.
The net interest charge is GBP8.3m (2018: GBP5.7m), reflecting
higher average net debt as a result of the continued investment in
assets.
Underlying profit before taxation has decreased by 38% to
GBP15.6m. The Group's overall depreciation charge, largely driven
by the meter portfolio, and our largest non-cash cost item, has
grown from GBP21.8m to GBP35.1m. Together with a flow through of
the above points, this has resulted in a drop at the pre-tax level.
Management is optimistic that pre-tax profits will start to show an
upwards trajectory as the smart meter rollout picks up pace and, in
the meantime, uses ILARR, revenue and pre-exceptional EBITDA as the
key performance measures of the business.
Taxation
The effective tax rate on statutory profits was 26.81%
(2018:16.6%). The increase in the effective rate is driven
primarily by an increase in permanent differences from disallowable
items, including legal and professional costs incurred in the sale
process of a minority of the Group's meter assets.
The Group's capital expenditure as it pertains to meter assets
qualifies for capital allowances, providing the Group with tax
relief on such expenditure. These allowances are claimed in the tax
year in which the asset is acquired and set against taxable profit
for that year, thus reducing the total tax payable. As a result,
the Group was not tax paying in either the current or prior
year.
The Group's deferred tax balance of GBP13.8m is primarily made
up of GBP11.7m in respect of accelerated capital allowances.
Earnings per share (EPS)
Underlying basic EPS, which excludes exceptional costs,
amortisation of intangibles and their associated tax effect is
11.30p (2018: 18.46p), reflecting the underlying profitability of
the Group. Statutory earnings per share decreased to 3.56p (2018:
3.97p) as a result of lower statutory profits for the reasons
detailed above.
Diluted EPS does not vary significantly from basic EPS; a small
decrease is seen as a result of the dilutive impact of shares
issuable in the future to settle the Group's share scheme
obligations.
Dividend
With regard to the 2019 final dividend, the Board has continued
to pursue a progressive dividend policy, aiming to increase the
dividend proposed by c.15% on its prior period comparative.
The Directors recommend a final dividend of 4.58p per share
(2018: 3.98p), bringing the total dividend payable in respect of
the year to 6.88p per share (2018: 5.98p), an increase of 15%.
The total final dividend is expected to total c. GBP5.2m and, if
approved, will be paid on 4 June 2020 to shareholders on the
register at 24 April 2020, with an ex-dividend date of 23 April
2020.
Cash flow
The Group generated an operating cash inflow of GBP42.4m (2018:
GBP40.0m), supported by underlying revenues and good cash
collection.
There has been a significant increase in inventory, with the
strategic purchasing of SMETS2 meters to ensure SMS can meet
forecast installations in the first part of 2020.
Capital expenditure on property, plant and equipment was
GBP101.7m (2018: GBP132.6m), excluding right-of-use asset additions
of GBP4.9m. Of this, GBP95.2m has been used to purchase
revenue-generating assets. This capital expenditure is lower than
the prior year as a result of lower than anticipated installation
run rates throughout 2019 as well as a lower unit cost for SMETS2
meters compared to SMETS1.
A further GBP6.9m investment has been made in intangible assets.
This includes development of software to support the installation
business, together with investment in a Group-wide Enterprise
Resource Planning system that will consolidate, integrate and
update various support systems.
A GBP1.0m cash outflow was made for the acquisition of Solo
Energy Limited, a block chain energy flexibility IT platform.
There has been a GBP97.9m net cash inflow from drawdowns on the
loan facility in the year. GBP9.2m of finance costs have also been
paid (2018: GBP4.8m), including GBP3.1m of arrangement fees in
relation to the new facility.
Financial resources
With further growth anticipated as the UK domestic smart meter
rollout continues, SMS has access to sufficient funding to
accelerate installation in line with market demand.
On 21 December 2018 a new banking facility was signed, providing
the business access to GBP420m on a fully revolving basis over the
next five years. The first drawdown under this new facility was on
3 January 2019, and at that date the Group's obligations under the
previous facility were settled.
At 31 December 2019, utilisation of the new facility totalled
GBP269.3m, net of GBP2.5m arrangements fees which will be amortised
over the term of the facility. No principal repayments are required
until 2022, providing us with greater flexibility during the
current industry transition period.
Net debt was GBP219.2m at 31 December 2019, GBP77.2m higher than
at 31 December 2018, primarily as a result of increased funds drawn
down from the Group's banking facility for the purchase of
revenue-generating assets. The Group's available cash and
unutilised element of the revolving credit facility stood at
GBP200.8m (2018: GBP278.0m). The Group had cash in bank of GBP50.1m
at 31 December 2019 (31 December 2018: GBP30.0m).
Disposal of a minority of the Group's I&C portfolio (the
"Disposal")
In respect of the 2019 financial statements, this transaction
represents a non-adjusting post-balance sheet event, disclosed
further in note 28 to the financial statements. It was deemed that
the transaction at 31 December 2019 was not highly probable and,
therefore, it did not meet the Held for Sale criteria under IFRS 5
at this date. The effect of the Disposal will be accounted for in
our financial statements for the year ended 31 December 2020.
The Disposal, generating gross proceeds of GBP291m, fully resets
the Group's leverage, resulting in a positive net cash position
versus net debt to pre-exceptional EBITDA of 3.7x at 31 December
2019. Forming the core of our strategy going forward, the size of
proceeds received for the disposed portfolio of c.187,000 I&C
meter assets reinforces the inherent value present within our meter
assets, with their index-linked long-term cash flows and limited
maintenance requirements.
Following the deduction of transaction and other expenses, and
subject to completion, the Group expects to receive net cash
consideration of GBP282 million which, together a revised debt
facility, significantly enhances our ability to maximise domestic
smart meter opportunities and secure additional ILARR. The Disposal
is expected to result in a gain on disposal of GBP193m, which will
be classified as an exceptional item in the Group's financial
statements.
It is intended that the proceeds from the Disposal will be used,
in part, to settle our existing loan facility and an amended
GBP300m revolving credit facility will be established on the same
terms. This provides significant headroom to manage the business
going forward on a low leveraged basis and the Group will have
several funding options, providing flexibility to maximise growth
in a capital efficient way.
The Disposal also enables us to announce an intended new
enhanced dividend strategy of 25p per share, increasing at least
with RPI through to 2024. This revised dividend policy seeks to
provide SMS shareholders with a long-term and secure dividend
pay-out, underpinned by the Group's highly sustainable,
annuity-style cash flows.
A key feature of the Disposal is that we will continue to manage
the portfolio of disposed assets for the new owners, generating
annual RPI-linked recurring management fees of GBP0.8m for these
services. We will still apply our knowledge and expertise in
relation to managing the portfolio as we do for other third-party
meter owners.
Definitions of alternative performance measures
Alternative performance
measure Definition
--------------------------- ------------------------------------------------
The revenue being generated from meter
rental and data contracts at a point
Index-linked annualised in time. Includes revenue from third-party
recurring revenue managed meters.
--------------------------- ------------------------------------------------
Depreciation-adjusted gross Statutory gross profit less depreciation
profit on revenue-generating assets, recognised
within cost of sales.
--------------------------- ------------------------------------------------
Depreciation-adjusted gross Depreciation-adjusted gross profit divided
profit margin by statutory revenue
--------------------------- ------------------------------------------------
Statutory EBITDA excluding exceptional
Pre-exceptional EBITDA items.1
--------------------------- ------------------------------------------------
Underlying profit before Profit before taxation excluding exceptional
taxation items and amortisation of intangibles.
--------------------------- ------------------------------------------------
Profit after taxation excluding exceptional
Underlying profit after items and amortisation of intangibles
taxation and the tax effect of these adjustments.
--------------------------- ------------------------------------------------
Underlying profit after taxation divided
by the weighted average number of ordinary
Underlying basic EPS shares for the purposes of basic EPS.
--------------------------- ------------------------------------------------
Underlying profit after taxation divided
by the weighted average number of ordinary
Underlying diluted EPS shares for the purposes of diluted EPS.
--------------------------- ------------------------------------------------
Net debt Total bank loans less cash and cash equivalents.
Excludes lease liabilities recognised
under IFRS 16.
--------------------------- ------------------------------------------------
1. Exceptional items are those material items of income and
expense which, because of the nature or expected infrequency of the
events giving rise to them, merit separate presentation on the
consolidated income statement.
Consolidated income statement
For the year ended 31 December 2019
2019 2018
Before 2019 Before 2018
exceptional Exceptional 2019 exceptional Exceptional 2018
items items 1 Total items items Total
Notes GBP'000 GBP'000 GBP'000 GBP'000 GBP'000 GBP'000
------------------------ ----- ------------ ------------ -------- ------------ ------------ --------
Revenue 2 114,281 - 114,281 98,492 - 98,492
Cost of sales 3 (72,217) - (72,217) (51,333) (5,612) (56,945)
------------------------ ----- ------------ ------------ -------- ------------ ------------ --------
Gross profit 42,064 - 42,064 47,159 (5,612) 41,547
Administrative expenses 3 (25,514) (8,527) (34,041) (21,263) (10,529) (31,792)
Other operating
income 3 5,726 - 5,726 1,330 - 1,330
------------------------ ----- ------------ ------------ -------- ------------ ------------ --------
Profit from operations 3 22,276 (8,527) 13,749 27,226 (16,141) 11,085
------------------------ ----- ------------ ------------ -------- ------------ ------------ --------
Finance costs 5 (8,461) (104) (8,565) (4,962) (996) (5,958)
Finance income 5 278 - 278 224 - 224
------------------------ ----- ------------ ------------ -------- ------------ ------------ --------
Profit before taxation 14,093 (8,631) 5,462 22,488 (17,137) 5,351
Taxation 6 (2,584) 1,119 (1,465) (3,835) 2,948 (887)
------------------------ ----- ------------ ------------ -------- ------------ ------------ --------
Profit for the year
attributable to
owners of the parent 11,509 (7,512) 3,997 18,653 (14,189) 4,464
------------------------ ----- ------------ ------------ -------- ------------ ------------ --------
1 Refer to note 3 for details of exceptional items.
The profit from operations arises from the Group's continuing
operations.
Earnings per share attributable to owners of the parent during
the year:
Notes 2019 2018
----------------------------------- ----- ---- ----
Basic earnings per share (pence) 7 3.56 3.97
Diluted earnings per share (pence) 7 3.53 3.93
----------------------------------- ----- ---- ----
Consolidated statement of comprehensive income
For the year ended 31 December 2019
2019 2018
Before 2019 Before 2018
exceptional Exceptional 2019 exceptional Exceptional 2018
items items Total items items Total
GBP'000 GBP'000 GBP'000 GBP'000 GBP'000 GBP'000
------------------------ ------------ ------------ -------- ------------ ------------ --------
Profit for the year 11,509 (7,512) 3,997 18,653 (14,189) 4,464
Other comprehensive
income
Exchange differences
on translation of
foreign operations(1) (66) - (66) - - -
------------------------- ------------ ------------ -------- ------------ ------------ --------
Other comprehensive
income for the year,
net of tax (66) - (66) - - -
------------------------- ------------ ------------ -------- ------------ ------------ --------
Total comprehensive
income for the year
attributable to owners
of the parent 11,443 (7,512) 3,931 18,653 (14,189) 4,464
------------------------- ------------ ------------ -------- ------------ ------------ --------
(1) (May be reclassified to profit or loss)
Consolidated statement of financial position
As at 31 December 2019
2019 2018
Notes GBP'000 GBP'000
------------------------------------------- ----- -------- --------
Assets
Non-current assets
Intangible assets 9 23,743 17,138
Property, plant and equipment 10 412,658 356,732
Investments 11 75 75
Trade and other receivables 14 232 402
------------------------------------------- ----- -------- --------
Total non-current assets 436,708 374,347
------------------------------------------- ----- -------- --------
Current assets
Inventories 13 22,061 11,261
Other assets 17 - 3,105
Trade and other receivables 14 48,287 30,640
Income tax recoverable 227 292
Cash and cash equivalents 15 50,092 30,027
------------------------------------------- ----- -------- --------
Total current assets 120,667 75,325
------------------------------------------- ----- -------- --------
Total assets 557,375 449,672
------------------------------------------- ----- -------- --------
Liabilities
Current liabilities
Trade and other payables 16 46,796 36,348
Lease liabilities 17 1,013 -
Other liabilities 17 - 3,105
Bank loans and overdrafts 17 1,724 172,016
------------------------------------------- ----- -------- --------
Total current liabilities 49,533 211,469
------------------------------------------- ----- -------- --------
Non-current liabilities
Bank loans 17 267,536 -
Lease liabilities 17 2,950 -
Deferred tax liabilities 20 13,779 12,070
------------------------------------------- ----- -------- --------
Total non-current liabilities 284,265 12,070
------------------------------------------- ----- -------- --------
Total liabilities 333,798 223,539
------------------------------------------- ----- -------- --------
Net assets 223,577 226,133
------------------------------------------- ----- -------- --------
Equity
Share capital 22 1,128 1,125
Share premium 160,106 158,861
Other reserve 24 9,562 9,562
Own share reserve 22 (768) (588)
Foreign currency translation reserve (66) -
Retained earnings 53,615 57,173
------------------------------------------- ----- -------- --------
Total equity attributable to owners of the
parent 223,577 226,133
------------------------------------------- ----- -------- --------
Consolidated statement of changes in equity
For the year ended 31 December 2019
Foreign
currency
Share Share Other Own share translation Retained
Attributable to the owners capital premium reserve reserve reserve earnings Total
of the parent company: GBP'000 GBP'000 GBP'000 GBP'000 GBP'000 GBP'000 GBP'000
----------------------------- -------- -------- -------- --------- ------------ --------- --------
As at 1 January 2018 1,124 158,592 9,562 (697) - 58,991 227,572
Total comprehensive income
for the year - - - - - 4,464 4,464
Transactions with owners
in their capacity as owners
Dividends (note 8) - - - - - (6,143) (6,143)
Shares issued (note 22) 1 269 - - - - 270
Movement in own shares (note
22) - - - 109 - (339) (230)
Share-based payments (note
23) - - - - - 1,208 1,208
Income tax effect of share
options - - - - - (1,008) (1,008)
----------------------------- -------- -------- -------- --------- ------------ --------- --------
As at 31 December 2018 1,125 158,861 9,562 (588) - 57,173 226,133
Total profit for the year - - - - - 3,997 3,997
Total other comprehensive
income for the year - - - - (66) - (66)
Transactions with owners
in their capacity as owners
Dividends (note 8) - - - - - (7,079) (7,079)
Shares issued (note 22) 3 1,245 - - - (829) 419
Movement in own shares (note
22) - - - (180) - (169) (349)
Share-based payments (note
23) - - - - - 671 671
Income tax effect of share
options - - - - - (149) (149)
----------------------------- -------- -------- -------- --------- ------------ --------- --------
As at 31 December 2019 1,128 160,106 9,562 (768) (66) 53,615 223,577
----------------------------- -------- -------- -------- --------- ------------ --------- --------
See notes 23 and 24 for details of the own share reserve and
other reserve.
Consolidated statement of cash flows
For the year ended 31 December 2019
2019 2018
GBP'000 GBP'000
------------------------------------------------------------ --------- ---------
Operating activities
Profit before taxation 5,462 5,351
Finance costs 8,461 4,962
Finance income (278) (224)
Exceptional items1 6,326 15,426
Depreciation 35,137 21,796
Amortisation of intangibles 1,483 2,597
Share-based payment expense 603 488
Loss on disposal of property, plant and equipment 2,280 1,659
Loss on disposal of intangible assets 421 -
Movement in inventories (10,049) 4,432
Movement in trade and other receivables (17,503) (5,215)
Movement in trade and other payables 9,989 (11,639)
------------------------------------------------------------ --------- ---------
Cash generated from operations 42,332 39,633
Income tax received 56 408
------------------------------------------------------------ --------- ---------
Net cash generated from operations 42,388 40,041
------------------------------------------------------------ --------- ---------
Investing activities
Payment for acquisition of subsidiary, net of cash
acquired (1,027) -
Payments to acquire property, plant and equipment (101,698) (132,643)
Proceeds on disposal of property, plant and equipment 6,407 4,264
Payments to acquire intangible assets (6,936) (5,887)
Finance income received 278 224
------------------------------------------------------------ --------- ---------
Net cash used in investing activities (102,976) (134,042)
------------------------------------------------------------ --------- ---------
Financing activities
New borrowings 270,000 101,627
Borrowings repaid (172,114) (117,281)
Principal elements of lease payments (1,075) -
Finance costs paid (9,149) (4,815)
Net proceeds from share issue 419 270
Purchase of own shares (349) (230)
Dividends paid (7,079) (6,143)
------------------------------------------------------------ --------- ---------
Net cash generated from/(used in) financing activities 80,653 (26,572)
------------------------------------------------------------ --------- ---------
Net increase/(decrease) in cash and cash equivalents 20,065 (120,573)
Cash and cash equivalents at the beginning of the financial
year 30,027 150,600
------------------------------------------------------------ --------- ---------
Cash and cash equivalents at the end of the financial
year (note 15) 50,092 30,027
------------------------------------------------------------ --------- ---------
1 Non-cash exceptional items include a GBP6,837,000 loss on
disposal on our meter portfolio, GBP68,000 cost relating to
deferred remuneration arising on the acquisition of a subsidiary in
2016 settled in shares in April 2019, GBP751,000 stock write-back
for returned SMETS1 meters, GBP93,000 acceleration of loan
arrangement fees in relation to the refinancing of the loan
facility and GBP79,000 for non-recurring impairment charges.
