TIDMSMS
RNS Number : 0651V
Smart Metering Systems PLC
04 April 2019
Smart Metering Systems plc
("SMS" or "the Company" or "the Group")
Final results for the year ended 31 December 2018
Smart Metering Systems plc (AIM: SMS.L) is pleased to announce
its final results for the 12 months to 31 December 2018, which show
continued underlying business growth.
Financial highlights
-- Revenue increased by 24% to GBP98.5m (2017: GBP79.6m)
-- Total annualised recurring revenue(1) increased by 32% to GBP75.3m (2017: GBP57.0m)
-- Gas: meter recurring revenue increased by 19% to GBP42.9m
(2017: GBP36.1m) and data recurring revenue increased by 6% to
GBP3.13m (2017: GBP2.96m)
-- Electricity: meter recurring revenue increased by 81% to
GBP20.3m (2017: GBP11.2m) and data recurring revenue grew 34% to
GBP9.0m (2017: GBP6.7m)
-- Pre-exceptional EBITDA(1) increased by 28% to GBP51.6m (2017: GBP40.3m)
-- Underlying PBT(1) increased by 13% to GBP25.1m (2017: GBP22.2m)
-- Gross profit increased by 3% to GBP41.5m (2017: GBP40.4m),
with gross margin decreasing by 9% to 42% (2017: 51%)
-- Exceptional items of GBP17.1m (2017: GBP2.0m), reflecting the
reduced carrying value of meter assets, predominantly in the
Group's traditional meter portfolio
-- Statutory EBITDA decreased by 9% to GBP35.5m (2017:
GBP38.8m), with statutory EBITDA margin decreasing by 13% to 36%
(2017: 49%)
-- Statutory Profit before tax decreased by 70% to GBP5.4m (2017: GBP18.0m)
-- Underlying earnings per share(1) decreased to 18.46p (2017:
19.93p) and statutory earnings per share decreased to 3.97p (2017:
16.17p)
-- Final dividend proposed of 3.98p per ordinary share totalling
5.98p for the full year (2017: 5.20p), an increase of 15%
-- Net debt at 31 December 2018 was GBP142.0m (2017: GBP36.5m),
with access to cash and undrawn facilities at 31 December 2018 of
GBP138.0m (2017: GBP243.5m), increasing to GBP277.0m on 3 January
2019
1 Refer to the Financial Review for definitions and details on
the Group's alternative performance measures, which includes
annualised recurring revenue, pre-exceptional EBITDA, underlying
PBT and underlying earnings per share.
Operational highlights
-- Total gas and electricity metering and data assets increased
by 1.1m to 3.13 million under management at 31 December 2018 (2017:
2.03 million)
-- Total gas meter portfolio, including third-party management
assets, increased by 65% to 2,106,000 (2017: 1,273,000), with
industrial and commercial (I&C) meters increasing by 6% to
173,000 (2017: 163,000). Gas data portfolio increased by 4% to
131,000 (2017: 126,000)
-- Total electricity meter portfolio increased by 78% to 552,000
(2017: 309,000). Electricity data portfolio increased by 7% to
345,000 (2017: 323,000)
-- ADM(TM) installations up 2% to 105,000 units (2017: 103,000)
with international trials continuing
-- Capital expenditure on revenue-generating assets was GBP128.2m (2017: GBP122.5m)
-- Over 30,000 hours of engineer training delivered in 2018
-- First dedicated smart metering training facility in the UK
established and the facilitation of a test lab to assist with DCC
SMETS2 readiness
-- Employed 964 people at 31 December 2018 and reached the
milestone of becoming a living wage employer
-- Recognised by the Office of Low Emission Vehicles (OLEV) as
an accredited installer of electric vehicle charging points for the
government's Workplace Charging Scheme (WCS)
Alan Foy, Chief Executive Officer, commented:
"2018 has been a year of continued investment and growth, and I
am especially pleased with the way in which we have brought our end
to end solutions to the UK's energy suppliers shown by the
significant contract wins announced in the last 6 months. Building
long term partnerships with our customers is key to our success. We
enter 2019 with a strong order book and are well positioned to
continue making progress in our core markets."
For further Information:
Smart Metering Systems plc 0141 249 3850
Alan Foy, Chief Executive Officer
David Thompson, Chief Financial Officer
Craig McGinn, Company Secretary
Dilip Kejriwal, Head of Investor Relations
Cenkos Securities plc 0131 220 6939 / 0207 397 8900
Neil McDonald
Beth McKiernan
Kreab 020 7074 1800
Matthew Jervois
Notes to Editors
About Smart Metering Systems
Established in 1995, Smart Metering Systems plc, headquartered
in Glasgow, installs, owns, operates and maintains gas and
electricity meters on behalf of major energy companies in the UK
energy and utilities market.
The SMS Asset Management business delivers long term stable
income from ownership of over 3.1 million utility metering
assets.
The SMS Asset Installation business installs gas and electricity
meter assets for the Meter Asset Management business through
engineering workforce across the UK.
The SMS Energy Management business provides energy management
and consultancy services to support large blue-chip companies in
the UK, through a network of offices across the UK.
The 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 (DNO's).
The Company was quoted on AIM in July 2011 and is now part of
the FTSE AIM 50 index. For more information on SMS please visit the
Company's website: www.sms-plc.com.
About DCC (Data Communications Company)
DCC is leading the design, build, test and integration of the
data and communications infrastructure to connect with the business
systems of energy.
Smart DCC Ltd (DCC) operates under the Smart Meter Communication
Licence which was granted by the Department of Business, Energy and
Industrial Strategy (BEIS) and is regulated by Ofgem.
Chairman's statement
2018 has, once again, been an excellent year for SMS, with
substantial and increased capital investment in metering assets
being reflected in the significant growth in annualised recurring
revenues and our trading performance.
The Group, as at 31 December 2018, had more than 3.1 million
metering and data assets under management, up 54% from 2.0 million
at the end of 2017. We have established a substantial source of
long-term, index-linked recurring revenues, in a secure and
established asset class. We continue to demonstrate that we have
proven operational and financial capacity and the platform to
deliver the smart domestic meter rollout. As a result, we saw a 32%
increase to GBP75.3m in annualised recurring revenues. This
recurring revenue stream, which provides long-term returns, firmly
underpins our robust investment proposition.
SMS is now one of the largest installers of meter assets in the
UK. The domestic smart market opportunity continues to be the clear
focus for us, but, as you would expect, we are also looking ahead
to ensure that we have the capabilities to deliver integrated
energy solutions to our customers. By investing in smart meters, we
are establishing the foundations for a business at the centre of
the energy system as we transition to a more sustainable and
low-carbon future.
People and systems
We are now a business nearing 1,000 people across the UK and, as
we continue to grow, investing in our people has never been more
important. We are continuously working to ensure that we foster a
culture which enables all our staff to uphold the highest levels of
integrity, and to maintain a positive empowering environment in
which we encourage all colleagues to take responsibility, and to
make a difference to our organisation and to our customers every
day.
Our business strategy is to provide a market-leading service in
our industry and we continue to work towards becoming an "Employer
of Choice". During 2018, we harmonised our people policies and
procedures across the Group and, as we enter 2019, we have embarked
on projects to enhance our current benefits package for employees.
We continue to develop our business to ensure we offer a culture
and environment that attracts and retains exceptional employees. I
would like to thank all the staff at SMS for their commitment and
contribution to our continuing success.
We have continued to invest in the business infrastructure to
support this staff growth, and we are building on our experienced
and proven management team, which is now focused on successfully
delivering the transition from SMETS1 to SMETS2, innovation in our
future services and our growth plans.
Technology, information security and IT systems are critical to
the delivery of the smart meter rollout, the transition to SMETS2,
the delivery of a first-class customer experience, and the
development of our services beyond smart meters to deliver the
future of smart energy and a low-carbon energy system. The
importance of technology is reflected in our continued and
substantial investment in this area to support our existing and
future service offering.
Health and safety
Our primary focus is on health and safety and we have
standardised policies and protocols designed to protect our
employees and customers, including training, testing and risk
assessments. Health and safety is always the key Group priority,
with the Board ensuring appropriate engagement throughout our
workforce to promote and achieve healthy and safe conditions. We
have increased investment in our compliance and training resources,
with executive leadership actively involved, and have implemented a
new electronic safety management system and launched a new
mandatory health and safety training regime. We actively encourage
our employees to stop work when they feel safety may be
compromised, to report all incidents or near misses however small,
and to continually invest and rigorously challenge, evaluate and
assess the risks within our business.
Dividend
We aim to provide a progressive, through-cycle dividend that
shares the rewards of our profitability and growth with
shareholders and provides a sustainable return.
The Board is pleased to announce a proposed final cash dividend
of 3.98p per ordinary share for the year ended 31 December 2018
(2017: 3.46p). In addition to the interim dividend of 2.00p (2017:
1.74p), this will give a total ordinary dividend of 5.98p (2017:
5.20p), an increase of 15% on last year.
Delivering our strategy
Our strategic priorities, in 2019, are to:
1. Continue to increase our metering installation run rates in
the Domestic and Industrial and Commercial (I&C) markets to
further grow our 3.1 million metering and data assets currently
under management.
2. Build on our strategic positioning and investment in capacity
to take advantage of the domestic smart market opportunity in the
UK, carefully managing the technology, logistics and engineering
challenges associated with the SMETS2 delivery. This is founded on
our proven end-to-end delivery capability, increasing capacity and
track record of customer service and operational delivery.
3. Innovate our services to build data, energy, financing and
installation capabilities that enable our customers to reduce their
carbon emissions and facilitate our investment in infrastructure
asset classes which provide long-term recurring revenue.
Looking beyond the smart meter rollout, we will continue to
invest in our business - strategically positioning ourselves as an
integrated energy solutions provider, seeking partnerships to
support this.
Outlook
2018 has seen us accelerate our annualised recurring revenues
and our trading performance, and significantly increase capital
investment in metering assets accordingly, making us one of the
largest installers of meter assets in the UK.
As we enter 2019, the domestic smart market provides us with a
significant opportunity for further growth. We will continue to
manage the business change required through the transition from
SMETS1 to SMETS2 meters and fully expect our smart meter
installation run rates to increase in the second half of 2019 as
the smart meter rollout enters its main phase.
In understanding our business, it is crucial to remember that
data is at the centre of everything we do. Through the installation
of smart meters, we deploy the devices that produce the data
essential for managing and understanding energy flows and we use
this data across our range of services to help our clients make
better decisions and achieve operational efficiency and
sustainability. We will continue to develop our capabilities to
deliver innovative and integrated energy solutions to our
customers, leveraging the foundations we have established in smart
meters to grow our service proposition.
Chief Executive Officer's statement
Overview
It is a privilege to report on the continued growth and success
of SMS for the year ended 31 December 2018, an exciting twelve
months during which we extended and deepened our relationships with
our energy supplier customers. As a result, we have strengthened
our position at the heart of the low-carbon, smart energy
revolution, a transformation that is well underway and is pivotal
in realising a greener, more sustainable world.
Our successful journey has been made possible by listening to
our customers and, in partnership with them, an untiring ambition
to offer solutions which deliver the future of smart energy. We do
this by providing smart meter, data and energy services which give
greater control over the generation, use and storage of energy. Our
valued service offer prioritises safety and builds on our
engineering installation experience, knowledge, finance and
technology to deliver an unrivalled customer experience whilst
generating sustainable and recurring revenue streams.
A significant part of our growth has been due to the continued
expansion of our customer pipeline in the mandated smart domestic
meter rollout. Our contracted customer pipeline, through our
exclusive and framework agreements, also gives us access to a
further c.2.0 million meter points.
Installation run rates dipped in the second half of 2018 as we
began the industry-wide transition from SMETS1 to the
second-generation SMETS2 smart meters, which we anticipated. We are
now well positioned with the engineering capacity to accelerate the
delivery of this pipeline as we progress into the second half of
2019.
