Final results for the year ended 31 December 2013

RNS Number : 4277C

Smart Metering Systems PLC

17 March 2014

 



17 March 2014

Smart Metering Systems plc

("SMS", "the Company")

Final results for the year ended 31 December 2013

Smart Metering Systems plc (AIM: SMS.L), the integrated metering services company that connects, owns, operates and maintains current generation and new advanced metering assets and databases is pleased to announce its final results for the 12 months to 31 December 2013 which show continued growth across all business areas.

Financial Highlights

·      Revenue increased by 33% to £27.9m (2012: £21.0m)

·      Total annualised recurring meter rental increased by 44% to £15.5m (2012: £10.8m)

·      Gross profit increased by 34% to £17.8m (2012: £13.3m)

·      Gross profit margin at 64% (2012: 63%)

·      Adjusted EBITDA* increased by 31% to £11.8m (2012: £9.0m)

·      EBITDA margin at 42% (2012: 43%)

·      Basic earnings per share increased by 52% to 7.86p (2012: 5.18p)

·      Final dividend of 1.61p per ordinary share making 2.31p for the full year (2012: 1.65p), an increase of 40%

·      Available cash resources of £11.7m at 31 December 2013

·      New long term debt facilities announced on 12 March 2014 with £105.0m revolving credit agreement with Barclays Bank plc (lead bank), Clydesdale Bank plc and Bank of Scotland plc, replacing all existing facilities

(*Excluding exceptional items and fair value adjustments).

Operational Highlights

·      Total meter portfolio increased by 38% to 469,000 with industrial and commercial meters growing by over 118%

·      Capital expenditure on meters increased by 46% to £23.3 million, reaching a monthly run rate of approximately £2.5 million in December 2013

·      The gas supplier client base grew from 13 to 17, representing over 80% of the UK industrial and commercial market, and the number of energy broker contracts increased from 10 to 24

·      Over 16,000 ADM devices deployed in the UK by 31 December 2013 up from 2,000 in December 2012

·      17 trials of the ADM device in 5 different countries, with further trials now committed in 3 additional countries

Alan Foy, Chief Executive Officer, commented:

"Our progress in 2013 continued to be in line with our strategic priorities, at both a financial and operational level. Our gas meter portfolio increased by 38% year-on-year and we signed major new contracts with gas suppliers. We now have contracts in place with 80% of the I&C meter market."

Smart Metering Systems plc	0141 249 3850
Alan Foy, Chief Executive Officer
Glen Murray, Finance Director
Cenkos Securities plc	0131 220 6939 / 0207 397 8900
Neil McDonald
Beth McKiernan
Kreab Gavin Anderson	020 7074 1800
Chris Philipsborn
Anna Schoeffler

Notes to Editors

About Smart Metering Systems

Established in 1995, Smart Metering Systems plc based in Glasgow, connects, owns, operates and maintains metering systems and databases on behalf of major energy companies and energy brokers.

Currently the Company is concentrating its efforts on offering its unique integrated services to the UK industrial and commercial gas market in which its customers have an 80% market share.

The Company has further applications for gas with its ADM™ device which allows "smart" functions such as remote reading and half hourly consumption data to be offered to customers in addition to the normal metering services. Longer term the Company also has additional applications for water and LPG.

The Company was admitted to the AiM market in July 2011 and is now part of the FTSE AiM 50 index. For more information on SMS please visit the Company's website: www.sms-plc.com

Chairman's statement

Review of the year

Firstly, as the new chairman of SMS, I would like to thank my predecessor, Kevin Lyon, for his considerable contribution to the growth and development of the Group and on the successful flotation of the business on AIM.

I am pleased to confirm SMS has continued to make considerable progress in 2013 in all three business areas.

Since SMS floated on AIM in 2011, the company has continued to demonstrate year on year growth and has an established and growing market position in the UK smart metering market. The business strategy in the medium term is to maintain high levels of service to customers in the gas supplier market, increase the run rate with these customers, and continue to grow the meter asset portfolio.

SMS has consolidated this position and invested heavily over the years in IT infrastructure to provide a strong foundation for growth with the gas suppliers in the market and has established long-term relationships based on the high levels of service it provides to its customers. This is reflective of the standards set by the management and employees with key gas suppliers.

SMS has a clearly defined growth strategy in the gas supplier market, and together with the potential to establish ADM™ as the industry standard smart metering device, the Group has a very promising outlook.

During 2013, the Group continued to increase its recurring meter rental and expand the portfolio of gas meter assets in the face of competition from market leader National Grid. The order book also continues to expand with key gas suppliers in the I&C market, with potential to grow this substantially further to increase SMS's position in the market.

The UK meter assets business presents a large market opportunity with a substantial proportion of an estimated 1.6m I&C meters in the UK to be exchanged for a smart metering solution by 2020 with the added potential of a domestic market rollout.

The order book for ADM™ continued to grow and our current gas supplier contracts provide potential access to over 80% of UK industrial and commercial gas meters and 40% of residential gas meters.

Our strategic vision is to be the leading independent provider of smart metering and data management solutions to suppliers in the gas sector with the highest levels of service. The way we achieve this must reflect the evolution in domestic and international markets as well as a prudent approach to our growth and return to shareholders.

Our aim in 2014 and in future years is to focus on our three strategic priorities: grow our domestic meters business organically and through new contracts; establish our ADM™ technology as the industry standard smart metering solution for industrial and commercial (I&C) clients, and increase levels of business with, and services provided to key gas suppliers.

We will also continue to trial ADM data services internationally in gas, electricity, water and LPG markets.

We will achieve these goals by continuing to invest in providing the highest levels of service to the gas supplier market and investing in our research and development capability to ensure we maintain our competitive advantage.

We also believe that during Alan Foy's continuing leadership the Group has developed a strong and evolving business model and strategy that is well positioned to expand the business to reward our customers and shareholders. 

Corporate Culture

SMS's culture is based on a commitment by its employees to know their customers. This has been instrumental in developing, building and maintaining trusted relationships with our customers the gas suppliers. Our core values around good counsel, prudence and wisdom have ensured we continue to maintain these strong relationships.

Equally important in terms of operational performance is how our IT systems and compliance management work with the gas suppliers. These are integral to how we achieve customer satisfaction and the building of a trusted relationship.

Board Composition

The Board comprises myself as Non-Executive Chairman, and four other directors, of which two are Non-Executive. We have sought to evolve our Board structure to ensure we have a balanced board and welcome Miriam Greenwood who has recently joined us as a Non-Executive Director of the Company. She is a qualified barrister and has spent much of her career in corporate finance working for a number of leading investment banks and other financial institutions.

