Smart Metering Sys - Full year results
15/03/2022 07:00
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RNS Number : 7471E Smart Metering Systems PLC 15 March 2022
15 March 2022
Smart Metering Systems plc
Full year results
Strong 2021 performance, well-positioned for 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 2021.
2021 financial performance
£'000 2021 2020(1)
Alternative performance measures
Index-linked annualised recurring revenue (ILARR)(2) 85,860 76,982
Pre-exceptional EBITDA(3) 52,766 49,894
Underlying profit before taxation(4) 18,267 15,246
Underlying basic EPS (p)(5) 9.60 9.56
Statutory performance measures
Group revenue 108,480 102,982
EBITDA(6) 46,288 231,632
Profit before taxation(6) 8,293 194,964
Basic EPS (p) 3.20 171.65
Dividend per share (p) 27.5 25.0
Net cash 117,687 40,236
(1 2020 measures include the financial performance of the disposed I&C
portfolio up to the date of sale on 22 April 2020. )
(2 ILARR is the revenue generated from meter rental and data contracts at a
point in time. Includes revenue from third-party managed meters.)
(3 Pre-exceptional EBITDA is statutory EBITDA excluding exceptional items.)
(4 Underlying profit before taxation is profit before taxation excluding
exceptional items and amortisation of certain intangibles.)
(5 Underlying basic EPS is underlying profit after taxation divided by the
weighted average number of ordinary shares for the purpose of basic EPS.)
(6 2020 measures for statutory EBITDA and statutory profit before taxation
include a non-recurring gain of £194,713,000 on the I&C meter portfolio
disposal. )
(A reconciliation between statutory and underlying performance is detailed in
the Financial Review section. )
Highlights
Financial
· ILARR at 31 December 2021 up 12% to £85.9m (2020: £77.0m)
· Pre-exceptional EBITDA up 6% to £52.8m (2020: £49.9m), up 17%
like-for-like(7)
· Underlying profit before taxation marginally ahead of upgraded
expectations, up 20% to £18.3m (2020: £15.2m), up 58% like-for-like(7)
· Acquired I&C meter portfolio and data service contracts initially
adding c.£3.1m of ILARR
· Completed £175m equity raise in October and refinanced debt facility
increased to £420m
· Net cash at 31 December 2021 of £117.7m (2020: £40.2m)
Dividend
· +10% year-over-year, in line with policy until 2024; covered by
long-term index-linked cash flows from existing metering and data asset base
Smart meters
· Smart meter installation run rate increased to over 30,000 per month
in the second half of the year; currently installing 9.4% of all new smart
meters in the UK; targeting progressive improvement in meter install run rate
· Exclusivity agreement with Shell Energy Retail Limited extended until
December 2025
· Contract wins totalling 900,000 meters in 2021; net of installations,
the contracted smart meter order pipeline improved to c.2.55m (31 December
2020: c.2.0m)
· Negligible impact on pipeline from the failure of some energy
suppliers; customer base strengthened
Grid-scale batteries
· Grid-scale battery pipeline increased to 620MW (31 December 2020:
267MW(8)):
o 50MW site at Burwell now operational (January 2022)
o 270MW fully secured, including a 30MW site acquired in February 2022
o 300MW under exclusivity
· Second site of 40MW expected to be operational by mid-2022 and
further 100MW during H1'23
Developing CaRe assets
· Installation of electric vehicle charge points commenced as part of
Virgin Media Park and Charge project
· Behind-the-meter smart solar and battery solution launched with
initial pilot projects
· Continued progress in the development of wider CaRe products and
services
Environmental, Social and Governance (ESG)
· Strong progress towards 'net zero by 2030' target, led by energy
upgrades to estate and fleet
· Highest scoring range achieved for 'Corporate Governance' by Morgan
Stanley Capital International (MSCI)
(7 Like-for-like adjusted for the I&C metering and data portfolio
acquisition in 2021 and the prior year I&C meter portfolio disposal.)
(8 267MW grid-scale battery pipeline was increased to 470MW in March 2021 and
then to 620MW in November 2021.)
( )
Tim Mortlock, Chief Executive Officer, commented:
"Throughout 2021, SMS has demonstrated the strength of its business model,
delivering profit ahead of upgraded expectations, growth in index-linked
annualised recurring revenue and concluding the year with a strong cash
position. Given COVID-19 related operational challenges and recent turbulence
in the UK energy market, these are impressive results.
"Our contracted smart meter order pipeline remains solid and now more
favourably weighted to larger, well-financed independent energy suppliers, and
supported by the extension to our exclusivity agreement with Shell Energy
Retail. We expect our installation rate to progressively increase throughout
the coming year.
"We made excellent progress in the development of our grid-scale battery
storage assets. The pipeline increased significantly to 620MW, and we finished
the year with energising our first 50MW battery site at Burwell - ahead of
programme and on budget. With construction of our wider secured pipeline
progressing well, and our second 40MW site expected to be operational by
mid-2022, we will soon be able to demonstrate the attractiveness of the
underlying revenue streams and their importance as critical energy
infrastructure.
"Looking ahead, the year has started well, and we are confident with our
previously guided expectations for 2022. Our strong balance sheet and a
resilient, growing smart meter and grid-scale battery pipeline make SMS
well-positioned for further growth.
"Lastly, after nearly two decades with the business, Alan Foy stepped down as
CEO on 1 March 2022. I, along with the Board, wish to thank him for the
tremendous work he has done to drive and deliver sustained growth and success
to SMS. We all wish Alan the very best for the future."
There will be an analyst webcast at 9.00am today - please
contact sms@instinctif.com for details. The full year results presentation
will be published on the Group's website shortly.
For further information:
Smart Metering Systems plc 0141 249 3850
Tim Mortlock, Chief Executive Officer
Gavin Urwin, 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
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) is a fully integrated energy
infrastructure company, which installs and manages smart meters, energy data,
grid-scale battery storage and other carbon reduction ("CaRe") assets. The
Group manages and optimises these assets through its in-house technology and
data analytical platform "METIS".
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. SMS has
been recognised with the London Stock Exchange's Green Economy Mark every year
since it was introduced in 2019.
SMS plc is headquartered in Glasgow with a national presence across twelve UK
locations.
SMS's shares are listed on AIM.
Overview
The Group's resilient business model has delivered significant strategic
progress and a strong financial performance in 2021 with underlying profit
before tax marginally ahead of already upgraded consensus expectations at
£18.3m. Group index-linked annualised recurring revenue grew 12% to £85.9m.
Our contracted smart meter pipeline increased by 900,000 meters to c.2.55
million, net of meters installed in 2021. While the failure of some energy
suppliers has resulted in some movement in our customers' metering portfolios,
the net impact on the Group's pipeline has been negligible. We have also
benefitted from a strengthening in our customer base as some portfolios have
consolidated into larger SMS customers through the Supplier of Last Resort
(SoLR) process.
We made considerable progress in developing the pipeline of our grid-scale
battery storage assets. The total pipeline increased to 620MW, of which the
first 50MW battery site at Burwell became operational in January 2022. Another
270MW is fully secured, of which 40MW is scheduled to become operational
mid-2022 and a further 100MW is scheduled to become operational during H1
2023. The remaining 300MW is under exclusivity.
This strong operational performance is testament to the continued dedication
and commitment of our people, who remain at the heart of driving our mission
to deliver carbon reduction energy solutions. The existing meter and
grid-scale battery pipelines, once fully installed, are expected to add a
combined c.£77m of EBITDA.
In September, we were pleased to complete a successful £175m equity raise and
a refinancing of our debt facility to £420m, which was well supported by our
investors and lenders. This funding, together with internally generated cash,
will enable us to invest in our existing contracted pipelines, whilst also
positioning the business to progress wider-identified growth opportunities and
drive long term shareholder value.
Our established CaRe products, which include meters, energy data and
grid-scale batteries, provide significant additional market opportunity. Our
CaRe asset portfolio also reinforces SMS's position within and beyond the UK
smart meter rollout to drive the broader 'net zero' agenda and UK energy
transition.
Dividend
In line with the Group's stated policy of increasing the dividend by +10%
year-on-year until 2024, the Board is proposing a 27.5p per share dividend (FY
2020: 25.0p). The dividend demonstrates the sustainable growth delivered by
SMS's strategy and is covered by long-term index-linked cash flows from the
existing metering and data asset base.
Financial review
In 2021 we again faced a challenging macro environment with COVID-19 impacting
the early part of the year and the UK energy market facing considerable
turbulence in the latter part of the year. With this in mind, we are very
pleased to report financial results ahead of market expectations once again,
underpinned by consistent growth across our key metrics.
2021 has seen us make significant investment in our established CaRe
verticals. Capital expenditure on metering, data and grid-scale battery
storage assets in the year totalled c.£112m, over double our corresponding
expenditure in the prior year, and we invested c.£8m on the acquisition of a
large-power I&C metering and data portfolio.
We had a net cash position at 31 December 2021 of £117.7m (31 December 2020:
£40.2m), supported by the c.£170m net cash proceeds raised from our
successful equity placing in October and strong internal cash generation.
Following the refinancing of our debt in September, we finished the year with
access to our full £420m revolving credit facility and are thus in a strong
position to support the delivery of our existing meter and battery pipelines.
UK smart meter rollout
The UK smart meter rollout continues to present a significant opportunity to
grow our ILARR, with Ofgem placing annual binding installation targets on
energy suppliers to ensure at least 85% of all meters are exchanged to smart
by the end of 2025. Ofgem has also proposed mandatory settlement of energy on
a half-hourly basis, which would significantly increase the market size for
these services from c.300,000 electricity meters to over 26 million meters by
2026.
SMS succeeded in restoring its smart meter installation rate to c.30,000 per
month following the challenges of COVID-19 and currently installs 9.4% of all
smart meters across the UK. With a well-balanced engineering workforce,
comprising both direct and sub-contract labour, we are well placed to
progressively improve our run rate through the remainder of the UK smart meter
rollout.
Grid-scale battery storage
The total grid-scale battery pipeline increased to 620MW as at 31 December
2021 (2020: 267MW). Since the year end, we have acquired a further 30MW
grid-scale battery site, taking the total fully secured to 270MW in addition
to the 50MW we now have operational. The remaining 300MW is under exclusivity.
Further to the launch of our first 50MW site at Burwell in January 2022 we
expect to have our second 40MW site operational by mid-2022 with a further
100MW expected to become operational during H1 2023. As these assets become
operational in the year, we expect to evidence the quality of the underlying
revenue streams from this critical energy infrastructure.
The economics of this asset class are attractive with an initial EBITDA yield
of c.11-14% against a build cost of c.£380,000 per MW, from an asset whose
base electrical infrastructure has an expected life in excess of 40 years
(with battery cell replacement around every 10 years). The economic profile of
these assets thus provides long-term returns after a relatively short
construction phase of typically one year or less.
As early evidence of the returns expected from these assets, we have secured
strong contracted revenues from the recent capacity market T-1 and T-4
auctions.
ESG progress and sustainability
ESG remains at the core of SMS's culture and operations. Our ESG
responsibilities are an integral element of our business model and critical to
our commitment to managing risk in all areas of the Company. Our business is
intrinsically linked with tackling one of the greatest challenges of our time
- carbon reduction - and we are proud to be utilising our passion and
innovation to work with the global community as part of the solution.
Key developments in 2021 include:
Environmental:
· Recognised with the London Stock Exchange's Green Economy Mark for
another consecutive year.
· Scope 1 and Scope 2 emissions fell by 29% in 2021 when compared with
2019. Although during the year these emissions rose 19% compared to 2020,
distorted by the impact of COVID-19.
· Carbon emissions mitigated through the use of our products and
services increased 17% in 2021.
· Energy upgrades progressed within both our estate and fleet:
· More than 90% of company cars transitioned to plug-in hybrid.
· Several electric vehicle vans received as trial vehicles to test
their viability and suitability.
· Upgrades commenced on our first office, with extensive surveying
activity across a range of energy efficiency and renewable solutions.
Social:
· SMS is now a signatory of the Business in the Community Race at Work
Charter, ensuring our workplaces are tackling barriers ethnic minority people
face in recruitment and progression.
· We have become a Level 3 Disability Confident Leader, the highest
level possible.
· Renewed focus on equality, diversity and inclusion (EDI) led by the
Board through the launch of a partnership with the Hive Inclusion Works
programme.
· Group employee survey completed for the second time with a 75%
response rate, up 25 percentage points on the inaugural launch of the survey
in 2020.
· Several initiatives launched to support local communities and
biodiversity efforts whilst constructing grid-scale battery projects.
Governance:
· Dedicated board subcommittee for Health, Safety, and Sustainability
operating effectively, headed by the Group's Chairman Miriam Greenwood.
· Completion of annual Carbon Disclosure Project (CDP) submission in
July, aligning with the key requirements under TCFD (Taskforce for
Climate-related Financial Disclosure) of climate-related governance, strategy,
risk management, metrics and targets.
· Successfully concluded the ISO50001 external audit process and
completed our external ISO re-certification audits with zero non-conformities
or observations.
· Morgan Stanley Capital International (MSCI) weighted average
performance improved from 6.3 to 6.6 (on scale of 10) and Sustainalytics risks
rating improved from 27.8 to 26.6 (on scale of 0-50).
Current trading and outlook
The Group's installation run rate has continued to average c.30,000 meters per
month in the early part of 2022. The Group expects progressive improvement in
this run rate through the year.
At the end of February 2022, the Group's ILARR stood at £86.8m (31 December
2021: £85.9m).
The trading performance of our first 50MW grid-scale battery project is in
line with our expectations and the project has accessed all available forms of
revenue streams.
We have a strong balance sheet and the net proceeds of the 2021 equity
placing, alongside our new debt facility and strong internal cash generation,
give us the financial and operational flexibility to help fund our growing
smart meter and grid-scale battery pipelines.
We remain well positioned in the UK's energy market, with significant
additional growth opportunities for our established and developing CaRe
products and services.
The Board remains confident of the consensus expectations for the current
financial year ("FY 2022").
Management succession
After nearly two decades with the business, Alan Foy decided to step down as
Chief Executive Officer on 1 March 2022. In that time, Alan dedicated himself
to building the business into a full end-to-end energy solutions provider. He
leaves the business positioned with a strong platform for continued,
sustainable growth in the coming years.
The Board appointed Tim Mortlock to replace Alan as Chief Executive Officer.
Tim has worked closely alongside Alan for several years and has been central
to the development and delivery of SMS's strategy, most recently as Chief
Operating Officer.
Operational review by division
Asset management:
During 2021, meter and data ILARR increased from £77.0m to £85.9m due in
part to the growth in our I&C data services following the acquisition of a
meter portfolio in April 2021 and its associated data contracts. The ILARR
associated with the domestic smart meter portfolio increased from £42.6m to
£50.1m, offset by the anticipated ongoing removal of traditional meters.
Data services ILARR increased from £11.7m to £13.9m.
At the start of the year SMS had a c.2.0 million contracted smart meter order
pipeline, which increased on a like-for-like basis to c.2.9 million meters
from new contract wins. We exited the year with a net contracted smart meter
order pipeline of c.2.55 million meters, which is expected to add c.£51m to
our ILARR with continued additional opportunities in the market to increase
this pipeline further.
We continue to support the enrolment and adoption of first generation
('SMETS1') smart meters into the Data Communications Company (DCC) platform,
which is progressing at pace. At 28 February 2022, c.8.0 million SMETS1 meters
had been migrated as compared with 3.5 million in February 2021. The migration
of the Group's own SMETS1 portfolio specifically is well underway, progressing
broadly in line with the industry. This process is now expected to continue
through to the end of 2022 following an extension issued by the Department for
Business, Energy & Industrial Strategy (BEIS).
Our integrated model continues to enable us to originate smart meter assets
with market-leading returns, with the index-linked nature of our rentals
providing strong protection against an inflationary environment. We have also
taken measures to fix the purchase cost of meters for a large proportion of
our pipeline.
The metering market is not immune to global supply chain issues. This was
evident during the year with a combination of COVID-19 and Brexit impacting
the production and delivery of stock from our key suppliers, and global chip
shortages. However, we have taken further steps to diversify our supply chain
and have revised our stock management policies to ensure we hold significant
buffer stock within our UK distribution warehouses, thereby ensuring stock
availability is not a constraint in delivering our meter pipeline.
We are extremely pleased with the efficiency of our operational delivery, and
we continue to invest in our engineering capacity to deliver our increased
meter pipeline over the course of the rollout.
Asset installation:
Installation activities remained restricted by national lockdowns in the first
quarter of the year, especially in Scotland. Vigilant compliance with updated
health and safety working practices was enforced to protect both our teams and
customers. The impact of COVID-19 has led to the UK smart meter rollout being
extended to the end of 2025, with annual binding installation targets on
energy suppliers from the beginning of 2022.