The transition to SMETS2 has required investment in our supply
chain to move from SMETS1 meter stock to the SMETS2 meters and
communication hubs which will immediately connect to the Data
Communications Company (DCC), the body set up by the government to
collect data from all smart meters. The DCC has made significant
progress, supported by our test labs in Cardiff, in progressing the
enrolment and adoption of SMETS1 meters into the DCC systems, a
process which will make them interoperable through an over-the-air
integration programme to be rolled out during 2019.
Key highlights
We have seen substantial growth in our gas and electricity meter
and data portfolio under management, which increased by 54% from
2.0 million to over 3.1 million assets. Meter assets grew by 68%
from 1,582,000 to 2,658,000, and data assets grew by 6% from
449,000 to 476,000 data points.
Our success during the year has also been demonstrated in the
number of contract wins we have been pleased to announce with both
new and existing energy supplier customers. This includes exclusive
arrangements with First Utility (Shell Energy) and Good Energy, and
framework agreements with Co-op Energy, Bristol Energy and Octopus
Energy. Most recently, we are delighted to have signed an agreement
with SSE Energy Supply, with whom we have a longstanding
relationship, which provides us with the opportunity to supply and
install up to 200,000 SMETS2 non-domestic meters to its small
business customers. Whilst energy suppliers have seen a number of
challenges, particularly independent or "challenger" entrants, we
are pleased to be partnering with robust businesses who, like SMS,
are committed to the smart meter revolution.
Our primary financial KPI is our annualised long-term
index-linked recurring revenue (our recurring rental revenue from
our installed meter and data asset base) which increased by 32%
from GBP57.0m to GBP75.3m as of the end of 2018. This increase of
GBP18.3m compares to an increase of GBP15.7m in 2017, despite the
decrease in installation run rates in the latter part of 2018 as we
transition to SMETS2 meter stock. As at the 1 April 2019 our
annualised recurring revenue had increased to c.GBP80m supported by
further growth in our smart meter portfolio to 932,000 smart
meters. This growth and the expanding order book from our
contracted customers provide the context for the increase in our
banking facilities.
Our annual recurring index linked revenue is at the core of our
long-term cash-generative financial model. Once installed, our
long-term assets provide recurring rental revenue for their
lifetime and sit alongside the provision of maintenance, support
and continuing service opportunities.
As the smart meter rollout enters a significant phase in 2019,
we have taken the decision to write down the value of our
traditional meter portfolio.
We continue our focus on ensuring our culture of customer
excellence is front of mind for all our staff. Delivering on our
promises of attention to detail and going the extra mile, with
integrity and passion, is critical to our continued success and we
will keep listening to our customers as we evolve our services
within and beyond the immediate smart meter rollout.
This proven culture of success is a clear reflection of strength
of the Company's leadership and wider Executive team and provides
confidence as to the continued execution of our strategy within the
smart meter rollout.
Industrial and Commercial (I&C) market
In 2018, we continued to install advanced meters for the I&C
market (and provide data services by collecting meter consumption
information); we are now beginning to see a shift in focus to
extend the smart metering rollout to the micro-business sector. We
believe our proven experience of delivering quality services to
I&C customers with the installation of advanced meters (and
data services allied to our experience of smart) will provide the
foundation of success in this significant market segment. We expect
this segment to grow, particularly as I&C energy suppliers
begin to focus on their mandated requirements under the smart meter
programme which apply to the micro-business segment as to the
Domestic market.
We continue to deploy the ADM(TM) device in the I&C gas
market. This is our advanced metering solution which provides
half-hourly meter read information and we have invested further to
provide 3G/4G/5G capability which we believe will support its
potential for deployment as part of other UK and international
utility metering solutions.
UK Domestic market
Over the year, we significantly extended our portfolio of smart
meters as part of the UK government's mandated smart meter
programme, which requires all UK households and small businesses to
be offered a smart meter by the end of 2020. However we anticipate
the domestic smart meter exchange to extend to the end of 2022, and
potentially into 2023. We now own 846,000 smart domestic meters
(+100%), with substantial contracted pipeline opportunities from
both our exclusive and framework energy supplier customers.
There are c.53 million gas and electricity meters in the UK and,
as of the end of December 2018, there were 14.9 million smart and
advanced meters installed in homes and businesses across the
country. The market share of "challenger" energy suppliers in the
Domestic market has increased to c.25% at the start of 2019 (c.13
million meters). SMS now has either framework or exclusive
agreements with twelve of the independent energy suppliers,
equivalent to a potential 8 million meter points. We continue to
engage with all energy suppliers in the market with the ability to
offer both financial and operational capacity to provide certainty
to deliver their mandated obligations.
Evolution
The execution of the delivery phase of the smart domestic
rollout is without doubt a major growth opportunity for us, with
even greater opportunity beyond that from the changing energy
market enabled and facilitated by the smart energy revolution. We
are optimistic about the future energy market opportunities which
our business model presents and we are confident that we can
effectively leverage our existing capabilities in its delivery.
With the increasing demand for our utility connections and
energy management services, we are investing to diversify and
innovate in energy, installation and data services which will
support the transition and decarbonisation of the UK energy
system.
We are proud to have been recognised by the Office of Low
Emission Vehicles (OLEV) as an accredited installer of electric
vehicle charging points for the government's Workplace Charging
Scheme (WCS). Through the WCS, UK business can benefit from a grant
towards the cost of installation of electric vehicle charging
points, and as an accredited OLEV installer, funder and expert
energy consultant we are not only able to design and deliver the
installation, but also to maximise value through provision of
integrated energy strategies.
We are also pleased to have delivered a major LED lighting
retrofit project for a major national hotel chain during 2018 and
are continuing to identify and deliver opportunities to invest and
deliver energy efficiency reduction strategies and to optimise
building control solutions which, allied to our leading data
presentation and analytics systems, provide smart monitoring and
energy reduction solutions across the country.
We are trialling the installation of innovative battery storage
and generation solutions, typically upstream of the customer meter.
Working closely with both our I&C corporate customers and
energy supplier partners, we are currently developing services
which aggregate such opportunities to maximise returns by shifting
demand and aligning generation/export with demand.
Whilst still at a trial stage, we believe that these
developments, in combination with our accredited provision of
half-hourly settlement services to energy suppliers (enabling the
purchase/trading and settlement of energy use on a half-hourly
basis through smart meter consumption data) and continued
technology investments provide significant market opportunity for
further capital deployment and recurring revenue streams beyond
smart metering. These opportunities will also leverage on our
highly trained national engineering workforce and smart home
installation capabilities developed initially for the smart meter
rollout.
It goes without saying that our people remain our most valuable
asset, and we continue to invest in training, development and
balanced benefits packages, as well as strategically investing
ahead of time in the future of our business. I would like to thank
all our employees for their continued hard work, dedication and
commitment in delivering for our customers and the ongoing success
of our business.
As a major energy services and smart metering company, which
places data and sustainability at the core of our ethos and
business model, we are excited to be at the heart of the revolution
in the United Kingdom with a mission to deliver the future of smart
energy.
Financial review
Financial results
The Group has delivered a strong underlying performance for the
year, with reported revenue increasing by 24% to GBP98.5m and
pre-exceptional EBITDA increasing by 28% to GBP51.6m. We have again
seen a record year of growth in our revenue-generating assets,
having invested GBP128.2m, and have grown our smart meter portfolio
by 100%, or 423,000 meters, in this year alone. Underlying profit
before taxation has increased by 13% to GBP25.1m. Whilst the Group
has clearly grown its base of annualised recurring rental assets,
there continues to be a requirement for tactical investment in our
smart meter installation capacity that underpins our end-to-end
service offering. The depreciation charge, largely driven by
investment in our meter portfolio, and our largest non-cash cost
item, has grown from GBP14.1m to GBP21.8m. This investment in meter
capacity, infrastructure and the associated depreciation charge
resulted in slower growth at the PBT level. We therefore use
annualised recurring revenue (ARR), revenue and pre-exceptional
EBITDA as the key performance measures of the business. On a
statutory basis, after charging GBP17.1m of exceptional costs, the
profit before tax was GBP5.4m (2017: GBP18.0m).
Divisional trading performance
Asset Management revenue grew 35% to GBP65.5m (2017: GBP48.7m)
largely due to the continued transition into the Domestic smart
market with our domestic smart meter portfolio doubling during the
year to 846,000. Energy Management revenue has increased by 89% to
GBP6.5m (2017: GBP3.4m), primarily attributable to the commencement
of a nationwide energy-efficient lighting project for a large hotel
chain. Asset Installation revenue has decreased 3.5% to GBP26.6m
(2017: GBP27.5m) due to legacy installation-only contract work from
the acquisition of Trojan Utilities Limited diminishing, and a
decreasing portfolio of domestic traditional meters requiring
transactional works. The continuation of legacy installation-only
type works is being phased out as part of a wider strategic
decision to allocate our internal engineering resource to fit our
own portfolio of smart meters.
Overall, the depreciation-adjusted gross profit margin at a
Group level has decreased by 5% to 63% (2017: 68%). We include
depreciation on our revenue-generating assets within cost of sales
and removing this from our margin analysis provides a better
comparison of underlying trading performance year on year. Our
strategic decision to invest in the smart meter rollout and more
infrastructure-type projects means sales activity will grow, albeit
at a lower margin caused by this changing mix. The key drivers
behind this margin trend are the focus away from external meter
installation activity in our Asset Installation division and the
increase in infrastructure-type projects undertaken within our
Energy Management division which generate increased revenue, albeit
at a lower overall margin.
To support the significant growth in the business we have
continued to invest in our people across all areas, from our
engineering workforce, to the operational support department and
our central functions. Development of our people is critical to the
growth of the business and our investment in our employees and
their skill set will continue. As an example of this continued
investment, in the final quarter of 2018 we opened an additional
customer experience centre in Bolton to facilitate the conversion
of the UK to domestic smart meters. This new facility will employ
over 150 people and aims to be a best in class operational hub to
drive the business through the smart meter rollout.
Other costs in the year which impacted our underlying
profitability include a GBP1.1m bad debt write off in relation to
smaller independent energy suppliers that have ceased trading. As a
consequence our credit risk has improved going forward because
these end consumers were transferred to much larger energy
suppliers under the "Supplier of last resort mechanism". Further,
we made investment of GBP0.5m in the training of smart engineers in
the year.
Annualised recurring revenue
Total annualised recurring revenue increased by 32% to GBP75.3m
as at 31 December 2018. In the gas division, meter recurring
revenue grew by 19% to GBP42.9m, while data recurring revenue
increased 6% to GBP3.1m. In the electricity division, meter
recurring revenue nearly doubled to GBP20.3m and data recurring
revenue grew 34% to GBP9.0m.
This growth continues to be predominantly driven by the domestic
smart meter rollout with the installation of dual fuel meters
favouring higher growth in our younger electricity portfolio, when
compared with our historic gas-weighted portfolio.
Investment in revenue-generating assets
With the domestic smart meter rollout progressing, we have seen
our portfolio of revenue-generating assets, including the meter
assets and their associated data points, grow 54% to 3.1 million as
at the end of 2018. Whilst we have seen our installation rates slow
in the latter part of 2018 and into early 2019 as we approach the
SMETS1/2 crossover, we are confident that these will recover in the
first half of 2019 as the DCC becomes operational in scale. Based
on the contract wins in the second half of the year, we are holding
our cost base in respect of engineers and infrastructure support
during this transitional period to ensure we are best placed to
accelerate our run rates into 2019. We continue to win significant
contracts, as evidenced by our first "big six" win in smart
metering with SSE Energy Supply on 18 March 2019, and will,
therefore, continue to build our installation capacity, grow and
develop our pool of in-house engineers, and manage our stock to
ensure we can meet the demands facing us through 2019 and
beyond.
31 December 31 December
2018 2017 Percentage
units units increase
--------------------------------------------------- ----------- ----------- ----------
Gas meter portfolio* 2,106,000 1,273,000 65%
Electricity meter portfolio 552,000 309,000 78%
Gas data portfolio 131,000 126,000 4%
Electricity data portfolio 345,000 323,000 7%
--------------------------------------------------- ----------- ----------- ----------
Total meter portfolio* 2,658,000 1,582,000 68%
Total data portfolio 476,000 449,000 6%
--------------------------------------------------- ----------- ----------- ----------
Total gas and electricity metering and data assets 3,134,000 2,031,000 54%
--------------------------------------------------- ----------- ----------- ----------
* Includes third-party meter management appointments.
