Smart Metering Sys - Final Results
14/03/2023 07:00
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RNS Number : 8218S Smart Metering Systems PLC 14 March 2023
14 March 2023
Smart Metering Systems plc
Strong and resilient 2022 performance; solid foundation to deliver sustainable
growth
Smart Metering Systems plc (AIM: SMS, "SMS", "the Group"), which installs and
manages smart meters, energy data, grid-scale battery storage and other carbon
reduction ("CaRe") assets, today publishes its full year results for the year
ended 31 December 2022.
2022 financial performance
£'m (unless stated otherwise) 2022 2021 % Change
Alternative performance measures
Index-linked annualised recurring revenue (ILARR)(1) 97.1 85.9 +13%
Pre-exceptional EBITDA(2) 63.8 52.8 +21%
Underlying profit before taxation(3) 24.5 18.3 +34%
Underlying basic EPS (p)(4) 16.06 9.60 +67%
Statutory performance measures
Group revenue 135.5 108.5 +25%
EBITDA 57.1 46.3 +23%
Profit before taxation 16.0 8.3 +92%
Basic EPS (p) 11.16 3.20 +248%
Dividend per share (p) 30.25 27.50 +10%
Net (debt)/cash (31.2) 117.7
1 ILARR is the revenue generated from meter rental and data contracts at a
point in time. Includes revenue from third-party managed meters.
2 Pre-exceptional EBITDA is statutory EBITDA excluding exceptional items.
3 Underlying profit before taxation is profit before taxation excluding
exceptional items and amortisation of certain intangibles.
4 Underlying basic EPS is underlying profit after taxation divided by the
weighted average number of ordinary shares for the purpose of basic EPS.
A reconciliation between statutory and underlying performance is detailed in
the Financial Review section. Percentage changes are calculated based on
unrounded amounts as shown in the Financial statements.
Highlights
Financial
· ILARR at 31 December 2022 up 13% to £97.1m (2021: £85.9m)
· Revenue up 25% to £135.5m (2021: £108.5m)
· Pre-exceptional EBITDA up 21% to £63.8m (2021: £52.8m)
· Underlying profit before taxation up 34% to £24.5m (2021: £18.3m)
· Net debt at 31 December 2022 of £31.2m (2021: net cash of £117.7m)
· Undrawn debt facility of £355m (2021: £420m)
Smart meters
· Smart meter portfolio increased to c.2.1m (2021: c.1.7m)
· Contracted smart meter order pipeline of c.2.17m (2021: c.2.55m)
reflecting a contract win and net of 480,000 installations
· Continued growth in meter installation run rate, averaging c.45,000
per month in the second half of the year (H2 2021: c.30,000 per month)
Grid-scale batteries
· Grid-scale battery portfolio increased to 760MW at the year end (31
December 2021: 620MW), and since then by a further 100MW project under
exclusivity to 860MW including:
· 140MW operational which have performed ahead of management
expectations
· 470MW fully secured, including 150MW in construction due to be
operational in H2 2023
· 250MW under exclusivity
Other CaRe assets
· Strategic investments in Clenergy EV and n3rgy Data accelerate the
Group's capabilities in electric vehicle (EV) charging infrastructure and
energy data management
· The Group continued to build its delivery capability and commercial
asset models for the provision of other 'Behind-the-Meter' CaRe assets such as
solar and storage, domestic EV chargers and air sourced heat pumps
· The Group continue to see significant long term market opportunity in
these sectors
Dividend
· 10% increase year-over-year, in line with policy until 2024; covered
by long-term, sustainable cash flows generated from existing assets
Outlook
· The FY 2023 pre-exceptional EBITDA is expected to be marginally ahead
of and underlying PBT to be in line with our previous expectations; confident
in the medium term outlook
· The smart meter installation run-rate is expected to progressively
improve throughout rest of the year
· Continued delivery and growth of the grid-scale battery pipeline,
with EBITDA contribution expected to be at least within our guided range
· Confident in successfully developing offerings and building pipeline
in other CaRe assets
Tim Mortlock, Chief Executive Officer, commented:
"We have delivered another year of strong performance across all our key
metrics. This again highlights the attractiveness of our CaRe asset portfolio
and the strong execution by our teams.
The strong momentum in our meter and grid-scale batteries businesses provides
us with confidence in our 2023 and longer term outlook - we will continue to
deliver on our sustainable promises.
We also see significant market opportunities to further accelerate our
portfolio of CaRe assets, including EV charging infrastructure and
Behind-the-meter solar and storage. Meeting the key challenges of energy
security, affordability and sustainability - SMS is strongly positioned to
provide the knowledge, engineering, data platforms and services behind the
UK's move to net zero."
Analyst Webcast
There will be an analyst webcast at 9.00am today - please contact
sms@instinctif.com (mailto:sms@instinctif.com) for details. The full year
results presentation will be published on the Group's website.
For further information:
Smart Metering Systems plc 0141 249 3850
Tim Mortlock, Chief Executive Officer
Gail Blain, Chief Financial Officer
Dilip Kejriwal, Head of Investor Relations
Cenkos Securities plc (Joint Broker and Nomad) 0131 220 6939 / 020 7397 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 / Jack Wood
Instinctif Partners (PR Adviser) 020 7457 2020
Tim Linacre / Guy Scarborough / Sarah Hourahane SMS@instinctif.com
Notes to Editors
Smart Metering Systems plc (www.sms-plc.com (www.sms-plc.com) ) installs and
manages smart meters, energy data, grid-scale battery storage and other 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.
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. Since
2019, SMS has been awarded the London Stock Exchange Green Economy Mark every
year.
SMS plc is headquartered in Glasgow with a national presence across several UK
locations.
SMS shares are quoted on AIM.
Overview
The Group delivered another year of exceptional operational and financial
performance in 2022, despite a challenging macro environment. This is evidence
of the resilience of our business model and the consistent cash flows
generated from our existing portfolio of CaRe assets. The momentum across all
our CaRe assets and solutions continued to remain strong providing a solid
foundation for growth and these assets will continue to facilitate the
transformation to a smarter, low carbon and more flexible energy system.
The meter and data assets ILARR increased 13% to £97.1m, including the annual
RPI adjustment. Pre-exceptional EBITDA, marginally upgraded in the FY 2022
trading statement issued on 26 January 2023, was up 21% to £63.8m and
underlying PBT, materially upgraded, was up 34% to £24.5m.
The monthly installation run-rate continued to improve throughout the year,
with SMS installing 480,000 smart meters in 2022, outperforming the Group's
expectations. The Group have a contracted pipeline of c.2.17 million smart
meters to install which will further increase ILARR by c.£50m.
The Group's first 50MW grid-scale battery site commenced trading in January
2022. Two further sites went live in December 2022 resulting in 140MW
operational by end of the year. The financial performance of these sites has
been considerably ahead of the Board's initial expectations. The Group's
grid-scale battery pipeline currently stands at 860MW (31 December 2022:
760MW, 2021: 620MW), of which 140MW is operational and 470MW fully secured
with the remaining 250MW under exclusivity.
SMS made two strategic investments in 2022 expanding its offering in energy
data management and accelerating the Group's capabilities in EV charging
infrastructure. The Board see significant market opportunity in these and
other 'Behind-the-Meter' CaRe assets.
UK smart meter rollout
The Group increased the meter installation run rate from c.30,000 per month in
H2 2021 to c.45,000 per month in H2 2022. This resulted in SMS installing
480,000 smart meters in 2022, exceeding our expectations and growing our smart
meter portfolio to 2.1m as at 31 December 2022 (2021: 1.7m). The Group's
strong supply chain, inventories, delivery capacity and installation run rate
provides the Board confidence in the Group's ability to successfully deliver,
and expand, SMS's smart meter pipeline.
Net of meters installed and including the benefit of a contract win during the
year, the contracted smart meter order pipeline stood at c.2.17m at 31
December 2022 (31 December 2021: c.2.55m).
Grid-scale batteries
The Group's first 50MW grid-scale battery site at Burwell commenced trading in
January 2022. Two further sites, 40MW at Barnsley and 50MW at Brook Farm,
became operational in December 2022.
Performance of these sites has been significantly ahead of our initial
expectations of £57,000-65,000 EBITDA per MW, generating an annualised EBITDA
of c.£123,000 per MW. The majority of the revenue generated from these assets
was from the provision of frequency services, such as Dynamic Containment,
which we expect to soften over time towards our guided range as the volume of
battery storage in the market grows.
We are also pleased with the record high pricing achieved by grid-scale
battery storage assets during the recent Capacity Market auction in the UK.
As at 31 December 2022, the Group's portfolio of grid-scale battery storage
assets totalled 760MW (31 December 2021: 620MW), and since then the pipeline
has increased by a further 100MW to 860MW, split as follows:
· 140MW operational (31 December 2021: nil)
· 470MW fully secured (31 December 2021: 320MW), of which 150MW in
construction
· 250MW under exclusivity (31 December 2021: 300MW)
Strategic Investments
SMS made two strategic investments in 2022 to accelerate the Group's EV
charging infrastructure capabilities and further expanding its service
offering in energy data management.
The investment in Clenergy EV, a software business with a Charge Point
Operator (CPO) platform focused on EV charging infrastructure, complements the
SMS EV installation capabilities and has enabled the Group to deliver a fully
end-to-end integrated platform for EV charging infrastructure. The CPO
platform is currently used in c.2,700 EV charge points across the UK. We are
investing further in growing our pipeline of activity in this area over the
coming years, addressing the destination, on-street and fleet market segments.
The acquisition of n3rgy, a data software company, enhances and accelerates
the SMS existing capabilities in smart energy data solutions, providing the
Group with a strong competitive position in a considerable addressable market
as the electricity industry moves towards mandatory half-hourly settlement. We
have integrated this capability with our existing FlexiGrid platform, enabling
energy suppliers and other third parties to participate in the National Grid
Demand Flexibility Scheme (DFS) over this Winter, which pays end consumers to
use less energy at times of stress on the energy network.
ESG progress and sustainability
During 2022, SMS continued to make progress in executing on its 2030 net zero
roadmap. Our 'handprint' (carbon emissions mitigated through our customers
using our products and services) during the year was 14.5 times higher when
compared to our total Scope 1 and Scope 2 'footprint' (carbon emissions
generated through our operations for the reasons explained below).
MSCI upgraded SMS's ESG ratings from A to AA rating in January 2023.
Details on SMS's Scope 1 and Scope 2 emissions over the last three years are
summarised below:
Scope 1 and 2 emissions (TCO2e) 2022 2021 2020
Scope 1 - Company owned vehicles 3,054.9 1,988.0 1,690.0
Scope 1 - Building related 87.6 136.2 106.8
Scope 2 - Building electricity 122.0 137.5 152.4
Scope 2 - Grid-scale batteries electricity 1,111.2 53.1 -
Total Scope 1 and Scope 2 emissions in 2022 were higher than the prior year.
The increase was due to emissions from operating our new grid-scale battery
assets and from our vehicle fleets. Both 2020 and 2021 were also distorted by
the effect of the COVID-19 pandemic.
Whilst our fleet related emissions increased because we added vehicles to
service the increase in smart meter installations, we improved the overall
fuel efficiency with the amount of carbon emissions emitted per vehicle
reducing by 5% since 2019. We are now beginning our fleet transition and will
introduce 100 mild hybrid vans to the fleet in 2023.
Our Scope 2 emissions from grid-scale batteries reflects the electricity used
to operate the cooling and communication systems at our grid-scale battery
sites. Grid-scale battery storage plays an essential role in enabling the UK
to accelerate the adoption of renewables and so, whilst within the scope of
our reporting, we report these emissions separately due to the positive
contribution these assets make to the net zero transition.
Emissions related to our buildings fell 23% from 2021 levels as we continued
to introduce solar panels and battery storage across our sites.
Dividend
The Board is proposing a 30.25p per share dividend (FY 2021: 27.5p) in line
with our stated policy of increasing the dividend +10% year-on-year until
2024. The dividend demonstrates the sustainable growth delivered by our
strategy and is covered by long-term, sustainable cash flows generated from
our existing portfolio of CaRe assets.
Current trading and outlook
Meters:
· The Group's ILARR at the end of February 2023 stood at £98.5m
(31 December 2022: £97.1m).
· The smart meter installation run-rate is expected to
progressively improve throughout rest of the year and we aim to install
c.600,000 meters in 2023.
Grid-scale battery storage:
· The grid-scale battery storage assets continued to perform well
during the first two months of 2023.
· EBITDA contribution expected to be at least within guided range
of £57,000 to £65,000 per MW.
· 150MW of assets are under construction, which we expect to become
operational in FY 2023.
FY 2023 outlook:
· The Board expects pre-exceptional EBITDA to be marginally ahead
of its previous expectations and underlying PBT to remain in line with its
previous expectations.
Operational review by division
Asset management:
During 2022, total meter and data asset ILARR grew 13% to £97.1m (2021:
£85.9m). The increase includes an annual RPI adjustment which came into
effect on 1 April 2022.
A breakdown on ILARR at 31 December 2022 and the % change compared to 31
December 2021 is shown below:
Category % change ILARR Portfolio
Domestic smart meters + 22.0% £61.1m 2.1 million
Data assets + 15.5% £16.0m 0.4 million
Industrial & Commercial meters + 14.0% £5.3m 0.1 million
Traditional domestic meters - 5.3% £11.2m 0.3 million
Third party assets - 36.1% £3.5m 1.6 million
Total £97.1m 4.5 million
In 2022, we added a new contract for c.100,000 meters to our pipeline.
Following the installation of c.480,000 meters during the year, we ended the
year with a contracted smart meter order pipeline of c.2.17 million meters
(2021: c.2.55 million)
SMS has continued to support the enrolment and adoption of first generation
('SMETS1') smart meters into the Data Communications Company (DCC) platform.
The migration of the Group's own SMETS1 portfolio is progressing ahead of the
industry with c.80% of our portfolio of SMETS1 meters now enrolled onto the
DCC platform. This enrolment and adoption programme has now been extended to
the end of 2023.
