TIDMSMS
RNS Number : 3336S
Smart Metering Systems PLC
16 March 2021
16 March 2021
Smart Metering Systems plc
Full year results
Resilient performance in an exceptional year with strong
execution, delivering against key strategic pillars
Smart Metering Systems plc (AIM: SMS, "SMS", "the Group"), which
installs and manages smart meters and carbon reduction ("CaRe")
assets to facilitate effective energy management , has published
its full year results for the year ended 31 December 2020.
2020 financial performance
GBP'000 2020(1) 2019
Alternative performance measures
Index-linked annualised recurring
revenue (ILARR)(2) 76,982 72,553
Pre-exceptional EBITDA(3) 49,894 58,897
Underlying profit before taxation(4) 15,246 15,577
Underlying basic EPS (p)(5) 9.56 11.30
Statutory performance measures
Group revenue 102,982 114,281
Profit before taxation 194,964 5,462
EBITDA 231,632 50,369
Basic EPS (p) 171.65 3.56
Dividend per share (p) 25.0 6.88
Net cash/(debt) 40,236 (219,168)
-------------------------------------- -------- ----------
(1 2020 measures only include the financial performance of the
disposed I&C portfolio up to the date of sale on 22 April
2020.)
(2 ILARR is the revenue generated from meter rental and data
contracts at a point in time. Includes revenue from third-party
managed meters.) (2019 ILARR is presented on a pro-forma basis for
comparative purposes, excluding a net contribution of GBP17.6m from
disposed I&C meter assets.)
(3 Pre-exceptional EBITDA is statutory EBITDA excluding
exceptional items.)
(4 Underlying profit before taxation is profit before taxation
excluding exceptional items and amortisation of certain
intangibles.)
(5 Underlying basic EPS is underlying profit after taxation
divided by the weighted average number of ordinary shares for the
purpose of basic EPS.)
(A reconciliation between statutory and underlying performance
is detailed in the Financial review section.)
Highlights
Financial
-- ILARR at 31 December 2020 up 6% to GBP77.0m (2019: GBP72.6m, pro-forma)
-- Pre-exceptional EBITDA down GBP9.0m, or 15%, year-on-year to
GBP49.9m (2019: GBP58.9m), reflecting the effect of minority asset
disposal
-- Underlying profit before taxation down GBP0.4m, or c.2%,
year-on-year to GBP15.2m (2019: GBP15.6m), reflecting the effect of
minority asset disposal
-- Excluding the effect of the minority asset disposal there has
been underlying growth in profitability on a like-for-like
basis
-- Net cash at 31 December 2020 of GBP40.2m (2019: net debt of GBP219.2m)
Minority asset disposal - completed 22 April 2020
-- c.187,000 Industrial & Commercial ('I&C') meter
assets disposed of with a weighted average age of 4.7 years
-- GBP290.6m gross cash proceeds received from minority asset disposal
-- GBP194.7m net gain on disposal reported in the year
Dividend
-- 25p per share dividend proposed in respect of FY 2020, paid
in four instalments starting October 2020
-- Intention to increase by 10% per annum until FY 2024
o 27.5p per share dividend in respect of FY 2021 targeted
o Covered by long-term index-linked cash flows from existing
metering and data asset base
COVID-19
-- Continued growth on a like-for-like basis during
exceptionally challenging period demonstrates resilience and
strength of the business model
-- Supporting measures provided to ensure safety of engineers, staff and end consumers
-- Emergency works maintained throughout the period, helping
keep UK's energy infrastructure operating securely
-- No reliance placed on UK Government support during FY 2020
Smart meters
-- Despite ongoing national lockdown, meter installation run
rate sustained at c.80% of pre-COVID-19 rate in Q4 2020
-- Domestic smart meter contract wins post year-end increase
contracted smart meter order pipeline to c.2.5
million (from c.2.0 million) that will add c.GBP50m of ILARR
CaRe assets
-- Well positioned to capitalise on decarbonisation trends and policy initiatives
-- 90MW of grid-scale battery projects acquired and currently
under construction, with rights to acquire a further 100MW obtained
post year-end
-- In exclusivity to acquire a further 280MW, giving a total
pipeline of 470MW which in total will generate c.GBP20m EBITDA once
completed
-- Establishing other CaRe assets pipeline, including through
its existing partner Columbia Threadneedle European Sustainable
Infrastructure Fund (ESIF)
Post year-end acquisition
-- Concluded an agreement to acquire an I&C large power
electricity meter portfolio and Half Hourly ('HH') data service
contracts from a large energy supplier
o The portfolio will initially generate additional c.GBP3.1m of
ILARR
o Reinforces strength of SMS end-to-end industry platform
Environmental, Social and Governance ('ESG')
-- Dedicated Health, Safety and Sustainability Board Committee headed by the Group's Chairman
-- Committed to target of 'net-zero' carbon emissions by 2030
-- Established strong ESG credentials: rated 'A' by Morgan
Stanley Capital International (MSCI) and 'B' by Carbon Disclosure
Project (CDP)
Board changes
-- Willie MacDiarmid stepped down from the Board and as Non-executive Chairman on 23 June 2020
-- Miriam Greenwood, formerly Senior Independent Non-executive
Director, appointed Non-executive Chairman
-- Jamie Richards appointed Independent Non-executive Director
and chair of the Remuneration Committee
-- Gavin Urwin joined as CFO-Designate on 8 February 2021; David
Thompson, current CFO, to depart 31 March 2021.
Alan Foy , Chief Executive Officer, commented:
"2020 has been a transformational year for SMS, from which we
have emerged a stronger, leaner organisation with a reinforced
commitment to our customers, the environment and our people. We
have delivered financial results ahead of market expectations in an
unprecedented year, demonstrating the strength of our business
model.
"Since the end of the year we have won new meter contracts,
secured rights to an additional 100MW of grid-scale battery storage
projects and purchased an I&C portfolio that will benefit from
our end-to-end industry systems. These achievements are testament
to SMS's ability to leverage its well-established platform and
infrastructure, and to support continuing growth, with significant
additional opportunities in CaRe assets.
"The COVID-19 pandemic has accelerated the urgency to
decarbonise, decentralise and digitalise the UK's energy systems.
For over 25 years SMS has played a pivotal role in UK energy and is
now well positioned to transform the economy towards net zero. SMS
itself has committed to achieving 'net-zero' carbon emissions by
2030, two decades ahead of the UK's own 'net-zero' target.
"I am exceptionally proud of the way all our staff have
responded to the challenges presented by the pandemic in 2020. We
maintain our focus on safely serving our customers and are well
placed to drive forward our strategy of delivering smart energy
solutions to realise a greener, more sustainable future."
There will be an analyst webcast at 9.00am today - please
contact sms@instinctif.com for details. The full year results
presentation will be published on the Group's website shortly.
For further information:
Smart Metering Systems plc 0141 249 3850
Alan Foy, Chief Executive Officer
Dilip Kejriwal, Head of Investor
Relations
Cenkos Securities plc (Joint Broker 0131 220 6939 / 020 7397
and Nomad) 8900
Neil McDonald / Pete Lynch
Investec Bank plc (Joint Broker) 020 7597 5970
Christopher Baird / Henry Reast
RBC Capital Markets (Joint Broker) 020 7653 4000
Matthew Coakes / Evgeni Jordanov
Instinctif Partners (PR Adviser) 020 7457 2020
Kay Larsen / Sarah Hourahane / Hannah SMS@instinctif.com
Campbell
Notes to Editors
SMS (www.sms-plc.com) installs and manages smart meters, data
and carbon reduction ("CaRe") assets to facilitate effective energy
management. The Group manages and optimises these assets through
its in-house technology and data analytical platform. As at 31
December 2020 SMS had 3.81 million meter and data assets under
management.
Established in 1995, SMS provides a full end-to-end service,
from funding and installation to management and maintenance, with a
highly skilled workforce, deep engineering expertise and
well-established industrial partnerships.
SMS is leading the low-carbon, smart energy revolution in the UK
and is committed to reducing its own carbon emissions to 'net-
zero' by 2030. In 2019, SMS was awarded the London Stock Exchange
Green Economy Mark.
SMS is headquartered in Glasgow with a national presence across
twelve UK locations.
SMS's shares are listed on AIM.
Overview
The Group has delivered a strong, resilient financial
performance in the year, repaid GBP270m of debt, strengthened its
balance sheet to a cash-positive position, and established an
attractive dividend policy underpinned by the existing asset base.
Building on this secure platform, SMS continued to grow both its
contracted smart meter order pipeline and its other CaRe assets,
enabled by smart meters.
This strong and growing pipeline is reinforced by the global
trends towards decarbonisation and digitalisation and SMS is well
positioned at the heart of this agenda. SMS's CaRe asset classes
have long-term, infrastructure characteristics, which provide
flexibility around funding options whilst maintaining a prudent
leverage position.
In 2020, despite the national and local lockdowns associated
with COVID-19, the Group delivered an effective transition to home
working with complete continuity in services, and followed this
with the rapid and safe remobilisation of field activity as
lockdowns were eased.
The Group's remobilisation plan progressed well through the
second half of the year, amidst ongoing and varying local
restrictions, and during Q4 2020 the Group reached an installation
run rate of c.80% of the pre-COVID-19 rate.
Financial review
The Group's financial performance in 2020 demonstrates the
underlying financial strength of the business. SMS has remained
profitable and continues to grow its long-term, asset-backed,
index-linked annual recurring revenues.
ILARR grew 6% on a like-for-like basis to GBP77.0m as at 31
December 2020, despite the temporary suspension of all
non-essential site work between 24 March and 1 June in response to
COVID-19. This reflects continued growth in the meter estate from
smart meter installations, together with the effect of an annual
RPI increase effected in April.
The minority asset disposal in April 2020 enabled the Group to
return to a cash-positive position with significant short-term
liquidity.
Minority assets disposal
SMS sold a minority of the Group's meter asset portfolio,
representing c.187,000 I&C meter assets equivalent to
c.GBP18.4m gross ILARR, for a total gross cash consideration of
GBP290.6m on 12 March 2020.
The transaction reinforced the inherent value of the Group's
meter assets, which generate highly stable and long-term
index-linked cash flows with limited maintenance requirements. The
proceeds of the sale have allowed the Group to reset its leverage,
supporting a GBP270m voluntary prepayment of the Group's revolving
credit facility and resulting in a net cash position of GBP40.2m at
31 December 2020.
Enhanced dividend
SMS proposes a 25p per share dividend in respect of FY 2020
(representing an increase of 3.6x over FY 2019). The first two (of
three) interim dividend instalments were paid in October 2020 and
January 2021, respectively. The third instalment is intended to be
paid in April 2021 with a final dividend in July 2021.
As announced at the half-year results on 15 September 2020, the
Board intends to grow this dividend annually, with a 10% annual
increase planned for each of the financial years FY 2021, FY 2022,
FY 2023 and FY 2024.
SMS thus intends to pay a 27.5p per share dividend in respect of
FY 2021. The Board will review this regularly with shareholder
value in mind, taking into account a range of factors including
expected business performance; however, future dividend payment
amounts are covered by income from the Group's existing metering
and data asset base and their long-term index-linked cash
flows.
COVID-19
National and local lockdowns had a significant impact on
field-based activities during the year, from smart meter
installation to energy efficiency projects. The business responded
effectively and responsibly to these challenges, with an
unparalleled focus on the health, safety and the wellbeing of all
staff and customers.
Throughout the year, SMS continued to provide essential and
emergency services to critical national infrastructure and
maintained energy supplies to consumers on a national basis. The
Group's engineers continued to deliver essential new connections to
care homes and other critical national infrastructure, keeping
vulnerable customers on supply.
Development of CaRe assets
In 2020, the Group made significant progress in developing its
pipeline of CaRe assets across several verticals, most notably in
grid-scale battery storage. SMS now has 90MW under construction
(forecast to be energised by the end of 2021), driving forward the
Group's strategy of being at the heart of the energy transition in
the UK. Rights to a further 100MW of grid-scale battery storage
projects have been secured post year-end, from SMS's previously
advised pipeline of projects, with construction expected to
commence in Q4 2021 (forecast to be energised by the end of 2022).
Additionally, the Group is under exclusivity to acquire a further
280MW, giving a total pipeline of 470MW.
The Group has also seen continued momentum in other CaRe
verticals, including behind-the-meter solar and storage, Electric
Vehicle (EV) infrastructure, data and heat meters and networks. The
Board remains confident that the Group is strategically well
positioned to capitalise on the trends towards decarbonisation and
net zero.
ESG and sustainability
Sustainability underpins the Group's commitment to create
long-standing value for stakeholders and achieve its vision to be
at the heart of the low-carbon, smart energy revolution that is
pivotal to realising a greener, more sustainable world.
Whilst SMS's assets and services already provide a substantial
net-positive carbon impact, the Group announced in December 2020
its own commitment to achieving 'net-zero' carbon emissions by
2030, two decades ahead of the UK's own 'net-zero' target.
In 2020, the Group also secured strong ESG ratings - an 'A' by
MSCI and 'B' by CDP - and became a signatory to the UN Global
Compact and supporter of TCFD.
Throughout 2020, the provision of financial and emotional
support to all employees was critical. The significant majority of
staff retained their full salaries, supported by a robust financial
performance, with no reliance on UK Government support. The Group
launched an extensive suite of employee wellbeing resources,
conducted its first Groupwide external employee engagement survey,
and was recognised for its people initiatives as an 'Employer of
the Year' finalist at the Utility Week Awards 2020, amongst other
accreditations.
Board changes
Willie MacDiarmid stepped down as Chairman, and from the Board,
in June 2020 after six years in the role. Miriam Greenwood,
formerly the Senior Independent Non-executive Director, succeeded
Willie as Non-executive Chairman.
Jamie Richards joined the Board as Independent Non-executive
Director in April 2020.
On 8 February 2021, SMS announced that David Thompson, CFO, will
leave the Group on 31 March 2021 and that Gavin Urwin joined the
Group as CFO-Designate.
Post-year-end developments
Since the start of 2021, SMS has secured two new domestic smart
meter contract wins and concluded an agreement to acquire a
portfolio of I&C Half Hourly (HH) electricity meters and data
contracts. Further developments in grid-scale battery storage are
detailed above.
New domestic smart meter contract wins
SMS has entered into agreements with two of the fastest growing
independent energy suppliers to provide services as an integrated
domestic smart meter installer and Meter Asset Provider.
Under the terms of the agreement, which include a minimum
contracted order commitment, SMS will fund and install domestic
smart meters on behalf of the energy suppliers. These wins enhance
SMS's contracted smart meter order pipeline to c.2.5 million meters
and will add in due course c.GBP50m to the Group's existing
ILARR.
Acquisition of I&C meter portfolio
SMS acquired an I&C large power HH electricity meter
portfolio from a large energy supplier.
The c.15,000 I&C meters acquired have an average life of 4.6
years and will add c.GBP1m to the Group's ILARR. As part of the
transaction, which is due to complete in early April 2021, the data
service contracts associated with over 20,000 meters will be
transferred to SMS, which will initially generate a further c.GBP2m
of data annualised recurring revenue. The agreed consideration for
the transaction is c.GBP8.25m.
This acquisition underpins SMS's competitive position in the
I&C sector and reinforces the Group's ability to consolidate
its position by leveraging on its existing technology platform and
nationwide infrastructure, particularly as the UK's electricity
industry moves towards HH settlements in the next few years.
Strategy
The UK smart meter rollout plays a central role in facilitating
the transition to a zero-carbon economy. As SMS accelerates its
progress following COVID-19, its immediate priorities are to
leverage its unique end-to-end platform in order to grow and safely
deliver the contracted smart meter order pipeline, to extend its
data services and to establish new carbon reduction infrastructure
asset classes.
The significant scale of the market opportunities in a rapidly
changing energy landscape is reflected in SMS's strategic focus,
which is prioritised around four key pillars. This framework
provides a clear strategic vision for the Group, to ensure that the
business is capable of growing whilst balancing delivery of
long-term value for all stakeholders.
-- Building long-term recurring cash flows from secure infrastructure assets
SMS's vertically integrated platform allows the origination of
carbon-reducing assets, with the primary focus of the business
being to grow ILARR from its meter and data portfolio whilst
demonstrating the reliability and security of the new CaRe asset
classes and the ongoing management services the Group provides.
-- Customer excellence and efficient delivery
An unrelenting focus on serving the Group's customers. During
the year, SMS worked hard to align its resources to the extended UK
smart meter rollout, driving the digital conversion of customers to
smart meters.
-- Efficient capital allocation to provide headroom for growth
SMS is focused on optimal capital allocation. The disposal of a
minority of the I&C meter assets in April 2020 transformed the
financial foundations of the business, strengthening its growth
platform and demonstrating the inherent value of the assets SMS
creates. The Group will maintain prudent leverage and has announced
an enhanced and sustainable dividend, which it aims to increase by
10% each year through to 2024.
-- Sustainable and socially responsible business
SMS has a strong ESG focus, reflected in the creation of this
new strategic objective. The Group has a robust governance
structure including through its recently established Health, Safety
and Sustainability Board Committee, which monitors the delivery of
the Safety, Health and Wellbeing action plan.
Current trading and outlook
Following the first national lockdown in early 2020, SMS saw a
progressive recovery in its installation run rate and, by December
2020, was operating at c.80% of pre-COVID-19 levels. SMS has
maintained this operating level through the early part of 2021,
despite the strict national lockdown.
At the end of February 2021, the Group's ILARR stood at GBP77.5m
with 3.80 million meter and data assets under management. SMS's
existing meter and data ILARR, coupled with a cash-positive
position, provides a strong foundation and ability to withstand
economic shocks.
As the UK Government's vaccination programme progresses, and as
the wider economy emerges from the pandemic, the Group expects a
gradual recovery in installation run rates. The c.2.5 million
contracted smart meter order pipeline has the potential to add
c.GBP50m ILARR by the end of the rollout period (in real terms)
with significant additional opportunities available.
SMS will also continue to expand its pipeline of CaRe assets,
buoyed by the trend towards decarbonisation.
The Group continues to trade in line with the Board's
expectations.
Operational review
National and local lockdowns associated with COVID-19 had a
significant impact on field-based activities during the year, from
smart meter installation to energy efficiency projects. However,
the business responded effectively and responsibly to these
challenges, with an unparalleled focus on the health, safety and
the wellbeing of all staff and customers. The Group delivered a
seamless transition to home working with complete continuity in
services, and followed this with the rapid and safe remobilisation
of field activity as lockdowns were eased. Throughout the year, SMS
continued to provide essential and emergency services to critical
national infrastructure and maintained energy supplies to consumers
on a national basis.
SMS has retained its engineering capacity to ensure it can
accelerate back into the UK smart meter rollout and continue to
build its asset portfolio and other field-based services in 2021.
This includes the extension of SMS's long track record in designing
and delivering large-scale utility infrastructure projects to the
construction and maintenance of the first grid-scale battery
storage projects. In 2021 SMS will also continue to extend its
asset management and installation services into other asset classes
such as behind-the-meter renewable generation and storage, electric
vehicle charging, heat metering and a range of energy efficiency
measures.
Asset Management:
Summary 2020(1) 2019 Change
ILARR GBP77.0m GBP72.6m(2) 6%
---------- ------------ -------
Revenue GBP78.7m GBP82.9m (5%)
---------- ------------ -------
Depreciation-adjusted
cost of sales(3) (GBP5.2m) (GBP5.9m) (12%)
---------- ------------ -------
Depreciation-adjusted
gross profit GBP73.5m GBP77.0m (5%)
---------- ------------ -------
Depreciation-adjusted
gross margin 93% 93% Flat
---------- ------------ -------
Capex on meters GBP40.3m GBP95.2m
---------- ------------ -------
(1 2020 measures only include the financial performance of the
disposed I&C portfolio up to the date of sale on 22 April
2020.)
(2 2019 ILARR is presented on a pro-forma basis for comparative
purposes, excluding a net contribution of GBP17.6m from disposed
I&C meter assets.)
(3 Excludes depreciation on revenue-generating assets,
recognised within cost of sales. Refer to the Financial review for
definitions and details of the Group's alternative performance
measures.)
The Asset Management division remains focused on the growth of
long-term, index-linked and sustainable revenue streams. The
primary strategic objectives are to:
- grow core ILARR, driven by recurring rentals from the UK smart meter rollout;
- control capital costs required in deployment of
revenue-generating assets through their life cycle, providing
strong levels of return on investment;
- continually work to maintain a capital-efficient structure, to
maximise the opportunity available from the UK smart meter rollout;
and
- develop and grow Half Hourly data services, both in the UK and overseas.
Through SMS's industry-accredited services, underpinned by
extensive in-house technical expertise and technology platforms,
SMS continues to offer effective asset and data solutions to
customers. The Group engages closely with the Department for
Business, Energy and Industrial Strategy (BEIS), the Data
Communications Company (DCC) and energy suppliers to assist in the
formulation and delivery of key energy policies, helping to address
existing issues and future opportunities. For example, SMS is
addressing the firmware management requirements of smart meters and
supporting the enrolment and adoption of SMETS1 meters into the DCC
platform.
The UK smart meter rollout continues to present significant
opportunities for growth in ILARR from capital deployment into
meter assets, an increasingly mature and proven asset class, over
the next five years. SMS is also able to grow ILARR by supporting
both I&C customers and energy suppliers to collect, settle and
benefit from the Half Hourly and real-time data enabled by smart
meters, and its ADM(TM) data logger solutions.
The UK Government's drive to increase smart metering awareness,
through its Smart Energy GB campaign, is helping the public
understand the benefits of smart meters by showing how they can
lead to more efficient energy usage and enable a more flexible,
low-carbon energy system.
The Group has also seen continued growth in the 'independent'
energy supplier market, which now supplies nearly 30% of households
in the UK. This independent market segment, with which SMS is
heavily engaged, benefits the most from the Group's turnkey
approach, including installation, data and active asset management.
Approximately 40% of energy supplies have currently been converted
to smart so, in addition to the contracted order pipeline, there
remain significant opportunities for SMS to continue to grow its
market share through a focus on provision of this turnkey
service.
The competitive energy supply market continues to expose some
smaller energy suppliers to financial risk. Over recent years, a
number of small independent energy suppliers have entered Ofgem's
Supplier of Last Resort (SoLR) scheme and it is reasonable to
expect this to remain a feature of the market, with continued rapid
growth of some suppliers and challenges for others. SMS manages the
short-term credit risk this presents very closely; however, the
SoLR industry process has proven to be effective, ensuring
continuity of service and revenue collection.
Positive progress has been made in the maturity of the DCC
SMETS2 solution and platform, with the initial industry-wide radio
frequency technical issues now resolved and energy suppliers
introducing SMETS2 prepayment solutions. As at 4 March 2021, c.3.7
million SMETS1 meters had also been migrated to the DCC systems
through the Enrolment and Adoption programme, with the cohorts of
meter types which form the Group's SMETS1 portfolio commencing
migration in August 2020. This process is expected to continue
through to the end of 2021.
Performance summary
- ILARR increased by GBP4.4m,* a 6% increase, to GBP77.0m,
providing a stable foundation for the business
- Owned smart meter portfolio grew 10% to over 1.3 million meters
- Sale of c.GBP17.6m net ILARR for c.GBP291m, representing 16.4x net EBITDA
- Growth in contracted smart meter order pipeline to c.2.5m meters at March 2021
- Strong capital position ensures sufficient funding for future contracted pipeline
- Development of Half Hourly data settlement and firmware management services
(* 2019 ILARR is presented on a pro-forma basis for comparative
purposes, excluding a net contribution of GBP17.6m from disposed
I&C meter assets.)
Throughout the COVID-19 national and local lockdowns, SMS's
cloud-based asset management and data platforms enabled seamless
continuity of services for customers - continuing to track assets
from installation, through customer churn, to ensure accurate
billing and management. SMS continued to collect and process over
5.1 billion Half Hourly data packets during the year, again with
complete continuity of services throughout the year.
The pandemic did slow capital deployment into new smart meter
assets, but the corollary was that the Group's portfolio of
traditional meters has remained on the wall for longer than
expected and has continued to generate revenue over the period
through both meter rental and transactional emergency work. The
slowdown in meter installations and associated capital deployment
also conversely demonstrated the cash-generative nature of the
asset base and the strength of long-term underlying recurring
revenues.