In the final quarter of 2021, the exit of some energy suppliers from the
market, and subsequent implementation of the SoLR process, led to some
temporary delays in energy suppliers engaging with end consumers to roll out
smart meters, with an increase in transactional meter call-out requirements as
a result.
Despite these challenges, we increased our installation run rate to over
30,000 meters per month and installed c.350,000 smart meters during the year
in line with expectations, demonstrating the robustness of our operational
model. Through careful management, we have driven significant efficiencies
within the installation business in the year, with full utilisation of our
direct labour workforce, supplemented by our network of sub-contractors. This
flexible model has allowed us to navigate market conditions effectively,
delivering results marginally ahead of expectations.
We continue to invest in our engineering capacity as we expect to drive
progressive improvement in our installation run rate during 2022. Maintaining
an appropriate balance between direct labour and sub-contractors will remain a
key focus, ensuring we sustain the efficiency and utilisation levels we have
achieved over the last 18 months.
Energy management:
The pandemic continued to have an impact on our traditional consultancy and
energy management services, with ongoing delays as a result of disruption to
site works. Service delivery was maintained but roll out of site-based energy
efficiency measures was impacted by customers' financial and operational
constraints imposed by COVID-19, impacting our ability to deploy these
services. Consequently, revenue in this division declined during the year.
However, supported by the UK Government's 'Net Zero' and 'Heat and Buildings'
strategies, and with increasing energy costs of significant concern to both
I&C and domestic customers, we remain positive regarding the substantial
market opportunities available to us and the potential for deployment of our
existing and developing CaRe products and services.
It has been a transformative year for our ambitions in grid-scale battery
storage with our first site in Burwell, Cambridgeshire (50MW) now fully
operational following commissioning in January 2022. We deliver these
grid-scale projects from initial construction through to ongoing operation,
trading, maintenance and asset management. The cash flows from grid-scale
batteries, once energised, are fundamentally driven by the daily requirement
for balancing services on the grid which, in tandem with growth in
intermittent renewable generation, is substantially increasing the need for
such services. The counterparties to these services are the system operators -
National Grid and the distribution network operator (DNO) - providing strong
revenue protection, allied with strong battery warranty protections.
The increase in wholesale energy costs, which will inevitably flow through to
both I&C and domestic energy charges, drives greater urgency for
innovative solutions which address consumption, cost and the net-zero
challenge. We continue to develop solutions, aligned to our established
technology platforms and engineering capabilities, to address these
challenges:
· EV infrastructure: we are developing solutions in the domestic and
destination (both workplace and on-street) parts of the market and remain lead
coordinators on the Virgin Media Park and Charge ("VPACH") project, which is
establishing on-street charging solutions. Installations of EV chargers as
part of the VPACH project have commenced and it is expected that approximately
600 charging sockets will have been installed by the end of the project. We
have the engineering skills and knowledge to establish and originate
destination charging infrastructure and its electrical connection to the grid,
utilising our established and scalable field management platform. Our training
academy is also now able to train engineers to install EV chargers at the
domestic level.
· Solopower (behind-the-meter smart solar and storage): our Solopower
solution, which aims to radically reduce carbon emissions within the UK's
social housing stock, was launched in 2021. To deliver this solution, we are
partnering with local councils and housing associations to upgrade the energy
performance of social housing accommodation significantly through the use of
solar generation and battery storage, supported by our FlexiGrid(TM)
technology platform. Pilot projects are being progressed in over 1,000 homes
across the UK, as well as early-stage projects in the Republic of Ireland.
· Heat meters and networks: we have successfully delivered a pilot
solution to a nation-wide hotel chain for smart heating controls, and we are
working with other existing and potential customers to explore alternative
heat solutions. In April 2021 we announced our partnership with Aberdeen City
Council to roll out fabric retrofits and air-sourced heat pumps, alongside the
Group's Solopower solution, to a group of homes, thereby trialling a
'whole-house' approach to the domestic decarbonisation challenge. This project
is expected to progress through 2022.
· Energy efficiency: with more than 20 years of energy efficiency
consulting and project delivery experience, we are developing capital projects
which will deliver reduced energy consumption for our I&C customer base.
These projects are often linked to, and identified by, the data services we
can provide from smart and advanced meters - for example, using smart energy
control solutions for energy management and LED lighting projects. By aligning
capital with this expertise, we can deliver cost savings and permanent carbon
reduction for our customers whilst generating long-term recurring revenues for
the Group.
Whilst these verticals are at various stages of development, we have
established trials and pilots in all of them and are developing the commercial
models and pipelines accordingly. All of these products are closely aligned to
our existing vertically-integrated technology and engineering platform, and
indeed are complementary to each other - we are positioning our business in
areas in which we already have substantial experience and capability. These
markets also all share two key characteristics - they reduce carbon, and they
each provide a substantial growth market opportunity.
Financial review
Revenue
31 December 2021 31 December 2020
£m £m Percentage
change
Asset management 82.9 78.7 5%
Asset installation 22.0 19.7 12%
Energy management 3.6 4.6 (22%)
Group revenue 108.5 103.0 5%
Asset management revenues, which include new revenues from the acquisition of
the large-power I&C metering and data portfolio in April 2021, are up on
the prior year despite loss of revenue from the prior year I&C meter
portfolio disposal. Excluding both transactions, asset management revenues
have increased by c.8% on a like-for-like basis on the prior year. This
reflects the flow-through effect of increased meter installations at the end
of 2020 and into 2021 as COVID-19 restrictions eased and the run rate was
restored to a normalised rate.
Asset installation revenues increased 12% to £22.0m as compared with the
prior year, reflecting the recovery of non-essential field work which was
suspended for the majority of 2020. Whilst our connections and infrastructure
services have taken longer to recover than anticipated, we saw a
higher-than-usual volume of transactional meter works through the year as
access to consumer properties re-opened.
As expected, energy management revenues experienced a reduction of 22% to
£3.6m. Despite the resumption of key customer projects, we saw projects run
at a lower capacity due to the slow recovery of the broader hospitality
industry post COVID-19, with revised scope changes to align with customer
budget constraints.
Gross margins
Overall, the depreciation-adjusted gross margin at the Group level increased
by 6% to 77% (2020: 71%). SMS includes depreciation on revenue-generating
assets within cost of sales and removing this from the gross margin provides a
better comparison of the Group's underlying trading performance year on year.
Depreciation-adjusted gross profit, in absolute terms, has increased by
£11.3m driven in the first instance by the favourable asset management and
asset installation revenue movements detailed above. The remaining increase is
attributable to our continued and dedicated focus on operational efficiency
and cost control within the asset installation business, which has reported a
positive gross profit margin, excluding exceptional cost of sales arising as a
result of COVID-19, of 36% in 2021 (2020: 16%). Efforts to control the Group's
operating cost base in order to increase efficiency in the labour force,
including an appropriate balance between direct labour and subcontractors,
have driven a reduction in cost of sales with minimal inefficiency being
reported in profit and loss in the year. This focus on operational efficiency
and cost control has allowed the business to invest in and strengthen other
areas which will ensure we continue to drive efficiency in our operations, and
innovation in our services.
The energy management gross margin has increased to 24% (2020: 22%), with the
2020 margin impacted by a non-recurring project delivered by Solo Energy in
the year at a slightly lower margin. With a predominantly variable cost of
sales base, reductions in revenue have been largely offset by equivalent
reductions in cost of sales.
EBITDA
Pre-exceptional EBITDA provides a more ready comparison of trading, year on
year, showing an increase of 6% to £52.8m (2020: £49.9m). Similar to
revenue, this includes the effect of the large-power I&C metering and data
portfolio acquired in the year offset by lost revenue from the 2020 I&C
meter portfolio disposal. Excluding these transactions, like-for-like
pre-exceptional EBITDA increased by c.17% on the prior year. The primary
drivers for this growth are detailed above within the Revenue and Gross margin
sections.
Administrative costs, excluding depreciation and amortisation, have increased
by c.£4m year on year, largely driven by the following:
· c.£1m of this increase relates to expenditure incurred to restore
our supporting functions to a normalised state following COVID-19 lockdowns,
in areas such as marketing, training, recruitment, and professional services.
· As noted above we have worked hard to drive operational
efficiency and cost control within our asset installation business, and a key
enabler of this has been continued investment (c.£1m) in our IT and support
systems with the aim of unifying legacy platforms in areas such as field
service management, warehousing, and logistics.
· The considerable turbulence in the UK energy market in the second
half of the year, as a result of increases in wholesale gas prices, has placed
significant pressure on energy suppliers and caused a large number of
companies to exit the market. Whilst the Supplier of Last Resort (SoLR)
process provides us with a degree of protection over the long term, we are
exposed in the short term where there are unpaid charges incurred prior to the
supplier exiting the market. During 2021 we saw an increase in bad debt
charges of c.£1m year on year.
Consistent with the prior year, costs directly attributable to COVID-19,
including staff costs that would ordinarily be capitalised, have been
recognised within exceptional costs (detailed below).
Statutory EBITDA decreased to £46.3m (2020: £231.6m) mainly as a result of
the non-recurring gain of £194.7m arising from the I&C meter portfolio
disposal in the prior year.
Operational and pre-tax profits
Depreciation costs on general property, plant and equipment, excluding meter
assets, have decreased by £0.3m to £4.1m (2020: £4.4m) due to the effect of
disposals and fully depreciated assets across the various asset classes.
Depreciation costs on meter assets are in line with the prior year at £24.7m.
The effects of the 2020 I&C meter portfolio disposal, for which a c.£1.8m
depreciation charge was recognised in 2020, have been partially offset by
additional depreciation recognised as a result of the 2021 large-power I&C
metering and data portfolio acquisition together with the net effect of
additions and removals across the various meter types.
As expected, amortisation costs on our intangible assets increased by £1.1m
to £4.1m in 2021 (2020: £3.0m) following the implementation of our Groupwide
Enterprise Resource Planning system, which went fully live in April 2020.
Finance costs decreased to £3.5m excluding exceptional costs (2020: £4.7m),
reflecting the reduced debt position on our revolving credit facility.
Overall, underlying profit before taxation increased by 20% to £18.3m due to
a flow-through of the above points.
Exceptional items
The operating charge to the income statement in respect of exceptional items
of £6.5m (2020: £13.1m excluding the gain on the I&C meter portfolio
disposal) is driven largely by £5.9m of losses on the traditional and
first-generation smart meter ('SMETS1') portfolio (2020: £6.0m).
Consistent with the prior year, management has deemed it appropriate to
classify costs attributable to COVID-19 as exceptional in line with the
Group's accounting policy. Net costs of £0.3m (2020: £6.9m) have been
treated as such, broken down as follows:
· £0.8m (2020: £6.4m) of costs that would have ordinarily been
capitalised as directly attributable to the installation of meter assets -
consisting primarily of staff costs - have been recognised as exceptional in
line with the same principles as those applied in the prior year. This amount
is substantially reduced due to the lifting of restrictions in 2021, and
largely represents costs related to the Scottish workforce being unable to
work in the early part of the year.
· In the prior year, management had recognised an exceptional bad debt
charge of £0.5m in relation to a sub-portfolio of smaller, independent
customers, who were identified as having a potentially elevated credit risk as
a direct consequence of COVID-19 and were provided for on a specific basis. As
at 31 December 2021 this provision has been reduced to £nil, reflecting
positive recovery trends over the past twelve months, and giving rise to a
£0.4m credit in the current year financial statements (net of write offs).
Whilst we will continue to monitor the situation, we are of the view that
there is no longer significant uncertainty regarding the impact of COVID-19 on
our customer default risk. Consistent with the recognition of the original
impairment loss in the prior year, we have recognised this write back as
exceptional.
· A successful COVID-19 insurance claim against business recovery
costs of £0.1m was also received in the year, recognised as an exceptional
credit in line with the recognition of the original costs in the prior year.
Other operating exceptional items total £0.3m (2020: £0.1m) and comprise
acquisition-related costs incurred as part of the large-power I&C metering
and data portfolio acquisition in April 2021.
The finance charge to the income statement in respect of exceptional items of
£1.7m (2020: £0.1m) primarily comprises accelerated amortisation of loan
arrangement fees in relation to the refinancing of the loan facility detailed
below.
Effective tax rate
The effective tax rate on statutory profits was 54% (2020: 1%). The effective
tax rate on pre-exceptional profits was 39% (2020: 31%). This remains 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 an increase in the rate of
corporation tax from 19% to 25% from 1 April 2023. This has been applied to
the Group's brought-forward deferred tax liabilities on its portfolio of meter
assets, giving rise to an opening balance impact of c.£2.5m recognised as a
charge in the current period. Excluding the impact of this rate change, the
full-year effective tax rate on pre-exceptional profits is 18.5% as expected
and broadly in line with the prior year.
The Group's capital expenditure as it pertains to meter assets qualifies for
capital allowances, providing the Group with tax relief on such expenditure.
These allowances are claimed in the tax year in which the asset is acquired
and set against taxable profit for that year, thus reducing the total tax
payable. As a result, the Group was not tax-paying in either the current or
prior year.
The Group's deferred tax balance of £12.2m (2020: £8.5m) is primarily made
up of £11.0m (2020: £7.1m) in respect of accelerated capital allowances.
Earnings per share
Underlying basic earnings per share (EPS), which excludes exceptional costs,
amortisation of certain intangibles and their associated tax effect, was
9.60p (2020: 9.56p), reflecting the underlying profitability of the Group.
Statutory earnings per share decreased to 3.20p (2020: 171.65p) as a result of
the exceptional gain on the I&C meter portfolio disposal driving higher
statutory profits in the prior year.
Diluted EPS does not vary significantly from basic EPS; a small decrease
arises as a result of the dilutive impact of shares issuable in the future to
settle the Group's share scheme obligations.
Dividend
A 25p per share dividend in respect of FY 2020 was approved at the Group's
Annual General Meeting in May, and the fourth and final instalment of this was
paid in July 2021.
In line with the Group's policy announced last year, a 27.5p per share
dividend is proposed in respect of FY 2021, representing 10% growth on the FY
2020 dividend as planned. Consistent with FY 2020, this is expected to be
settled in four equal quarterly instalments. Two instalments have already been
paid, in October 2021 and January 2022 respectively, with the following
timetable for the remaining instalments:
Instalment Ex-dividend date Record date Payment date
3 31 March 2022 1 April 2022 28 April 2022
4 30 June 2022 1 July 2022 28 July 2022
The Board remains comfortable that future dividend payment amounts are
sufficiently secured by income from our existing metering and data asset base
and its long-term index-linked cash flows.
Cash flow
Operating cash inflow generated in 2021 was strong at £62.2m (2020: £43.9m),
driven by growth in our underlying cash earnings and an overall working
capital inflow. This operating cash flow is net of a restricted cash balance
of £1.3m that has been recognised in 2021 (2020: £1.6m) in relation to
amounts received from energy suppliers on the I&C assets disposed of in
the prior year, together with trading collateral held as part of our
grid-scale battery business.
Capital expenditure on property, plant and equipment was £108.2m (2020:
£41.8m), excluding right-of-use asset additions of £5.3m primarily in
relation to land leases secured as part of our grid-scale acquisitions. Of
this, £82.4m (2020: £40.3m) was invested in revenue-generating metering and
data assets. This capital expenditure increased as the prior year was
significantly impacted by COVID-19.
Of the remaining capital expenditure in the year, £24.5m relates to
construction of grid-scale battery storage sites, classified as assets under
construction within the Property, plant and equipment note to the financial
statements. The majority of this spend has arisen on our Burwell site, which
went live in January 2022. In addition to this construction spend, there was a
£4.7m cash outflow on sites in development and under construction, detailed
in note 21 to the financial statements.
An £8.4m cash outflow funded the acquisition of the large-power I&C
metering and data portfolio. See note 20 to the consolidated financial
statements for further details.
A further £2.8m (2020: £4.1m) investment has been made in intangible
assets, primarily comprising development of software to support the metering
and installations business. This has reduced on the prior year as a result of
the Groupwide Enterprise Resource Planning system that went live across the
Group in H1 2020, with a reduction in capital investment post 'go live' as
expected.
Financial resources
From a financing perspective, 2021 was a significant year. With an increasing
requirement for capital, driven by the growth in our meter and grid-scale
battery pipelines, the business made the decision to raise additional funds
via an equity placing. Concurrently, we entered negotiations with our
syndicate of lenders to refinance our revolving credit facility to better suit
the developing needs of the business.
Our equity placing successfully completed on 4 October 2021 with the support
of both existing shareholders and new investors, raising gross proceeds of
£175.1m in line with management's targets. After the deduction of £4.9m of
issue costs net proceeds were £170.2m, of which £53.3m was used to settle
all outstanding principal amounts under our existing revolving credit
facility. This has re-based our leverage at 31 December 2021 and will help the
business maintain a prudent leverage position over the medium term.