SMS made the decision through 2021 and 2022 to diversify further our supply
chain to four meter manufacturing partners, which provided assurance in the
near term future cost for a large proportion of our meter purchases and we
increased the level of buffer stock we hold in our UK warehouses. Whilst not
without some impact on working capital, these decisions have reduced the
impact of inflationary cost increases and ensured that stock availability has
not been an impediment to delivering our pipeline.
The index-linked nature of our meter rentals provides significant protection
against the current high levels of inflation. Over time, the installed cost of
meters may rise but we expect to at least maintain our initial guided yield on
these assets.
Looking forward, the acquisition of n3rgy enhances SMS capabilities in smart
energy data solutions enabling us to take advantage of the significant new
addressable market opportunity created by the move to market-wide half hourly
settlement which is mandated from 2026. We are already using this capability
in conjunction with our Flexigrid platform by enabling end consumers to get
paid to use less energy at times of stress on the energy network, through
National Grid's Demand Flexibility service.
Asset installation:
We continued to grow our nationwide engineering services business over 2022,
increasing our total engineering workforce capacity to over 600 engineers. Our
in-house engineers are supplemented by contractors, and we continue to
maintain an appropriate balance to meet our installation targets while
maximising installation efficiency. We will continue to invest incrementally
in our engineering capacity to further increase our installation run-rate in
the future.
Safety remains our first priority and we again reported zero injuries under
the Reporting of Injuries, Diseases and Dangerous Occurrences Regulations. We
also maintained industry-leading performance across our other health and
safety metrics.
Our engineering resource is supported by our in-house accredited training
academy which we see as essential to promoting health and safety standards
across our business. The training academy also allows us to extend our
capabilities into new sectors, such as the installation of EV charging
infrastructure.
Energy management:
The strong growth in our portfolio of grid-scale battery storage assets has
transformed the Energy management division. The trading performance and the
growth in these assets are detailed in the grid-scale battery storage section
above.
The roll-out of site-based energy efficiency measures accelerated during the
year following the relaxation of COVID-19 restrictions. Our traditional
consultancy and energy management services therefore grew significantly
compared to prior year. The substantial increase in energy costs in 2022 makes
the case for our energy management and efficiency services even more
compelling, and we see significant opportunities to help our Industrial &
Commercial customers reduce costs and support them on their path to net-zero.
We continued to develop further our capability in the EV charging space, with
particular focus on the destination, on-street and fleet market segments. Our
partnership with Clenergy EV provides us access to a Charge Point Operator
technology platform that allows us to control both the charge of EV's from any
chargepoint type and the collection of revenue for use of the chargepoint.
With this end-to-end capability in place, we are well positioned to develop a
pipeline of activity in these areas over the coming years.
We also commenced developing integrated funded-energy solutions that aggregate
the individual CaRe asset classes, such as distributed solar generation and
storage. Applying these to commercial properties, we are able to reduce
reliance on energy from the grid and optimise the use of energy on-site. We
see a significant growth opportunity for asset deployment in this sector.
Financial review
Revenue
31 December 2022 31 December 2021
£m £m Percentage
change
Asset management 92.8 82.9 12%
Asset installation 30.5 22.0 38%
Energy management 12.2 3.6 237%
Group revenue 135.5 108.5 25%
Asset management revenues of £92.8m are 12% up on the prior year. This growth
reflects the flow-through effect of progressively increasing the rate of meter
installations at the end of 2021 and into 2022 and the annual RPI uplift which
took effect on 1 April 2022.
Asset installation revenues of £30.5m increased 38% on the prior year as a
result of increased volume in transactional meter works and increased activity
in our connections business.
Energy management revenues of £12.2m were up 237% on the prior year. This
includes £7.2m revenue from our grid-scale battery sites which began
operating in the year. Our first grid-scale battery site became operational in
January 2022 and two further sites went live in December 2022. Revenue from
Energy management excluding grid-scale batteries was £5.0m, up 38% on prior
year as a key customer project in the hospitality sector picked up momentum
with the continued recovery from the effect of COVID-19 and sector focus
turning to energy efficiency.
Gross margins
SMS includes depreciation on revenue-generating assets within cost of sales
for statutory reporting purposes. Removing this from the gross margin provides
a better comparison of the Group's underlying trading performance
year-on-year.
Depreciation-adjusted gross margin for the asset management segment is 92%
which is in line with prior year (2021: 92%).
The asset installation segment gross margin was 23% (2021: 32%). In H1 2022
the Group continued to grow its engineering workforce in order to support the
planned increase in meter installations. Costs associated with this investment
in the workforce such as recruitment and training led to additional one-off
costs which depressed the margin in the first half. As expected, the margin
recovered in the second half of 2022.
The energy management segment depreciation-adjusted gross margin has increased
to 57% (2021: 24%). This is due to the addition of our grid-scale battery
sites which generated an 80% depreciation-adjusted gross margin over the year.
Grid-scale batteries delivered revenue of £7.2m and depreciation adjusted
gross profit of £5.8m in the year. The gross margin on the segment's other
activities remained constant at 24% (2021: 24%).
Overall, the depreciation-adjusted gross margin at the Group level fell by 4%
to 73% (2021: 77%) due to the investment in our engineer base in H1 2022 in
our asset installation division coupled with the increase in battery revenues
during 2022.
Pre-exceptional EBITDA
Pre-exceptional EBITDA provides a measure of underlying performance that is
comparable over time. Pre-exceptional EBITDA of £63.8m was 21% higher than in
the prior year (2021: £52.8m).
The £14.5m increase in depreciation-adjusted gross profit (excluding
exceptional cost of sales in 2021 arising from the result of COVID-19) was
partly offset by a £3.5m increase in net operating costs, excluding
depreciation and amortisation. This is being driven by a cost-of-living
payment made to our employees in H2 2022 in response to inflationary and other
pressures experienced in the wider economic environment, further investment in
our IT and support systems and small increases across our cost base to support
growth in other CaRe assets.
Underlying profit before tax
Depreciation costs on meter assets increased 15% to £28.3m (2021: £24.7m)
due to the increase in the meter asset portfolio.
Depreciation cost on grid-scale battery sites increased to £1.0m (2021: nil)
due to the commencement of depreciation on operational grid-scale battery
sites in the year.
Depreciation costs on general property, plant and equipment, excluding meter
assets and grid-scale battery sites, has reduced by £0.5m to £3.5m (2021:
£4.0m) due to some computer equipment and fixtures and fittings now being
fully depreciated.
Amortisation costs on our intangible assets of £4.1m (2021: £4.1m) mainly
consist of software amortisation and were in line with prior year.
Net finance costs increased £0.4m to £3.9m (2021: £3.5m). Finance costs
relating to our loan facility increased £0.7m as we started drawing on the
facility in the second half, and interest on leases also increased £0.5m as
we leased land for our new grid-scale battery sites. The impact was however
partly offset by £0.3m interest income earned.
As a result, underlying profit before taxation increased by 34% to £24.5m
(2021: £18.3m).
Exceptional items
Exceptional items of £6.6m (2021: £8.2m) mainly comprise a £5.7m loss on
the traditional and first-generation smart meter ('SMETS1') portfolio (2021:
£5.9m). In line with the Group's established policy, these losses are shown
separately as exceptional items in order to enhance disclosure of underlying
continuing profitability. Acquisition-related costs and other exceptional
operating items amounted to £0.9m (2021: £0.6m). Exceptional items in 2021
also included £1.7m exceptional finance costs comprising the acceleration of
unamortised arrangement fees relating to the Group's previous loan facility
which was refinanced in 2021.
Effective tax rate
The Group's capital expenditure on 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 effective tax rate on pre-exceptional profits for the year is 11.3% (2021:
39%). This represents the announced rate of UK corporation tax of 25% from 1
April 2023, which is the rate that will apply when the deferred tax liability
generated by the capital allowances unwinds, less the impact of c.£2.5m
benefit of the tax super-deduction that has been assessed on our qualifying
meter assets and grid scale battery capital expenditure during 2022. The
super-deduction is only available on qualifying capital expenditure until 31
March 2023, therefore it is expected that our effective tax rate will increase
to a more normalised level in 2023.
It should also be noted that the effective rate on pre-exceptional profits in
2021 was high, due to a change in the deferred tax rate, following the UK
Government's enactment of the Finance Bill 2021 in May, which confirmed the
increase in the rate of corporation tax from 19% to 25% from 1 April 2023.
This was applied to the Group's brought-forward deferred tax liabilities on
its portfolio of meter assets increasing the charge in 2021. The full-year
effective tax rate on 2021 pre-exceptional profits excluding the impact of
this rate change, was 18.5%.
Earnings per share
Underlying basic earnings per share (EPS), which excludes exceptional items,
amortisation of certain intangibles and their associated tax effect, was
16.06p (2021: 9.60p), reflecting the underlying profitability of the Group.
Statutory earnings per share increased to 11.16p (2021: 3.20p). As noted above
our 2022 tax charge also includes the benefit of the tax super-deduction
available on qualifying capital expenditure since April 2021. Our effective
tax rate for 2022 is therefore abnormally low, and this has resulted in a
particularly high growth in our earnings per share.
Dividend
A 27.5p per share dividend in respect of FY 2021 was approved at the Group's
Annual General Meeting in May, and the fourth and final instalment of this was
paid in July 2022.
In line with the Group's policy to grow dividends at 10% per annum, a 30.25p
per share dividend is proposed in respect of FY 2022. This is expected to be
settled in four equal quarterly instalments. Two instalments have already been
paid, in October 2022 and January 2023 with the following provisional
timetable for the remaining instalments:
Instalment Ex-dividend date Record date Payment date
3 06 April 2023 11 April 2023 27 April 2023
4 06 July 2023 07 July 2023 27 July 2023
The Board remains comfortable that future dividend payment amounts are
sufficiently secured by long-term, sustainable cash flows generated from our
existing portfolio of metering, data and grid-scale battery assets.
Cash flow and capex investment
Operating cash inflow in 2022 was £63.8m (2021: £61.8m). The cash inflow
reflects £63.8m pre-exceptional EBITDA, £5.5m of non-cash costs included in
EBITDA and a £4.3m cash outflow on working capital net of tax receipts,
largely due to a deliberate build-up of inventory levels to mitigate the risk
of delays in the supply chain and ensure that meters are available to grow our
installation run rate.
The Group also drew down £65.0m under its loan facility.
The cash generated from operations and from our borrowing has been used to
continue investment in our revenue generating meter and grid-scale battery
assets.
Capital expenditure on property, plant and equipment was £143.4m (2021:
£108.2m). Of this, £105.0m was invested in meter and data assets, £36.3m in
developing grid-scale battery sites and £1.1m relates to the purchase of land
at one of our grid-scale sites.
Investing activities also include payments of £14.6m to acquire battery sites
(2021: £4.7m) and a further £12.3m of instalment payments made for
grid-scale batteries which have not yet been delivered (2021: £nil). On the
balance sheet, the sites under development are classified as assets under
construction within property, plant and equipment and the instalment payments
for batteries are classified as other non-current receivables.
A further £2.2m (2021: £2.8m) investment has been made in intangible assets,
mainly relating to the development of software to support the metering and
installations business.
Investing cash outflows also include a £1.4m payment to acquire n3rgy and a
£2.1m investment (including transaction costs) to acquire a 25% stake in
Clenergy EV Ltd. See note 24 and note 12 to the consolidated financial
statements for further details.
Financial resources
Net debt at 31 December 2022 was £31.2m (31 December 2021: Net cash
£117.7m). This excludes restricted cash and lease liabilities accounted for
under IFRS 16.
The Group has in place a £420m debt facility which matures in December 2025
and was fully compliant with all its bank covenants throughout the year. The
Group has £32.8m available in cash and £355m in unutilised facilities (31
December 2021: £420m) and therefore continues to have the financial
flexibility required to maximise growth potential in a capital-efficient way.
Definitions of alternative performance measures
Alternative performance measure Definition
Index-linked annualised recurring revenue The revenue being generated from meter rental and data contracts at a point
in time. Includes revenue from third-party managed meters.
Depreciation-adjusted gross profit Statutory gross profit less depreciation on revenue-generating assets,
recognised within cost of sales.
Depreciation-adjusted gross Depreciation-adjusted gross profit divided by statutory revenue.
profit margin
Pre-exceptional EBITDA Statutory EBITDA excluding exceptional items.
Underlying profit before taxation Profit before taxation excluding exceptional items and amortisation of certain
intangibles(1).
Underlying profit after taxation Profit after taxation excluding exceptional items and amortisation of certain
intangibles(1) and the tax effect of these adjustments.
Underlying basic EPS Underlying profit after taxation divided by the weighted average number of
ordinary shares for the purposes of basic EPS.
Underlying diluted EPS Underlying profit after taxation divided by the weighted average number of
ordinary shares for the purposes of diluted EPS.
Net debt/cash Total bank loans less cash and cash equivalents, excluding restricted cash.
Excludes lease liabilities recognised under IFRS 16.
1 Amortisation of the Group's 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.
Reconciliation of statutory to underlying results
SMS uses alternative performance measures, defined above, 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 Year ended Percentage
ended 31 December change
31 December 2021
2022 £m
£m
Index-linked annualised recurring revenue 97.1 85.9 13%
Group revenue 135.5 108.5 25%
Statutory profit from operations 20.1 13.5
Amortisation of intangibles 4.2 4.1
Depreciation 32.9 28.7
Statutory EBITDA 57.1 46.3 23%
Exceptional items(1) (EBITDA-related) 6.6 6.5
Pre-exceptional EBITDA 63.8 52.8 21%
Share of loss of associate (0.2) -
Net interest (excluding exceptional) (3.9) (3.5)
Depreciation (32.9) (28.7)
Amortisation of intangibles included in underlying profit before taxation(2) (2.3) (2.3)
Underlying profit before taxation 24.5 18.3 34%
Exceptional items(1) (EBITDA) (6.6) (6.5)
Exceptional items(1) (interest) - (1.7)
Amortisation of intangibles excluded in underlying profit before taxation (1.8) (1.8)
Statutory profit before taxation 16.0 8.3 92%
Taxation (1.1) (4.5)
Statutory profit after taxation 14.9 3.8 292%
Amortisation of intangibles excluded in underlying profit after taxation 1.8 1.8
Exceptional items(1) (EBITDA and interest) 6.6 8.2
Tax effect of adjustments (2.0) (2.4)
Underlying profit after taxation 21.4 11.4 88%
Weighted average number of ordinary shares (basic) 133,241,113 118,330,817
Underlying basic EPS (pence) 16.06 9.60 67%
Weighted average number of ordinary shares (diluted) 133,857,082 118,972,527
Underlying diluted EPS (pence) 15.98 9.55 67%
(1 Exceptional items are those material items of income and expense which,
because of the nature or expected infrequency of the events giving rise to
them, merit separate presentation on the consolidated income statement.)