Exceptional items
The charge to the income statement in respect of exceptional
items of GBP17.1m is largely caused by the recognition of GBP12.6m
of losses on our meter portfolio (including an impairment charge of
GBP5.6m) due to the temporary industry transition period. We show
these meter removals and the associated termination income as an
exceptional item as the removal profile is outside our control and
there is inherent volatility in the associated financial
impact.
The largest reduction in carrying value relates to the
traditional meter portfolio. We had reduced the expected useful
life of this asset class from 20 to 5 years when the smart meter
rollout began, in earnest, in 2016. This decision was taken to
reflect the accelerated removal of these traditional meters when
exchanged for a smart meter, well in advance of their actual useful
life. Important judgements surround this removal profile and the
associated termination income received, as the timing of the
removal of these meters is entirely outside our control with
removal dependent on when the end consumer switches to a smart
meter. Termination income can also vary depending on the identity
of the energy supplier at the time of removal. During the year the
estimated life was extended to 2022. We regularly review the
traditional meter portfolio for impairment by comparing a
calculated "value in use" against the carrying value on our balance
sheet. Due to an increase in removals in 2018, particularly in H2,
our impairment review has resulted in the write down of this
carrying value by GBP5.6m to reflect the reduction in rental income
going forward from the reducing portfolio of these meters remaining
on the wall. To assist the users of our financial statements, we
will also disclose separately the constituent parts of these
accounting adjustments so that the traditional meter portfolio can
be better tracked. Further, as we do not consider the entirely
variable and unpredictable financial result of the decline of the
traditional meter portfolio to represent the underlying nature of
our business, we do not include these items in our underlying
measures of performance. Additional information on the results from
the traditional estate is provided in note 10 to the financial
statements.
We have also seen a net balance of GBP3.0m written off against
the carrying value of our smart portfolio in 2018. This represents
approximately 12,500 meters, or 1.5% of our portfolio as at 31
December 2018, which were removed in the year by new energy
suppliers on customer churn and replaced by similar SMETS1 meters
albeit from a different manufacturer. The main driver of these
replacements we believe to be the small minority of cases of churn
when 2-way communication is temporarily lost due to the SMETS1
meter not yet having been adopted into the DCC. With the enrolment
and adoption process of SMETS1 meters into DCC having now begun, we
do not expect this type of meter removal to continue beyond 2019.
We have treated the loss of these meters as exceptional due to this
temporary industry transition period.
Further, we have taken the decision to write down the value of
returned and refurbished traditional meters held in inventory
pursuant to an internal review. This year-end decision was
supported by the release on 22 January 2019 of a consultation from
the department of Business, Energy & Industrial Strategy (BEIS)
to introduce a "New or Replacement Obligation" to help drive the
switch to smart meters. This proposal, planned to become effective
in H1 2019, will further reduce the opportunity to redeploy
domestic traditional meters on a short-term basis. We see this as a
positive step for our business, requiring less resource to handle
and refurbish these assets and allowing us to focus more resource
on smart meter exchanges. A one-off charge of GBP1.6m has been
recognised in 2018 in relation to this write down. Consistent with
our approach, we treat write-offs of inventory value relating to
traditional meters as exceptional charges.
Other exceptional items include bank and professional fees
relating to the arrangement of our new banking facility (GBP1.0m),
payments relating to deferred remuneration arising from the
acquisition of a subsidiary in 2016 (GBP0.7m) and costs associated
with the settlement of a legacy Employee Benefit Trust
(GBP0.8m).
Financial resources
With further growth anticipated as the UK domestic smart meter
rollout continues, we reviewed our longer-term funding during 2018
and decided upon a flexible strategy to allow us the capability to
match the pace of the smart rollout. 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
therefore removing any amortisation in that period. The first
drawdown under this new facility was on 3 January 2019, and at that
date the Group's obligations under the existing facility were
settled. The support from our new banking syndicate comprising
Barclays Bank plc, Santander UK plc, HSBC UK, Clydesdale Bank plc,
Bank of Scotland plc and BNP Paribas is invaluable, providing us
with significant additional financial capacity.
We ended the year with a net debt position of GBP142.0m (2017:
GBP36.5m), with the increase in our continued investment in the
domestic smart meter estate. The Group's pre-exceptional Net
Debt/EBITDA ratio remains well within covenant at around 2.75x
(2017: 0.9x) and as at 31 December 2018 the Group's available cash
and unutilised element of the revolving credit facility stood at
GBP138.0m (2017: GBP243.5m), increasing to c.GBP277.0m after the
first drawdown under the new facility on 3 January 2019.
Dividends
SMS has a progressive ordinary dividend policy, and our
objective is that ordinary dividends will steadily increase on an
annual basis.
The Board considers the dividend in the context of the overall
funding of the business, taking into account obligations under our
existing facility arrangements and our strategy of further capital
deployment to ensure we can meet the demands of the UK smart meter
rollout. We aim to apply a balanced approach, using profits and
cash flow to pay shareholder dividends whilst retaining sufficient
capital to fund investment in meter assets.
The Board has declared a final ordinary dividend for the year of
3.98p (2017: 3.46p) per share. This results in a total ordinary
dividend for the year of 5.98p (2017: 5.20p), an increase of 15% on
last year. The final ordinary dividend payment will be paid in
early June 2019 to shareholders on the register on 26 April
2019.
We remain confident that SMS is able to support a growing
dividend for the foreseeable future, whilst continuing to invest in
the business.
Outlook
We are very pleased with our results for 2018, which have shown
increased revenues and profitability and a continued growth in our
capital investment in revenue-generating assets.
Having successfully secured access to funding of up to GBP420m
over the next five years, we are in a strong position to
effectively manage our meter portfolio in order to meet upcoming
deployment demand in H1 2019 as the crossover to SMETS2 takes
effect.
In this way we are confident that we can continue to retain
momentum through the rollout and maximise the opportunity to obtain
additional market share of the meter portfolio in the UK.
Alternative performance measures
The Group uses alternative performance measures, as listed
below, to present users of the accounts with a clear view of what
the Group considers to be the results of its underlying,
sustainable business operations, thereby enabling consistent
period-on-period comparisons and making it easier for users of the
accounts to identify trends.
Alternative performance measure Definition
--------------------------------- ------------------------------------------------
Annualised recurring revenue The revenue being generated from meter rental
and data contracts at a point in time. Includes
revenue from third-party managed meters.
--------------------------------- ------------------------------------------------
Pre-exceptional EBITDA Statutory EBITDA excluding exceptional items.(1)
--------------------------------- ------------------------------------------------
Underlying profit before taxation Profit before taxation excluding exceptional
items and amortisation of intangibles.
--------------------------------- ------------------------------------------------
Underlying profit after taxation Profit after taxation excluding exceptional
items and amortisation of intangibles and the
tax effect of these adjustments.
--------------------------------- ------------------------------------------------
Adjusted basic EPS Underlying profit after taxation divided by
the weighted average number of ordinary shares
for the purposes of basic EPS.
--------------------------------- ------------------------------------------------
Adjusted diluted EPS Underlying profit after taxation divided by
the weighted average number of ordinary shares
for the purposes of diluted EPS.
--------------------------------- ------------------------------------------------
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.
A reconciliation of these alternative performance measures has
been disclosed in the table below:
Year ended Year ended
31 December 31 December
2018 2017 Percentage
GBPm GBPm increase
------------------------------------------- ------------ ------------ ----------
Group revenue 98.5 79.6 24%
Annualised recurring revenue 75.3 57.0 32%
------------------------------------------- ------------ ------------ ----------
Statutory profit from operations 11.1 22.6
Amortisation of intangibles 2.6 2.2
Depreciation 21.8 14.0
------------------------------------------- ------------ ------------ ----------
Statutory EBITDA 35.5 38.8 (9%)
Exceptional items (EBITDA related) 16.1 1.5
------------------------------------------- ------------ ------------ ----------
Pre-exceptional EBITDA 51.6 40.3 28%
Net interest (excl. exceptional) (4.7) (4.1)
Depreciation (21.8) (14.0)
------------------------------------------- ------------ ------------ ----------
Underlying profit before taxation 25.1 22.2 13%
Exceptional items (EBITDA) (16.1) (1.5)
Exceptional items (interest) (1.0) (0.5)
Amortisation of intangibles (2.6) (2.2)
------------------------------------------- ------------ ------------ ----------
Statutory profit before taxation 5.4 18.0 (70%)
Taxation (0.9) (3.3)
------------------------------------------- ------------ ------------ ----------
Statutory profit after taxation 4.5 14.7
Amortisation of intangibles 2.6 2.2
Exceptional items (EBITDA and interest) 17.1 2.0
Tax effect of adjustments (3.4) (0.8)
------------------------------------------- ------------ ------------ ----------
Underlying profit after taxation 20.8 18.1
Weighted average number of ordinary shares
(basic) 112,408,338 90,655,868
Adjusted basic EPS (pence) 18.46 19.93
Weighted average number of ordinary shares
(diluted) 113,465,235 91,783,618
Adjusted diluted EPS (pence) 18.29 19.69
------------------------------------------- ------------ ------------ ----------
Consolidated income statement and statement of comprehensive
income
For the year ended 31 December 2018
2018 2017
Before 2018 Before 2017
exceptional Exceptional 2018 exceptional Exceptional 2017
items items Total items items Total
Notes GBP'000 GBP'000 GBP'000 GBP'000 GBP'000 GBP'000
------------------------- ----- ------------ ------------ -------- ------------ ------------ --------
Revenue 2, 28 98,492 - 98,492 79,593 - 79,593
Cost of sales 3, 28 (51,333) (5,612) (56,945) (39,164) - (39,164)
------------------------- ----- ------------ ------------ -------- ------------ ------------ --------
Gross profit 47,159 (5,612) 41,547 40,429 - 40,429
Administrative expenses 3 (21,263) (10,529) (31,792) (19,755) (1,515) (21,270)
Other operating income 3 1,330 - 1,330 3,446 - 3,446
------------------------- ----- ------------ ------------ -------- ------------ ------------ --------
Profit from operations 3 27,226 (16,141) 11,085 24,120 (1,515) 22,605
------------------------- ----- ------------ ------------ -------- ------------ ------------ --------
Finance costs 5 (4,962) (996) (5,958) (4,137) (524) (4,661)
Finance income 5 224 - 224 21 - 21
------------------------- ----- ------------ ------------ -------- ------------ ------------ --------
Profit before taxation 22,488 (17,137) 5,351 20,004 (2,039) 17,965
Taxation 6 (3,835) 2,948 (887) (3,673) 367 (3,306)
------------------------- ----- ------------ ------------ -------- ------------ ------------ --------
Profit for the year
and total comprehensive
income attributable
to owners of the
parent 18,653 (14,189) 4,464 16,331 (1,672) 14,659
------------------------- ----- ------------ ------------ -------- ------------ ------------ --------
The profit from operations arises from the Group's continuing
operations.