As part of the refinancing, all outstanding amounts under the existing
facility were settled. Concurrently, the Group undertook a commercial
negotiation, facilitated by debt advisory specialists, to enter into a new
facility on market terms. The new facility has total available commitments of
£420m and matures in December 2025. The new facility is provided by a
syndicate of lenders, including the lenders of the existing facility and new
lenders. Unamortised arrangement fees on the existing facility of £1.5m have
been accelerated and recognised as an exceptional finance cost in the
consolidated income statement together with £0.2m of legal and professional
fees arising on the refinancing.
Transaction costs of £2.4m directly attributable to the establishment of the
new facility will be amortised over the remaining term to 2025.
For the year ended 31 December 2021, £0.6m of amortisation of transaction
costs has been recognised within underlying profit in the consolidated income
statement (2020: £0.7m) of which £0.2m relates to the new facility. Interest
of £0.6m (2020: £2.3m) and £1.9m of non-utilisation fees (2020: £1.6m)
have also been recognised.
Drawdowns made following the refinancing were fully repaid by 31 December
2021, leaving the Group with access to its full £420m commitment at this
date. We therefore remain in a net cash position at 31 December 2021 of
£117.7m (31 December 2020: net cash of £40.2m). This excludes restricted
cash and lease liabilities accounted for under IFRS 16. Our available cash and
unutilised element of the revolving credit facility stood at £537.7m (31
December 2020: £340.2m) and we had cash in bank of £117.7m at 31 December
2021 (31 December 2020: £40.2m), again excluding restricted cash.
The Group was fully compliant with all its bank covenants through the year and
at 31 December 2021.
Our financial resources continue to provide the financial flexibility required
to maximise pipeline growth 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 cash/debt Total bank loans less cash and cash equivalents, excluding restricted cash.
Excludes lease liabilities recognised under IFRS 16.
(1 Amortisation of the Group's new Enterprise Resource Planning system, which
went live in full in 2020, remains within the underlying cost base of the
business and is therefore a part of the Group's underlying profit measures.)
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 ended Year ended Percentage
31 December 31 December change
2021 2020
£m £m
Index-linked annualised recurring revenue 85.9 77.0 12%
Group revenue 108.5 103.0 5%
Statutory profit from operations 13.5 199.6
Amortisation of intangibles 4.1 3.0
Depreciation 28.7 29.1
Statutory EBITDA 46.3 231.6 (80%)
Exceptional items(1) (EBITDA-related) 6.5 (181.7)
Pre-exceptional EBITDA 52.8 49.9 6%
Net interest (excl. exceptional) (3.5) (4.5)
Depreciation (28.7) (29.1)
Amortisation of intangibles included in underlying profit before taxation(2) (2.3) (1.1)
Underlying profit before taxation 18.3 15.2 20%
Exceptional items(1) (EBITDA) (6.5) 181.7
Exceptional items(1) (interest) (1.7) (0.1)
Amortisation of intangibles excluded in underlying profit before taxation (1.8) (1.9)
Statutory profit before taxation 8.3 195.0 (96%)
Taxation (4.5) (1.5)
Statutory profit after taxation 3.8 193.5 (98%)
Amortisation of intangibles excluded in underlying profit after taxation 1.8 1.9
Exceptional items(1) (EBITDA and interest) 8.2 (181.6)
Tax effect of adjustments (2.4) (3.0)
Underlying profit after taxation 11.4 10.8 6%
Weighted average number of ordinary shares (basic) 118,330,817 112,715,328
Underlying basic EPS (pence) 9.60 9.56
Weighted average number of ordinary shares (diluted) 118,972,527 113,637,882
Underlying diluted EPS (pence) 9.55 9.49
(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 new Enterprise Resource Planning system, which
went live in full in 2020, remains within the underlying cost base of the
business and is therefore a part of the Group's underlying profit measures.)
Consolidated income statement
For the year ended 31 December 2021
2021 2021 2020 2020
Before Before
exceptional Exceptional 2021 exceptional Exceptional 2020
items Items(1) Total items items Total
Notes £'000 £'000 £'000 £'000 £'000 £'000
Revenue 2 108,480 - 108,480 102,982 - 102,982
Cost of sales 3 (48,316) (829) (49,145) (49,980) (4,890) (54,870)
Gross profit 60,164 (829) 59,335 53,002 (4,890) 48,112
Administrative expenses 3 (41,866) (5,649) (47,515) (36,845) (8,085) (44,930)
Other operating income 3 1,696 - 1,696 1,723 - 1,723
Gain on disposal of subsidiary 4 - - - - 194,713 194,713
Profit from operations 3 19,994 (6,478) 13,516 17,880 181,738 199,618
Finance costs 6 (3,488) (1,742) (5,230) (4,705) (115) (4,820)
Finance income 6 7 - 7 166 - 166
Profit before taxation 16,513 (8,220) 8,293 13,341 181,623 194,964
Taxation 7 (6,479) 1,978 (4,501) (4,103) 2,618 (1,485)
Profit for the year attributable to owners of the parent 10,034 (6,242) 3,792 9,238 184,241 193,479
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 2021 2020
Basic earnings per share (pence) 8 3.20 171.65
Diluted earnings per share (pence) 8 3.19 170.26
Consolidated statement of comprehensive income
For the year ended 31 December 2021
2021 2020
Before 2021 Before 2020
exceptional Exceptional 2021 exceptional Exceptional 2020
items items Total items items Total
£'000 £'000 £'000 £'000 £'000 £'000
Profit for the year 10,034 (6,242) 3,792 9,238 184,241 193,479
Other comprehensive income(1)
Exchange differences on translation of foreign operations (46) - (46) 67 - 67
Other comprehensive income for the year, net of tax (46) - (46) 67 - 67
Total comprehensive income for the year attributable to owners of the parent 9,988 (6,242) 3,746 9,305 184,241 193,546
1 May be reclassified to profit or loss.
Consolidated statement of financial position
As at 31 December 2021
2021 2020
Notes £'000 £'000
Assets
Non-current assets
Intangible assets 10, 13 25,463 24,923
Property, plant and equipment 11 415,901 328,338
Investments 12 75 75
Other assets 18 1,651 1,308
Trade and other receivables 15 - 12
Total non-current assets 443,090 354,656
Current assets
Inventories 14 22,980 27,650
Other assets 18 550 641
Trade and other receivables 15 47,631 37,164
Income tax recoverable - 576
Cash and cash equivalents 16 117,687 40,236
Restricted cash 16 1,299 1,627
Total current assets 190,147 107,894
Total assets 633,237 462,550
Liabilities
Current liabilities
Trade and other payables 17 56,489 41,958
Lease liabilities 18 999 936
Other liabilities 18 638 388
Bank loans and overdrafts 18 - -
Total current liabilities 58,126 43,282
Non-current liabilities
Bank loans 18 - -
Lease liabilities 18 7,574 4,315
Deferred tax liabilities 22 12,199 8,511
Provisions 18 798 -
Other long-term liabilities 18 750 -
Total non-current liabilities 21,321 12,826
Total liabilities 79,447 56,108
Net assets 553,790 406,442
Equity
Share capital 24 1,333 1,129
Share premium 332,048 160,471
Other reserve 26 9,562 9,562
Own share reserve 24 (825) (749)
Foreign currency translation reserve (45) 1
Retained earnings 211,717 236,028
Total equity attributable to owners of the parent 553,790 406,442
Consolidated statement of changes in equity
For the year ended 31 December 2021
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 2020 1,128 160,106 9,562 (768) (66) 53,615 223,577
Total profit for the year - - - - - 193,479 193,479
Total other comprehensive - - - - 67 - 67
income for the year
Transactions with owners in their capacity as owners
Dividends (note 9) - - - - - (12,226) (12,226)
Shares issued (note 24) 1 365 - - - - 366
Movement in own shares (note 24) - - - 19 - (180) (161)
Share-based payments (note 25) - - - - - 626 626
Income tax effect of share options - - - - - 714 714
As at 31 December 2020 1,129 160,471 9,562 (749) 1 236,028 406,442
Total profit for the year - - - - - 3,792 3,792
Total other comprehensive income - - - - (46) - (46)
for the year
Transactions with owners in their capacity as owners
Dividends (note 9) - - - - - (29,060) (29,060)
Shares issued (note 24) 204 171,577 - - - - 171,781
Movement in own shares (note 24) - - - (76) - (203) (279)
Share-based payments (note 25) - - - - - 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
See notes 24 and 26 for details of the Own share reserve and Other reserve.
Consolidated statement of cash flows
For the year ended 31 December 2021
2021 2020
£'000 £'000
Operating activities
Profit before taxation 8,293 194,964
Finance costs 3,488 4,705
Finance income (7) (166)
Foreign exchange loss 29 4
Exceptional items: gain on disposal of subsidiary (note 4) - (194,713)
Exceptional items: other(1) 7,288 6,148
Depreciation 28,712 29,057
Amortisation of intangibles 4,060 2,957
Share-based payment expense 841 626
RDEC income (489) (536)
Loss on disposal of property, plant and equipment 2,457 1,028
Loss on disposal of intangible assets - 12
Movement in inventories 3,359 (648)
Movement in trade and other receivables(2) (7,671) 6,461
Movement in restricted cash 328 (1,627)
Movement in trade and other payables(2) 11,078 (4,361)
Cash generated from operations 61,766 43,911
Income tax received 403 -
Net cash generated from operations 62,169 43,911
Investing activities
Proceeds on disposal of subsidiary, gross - 290,615
Payments to dispose of subsidiary(3) - (11,589)
Proceeds on disposal of subsidiary, net of payments to dispose - 279,026
Payments for acquisition of subsidiaries, net of cash acquired (4,749) (2,438)
Payment for acquisition of new business (8,433) -
Payments to acquire property, plant and equipment (108,214) (41,796)
Proceeds on disposal of property, plant and equipment 2,508 4,779
Payments to acquire intangible assets (2,831) (4,056)
Finance income received 7 166
Net cash (used in)/generated from investing activities (121,712) 235,681
Financing activities
New borrowings 53,250 15,000
Borrowings repaid (53,250) (285,000)
Principal elements of lease payments (1,247) (1,155)
Finance costs paid (4,200) (6,272)
Net proceeds from share issue 171,781 362
Purchase of own shares (279) (161)
Dividends paid (29,060) (12,226)
Net cash generated (used in)/from financing activities 136,995 (289,452)
Net increase/(decrease) in cash and cash equivalents 77,452 (9,860)
Exchange (gain)/loss on cash and cash equivalents (1) 4
Cash and cash equivalents at the beginning of the financial year 40,236 50,092
Cash and cash equivalents at the end of the financial year (note 16) 117,687 40,236
1 Other exceptional items include £5,546,000 for losses on our meter
portfolio and the £1,742,000 exceptional finance cost. In 2020, non-cash
exceptional items included £6,033,000 for losses on our meter portfolio and
the £115,000 exceptional finance cost.
2 In 2020, the movement in trade and other receivables included an
adjustment of £4,922,000 and the movement in trade and other payables
included an adjustment of £237,000 for working capital disposed of as part
of the subsidiary sale.
3 In 2020, Payments to dispose of subsidiary of £11,589,000 included cash
disposed of £4,681,000 and transaction costs paid in the year of £6,908,000.
Accounting policies
This note provides a list of the significant accounting policies adopted in
the preparation of these consolidated financial statements. These policies
have been consistently applied to all the years presented, unless otherwise
stated. The consolidated financial statements of the Group for the year ended
31 December 2021 were approved and authorised for issue in accordance with a
resolution of the Directors on 15 March 2022. 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.
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. 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 2023. 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.
The financial information set out above does not constitute the Company's
statutory accounts for the years ended 31 December 2021 or 2020 but is derived
from those accounts. Statutory accounts for the year ended 31 December 2020
have been delivered to the Registrar of companies and those for 2021 will be
delivered in due course. The auditor has reported on both sets of accounts;
its reports were unqualified, did not contain an emphasis of matter reference
and did not contain statements under section 498 (2) or (3) of the Companies
Act 2006.
Going concern
Management prepares budgets and forecasts on a five-year forward-looking
basis. These forecasts cover operational cash flows and investment capital
expenditure and are prepared based on management's estimation of installation
run rates through the UK smart meter rollout. The Directors have performed
their assessment of the entity's ability to continue as a going concern, from
the date of issue of these financial statements to 31 December 2023. Over the
course of the COVID-19 pandemic, forecasts have continued to be reviewed in
detail to ensure any estimated potential impact of COVID-19 restrictions and
regulations has been appropriately incorporated, along with the Group's
proposed responses. Following the lifting of restrictions and resumption of
core services, no significant COVID-19 adjustments have been required in
management's latest forecasts.
Non-essential field work, including planned installations of smart meters, was
suspended from 24 March 2020. However, this was a temporary response measure
and, following the UK Government's announcement detailing phased lifting of
restrictions, a progressive resumption of all non-essential field work
commenced from 1 June 2020. Through the second half of 2020, the Group
continued to see a recovery in installation run rates, despite continued local
restrictions, and by Q4 2020 was operating at c.80% of the pre-COVID-19 run
rate. Where permitted under the UK Government's guidelines, installation
activity continued in the early part of 2021 through the second national
lockdown. Since April 2021, following the easing of restrictions, the Group
has operated above its pre-COVID-19 run rate. As anticipated, the main
impact of COVID-19 has been one of timing and management does not expect any
significant longer-term effects on the business as a result of the pandemic.
Management has modelled several different meter installation and grid-scale
battery storage scenarios, including a downside scenario which assumed a
slower rollout of new meter installations over the year 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 addition, in
early 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 the date of approving the financial statements, the Group had
access to the full £420m of its revolving credit facility with no amount
drawn down. The Group has not required any new or extended facilities as a
result of COVID-19, nor has it needed to renegotiate or waive any of its bank
covenants.
The Group was compliant with all its debt covenants at 31 December 2021. The
financial covenants attached to the refinanced 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 2021 these stood at 16.11x and -2.07x respectively, on
account of a net cash-positive position, 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 2023.
The Group was in a net cash position of £117.7m at 31 December 2021 following
the equity placing and the subsequent voluntary prepayment of its loan
facility (31 December 2020: £40.2m net cash) and, at that date, undrawn
facilities were £420m (31 December 2020: £300m). The Group balance sheet
shows consolidated net assets of £553.8m (31 December 2020: £406.4m), of
which £366.7m (31 December 2020: £315.5m) 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.
The Group has not had to rely on any government support schemes as a result of
COVID-19. 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 27.5p per share annualised dividend in
respect of FY 2021. The first of four cash instalments, a total of £7.8m, was
paid in October 2021.
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:
· presentation of costs attributable to COVID-19 as exceptional:
- as a result of reduced engineering activity in periods of lockdown due
to COVID-19, management has estimated that £0.8m of costs that would
ordinarily be capitalised as directly attributable to the installation of
meter assets - consisting primarily of staff costs - have remained in
underlying profit. Consistent with the Group's accounting policy on
exceptional items, these material costs are attributable to a rare
macroeconomic event, being the COVID-19 pandemic, and therefore management has
taken the judgement to recognise these costs as exceptional; and
- as at 31 December 2021, management has assessed the expected credit
losses for trade receivables. COVID-19 has generated global financial
uncertainty; however, the potential impact of this on the Group's credit risk
is mitigated by the highly regulated nature of the utilities industry and the
extensive support made available to energy - and other infrastructure -
suppliers by the UK Government. As a result, management has not increased the
expected loss rates for the trade receivables portfolio as a whole. Instead, a
subset of trade receivables has been identified as having a potentially
elevated credit risk, due to a greater risk of administration as a direct
consequence of COVID-19. This subset of trade receivables has been provided
for on a specific basis and in the prior year resulted in an additional £0.5m
impairment loss. This provision has been reduced to £nil as at 31 December
2021, reflecting positive recovery trends over the past twelve months, giving
rise to a £0.4m credit in the current year financial statements (net of
write-offs). Whilst management will continue to monitor the situation in case
of any changed circumstances arising from the pandemic, it is of the view that
there is no longer significant uncertainty regarding the impact of COVID-19 on
customer default risk. Consistent with the recognition of the original
impairment loss in the prior year, management has taken the judgement to
recognise this write-back as exceptional;
· capitalisation of internal installation costs:
- a significant level of in-house installation of customers' meter
assets is carried out by the Group, certain costs of which are capitalised
(2021: £38.2m, 2020: £19.8m) and depreciated as part of property, plant and
equipment depreciation. Judgement is required by management to ascertain the
appropriate categories and proportion of overheads and other expenses that are
directly attributable to installation of meter assets. Typically, capitalised
costs will include staff costs, and a systematic allocation of any production
overheads deemed to be directly attributable to the process of installing a
meter owned by the Group. Other general and administrative overheads, such as
sales, marketing and training costs, are expensed directly to profit and loss;
and
· presentation of losses on disposal of certain meter assets as
exceptional items:
- as a result of the inherent volatility associated with the UK smart
meter rollout, and removal of traditional meter assets as part of this,
management has taken the decision to show losses arising on disposal of these
meters - being the net book value less the associated termination income
received representing proceeds on disposal - as exceptional administrative
expenses. By disclosing these amounts separately, the traditional meter asset
portfolio can be better tracked to assist the users of the financial
statements to better understand the premature retirement of these
revenue-generating assets that is outside the Group's control. The residual
value of the traditional meter asset portfolio of £nil reflects the
consumption of economic benefit from installed assets, being the income earned
from the provision of the meter. On disposal, the receipt of termination
income, recognised as a component of the net gain or loss on the disposal of
these meter assets, will vary depending on the energy supplier and is
therefore not within our control. As the receipt of proceeds from disposal is
inherently volatile, a loss on disposal can still arise in certain
circumstances. A loss on disposal of traditional meter assets was recognised
as an exceptional cost in the year ended 31 December 2021; and
- technical communication issues for some first-generation smart meter
assets (SMETS1 meters) on supplier churn have continued through 2021, with the
Data Communications Company (DCC) Enrolment and Adoption programme now due to
extend through to the end of 2022. As a result, the Group has continued to see
a small proportion of SMETS1 meters removed from the wall. As these removals
are attributable to the temporary industry transition period, management has
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.