(2 Amortisation of the Group's Enterprise Resource Planning system remains
within the underlying cost base of the business and is therefore a part of the
Group's underlying profit measures.)
( )
Year Year ended Percentage
ended 31 December change
31 December 2021
2022 £m
£m
Statutory gross profit 70.0 59.4 18%
Depreciation included in cost of sales 29.3 24.7
Depreciation-adjusted gross profit 99.4 84.1 18%
Depreciation-adjusted gross margin 73% 77%
Financial tables and notes
CONSOLIDATED INCOME STATEMENT
For the year ended 31 December 2022
Notes 2022 2022 2022 2021 2021 2021
Before Exceptional Total Before Exceptional Total
exceptional items(1) £'000 exceptional items £'000
items £'000 items £'000
£'000 £'000
Revenue 2 135,520 - 135,520 108,480 - 108,480
Cost of sales 3 (65,498) - (65,498) (48,316) (829) (49,145)
Gross profit 70,022 - 70,022 60,164 (829) 59,335
Administrative expenses 3 (45,222) (6,646) (51,868) (41,866) (5,649) (47,515)
Other operating income 3 1,936 - 1,936 1,696 - 1,696
Profit from operations 3 26,736 (6,646) 20,090 19,994 (6,478) 13,516
Share of loss of associate 12 (186) - (186) - - -
Finance costs 5 (4,273) - (4,273) (3,488) (1,742) (5,230)
Finance income 5 324 - 324 7 - 7
Profit before taxation 22,601 (6,646) 15,955 16,513 (8,220) 8,293
Taxation 6 (2,557) 1,473 (1,084) (6,479) 1,978 (4,501)
Profit for the year attributable to owners 20,044 (5,173) 14,871 10,034 (6,242) 3,792
of the parent
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 2022 2021
Basic earnings per share (pence) 7 11.16 3.20
Diluted earnings per share (pence) 7 11.11 3.19
CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME
For the year ended 31 December 2022
2022 2022 2022 2021 2021 2021
Before Exceptional Total Before Exceptional Total
exceptional items £'000 exceptional items £'000
items £'000 items £'000
£'000 £'000
Profit for the year 20,044 (5,173) 14,871 10,034 (6,242) 3,792
Other comprehensive income(1)
Exchange differences on translation 9 - 9 (46) - (46)
of foreign operations
Other comprehensive income 9 - 9 (46) - (46)
for the year, net of tax
Total comprehensive income 20,053 (5,173) 14,880 9,988 (6,242) 3,746
for the year attributable to owners
of the parent
1 May be reclassified to profit or loss.
CONSOLIDATED STATEMENT OF FINANCIAL POSITION
As at 31 December 2022
Notes 2022 2021
£'000 £'000
Assets
Non-current assets
Intangible assets 9, 10 25,832 25,463
Property, plant and equipment 11 533,240 415,901
Investments 40 75
Investment in associate 12 1,940 -
Other assets - 1,651
Trade and other receivables 14 12,347 -
Total non-current assets 573,399 443,090
Current assets
Inventories 13 37,438 22,980
Other assets - 550
Trade and other receivables 14 52,935 47,631
Cash and cash equivalents 15 32,770 117,687
Cash and cash equivalents - restricted 15 307 1,299
Total current assets 123,450 190,147
Assets held for sale 16 513 -
Total assets 697,362 633,237
Liabilities
Current liabilities
Trade and other payables 17 69,378 56,489
Bank loans and overdrafts 18 591 -
Lease liabilities 19 885 999
Other liabilities 21 1,388 638
Total current liabilities 72,242 58,126
Non-current liabilities
Bank loans 18 63,349 -
Lease liabilities 19 11,476 7,574
Provisions 20 2,033 798
Other liabilities 21 1,280 750
Deferred tax liabilities 22 13,496 12,199
Total non-current liabilities 91,634 21,321
Total liabilities 163,876 79,447
Net assets 533,486 553,790
Equity
Share capital 27 1,334 1,333
Share premium 332,332 332,048
Other reserve 29 9,562 9,562
Own share reserve 27 (955) (825)
Foreign currency translation reserve (36) (45)
Retained earnings 191,249 211,717
Total equity attributable to owners of the parent 533,486 553,790
CONSOLIDATED STATEMENT OF CHANGES IN EQUITY
For the year ended 31 December 2022
Attributable to the owners of the parent company: Share Share Other Own share Foreign currency translation Retained Total
capital premium reserve reserve reserve earnings £'000
£'000 £'000 £'000 £'000 £'000 £'000
As at 1 January 2021 1,129 160,471 9,562 (749) 1 236,028 406,442
Total profit for the year - - - - - 3,792 3,792
Total other comprehensive - - - - (46) - (46)
income for the year
Transactions with owners in their capacity as owners
Dividends (note 8) - - - - - (29,060) (29,060)
Shares issued (note 27) 204 171,577 - - - - 171,781
Movement in own shares (note 27) - - - (76) - (203) (279)
Share-based payments (note 28) - - - - - 841 841
Income tax effect of share options - - - - - 319 319
As at 31 December 2021 1,333 332,048 9,562 (825) (45) 211,717 553,790
Total profit for the year - - - - - 14,871 14,871
Total other comprehensive income - - - - 9 - 9
for the year
Transactions with owners in their capacity as owners
Dividends (note 8) - - - - - (37,592) (37,592)
Shares issued (note 27) 1 284 - - - - 285
Movement in own shares (note 27) - - - (130) - (265) (395)
Share-based payments (note 28) - - - - - 2,611 2,611
Income tax effect of share options - - - - - (93) (93)
As at 31 December 2022 1,334 332,332 9,562 (955) (36) 191,249 533,486
See notes 27 and 29 for details of the Own share reserve and Other reserve.
CONSOLIDATED STATEMENT OF CASH FLOWS
For the year ended 31 December 2022
2022 2021
£'000 (restated)
£'000
Operating activities
Profit before taxation 15,955 8,293
Share of loss of associate 186 -
Finance costs 4,273 3,488
Finance income (324) (7)
Foreign exchange loss - 29
Exceptional items: other(1) 5,716 7,288
Depreciation 32,876 28,712
Amortisation of intangibles 4,152 4,060
Share-based payment expense 2,612 841
RDEC income (280) (489)
Loss on disposal of property, plant and equipment 2,937 2,457
Movement in inventories (12,481) 3,359
Movement in trade and other receivables (5,369) (7,671)
Movement in trade and other payables 13,009 11,078
Movement in provisions (5) -
Cash generated from operations 63,257 61,438
Income tax received 568 403
Net cash generated from operations 63,825 61,841
Investing activities
Payments for asset acquisitions (14,627) (4,749)
Payment for acquisition of new business, net of cash acquired (1,346) (8,433)
Payment for acquisition of associate (2,126) -
Payments to acquire property, plant and equipment (143,399) (108,214)
Payments on account to acquire grid-scale battery assets (12,347) -
Proceeds on disposal of property, plant and equipment 3,131 2,508
Payments to acquire intangible assets (2,172) (2,831)
Finance income received 324 7
Net cash used in investing activities (172,562) (121,712)
Financing activities
New borrowings 65,000 53,250
Borrowings repaid - (53,250)
Principal elements of lease payments (1,500) (1,247)
Finance costs paid (2,975) (4,200)
Net proceeds from share issue 285 171,781
Purchase of own shares (395) (279)
Dividends paid (37,592) (29,060)
Net cash generated from financing activities 22,823 136,995
Net increase/(decrease) in cash and cash equivalents (85,914) 77,124
Exchange (gain)/loss on cash and cash equivalents 5 (1)
Cash and cash equivalents at the beginning of the financial year 118,986 41,863
Cash and cash equivalents at the end of the financial year (note 15) (2) 33,077 118,986
1 Other exceptional items comprise £5,716,000 for losses on our meter
portfolio. In 2021, non-cash exceptional items included £5,546,000 for losses
on our meter portfolio and the £1,742,000 exceptional finance cost.
2 Cash and cash equivalents includes restricted cash following an
IFRIC agenda decision in March 2022. Amounts shown for 2021 have been restated
on a comparable basis.
Cash and cash equivalents comprise:
2022 2021
£'000 £'000
Cash and cash equivalents 32,770 117,687
Cash and cash equivalents - restricted cash 307 1,299
Total cash and cash equivalents 33,077 118,986
ACCOUNTING POLICIES
The significant accounting policies adopted in the preparation of these
consolidated financial statements are set out below. 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
2022 were approved and authorised for issue in accordance with a resolution of
the Directors on 14 March 2023. Smart Metering Systems plc (SMS) 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
UK-adopted international accounting standards.
The consolidated 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
(£), which is Smart Metering System plc's functional and presentation
currency, and all values are rounded to the nearest thousand (£'000) except
where otherwise indicated.
Following an IFRIC agenda decision in March 2022 cash and cash equivalents now
include restricted cash. Amounts shown for 2021 have been restated on a
comparable basis.
In preparing the consolidated financial statements management has considered
the impact of climate change, particularly in the context of the disclosures
included in the Strategic report and the Group's net-zero carbon target. Our
net-zero plans are to electrify our vehicle fleet and carry out sustainability
upgrades to our building estate. The fleet will be replaced at the end of the
useful life. These considerations did not have a material impact on the
financial reporting judgements and estimates, consistent with the assessment
that climate change is not expected to have a significant impact on the
Group's going concern assessment to December 2024. Qualitative explorations of
potential areas of concern, including an evaluation of climate exposure on our
physical assets such as offices, warehouses and vehicles, has been carried out
and we have identified areas of potential climate-related risk, such as
extreme weather events which could affect our physical locations and
road-based employees. Overall, the risk of climate-related change on the Group
is considered low.
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 December 2024.
Management has modelled several different meter installation and grid-scale
battery storage scenarios, including a downside scenario which assumed a
reduced rollout of new meter installations over the five-year period and
delayed the energisation of grid-scale battery storage sites. 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 adverse
circumstances, the business will still have sufficient resources to continue
to operate.
In September 2021, the Group completed the refinancing of its revolving credit
facility in order to support ongoing investment in its established carbon
reduction ('CaRe') assets. The total available funding under the new loan
facility is £420m and the maturity date is December 2025. In October 2021,
the Group completed a successful equity placing, raising proceeds of c.£175m.
These proceeds were used to make a voluntary prepayment under the Group's
refinanced loan facility of the full outstanding principal of c.£53m. At 31
December 2022, the Group had a drawn-down amount of £65m (31 December 2021:
£nil).
The Group was compliant with all its debt covenants at 31 December 2022. The
financial covenants attached to the facility are that EBITDA should be no less
than 4.00x interest and net debt should be no more than 4.75x EBITDA. At 31
December 2022 these stood at 18.84x and 0.45x respectively, demonstrating
significant headroom. The Group does not expect to breach these covenants in
the period from the date of release of these financial statements to 31
December 2024, being the period for the going concern assessment.
The Group balance sheet shows consolidated net assets of £533.5m (31 December
2021: £553.8m), of which £429.7m (31 December 2021: £366.7m) relates to
revenue-generating meter and data assets. The liquidity of the Group thus
remains strong and continues to provide the financial flexibility required to
support the Group's long-term growth prospects.
With significant coverage provided by existing long-term, inflation-linked and
recurring cash flows, the Group remains committed to its enhanced dividend
policy. It proposes a 30.25p per share annualised dividend in respect of FY
2022. The first of four cash instalments, a total of £10.1m, was paid in
October 2022.
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 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 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 considered to be relevant. Actual
results may differ from these estimates. The estimates and underlying
assumptions are reviewed on an ongoing basis. Revisions to accounting
estimates are recognised in the period in which the estimate is revised if the
revision affects only that period, or in the period of the revision and future
periods if the revision affects both current and future periods.
Critical accounting judgements
The following are the critical judgements that the Directors have made in the
process of applying the Group's accounting policies and that have the most
significant effect on the amounts recognised in the financial statements:
· capitalisation of internal installation costs:
· a significant level of in-house installation of meter assets is carried
out by the Group, certain costs of which are capitalised (2022: £51.8m, 2021:
£38.2m) 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;
· 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 users of the financial statements to better
understand the premature retirement of these revenue-generating assets that is
outside the Group's control. On disposal, the receipt of termination income
which is 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
· 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 made the judgement to recognise
losses arising on the disposal of these meters as exceptional until resolution
by the Enrolment and Adoption programme is complete.; and
· identification of indicators of impairment of the meter asset portfolio
in accordance with IAS 36 and assumptions applied in determining the carrying
value of the portfolio of meter assets:
· due to the uncertainties associated with the timing of the UK domestic
smart meter rollout, the expected useful life and carrying value of
traditional meters requires significant judgement, as does the level of
recoverability of termination income. These assumptions are used in deriving
the depreciation rates applied and the impairment calculation performed on
carrying value. For the traditional meters, 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 these 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 - this decision lies with
the end consumer and removals are largely undertaken by third parties, which
means we have little control over the timing and quantity of these removals;
and
2) the estimated future cash flows from termination income - these are
derived using historical data and analysis around the risk of churn between
contracted and non-contracted customers. The assessment includes consideration
of the extent to which termination income and future rental income are
received as traditional meters continue to be removed from the wall.