In 2018, non-cash exceptional items included a GBP7,040,000 loss
on disposal on our meter portfolio, GBP5,612,000 impairment on our
meter portfolio, GBP1,653,000 traditional meters stock write down,
GBP720,000 relating to deferred remuneration arising from the
acquisition of a subsidiary in 2016 to be settled in shares,
GBP43,000 for impairment of an investment and GBP358,000
acceleration of loan arrangement fees in relation to the
refinancing of the loan facility.
Accounting policies
This note provides a list of the significant accounting policies
adopted in the preparation of these consolidated financial
statements. These policies have been consistently applied to all
the years presented, unless otherwise stated. The consolidated
financial statements of the Group for the year ended 31 December
2019 were approved and authorised for issue in accordance with a
resolution of the Directors on 17 March 2020. Smart Metering
Systems plc is a public limited company limited by shares and
incorporated in Scotland, with its registered office at 2nd Floor,
48 St. Vincent Street, Glasgow G2 5TS. The Company's ordinary
shares are traded on AIM.
Basis of preparation
The consolidated financial statements have been prepared in
accordance with EU-endorsed International Financial Reporting
Standards (IFRSs), IFRIC interpretations and the Companies Act 2006
applicable to companies reporting under IFRSs.
The financial statements have been prepared on a historical cost
basis, modified by the revaluation of certain financial assets and
financial liabilities that have been measured at fair value.
The consolidated financial statements are presented in British
Pounds Sterling (GBP), which is Smart Metering System plc's
functional and presentation currency, and all values are rounded to
the nearest thousand (GBP'000) except where otherwise
indicated.
The financial information set out above does not constitute the
Company's statutory accounts for the years ended 31 December 2019
or 2018 but is derived from those accounts. Statutory accounts for
the year ended 31 December 2018 have been delivered to the
Registrar of companies and those for 2019 will be delivered in due
course. The auditor has reported on both sets of accounts; its
reports were unqualified, did not contain an emphasis of matter
reference and did not contain statements under section 498 (2) or
(3) of the Companies Act 2006.
Going concern
Management prepares budgets and forecasts on a five-year
forward-looking basis. These forecasts cover operational cash flows
and investment capital expenditure and are prepared based on
management's estimation of installation run rates through the UK
smart meter rollout.
On 21 December 2018 a new banking facility was signed, providing
the business access to GBP420m over the next five years. The first
drawdown under this new facility was on 3 January 2019, at which
point the Group's obligations under the previous GBP280m facility
of GBP172m were settled. These transactions were settled
concurrently on a net cash basis.
Net debt amounted to GBP219.2m at 31 December 2019 and, at that
date, undrawn facilities were GBP150m. The Group balance sheet
shows consolidated net assets of GBP223.6m (2018: GBP226.1m) of
which GBP398.7m (2018: GBP350.4m) relates to meter assets.
Based on the above, the Directors consider it appropriate to
continue to prepare the financial statements on a going concern
basis.
Basis of consolidation
The consolidated accounts of the Group include the assets,
liabilities and results of the Company and subsidiary undertakings
in which Smart Metering Systems plc (SMS) has a controlling
interest. Control is achieved when the Group is exposed, or has
rights, to variable returns from its involvement with the investee
and has the ability to affect those returns through its power over
the investee. Specifically, the Group controls an investee if, and
only if, the Group has all of the following: power over the
investee (i.e. existing rights that give it the current ability to
direct the relevant activities of the investee); exposure, or
rights, to variable returns from its involvement with the investee;
and the ability to use its power over the investee to affect its
returns.
The acquisition method of accounting is used to account for
business combinations by the Group (refer to note 19).
When necessary, adjustments are made to the financial statements
of subsidiaries to bring their accounting policies into line with
the Group's accounting policies.
All intra-group assets and liabilities, equity, income, expenses
and cash flows relating to transactions between members of the
Group are eliminated in full on consolidation.
Foreign currency translation
Group companies
The results and financial position of foreign operations (none
of which has the currency of a hyperinflationary economy) that have
a functional currency different from the presentation currency are
translated into the presentation currency as follows:
-- assets and liabilities for each balance sheet presented are
translated at the closing historical rate at the date of that
balance sheet;
-- non-monetary assets at the date of acquisition are translated
at the historical rate and are not subsequently revalued;
-- income and expenses for each statement of profit or loss and
statement of comprehensive income are translated at average
exchange rates (unless this is not a reasonable approximation of
the cumulative effect of the rates prevailing on the transaction
dates, in which case income and expenses are translated at the
dates of the transactions); and
-- all resulting exchange differences are recognised in other
comprehensive income and accumulated in a separate reserve within
equity.
Goodwill and fair value adjustments arising on the acquisition
of a foreign operation are treated as assets and liabilities of the
foreign operation and translated at the closing rate.
Transactions and balances
Foreign currency transactions are translated into the functional
currency using the exchange rates at the dates of the transactions.
Foreign exchange gains and losses resulting from the settlement of
such transactions, and from the translation of monetary assets and
liabilities denominated in foreign currencies at year-end exchange
rates, are generally recognised in profit or loss. They are
deferred in equity if they relate to qualifying cash flow hedges
and qualifying net investment hedges or are attributable to part of
the net investment in a foreign operation.
Foreign exchange gains and losses that relate to borrowings are
presented in the statement of profit or loss, within finance costs.
All other foreign exchange gains and losses are presented in the
statement of profit or loss on a net basis within administrative
expenses.
Use of estimates and judgements
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. These 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 if the revision affects only that period, or in
the period of the revision and future periods if the revision
affects both current and future periods.
Critical accounting judgements
The following are the critical judgements that the Directors
have made in the process of applying the Group's accounting
policies and that have the most significant effect on the amounts
recognised in the financial statements:
-- capitalisation of internal installation costs:
-- a significant level of in-house installation of customers'
meter assets is carried out by the Group, certain costs of which
are capitalised (GBP39.7m in 2019) and depreciated as part of
property, plant and equipment depreciation. Judgement is required
by management to ascertain the appropriate categories and
proportion of overheads and other expenses that are directly
attributable to installation of meter assets. Typically,
capitalised costs will include staff costs, and a systematic
allocation of any production overheads, deemed to be directly
attributable to the process of installing a meter owned by the
Group. Other general and administrative overheads, such as sales,
marketing and training costs, are expensed directly to profit and
loss; and
-- presentation of losses on disposal of certain meter assets as exceptional items:
-- as a result of the inherent volatility associated with the
smart meter rollout, and removal of traditional meter assets as
part of this, management has taken the decision to show losses
arising on disposal of these meters, being the net book value less
the associated termination income received representing proceeds on
disposal, as exceptional administrative expenses. By disclosing
these amounts separately, the traditional meter asset portfolio can
be better tracked to assist the users of the financial statements.
A loss on disposal of traditional meter assets has been recognised
as an exceptional cost in the year ended 31 December 2019. The
change in accounting policy to reduce the residual value of the
traditional meter asset portfolio to nil (see note 10 for further
details) was designed to reflect the consumption of economic
benefit from installed assets, being the income earned from the
provision of the meter. On disposal, the receipt of termination
income, recognised as a component of the net gain or loss on the
disposal of these meter assets, will vary depending on the energy
supplier and is therefore not within our control. As the receipt of
proceeds from disposal is inherently volatile, a loss on disposal
can still arise in certain circumstances.
-- technical communication issues for some first-generation
smart meter assets (SMETS1 meters) on supplier churn have continued
through 2019, with the enrolment and adoption process into the DCC
delayed into 2020. As a result, the Group has continued to see a
very small proportion of SMETS1 meters removed from the wall. As
these removals are attributable to the temporary industry
transition period, management has taken the judgement to recognise
losses arising on the disposal of these meters as exceptional.
Key sources of estimation uncertainty
The key assumptions concerning the future and other key sources
of estimation uncertainty at the reporting date that may have a
significant risk of causing material adjustment to the carrying
amounts of assets and liabilities within the next financial year
are discussed below:
-- recoverability of carrying value of meter assets portfolio:
-- as the smart meter rollout progresses, our portfolio of
traditional meter assets is diminishing. It is therefore crucial
that the recoverability of the carrying value of our meter assets,
recognised in property, plant and equipment, be assessed. The two
main drivers for assessing this recoverability are:
1) the timing of the removals of these meters given this
decision lies with the end consumer and removals are largely
undertaken by third parties. We thus have little control over the
timing and quantity of these removals; and
2) the estimated future cash flows from termination income,
which are derived using historical data and analysis around the
risk of churn between contracted and non-contracted customers. This
assessment includes consideration of the extent to which
termination income and future rental income are received as
traditional meters continue to be removed from the wall.
In 2019, this assessment has identified that the carrying value
of the traditional meter assets portfolio is recoverable and,
therefore, no impairment charge has been recognised. The carrying
value of the traditional meter assets portfolio at 1 January 2019
included an impairment charge of GBP5.6m, which was recognised in
2018 as an exceptional cost of sales in line with our accounting
policy (refer to details in note 10).
Revenue recognition
Refer to details in note 2.
Exceptional items and separately disclosed items
The Group presents as exceptional items on the face of the
consolidated statement of comprehensive income those items of
income and expense which, because of the material nature or
expected infrequency of the events giving rise to them, merit
separate presentation to allow shareholders to understand better
the elements of financial performance in that year, so as to
facilitate comparison with prior periods and to assess better
trends in financial performance.
Termination fee income is reported as part of "Other operating
income" on the consolidated statement of comprehensive income given
the materiality and nature. Any termination fee income arising on
the loss of meter assets is reported within administrative expenses
as a component of net gain or loss on disposal. Termination fee
income does not arise from the principal activities of the Group.
Any such gain or loss on disposal relating to traditional meter
assets and SMETS1 meter assets is disclosed as an exceptional
item.
Financial assets
The Group's financial assets include cash and cash equivalents
and trade and other receivables. Investments consist of an
immaterial debt investment held at amortised cost.
Classification
The Group classifies its financial assets in the following
measurement categories:
-- those to be measured subsequently at fair value, either
through other comprehensive income (FVOCI) or through profit or
loss (FVPL); and
-- those to be measured at amortised cost.
The classification depends on the Group's business model for
managing the financial assets and the contractual terms of the cash
flows.
For investments in equity instruments that are not held for
trading, this will depend on whether the Group has made an
irrevocable election at the time of initial recognition to account
for the equity investment at FVOCI. The Group reclassifies debt
investments when and only when its business model for managing
those assets changes.
Recognition and derecognition
Financial assets are initially recognised on trade date.
Financial assets are derecognised when the rights to receive cash
flows from the financial assets have expired or have been
transferred and the Group has transferred substantially all the
risks and rewards of ownership.
Measurement
At initial recognition, the Group measures a financial asset at
its fair value plus, in the case of a financial asset not at FVPL,
transaction costs that are directly attributable to the acquisition
of the financial asset. Transaction costs of financial assets
carried at FVPL are expensed in profit or loss.
Trade and other receivables
Trade and other receivables are recognised initially at fair
value and subsequently measured at amortised cost. They are
generally due for settlement within 30 days and are therefore all
classified as current. Due to their short-term nature, carrying
value is considered to approximate fair value.
Cash and cash equivalents
Refer to accounting policy.
Impairment
The Group assesses, on a forward-looking basis, the expected
credit losses associated with its debt instruments carried at
amortised cost and FVOCI. The impairment methodology applied
depends on whether there has been a significant increase in credit
risk. For trade receivables and accrued income, which include
contract assets and billed and unbilled receivables arising from
contracts with customers, the Group applies the simplified approach
permitted by IFRS 9, which requires expected lifetime losses to be
recognised from initial recognition of the receivables.
Trade receivables and accrued income are written off, and
derecognised, where there is no reasonable expectation of recovery.
Indicators that there is no reasonable expectation of recovery
include, amongst others, the customer ceasing trading and entering
administration with no expected recovery from the Supplier of Last
Resort process, or a failure by the customer to make contractual
payments for a period of greater than or equal to 365 days past
due. Indicators are assessed on an individual customer basis.
Impairment losses, including the loss allowance, on trade
receivables and contract assets are presented within administrative
expenses. Impairment losses on accrued termination income are
presented within other operating income. Subsequent recoveries of
amounts previously written off are credited against the same line
item.
Further information about the impairment of trade receivables
and accrued income, and the Group's exposure to credit risks, can
be found in note 18.
Financial liabilities
The Group's financial liabilities include trade and other
payables, bank loans and overdrafts.
Classification
Financial liabilities are classified as financial liabilities at
fair value through profit or loss or loans and borrowings, as
appropriate. The Group determines the classification of its
financial liabilities at initial recognition.
Recognition
All financial liabilities are recognised initially at fair value
and, in the case of bank loans, net of directly attributable
transaction costs.
Measurement
Trade and other payables and bank overdrafts
Trade and other payables, and overdrafts, are subsequently
measured at amortised cost using the effective interest rate
method.
Trade and other payables are presented as current liabilities
unless payment is not due within twelve months after the reporting
period. Due to their short-term nature, carrying value is
considered to approximate fair value.
Bank loans
Bank loans are subsequently measured at amortised cost. Interest
expense on bank loans is recognised in the consolidated income
statement using the effective interest rate method.
Transaction costs on revolving credit facilities are recognised
as transaction costs of the loan to the extent that it is probable
that some or all the facility will be drawn down. In this case, the
fee is deferred within other assets until the drawdown occurs. Upon
drawdown of the first loan, these costs are reclassified from other
assets to bank loans and subsequently amortised over the term of
the facility.
Borrowings are removed from the balance sheet when the
obligation specified in the contract is discharged or cancelled or
has expired. The difference between the carrying amount of a
financial liability that has been extinguished or transferred to
another party and the consideration paid, including any non-cash
assets transferred, or liabilities assumed, is recognised in profit
or loss as other income or finance costs.
If a facility is modified, then it is assessed whether the
modification is significant enough to constitute an extinguishment
either qualitatively or quantitatively, where the change in present
value of cash flows, including any transaction costs paid, exceeds
10%. If a modification is considered an extinguishment of the
initial loan, the new modified loan is recorded at fair value and a
gain/loss recognised immediately in the consolidated income
statement for the difference between the carrying amount of the old
loan and the new loan. Where a modification is not significant
enough to be an extinguishment, the cash flows under the modified
loan are rediscounted at the original effective interest rate and
an immediate gain or loss is recognised accordingly in the
consolidated income statement on the date of modification.
Borrowings are classified as current liabilities unless the
Group has an unconditional right to defer settlement of the
liability for at least twelve months after the reporting
period.
Offsetting of financial instruments
Financial assets and financial liabilities are offset, and the
net amount reported in the consolidated statement of financial
position, if, and only if, there is a currently enforceable legal
right to offset the recognised amounts and there is an intention to
settle on a net basis, or to realise the assets and settle the
liabilities simultaneously.
Research and development
Expenditure on pure and applied research activities is
recognised in the consolidated statement of comprehensive income as
an expense as incurred.
Expenditure on product and system development activities is
capitalised if the product or process is technically and
commercially feasible and the Group intends and has the technical
ability and sufficient resources to complete development; if future
economic benefits are probable; and if the Group can measure
reliably the expenditure attributable to the intangible asset
during its development. The expenditure capitalised includes the
cost of materials, direct labour and an appropriate proportion of
overheads.
Capitalised development expenditure is stated at cost less
accumulated amortisation and accumulated impairment losses.
Amortisation is calculated when the asset is available for use,
so as to write off its cost, less its estimated residual value,
over the useful economic life of that asset as follows:
10% on cost straight
--Development of ADMTM units line
--Development of internally generated information technology 20% on cost straight
systems (IT development) line
Capitalised development expenditure on ADMTM units is disclosed
within property, plant and equipment as part of meter assets and
amortised over the same useful economic life as that applied to the
tangible ADMTM unit.
Capitalised IT development expenditure is disclosed within
intangible assets as part of IT development and software.
Development and software were previously disclosed separately but
have been combined into a single asset class for the year ended 31
December 2019 as all costs capitalised within these categories
relate to information technology and, with effect from 1 January
2019, are amortised over the same useful economic life of five
years.
Intangible assets
Intangible assets acquired separately from third parties consist
of software costs, including licence fees. These are recognised as
assets, measured at cost and classified as part of IT development
and software.
Internally generated intangible assets relate to IT development
and are recognised as part of IT development and software. Refer to
further details in the research and development accounting policy
above.
Intangible assets acquired as part of a business combination are
recognised outside goodwill if the asset is separable or arises
from contractual or other legal rights. They are recognised at
their fair value at the date of acquisition and are subsequently
amortised on a straight line based on the timing of projected cash
flows of the contracts over their estimated useful lives.
Following initial recognition, intangible assets are measured at
cost at the date of acquisition less any amortisation and any
impairment losses. Amortisation costs are included within the
administrative expenses disclosed in the consolidated statement of
comprehensive income.
Intangible assets are amortised over their useful lives as
follows:
-- IT development and software 20% on cost straight line
Intangibles recognised upon acquisition:
* Customer contracts 10% on cost straight line
* Trademarks 33% on cost straight line
Useful lives are examined on an annual basis and adjustments,
where applicable, are made on a prospective basis.