· 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 our meter
assets, recognised in Property, plant and equipment, be assessed. The two main
drivers for assessing this recoverability are:
1) the timing of the removals of these meters -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 2021, this assessment has identified that the carrying value of the
traditional meter assets portfolio is recoverable and, therefore, no
impairment charge has been recognised (2020: £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
2021, 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
Refer to details in note 2.
Exceptional items and separately disclosed items
The Group presents as exceptional items on the face of the consolidated
statement of comprehensive income those items of income and expense which,
because of the material nature or expected infrequency of the events giving
rise to them, merit separate presentation to allow shareholders to 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 fair value and
subsequently measured at amortised cost. They are generally due for settlement
within 30 days and are therefore all classified as current. Due to their
short-term nature, carrying value is considered to approximate fair value.
Cash and cash equivalents
Refer to accounting policy 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 19.
Financial liabilities
The Group's financial liabilities include trade and other payables, bank loans
and overdrafts, and leases.
Classification
Financial liabilities are classified as financial liabilities at fair value
through profit or loss or loans and borrowings, as appropriate. The Group
determines the classification of its financial liabilities at initial
recognition.
Recognition
All financial liabilities are recognised initially at fair value and, in the
case of bank loans, net of directly attributable transaction costs.
Measurement
Trade and other payables and bank overdrafts
Trade and other payables, and overdrafts, are subsequently measured at
amortised cost using the effective interest rate method. Trade and other
payables are presented as current liabilities unless payment is not due within
twelve months after the reporting period. Due to their short-term nature,
carrying value is considered to approximate fair value.
Bank loans
Bank loans are subsequently measured at amortised cost. Interest expense on
bank loans is recognised in the consolidated income statement using the
effective interest rate method.
Transaction costs on revolving credit facilities are recognised as transaction
costs of the loan to the extent that it is probable that some or all the
facility will be drawn down. In this case, the fee is deferred within Other
assets until the drawdown occurs. Upon drawdown of the first loan, these costs
are reclassified from Other assets to Bank loans and subsequently amortised
over the term of the facility.
Borrowings are removed from the balance sheet when the obligation specified in
the contract is discharged or cancelled or has expired. The difference between
the carrying amount of a financial liability that has been extinguished or
transferred to another party and the consideration paid, including any
non-cash assets transferred, or liabilities assumed, is recognised in profit
or loss as Other income or Finance costs.
If a facility is modified, then it is assessed whether the modification is
significant enough to constitute an extinguishment either qualitatively or
quantitatively (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 related income for the
service of providing a fitted meter is recognised in accordance with IFRS 15.
Further information about the Group's accounting policy for revenue
recognition is given in note 2, and for property, plant and equipment in note
11.
Group as lessee
The Group leases various offices, warehouses and motor vehicles and, following
the business combinations disclosed in note 20, land. For offices, warehouses
and motor vehicles rental contracts are typically made for fixed periods of
three to ten years. For land, rental contracts are typically made for fixed
periods of 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
2021 was 4.7% (31 December 2020: 4.8%).
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.
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.
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(TM)
units
10% on cost, straight line
· Development of internally generated information technology
systems ('IT development) 20% and
50% on cost, straight line
Capitalised development expenditure on ADM(TM) units is disclosed within
Property, plant and equipment as part of Meter assets and amortised over the
same useful economic life as that applied to the tangible ADM(TM) unit.
Capitalised IT development expenditure is disclosed within Intangible assets
as part of IT development and software. All costs capitalised within this
category relate to information technology and, with the exception of one
system, are amortised over the same useful economic life of five years. A new
system was integrated and brought into use during 2020 and associated
development costs are amortised over the remaining contract term of two
years.
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.
As part of a business acquisition in 2021 (see note 20 for details), the Group
acquired a portfolio of customer contracts which are amortised over the
average remaining contract term of five years. All other customer contracts
recognised upon acquisition were fully amortised in the year.
In preparing the consolidated financial statements management considered the
impact of the IFRS Interpretations Committee's March 2021 decision, that
clarifies the treatment and recognition of cloud computing implementation
costs. These considerations did not have a material impact on the consolidated
financial statements in the year ended 31 December 2021.
Goodwill
Goodwill represents the excess of the consideration transferred over the fair
value of the identifiable assets and liabilities of the acquiree at the date
of acquisition. Goodwill on acquisitions of subsidiaries is included in
intangible assets. Goodwill is not amortised but is tested annually for
impairment, or if there is an indication of impairment, and is carried at cost
less accumulated impairment losses. See note 13 for detailed assumptions and
methodology. Impairment losses are not subsequently reversed.
Goodwill is allocated to cash-generating units (CGUs) for the purpose of
impairment testing. The allocation is made to those 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. In the
prior year the CGUs were defined in line with the Group's operating segments.
However, given the ongoing business development within the energy management
segment and the diversification of energy assets as a result, management has
deemed it appropriate to separate out the Solo Energy business as a standalone
CGU. See note 13 for further details.
If the recoverable amount of an asset (or CGU) is estimated to be less than
its carrying amount, the carrying amount of the asset (or CGU) is reduced to
its recoverable amount. An impairment loss is recognised as an expense
immediately.
Where an impairment loss subsequently reverses, the carrying amount of the
asset (or CGU) is increased to the revised estimate of its recoverable amount,
but so that the increased carrying amount does not exceed the carrying amount
that would have been determined had no impairment loss been recognised for the
asset (or CGU) in prior years. A reversal of an impairment loss is recognised
as income immediately.
Detailed assumptions used in the annual impairment test for goodwill, with
regard to discount, growth and inflation rates, are set out in note 13.
Contingent consideration is recorded initially at fair value and classified as
equity or a financial liability. Contingent consideration classified as equity
is not remeasured, but contingent consideration classified as a financial
liability is subsequently remeasured at fair value through profit or loss.
Adjustments to provisional fair values of identifiable assets and liabilities
(and to estimates of contingent consideration) arising from additional
information, obtained within the measurement period (no more than one year
from the acquisition date), about facts and circumstances existing at the
acquisition date, are adjusted against goodwill. Other adjustments
to provisional fair values or changes in contingent consideration are
recognised through profit or loss.
Impairment of tangible and intangible assets other than goodwill
At each reporting date, the Group reviews the carrying amounts of its
property, plant and equipment and intangibles to determine whether there is
any indication that those assets have suffered an impairment loss. If any such
indication exists, the recoverable amount of the asset is estimated in order
to determine the extent of the impairment loss (if any). Where the asset does
not generate cash flows that are independent from other assets, the Group
estimates the recoverable amount of the CGU to which the asset belongs.
The recoverable amount is the higher of fair value less costs to sell and
value in use. In assessing value in use, the estimated future cash flows are
discounted to their present value using a discount rate that reflects current
market assessments of the time value of money and the risks specific to the
asset for which the estimates of future cash flows have been adjusted.
Detailed assumptions used in the impairment test for meter assets are set out
in note 11.
An impairment loss is recognised for the amount by which the asset's carrying
amount exceeds its recoverable amount.
Property, plant and equipment
Property, plant and equipment is stated at cost, net of accumulated
depreciation and any accumulated impairment losses. Such cost includes the
cost of replacing part of the property, plant and equipment. When significant
parts of property, plant and equipment are required to be replaced in
intervals, the Group recognises such parts as individual assets with specific
useful lives and depreciation. Pursuant to the acquisition of the meter
installation businesses on 18 March 2016 certain internal costs to the Group
are also capitalised where they are demonstrated as being directly
attributable to bringing the meter assets into their usable condition.
All other repair and maintenance costs are recognised in the consolidated
statement of comprehensive income as incurred.
For each asset depreciation is calculated using the straight-line method to
allocate its cost, net of its residual value if applicable, over its
estimated useful life as follows:
· Freehold
property 2%
· Short-leasehold property
Shorter of the lease term or 15% and 20%
· Meter
assets
Smart meters and Industrial & Commercial meters 5%
ADM(TM) units 10%
Traditional meters to 1 July 2025
· Plant and machinery
33%
· Fixtures, fittings and equipment 20% and 33%
· Motor
vehicles 25%
· Right-of-use
assets Shorter of the
asset's useful life and the lease term
An item of property, plant and equipment and any significant part initially
recognised is derecognised upon disposal or when no future economic benefits
are expected from its use or disposal. Any gain or loss arising on
derecognition of the asset (calculated as the difference between the net
disposal proceeds and the carrying amount of the asset) is included in the
consolidated statement of comprehensive income when the asset is derecognised.
The asset's residual values, useful lives and methods of depreciation are
reviewed at each financial year end and adjusted prospectively, if
appropriate.
Property, plant and equipment is initially recorded at cost.
The following changes in estimates with regard to property, plant and
equipment were made with effect from 1 April 2021:
· Construction of grid-scale battery storage sites
At 31 December 2020, SMS had acquired two special purpose vehicles, enabling
the Group to obtain control over the rights required to develop and commission
two grid-scale battery storage sites, totalling 90MW, as part of the Group's
investment strategy in CaRe assets. At 31 December 2020, the Company accounted
for work in progress acquired, together with the fair value uplift applied to
the acquisition balance sheets in relation to development and construction
rights, and additional costs of development incurred up to 31 December 2020,
as part of Inventories on the consolidated balance sheet.
A change in management's business intention regarding these grid-scale battery
storage sites, implemented as part of the Group's wider strategy and effective
from 1 April 2021, is accounted for on a prospective basis in the 2021
financial statements and has resulted in a £4.1m reclassification of amounts
previously recognised as Inventory to Assets under construction within
Property, plant and equipment (see note 11). There has been no material change
in the amounts capitalised as a result of this reclassification.
With effect from 1 April 2021, 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.
The following change in estimates with regard to property, plant and equipment
was made with effect from 1 January 2020:
· With respect to the domestic traditional meter asset portfolio,
the useful life of all opening assets was extended from 31 December 2022 to 1
July 2025 to reflect the UK Government's confirmation on 18 June 2020 that it
would introduce a new regulatory framework, first proposed in September 2019,
for the next phase of the UK smart meter rollout. The new four-year framework
was implemented from 1 July 2021, effectively extending the smart meter
rollout to 1 July 2025. It is accepted that the rate of meter exchange to
smart meters will vary year by year as the rollout proceeds, but there is
currently no reliable basis on which to predict the annual profile.
Accordingly, a straight-line approach to depreciation of these assets
continued to be adopted. As a result of this change in estimate, the
consolidated income statement for the year ended 31 December 2020 reflected a
reduced charge for depreciation of £4.8m, recognised within depreciation in
Cost of sales. It was not practicable to estimate the effect of this change on
future periods because the future removal profile of the domestic traditional
meter asset portfolio is volatile and outside our control.
See the Leases accounting policy for further details on the recognition and
measurement of right-of-use assets under IFRS 16.
Inventories
Finished goods and consumables
Finished goods and consumables are stated at the lower of cost and net
realisable value. Cost comprises direct materials and purchases of meter
assets and ADM(TM) units at cost. Costs of purchased inventory are determined
after deducting rebates and discounts. Net realisable value represents the
estimated selling price for inventories in the ordinary course of business
less the estimated costs necessary to make the sale.
At 31 December 2020: Work in progress - grid-scale batteries
Work in progress is stated at the lower of cost and net realisable value. Cost
includes:
· work in progress recognised as a result of business combinations;
· direct materials, including the purchase of batteries at cost
(after deducting rebates and discounts); and
· the cost of development, including direct labour and an
appropriate proportion of overhead expenditure.
Net realisable value is the estimated selling price in the ordinary course of
business less the estimated costs of completion and the estimated costs
necessary to make the sale.
With effect from 1 April 2021 work in progress in relation to grid-scale
batteries is recognised as part of Property, plant and equipment. See
Accounting policies - property, plant and equipment for details.
Cash and cash equivalents
Cash and cash equivalents in the consolidated statement of financial position
comprises cash at bank and in hand and short-term deposits with an original
maturity of three months or less. For the purpose of the consolidated
statement of cash flows, cash and cash equivalents consists of cash and
short-term deposits as defined above, net of outstanding bank overdrafts.
Restricted cash
Restricted cash in the consolidated statement of financial position comprises:
· amounts collected from customers on behalf of a third party, as
part of a services arrangement, that have not yet been allocated. These monies
are held in a trust account whilst awaiting allocation and, per the terms of
the account, cannot be used by the Group to meet other short-term cash
commitments. They have thus been disclosed separately from cash and cash
equivalents and;
· amounts held as collateral in order to trade electricity on the
wholesale market as part of the Group's grid-scale battery storage business.
Whilst no grid-scale battery storage sites were operational at 31 December
2021, collateral was in place at this date in preparation for the commencement
of wholesale trading services in early FY 2022. These monies are held in
designated trading accounts and cannot be used by the Group to meet other
short-term cash commitments. They have thus been disclosed separately from
cash and cash equivalents.
Any movement in restricted cash is classified as an operating cash flow in the
consolidated statement of cash flows, in line with the operational nature of
the services being delivered.
Pension costs
The Group operates a defined contribution pension scheme for employees. The
assets of the scheme are held separately from those of the Group. The annual
contributions payable are charged to the consolidated statement of
comprehensive income.
Share-based payments
IFRS 2 Share-based Payment has been applied to all grants of equity
instruments. The Group issues equity-settled share-based payments to certain
employees under the terms of the Group's various employee share and option
schemes. Equity-settled share-based payments are measured at fair value at the
date of the grant. The fair value determined at the grant date of
equity-settled share-based payments is expensed on a straight-line basis over
the vesting period, based on an estimate of the shares that will ultimately
vest.
Share capital
Ordinary shares are classified as equity. Incremental costs directly
attributable to the issue of new ordinary shares or options are shown in
equity as a deduction from the proceeds.
Own share reserve
The Group offers a Share Incentive Plan for all employees and has established
a trust to facilitate the delivery of SMS shares under this plan. The holdings
of this trust include shares that have not vested unconditionally to employees
of the Group. These shares are recorded at cost and are classified as own
shares. The cost to the Company of acquiring these own shares held in trust is
shown as a deduction from shareholders' equity.
Dividends
Dividend distributions to the Company's shareholders are recognised in the
accounting period in which the dividends are paid.
Taxation
Tax currently payable is based on the taxable profit for the year and any
adjustment to tax payable in respect of prior years. Taxable profit differs
from accounting profit as reported in the consolidated statement of
comprehensive income because it excludes items of income or expense that are
taxable or deductible in other years and it further excludes items that are
never taxable or deductible. The Group's liability for current tax is measured
using tax rates that have been enacted or substantively enacted by the
reporting date.
Deferred tax is the tax expected to be payable or recoverable on temporary
differences between the carrying amount of assets and liabilities in the
financial statements and the corresponding tax bases used in the computation
of taxable profit, and is accounted for using the balance sheet liability
method. Deferred tax is recognised in respect of all temporary differences
that have originated but not reversed at the balance sheet date, where
transactions or events that result in an obligation to pay more tax in the
future or a right to pay less tax in the future have occurred at the balance
sheet date.