Miriam is a Non-Executive Director of a number of companies including Henderson Global Trust plc, Mithras Investment Trust plc and the Offshore Renewable Energy Catapult Limited. She was, for 9 years until 2013, a Non-Executive Director of the Gas and Electricity Markets Authority (OFGEM) for whom she is currently Chair of the Gas Network Innovation Expert Panel. A Deputy Lieutenant of the City of Edinburgh, Miriam was awarded an OBE for services to corporate finance in 2000.

Miriam will bring considerable experience and knowledge to the management team and in particular will help with our work in corporate governance.

Outlook

The Group continues to make progress based on our strategic priorities and we view the outlook for the market in 2014 as very promising for our business model.

Chief Executive Officer's statement

We are pleased to announce another strong set of results for the year ended 31 December 2013. The results reflect the cumulative effect of the increase in meters and the increasing number of contracts signed during 2013.

Operational Review

During 2013 we made substantial progress in all three areas of our business. Following a strong first half where we saw our meter portfolio increase by 60,000 and break the 400,000 level, growth accelerated in the second half with a further 69,000 added leading to a 38% increase year-on-year in our gas meter portfolio. The progress we have made in establishing long-term recurring revenue was evidenced by an increase in year-end annualised recurring meter rental revenue of 44% to £15.5m and £300k data provision sales from our ADM™ device.

Industrial and Commercial meters

During 2013 we were delighted to announce a number of major new contracts for the provision of gas meters within DONG Energy, Opus Gas Supply, Flow Energy, Daligas, and Crown Gas and Power. The current estimates are for a total programme in excess of 22,000 meters to the end of 2014, of which over 2,000 had already been delivered by 31 December 2013.

In addition, SMS has also signed contracts with five energy brokers who provide brokerage and energy management services to small, medium and large group consumers for the provision of the ADM™ device and gas meters. The broker business is at present a small but growing part of our portfolio. The increase in customer base during 2013 now means that SMS has contracts in place with over 80% of the total I&C meter market.

Once installed, these meters will be on SMS's long-term index linked contracts and provide recurring revenue for the lifetime of the assets (expected to be 25 years).

The size of I&C meters is typically much greater than that of domestic meters and therefore the revenue per meter is substantially higher: the equivalent number of domestic meters for these 22,000 contracts would be in the order of 300,000.

Our transactional gas connections business continues to be cash generative and to secure gas meter ownership for the Group; it has performed in line with management expectations.

ADM™

The ADM™ device is SMS' advanced metering solution which allows for remote meter reading on a half-hourly basis and has been designed in line with our own customer requirements.

SMS has now installed over 16,000 ADM™ devices and feedback continues to be very positive. The ability of remote reading alongside SMS's full service capability in the I&C market provides a major opportunity for the Company in extending the service we offer and the ability to seek out further markets for our overall service.

As in 2012, all new contracts announced in 2013 allow for the introduction of the ADM™ device into I&C premises during meter replacement programmes.

The Department of Energy & Climate Change (DECC) has recently announced a delay in the start of the UK domestic smart metering programme. The Company believes, however, that the small I&C market will be largely unaffected by this delay as suppliers are already rolling out advanced solutions for commercial reasons to allow their customers to benefit from being able to manage their energy bills at the earliest practicable date rather than waiting until they are mandated to install smart meters. Based on the ADM's competitive price and ease of installation and the ongoing increase in the Company's meter portfolio, SMS expects to benefit from this delay and also to be well placed when the mandated smart metering program occurs.

The large I&C market, estimated by SMS to be over 600,000 meters, has to move to an advanced metering solution, with around 60,000 of the very large category having to be completed or contracted by 2014.

The small I&C market, estimated by SMS at over 1.1 million meters, has until 2014 to either opt for an advanced metering solution such as the ADM™ device or, alternatively, to be included in the government's proposed domestic roll out of smart meters.

SMS believes that both market segments will find the ADM™ device an attractive solution, based on its competitive price and ease of installation.

The Company received full European Patent Approval for ADM™ in 2012 and continues to progress the potential use of the ADM™ device in other sectors such as the UK's water and LPG industries and internationally where trials have commenced.

Domestic Meters

SMS was successful during 2013 in obtaining 2 further contracts in the domestic market. As previously announced SMS has been contracted by SSE to provide Meter Operations Services in all regions outside Scotland and the South-East of England up to April 2014, and is on track to complete the original 180,000 meter program.

SMS will continue to support its existing and potential new customers in the domestic market for gas meter services, leaving the business well placed to support our customers in the domestic smart programme, now expected to commence in the autumn 2015.

We are well placed to capitalise on the this potential rollout of smart meters in the domestic market, though our future strategic growth is not reliant on this taking place, either in terms of capturing market share or in terms of increasing revenue growth.

Smart Metering Systems plc

Annual report and accounts 2013

Consolidated statement of comprehensive income

For the year ended 31 December 2013

		2013	2012
	Notes	£'000	£'000
Revenue	1	27,916	21,029
Cost of sales	2	(10,101)	(7,759)
Gross profit		17,815	13,270
Administrative expenses	2	(9,248)	(7,337)
Profit from operations	2	8,567	5,933
Attributable to
Operating profit before exceptional items		8,834	7,176
Exceptional items and fair value adjustments	2	(267)	(1,243)
Finance costs	5	(1,122)	(739)
Finance income	5	26	33
Profit before taxation		7,471	5,227
Taxation	6	(896)	(914)
Profit for the year attributable to equity holders		6,575	4,313
Other comprehensive income		-	-
Total comprehensive income		6,575	4,313

The profit from operations arises from the Group's continuing operations.

Earnings per share attributable to owners of the parent during the year:

	Notes	2013	2012
Basic earnings per share (pence)	7	7.86	5.18
Diluted earnings per share (pence)	7	7.43	5.00

Consolidated statement of financial position

As at 31 December 2013

		2013	2012
	Notes	£'000	£'000
Assets
Non-current
Intangible assets	9	2,018	1,916
Property, plant and equipment	10	57,382	36,104
		59,400	38,020
Current assets
Inventories	12	2,504	373
Trade and other receivables	13	6,099	3,091
Cash and cash equivalents	14	2,073	6,455
Other current financial assets	18	207	-
		10,883	9,919
Total assets		70,283	47,939
Liabilities
Current liabilities
Trade and other payables	15	8,879	8,201
Bank loans and overdrafts	16	3,933	2,150
Commitments under hire purchase agreements	17	3	3
Other current financial liabilities	18	-	170
		12,815	10,524
Non-current liabilities
Bank loans	16	31,475	18,299
Obligations under hire purchase agreements	17	6	10
Deferred tax liabilities	20	3,395	2,510
		34,876	20,819
Total liabilities		47,691	31,343
Net assets		22,592	16,596
Equity
Share capital	22	838	833
Share premium		8,971	8,653
Other reserve	24	1	1
Retained earnings		12,782	7,109
Total equity attributable to equity holders of the parent company		22,592	16,596