Earnings per share attributable to owners of the parent during
the year:
Notes 2018 2017
--------------------------------------------------- ----- ---- -----
Basic earnings per share (pence) 7 3.97 16.17
Diluted earnings per share (pence) (2017 restated) 7 3.93 15.97
--------------------------------------------------- ----- ---- -----
Consolidated statement of financial position
As at 31 December 2018
2018 2017
Notes GBP'000 GBP'000
------------------------------------------- ----- -------- --------
Assets
Non-current assets
Intangible assets 9 17,138 13,870
Property, plant and equipment 10 356,732 265,346
Investments 11 75 118
Trade and other receivables 14 402 594
------------------------------------------- ----- -------- --------
Total non-current assets 374,347 279,928
------------------------------------------- ----- -------- --------
Current assets
Inventories 13 11,261 16,575
Other assets 17 3,105 -
Trade and other receivables 14 30,640 25,282
Income tax recoverable 292 426
Cash and cash equivalents 15 30,027 150,600
------------------------------------------- ----- -------- --------
Total current assets 75,325 192,883
------------------------------------------- ----- -------- --------
Total assets 449,672 472,811
------------------------------------------- ----- -------- --------
Liabilities
Current liabilities
Trade and other payables 16 36,348 48,182
Other liabilities 17 3,105 -
Bank loans and overdrafts 17 172,016 23,197
------------------------------------------- ----- -------- --------
Total current liabilities 211,469 71,379
------------------------------------------- ----- -------- --------
Non-current liabilities
Bank loans 17 - 163,887
Deferred tax liabilities 19 12,070 9,924
------------------------------------------- ----- -------- --------
Total non-current liabilities 12,070 173,811
------------------------------------------- ----- -------- --------
Total liabilities 223,539 245,190
------------------------------------------- ----- -------- --------
Net assets 226,133 227,621
------------------------------------------- ----- -------- --------
Equity
Share capital 21 1,125 1,124
Share premium 158,861 158,592
Other reserve 23 9,562 9,562
Own share reserve 22 (588) (697)
Retained earnings 57,173 59,040
------------------------------------------- ----- -------- --------
Total equity attributable to owners of the
parent 226,133 227,621
------------------------------------------- ----- -------- --------
Company registration number
SC367563
Consolidated statement of changes in equity
For the year ended 31 December 2018
Share Share Other Own share Retained
Attributable to the owners capital premium reserve reserve earnings Total
of the parent company: GBP'000 GBP'000 GBP'000 GBP'000 GBP'000 GBP'000
----------------------------------- -------- -------- -------- --------- --------- --------
As at 1 January 2017 892 10,861 8,447 (327) 46,543 66,416
Total comprehensive income for
the year - - - - 14,659 14,659
Transactions with owners in their
capacity as owners
Dividends (note 8) - - - - (4,028) (4,028)
Shares issued (note 21) 232 147,731 1,115 - - 149,078
Movement in own shares (note 21) - - - (370) 70 (300)
Share-based payments (note 22) - - - - 446 446
Income tax effect of share options - - - - 1,350 1,350
----------------------------------- -------- -------- -------- --------- --------- --------
As at 31 December 2017 1,124 158,592 9,562 (697) 59,040 227,621
Adjustment on initial application
of IFRS 9 - - - - (49) (49)
----------------------------------- -------- -------- -------- --------- --------- --------
Restated 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 21) 1 269 - - - 270
Movement in own shares (note 21) - - - 109 (339) (230)
Share-based payments (note 22) - - - - 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
----------------------------------- -------- -------- -------- --------- --------- --------
See notes 22 and 23 for details of the own share reserve and
other reserve. The movement in share premium in 2017 is net of
GBP4.0m of permissible costs in relation to the equity placing
which took place in November 2017.
Consolidated statement of cash flows
For the year ended 31 December 2018
2018 2017
GBP'000 GBP'000
------------------------------------------------------------ --------- ---------
Operating activities
Profit before taxation 5,351 17,965
Finance costs 4,962 4,661
Finance income (224) (21)
Exceptional items(1) 15,426 -
Depreciation 21,796 14,061
Amortisation of intangibles 2,597 2,151
Share-based payment expense 488 446
Loss on disposal of property, plant and equipment 1,659 -
Movement in inventories 4,432 (10,454)
Movement in trade and other receivables (5,215) (9,300)
Movement in trade and other payables (11,639) 22,031
------------------------------------------------------------ --------- ---------
Cash generated from operations 39,633 41,540
Income tax received/(paid) 408 (1,008)
------------------------------------------------------------ --------- ---------
Net cash generated from operations 40,041 40,532
------------------------------------------------------------ --------- ---------
Investing activities
Payments to acquire property, plant and equipment (132,643) (123,864)
Proceeds on disposal of property, plant and equipment 4,264 3,335
Payments to acquire intangible assets (5,887) (1,416)
Finance income received 224 21
------------------------------------------------------------ --------- ---------
Net cash used in investing activities (134,042) (121,924)
------------------------------------------------------------ --------- ---------
Financing activities
New borrowings 101,627 104,075
Borrowings repaid (117,281) (19,167)
Hire purchase repayments - (29)
Finance costs paid (4,815) (4,521)
Net proceeds from share issue 270 147,963
Purchase of own shares (230) (300)
Dividends paid (6,143) (4,028)
------------------------------------------------------------ --------- ---------
Net cash (used in)/generated from financing activities (26,572) 223,993
------------------------------------------------------------ --------- ---------
Net (decrease)/increase in cash and cash equivalents (120,573) 142,601
Cash and cash equivalents at the beginning of the financial
year 150,600 7,999
------------------------------------------------------------ --------- ---------
Cash and cash equivalents at the end of the financial
year (note 15) 30,027 150,600
------------------------------------------------------------ --------- ---------
1 Non-cash exceptional items include 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
2018 were approved and authorised for issue in accordance with a
resolution of the Directors on 4 April 2019. 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) 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 2018
or 2017 but is derived from those accounts. Statutory accounts for
the year ended 31 December 2017 have been delivered to the
Registrar of companies and those for 2018 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 rolling 24-month
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 existing GBP280m facility
of GBP172m were settled.
Based on the current projections and facilities in place, 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.
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.
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 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 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.
Management has made the judgement that amounts arising in relation
to the loss of smart meter assets, attributable to this temporary
industry transition period, will also be recognised 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:
-- impairment of goodwill:
-- management reviews the valuation of goodwill for impairment
annually or if events and changes in circumstances indicate that
the carrying value may not be recoverable. The recoverable amount
is determined based on value in use as fair value less costs to
sell is not easily validated as there is no active market in these
assets. See further details in note 12; and
-- 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, giving rise to an inherent volatility to the value of these assets on our balance sheet; 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 continued to be removed from the wall.
In 2018, this assessment has given rise to an impairment charge
of GBP5.6m on our traditional meter asset portfolio, which has been
recognised as an exceptional cost of sales in line with our
accounting policy (refer to details in note 10).
Revenue recognition
With effect from 1 January 2018
Refer to details in note 2.
Up to 31 December 2017
Revenue is recognised to the extent that it is probable that the
economic benefits will flow to the Group and the revenue can be
reliably measured. Revenue is measured at the fair value of the
consideration received or receivable, excluding discounts and VAT.
Revenue is recognised when the significant rewards and risk of
ownership have been passed to the buyer. The risk and rewards of
ownership transfer when the Group fulfils its contractual
obligations to customers by supplying services.
Meter rental income
Rental income represents operating lease payments receivable
from gas and electricity suppliers. Revenue is recognised on a
straight line basis over the lease term. Rental income is
calculated on a daily basis and invoiced monthly. Rental contracts
do not operate on a fixed-term basis and are cancellable at any
time by the lessee, in which case termination payments are levied
and recognised as other operating income in accordance with the
terms of the contract with immediate effect and do not transfer
risks and rewards of ownership of the underlying asset. They are
therefore considered as operating lease arrangements and accounted
for as such. 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.
Utility connection
Revenue from connection contracts is recognised upon delivery of
the related service. Data management income is recognised on a
straight line basis over the contract period. Amounts invoiced in
advance are recorded as deferred income.
Energy management
Energy advice is provided and revenue is recognised when risk
and reward transfers. Advice is normally quite specific so
recognised on a transactional basis.
Exceptional items and separately disclosed items
The Group presents as exceptional items on the face of the
consolidated statement of comprehensive income those material 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 separately as "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. Any such gain or loss on disposal relating to traditional
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
From 1 January 2018, 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
Regular way purchases and sales of financial assets are
recognised on trade date (that is, the date on which the Group
commits to purchase or sell the asset). 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, which include operating lease
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
From 1 January 2018, 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 and operating leases, 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
de-recognised, where there is no reasonable expectation of
recovery. Indicators that there is no reasonable expectation of
recovery includes, 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 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. 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.
Accounting policies applied until 31 December 2017
The Group has applied IFRS 7 using the modified retrospective
approach and has therefore not restated comparative information. As
a result, the comparative information provided continues to be
accounted for in accordance with the Group's previous accounting
policy.
Classification
Until 31 December 2017, the Group classified its financial
assets in the following categories:
-- financial assets at FVPL;
-- loans and receivables;
-- held-to-maturity investments; and
-- available-for-sale financial assets.
At 31 December 2017, the Group held loans and receivables and
held-to-maturity investments.
The classification depended on the purpose for which the
investments were acquired. Management determined the classification
of its investments at initial recognition.
Subsequent measurement
The measurement at initial recognition did not change on
adoption of IFRS 9. After the initial recognition, loans and
receivables and held-to-maturity investments were carried at
amortised cost using the effective interest method. Financial
assets at FVPL and available-for-sale financial assets were held at
fair value.
Impairment
In the prior year, the impairment of trade receivables was
assessed based on the incurred loss model. Individual receivables
which were known to be uncollectable were written off by reducing
the carrying amount directly. The other receivables were assessed
collectively to determine whether there was objective evidence that
an impairment had been incurred but not yet been identified. For
these receivables the estimated impairment losses were recognised
in a separate provision for impairment.
Receivables for which an impairment provision was recognised
were written off against the provision where there was no
expectation of recovering additional cash. Impairment was
recognised within administrative expenses.
Financial liabilities
The Group's financial liabilities include trade and other
payables, bank loans and overdrafts.
Upon adoption of IFRS 9 from 1 January 2018, there has been no
change in the accounting policies previously applied.
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 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 product or system is
available for use, so as to write off the cost of an asset, less
its estimated residual value, over the useful economic life of that
asset as follows:
-- Amortisation 10% and 33% on cost straight line
Intangible assets
Intangible assets acquired separately from third parties are
recognised as assets and measured at cost.
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 acquired as part of a business combination are
recognised outside goodwill if the asset is separable or arises
from contractual or other legal rights.
Intangible assets are amortised over their useful lives as
follows:
-- Software 20% and 33% on cost straight line
-- Development costs 10% and 33% on cost straight line
-- Customer contracts 10% on cost straight line
Useful lives are examined on an annual basis and adjustments,
where applicable, are made on a prospective basis.
Longer life software is related to underlying meter assets.
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
rental 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%
ADM(TM) units 10%
Traditional 20% to 31 December 2022
-- Plant and machinery 33% on cost
-- Fixtures, fittings 15%, 20% and 33% on cost
and equipment
-- Motor vehicles 25% on cost
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 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 has seen the estimate of residual
value reduce to 0% to reflect revised customer terms in new
customer contracts. As a result the income statement has been
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.
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
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.
As of 1 January 2019, SMS will change its accounting policy to
account for leases under IFRS 16 Leases. The impact of this
transition is discussed in the "Standards and interpretations"
section below.
Group as lessor
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
These new accounting standards and amendments are applicable to
the Group for the first time in 2018. IFRS 9 is further discussed
in note 18 and IFRS 15 is further discussed in note 2. Also refer
to note 28. None of these have had a material effect on the
financial statements of the Group. These are:
Standard or interpretation Effective date
-------------------------- ---------------------------------------------- --------------
IFRS 9 Financial Instruments 1 January 2018
IFRS 15 Revenue from Contracts with Customers 1 January 2018
IFRS 2 Classifications and Measurement of Share-based
Payment Transactions - Amendments to IFRS
2 1 January 2018
Annual Improvements to IFRSs - 2014-2016
Various cycle 1 January 2018
-------------------------- ---------------------------------------------- --------------
The standards and interpretations below will be adopted in
accordance with their effective dates, to the extent that they are
applicable to the Group and have not been adopted in these
financial statements.
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
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
-------------------------- -------------------------------------------- --------------
For standards with a future effective date, management is
reviewing the impact on the Group's financial statements. The key
considerations are as follows:
IFRS 16
IFRS 16 Leases was issued in January 2016 and will have an
impact from 1 January 2019 on the Group's consolidated financial
statements, as all leases will be recognised on the Consolidated
Balance Sheet (except for short-term and low value leases). The
Group will transition to IFRS 16 using the modified retrospective
application approach with no restatement of prior year
comparatives.