The Group's metering and data assets provide a solid platform
for the future, enabling SMS to focus on continued investment in
its people, technology and products and services.
Asset Installation:
Summary 2020 2019 Change
Revenue (external) GBP19.7m GBP22.4m (12%)
----------- ----------- -------
Pre-exceptional
cost of sales (GBP16.6m) (GBP28.0m) (41%)
----------- ----------- -------
Pre-exceptional
gross profit GBP3.1m (GBP5.6m) 155%
----------- ----------- -------
Pre-exceptional
gross margin 16% (25%) 41%
----------- ----------- -------
Net portfolio
additions - smart
and I&C meters(1) 139,000 313,000 (56%)
----------- ----------- -------
(1 2020 net portfolio additions of 139,000 exclude the disposal
of c.187,000 I&C meters to a third party in April 2020. 2019
net portfolio additions of 313,000 exclude 69,000 smart meters
acquired from a customer during the year.)
The installation division is focused on operational excellence
and efficiency . The primary strategic objectives are to:
- safely deliver the installation of meter assets which provide
long-term recurring revenue;
- align the engineering capacity and installation profile over
the extended BEIS rollout period, using technology to drive both
efficiency improvements and an improved customer
experience/appointment booking process;
- expand installation services into non-metering utility
infrastructure and energy services activities,
in support of new CaRe assets; and
- reduce the carbon footprint of delivery - in particular from
the Group's fleet - in line with the 'net
zero by 2030' carbon target unveiled in December 2020.
SMS's nationwide installation business, supported by its
in-house training academy, has 25 years' experience in the design
and delivery of a range of utility infrastructure and metering
solutions.
Leveraging this experience, it is focused on efficiently
delivering the UK smart meter rollout, and is working with the
Group's customers, and other divisions, to trial the installation
of next-generation asset classes, in particular smart home and
domestic EV charging point devices which can be installed at the
same time as smart meters.
The COVID-19 crisis has had a direct impact on the Asset
Installation division, impeding its ability to deploy meter assets
(in particular between 24 March and 1 June 2020), due to the
temporary cessation of all non-essential meter works between these
dates. Even since this date, whilst the division has been able to
resume installation activities in a phased and progressive manner,
ongoing national and regional restrictions have presented continued
logistical and operational challenges.
The UK Government's new four-year regulatory framework for the
UK smart meter rollout, extending the deadline to 1 July 2025
(which includes a 6-month extension due to COVID-19), reaffirms the
importance of the smart meter rollout to the future of the UK
energy system. Crucially, the previous requirement on energy
suppliers for all 'reasonable steps' to be taken by 30 June 2021
has been replaced with the introduction of annual binding
installation targets from 1 July 2021.
SMS is engaged in industry-wide initiatives to continually
improve health and safety performance, with smart meter
installations providing an ideal opportunity to identify any
existing quality issues in the meter or the incoming electrical/gas
supply. The Group is engaged in a number of BEIS and regulatory
forums to share best practice across the industry.
Performance summary
- Maintained critical energy supplies to vulnerable and
off-supply customers, and supported critical national
infrastructure, throughout the pandemic
- Implemented new safe working practices to protect the Group's
team and customers, with increased levels of investment in
procedures, PPE and SMS's training academy
- Continued to drive productivity and efficiency through investment in people and systems
- Implemented new technologies such as consumer-direct digital
bookings and a new scheduling system to drive improved levels of
service, efficiency and reduce carbon
- Maintained a reliable engineering resource base supported by
in-house training academy, which was expanded in the year to cover
new asset classes such as EV charging points and batteries
- Effectively positioned the business for the remainder of the
UK smart meter rollout, to maximise delivery and volume in the most
efficient way
- Installed the first live polyphase smart meter in the UK
As the UK exited the national lockdown in June, SMS slowly began
to return to normalised levels of installation and, by December
2020, installation levels had recovered to c.80% of pre-COVID-19
levels.
Whilst March through to July saw most of the engineering
workforce stood down, the time was used to improve the customer
journey and experience, and to drive innovation. SMS implemented
two-way texting and new consumer booking portals, which saw
self-serve (consumer control) bookings increase to over 60% of all
domestic smart meter appointments generated. New route scheduling
software was also implemented during the year, following
significant in-house development and integration with existing
systems. The Group is already seeing early signs of reduced levels
of travel and improved efficiency of engineers as a result of these
innovations.
SMS also installed the industry's first three-phase SMETS2
meter, in August 2020, which will enable smart meters to be used
for large domestic and small I&C properties for the first time.
This is a significant milestone for the industry and demonstrates
the Group's leading position in developing and delivering
innovative market solutions in partnership with its customers and
supply chain.
Following the national lockdown, SMS ensured all its engineers
were trained in its COVID-19 Business Risk Assessment and
associated enhanced processes and protocols through the in-house
training academy. In support of ongoing development in CaRe assets
within the Energy Management division, the Group also built new
facilities in the training academy to support EV charging and
domestic battery installation. This positions the business to be at
the forefront of the changes happening in the energy industry.
Energy Management:
Summary 2020 2019 Change
Revenue GBP4.6m GBP9.0m (49%)
---------- ---------- -------
Cost of sales (GBP3.6m) (GBP6.8m) (47%)
---------- ---------- -------
Gross profit GBP1.0m GBP2.2m (55%)
---------- ---------- -------
Gross margin 22% 24% (2%)
---------- ---------- -------
Value of utilities
under management(1) GBP334m GBP320m 4%
---------- ---------- -------
(1 Based on value of utility bills validated on behalf of
customers.)
The Energy Management division is focused on deploying CaRe
assets and solutions which reduce energy consumption and carbon
emissions, and enable a low-carbon, more flexible energy system.
The primary strategic objectives are to:
- build and deliver capital projects to deploy services and
assets to reduce customers' carbon footprints;
- generate long-term, secure recurring returns by originating
and managing assets and services in:
o grid-scale battery storage and distributed generation
o behind-the-meter smart solar and storage solutions
(Solopower)
o EV charging infrastructure
o heat meters & networks
o energy efficiency measures such as LED lighting and smart
energy controls.
The shutdown of large parts of the economy due to COVID-19 has
affected the large hospitality and retail estates which have
traditionally provided much of the demand for energy and
sustainability services, and this had a short-term impact on some
of SMS's activities in the year.
Conversely, however, the UK Government's climate change agenda
supports a range of substantial market opportunities. This includes
the UK's commitment to 'net zero' by 2050, the acceleration of the
deadline for ceasing the sale of petrol and diesel cars to 2030,
and the proposals contained in the Energy White Paper published in
December 2020. The UK Government's policy for economic recovery
from the COVID-19 crisis is also aimed particularly at green
recovery, reinforcing the need to focus on low-carbon technologies
and improving the potential scope for deployment of CaRe
assets.
Performance summary
Despite the economic effect of COVID-19, the division has been
able to maintain service delivery for all customers and service
lines. The division continues to provide bureau, energy management
and environmental consultancy services to a range of blue-chip,
typically multi-site, large energy users.
Whilst most of these consultancy and energy management services
proceeded seamlessly, COVID-19 had a significant impact in forcing
the temporary suspension of all site works between March and June
2020. The majority of works successfully resumed from August
onwards but progressed at a slower pace whilst ongoing local and
regional restrictions continued to be navigated. This impacted the
ability to deploy energy-saving solutions to customers, most
notably the delivery of an LED lighting and heating controls
project for a large hotel chain. Revenue in this division declined
in the year as a result. Fundamentally, however, the Group's
contracts have remained intact and management is confident that
in-progress projects will successfully continue in 2021.
In addition, SMS has made progress in the origination of CaRe
assets, developing the Group's propositions and customer base in
several new low-carbon technologies and applications.
Most notably, SMS is now actively operating within the
grid-scale battery storage sector.
Grid-scale battery storage technology enables power system
operators and utilities to collect energy from the grid (i.e.
charge) and then discharge this energy at a later time, when
required. It is a critical part of the changing face of the
electricity network, becoming a practical alternative to new-build
electricity generation or network reinforcement, as it enables
greater flexibility to connect larger amounts of renewable energy's
intermittent generation. An increased capacity of batteries on the
grid will, in many ways, also contribute to a more affordable
energy system for consumers.
It is estimated that between 2015 and 2050 the renewables market
will grow by 249%, whilst the flexible capacity market, the segment
in which battery storage sits, is predicted to grow by 545%.
National Grid forecasts a need for c.30GW of electricity storage by
2050 to help reach 'net zero'. With 25 years' experience in the
design and delivery of large-scale electrical infrastructure
projects and being accredited for design up to 132kV under the
National Electricity Registration Scheme (NERS), SMS has the
end-to-end capability to originate, design, build and operate
grid-scale battery projects.
The economics of this asset class are attractive with an initial
EBITDA yield of c.11-14%, and margin of c.75%, against a build cost
of c.GBP380,000 per MW, from an asset whose base electrical
infrastructure has an expected life in excess of 40 years (with
battery cell replacement around every 10 years). These forecasts
are supported by independent industry modelling, both of the
revenue and the long-term growth in system demand for the asset
class to support the transition to a net-zero electricity network,
and are considered to be a conservative baseline. The economic
profile of these assets thus provides secure long-term returns
after a relatively quick construction phase of typically one year
or less.
SMS has two projects, in Burwell and Barnsley, totalling an
initial 90MW storage capacity, that will be constructed and are
forecast to be energised by the end of 2021. SMS will deliver the
projects in their entirety, from initial construction through to
ongoing operation, trading, maintenance, and asset management for
the 40-year lifespan of the batteries.
In addition, the Group obtained the rights to acquire 100MW of
grid-scale battery storage projects post year-end and is in
exclusivity to acquire a further 280MW, giving a total pipeline of
470MW. The Group expects this pipeline to continue to grow over the
coming years.
In addition to the progress across the above three divisions,
continued development has been made in the verticals below:
- Solopower (behind-the-meter smart solar and storage): Focused
initially on the domestic social housing and I&C market, and
backed by long-term secured revenues, Solopower uses a combination
of roof-mounted solar panels and battery storage, supported by
SMS's Flexigrid(TM) technology platform, to deliver both low-carbon
energy (up to 90% of electricity supply) and reduced energy costs
(up to 25%). SMS has been successfully delivering pilots for up to
1,500 homes, working with local authorities and housing
associations, and the Group intends to launch its fully funded
Solopower solution in 2021.
- EV infrastructure: SMS is an accredited EV charger installer
from the Office for Low Emission Vehicles and has been consulting
industry-wide to build upon existing car charging contracts, and to
develop disruptive models that align with the UK Government mandate
to ban internal combustion engines whilst requiring charging
infrastructure to encourage the uptake of electric vehicles. SMS is
also lead co-ordinator in the Virgin Media Park and Charge
('VPACH') project. The Group is in the process of developing
funding models for both the domestic and destination charging
sectors, and expanding its installation capability.
- Heat meters and networks: SMS is working with customers to
develop alternative heat solutions that include heating controls,
air-sourced heat pumps, waste to energy, and combined heat and
power. Heat represents a huge challenge across the UK, with gas as
a source of heat being phased out domestically and lower-carbon
sources of heat needing to prove they are economically attractive
alternatives. SMS is also delivering a smart heating controls
project for a nationwide hotel chain together with addressing the
need, legislated via the Heat Network (Metering and Billing)
Regulations, for heat meters to be installed on existing and new
heat networks.
- Energy efficiency: a range of energy efficiency projects are
in development with the Group's telecoms, hospitality, banking and
retail customers, from LED projects to smart energy controls.
Whilst COVID-19 has impacted on the development and delivery of
these projects, SMS confidently expect acceleration of progress in
2021.
Financial review
The Group continued to generate ILARR from its 3.81 million
revenue-generating assets under management, demonstrating the
robust nature of the metering infrastructure asset class and the
resilience of the investment strategy in assets with a long-term
income stream.
Liquidity was also significantly strengthened in the year as the
GBP290.6m gross cash proceeds from the sale of a minority of meter
assets were used to repay the entirety of the Group's debt, leaving
the business in a cash-positive position and with access to a
GBP300m revolving credit facility.
As a result of the sale, together with lower capital expenditure
on revenue-generating assets through the year, the Group was in a
net cash position of GBP40.2m at 31 December 2020 (31 December
2019: net debt of GBP219.2m).
The Group's strong cash position during the 2020 lockdown period
enabled the Board to take the decision in June to return furlough
grants covering the earlier part of the furlough scheme, and SMS
was one of the first companies in the UK to do so.
On the strength of the underlying business performance, the
intention to increase the dividend from 6.88p for FY 2019 to 25p
for FY 2020 was announced, demonstrating the Group's commitment to
returning value to shareholders from its installed asset base.
Reconciliation of statutory to underlying results
SMS uses alternative performance measures, defined at the end of
this Financial review, to present a clear view of what the Group
considers to be the results of its underlying, sustainable business
operations. Excluding certain items enables consistent year-on-year
comparisons and aids a better understanding of business
performance.
A reconciliation of these performance measures is disclosed
below:
Year ended Year ended
31 December 31 December
2020 2019 Percentage
GBPm GBPm change
------------------------------------------- ------------ ------------ ----------
Annualised recurring revenue(1) 77.0 72.6 6%
------------------------------------------- ------------ ------------ ----------
Group revenue 103.0 114.3 (10%)
Statutory profit from operations 199.6 13.8
------------------------------------------- ------------ ------------ ----------
Amortisation of intangibles 3.0 1.5
Depreciation 29.1 35.1
------------------------------------------- ------------ ------------ ----------
Statutory EBITDA 231.6 50.4 360%
Exceptional items(2) (EBITDA-related) (181.7) 8.5
------------------------------------------- ------------ ------------ ----------
Pre-exceptional EBITDA 49.9 58.9 (15%)
Net interest (excl. exceptional) (4.5) (8.2)
Depreciation (29.1) (35.1)
Amortisation of intangibles included
in underlying profit before taxation(3) (1.1) -
------------------------------------------- ------------ ------------ ----------
Underlying profit before taxation 15.2 15.6 (2%)
Exceptional items(2) (EBITDA) 181.7 (8.5)
Exceptional items(2) (interest) (0.1) (0.1)
Amortisation of intangibles excluded
in underlying profit before taxation (1.9) (1.5)
------------------------------------------- ------------ ------------ ----------
Statutory profit before taxation 195.0 5.5 >500%
Taxation (1.5) (1.5)
------------------------------------------- ------------ ------------ ----------
Statutory profit after taxation 193.5 4.0 >500%
Amortisation of intangibles excluded
in underlying profit after taxation 1.9 1.5
Exceptional items(2) (EBITDA and interest) (181.6) 8.6
Tax effect of adjustments (3.0) (1.4)
------------------------------------------- ------------ ------------ ----------
Underlying profit after taxation 10.8 12.7 (15%)
Weighted average number of ordinary
shares (basic) 112,715,328 112,446,154
Underlying basic EPS (pence) 9.56 11.30
Weighted average number of ordinary
shares (diluted) 113,637,882 113,269,412
Underlying diluted EPS (pence) 9.49 11.22
------------------------------------------- ------------ ------------ ----------
(1 ILARR for the year ended 31 December 2019 is presented on a
pro-forma basis for comparative purposes, excluding a net
contribution of GBP17.6m from disposed I&C meter assets.)
(2 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.)
(3 Amortisation of the Group's new Enterprise Resource Planning
system, which went live in full in 2020, remains within the
underlying cost base of the business and is therefore a part of the
Group's underlying profit measures.)
Revenue
31 December 31 December
2020 2019 Percentage
GBP'm GBP'm change
------------------- ----------- ----------- ----------
Asset Management 78.7 82.9 (5%)
Asset Installation 19.7 22.4 (12%)
Energy Management 4.6 9.0 (49%)
------------------- ----------- ----------- ----------
Group revenue 103.0 114.3 (10%)
------------------- ----------- ----------- ----------
The disposal of c.187,000 of the Group's meter assets in April
2020 has resulted in a net ILARR adjustment of GBP17.6m, presented
on a pro-forma basis as GBP72.6m at 31 December 2019 for
comparative purposes. Like-for-like ILARR therefore grew 6% to
GBP77.0m as at 31 December 2020, despite the temporary suspension
of all non-essential site work between 24 March and 1 June in
response to COVID-19. This reflects continued growth in the meter
estate from Q1 smart meter installations, together with the effect
of an annual RPI increase effected in April. The Group's
remobilisation plan progressed well through the second half of the
year, despite ongoing and varying local restrictions, and during Q4
2020 the Group reached operating levels of c.80% of the
pre-COVID-19 run rate.
Asset Management revenues are down on the prior year due to the
loss of revenue from the asset disposal. Growth in revenue in the
year was also lower with the cumulative impact of lower meter
installations through Q2 and Q3. The decrease has, in part, been
mitigated by the flow-through effect of installations in 2019 and
Q1 2020, together with an annual RPI increase in April. Whilst
COVID-19 restrictions have slowed growth in the short term, the
Group's installed portfolio of 3.81 million revenue-generating
assets continues to provide financial resilience.
Asset Installation revenue has decreased 12% to GBP19.7m as
compared with the prior year. This is in part due to legacy
installation-only work for third parties coming to an end, as
planned, in the first quarter of 2019 as the Group focused its
workforce on installing the Group's own smart meter portfolio. The
suspension of all non-essential field work for part of the year
also brought a reduction in revenues from utility connections and
infrastructure services. Despite remobilisation, there have been
ongoing project delays as the Group navigates local restrictions;
however, customer contracts remain intact into 2021. The adverse
impact on revenues due to COVID-19 has, in part, been mitigated by
the continued delivery of emergency jobs during the outbreak.
Of the Group's operating segments, Energy Management has
experienced the largest decrease in revenue as a result of
COVID-19, with a reduction of 49% to GBP4.6m (2019: GBP9.0m). This
is attributable to the suspension of all site work from mid-March,
most notably the suspension of work associated with the
energy-efficient lighting and heating control project for a large
hotel chain. Projects started to resume in the second half of the
year but, as anticipated, site work continues to run at a lower
capacity as the broader economy recovers.
Gross margins
Overall, the depreciation-adjusted gross margin at the Group
level has increased 7% to 71% (2019: 64%). SMS includes
depreciation on revenue-generating assets within cost of sales, and
removing this from the gross margin provides a better comparison of
the Group's underlying trading performance year on year.
Depreciation-adjusted gross profit, in absolute terms, has
decreased by GBP0.8m due to reduced activity and revenues. However,
a reduction of GBP17.3m in cost of sales year on year has
favourably offset the GBP11.3m reduction in revenues, giving rise
to the 7% increase in depreciation-adjusted gross margin. Although
revenues have decreased, the flow-through impact of the Group's
ILARR has provided protection against the impacts of COVID-19. Cost
of sales, which includes a substantial variable component, has
decreased due to the initial suspension of non-essential field work
together with ongoing project delays, and improved efficiency in
the engineering model through greater use of subcontractors.
The depreciation-adjusted gross margin for Asset Management has
stayed flat at 93%, with the reduction in revenues detailed above
offset by a reduction in cost of sales due to lower contractor
costs incurred in the data business as a result of COVID-19. The
gross margin for Asset Management, including depreciation, has
increased by 7% from 55% to 62%, primarily as a result of a change
to a depreciation-related accounting estimate, made with effect
from 1 January 2020, in relation to SMS's traditional meter assets.
With the smart meter exchange programme being extended to 1 July
2025, management has extended the estimated economic life of the
traditional meters to match and the depreciation charge therefore
reduces. As a result, there has been a GBP4.8m reduction recognised
within depreciation in cost of sales - see note 1(a) to the
financial statements for further details.
The Asset Installation business reported a positive
pre-exceptional gross profit margin of 16% (2019: negative 25%),
excluding exceptional costs of sales arising as a result of
COVID-19. The low margin in 2019, driven largely by H1 with a
negative gross margin of 48%, was due to the Group's decision to
retain its installation capacity to ensure the business was
appropriately positioned to benefit from the run rates initially
anticipated from progression to the main SMETS2 phase of the smart
meter rollout. As initial installation targets in the market
started to look increasingly challenging, attention was turned to
controlling the Group's operating cost base in order to increase
efficiency in the labour force. As a result, the gross profit
margin improved to negative 6% in H2 2019.
The significant improvement to positive 16% in 2020, on a
pre-exceptional basis, reflects a continued, dedicated focus on
cost control, adapting the Group's engineer capacity to meet
customer demand efficiently. An increased use of subcontractors has
provided greater operational and financial flexibility during a
very uncertain time. Management has also reduced operating costs
where possible, with staff costs from March to August that would
ordinarily be capitalised recognised within exceptional costs
arising from the effect of the pandemic (detailed below).
The Energy Management gross margin has decreased to 22% (2019:
24%) due to a project delivered by Solo Energy in the year at a
slightly lower margin. With a predominantly variable cost of sales
base, reductions in revenue have been largely offset by equivalent
reductions in cost of sales.
EBITDA
Statutory EBITDA increased to GBP231.6m (2019: GBP50.4m) largely
as a result of the gain of GBP194.7m recognised upon disposal of a
minority of the Group's meter assets.
Pre-exceptional EBITDA provides a clearer comparison of trading,
year on year, showing a decrease of c.15%, or GBP9.0m, to GBP49.9m
(2019: GBP58.9m). This, however, does not readily illustrate the
underlying growth on a like-for-like basis, particularly from the
flow-through of the recurring metering and data asset portfolio,
after taking account of the minority asset disposal. Excluding the
effect of the disposal, the Group would expect an increase due to
the compounding effect of RPI increases and flow-through of
full-year revenue from previously installed assets.
The Group's performance fundamentally demonstrates the financial
resilience of the Group's business model, with strong ILARR and a
dedicated focus on cost control. Up to March 2020 cost control was
focused on right-sizing the Group's internal installation capacity,
as detailed above. Towards the end of March, as the pandemic
worsened, management turned its attention to ensuring the Group's
operating cost base was as streamlined as possible, suspending any
non-critical business spend. This focus has held strong all the way
through the year with cost savings maximised where possible,
mitigating the impact of COVID-19 on the bottom line.
Disposal of a minority of the Group's I&C portfolio ('the
Disposal')
As previously announced, on 12 March 2020, the Group
conditionally signed an agreement to dispose of a minority of the
Group's meter assets through the sale of the entire share capital
of Crail Meters Limited ('Crail'), a wholly owned subsidiary of the
Group. This transaction completed on 22 April 2020.
The meter asset provider (MAP) business that was transferred
comprised c.187,000 I&C meter assets, representing c.GBP18.4m
gross ILARR.
Total gross cash consideration received by the Group on 22 April
2020 was GBP290.6m, representing x16.4 net EBITDA and reinforcing
the inherent value of the Group's meter assets, which generate
highly stable and long-term index-linked cash flows with limited
maintenance requirements. These proceeds have allowed the Group to
reset its leverage, supporting a GBP270m voluntary prepayment of
the Group's revolving credit facility and resulting in a net cash
position of GBP40.2m at 31 December 2020. Strengthening the balance
sheet significantly, the transaction has enhanced the Group's
investment capacity to accelerate growth of an already-secure asset
base .
Overall, the Disposal has given rise to a gross gain of
GBP201.6m in the year. After the deduction of GBP6.9m transaction
costs, noting certain transaction costs were recognised in the
prior year as exceptional items, a net gain on disposal of
GBP194.7m has been recognised separately in the consolidated
statement of comprehensive income as exceptional. Of this net gain,
GBP6.2m relates to the transfer of a deferred tax liability on the
transferred assets. Further details can be found in note 4 to the
financial statements.
The Disposal does not constitute a discontinued operation, as
the minority portfolio of I&C assets disposed does not
represent the loss of a separate, major line of business and,
whilst I&C activities have been significantly reduced, they
have not been entirely discontinued. The Group will continue to
pursue new contracts.
The disposed portfolio of assets generates a new recurring
revenue stream for the Group in the form of management fees. The
Group will continue to manage the portfolio of disposed assets for
the new owners, generating annual RPI-linked recurring management
fees of GBP0.8m for these services.
Other exceptional items
The operating charge to the income statement in respect of other
exceptional items of GBP13.1m (2019: GBP8.5m) is driven largely by
GBP6.9m of costs attributable to COVID-19 that management has
deemed appropriate to classify as exceptional in line with the
Group's accounting policy.