In 2022, this assessment has identified that the carrying value of the
traditional meter assets portfolio is recoverable and, therefore, no
impairment charge has been recognised (2021: £nil).
· potential indicators of impairment have also been assessed in relation to
our smart and I&C meters, including consideration of the temporary
industry transitional issues experienced with some SMETS1 assets as detailed
above. Management has concluded that there is no significant risk of
impairment with regards to the Group's smart and I&C meters at 31 December
2022, consistent with the prior year.
Key sources of estimation uncertainty
The Group has no 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.
Revenue recognition
(i) Metering
Meter rental
The Group acts as a gas and electricity Meter Asset Provider (MAP), 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 MAP 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 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 in perpetuity, the Group delivers a series of
monthly services for which benefits are simultaneously received and consumed
by the customer.
Charges for MAP services 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
Retail Price Index (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 are 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 for 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 in
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 appointed and are
accrued 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. For charges invoiced to customers monthly revenue is thus recognised
over time based on our right to invoice and includes contract RPI uplifts. For
charges invoiced to customers annually in advance, including contract RPI
uplifts, 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 Group's meter asset management contracts also include the provision of
transactional meter works. These are considered further in section (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 Industrial
& Commercial (I&C) electricity customers and, through use of the
ADM(TM) unit, to I&C gas customers. Over the course of the contract term,
which can either be fixed or in perpetuity, the Group delivers a series of
monthly services for which the benefits are simultaneously received and
consumed by a customer. Therefore, these are accounted for as a single
performance obligation.
Service charges are calculated based on the number of meters/ADM™ units
appointed and are accrued 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 ADM™ 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 to
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 works 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.
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) Grid-scale batteries
Grid-scale battery assets generate revenue by providing several services.
Capacity market
SMS enters into longer term contracts with the National Grid. During the
contract period, which may last from one to 15 years, SMS's only obligation is
to make itself available to provide the capacity agreed in the contract when
notification is received from National Grid. Pricing is fixed at an auction.
There is a single performance obligation to be available to provide capacity
to the National Grid. Revenue is recognised over time.
Wholesale market
SMS trades power with a counterparty on an exchange on the EPEX GB Day Ahead
and Intraday markets, with the intention of buying power at a low off-peak
price and selling at a high peak price. All trades take place at spot price
and there are no forward or future contracts. All trades are settled daily.
There is a single performance obligation for SMS to buy or sell power on the
exchange. Revenue is recognised for each transaction at a point in time.
Balancing mechanism
SMS enters into short-term contracts with Elexon BSC to help balance the
demands of the National Grid by increasing or decreasing generation (or
consumption). Contracts range for a length of one to 60 minutes and prices are
fixed when a bid is submitted. Elexon accepts only the cheapest bids needed to
balance the grid.
There is a single performance obligation for SMS to increase or decrease its
battery asset output. Revenue is recognised over time. However, due to the
short-term nature of the contracts, there would be no material difference
between recognition over time or at a point in time.
Ancillary services market
SMS enters into contracts with the National Grid to help maintain frequency on
the grid. During the contract period SMS is required to use the grid-scale
battery asset following the Grid's instructions. The price is fixed at
auction.
Revenue is recognised over time. However, due to the short-term nature of the
contracts, there would be no material difference between recognition over time
or at a point in time.
Embedded benefits
SMS enters into contracts with the National Grid and the Distribution Network
Operator under which SMS is paid based on the amount of electricity exported
during Triad or peak periods.
There is a single performance obligation to export capacity during Triad or
peak periods. Revenue is recognised over time. However, due to the short-term
nature of the contracts, there would be no material difference between
recognition over time or at a point in time.
Imbalance
Elexon BSC is obliged to purchase or sell electricity generated or sold in any
half-hour period which is not otherwise contracted for. SMS buys or sells
power to meet its requirements for the other revenue streams. The purchase and
selling prices are at a spot price set by a formula.
There is a single performance obligation for SMS to export or import power.
Revenue is recognised for each transaction at a point in time.
(vi) 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
section (iii) above.
(vii) 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.
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 better
understand the elements of financial performance in that year facilitating
comparison with prior periods and to better assess trends in financial
performance.
Termination fee income is reported as part of Other operating income in the
consolidated statement of comprehensive income given its 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 governments are recognised at their fair value where there is
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 in the consolidated statement of comprehensive
income.
The R&D expenditure credit (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 in
the consolidated statement of comprehensive income. Outstanding amounts
receivable are recognised in the consolidated balance sheet within Trade and
other receivables.
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 the IFRS 15
transaction price 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 on Cash and cash equivalents.
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 accrued income
are presented within Administrative expenses. Subsequent recoveries of amounts
previously written off are credited against the same line item.
Further information about the impairment of trade receivables and accrued
income, and the Group's exposure to credit risks, can be found in note 23.
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 (defined as a change in the present value of cash flows,
including any transaction costs paid, exceeding 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 is 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
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 the 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 above, and for property, plant and equipment in note 11.
Group as lessee
The Group leases land, offices, warehouses and motor vehicles. 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 20 to 40 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.
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
2022 was 5% (31 December 2021: 4.7%).
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.
The Group is required to restore the land leased as part of its grid-scale
battery storage business, and certain leased warehouses, to the condition
required by the terms and conditions of the lease at the end of the respective
lease terms. Under IFRS 16, the estimated liability for such restoration costs
is recognised as a provision under IAS 37 at initial recognition and is not
included as part of the lease liability. As right-of-use assets are measured
subsequent to initial recognition using a cost model, any change in the
estimate of such costs after initial recognition is added to, or deducted
from, the cost of the right-of-use asset.
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.
Provisions
Provisions are recognised when the Group has a present legal or constructive
obligation as a result of a past event, it is probable that an outflow of
resources embodying economic benefits will be required to settle the
obligation, and a reliable estimate can be made of the amount of the
obligation.
The amount recognised as a provision is the best estimate of the consideration
required to settle the present obligation at the end of the reporting period,
taking into account the risks and uncertainties surrounding the obligation.
If the effect of the time value of money is material, provisions are
determined by discounting the expected future cash flows at a discount rate
that reflects the current market assessments of the time value of money. Where
discounting is used, the increase in the provision due to the passage of time
is recognised within finance costs.
Provisions are split between amounts expected to be settled within 12 months
of the balance sheet date (current) and amounts expected to be settled later
(non-current).
Decommissioning and restoration provisions
Provisions for decommissioning and restoration costs arise in connection with
the Group's grid-scale battery storage business, and with certain leased
warehouses.
The Group is required to restore the land leased as part of its grid-scale
battery storage sites, and certain leased warehouses, to the condition
required by the terms and conditions of the lease at the end of the respective
lease terms (which range between three to ten years for warehouses, and 20 to
40 years for land).
The amount recognised is the present value of the estimated future expenditure
determined in accordance with current conditions, requirements, and price
levels, discounted over the useful economic life of the asset where
appropriate.
The effects of changes resulting from revisions to the timing or amount of the
original estimate of the provision are reflected on a prospective basis,
generally by adjustment to the carrying amount of the related right-of-use
asset recorded within property, plant and equipment.
An amount equivalent to the decommissioning provision is recognised as part of
the corresponding right-of-use asset, which is subsequently depreciated at the
same rate as the rest of the asset. Other than the unwinding of discount on or
utilisation of the provision, any change in present value of the estimated
expenditure is reflected as an adjustment to the provision and the
corresponding asset.
Provisions also include the estimated cost to de-commission grid-scale battery
assets at the end of their life. These costs have been capitalised as part of
the related asset within property, plant and equipment, and are depreciated
over the life of the asset. Changes in the provision arising from revised
estimates that relate to the asset are recorded as adjustments to the carrying
value of the asset.
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.
Investments in associates
An associate is an entity in which the Group has significant influence, but
not control or joint control, over the financial and operating policies.
Interests in associates are accounted for using the equity method. They are
initially recognised at cost, which includes transaction costs. Subsequent to
initial recognition, the consolidated financial statements include the Group's
share of the profit or loss and other comprehensive income of the associated
undertakings, until the date on which significant influence ceases.
Asset acquisitions
Asset acquisitions include the acquisition of a group of assets that does not
constitute a business.
The relevant IFRS is applied when accounting for the acquisition of an
individual asset.
Where the acquisition involves a group of assets and liabilities, the
individual assets and liabilities acquired are identified and recognised. The
cost of the transaction is allocated to the assets acquired, and liabilities
assumed, based on their relative fair values at the date of purchase. No
goodwill arises on the transaction.
The cost of the transaction is measured at the fair value of the consideration
transferred at the acquisition date. This can include cash payments, financial
liabilities incurred, equity interests issued by the Group and the fair value
of any asset or liability arising from a contingent or deferred consideration
arrangement. Non-monetary assets might be exchanged as part of the
consideration for the transaction. The cost of an item acquired in exchange
for a non-monetary asset or assets is generally measured at fair value.
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.
Transaction costs are capitalised as a component of the cost of the assets
acquired.
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 ADM™ units 10% on cost, straight line
· Development of internally generated information technology systems ('IT 20% and 50% on cost, straight line
development')
Capitalised development expenditure on ADM™ 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™ unit.
Capitalised IT development expenditure is disclosed within Intangible assets
as part of IT development and software. All costs capitalised within this
category relate to information technology and, in general, are amortised over
an 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.
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 basis 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 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 20% 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. 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 CGUs or groups of CGUs
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.
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.
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.
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.
Property, plant and equipment is initially recorded at cost. 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. 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.
Acquired development and construction rights together with directly
attributable costs incurred in relation to the construction of the grid-scale
battery storage sites are accounted for under IAS 16: Property, plant and
equipment. These are recorded at cost and classified as part of Assets under
construction within Property, plant and equipment. Whilst under construction
no depreciation is recorded.
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 meters and Industrial & Commercial meters 5%
ADM™ units 10%
Traditional meters to 1 July 2025
· Plant and machinery 33%
· Fixtures, fittings and equipment 20% and 33%
· Motor vehicles 25%
· Grid-scale assets Shorter of the lease term or 2.5% to 10%
Battery assets 10%
· 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.
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 are stated at the lower of cost and net
realisable value. Cost comprises direct materials and purchases of meter
assets and ADM™ 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.
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 on the statement of
financial position.
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 its annual reporting period commencing 1 January 2022:
Standard or interpretation Effective date
IFRS 3 (amendment) Business Combinations Reference to the Conceptual Framework 1 January 2022
IAS 16 (amendment) Property, Plant and Equipment - Proceeds Before Intended Use 1 January 2022
IAS 37 (amendment) Provisions, Contingent Liabilities, Contingent Assets, Onerous Contracts - 1 January 2022
Cost of Fulfilling a Contract
The amendments listed above did not have any material impact on the amounts
recognised in prior periods or the current period and are not expected to
affect future periods significantly.
New standards and interpretations not yet adopted:
Certain new accounting standards and interpretations have been published that
are not mandatory for 31 December 2022 reporting periods and have not been
early-adopted by the Group. The amendments to IAS 12 Income Taxes, regarding
deferred tax related to assets and liabilities arising from a single
transaction, will apply to the Group as a lessee under IFRS 16. These
amendments are effective for periods beginning on or after 1 January 2023 and
their potential effects are under consideration. All other standards are not
expected to have a material impact on the entity in the current or future
reporting periods, or on foreseeable future transactions.
NOTES TO THE FINANCIAL STATEMENTS
For the year ended 31 December 2022
1 Segmental reporting
For management purposes, the Group is organised into three core divisions, as
follows:
· Asset management, which comprises regulated management of gas and
electric meters, ADM™ units and energy data assets 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 building and operation of
grid-scale batteries, the provision of energy consultancy services and the
management of distributed energy resources (DER).
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-maker, being the SMS Board. It is these divisions, therefore, that
are defined as the Group's reportable operating segments.
Segment performance is mainly 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:
31 December 2022 Asset Asset Energy Unallocated Total
management installation management £'000 operations
£'000 £'000 £'000 £'000
Segment revenue 92,815 83,752 12,213 - 188,780
Inter-segment revenue - (53,260) - - (53,260)
Revenue from external customers 92,815 30,492 12,213 - 135,520
Cost of sales (35,698) (23,530) (6,270) - (65,498)
Segment gross profit 57,117 6,962 5,943 - 70,022
Other operating costs/income - - 611 (36,204) (35,593)
Depreciation - (69) (240) (3,232) (3,541)
Amortisation of intangibles (1,828) - (20) (2,304) (4,152)
Profit/(loss) from operations - pre-exceptional operating items 55,289 6,893 6,294 (41,740) 26,736
Exceptional items (operating) (5,789) (30) - (827) (6,646)
Profit/(loss) from operations 49,500 6,863 6,294 (42,567) 20,090
Share of loss of associate (186)
Net finance costs: other (3,949)
Profit/(loss) before tax 15,955
Tax expense (1,084)
Profit for year 14,871
31 December 2021 Asset Asset Energy Unallocated Total
management installation management £'000 operations
£'000 £'000 £'000 £'000
Segment revenue 82,828 74,208 3,620 - 160,656
Inter-segment revenue - (52,176) - - (52,176)
Revenue from external customers 82,828 22,032 3,620 - 108,480
Cost of sales (31,479) (14,081) (2,756) - (48,316)
Segment gross profit - pre-exceptional 51,349 7,951 864 - 60,164
cost of sales
Exceptional items (cost of sales) - (829) - - (829)
Segment gross profit 51,349 7,122 864 - 59,355
Other operating costs/income - - 1,256 (33,373) (32,117)
Depreciation - (196) - (3,797) (3,993)
Amortisation of intangibles (1,725) - (31) (2,304) (4,060)
Profit/(loss) from operations - pre-exceptional operating items 49,624 6,926 2,089 (39,474) 19,165
Exceptional items (operating) (6,213) - - 564 (5,649)
Profit/(loss) from operations 43,411 6,926 2,089 (38,910) 13,516
Net finance costs: other (3,481)
Net finance costs: exceptional (1,742)
Profit/(loss) before tax 8,293
Tax expense (4,501)
Profit for year 3,792
Inter-segment revenue relates to installation services provided by the asset
installation segment to the asset management segment.