Goodwill
Goodwill represents the excess of the consideration transferred
over the fair value of the identifiable assets and liabilities of
the acquiree at the date of acquisition. Goodwill on acquisitions
of subsidiaries is included in intangible assets. Goodwill is not
amortised but is tested annually for impairment and is carried at
cost less accumulated impairment losses. See note 12 for detailed
assumptions and methodology. Impairment losses are not subsequently
reversed.
Goodwill is allocated to cash-generating units (CGUs) for the
purpose of impairment testing. The allocation is made to those
cash-generating units or groups of cash-generating units that are
expected to benefit from the business combination in which the
goodwill arose. The units or groups of units are identified at the
lowest level at which goodwill is monitored for internal management
purposes, being the operating segments.
Contingent consideration is recorded initially at fair value and
classified as equity or a financial liability. Contingent
consideration classified as equity is not remeasured, but
contingent consideration classified as a financial liability is
subsequently remeasured at fair value through profit or loss.
Adjustments to provisional fair values of identifiable assets
and liabilities (and to estimates of contingent consideration)
arising from additional information, obtained within the
measurement period (no more than one year from the acquisition
date), about facts and circumstances existing at the acquisition
date are adjusted against goodwill. Other adjustments to
provisional fair values or changes in contingent consideration are
recognised through profit or loss.
Impairment
At each reporting date, the Group reviews the carrying amounts
of its property, plant and equipment and intangibles, including
goodwill, 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 (if any). Where the
asset does not generate cash flows that are independent from other
assets, the Group estimates the recoverable amount of the CGU to
which the asset belongs.
The 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
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 been adjusted.
If the recoverable amount of an asset (or CGU) is estimated to
be less than its carrying amount, the carrying amount of the asset
(or CGU) is reduced to its recoverable amount. An impairment loss
is recognised as an expense immediately.
Where an impairment loss subsequently reverses, the carrying
amount of the asset (or CGU) is increased to the revised estimate
of its recoverable amount, but so that the increased carrying
amount does not exceed the carrying amount that would have been
determined had no impairment loss been recognised for the asset (or
CGU) in prior years. A reversal of an impairment loss is recognised
as income immediately.
Detailed assumptions used in the annual impairment test for
goodwill, with regard to discount, growth and inflation rates, are
set out in note 12 to the accounts. Detailed assumptions used in
the impairment test for meter assets, namely traditional meter
assets, are set out in note 10.
Property, plant and equipment
Property, plant and equipment is stated at cost, net of
accumulated depreciation and any accumulated impairment losses.
Such cost includes the cost of replacing part of the property,
plant and equipment. When significant parts of property, plant and
equipment are required to be replaced in intervals, the Group
recognises such parts as individual assets with specific useful
lives and depreciation, respectively. Pursuant to the acquisition
of the meter installation businesses on 18 March 2016 certain
internal costs to the Group are also capitalised where they are
demonstrated as being directly attributable to bringing the meter
assets into their usable condition.
All other repair and maintenance costs are recognised in the
consolidated statement of comprehensive income as incurred.
For each asset depreciation is calculated using the straight
line method to allocate its cost, net of its residual value if
applicable, over its estimated useful life as follows:
* Freehold property 2%
* Short leasehold property Shorter of the lease term or 15% and 20%
* Meter assets Smart and I&C 5%
ADMTM units 10%
Traditional to 31 December 2022
* Plant and machinery 33% on cost
* Motor vehicles 25% on cost
Shorter of the asset's useful life and the lease
* Right-of-use assets term
An item of property, plant and equipment and any significant
part initially recognised is derecognised upon disposal or when no
future economic benefits are expected from its use or disposal. Any
gain or loss arising on derecognition of the asset (calculated as
the difference between the net disposal proceeds and the carrying
amount of the asset) is included in the consolidated statement of
comprehensive income when the asset is derecognised. The asset's
residual values, useful lives and methods of depreciation are
reviewed at each financial year end and adjusted prospectively, if
appropriate.
Property, plant and equipment is initially recorded at cost.
The following changes in estimates with regard to property,
plant and equipment were made with effect from 1 January 2019:
-- Subsequent to the impairment review carried out at 31
December 2018, the estimate of residual value on the domestic
traditional meter asset portfolio has been reduced to 0% to reflect
management's updated forecasts and assumptions regarding the
recoverability of value on these assets. As a result, the income
statement has been charged with an additional GBP7.3m, recognised
within depreciation in cost of sales.
The following changes in estimates with regards to property,
plant and equipment were made with effect from 1 January 2018:
-- A review concluded that there should be a change to the
I&C electric estimate of useful life from 15 years to 20 years
on the basis that these meters are no longer subject to a
certification period and fall under the same considerations as
smart meters. The impact on the financial statements for the year
to 31 December 2018 was a decrease to the depreciation charge in
the consolidated income statement and statement of comprehensive
income of GBP266,000.
-- The I&C gas portfolio saw the estimate of residual value
reduce to 0% to reflect revised customer terms in new customer
contracts. As a result, the income statement for the year to 31
December 2018 was charged with an additional GBP340,000 recognised
within depreciation in cost of sales.
-- With respect to the domestic traditional meter asset
portfolio, the useful life of all opening assets was extended to 5
years to reflect the fact that the expected end date for the
domestic smart meter rollout is likely to be at the end of 2022. It
is accepted that the rate of meter exchange to smart meters will
vary year by year as the rollout proceeds but there is currently no
reliable basis on which to predict the annual profile. Accordingly,
a straight line approach to depreciation of these assets continues
to be adopted. The impact on the financial statements for the year
to 31 December 2018 was a decrease to the depreciation charge in
the consolidated income statement and statement of comprehensive
income of GBP2.9m.
See note 29 for further details on the recognition and
measurement of right-of-use assets under IFRS 16.
Inventories
Inventories are stated at the lower of cost and net realisable
value. Cost comprises direct materials and purchases of meter
assets at cost. Net realisable value represents the estimated
selling price for inventories less all estimated costs of
completion and costs to be incurred in marketing, selling and
distribution.
Cash and cash equivalents
Cash and cash equivalents in the consolidated statement of
financial position comprises cash at bank and in hand and
short-term deposits with an original maturity of three months or
less. For the purpose of the consolidated statement of cash flows,
cash and cash equivalents consists of cash and short-term deposits
as defined above, net of outstanding bank overdrafts.
Leased assets and obligations as lessee
With effect from 1 January 2019
As of 1 January 2019, SMS adopted IFRS 16 Leases. Refer to
details in note 29.
Up to 31 December 2018
Leases are classified as finance leases whenever the terms of
the lease transfer substantially all the risks and rewards of
ownership to the lessee. All other leases are classified as
operating leases. Assets acquired under finance leases are
capitalised in the balance sheet at their fair value or, if lower,
at the present value of the minimum lease payments, each determined
at the inception of the lease. The corresponding liability to the
lessor is recorded in the balance sheet as a finance lease
obligation. The lease payments are apportioned between finance
charges to the income statement and a reduction of the lease
obligations.
Rental payments under operating leases are charged to the income
statement on a straight line basis over the applicable lease
periods.
Group as lessor
With effect from 1 January 2019
As of 1 January 2019, SMS adopted IFRS 16 Leases. Refer to
details in note 29.
Up to 31 December 2018
Leases in which the Group does not transfer substantially all
the risks and rewards of ownership of assets are classified as
operating leases with meter income recognised in line with the
meter rental income policy.
Pension costs
The Group operates a defined contribution pension scheme for
employees. The assets of the scheme are held separately from those
of the Group. The annual contributions payable are charged to the
consolidated statement of comprehensive income.
Share-based payments
IFRS 2 Share-based Payment has been applied to all grants of
equity instruments. The Group issues equity-settled share-based
payments to certain employees under the terms of the Group's
various employee share and option schemes. Equity-settled
share-based payments are measured at fair value at the date of the
grant. The fair value determined at the grant date of
equity-settled share-based payments is expensed on a straight line
basis over the vesting period, based on an estimate of the shares
that will ultimately vest.
Share capital
Ordinary shares are classified as equity. Incremental costs
directly attributable to the issue of new ordinary shares or
options are shown in equity as a deduction from the proceeds.
Own share reserve
The Group offers a Share Incentive Plan for all employees and
has established a trust to facilitate the delivery of SMS shares
under this plan. The holdings of this trust include shares that
have not vested unconditionally to employees of the Group. These
shares are recorded at cost and are classified as own shares. The
cost to the Company of acquiring these own shares held in trust is
shown as a deduction from shareholders' equity.
Dividends
Dividend distributions to the Company's shareholders are
recognised in the accounting period in which the dividends are
paid.
Taxation
Tax currently payable is based on the taxable profit for the
year and any adjustment to tax payable in respect of prior years.
Taxable profit differs from accounting profit as reported in the
consolidated statement of comprehensive income because it excludes
items of income or expense that are taxable or deductible in other
years and it further excludes items that are never taxable or
deductible. The Group's liability for current tax is measured using
tax rates that have been enacted or substantively enacted by the
reporting date.
Deferred tax is the tax expected to be payable or recoverable on
temporary differences between the carrying amount of assets and
liabilities in the financial statements and the corresponding tax
bases used in the computation of taxable profit and is accounted
for using the balance sheet liability method. Deferred tax is
recognised in respect of all temporary differences that have
originated but not reversed at the balance sheet date, where
transactions or events that result in an obligation to pay more tax
in the future or a right to pay less tax in the future have
occurred at the balance sheet date.
Deferred tax is measured at the tax rates that are expected to
apply in the periods in which the asset or liability is settled
based on tax rates (and tax laws) that have been enacted or
substantively enacted at the balance sheet date. It is recognised
in the income statement except when it relates to items recognised
in other comprehensive income or directly in equity, such as
share-based payments. In this case, the deferred tax is also
recognised in other comprehensive income or directly in equity,
respectively.
Deferred tax assets are recognised to the extent that it is
probable that future taxable profit will be available against which
the temporary difference can be utilised. Their carrying amount is
reviewed at each balance sheet date on the same basis.
Deferred tax liabilities are recognised for all temporary
differences, except in respect of:
-- temporary differences arising from the initial recognition of
goodwill or an asset or liability in a transaction that is not a
business combination and at the time of the transaction affects
neither the accounting profit nor taxable profit or loss; and
-- temporary differences associated with investments in
subsidiaries where the timing of the reversal of the temporary
differences can be controlled and it is probable that the temporary
difference will not reverse in the foreseeable future.
Deferred tax assets and liabilities are offset where there is a
legally enforceable right to offset current tax assets and
liabilities and where the deferred tax balances relate to the same
taxation authority. Current tax assets and tax liabilities are
offset where the entity has a legally enforceable right to offset
and intends either to settle on a net basis, or to realise the
asset and settle the liability simultaneously.
Standards and interpretations
New and amended standards adopted by the Group
The Group has applied the following standards and amendments for
the first time for their annual reporting period commencing 1
January 2019:
Standard or interpretation Effective date
-------------------------- ---------------------------------------- --------------
IFRS 16 Leases 1 January 2019
Annual Improvements to IFRSs - 2015-2017
Various Cycle 1 January 2019
IFRIC 23 Uncertainty over Income Tax Treatments 1 January 2019
-------------------------- ---------------------------------------- --------------
The Group had to change its accounting policies as a result of
adopting IFRS 16. See further details in note 29. The other
amendments listed above did not have any impact on the amounts
recognised in prior periods and the current period and are not
expected to significantly affect future periods. The Group does not
currently have any material uncertain tax positions.
The following new accounting standards and interpretations have
been published that are not mandatory for 31 December 2019
reporting periods and have not been early adopted by the Group.
These standards are not expected to have a material impact on the
entity in the current or future reporting periods and on
foreseeable future transactions:
Standard or interpretation Effective date
-------------------------- -------------------------------------------- --------------
IFRS 3 (amendment) Definition of a Business 1 January 2020
IAS 1 and IAS 8
(amendment) Definition of Material 1 January 2020
CF Conceptual Framework for Financial Reporting 1 January 2020
-------------------------- -------------------------------------------- --------------
Notes to the financial statements
For the year ended 31 December 2019
1 Segmental reporting
For management purposes, the Group is organised into three core
divisions, as follows:
-- asset management, which comprises regulated management of gas
meters, electric meters and ADM(TM) units within the UK;
-- asset installation, which comprises installation of domestic
and I&C gas meters and electricity meters throughout the UK;
and
-- energy management, which comprises the provision of energy
consultancy services and, following the acquisition of Solo Energy
Limited, the management of Distributed Energy Resources (DER)
assets.
The Group's chief operating decision maker (CODM), being the SMS
plc Board, receives certain management information at a granular
"utility" level. Asset management includes reporting on gas meter
rental, electricity meter rental, gas data and electricity data.
Asset installation includes reporting on gas transactional work and
electricity transactional work. However, whilst the Group has the
ability to analyse its underlying information in this way, this
information is only used to assess performance for the Group as a
whole. These utility levels are thus combined within asset
management and asset installation, respectively, on the basis that
they have similar long-term economic characteristics - they derive
from the same asset, use similar delivery processes, have
consistent customers and have similar long-term gross margins.
For the purpose of making decisions about resource allocation
and performance assessment, it is the operating results of the
three core divisions listed above that are monitored by management
and the CODM. It is these divisions, therefore, that are defined as
the Group's reportable operating segments.
Segment performance is evaluated based on gross profit.
The following segment information is presented in respect of the
Group's reportable segments together with additional balance sheet
information:
Asset Asset Energy Total
management installation management Unallocated operations
31 December 2019 GBP'000 GBP'000 GBP'000 GBP'000 GBP'000
-------------------------------- ----------- ------------- ----------- ----------- -----------
Segment revenue 82,907 59,968 9,024 - 151,899
Inter-segment revenue - (37,618) - - (37,618)
-------------------------------- ----------- ------------- ----------- ----------- -----------
Revenue from external customers 82,907 22,350 9,024 - 114,281
Cost of sales (37,389) (27,981) (6,847) - (72,217)
-------------------------------- ----------- ------------- ----------- ----------- -----------
Segment gross profit 45,518 (5,631) 2,177 - 42,064
Other operating costs/income - - - (14,659) (14,659)
Depreciation (1,347) - - (2,299) (3,646)
Amortisation of intangibles (1,473) - (10) - (1,483)
Exceptional items (8,085) (51) - (391) (8,527)
-------------------------------- ----------- ------------- ----------- ----------- -----------
Profit from operations 34,613 (5,682) 2,167 (17,349) 13,749
Net finance costs: exceptional (104) - - - (104)
Net finance costs: other (8,065) - - (118) (8,183)
-------------------------------- ----------- ------------- ----------- ----------- -----------
Profit before tax 26,444 (5,682) 2,167 (17,467) 5,462
Tax expense - - - - (1,465)
-------------------------------- ----------- ------------- ----------- ----------- -----------
Profit for year 3,997
-------------------------------- ----------- ------------- ----------- ----------- -----------
Asset Asset Energy Total
management installation management Unallocated operations
31 December 2018 GBP'000 GBP'000 GBP'000 GBP'000 GBP'000
-------------------------------- ------------ -------------- ------------ ------------- ------------
Segment revenue 65,468 52,153 6,469 - 124,090
Inter-segment revenue - (25,598) - - (25,598)
-------------------------------- ------------ -------------- ------------ ------------- ------------
Revenue from external customers 65,468 26,555 6,469 - 98,492
Cost of sales (25,746) (20,500) (5,087) - (51,333)
-------------------------------- ------------ -------------- ------------ ------------- ------------
Segment gross profit 39,722 6,055 1,382 - 47,159
Other operating costs/income - - - (15,930) (15,930)
Depreciation - (280) - (1,126) (1,406)
Amortisation of intangibles (2,597) - - - (2,597)
Exceptional items (12,652) (1,653) - (1,836) (16,141)
-------------------------------- ------------ -------------- ------------ ------------- ------------
Profit from operations 24,473 4,122 1,382 (18,892) 11,085
Net finance costs: exceptional (996) - - - (996)
Net finance costs: other (4,738) - - - (4,738)
-------------------------------- ------------ -------------- ------------ ------------- ------------
Profit before tax 18,739 4,122 1,382 (18,892) 5,351
Tax expense - - - - (887)
-------------------------------- ------------ -------------- ------------ ------------- ------------
Profit for year 4,464
-------------------------------- ------------ -------------- ------------ ------------- ------------
Inter-segment revenue relates to installation services provided
by the asset installation segment to the asset management
segment.
Depreciation of GBP31.5m (2018: GBP20.4m) associated with meter
assets has been reported within cost of sales, in the asset
management segment, as the meter assets directly drive revenue.
All revenues and operations are based and generated in the
UK.