Group as lessor
The Group acts as a lessor in its arrangements to provide meter
assets to energy suppliers. Under IAS 17 the Group classified these
leases as operating leases as it did not transfer substantially all
the risks and rewards of ownership of the meter assets. The related
meter income was recognised in line with the meter rental income
policy. Upon implementation of IFRS 16, we do not expect there to
be any change in the Group's accounting policies, or measurement
and recognition, as it has been determined that our meter rental
contracts continue to include a lease component under the
definitions in IFRS 16. These arrangements will continue to be
classified as operating leases with meter income recognised in line
with the meter rental income policy.
Group as a lessee
The Group previously accounted for leases under IAS 17. Leases
were 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 were 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
was recorded in the balance sheet as a finance lease obligation.
The lease payments were apportioned between finance charges to the
income statement and a reduction of the lease obligations. Rental
payments under operating leases were charged to the income
statement on a straight line basis over the applicable lease
periods. The total cost of an operating lease was spread over the
term of the lease on a straight line basis.
IFRS 16 requires lessees to recognise all leases on the balance
sheet with limited exemptions for short-term leases (leases with an
expected term of less than twelve months) and low value leases
(where the value of the asset in the lease on inception is less
than c. US $5,000). This will result in the recognition of a
right-of-use asset and corresponding liability on the balance sheet
for each lease, with the associated depreciation and interest
expense being recorded in the income statement over the lease
period. The right-of-use asset is assessed for impairment under IAS
36 at the date of initial application.
The Group has completed its impact assessment of this standard.
This impact assessment reviewed the operating leases held by the
Group, which primarily consist of leases for premises, vans and
office equipment, as no finance leases were in place in the year to
31 December 2018.
The Group plans to make the following policy choices upon
transition to IFRS on 1 January 2019:
-- The Group plans to apply IFRS 16 initially on 1 January 2019
using a modified retrospective approach. The cumulative effect of
adopting IFRS 16 will be recognised through opening retained
earnings with no restatement of comparatives.
-- Where the Group has concluded that a contract does not
contain a lease under IAS 17 and IFRIC 4 then this assumption has
not been revisited on the initial application of IFRS 16.
-- The value of the right-of-use asset recognised on the initial
application of IFRS 16 is equal to the lease liability, adjusted
for accruals and prepayments. In addition, the Group plans to apply
the practical expedient that permits the exclusion of initial
direct costs from the measurement of the right-of-use asset at the
date of initial application.
-- Services will be separated from the lease components of a
contract and accounted for as an administrative expense; and
-- The Group does not plan to apply IFRS 16 to its intangible
assets. All leases of intangible assets recognised under IAS 38 at
1 January 2019 will continue to be accounted for as such.
The Group plans to make use of the following practical
expedients available under IFRS 16:
-- Leases previously classed as operating leases under IAS 17
which have a duration of less than twelve months remaining at 1
January 2019 will continue to be treated as operating leases (as
set out under IAS 17) until the end of the lease prior to 31
December 2019.
-- Leases previously classed as operating leases under IAS 17
for which the underlying assets meet the definition of "low value"
will continue to be treated as operating leases.
The lease liability at 1 January 2019 has been measured at the
present value of unpaid lease payments at this date, comprising
fixed and variable lease payments. In calculating the net present
value of the lease liability at 1 January 2019, the Group has
determined an appropriate incremental borrowing rate for each lease
based on the rate of interest that the Group would have to pay to
borrow over a similar term, and with a similar security, the funds
necessary to obtain an asset of a similar value to the right-of-use
asset.
Based on this impact assessment, we have estimated the effect of
applying IFRS 16 in its first full year of application to 31
December 2019 as follows:
-- There will be recognition of a right-of-use asset and lease
liability of c. GBP4.2m (on a pre-tax basis) at 1 January 2019 with
no material impact on net assets.
-- There will be no material impact on the total annual income
statement charge or EBITDA in 2019 but a portion of expense
previously recognised within administrative expenses will be
recognised as a finance cost under IFRS 16.
-- The total income statement charge over the life of the leases
will remain unchanged. The impact of IFRS 16 is to recognise higher
costs during the earlier stages in the lease with a reduction in
costs in the later stages of the lease.
Notes to the financial statements
For the year ended 31 December 2018
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.
-- Energy Management, which comprises the provision of energy consultancy services.
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 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
-------------------------------- ----------- ------------- ----------- ----------- -----------
Asset Asset Energy Total
Management Installation Management Unallocated Operations
31 December 2017 GBP'000 GBP'000 GBP'000 GBP'000 GBP'000
-------------------------------- ----------- ------------- ----------- ----------- -----------
Segment revenue 48,655 41,792 3,421 - 93,868
Inter-segment revenue - (14,275) - - (14,275)
-------------------------------- ----------- ------------- ----------- ----------- -----------
Revenue from external customers 48,655 27,517 3,421 - 79,593
Cost of sales (18,958) (17,970) (2,236) - (39,164)
-------------------------------- ----------- ------------- ----------- ----------- -----------
Segment gross profit 29,697 9,547 1,185 - 40,429
Other operating costs/income - - - (13,465) (13,465)
Depreciation - (24) - (669) (693)
Amortisation of intangibles (2,151) - - - (2,151)
Exceptional items - - - (1,515) (1,515)
-------------------------------- ----------- ------------- ----------- ----------- -----------
Profit from operations 27,546 9,523 1,185 (15,649) 22,605
Net finance costs: exceptional - - - (524) (524)
Net finance costs: other (4,116) - - - (4,116)
-------------------------------- ----------- ------------- ----------- ----------- -----------
Profit before tax 23,430 9,523 1,185 (16,173) 17,965
Tax expense - - - - (3,306)
-------------------------------- ----------- ------------- ----------- ----------- -----------
Profit for year 14,659
-------------------------------- ----------- ------------- ----------- ----------- -----------
Inter-segment revenue relates to installation services provided
by the Asset Installation segment to the Asset Management
segment.
Depreciation of GBP20.4m (2017: GBP13.3m) associated with meter
assets has been reported within cost of sales 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:
2018 2017
GBP'000 GBP'000
-------------------------------- -------- --------
Customer 1 - Asset Management 6,024 10,175
Customer 1 - Asset Installation 1,753 3,541
-------------------------------- -------- --------
7,777 13,716
-------------------------------- -------- --------
Segment assets and liabilities
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
------------------------------ ----------- ------------- ----------- ----------- -----------
Asset Asset Energy Total
Management Installation Management Unallocated Operations
31 December 2017 GBP'000 GBP'000 GBP'000 GBP'000 GBP'000
------------------------------ ----------- ------------- ----------- ----------- -----------
Assets reported by segment
Intangible assets 10,373 3,497 - - 13,870
Property, plant and equipment 261,992 251 - 3,103 265,346
Inventories 16,056 410 109 - 16,575
Contract assets - - 211 - 211
------------------------------ ----------- ------------- ----------- ----------- -----------
288,421 4,158 320 3,103 296,002
Assets not by segment 176,809
------------------------------ ----------- ------------- ----------- ----------- -----------
Total assets 472,811
------------------------------ ----------- ------------- ----------- ----------- -----------
Liabilities by segment
Contract liabilities 1,072 2,469 83 - 3,624
Bank loans 187,084 - - - 187,084
------------------------------ ----------- ------------- ----------- ----------- -----------
188,156 2,469 83 - 190,708
Liabilities not by segment 54,482
------------------------------ ----------- ------------- ----------- ----------- -----------
Total liabilities 245,190
------------------------------ ----------- ------------- ----------- ----------- -----------
Assets not by segment include cash and cash equivalents, trade
and other receivables, other assets and investments.
Liabilities not by segment include 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
2018 134,882 2,685 - 963 138,530
2017 123,942 256 - 1,082 125,280
------------------------- ----------- ------------- ----------- ----------- -----------
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 2018 GBP'000 GBP'000 GBP'000 GBP'000
----------------------------------- ---------- ------------ ---------- ----------
Major service lines
Metering(1) 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
----------------------------------- ---------- ------------ ---------- ----------
Asset Asset Energy Total
Management Installation Management Operations
Year ended 31 December 2017 GBP'000 GBP'000 GBP'000 GBP'000
----------------------------------- ---------- ------------ ---------- ----------
Major service lines
Metering(1) 41,039 - - 41,039
Data Management 7,616 - - 7,616
Utility Connections - 11,038 - 11,038
Transactional Meter Works - 15,688 - 15,688
Energy Management - 791 3,421 4,212
----------------------------------- ---------- ------------ ---------- ----------
48,655 27,517 3,421 79,593
----------------------------------- ---------- ------------ ---------- ----------
Timing of revenue recognition
Services transferred at a point in
time - 14,853 - 14,853
Services transferred over time 48,655 12,664 3,421 64,740
----------------------------------- ---------- ------------ ---------- ----------
48,655 27,517 3,421 79,593
----------------------------------- ---------- ------------ ---------- ----------
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.
2 (b) Assets and liabilities related to contracts with
customers
The Group has recognised the following assets and liabilities
related to contracts with customers:
2018 2017
GBP'000 GBP'000
----------------------------- ------- -------
Current contract assets 22 211
----------------------------- ------- -------
Total contract assets 22 211
----------------------------- ------- -------
Current contract liabilities 3,229 3,624
----------------------------- ------- -------
Total contract liabilities 3,229 3,624
----------------------------- ------- -------
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:
2018
GBP'000
--------------------------------------------------------------- -------
Revenue recognised that was included in the contract liability
balance at the beginning of the period 3,139
--------------------------------------------------------------- -------
No revenue was recognised in 2018 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 monthly
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. 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.
In most circumstances, if a rental contract is cancelled
termination payments are 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 inflation 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 ADM(TM) 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/ADM(TM) 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
inflation 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 ADM(TM) 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 good 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.
2018 2017
GBP'000 GBP'000
------------------------------------------------------------- -------- --------
Profit from operations is stated after (charging)/crediting:
Cost of sales:
Direct subcontractor costs (6,786) (4,667)
Depreciation of meter assets (20,390) (13,369)
Direct staff and other costs (22,335) (19,768)
Inventory costs (1,822) (1,360)
------------------------------------------------------------- -------- --------
Total cost of sales (before exceptional items) (51,333) (39,164)
Administrative expenses:
Staff costs (11,447) (12,921)
Depreciation:
- owned assets (1,406) (675)
- leased assets - (17)
Amortisation of intangibles (2,597) (2,151)
Auditor's remuneration (note 3a) (191) (261)
(Loss)/Gain on disposal (1,659) 970
Operating lease rentals (2,041) (1,621)
Research and Development costs (307) -
Other operating charges (1,615) (3,079)
------------------------------------------------------------- -------- --------
Total administrative expenses (before exceptional items) (21,263) (19,755)
Exceptional items (note 3b) (16,141) (1,515)
Other operating income (note 3c) 1,330 3,446
------------------------------------------------------------- -------- --------
Total operating costs (87,407) (56,988)
------------------------------------------------------------- -------- --------
3 (a) Auditor's remuneration
Auditor's remuneration can be analysed as:
2018 2017
GBP'000 GBP'000
------------------------------------------------------- -------- --------
Audit of the parent company and consolidated financial
statements 55 69
Audit of the financial statements of the Company's
subsidiaries 107 133
Other services - audit related assurance services 29 59
------------------------------------------------------- -------- --------
191 261
------------------------------------------------------- -------- --------
3 (b) Exceptional items
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 2018 is a credit
of GBP2,948,000 (2017: GBP367,000).
In 2017, exceptional items are GBP300,000 of refinance costs and
GBP1,215,000 of redundancy, other personnel and property
dilapidations costs relating to the reorganisation of subsidiaries
acquired in 2016. There were also exceptional finance costs of
GBP524,000 relating to refinancing.
3 (c) Other operating income
Other operating income represents termination fee income.