Consolidated statement of changes in equity

For the year ended 31 December 2013

	Share	Share	Other	Retained
	capital	premium	reserve	earnings	Total
Attributable to the owners of the parent company:	£'000	£'000	£'000	£'000	£'000
As at 1 January 2012	833	8,653	1	2,969	12,456
Profit for the year	-	-	-	4,313	4,313
Transactions with owners in their capacity as owners:
Dividends (Note 8)	-	-	-	(417)	(417)
Share options	-	-	-	244	244
As at 31 December 2012	833	8,653	1	7,109	16,596
Profit for the year	-	-	-	6,575	6,575
Transactions with owners in their capacity as owners:
Dividends (Note 8)	-	-	-	(1,546)	(1,546)
Shares Issued	5	318	-	-	323
Share options	-	-	-	644	644
As at 31 December 2013	838	8,971	1	12,782	22,592

Consolidated statement of cash flows

For the year ended 31 December 2013

	2013	2012
	£'000	£'000
Cash flow from operating activities
Profit before taxation	7,471	5,227
Finance costs	1,122	739
Finance income	(26)	(33)
Fair value movement on derivatives	(377)	(151)
Depreciation	2,754	1,599
Amortisation	262	238
Share-based payment expense	644	244
Increase in inventories	(2,131)	(290)
(Increase) in trade and other receivables	(2,961)	(1,485)
Decrease in trade and other payables	826	1,835
Cash generated from operations	7,584	7,923
Taxation	(206)	(290)
Net cash generated from operations	7,378	7,633
Investing activities
Payments to acquire property, plant and equipment	(24,595)	(16,380)
Disposal of property, plant and equipment	563	4
Payments to acquire intangible assets	(364)	(269)
Finance income	26	33
Net cash used in investing activities	(24,370)	(16,612)
Financing activities
New borrowings	17,830	10,947
Capital repaid	(2,875)	(1,671)
Net outflow from other long-term creditors	-	(3)
Finance costs	(1,122)	(739)
Net proceeds from share issue	323	-
Dividend paid	(1,546)	(417)
Net cash generated from financing activities	12,610	8,117
Net increase in cash and cash equivalents	(4,382)	(862)
Cash and cash equivalents at the beginning of the financial year	6,455	7,317
Cash and cash equivalents at the end of the financial year (Note 14)	2,073	6,455

ACCOUNTING POLICIES

The Company is incorporated and domiciled in the UK. The Group's activities consist of the rental and management of gas meters and that of laying infrastructure pipes for industrial and commercial premises and the provision of specialist technical advice on the use and management of energy for industrial and commercial users.

BASIS OF PREPARATION

The consolidated financial statements have been prepared on a historical cost basis, except for derivative financial instruments which are measured at fair value in line with applicable accounting standards. The consolidated financial statements are presented in British pounds Sterling (£), which is also the functional currency of the Group, and all values are rounded to the nearest thousand (£'000) except where otherwise indicated.

GOING CONCERN

Management prepares budgets and forecasts on a rolling 24 month basis. These forecasts cover operational cash flows and investment capital expenditure. The Group has committed bank facilities which extend to March 2016 and available cash resources at 31 December 2013 of £11.7m.

Based on the current projections and facilities in place the Directors consider it appropriate to continue to prepare the financial statements on a going concern basis.

BASIS OF CONSOLIDATION

The consolidated financial statements incorporate the consolidated financial statements of the Company and all Group undertakings being UK Gas Connection Limited, UK Meter Assets Limited, UKMA (AF) Limited and UK Data Management Limited. These are adjusted, where appropriate, to conform to Group accounting policies and are prepared to the same accounting reference date. The Company was incorporated on 27 October 2009. The Group was formed on 24 December 2009 through the acquisition of the entire share capital of UK Gas Connection Limited and UK Meter Assets Limited (the only subsidiaries in existence at that time).

Whilst the Group was newly formed, the ultimate ownership of all companies remained unchanged and, as such, the financial statements have been prepared based on a reconstruction under common control, reflecting the Group results for the current and prior years as though the Group structure has always existed.

USE OF ESTIMATES AND JUDGEMENTS

The preparation of the financial statements requires the use of estimates and assumptions. Although these estimates are based on management's best knowledge, actual results ultimately may differ from these estimates.

The key sources of estimation uncertainty that have a significant risk of causing material adjustment to the carrying amounts of assets and liabilities within the next financial year are the estimation of share-based payment costs. The estimation of share-based payment costs requires the selection of an appropriate valuation model, consideration as to the inputs necessary for the valuation model chosen and the estimation of the number of awards that will ultimately vest, inputs for which arise from judgements relating to the probability of meeting non-market performance conditions and the continuing participation of employees.

REVENUE RECOGNITION

Revenue is recognised to the extent that it is probable that the economic benefits will flow to the Group and the revenue can be reliably measured. Revenue is measured at the fair value of the consideration received, excluding discounts and VAT.

Revenue is recognised when the significant rewards and risk of ownership have been passed to the buyer. The risk and rewards of ownership transfer when the Company fulfils its contractual obligations to customers by supplying services.

METER RENTAL INCOME

Rental income is recognised when the Company is contractually entitled to it. Rental income is calculated on a daily basis and invoiced monthly. Rental contracts do not operate on a fixed term basis and are cancellable by the lessee with immediate effect and do not transfer risks and rewards of ownership of the underlying asset. They are therefore considered as operating lease arrangements and accounted for as such.

GAS CONNECTION

Revenue from gas connection contracts is recognised upon delivery of the related service, in line with our contractual entitlement.

DATA MANAGEMENT

Data provision income is recognised when the Company is contractually entitled to it. Data provision income is invoiced in advance and is recognised in a straight line over the contract period.

SEGMENT REPORTING

An operating segment is a group of assets and operations engaged in providing products or services that are subject to risks and returns that are different from those of other business segments. Operating segments are reported in a manner consistent with the reports made to the chief operating decision maker which are consistent with the reported results.

The Company considers that the role of chief operating decision maker is performed by the Board of Directors.

FINANCIAL ASSETS

INITIAL RECOGNITION AND MEASUREMENT

Financial assets within the scope of IAS 39 are classified as financial assets at fair value through profit or loss, loans and receivables, held-to-maturity investments, available-for-sale financial assets or as derivatives designated as hedging instruments in an effective hedge, as appropriate. The Group determines the classification of its financial assets at initial recognition.

Purchases or sales of financial assets that require delivery of assets within a time frame established by regulation or convention in the marketplace (regular way trades) are recognised on the trade date, i.e. the date that the Group commits to purchase or sell the asset.

The Group's financial assets include cash and short-term deposits, trade and other receivables, loans and other receivables, quoted and unquoted financial instruments and derivative financial instruments.