The Group has one major customer that generated turnover within
each segment as listed below:
2019 2018
GBP'000 GBP'000
-------------------------------- -------- --------
Customer 1 - asset management 14,030 6,024
Customer 1 - asset installation 796 1,753
-------------------------------- -------- --------
14,826 7,777
-------------------------------- -------- --------
Segment assets and liabilities
Asset Asset Energy Total
management installation management Unallocated operations
31 December 2019 GBP'000 GBP'000 GBP'000 GBP'000 GBP'000
------------------------------ ----------- ------------- ----------- ----------- -----------
Assets reported by segment
Intangible assets 18,417 3,493 1,833 - 23,743
Property, plant and equipment 403,948 518 - 8,192 412,658
Inventories 21,734 327 - - 22,061
Contract assets - 11 - - 11
------------------------------ ----------- ------------- ----------- ----------- -----------
444,099 4,349 1,833 8,192 458,473
Assets not by segment 98,902
------------------------------ ----------- ------------- ----------- ----------- -----------
Total assets 557,375
------------------------------ ----------- ------------- ----------- ----------- -----------
Liabilities by segment
Contract liabilities 1,360 2,010 124 - 3,494
Lease liabilities 893 - - 3,072 3,965
Bank loans 269,260 - - - 269,260
------------------------------ ----------- ------------- ----------- ----------- -----------
271,513 2,010 124 3,072 276,719
Liabilities not by segment 57,079
------------------------------ ----------- ------------- ----------- ----------- -----------
Total liabilities 333,798
------------------------------ ----------- ------------- ----------- ----------- -----------
Asset Asset Energy Total
management installation management Unallocated operations
31 December 2018 GBP'000 GBP'000 GBP'000 GBP'000 GBP'000
------------------------------ ----------- ------------- ----------- ----------- -----------
Assets reported by segment
Intangible assets 13,643 3,495 - - 17,138
Property, plant and equipment 350,360 2,463 - 3,909 356,732
Inventories 10,762 499 - - 11,261
Contract assets 2 20 - - 22
------------------------------ ----------- ------------- ----------- ----------- -----------
374,767 6,477 - 3,909 385,153
Assets not by segment 64,519
------------------------------ ----------- ------------- ----------- ----------- -----------
Total assets 449,672
------------------------------ ----------- ------------- ----------- ----------- -----------
Liabilities by segment
Contract liabilities 1,010 1,801 418 - 3,229
Bank loans 172,016 - - - 172,016
------------------------------ ----------- ------------- ----------- ----------- -----------
173,026 1,801 418 - 175,245
Liabilities not by segment 48,294
------------------------------ ----------- ------------- ----------- ----------- -----------
Total liabilities 223,539
------------------------------ ----------- ------------- ----------- ----------- -----------
Assets not by segment include cash and cash equivalents, trade
and other receivables and investments. In 2018, assets not by
segment included cash and cash equivalents, trade and other
receivables, other assets and investments.
Liabilities not by segment include trade and other payables and
deferred tax liabilities. In 2018, liabilities not by segment
included trade and other payables, other liabilities and deferred
tax liabilities.
Additions to non-current assets within each segment are listed
below:
Asset Asset Energy Total
management installation management Unallocated operations
GBP'000 GBP'000 GBP'000 GBP'000 GBP'000
------------------------- ----------- ------------- ----------- ----------- -----------
Additions to non-current
assets
2019 106,452 509 67 6,495 113,523
2018 134,882 2,685 - 963 138,530
------------------------- ----------- ------------- ----------- ----------- -----------
2 Revenue from contracts with customers
2 (a) Disaggregation of revenue from contracts with
customers
The Group reports the following segments: asset management,
asset installation and energy management, in accordance with IFRS 8
Operating Segments. We have determined that, to meet the objective
of the disaggregation disclosure requirement in paragraph 114 of
IFRS 15, which is to disaggregate revenue from contracts with
customers into categories that depict how the nature, amount,
timing and uncertainty of revenue and cash flows are affected by
economic factors, further disaggregation is required into the major
types of services offered. The following table thus discloses
segmental revenue by type of service delivered and timing of
revenue recognition, including a reconciliation of how this
disaggregated revenue ties in with the asset management, asset
installation and energy management segments, in accordance with
paragraph 115 of IFRS 15.
Asset Asset Energy Total
management installation management operations
Year ended 31 December 2019 GBP'000 GBP'000 GBP'000 GBP'000
----------------------------------- ---------- ------------ ---------- ----------
Major service lines
Metering 75,472 - - 75,472
Data management 7,435 - - 7,435
Utility connections - 8,406 - 8,406
Transactional meter works - 13,295 - 13,295
Energy management - 649 9,024 9,673
----------------------------------- ---------- ------------ ---------- ----------
82,907 22,350 9,024 114,281
----------------------------------- ---------- ------------ ---------- ----------
Timing of revenue recognition
Services transferred at a point in
time - 13,172 - 13,172
Services transferred over time 82,907 9,178 9,024 101,109
----------------------------------- ---------- ------------ ---------- ----------
82,907 22,350 9,024 114,281
----------------------------------- ---------- ------------ ---------- ----------
Asset Asset Energy Total
management installation management operations
Year ended 31 December 2018 GBP'000 GBP'000 GBP'000 GBP'000
----------------------------------- ---------- ------------ ---------- ----------
Major service lines
Metering1 58,507 - - 58,507
Data management 6,961 - - 6,961
Utility connections - 9,687 - 9,687
Transactional meter works - 16,290 - 16,290
Energy management - 578 6,469 7,047
----------------------------------- ---------- ------------ ---------- ----------
65,468 26,555 6,469 98,492
----------------------------------- ---------- ------------ ---------- ----------
Timing of revenue recognition
Services transferred at a point in
time - 14,677 - 14,677
Services transferred over time 65,468 11,878 6,469 83,815
----------------------------------- ---------- ------------ ---------- ----------
65,468 26,555 6,469 98,492
----------------------------------- ---------- ------------ ---------- ----------
1 The "Metering" service line within asset management includes
operating lease rental income recognised under IAS 17.
Approximately 86% of the revenue recognised of GBP58,507,000 in
2018 relates to operating lease income. See note 29 for further
details on the Group's lessor accounting under IFRS 16, effective 1
January 2019.
2 (b) Assets and liabilities related to contracts with
customers
The Group has recognised the following assets and liabilities
related to contracts with customers:
2019 2018
GBP'000 GBP'000
----------------------------- ------- -------
Current contract assets 11 22
----------------------------- ------- -------
Total contract assets 11 22
----------------------------- ------- -------
Current contract liabilities 3,494 3,229
----------------------------- ------- -------
Total contract liabilities 3,494 3,229
----------------------------- ------- -------
Trade receivables and unbilled receivables are disclosed in note
14.
(i) Significant changes in contract assets and liabilities
Contract assets and contract liabilities have not changed
significantly and movements reflect the general timing of revenue
recognition and status of services in progress at the end of the
year.
(ii) Revenue recognised in relation to contract liabilities
The following table shows how much of the revenue recognised in
the current period relates to carried-forward contract
liabilities:
2019 2018
GBP'000 GBP'000
----------------------------------------------------- ------- -------
Revenue recognised that was included in the contract
liability balance at the beginning of the period 3,057 3,139
----------------------------------------------------- ------- -------
No revenue was recognised in 2019 in relation to performance
obligations satisfied in previous periods.
(iii) Transaction price for which performance obligations not
satisfied
All our utilities connections and energy management contracts
are either for periods of one year or less or are billed
periodically based on time and resources incurred, or other unit
measures. As permitted under IFRS 15, the transaction price
allocated to these performance obligations unsatisfied at the end
of the reporting period is not disclosed.
2 (c) Accounting policies and significant judgements
(i) Metering
Meter rental
The Group acts as a gas and electricity meter asset provider,
providing and installing meters to energy suppliers on behalf of
the end consumer.
With effect from 1 January 2019
As a result of the Group's assessment of contracts on
implementation of IFRS 16, and any potential interaction with IFRS
15, the arrangements the Group has in place to act as meter asset
provider were reconsidered and it was determined that the contract
does not constitute a lease of the meter asset to the energy
supplier. See note 29 for further details. With effect from 1
January 2019, therefore, the related income for the service of
providing a fitted meter is recognised in accordance with IFRS
15.
The provision of meter assets to energy suppliers (MAP
services), together with the initial installation, is considered a
distinct and single performance obligation on the basis that, as
Meter Asset Provider (MAP), the Group has an obligation to its
customers to provide a fitted meter. This is a separately
identifiable service to which a stand-alone selling price is
typically allocated. Over the course of the contract term, which
runs into perpetuity, the Group delivers a series of monthly
services for which benefits are simultaneously received and
consumed by the customer.
MAP charges are calculated daily based on the number of
installed meters and invoiced to customers monthly once validation
checks have been completed. As revenue from MAP charges is
attributed to services provided daily, revenue is always based on
the actual level of service provided and, therefore, any
uncertainty at the end of each reporting period is limited to the
extent that validation checks are still being completed. Revenue is
thus recognised over time based on our right to invoice and
includes contract RPI uplifts.
As a result of industry regulations, and subject to specific
contract terms with a customer, the Group may be required to make
payments to customers for shortfalls in the level of service
provided. These charges are directly related to the service being
provided to the customer and thus recognised as a reduction to
revenue in the month in which the service failure occurred. Where
service levels are set based on annual targets, charges are
estimated monthly and subsequently finalised at the end of the
year. Uncertainty, as it pertains to these payments to customers,
is thus typically resolved by the end of the reporting period.
If a MAP contract is cancelled, termination fees may be levied
on the energy supplier. There has been no change in the accounting
of these termination fees and they continue to be classified within
other operating income unless they have arisen on the loss of the
meter assets, in which case they are reported within administrative
expenses as a component of net gain or loss on disposal.
If the services rendered by the Group exceed the payment
received, then accrued income is recognised. This is subsequently
reclassified to receivables at the point at which the Group has an
unconditional right to payment.
Up to 31 December 2018
The provision of the meter asset is accounted for as an
operating lease under IAS 17 on the basis that the energy suppliers
have control of the data being collected from the meter over the
duration of the contract. Meter rentals receivable from energy
suppliers are accounted for as operating lease payments and
recognised as rental income under IAS 17. This income is calculated
daily, based on the number of meter assets, and invoiced to
customers monthly. Rental contracts do not operate on a fixed-term
basis and are cancellable at any time by the lessee.
The installation of the meter is considered integral to the use
of the underlying asset and therefore is accounted for as part of
the lease of the meter. Consideration for installation is
recognised as part of the total consideration earned from meter
rentals.
If a rental contract is cancelled termination payments may be
levied on the energy supplier. In line with the underlying
contractual terms, termination fees due are recognised at fair
value upon notification of de-appointment and are classified as
other operating income unless the fees have arisen on the loss of
meter assets, in which case they are reported within administrative
expenses as a component of net gain or loss on disposal.
If the services rendered by the Group exceed the payment
received, then accrued income is recognised. This is subsequently
reclassified to receivables at the point at which the Group has an
unconditional right to payment.
Asset management services
The Group provides meter asset management and operations
services to energy suppliers. These services are considered a
distinct performance obligation from the meter rental on the basis
that these are separately identifiable services to which a
stand-alone selling price is allocated, and they are not necessary
to bring the meter asset into use.
Over the course of the contract term, which can either be fixed
or into perpetuity, the Group delivers a series of monthly services
for which the benefits are simultaneously received and consumed by
a customer. Therefore, these are accounted for as a single
performance obligation.
Service charges are calculated daily based on the number of
meters appointed and invoiced to customers monthly. As revenue from
service charges is attributed to services provided daily, revenue
is always based on the actual level of service provided and,
therefore, there is no uncertainty at the end of each reporting
period. Revenue is thus recognised over time based on our right to
invoice and includes contract RPI uplifts.
The Group's meter asset management contracts also include the
provision of transactional meter works. These are considered
further in accounting policy (iv) below.
If the services rendered by the Group exceed the payment
received, then a contract asset is recognised. This is subsequently
reclassified to receivables at the point at which the Group has an
unconditional right to payment.
(ii) Data services
The Group provides data collection and aggregation services to
I&C electricity customers and, through use of the ADMTM unit,
to I&C gas customers. Over the course of the contract term,
which can either be fixed or into perpetuity, the Group delivers a
series of monthly services for which the benefits are
simultaneously received and consumed by a customer. Therefore,
these are accounted for as a single performance obligation.
Service charges are calculated based on the number of
meters/ADMTM units appointed and invoiced to customers monthly. As
revenue from service charges is attributed to services provided
periodically, revenue is always based on the actual level of
service provided and, therefore, there is no uncertainty at the end
of each reporting period. Service charges, including contract RPI
uplifts, are billed to clients annually in advance and therefore a
contract liability is recognised and subsequently released to the
income statement over the year on a straight line basis. The Group
uses the practical expedient under IFRS 15 from adjusting revenue
for any significant financial components of one year or less.
The ADMTM device is a proprietary product for the Group and
there are no other market providers of this device. A customer
cannot therefore benefit from the data services without
installation, and the installation is not separately identifiable
as it is integral to the subsequent data services. This is
therefore accounted for along with the data services as a single
performance obligation and any corresponding charges are recognised
over the term of the contract.
(iii) Utility connections services (gas and electricity)
Gas and electricity connections services are provided under
fixed-price contracts with I&C customers and can be delivered
to a single site or multiple sites. Whilst each service consists of
multiple activities, the Group's promise in the contract is to
deliver an integrated end-to-end service to which the underlying
activities are inputs. Where services are delivered to multiple
sites, and these are substantially the same, a series of services
is being provided. In all cases, therefore, these contracts give
rise to a single performance obligation to which the fixed price is
allocated. Subsequent variations to this price, due to changes in
the inputs required, are accounted for as contract modifications
and recognised on a cumulative catch-up basis.
Services are transferred over time on the basis that these are
customised services with no alternative use and the Group has an
enforceable right to payment for work completed to date.
Revenue is recognised on the stage of completion with reference
to the actual services provided as a proportion of the total
service expected to be provided under the contract as the services
can enhance a work in progress asset for the customer and have no
alternative use. This is determined on a contract by contract basis
using a milestone approach with reference to the milestones set out
in the contract or otherwise agreed. Where relevant, consideration
is also given to material services provided between milestones.
Estimates of revenues, costs or extent of progress towards
completion are revised if circumstances change and any resulting
increases or decreases in estimated revenues or costs are reflected
in profit or loss in the period in which the circumstances that
give rise to the revision become known by management.
The customer pays the fixed amount based on a payment schedule.
In certain circumstances the customer pays in advance and therefore
a contract liability is recognised and subsequently released to the
income statement based on the measure of progress detailed above.
As the contract is cancellable at the customer's discretion,
subject to settlement for services provided to the date of
cancellation, a contract liability is not recognised until the cash
has been received.
If the services rendered by the Group exceed the payment
received, then a contract asset is recognised. This is subsequently
reclassified to receivables at the point at which the Group has an
unconditional right to payment.
The Group utilises the practical expedient available under IFRS
15 for costs to obtain a contract. Commissions paid as part of
obtaining a contract are expensed as incurred on the basis that the
contract term is typically less than twelve months.
(iv) Transactional meter works
Transactional works, which include emergency, adversarial and
other maintenance services, and are typically short term in nature,
are accounted for as a separate performance obligation to asset
management services (see section (i) above) on the basis that these
are separately identifiable and can be performed by another party.
A customer, being the energy supplier, is legally obligated to
appoint a meter asset manager and can therefore benefit from this
service in isolation, without the subsequent transactional works
which are initiated on an ad-hoc basis upon demand by the
customer.
Transactional meter works also include contracts with customers
for installation-only services.
The transaction price allocated to transactional works is based
on stand-alone selling prices (per unit, where relevant) and
revenue is recognised at a point in time when the transaction has
been completed and accepted by the customer. This is the point at
which the customer is charged for the service and a receivable is
recognised by the Group as we have an unconditional right to
payment. The customer will settle the transaction price for these
services as part of the regular monthly billing cycle for metering
services.
The customer pays the fixed amount based on the transactional
services provided and this is charged once the service has been
completed and accepted by the customer.
For segmental purposes, this transactional, non-recurring
revenue is recognised within asset installation.
(v) Energy management services
Energy management services provided mainly to I&C customers
include utility bureau and bill validation services, risk
management and procurement services and energy reduction and
environmental management services.
Certain services, such as utility bureau and bill validation,
are delivered through a series of monthly services over the course
of the contract term, for which the benefits are simultaneously
received and consumed by a customer. These are accounted for as a
single performance obligation. The transaction price allocated
includes a fixed monthly service charge together with a variable
component for specific activities that may not be carried out every
month. As revenue from charges is attributed to services provided
monthly, revenue is always based on the actual level of service
provided and, therefore, there is no uncertainty at the end of each
reporting period. Revenue is thus recognised over time based on our
right to invoice.
Contracts for specialist consultancy services may include
multiple projects. Where these projects are separately identifiable
within the contract and are not interrelated, they are accounted
for as separate performance obligations. The transaction price is
allocated based on the stand-alone charges for each project.
Other energy reduction and environmental management services are
typically longer-term, multi-site contracts and, therefore, the
revenue recognition is consistent with that detailed above for
utility connections - see details in note 2 (c)(iii) above.
(vi) Assets and liabilities arising from contracts with
customers
Costs to fulfil a contract
In certain circumstances, the Group may incur costs to fulfil
its obligations under a contract once it is obtained, but before
transferring goods or services to the customer. These costs are
assessed on a contract by contract basis and, where they are
considered to meet the definition of fulfilment costs under IFRS
15, they are recognised as an asset and amortised on a systematic
basis consistent with the pattern of transfer of the services to
which the asset relates.
Contract assets and liabilities
We receive payments from customers based on a billing schedule,
as established in our contracts.
The timing of revenue recognition, billing and cash collections
results in:
-- billed and unbilled accounts receivable, which are recognised
when our right to consideration becomes unconditional, and
classified as trade receivables and accrued income
respectively;
-- unbilled amounts, where we have a conditional right to
consideration based on future performance, recognised as contract
assets. These amounts will be billed in accordance with the agreed
upon contractual terms; and
-- payments received in advance of performance under a contract,
recognised as contract liabilities. Contract liabilities are
recognised as revenue as (or when) we perform under a contract.