4 Particulars of employees
The average number of staff employed by the Group during the
financial year, including Executive Directors, by activity was:
2018 2017
Number Number
---------------------------------------------------------- ------- -------
Administrative staff 263 188
Operational staff 602 563
Sales staff 3 3
IT staff 45 35
Directors (excluding 3 (2017: 3) Non-executive Directors) 2 2
---------------------------------------------------------- ------- -------
915 791
---------------------------------------------------------- ------- -------
The aggregate payroll costs, including Executive Directors, of
the employees were:
2018 2017
GBP'000 GBP'000
------------------------------ -------- --------
Wages and salaries 29,993 26,615
Social security costs 3,047 2,754
Staff pension costs 638 400
Share-based payment (note 22) 1,208 446
Director pension costs 8 9
------------------------------ -------- --------
34,894 30,224
------------------------------ -------- --------
5 Finance costs and finance income
2018 2017
GBP'000 GBP'000
------------------------------------ -------- --------
Finance costs
Bank loans and overdrafts 4,962 4,134
Hire purchase - 3
------------------------------------ -------- --------
Total pre-exceptional finance costs 4,962 4,137
------------------------------------ -------- --------
Exceptional finance costs 996 524
------------------------------------ -------- --------
Total finance costs 5,958 4,661
------------------------------------ -------- --------
Finance income
Bank interest receivable 224 21
------------------------------------ -------- --------
Total finance income 224 21
------------------------------------ -------- --------
6 Taxation
2018 2017
GBP'000 GBP'000
-------------------------------------------------------- -------- --------
Analysis of charge in the year
Current tax:
Current income tax expense (127) 971
Adjustment to tax charge in respect of previous periods (37) (83)
-------------------------------------------------------- -------- --------
Total current income tax (164) 888
Deferred tax:
Origination and reversal of temporary differences 1,056 2,705
Adjustment to tax charge in respect of prior periods (5) (287)
-------------------------------------------------------- -------- --------
Tax on profit 887 3,306
-------------------------------------------------------- -------- --------
The charge for the period can be reconciled to the profit per
the consolidated statement of comprehensive income as follows:
Profit before tax 5,351 17,965
--------------------------------------------------------- ----- ------
Tax at the UK corporation tax rate of 19.00% (2017:
19.25%) 1,017 3,458
Expenses not deductible for tax purposes 40 (7)
Deferred tax not recognised - 2
Adjustments to tax charge in respect of previous periods (43) 140
Change in tax rate (127) (287)
--------------------------------------------------------- ----- ------
Tax expense in the income statement 887 3,306
--------------------------------------------------------- ----- ------
Current tax credit through equity in the year was GBP85,000
(2017: GBP97,000).
7 Earnings per share (EPS)
The calculation of EPS is based on the following data and number
of shares:
2018 2017
GBP'000 GBP'000
------------------------------------------------------ -------- --------
Profit for the year used for calculation of basic EPS 4,464 14,659
------------------------------------------------------ -------- --------
Number of shares 2018 2017
----------------------------------------------------------- ----------- ----------
Weighted average number of ordinary shares for the
purposes of basic EPS 112,408,338 90,655,868
Effect of potentially dilutive ordinary shares (restated):
- share options 1,056,897 1,127,750
----------------------------------------------------------- ----------- ----------
Weighted average number of ordinary shares for the
purposes of diluted EPS 113,465,235 91,783,618
----------------------------------------------------------- ----------- ----------
EPS:
- basic (pence) 3.97 16.17
- diluted (pence) 3.93 15.97
----------------------------------------------------------- ----------- ----------
8 Dividends
Year Year
Year ended Year ended
ended 31 December ended 31 December
31 December 2018 31 December 2017
2018 Per share 2017 Per share
GBP'000 (pence) GBP'000 (pence)
---------------------- ------------ ------------ ------------ ------------
Paid final dividend 3,892 3.46 2,452 2.73
Paid interim dividend 2,251 2.00 1,576 1.74
---------------------- ------------ ------------ ------------ ------------
Total dividends 6,143 5.46 4,028 4.47
---------------------- ------------ ------------ ------------ ------------
A final cash dividend for 2018 of 3.98p per share (2017: 3.46p)
has been declared by the Directors and will be paid in June 2019.
These dividends amount to GBP4,479,000 and will be accounted for in
2019. Including the interim dividend for 2018 of 2.00p per share
(2017: 1.74p), this gives a full-year dividend for 2018 of 5.98p
per share (2017: 5.20p).
Final paid dividends are paid out of profits recognised in the
year prior to the year in which the dividends are declared and
reported. As at 31 December 2018 the distributable profits in the
parent company of GBP2,565,000 are not adequate to cover the
proposed final dividend of GBP4,479,000. In accordance with UK law,
interim financial statements for the parent company as at 31 March
2019 have been filed and include a further intercompany dividend of
GBP10,000,000 from a subsidiary undertaking to increase the
company's distributable reserves to GBP12,513,000. These interim
financial statements are the relevant accounts by which
permissibility of the final dividend is referenced. No modification
has thus been made to the final proposed dividend.
9 Intangible assets
Customer
Goodwill contracts Development Software Total
GBP'000 GBP'000 GBP'000 GBP'000 GBP'000
----------------------- -------- ---------- ----------- -------- --------
Cost
As at 1 January 2017 7,609 2,166 2,514 7,911 20,200
Additions - - 206 1,210 1,416
Disposals - - - (28) (28)
----------------------- -------- ---------- ----------- -------- --------
As at 31 December 2017 7,609 2,166 2,720 9,093 21,588
Additions - - 336 5,551 5,887
Disposals - - - (22) (22)
----------------------- -------- ---------- ----------- -------- --------
As at 31 December 2018 7,609 2,166 3,056 14,622 27,453
----------------------- -------- ---------- ----------- -------- --------
Amortisation
As at 1 January 2017 - 1,430 470 3,689 5,589
Charge for year - 171 159 1,820 2,150
Disposals - - - (21) (21)
----------------------- -------- ---------- ----------- -------- --------
As at 31 December 2017 - 1,601 629 5,488 7,718
Charge for year - 433 544 1,620 2,597
----------------------- -------- ---------- ----------- -------- --------
As at 31 December 2018 - 2,034 1,173 7,108 10,315
----------------------- -------- ---------- ----------- -------- --------
Net book value
As at 31 December 2018 7,609 132 1,883 7,514 17,138
----------------------- -------- ---------- ----------- -------- --------
As at 31 December 2017 7,609 565 2,091 3,605 13,870
----------------------- -------- ---------- ----------- -------- --------
As at 1 January 2017 7,609 736 2,044 4,222 14,611
----------------------- -------- ---------- ----------- -------- --------
10 Property, plant and equipment
Fixtures,
Freehold/ fittings
leasehold Meter Plant and and Motor
property assets machinery equipment vehicles Total
GBP'000 GBP'000 GBP'000 GBP'000 GBP'000 GBP'000
--------------------- ---------- --------- ---------- ----------- --------- --------
Cost
As at 1 January 2017 2,239 180,622 87 2,108 169 185,225
Additions 61 122,527 255 1,020 1 123,864
Disposals - (3,334) (25) (63) (87) (3,509)
--------------------- ---------- --------- ---------- ----------- --------- --------
As at 31 December
2017 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
--------------------- ---------- --------- ---------- ----------- --------- --------
Depreciation
As at 1 January 2017 263 25,495 22 1,340 128 27,248
Charge for year 129 13,312 56 540 24 14,061
Disposals - (987) (7) (12) (69) (1,075)
--------------------- ---------- --------- ---------- ----------- --------- --------
As at 31 December
2017 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
--------------------- ---------- --------- ---------- ----------- --------- --------
Net book value
As at 31 December
2018 2,017 350,362 271 1,630 2,452 356,732
--------------------- ---------- --------- ---------- ----------- --------- --------
As at 31 December
2017 1,908 261,995 246 1,197 - 265,346
--------------------- ---------- --------- ---------- ----------- --------- --------
As at 1 January 2017 1,976 155,127 65 768 41 157,977
--------------------- ---------- --------- ---------- ----------- --------- --------
Meter assets have been disclosed separately, previously
disclosed within plant and machinery, to align with management
reporting. Included within the closing meter assets net book value
of GBP350,362,000 (2017: GBP261,995,000) is GBP43,049,000 (2017:
GBP56,570,000) relating to the traditional meter portfolio. In
accordance with our accounting policy these assets will be written
down to zero by 2022. In the 2018 consolidated financial statements
the traditional meter portfolio generated GBP13,216,000 revenue
with a corresponding GBP4,682,000 depreciation charge.
GBP12,853,000 annualised recurring revenue as at 31 December 2018
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
standalone 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
-- a pre-tax discount rate of 2.75%, 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
carrying value of the traditional meter assets CGU exceeded the
value in use. As a result, an impairment charge of GBP5.6m has been
recognised.
Based on sensitivity analysis performed by management, with
other variable components held constant:
-- a 1% increase or decrease in estimated future termination
income gives rise to a GBP0.28m change in the impairment
charge;
-- a 0.5% increase or decrease in the pre-tax discount rate
gives rise to a GBP0.43m change in the impairment charge; and
-- if the end date of the smart meter rollout is flexed by six
months, this results in a change in the impairment charge of
approximately GBP1.0m.
No impairment on other meter assets was recognised in 2018.
11 Financial asset investments
Shares in
Group Unlisted
undertaking investments Total
GBP'000 GBP'000 GBP'000
----------------------- ------------ ------------ --------
Cost
As at 1 January 2018 43 75 118
Impairment (43) - (43)
----------------------- ------------ ------------ --------
As at 31 December 2018 - 75 75
----------------------- ------------ ------------ --------
The amount impaired represents the impairment of a subsidiary
undertaking, SMS Italia SRL. The amount written off represents the
original purchase price. These shares in Group undertakings were
previously not consolidated on the basis that they were not
material to the Group.
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
As at 31 December 2017 and 31 December Management Installation Management Total
2018 GBP'000 GBP'000 GBP'000 GBP'000
--------------------------------------- ----------- ------------- ----------- --------
Goodwill 4,112 3,497 - 7,609
--------------------------------------- ----------- ------------- ----------- --------
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 three-year period. These budgets
and forecasts have regard to historic 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 annual impairment test was performed for the two 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 2.0% (2017:
2.0%). This is prudently aligned with the rate of inflation and is
not considered to be higher than the average long-term industry
growth rate. This long-term growth rate is common to both CGUs.
-- Discount rate - the discount rate is based on the weighted
average cost of capital (WACC) which would be anticipated for a
market participant investing in the Group. This rate reflects the
time value of money, the Group's risk profile and the impact of the
current economic climate. The pre-tax discount rate is 7.2% (2017:
10.25%) and the post-tax discount rate is 5.9% (2017: 8.2%).
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 any key assumptions
that would cause the carrying amounts of goodwill to exceed the
value in use for either CGU.
13 Inventories
2018 2017
GBP'000 GBP'000
--------------- -------- --------
Finished goods 10,728 16,049
Consumables 533 526
--------------- -------- --------
11,261 16,575
--------------- -------- --------
14 Trade and other receivables
2018 2017
GBP'000 GBP'000
------------------ -------- --------
Trade receivables 17,582 10,959
Prepayments 1,090 1,421
Accrued income 10,454 9,812
Other receivables 944 1,263
VAT recoverable 570 1,827
------------------ -------- --------
30,640 25,282
------------------ -------- --------
Trade receivables and accrued income include billed and unbilled
receivables relating to our meter rental contracts.