FINANCIAL LIABILITIES

INITIAL RECOGNITION AND MEASUREMENT

Financial liabilities within the scope of IAS 39 are classified as financial liabilities at fair value through profit or loss, loans and borrowings or as derivatives designated as hedging instruments in an effective hedge, as appropriate. The Group determines the classification of its financial liabilities at initial recognition. All financial liabilities are recognised initially at fair value and in the case of loans and borrowings, net of directly attributable transaction costs.

The Group's financial liabilities include trade and other payables, bank overdraft, loans and borrowings, financial guarantee contracts and derivative financial instruments.

DERECOGNITION

A financial liability is derecognised when the obligation under the liability is discharged or cancelled or expires. When an existing financial liability is replaced by another from the same lender on substantially different terms, or the terms of an existing liability are substantially modified, such an exchange or modification is treated as a derecognition of the original liability and the recognition of a new liability and the difference in the respective carrying amounts is recognised in the income statement.

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.

INITIAL RECOGNITION AND SUBSEQUENT MEASUREMENT

The Group uses derivative financial instruments such as interest rate swaps to hedge its interest rate risk. Such derivative financial instruments are initially recognised at fair value on the date on which a derivative contract is entered into and are subsequently remeasured at fair value. Derivatives are carried as financial assets when the fair value is positive and as financial liabilities when the fair value is negative. The Group has not designated any derivatives for hedge accounting.

CURRENT VERSUS NON-CURRENT CLASSIFICATION

Derivative instruments that are not designated as effective hedging instruments are classified as current or non-current or separated into a current and non-current portion based on an assessment of the facts and circumstances (i.e. the underlying contracted cash flows).

Where the Group will hold a derivative as an economic hedge (and does not apply hedge accounting) for a period beyond twelve months after the reporting date, the derivative is classified as non-current (or separated into current and non-current portions) consistent with the classification of the underlying item.

Derivative instruments that are designated as, and are effective hedging instruments, are classified consistent with the classification of the underlying hedged item. The derivative instrument is separated into a current portion and non-current portion only if a reliable allocation can be made.

EXCEPTIONAL ITEMS

The Group presents as exceptional items on the face of the income statement 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 to allow shareholders to understand better the elements of financial performance in that year, so as to facilitate comparison with prior periods and to assess better trends in financial performance.

RESEARCH AND DEVELOPMENT

Expenditure on pure and applied research activities is recognised in the income statement as an expense as incurred.

Expenditure on product development activities is capitalised if the product or process is technically and commercially feasible and the Group intends and has the technical ability and sufficient resources to complete development, future economic benefits are probable and if the Group can measure reliably the expenditure attributable to the intangible asset during its development. The expenditure capitalised includes the cost of materials, direct labour and an appropriate proportion of overheads.

Capitalised development expenditure is stated at cost less accumulated amortisation and accumulated impairment losses.

Amortisation is calculated, when the product or system is commercialised or in use, so as to write off the cost of an asset, less its estimated residual value, over the useful economic life of that asset as follows:

Amortisation                        20% on cost straight line

INTANGIBLE ASSETS

Intangible assets acquired separately from third parties are recognised as assets and measured at cost.

Following initial recognition, intangible assets are measured at cost at the date of acquisition less any amortisation and any impairment losses. Amortisation costs are included within the net operating expenses disclosed in the statement of comprehensive income.

Intangible assets are amortised over their useful lives as follows:

Software                                                12.5% straight line

Useful lives are also examined on an annual basis and adjustments, where applicable, are made on a prospective basis. The Company does not have any intangible assets with indefinite lives.

PROPERTY, PLANT AND EQUIPMENT

Property, plant and equipment is stated at cost, net of accumulated depreciation and/or accumulated impairment losses, if any. Such cost includes the cost of replacing part of the plant and equipment and borrowing costs for long-term construction projects if the recognition criteria are met. When significant parts of property, plant and equipment are required to be replaced in intervals, the Group recognises such parts as individual assets with specific useful lives and depreciation, respectively.

All other repair and maintenance costs are recognised in the income statement as incurred.

Depreciation is calculated on a straight line basis over the estimated useful life of the asset as follows:

Short leasehold property   20% on cost

Plant and machinery           5% on cost

Fixtures and fittings            15% on cost

Equipment                            33% on cost

Land is not depreciated.

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 income statement 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.

All fixed assets are initially recorded at cost.

IMPAIRMENT OF ASSETS

Property, plant and equipment and intangible assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. An impairment loss is recognised for the amount by which the asset's carrying amount exceeds its recoverable amount. The recoverable amount is the higher of an asset's fair value less costs to sell and value in use. For purposes of assessing impairment assets that do not individually generate cash flows are assessed as part of the cash-generating unit to which they belong. Cash-generating units are the lowest levels for which there are cash flows that are largely independent of the cash flows from other assets or groups of assets.

INVENTORIES

Inventories are stated at the lower of cost and net realisable value. Costs comprise direct materials. Net realisable value represents the estimated selling price for inventories less all estimated costs of completion and costs to be incurred in marketing, selling and distribution.

CASH AND CASH EQUIVALENTS

Cash and cash equivalents in the balance sheet comprise 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 consist of cash and short-term deposits as defined above, net of outstanding bank overdrafts.

HIRE PURCHASE AGREEMENTS

Assets held under hire purchase agreements are capitalised and disclosed under tangible fixed assets at their fair value. The capital element of the future payments is treated as a liability and the notional interest is charged to the statement of comprehensive income in proportion to the remaining balance outstanding.

LEASED ASSETS AND OBLIGATIONS

Finance leases, which transfer to the Group substantially all the risks and benefits incidental to ownership of the leased item, are capitalised at the commencement of the lease at the fair value of the leased property or, if lower, at the present value of the minimum lease payments. Lease payments are apportioned between finance charges and reduction of the lease liability so as to achieve a constant rate of interest on the remaining balance of the liability. Finance charges are recognised in the income statement. Leased assets are depreciated over the useful life of the asset. However, if there is no reasonable certainty that the Group will obtain ownership by the end of the lease term, the asset is depreciated over the shorter of the estimated useful life of the asset and the lease term. Operating lease payments are recognised as an expense in the income statement on a straight line basis over the lease term.

All other leases are operating leases and the annual rentals are charged to the statement of comprehensive income on a straight line basis over the lease term.

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 statement of comprehensive income.

SHARE-BASED PAYMENTS

The costs of equity-settled share-based payments are charged to the income statement over the vesting period. The charge is based on the fair value of the equity instrument granted and the number of equity instruments that are expected to vest.