As a result of reduced engineering activity in periods of
lockdown due to COVID-19, management has estimated that GBP6.4m of
costs that would have ordinarily been capitalised as directly
attributable to the installation of meter assets - consisting
primarily of staff costs - have remained in underlying profit. As
these are material costs, attributable to a rare macroeconomic
event, management has taken the judgement to recognise these costs
as exceptional. In addition, management has recognised an
exceptional bad debt charge of GBP0.5m in relation to a subset of
trade receivables which have been identified as having a
potentially elevated credit risk as a direct consequence of
COVID-19, and have been provided for on a specific basis. This
judgement will be revisited as the economy recovers.
Excluding COVID-19 costs, other operating exceptional items
total GBP6.1m and primarily comprise GBP6.0m of losses on the
traditional and SMETS1 meter portfolio, a similar charge to prior
years. With the Enrolment and Adoption programme of SMETS1 meters
into the DCC extended into 2021, consistent with 2019 the Group has
continued to see a small proportion of SMETS1 meters removed from
the wall. As these removals are attributable to the temporary
industry transition period, management has taken the judgement to
recognise losses arising on the disposal of these meters as
exceptional.
Operational and pre-tax profits
Depreciation costs on general property, plant and equipment,
excluding meter assets, have increased by GBP0.8m to GBP4.4m (2019:
GBP3.6m) due to net additions across the various asset classes.
Depreciation costs on meter assets have decreased by GBP6.8m to
GBP24.7m (2019: GBP31.5m). This is predominantly due to
management's revision of the useful economic life of traditional
meter assets through to 1 July 2025 following the UK Government's
confirmation in June 2020 that it will introduce a new four-year
regulatory framework for the next phase of the UK smart meter
rollout, to be implemented from 1 July 2021. As a result of this
change in estimate, the depreciation charge in the income statement
for the year ended 31 December 2020 was reduced by GBP4.8m. The
additional depreciation charged in relation to newly installed
meters has been offset by a decrease in depreciation as a result of
removals, making up the remaining net GBP2.0m difference.
The net interest charge in the period is GBP4.6m (2019:
GBP8.3m), reflecting the overall lower leveraged position of the
Group following the Disposal.
Underlying profit before taxation has decreased slightly by 2%
to GBP15.2m due to a flow through of the above points. As the Group
navigates out of COVID-19 management is optimistic that results
will start to show an upwards trajectory as the UK Government's
vaccination programme progresses.
Effective tax rate
The effective tax rate on statutory profits was 1 % (2019: 27%).
The effective tax rate on pre-exceptional profits was 31%
(2019:18%) driven primarily by an increase in the deferred tax rate
from 17% to 19%, which has been applied to the Group's
brought-forward deferred tax liabilities on its portfolio of meter
assets. Excluding the impact of this rate change, the effective tax
rate on pre-exceptional profits is 19%, which is broadly in line
with the prior year.
The Group's capital expenditure as it pertains to meter assets
qualifies for capital allowances, providing the Group with tax
relief on such expenditure. These allowances are claimed in the tax
year in which the asset is acquired and set against taxable profit
for that year, thus reducing the total tax payable. As a result,
the Group was not tax-paying in either the current or prior
year.
The Group's deferred tax balance of GBP8.5m is primarily made up
of GBP7.1m in respect of accelerated capital allowances.
Earnings per share (EPS)
Underlying basic EPS, which excludes exceptional costs,
amortisation of certain intangibles and their associated tax
effect, is 9.56p (2019: 11.30p), reflecting the underlying
profitability of the Group. Statutory earnings per share increased
to 171.65p (2019: 3.56p) as a result of higher statutory profits
for the reasons detailed above.
Diluted EPS does not vary significantly from basic EPS; a small
decrease is seen as a result of the dilutive impact of shares
issuable in the future to settle the Group's share scheme
obligations.
Dividend
As detailed below, the Group's liquidity position has remained
strong since the end of the year, despite the challenges COVID-19
has presented. The second interim dividend for 2019 of 4.58p per
share (GBP5.2m) was paid to shareholders on 4 June 2020.
The Group has a growing, sustainable dividend and, as previously
announced, in line with the Board's policy SMS proposes to pay a
25p per share dividend in respect of FY 2020 (representing an
increase of 3.6x over FY 2019). The first two (of three) interim
dividend instalments were paid in October 2020 and January 2021
respectively, in line with the provisional dividend timetable
previously reported. The third instalment is intended to be paid in
April 2021 with a final dividend in July 2021.
The Board intends to grow the dividend annually, with a 10%
annual increase for each of the financial years FY 2021, FY 2022,
FY 2023 and FY 2024. SMS thus intends to pay a 27.5p per share
dividend in respect of FY 2021. The Board will review this
regularly with shareholder value in mind, taking into account a
range of factors including expected business performance.
Future dividend payment amounts are covered by income from the
Group's existing metering and data asset base and their long-term
index-linked cash flows.
Cash flow
Operating cash inflow in 2020 was GBP43.9m (2019: GBP42.4m),
supported by robust operational performance and a continued focus
on cash collection despite the challenges of COVID-19. This
operating cash flow is net of a restricted cash balance of GBP1.6m
that has been recognised in 2020 in relation to amounts received
from energy suppliers on the I&C assets disposed of. Cash
collection forms part of the Group's ongoing management of the
portfolio of disposed assets for the new owners and, until this
cash has been allocated, it is held in a restricted trust account.
As per IAS 7, this movement in restricted cash has been classified
as an operating cash flow in line with the operational nature of
the management service being delivered.
Of the GBP5.6m increase in inventories since 31 December 2019,
GBP4.7m relates to work-in-progress on the Group's grid-scale
battery storage projects. In H2 2020 the Group acquired 100% of the
share capital of two special purpose vehicles for GBP2.9m, enabling
SMS to obtain control over the rights required to develop and
commission two grid-scale battery storage sites totalling 90MW. The
acquired sites are forecast to be energised by the end of 2021. See
note 20 to the financial statements for further details. The
remaining GBP0.9m increase, net of provisions, relates to meter
stock in order to fulfil forecast SMETS2 installations.
Capital expenditure on property, plant and equipment was
GBP41.8m (2019: GBP101.7m), excluding right-of-use asset additions
of GBP2.2m in relation to the land leases secured as part of the
acquisitions detailed above. Of this, GBP40.3m (2019: GBP95.2m) has
been used to invest in revenue-generating assets. This capital
expenditure is significantly lower than the prior year as a result
of the disruption caused by COVID-19; predominantly the temporary
suspension of non-essential field work, including smart meter
installations, from 24 March 2020 to 1 June 2020. Capital
expenditure increased through H2 in conjunction with the Group's
progressive remobilisation plan, but installations still lagged
behind pre-COVID-19 rates. However, with the UK Government's
vaccination programme progressing well, management is confident
that installations will recover as consumers become more willing to
permit access to properties and, therefore, capital expenditure
should increase from Q2 2021 onwards.
A further GBP4.1m (2019: GBP6.9m) investment has been made in
intangible assets. This includes development of software to support
the installations business, together with investment in a Groupwide
Enterprise Resource Planning system that went live across the Group
in H1 2020 and consolidates, integrates and updates various
business support systems.
As detailed above, gross proceeds from the Disposal were used to
make a voluntary prepayment under the Group's revolving credit
facility, and the total outstanding principal value at 22 April
2020 of GBP270m, together with outstanding interest and commitment
fees of GBP0.6m, was settled. Drawdowns made since this date were
fully repaid by 31 December 2020. In total, GBP6.3m of interest and
loan costs have been paid (2019: GBP9.2m), including GBP0.1m of
transaction costs incurred in modifying the total commitments
available under the facility.
The Group continues to manage its cash flows carefully amidst
the ongoing disruptions of COVID-19, with a continued concentrated
effort to collect debt from customers and manage business costs
prudently so that operational flexibility is maintained in this
uncertain time.
Financial resources
Concurrent with the voluntary facility prepayment detailed
above, the total available funding under the loan facility was
reduced from GBP420m to GBP300m on the same terms through to the
end of 2023. Commencement of any repayment of the principal by way
of a limited excess cash sweeping mechanism is not required until
the end of 2022. At the end of 2021 LIBOR will be replaced by
Sterling Overnight Index Average (SONIA) but the Group does not
expect any material change in the overall cost of borrowing as a
result. The Group has not required any new or extended facilities
as a result of COVID-19, nor has it needed to renegotiate or waive
any of its bank covenants. The Group was fully compliant with all
its bank covenants at 31 December 2020.
Throughout the second half of the year the Group operated
entirely within its own cash resources. At 31 December 2020, the
Group had no drawn debt with availability of the full GBP300m
commitment. Arrangement fees of GBP1.9m continue to be amortised
over the term of the facility and have been reclassified to other
assets on the consolidated statement of financial position at 31
December 2020, in line with the Group's accounting policy.
As a result of the Disposal, together with lower capital
expenditure on revenue-generating assets through the year, the
Group was in a net cash position of GBP40.2m at 31 December 2020
(31 December 2019: net debt of GBP219.2m). This excludes lease
liabilities accounted for under IFRS 16. Reported net cash at 31
December 2020 also excludes restricted cash as detailed above. The
Group's available cash and unutilised element of the revolving
credit facility stood at GBP340.2m (2019: GBP200.8m) and the Group
had cash in bank of GBP40.2m at 31 December 2020 (31 December 2019:
GBP50.1m), again excluding restricted cash.
There is significant headroom to manage the business going
forward on a prudent leveraged basis. The liquidity of the Group
remains strong and provides critical financial flexibility as the
Group navigates out of the pandemic.
Definitions of alternative performance measures
Alternative performance
measure Definition
--------------------------- --------------------------------------------------
The revenue being generated from meter
rental and data contracts at a point
Index-linked annualised in time. Includes revenue from third-party
recurring revenue managed meters.
--------------------------- --------------------------------------------------
Depreciation-adjusted gross Statutory gross profit less depreciation
profit on revenue-generating assets, recognised
within cost of sales.
--------------------------- --------------------------------------------------
Depreciation-adjusted gross Depreciation-adjusted gross profit divided
profit margin by statutory revenue
--------------------------- --------------------------------------------------
Statutory EBITDA excluding exceptional
Pre-exceptional EBITDA items.
--------------------------- --------------------------------------------------
Underlying profit before Profit before taxation excluding exceptional
taxation items and amortisation of certain intangibles.(1)
--------------------------- --------------------------------------------------
Profit after taxation excluding exceptional
Underlying profit after items and amortisation of certain intangibles(1)
taxation and the tax effect of these adjustments.
--------------------------- --------------------------------------------------
Underlying profit after taxation divided
by the weighted average number of ordinary
Underlying basic EPS shares for the purposes of basic EPS.
--------------------------- --------------------------------------------------
Underlying profit after taxation divided
by the weighted average number of ordinary
Underlying diluted EPS shares for the purposes of diluted EPS.
--------------------------- --------------------------------------------------
Net debt Total bank loans less cash and cash equivalents.
Excludes lease liabilities recognised
under IFRS 16.
--------------------------- --------------------------------------------------
(1 Amortisation of the Group's new Enterprise Resourcing
Planning system, which went live in full in 2020, remains within
the underlying cost base of the business and is therefore a part of
the Group's underlying profit measures.)
Consolidated income statement
For the year ended 31 December 2020
2020 2019
Before 2020 Before 2019
exceptional Exceptional 2020 exceptional Exceptional 2019
items Items(1) Total items items Total
Notes GBP'000 GBP'000 GBP'000 GBP'000 GBP'000 GBP'000
------------------------ ----- ------------ ------------ -------- ------------ ------------ --------
Revenue 2 102,982 - 102,982 114,281 - 114,281
Cost of sales 3 (49,980) (4,890) (54,870) (72,217) - (72,217)
------------------------ ----- ------------ ------------ -------- ------------ ------------ --------
Gross profit 53,002 (4,890) 48,112 42,064 - 42,064
Administrative expenses 3 (36,845) (8,085) (44,930) (25,514) (8,527) (34,041)
Other operating
income 3 1,723 - 1,723 5,726 - 5,726
Gain on disposal
of subsidiary 4 - 194,713 194,713 - - -
------------------------ ----- ------------ ------------ -------- ------------ ------------ --------
Profit from operations 3 17,880 181,738 199,618 22,276 (8,527) 13,749
------------------------ ----- ------------ ------------ -------- ------------ ------------ --------
Finance costs 6 (4,705) (115) (4,820) (8,461) (104) (8,565)
Finance income 6 166 - 166 278 - 278
------------------------ ----- ------------ ------------ -------- ------------ ------------ --------
Profit before taxation 13,341 181,623 194,964 14,093 (8,631) 5,462
Taxation 7 (4,103) 2,618 (1,485) (2,584) 1,119 (1,465)
------------------------ ----- ------------ ------------ -------- ------------ ------------ --------
Profit for the year
attributable to
owners of the parent 9,238 184,241 193,479 11,509 (7,512) 3,997
------------------------ ----- ------------ ------------ -------- ------------ ------------ --------
(1 Refer to note 3 for details of exceptional items.)
The profit from operations arises from the Group's continuing
operations.
Earnings per share attributable to owners of the parent during
the year:
Notes 2020 2019
----------------------------------- ----- ------ ----
Basic earnings per share (pence) 8 171.65 3.56
Diluted earnings per share (pence) 8 170.26 3.53
----------------------------------- ----- ------ ----
Consolidated statement of comprehensive income
For the year ended 31 December 2020
2020 2019
Before 2020 Before 2019
exceptional Exceptional 2020 exceptional Exceptional 2019
items Items Total items items Total
GBP'000 GBP'000 GBP'000 GBP'000 GBP'000 GBP'000
--------------------------- ------------ ------------ -------- ------------ ------------ --------
Profit for the year 9,238 184,241 193,479 11,509 (7,512) 3,997
Other comprehensive
income (1)
Exchange differences
on translation of foreign
operations 67 - 67 (66) - (66)
---------------------------- ------------ ------------ -------- ------------ ------------ --------
Other comprehensive
income for the year,
net of tax 67 - 67 (66) - (66)
---------------------------- ------------ ------------ -------- ------------ ------------ --------
Total comprehensive
income for the year
attributable to owners
of the parent 9,305 184,241 193,546 11,443 (7,512) 3,931
---------------------------- ------------ ------------ -------- ------------ ------------ --------
(1 May be reclassified to profit or loss.)
Consolidated statement of financial position
As at 31 December 2020
2020 2019
Notes GBP'000 GBP'000
------------------------------------------- ------ -------- --------
Assets
Non-current assets
Intangible assets 10, 13 24,923 23,743
Property, plant and equipment 11 328,338 412,658
Investments 12 75 75
Other assets 18 1,308 -
Trade and other receivables 15 12 232
------------------------------------------- ------ -------- --------
Total non-current assets 354,656 436,708
------------------------------------------- ------ -------- --------
Current assets
Inventories 14 27,650 22,061
Other assets 18 641 -
Trade and other receivables 15 37,164 48,287
Income tax recoverable 576 227
Cash and cash equivalents 16 40,236 50,092
Restricted cash 16 1,627 -
------------------------------------------- ------ -------- --------
Total current assets 107,894 120,667
------------------------------------------- ------ -------- --------
Total assets 462,550 557,375
------------------------------------------- ------ -------- --------
Liabilities
Current liabilities
Trade and other payables 17 41,958 46,796
Lease liabilities 18 936 1,013
Other liabilities 18 388 -
Bank loans and overdrafts 18 - 1,724
------------------------------------------- ------ -------- --------
Total current liabilities 43,282 49,533
------------------------------------------- ------ -------- --------
Non-current liabilities
Bank loans 18 - 267,536
Lease liabilities 18 4,315 2,950
Deferred tax liabilities 21 8,511 13,779
------------------------------------------- ------ -------- --------
Total non-current liabilities 12,826 284,265
------------------------------------------- ------ -------- --------
Total liabilities 56,108 333,798
------------------------------------------- ------ -------- --------
Net assets 406,442 223,577
------------------------------------------- ------ -------- --------
Equity
Share capital 23 1,129 1,128
Share premium 160,471 160,106
Other reserve 25 9,562 9,562
Own share reserve 23 (749) (768)
Foreign currency translation reserve 1 (66)
Retained earnings 236,028 53,615
------------------------------------------- ------ -------- --------
Total equity attributable to owners of the
parent 406,442 223,577
------------------------------------------- ------ -------- --------
Consolidated statement of changes in equity
For the year ended 31 December 2020
Foreign
currency
Share Share Other Own share translation Retained
Attributable to the owners capital premium reserve reserve reserve earnings Total
of the parent company: GBP'000 GBP'000 GBP'000 GBP'000 GBP'000 GBP'000 GBP'000
----------------------------- -------- -------- -------- --------- ------------ --------- --------
As at 1 January 2019 1,125 158,861 9,562 (588) - 57,173 226,133
Total profit for the year - - - - - 3,997 3,997
Total other comprehensive
income for the year - - - - (66) - (66)
Transactions with owners in
their capacity as owners
Dividends (note 9) - - - - - (7,079) (7,079)
Shares issued (note 23) 3 1,245 - - - (829) 419
Movement in own shares (note
23) - - - (180) - (169) (349)
Share-based payments (note
24) - - - - - 671 671
Income tax effect of share
options - - - - - (149) (149)
----------------------------- -------- -------- -------- --------- ------------ --------- --------
As at 31 December 2019 1,128 160,106 9,562 (768) (66) 53,615 223,577
Total profit for the year - - - - - 193,479 193,479
Total other comprehensive
income for the year - - - - 67 - 67
Transactions with owners in
their capacity as owners
Dividends (note 9) - - - - - (12,226) (12,226)
Shares issued (note 23) 1 365 - - - - 366
Movement in own shares (note
23) - - - 19 - (180) (161)
Share-based payments (note
24) - - - - - 626 626
Income tax effect of share
options - - - - - 714 714
----------------------------- -------- -------- -------- --------- ------------ --------- --------
As at 31 December 2020 1,129 160,471 9,562 (749) 1 236,028 406,442
----------------------------- -------- -------- -------- --------- ------------ --------- --------
See notes 23 and 25 for details of the own share reserve and
other reserve.
Consolidated statement of cash flows
For the year ended 31 December 2020
2020 2019
GBP'000 GBP'000
------------------------------------------------------------ --------- ---------
Operating activities
Profit before taxation 194,964 5,462
Finance costs 4,705 8,461
Finance income (166) (278)
Foreign exchange loss 4 -
Exceptional items: gain on disposal of subsidiary (note
4) (194,713) -
Exceptional items: other1 6,148 6,326
Depreciation 29,057 35,137
Amortisation of intangibles 2,957 1,483
Share-based payment expense 626 603
RDEC income (536) -
Loss on disposal of property, plant and equipment 1,028 2,280
Loss on disposal of intangible assets 12 421
Movement in inventories (648) (10,049)
Movement in trade and other receivables(2) 6,461 (17,503)
Movement in restricted cash (1,627) -
Movement in trade and other payables(2) (4,361) 9,989
------------------------------------------------------------ --------- ---------
Cash generated from operations 43,911 42,332
Income tax received - 56
------------------------------------------------------------ --------- ---------
Net cash generated from operations 43,911 42,388
------------------------------------------------------------ --------- ---------
Investing activities
------------------------------------------------------------ --------- ---------
Proceeds on disposal of subsidiary, gross 290,615 -
Payments to dispose of subsidiary(3) (11,589) -
------------------------------------------------------------ --------- ---------
Proceeds on disposal of subsidiary, net of payments
to dispose 279,026 -
Payment for acquisition of subsidiary, net of cash
acquired (2,438) (1,027)
Payments to acquire property, plant and equipment (41,796) (101,698)
Proceeds on disposal of property, plant and equipment 4,779 6,407
Payments to acquire intangible assets (4,056) (6,936)
Finance income received 166 278
------------------------------------------------------------ --------- ---------
Net cash generated from/(used in) investing activities 235,681 (102,976)
------------------------------------------------------------ --------- ---------
Financing activities
New borrowings 15,000 270,000
Borrowings repaid (285,000) (172,114)
Principal elements of lease payments (1,155) (1,075)
Finance costs paid (6,272) (9,149)
Net proceeds from share issue 362 419
Purchase of own shares (161) (349)
Dividends paid (12,226) (7,079)
------------------------------------------------------------ --------- ---------
Net cash generated (used in)/from financing activities (289,452) 80,653
------------------------------------------------------------ --------- ---------
Net (decrease)/increase in cash and cash equivalents (9,860) 20,065
Exchange gain on cash and cash equivalents 4 -
Cash and cash equivalents at the beginning of the financial
year 50,092 30,027
------------------------------------------------------------ --------- ---------
Cash and cash equivalents at the end of the financial
year (note 16) 40,236 50,092
------------------------------------------------------------ --------- ---------
1 Other non-cash exceptional items include GBP6,033,000 for
losses on our meter portfolio and the GBP115,000 exceptional
finance cost. In 2019, non-cash exceptional items included a
GBP6,837,000 loss on disposal on our meter portfolio, GBP68,000
cost relating to deferred remuneration arising on the acquisition
of a subsidiary in 2016 settled in shares in April 2019, GBP751,000
stock write-back for returned SMETS1 meters, GBP93,000 acceleration
of loan arrangement fees in relation to the refinancing of the loan
facility and GBP79,000 for non-recurring impairment charges.
2 Movement in trade and other receivables includes an adjustment
of GBP4,922,000 and movement in trade and other payables includes
an adjustment of GBP237,000 for working capital disposed of as part
of the subsidiary sale.
3 Payments to dispose of subsidiary of GBP11,589,000 include
cash disposed of GBP4,681,000 and transaction costs paid in the
year of GBP6,908,000.
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
2020 were approved and authorised for issue in accordance with a
resolution of the Directors on 16 March 2021. 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 international accounting standards in conformity
with the requirements of the Companies Act 2006.
The financial statements have been prepared on a historical cost
basis, modified by the revaluation of certain financial assets and
financial liabilities that have been measured at fair value.
The consolidated financial statements are presented in British
Pounds Sterling (GBP), which is Smart Metering System plc's
functional and presentation currency, and all values are rounded to
the nearest thousand (GBP'000) except where otherwise
indicated.
The financial information set out above does not constitute the
Company's statutory accounts for the years ended 31 December 2020
or 2019 but is derived from those accounts. Statutory accounts for
the year ended 31 December 2019 have been delivered to the
Registrar of companies and those for 2020 will be delivered in due
course. The auditor has reported on both sets of accounts; its
reports were unqualified, did not contain an emphasis of matter
reference and did not contain statements under section 498 (2) or
(3) of the Companies Act 2006.
Going concern
Management prepares budgets and forecasts on a five-year
forward-looking basis. These forecasts cover operational cash flows
and investment capital expenditure and are prepared based on
management's estimation of installation run rates through the UK
smart meter rollout. The Directors have performed their assessment
of the entity's ability to continue as a going concern, from the
date of issue of these financial statements to 31 March 2022.
Following the outbreak of COVID-19, forecasts have been reviewed
in detail based on the estimated potential impact of COVID-19
restrictions and regulations, along with the Group's proposed
responses. Non-essential field work, including planned
installations of smart meters, was suspended from 24 March 2020.
However, this was a temporary response measure and, following the
UK Government's announcement detailing phased lifting of
restrictions, a progressive resumption of all non-essential field
work commenced from 1 June 2020. Through the second half of 2020,
the Group continued to see a recovery in installation run rates,
despite continued local restrictions, and by Q4 2020 was operating
at c.80% of the pre-COVID-19 run rate. Where permitted under the UK
Government's guidelines, installation activity has continued in the
early part of 2021 through the second national lockdown. However,
access to consumer properties has been limited and the Group has
seen a fall in installation rates as a result. Although these
events will impact Group revenues and index-linked annualised
recurring revenue (ILARR) in the short term, management is of the
view that, subject to no further setbacks with the pandemic, smart
meter installations should return to normal levels by the end of
2021. Through all of this, the Group continued to generate ILARR
from its 3.8 million revenue-generating assets already on the wall,
demonstrating the robust nature of the metering infrastructure
asset class.