For project-based services, work in progress is billed in
accordance with the agreed upon contractual terms with the
customer. We typically receive interim payments as work progresses,
which can give rise to a billed or unbilled accounts receivable,
where our right to payment is unconditional, or a contract asset,
where revenue has been recognised based on progress completed but
our right to payment is still conditional on future performance.
For some contracts, we may be entitled to receive advance payments.
We recognise a contract liability for these advance payments in
excess of revenue recognised.
Cancellation terms can vary but typically include provisions
that allow the customer to terminate the contract at their
discretion subject to a penalty or settlement of amounts for work
completed prior to termination. Contracts allow both parties to
cancel without penalty in the case of a material breach of
contract.
3 Profit from operations
The Group has identified a number of items which are material
due to the significance of their nature and/or amount. These are
listed separately here to provide a better understanding of the
financial performance of the Group.
2019 2018
GBP'000 GBP'000
------------------------------------------------------------- --------- --------
Profit from operations is stated after (charging)/crediting:
Cost of sales:
Direct subcontractor costs (7,195) (6,786)
Depreciation of meter assets (31,491) (20,390)
Direct staff and other costs (31,212) (22,335)
Inventory costs (2,319) (1,822)
------------------------------------------------------------- --------- --------
Total cost of sales (before exceptional items) (72,217) (51,333)
Administrative expenses:
Staff costs (12,380) (11,447)
Depreciation:
- owned assets (2,729) (1,406)
- leased assets (917) -
Amortisation of intangibles (1,483) (2,597)
Auditor's remuneration (note 3a) (300) (191)
Loss on disposal (2,701) (1,659)
Operating lease rentals1 (1,032) (2,041)
Research and development costs - (307)
Other operating charges (3,972) (1,615)
------------------------------------------------------------- --------- --------
Total administrative expenses (before exceptional items) (25,514) (21,263)
Exceptional items (note 3b) (8,527) (16,141)
Other operating income (note 3c) 5,726 1,330
------------------------------------------------------------- --------- --------
Total operating costs (100,532) (87,407)
------------------------------------------------------------- --------- --------
1 2019 operating lease rentals include GBP1,010,000 on
short-term leases and GBP22,000 on leases of low value assets.
3 (a) Auditor's remuneration
Auditor's remuneration can be analysed as:
2019 2018
GBP'000 GBP'000
------------------------------------------------------- -------- --------
Audit of the parent company and consolidated financial
statements 95 55
Audit of the financial statements of the Company's
subsidiaries 155 107
Other services - audit related assurance services 50 29
------------------------------------------------------- -------- --------
300 191
------------------------------------------------------- -------- --------
3 (b) Exceptional items
There are total exceptional items on the consolidated income
statement of GBP8,631,000.
Exceptional operating costs comprise GBP6,837,000 for losses on
disposal of our meter portfolio (GBP11,819,000 net book value less
GBP4,982,000 termination income), GBP1,999,000 of legal and
professional fees incurred as part of the conditional sale of a
minority of our assets, GBP751,000 SMETS1 meters stock write-back,
GBP96,000 of redundancy costs relating to the reorganisation of
subsidiaries, GBP92,000 of costs incurred in relation to the
acquisition of Solo Energy Limited, GBP82,000 of costs that the
Company has agreed to settle in relation to a former legacy
Employee Benefit Trust, GBP68,000 of deferred remuneration arising
on the acquisition of a subsidiary in 2016 settled in shares in
April 2019 and GBP104,000 impairment charges.
Exceptional finance costs of GBP104,000 include GBP98,000
accelerated amortisation of loan arrangement fees in relation to
the refinancing of the loan facility and GBP6,000 of bank break
fees.
In 2018, there are total exceptional items on the consolidated
income statement of GBP17,137,000. Exceptional operating costs
comprise GBP12,652,000 for losses on our meter portfolio (including
an impairment charge of GBP5,612,000), GBP1,653,000 traditional
meters stock write down, GBP720,000 of deferred remuneration
arising on the acquisition of a subsidiary in 2016 to be settled in
shares, GBP810,000 of costs that the Company has agreed to settle
in relation to a former legacy Employee Benefit Trust, GBP198,000
of redundancy costs relating to the reorganisation of subsidiaries
and GBP108,000 impairment of subsidiary undertaking SMS Italia SRL,
together with associated costs.
Exceptional finance costs of GBP996,000 include GBP358,000
accelerated amortisation of bank loan fees and GBP635,000 legal and
professional fees incurred in conjunction with the refinancing of
the loan facility and GBP3,000 of bank break fees.
The tax effect of exceptional items charged in 2019 is a credit
of GBP1,119,000 (2018: GBP2,948,000).
3 (c) Other operating income
In 2019, other operating income represents termination fee
income and non-recurring, contractual charges.
In 2018, other operating income represents termination fee
income only.
4 Particulars of employees
The average number of staff employed by the Group during the
financial year, including Executive Directors, by activity was:
2019 2018
Number Number
---------------------------------------------------------- ------- -------
Administrative staff 487 263
Operational staff 669 602
Sales staff 4 3
IT staff 62 45
Directors (excluding 4 (2018: 3) Non-executive Directors) 3 2
---------------------------------------------------------- ------- -------
1,225 915
---------------------------------------------------------- ------- -------
The aggregate payroll costs, including Executive Directors, of
the employees were:
2019 2018
GBP'000 GBP'000
------------------------------ -------- --------
Wages and salaries 39,817 29,993
Social security costs 4,400 3,047
Staff pension costs 1,115 638
Share-based payment (note 23) 671 1,208
Director pension costs 11 8
------------------------------ -------- --------
46,014 34,894
------------------------------ -------- --------
5 Finance costs and finance income
2019 2018
GBP'000 GBP'000
----------------------------------------------- -------- --------
Finance costs
Bank loans and overdrafts 8,255 4,962
Lease liabilities 157 -
Foreign exchange loss on intragroup borrowings 49 -
----------------------------------------------- -------- --------
Total pre-exceptional finance costs 8,461 4,962
----------------------------------------------- -------- --------
Exceptional finance costs 104 996
----------------------------------------------- -------- --------
Total finance costs 8,565 5,958
----------------------------------------------- -------- --------
Finance income
Bank interest receivable 278 224
----------------------------------------------- -------- --------
Total finance income 278 224
----------------------------------------------- -------- --------
6 Taxation
2019 2018
GBP'000 GBP'000
-------------------------------------------------------- -------- --------
Analysis of charge in the year
Current tax:
Current income tax expense (81) (127)
Adjustment to tax charge in respect of previous periods 2 (37)
-------------------------------------------------------- -------- --------
Total current income tax (79) (164)
Deferred tax:
Origination and reversal of temporary differences 1,405 1,056
Adjustment to tax charge in respect of prior periods 139 (5)
-------------------------------------------------------- -------- --------
Tax on profit 1,465 887
-------------------------------------------------------- -------- --------
The charge for the period can be reconciled to the profit per
the consolidated statement of comprehensive income as follows:
Profit before tax 5,642 5,351
--------------------------------------------------------- ----- -----
Tax at the UK corporation tax rate of 19.00% (2018:
19.00%) 1,038 1,017
Expenses not deductible for tax purposes 420 40
Deferred tax not recognised - -
Adjustments to tax charge in respect of previous periods 142 (43)
Change in tax rate (135) (127)
--------------------------------------------------------- ----- -----
Tax expense in the income statement 1,465 887
--------------------------------------------------------- ----- -----
Current tax credit through equity in the year was GBPNil (2018:
GBP85,000).
7 Earnings per share (EPS)
The calculation of EPS is based on the following data and number
of shares:
2019 2018
GBP'000 GBP'000
------------------------------------------------------ -------- --------
Profit for the year used for calculation of basic EPS 3,997 4,464
------------------------------------------------------ -------- --------
Number of shares 2019 2018
--------------------------------------------------- ----------- -----------
Weighted average number of ordinary shares for the
purposes of basic EPS 112,446,154 112,408,338
Effect of potentially dilutive ordinary shares:
- share options 823,258 1,056,897
--------------------------------------------------- ----------- -----------
Weighted average number of ordinary shares for the
purposes of diluted EPS 113,269,412 113,465,235
--------------------------------------------------- ----------- -----------
EPS:
- basic (pence) 3.56 3.97
- diluted (pence) 3.53 3.93
--------------------------------------------------- ----------- -----------
8 Dividends
Year Year
Year ended Year ended
ended 31 December ended 31 December
31 December 2019 31 December 2018
2019 Per share 2018 Per share
GBP'000 (pence) GBP'000 (pence)
---------------------- ------------ ------------ ------------ ------------
Paid final dividend 4,485 3.98 3,892 3.46
Paid interim dividend 2,594 2.30 2,251 2.00
---------------------- ------------ ------------ ------------ ------------
Total dividends 7,079 6.28 6,143 5.46
---------------------- ------------ ------------ ------------ ------------
A final cash dividend for 2019 of 4.58p per share (2018: 3.98p)
has been declared by the Directors and will be paid in June 2020.
These dividends amount to c.GBP5,162,000 and will be accounted for
in 2020. Including the interim dividend for 2019 of 2.30p per share
(2018: 2.00p), this gives a full-year dividend for 2019 of 6.88p
per share (2018: 5.98p).
As at 31 December 2019 the distributable profits in the parent
company were adequate to cover the proposed final dividend of
c.GBP5,162,000.
9 Intangible assets
Intangibles
recognised IT development
upon and software
Goodwill acquisition 1 Total
GBP'000 GBP'000 GBP'000 GBP'000
----------------------- -------- ------------ -------------- --------
Cost
As at 1 January 2018 7,609 2,166 11,813 21,588
Additions - - 5,887 5,887
Disposals - - (22) (22)
----------------------- -------- ------------ -------------- --------
As at 31 December 2018 7,609 2,166 17,678 27,453
Additions - - 6,936 6,936
Acquisitions 995 96 697 1,788
Reclassifications2 - - (205) (205)
Disposals - - (639) (639)
Exchange adjustments (57) (5) (22) (84)
----------------------- -------- ------------ -------------- --------
As at 31 December 2019 8,547 2,257 24,445 35,249
----------------------- -------- ------------ -------------- --------
Amortisation
As at 1 January 2018 - 1,601 6,117 7,718
Charge for year - 433 2,164 2,597
----------------------- -------- ------------ -------------- --------
As at 31 December 2018 - 2,034 8,281 10,315
Reclassifications2 - - (74) (74)
Disposals - - (218) (218)
Charge for year - 137 1,346 1,483
----------------------- -------- ------------ -------------- --------
As at 31 December 2019 - 2,171 9,335 11,506
----------------------- -------- ------------ -------------- --------
Net book value
As at 31 December 2019 8,547 86 15,110 23,743
----------------------- -------- ------------ -------------- --------
As at 31 December 2018 7,609 132 9,397 17,138
----------------------- -------- ------------ -------------- --------
As at 1 January 2018 7,609 565 5,696 13,870
----------------------- -------- ------------ -------------- --------
1 In the 2018 financial statements development and software were
disclosed separately. These have been combined into a single asset
class, IT development and software, for the year ended 31 December
2019 as all costs capitalised within these categories relate to IT
and, with effect from 1 January 2019, are amortised over the same
useful economic life.
2 Capitalised development expenditure on ADM(TM) units has been
reallocated from IT development and software in intangible assets
to meter assets within property, plant and equipment, to align with
the Group's accounting policy.
The acquisition of Solo Energy Limited in September 2019
resulted in the recognition of goodwill of GBP995,000, which has
been assigned to the energy management operating segment. In
addition, the trademarks of Solo Energy Limited and its FlexiGrid
platform were valued at GBP96,000 and have been recognised as
additions within the acquired intangibles asset class. See note 19
for further details on this business acquisition.
10 Property, plant and equipment
Fixtures,
Freehold/ fittings
leasehold Meter Plant and and Motor Right-of-use
property assets machinery equipment vehicles assets Total
GBP'000 GBP'000 GBP'000 GBP'000 GBP'000 GBP'000 GBP'000
----------------------- ---------- --------- ---------- ----------- --------- ------------ --------
Cost
As at 1 January 2018 2,300 299,815 317 3,065 83 - 305,580
Additions 236 128,173 187 1,230 2,817 - 132,643
Disposals - (17,860) - (47) (86) - (17,993)
----------------------- ---------- --------- ---------- ----------- --------- ------------ --------
As at 31 December 2018 2,536 410,128 504 4,248 2,814 - 420,230
Additions 215 95,186 520 2,498 3,279 4,889 106,587
Acquisitions - - - 6 - - 6
Reclassifications1 - 205 - - - - 205
Impairment - - - - - (90) (90)
Disposals - (21,991) - (894) (65) (54) (23,004)
Exchange adjustments - - - - - - -
----------------------- ---------- --------- ---------- ----------- --------- ------------ --------
As at 31 December 2019 2,751 483,528 1,024 5,858 6,028 4,745 503,934
----------------------- ---------- --------- ---------- ----------- --------- ------------ --------
As at 1 January 2018 392 37,820 71 1,868 83 - 40,234
Charge for year 127 20,390 162 794 323 - 21,796
Impairment - 5,612 - - - - 5,612
Disposals - (4,056) - (44) (44) - (4,144)
----------------------- ---------- --------- ---------- ----------- --------- ------------ --------
As at 31 December 2018 519 59,766 233 2,618 362 - 63,498
Charge for year (14) 31,491 267 1,337 1,139 917 35,137
Reclassifications1 - 74 - - - - 74
Impairment - - - - - (37) (37)
Disposals - (6,520) - (841) (35) - (7,396)
----------------------- ---------- --------- ---------- ----------- --------- ------------ --------
As at 31 December 2019 505 84,811 500 3,114 1,466 880 91,276
----------------------- ---------- --------- ---------- ----------- --------- ------------ --------
Net book value
As at 31 December 2019 2,246 398,717 524 2,744 4,562 3,865 412,658
----------------------- ---------- --------- ---------- ----------- --------- ------------ --------
As at 31 December 2018 2,017 350,362 271 1,630 2,452 - 356,732
----------------------- ---------- --------- ---------- ----------- --------- ------------ --------
As at 1 January 2018 1,908 261,995 246 1,197 - - 265,346
----------------------- ---------- --------- ---------- ----------- --------- ------------ --------
1 Capitalised development expenditure on ADM(TM) units has been
reallocated from IT development and software in intangible assets
to meter assets within property, plant and equipment, to align with
the Group's accounting policy.
Right-of-use assets have been recognised following the
implementation of IFRS 16. Of the GBP4,889,000 additions reported
above, GBP3,820,000 relates to right-of-use assets recognised upon
implementation on 1 January 2019. See note 29 for further
details.
Included within the closing meter assets net book value of
GBP398,717,000 (2018: GBP350,362,000) is GBP30,298,000 (2018:
GBP43,049,000) relating to the traditional meter portfolio. In
accordance with our accounting policy these assets will be written
down to zero by 2022. In the 2019 consolidated financial statements
the traditional meter portfolio generated GBP12,965,000 (2018:
GBP13,216,000) revenue with a corresponding GBP11,184,000 (2018:
GBP4,682,000) depreciation charge. GBP13,928,000 (2018:
GBP12,853,000) annualised recurring revenue as at 31 December 2019
arises from the traditional meter portfolio.
The assets are secured by a bond and floating charge (note
17).
For the purpose of impairment testing the traditional meter
asset portfolio recognised within "meter assets" is assessed as a
stand-alone cash-generating unit (CGU) and its carrying amount is
compared with the recoverable amount. See background information
provided in the "Key sources of estimation uncertainty" section in
the accounting policies. The recoverable amount is determined based
on a value in use calculation, which uses the following key
assumptions:
-- estimated future cash flows from rental income, which are
assumed to decline on a straight line basis;
-- estimated future cash flows from termination income, which
are derived using historical data and analysis around the risk of
churn between contracted and non-contracted customers and the risk
of recoverability once issued; and
-- a pre-tax discount rate of 2.65%, which reflects the risk
attached to the time value of these specific cash flows and is
deemed to be best represented by the Group's incremental cost of
borrowing on the basis that cash flows are secured by the installed
meter and the risk inherent in the decline of the cash flows is
already accounted for through the assumptions detailed above.
As a result of this impairment test, it was identified that the
value in use exceeded the carrying value of the traditional meter
assets CGU and, therefore, no impairment has been recognised in the
year to 31 December 2019. An impairment charge of GBP5.6m was
recognised in the year to 31 December 2018.
Management has performed sensitivity analysis on the key
assumptions both with other variables held constant and with other
variables simultaneously changed. Management has concluded that
there are no reasonably possible changes in the key assumptions
that would cause the carrying amounts of the traditional meter
portfolio to exceed the value in use for either CGU.
No impairment on other meter assets was recognised in 2019.
11 Financial asset investments
Shares in
Group Unlisted
undertaking investments Total
GBP'000 GBP'000 GBP'000
----------------------- ------------ ------------ --------
Cost
As at 1 January 2019 - 75 75
Impairment - - -
----------------------- ------------ ------------ --------
As at 31 December 2019 - 75 75
----------------------- ------------ ------------ --------
12 Impairment of goodwill
The goodwill acquired in business combinations is allocated, at
acquisition, to the CGUs that are expected to benefit from that
business combination. Goodwill is monitored by management at the
level of the CGUs (defined as the three operating segments)
identified in note 1.