Amounts falling due after more than one year:
2018 2017
GBP'000 GBP'000
--------------- -------- --------
Accrued income 402 594
--------------- -------- --------
Accrued income is made up of the following balances:
2018 2017
GBP'000 GBP'000
--------------------- -------- --------
Unbilled receivables 10,432 9,601
Contract assets 22 211
--------------------- -------- --------
10,454 9,812
--------------------- -------- --------
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 2018 was GBP3,112,000 (2017:
GBP2,316,000). See note 18 for further details. The ageing profile
of trade receivables past due date is shown below:
2018 2017
GBP'000 GBP'000
--------------- -------- --------
31-60 days 1,761 2,572
61-90 days 1,662 114
Over 90 days 2,719 3,055
--------------- -------- --------
6,142 5,741
Loss allowance (2,356) (1,812)
--------------- -------- --------
3,786 3,929
--------------- -------- --------
Trade receivables are non-interest bearing and are generally on
30-90-day terms. Trade receivables due from related parties at 31
December 2018 amounted to GBPNil (2017: 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:
2018 2017
GBP'000 GBP'000
----- -------- --------
Cash 30,027 150,600
----- -------- --------
30,027 150,600
----- -------- --------
16 Trade and other payables
2018 2017
GBP'000 GBP'000
----------------- -------- --------
Current
Trade payables 13,835 23,923
Other payables 775 1,396
Other taxes 2,628 2,718
Deferred income 3,540 2,311
Advance payments 1,345 2,032
Accruals 14,225 15,802
36,348 48,182
----------------- -------- --------
Deferred income and advance payments are made up of the
following balances:
2018 2017
GBP'000 GBP'000
---------------------- -------- --------
Contract liabilities 3,229 3,623
Other deferred income 1,656 720
---------------------- -------- --------
4,885 4,343
---------------------- -------- --------
The Directors consider that the carrying amount of trade and
other payables approximates to their fair value.
Trade payables are classified at amortised cost and are
non-interest bearing and are normally settled on 30-45-day
terms.
All trade liabilities are denominated in Sterling.
17 Bank loans and overdrafts
2018 2017
GBP'000 GBP'000
------------ -------- --------
Current
Bank loans 172,016 23,197
------------ -------- --------
172,016 23,197
------------ -------- --------
Non-current
Bank loans - 163,887
------------ -------- --------
- 163,887
------------ -------- --------
Bank loans at 31 December 2018 relate to a revolving credit
facility of GBP280m (the existing facility). In November 2017, SMS
agreed a refinancing of this facility with its existing syndicate
of banks. This extended debt facility extended the maturity date of
the existing facility from March 2019 to November 2020 on similarly
attractive terms to the existing facility. The extension of the
facility resulted in GBP0.5m of finance costs that were expensed
through the consolidated income statement as exceptional in the
year ended 31 December 2017. The loan attracts interest at a rate
of 1.85% over the three-month LIBOR. 0.65% is paid on undrawn
funds. The syndicate of banks comprise Barclays Bank plc, Santander
UK plc, HSBC UK, Clydesdale Bank plc and Bank of Scotland plc. The
banks have a bond and floating charge over current and future
property and assets.
Accrued interest on the loan balance is recognised separately in
accruals, within trade and other payables (Note 16).
The Group has complied with the financial covenants of its
borrowing facility during the 2018 and 2017 reporting period.
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
discharges the Group's obligations under the existing facility with
effect from the first utilisation on 3 January 2019. It is thus
deemed to be an extinguishment. As at 31 December 2018 the existing
facility was still outstanding and the total balance of GBP172.0m
has been classified as current. In addition to this, GBP0.02m of
accrued interest has been recognised within trade and other
payables. Unamortised arrangement fees on the existing facility of
GBP0.36m have been accelerated and recognised as an exceptional
finance cost in the consolidated income statement together with
GBP0.63m of legal and professional fees attributable to the
extinguishment.
No drawdowns had been made under the new facility at 31 December
2018 and, therefore, transaction costs payable of GBP3.1m have been
deferred within other assets at 31 December 2018. These will be
reclassified to bank loans, and subsequently amortised over the
term of the new facility, with effect from 3 January 2019.
17 (a) Changes in liabilities arising from financing
activities
2018 2017
GBP'000 GBP'000
--------------------------------------------------- --------- --------
Brought forward at 1 January 187,084 102,176
New borrowings 101,627 104,075
Borrowings repaid, including arrangement fees paid (117,281) (19,378)
Amortisation of arrangement fees 586 211
--------------------------------------------------- --------- --------
Carried forward at 31 December 172,016 187,084
--------------------------------------------------- --------- --------
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:
Interest rate risk
The Group's interest rate risk generally arises from its long
and short-term borrowing facilities. As at 31 December 2018, all
borrowings are considered short term since the existing loan will
be extinguished on 3 January 2019 upon commencement of the new
revolving credit facility agreement (note 17). A sensitivity
analysis was still performed on the loan balance outstanding at 31
December 2018 on the basis that this will be replaced by the new
loan facility which will be subject to future interest rate
risk.
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
Increase/decrease profit
in basis before tax
points GBP'000
----- ------------------ -----------
2018 +70bps (1,204)
2017 +70bps (741)
----- ------------------ -----------
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.
Interest rate risk profile of financial liabilities
The interest rate profile of the financial liabilities of the
Group (being bank loans and overdrafts) as at each period end is as
follows:
Variable
rate
financial
liabilities
GBP'000
-------- ------------
2018(1) 172,016
2017 206,568
-------- ------------
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.
Interest rate risk profile of financial assets
The Group's financial assets at 31 December 2018 comprise cash
and trade receivables. The cash balance of GBP30,027,000 (2017:
GBP150,600,000) is a floating rate financial asset.
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.
Foreign currency risk
The Group's exposure to the risk of changes in foreign exchange
is insignificant as primarily all of the Group's operating
activities are denominated in Pounds Sterling.
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
liabilities is covered within the relevant liability note or
below.
2018 (1) 2017
GBP'000 GBP'000
------------------- -------- --------
Variable rate
Less than one year 172,016 27,500
Two to five years - 104,664
Over five years - 74,404
------------------- -------- --------
172,016 206,568
------------------- -------- --------
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.
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 GBP28,438,000 (2017: GBP21,365,000) 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.
Impairment of financial assets
The Group has two types of financial assets that are subject to
IFRS 9's new expected credit loss model:
-- trade receivables, which consist of billed receivables
arising from contracts with customers and operating leases, 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 and
operating leases.
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, lease rentals 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 a period of twelve months before 31
December 2018 or 1 January 2018 respectively 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 provision on trade
receivables at 31 December 2018, an adjustment was made to increase
the historical loss rates in recognition of the number of
independent energy suppliers that have gone into administration
during the year for which outstanding invoices are unlikely to be
recoverable.
On that basis, the loss allowances as at 31 December 2018 and 1
January 2018 (on adoption of IFRS 9) were determined as
GBP3,112,000 and GBP2,316,000 respectively 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 31 December 2017 - calculated under IAS
39 455 1,812 2,267
Amounts restated through opening retained
earnings - 49 49
------------------------------------------------ -------- ------------ --------
At 1 January 2018 - calculated under IFRS
9 455 1,861 2,316
Increase in loss allowance recognised in profit
or loss during the year 523 2,065 2,588
Receivables written off during the year as
uncollectable - (1,570) (1,570)
Unused amount reversed (222) - (222)
------------------------------------------------ -------- ------------ --------
At 31 December 2018 - calculated under IFRS
9 756 2,356 3,112
------------------------------------------------ -------- ------------ --------
The increase in the loss allowance on trade receivables has
arisen due to the number of new, typically smaller, independent
energy companies that have gone into administration during 2018,
for which amounts are considered unrecoverable, together with the
impact of IFRS 9. There was no material movement in the loss
allowance on accrued income. Total net impairment losses on
financial and contract assets were GBP2,409,000 in 2018 (2017:
GBP704,000). Of this amount, GBP2,366,000 (2017: GBP704,000)
relates to amounts arising from trade receivables and accrued
income. The balance of GBP43,000 relates to the impairment of an
investment in a subsidiary undertaking (see note 11).
Fair value
There is no material difference between the book value and the
fair value of any financial asset or liability.
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 is to provide a progressive,
through-cycle dividend that reflects the potential volatility of
our business.
19 Deferred taxation
The movement in the deferred taxation liability during the
period was:
2018 2017
GBP'000 GBP'000
----------------------------------------------------- -------- --------
Opening deferred tax liability 9,924 7,885
Increase in provision through consolidated statement
of comprehensive income 1,052 2,418
Increase/(decrease) in provision through equity 1,094 (379)
----------------------------------------------------- -------- --------
Closing deferred tax liability 12,070 9,924
----------------------------------------------------- -------- --------
The Group's provision for deferred taxation consists of the tax
effect of temporary differences in respect of:
2018 2017
GBP'000 GBP'000
--------------------------------------------------- -------- --------
Excess of taxation allowances over depreciation on
property, plant and equipment 12,170 11,559
Tax losses available (96) (61)
Deferred tax asset on share options (1,056) (1,998)
Deferred tax on intangibles acquired 147 427
Other 905 (3)
--------------------------------------------------- -------- --------
12,070 9,924
--------------------------------------------------- -------- --------
The deferred tax included in the consolidated statement of
comprehensive income is as follows:
2018 2017
GBP'000 GBP'000
-------------------------------------- -------- --------
Accelerated capital allowances 613 2,431
Tax losses (35) 204
Deferred tax asset on share options (152) 22
Movement in fair value of intangibles (280) (252)
Other 906 13
-------------------------------------- -------- --------
1,052 2,418
-------------------------------------- -------- --------
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.
20 Related party transactions
20 (a) Subsidiaries
The Group's subsidiaries at 31 December 2018 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 management
SMS Meter Assets
Limited 1 Ordinary shares 100% Gas utility management
SMS Data Management
Limited 1 Ordinary shares 100% Data management
UKMA (AF) Limited* 2 Ordinary shares 100% Leasing
SMS Energy Services
Limited 2 Ordinary shares 100% Electricity utility management
SMS Italia SRL** 3 Ordinary shares 100% Electricity utility management
CH4 Gas Utility and
Maintenance Services
Limited 2 Ordinary shares 100% Meter installation
Trojan Utilities
Limited 2 Ordinary shares 100% Meter installation
Business and domestic software
Qton Solutions Limited 2 Ordinary shares 100% development
------------------------ ---------- --------------- ------------ ------------------------------
* The shareholding in this company is indirect via a subsidiary company.
** This company was wound up during 2018; the shareholding was
indirect via a subsidiary company.
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: Via Gaudenzio Ferrari, 21/C 21047 Saronno VA, Italy.
20 (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:
2018 2017
GBP'000 GBP'000
----------------------------- -------- --------
Short-term employee benefits 2,369 2,058
Post-employment benefits 23 15
Share-based payments 114 105
----------------------------- -------- --------
2,506 2,178
----------------------------- -------- --------
20 (c) Directors
(i) Directors' emoluments
Aggregate remuneration for both Executive and Non-executive
Directors in respect of qualifying services was:
2018 2017
GBP'000 GBP'000
------------------------------------------------------- -------- --------
Aggregate emoluments 1,281 1,046
Company contributions to money purchase pension scheme 8 4
Company contributions to private pension plan(1) - 1
------------------------------------------------------- -------- --------
1,289 1,051
------------------------------------------------------- -------- --------
1 A pension contribution was paid into a private pension plan for the CEO.
In 2018, no amount was payable to Directors as settlements
following resignation (2017: GBP139,605 payable to two
Directors).
(ii) Emoluments of highest paid Director
2018 2017
GBP'000 GBP'000
------------------------------------------------------- -------- --------
Emoluments 663 619
Company contributions to money purchase pension scheme - 1
------------------------------------------------------- -------- --------
663 620
------------------------------------------------------- -------- --------
(iii) Number of Directors who accrued benefits under Company
pension schemes
2018 2017
Number Number
----------------------- ------- -------
Money purchase schemes 1 2
----------------------- ------- -------
20 (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 GBP41,615 (2017: GBP49,800) 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 (2017: GBP8,300) was
outstanding in this regard.
-- The Group paid dividends to Alan Foy of GBP244,641 (2017:
GBP320,973), The Metis Trust(1) of GBP49,140 (2017: GBPNil), David
Thompson of GBP27 (2017: GBPNil), Miriam Greenwood of GBP893 (2017:
GBP723), Willie MacDiarmid(2) of GBP323 (2017: GBP265), Graeme
Bissett of GBP289 (2017: GBP237) and Kelly Olsen of GBP27 (2017:
GBPNil).
-- At the year end Trojan Utilities Limited had a balance with
Utilities Academy Limited of GBP26,442 (2017: GBP26,442) with
transactions during the year amounting to GBPNil (2017: GBP3,165).
Utilities Academy Limited is a smart meter training facility in
which a subsidiary company of the Group holds a minority
shareholding.