Depreciation associated with meter assets in the asset management segment and
grid-scale battery assets in the energy management segment has been reported
within Cost of sales as these assets directly drive revenue (see note 3).
All material operations are based in the UK and revenue generated in the UK.
Following the acquisition of Solo Energy Limited in 2019, a small minority of
operations are based in the Republic of Ireland.
The Group has two major customers that each generated 10% or more of total
Group turnover, as listed below by segment:
2022 2021
£'000 £'000
Customer 1 - Asset management 17,574 12,647
Customer 1 - Asset installation 5,052 2,644
Customer 2 - Asset management 8,056 8,900
Customer 2 - Asset installation 8,784 8,025
39,466 32,216
Segment assets and liabilities
31 December 2022 Asset Asset Energy Unallocated Total
management installation management £'000 operations
£'000 £'000 £'000 £'000
Assets reported by segment
Intangible assets 13,550 3,497 3,161 5,624 25,832
Property, plant and equipment 429,709 71 95,225 8,235 533,240
Investment in associate - - 1,940 - 1,940
Trade and other receivables - non-current - - 12,347 - 12,347
Inventories 37,136 302 - - 37,438
Contract assets - 10 277 - 287
480,395 3,880 112,950 13,859 611,084
Assets not by segment 86,278
Total assets 697,362
Liabilities by segment
Contract liabilities 1,518 1,805 80 - 3,403
Lease liabilities - - 8,405 3,956 12,361
Provisions - - 1,963 70 2,033
Other liabilities 606 - 2,062 - 2,668
2,124 1,805 12,510 4,026 20,465
Liabilities not by segment 143,411
Total liabilities 163,876
31 December 2021 Asset Asset Energy Unallocated Total
management installation management £'000 operations
£'000 £'000 £'000 £'000
Assets reported by segment
Intangible assets 11,540 3,497 2,497 7,929 25,463
Property, plant and equipment 366,702 128 38,868 10,203 415,901
Inventories 22,763 215 2 - 22,980
Contract assets - 46 - - 46
Other assets (bank loans) 2,201 - - - 2,201
403,206 3,886 41,367 18,132 466,591
Assets not by segment 166,646
Total assets 633,237
Liabilities by segment
Contract liabilities 1,527 2,084 121 - 3,732
Lease liabilities - - 4,060 4,513 8,573
Other liabilities - - 638 - 638
Other long-term liabilities - - 1,473 75 1,548
1,527 2,084 6,292 4,588 14,491
Liabilities not by segment 64,956
Total liabilities 79,447
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, and in 2022 also include bank loans.
Additions to non-current assets within each segment are listed below:
Asset Asset Energy Unallocated Total
Management Installation Management Operations
£'000 £'000 £'000 £'000 £'000
Additions to non-current assets
2022 106,626 14 43,003 2,263 151,906
2021 84,779 90 27,720 3,686 116,275
2 Revenue from contracts with customers
(a) Disaggregation of revenue from contracts with customers
Segment revenue by type of service delivered and by timing of revenue
recognition is as follows:
Year ended 31 December 2022 Asset Asset Energy Total
management installation management operations
£'000 £'000 £'000 £'000
Major service lines
Metering 80,634 - - 80,634
Data management 12,181 - - 12,181
Utility connections - 7,129 - 7,129
Transactional meter works - 23,059 - 23,059
Grid-scale batteries - - 7,211 7,211
Energy management - 304 5,002 5,306
92,815 30,492 12,213 135,520
Timing of revenue recognition
Services transferred at a point in time - 23,059 1,533 24,592
Services transferred over time 92,815 7,433 10,680 110,928
92,815 30,492 12,213 135,520
Year ended 31 December 2021 Asset Asset Energy Total
management installation management operations
£'000 £'000 £'000 £'000
Major service lines
Metering 74,358 - - 74,358
Data management 8,470 - - 8,470
Utility connections - 5,852 - 5,852
Transactional meter works - 15,649 - 15,649
Energy management - 531 3,620 4,151
82,828 22,032 3,620 108,480
Timing of revenue recognition
Services transferred at a point in time - 15,649 - 15,649
Services transferred over time 82,828 6,383 3,620 92,381
82,828 22,032 3,620 108,480
(b) Assets and liabilities related to contracts with customers
The Group has recognised the following assets and liabilities related to
contracts with customers:
2022 2021
£'000 £'000
Current contract assets 287 46
Total contract assets 287 46
Current contract liabilities 3,403 3,732
Total contract liabilities 3,403 3,732
Trade receivables and unbilled receivables are disclosed in note 14.
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.
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:
2022 2021
£'000 £'000
Revenue recognised that was included in the contract liability balance 3,107 2,636
at the beginning of the period
No revenue was recognised in 2022 in relation to performance obligations
satisfied in previous periods.
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.
3 Profit from operations
2022 2021
£'000 (restated)
£'000
Profit from operations is stated after (charging)/crediting:
Cost of sales:
Direct staff and subcontractor costs (31,207) (22,338)
Depreciation of meter assets (28,340) (24,719)
Depreciation of grid-scale assets (994) -
Inventory costs (3,316) (995)
Short-term lease expense - restated(1) (1,641) (264)
Total cost of sales (before exceptional items) (65,498) (48,316)
Administrative expenses:
Staff costs (20,924) (17,842)
Depreciation:
- owned assets (2,477) (3,087)
- leased assets (1,064) (906)
Amortisation of intangibles (4,152) (4,060)
Auditor's remuneration (note 3a) (405) (392)
Loss on disposal (2,937) (2,457)
Low-value lease expense (37) (29)
Research and development costs (55) (39)
Other operating charges (13,171) (13,054)
Total administrative expenses (before exceptional items) (45,222) (41,866)
Exceptional items (note 3b) (6,646) (6,478)
Other operating income (note 3c) 1,936 1,696
Total operating costs (115,430) (94,964)
(1) Short-term lease expense relating to vans has been reclassified from
Administrative expenses to Cost of sales in line with current year disclosure.
(a) Auditor's remuneration
Auditor's remuneration can be analysed as:
2022 2021
£'000 £'000
Audit of the parent company and consolidated financial statements 141 133
Audit of the financial statements of the Company's subsidiaries 234 229
Other services - audit-related assurance services 30 30
405 392
(b) Exceptional items
2022 2021
£'000 £'000
Exceptional operating items
Losses on the traditional and SMETS1 meter portfolio (5,716) (5,906)
Acquisition-related costs (205) (307)
Costs attributable to COVID-19 - (265)
Other non-recurring professional fees (725) -
(6,646) (6,478)
Exceptional finance items
Facility fees - (1,742)
- (1,742)
Total exceptional items (6,646) (8,220)
In 2021 exceptional finance costs of £1,742,000 comprised the acceleration of
unamortised arrangement fees relating to the existing facility of £1,506,000
together with £236,000 of legal and professional fees attributable to the
extinguishment.
The tax effect of exceptional items charged in 2022 is a credit of £1,473,000
(2021: credit of £1,978,000).
(c) Other operating income
2022 2021
£'000 £'000
Termination fee income - 103
Government grant income 891 1,255
Other income 1,045 338
1,936 1,696
Of the government grant income of £891,000 (2021: £1,255,000) recognised in
the year ended 31 December 2022, £280,000 relates to RDECs (2021: £489,000)
which are detailed in the Accounting policies. A further £611,000 (2021:
£766,000) relates to grant income received on government-funded energy
efficiency projects within the energy management business.
4 Particulars of employees
The average number of staff employed by the Group during the financial year,
including Executive Directors, by activity was:
2022 2021
Number Number
Administrative staff 539 488
Operational staff 729 548
Sales staff 6 5
IT staff 85 81
Directors (excluding 4 (2021: 4) Non-executive Directors) 2 3
1,361 1,125
The aggregate payroll costs of the employees were:
2022 2021
£'000 £'000
Wages and salaries 58,823 42,973
Social security costs 5,050 4,694
Staff pension costs 1,426 1,365
Share-based payment (note 28) 2,612 841
Director pension costs 24 21
67,935 49,894
5 Finance costs and finance income
2022 2021
£'000 £'000
Finance costs
Bank loans and overdrafts 3,833 3,132
Lease liabilities 552 75
Unwind of discount on liabilities 19 -
Foreign exchange (gain)/loss on intra-group borrowings (131) 281
Total pre-exceptional finance costs 4,273 3,488
Exceptional finance costs - 1,742
Total finance costs 4,273 5,230
Finance income
Bank interest receivable 324 7
Total finance income 324 7
6 Taxation
2022 2021
£'000 £'000
Analysis of charge in the year
Current tax:
Current income tax expense 53 93
Adjustment to tax charge in respect of previous periods 2 -
Total current income tax 55 93
Deferred tax:
Origination and reversal of temporary differences 1,322 2,087
Adjustment to tax charge in respect of prior periods (293) (127)
Adjustment attributable to change in tax rates - 2,448
Tax on profit 1,084 4,501
The charge for the period can be reconciled to the profit per the consolidated
statement of comprehensive income as follows:
2022 2021
£'000 £'000
Profit before tax 15,955 8,293
Tax at the UK corporation tax rate of 19.00% (2021: 19.00%) 3,031 1,576
Expenses not deductible for tax purposes 277 171
Income not taxable (28) -
Impact of super-deduction permanent benefit (2,294) -
Adjustments to tax charge in respect of previous periods (291) (127)
Impact of deferred tax not recognised 47 (99)
Impact of overseas tax rates 25 24
Change in tax rate(1) 317 2,956
Tax expense in the income statement 1,084 4,501
1 See note 22 for further details.
Current tax credit through equity in the year was £nil (2021: £nil).
7 Earnings per share
The calculation of earnings per share (EPS) is based on the following data and
number of shares:
2022 2021
£'000 £'000
Profit for the year used for calculation of basic EPS 14,871 3,792
Number of shares 2022 2021
Weighted average number of ordinary shares for the purposes of basic EPS 133,241,113 118,330,817
Effect of potentially dilutive ordinary shares:
- share options 615,969 641,710
Weighted average number of ordinary shares for the purposes of diluted EPS 133,857,082 118,972,527
EPS:
- basic (pence) 11.16 3.20
- diluted (pence) 11.11 3.19
8 Dividends
Year Year Year Year
ended ended ended ended
31 December 31 December 31 December 31 December
2022 2022 2021 2021
£'000 Per share £'000 Per share
(pence) (pence)
FY 2020 second interim dividend paid - - 7,059 6.2500
FY 2020 third interim dividend paid - - 7,065 6.2500
FY 2020 final dividend paid - - 7,107 6.2500
FY 2021 first interim dividend paid - - 7,829 6.8750
FY 2021 second interim dividend paid 9,166 6.8750 - -
FY 2021 third interim dividend paid 9,169 6.8750 - -
FY 2021 final dividend paid 9,170 6.8750 - -
FY 2022 first interim dividend paid 10,087 7.5625
Total dividends 37,592 28.1875 29,060 25.6250
Per the Group's dividend policy, a 27.5p per share dividend was approved in
respect of FY 2021 payable in four instalments of 6.875p per share to
shareholders in four cash instalments.
A 30.25p per share dividend is proposed in respect of FY 2022 payable in four
instalments of 7.5625p per share which are intended to be paid as follows:
Instalment Ex-dividend date Record date Payment date
1 06 October 2022 07 October 2022 28 October 2022
2 05 January 2023 06 January 2023 26 January 2023
3 06 April 2023 11 April 2023 27 April 2023
4 06 July 2023 07 July 2023 27 July 2023
The second, third and fourth instalments will amount to c.£30m and will be
accounted for in 2023.
Under the 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 2022, the distributable profits in the parent
company were adequate to cover the proposed second interim dividend of
c.£10m.
9 Intangible assets
Goodwill Intangibles recognised upon acquisition IT development and software Total
£'000 £'000 £'000 £'000
Cost
As at 1 January 2021 8,607 2,261 28,518 39,386
Additions - - 2,831 2,831
Acquisitions (note 24) 859 1,010 - 1,869
Exchange adjustments (66) (3) (31) (100)
As at 31 December 2021 9,400 3,268 31,318 43,986
Additions - - 2,222 2,222
Acquisitions (note 24) 737 - 1,479 2,216
Exchange adjustments 51 - 32 83
As at 31 December 2022 10,188 3,268 35,051 48,507
Amortisation
As at 1 January 2021 - 2,203 12,260 14,463
Charge for year - 179 3,881 4,060
As at 31 December 2021 - 2,382 16,141 18,523
Charge for year - 223 3,929 4,152
As at 31 December 2022 - 2,605 20,070 22,675
Net book value
As at 31 December 2022 10,188 663 14,981 25,832
As at 31 December 2021 9,400 886 15,177 25,463
As at 1 January 2021 8,607 58 16,258 24,923
10 Impairment of goodwill
The goodwill arising in a business combination is allocated, at acquisition,
to the CGUs that are expected to benefit from that business combination.
Goodwill is allocated to CGUs as follows:
Asset Asset Solo Energy Total
management installation £'000 £'000
£'000 £'000
Cost
As at 1 January 2022 4,971 3,497 932 9,400
Acquisitions (note 24) 737 - - 737
Exchange adjustments - - 51 51
As at 31 December 2022 5,708 3,497 983 10,188
Additional goodwill of £737,000 has been recognised in the year on the
acquisition of n3rgy Data Limited and is recognised in the Asset management
CGU.
The Group tests goodwill for impairment annually or more frequently if there
are indications that goodwill might be impaired. Goodwill is tested for
impairment by comparing the carrying amount of each CGU, including goodwill,
with the recoverable amount. The recoverable amounts are determined based on
value-in-use calculations which require assumptions. The calculations use cash
flow projections based on financial budgets approved by the Board covering a
one-year period, together with management forecasts for a further four-year
period. These budgets and forecasts have regard to historical performance and
knowledge of the current market, together with the Group's views on the future
achievable growth and the impact of committed cash flows. Cash flows beyond
this are extrapolated using the estimated growth rates stated below.