A segment-level summary of the goodwill allocation is presented
below:
Asset Asset Energy
management installation management Total
GBP'000 GBP'000 GBP'000 GBP'000
----------------------- ----------- ------------- ----------- --------
Cost
As at 1 January 2019 4,112 3,497 - 7,609
Acquisitions (note 19) - - 995 995
Exchange adjustments - - (57) (57)
----------------------- ----------- ------------- ----------- --------
As at 31 December 2019 4,112 3,497 938 8,547
----------------------- ----------- ------------- ----------- --------
The goodwill recognised in energy management in the year ended
31 December 2019 has arisen on the acquisition of Solo Energy
Limited, a blockchain energy flexibility IT platform. See note 19
for further details. Goodwill was allocated entirely to energy
management on the basis that this is the operating segment that
will receive the benefits from the acquisition.
The Group tests goodwill annually for impairment or more
frequently if there are indications that goodwill might be
impaired.
Goodwill is tested for impairment by comparing the carrying
amount of each CGU, including goodwill, with the recoverable
amount. The recoverable amounts are determined based on value in
use calculations which require assumptions. The calculations use
cash flow projections based on financial budgets approved by the
Board covering a one-year period, together with management
forecasts for a further four-year period. These budgets and
forecasts have regard to historical performance and knowledge of
the current market, together with the Group's views on the future
achievable growth and the impact of committed cash flows. Cash
flows beyond this are extrapolated using the estimated growth rates
stated below.
The cash flows used in the value in use calculation for the
asset management segment include all costs incurred in the
provision of meter assets to energy suppliers, together with the
initial installation. The cash flows used in the value in use
calculation for the asset installation segment exclude installation
costs incurred to fit an owned meter. For the purpose of the value
in use calculation, these are instead allocated to the asset
management segment, being the segment to which the corresponding
revenues are allocated.
The annual impairment test was performed for the three CGUs
identified above that have goodwill allocated to them. No evidence
of impairment was found at the balance sheet date.
The key assumptions used in the value in use calculations for
those CGUs that have goodwill allocated to them are as follows:
-- Perpetual growth rate - the terminal cash flows are
extrapolated in perpetuity using a growth rate of 3% for asset
management (2018: 2.0%) and 0.5% for asset installation and energy
management (2018: 2.0%). The rate of 3% applied to asset management
is derived from historical Retail Price Index increases applied to
the segment's index-linked meter rentals. This is not considered to
be higher than the average long-term industry growth rate. The rate
of 0.5% applied to asset installation and energy management is
prudently aligned with the UK rate of inflation as revenues in
these segments are not always index linked.
-- Discount rate - the discount rate is initially based on the
weighted average cost of capital (WACC) which would be anticipated
for a market participant investing in the Group. A specific
discount rate is then calculated for each operating segment, taking
into account the time value of money, the segment's risk profile
and the impact of the current economic climate. The pre-tax
discount rates applied are 7.1%, 10.7% and 10.7% for asset
management, asset installation and energy management respectively
(2018: 7.2% for all three segments) and the post-tax discount rates
applied are 5.9%, 8.9% and 8.9% for asset management, asset
installation and energy management respectively (2018: 5.9% for all
three segments).
Management has performed sensitivity analysis on the key
assumptions both with other variables held constant and with other
variables simultaneously changed. Management has concluded that
there are no reasonably possible changes in the key assumptions
that would cause the carrying amounts of goodwill to exceed the
value in use for either CGU.
13 Inventories
2019 2018
GBP'000 GBP'000
--------------- -------- --------
Finished goods 21,734 10,728
Consumables 327 533
--------------- -------- --------
22,061 11,261
--------------- -------- --------
There has been a significant increase in inventory, with the
strategic purchasing of SMETS2 meters to ensure the Group can meet
forecast installations in the first part of 2020.
14 Trade and other receivables
2019 2018
GBP'000 GBP'000
------------------ -------- --------
Trade receivables 28,596 17,582
Prepayments 1,944 1,090
Accrued income 15,490 10,454
Other receivables 1,655 944
VAT recoverable 602 570
------------------ -------- --------
48,287 30,640
------------------ -------- --------
Trade receivables and accrued income include billed and unbilled
receivables relating to our meter rental contracts.
Amounts falling due after more than one year:
2019 2018
GBP'000 GBP'000
--------------- -------- --------
Accrued income 232 402
--------------- -------- --------
Accrued income is made up of the following balances:
2019 2018
GBP'000 GBP'000
--------------------- -------- --------
Unbilled receivables 15,455 10,432
Contract assets 11 22
Other accrued income 24 -
--------------------- -------- --------
15,490 10,454
--------------------- -------- --------
Unbilled receivables include receivables relating to our meter
rental contracts.
The Directors consider that the carrying amount of trade and
other receivables approximates to their fair value.
The Group's credit risk is primarily attributable to trade
receivables and accrued income. The amounts presented in the
consolidated statement of financial position are net of any loss
allowance. The total loss allowance for trade receivables and
accrued income at 31 December 2019 was GBP4,413,000 (2018:
GBP3,112,000). See note 18 for further details. The ageing profile
of trade receivables past due date is shown below:
2019 2018
GBP'000 GBP'000
--------------- -------- --------
31-60 days 6,623 1,761
61-90 days 2,228 1,662
Over 90 days 4,359 2,719
--------------- -------- --------
13,210 6,142
Loss allowance (4,284) (2,356)
--------------- -------- --------
8,926 3,786
--------------- -------- --------
Trade receivables are non-interest bearing and are generally on
30-90-day terms. Trade receivables due from related parties at 31
December 2019 amounted to GBPNil (2018: GBPNil).
Receivables are all in Sterling denominations.
Accrued income, which is made up of unbilled receivables and
contract assets, is presented net of any loss allowance and
impairment, with amounts being invoiced periodically and customers
being the same as those within trade receivables.
15 Cash and cash equivalents
Cash and cash equivalents comprise cash held by the Group. The
carrying amount of the asset approximates the fair value. All
balances are held in Sterling.
During each period, there were no amounts of cash placed on
short-term deposit.
For the purposes of the cash flow statement, cash and cash
equivalents comprises:
2019 2018
GBP'000 GBP'000
----- -------- --------
Cash 50,092 30,027
----- -------- --------
50,092 30,027
----- -------- --------
16 Trade and other payables
2019 2018
GBP'000 GBP'000
----------------- -------- --------
Current
Trade payables 16,466 13,835
Other payables 2,420 775
Other taxes 4,788 2,628
Deferred income 2,487 3,540
Advance payments 1,335 1,345
Accruals 19,300 14,225
----------------- -------- --------
46,796 36,348
----------------- -------- --------
Deferred income and advance payments are made up of the
following balances:
2019 2018
GBP'000 GBP'000
---------------------- -------- --------
Contract liabilities 3,494 3,229
Other deferred income 328 1,656
---------------------- -------- --------
3,822 4,885
---------------------- -------- --------
The Directors consider that the carrying amount of trade and
other payables approximates to their fair value.
Trade payables are classified at amortised cost, are
non-interest bearing and are normally settled on 30-45-day
terms.
All trade liabilities are denominated in Sterling.
17 Financial liabilities
2019 2018
GBP'000 GBP'000
------------------ -------- --------
Current
Lease liabilities 1,013 -
Bank loans 1,724 172,016
------------------ -------- --------
2,737 172,016
------------------ -------- --------
Non-current
Lease liabilities 2,950 -
Bank loans 267,536 -
------------------ -------- --------
270,486 -
------------------ -------- --------
Bank loans at 31 December 2018 relate to a revolving credit
facility of GBP280m.
On 21 December 2018, the Group entered into a new revolving
credit facility agreement with a syndicate of banks for GBP420m,
available for five years (the new facility). This new facility
comprises a different banking structure, gives rise to a
significant increase in the Group's borrowing capacity and
discharged the Group's obligations under the previous facility with
effect from the first utilisation on 3 January 2019. It is thus
deemed to be an extinguishment.
On 3 January 2019, the first drawdown was made under the new
facility for GBP200m. This was used to settle the Group's
outstanding obligations under the previous facility of GBP172m and
fund additional capital investment. The drawdown pattern changes
under the new facility to quarterly in advance, rather than monthly
in arrears. The balance of unamortised arrangement fees on the
previous facility of GBP0.1m has been accelerated and recognised as
an exceptional finance cost in the consolidated income statement
for the year ended 31 December 2019.
Transaction costs on the new facility of GBP3.1m, deferred
within other assets at 31 December 2018 and also recognised within
other liabilities, were reclassified to bank loans on 3 January
2019 and are amortised over the term of the new facility. At 31
December 2019, GBP0.6m of transaction costs had been recognised
within the consolidated income statement.
The Group had a total outstanding principal of GBP270m at 31
December 2019. Repayment of the principal is not required until
2022 under the terms of the contract and, therefore, this balance
has been classified as non-current at 31 December 2019. Accrued
interest of GBP1.7m has been recognised as part of the carrying
value of bank loans at 31 December 2019 together with a deduction
of GBP2.5m for unamortised transaction costs.
In 2019, the new facility attracted interest at a rate of 1.85%
over the three-month LIBOR and 0.65% was payable on undrawn funds.
The interest is required to be settled quarterly and has thus been
classified as current at 31 December 2019.
The Group has complied with the financial covenants of its
borrowing facility during the 2019 and 2018 reporting period.
Following the announcement on 12 March 2020 that the Group has
signed an agreement to dispose of a minority of the Group's meter
assets, as detailed in note 28(a), the Group intends to fully repay
the existing debt facility in 2020 and replace it with an amended
GBP300m revolving credit facility on the same terms.
17 (a) Changes in liabilities arising from financing
activities
Lease liabilities Bank loans
Financial liabilities GBP'000 GBP'000
------------------------------------------------- ----------------- ----------
At 1 January 2018 - 187,084
Cash flows (i) - (15,654)
Other non-cash changes (i) - 586
------------------------------------------------- ----------------- ----------
At 31 December 2018 - 172,016
Recognition on adoption of IFRS 16 (see note 29) 3,868 -
------------------------------------------------- ----------------- ----------
At 1 January 2019 3,868 172,016
Cash flows (i) (1,075) 90,149
New leases 1,040 -
Other non-cash changes (i) 130 7,095
------------------------------------------------- ----------------- ----------
At December 2019 3,963 269,260
------------------------------------------------- ----------------- ----------
(i) Cash flows and other non-cash changes
Cash flows lease liabilities include GBP1,075,000 of lease
payments. Cash flows on bank loans include GBP270,000,000 of new
borrowings less GBP172,114,000 of borrowings repaid, interest
payments of GBP4,632,000 and a payment of GBP3,105,000 for
arrangement fees.
Other non-cash changes in lease liabilities include GBP157,000
of interest charges less GBP27,000 arising from changes in lease
terms in the year. Other non-cash changes in bank loans include
GBP6,356,000 of interest charges, of which GBP1,724,000 were unpaid
at 31 December 2019, and GBP739,000 amortisation of arrangement
fees.
In 2018, cash flows on bank loans included GBP101,627,000 of new
borrowings less GBP117,281,000 of borrowings repaid. Other non-cash
changes in bank loans included GBP586,000 amortisation of
arrangement fees.
18 Financial risk management
The Board reviews and agrees policies for managing the risks
associated with interest rate, credit and liquidity risk. The Group
has in place a risk management policy that seeks to minimise any
adverse effect on the financial performance of the Group by
continually monitoring the following risks:
18 (a) Interest rate risk
The Group's main interest rate risk arises from its floating
rate bank loan of GBP269,260,000 (2018: GBP172,016,000). See note
17 for further details.
There were no overdrafts at 31 December 2019 (2018: none) and
the interest charge arising on lease liabilities, recognised from 1
January 2019 upon implementation of IFRS 16, does not represent a
cash interest rate risk for the Group.
The Group's financial assets at 31 December 2019 comprise cash
and trade receivables. The cash balance of GBP50,092,000 (2018:
GBP30,027,000) is a floating rate financial asset but interest
income is not typically material.
(i) Interest rate sensitivity
The following table demonstrates the sensitivity to a change in
interest rates on the Group's floating rate bank loan. The Group's
profit before tax is affected through the impact on floating rate
borrowings as follows:
Effect on
profit
Increase/decrease before tax
in basis points GBP'000
----- ------------------ -----------
2019 +70bps (1,885)
2018 +70bps (1,204)
----- ------------------ -----------
Management believes that a movement in interest rates of 70bps
gives a reasonable measure of the Group's sensitivity to interest
rate risk. The table above demonstrates the sensitivity to a
possible change in interest rates, with all other variables held
constant, of the Group's profit before tax.
18 (b) Fair values of financial liabilities and financial
assets
The Group's bank loan is measured at amortised cost. For fair
value disclosure purposes, the bank loan is considered to be a
level 2 financial instrument on the basis that it is not traded in
an active market. The fair values, based upon the market value or
discounted cash flows of financial liabilities and financial assets
held in the Group, were not materially different from their book
values.
18 (c) Foreign currency risk
The Group's exposure to the risk of changes in foreign exchange
primarily arises from a single subsidiary acquired during the year,
operating in Euros, With the exception of this entity, all of the
Group's operating activities are denominated in Pounds Sterling
and, therefore, the Group's overall exposure is not
significant.
18 (d) Liquidity risk
The Group manages its cash in a manner designed to ensure
maximum benefit is gained whilst ensuring security of investment
sources. The Group's policy on investment of surplus funds is to
place deposits at institutions with strong credit ratings; this is
considered to be institutions with a credit rating of AA- and
above. Currently, all of the chosen investment institutions are in
line with these criteria.
The ageing and maturity profile of the Group's material
financial liabilities is disclosed in the table below. The amounts
disclosed are the contractual undiscounted cash flows.
Between
two Total
Less than and five Over contractual
one year years five years cash flows
31 December 2019 GBP'000 GBP'000 GBP'000 GBP'000
------------------------------------ --------- --------- ----------- ------------
Contractual maturities of financial
liabilities
Trade payables 16,466 - - 16,466
Bank loan 7,049 290,954 - 298,003
Lease liabilities 1,153 2,748 456 4,357
------------------------------------ --------- --------- ----------- ------------
24,668 293,702 456 318,826
------------------------------------ --------- --------- ----------- ------------
The contractual undiscounted cash flows on the bank loan reflect
the contractual arrangements in place at 31 December 2019. As
disclosed in note 28(a), the Group intends to fully repay the
existing debt facility in 2020. Of the GBP290,954,000 disclosed in
the 2019 bank loan time band "between two and five years", the
Group has assumed that the entire principal balance will be settled
upon maturity of the loan facility at the end of 2023.
Between two
Less than and five Over Total contractual
one year years five years cash flows
31 December 2018 GBP'000 GBP'000 GBP'000 GBP'000
------------------------------------ --------- ----------- ----------- -----------------
Contractual maturities of financial
liabilities
Trade payables 13,835 - - 13,835
Bank loan1 172,016 - - 172,016
Lease liabilities - - - -
------------------------------------ --------- ----------- ----------- -----------------
185,851 - - 185,851
------------------------------------ --------- ----------- ----------- -----------------
1 In 2018, there was a nil variable interest rate impact given
the full loan balance at 31 December 2018 was considered short term
and was extinguished on 3 January 2019.
18 (e) Credit risk
The Group's credit risk primarily arises from credit exposures
to energy suppliers (our customers), including outstanding
receivables, due to the Group trading with a limited number of
companies, which are generally large utility companies or financial
institutions.
Credit risk is managed on a Group basis. For banks and financial
institutions, only independently rated parties with a minimum
rating of "AA-" are accepted. With regard to customers, the Group
assesses the credit quality of the customer, considering its
financial position, past experience and other factors. The Group
does not expect, in the normal course of events, that debts due
from customers are at significant risk. The Group's maximum
exposure to credit risk equates to the carrying value of cash and
cash equivalents, trade and other receivables, contract assets and
investments. The Group's maximum exposure to credit risk from its
customers is GBP44,318,000 (2018: GBP28,438,000) being the sum of
the carrying value of trade receivables and accrued income,
including contract assets, as disclosed within trade and other
receivables in note 14. The Group regularly monitors and updates
its cash flow forecasts to ensure it has sufficient and appropriate
funds to meet its ongoing operational requirements.
(i) Impairment of financial assets
The Group has two types of financial assets that are subject to
IFRS 9's expected credit loss model:
-- trade receivables, which consist of billed receivables
arising from contracts with customers, for the provision of meter
asset installation, management and energy services; and
-- accrued income, which consists of contract assets and
unbilled receivables arising from contracts with customers.
While cash and cash equivalents, and debt investments held at
amortised cost, are also subject to the impairment requirements of
IFRS 9, the identified impairment loss was immaterial.
The Group applies the IFRS 9 simplified approach to measuring
forward-looking expected credit losses (ECL) which uses a lifetime
expected loss allowance for all trade receivables and accrued
income, including contract assets.
To measure the ECL, trade receivables and accrued income have
been grouped based on shared credit risk characteristics and the
days past due. Accrued income relates to rights to consideration
for performance, and other operating charges, before payment is due
from customers and consists of unbilled receivables and contract
assets (see note 2 for details). These have substantially the same
risk characteristics as the trade receivables for the same types of
contracts. The Group has therefore concluded that the expected loss
rates for trade receivables are a reasonable approximation of the
loss rates for accrued income.