1 Alan Foy is a trustee but not a beneficiary.
2 Paid to a connected person.
21 Share capital
2018 2017
GBP'000 GBP'000
--------------------------------------------------- -------- --------
Allotted and called up:
112,548,050 ordinary shares of GBP0.01 each (2017:
112,450,800 ordinary shares of GBP0.01 each) 1,125 1,124
--------------------------------------------------- -------- --------
During the year 97,250 (2017: 1,222,563) ordinary share options
were exercised in relation to the Group's employee share plans
which are described in note 22. The ordinary shares issued have a
nominal value of GBP973 (2017: GBP12,226), and aggregate
consideration of GBP270,001 (2017: GBP1,985,487) was received.
On 24 November 2017 the Company completed a placing of new
shares (21,739,131 ordinary shares at 690p per ordinary share) to
raise gross proceeds of GBP150m.
The Group's Share Incentive Plan is administered by the Smart
Metering Systems SIP Trust (the trust), who acquire shares in SMS
(own shares) to satisfy awards under this plan and facilitate the
delivery of shares to participants. At 31 December 2018, 111,307
(2017: 110,779) own shares were held in trust with a market value
of GBP584,000 (2017: GBP969,000). The Company purchased 36,137
shares (2017: 40,484) from the market during 2018 with a weighted
average fair value of GBP6.34 per share (2017: GBP6.78).
22 Share-based payments
22 (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, Executive Director or Non-executive
Director 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 2018 Granted Exercised Forfeited Expired 2018 (pence) exercisable date (pence)
-------------- --------- ------- --------- --------- ------- --------- -------- ----------- ------- --------
15 Jul 15 Jul
CSOP 28,453 - (1,200) - - 27,253 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 450,000 - (45,000) - - 405,000 153.5 2017 2022 40.0
31 Dec 12 Nov
Unapproved 65,000 - - - - 65,000 350.0 2018 2024 84.8
12 Nov 12 Nov
Unapproved 717,285 - - (25,213) - 692,072 350.0 2019 2024 84.8
20 Mar 19 Mar
Unapproved 299,349 - (51,050) (82,575) (4,000) 161,724 391.8 2021 2026 61.5
3 Jul
Unapproved 38,586 - - - - 38,586 410.0 4 Jul 2021 2026 114.3
18 Aug 17 Aug
Unapproved 158,004 - - (61,446) (5,852) 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 9,090 - - - - 9,090 550.0 2021 2026 141.0
13 Jul
Unapproved(1) - 489,001 - - - 489,001 700.0 1 Jan 2023 2028 125.2
-------------- --------- ------- --------- --------- ------- --------- -------- ----------- ------- --------
Total 2,237,433 489,001 (97,250) (169,234) (9,852) 2,450,098
-------------- --------- ------- --------- --------- ------- --------- -------- ----------- ------- --------
1 Options granted on 13 July 2018 of 489,001 relate to only the
first of five tranches of shares. 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 2018 was
GBP7.59 (2017: GBP6.20).
(ii) Fair value of options granted
The assessed fair value at grant date of options granted during
the year ended 31 December 2018 was 125.2p (2017: not applicable).
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 2018:
Dividend yield (%) 1.0%
Expected volatility (%) 30.0%
Risk-free interest rate (%) 1.025%
Expected option life (years) 5
Exercise price (GBP) 7.00
Share price at grant date (GBP) 6.95
Fair value at grant date (GBP) 1.25
-------------------------------- ------
As 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. 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 2018 for all options is
GBP281,596.
22 (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 2018 shares Sold/transferred Forfeited 2018 price
-------------- ------------ ------- ---------------- --------- -------------- ------------
Partnership 124,328 49,565 (14,932) - 158,961 GBP5.24
Matching 123,178 49,565 (7,496) (7,623) 157,624 GBP5.24
Dividend 2,762 1,034 (179) - 3,617 GBP5.24
-------------- ------------ ------- ---------------- --------- -------------- ------------
Total 250,268 100,164 (22,607) (7,623) 320,202
-------------- ------------ ------- ---------------- --------- -------------- ------------
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 2018 was
approximately GBP6.56 per share (2017: GBP6.65). 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 2018 for all Matching Shares is
GBP205,964. No expense is recognised for the Partnership Shares and
Dividend Shares because the participants pay full market value for
these shares.
23 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.
24 Commitments under operating leases
The Group has entered into commercial leases for vehicles,
office space and various items of office equipment. These leases
have lives between one and 15 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:
2018 2017
GBP'000 GBP'000
------------------------------------------------------------ -------- --------
Future minimum commitments under operating lease agreements
are as follows:
Payable within one year 1,258 1,262
Payable within two and five years 2,841 1,884
Payable after five years 861 477
------------------------------------------------------------ -------- --------
4,960 3,623
------------------------------------------------------------ -------- --------
25 Capital commitments
The Group has significant capital expenditure contracted for at
the end of the reporting period but not recognised as liabilities
of GBP2,430,000 in relation to the implementation of a new ERP
system across the Group. In 2017 the Group had no capital
commitments.
26 Ultimate controlling party
There is no ultimate controlling party by virtue of the
structure of shareholdings in the Group.
27 Post balance sheet events
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 arrangement
extinguished the Group's obligations under the existing facility
with effect from the first utilisation on 3 January 2019, at which
point GBP200m was drawn down under the new facility. As at 31
December 2018, therefore, the existing facility was still
outstanding and the total balance of GBP172.0m has been classified
as current. See note 17 for further details.
28 Impact of change in accounting policies on the financial
statements
This note explains the impact of the adoption of IFRS 9 and IFRS
15 on the Group's financial statements.
28 (a) Impact on the financial statements
Because of the changes in the entity's accounting policies,
prior year financial statements had to be restated. As explained in
notes 28 (b) and 28 (c) below, IFRS 9 and IFRS 15 were both adopted
on a modified retrospective basis and therefore comparative
information has not been restated. The reclassifications and
adjustments arising from the new rules are therefore not reflected
in the consolidated balance sheet as at 31 December 2017 but are
recognised in the opening consolidated balance sheet on 1 January
2018.
The following table shows the adjustments recognised for each
individual line item. Line items that were not affected by the
changes have not been included. As a result, the subtotals and
totals disclosed cannot be recalculated from the numbers provided.
The adjustments are explained in more detail by standard below.
31 December
2017 1 January
as originally 2018
presented IFRS 9 restated
Balance sheet (extract) GBP'000 GBP'000 GBP'000
---------------------------- -------------- -------- ---------
Trade and other receivables 26,302 (49) 26,253
Retained earnings 59,040 (49) 58,991
---------------------------- -------------- -------- ---------
There were no adjustments to individual line items as a result
of the adoption of IFRS 15.
The adjustments are explained in more detail by standard
below.
28 (b) IFRS 9
IFRS 9 replaces the provisions of IAS 39 that relate to the
recognition, classification and measurement of financial assets and
financial liabilities, derecognition of financial instruments,
impairment of financial assets and hedge accounting. The adoption
of IFRS 9 from 1 January 2018 resulted in changes in accounting
policies and adjustments to the amounts recognised in the financial
statements. The new accounting policies are set out in the
accounting policies section above. In accordance with the
transitional provisions in paragraphs 7.2.15 and 7.2.26 of IFRS 9,
comparative figures have not been restated.
The total impact on the Group's retained earnings as at 1
January 2018 is as follows:
GBP'000
-------------------------------------------------------------- -------
Retained earnings at 31 December 2017 as originally presented 59,040
Adjustment to retained earnings from adoption of IFRS 9 on
1 January (49)
-------------------------------------------------------------- -------
Restated retained earnings at 1 January 2018 58,991
-------------------------------------------------------------- -------
The adjustment to retained earnings relates to an increase in
the loss allowance provision for trade receivables and accrued
income upon adoption of the new impairment rules under IFRS 9. See
further details in section (i) below.
(i) Classification and measurement
On 1 January 2018 (the date of initial application of IFRS 9),
management has assessed which business models apply to the
financial assets held by the Group and has classified its financial
instruments into the appropriate IFRS 9 categories.
The main effect resulting from this is the reclassification of
debt investments of GBP74,000 from held to maturity to amortised
cost. There was no difference between the previous carrying amount
and the revised carrying amount at 1 January 2018 to be recognised
in opening retained earnings.
The classification of all other financial assets, which consists
of cash and cash equivalents and trade and other receivables, has
remain unchanged upon adoption of IFRS 9 on 1 January 2018. These
continue to be classified as investments held at amortised
cost.
(ii) Impairment of financial assets
Refer to the accounting policies and note 18 for details on the
Group's financial assets that are subject to IFRS 9's new expected
credit loss model.
The Group was required to revise its impairment methodology
under IFRS 9 for each of these classes of assets. The impact of the
change in impairment methodology on the Group's retained earnings
and equity is disclosed in the table in section (a) above. Note 18
(financial risk management) provides further details about the
approach and calculation of the loss allowance for trade
receivables and accrued income.
(iii) Refinancing
In 2017, the Group refinanced its existing revolving credit
facility on two occasions in March 2017 and November 2017
respectively to increase the total facility amount available and to
extend the maturity date of the facility from March 2019 to
November 2020. In exchange, arrangement fees were paid. There were
no changes to the interest payable or loan repayment schedules of
the drawdowns. In accordance with paragraph AG62 of IAS 39, the
modifications to the facility were not considered to result in an
extinguishment of the initial borrowings. Neither modification
altered the cash flows of the individual loans drawn down and thus
the effective interest rate remained unchanged. There was no impact
upon adoption of IFRS 9 and no adjustment was required within
brought forward retained earnings at 1 January 2018.
28 (c) IFRS 15
The Group has adopted IFRS 15 Revenue from Contracts with
Customers from 1 January 2018, which resulted in changes in
accounting policies and adjustments to the amounts recognised in
the financial statements. The new accounting policies are set out
in note 2. In accordance with the transitional provision in
paragraph C3(b) of IFRS 15, comparative figures have not been
restated.
Under this transition method, the Group has elected to only
apply the new standard retrospectively to contracts that were not
completed contracts at the date of initial application on 1 January
2018.
There was no impact on the Group's retained earnings at 1
January 2018.
There was also no impact to amounts recognised in the balance
sheet at the date of initial application. However, certain
components within trade and other receivables and trade and other
payables have been further analysed in order to meet the disclosure
requirements of IFRS 15. Refer to notes 14 and 16 for these
supplementary disclosures.
As IFRS 15 has been applied on a modified retrospective basis,
the Group has disclosed in the table below the amount by which each
financial statement line item in the primary financial statements
is affected in 2018 by the application of IFRS 15 as compared to
IAS 18. Only those financial statement line items that have been
impacted have been disclosed.
Remeasurement
adjustment IFRS 15
IAS 18 amount (i) amount
Income statement GBP'000 GBP'000 GBP'000
----------------- ------------- ------------- --------
Revenue 97,415 1,077 98,492
Cost of sales (56,508) (437) (56,945)
----------------- ------------- ------------- --------
Remeasurement
adjustment IFRS 15
IAS 18 amount (i) amount
Balance Sheet GBP'000 GBP'000 GBP'000
------------------------- ------------- ------------- --------
Trade and other payables 36,988 (640) 36,348
------------------------- ------------- ------------- --------
(i) Remeasurement
As a result of the adoption of IFRS 15, there has been just one
measurement impact in relation to utility connections services.
Previously, under IAS 18, revenue was deferred at the point of
upfront payment by the customer and subsequently recognised in the
consolidated income statement upon delivery of the service. Costs
were also deferred until completion of the service. Under IFRS 15,
these contracts contain a single performance obligation to deliver
an end-to-end connection service over time. Revenue is thus
recognised based on the progress measurement method detailed in the
accounting policies in note 2. Costs are expensed as incurred, to
the extent they do not meet the definition of a fulfilment cost
under IFRS 15. As a result, the adjustment in the tables above is
to recognise the release of revenue and costs related to incomplete
contracts, in accordance with progress measured. There is a
corresponding impact on deferred income and accruals respectively,
both recognised within trade and other payables.
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 GMGGDLFFGLZM
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