The cash flows used in the value-in-use calculation for the asset management
segment include all costs incurred in the provision of meter assets to energy
suppliers, together with the initial installation. The cash flows used in the
value-in-use calculation for the asset installation segment exclude
installation costs incurred to fit an owned meter. For the purpose of the
value-in-use calculation, these are instead allocated to the asset management
segment, being the segment to which the corresponding revenues are allocated.
The annual impairment test was performed for the three CGUs identified above
that have goodwill allocated to them. No evidence of impairment was found at
the balance sheet date.
The key assumptions used in the value-in-use calculations for those CGUs that
have goodwill allocated to them are as follows:
· Perpetual growth rate - the terminal cash flows are extrapolated in
perpetuity using a growth rate of 2.25% for asset management (2021: 2.25%) and
1.0% for asset installation and Solo Energy (2021: 1.0% for asset installation
and energy management). The rate of 2.25% applied to asset management is
derived from historical Retail Price Index increases applied to the segment's
index-linked meter rentals. This is not considered to be higher than the
average long-term industry growth rate. The rate of 1.0% applied to asset
installation and Solo Energy is aligned to the Group's corporate forecast
model and is lower than the rate applied to asset management 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 8.0%, 10.0% and 19.4% for
asset management, asset installation and Solo Energy respectively (2021: 6.8%
for asset management, 8.6% for asset installation and 18.2% for Solo Energy)
and the post-tax discount rates applied are 6.0%, 7.5% and 15.0% for asset
management, asset installation and Solo Energy respectively (2021: 5.5% for
asset management, 7.00% for asset installation and 15.0% for Solo Energy). The
risk premium assigned to the asset installation CGU reflects the shorter-term
nature of the underlying revenues within this segment, as compared to the
annually recurring revenue generated by an installed asset. The risk premium
assigned to the Solo Energy CGU reflects the pre-revenue status of this part
of the business, in which the underlying system is still undergoing
development.
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 any of the CGUs.
11 Property, plant and equipment
Land and buildings Meter Plant and Fixtures, Motor Right-of-use Grid-scale assets Assets under Total
£'000
£'000 assets machinery fittings and vehicles assets construction £'000
£'000 £'000 equipment £'000 £'000 £'000
£'000
Cost
As at 1 January 2021 2,807 392,146 1,044 7,148 5,305 7,010 - - 415,460
Reclassification(1) - - - - - - - 4,071 4,071
Additions - 82,401 126 1,117 28 5,267 - 24,505 113,444
Acquisitions - 6,682 - - - - - 5,414 12,096
Disposals (2) (19,889) - (52) (202) - - - (20,145)
Exchange adjustments - - - (6) - (4) - - (10)
As at 31 December 2021 2,805 461,340 1,170 8,207 5,131 12,273 - 33,990 524,916
Reclassification - - - 1 - - 54,048 (54,049) -
Reclassified as held for sale (688) - - - - - - - (688)
Additions 1,105 105,004 18 994 719 5,509 84 36,251 149,684
Acquisitions - - - 1 - - - 15,190 15,191
Disposals (4) (20,773) (2) (8) (494) (785) - - (22,066)
Exchange adjustments - - - 3 - 3 - - 6
As at 31 December 2022 3,218 545,571 1,186 9,198 5,356 17,000 54,132 31,382 667,043
Depreciation
As at 1 January 2021 679 76,683 790 4,721 2,387 1,862 - - 87,122
Charge for year 171 24,719 204 1,555 1,157 1,032 - - 28,838
Disposals 1 (6,767) - (43) (134) - - - (6,943)
Exchange adjustments - - - (1) - (1) - - (2)
As at 31 December 2021 851 94,635 994 6,232 3,410 2,893 - - 109,015
Reclassified as held for sale (174) - - - - - - - (174)
Charge for year 172 28,340 91 1,176 1,038 1,264 994 - 33,075
Disposals (3) (7,116) - (7) (391) (599) - - (8,116)
Exchange adjustments - - - 2 - 1 - - 3
As at 31 December 2022 846 115,859 1,085 7,403 4,057 3,559 994 - 133,803
Net book value
As at 31 December 2022 2,372 429,712 101 1,795 1,299 13,441 53,138 31,382 533,240
As at 31 December 2021 1,954 366,705 176 1,975 1,721 9,380 - 33,990 415,901
As at 1 January 2021 2,128 315,463 254 2,427 2,918 5,148 - - 328,338
1. The reclassification of £4,071,000 within Assets under construction
relates to costs previously recorded within Inventories at 31 December 2020.
Meter assets
In 2021, meter asset acquisitions include the c.15,000 assets acquired as part
of the Industrial & Commercial large-power half-hourly electricity
business acquisition. See note 24 for details.
Included within the closing Meter assets net book value of £429,712,000
(2021: £366,705,000) is £11,173,000 (2021: £16,246,000) 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 2022 consolidated
financial statements the traditional meter portfolio generated £10,198,000
(2021: £12,781,000) of revenue with a corresponding £4,383,000 (2021:
£5,071,000) depreciation charge. As at 31 December 2022, £11,168,000 (2021:
£11,787,000) of annualised recurring revenue arises from the owned
traditional meter portfolio.
The assets are secured by a bond and floating charge.
For the purpose of impairment testing the traditional meter asset portfolio
recognised within "Meter assets" is assessed as a stand alone cash-generating
unit (CGU) and its carrying amount is compared with the recoverable amount.
See background information provided in the "Key sources of estimation
uncertainty" section in the accounting policies. The recoverable amount is
determined based on a value-in-use calculation, which uses the following key
assumptions:
· estimated future cash flows from rental income, which decline based on
the forecast for when meters are replaced;
· estimated future cash flows from termination income, which are derived
using historical data and analysis around the risk
of churn between contracted and non-contracted customers and the risk of
non-recoverability once issued; and
· a pre-tax discount rate of 6.45%, which reflects the risk attached to the
time value of these specific cash flows and is deemed to be best represented
by the Group's incremental cost of borrowing on the basis that cash flows are
secured by the installed meter and the risk inherent in the decline of the
cash flows is already accounted for through the assumptions detailed above.
The impairment test indicated that the value in use of the traditional meter
assets CGU exceeded its carrying value and therefore no impairment has been
recognised in the year to 31 December 2022.
Management has performed sensitivity analysis on the key assumptions both with
other variables held constant and with other variables simultaneously changed.
Management has concluded that there are no reasonably possible changes in the
key assumptions that would cause the carrying amounts of the traditional meter
portfolio to exceed the value in use for either CGU.
No impairment on other meter assets was recognised in 2022 or 2021.
Right-of-use assets
A breakdown of right-of-use assets is presented below:
Carrying value 2022 2021
£'000 £'000
Properties(1) 3,840 4,502
Land 9,601 4,878
13,441 9,380
1 Properties include office and warehouse space.
The statement of profit or loss shows the following amounts relating to
leases:
Depreciation charge on right-of-use assets 2022 2021
£'000 £'000
Properties 1,024 919
Motor vehicles - 6
Land 240 107
1,264 1,032
12 Investment in associate
2022 2021
£'000 £'000
At 1 January - -
Additions 2,126 -
Share of loss for the period (186)
Dividends received - -
At 31 December 1,940 -
On 15 June 2022, the Group acquired a 25% shareholding in Clenergy EV Ltd, a
software business with a chargepoint operator (CPO) platform focused on
electric vehicle charging infrastructure. The agreement also gives the Group
the option to invest a further £2.0m after one year to acquire an additional
26% interest and an option to acquire the remining shares after five years.
Summarised financial information for Clenergy EV Ltd for the period since
investment and after adjustment for fair value adjustments at acquisition and
differences in accounting policies is set out below:
2022 2021
£'000 £'000
Revenue 723 -
Operating profit excluding depreciation and amortisation (EBITDA) (88) -
Depreciation and amortisation (868) -
Taxation 214 -
Loss after taxation (742) -
Group's share of associate's loss for the period (186) -
2022 2021
£'000 £'000
Non-current assets 8,627 -
Current assets 1,609 -
Current liabilities (482) -
Non-current liabilities (1,996) -
Net assets 7,758 -
Group's share of associate's net assets 1,940 -
13 Inventories
2022 2021
£'000 £'000
Finished goods 36,888 22,476
Consumables 550 504
37,438 22,980
14 Trade and other receivables
2022 2021
£'000 £'000
Current
Trade receivables 25,297 22,451
Prepayments and deferred costs 3,112 2,520
Accrued income 19,385 19,265
Other receivables 4,517 1,463
VAT recoverable 624 1,932
52,935 47,631
Amounts falling due after more than one year:
2022 2021
£'000 £'000
Payments on account to acquire grid-scale battery assets 12,347 -
Accrued income is made up of the following balances:
2022 2021
£'000 £'000
Unbilled receivables 18,714 18,915
Contract assets 287 46
Other accrued income 384 304
19,385 19,265
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 2022 was £4,182,000
(2021: £4,370,000). See note 23 for further details. The ageing profile of
trade receivables past due date is shown below:
2022 2021
£'000 £'000
Current 15,894 13,019
1-30 days 7,069 3,728
31-60 days 1,128 1,615
61-90 days 639 1,499
91-120 days 597 1,705
Over 120 days 4,782 5,812
30,109 27,378
Loss allowance (3,026) (3,969)
Amounts offset (see note 23) (1,786) (958)
25,297 22,451
Trade receivables are non-interest-bearing and are generally on 30 to 90-day
terms. Trade receivables due from related parties at 31 December 2022 amounted
to £nil (2021: £nil).
Substantially all trade receivables are denominated in Sterling.
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. The loss allowance for accrued income at 31 December 2022 was
£1,156,000 (2021: £401,000) and the charge recognised in profit or loss
during the year was £755,000.
15 Cash and cash equivalents
Cash and cash equivalents comprise cash held by the Group. The carrying amount
of the asset approximates the fair value. Substantially all balances are held
in Sterling.
For the purposes of the cash flow statement, cash and cash equivalents
comprises:
2022 2021
£'000 £'000
Cash at bank 32,770 67,687
Short-term deposits - 50,000
Cash and cash equivalents 32,770 117,687
Cash and cash equivalents - restricted 307 1,299
Total cash and cash equivalents 33,077 118,986
16 Assets held for sale
The Group classifies non-current assets as held for sale if the assets are
available immediately for sale in their present condition, management is
committed to a plan to sell the assets under usual terms, it is highly
probable that their carrying amounts will be recovered principally through a
sale transaction rather than through continuing use and the sale is expected
to be completed within one year from the date of the initial classification.
Assets classified as held for sale are presented separately in the
consolidated statement of financial position and are measured at the lower of
their carrying amount and fair value less costs to sell. Property, plant and
equipment are not depreciated once classified as held for sale.
2022 2021
£'000 £'000
Property awaiting disposal 513 -
513 -
A warehouse, which is no longer required following the consolidation of the
Group's warehouse operations, is classified as held for sale as at 31 December
2022.
17 Trade and other payables
2022 2021
£'000 £'000
Current
Trade payables 28,447 16,638
Other payables 5,350 4,097
Other taxes 1,725 1,519
Deferred income 2,806 2,898
Advance payments 995 1,185
Accruals 30,055 30,152
69,378 56,489
Deferred income and advance payments are made up of the following balances:
2022 2021
£'000 £'000
Contract liabilities 3,403 3,732
Other deferred income 398 351
3,801 4,083
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 to 45-day terms.
Substantially all trade liabilities are denominated in Sterling.
18 Bank loans
2022 2021
£'000 £'000
Current 591 -
Non-current 63,349 -
63,940 -
The Group has a £420m revolving credit facility which matures in December
2025. Interest is payable at a rate of 1.85% over SONIA and 0.65% is payable
on undrawn funds.
The loans drawn under the facility are all denominated in Pounds Sterling. The
balance as at 31 December 2022 is stated net of £1,651,000 of unamortised
transaction costs.
No principal or interest was outstanding as at 31 December 2021 and the amount
recognised as Bank loans was therefore nil. Unamortised transaction costs of
£2,201,000 that would ordinarily be deducted from the carrying value of bank
loans were therefore classified as Other assets (£550,000 was classified as
current Other assets, with the balance of £1,651,000 classified as
non-current, in line with the remaining term of the facility).
The movement in bank loans is:
2022 2021
£'000 £'000
As at 1 January (2,201) (1,949)
Cash flows - proceeds of new borrowings 65,000 -
Cash flows - payments of interest (212) (554)
Cash flows - payments of arrangement fees (227) (2,077)
Non-cash changes - accrual of interest 803 246
Non-cash changes - amortisation of arrangement fees 777 2,133
As at 31 December 63,940 (2,201)
Presentational reclassification to Other assets - 2,201
Bank loans as at 31 December 63,940 -
The Group has the following committed facility:
2022 2021
£'000 £'000
Undrawn committed borrowing facility 323,450 404,650
Bank loans drawn 65,000 -
Utilised in respect of guarantees 31,550 15,350
Total facility 420,000 420,000
The Group has complied with the financial covenants of its borrowing facility
during the current and prior reporting periods.
19 Lease liabilities
2022 2021
£'000 £'000
Current
Current 885 999
Non-current 11,476 7,574
12,361 8,573
The movement in lease liabilities is:
2022 2021
£'000 £'000
As at 1 January 8,573 5,251
Cash flows - lease payments (1,500) (1,247)
Non-cash changes - accrued lease payments (22) -
Non-cash changes - new leases 3,654 4,230
Non-cash changes - changes in lease terms and foreign exchange impact 1,107 58
Non-cash changes - interest charge 549 281
As at 31 December 12,361 8,573
20 Provisions
Provisions comprise:
2022 2021
£'000 £'000
Non-current
Provision for restoration and decommissioning costs 2,033 798
2,033 798
The movement in provisions is:
2022 2021
£'000 £'000
As at 1 January 798 -
Provisions recognised 1,240 798
Utilised in the year (5) -
As at 31 December 2,033 798
The Group is required to restore the land leased as part of its grid-scale
battery storage business, and certain leased warehouses, to the condition
required by the terms and conditions of the lease at the end of the respective
lease terms (which range between three to ten years for warehouses and 20 to
40 years for land). A provision has been recognised for the present value of
the estimated expenditure required to carry out this restoration. These costs
have been capitalised as part of the cost of right-of-use assets and are
depreciated over the shorter of the term of the lease and the useful life of
the assets. Provisions also include the estimated cost to decommission
grid-scale batteries at the end of their life.