The Group has established a provision matrix based on the
payment profiles of sales, over the most recent twelve-month period
that is an appropriate representation of loss patterns, and the
corresponding historical credit losses experienced within this
period. The historical loss rates are adjusted to reflect current
and forward-looking information that might affect the ability of
customers to settle the receivables, including macroeconomic
factors as relevant. In calculating the loss rates, certain
historical losses arising from specific circumstances with
customers have been removed where these are not indicative of
future loss patterns.
On that basis, the loss allowance at 31 December 2019 was
determined as GBP4,413,000 (31 December 2018: GBP3,112,000) for
trade receivables and accrued income. A reconciliation of these
balances is provided as follows:
Accrued Trade
income receivables Total
GBP'000 GBP'000 GBP'000
------------------------------------------------- -------- ------------ --------
At 1 January 2019 756 2,356 3,112
(Decrease)/Increase in loss allowance recognised
in profit or loss during the year (627) 4,012 3,385
Receivables written off during the year as
uncollectable - (2,084) (2,084)
Unused amount reversed - - -
------------------------------------------------- -------- ------------ --------
At 31 December 2019 129 4,284 4,413
------------------------------------------------- -------- ------------ --------
Total trade receivables have increased since the prior year end,
contributing to the increase in loss allowance recognised at 31
December 2019. In addition, the loss allowance at 31 December 2019
includes certain individually impaired trade receivables as a
result of specific circumstances with customers. The decrease in
the loss allowance on accrued income reflects the application of
updated loss rates and an overall decrease in accrued termination
income as compared with the prior year. Total net impairment losses
on financial and contract assets were GBP3,385,000 in 2019 (2018:
GBP2,409,000). Of this amount, GBP3,385,000 (2018: GBP2,366,000)
relates to amounts arising from trade receivables and accrued
income.
(ii) Fair value
There is no material difference between the book value and the
fair value of any financial asset or liability.
18 (f) Capital management
Capital is the equity attributable to the equity holders of the
parent. The primary objective of the Group's capital management is
to ensure that it maintains a strong credit rating and healthy
capital ratios in order to support its business and maximise
shareholder value. The Group manages its capital structure, and
makes adjustments to it, in light of changes in economic
conditions. To maintain or adjust the capital structure, the Group
may adjust the dividend payment to shareholders, sell assets,
return capital to shareholders or issue new shares.
The Group monitors capital on the basis of a leverage ratio.
This ratio is calculated as net debt divided by pre-exceptional
EBITDA. Net debt is calculated as total borrowings less cash.
Pre-exceptional EBITDA is calculated as operating profit before any
significant exceptional items, interest, tax, depreciation and
amortisation.
The objective of SMS's strategy is to deliver long-term value to
its shareholders whilst maintaining a balance sheet structure that
safeguards the Group's nancial position. From an ordinary dividend
perspective our objective has been to provide a progressive,
through-cycle dividend that reflects the potential volatility of
our business. A revised dividend policy has been proposed,
effective in FY20, following the disposal of a minority of the
Group's meter assets. See note 28(a) for further details.
19 Business combinations
On 5 September 2019 the Group acquired 100% of the issued share
capital of Solo Energy Limited (company number 566746), a
blockchain energy flexibility IT platform. The acquisition will
enable SMS to utilise Solo's IT platform, which was still under
development at 31 December 2019, to establish new long-term revenue
streams from a decentralised energy grid.
The company's registered office address is Phoenix House,
Monahan Road, Cork T12 H1XY, and it reports in Euros.
Purchase consideration consisted of cash only. Total cash paid
was 1,152,000 EUR (equivalent to GBP1,032,000 using an exchange
rate of 1.1163 at 5 September 2019).
The assets and liabilities recognised as a result of the
acquisition are as follows:
Fair value
GBP'000
1
------------------------------------------- ----------
Intangible assets: capitalised development 697
Intangible assets: trademarks 96
Plant and equipment 6
Cash and cash equivalents 5
Trade and other receivables 4
Trade and other payables (230)
Deferred income: government grants (24)
Borrowings (334)
Deferred tax liability (16)
------------------------------------------- ----------
Net identifiable assets acquired 204
------------------------------------------- ----------
Less: pre-existing relationship (167)
Add: goodwill 995
------------------------------------------- ----------
Net assets acquired 1,032
------------------------------------------- ----------
1 All net assets acquired have been translated using an exchange
rate of 1.1163 at 5 September 2019.
No contingent assets or liabilities were acquired.
In addition to the borrowings acquired above of GBP334,000 Solo
Energy Limited had a short-term loan of GBP167,000 due to an SMS
subsidiary company at the date of acquisition. In accordance with
IFRS 3, this pre-existing relationship is accounted for as
"effectively" settled on acquisition by increasing the
consideration transferred for the acquisition. The acquisition of
Solo Energy Limited and the effective settlement of the receivable
are recorded as separate transactions. No gain or loss has been
recognised as the receivable due from Solo Energy Limited was
effectively settled at the recorded amount.
The goodwill is attributable to management expertise and the
new, long-term revenue opportunities expected from the deployment
of Solo Energy's IT platform. Goodwill will not be deductible for
tax purposes.
The IT platform acquired was still under development at 31
December 2019. Therefore, for the period from 5 September to 31
December 2019, the acquired business contributed immaterial
revenues and a net loss before taxation of GBP120,000 to the Group.
If the acquisition had occurred on 1 January 2019, consolidated
pro-forma revenue for the year ended 31 December 2019 would also
have been immaterial and consolidated pro-forma loss for the year
ended 31 December 2019 would have been approximately GBP384,000. No
further adjustments were required as there were no material
differences in the accounting policies between the Group and the
entities acquired.
Acquisition related costs of GBP92,000 were incurred and are
included as part of exceptional administrative costs in the
consolidated statement of comprehensive income.
There were no acquisitions in the year ending 31 December
2018.
20 Deferred taxation
The movement in the deferred taxation liability during the
period was:
2019 2018
GBP'000 GBP'000
------------------------------------------------------------- -------- --------
Opening deferred tax liability 12,070 9,924
Increase in provision through consolidated statement
of comprehensive income 1,544 1,052
Increase/(decrease) in provision through equity 149 1,094
Deferred tax on intangibles acquired as part of acquisitions 16 -
------------------------------------------------------------- -------- --------
Closing deferred tax liability 13,779 12,070
------------------------------------------------------------- -------- --------
The Group's provision for deferred taxation consists of the tax
effect of temporary differences in respect of:
2019 2018
GBP'000 GBP'000
--------------------------------------------------- -------- --------
Excess of taxation allowances over depreciation on
property, plant and equipment 11,691 12,170
Tax losses available (1) (96)
Deferred tax asset on share options (992) (1,056)
Deferred tax on intangibles acquired 58 147
Other 3,023 905
--------------------------------------------------- -------- --------
13,779 12,070
--------------------------------------------------- -------- --------
The deferred tax included in the consolidated statement of
comprehensive income is as follows:
2019 2018
GBP'000 GBP'000
-------------------------------------- -------- --------
Accelerated capital allowances (478) 613
Tax losses 95 (35)
Deferred tax asset on share options (85) (152)
Movement in fair value of intangibles (106) (280)
Other 2,118 906
-------------------------------------- -------- --------
1,544 1,052
-------------------------------------- -------- --------
The Group had unrecognised tax losses of GBP763,000 in a
subsidiary undertaking at 31 December 2019.
The main rate of corporate taxation is expected to reduce from
19% to 17% effective 1 April 2020, as a result of the Finance Act
2016, which was substantively enacted on 6 September 2016.
Consequently, deferred tax has been provided at the tax rates at
which temporary differences are expected to reverse.
21 Related party transactions
21 (a) Subsidiaries
The Group's subsidiaries at 31 December 2019 are set out below.
Unless otherwise stated, they have share capital consisting solely
of ordinary shares, and the proportion of ownership interests held
equals the voting rights held by the Group. The country of
registration is also their principal place of business.
Proportion
Registered of
office Holding shares held Nature of business
--------------------------- ---------- --------------- ------------ ---------------------------------
SMS Connections Limited 1 Ordinary shares 100% Gas utility connections
SMS Meter Assets Limited 1 Ordinary shares 100% Gas and electric asset management
SMS MAPCO 1 Limited 1 Ordinary shares 100% Gas and electric asset management
Crail Meters Limited*(+/-) 1 Ordinary shares 100% Gas and electric asset management
SMS Data Management
Limited 1 Ordinary shares 100% Data management
UKMA (AF) Limited* 2 Ordinary shares 100% Funding
SMS Corporate Services
Limited(+/-) 1 Ordinary shares 100% Administrative services
SMS Energy Services Electricity utility connections
Limited 2 Ordinary shares 100% and management
CH4 Gas Utility and
Maintenance Services
Limited* 2 Ordinary shares 100% Meter installation
SMS Utilities Academy
Limited*(+/-) 2 Ordinary shares 100% Engineer training and development
Trojan Utilities Limited* 2 Ordinary shares 100% Meter installation
Business and domestic software
Qton Solutions Limited* 2 Ordinary shares 100% development
Solo Energy Limited
(UK)* (+/-) 1 Ordinary shares 100% Renewable asset management
Solo Energy Limited
(Ireland)* (+/-) 3 Ordinary shares 100% Renewable asset management
--------------------------- ---------- --------------- ------------ ---------------------------------
* The shareholding in this company is indirect via a subsidiary company.
+/- Newly incorporated entity in 2019.
1 Registered office address: 2nd Floor, 48 St. Vincent Street, Glasgow G2 5TS.
2 Registered office address: Prennau House, Copse Walk, Cardiff
Gate Business Park, Cardiff CF23 8XH.
3 Registered office address: Phoenix House, Monahan Road, Cork T12 H1XY.
21 (b) Key management personnel compensation
The Group has determined that key management personnel
constitute the Executive Directors, Non-executive Directors and
certain senior management personnel. The aggregate compensation
paid or payable to key management is shown below:
2019 2018
GBP'000 GBP'000
----------------------------- -------- --------
Short-term employee benefits 1,557 2,369
Post-employment benefits 22 23
Share-based payments 186 114
----------------------------- -------- --------
1,765 2,506
----------------------------- -------- --------
21 (c) Directors
(i) Directors' emoluments
Aggregate remuneration for both Executive and Non-executive
Directors in respect of qualifying services was:
2019 2018
GBP'000 GBP'000
------------------------------------------------------- -------- --------
Aggregate emoluments 877 1,281
Company contributions to money purchase pension scheme 11 8
Company contributions to private pension plan - -
------------------------------------------------------- -------- --------
888 1,289
------------------------------------------------------- -------- --------
In 2019, no amount was payable to Directors as settlements
following resignation (2018: no amount was payable to
Directors).
(ii) Emoluments of highest paid Director
2019 2018
GBP'000 GBP'000
----------- -------- --------
Emoluments 377 663
----------- -------- --------
In addition, rent was paid into the highest paid Director's
personal pension scheme. See note 21 (d) for further details.
(iii) Number of Directors who accrued benefits under Company
pension schemes
2019 2018
Number Number
----------------------- ------- -------
Money purchase schemes 2 1
----------------------- ------- -------
21 (d) Other transactions with related parties
A number of key management personnel hold positions in other
entities that result in them having control or significant
influence over the financial or operating policies.
A number of these entities transacted with the Group in the
reporting period. The terms and conditions of the transactions with
key management personnel and their related parties were no more
favourable than those available, or which might reasonably be
expected to be available, on similar transactions to non-key
management personnel and related entities on an arm's length
basis.
During the period, the Group entered into the following
transactions with related parties:
-- Rent amounting to GBP41,500 (2018: GBP41,615) paid to the
Directors' pension scheme, Eco Retirement Benefit Scheme, for the
use of certain premises. Alan Foy is a trustee of the scheme. At
the year-end date, an amount of GBPNil (2018: GBPNil) was
outstanding in this regard.
-- The Group paid dividends to Alan Foy of GBP281,382 (2018:
GBP244,641), The Metis Trust1 of GBP56,520 (2018: GBP49,140), David
Thompson of GBP84 (2018: GBP27), Miriam Greenwood of GBP1,046
(2018: GBP893), Willie MacDiarmid2 of GBP372 (2018: GBP323), Graeme
Bissett of GBP333 (2018: GBP289) and Tim Mortlock of GBP121 (2018:
GBPNil).
-- During the year, SMS Utilities Academy Limited purchased a
group of assets and liabilities for GBP27,500 from Utilities
Academy Limited - a third-party smart meter training facility in
which another subsidiary undertaking, Trojan Utilities Limited, had
a minority shareholding. The net assets purchased were previously
used by Utilities Academy Limited in its business of providing
training to dual fuel smart meter engineers on behalf of
third-party customers. Utilities Academy Limited went into
administration on 28 March 2019, at which point the cost of Trojan
Utilities Limited's minority investment in the company was written
off. At 31 December 2018 Trojan Utilities Limited had a balance
with Utilities Academy Limited of GBP26,442 with transactions
during the year amounting to GBPNil.
1 Alan Foy is a trustee but not a beneficiary.
2 Paid to a connected person.
22 Share capital
2019 2018
GBP'000 GBP'000
--------------------------------------------------- -------- --------
Allotted and called up:
112,811,122 ordinary shares of GBP0.01 each (2018:
112,548,050 ordinary shares of GBP0.01 each) 1,128 1,125
--------------------------------------------------- -------- --------
During the year 125,519 (2018: 97,250) ordinary share options
were exercised in relation to the Group's employee share plans
which are described in note 23. The ordinary shares issued have a
nominal value of GBP1,000 (2018: GBP1,000), and aggregate
consideration of GBP419,000 (2018: GBP270,000) was received.
In addition, 137,553 shares were issued during the year (2018:
nil) in relation to deferred remuneration arising on the
acquisition of a subsidiary in 2016, settled in shares in April
2019. The ordinary shares issued have a nominal value of GBP2,000
and a fair value of GBP829,000. No consideration was received for
these shares. The total fair value of GBP829,000 has been
recognised directly within retained earnings and the difference
between the fair value and nominal value of GBP827,000 has been
recognised within share premium.
The Group's Share Incentive Plan is administered by the Smart
Metering Systems SIP Trust (the trust), which acquires shares in
SMS (own shares) to satisfy awards under this plan and facilitate
the delivery of shares to participants. At 31 December 2019,
146,412 (2018: 111,307) own shares were held in trust with a carry
value of GBP768,000 and a market value of GBP827,000 (2018:
GBP584,000). The Company purchased 67,220 shares (2018: 36,137)
from the market during 2019 with a weighted average fair value of
GBP5.20 per share (2018: GBP6.34).
23 Share-based payments
23 (a) Employee option plans
On 20 June 2011 the Company adopted both the Approved Company
Share Option Plan (CSOP) and the Unapproved Share Option Plan (the
Unapproved Plan).
The CSOP is open to any employee of any member of the Group up
to a maximum value of GBP30,000 per employee. The Unapproved Plan
is open to any employee, including Executive Directors, of the
Company or any other Group company who is required to devote
substantially the whole of their time to their duties under his
contract of employment.
Under the plans, participants are granted options which, except
in certain specified circumstances, only vest if certain
performance conditions are met and the employee is still in service
within five years of the date of grant. The performance conditions
for awards are based on market capitalisation and individual
performance targets. Once vested, the options remain exercisable
for a period of up to ten years from the date of grant. The
exercise price of the options is determined by the Directors but
shall not be less than the closing price at which the Company's
shares are traded on the date of grant.
(i) Summary of options
The table below summarises options granted under the CSOP and
Unapproved Plan:
At Fair
At 31 Exercise value
1 January December price Date Expiry at grant
Plan 2019 Granted Exercised Forfeited Expired 2019 (pence) exercisable date (pence)
------------ --------- ------- --------- --------- ------- --------- -------- ----------- -------- ---------
15 Jul 15 Jul
CSOP 27,253 - (1,400) - - 25,853 76.0 2014 2021 17.1
20 Jun 20 Jun
Unapproved 321,666 - - - - 321,666 60.0 2016 2021 13.0
28 May 28 May
Unapproved 405,000 - (25,000) - - 380,000 153.5 2017 2022 40.0
12 Nov 12 Nov
Unapproved 65,000 - - (25,000) - 40,000 350.0 2019 2024 84.8
12 Nov 12 Nov
Unapproved 698,019 - (22,544) (15,693) (1,904) 657,878 350.0 2019 2024 84.8
20 Mar 19 Mar
Unapproved 161,724 - (76,575) (51,050) - 34,099 391.8 2021 2026 61.5
3 Jul
Unapproved 38,586 - - - - 38,586 410.0 4 Jul 2021 2026 114.3
18 Aug 17 Aug
Unapproved 90,706 - - - - 90,706 470.0 2021 2026 87.2
31 Aug
Unapproved 100,000 - - - - 100,000 529.0 1 Sep 2021 2026 141.5
26 Sep 25 Sep
Unapproved 50,000 - - - - 50,000 529.0 2021 2026 142.4
28 Nov 28 Nov
Unapproved 9,091 - - - - 9,091 550.0 2021 2026 141.0
13 Jul
Unapproved1 489,001 - - (10,000) - 479,001 700.0 1 Jan 2023 2028 125.2
13 Sep 12 Sep
Unapproved3 12,000 - - - - 12,000 602.8 2023 2028 154.3
13 Jul
Unapproved2 - 489,000 - (10,000) - 479,000 700.0 1 Jan 2023 2028 34.6
13 Sep 12 Sep
Unapproved3 - 12,000 - - - 12,000 602.8 2023 2028 98.0
4 Sep
Unapproved - 370,000 - - - 370,000 454.6 5 Sep 2024 2029 111.5
------------ --------- ------- --------- --------- ------- --------- -------- ----------- -------- ---------
Total 2,468,046 871,000 (125,519) (111,743) (1,904) 3,099,880
------------ --------- ------- --------- --------- ------- --------- -------- ----------- -------- ---------
1 Options of 489,001 relate to the first of five tranches.
Remaining tranches will be granted in line with plan rules.