Management has modelled several different meter installation
scenarios, including an extreme downside scenario arising solely
from a COVID-19 protracted national lockdown, which assumes that no
new installations took place for a period of six months. The
scenario proved that the business would still have sufficient cash
flow to continue to operate, banking covenants would remain
satisfied with adequate headroom, and adequate cash would be
available to cover liabilities and operating costs. This modelling
provides confidence to management that, even in extreme
circumstances, the business will still have sufficient resources to
continue to operate. Overall, the main impact of COVID-19 is one of
timing and, longer term, management does not anticipate any
significant effects on the business as a result of the
pandemic.
Management has concluded that no significant structural changes
to the business are needed as a result of COVID-19.
Following the disposal of a minority of the Group's meter
assets, effected by the sale of a wholly owned subsidiary of the
Group on 22 April 2020 (the Disposal), gross cash consideration of
GBP290.6m was received (see note 4 for further details). These
proceeds were used to make a voluntary prepayment under the Group's
existing loan facility of the full outstanding principal of
GBP270m. Concurrently, the total available funding under the loan
facility was reduced from GBP420m to GBP300m on the same terms
through to the end of 2023 (see note 18 for further details). At
the date of approving the financial statements, the Group had
access to its full GBP300m revolving credit facility, with no
amounts drawn on the facility. The Group has not required any new
or extended facilities as a result of COVID-19, nor has it needed
to renegotiate or waive any of its bank covenants.
The Group was compliant with all its debt covenants at 31
December 2020. The financial covenants attached to this facility
are that EBITDA should be no less than 4.00x interest and net debt
should be no more than 5.75x EBITDA. At 31 December 2020 these
stood at 8.58x and -1.05x respectively, on account of a net
cash-positive position, demonstrating significant headroom. The
Group does not expect to breach these covenants in the year from
the date of approval of this report.
As a result of the Disposal and the subsequent voluntary
prepayment of its loan facility, the Group was in a net cash
position of GBP40.2m at 31 December 2020 (31 December 2019: net
debt of GBP219.2m) and, at that date, undrawn facilities were
GBP300.0m (31 December 2019: GBP150.0m). The Group balance sheet
shows consolidated net assets of GBP406.4m (31 December 2019:
GBP223.6m), of which GBP315.5m (31 December 2019: GBP398.7m)
relates to revenue-generating meter and data assets. The liquidity
of the Group thus remains strong and continues to provide the
financial flexibility required in order to support the Group's
long-term growth prospects.
The Group's cash generation over the period from 24 March to 1
June 2020, from its already installed asset portfolio, enabled the
return of funds received from the UK Government under the
Coronavirus Job Retention Scheme (CJRS), together with withdrawal
from the scheme altogether. The Group has not had to rely on any
other government support schemes as a result of COVID-19. With
confidence in the Group's liquidity position, despite COVID-19, the
Directors elected not to suspend payment of the second interim
dividend for 2019 and GBP5.2m was paid out to shareholders on 4
June 2020. With significant coverage provided by existing
long-term, inflation-linked and recurring cash flows, the Group
also remains committed to its revised dividend policy and proposes
a 25p per share annualised dividend in respect of FY 2020. The
first of four cash instalments, a total of GBP7.1m, was paid in
October 2020.
Based on the current cash flow projections and facilities in
place and having given consideration to various outcomes of future
performance and forecast capital expenditure, including extreme
downside scenarios, the Directors consider it appropriate to
continue to prepare the financial statements on a going concern
basis and are of the view that there are no material uncertainties
regarding the Group's going concern status.
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. Subsidiaries are fully consolidated from the date on which
control is transferred to the Group. They are deconsolidated from
the date that control ceases.
The acquisition method of accounting is used to account for
business combinations by the Group.
When necessary, adjustments are made to the financial statements
of subsidiaries to bring their accounting policies into line with
the Group's accounting policies.
All intra-group assets and liabilities, equity, income, expenses
and cash flows relating to transactions between members of the
Group are eliminated in full on consolidation.
Foreign currency translation
Group companies
The results and financial position of foreign operations (none
of which has the currency of a hyperinflationary economy) that have
a functional currency different from the presentation currency are
translated into the presentation currency as follows:
-- assets and liabilities for each balance sheet presented are
translated at the closing rate at the date of that balance
sheet;
-- non-monetary assets at the date of acquisition are translated
at the historical rate and are not subsequently revalued;
-- income and expenses for each statement of profit or loss and
statement of comprehensive income are translated at average
exchange rates (unless this is not a reasonable approximation of
the cumulative effect of the rates prevailing on the transaction
dates, in which case income and expenses are translated at the
dates of the transactions); and
-- all resulting exchange differences are recognised in other
comprehensive income and accumulated in a
separate reserve within equity.
Goodwill and fair value adjustments arising on the acquisition
of a foreign operation are treated as assets and liabilities of the
foreign operation and translated at the closing rate.
Transactions and balances
Foreign currency transactions are translated into the functional
currency using the exchange rates at the dates of the transactions.
Foreign exchange gains and losses resulting from the settlement of
such transactions, and from the translation of monetary assets and
liabilities denominated in foreign currencies at year-end exchange
rates, are generally recognised in profit or loss. They are
deferred in equity if they relate to qualifying cash flow hedges
and qualifying net investment hedges or are attributable to part of
the net investment in a foreign operation.
Foreign exchange gains and losses that relate to borrowings are
presented in the statement of profit or loss, within finance costs.
All other foreign exchange gains and losses are presented in the
statement of profit or loss on a net basis within administrative
expenses.
Use of estimates and judgements
The Directors are required to make judgements, estimates and
assumptions about the carrying amount of assets and liabilities
that are not readily apparent from other sources. These estimates
and associated assumptions are based on historical experience and
other factors that are considered to be relevant. Actual results
may differ from these estimates. The estimates and underlying
assumptions are reviewed on an ongoing basis. Revisions to
accounting estimates are recognised in the period in which the
estimate is revised if the revision affects only that period, or in
the period of the revision and future periods if the revision
affects both current and future periods.
Critical accounting judgements
The following are the critical judgements that the Directors
have made in the process of applying the Group's accounting
policies and that have the most significant effect on the amounts
recognised in the financial statements:
-- presentation of costs attributable to COVID-19 as exceptional:
-- As a result of reduced engineering activity in periods of
lockdown due to COVID-19, management has estimated that GBP6.4m of
costs that would ordinarily be capitalised as directly attributable
to the installation of meter assets - consisting primarily of staff
costs - have remained in underlying profit. Consistent with the
Group's accounting policy on exceptional items (see below), these
material costs are attributable to a rare macroeconomic event,
being the COVID-19 pandemic, and therefore management has taken the
judgement to recognise these costs as exceptional; and
-- At 31 December 2020, management has assessed the expected
credit losses for trade receivables. COVID-19 has generated global
financial uncertainty; however, the potential impact of this on the
Group's credit risk is mitigated by the highly regulated nature of
the utilities industry and the extensive support made available to
energy - and other infrastructure - suppliers by the UK Government.
As a result, management has not increased the expected loss rates
for the trade receivables portfolio as a whole. Instead, a subset
of trade receivables has been identified as having a potentially
elevated credit risk, due to a greater risk of administration as a
direct consequence of COVID-19. This subset of trade receivables
has been provided for on a specific basis and has resulted in an
additional GBP0.5m impairment loss. Given the continued uncertainty
regarding the impact of COVID-19 on customer default risk,
management will continue to monitor the situation and reassess its
expected credit losses at each reporting period end. Management has
taken the judgement to recognise this incremental impairment loss
as exceptional on the same basis as that outlined above.
-- 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 (GBP19.8m in 2020, GBP39.7m in 2019) and
depreciated as part of property, plant and equipment depreciation.
Judgement is required by management to ascertain the appropriate
categories and proportion of overheads and other expenses that are
directly attributable to installation of meter assets. Typically,
capitalised costs will include staff costs, and a systematic
allocation of any production overheads, deemed to be directly
attributable to the process of installing a meter owned by the
Group. Other general and administrative overheads, such as sales,
marketing and training costs, are expensed directly to profit and
loss; and
-- presentation of losses on disposal of certain meter assets as exceptional items:
-- as a result of the inherent volatility associated with the UK
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
to better understand this premature retirement of these revenue
generating assets that is outside the Group's control. A loss on
disposal of traditional meter assets was recognised as an
exceptional cost in the year ended 31 December 2020. In 2019, the
change in accounting policy to reduce the residual value of the
traditional meter asset portfolio to GBP nil (see note 11 for
further details) was designed to reflect the consumption of
economic benefit from installed assets, being the income earned
from the provision of the meter. On disposal, the receipt of
termination income, recognised as a component of the net gain or
loss on the disposal of these meter assets, will vary depending on
the energy supplier and is therefore not within our control. As the
receipt of proceeds from disposal is inherently volatile, a loss on
disposal can still arise in certain circumstances; and
-- technical communication issues for some first-generation
smart meter assets (SMETS1 meters) on supplier churn have continued
through 2020, with the enrolment and adoption process into the DCC
now due to extend into 2021. As a result, the Group has continued
to see a small proportion of SMETS1 meters removed from the wall.
As these removals are attributable to the temporary industry
transition period, management has taken the judgement to recognise
losses arising on the disposal of these meters as exceptional until
resolution by the enrolment and adoption process is complete.
Key sources of estimation uncertainty
The key assumptions concerning the future and other key sources
of estimation uncertainty at the reporting date that may have a
significant risk of causing material adjustment to the carrying
amounts of assets and liabilities within the next financial year
are discussed below:
-- recoverability of carrying value of meter assets portfolio:
-- as the UK smart meter rollout progresses, our portfolio of
traditional meter assets is diminishing. It is therefore crucial
that the recoverability of the carrying value of our meter assets,
recognised in property, plant and equipment, be assessed. The two
main drivers for assessing this recoverability are:
1) the timing of the removals of these meters given this
decision lies with the end consumer and removals are largely
undertaken by third parties. We thus have little control over the
timing and quantity of these removals; and
2) the estimated future cash flows from termination income,
which are derived using historical data and analysis around the
risk of churn between contracted and non-contracted customers. This
assessment includes consideration of the extent to which
termination income and future rental income are received as
traditional meters continue to be removed from the wall.
No impairment review was considered necessary at 31 December
2020 for the reasons detailed within note 11. The carrying value of
the traditional meter assets portfolio is thus considered
recoverable and, therefore, no impairment charge has been
recognised.
Revenue recognition
Refer to details in note 2.
Exceptional items and separately disclosed items
The Group presents as exceptional items on the face of the
consolidated statement of comprehensive income those items of
income and expense which, because of the material nature or
expected infrequency of the events giving rise to them, merit
separate presentation to allow shareholders to understand better
the elements of financial performance in that year, so as to
facilitate comparison with prior periods and to assess better
trends in financial performance.
Termination fee income is reported as part of "Other operating
income" on the consolidated statement of comprehensive income given
the materiality and nature. Any termination fee income arising on
the loss of meter assets is reported within administrative expenses
as a component of net gain or loss on disposal. Termination fee
income does not arise from the principal activities of the Group.
Any such gain or loss on disposal relating to traditional meter
assets and SMETS1 meter assets is disclosed as an exceptional
item.
Government grants
Grants from the government are recognised at their fair value
where there is a reasonable assurance that the grant will be
received and the Group will comply with all attached conditions,
usually on submission of a valid claim for payment. Government
grants relating to costs are deferred and recognised in profit or
loss over the period necessary to match them with the costs that
they are intended to compensate. Government grants relating to
capital expenditure are included in liabilities as deferred income
and they are credited to profit or loss on a straight-line basis
over the expected lives of the related assets. Amounts credited to
profit or loss are recognised as part of "Other operating income"
on the consolidated statement of comprehensive income.
The RDEC scheme is a UK Government tax incentive which allows
qualifying companies to claim R&D expenditure credits (RDECs)
equal to 12% of their qualifying research and development
expenditure. The credit is taxable at the corporation tax rate and
is included in the company's taxable trading profits. RDECs are
accounted for by the Group in accordance with IAS 20 "Government
Grants" and recognised within "Other operating income" on the
consolidated statement of comprehensive income. Outstanding amounts
receivable or payable are recognised on the consolidated balance
sheet within the corporation tax asset or corporation tax liability
respectively.
Financial assets
The Group's financial assets include cash and cash equivalents
and trade and other receivables. Investments consist of an
immaterial debt investment held at amortised cost.
Classification
The Group classifies its financial assets in the following
measurement categories:
-- those to be measured subsequently at fair value, either
through other comprehensive income (FVOCI) or through profit or
loss (FVPL); and
-- those to be measured at amortised cost.
The classification depends on the Group's business model for
managing the financial assets and the contractual terms of the cash
flows.
For investments in equity instruments that are not held for
trading, this will depend on whether the Group has made an
irrevocable election at the time of initial recognition to account
for the equity investment at FVOCI. The Group reclassifies debt
investments when and only when its business model for managing
those assets changes.
Recognition and derecognition
Financial assets are initially recognised on trade date.
Financial assets are derecognised when the rights to receive cash
flows from the financial assets have expired or have been
transferred and the Group has transferred substantially all the
risks and rewards of ownership.
Measurement
At initial recognition, the Group measures a financial asset at
its fair value plus, in the case of a financial asset not at FVPL,
transaction costs that are directly attributable to the acquisition
of the financial asset. Transaction costs of financial assets
carried at FVPL are expensed in profit or loss.
Trade and other receivables
Trade and other receivables are recognised initially at fair
value and subsequently measured at amortised cost. They are
generally due for settlement within 30 days and are therefore all
classified as current. Due to their short-term nature, carrying
value is considered to approximate fair value.
Cash and cash equivalents
Refer to accounting policy.
Impairment
The Group assesses, on a forward-looking basis, the expected
credit losses associated with its debt instruments carried at
amortised cost and FVOCI. The impairment methodology applied
depends on whether there has been a significant increase in credit
risk. For trade receivables and accrued income, which include
contract assets and billed and unbilled receivables arising from
contracts with customers, the Group applies the simplified approach
permitted by IFRS 9, which requires expected lifetime losses to be
recognised from initial recognition of the receivables.
Trade receivables and accrued income are written off, and
derecognised, where there is no reasonable expectation of recovery.
Indicators that there is no reasonable expectation of recovery
include, amongst others, the customer ceasing trading and entering
administration with no expected recovery from the Supplier of Last
Resort process, or a failure by the customer to make contractual
payments for a period of greater than or equal to 365 days past
due. Indicators are assessed on an individual customer basis.
Impairment losses, including the loss allowance, on trade
receivables and contract assets are presented within administrative
expenses. Impairment losses on accrued termination income are
presented within other operating income. Subsequent recoveries of
amounts previously written off are credited against the same line
item.
Further information about the impairment of trade receivables
and accrued income, and the Group's exposure to credit risks, can
be found in note 19.
Financial liabilities
The Group's financial liabilities include trade and other
payables, bank loans and overdrafts, and leases.
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. Any costs incurred are recognised in profit
or loss. 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. Any
costs incurred are recognised over the remaining period of the
modified debt, within the effective interest rate.
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.
Leases
(i)Group as lessor
The arrangements the Group has in place to act as meter asset
provider do not constitute a lease of the meter asset to the energy
supplier. SMS controls the meter as the Group retains legal title
and obtains substantially all the economic benefit. The assets are
recognised as property, plant and equipment when in use under
contract with an energy supplier and related income for the service
of providing a fitted meter is recognised in accordance with IFRS
15. Further information about the Group's accounting policy for
revenue recognition is given in note 2 and for property, plant and
equipment in note 11.
(ii)Group as a lessee
The Group leases various offices, warehouses and motor vehicles
and, following the business combinations disclosed in note 20,
land. For offices, warehouses and motor vehicles rental contracts
are typically made for fixed periods of three to ten years. For
land, rental contracts are typically made for fixed periods of
twenty to forty years. Contracts may have extension or early
termination options. Lease terms are negotiated on an individual
basis and contain a wide range of different terms and conditions.
The lease agreements do not impose any covenants, but leased assets
may not be used as security for borrowing purposes.
From 1 January 2019, leases are recognised as a right-of-use
asset and a corresponding liability at the date at which the leased
asset is available for use by the Group.
In determining the lease term, management considers all facts
and circumstances that create an economic incentive to exercise an
extension option, or not exercise a termination option. Extension
options (or periods after termination options) are only included in
the lease term if the lease is reasonably certain to be extended
(or not terminated). The lease term is reassessed if an option is
actually exercised (or not exercised) or the Group becomes obliged
to exercise (or not exercise) it. The assessment of reasonable
certainty is only revised if a significant event or a significant
change in circumstances occurs, which affects this assessment, and
that is within the control of the lessee.
Assets and liabilities arising from a lease are initially
measured on a present value basis. Lease liabilities include the
net present value of the following lease payments:
-- fixed payments (including in-substance fixed payments), less
any lease incentives receivable;
-- variable lease payments that are based on an index or a rate,
initially measured using the index or rate as at the commencement
date;
-- amounts expected to be payable by the lessee under residual value guarantees;
-- the exercise price of a purchase option if the lessee is
reasonably certain to exercise that option; and
-- payments of penalties for terminating the lease, if the lease
term reflects the lessee exercising that option.
Lease payments to be made under reasonably certain extension
options are also included in the measurement of the liability.
The lease payments are discounted using the interest rate
implicit in the lease. If that rate cannot be determined, the
lessee's incremental borrowing rate is used, being the rate that
the lessee would have to pay to borrow the funds necessary to
obtain an asset of similar value in a similar economic environment
with similar terms and conditions. The weighted average lessee's
incremental borrowing rate applied to the lease liabilities at 31
December 2020 was 4.8% (31 December 2019: 4%), representing a small
increase due to the new lease liabilities recognised in the year in
relation to land acquired as part of the grid-scale business
acquisitions detailed in note 20.
The Group is exposed to potential future increases in variable
lease payments based on an index or rate, which are not included in
the lease liability until they take effect. When adjustments to
lease payments based on an index or rate take effect, the lease
liability is reassessed and adjusted against the right-of-use
asset.
Lease payments are allocated between principal and finance cost.
The finance cost is charged to profit or loss over the lease period
so as to produce a constant periodic rate of interest on the
remaining balance of the liability for each period.
Right-of-use assets are measured at cost comprising the
following:
-- the amount of the initial measurement of lease liability;
-- any lease payments made at or before the commencement date
less any lease incentives received;
-- any initial direct costs; and
-- restoration costs.
Right-of-use assets are generally depreciated over the shorter
of the asset's useful life and the lease term on a straight-line
basis.
Payments associated with short-term leases and leases of
low-value assets are recognised on a straight line basis as an
expense in profit or loss. Short-term leases are leases with a
lease term of twelve months or less. Low-value assets comprise IT
equipment and small items of office furniture, where the value of
the asset on inception is less than c.US$5,000.
Payments for services are separated from the lease components of
a contract and accounted for as an administrative expense.
Business combinations
The acquisition method of accounting is used to account for all
business combinations, regardless of whether equity instruments or
other assets are acquired. The consideration transferred for the
acquisition of a subsidiary comprises the:
-- fair values of the assets transferred;
-- liabilities incurred to the former owners of the acquired business;
-- equity interests issued by the group;
-- fair value of any asset or liability resulting from a
contingent consideration arrangement; and
-- fair value of any pre-existing equity interest in the subsidiary.
Identifiable assets acquired and liabilities and contingent
liabilities assumed in a business combination are, with limited
exceptions, measured initially at their fair values at the
acquisition date. The Group recognises any non-controlling interest
in the acquired entity on an acquisition-by-acquisition basis
either at fair value or at the non-controlling interest's
proportionate share of the acquired entity's net identifiable
assets.
Acquisition-related costs are expensed as incurred.
The excess of the:
-- consideration transferred;
-- amount of any non-controlling interest in the acquired entity; and
-- acquisition-date fair value of any previous equity interest in the acquired entity.
over the fair value of the net identifiable assets acquired is
recorded as goodwill. If those amounts are less than the fair value
of the net identifiable assets of the business acquired, the
difference is recognised directly in profit or loss as a bargain
purchase. Where settlement of any part of cash consideration is
deferred, the amounts payable in the future are discounted to their
present value as at the date of exchange. The discount rate used is
the entity's incremental borrowing rate, being the rate at which a
similar borrowing could be obtained from an independent financier
under comparable terms and conditions.
Contingent consideration is classified either as equity or a
financial liability. Amounts classified as a financial liability
are subsequently remeasured to fair value, with changes in fair
value recognised in profit or loss.
If the business combination is achieved in stages, the
acquisition date carrying value of the acquirer's previously held
equity interest in the acquiree is remeasured to fair value at the
acquisition date. Any gains or losses arising from such
remeasurement are recognised in profit or loss.
Research and development
Expenditure on pure and applied research activities is
recognised in the consolidated statement of comprehensive income as
an expense as incurred.
Expenditure on product and system development activities is
capitalised if the product or process is technically and
commercially feasible and the Group intends and has the technical
ability and sufficient resources to complete development; if future
economic benefits are probable; and if the Group can measure
reliably the expenditure attributable to the intangible asset
during its development. The expenditure capitalised includes the
cost of materials, direct labour and an appropriate proportion of
overheads.
Capitalised development expenditure is stated at cost less
accumulated amortisation and accumulated impairment losses.
Amortisation is calculated when the asset is available for use,
so as to write off its cost, less its estimated residual value,
over the useful economic life of that asset as follows:
-- Development of ADMTM units 10% on cost straight line
-- Development of internally generated information technology
systems (IT development) 20% and 50% on cost straight line
Capitalised development expenditure on ADM(TM) units is
disclosed within property, plant and equipment as part of meter
assets and amortised over the same useful economic life as that
applied to the tangible ADM(TM) unit.
Capitalised IT development expenditure is disclosed within
intangible assets as part of IT development and software.
Development and software were previously disclosed separately but
were combined into a single asset class for the year ended 31
December 2019 as all costs capitalised within these categories
relate to information technology and, with effect from 1 January
2019, costs were amortised over the same useful economic life of
five years. A new system was integrated and brought into use during
2020 and associated development costs are amortised over the
remaining contract term of two years. All other costs continue to
be amortised over five years.
Intangible assets
Intangible assets acquired separately from third parties consist
of software costs, including licence fees. These are recognised as
assets, measured at cost and classified as part of IT development
and software.
Internally generated intangible assets relate to IT development
and are recognised as part of IT development and software. Refer to
further details in the research and development accounting policy
above.
Intangible assets acquired as part of a business combination are
recognised outside goodwill if the asset is separable or arises
from contractual or other legal rights. They are recognised at
their fair value at the date of acquisition and are subsequently
amortised on a straight line based on the timing of projected cash
flows of the contracts over their estimated useful lives.
Following initial recognition, intangible assets are measured at
cost at the date of acquisition less any amortisation and any
impairment losses. Amortisation costs are included within the
administrative expenses disclosed in the consolidated statement of
comprehensive income.
Intangible assets are amortised over their useful lives as
follows:
-- IT development and software 20% and 50% on cost straight line
-- Intangibles recognised upon acquisition:
- Customer contracts 10% on cost straight line
- Trademarks 33% on cost straight line
Useful lives are examined on an annual basis and adjustments,
where applicable, are made on a prospective basis.
Goodwill
Goodwill represents the excess of the consideration transferred
over the fair value of the identifiable assets and liabilities of
the acquiree at the date of acquisition. Goodwill on acquisitions
of subsidiaries is included in intangible assets. Goodwill is not
amortised but is tested annually for impairment, or if there is an
indication of impairment, and is carried at cost less accumulated
impairment losses. See note 13 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.
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 13 to the accounts.
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 of tangible and intangible assets other than
goodwill
At each reporting date, the Group reviews the carrying amounts
of its property, plant and equipment and intangibles 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.
Detailed assumptions used in the impairment test for meter
assets, namely traditional meter assets, are set out in note
11.
An impairment loss is recognised for the amount by which the
asset's carrying amount exceeds its recoverable amount.
Property, plant and equipment
Property, plant and equipment is stated at cost, net of
accumulated depreciation and any accumulated impairment losses.
Such cost includes the cost of replacing part of the property,
plant and equipment. When significant parts of property, plant and
equipment are required to be replaced in intervals, the Group
recognises such parts as individual assets with specific useful
lives and depreciation, respectively. Pursuant to the acquisition
of the meter installation businesses on 18 March 2016 certain
internal costs to the Group are also capitalised where they are
demonstrated as being directly attributable to bringing the meter
assets into their usable condition.