21 Other liabilities
Other liabilities comprise:
2022 2021
£'000 £'000
Current
Deferred consideration on acquisitions 1,388 638
1,388 638
Non-current
Deferred consideration on acquisitions 674 750
Contingent consideration on acquisitions 606 -
1,280 750
Refer to notes 24 and 25 for further details on the contingent and deferred
consideration.
22 Deferred taxation
The movement in the deferred taxation liability during the year was:
2022 2021
£'000 £'000
Opening deferred tax liability 12,199 8,511
Increase in provision through consolidated statement of comprehensive income 1,029 4,408
Increase/(decrease) in provision through equity 93 (319)
Deferred tax in respect of acquisitions and disposals 175 (401)
Closing deferred tax liability 13,496 12,199
The Group's provision for deferred taxation consists of the tax effect of
temporary differences in respect of:
2022 2021
£'000 £'000
Excess of taxation allowances over depreciation on property, plant and 13,527 11,036
equipment
Tax losses available (115) (51)
Deferred tax asset on share options (1,519) (1,438)
Deferred tax on intangibles acquired 1,240 1,168
Other temporary differences(1) 363 1,484
13,496 12,199
The deferred tax included in the consolidated statement of comprehensive
income is as follows:
2022 2021
£'000 £'000
Accelerated capital allowances 2,491 3,902
Tax losses (9) 74
Deferred tax asset on share options (175) 558
Movement in fair value of intangibles (157) 256
Other temporary differences(1) (1,121) (382)
1,029 4,408
1 Other temporary differences predominately relate to deferred tax on
provisions and accruals.
At 31 December 2022, the main rate of corporate tax applying to the profits of
the Group was 19%. In the spring Budget 2021, the UK Government announced that
from 1 April 2023 the corporation tax rate would increase to 25% (rather than
remaining at 19%, as previously enacted). This new law was substantively
enacted on 24 May 2021. Deferred taxes at the balance sheet date have been
measured using these enacted tax rates and reflected in these financial
statements.
Further, the UK Government announced legislation in respect of the
'super-deduction' for qualifying capital expenditure incurred during a
two-year period commencing 1 April 2021. This new law was also substantively
enacted on 24 May 2021. The Group has recognised an estimated permanent
benefit of £2,294,000 on qualifying assets when calculating the tax charge
for the current year, as well as a permanent benefit in respect of the prior
year of £230,000.
The Group had unrecognised trading losses of £1,762,000 (2021: £1,456,000)
in subsidiary undertakings at 31 December 2022. The Group also had
unrecognised capital losses of £729,000 (2021: £729,000) in subsidiary
undertakings at 31 December 2022.
23 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:
(a) Interest rate risk
The Group's main interest rate risk arises from its floating rate bank loan.
See note 18 for further details.
There were no overdrafts at 31 December 2022 (2021: none) and the interest
charge arising on lease liabilities does not represent a cash interest rate
risk for the Group.
The Group's financial assets at 31 December 2022 comprise cash and trade
receivables. The cash balance of £32,770,000 (2021: £117,687,000) is a
floating rate financial asset, but interest income is not typically material.
Interest rate sensitivity
The following table shows how a change in interest rates applied to the
average level of borrowings would have affected the Group's interest cost and
profit before tax:
Increase/(decrease) (Decrease) in profit
in interest rate in basis points before tax
£'000
2022 +100bps (198)
2021 +70bps -
(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.
(c) Foreign currency risk
The Group's exposure to the risk of changes in foreign exchange primarily
arises from a single subsidiary, 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.
(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.
31 December 2022 Less than Between Over Total contractual cash flows
one year two and five years £'000
£'000 five years £'000
£'000
Contractual maturities of financial liabilities
Trade payables 28,447 - - 28,447
Bank loan 591 - - 591
Other liabilities 1,388 1,280 - 2,668
Lease liabilities 1,133 3,104 5,648 9,885
31,559 4,384 5,648 41,591
31 December 2021 Less than Between Over Total contractual cash flows
one year two and five years £'000
£'000 five years £'000
£'000
Contractual maturities of financial liabilities
Trade payables 16,638 - - 16,638
Bank loan - - - -
Other liabilities 638 - - 638
Other long-term liabilities - 750 - 750
Lease liabilities 1,280 3,232 5,965 10,477
18,556 3,982 5,965 28,503
(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 £44,682,000 (2021:
£41,716,000), being the sum of the carrying value of trade receivables and
accrued income, including contract assets, as disclosed within Trade and other
receivables in note 14. The Group regularly monitors and updates its cash flow
forecasts to ensure it has sufficient and appropriate funds to meet its
ongoing operational requirements.
Impairment of financial assets
The Group has two types of financial assets that are subject to IFRS 9's
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, 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.
During the second half of 2021, the global energy market suffered from
unprecedented increases in wholesale gas prices, creating significant
volatility within the UK energy market and leading to a number of independent
energy suppliers entering administration and exiting the market. This crisis
notably impacted the smaller independent energy suppliers and, as a result,
management did not increase 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 the crisis. This subset of
trade receivables has been provided for on a specific basis and has resulted
in an additional £0.2m impairment loss in the year. Given the continued and
changing uncertainty regarding the impact of this crisis on customer default
risk, management will continue to monitor the situation and reassess its ECL
at each reporting period end accordingly.
On that basis, the loss allowance at 31 December 2022 was determined as
£4,182,000 (2021: £4,370,000) for trade receivables and accrued income. A
reconciliation of these balances is provided as follows:
Accrued Trade Total
income receivables £'000
£'000 £'000
At 1 January 2022 401 3,969 4,370
Increase in loss allowance recognised in profit or loss 755 (192) 563
during the year - underlying
Decrease in loss allowance recognised in profit or loss - - -
during the year - exceptional
Amounts reversed/written off during the year - (751) (751)
At 31 December 2022 1,156 3,026 4,182
The overall loss allowance has decreased at 31 December 2022. Whilst the
crisis in the energy market has given rise to an additional impairment loss in
the year, as detailed above, only one energy supplier entered administration
during 2022 in comparison to the high number of insolvencies seen in the prior
year.
Total net impairment losses on financial and contract assets were £563,000 in
2022 (2021: £2,964,000). Of this amount, £563,000 (2021: £2,964,000)
relates to amounts arising from trade receivables and accrued income.
Fair value
There is no material difference between the book value and the fair value of
any financial asset or liability.
(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 financial position. Under the Group's enhanced dividend policy, SMS
declared a 27.5p per share dividend in respect of FY 2021 and proposes a
30.25p per share dividend in respect of FY 2022. The Group's 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 2022, FY 2023 and FY 2024. This results 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.
(g) Disclosure of offsetting arrangements
31 December 2022 Gross balances(1) Amounts offset(2) Balance sheet(3)
£'000 £'000 £'000
Financial assets
Trade receivables 27,083 (1,786) 25,297
Accrued income 23,138 (3,753) 19,385
Financial liabilities
Trade payables 28,579 (132) 28,447
Accruals 35,463 (5,408) 30,055
31 December 2021 Gross balances(1) Amounts offset(2) Balance sheet(3)
£'000 £'000 £'000
Financial assets
Trade receivables 23,409 (958) 22,451
Accrued income 20,313 (1,048) 19,265
Financial liabilities
Trade payables 16,770 (132) 16,638
Accruals 32,026 (1,874) 30,152
1 The gross amounts of the recognised financial assets and
liabilities.
2 Amounts are offset where there is a legally enforceable right to
offset the recognised amounts and there is an intention to settle on a net
basis or realise the asset and liability simultaneously, in accordance with
IAS 32.
3 The net amounts presented in the consolidated statement of financial
position.
24 Business combinations
Year ended 31 December 2022
On 25 May 2022, the Group acquired 100% of the issued share capital of n3rgy
Data Limited, a data software company, for cash consideration of £1.4m and
additional contingent consideration subject to the company achieving certain
performance targets. n3rgy Data Limited's software enables and facilitates the
use of energy consumption, generation and tariff data from smart meters. The
acquisition is expected to enhance and accelerate the Group's capabilities in
smart energy data solutions and is reported in the Group's asset management
segment.
The fair values of the assets and liabilities acquired and of the
consideration are as follows:
Fair value
£'000
Intangible assets: software 1,479
Trade and other receivables 149
Cash 86
Trade and other payables (202)
Deferred tax liabilities (229)
Net identifiable assets acquired 1,283
Add: goodwill 737
Net assets acquired 2,020
Satisfied by:
Cash 1,432
Contingent consideration 588
Total consideration 2,020
The net outflow of cash in respect of the purchase of the business is:
£'000
Cash consideration 1,432
Cash and cash equivalents acquired (86)
Net cash outflow in respect of the purchase of the business 1,346
No contingent assets or liabilities were acquired.
If n3rgy Data Limited's EBITDA over a five year earn-out period exceeds a
threshold, then contingent consideration becomes payable based on the amount
by which the EBITDA exceeds threshold. The minimum payment is therefore nil
and the maximum payment is unlimited. The fair value of the contingent
consideration at the acquisition date of £588,000 represents the estimated
most likely pay-out based on management's future forecast of future trading
(level 3) discounted at the Group's incremental borrowing rate.
The goodwill is mainly attributable to synergies and the opportunity to
accelerate growth of the Group's data business. Goodwill will not be
deductible for tax purposes.
The acquisition contributed £127,000 to the Group's revenue and reduced the
Group's profit before tax by £406,000 between the date of acquisition and 31
December 2022.
If the acquisition had been completed on 1 January 2022, the Group's revenue
would have been £135,591,000 and profit before tax would have been
£15,786,000 for the year ended 31 December 2022.
Acquisition-related costs of £20,000 have been included as part of
exceptional Administrative costs in the consolidated statement of
comprehensive income.
Year ended 31 December 2021
On 6 April 2021 the Group acquired a portfolio of c.15,000 Industrial &
Commercial large-power half-hourly electricity meters from a third party. The
Group also took ownership of the Meter Operator (MOP) and data service
contracts associated with a portfolio of electricity meters. This is reported
through the Group's asset management segment.
As part of the transaction, a workforce was transferred with the skills,
knowledge and experience to generate revenues from the assets and contracts
acquired, and potentially grow the acquired business for the Group. Such a
workforce meets the definition of a substantive process under IFRS 3. On the
basis that the Group has obtained inputs, a substantive process and outputs,
management has concluded that the acquisition meets the definition of a
business combination and should be accounted for as such under IFRS 3.
Purchase consideration consisted of cash only. Total cash paid was
£8,433,000.
The assets and liabilities recognised as a result of the acquisition were as
follows:
31 December 2021 Fair value
£'000
Intangible assets: customer contracts 1,010
Property, plant and equipment: meter assets 6,682
Inventories 700
Trade and other receivables 1,778
Trade and other payables (2,368)
Deferred tax liability (228)
Net identifiable assets acquired 7,574
Add: goodwill 859
Net assets acquired 8,433
No contingent assets or liabilities were acquired. The customer contracts
acquired were valued using a multi-period excess earnings method, which
assesses the present value of the after-tax cash flows attributable only to
these contracts.
The goodwill is attributable to the opportunity to grow this part of the
business for the Group. Goodwill will not be deductible for tax purposes.
For the year ended 31 December 2021, the acquired business contributed a net
profit before taxation of £1.7m to the Group.
If the acquisition had occurred on 1 January 2021, consolidated pro-forma
profit for the year ended 31 December 2021 would have been approximately
£2.2m.
Acquisition-related costs of £0.3m have been incurred to date, including
transaction costs and mobilisation costs to integrate the newly-acquired
business into the Group, and have been included as part of exceptional
Administrative costs in the consolidated statement of comprehensive income.
25 Asset acquisitions
Year ended 31 December 2022
During the year ended 31 December 2022, the Group acquired 100% of the issued
share capital of the seven special purpose vehicle companies listed below.
Details of the purchase consideration are as follows:
Name of acquired company Company number Acquisition date Cash consideration Deferred consideration Total consideration
£'000 £'000 £'000
Balance Energy 2 Limited 12266348 14 February 2022 856 - 856
Fen Power 1 Limited 12875930 26 April 2022 600 274 874
Drumcross Energy Storage Limited SC679835 8 July 2022 2,815 - 2,815
Erskine Energy Storage Limited SC690064 17 August 2022 2,654 - 2,654
Balance Energy 3 Ltd 12341398 1 October 2022 2,780 400 3,180
Balance Energy 1 Ltd 11894406 1 October 2022 3,031 200 3,231
Bramford Power Limited 12480700 7 October 2022 1,826 - 1,826
Total purchase consideration 14,562 874 15,436
All seven companies report in British Pounds Sterling. The acquisitions enable
SMS to obtain control over the rights required to develop and commission seven
grid-scale battery storage sites, totalling 320MW, as part of the Group's
strategy of investment in CaRe assets. Grid-scale battery storage is reported
through the Group's energy management segment and 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.
In respect of one of the companies, deferred consideration of £274,000 is
payable in cash upon energisation (when the grid-scale battery storage asset
is connected to the grid). Deferred consideration of a further £600,000 is
payable on the execution of certain property deeds. The payments have been
measured at fair value at the acquisition date, ignoring the impact of
discounting on the basis that the anticipated payment date is within 24 months
of the current reporting date and management consider the impact of
discounting over this period to be immaterial.
Management has concluded that these acquisitions do not meet the definition of
a business combination under IFRS 3 on the basis that no substantive processes
have been transferred. Therefore, these transactions have been accounted for
as acquisitions of a group of assets. No goodwill thus arises on the
transactions.