Deferred tax is measured at the tax rates that are expected to apply in the
periods in which the asset or liability is settled based on tax rates (and tax
laws) that have been enacted or substantively enacted at the balance sheet
date. It is recognised in the income statement except when it relates to items
recognised in other comprehensive income or directly in equity, such as
share-based payments. In this case, the deferred tax is also recognised in
other comprehensive income or directly in equity, respectively.
Deferred tax assets are recognised to the extent that it is probable that
future taxable profit will be available against which the temporary difference
can be utilised. Their carrying amount is reviewed at each balance sheet date
on the same basis.
Deferred tax liabilities are recognised for all temporary differences, except
in respect of:
· temporary differences arising from the initial recognition of
goodwill or an asset or liability in a transaction that is not a business
combination and at the time of the transaction affects neither the accounting
profit nor taxable profit or loss; and
· temporary differences associated with investments in subsidiaries
where the timing of the reversal of the temporary differences can be
controlled and it is probable that the temporary difference will not reverse
in the foreseeable future.
Deferred tax assets and liabilities are offset where there is a legally
enforceable right to offset current tax assets and liabilities and where the
deferred tax balances relate to the same taxation authority. Current tax
assets and tax liabilities are offset where the entity has a legally
enforceable right to offset and intends either to settle on a net basis, or to
realise the asset and settle the liability simultaneously.
Standards and interpretations
New and amended standards adopted by the Group
The Group has applied the following standards and amendments for the first
time for its annual reporting period commencing 1 January 2021:
Standard or interpretation Effective date
IFRS 16 (amendment) 'Leases', COVID-19 - Related rent concessions 1 June 2020
IFRS 9, IAS 39, IFRS 7, IFRS 4 and IFRS 16 (amendment) Interest rate benchmark reform - Phase 2 1 January 2021
The amendments listed above did not have any impact on the amounts recognised
in prior periods or the current period and are not expected to affect future
periods significantly.
The Group's revolving credit facility previously attracted interest at a fixed
margin over the three-month London Inter-Bank Offered Rate (LIBOR). Under the
new facility established in September 2021, LIBOR was replaced by the Sterling
Overnight Index Average (SONIA) and the transition was managed carefully with
the Group's lending agent. There has not been any material change in the
overall cost of borrowing as a result of this. Overall, interest rate
benchmark reform is not anticipated to have a significant impact on the
Group's risk management strategy.
New standards and interpretations not yet adopted
Certain new accounting standards and interpretations have been published that
are not mandatory for 31 December 2021 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. Its 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 2021
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 provision of energy
consultancy services and, following the acquisition of Solo Energy Limited,
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 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 cost of sales 51,349 7,951 864 - 60,164
Exceptional items (cost of sales) - (829) - - (829)
Segment gross profit 51,349 7,122 864 - 59,335
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 (3,132) - (161) (188) (3,481)
Net finance costs: exceptional (1,742) - - - (1,742)
Profit/(loss) before tax 38,537 6,926 1,928 (39,098) 8,293
Tax expense (4,501)
Profit for year 3,792
31 December 2020 Asset Asset Energy Unallocated Total
management installation management (restated) operations
(restated) £'000 £'000 £'000 £'000
£'000
Segment revenue 78,675 49,011 4,583 - 132,269
Inter-segment revenue - (29,287) - - (29,287)
Revenue from external customers 78,675 19,724 4,583 - 102,982
Cost of sales (29,825) (16,591) (3,564) - (49,980)
Segment gross profit - pre-exceptional cost of sales 48,850 3,133 1,019 - 53,002
Exceptional items (cost of sales) - (4,890) - - (4,890)
Segment gross profit/(loss) 48,850 (1,757) 1,019 - 48,112
Other operating costs/income - - - (27,780) (27,780)
Depreciation (1,385) - (21) (2,979) (4,385)
Amortisation of intangibles - restated(1) (1,642) - (32) (1,283) (2,957)
Profit/(loss) from operations - pre-exceptional operating items - restated(1) 45,823 (1,757) 966 (32,042) 12,990
Exceptional items (operating) 188,612 (928) - (1,056) 186,628
Profit/(loss) from operations - restated(1) 234,435 (2,685) 966 (33,098) 199,618
Net finance costs: other (4,399) - (33) (107) (4,539)
Net finance costs: exceptional (115) - - - (115)
Profit/(loss) before tax - restated(1) 229,921 (2,685) 933 (33,205) 194,964
Tax expense (1,485)
Profit for year 193,479
(1 Amortisation of the Group's Enterprise Resourcing Planning system, which
went live in full in 2020, has been reclassified from Asset management to
Unallocated to reflect its Groupwide use. This is in line with the current
year disclosure. )
Inter-segment revenue relates to installation services provided by the asset
installation segment to the asset management segment.
Depreciation of £24.7m (2020: £24.7m) associated with meter assets has been
reported within Cost of sales, in the asset management segment, as the meter
assets directly drive revenue.
All material revenues and operations are based and generated in the UK.
Following the acquisition of Solo Energy Limited in 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:
2021 2020
£'000 £'000
Customer 1 - Asset Management 12,647 12,876
Customer 1 - Asset Installation 2,644 359
Customer 2 - Asset Management 8,900 7,816
Customer 2 - Asset Installation 8,025 6,251
32,216 27,302
Segment assets and liabilities
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
Bank loans - - - - -
1,527 2,084 6,292 4,588 14,491
Liabilities not by segment 64,956
Total liabilities 79,447
31 December 2020 Asset Asset Energy Unallocated Total
management installation management (restated) operations
(restated) £'000 £'000 £'000 £'000
£'000
Assets reported by segment
Intangible assets - restated(1) 9,072 3,497 2,118 10,236 24,923
Property, plant and equipment 318,979 235 2,222 6,902 328,338
Inventories 22,676 273 4,701 - 27,650
Contract assets - - 47 - 47
Other assets (bank loans) 1,949 - - - 1,949
352,676 4,005 9,088 17,138 382,907
Assets not by segment 79,643
Total assets 462,550
Liabilities by segment
Contract liabilities 1,254 2,216 219 - 3,689
Lease liabilities 727 - 2,276 2,248 5,251
Bank loans - - - - -
1,981 2,216 2,495 2,248 8,940
Liabilities not by segment 47,168
Total liabilities 56,108
(1 Intangible assets recognised in relation to the Group's Enterprise
Resourcing Planning System, which went live in full in 2020, have been
reclassified from Asset Management to Unallocated to reflect its Groupwide
use. This is in line with the current year disclosure. )
Assets not by segment include cash and cash equivalents, trade and other
receivables and investments.
Liabilities not by segment include trade and other payables and deferred tax
liabilities.
Additions to non-current assets within each segment are listed below:
Asset Asset Energy Unallocated Total
management installation management (restated) operations
(restated) £'000 £'000 £'000 £'000
£'000
Additions to non-current assets
2021 84,779 90 27,720 3,686 116,275
2020 - restated(1) 42,736 2 2,568 2,811 48,117
(1 Intangible asset additions recognised in relation to the Group's Enterprise
Resourcing Planning System, which went live in full in 2020, have been
reclassified from Asset Management to Unallocated to reflect its Groupwide
use. This is in line with the current year disclosure. )
2 Revenue from contracts with customers
(a) Disaggregation of revenue from contracts with customers
The Group reports the following segments: asset management, asset installation
and energy management, in accordance with IFRS 8 Operating Segments. We have
determined that, to meet the objective of the disaggregation disclosure
requirement in paragraph 114 of IFRS 15, which is to disaggregate revenue from
contracts with customers into categories that depict how the nature, amount,
timing and uncertainty of revenue and cash flows are affected by economic
factors, further disaggregation is required into the major types of services
offered. The following table thus discloses segmental revenue by type of
service delivered and timing of revenue recognition, including a
reconciliation of how this disaggregated revenue ties in with the asset
management, asset installation and energy management segments, in accordance
with paragraph 115 of IFRS 15.
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 92,831
82,828 22,032 3,620 108,480
Year ended 31 December 2020 Asset Asset Energy Total
Management Installation Management operations
£'000 £'000 £'000 £'000
Major service lines
Metering 70,780 - - 70,780
Data management 7,895 - - 7,895
Utility connections - 8,817 - 8,817
Transactional meter works - 10,275 - 10,275
Energy management - 632 4,583 5,215
78,675 19,724 4,583 102,982
Timing of revenue recognition
Services transferred at a point in time - 10,275 - 10,275
Services transferred over time 78,675 9,449 4,583 92,707
78,675 19,724 4,583 102,982
(b) Assets and liabilities related to contracts with customers
The Group has recognised the following assets and liabilities related to
contracts with customers:
2021 2020
£'000 £'000
Current contract assets 46 47
Total contract assets 46 47
Current contract liabilities 3,732 3,689
Total contract liabilities 3,732 3,689
Trade receivables and unbilled receivables are disclosed in note 15.
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:
2021 2020
£'000 £'000
Revenue recognised that was included in the contract liability balance at the 2,636 2,991
beginning of the period
No revenue was recognised in 2021 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.
(c) Accounting policies and significant judgements
(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 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(TM) 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(TM) device is a proprietary product for the Group and there are no
other market providers of this device. A customer cannot therefore benefit
from the data services without installation, and the installation is not
separately identifiable as it is integral to the subsequent data services.
This is therefore accounted for along with the data services as a single
performance obligation and any corresponding charges are recognised over the
term of the contract.
(iii) Utility connections services (gas and electricity)
Gas and electricity connections services are provided under fixed-price
contracts with I&C customers and can be delivered to a single site or
multiple sites. Whilst each service consists of multiple activities, the
Group's promise in the contract is to deliver an integrated end-to-end service
to which the underlying activities are inputs. Where services are delivered to
multiple sites, and these are substantially the same, a series of services is
being provided. In all cases, therefore, these contracts give rise to a single
performance obligation to which the fixed price is allocated. Subsequent
variations to this price, due to changes in the inputs required, are accounted
for as contract modifications and recognised on a cumulative catch-up basis.
Services are transferred over time on the basis that these are customised
services with no alternative use and the Group has an enforceable right to
payment for work completed to date.
Revenue is recognised on the stage of completion with reference to the actual
services provided as a proportion of the total service expected to be provided
under the contract, as the services can enhance a work-in-progress asset for
the customer and have no alternative use. This is determined on a
contract-by-contract basis using a milestone approach with reference to the
milestones set out in the contract or otherwise agreed. Where relevant,
consideration is also given to material services provided between milestones.
Estimates of revenues, costs or extent of progress towards completion are
revised if circumstances change and any resulting increases or decreases in
estimated revenues or costs are reflected in profit or loss in the period in
which the circumstances that give rise to the revision become known 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) 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.
(vi) Assets and liabilities arising from contracts with customers
Costs to fulfil a contract
In certain circumstances, the Group may incur costs to fulfil its obligations
under a contract once it is obtained, but before transferring goods or
services to the customer. These costs are assessed on a contract-by-contract
basis and, where they are considered to meet the definition of fulfilment
costs under IFRS 15, they are recognised as an asset and amortised on a
systematic basis consistent with the pattern of transfer of the services to
which the asset relates.
Contract assets and liabilities
We receive payments from customers based on a billing schedule, as established
in our contracts.
The timing of revenue recognition, billing and cash collections results in:
· billed and unbilled accounts receivable, which are recognised
when our right to consideration becomes unconditional, and classified as trade
receivables and accrued income respectively;
· unbilled amounts, where we have a conditional right to
consideration based on future performance, recognised as contract assets.
These amounts will be billed in accordance with the agreed-upon contractual
terms; and
· payments received in advance of performance under a contract,
recognised as contract liabilities. Contract liabilities are recognised as
revenue as (or when) we perform under a contract.
For project-based services, work in progress is billed in accordance with the
agreed-upon contractual terms with the customer. We typically receive interim
payments as work progresses, which can give rise to a billed or unbilled
accounts receivable, where our right to payment is unconditional, or a
contract asset, where revenue has been recognised based on progress completed
but our right to payment is still conditional on future performance. For some
contracts, we may be entitled to receive advance payments. We recognise a
contract liability for these advance payments in excess of revenue recognised.
Cancellation terms can vary but typically include provisions that allow the
customer to terminate the contract at their discretion subject to a penalty or
settlement of amounts for work completed prior to termination. Contracts allow
both parties to cancel without penalty in the case of a material breach of
contract.
3 Profit from operations
The Group has identified a number of items which are material due to their
nature and/or amount. These are listed separately here to provide a better
understanding of the financial performance of the Group.
2021 2020
£'000 Restated(2)
£'000
Profit from operations is stated after (charging)/crediting:
Cost of sales:
Direct staff and subcontractor costs (22,602) (23,752)
Depreciation of meter assets (24,719) (24,672)
Inventory costs (995) (1,556)
Total cost of sales (before exceptional items) (48,316) (49,980)
Administrative expenses:
Staff costs (17,842) (17,685)
Depreciation:
- owned assets (3,087) (3,403)
- leased assets (906) (982)
Amortisation of intangibles (4,060) (2,957)
Auditor's remuneration (note 3a) (392) (346)
Loss on disposal (2,457) (1,040)
Operating lease rentals(1) (293) (346)
Research and development costs (39) (76)
Other operating charges (12,790) (10,010)
Total administrative expenses (before exceptional items) (41,866) (36,845)
Exceptional items (note 3b) (6,478) 181,738
Other operating income (note 3c) 1,696 1,723
Total operating costs (94,964) 96,636
1 2021 operating lease rentals include £264,000 on short-term leases (2020:
£314,000) and £29,000 on leases of low-value assets (2020: £32,000).
2 2020 capitalised staff costs have been reclassified from Other operating
charges to Staff costs to align with current year presentation.
(a) Auditor's remuneration
Auditor's remuneration can be analysed as:
2021 2020
£'000 £'000
Audit of the parent company and consolidated financial statements 133 144
Audit of the financial statements of the Company's subsidiaries 229 172
Other services - audit-related assurance services 30 30
392 346
(b) Exceptional items
2021 2020
£'000 £'000
Exceptional operating items
Gain on disposal of subsidiary - 194,713
Costs attributable to COVID-19 (265) (6,857)
Losses on the traditional and SMETS1 meter portfolio (5,906) (6,033)
Acquisition-related costs (307) -
Other - (85)
(6,478) 181,738
Exceptional finance items
Facility fees (1,742) (115)
(1,742) (115)
Total exceptional items (8,220) 181,623
There are total exceptional items in the consolidated income statement of
£8,220,000. Exceptional operating costs primarily comprise £265,000 of costs
directly attributable to COVID-19 (see Accounting policies - critical
accounting judgements - for further details), £5,906,000 of losses on our
traditional and SMETS1 meter portfolio and £307,000 of acquisition-related
costs incurred on the large-power I&C meter and data acquisition detailed
in note 20.
In 2020, an exceptional gain on the disposal of a subsidiary of £194,713,000
was recognised separately in the consolidated income statement. See note 4 for
details. There were total other exceptional items in the consolidated income
statement of £13,090,000. Exceptional operating costs comprised £6,857,000
of costs directly attributable to COVID-19, £6,033,000 of losses on disposal
of our traditional and SMETS1 meter portfolio (£9,521,000 net book value less
£3,488,000 termination income) and £85,000 of other miscellaneous costs.
Exceptional finance costs of £1,742,000 comprise 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. In 2020, exceptional finance costs of £115,000 comprised
break costs incurred on full voluntary prepayment of the Group's loan facility
(see note 18 for details).
The tax effect of exceptional items charged in 2021 is a credit of £1,978,000
(2020: credit of £2,618,000).
(c) Other operating income
2021 2020
£'000 £'000
Termination fee income 103 985
Government grant income 1,255 738
Other income 338 -
1,696 1,723
Of the government grant income of £1,255,000 (2020: £738,000) recognised in
the year ended 31 December 2021, £489,000 relates to RDECs (2020: £536,000)
which are detailed in the Accounting policies. £766,000 relates to grant
income received on government-funded energy efficiency projects within the
energy management business.
4 Disposal of subsidiary
On 12 March 2020, the Group conditionally signed an agreement to dispose of a
minority of the Group's meter assets through the sale of the entire share
capital of Crail Meters Limited (Crail), a wholly owned subsidiary of the
Group.
The meter asset provision (MAP) business carried on by two existing operating
subsidiaries of the Group (the Meter Managers) was transferred to Crail on 12
March 2020. The business transferred included c.187,000 Industrial &
Commercial (I&C) meter assets, amongst other working capital balances.
Crail continued to trade from 12 March 2020 through to 22 April 2020.
On 22 April 2020 the entire share capital of Crail was sold to an unconnected
third party. Total gross cash consideration of £290.6m was received,
comprising a payment for the sale of the shares in Crail and the repayment of
an intercompany debt owed by Crail to the Meter Managers. There was no
contingent or non-cash consideration.