All other repair and maintenance costs are recognised in the
consolidated statement of comprehensive income as incurred.
For each asset depreciation is calculated using the straight
line method to allocate its cost, net of its residual value if
applicable, over its estimated useful life as follows:
-- Freehold property 2%
-- Short leasehold property Shorter of the lease term or 15% and
20%
-- Meter assets Smart and I&C 5%
ADMTM units 10%
Traditional to 1 July 2025
-- Plant and machinery 33% on cost
-- Fixtures, fittings and equipment 20% and 33% on cost
-- Motor vehicles 25% on cost
-- Right-of-use assets Shorter of the asset's useful life and
the lease term
An item of property, plant and equipment and any significant
part initially recognised is derecognised upon disposal or when no
future economic benefits are expected from its use or disposal. Any
gain or loss arising on derecognition of the asset (calculated as
the difference between the net disposal proceeds and the carrying
amount of the asset) is included in the consolidated statement of
comprehensive income when the asset is derecognised. The asset's
residual values, useful lives and methods of depreciation are
reviewed at each financial year end and adjusted prospectively, if
appropriate.
Property, plant and equipment is initially recorded at cost.
The following changes in estimates with regard to property,
plant and equipment were made with effect from 1 January 2020:
-- With respect to the domestic traditional meter asset
portfolio, the useful life of all opening assets has been extended
from 31 December 2022 to 1 July 2025 to reflect the UK Government's
confirmation on 18 June 2020 that it will introduce a new
regulatory framework, first proposed in September 2019, for the
next phase of the UK smart meter rollout. The new four-year
framework will be implemented from 1 July 2021, effectively
extending the smart meter rollout to 1 July 2025. 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. As a result of this change in estimate, the
consolidated income statement for the year ended 31 December 2020
reflected a reduced charge for depreciation of GBP4.8m, recognised
within depreciation in cost of sales. It is not practicable to
estimate the effect of this change on future periods because the
future removal profile of the domestical traditional meter asset
portfolio is volatile and outside of our control.
The following changes in estimates with regard to property,
plant and equipment were made with effect from 1 January 2019:
-- Subsequent to the impairment review carried out at 31
December 2018, the estimate of residual value on the domestic
traditional meter asset portfolio has been reduced to 0% to reflect
management's updated forecasts and assumptions regarding the
recoverability of value on these assets. As a result, the income
statement has been charged with an addition al c.GBP7.3m,
recognised within depreciation in cost of sales.
See the Leases accounting policy for further details on the
recognition and measurement of right-of-use assets under IFRS
16.
Inventories
Finished goods and consumables
Finished goods and consumables are stated at the lower of cost
and net realisable value. Cost comprises direct materials and
purchases of meter assets and ADM(TM) units at cost. Costs of
purchased inventory are determined after deducting rebates and
discounts. Net realisable value represents the estimated selling
price for inventories in the ordinary course of business less the
estimated costs necessary to make the sale.
Work in progress: grid-scale batteries
Work in progress is stated at the lower of cost and net
realisable value. Cost includes:
-- work in progress recognised as a result of business combinations;
-- direct materials, including the purchase of batteries at cost
(after deducting rebates and discounts); and
-- the cost of development, including direct labour and an
appropriate proportion of overhead expenditure.
Net realisable value is the estimated selling price in the
ordinary course of business less the estimated costs of completion
and the estimated costs necessary to make the sale.
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.
Restricted cash
Restricted cash in the consolidated statement of financial
position comprises amounts collected from customers, on behalf of a
third party as part of a services arrangement, that have not yet
been allocated. These monies are held in a trust account whilst
awaiting allocation and, per the terms of the account, cannot be
used by the Group to meet other short-term cash commitments. They
have thus been disclosed separately from cash and cash
equivalents.
Any movement in restricted cash is classified as an operating
cash flow in the consolidated statement of cash flows, in line with
the operational nature of the management service being
delivered.
Pension costs
The Group operates a defined contribution pension scheme for
employees. The assets of the scheme are held separately from those
of the Group. The annual contributions payable are charged to the
consolidated statement of comprehensive income.
Share-based payments
IFRS 2 Share-based Payment has been applied to all grants of
equity instruments. The Group issues equity-settled share-based
payments to certain employees under the terms of the Group's
various employee share and option schemes. Equity-settled
share-based payments are measured at fair value at the date of the
grant. The fair value determined at the grant date of
equity-settled share-based payments is expensed on a straight line
basis over the vesting period, based on an estimate of the shares
that will ultimately vest.
Share capital
Ordinary shares are classified as equity. Incremental costs
directly attributable to the issue of new ordinary shares or
options are shown in equity as a deduction from the proceeds.
Own share reserve
The Group offers a Share Incentive Plan for all employees and
has established a trust to facilitate the delivery of SMS shares
under this plan. The holdings of this trust include shares that
have not vested unconditionally to employees of the Group. These
shares are recorded at cost and are classified as own shares. The
cost to the Company of acquiring these own shares held in trust is
shown as a deduction from shareholders' equity.
Dividends
Dividend distributions to the Company's shareholders are
recognised in the accounting period in which the dividends are
paid.
Taxation
Tax currently payable is based on the taxable profit for the
year and any adjustment to tax payable in respect of prior years.
Taxable profit differs from accounting profit as reported in the
consolidated statement of comprehensive income because it excludes
items of income or expense that are taxable or deductible in other
years and it further excludes items that are never taxable or
deductible. The Group's liability for current tax is measured using
tax rates that have been enacted or substantively enacted by the
reporting date.
Deferred tax is the tax expected to be payable or recoverable on
temporary differences between the carrying amount of assets and
liabilities in the financial statements and the corresponding tax
bases used in the computation of taxable profit and is accounted
for using the balance sheet liability method. Deferred tax is
recognised in respect of all temporary differences that have
originated but not reversed at the balance sheet date, where
transactions or events that result in an obligation to pay more tax
in the future or a right to pay less tax in the future have
occurred at the balance sheet date.
Deferred tax is measured at the tax rates that are expected to
apply in the periods in which the asset or liability is settled
based on tax rates (and tax laws) that have been enacted or
substantively enacted at the balance sheet date. It is recognised
in the income statement except when it relates to items recognised
in other comprehensive income or directly in equity, such as
share-based payments. In this case, the deferred tax is also
recognised in other comprehensive income or directly in equity,
respectively.
Deferred tax assets are recognised to the extent that it is
probable that future taxable profit will be available against which
the temporary difference can be utilised. Their carrying amount is
reviewed at each balance sheet date on the same basis.
Deferred tax liabilities are recognised for all temporary
differences, except in respect of:
-- temporary differences arising from the initial recognition of
goodwill or an asset or liability in a transaction that is not a
business combination and at the time of the transaction affects
neither the accounting profit nor taxable profit or loss; and
-- temporary differences associated with investments in
subsidiaries where the timing of the reversal of the temporary
differences can be controlled and it is probable that the temporary
difference will not reverse in the foreseeable future.
Deferred tax assets and liabilities are offset where there is a
legally enforceable right to offset current tax assets and
liabilities and where the deferred tax balances relate to the same
taxation authority. Current tax assets and tax liabilities are
offset where the entity has a legally enforceable right to offset
and intends either to settle on a net basis, or to realise the
asset and settle the liability simultaneously.
Standards and interpretations
New and amended standards adopted by the Group
The Group has applied the following standards and amendments for
the first time for their annual reporting period commencing 1
January 2020:
Standard or interpretation Effective date
-------------------------- -------------------------------------------- --------------
IFRS 3 (amendment) Definition of a Business 1 January 2020
IAS 1 and IAS 8
(amendment) Definition of Material 1 January 2020
CF Conceptual Framework for Financial Reporting 1 January 2020
-------------------------- -------------------------------------------- --------------
The amendments listed above did not have any impact on the
amounts recognised in prior periods and the current period and are
not expected to significantly affect future periods.
New standards and interpretations not yet adopted
Certain new accounting standards and interpretations have been
published that are not mandatory for 31 December 2020 reporting
periods and have not been early adopted by the group. These
standards are not expected to have a material impact on the entity
in the current or future reporting periods and on foreseeable
future transactions.
Notes to the financial statements
For the year ended 31 December 2020
1 Segmental reporting
For management purposes, the Group is organised into three core
divisions, as follows:
-- Asset Management, which comprises regulated management of gas
meters, electric meters and ADM(TM) units within the UK;
-- Asset Installation, which comprises installation of domestic
and I&C gas meters and electricity meters throughout the UK;
and
-- Energy Management, which comprises the provision of energy
consultancy services and, following the
acquisition of Solo Energy Limited, the management of Distributed Energy Resources (DER) assets.
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 Group's chief operating decision making, being the SMS
Board. 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 2020 GBP'000 GBP'000 GBP'000 GBP'000 GBP'000
------------------------------------------------ ----------- ------------- ----------- ----------- -----------
Segment revenue 78,675 49,011 4,583 - 132,269
Inter-segment revenue - (29,287) - - (29,287)
------------------------------------------------ ----------- ------------- ----------- ----------- -----------
Revenue from external customers 78,675 19,724 4,583 - 102,982
Cost of sales (29,825) (16,591) (3,564) - (49,980)
------------------------------------------------ ----------- ------------- ----------- ----------- -----------
Segment gross profit - pre-exceptional
cost of sales 48,850 3,133 1,019 - 53,002
Exceptional items (cost of sales) - (4,890) - - (4,890)
------------------------------------------------ ----------- ------------- ----------- ----------- -----------
Segment gross profit/(loss) 48,850 (1,757) 1,019 - 48,112
Other operating costs/income - - - (27,780) (27,780)
Depreciation (1,385) - (21) (2,979) (4,385)
Amortisation of intangibles (2,925) - (32) - (2,957)
------------------------------------------------ ----------- ------------- ----------- ----------- -----------
Profit/(loss) from operations - pre-exceptional
operating items 44,540 (1,757) 966 (30,759) 12,990
Exceptional items (operating) 188,612 (928) - (1,056) 186,628
------------------------------------------------ ----------- ------------- ----------- ----------- -----------
Profit/(loss) from operations 233,152 (2,685) 966 (31,815) 199,618
Net finance costs: other (4,399) - (33) (107) (4,539)
Net finance costs: exceptional (115) - - - (115)
------------------------------------------------ ----------- ------------- ----------- ----------- -----------
Profit/(loss) before tax 228,638 (2,685) 933 (31,922) 194,964
Tax expense - - - - (1,485)
------------------------------------------------ ----------- ------------- ----------- ----------- -----------
Profit for year 193,479
------------------------------------------------ ----------- ------------- ----------- ----------- -----------
Asset Asset Energy Total
Management Installation Management Unallocated operations
31 December 2019 GBP'000 GBP'000 GBP'000 GBP'000 GBP'000
-------------------------------- ----------- ------------- ----------- ----------- -----------
Segment revenue 82,907 59,968 9,024 - 151,899
Inter-segment revenue - (37,618) - - (37,618)
-------------------------------- ----------- ------------- ----------- ----------- -----------
Revenue from external customers 82,907 22,350 9,024 - 114,281
Cost of sales (37,389) (27,981) (6,847) - (72,217)
-------------------------------- ----------- ------------- ----------- ----------- -----------
Segment gross profit/(loss) 45,518 (5,631) 2,177 - 42,064
Other operating costs/income - - - (14,659) (14,659)
Depreciation (1,347) - - (2,299) (3,646)
Amortisation of intangibles (1,473) - (10) - (1,483)
Exceptional items (8,085) (51) - (391) (8,527)
-------------------------------- ----------- ------------- ----------- ----------- -----------
Profit/(loss) from operations 34,613 (5,682) 2,167 (17,349) 13,749
Net finance costs: exceptional (104) - - - (104)
Net finance costs: other (8,065) - - (118) (8,183)
-------------------------------- ----------- ------------- ----------- ----------- -----------
Profit/(loss) before tax 26,444 (5,682) 2,167 (17,467) 5,462
Tax expense - - - - (1,465)
-------------------------------- ----------- ------------- ----------- ----------- -----------
Profit for year 3,997
-------------------------------- ----------- ------------- ----------- ----------- -----------
Inter-segment revenue relates to installation services provided
by the Asset Installation segment to the Asset Management
segment.
Depreciation of GBP24.7m (2019: GBP31.5m) associated with meter
assets has been reported within cost of sales, in the Asset
Management segment, as the meter assets directly drive revenue.
All material revenues and operations are based and generated in
the UK. Following the acquisition of Solo Energy Limited in
September 2019, a small minority of operations are based in the
Republic of Ireland.
The Group has two major customers that each generated turnover
of 10% or more of total Group turnover, as listed below by
segment:
2020 2019
GBP'000 GBP'000
-------------------------------- -------- --------
Customer 1 - Asset Management 12,876 14,030
Customer 1 - Asset Installation 359 796
Customer 2 - Asset Management 7,816 -
Customer 2 - Asset Installation 6,251 -
-------------------------------- -------- --------
27,302 14,826
-------------------------------- -------- --------
Segment assets and liabilities
Asset Asset Energy Total
Management Installation Management Unallocated operations
31 December 2020 GBP'000 GBP'000 GBP'000 GBP'000 GBP'000
------------------------------ ----------- ------------- ----------- ----------- -----------
Assets reported by segment
Intangible assets 19,308 3,497 2,118 - 24,923
Property, plant and equipment 318,979 235 2,222 6,902 328,338
Inventories 22,676 273 4,701 - 27,650
Contract assets - - 47 - 47
Other assets (bank loans) 1,949 - - - 1,949
------------------------------ ----------- ------------- ----------- ----------- -----------
362,912 4,005 9,088 6,902 382,907
Assets not by segment 79,643
------------------------------ ----------- ------------- ----------- ----------- -----------
Total assets 462,550
------------------------------ ----------- ------------- ----------- ----------- -----------
Liabilities by segment
Contract liabilities 1,254 2,216 219 - 3,689
Lease liabilities 727 - 2,276 2,248 5,251
Bank loans - - - - -
------------------------------ ----------- ------------- ----------- ----------- -----------
1,981 2,216 2,495 2,248 8,940
Liabilities not by segment 47,168
------------------------------ ----------- ------------- ----------- ----------- -----------
Total liabilities 56,108
------------------------------ ----------- ------------- ----------- ----------- -----------
Asset Asset Energy Total
Management Installation Management Unallocated operations
31 December 2019 GBP'000 GBP'000 GBP'000 GBP'000 GBP'000
------------------------------ ----------- ------------- ----------- ----------- -----------
Assets reported by segment
Intangible assets 18,417 3,493 1,833 - 23,743
Property, plant and equipment 403,948 518 - 8,192 412,658
Inventories 21,734 327 - - 22,061
Contract assets - 11 - - 11
------------------------------ ----------- ------------- ----------- ----------- -----------
444,099 4,349 1,833 8,192 458,473
Assets not by segment 98,902
------------------------------ ----------- ------------- ----------- ----------- -----------
Total assets 557,375
------------------------------ ----------- ------------- ----------- ----------- -----------
Liabilities by segment
Contract liabilities 1,360 2,010 124 - 3,494
Lease liabilities 893 - - 3,072 3,965
Other liabilities
Bank loans 269,260 - - - 269,260
------------------------------ ----------- ------------- ----------- ----------- -----------
271,513 2,010 124 3,072 276,719
Liabilities not by segment 57,079
------------------------------ ----------- ------------- ----------- ----------- -----------
Total liabilities 333,798
------------------------------ ----------- ------------- ----------- ----------- -----------
Assets not by segment include cash and cash equivalents, trade
and other receivables and investments.
Liabilities not by segment include trade and other payables 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
2020 44,080 2 2,568 1,467 48,117
2019 106,452 509 67 6,495 113,523
------------------------- ----------- ------------- ----------- ----------- -----------
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 2020 GBP'000 GBP'000 GBP'000 GBP'000
----------------------------------- ---------- ------------ ---------- ----------
Major service lines
Metering 70,780 - - 70,780
Data management 7,895 - - 7,895
Utility connections - 8,817 - 8,817
Transactional meter works - 10,275 - 10,275
Energy management - 632 4,583 5,215
----------------------------------- ---------- ------------ ---------- ----------
78,675 19,724 4,583 102,982
----------------------------------- ---------- ------------ ---------- ----------
Timing of revenue recognition
Services transferred at a point in
time - 10,275 - 10,275
Services transferred over time 78,675 9,449 4,583 92,707
----------------------------------- ---------- ------------ ---------- ----------
78,675 19,724 4,583 102,982
----------------------------------- ---------- ------------ ---------- ----------
Asset Asset Energy Total
Management Installation Management operations
Year ended 31 December 2019 GBP'000 GBP'000 GBP'000 GBP'000
----------------------------------- ---------- ------------ ---------- ----------
Major service lines
Metering 75,472 - - 75,472
Data management 7,435 - - 7,435
Utility connections - 8,406 - 8,406
Transactional meter works - 13,295 - 13,295
Energy management - 649 9,024 9,673
----------------------------------- ---------- ------------ ---------- ----------
82,907 22,350 9,024 114,281
----------------------------------- ---------- ------------ ---------- ----------
Timing of revenue recognition
Services transferred at a point in
time - 13,172 - 13,172
Services transferred over time 82,907 9,178 9,024 101,109
----------------------------------- ---------- ------------ ---------- ----------
82,907 22,350 9,024 114,281
----------------------------------- ---------- ------------ ---------- ----------
2 (b) Assets and liabilities related to contracts with
customers
The Group has recognised the following assets and liabilities
related to contracts with customers:
2020 2019
GBP'000 GBP'000
----------------------------- ------- -------
Current contract assets 47 11
----------------------------- ------- -------
Total contract assets 47 11
----------------------------- ------- -------
Current contract liabilities 3,689 3,494
----------------------------- ------- -------
Total contract liabilities 3,689 3,494
----------------------------- ------- -------
Trade receivables and unbilled receivables are disclosed in note
15.
(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:
2020 2019
GBP'000 GBP'000
--------------------------------------------------------------- ------- -------
Revenue recognised that was included in the contract liability
balance at the beginning of the period 2,991 3,057
--------------------------------------------------------------- ------- -------
No revenue was recognised in 2020 in relation to performance
obligations satisfied in previous periods.
(iii) Transaction price for which performance obligations not
satisfied
All our utilities connections and energy management contracts
are either for periods of one year or less or are billed
periodically based on time and resources incurred, or other unit
measures. As permitted under IFRS 15, the transaction price
allocated to these performance obligations unsatisfied at the end
of the reporting period is not disclosed.
2 (c) Accounting policies and significant judgements
(i) Metering
Meter rental
The Group acts as a gas and electricity meter asset provider,
providing and installing meters to energy suppliers on behalf of
the end consumer.
As a result of the Group's assessment of contracts on
implementation of IFRS 16, and any potential interaction with IFRS
15, it was determined that the arrangements the Group has in place
to act as meter asset provider do not constitute a lease of the
meter asset to the energy supplier. Therefore, the related income
for the service of providing a fitted meter is recognised in
accordance with IFRS 15.
The provision of meter assets to energy suppliers (MAP
services), together with the initial installation, is considered a
distinct and single performance obligation on the basis that, as
Meter Asset Provider (MAP), the Group has an obligation to its
customers to provide a fitted meter. This is a separately
identifiable service to which a stand-alone selling price is
typically allocated. Over the course of the contract term, which
runs into perpetuity, the Group delivers a series of monthly
services for which benefits are simultaneously received and
consumed by the customer.
MAP charges are calculated daily based on the number of
installed meters and invoiced to customers monthly once validation
checks have been completed. As revenue from MAP charges is
attributed to services provided daily, revenue is always based on
the actual level of service provided and, therefore, any
uncertainty at the end of each reporting period is limited to the
extent that validation checks are still being completed. Revenue is
thus recognised over time based on our right to invoice and
includes contract RPI uplifts.
As a result of industry regulations, and subject to specific
contract terms with a customer, the Group may be required to make
payments to customers for shortfalls in the level of service
provided. These charges are directly related to the service being
provided to the customer and thus recognised as a reduction to
revenue in the month in which the service failure occurred. Where
service levels are set based on annual targets, charges are
estimated monthly and subsequently finalised at the end of the
year. Uncertainty, as it pertains to these payments to customers,
is thus typically resolved by the end of the reporting period.
If a MAP contract is cancelled, termination fees may be levied
on the energy supplier. There has been no change in the accounting
of these termination fees and they continue to be classified within
other operating income unless they have arisen on the loss of the
meter assets, in which case they are reported within administrative
expenses as a component of net gain or loss on disposal.
If the services rendered by the Group exceed the payment
received, then accrued income is recognised. This is subsequently
reclassified to receivables at the point at which the Group has an
unconditional right to payment.
Asset management services
The Group provides meter asset management and operations
services to energy suppliers. These services are considered a
distinct performance obligation from the meter rental on the basis
that these are separately identifiable services to which a
stand-alone selling price is allocated, and they are not necessary
to bring the meter asset into use.
Over the course of the contract term, which can either be fixed
or into perpetuity, the Group delivers a series of monthly services
for which the benefits are simultaneously received and consumed by
a customer. Therefore, these are accounted for as a single
performance obligation.
Service charges are calculated daily based on the number of
meters appointed and invoiced to customers monthly. As revenue from
service charges is attributed to services provided daily, revenue
is always based on the actual level of service provided and,
therefore, there is no uncertainty at the end of each reporting
period. Revenue is thus recognised over time based on our right to
invoice and includes contract RPI uplifts.
The Group's meter asset management contracts also include the
provision of transactional meter works. These are considered
further in accounting policy (iv) below.
If the services rendered by the Group exceed the payment
received, then a contract asset is recognised. This is subsequently
reclassified to receivables at the point at which the Group has an
unconditional right to payment.
Third party management services
The Group provides management services to a third party to whom
it sold a minority of its meter asset portfolio in April 2020.
These services include accounting and treasury, portfolio asset
management and other administrative tasks.
The various activities that make up these management services
are provided to the third party on an integrated basis. Over the
course of the contract term, which runs for as long as there are
meters within the scope of the services, the Group delivers a
series of monthly services for which the benefits are
simultaneously received and consumed by the customer. Therefore,
these are accounted for as a single performance obligation.
Service charges are currently based on a fixed annual fee,
subject to contract RPI uplifts, and are invoiced to the customer
monthly. Revenue is thus recognised over time based on our right to
invoice.
If the services rendered by the Group exceed the payment
received, then a contract asset is recognised. This is subsequently
reclassified to receivables at the point at which the Group has an
unconditional right to payment.
(ii) Data services
The Group provides data collection and aggregation services to
I&C electricity customers and, through use of the ADMTM unit,
to I&C gas customers. Over the course of the contract term,
which can either be fixed or into perpetuity, the Group delivers a
series of monthly services for which the benefits are
simultaneously received and consumed by a customer. Therefore,
these are accounted for as a single performance obligation.
Service charges are calculated based on the number of
meters/ADMTM units appointed and invoiced to customers monthly. As
revenue from service charges is attributed to services provided
periodically, revenue is always based on the actual level of
service provided and, therefore, there is no uncertainty at the end
of each reporting period. Service charges, including contract RPI
uplifts, are billed to clients annually in advance and therefore a
contract liability is recognised and subsequently released to the
income statement over the year on a straight line basis. The Group
uses the practical expedient under IFRS 15 from adjusting revenue
for any significant financial components of one year or less.
The ADMTM device is a proprietary product for the Group and
there are no other market providers of this device. A customer
cannot therefore benefit from the data services without
installation, and the installation is not separately identifiable
as it is integral to the subsequent data services. This is
therefore accounted for along with the data services as a single
performance obligation and any corresponding charges are recognised
over the term of the contract.
(iii) Utility connections services (gas and electricity)
Gas and electricity connections services are provided under
fixed-price contracts with I&C customers and can be delivered
to a single site or multiple sites. Whilst each service consists of
multiple activities, the Group's promise in the contract is to
deliver an integrated end-to-end service to which the underlying
activities are inputs. Where services are delivered to multiple
sites, and these are substantially the same, a series of services
is being provided. In all cases, therefore, these contracts give
rise to a single performance obligation to which the fixed price is
allocated. Subsequent variations to this price, due to changes in
the inputs required, are accounted for as contract modifications
and recognised on a cumulative catch-up basis.