TAXATION

Tax currently payable is based on the taxable profit for the year. Taxable profit differs from accounting profit as reported in the 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 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 liabilities are recognised for all taxable temporary differences and deferred tax assets are recognised to the extent that it is probable that taxable profits will be available against which deductible temporary differences can be utilised. The deferred tax balance is calculated based on tax rates that have been enacted or substantively enacted by the reporting date.

ADOPTION OF THE INTERNATIONAL ACCOUNTING STANDARDS NEW STANDARDS, AMENDMENTS AND INTERPRETATIONS ISSUED BUT NOT YET EFFECTIVE FOR PERIODS COMMENCING ON OR AFTER 1 JULY 2014

ANNUAL IMPROVEMENTS TO IFRSS 2010/2012 CYCLE (NOT YET ENDORSED FOR USE IN EU)

IFRS	Amendment
IFRS 2 Share-based Payment	Separate definitions of 'service condition' and 'performance condition' now included in IFRS 2, Appendix A and the definition of 'vesting condition' and 'market condition' amended. Applied prospectively for share-based transactions for which the grant date is on or after 1 July 2014
IFRS 3 Business Combinations	Paragraph 40 amended to clarify that contingent consideration that meets the definition of a financial instrument must be classified as equity or financial liability based on the requirements of IAS 32 only and the reference to 'or other applicable IFRSs' has been deleted References to 'IAS 37 or other IFRSs as appropriate' deleted in paragraph 58(b) for contingent consideration that is a non-financial asset or liability. This retains fair value, with changes through profit or loss, as the subsequent measurement basis for all non-equity contingent consideration to which IFRS 3 applies. Consequential amendments made to IAS 37 and IAS 39 (and IFRS 9) to clarify that contingent consideration in a business combination that is classified as an asset or a liability shall be subsequently measured at fair value with changes in fair value recognised in profit or loss. Applied prospectively to business combinations for which the acquisition date is on or after 1 July 2014.
IFRS 8 Operating Segments	A new paragraph 22(aa) added to require disclosure of the judgements made by management in applying the aggregation criteria in the standard. This includes a brief description of the operating segments that have been aggregated and the economic indicators that have been assessed in determining that the aggregated operating segments share similar economic characteristics. Paragraph 28(c) amended to require a reconciliation of the total of the reportable segments' assets to the entity's assets only if the amount is regularly provided to the chief operating decision maker, consistent with the requirement in paragraph 28(d) for an entity's liabilities.
IFRS 13 Fair Value Measurement	Amendment to the Basis for Conclusions to clarify that when certain paragraphs from IAS 39 and IFRS 9 were deleted because IFRS 13 contains guidance for using present value techniques, the intention was not to remove the ability of an entity to measure short-term receivables and payables with no stated interest rate at invoice amounts without discounting, when the effect of not discounting is immaterial.
IAS 16 Property, Plant and Equipment	Paragraph 35 amended and new paragraphs added to clarify the treatment of accumulated depreciation when an item of property, plant and equipment is revalued, as the IFRS Interpretations Committee had reported to the IASB that practice differed. At the date of the revaluation, the asset must be treated in one of the following ways: -       the gross carrying amount is adjusted in a manner that is consistent with the revaluation of the carrying amount of the asset. The accumulated depreciation at the date of the revaluation is adjusted to equal the difference between the gross carrying amount and the carrying amount of the asset after taking into account accumulated impairment losses; -       the accumulated depreciation is eliminated against the gross carrying amount of the asset. Applies to revaluations in the initial period of application (i.e. beginning on or after 1 July 2014) and the preceding period.  Adjusted comparative information may be presented for earlier periods, but there is no requirement to do so.
IAS 24 Related Party Disclosures	Paragraph 9 amended and new paragraphs added to extend the definition of a related party as IAS 24 was not clear of the relationship when a management entity provides key management personnel services to an entity. The definition of a related party now includes an entity, or any member of a group of which it is a part, that provides key management personnel services to the reporting entity, or to the parent of the reporting entity. Separate disclosure is required for the provisions of key management personnel services provided by a separate management entity.  The key management personnel compensation that is provided by a management entity to its own employees is excluded from the disclosure requirements.
IAS 38 Intangible Assets	Paragraph 80 amended and new paragraphs added to align the accounting treatment of accumulated depreciation when an intangible asset is revalued with the amendments to IAS 16 when an item of property, plant and equipment is revalued (see above).
Effective date: Periods commencing on or after 1 July 2014 unless otherwise indicated.
IFRS 1 First-time Adoption of International Financial Reporting Standards	A footnote to paragraph BC11 and a new paragraph BC11A added to clarify that if a new IFRS is not yet mandatory but permits early application, that IFRS is permitted but not required to be applied in the entity's first IFRS financial statements. If a new IFRS is so applied it must be applied in all the periods presented in the first IFRS financial statements on a retrospective basis. Effective from 12 Dec 2013
IFRS 3 Business Combinations	Paragraph 2(a) amended (and paragraphs added to the Basis for Conclusions) to: -       exclude the formation of all types of joint arrangements (as defined in IFRS 11 Joint Arrangements, i.e. joint ventures and joint operations), from the scope of IFRS 3; and -       clarify that the scope exception only applies to the accounting for the formation of a joint arrangement in the financial statements of the joint arrangement itself. Apply prospectively for periods beginning on or after 1 July 2014
IFRS 13 Fair Value Measurement	Paragraph 52 of IFRS 13 defines the scope of the exception that permits an entity to measure the fair value of a group of financial assets and financial liabilities on a net basis if the entity manages that group of financial assets and financial liabilities on the basis of its net exposure to either market risk or credit risk. This is referred to as the portfolio exception. The IASB has amended paragraph 52 to clarify that the portfolio exception applies to all contracts within the scope of IAS 39 Financial Instruments: Recognition and Measurement or IFRS 9 Financial Instruments, regardless of whether they meet the definitions of financial assets or financial liabilities as defined in IAS 32 Financial Instruments: Presentation. Periods beginning on or after 1 July 2014.  Apply prospectively from the beginning of the annual period in which IFRS 13 was initially applied.
IAS 40 Investment Property	IAS 40 amended to clarify that reference should be made to IFRS 3 to determine whether the acquisition of investment property is the acquisition of an asset; or a group of assets; or a business combination.   This judgement is not based on paragraphs 7-15 of IAS 40, which relate to whether or not property is owner-occupied or investment property, but is instead based on the guidance in IFRS 3.  Transitional provisions: The amendment applies prospectively and consequently amounts recognised for acquisitions of investment property in prior periods are not adjusted.  However, the IASB noted that the amendment is really only a clarification of the interrelationship between IFRS 3 and IAS 40.  It therefore permits an entity to choose to apply the amendment to individual acquisitions of investment property that occurred before the effective date if, and only if, information needed to apply the amendment is available to the entity. Apply prospectively to acquisitions of investment property made in periods beginning on or after 1 July 2014.  Adjusted comparative information may be presented for earlier periods but there is no requirement to do so.