The total carrying amount of net assets disposed was £89.0m, including
£86.1m of meter assets, a £9.1m net receivable of working capital balances
and £6.2m of deferred tax liabilities, giving rise to a gross gain of
£201.6m. After the deduction of £6.9m transaction costs, a net gain on
disposal of £194.7m was recognised separately in the consolidated income
statement. Excluding deferred taxation and transaction costs, the gain was
£195.4m.
Crail did not meet the definition of a discontinued operation under IFRS 5 on
the basis that the minority portfolio of I&C assets disposed did not
represent the loss of a separate, major line of business and, although I&C
activities were significantly reduced, they were not entirely discontinued.
SMS manages the disposed I&C meter portfolio on behalf of the purchaser,
for which it receives annual RPI-linked management fees of £0.8m.
5 Particulars of employees
The average number of staff employed by the Group during the financial year,
including Executive Directors, by activity was:
2021 2020
Number Number
Administrative staff 488 497
Operational staff 548 546
Sales staff 5 4
IT staff 81 73
Directors (excluding 4 (2020: 4) Non-executive Directors) 3 3
1,125 1,123
The aggregate payroll costs of the employees, including Executive Directors,
were:
2021 2020
£'000 £'000
Wages and salaries 42,973 39,880
Social security costs 4,694 4,103
Staff pension costs 1,365 1,229
Share-based payment (note 25) 841 626
Director pension costs 21 18
49,894 45,856
6 Finance costs and finance income
2021 2020
£'000 £'000
Finance costs
Bank loans and overdrafts 3,132 4,556
Lease liabilities 75 172
Foreign exchange loss/(gain) on intra-group borrowings 281 (23)
Total pre-exceptional finance costs 3,488 4,705
Exceptional finance costs 1,742 115
Total finance costs 5,230 4,820
Finance income
Bank interest receivable 7 166
Total finance income 7 166
7 Taxation
2021 2020
£'000 £'000
Analysis of charge in the year
Current tax:
Current income tax expense 93 331
Adjustment to tax charge in respect of previous periods - 92
Total current income tax 93 423
Deferred tax:
Origination and reversal of temporary differences 2,087 (198)
Adjustment to tax charge in respect of prior periods (127) (304)
Adjustment attributable to change in tax rates 2,448 1,564
Tax on profit 4,501 1,485
The charge for the period can be reconciled to the profit per the consolidated
statement of comprehensive income as follows:
2021 2020
£'000 £'000
Profit before tax 8,293 194,964
Tax at the UK corporation tax rate of 19.00% (2020: 19.00%) 1,576 37,043
Expenses not deductible for tax purposes 171 1,565
Income not taxable - (38,495)
Adjustments to tax charge in respect of previous periods (127) (212)
Impact of deferred tax not recognised (99)
Impact of overseas tax rates 24 20
Change in tax rate(1) 2,956 1,564
Tax expense in the income statement 4,501 1,485
1 See note 22 for further details.
Current tax credit through equity in the year was £nil (2020: £nil).
8 Earnings per share
The calculation of earnings per share (EPS) is based on the following data and
number of shares:
2021 2020
£'000 £'000
Profit for the year used for calculation of basic EPS 3,792 193,479
Number of shares 2021 2020
Weighted average number of ordinary shares for the purposes of basic EPS 118,330,817 112,715,328
Effect of potentially dilutive ordinary shares:
- share options 641,710 922,554
Weighted average number of ordinary shares for the purposes of diluted EPS 118,972,527 113,637,882
EPS:
- basic (pence) 3.20 171.65
- diluted (pence) 3.19 170.26
9 Dividends
Year Year Year Year
ended ended ended ended
31 December 31 December 31 December 31 December
2021 2021 2020 2020
£'000 Per share £'000 Per share
(pence) (pence)
Paid final dividend 7,107 6.25 - -
Paid third interim dividend 7,065 6.25 - -
Paid second interim dividend 7,059 6.25 5,168 4.58
Paid first interim dividend 7,829 6.875 7,058 6.25
Total dividends 29,060 25.625 12,226 10.83
In 2021, the paid second interim dividend, paid third interim dividend and
paid final dividend are in respect of FY 2020 and the paid first interim
dividend is in respect of FY 2021. In 2020, the paid second interim dividend
is in respect of FY 2019 and the paid first interim dividend is in respect of
FY 2020.
Per the Group's revised dividend policy, a 27.5p per share dividend is
proposed in respect of FY 2021. This will be paid to shareholders in four cash
instalments.
The first instalment of £7.8m was paid on 28 October 2021 to shareholders on
the register at 1 October 2021, with an ex-dividend date of 30 September 2021.
The remaining instalments are intended to be paid as follows:
Instalment Ex-dividend date Record date Payment date
2 06 January 2022 07 January 2022 27 January 2022
3 31 March 2022 01 April 2022 28 April 2022
4 30 June 2022 1 July 2022 28 July 2022
These remaining instalments will amount to c.£24m and will be accounted for
in 2022.
Under the new dividend policy, the second interim dividend is paid out of
profits recognised in the year prior to the year in which the dividends are
declared and reported. As at 31 December 2021, the distributable profits in
the parent company were adequate to cover the proposed second interim dividend
of c.£8m.
10 Intangible assets
Goodwill Intangibles recognised upon acquisition IT development and software Total
£'000 £'000 £'000 £'000
Cost
As at 1 January 2020 8,547 2,257 24,445 35,249
Additions - - 4,056 4,056
Exchange adjustments - - (12) (12)
Disposals 60 4 29 93
As at 31 December 2020 8,607 2,261 28,518 39,386
Additions - - 2,831 2,831
Acquisitions 859 1,010 - 1,869
Exchange adjustments (66) (3) (31) (100)
As at 31 December 2021 9,400 3,268 31,318 43,986
Amortisation
As at 1 January 2020 - 2,171 9,335 11,506
Charge for year - 32 2,925 2,957
As at 31 December 2020 - 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
Net book value
As at 31 December 2021 9,400 886 15,177 25,463
As at 31 December 2020 8,607 58 16,258 24,923
As at 1 January 2020 8,547 86 15,110 23,743
The acquisition of an Industrial & Commerical large-power Half Hourly
electricity meter and data portfolio in April 2021 resulted in the recognition
of goodwill of £859,000, which has been assigned to the asset management
operating segment. In addition, the customer contracts acquired as part of
this transaction were valued at £1,010,000 and have been recognised as
additions within the Intangibles recognised upon acquisition asset class. See
note 20 for further details on this business acquisition.
No goodwill or intangible assets were recognised as a result of acquisitions
in 2020.
11 Property, plant and equipment
Freehold/ Meter Plant and Fixtures, Motor Right-of-use assets Assets under construction Total
leasehold assets machinery fittings and vehicles £'000 £'000 £'000
property £'000 £'000 equipment £'000
£'000 £'000
Cost
As at 1 January 2020 2,751 483,528 1,024 5,858 6,028 4,745 - 503,934
Additions 56 40,349 20 1,329 42 2,265 - 44,061
Acquisitions - - - - - - - -
Impairment - - - - - - - -
Disposals - (131,731) - (43) (765) - - (132,539)
Exchange adjustments - - - 4 - - - 4
As at 31 December 2020 2,807 392,146 1,044 7,148 5,305 7,010 - 415,460
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
Impairment - - - - - - - -
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
Depreciation
As at 1 January 2020 505 84,811 500 3,114 1,466 880 - 91,276
Charge for year 174 24,672 290 1,639 1,300 982 - 29,057
Impairment - - - - - - - -
Disposals - (32,800) - (37) (379) - - (33,216)
Exchange adjustments - - - 5 - - - 5
As at 31 December 2020 679 76,683 790 4,721 2,387 1,862 - 87,122
Charge for year 171 24,719 204 1,555 1,157 1,032 - 28,838
Impairment - - - - - - - -
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
Net book value
As at 31 December 2021 1,954 366,705 176 1,975 1,721 9,380 33,990 415,901
As at 31 December 2020 2,128 315,463 254 2,427 2,918 5,148 - 328,338
As at 1 January 2020 2,246 398,717 524 2,744 4,562 3,865 - 412,658
1 The reclassification of £4,071,000 within Assets under construction relates
to costs previously recorded within Inventories at 31 December 2020. See
Accounting policies - property, plant and equipment - for further details.
Meter assets
In 2020, meter asset disposals included c.187,000 assets disposed of as part
of the sale of a subsidiary on 22 April 2020. The assets disposed of had a net
book value of £86,103,000.
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 20 for details.
Included within the closing Meter assets net book value of £366,705,000
(2020: £315,463,000) is £16,246,000 (2020: £22,627,000) 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 2021 consolidated
financial statements the traditional meter portfolio generated £12,781,000
(2020: £13,140,000) revenue with a corresponding £5,071,000 (2020:
£5,668,000) depreciation charge. As at 31 December 2021, £11,787,000 (2020:
£13,333,000) of annualised recurring revenue arises from the owned
traditional meter portfolio.
The assets are secured by a bond and floating charge (note 18).
For the purpose of impairment testing the traditional meter asset portfolio
recognised within "Meter assets" is assessed as a stand-alone cash-generating
unit (CGU) and its carrying amount is compared with the recoverable amount.
See background information provided in the "Key sources of estimation
uncertainty" section in the accounting policies. The recoverable amount is
determined based on a value-in-use calculation, which uses the following key
assumptions:
• estimated future cash flows from rental income, which
are assumed to decline on a straight-line basis;
• estimated future cash flows from termination income,
which are derived using historical data and analysis around the risk of churn
between contracted and non-contracted customers and the risk of recoverability
once issued; and
• a pre-tax discount rate of 1.9%, which reflects the
risk attached to the time value of these specific cash flows and is deemed to
be best represented by the Group's incremental cost of borrowing on the basis
that cash flows are secured by the installed meter and the risk inherent in
the decline of the cash flows is already accounted for through the assumptions
detailed above.
As a result of this impairment test, it was identified that the value in use
of the traditional meter assets CGU exceeded its carrying value and therefore
no impairment has been recognised in the year to 31 December 2021.
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.
In line with IAS 36, no impairment review was considered necessary at 31
December 2020 as the previous impairment review at 31 December 2019 showed a
significant excess of recoverable amount over carrying amount and management
concluded that there were no reasonably possible changes in the key
assumptions that would cause the carrying amounts of the traditional meter
portfolio to exceed the value in use. There had also been no events that would
eliminate this excess or any new material indicators of impairment. As a
result of COVID-19, and the reduced smart meter installation activity, there
was a lower volume of traditional meter asset removals through 2020.
Therefore, no impairment was recognised in the period ended 31 December 2020.
No impairment on other meter assets was recognised in 2021 or 2020.
Right-of-use assets
Additions to right-of-use assets during the 2021 financial year were
£5,267,000 (2020: £2,265,000).
A breakdown of right-of-use assets is presented below:
Carrying value 2021 2020
£'000 £'000
Properties(1) 4,502 2,918
Motor vehicles - 7
Land 4,878 2,223
9,380 5,148
(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 2021 2020
£'000 £'000
Properties 919 948
Motor vehicles 6 13
Land 107 21
1,032 982
12 Financial asset investments
Unlisted investments Total
£'000 £'000
Cost
As at 1 January 2020 and 1 January 2021 75 75
Impairment - -
As at 31 December 2020 and 31 December 2021 75 75
13 Impairment of goodwill
The goodwill acquired in a business combination is allocated, at acquisition,
to the CGUs that are expected to benefit from that business combination.
Goodwill is monitored by management at the level of the CGUs which, in the
prior year, were defined as the three operating segments identified in note 1.
Given the ongoing business development within the energy management segment
and the diversification of energy assets as a result, management has deemed it
appropriate to separate out the Solo Energy business in the current year as a
standalone CGU. All the goodwill previously allocated to the energy management
CGU relates to the acquisition of Solo Energy Limited and, therefore, as the
Solo Energy business develops it is at this level that goodwill will be
monitored for internal management purposes. The corresponding goodwill balance
has thus been reclassified in the current year, as seen in the table below.
A segment-level summary of the goodwill allocation is presented below:
Asset Asset Energy Solo Energy Total
management installation management £'000 £'000
£'000 £'000 £'000
Cost
As at 1 January 2020 4,112 3,497 998 - 8,607
Reclassification - - (998) 998 -
Acquisitions (note 20) 859 - - - 859
Exchange adjustments - - - (66) (66)
As at 31 December 2021 4,971 3,497 - 932 9,400
Additional goodwill of £859,000 has been recognised in the current year as a
result of business combinations, arising on the acquisition of an Industrial
& Commercial large-power Half Hourly electricity business. See note 20 for
further details. This goodwill has been allocated entirely to asset management
on the basis that this is the operating segment that will receive the benefits
from the acquisition.
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. Specifically,
budgets and forecasts used in the assessment of goodwill at 31 December 2021
incorporate the effects of the extended deadline for the UK smart meter
rollout to 31 December 2025. Cash flows beyond this are extrapolated using the
estimated growth rates stated below.
The cash flows used in the value-in-use calculation for the asset management
segment include all costs incurred in the provision of meter assets to energy
suppliers, together with the initial installation. The cash flows used in the
value-in-use calculation for the asset installation segment exclude
installation costs incurred to fit an owned meter. For the purpose of the
value-in-use calculation, these are instead allocated to the asset management
segment, being the segment to which the corresponding revenues are allocated.
The annual impairment test was performed for the three CGUs identified above
that have goodwill allocated to them. No evidence of impairment was found at
the balance sheet date.
The key assumptions used in the value-in-use calculations for those CGUs that
have goodwill allocated to them are as follows:
· Perpetual growth rate - the terminal cash flows are extrapolated
in perpetuity using a growth rate of 2.25% for asset management (2020: 2.0%)
and 1.0% for asset installation and Solo Energy (2020: 1.5% 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, with a small reduction in
recognition of the impact of COVID-19 on macroeconomic growth. This is not
considered to be higher than the average long-term industry growth rate. The
rate of 1.0% applied to asset installation and Solo Energy is aligned to the
Group's corporate forecast model and is prudently 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 6.8%, 8.6% and 18.2% for asset
management, asset installation and Solo Energy respectively (2020: 6.8% for
asset management, 9.0% for asset installation and 11.7% for energy management)
and the post-tax discount rates applied are 5.5%, 7.00% and 15.0% for asset
management, asset installation and Solo Energy respectively (2020: 5.5% for
asset management, 7.25% for asset installation and 8.9% 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 either CGU.
14 Inventories
2021 2020
£'000 £'000
Finished goods 22,476 22,676
Work in progress - 4,701
Consumables 504 273
22,980 27,650
In the prior year, work in progress related to the construction of grid-scale
battery storage sites. Of the total work-in-progress balance of £4,701,000
at 31 December 2020, £3,438,000 related to the acquisition of companies and
£1,262,000 related to the subsequent capitalisation of directly attributable
construction costs. This work in progress has been reclassified to Assets
under construction within Property, plant and equipment in the current year,
in line with the Group's change in accounting policy. See Accounting policies
- property, plant and equipment - for further details.
15 Trade and other receivables
2021 2020
£'000 restated(1)
£'000
Current
Trade receivables 22,451 20,272
Prepayments and deferred costs 2,520 2,225
Accrued income 19,265 12,442
Other receivables 1,463 1,245
VAT recoverable 1,932 980
47,631 37,164
(1 £2,038,000 has been reclassified from Prepayments and deferred costs to
Accrued income. )
Amounts falling due after more than one year:
2021 2020
£'000 £'000
Accrued income - 12
Accrued income is made up of the following balances:
2021 2020
£'000 restated(1)
£'000
Unbilled receivables 18,915 12,395
Contract assets 46 47
Other accrued income 304 -
19,265 12,442
(1 £2,038,000 has been reclassified from Prepayments and deferred costs to
Accrued income and recognised as part of Unbilled receivables. )
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 2021 was £4,370,000
(2020: £4,904,000). See note 19 for further details. The ageing profile of
trade receivables past due date is shown below:
2021 2020
£'000 £'000
Current 13,019 13,608
1-30 days 3,728 3,208
31-60 days 1,615 1,914
61-90 days 1,499 1,090
91-120 days 1,705 328
Over 120 days 5,812 4,868
27,378 25,016
Loss allowance (3,969) (4,744)
Amounts offset (see note 19) (958) -
22,451 20,272
Trade receivables are non-interest-bearing and are generally on 30-90-day
terms. Trade receivables due from related parties at 31 December 2021 amounted
to £nil (2020: £nil).
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.
16 Cash and cash equivalents
Cash and cash equivalents comprise cash held by the Group. The carrying amount
of the asset approximates the fair value. All balances are held in Sterling.