Services are transferred over time on the basis that these are
customised services with no alternative use and the Group has an
enforceable right to payment for work completed to date.
Revenue is recognised on the stage of completion with reference
to the actual services provided as a proportion of the total
service expected to be provided under the contract as the services
can enhance a work in progress asset for the customer and have no
alternative use. This is determined on a contract by contract basis
using a milestone approach with reference to the milestones set out
in the contract or otherwise agreed. Where relevant, consideration
is also given to material services provided between milestones.
Estimates of revenues, costs or extent of progress towards
completion are revised if circumstances change and any resulting
increases or decreases in estimated revenues or costs are reflected
in profit or loss in the period in which the circumstances that
give rise to the revision become known by management.
The customer pays the fixed amount based on a payment schedule.
In certain circumstances the customer pays in advance and therefore
a contract liability is recognised and subsequently released to the
income statement based on the measure of progress detailed above.
As the contract is cancellable at the customer's discretion,
subject to settlement for services provided to the date of
cancellation, a contract liability is not recognised until the cash
has been received.
If the services rendered by the Group exceed the payment
received, then a contract asset is recognised. This is subsequently
reclassified to receivables at the point at which the Group has an
unconditional right to payment.
The Group utilises the practical expedient available under IFRS
15 for costs to obtain a contract. Commissions paid as part of
obtaining a contract are expensed as incurred on the basis that the
contract term is typically less than twelve months.
(iv) Transactional meter works
Transactional works, which include emergency, adversarial and
other maintenance services, and are typically short term in nature,
are accounted for as a separate performance obligation to asset
management services (see section (i) above) on the basis that these
are separately identifiable and can be performed by another party.
A customer, being the energy supplier, is legally obligated to
appoint a meter asset manager and can therefore benefit from this
service in isolation, without the subsequent transactional works
which are initiated on an ad-hoc basis upon demand by the
customer.
In 2020, the Group also started to provide transactional meter
works to the third party to whom the Group sold a minority of its
meter asset portfolio in April 2020. In 2019, transactional meter
works also included 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
and asset management services.
The customer pays the fixed amount based on the transactional
services provided and this is charged once the service has been
completed and accepted by the customer.
For segmental purposes, this transactional, non-recurring
revenue is recognised within asset installation.
(v) Energy management services
Energy management services provided mainly to I&C customers
include utility bureau and bill validation services, risk
management and procurement services and energy reduction and
environmental management services.
Certain services, such as utility bureau and bill validation,
are delivered through a series of monthly services over the course
of the contract term, for which the benefits are simultaneously
received and consumed by a customer. These are accounted for as a
single performance obligation. The transaction price allocated
includes a fixed monthly service charge together with a variable
component for specific activities that may not be carried out every
month. As revenue from charges is attributed to services provided
monthly, revenue is always based on the actual level of service
provided and, therefore, there is no uncertainty at the end of each
reporting period. Revenue is thus recognised over time based on our
right to invoice.
Contracts for specialist consultancy services may include
multiple projects. Where these projects are separately identifiable
within the contract and are not interrelated, they are accounted
for as separate performance obligations. The transaction price is
allocated based on the stand-alone charges for each project.
Other energy reduction and environmental management services are
typically longer-term, multi-site contracts and, therefore, the
revenue recognition is consistent with that detailed above for
utility connections - see details in note 2 (c)(iii) above.
(vi) Assets and liabilities arising from contracts with
customers
Costs to fulfil a contract
In certain circumstances, the Group may incur costs to fulfil
its obligations under a contract once it is obtained, but before
transferring goods or services to the customer. These costs are
assessed on a contract by contract basis and, where they are
considered to meet the definition of fulfilment costs under IFRS
15, they are recognised as an asset and amortised on a systematic
basis consistent with the pattern of transfer of the services to
which the asset relates.
Contract assets and liabilities
We receive payments from customers based on a billing schedule,
as established in our contracts.
The timing of revenue recognition, billing and cash collections
results in:
-- billed and unbilled accounts receivable, which are recognised
when our right to consideration becomes
unconditional, and classified as trade receivables and accrued income respectively;
-- unbilled amounts, where we have a conditional right to
consideration based on future performance, recognised as contract
assets. These amounts will be billed in accordance with the agreed
upon contractual terms; and
-- payments received in advance of performance under a contract,
recognised as contract liabilities. Contract
liabilities are recognised as revenue as (or when) we perform under a contract.
For project-based services, work in progress is billed in
accordance with the agreed upon contractual terms with the
customer. We typically receive interim payments as work progresses,
which can give rise to a billed or unbilled accounts receivable,
where our right to payment is unconditional, or a contract asset,
where revenue has been recognised based on progress completed but
our right to payment is still conditional on future performance.
For some contracts, we may be entitled to receive advance payments.
We recognise a contract liability for these advance payments in
excess of revenue recognised.
Cancellation terms can vary but typically include provisions
that allow the customer to terminate the contract at their
discretion subject to a penalty or settlement of amounts for work
completed prior to termination. Contracts allow both parties to
cancel without penalty in the case of a material breach of
contract.
3 Profit from operations
The Group has identified a number of items which are material
due to the significance of their nature and/or amount. These are
listed separately here to provide a better understanding of the
financial performance of the Group.
2020 2019
GBP'000 GBP'000
------------------------------------------------------------- -------- ---------
Profit from operations is stated after (charging)/crediting:
Cost of sales:
Direct subcontractor costs (7,183) (7,195)
Depreciation of meter assets (24,672) (31,491)
Direct staff and other costs (16,569) (31,212)
Inventory costs (1,556) (2,319)
------------------------------------------------------------- -------- ---------
Total cost of sales (before exceptional items) (49,980) (72,217)
Administrative expenses:
Staff costs (18,306) (12,380)
Depreciation:
- owned assets (3,403) (2,729)
- leased assets (982) (917)
Amortisation of intangibles (2,957) (1,483)
Auditor's remuneration (note 3a) (346) (300)
Loss on disposal (1,040) (2,701)
Operating lease rentals(1) (346) (1,032)
Research and development costs (76) -
Other operating charges (9,389) (3,972)
------------------------------------------------------------- -------- ---------
Total administrative expenses (before exceptional items) (36,845) (25,514)
Exceptional items (note 3b) 181,738 (8,527)
Other operating income (note 3c) 1,723 5,726
------------------------------------------------------------- -------- ---------
Total operating costs 96,636 (100,532)
------------------------------------------------------------- -------- ---------
1 2020 operating lease rentals include GBP314,000 on short-term
leases (2019: GBP1,010,000) and GBP32,000 on leases of low value
assets (2019: GBP22,000).
3 (a) Auditor's remuneration
Auditor's remuneration can be analysed as:
2020 2019
GBP'000 GBP'000
------------------------------------------------------- -------- --------
Audit of the parent company and consolidated financial
statements 144 95
Audit of the financial statements of the Company's
subsidiaries 172 155
Other services - audit related assurance services 30 50
------------------------------------------------------- -------- --------
346 300
------------------------------------------------------- -------- --------
3 (b) Exceptional items
An exceptional gain on the disposal of a subsidiary of
GBP194,713,000 has been recognised separately on the consolidated
income statement for the year ended 31 December 2020. See note 4
for details.
There are total other exceptional items on the consolidated
income statement of GBP13,090,000. Exceptional operating costs
comprise GBP6,857,000 of costs directly attributable to COVID-19
(see accounting policies - critical accounting judgements - for
further details), GBP6,033,000 of losses on disposal of our
traditional and SMETS1 meter portfolio (GBP9,521,000 net book value
less GBP3,488,000 termination income) and GBP85,000 of other
miscellaneous costs.
Exceptional finance costs of GBP115,000 comprise break costs
incurred on full voluntary prepayment of the Group's loan facility
(see note 18 for details).
In 2019, there were total exceptional items on the consolidated
income statement of GBP8,631,000. Exceptional operating costs
comprised GBP6,837,000 for losses on disposal of our meter
portfolio (GBP11,819,000 net book value less GBP4,982,000
termination income), GBP1,999,000 of legal and professional fees
incurred as part of the conditional sale of a minority of our
assets, GBP751,000 SMETS1 meters stock write-back, GBP96,000 of
redundancy costs relating to the reorganisation of subsidiaries,
GBP92,000 of costs incurred in relation to the acquisition of Solo
Energy Limited, GBP82,000 of costs that the Company has agreed to
settle in relation to a former legacy Employee Benefit Trust,
GBP68,000 of deferred remuneration arising on the acquisition of a
subsidiary in 2016 settled in shares in April 2019 and GBP104,000
impairment charges.
Exceptional finance costs of GBP104,000 include GBP98,000
accelerated amortisation of loan arrangement fees in relation to
the refinancing of the loan facility and GBP6,000 of bank break
fees.
The tax effect of exceptional items charged in 2020 is a credit
of GBP2,618,000 (2019: credit of GBP1,119,000).
3 (c) Other operating income
2020 2019
GBP'000 GBP'000
---------------------------------------------- -------- --------
Termination fee income 985 2,415
Other contractual charges levied on customers - 3,301
Government grant income 738 10
---------------------------------------------- -------- --------
1,723 5,726
---------------------------------------------- -------- --------
Of the government grant income of GBP738,000 recognised in the
year ended 31 December 2020, GBP536,000 relates to RDECs.
4 Disposal of subsidiary
On 12 March 2020, the Group conditionally signed an agreement to
dispose of a minority of the Group's meter assets through the sale
of the entire share capital of Crail Meters Limited (Crail), a
wholly owned subsidiary of the Group.
The meter asset provision (MAP) business carried on by two
existing operating subsidiaries of the Group (the Meter Managers)
was transferred to Crail on 12 March 2020. The business transferred
included c.187,000 Industrial & Commercial (I&C) meter
assets, amongst other working capital balances. Crail continued to
trade from 12 March 2020 through to 22 April 2020.
On 22 April 2020 the entire share capital of Crail was sold to
an unconnected third party. Total gross cash consideration of
GBP290.6m was received, comprising a payment for the sale of the
shares in Crail and the repayment of an intercompany debt owed by
Crail to the Meter Managers. There was no contingent or non-cash
consideration.
The total carrying amount of net assets disposed was GBP89.0m,
including GBP86.1m of meter assets, a GBP9.1m net receivable of
working capital balances and GBP6.2m of deferred tax liabilities,
giving rise to a gross gain of GBP201.6m. After the deduction of
GBP6.9m transaction costs, a net gain on disposal of GBP194.7m has
been recognised separately in the consolidated income statement.
Excluding deferred taxation and transaction costs, the gain is
GBP195.4m.
Crail does not meet the definition of a discontinued operation
under IFRS 5 on the basis that the minority portfolio of I&C
assets disposed does not represent the loss of a separate, major
line of business and, although I&C activities have been
significantly reduced, they have not been entirely
discontinued.
SMS will continue to manage the disposed I&C meter portfolio
on behalf of the purchaser, for which it will receive annual
RPI-linked management fees of GBP0.8m.
5 Particulars of employees
The average number of staff employed by the Group during the
financial year, including Executive Directors, by activity was:
2020 2019
Number Number
---------------------------------------------------------- ------- -------
Administrative staff 497 487
Operational staff 546 669
Sales staff 4 4
IT staff 73 62
Directors (excluding 4 (2019: 4) Non-executive Directors) 3 3
---------------------------------------------------------- ------- -------
1,123 1,225
---------------------------------------------------------- ------- -------
The aggregate payroll costs, including Executive Directors, of
the employees were:
2020 2019
GBP'000 GBP'000
------------------------------ -------- --------
Wages and salaries 39,880 39,817
Social security costs 4,103 4,400
Staff pension costs 1,229 1,115
Share-based payment (note 24) 626 671
Director pension costs 18 11
------------------------------ -------- --------
45,856 46,014
------------------------------ -------- --------
6 Finance costs and finance income
2020 2019
GBP'000 GBP'000
------------------------------------------------------ -------- --------
Finance costs
Bank loans and overdrafts 4,556 8,255
Lease liabilities 172 157
Foreign exchange (gain)/loss on intragroup borrowings (23) 49
------------------------------------------------------ -------- --------
Total pre-exceptional finance costs 4,705 8,461
------------------------------------------------------ -------- --------
Exceptional finance costs 115 104
------------------------------------------------------ -------- --------
Total finance costs 4,820 8,565
------------------------------------------------------ -------- --------
Finance income
Bank interest receivable 166 278
------------------------------------------------------ -------- --------
Total finance income 166 278
------------------------------------------------------ -------- --------
7 Taxation
2020 2019
GBP'000 GBP'000
-------------------------------------------------------- -------- --------
Analysis of charge in the year
Current tax:
Current income tax expense 331 (81)
Adjustment to tax charge in respect of previous periods 92 2
-------------------------------------------------------- -------- --------
Total current income tax 423 (79)
Deferred tax:
Origination and reversal of temporary differences (198) 1,405
Adjustment to tax charge in respect of prior periods (304)
Adjustment attributable to change in tax rates 1,564 139
-------------------------------------------------------- -------- --------
Tax on profit 1,485 1,465
-------------------------------------------------------- -------- --------
The charge for the period can be reconciled to the profit per
the consolidated statement of comprehensive income as follows:
Profit before tax 194,964 5,462
--------------------------------------------------------- -------- -----
Tax at the UK corporation tax rate of 19.00% (2019:
19.00%) 37,043 1,038
Expenses not deductible for tax purposes 1,565 420
Income not taxable (38,495) -
Adjustments to tax charge in respect of previous periods (212) 142
Impact of overseas tax rates 20 -
Change in tax rate(1) 1,564 (135)
--------------------------------------------------------- -------- -----
Tax expense in the income statement 1,485 1,465
--------------------------------------------------------- -------- -----
(1 See note 21 for further details.)
Current tax credit through equity in the year was GBPNil (2019:
GBPNil).
8 Earnings per share (EPS)
The calculation of EPS is based on the following data and number
of shares:
2020 2019
GBP'000 GBP'000
------------------------------------------------------ -------- --------
Profit for the year used for calculation of basic EPS 193,479 3,997
------------------------------------------------------ -------- --------
Number of shares 2020 2019
--------------------------------------------------- ----------- -----------
Weighted average number of ordinary shares for the
purposes of basic EPS 112,715,328 112,446,154
Effect of potentially dilutive ordinary shares:
- share options 922,554 823,258
--------------------------------------------------- ----------- -----------
Weighted average number of ordinary shares for the
purposes of diluted EPS 113,637,882 113,269,412
--------------------------------------------------- ----------- -----------
EPS:
- basic (pence) 171.65 3.56
- diluted (pence) 170.26 3.53
--------------------------------------------------- ----------- -----------
9 Dividends
Year Year
Year ended Year ended
ended 31 December ended 31 December
31 December 2020 31 December 2019
2020 Per share 2019 Per share
GBP'000 (pence) GBP'000 (pence)
----------------------------- ------------ ------------ ------------ ------------
Paid final dividend - - 4,485 3.98
Paid second interim dividend 5,168 4.58 - -
Paid first interim dividend 7,058 6.25 2,594 2.30
----------------------------- ------------ ------------ ------------ ------------
Total dividends 12,226 10.83 7,079 6.28
----------------------------- ------------ ------------ ------------ ------------
The paid second interim dividend is in respect of FY 2019. The
paid first interim dividend is in respect of FY 2020.
Per the Group's revised dividend policy, a 25p per share
dividend is proposed in respect of FY 2020. This will be paid to
shareholders in four cash instalments.
The first instalment of GBP7.1m was paid on 29 October 2020 to
shareholders on the register at 2 October 2020, with an ex-dividend
date of 1 October 2020. The remaining instalments are intended to
be paid as follows:
Instalment Ex-dividend date Record date Payment date
Second interim 7 January 2021 8 January 2021 28 January 2021
----------------- --------------- ----------------
Third interim 1 April 2021 6 April 2021 29 April 2021
----------------- --------------- ----------------
Final 1 July 2021 2 July 2021 29 July 2021
----------------- --------------- ----------------
These remaining instalments will amount to c.GBP21m and will be
accounted for in 2021.
Under the new dividend policy, the second interim dividend is
paid out of profits recognised in the year prior to the year in
which the dividends are declared and reported. As at 31 December
2020, the distributable profits in the parent company were adequate
to cover the proposed second interim dividend of c.GBP7m.
10 Intangible assets
Intangibles
recognised IT development
Goodwill upon acquisition and software Total
GBP'000 GBP'000 GBP'000 GBP'000
----------------------- -------- ----------------- -------------- --------
Cost
As at 1 January 2019 7,609 2,166 17,678 27,453
Additions - - 6,936 6,936
Acquisitions 995 96 697 1,788
Reclassifications(1) - - (205) (205)
Exchange adjustments (57) (5) (22) (84)
Disposals - - (639) (639)
----------------------- -------- ----------------- -------------- --------
As at 31 December 2019 8,547 2,257 24,445 35,249
Additions - - 4,056 4,056
Acquisitions - - - -
Disposals - - (12) (12)
Exchange adjustments 60 4 29 93
----------------------- -------- ----------------- -------------- --------
As at 31 December 2020 8,607 2,261 28,518 39,386
----------------------- -------- ----------------- -------------- --------
Amortisation
As at 1 January 2019 - 2,034 8,281 10,315
Reclassifcations(1) - - (74) (74)
Disposals - - (218) (218)
Charge for year - 137 1,346 1,483
----------------------- -------- ----------------- -------------- --------
As at 31 December 2019 - 2,171 9,335 11,506
Disposals - - - -
Charge for year - 32 2,925 2,957
----------------------- -------- ----------------- -------------- --------
As at 31 December 2020 - 2,203 12,260 14,463
----------------------- -------- ----------------- -------------- --------
Net book value
As at 31 December 2020 8,607 58 16,258 24,923
----------------------- -------- ----------------- -------------- --------
As at 31 December 2019 8,547 86 15,110 23,743
----------------------- -------- ----------------- -------------- --------
As at 1 January 2019 7,609 132 9,397 17,138
----------------------- -------- ----------------- -------------- --------
(1 Capitalised development expenditure on ADMTM units has been
reallocated from IT development and software in intangible assets
to meter assets within property, plant and equipment, to align with
the Group's accounting policy.)
No goodwill or intangible assets were recognised as a result of
acquisitions during the year. The acquisition of Solo Energy
Limited in September 2019 resulted in the recognition of goodwill
of GBP995,000, which was assigned to the Energy Management
operating segment. In addition, the trademarks of Solo Energy
Limited and its FlexiGrid(TM) platform were valued at GBP96,000 and
were recognised as additions within the acquired intangibles asset
class. See note 20 for further details on business
acquisitions.
11 Property, plant and equipment
Fixtures,
Freehold/ Plant fittings
leasehold Meter and and Motor Right-of-use
property assets machinery equipment vehicles assets Total
GBP'000 GBP'000 GBP'000 GBP'000 GBP'000 GBP'000 GBP'000
---------------------------- --------- ---------- ----------- --------- ------------ ---------
Cost
As at 1 January
2019 2,536 410,128 504 4,248 2,814 - 420,230
Additions 215 95,186 520 2,498 3,279 4,889 106,587
Acquisitions - - - 6 - - 6
Reclassifications(1) - 205 - - - - 205
Impairment - - - - - (90) (90)
Disposals - (21,991) - (894) (65) (54) (23,004)
---------------------- ----- --------- ---------- ----------- --------- ------------ ---------
As at 31 December
2019 2,751 483,528 1,024 5,858 6,028 4,745 503,934
Additions 56 40,349 20 1,329 42 2,265 44,061
Acquisitions - - - - - - -
Impairment - - - - - - -
Disposals - (131,731) - (43) (765) - (132,539)
Exchange adjustments - - - 4 - - 4
---------------------- ----- --------- ---------- ----------- --------- ------------ ---------
As at 31 December
2020 2,807 392,146 1,044 7,148 5,305 7,010 415,460
---------------------- ----- --------- ---------- ----------- --------- ------------ ---------
Depreciation
As at 1 January
2019 519 59,766 233 2,618 362 - 63,498
Charge for year (14) 31,491 267 1,337 1,139 917 35,137
Reclassifications(1) - 74 - - - - 74
Impairment - - - - - (37) (37)
Disposals - (6,520) - (841) (35) - (7,396)
---------------------- ----- --------- ---------- ----------- --------- ------------ ---------
As at 31 December
2019 505 84,811 500 3,114 1,466 880 91,276
Charge for year 174 24,672 290 1,639 1,300 982 29,057
Impairment - - - - - - -
Disposals - (32,800) - (37) (379) - (33,216)
Exchange adjustments - - - 5 - - 5
---------------------- ----- --------- ---------- ----------- --------- ------------ ---------
As at 31 December
2020 679 76,683 790 4,721 2,387 1,862 87,122
---------------------- ----- --------- ---------- ----------- --------- ------------ ---------
Net book value
As at 31 December
2020 2,128 315,463 254 2,427 2,918 5,148 328,338
---------------------- ----- --------- ---------- ----------- --------- ------------ ---------
As at 31 December
2019 2,246 398,717 524 2,744 4,562 3,865 412,658
---------------------- ----- --------- ---------- ----------- --------- ------------ ---------
As at 1 January
2019 2,017 350,362 271 1,630 2,452 - 356,732
---------------------- ----- --------- ---------- ----------- --------- ------------ ---------
(1 Capitalised development expenditure on ADMTM units was
reallocated in 2019 from IT development and software in intangible
assets to meter assets within property, plant and equipment, to
align with the Group's accounting policy.)
Meter assets
Meter asset disposals in the year include the c.187,000 assets
disposed of as part of the sale of a subsidiary on 22 April 2020.
The assets disposed of had a net book value of GBP86,103,000.
Included within the closing meter assets net book value of
GBP315,463,000 (2019: GBP398,717,000) is GBP22,627,000 (2019:
GBP30,298,000) relating to the traditional meter portfolio. In
accordance with our accounting policy these assets will be written
down to zero by 1 July 2025. In the 2020 consolidated financial
statements the traditional meter portfolio generated GBP13,140,000
(2019: GBP12,965,000) revenue with a corresponding GBP5,668,000
(2019: GBP11,184,000) depreciation charge. GBP13,333,000 (2019:
GBP13,928,000) annualised recurring revenue as at 31 December 2020
arises from the owned traditional meter portfolio.
The assets are secured by a bond and floating charge (note
18).
For the purpose of impairment testing, the traditional meter
asset portfolio recognised within "meter assets" is assessed as a
stand alone cash-generating unit (CGU) and its carrying amount is
compared with the recoverable amount. In line with IAS 36, no
impairment review was considered necessary at 31 December 2020 as
the previous impairment review at 31 December 2019 showed a
significant excess of recoverable amount over carrying amount and
management concluded that there were no reasonably possible changes
in the key assumptions that would cause the carrying amounts of the
traditional meter portfolio to exceed the value in use. There have
also been no events during 2020 that would eliminate this excess or
any new material indicators of impairment in the year. As a result
of COVID-19, and the reduced smart meter installation activity,
there has been a lower volume of traditional meter asset removals.
In addition, as detailed in the accounting policies, the useful
economic life of traditional meter assets has been extended to 1
July 2025 following the UK Government's announcement of its new
framework for the UK smart meter rollout.
Therefore, no impairment has been recognised in the period ended
31 December 2020 (31 December 2019: GBPnil). No impairment on other
meter assets was recognised in 2020 or 2019.
Right-of-use assets
In 2019, right-of-use assets were recognised following the
implementation of IFRS 16. Of the GBP4,889,000 additions reported
above, GBP3,820,000 related to right-of-use assets recognised upon
implementation on 1 January 2019.
Additions to right-of-use assets during the 2020 financial year
were GBP2,265,000 (2019: GBP1,069,000, excluding right-of-use
assets recognised upon implementation on 1 January 2019).
A breakdown of right-of-use assets is presented below:
2020 2019
Carrying value GBP'000 GBP'000
--------------- -------- --------
Properties(1) 2,918 3,846
Motor vehicles 7 19
Land 2,223 -
--------------- -------- --------
5,148 3,865
--------------- -------- --------
(1 Properties include office and warehouse space.)