 There are no other IFRS or IFRIC interpretations that are not yet effective that would be expected to have a material impact on Smart Metering Systems plc.

None of the above interpretations would have an impact on this financial information if applied.

Notes to the financial statements

For the year ended 31 December 2013

1 SEGMENTAL REPORTING

For management purposes, the Group is organised into two core divisions, management of assets and installation of meters, which form the basis of the Group's reportable operating segments. Operating segments within those divisions are combined on the basis of their similar long-term economic characteristics and similar nature of their products and services, as follows:

The management of assets comprises regulated management of gas meters within the UK.

The installation of meters comprises installation of domestic and industrial and commercial gas meters throughout the UK.

Management monitors the operating results of its divisions separately for the purpose of making decisions about resource allocation and performance assessment. The operating segments disclosed in the financial statements are the same as reported to the Board. Segment performance is evaluated based on gross profit or loss excluding operating costs not reported by segment, depreciation, amortisation of intangible assets and exceptional items.

The following tables present information regarding the Group's reportable segments for the years ended 31 December 2013 and 31 December 2012: 

	Asset	Asset		Total
	management	installation	Unallocated	operations
31 December 2013	£'000	£'000	£'000	£'000
Segment/Group revenue	13,803	14,113	-	27,916
Operating costs	(2,575)	(7,526)	-	(10,101)
Segment profit - Group gross profit	11,228	6,587	-	17,815
Items not reported by segment:
Other operating costs	-	-	(5,965)	(5,965)
Depreciation	(2,654)	-	(100)	(2,754)
Amortisation	(262)	-	-	(262)
Exceptional items and fair value adjustments	-	-	(267)	(267)
Profit before interest and tax	8,312	6,587	(6,332)	8,567
Net finance costs	(1,096)	-	-	(1,096)
Profit before tax	7,216	6,587	(6,332)	7,471
Tax expense				(896)
Profit for year				6,575

	Asset	Asset		Total
	management	installation	Unallocated	operations
31 December 2012	£'000	£'000	£'000	£'000
Segment/Group revenue	9,254	11,775	-	21,029
Cost of sales	(2,194)	(5,565)	-	(7,759)
Segment profit - Group gross profit	7,060	6,210	-	13,270
Items not reported by segment:
Other operating costs	-	-	(4,257)	(4,257)
Depreciation	(1,534)	-	(65)	(1,599)
Amortisation	(238)	-	-	(238)
Exceptional items and fair value adjustments	-	-	(1,243)	(1,243)
Profit before interest and tax	5,288	6,210	(5,565)	5,933
Net finance costs	-	-	(706)	(706)
Profit before tax	5,288	6,210	(6,271)	5,227
Tax expense				(914)
Profit for year				4,313

All revenues and operations are based and generated in the UK.

The Group has one major customer that generated turnover within each segment as listed below:

	2013	2012
	£'000	£'000
Customer 1 - Asset Management	7,677	5,511
Customer 1 - Asset Installation	4,901	4,228
	12,578	9,739

No segmentation is presented for the majority of Group assets and liabilities as these are managed centrally, independently of operating segments.

Those assets and liabilities that are managed and reported on a segmental basis are detailed below.

SEGMENT ASSETS AND LIABILITIES

	Asset	Asset	Total
	management	installation	operations
31 December 2013	£'000	£'000	£'000
Assets reported by segment
Intangible assets	2,018	-	2,018
Plant and machinery	57,041	-	57,041
Inventories	2,504	-	2,504
			61,563
Assets not reported by segment			8,720
Total assets			70,283
Liabilities reported by segment
Obligations under hire purchase agreements	9	-	9
			9
Liabilities not reported by segment			47,682
Total liabilities			47,691

	Asset	Asset	Total
	management	installation	operations
31 December 2012	£'000	£'000	£'000
Assets reported by segment
Intangible assets	1,916	-	1,916
Plant and machinery	35,791	-	35,791
Inventories	373	-	373
			38,080
Assets not reported by segment			9,859
Total assets			47,939
Liabilities reported by segment
Obligations under hire purchase agreements	13	-	13
			13
Liabilities not reported by segment			31,330
Total liabilities			31,343

2 INCOME STATEMENT BY NATURE AND ITEMS OF EXPENDITURE INCLUDED IN THE CONSOLIDATED INCOME STATEMENT

	2013	2012
	£'000	£'000
Revenue	27,916	21,029
Direct rental costs	(2,575)	(2,194)
Direct subcontractor costs	(6,220)	(4,556)
Other direct sales costs and systems rental	(1,312)	(1,001)
Staff costs	(3,830)	(2,665)
Depreciation:
- owned assets	(2,723)	(1,568)
- leased assets	(31)	(31)
Amortisation	(262)	(238)
Auditor's remuneration:
- as auditor	(51)	(43)
- other services	(29)	(22)
Exceptional costs and fair value adjustments	(267)	(1,243)
Operating lease costs:
- plant and equipment	1	(30)
Other operating charges	(2,050)	(1,505)
Operating profit	8,567	5,933
Finance costs	(1,122)	(739)
Finance income	26	33
Profit before taxation	7,471	5,227

Included in exceptional items and fair value adjustments expenses are: i) £377,143 (2012: £(151,000)) relates to the interest rate hedge fair value adjustment and ii) £644,275 (2012: £243,675) that relates to share-based payments. £Nil (2012: £652,518) restructuring debt, £Nil (2012: 395,300) settlement of hedge and £Nil (2012: £102,650) TUPE costs.

Amounts paid to our auditor during the year totalled £80,155 (2012: £65,480).

This can be analysed as: 

	2013	2012
	£'000	£'000
Statutory audit (Baker Tilly UK Audit LLP)	51	43
Taxation services (Baker Tilly Tax and Accounting Limited)	15	19
Non-statutory audit services (Baker Tilly UK Audit LLP)	14	3
	80	65

3 PARTICULARS OF EMPLOYEES

The average number of staff employed by the Group, including Executive Directors, during the financial year was:

	2013	2012
	Number	Number
Number of administrative staff	8	5
Number of operational staff	76	54
Number of sales staff	5	3
Number of IT staff	4	3
Number of Directors	3	3
	96	68

The aggregate payroll costs, including Executive Directors, of the above were:

	2013	2012
	£'000	£'000
Wages and salaries	3,364	2,351
Social security costs	384	256
Staff pension costs	64	40
Director pension costs	18	18
	3,830	2,665

4 DIRECTOR'S EMOLUMENTS

The Directors' aggregate remuneration in respect of qualifying services were:

	2013	2012
	£'000	£'000
Emoluments receivable	589	518
Fees	52	50
Value of Group pension contributions to money purchase schemes	5	4
Other pension	15	14
	661	586