During 2021, £50,000,000 of cash was placed on short-term deposit (2020:
£nil)
For the purposes of the cash flow statement, cash and cash equivalents
comprises:
2021 2020
£'000 £'000
Cash at bank 67,687 40,236
Short-term deposits 50,000 -
117,687 40,236
Restricted cash is excluded from cash and cash equivalents, in line with the
Group's accounting policy and is disclosed separately in the consolidated
statement of financial position.
17 Trade and other payables
2021 2020
£'000 £'000
Current
Trade payables 16,638 10,215
Other payables 4,097 3,815
Other taxes 1,519 3,894
Deferred income 2,898 2,498
Advance payments 1,185 1,422
Accruals 30,152 20,114
56,489 41,958
Deferred income and advance payments are made up of the following balances:
2021 2020
£'000 £'000
Contract liabilities 3,732 3,689
Other deferred income 351 231
4,083 3,920
The Directors consider that the carrying amount of trade and other payables
approximates to their fair value.
Trade payables are classified at amortised cost, are non-interest-bearing and
are normally settled on 30-45-day terms.
All trade liabilities are denominated in Sterling.
18 Financial liabilities and provisions
(a) Financial liabilities
2021 2020
£'000 £'000
Current
Lease liabilities 999 936
Other liabilities 638 388
Bank loans - -
1,637 1,324
Non-current
Lease liabilities 7,574 4,315
Other liabilities 1,548 -
Bank loans - -
9,122 4,315
At the start of 2020, the Group had a revolving credit facility of £420m,
with a five-year term ending December 2023 (the 'existing facility').
Following the Group's sale of a wholly owned subsidiary on 22 April 2020, the
gross proceeds received of £290.6m were used to make a voluntary prepayment
and the total outstanding principal value at 22 April 2020 of £270m, together
with outstanding interest and commitment fees of £0.6m, was settled.
Concurrently, the total commitments available under the existing facility were
reduced from £420m to £300m. There were no other material changes to the
terms and conditions. This amendment did not substantially change the existing
revolving credit facility, nor did it discharge any obligations. As such,
this was deemed to be a modification. There was no material impact to the
consolidated income statement in the year ended 31 December 2020 as a result
of the modification; £0.1m of break costs incurred as a result of the
voluntary prepayment were recognised as an exceptional finance cost.
A drawdown of £15.0m was made in May 2020 but this was subsequently settled
at the end of the three-month term. No subsequent drawdowns were made by the
Group in FY 2020 and, therefore, as at 31 December 2020 there was no
outstanding principal or interest. The amount recognised against Bank loans
was thus £nil.
Unamortised transaction costs from the initial establishment of the revolving
credit facility in December 2018 continued to be amortised over the remaining
duration of the facility to 2023, together with additional transaction costs
of £0.1m directly attributable to the modification of the loan on 22 April
2020. For the year ended 31 December 2020, £0.7m of transaction costs were
recognised within the consolidated income statement and the unamortised
transaction costs of £1.9m that would ordinarily be deducted from the
carrying value of the bank loans were recorded as 'Other assets' at 31
December 2020.In line with the Group's accounting policy, these unamortised
transaction costs were reclassified to Bank loans upon the first drawdown in
H1 2021.
On 13 September 2021, the Group successfully completed the refinancing of its
existing facility to better support the ongoing growth and development of the
Group. As part of the refinancing, all outstanding amounts under the existing
facility were settled. Concurrently, the Group undertook a commercial
negotiation, facilitated by debt advisory specialists, to enter into a new
facility on market terms. The new facility has total available commitments of
£420m and matures in December 2025. The new facility is provided by a
syndicate of lenders, including the lenders of the existing facility and new
lenders. Unamortised arrangement fees on the existing facility of £1.5m have
been accelerated and recognised as an exceptional finance cost in the
consolidated income statement together with £0.2m of legal and professional
fees arising on the refinancing. No amount is drawn down on the new facility
at 31 December 2021 and transaction costs of £2.4m are amortised over the
duration of the new facility to 2025.
For the year ended 31 December 2021, £2.1m of transaction costs have been
recognised within the consolidated income statement (2020: £0.7m) of which
£0.2m relates to the new facility. £1.9m relates to the existing facility of
which £1.5m accelerated amortisation of transaction costs has been recognised
within Exceptional costs. Interest of £0.6m has been recognised (2020:
£2.3m).
Whilst a drawdown of £53m was made under the new facility in H2, this was
settled in full in November 2021. Therefore, as at 31 December 2021 there is
no outstanding principal or interest. The amount recognised against Bank loans
is thus £nil. Unamortised transaction costs of £2.2m, that would ordinarily
be deducted against the carrying value of the bank loans, have therefore been
reclassified to Other assets at 31 December 2021.
Up until 13 September 2021, the existing facility attracted interest at a rate
of 1.85% over three-month LIBOR and 0.65% was payable on undrawn funds. From
13 September 2021, the new facility attracted interest at a rate of 1.85% over
three-month SONIA and 0.65% was payable on undrawn funds. Interest continues
to be settled quarterly.
The Group has complied with the financial covenants of its borrowing facility
during the current and prior reporting periods.
(b) Changes in liabilities arising from financing activities
Financial liabilities Lease liabilities Bank loans
£'000 £'000
At 1 January 2020 3,963 269,260
Cash flows (i) (1,155) (274,143)
New leases 2,260 -
Other non-cash changes (i) 183 2,934
At 31 December 2020 5,251 (1,949)
Cash flows (i) (1,247) (2,631)
New leases 4,230 -
Other non-cash changes (i) 339 2,379
At 31 December 2021 8,573 (2,201)
Presentational reclassification to Other assets - 2,201
At 31 December 2021 8,573 -
(i) Cash flows and other non-cash changes
Cash flows on lease liabilities include £1,247,000 of lease payments. Cash
flows on bank loans include £53,250,000 of new borrowings less £53,250,000
of borrowings repaid, interest payments of £554,000 and a payment of
£2,077,000 for arrangement fees.
Other non-cash changes in lease liabilities include £281,000 of interest
charges plus £58,000 arising from changes in lease terms and foreign exchange
impact in the year. Other non-cash changes in bank loans include £308,000 of
arrangement fees accrued but not yet paid offset with £554,000 of interest
charges and £2,133,000 amortisation of arrangement fees (of which £1,506,000
relates to the accelerated amortisation of arrangement fees as a result of the
re-financing of the Group's revolving credit facility).
At 31 December 2021, there were no outstanding amounts under the Group's
revolving credit facility. Therefore, unamortised arrangement fees of
£2,201,000 have been classified separately as Other assets in the
consolidated statement of financial position in line with the Group's
accounting policy. Unamortised arrangement fees of £550,000 have been
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.
In 2020, cash flows on lease liabilities included £1,155,000 of lease
payments. Cash flows on bank loans included £15,000,000 of new borrowings
less £285,000,000 of borrowings repaid, interest payments of £4,000,000 and
a payment of £143,000 for arrangement fees.
Other non-cash changes in lease liabilities included £172,000 of interest
charges plus £11,000 arising from changes in lease terms and foreign exchange
impact in the year. Other non-cash changes in bank loans included £2,276,000
of interest charges and £658,000 amortisation of arrangement fees.
(c) Other liabilities
Other liabilities comprise:
2021 2020
£'000 £'000
Current
Deferred consideration on acquisitions 638 388
638 388
Non-current
Deferred consideration on acquisitions 750 -
750 -
Refer to note 21 for further details on the deferred consideration on
acquisitions.
(d) Provisions
Provisions comprise:
Non-current
Provision for restoration costs recognised under IFRS 16 798 -
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.
19 Financial risk management
The Board reviews and agrees policies for managing the risks associated with
interest rate, credit and liquidity risk. The Group has in place a risk
management policy that seeks to minimise any adverse effect on the financial
performance of the Group by continually monitoring the following risks:
(a) Interest rate risk
The Group's main interest rate risk arises from its floating rate bank loan,
which was undrawn at 31 December 2021 (2020: £nil). See note 18 for further
details.
There were no overdrafts at 31 December 2021 (2020: 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 2021 comprise cash and trade
receivables. The cash balance of £117,687,000 (2020: £40,236,000) is a
floating rate financial asset, but interest income is not typically material.
Interest rate sensitivity
The following table demonstrates the sensitivity to a change in interest rates
on the Group's floating rate bank loan. The Group's profit before tax is
affected through the impact on floating rate borrowings as follows:
Increase/(decrease) Effect on profit
in basis points before tax
£'000
2021 +70bps -
2020 +70bps -
Management believes that a movement in interest rates of 70 bps gives a
reasonable measure of the Group's sensitivity to interest rate risk. The table
above demonstrates the sensitivity to a possible change in interest rates,
with all other variables held constant, of the Group's profit before tax.
(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 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
31 December 2020 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 10,215 - - 10,215
Bank loan - - - -
Other liabilities 388 - - 388
Lease liabilities 1,172 2,657 4,222 8,051
11,775 2,657 4,222 18,654
The contractual undiscounted cash flows on the bank loan reflect the
contractual arrangements in place at the year-end date. As disclosed in note
18, the Group had no outstanding principal at 31 December 2021 or 31 December
2020 and therefore the contractual undiscounted cash flows at 31 December 2021
and 31 December 2020 are £nil in the tables above.
(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 £41,716,000 (2020 restated:
£32,725,000), being the sum of the carrying value of trade receivables and
accrued income, including contract assets, as disclosed within Trade and other
receivables in note 15. The Group regularly monitors and updates its cash flow
forecasts to ensure it has sufficient and appropriate funds to meet its
ongoing operational requirements.
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.
COVID-19 has generated global financial uncertainty; however, the potential
impact of this on the Group's credit risk is mitigated by the highly regulated
nature of the utilities industry and the extensive support made available to
energy - and other infrastructure - suppliers by the UK Government. As a
result, management has not increased the expected loss rates for the trade
receivables portfolio as a whole. Instead, a subset of trade receivables has
been identified as having a potentially elevated credit risk, due to a
greater risk of administration as a direct consequence of COVID-19. This
subset of trade receivables has been provided for on a specific basis and in
the prior year resulted in an additional £0.5m impairment loss. This
provision has been reduced to £nil at 31 December 2021, reflecting positive
recovery trends over the past twelve months, giving rise to a £0.4m credit in
the current year financial statements (net of write-offs). Whilst management
will continue to monitor the situation in case of any changed circumstances
arising from the pandemic, it is of the view that there is no longer
significant uncertainty regarding the impact of COVID-19 on customer default
risk. Consistent with the recognition of the original impairment loss in the
prior year, management has taken the judgement to recognise this write back as
exceptional.
During the second half of 2021, the global energy market has 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
has notably impacted the smaller independent energy suppliers and, as a
result, management has not increased the expected loss rates for the trade
receivables portfolio as a whole. Instead, a subset of trade receivables has
been identified as having a potentially elevated credit risk, due to a
greater risk of administration as a direct consequence of the crisis. This
subset of trade receivables has been provided for on a specific basis and has
resulted in an additional £0.4m 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 2021 was determined as
£4,370,000 (2020: £4,904,000) 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 2021 160 4,744 4,904
Increase in loss allowance recognised in profit or loss 241 3,161 3,402
during the year - underlying
Decrease in loss allowance recognised in profit or loss - (438) (438)
during the year - exceptional
Amounts reversed/written off during the year - (3,498) (3,498)
At 31 December 2021 401 3,969 4,370
The overall loss allowance has decreased at 31 December 2021. Whilst the
crisis in the energy market has given rise to an additional impairment loss in
the year, as detailed above, the impairment loss recognised in relation to
COVID-19 in 2020 has been reversed and several individual trade receivables,
previously impaired as a result of specific circumstance with customers, have
been settled in the year.
Total net impairment losses on financial and contract assets were £2,964,000
in 2021 (2020: £3,229,000) including the £438,000 exceptional credit. Of
this amount, £2,964,000 (2020: £3,229,000) 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 25p per share dividend in respect of FY 2020 and proposes a 27.5p
per share dividend in respect of FY 2021. The first of three interim dividend
instalments was paid in October 2021. 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 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 The amounts offset in accordance with the criteria in IAS 32)
(3 The net amounts presented in the consolidated statement of financial
position)
20 Business combinations
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. This
acquisition will add c.£1.1m of annualised recurring meter revenue to the
Group's ILARR. The Group also took ownership of the Meter Operator (MOP) and
data service contracts associated with a portfolio of electricity meters,
which will initially generate a further net c.£2m of annualised recurring
data revenue. 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 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:
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.
Year ended 31 December 2020
During the year ended 31 December 2020, the Group acquired 100% of the issued
share capital of the following companies:
Name of acquired company Company number Registered office prior Purchase Acquisition date Nature of the
to acquisition consideration £ company
£
East Anglia Grid Storage One Limited 11110483 Salisbury House 1,575,882 16 October 2020 Special purpose
Station Road vehicle
Cambridge
CB1 2LA
Burwell Power Limited 12028663 Holding company(1)
Add Renewables 10042216 16a Suite 18 1,344,000 30 September 2020 Special purpose
No.3 Limited
Oakham Enterprise Park vehicle
Ashwell Road
Oakham, Rutland
LE15 7TU
1 Burwell Power Limited is the direct parent of East Anglia Grid Storage One
Limited (the 'subsidiary').
All three companies report in British Pounds Sterling. The acquisitions enable
SMS to obtain control over the rights required to develop and commission two
grid-scale battery storage sites, totalling 90MW, as part of the Group's
strategy of investment in CaRe assets. Grid-scale battery storage is a key
asset class required by the UK energy system to provide flexibility services
to balance the grid and support the continued introduction of more
intermittent renewable generation. The acquired sites will be constructed over
the next twelve months.
Details of the purchase consideration are as follows:
Name of acquired company Cash paid Contingent consideration
£ £
Burwell Power Limited and its subsidiary 1,375,882 200,000
East Anglia Grid Storage One Limited (together, 'Burwell')
Add Renewables No.3 Limited ('Barnsley') 1,156,500 187,500
Total purchase consideration 2,532,382 387,500
In the event that total connection costs per MW fall below various set
thresholds, total additional consideration of up to £387,500 may be payable
in cash upon energisation (when the grid-scale battery storage asset is
connected to the grid). Target energisation was end of 2021. The fair value of
the contingent consideration recognised of £387,500 was estimated by
calculating the present value of the future expected cash flows based on
current budgets and forecasts. The estimate ignores the impact of discounting
on the basis that the anticipated payment date is within twelve months of the
current reporting date.
The assets and liabilities recognised as a result of the acquisitions were as
follows:
Burwell Barnsley Total
fair value fair value fair value
£'000 £'000 £'000
Cash and cash equivalents 94 - 94
Inventories: work in progress(1) 1,757 1,681 3,438
Trade and other receivables 39 - 39
Trade and other payables - (22) (22)
Deferred tax liability (314) (315) (629)
Net identifiable assets acquired 1,576 1,344 2,920
Add: goodwill - - -
Net assets acquired 1,576 1,344 2,920
1 Total inventories of £3,438,000 include a fair value uplift of £2,683,000.
No contingent assets or liabilities were acquired.
A total fair value uplift of £2.7m (net of tax) was applied to the
acquisition balance sheets in relation to development and construction
rights, which have been included within work in progress and recorded as part
of Inventories in the consolidated balance sheet. The acquisitions therefore
resulted in goodwill of £nil.
The entities acquired contributed £nil turnover or profit to the Group's
results in the year ended 31 December 2020. If the acquisitions had occurred
on 1 January 2020, consolidated pro-forma revenue and profit for the year
ended 31 December 2020 would also have been £nil. No further adjustments
were required as there were no material differences in the accounting
policies between the Group and the entities acquired.
Acquisition-related costs of £0.1m were incurred and have been recorded as
part of Administrative costs in the consolidated statement of comprehensive
income. These have not been classified as exceptional on the basis that,
through these acquisitions, the Group is establishing a trade of constructing
and selling grid-scale batteries.
As part of the acquisition, lease liabilities of £2.2m were recognised
relating to leases of land held by the acquired companies. Associated
right-of-use assets of the same amount were recognised on the Group's
consolidated balance sheet within Property, plant and equipment.
21 Asset acquisitions
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 to acquisition Purchase consideration Acquisition date Nature of the company
£'000
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. The acquired sites will be constructed over the next 12 to 24
months.
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.