The statement of profit or loss shows the following amounts
relating to leases:
2020 2019
Depreciation charge on right-of-use assets GBP'000 GBP'000
------------------------------------------- -------- --------
Properties 948 907
Motor vehicles 13 10
Land 21 -
------------------------------------------- -------- --------
982 917
------------------------------------------- -------- --------
12 Financial asset investments
Unlisted
investments Total
GBP'000 GBP'000
-------------------------------------------- ------------ --------
Cost
As at 1 January 2019 and 1 January 2020 75 75
Impairment - -
-------------------------------------------- ------------ --------
As at 31 December 2019 and 31 December 2020 75 75
--------------------------------------------- ------------ --------
13 Impairment of goodwill
The goodwill acquired in business combinations is allocated, at
acquisition, to the CGUs that are expected to benefit from that
business combination. Goodwill is monitored by management at the
level of the CGUs (defined as the three operating segments)
identified in note 1.
A segment-level summary of the goodwill allocation is presented
below:
Asset Asset Energy
Management Installation Management Total
GBP'000 GBP'000 GBP'000 GBP'000
----------------------- ----------- ------------- ----------- --------
Cost
As at 1 January 2020 4,112 3,497 938 8,547
Acquisitions (note 20) - - - -
Exchange adjustments - - 60 60
----------------------- ----------- ------------- ----------- --------
As at 31 December 2020 4,112 3,497 998 8,607
----------------------- ----------- ------------- ----------- --------
No goodwill was recognised in the year as a result of business
combinations. The goodwill recognised in Energy Management at 31
December 2019 of GBP938,000 arose on the acquisition of Solo Energy
Limited, a blockchain energy flexibility IT platform . See note 20
for further details. Goodwill was allocated entirely to Energy
Management on the basis that this is the operating segment that
will receive the benefits from the acquisition.
The Group tests goodwill annually for impairment or more
frequently if there are indications that goodwill might be
impaired. Goodwill is tested for impairment by comparing the
carrying amount of each CGU, including goodwill, with the
recoverable amount. The recoverable amounts are determined based on
value in use calculations which require assumptions. The
calculations use cash flow projections based on financial budgets
approved by the Board covering a one-year period, together with
management forecasts for a further four-year period. These budgets
and forecasts have regard to historical performance and knowledge
of the current market, together with the Group's views on the
future achievable growth and the impact of committed cash flows.
Specifically, budgets and forecasts used in the assessment of
goodwill at 31 December 2020 include the estimated impact of
COVID-19 and incorporate the effects of the extended deadline for
the UK smart meter rollout to 1 July 2025. Cash flows beyond this
are extrapolated using the estimated growth rates stated below.
The cash flows used in the value in use calculation for the
Asset Management segment include all costs incurred in the
provision of meter assets to energy suppliers, together with the
initial installation. The cash flows used in the value in use
calculation for the Asset Installation segment exclude installation
costs incurred to fit an owned meter. For the purpose of the value
in use calculation, these are instead allocated to the Asset
Management segment, being the segment to which the corresponding
revenues are allocated.
The annual impairment test was performed for the three CGUs
identified above that have goodwill allocated to them. No evidence
of impairment was found at the balance sheet date.
The key assumptions used in the value in use calculations for
those CGUs that have goodwill allocated to them are as follows:
-- Perpetual growth rate - the terminal cash flows are
extrapolated in perpetuity using a growth rate of 2% for Asset
Management (2019: 3.0%) and 1.5% for Asset Installation and Energy
Management (2019: 0.5%). The rate of 2% applied to Asset Management
is derived from historical Retail Price Index increases applied to
the segment's index-linked meter rentals, with a small reduction in
recognition of the impact of COVID-19 on macroeconomic growth. This
is not considered to be higher than the average long-term industry
growth rate. The rate of 1.5% applied to Asset Installation and
Energy Management is prudently aligned with the UK rate of
inflation as revenues in these segments are not always index
linked.
-- Discount rate - the discount rate is initially based on the
weighted average cost of capital (WACC) which would be anticipated
for a market participant investing in the Group. A specific
discount rate is then calculated for each operating segment, taking
into account the time value of money, the segment's risk profile
and the impact of the current economic climate. The pre-tax
discount rates applied are 6.8%, 9.0% and 11.0% for Asset
Management, Asset Installation and Energy Management respectively
(2019: 7.1%, 10.7% and 10.7%) and the post-tax discount rates
applied are 5.5%, 7.25% and 8.9% for Asset Management, Asset
Installation and Energy Management respectively (2019: 5.9%, 8.9%
and 8.9%). The risk premium assigned to the Asset Installation and
Energy Management segments reflects the shorter-term nature of the
underlying revenues within these segments, as compared to the
annually-recurring revenue generated by an installed asset.
Management has performed sensitivity analysis on the key
assumptions both with other variables held constant and with other
variables simultaneously changed. Management has concluded that
there are no reasonably possible changes in the key assumptions
that would cause the carrying amounts of goodwill to exceed the
value in use for either CGU.
14 Inventories
2020 2019
GBP'000 GBP'000
----------------- -------- --------
Finished goods 22,676 21,734
Work-in-progress 4,701 -
Consumables 273 327
----------------- -------- --------
27,650 22,061
----------------- -------- --------
Work-in-progress relates to the construction of grid-scale
battery storage sites. Of the total work-in progress balance of
GBP4,701,000 at 31 December 2020, GBP3,438,000 relates to the
acquisition of the companies detailed in note 20 and GBP1,262,000
relates to the subsequent capitalisation of directly attributable
construction costs.
15 Trade and other receivables
2020 2019
GBP'000 GBP'000
------------------------------- -------- --------
Trade receivables 20,272 28,596
Prepayments and deferred costs 4,263 1,944
Accrued income 10,404 15,490
Other receivables 1,245 1,655
VAT recoverable 980 602
------------------------------- -------- --------
37,164 48,287
------------------------------- -------- --------
Trade receivables and accrued income include billed and unbilled
receivables relating to our meter rental contracts.
Amounts falling due after more than one year:
2020 2019
GBP'000 GBP'000
--------------- -------- --------
Accrued income 12 232
--------------- -------- --------
Accrued income is made up of the following balances:
2020 2019
GBP'000 GBP'000
--------------------- -------- --------
Unbilled receivables 10,357 15,455
Contract assets 47 11
Other accrued income - 24
--------------------- -------- --------
10,404 15,490
--------------------- -------- --------
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 2020 was GBP4,904,000 (2019:
GBP4,413,000). See note 19 for further details. The ageing profile
of trade receivables past due date is shown below:
2020 2019
GBP'000 GBP'000
--------------- -------- --------
Current 13,608 19,669
1-30 days 3,208 6,624
31-60 days 1,914 2,228
61-90 days 1,090 1,309
91-120 days 328 719
Over 120 days 4,868 2,331
--------------- -------- --------
25,016 32,880
Loss allowance (4,744) (4,284)
--------------- -------- --------
20,272 28,596
--------------- -------- --------
Trade receivables are non-interest bearing and are generally on
30-90-day terms. Trade receivables due from related parties at 31
December 2020 amounted to GBPNil (2019: 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.
16 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:
2020 2019
GBP'000 GBP'000
----- -------- --------
Cash 40,236 50,092
----- -------- --------
40,236 50,092
----- -------- --------
Restricted cash is excluded from cash and cash equivalents in
line with the Group's accounting policy and is disclosed separately
on the consolidated statement of financial position.
17 Trade and other payables
2020 2019
GBP'000 GBP'000
----------------- -------- --------
Current
Trade payables 10,215 16,466
Other payables 3,815 2,420
Other taxes 3,894 4,788
Deferred income 2,498 2,487
Advance payments 1,422 1,335
Accruals 20,114 19,300
----------------- -------- --------
41,958 46,796
----------------- -------- --------
Deferred income and advance payments are made up of the
following balances:
2020 2019
GBP'000 GBP'000
---------------------- -------- --------
Contract liabilities 3,689 3,494
Other deferred income 231 328
---------------------- -------- --------
3,920 3,822
---------------------- -------- --------
The Directors consider that the carrying amount of trade and
other payables approximates to their fair value.
Trade payables are classified at amortised cost, are
non-interest bearing and are normally settled on 30-45-day
terms.
All trade liabilities are denominated in Sterling.
18 Financial liabilities
2020 2019
GBP'000 GBP'000
------------------ -------- --------
Current
Lease liabilities 936 1,013
Other liabilities 388 -
Bank loans - 1,724
------------------ -------- --------
1,324 2,737
------------------ -------- --------
Non-current
Lease liabilities 4,315 2,950
Other liabilities - -
Bank loans - 267,536
------------------ -------- --------
4,315 270,486
------------------ -------- --------
Bank loans at 31 December 2019 related to the Group's revolving
credit facility of GBP420m, with a five year term ending December
2023 (the facility). The Group had a total outstanding principal of
GBP270m at 31 December 2019 and, as commencement of any repayment
of the principal by way of a limited excess cash sweeping mechanism
is not required until 2022 under the terms of the contract, this
balance was classified as non-current. Accrued interest of GBP1.7m
was recognised as part of the carrying value of bank loans at 31
December 2019 together with a deduction of GBP2.5m for unamortised
transaction costs. In 2019, the facility attracted interest at a
rate of 1.85% over the three-month LIBOR and 0.65% was payable on
undrawn funds. The interest is required to be settled quarterly and
was thus classified as current at 31 December 2019.
Following the Group's sale of a wholly owned subsidiary on 22
April 2020, the gross proceeds received of GBP290.6m were used to
make a voluntary prepayment and the total outstanding principal
value at 22 April 2020 of GBP270m, together with outstanding
interest and commitment fees of GBP0.6m, was settled. Concurrently,
the total commitments available under the facility were reduced
from GBP420m to GBP300m. There were no other material changes to
the terms and conditions. This amendment does not substantially
change the existing revolving credit facility, nor does it
discharge any obligations. As such, this is deemed to be a
modification. There has been no impact to the consolidated income
statement in the year ended 31 December 2020 as a result of the
modification.
A drawdown of GBP15.0m was made in May 2020 but this was
subsequently settled at the end of the three-month term. No
subsequent drawdowns have been made by the Group and, therefore, as
at 31 December 2020 there was no outstanding principal or interest.
The amount recognised against bank loans is thus GBPnil.
Unamortised transaction costs from the initial establishment of
the revolving credit facility in December 2018 continue to be
amortised over the remaining duration of the facility to 2023,
together with additional transaction costs of GBP0.1m directly
attributable to the modification of the loan on 22 April 2020. For
the year ended 31 December 2020, GBP0.7m of transaction costs have
been recognised within the consolidated income statement.
Unamortised transaction costs of GBP1.9m that would ordinarily
be deducted against the carrying value of the bank loans, have been
recorded as 'other assets' at 31 December 2020. In line with the
Group's accounting policy, these will be reclassified to bank loans
upon the next drawdown.
GBP0.1m of break costs incurred as a result of the voluntary
prepayment have been recognised as an exceptional finance cost in
the year ended 31 December 2020.
The Group has complied with the financial covenants of its
borrowing facility during the current and prior reporting
periods.
18 (a) Changes in liabilities arising from financing
activities
Lease liabilities Bank loans
Financial liabilities GBP'000 GBP'000
------------------------------------------ ----------------- ----------
At 1 January 2019 3,868 172,016
Cash flows (i) (1,075) 90,149
New leases 1,040 -
Other non-cash changes (i) 130 7,095
------------------------------------------ ----------------- ----------
At 31 December 2019 3,963 269,260
Cash flows (i) (1,155) (274,143)
New leases 2,260 -
Other non-cash changes (i) 183 2,934
------------------------------------------ ----------------- ----------
At 31 December 2020 5,251 (1,949)
------------------------------------------ ----------------- ----------
Presentational reclassification to 'other
assets' 1,949
------------------------------------------ ----------------- ----------
At 31 December 2020 5,251 -
------------------------------------------ ----------------- ----------
(i) Cash flows and other non-cash changes
Cash flows on lease liabilities include GBP1,155,000 of lease
payments. Cash flows on bank loans include GBP15,000,000 of new
borrowings less GBP285,000,000 of borrowings repaid, interest
payments of GBP4,000,000 and a payment of GBP143,000 for
arrangement fees.
Other non-cash changes in lease liabilities include GBP172,000
of interest charges plus GBP11,000 arising from changes in lease
terms and foreign exchange impact in the year. Other non-cash
changes in bank loans include GBP2,276,000 of interest charges and
GBP658,000 amortisation of arrangement fees.
At 31 December 2020, there were no outstanding amounts under the
Group's revolving credit facility. Therefore, unamortised
arrangement fees of GBP1,949,000 have been classified separately as
'other assets' on the consolidated statement of financial position
in line with the Group's accounting policy. Unamortised arrangement
fees of GBP641,000 have been classified as current 'other assets,'
with the balance of GBP1,308,000 classified as non-current, in line
with the remaining term of the facility.
In 2019, cash flows on lease liabilities included GBP1,075,000
of lease payments. Cash flows on bank loans included GBP270,000,000
of new borrowings less GBP172,114,000 of borrowings repaid,
interest payments of GBP4,632,000 and a payment of GBP3,105,000 for
arrangement fees.
Other non-cash changes in lease liabilities included GBP157,000
of interest charges less GBP27,000 arising from changes in lease
terms in the year. Other non-cash changes in bank loans included
GBP6,356,000 of interest charges, of which GBP1,724,000 were unpaid
at 31 December 2019, and GBP739,000 amortisation of arrangement
fees.
19 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:
19 (a) Interest rate risk
The Group's main interest rate risk arises from its floating
rate bank loan, which was undrawn at 31 December 2020 (2019:
GBP269,260,000). See note 18 for further details.
There were no overdrafts at 31 December 2020 (2019: none) and
the interest charge arising on lease liabilities, recognised from 1
January 2019 upon implementation of IFRS 16, does not represent a
cash interest rate risk for the Group.
The Group's financial assets at 31 December 2020 comprise cash
and trade receivables. The cash balance of GBP40,236,000 (2019:
GBP50,092,000) is a floating rate financial asset but interest
income is not typically material.
i) Interest rate sensitivity
The following table demonstrates the sensitivity to a change in
interest rates on the Group's floating rate bank loan. The Group's
profit before tax is affected through the impact on floating rate
borrowings as follows:
Effect on
Increase/(decrease) profit
in basis before tax
points GBP'000
----- -------------------- -----------
2020 +70bps -
2019 +70bps (1,885)
----- -------------------- -----------
Management believes that a movement in interest rates of 70 bps
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.
19 (b) Fair values of financial liabilities and financial
assets
The Group's bank loan is measured at amortised cost. For fair
value disclosure purposes, the bank loan is considered to be a
level 2 financial instrument on the basis that it is not traded in
an active market. The fair values, based upon the market value or
discounted cash flows of financial liabilities and financial assets
held in the Group, were not materially different from their book
values.
19 (c) Foreign currency risk
The Group's exposure to the risk of changes in foreign exchange
primarily arises from a single subsidiary acquired in the prior
year, operating in Euros, With the exception of this entity, all of
the Group's operating activities are denominated in Pounds Sterling
and, therefore, the Group's overall exposure is not
significant.
19 (d) Liquidity risk
The Group manages its cash in a manner designed to ensure
maximum benefit is gained whilst ensuring security of investment
sources. The Group's policy on investment of surplus funds is to
place deposits at institutions with strong credit ratings; this is
considered to be institutions with a credit rating of AA- and
above. Currently, all of the chosen investment institutions are in
line with these criteria.
The ageing and maturity profile of the Group's material
financial liabilities is disclosed in the table below. The amounts
disclosed are the contractual undiscounted cash flows.
Between
Less than two and Over five Total contractual
one year five years years cash flows
31 December 2020 GBP'000 GBP'000 GBP'000 GBP'000
------------------------------------ --------- ----------- --------- -----------------
Contractual maturities of financial
liabilities
Trade payables 10,215 - - 10,215
Bank loan - - - -
Other liabilities 388 - - 388
Lease liabilities 1,172 2,657 4,222 8,051
------------------------------------ --------- ----------- --------- -----------------
11,775 2,657 4,222 18,654
------------------------------------ --------- ----------- --------- -----------------
Between
Less than two and Over five Total contractual
one year five years years cash flows
31 December 2019 GBP'000 GBP'000 GBP'000 GBP'000
------------------------------------ --------- ----------- --------- -----------------
Contractual maturities of financial
liabilities
Trade payables 16,466 - - 16,466
Bank loan 7,049 290,954 - 298,003
Other liabilities
Lease liabilities 1,153 2,748 456 4,357
------------------------------------ --------- ----------- --------- -----------------
24,668 293,702 456 318,826
------------------------------------ --------- ----------- --------- -----------------
The contractual undiscounted cash flows on the bank loan reflect
the contractual arrangements in place at the year-end date. At 31
December 2019, of the GBP290,954,000 disclosed in the 2019 bank
loan time band "between two and five years", the Group had assumed
that the entire principal balance would be settled upon maturity of
the loan facility at the end of 2023.
As disclosed in note 18, the Group subsequently made a full
voluntary prepayment on its loan facility in April 2020. It had no
outstanding principle at 31 December 2020 and therefore the
contractual undiscounted cash flows at 31 December 2020 are nil in
the table above.
19 (e) Credit risk
The Group's credit risk primarily arises from credit exposures
to energy suppliers (our customers), including outstanding
receivables, due to the Group trading with a limited number of
companies, which are generally large utility companies or financial
institutions.
Credit risk is managed on a Group basis. For banks and financial
institutions, only independently rated parties with a minimum
rating of "AA-" are accepted. With regard to customers, the Group
assesses the credit quality of the customer, considering its
financial position, past experience and other factors. The Group
does not expect, in the normal course of events, that debts due
from customers are at significant risk. The Group's maximum
exposure to credit risk equates to the carrying value of cash and
cash equivalents, trade and other receivables, contract assets and
investments. The Group's maximum exposure to credit risk from its
customers is GBP30,688,000 (2019: GBP44,318,000) 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 15. The Group regularly monitors and updates
its cash flow forecasts to ensure it has sufficient and appropriate
funds to meet its ongoing operational requirements.
(i) Impairment of financial assets
The Group has two types of financial assets that are subject to
IFRS 9's expected credit loss model:
-- trade receivables, which consist of billed receivables
arising from contracts with customers, for the provision of meter
asset installation, management and energy services; and
-- accrued income, which consists of contract assets and
unbilled receivables arising from contracts with customers.
While cash and cash equivalents, and debt investments held at
amortised cost, are also subject to the impairment requirements of
IFRS 9, the identified impairment loss was immaterial.
The Group applies the IFRS 9 simplified approach to measuring
forward-looking expected credit losses (ECL) which uses a lifetime
expected loss allowance for all trade receivables and accrued
income, including contract assets.
To measure the ECL, trade receivables and accrued income have
been grouped based on shared credit risk characteristics and the
days past due. Accrued income relates to rights to consideration
for performance, and other operating charges, before payment is due
from customers and consists of unbilled receivables and contract
assets (see note 2 for details). These have substantially the same
risk characteristics as the trade receivables for the same types of
contracts. The Group has therefore concluded that the expected loss
rates for trade receivables are a reasonable approximation of the
loss rates for accrued income.
The Group has established a provision matrix based on the
payment profiles of sales, over the most recent twelve-month period
that is an appropriate representation of loss patterns, and the
corresponding historical credit losses experienced within this
period. The historical loss rates are adjusted to reflect current
and forward-looking information that might affect the ability of
customers to settle the receivables, including macroeconomic
factors as relevant. In calculating the loss rates, certain
historical losses arising from specific circumstances with
customers have been removed where these are not indicative of
future loss patterns.
COVID-19 has generated global financial uncertainty; however,
the potential impact of this on the Group's credit risk is
mitigated by the highly regulated nature of the utilities industry
and the extensive support made available to energy - and other
infrastructure - suppliers by the UK Government. As a result,
management has not increased the expected loss rates for the trade
receivables portfolio as a whole. Instead, a subset of trade
receivables has been identified as having a potentially elevated
credit risk, due to a greater risk of administration as a direct
consequence of COVID-19. This subset has been provided for on a
specific basis and has resulted in an additional GBP495,000
impairment loss. Given the continued and changing uncertainty
regarding the impact of COVID-19 on customer default risk,
management will continue to monitor the situation and reassess its
expected credit losses at each reporting period end accordingly.
Management has taken the judgement to recognise this incremental
impairment loss as exceptional on the basis outlined in the
accounting policies.
On that basis, the loss allowance at 31 December 2020 was
determined as GBP4,904,000 (2019: GBP4,413,000) for trade
receivables and accrued income. A reconciliation of these balances
is provided as follows:
Accrued Trade
income receivables Total
GBP'000 GBP'000 GBP'000
------------------------------------------------ -------- ------------ --------
At 1 January 2020 129 4,284 4,413
Increase in loss allowance recognised in profit
or loss during the year - underlying 31 2,703 2,734
Increase in loss allowance recognised in profit
or loss during the year - exceptional - 495 495
Amounts reversed/written off during the year - (2,738) (2,738)
------------------------------------------------ -------- ------------ --------
At 31 December 2020 160 4,744 4,904
------------------------------------------------ -------- ------------ --------
The underlying increase in loss allowance recognised at 31
December 2020 is largely attributable to certain individual trade
receivables that have been impaired as a result of specific
circumstances with customers. It also reflects the application of
updated loss rates. As detailed above, an additional GBP495,000
impairment loss has been recognised in the year in relation to
COVID-19.
Total net impairment losses on financial and contract assets
were GBP3,229,000 in 2020 (2019: GBP3,824,000) including the
GBP495,000 exceptional charge. Of this amount, GBP3,229,000 (2019:
GBP3,824,000) relates to amounts arising from trade receivables and
accrued income.
(ii) Fair value
There is no material difference between the book value and the
fair value of any financial asset or liability.
19 (f) Capital management
Capital is the equity attributable to the equity holders of the
parent. The primary objective of the Group's capital management is
to ensure that it maintains a strong credit rating and healthy
capital ratios in order to support its business and maximise
shareholder value. The Group manages its capital structure, and
makes adjustments to it, in light of changes in economic
conditions. To maintain or adjust the capital structure, the Group
may adjust the dividend payment to shareholders, sell assets,
return capital to shareholders or issue new shares.
The Group monitors capital on the basis of a leverage ratio.
This ratio is calculated as net debt divided by pre-exceptional
EBITDA. Net debt is calculated as total borrowings less cash.
Pre-exceptional EBITDA is calculated as operating profit before any
significant exceptional items, interest, tax, depreciation and
amortisation.
The objective of SMS's strategy is to deliver long-term value to
its shareholders whilst maintaining a balance sheet structure that
safeguards the Group's nancial position. Earlier in the year, SMS
announced its intention to pay a 25p per share dividend in respect
of FY 2020 and the first of three interim dividend instalments was
paid in October 2020. It also announced that the long-term
index-linked cash flows from its existing asset base are able to
support an intended annual increase of 10% in dividends for each of
the financial years FY 2021, FY 2022, FY 2023 and FY 2024. This
will result in a more predictable return to shareholders and
reflects the forecast growth of the business over and above RPI in
that period. The Group's strong liquidity position supports the
funding of its contracted smart meter order pipeline, which will
further add to its long-term index-linked cash flows.
20 Business combinations
Year ended 31 December 2020
During the year ended 31 December 2020, the Group acquired 100%
of the issued share capital of the following companies:
Acquisition
Name of acquired Company Registered office Purchase consideration date Nature of the
company number prior to acquisition GBP GBP Company
--------------------- -------- --------------------- ---------------------- ------------ ------------------
Salisbury House
Station Road
East Anglia Grid Cambridge 16 October Special purpose
Storage One Limited 11110483 CB1 2LA 1,575,882 2020 vehicle
Burwell Power 12028663 Holding company(1)
Limited
16a Suite 18 Oakham
Enterprise Park
Ashwell Road
Add Renewables Oakham, Rutland 30 September Special purpose
No.3 Limited 10042216 LE15 7TU 1,344,000 2020 vehicle
--------------------- -------- --------------------- ---------------------- ------------ ------------------
1 Burwell Power Limited is the direct parent of East Anglia Grid
Storage One Limited (the Subsidiary).
All three companies report in British Pound Sterling. The
acquisitions enable SMS to obtain control over the rights required
to develop and commission two grid-scale battery storage sites,
totalling 90MW, as part of the Group's investment strategy in CaRe
assets. Grid-scale battery storage is a key asset class required by
the UK energy system to provide flexibility services to balance the
grid and support the continued introduction of more intermittent
renewable generation. The acquired sites will be constructed over
the next 12 months.