The individual assets and liabilities acquired have been identified and the
cost of the transactions has been allocated to the assets acquired, and
liabilities assumed, based on their relative fair values at the date of
purchase as follows:
Total
£'000
Assets under construction 15,190
Trade and other receivables 248
Trade and other payables (2)
Total purchase consideration 15,436
The majority of the value gained from acquiring the sites is attributable to
development and construction rights and therefore most of the total cost of
the transaction has been allocated to Assets under construction.
No contingent assets or liabilities were acquired.
The cash outflow in 2022 relating to asset acquisitions is as follows:
Total
£'000
Cash consideration 14,562
Less payments made in advance in earlier years (135)
Add deferred consideration paid in 2022 on acquisitions in earlier years 200
Cash outflow on asset acquisitions in 2022 14,627
Year ended 31 December 2021
During the year ended 31 December 2021, the Group acquired 100% of the issued
share capital of the following companies:
Name of acquired company Company number Registered office prior Purchase Acquisition date Nature of the
to acquisition consideration £ company
£
Newtonwood Energy Storage Limited 11257609 Unit 9, the Green Easter Park, Benyon Road, Reading, Berkshire 1,471 9 March 2021 Special purpose vehicle
RG7 2PQ
Brook Farm Energy Storage Limited 10780034 Unit 9, the Green Easter Park, Benyon Road, Reading, Berkshire 1,572 11 June 2021 Special purpose vehicle
RG7 2PQ
Berkeley Battery Storage 2 Limited 10942601 Suite 4D Drake House, Dursley, Gloucestershire 1,306 15 June 2021 Special purpose vehicle
GL11 4HH
Brentwood Energy Storage Limited 11516707 Unit 8-9 Benyon Road, Silchester, Reading, Berkshire RG7 2PQ 1,401 1 October 2021 Special purpose vehicle
All four companies report in British Pounds Sterling. The acquisitions enable
SMS to obtain control over the rights required to develop and commission four
grid-scale battery storage sites, totalling 200MW, as part of the Group's
strategy of investment in CaRe assets. Grid-scale battery storage is reported
through the Group's energy management segment and 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.
Details of the purchase consideration are as follows:
Name of acquired company Cash paid Deferred consideration Total consideration
£'000 £'000 £'000
Newtonwood Energy Storage Limited 1,221 250 1,471
Brook Farm Energy Storage Limited 1,572 - 1,572
Berkeley Battery Storage 2 Limited 1,056 250 1,306
Brentwood Energy Storage Limited 901 500 1,401
Total purchase consideration 4,750 1,000 5,750
In respect of three of the four companies, total additional consideration of
£750,000 is payable in cash upon energisation (when the grid-scale battery
storage asset is connected to the grid). In addition, in respect of one of the
four companies, total additional consideration of £250,000 is payable in cash
upon the full execution of an extension of the term of the land lease. The
payments have been measured at fair value at the acquisition date, ignoring
the impact of discounting on the basis that the anticipated payment date is
within 24 months of the current reporting date and management consider the
impact of discounting over this period to be immaterial.
Management has concluded that these acquisitions do not meet the definition of
a business combination under IFRS 3 on the basis that no substantive processes
have been transferred. Therefore, these transactions have been accounted for
as acquisitions of a group of assets. No goodwill thus arises on the
transactions.
The individual assets and liabilities acquired have been identified and the
cost of the transactions has been allocated to the assets acquired, and
liabilities assumed, based on their relative fair values at the date of
purchase as follows:
Newtonwood Brook Farm Berkeley Brentwood Total
£'000 £'000 £'000 £'000 £'000
Assets under construction 1,272 1,596 1,290 1,256 5,414
Trade and other receivables 199 76 16 145 436
Trade and other payables - (100) - - (100)
Total purchase consideration 1,471 1,572 1,306 1,401 5,750
No contingent assets or liabilities were acquired.
The majority of the value gained from acquiring the four sites is attributable
to development and construction rights and therefore a significant portion of
the total cost of the transaction has been allocated to Assets under
construction due to its higher fair value relative to the other net assets
acquired.
Transaction costs of £0.2m were incurred and have been capitalised as a
component of the cost of the assets acquired, classified as part of Assets
under construction within Property, plant and equipment.
26 Related party transactions
(a) Key management personnel compensation
The Group has determined that its key management personnel comprise the
Executive Directors, Non-executive Directors and certain senior management
personnel. The aggregate compensation paid or payable to key management is
shown below:
2022 2021
£'000 £'000
Short-term employee benefits 3,154 2,747
Post-employment benefits 50 35
Termination benefits 273 146
Share-based payments 1,661 262
5,138 3,190
(b) Directors
Directors' emoluments
Aggregate remuneration for both Executive and Non-executive Directors in
respect of qualifying services was:
2022 2021
£'000 £'000
Aggregate emoluments 1,776 1,744
Company contributions to money purchase pension scheme 24 21
1,800 1,765
In 2022, £273,000 was payable to a Director as settlement following
resignation (2021: £146,000 was payable to a Director as settlement following
resignation).
Emoluments of highest paid Director
2022 2021
£'000 £'000
Emoluments 901 694
Company contributions to money purchase pension scheme 20 -
921 694
Number of Directors who accrued benefits under Company pension schemes
2022 2021
Number Number
Money purchase schemes 3 3
(c) Other transactions with related parties
During the year, the Group entered into the following transactions with
related parties:
Rent amounting to £nil (2021: £10,375) paid to the Directors' pension
scheme, Eco Retirement Benefit Scheme, for the use of certain premises. Alan
Foy is a trustee of the scheme.
The Group paid dividends to Alan Foy (whilst a Director) of £321,809 (2021:
£906,915), The Metis Trust(1) of £61,875 (2021: £230,625), Metis
Investments Limited(2) of £25,599 (2021: £387,968), Tim Mortlock of £5,033
(2021: £1,501), Gavin Urwin (whilst a Director) of £458 (2021: £153),
Miriam Greenwood of £7,177 (2021: £6,129), Graeme Bissett of £5,796 (2021:
£4,116) and Jamie Richards of £1,389 (2021: £1,002).
1 Alan Foy is a trustee but not a beneficiary.
2 Alan Foy is a Director and shareholder.
27 Share capital
2022 2021
£'000 £'000
Allotted and called up:
133,397,009 ordinary shares of £0.01 each (2021: 133,321,555 ordinary shares 1,334 1,333
of £0.01 each)
During the year 75,454 (2021: 921,447) ordinary share options were exercised
in relation to the Group's employee share plans which are described in note
28. The ordinary shares issued have a nominal value of £755 (2021: £9,000)
and aggregate consideration of £285,000 (2021: £1,627,000) was received.
The Group's Share Incentive Plan is administered by the Smart Metering Systems
SIP 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 2022, 145,821 (2021: 139,055) own shares were held in trust with a
carrying value of £955,000 (2021: £825,000) and a market value of
£1,140,000 (2021: £1,169,000). The Company purchased 48,900 shares (2021:
34,191) from the market during 2022 with a weighted average fair value of
£8.08 per share (2021: £8.15).
28 Share-based payments
(a) Employee option plans
The Group operates the Unapproved Share Option Plan (the 'Unapproved Plan')
and the Long-Term Incentive Plan (LTIP).
The Unapproved Plan is open to any employee, including Executive Directors.
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 five years from 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.
The LTIP is open to senior employees. Participants are granted nil-cost
options which are subject to performance conditions and remaining employed up
to the vesting date. The performance conditions are based on the total
shareholder return and meeting financial and non-financial targets over a
three-year performance period. The vesting period varies from three to five
years. Once vested, the options remain exercisable for a period of up to ten
years from the date of award.
Summary of options
The table below summarises options granted under the Unapproved Plan and LTIP:
Plan At Granted Exercised Forfeited Expired At Exercise Date Expiry Fair value
1 January 31 December price exercisable date at grant
2022 2022 (pence) (pence)
Unapproved 437,832 - (57,898) - - 379,934 350.0 12 Nov 2019 11 Nov 2024 84.8
Unapproved 43,890 - (17,556) - - 26,334 470.0 18 Aug 2021 17 Aug 2026 87.2
Unapproved 50,000 - - - - 50,000 529.0 26 Sep 2021 25 Sep 2026 142.4
Unapproved 409,001 - - (16,000) - 393,001 700.0 1 Jan 2023 13 Jul 2028 125.2
Unapproved 12,000 - - - - 12,000 602.8 13 Sep 2023 12 Sep 2028 154.3
Unapproved 409,000 - - (16,000) - 393,000 700.0 1 Jan 2023 13 Jul 2028 34.6
Unapproved 12,000 - - - - 12,000 602.8 13 Sep 2023 12 Sep 2028 98.0
Unapproved 370,000 - - - - 370,000 454.6 5 Sep 2024 4 Sep 2029 111.5
Unapproved 409,000 - - (16,000) - 393,000 700.0 1 Jan 2023 13 Jul 2028 37.2
Unapproved 12,000 - - - - 12,000 602.8 13 Sep 2023 12 Sep 2028 105.6
Unapproved(1) 76,000 - - - - 76,000 577.4 26 Jun 2025 25 Jun 2030 59.3
Unapproved 408,999 - - (16,000) - 392,999 700.0 01 Jan 2023 13 Jul 2028 134.3
Unapproved 12,000 - - - - 12,000 602.8 13 Sep 2023 12 Sep 2028 266.1
Unapproved(1) 76,000 - - - - 76,000 577.4 26 Jun 2025 25 Jun 2030 191.4
Unapproved(2) 290,000 - - - - 290,000 705.4 10 Feb 2026 09 Feb 2031 210.8
Unapproved - 408,999 - (16,000) - 392,999 700.0 1 Jan 2023 13 Jul 2028 11.1
Unapproved - 12,000 - - 12,000 602.8 13 Sep 2023 12 Sep 2028 195.5
Unapproved(1) - 76,000 - - 76,000 577.4 26 Jun 2025 25 Jun 2030 144.4
Unapproved(2) - 290,000 - - 290,000 705.4 10 Feb 2026 09 Feb 2031 181.4
LTIP - 57,701 - - 57,701 nil 18 May 2025 18 May 2032 631.1
LTIP - 19,234 - - 19,234 nil 18 May 2025 18 May 2032 313.0
LTIP - 9,617 - - 9,617 nil 18 May 2026 18 May 2032 604.1
LTIP - 3,206 - - 3,206 nil 18 May 2026 18 May 2032 301.0
LTIP - 9,617 - - - 9,617 nil 18 May 2027 18 May 2032 578.3
LTIP - 3,205 - - - 3,205 nil 18 May 2027 18 May 2032 290.1
Total 3,027,722 889,579 (75,454) (80,000) - 3,761,847
1 These options relate to the first three of five tranches.
2 These options relate to the first two of five tranches.
The weighted average share price at the date of exercise of options exercised
during the year ended 31 December 2022 was £8.02 (2021: £8.37).
Fair value of options granted
Awards subject to a market capitalisation or total shareholder return
condition are valued using a Monte Carlo simulation. Other awards are valued
using the Black-Scholes model.
The principal assumptions used in these valuations were:
31 December 2022 31 December 2021
Dividend yield (%) 3.5 to 4.3 3.3
Expected volatility (%) 30.03 to 38.48 35.96 to 41.33
Risk-free interest rate (%) 1.25 to 4.16 0.09 to 0.39
Expected option life (years) 1.28 to 4.87 2.28 to 4.87
Exercise price (£) nil to 7.05 5.77 to 7.05
Share price at grant date (£) 7.08 to 7.89 8.30
Fair value at grant date (£) 0.11 to 6.31 1.34 to 2.66
The expected price volatility is based on historical volatility, adjusted for
any expected changes to future volatility due to publicly available
information.
In January 2022, the Remuneration Committee assessed performance of the first
four tranches of the 2018 awards and the first two tranches of the 2020 awards
under the Unapproved Plan against vesting criteria. These awards did not meet
the market capitalisation targets set when they were originally granted. The
Remuneration Committee exercised the discretion available to it under the plan
and, after taking into account a range of factors, concluded that these awards
would vest at 95% of the maximum. This has been accounted for as a
modification of the awards. In accordance with IFRS 2, the options were valued
as at the date of modification based on the original terms using a Monte-Carlo
simulation, and based on the modified terms using the Black Scholes model. The
incremental fair value granted as a result of the modifications was
£1,067,000, all of which was recognised as an expense in 2022.
The expense recognised in 2022 for all options, including the effect of the
modifications, is £2,262,000 (2021: £563,000).
(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 £1,800 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.
Type of award At 1 January 2022 Awarded Sold/transferred Forfeited At 31 December Weighted average
shares 2022 acquisition price
Partnership 230,315 61,103 (36,545) - 254,873 6.10
Matching 228,943 61,103 (23,875) (14,437) 251,734 6.10
Dividend 25,204 12,327 (2,826) - 34,705 7.24
Total 484,462 134,533 (63,246) (14,437) 541,312
The SIP is administered by the Smart Metering Systems SIP Trust (the 'Trust').
To the extent sufficient shares are not already held by the Trust, Matching
Shares awarded by the Trust to employees are acquired in the 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 2022 was approximately £8.02 per share (2021:
£8.18). 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 2022 for all Matching Shares is £350,000 (2021:
£278,000). No expense is recognised for the Partnership Shares and Dividend
Shares because the participants pay full market value for these shares.
29 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
£4,189,000 and £1,115,000 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.
30 Capital commitments
Significant capital expenditure contracted for at the end of the reporting
period but not recognised as liabilities is as follows:
2022 2021
£'000 £'000
Property, plant and equipment 38,930 27,746
Capital expenditure of £35,901,000 (2021: £27,746,000) contracted for in
relation to property, plant and equipment relates to the Group's grid-scale
battery storage projects under construction. The remaining £3,029,000 (2021:
£nil) relates to the purchase of motor vehicles.
31 Ultimate controlling party
There is no ultimate controlling party by virtue of the structure of
shareholdings in the Group.
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