	2013	2012
Emoluments of highest paid Director	£'000	£'000
Total emoluments	387	350
Pension contributions	15	13

The number of Directors who accrued benefits under Company pension schemes was as follows:

	2013	2012
	Number	Number
Money purchase schemes	1	1

5 FINANCE COSTS AND FINANCE INCOME

	2013	2012
	£'000	£'000
Finance costs
Bank loans and overdrafts	1,121	738
Finance leases	1	1
Total finance costs	1,122	739
Finance income
Bank interest receivable	26	33

6 TAXATION

	2013	2012
	£'000	£'000
Analysis of charge in the year
Current tax:
Current income tax expense	-	200
Over provision in prior year	11	77
Total current income tax	11
Deferred tax:
Origination and reversal of temporary differences	885	637
Tax on profit on ordinary activities	896	914

The charge for the period can be reconciled to the profit per the consolidated statement of comprehensive income as follows:

Profit before tax	7,471	5,227
Tax at the UK corporation tax rate of 23% (2012: 24.5%)	1,718	1,281
Expenses not deductible for tax purposes	19	45
Adjustments to tax charge in respect of previous periods	3	(174)
Change in tax rate	(844)	(221)
R&D enhanced deductions	-	(17)
Tax expense in the income statement	896	914

7 EARNINGS PER SHARE

The calculation of EPS is based on the following data and number of shares:

	2013	2012
	£'000	£'000
Profit for the year used for calculation of basic EPS	6,575	4,313
Amortisation of intangible assets	262	238
Exceptional costs	267	1,243
Tax effect of adjustments	(127)	(355)
Earnings for the purpose of adjusted EPS	6,977	5,439

Number of shares	2013	2012
Weighted average number of ordinary shares for the purposes of basic EPS	83,606,102	83,339,747
Effect of potentially dilutive ordinary shares:
- share options	4,898,694	2,957,911
Weighted average number of ordinary shares for the purposes of diluted EPS	88,504,796	86,297,658
Earnings per share:
- basic (pence)	7.86	5.18
- diluted (pence)	7.43	5.00
Adjusted earnings per share:
- basic (pence)	8.35	6.53
- diluted (pence)	7.88	6.30

The Directors consider that the adjusted earnings per share calculation gives a better understanding of the Group's earnings per share.

8 DIVIDENDS

	2013	2012
	£'000	£'000
Equity dividends
Paid during the year:
Dividends on equity shares £0.0185 (2012: £0.005)	1,546	417
Total dividends	1,546	417

9 INTANGIBLE ASSETS

	Research and
	development	Software	Total
	£'000	£'000	£'000
Cost
As at 1 January 2012	559	1,810	2,369
Additions	269	-	269
As at 31 December 2012	828	1,810	2,638
Additions	364	-	364
As at 31 December 2013	1,192	1,810	3,002
Amortisation
As at 1 January 2012	14	470	484
Charge for year	3	235	238
As at 31 December 2012	17	705	722
Charge for year	27	235	262
As at 31 December 2013	44	940	984
Net book value
At 31 December 2013	1,148	870	2,018
At 31 December 2012	811	1,105	1,916
At 1 January 2012	545	1,340	1,885

10 PROPERTY, PLANT AND EQUIPMENT

	Short leasehold	Plant and	Fixtures
	property	machinery	and fittings	Equipment	Total
	£'000	£'000	£'000	£'000	£'000
Cost
As at 1 January 2012	31	23,020	25	296	23,372
Additions	72	16,200	91	17	16,380
Disposals	-	-	(13)	-	(13)
As at 31 December 2012	103	39,220	103	313	39,739
Additions	33	24,467	16	79	24,595
Disposals	-	(687)	-	-	(687)
As at 31 December 2013	136	63,000	119	392	63,647
Depreciation
As at 1 January 2012	18	1,895	9	123	2,045
Charge for year	12	1,534	11	42	1,599
Disposals	-	-	(9)	-	(9)
As at 31 December 2012	30	3,429	11	165	3,635
Charge for year	20	2,654	16	64	2,754
Disposals	-	(124)	-	-	(124)
As at 31 December 2013	50	5,959	27	229	6,265
Net book value
At 31 December 2013	86	57,041	92	163	57,382
At 31 December 2012	73	35,791	92	148	36,104
At 1 January 2012	13	21,125	16	173	21,327

HIRE PURCHASE AGREEMENTS

Included within the net book value of £57,382,000 (2012: £36,104,000, 2011: £21,327,000) is £84,000 (2012: £115,000, 2011: £145,000) relating to assets held under hire purchase agreements. The depreciation charged to the consolidated financial statements in the year in respect of such assets amounted to £31,000 (2012: £31,000, 2011: £8,000).

The assets are secured by a bond and floating charge (note 16). 

11 FINANCIAL ASSET INVESTMENTS

SUBSIDIARY UNDERTAKINGS

	Country of		Proportion of
	incorporation	Holding	shares held	Nature of business
All held by the Company:
UK Gas Connection Limited	Scotland	Ordinary shares	100%	Gas utility management
UK Meter Assets Limited	Scotland	Ordinary shares	100%	Gas utility management
UK Data Management Limited	Scotland	Ordinary shares	100%	Data management
UKMA (AF) Limited*	England	Ordinary shares	100%	Leasing

*   The shareholding in this company is indirect via a subsidiary company.

12 INVENTORIES

	2013	2012
	£'000	£'000
Inventories	2,504	373

13 TRADE AND OTHER RECEIVABLES

	2013	2012
	£'000	£'000
Trade receivables	3,326	1,270
Prepayments	246	60
Accrued income	1,885	1,516
Other receivables	32	32
Corporation tax repayable	47	-
VAT recoverable	563	213
	6,099	3,091

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 statement of financial position are net of allowances for doubtful receivables. There was no allowance for doubtful receivables or provision against accrued income in the year (2013: £Nil, 2012: £Nil). The ageing profile of trade receivables past due date is shown below: 

	2013	2012
	£'000	£'000
31-60 days	299	148
60-90 days	401	56
Over 90 days	198	49
	898	253
Allowance for doubtful receivables	-	-
	898	253

Trade receivables are non-interest-bearing and are generally on 30-90 days terms.

Trade receivables due from related parties at 31 December 2013 amounted to £Nil (2012: £Nil, 2011: £34,000).

Receivables are all in Sterling denominations.

The Directors are of the opinion that none of the overdue debts as at 31 December 2013 (2012: £Nil, 2011: £Nil) require impairment.

Accrued income is invoiced periodically and customers are the same as those within Trade receivables. Due to its nature there is no accrued income past due.

 14 CASH AND CASH EQUIVALENTS

Cash and cash equivalents comprise cash held by the Group. The carrying amount of the asset approximates the fair value. All balances are held in Sterling.