Details of the purchase consideration are as follows:
Cash paid Contingent consideration
Name of acquired company GBP GBP
--------------------------------- --------- ------------------------
East Anglia Grid Storage
One Limited and its subsidiary,
Burwell Power Limited
(together, 'Burwell') 1,375,882 200,000
Add Renewables No.3 Limited
('Barnsley') 1,156,500 187,500
--------------------------------- --------- ------------------------
Total purchase consideration 2,532,382 387,500
--------------------------------- --------- ------------------------
In the event that total connection costs per MW fall below
various set thresholds, total additional consideration of up to
GBP387,500 may be payable in cash upon energisation (when energy is
first sold to the grid). Target energisation is currently end of
2021. The fair value of the contingent consideration recognised of
GBP387,500 was estimated by calculating the present value of the
future expected cash flows based on current budgets and forecasts.
The estimate ignores the impact of discounting on the basis that
the anticipated payment date is within 12 months of the current
reporting date.
The assets and liabilities recognised as a result of the
acquisitions were as follows:
Burwell fair Barnsley fair Total fair
value value value
GBP'000 GBP'000 GBP'000
------------------------------ ------------ ------------- ----------
Cash and cash equivalents 94 - 94
Inventories: work-in-progress 1,757 1,681 3,438(1)
Trade and other receivables 39 - 39
Trade and other payables - (22) (22)
Deferred tax liability (314) (315) (629)
Net identifiable assets
acquired 1,576 1,344 2,920
Add: goodwill - - -
------------------------------ ------------ ------------- ----------
Net assets acquired 1,576 1,344 2,920
------------------------------ ------------ ------------- ----------
(1 Total inventories of GBP3,438,000 include a fair value uplift
of GBP2,683,000.)
No contingent assets or liabilities were acquired.
A total fair value uplift of GBP2.7m (net of tax) was applied to
the acquisition balance sheets in relation to development and
construction rights, which have been included within
work-in-progress and recorded as part of inventories on the
consolidated balance sheet. The acquisitions therefore resulted in
goodwill of GBPnil.
The entities acquired contributed GBPnil turnover or profit to
the Group's results in the year ended 31 December 2020. If the
acquisitions had occurred on 1 January 2020, consolidated pro-forma
revenue and profit for the year ended 31 December 2020 would also
have been GBPnil. No further adjustments were required as there
were no material differences in the accounting policies between the
Group and the entities acquired.
Acquisition related costs of GBP0.1m were incurred and have been
recorded as part of administrative costs in the consolidated
statement of comprehensive income. These have not been classified
as exceptional on the basis that, through these acquisitions, the
Group is establishing a trade of constructing and selling
grid-scale batteries.
As part of the acquisition, lease liabilities of GBP2.2m were
recognised relating to leases of land held by the acquired
companies. Associated right-of-use assets of the same amount were
recognised on the Group's consolidated balance sheet within
property, plant and equipment.
Year ended 31 December 2019
On 5 September 2019 the Group acquired 100% of the issued share
capital of Solo Energy Limited (company number 566746), a
blockchain energy flexibility IT platform. The acquisition will
enable SMS to utilise Solo's IT platform, which was still under
development at 31 December 2019, to establish new long-term revenue
streams from a decentralised energy grid.
The company's registered office address is West Building,
Carrigaline Industrial Estate, Carrigaline, Co. Cork, and it
reports in Euros.
Purchase consideration consisted of cash only. Total cash paid
was 1,152,000 EUR (equivalent to GBP1,032,000 using an exchange
rate of 1.1163 at 5 September 2019).
The assets and liabilities recognised as a result of the
acquisition were as follows:
Fair value
GBP'000(1)
------------------------------------------- -----------
Intangible assets: capitalised development 697
Intangible assets: trademarks 96
Plant and equipment 6
Cash and cash equivalents 5
Trade and other receivables 4
Trade and other payables (230)
Deferred income: government grants (24)
Borrowings (334)
Deferred tax liability (16)
------------------------------------------- -----------
Net identifiable assets acquired 204
Less: pre-existing relationship (167)
Add: goodwill 995
------------------------------------------- -----------
Net assets acquired 1,032
------------------------------------------- -----------
(1 All net assets acquired have been translated using an
exchange rate of 1.1163 at 5 September 2019.)
No contingent assets or liabilities were acquired.
In addition to the borrowings acquired above of GBP334,000 Solo
Energy Limited had a short-term loan of GBP167,000 due to an SMS
subsidiary company at the date of acquisition. In accordance with
IFRS 3, this pre-existing relationship was accounted for as
"effectively" settled on acquisition by increasing the
consideration transferred for the acquisition. The acquisition of
Solo Energy Limited and the effective settlement of the receivable
were recorded as separate transactions. No gain or loss was
recognised as the receivable due from Solo Energy Limited was
effectively settled at the recorded amount.
The goodwill is attributable to management expertise and the
new, long-term revenue opportunities expected from the deployment
of Solo Energy's IT platform. Goodwill will not be deductible for
tax purposes.
The IT platform acquired was still under development at 31
December 2019. Therefore, for the period from 5 September to 31
December 2019, the acquired business contributed immaterial
revenues and a net loss before taxation of GBP120,000 to the Group.
If the acquisition had occurred on 1 January 2019, consolidated
pro-forma revenue for the year ended 31 December 2019 would also
have been immaterial and consolidated pro-forma loss for the year
ended 31 December 2019 would have been approximately GBP384,000. No
further adjustments were required as there were no material
differences in the accounting policies between the Group and the
entities acquired.
Acquisition related costs of GBP92,000 were incurred and were
included as part of exceptional administrative costs in the
consolidated statement of comprehensive income.
21 Deferred taxation
The movement in the deferred taxation liability during the
period was:
2020 2019
GBP'000 GBP'000
------------------------------------------------------ -------- --------
Opening deferred tax liability 13,779 12,070
Increase in provision through consolidated statement
of comprehensive income 1,061 1,544
Increase/(decrease) in provision through equity (714) 149
Deferred tax in respect of acquisitions and disposals (5,615) 16
Closing deferred tax liability 8,511 13,779
------------------------------------------------------ -------- --------
The Group's provision for deferred taxation consists of the tax
effect of temporary differences in respect of:
2020 2019
GBP'000 GBP'000
--------------------------------------------------- -------- --------
Excess of taxation allowances over depreciation on
property, plant and equipment 7,134 11,691
Tax losses available (125) (1)
Deferred tax asset on share options (1,676) (992)
Deferred tax on intangibles acquired 684 58
Other 2,494 3,023
--------------------------------------------------- -------- --------
8,511 13,779
--------------------------------------------------- -------- --------
The deferred tax included in the consolidated statement of
comprehensive income is as follows:
2020 2019
GBP'000 GBP'000
-------------------------------------- -------- --------
Accelerated capital allowances 1,688 (478)
Tax losses (124) 95
Deferred tax asset on share options 29 (85)
Movement in fair value of intangibles 626 (106)
Other (1,158) 2,118
-------------------------------------- -------- --------
1,061 1,544
-------------------------------------- -------- --------
At 31 December 2019, the main rate of corporate taxation was
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. Deferred tax at 31 December 2019 was thus
predominantly provided at 17%, being the tax rate at which
temporary differences are expected to reverse. However, the March
2020 Budget announced that the rate of 19% would continue to apply
with effect from 1 April and this change was substantively enacted
on 17 March 2020. The opening deferred tax liability of
GBP13,779,000 has thus been remeasured at 19% giving rise to
deferred tax charge of GBP1,564,000 in the current year.
Further to the Budget announcement on 3 March 2021, the
Chancellor has stated Government's intention to raise the future
corporate tax rate to 25%, effective post 1 April 2023. If this
change to the UK tax rate change were to be substantively enacted,
it would result in an increase to the group's closing deferred tax
liability of up to GBP2,688,000.
The Group had unrecognised tax losses of GBP954,000 (2019:
GBP763,000) in a subsidiary undertaking at 31 December 2020. The
Group also had unrecognised capital losses of GBP729,000 (2019:
GBP729,000) in subsidiary undertakings at 31 December 2020.
22 Related party transactions
22 (a) Subsidiaries
The Group's subsidiaries at 31 December 2020 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
of
Registered shares
office Holding held Nature of business
-------------------------- ---------- --------------- ---------- ---------------------------------
SMS Connections Limited 1 Ordinary shares 100% Gas utility connections
SMS Meter Assets Limited 1 Ordinary shares 100% Gas and electric asset management
SMS MAPCO 1 Limited 2 Ordinary shares 100% Gas and electric asset management
SMS MAPCO 2 Limited 2 Ordinary shares 100% Gas and electric asset management
SMS Data Management
Limited 1 Ordinary shares 100% Data management
Smart Metering Systems
PTY Limited (Australia) 4 Ordinary shares 100% Data management
UKMA (AF) Limited* 2 Ordinary shares 100% Funding
SMS Corporate Services
Limited 1 Ordinary shares 100% Administrative services
SMS Asset Management Gas and electric third-party
Limited* 2 Ordinary shares 100% asset management
SMS Energy Services Electricity utility connections
Limited 2 Ordinary shares 100% and management
CH4 Gas Utility and
Maintenance Services
Limited* 2 Ordinary shares 100% Meter installation
SMS Utilities Academy
Limited* 2 Ordinary shares 100% Engineer training and development
Trojan Utilities Limited* 2 Ordinary shares 100% Meter installation
Business and domestic software
Qton Solutions Limited* 2 Ordinary shares 100% development
Smart Battery Systems
Limited 2 Ordinary shares 100% Holding company
Solo Energy Limited
(UK)* 1 Ordinary shares 100% Renewable asset management
Solo Energy Limited
(Ireland)* 3 Ordinary shares 100% Renewable asset management
Care Assets Limited 2 Ordinary shares 100% Holding company
Add Renewables No.3
Limited* 2 Ordinary shares 100% Renewable asset management
Burwell Power Limited* 2 Ordinary shares 100% Holding company
East Anglia Grid Storage
One Limited* 2 Ordinary shares 100% Renewable asset management
-------------------------- ---------- --------------- ---------- ---------------------------------
* The shareholding in this company is 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: West Building, Carrigaline
Industrial Estate, Carrigaline, Co. Cork.
4 Registered office address: KPMG, 'Tower 3' Level 38, 300 Bangaroo Avenue, Sydney, NSW 2000.
22 (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 :
2020 2019
GBP'000 GBP'000
----------------------------- -------- --------
Short-term employee benefits 3,024 1,557
Post-employment benefits 28 22
Share-based payments 219 186
----------------------------- -------- --------
3,271 1,765
----------------------------- -------- --------
22 (c) Directors
(i) Directors' emoluments
Aggregate remuneration for both Executive and Non-executive
Directors in respect of qualifying services was:
2020 2019
GBP'000 GBP'000
------------------------------------------------------- -------- --------
Aggregate emoluments 2,010 877
Company contributions to money purchase pension scheme 18 11
Company contributions to private pension plan - -
------------------------------------------------------- -------- --------
2,028 888
------------------------------------------------------- -------- --------
In 2020, no amount was payable to Directors as settlements
following resignation (2019: no amount was payable to
Directors).
(ii) Emoluments of highest paid Director
2020 2019
GBP'000 GBP'000
----------- -------- --------
Emoluments 796 377
----------- -------- --------
In addition, rent was paid into the highest paid Director's
personal pension scheme. See note 22 (d) for further details.
(iii) Number of Directors who accrued benefits under Company
pension schemes
2020 2019
Number Number
----------------------- ------- -------
Money purchase schemes 2 2
----------------------- ------- -------
22 (d) Other transactions with related parties
A number of key management personnel hold positions in other
entities that result in them having control or significant
influence over the financial or operating policies.
A number of these entities transacted with the Group in the
reporting period. The terms and conditions of the transactions with
key management personnel and their related parties were no more
favourable than those available, or which might reasonably be
expected to be available, on similar transactions to non-key
management personnel and related entities on an arm's length
basis.
During the period, the Group entered into the following
transactions with related parties:
-- Rent amounting to GBP41,500 (2019: GBP41,500) 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 (2019: GBPNil) was
outstanding in this regard.
-- The Group paid dividends to Alan Foy of GBP441,930 (2019:
GBP281,382), The Metis Trust(1) of GBP97,470 (2019: GBP56,520),
Metis Investments Limited(2) of GBP105,332 (2019: GBPNil), Tim
Mortlock of GBP570 (2019: GBP121), David Thompson of GBP325 (2019:
GBP84), Miriam Greenwood of GBP2,529 (2019: GBP1,046), Willie
MacDiarmid(3) of GBP271 (2019: GBP372), Graeme Bissett of GBP901
(2019: GBP333) and Jamie Richards of GBP244 (2019: GBPnil).
-- During 2019, SMS Utilities Academy Limited purchased a group
of assets and liabilities for GBP27,500 from Utilities Academy
Limited - a third-party smart meter training facility in which
another subsidiary undertaking, Trojan Utilities Limited, had a
minority shareholding. The net assets purchased were previously
used by Utilities Academy Limited in its business of providing
training to dual fuel smart meter engineers on behalf of
third-party customers. Utilities Academy Limited went into
administration on 28 March 2019, at which point the cost of Trojan
Utilities Limited's minority investment in the company was written
off.
1 Alan Foy is a trustee but not a beneficiary.
2 Alan Foy is a Director and shareholder.
3 Paid to a connected person.
23 Share capital
2020 2019
GBP'000 GBP'000
--------------------------------------------------- -------- --------
Allotted and called up:
112,946,331 ordinary shares of GBP0.01 each (2019:
112,811,122 ordinary shares of GBP0.01 each) 1,129 1,128
--------------------------------------------------- -------- --------
During the year 134,793 (2019: 125,519) ordinary share options
were exercised in relation to the Group's employee share plans
which are described in note 24. The ordinary shares issued have a
nominal value of GBP1,000 (2019: GBP1,000) and aggregate
consideration of GBP362,000 (2019: GBP419,000) was received.
In addition, a scrip dividend was offered to shareholders in
respect of the first interim dividend, paid on 29 October 2020,
which allowed shareholders to elect to receive ordinary shares of
1p each in the Company in lieu of a cash dividend. Based on a scrip
dividend reference price of 634.6p a total of 416 new ordinary
shares were issued with a nominal value of GBP4. The excess value
of the shares over their nominal value of GBP3,000 has been
recorded as share premium.
In 2019, 137,553 shares were issued during the year in relation
to deferred remuneration arising on the acquisition of a subsidiary
in 2016, settled in shares in April 2019. The ordinary shares
issued had a nominal value of GBP2,000 and a fair value of
GBP829,000. No consideration was received for these shares. The
total fair value of GBP829,000 was recognised directly within
retained earnings and the difference between the fair value and
nominal value of GBP827,000 was recognised within share
premium.
The Group's Share Incentive Plan is administered by the Smart
Metering Systems SIP Trust (the trust), which acquires shares in
SMS (own shares) to satisfy awards under this plan and facilitate
the delivery of shares to participants. At 31 December 2020,
140,695 (2019: 146,412) own shares were held in trust with a carry
value of GBP749,000 (2019: GBP768,000) and a market value of
GBP1,000,000 (2019: GBP827,000). The Company purchased 28,354
shares (2019: 67,220) from the market during 2020 with a weighted
average fair value of GBP5.68 per share (2019: GBP5.20).
24 Share-based payments
24 (a) Employee option plans
On 20 June 2011 the Company adopted both the Approved Company
Share Option Plan (CSOP) and the Unapproved Share Option Plan (the
Unapproved Plan).
The CSOP is open to any employee of any member of the Group up
to a maximum value of GBP30,000 per employee. The Unapproved Plan
is open to any employee, including Executive Directors, of the
Company or any other Group company who is required to devote
substantially the whole of their time to their duties under his
contract of employment.
Under the plans, participants are granted options which, except
in certain specified circumstances, only vest if certain
performance conditions are met and the employee is still in service
within five years of the date of grant. The performance conditions
for awards are based on market capitalisation and individual
performance targets. Once vested, the options remain exercisable
for a period of up to ten years from the date of grant. The
exercise price of the options is determined by the Directors but
shall not be less than the closing price at which the Company's
shares are traded on the date of grant.
(i) Summary of options
The table below summarises options granted under the CSOP and
Unapproved Plan:
At Fair
At 31 Exercise value
1 January December price Date Expiry at grant
Plan 2020 Granted Exercised Forfeited Expired 2020 (pence) exercisable date (pence)
-------------- --------- ------- --------- --------- ------- --------- -------- ----------- ------- --------
15 Jul 15 Jul
CSOP 25,853 - - - - 25,853 76.0 2014 2021 17.1
20 Jun 20 Jun
Unapproved 321,666 - - - - 321,666 60.0 2016 2021 13.0
28 May 28 May
Unapproved 380,000 - (55,000) - - 325,000 153.5 2017 2022 40.0
12 Nov 12 Nov
Unapproved 40,000 - - - - 40,000 350.0 2019 2024 84.8
12 Nov 12 Nov
Unapproved 657,878 - (79,793) - - 578,085 350.0 2019 2024 84.8
20 Mar 19 Mar
Unapproved 34,099 - - (8,033) - 26,066 391.8 2021 2026 61.5
3 Jul
Unapproved 38,586 - - - - 38,586 410.0 4 Jul 2021 2026 114.3
18 Aug 17 Aug
Unapproved 90,706 - - (32,186) - 58,520 470.0 2021 2026 87.2
31 Aug
Unapproved 100,000 - - - - 100,000 529.0 1 Sep 2021 2026 141.5
26 Sep 25 Sep
Unapproved 50,000 - - - - 50,000 529.0 2021 2026 142.4
28 Nov 28 Nov
Unapproved 9,091 - - (9,091) - - 550.0 2021 2026 141.0
13 Jul
Unapproved(1) 479,001 - - (10,000) - 469,001 700.0 1 Jan 2023 2028 125.2
13 Sep 12 Sep
Unapproved(2) 12,000 - - - - 12,000 602.8 2023 2028 154.3
13 Jul
Unapproved(1) 479,000 - - (10,000) - 469,000 700.0 1 Jan 2023 2028 34.6
13 Sep 12 Sep
Unapproved(2) 12,000 - - - - 12,000 602.8 2023 2028 98.0
4 Sep
Unapproved 370,000 - - - - 370,000 454.6 5 Sep 2024 2029 111.5
13 Jul
Unapproved(1) - 469,000 - - - 469,000 700.0 1 Jan 2023 2028 37.2
13 Sep 12 Sep
Unapproved(2) - 12,000 - - - 12,000 602.8 2023 2028 105.6
26 Jun 25 Jun
Unapproved(3) - 76,000 - - - 76,000 577.4 2025 2030 59.3
-------------- --------- ------- --------- --------- ------- --------- -------- ----------- ------- --------
Total 3,099,880 557,000 (134,793) (69,310) - 3,452,777
-------------- --------- ------- --------- --------- ------- --------- -------- ----------- ------- --------
1 These options relate to the first three, of five,
tranches.
2 These options relate to the first three, of five,
tranches.
3 Options of 76,000 relate to the first of five tranches.
The weighted average share price at the date of exercise of
options exercised during the year ended 31 December 2020 was
GBP6.06 (2019: GBP5.39).
(ii) Fair value of options granted
The assessed fair value at the valuation date of options granted
during the year ended 31 December 2020 ranged from 37.2p to 105.6p,
as disclosed in the table above (2019: 34.6p to 111.5p). 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
options granted under the Unapproved Plan during the current and
prior years:
31 December 31 December 2019
2020
Dividend yield (%) 4.3 1.00 to 1.37
Expected volatility (%) 35.70 to 39.04 30.32 to 30.55
Risk-free interest rate (%) (0.05) to (0.06) 0.43 to 0.60
Expected option life (years) 3.03 to 5.00 4.04 to 5.00
Exercise price (GBP) 5.77 to 7.00 4.55 to 7.00
Share price at grant date (GBP) 5.79 to 5.81 4.64 to 5.31
Fair value at grant date (GBP) 0.37 to 1.06 0.35 to 1.12
------------------------------- ---------------- ----------------
Where the options granted have a market performance condition
attached, the Group has used a Monte Carlo model in order to allow
for the impact of this condition. Where there is no market
performance condition attached, the Group has used the traditional
Black-Scholes model. The dividend yield was determined using the
published yield at the date of grant. The expected volatility
reflects the assumption that historical volatility, as measured
over several different periods, is indicative of future trends,
which may not necessarily be the actual outcome. The risk-free
interest rate is taken from a government bond yield rate with a
redemption period consistent with the corresponding vesting period
of the options. The expected life of the options is based on
historical data and is not necessarily indicative of exercise
patterns that may occur.
The expense recognised in 2020 for all options is GBP357,000
(2019: GBP353,000).
24 (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 2020 shares Sold/transferred Forfeited 2020 price
-------------- ------------ ------- ---------------- --------- -------------- ------------
Partnership 203,247 59,992 (41,120) - 222,119 5.40
Matching 200,915 59,992 (18,971) (22,048) 219,888 5.40
Dividend 8,290 7,179 (1,062) - 14,407 5.80
-------------- ------------ ------- ---------------- --------- -------------- ------------
Total 412,452 127,163 (61,153) (22,048) 456,414
-------------- ------------ ------- ---------------- --------- -------------- ------------
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 2020 was
approximately GBP6.08 per share (2019: GBP5.26). 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 2020 for all Matching Shares is
GBP269,000 (2019: GBP250,000). No expense is recognised for the
Partnership Shares and Dividend Shares because the participants pay
full market value for these shares.
25 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.
26 Commitments under operating leases
The Group's commercial leases for certain vehicles, office and
warehouse space are accounted for under IFRS 16 with effect from 1
January 2019 and are thus excluded from the below operating lease
commitments disclosure.
Commitments under operating leases include the Group's
commercial leases for its fleet vans and items of office equipment.
These leases are either short term (the contract term is less than
twelve months) or low value (underlying asset less than $5,000)
and, therefore, meet the exemption criteria under IFRS 16. They
continue to be expensed through the consolidated statement of
comprehensive income. These leases have lives between one and three
years and some have renewal options included in the contracts.
There are no restrictions placed upon the Group by entering into
these leases.
Future minimum rentals payable under non-cancellable operating
leases as at each year end are as follows:
2020 2019
GBP'000 GBP'000
------------------------------------------------------------ -------- --------
Future minimum commitments under operating lease agreements
are as follows:
Payable within one year 59 61
Payable within two and five years 41 19
Payable after five years - -
------------------------------------------------------------ -------- --------
100 80
------------------------------------------------------------ -------- --------
27 Capital commitments
Significant capital expenditure contracted for at the end of the
reporting period but not recognised as liabilities is as
follows:
2020 2019
GBP'000 GBP'000
------------------------------ -------- --------
Property, plant and equipment - 579
Intangible assets 160 1,233
Inventory - work-in-progress 9,370 -
------------------------------ -------- --------
Capital expenditure of GBP 9,370,000 contracted for in relation
to inventory relates to the Group's grid-scale battery storage
projects that are currently under construction.
Included within the capital expenditure on intangible assets in
2019 was GBP1,041,000 in relation to the implementation of a new
ERP system across the Group.
28 Contingencies
The Group has a contingent success fee arrangement in place with
a supplier totalling GBP0.75m that becomes payable should certain
contractual conditions be met. At the date of signing these
conditions had not been met.
29 Ultimate controlling party
There is no ultimate controlling party by virtue of the
structure of shareholdings in the Group.
30 Post balance sheet events
30 (a) Acquisition of I&C HH electricity meter portfolio
As announced on 3 March 2021, the Group concluded an agreement
to acquire a portfolio of c.15,000 I&C large power HH
electricity meters for cash consideration of GBP8.25 million.
The assets have an average life of 4.6 years and will add GBP1.1
million meter rental to the Group's ILARR. As part of the
transaction, which is scheduled to complete in early April 2021,
SMS will also take ownership of the data service contracts
associated with over 20,000 meters, which will initially generate a
further net GBP2 million of data annualised recurring revenue.
30 (b) Acquisitions of grid-scale battery storage projects
On 9 March 2021 the Group entered into arrangements to acquire
the rights to 100MW of grid-scale battery storage projects.
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END
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