22 Deferred taxation
The movement in the deferred taxation liability during the year was:
2021 2020
£'000 £'000
Opening deferred tax liability 8,511 13,779
Increase in provision through consolidated statement of comprehensive income 4,408 1,061
Increase/(decrease) in provision through equity (319) (714)
Deferred tax in respect of acquisitions and disposals (401) (5,615)
Closing deferred tax liability 12,199 8,511
The Group's provision for deferred taxation consists of the tax effect of
temporary differences in respect of:
2021 2020
£'000 £'000
Excess of taxation allowances over depreciation on property, plant and 11,036 7,134
equipment
Tax losses available (51) (125)
Deferred tax asset on share options (1,438) (1,676)
Deferred tax on intangibles acquired 1,168 684
Other 1,484 2,494
12,199 8,511
The deferred tax included in the consolidated statement of comprehensive
income is as follows:
2021 2020
£'000 £'000
Accelerated capital allowances 3,902 1,688
Tax losses 74 (124)
Deferred tax asset on share options 558 29
Movement in fair value of intangibles 256 626
Other (382) (1,158)
4,408 1,061
At 31 December 2021, the main rate of corporate tax applying to the profits of
the Group was 19%. In the Spring Budget 2020, the UK Government announced
that from 1 April 2020 the corporation tax rate would remain at 19% (rather
than reducing to 17%, as previously enacted). The Government's budget
announcements on 3 March 2021 included the confirmation that the rate of
corporation tax would increase to 25% from 1 April 2023. This new law was
substantively enacted on 24 May 2021. Deferred taxes at the balance sheet
date have been re-measured using these enacted tax rates and reflected in
these financial statements. The impact of tax rate changes, on both the
Group's opening deferred tax liability and current-year total tax timing
differences, amounts to £2,956,000.
The Group had unrecognised trading losses of £1,456,000 (2020: £954,000) in
subsidiary undertakings at 31 December 2021. The Group also had unrecognised
capital losses of £729,000 (2020: £729,000) in subsidiary undertakings at 31
December 2021.
23 Related party transactions
(a) Subsidiaries
The Group's subsidiaries at 31 December 2021 are set out below. Unless
otherwise stated, they have share capital consisting solely of ordinary
shares, and the proportion of ownership interests held equals the voting
rights held by the Group. The country of registration is also their principal
place of business.
Registered Holding Proportion of Nature of business
Office (see key below table) shares held
SMS Connections Limited 1 Ordinary shares 100% Gas utility connections
SMS Meter Assets Limited 1 Ordinary shares 100% Gas and electric asset management
SMS MAPCO 1 Limited 2 Ordinary shares 100% Gas and electric asset management
SMS MAPCO 2 Limited 2 Ordinary shares 100% Gas and electric asset management
SMS Data Management Limited 1 Ordinary shares 100% Data management
Smart Metering Systems PTY Limited (Australia) 4 Ordinary shares 100% Data management
UKMA (AF) Limited* 2 Ordinary shares 100% Funding
SMS Corporate Services Limited 1 Ordinary shares 100% Administrative services
SMS Asset Management Limited* 2 Ordinary shares 100% Gas and electric third-party asset management
SMS Energy Services Limited 2 Ordinary shares 100% Electricity utility connections and management
SMS Data Services Limited* 2 Ordinary shares 100% Electric asset and data management
CH4 Gas Utility and Maintenance Services Limited* 2 Ordinary shares 100% Meter installation
SMS Utilities Academy Limited* 2 Ordinary shares 100% Engineer training and development
Trojan Utilities Limited* 2 Ordinary shares 100% Meter installation
Qton Solutions Limited* 2 Ordinary shares 100% Business and domestic software development
Smart Battery Systems Limited 2 Ordinary shares 100% Holding company
Solo Energy Limited (UK)* 1 Ordinary shares 100% Renewable asset management
Solo Energy Limited (Ireland)* 3 Ordinary shares 100% Renewable asset management
Care Assets Limited 2 Ordinary shares 100% Holding company
Add Renewables No.3 Limited* 2 Ordinary shares 100% Renewable asset management
Burwell Power Limited* 2 Ordinary shares 100% Holding company
East Anglia Grid Storage One Limited* 2 Ordinary shares 100% Renewable asset management
Newtonwood Energy Storage Limited* 2 Ordinary shares 100% Renewable asset management
Brook Farm Energy Storage Limited* 2 Ordinary shares 100% Renewable asset management
Berkeley Battery Storage 2 Limited* 2 Ordinary shares 100% Renewable asset management
Brentwood Energy Storage Limited* 2 Ordinary shares 100% Renewable asset management
* The shareholding in this company is indirect, via a subsidiary company.
1 Registered office address: 2nd Floor, 48 St. Vincent Street, Glasgow G2 5TS.
2 Registered office address: Prennau House, Copse Walk, Cardiff Gate Business
Park, Cardiff CF23 8XH.
3 Registered office address: West Building, Carrigaline Industrial Estate,
Carrigaline, Co. Cork, Republic of Ireland.
4 Registered office address: KPMG, 'Tower 3' Level 38, 300 Bangaroo Avenue,
Sydney, NSW 2000, Australia.
(b) 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:
2021 2020
£'000 £'000
Short-term employee benefits 2,747 3,024
Post-employment benefits 35 28
Termination benefits 146 -
Share-based payments 262 219
3,190 3,271
(c) Directors
Directors' emoluments
Aggregate remuneration for both Executive and Non-executive Directors in
respect of qualifying services was:
2021 2020
£'000 £'000
Aggregate emoluments 1,744 2,010
Company contributions to money purchase pension scheme 21 18
Company contributions to private pension plan - -
1,765 2,028
In 2021, £146,000 was payable to a Director as settlement following
resignation (2020: no amount was payable to Directors).
Emoluments of highest paid Director
2021 2020
£'000 £'000
Emoluments 694 796
In addition, rent was paid into the highest paid Director's personal pension
scheme. See note 22 (d) for further details.
Number of Directors who accrued benefits under Company pension schemes
2021 2020
Number Number
Money purchase schemes 3 2
(d) Other transactions with related parties
During the year, the Group entered into the following transactions with
related parties:
· Rent amounting to £10,375 (2020: £41,500) was paid to the
Directors' pension scheme, Eco Retirement Benefit Scheme, for the use of
certain premises. Alan Foy is a trustee of the scheme. At the year-end date,
an amount of £nil (2020: £nil) was outstanding in this regard.
· The Group paid dividends to Alan Foy of £906,915 (2020:
£441,930), The Metis Trust(1) of £230,625 (2020: £97,470), Metis
Investments Limited(2) of £387,968 (2020: £105,332), Tim Mortlock of £1,501
(2020: £570), Gavin Urwin of £153 (2020: £nil), David Thompson (whilst a
Director) of £188 (2020: £325), Miriam Greenwood of £6,129 (2020: £2,529),
Willie MacDiarmid(3) of £nil (2020: £271), Graeme Bissett of £4,116 (2020:
£901) and Jamie Richards of £1,002 (2020: £244).
(1 Alan Foy is a trustee but not a beneficiary.)
(2 Alan Foy is a Director and shareholder.)
(3 Paid to a connected person.)
24 Share capital
2021 2020
£'000 £'000
Allotted and called up:
133,321,555 ordinary shares of £0.01 each (2020: 112,946,331 ordinary shares 1,333 1,129
of £0.01 each)
On 4 October 2021, the Group successfully completed an equity raise for gross
proceeds of c.£175m. The total number of shares issued as a result of the
raise was 19,453,777 with a nominal value of £195,000. Net proceeds of
£170,154,000 were received, after the deduction of £4,930,000 of directly
attributable issue costs. The excess value of the shares over their nominal
value of £169,959,000 has been recognised within Share premium.
During the year 921,447 (2020: 134,793) ordinary share options were exercised
in relation to the Group's employee share plans which are described in note
25. The ordinary shares issued have a nominal value of £9,000 (2020: £1,000)
and aggregate consideration of £1,627,000 (2020: £362,000) was received.
In addition, in 2020, a scrip dividend was offered to shareholders in respect
of the first interim dividend, paid on 29 October 2020, which allowed
shareholders to elect to receive ordinary shares of 1p each in the Company in
lieu of a cash dividend. Based on a scrip dividend reference price of 634.6p
a total of 416 new ordinary shares were issued with a nominal value of £4.
The excess value of the shares over their nominal value of £3,000 was
recognised within Share premium.
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 2021, 139,055 (2020: 140,695) own shares were held in trust with a
carrying value of £825,000 (2020: £749,000) and a market value of
£1,169,000 (2020: £1,000,000). The Company purchased 34,191 shares (2020:
28,354) from the market during 2021 with a weighted average fair value of
£8.15 per share (2020: £5.68).
25 Share-based payments
(a) Employee option plans
On 20 June 2011 the Company adopted both the Approved Company Share Option
Plan (CSOP) and the Unapproved Share Option Plan (the 'Unapproved Plan').
The CSOP is open to any employee of any member of the Group up to a maximum
value of £30,000 per employee. The Unapproved Plan is open to any employee,
including Executive Directors, of the Company or any other Group company who
is required to devote substantially the whole of their time to their duties
under their contract of employment.
Under the plans, participants are granted options which, except in certain
specified circumstances, only vest if certain performance conditions are met
and the employee is still in service within five years of the date of grant.
The performance conditions for awards are based on market capitalisation and
individual performance targets. Once vested, the options remain exercisable
for a period of up to ten years from the date of grant. The exercise price of
the options is determined by the Directors but shall not be less than the
closing price at which the Company's shares are traded on the date of grant.
Summary of options
The table below summarises options granted under the CSOP and Unapproved Plan:
Plan At Granted Exercised Forfeited Expired At Exercise Date Expiry Fair value
1 January 31 December price exercisable date at grant
2021 2021 (pence) (pence)
CSOP 25,853 - (25,853) - - - 76.0 15 Jul 2014 15 Jul 2021 17.1
Unapproved 321,666 - (321,666) - - - 60.0 20 Jun 2016 20 Jun 2021 13.0
Unapproved 325,000 - (325,000) - - - 153.5 28 May 2017 28 May 2022 40.0
Unapproved 40,000 - - - - 40,000 350.0 12 Nov 2019 12 Nov 2024 84.8
Unapproved 578,085 - (175,498) (4,755) - 397,832 350.0 12 Nov 2019 12 Nov 2024 84.8
Unapproved 26,066 - (26,066) - - - 391.8 20 Mar 2021 19 Mar 2026 61.5
Unapproved 38,586 - (38,586) - - - 410.0 4 Jul 2021 3 Jul 2026 114.3
Unapproved 58,520 - (8,778) (5,852) - 43,890 470.0 18 Aug 2021 17 Aug 2026 87.2
Unapproved 100,000 - - (100,000) - - 529.0 1 Sep 2021 31 Aug 2026 141.5
Unapproved 50,000 - - - - 50,000 529.0 26 Sep 2021 25 Sep 2026 142.4
Unapproved - - - - - - 550.0 28 Nov 2021 28 Nov 2026 141.0
Unapproved(1) 469,001 - - (60,000) - 409,001 700.0 1 Jan 2023 13 Jul 2028 125.2
Unapproved(2) 12,000 - - - - 12,000 602.8 13 Sep 2023 12 Sep 2028 154.3
Unapproved(1) 469,000 - - (60,000) - 409,000 700.0 1 Jan 2023 13 Jul 2028 34.6
Unapproved(2) 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(1) 469,000 - - (60,000) - 409,000 700.0 1 Jan 2023 13 Jul 2028 37.2
Unapproved(2) 12,000 - - - - 12,000 602.8 13 Sep 2023 12 Sep 2028 105.6
Unapproved(3) 76,000 - - - - 76,000 577.4 26 Jun 2025 25 Jun 2030 59.3
Unapproved(1) - 468,999 - (60,000) - 408,999 700.0 01 Jan 2023 13 Jul 2028 134.3
Unapproved(2) - 12,000 - - - 12,000 602.8 13 Sep 2023 12 Sep 2028 266.1
Unapproved(3) - 76,000 - - - 76,000 577.4 26 Jun 2025 25 Jun 2030 191.4
Unapproved(4) - 290,000 - - - 290,000 705.4 10 Feb 2026 09 Feb 2031 210.8
Total 3,452,777 846,999 (921,447) (350,607) - 3,027,722
1 These options relate to the first four, of five, tranches.
2 These options relate to the first four, of five, tranches.
3 These options relate to the first two of five tranches.
4 These options relate to the first of five tranches.
The weighted average share price at the date of exercise of options exercised
during the year ended 31 December 2021 was £8.36 (2020: £6.06).
Fair value of options granted
The assessed fair value at the valuation date of options granted during the
year ended 31 December 2021 ranged from 134.3p to 266.1p, as disclosed in the
table above (2020: 37.2p to 105.6p). The fair value of options granted is
estimated using appropriate option pricing models, taking into account the
exercise price, the term of the option, the share price at grant date and
expected price volatility of the underlying share, the expected dividend
yield, the risk-free interest rate for the term of the option, and the
market-based performance conditions. The expected price volatility is based on
historical volatility, adjusted for any expected changes to future volatility
due to publicly available information.
The total fair value of these options is recognised over the period from their
grant date until they become exercisable.
The following table lists the range of assumptions applied to options granted
under the Unapproved Plan during the current and prior years:
31 December 2021 31 December 2020
Dividend yield (%) 3.3 4.3
Expected volatility (%) 35.96 to 41.33 35.70 to 39.04
Risk-free interest rate (%) 0.09 to 0.39 (0.05) to (0.06)
Expected option life (years) 2.28 to 4.87 3.03 to 5.00
Exercise price (£) 5.77 to 7.05 5.77 to 7.00
Share price at grant date (£) 8.30 5.79 to 5.81
Fair value at grant date (£) 1.34 to 2.66 0.37 to 1.06
Where the options granted have a market performance condition attached, the
Group has used a Monte-Carlo model in order to allow for the impact of this
condition. Where there is no market performance condition attached, the Group
has used the traditional Black-Scholes model. The dividend yield was
determined using the published yield at the date of grant. The expected
volatility reflects the assumption that historical volatility, as measured
over several different periods, is indicative of future trends, which may not
necessarily be the case. The risk-free interest rate is taken from
a government bond yield rate with a redemption period consistent with the
corresponding vesting period of the options. The expected life of the options
is based on historical data and is not necessarily indicative of exercise
patterns that may occur.
The expense recognised in 2021 for all options is £563,000 (2020: £357,000).
(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 2021 Awarded Sold/transferred Forfeited At 31 December Weighted average
shares 2021 acquisition price
Partnership 222,119 52,824 (44,628) - 230,315 5.40
Matching 219,888 52,824 (25,799) (17,970) 228,943 5.40
Dividend 14,407 13,771 (2,974) - 25,204 5.80
Total 456,414 119,419 (73,401) (17,970) 484,462
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 2021 was approximately £8.18 per share (2020:
£6.08). 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 2021 for all Matching Shares is £278,000 (2020:
£269,000). No expense is recognised for the Partnership Shares and Dividend
Shares because the participants pay full market value for these shares.
26 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.
27 Commitments under operating leases
The Group's commercial leases for certain vehicles, offices, warehouses and
land are accounted for under IFRS 16 and are thus excluded from the below
operating lease commitments disclosure.
Commitments under operating leases include the Group's commercial leases for
its fleet vans and items of office equipment. These leases are either
short-term (the contract term is less than twelve months) or low-value
(underlying asset less than $5,000) and, therefore, meet the exemption
criteria under IFRS 16. They continue to be expensed through the consolidated
statement of comprehensive income. These leases have lives between one and
three years and some have renewal options included in the contracts. There are
no restrictions placed upon the Group as a result of entering into these
leases.
Future minimum rentals payable under non-cancellable operating leases as at
each year end are as follows:
2021 2020
£'000 £'000
Future minimum commitments under operating lease agreements are as follows:
Payable within one year 31 59
Payable within two and five years 14 41
Payable after five years - -
45 100
28 Capital commitments
Significant capital expenditure contracted for at the end of the reporting
period but not recognised as liabilities is as follows:
2021 2020
£'000 £'000
Property, plant and equipment 27,746 -
Intangible assets - 160
Inventory - work in progress - 9,370
In 2021, capital expenditure of £27,746,000 contracted for in relation to
property, plant and equipment related to the Group's grid-scale battery
storage projects under construction.
In 2020, capital expenditure of £9,370,000 contracted for in relation to
inventory related to the Group's grid-scale battery storage projects under
construction. These costs are now recognised within Property, plant and
equipment. See Accounting policies - property, plant and equipment - for
further details.
29 Contingencies
The Group has a contingent success fee arrangement in place with a supplier
totalling £0.75m that becomes payable should certain contractual conditions
be met. At the date of signing these financial statements, the conditions had
not been met.
30 Ultimate controlling party
There is no ultimate controlling party by virtue of the structure of
shareholdings in the Group.
31 Post balance sheet events
Acquisition of grid-scale battery storage project
On 14 February 2022 the Group acquired 100% of the issued share capital of
Balance Energy 2 Limited for total purchase consideration of c.£0.8m. The
acquisition enables SMS to obtain control over the rights required to develop
and commission a 30MW grid-scale battery storage site as part of its ongoing
investment strategy in carbon reduction assets.
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