2 Options of 489,000 relate to the second of five tranches.
Remaining tranches will be granted in line with plan rules.
3 Options of 12,000 and 12,000, respectively, relate to the
first and second of five tranches. Remaining tranches will be
granted in line with plan rules.
The weighted average share price at the date of exercise of
options exercised during the year ended 31 December 2019 was
GBP5.39 (2018: GBP7.59).
(ii) Fair value of options granted
The assessed fair value at the valuation date of options granted
during the year ended 31 December 2019 ranged from 34.6p to 111.5p,
as disclosed in the table above (2018: 125.2p to 154.3p). The fair
value of options granted is estimated using appropriate option
pricing models, taking into account the exercise price, the term of
the option, the share price at grant date and expected price
volatility of the underlying share, the expected dividend yield,
the risk-free rate interest rate for the term of the option, and
the market-based performance conditions. The expected price
volatility is based on historical volatility, adjusted for any
expected changes to future volatility due to publicly available
information.
The total fair value of these options is recognised over the
period from their grant date until they become exercisable.
The following table lists the range of assumptions applied to
the options granted under the Unapproved Plan during the year ended
31 December 2019:
1.00 to
Dividend yield (%) 1.37
30.32 to
Expected volatility (%) 30.55
0.43 to
Risk-free interest rate (%) 0.60
4.04 to
Expected option life (years) 5.00
4.55 to
Exercise price (GBP) 7.00
4.64 to
Share price at grant date (GBP) 5.31
0.35 to
Fair value at grant date (GBP) 1.12
------------------------------- --------
Where the options granted have a market performance condition
attached, the Group has used a Monte Carlo model in order to allow
for the impact of this condition. Where there is no market
performance condition attached, the Group has used the traditional
Black-Scholes model. The dividend yield was determined using the
published yield at the date of grant. The expected volatility
reflects the assumption that historical volatility, as measured
over several different periods, is indicative of future trends,
which may not necessarily be the actual outcome. The risk-free
interest rate is taken from a government bond yield rate with a
redemption period consistent with the corresponding vesting period
of the options. The expected life of the options is based on
historical data and is not necessarily indicative of exercise
patterns that may occur.
The expense recognised in 2019 for all options is GBP353,000
(2018: GBP282,000).
23 (b) Share Incentive Plan (SIP)
The Company introduced the SIP in October 2014. All employees of
the Group (including Executive Directors) are eligible to
participate in the SIP. Participants may each acquire Partnership
Shares worth up to GBP1,800 per year from their pre-tax earnings at
market value. The Company awards participants one Matching Share
for each Partnership Share which they acquire. Dividends received
on shares held in the SIP are reinvested to acquire Dividend Shares
at market value. Matching Shares may be forfeited if the
participant disposes of the corresponding Partnership Shares or
leaves the employment of the Group within three years of the award
date.
The table below shows the number of shares held in the SIP at
the beginning and end of the year.
Weighted
average
At 1 January Awarded At 31 December acquisition
Type of award 2019 shares Sold/transferred Forfeited 2019 price
-------------- ------------ ------- ---------------- --------- -------------- ------------
Partnership 158,961 71,145 (26,776) (83) 203,247 GBP5.25
Matching 157,624 71,145 (13,216) (14,638) 200,915 GBP5.25
Dividend 3,617 5,302 (617) (12) 8,290 GBP5.47
-------------- ------------ ------- ---------------- --------- -------------- ------------
Total 320,202 147,592 (40,609) (14,733) 412,452
-------------- ------------ ------- ---------------- --------- -------------- ------------
The SIP is administered by the Smart Metering Systems SIP Trust.
To the extent sufficient shares are not already held by the trust,
Matching Shares awarded by the trust to employees are acquired on
market prior to the award. Matching Shares held by the trust, which
have not yet vested unconditionally at the end of the reporting
period, are shown as own shares in the financial statements.
The fair value of the Matching Shares at the award date is equal
to the share price at the award date. The weighted average fair
value per share of the Matching Shares awarded during 2019 was
approximately GBP5.26 per share (2018: GBP6.56). The total fair
value of Matching Shares awarded is recognised over the three-year
period starting on the respective award dates.
The expense recognised in 2019 for all Matching Shares is
GBP250,000 (2018: GBP206,000). No expense is recognised for the
Partnership Shares and Dividend Shares because the participants pay
full market value for these shares.
24 Other reserve
This is a non-distributable reserve that initially arose by
applying merger relief under section 612 of the Companies Act 2006
to the shares issued in 2009 in connection with the Group
restructuring. Additionally, the premium of GBP4,189,000 and
GBP1,115,000 arising on the issue of shares as part of the
acquisitions of CH4 Gas Utility and Maintenance Services Limited
(CH4), Trojan Utilities Limited (Trojan) and Qton Solutions Limited
(Qton) has been credited to this reserve.
25 Commitments under operating leases
The Group's commercial leases for certain vehicles, office and
warehouse space are accounted for under IFRS 16 with effect from 1
January 2019 and are thus excluded from the below operating lease
commitments disclosure in 2019. These were previously included in
the prior year. See note 29 for further details on the
implementation of IFRS 16.
2019 commitments under operating leases include the Group's
commercial leases for its fleet vans and items of office equipment.
These leases are either short term (the contract term is less than
twelve months) or low value (underlying asset less than $5,000)
and, therefore, meet the exemption criteria under IFRS 16. They
continue to be expensed through the consolidated statement of
comprehensive income. These leases have lives between one and three
years and some have renewal options included in the contracts.
There are no restrictions placed upon the Group by entering into
these leases.
Future minimum rentals payable under non-cancellable operating
leases as at each year end are as follows:
2019 2018
GBP'000 GBP'000
------------------------------------------------------------ -------- --------
Future minimum commitments under operating lease agreements
are as follows:
Payable within one year 61 1,258
Payable within two and five years 19 2,841
Payable after five years - 861
------------------------------------------------------------ -------- --------
80 4,960
------------------------------------------------------------ -------- --------
26 Capital commitments
Significant capital expenditure contracted for at the end of the
reporting period but not recognised as liabilities is as
follows:
2019 2018
GBP'000 GBP'000
------------------------------ -------- --------
Property, plant and equipment 579 -
Intangible assets 1,233 2,430
------------------------------ -------- --------
Included within the capital expenditure on intangible assets is
GBP1,041,000 (2018: GBP2,430,000) in relation to the implementation
of a new ERP system across the Group.
27 Ultimate controlling party
There is no ultimate controlling party by virtue of the
structure of shareholdings in the Group.
28 Post balance sheet events
28 (a) Sale of a minority of meter assets
As announced on 12 March, the Group has signed an agreement to
dispose of a minority of the Group's meter assets for a total gross
cash consideration of GBP291 million. Following the deduction of
transaction and other expenses, and subject to completion of the
disposal (which is expected to take place on 22 April 2020), the
Group expects to receive net cash consideration of GBP282
million.
The meters being disposed of have a net book value of GBP89m at
31 December 2019 and the transaction is expected to result in a
gain of approximately GBP193 million, which will be disclosed as an
exceptional item in the financial statements. The disposal will be
effected by the sale of the entire share capital of Crail Meters
Limited, a wholly owned subsidiary of the Group.
SMS will continue to manage the disposed meter portfolio on
behalf of the purchaser, for which it will receive RPI-linked
management fees of GBP0.8 million in the first full year.
The Group also announced a revised dividend policy, with a
proposed annual dividend of 25p per share for FY2020 increasing at
least in line with RPI until FY2024, and a scrip alternative offer
for up to 30% of the dividend.
Linked to this transaction, the Group intends to fully repay the
existing debt facility and replace it with an amended GBP300m
revolving credit facility on the same terms.
28 (b) Budget 2020 announcement
Deferred tax has been provided on the consolidated balance sheet
at 31 December 2019 at a rate of 17%; being the rate which was
substantively enacted at the balance sheet date (effective 6
September 2016). The Budget 2020, announced on 11 March 2020, has
confirmed that the decrease from 19% to 17%, previously due to
become effective from 1 April 2020, will no longer occur once draft
legislation is passed. The impact of this change would result in an
increase to closing deferred tax liabilities of GBP1.6m.
28 (c) Coronavirus
As the situation continues to evolve, our primary concern is for
the welfare of our people. We are following the development of the
coronavirus outbreak and have implemented several immediate
measures to protect our employees and to prepare for possible
consequences of the virus. Whilst the outbreak has not yet had any
direct impact on our operations, it is unclear how it will develop.
It is currently difficult to assess the potential impact this could
have on our 2020 business activities and results, but based on the
current financial position of the Group, together with the cash
that will be generated upon completion of the asset disposal
detailed in note 28(b), we are satisfied that the Company and the
Group have adequate resources to continue in business for the
foreseeable future. We will continue to follow developments closely
and are prepared to take further action as appropriate.
29 Impact of change in accounting policies on the financial
statements
This note explains the impact of the adoption of IFRS 16 Leases
on the Group's financial statements and discloses the new
accounting policies that have been applied from 1 January 2019 in
note 29 (b) below.
The Group has adopted IFRS 16 retrospectively from 1 January
2019 but has not restated comparatives for the 2018 reporting
period, as permitted under the specific transitional provisions in
the standard. The reclassifications and the adjustments arising
from the new leasing rules are therefore recognised in the opening
balance sheet on 1 January 2019.
29 (a) Adjustments recognised on adoption of IFRS 16
The change in accounting policy affected the following items in
the consolidated balance sheet on 1 January 2019:
-- right-of-use assets - increased by GBP3,820,000, recognised
within property, plant and equipment;
-- lease liabilities - increased by GBP3,868,000 (of which
GBP3,173,000 were non-current), recognised separately on the
consolidated balance sheet; and
-- prepayments and accruals - decreased by GBP140,000 and GBP187,000 respectively.
On adoption of IFRS 16, the Group recognised lease liabilities
in relation to leases which had previously been classified as
"operating leases" under the principles of IAS 17 Leases. These
liabilities were measured at the present value of the remaining
lease payments, discounted using the lessee's incremental borrowing
rate as of 1 January 2019. The weighted average lessee's
incremental borrowing rate applied to the lease liabilities on 1
January 2019 and 31 December 2019 was 4%.
There was no net impact to retained earnings on 1 January 2019
and thus no impact to taxation on transition.
For the year ended 31 December 2019 there has been no material
impact on operating profit or EBITDA but a portion of expense
previously recognised within administrative expenses has been
recognised as a finance cost under IFRS 16.
The Group had no leases previously classified as finance leases
at 1 January 2019.
Differences between the operating lease commitments disclosed at
31 December 2018, discounted using the incremental borrowing rate
at the date of initial application of IFRS 16, and the lease
liabilities recognised in the consolidated balance sheet at 1
January 2019 comprise adjustments for prepayments and rent-free
periods together with short-term and low-value leases recognised on
a straight line basis as administrative expenses.
The associated right-of-use assets for leases were measured at
the amount equal to the lease liability, adjusted by the amount of
any prepaid or accrued lease payments relating to that lease
recognised in the balance sheet as at 31 December 2018. There were
no onerous lease contracts that would have required an adjustment
to the right-of-use assets at the date of initial application.
The recognised right-of-use assets relate to the following types
of assets:
At 31 December At 1 January
2019 2019
Cost GBP'000 GBP'000
-------------------------- -------------- ------------
Properties1 3,845 3,806
Motor vehicles 19 14
-------------------------- -------------- ------------
Total right-of-use assets 3,864 3,820
-------------------------- -------------- ------------
1 Properties include office and warehouse space.
(i) Impact on segment disclosures and earnings per share
The asset management EBITDA, segment assets and segment
liabilities for December 2019 all increased as a result of the
change in accounting policy.
Lease liabilities and corresponding right-of-use assets are now
included in the asset management segment liabilities and assets to
the extent they relate to properties (i.e. warehouses) and motor
vehicles directly attributable to the provision and management of
meter assets.
Segment Segment
assets liabilities
at 31 December at 31 December
2019 2019
GBP'000 GBP'000
------------------------ --------------- ---------------
Asset management impact 905 893
------------------------ --------------- ---------------
All other right-of-use assets relate to corporate assets that
are not allocated to a segment.
The increase in EBITDA and EPS was not material for the year
ended 31 December 2019.
(ii) Practical expedients applied
In applying IFRS 16 for the first time, the Group has used the
following practical expedients permitted by the standard:
-- the use of a single discount rate to a portfolio of leases
with reasonably similar characteristics;
-- reliance on previous assessments on whether leases are onerous;
-- the accounting for operating leases with a remaining lease
term of less than twelve months as at 1 January 2019 as short-term
leases;
-- the exclusion of initial direct costs for the measurement of
the right-of-use asset at the date of initial application; and
-- the use of hindsight in determining the lease term where the
contract contains options to extend or terminate the lease.
29 (b) The Group's leasing activities and how these are
accounted for
(i) Group as lessor
Under IAS 17 it was concluded that the Group acts as a lessor in
its arrangements to provide meter assets to energy suppliers. These
leases were classified as operating leases as the Group did not
transfer substantially all the risks and rewards of ownership of
the meter assets. The related meter income was recognised on a
straight line basis per the meter rental income policy.
As a result of the Company's assessment of contracts on
implementation of IFRS 16, the arrangements the Group has in place
to act as meter asset provider were reconsidered and it was
determined that the contract does not constitute a lease of the
meter asset to the energy supplier. SMS controls the meter as the
Group retains legal title and obtains substantially all the
economic benefit. The assets are recognised as property, plant and
equipment when in use under contract with an energy supplier and
related income for the service of providing a fitted meter is
recognised in accordance with IFRS 15. Further information about
the Group's accounting policy for revenue recognition is given in
note 2 and for property, plant and equipment in note 10.
There is no impact on the recognition and measurement of income
earned from the provision of meter assets as a result of this
change.
(ii) Group as a lessee
The Group leases various offices, warehouses and motor vehicles.
Rental contracts are typically made for fixed periods of three to
ten years but may have extension or early termination options.
Lease terms are negotiated on an individual basis and contain a
wide range of different terms and conditions. The lease agreements
do not impose any covenants, but leased assets may not be used as
security for borrowing purposes.
Until 1 January 2019, leases of property, plant and equipment
were classified as either finance or operating leases and, as at 1
January 2019, all leases were classified as operating leases.
Payments (net of any incentives received from the lessor) were
charged to profit or loss on a straight line basis over the period
of the lease.
From 1 January 2019, leases are recognised as a right-of-use
asset and a corresponding liability at the date at which the leased
asset is available for use by the Group. Each lease payment is
allocated between the liability and finance cost. The finance cost
is charged to profit or loss over the lease period so as to produce
a constant periodic rate of interest on the remaining balance of
the liability for each period. The right-of-use asset is
depreciated over the shorter of the asset's useful life and the
lease term on a straight line basis.
In determining the lease term, management considers all facts
and circumstances that create an economic incentive to exercise an
extension option, or not exercise a termination option. Extension
options (or periods after termination options) are only included in
the lease term if the lease is reasonably certain to be extended
(or not terminated). The assessment is reviewed if a significant
event or a significant change in circumstances occurs which affects
this assessment and that is within the control of the lessee.
Assets and liabilities arising from a lease are initially
measured on a present value basis. Lease liabilities include the
net present value of the following lease payments:
-- fixed payments (including in-substance fixed payments), less any lease incentives receivable;
-- variable lease payments that are based on an index or a rate;
-- amounts expected to be payable by the lessee under residual value guarantees;
-- the exercise price of a purchase option if the lessee is
reasonably certain to exercise that option; and
-- payments of penalties for terminating the lease, if the lease
term reflects the lessee exercising that option.
The lease payments are discounted using the interest rate
implicit in the lease. If that rate cannot be determined, the
lessee's incremental borrowing rate is used, being the rate that
the lessee would have to pay to borrow the funds necessary to
obtain an asset of similar value in a similar economic environment
with similar terms and conditions.
Right-of-use assets are measured at cost comprising the
following:
-- the amount of the initial measurement of lease liability;
-- any lease payments made at or before the commencement date
less any lease incentives received;
-- any initial direct costs; and
-- restoration costs.
Payments associated with short-term leases and leases of
low-value assets are recognised on a straight line basis as an
expense in profit or loss. Short-term leases are leases with a
lease term of twelve months or less. Low-value assets comprise IT
equipment and small items of office furniture, where the value of
the asset on inception is less than c.US$5,000.
Payments for services are separated from the lease components of
a contract and accounted for as an administrative expense.
This information is provided by RNS, the news service of the
London Stock Exchange. RNS is approved by the Financial Conduct
Authority to act as a Primary Information Provider in the United
Kingdom. Terms and conditions relating to the use and distribution
of this information may apply. For further information, please
contact rns@lseg.com or visit www.rns.com.
END
FR UNOURRNUOAUR
(END) Dow Jones Newswires
March 17, 2020 03:00 ET (07:00 GMT)
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