During each period, there were no amounts of cash placed on short-term deposit.

For the purposes of the cash flow statement, cash and cash equivalents comprise:

	2013	2012
	£'000	£'000
Cash	2,073	6,455
	2,073	6,455

15 TRADE AND OTHER PAYABLES

	2013	2012
	£'000	£'000
Current
Trade payables	4,569	3,434
Other payables	15	12
Other taxes	249	176
Corporation tax	-	148
Deferred income	291	88
Accruals	3,755	4,343
	8,879	8,201

The maturity profile of trade payables is given below:

	2013	2012
	£'000	£'000
Current	4,026	2,518
31-60 days	160	607
60-90 days	58	42
Over 90 days	325	266
	4,569	3,433

Trade payables are non-interest-bearing and are normally settled on 30-45 day terms.

All trade liabilities are Sterling denominated.

16 BANK LOANS AND OVERDRAFTS

	2013	2012
	£'000	£'000
Current
Bank loans	3,933	2,150
Bank overdrafts	-	-
	3,933	2,150
Non-current
Bank loans	31,475	18,299
Bank overdraft	-	-
	31,475	18,299

Bank loans at 31 December 2013 relate to a term loan facility of £45.0m that was finalised in August 2013.

The term loan is available for 24 months, is payable in equal quarterly instalments based on a ten year repayment profile, with a final repayment date of 31 July 2017. The term loan attracts interest at a rate of 2.9% over the three month LIBOR. 1.45% is paid on undrawn funds.

The banks have a bond and floating charge over current and future property and assets.

The Group have fixed the bank interest payable through an interest rate swap (see note 18). 

17 COMMITMENTS UNDER HIRE PURCHASE AGREEMENTS

Future minimal commitments under hire purchase agreements are as follows:

	2013	2012
	£'000	£'000
Current
Amounts payable within one year	3	3
Non-current
Amounts payable between two to five years	6	10
Amounts payable after more than five years	-	-
	6	10

The Group has hire purchase contracts for various items of computer equipment. These leases have terms of renewal but no purchase options and escalation clauses. Renewals are at the option of the specific entity that holds the lease.

The Directors consider that the future minimum lease payments under hire purchase contracts approximate to the present value of the minimum payments. Obligations under hire purchase contracts are secured on the underlying assets.

18 OTHER FINANCIAL LIABILITIES AND ASSETS

The Group's treasury policy and management of financial instruments, which form part of these financial statements, are set out in the Financial Review. 

	2013	2012
	£'000	£'000
Other financial assets	207	-
Non-current liabilities
Other financial liabilities	-	170

Other financial assets and liabilities relate to the fair value adjustment on interest rate swaps.

The Group uses interest rate swaps to manage interest rate risk on interest-bearing loans and borrowings which means that the Group pays a fixed interest rate rather than being subject to fluctuations in the variable rate. The Group has not designated these derivatives as cash flow hedges.

The interest rate swaps cover an interest rate swap for an amount of £28,200,000 as at 31 December 2013 (2012: £13,200,000, 2011: £5,500,000) and an interest rate cap over an amount of £Nil as at 31 December 2013 (2012: £Nil, 2011: £5,500,000).

The interest rate swap results in a fixed interest rate of 0.90-0.92%.

The termination date for the derivatives is 15 September 2016.

The movement in the fair value is shown below: 

	2013	2012
	£'000	£'000
Interest rate swap
Opening position	-	18
Adjustment to fair value	207	(18)
Closing position	207	-
Interest rate cap
Opening position	(170)	(339)
Adjustment to fair value	170	169
Closing position	-	(170)

FAIR VALUES

The Directors do not consider there to be any material differences between the fair values and carrying values of any financial assets or liabilities recorded within these financial statements at the balance sheet date other than as set out below.

FAIR VALUE HIERARCHY

The Group uses the following hierarchy for determining and disclosing the fair value of financial instruments by valuation technique:

Level 1: quoted (unadjusted) prices in active markets for identical assets or liabilities;

Level 2: other techniques for which all inputs which have a significant effect on the recorded fair value are observable, either directly or indirectly; and

Level 3: techniques which use inputs which have a significant effect on the recorded fair value that are not based on observable market data.

At 31 December 2013, the Group held the following financial instruments measured at fair value: 

	31 December
	2013	Level 1	Level 2	Level 3
Liabilities measured at fair value	£'000	£'000	£'000	£'000
Financial liabilities at fair value through the income statement:
Interest rate derivatives	207	-	207	-

Fair value has been assessed on a Mark to Market basis.

The above assets are shown on the statement of financial position as other current financial assets and other current financial liabilities.

During the reporting period ended 31 December 2013, there were no transfers between Level 1 and Level 2 fair value measurements and no transfers into and out of Level 3 fair value measurements.

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:

INTEREST RATE RISK

The Group's interest rate risk arises as a result of both its long and short-term borrowing facilities.

The Group seeks to manage exposure to interest rate fluctuations through the use of fixed interest rate swaps.

INTEREST RATE SENSITIVITY

The following table demonstrates the sensitivity to a change in interest rates on loans and borrowings after the impact of hedge accounting. The Group's profit before tax is affected through the impact on floating rate borrowings as follows:

		Effect on profit
	Increase/decrease	before tax
Pound Sterling	in basis points	£'000
2013	1%	72
2012	1%	65

INTEREST RATE RISK PROFILE OF FINANCIAL LIABILITIES

The interest rate profile of the financial liabilities of the Group (being bank loans and overdrafts, obligations under finance leases and other financial liabilities) as at each period end is as follows:

	Fixed rate	Variable rate
	financial liabilities	financial liabilities	Total
	£'000	£'000	£'000
2013	28,209	7,208	35,417
2012	13,213	7,249	20,462
1 January 2012	5,516	5,673	11,189

The fixed rate financial liabilities relates to the portion of the banking facility that is fixed through hedging instruments.

The following is the maturity profile of the Group's financial liabilities as at 31 December:

	2013	2012
	£'000	£'000
Fixed rate
Less than one year	2,824	1,324
Two to five years	11,286	5,289
Over five years	14,099	6,600
	28,209	13,213
Variable rate
Less than one year	1,086	803
Two to five years	4,344	3,212
Over five years	1,778	3,234
	7,208	7,249

INTEREST RATE RISK PROFILE OF FINANCIAL ASSETS

The Group's financial assets at 31 December 2013 comprise cash and trade receivables. The cash balance of £2,073,000 (2012: £6,455,000, 2011: £7,317,000) is a floating rate financial asset.

FAIR VALUES OF FINANCIAL LIABILITIES AND FINANCIAL ASSETS

The fair values, based upon the market value or discounted cash flows of financial liabilities and financial assets held in the Group, were not materially different from their book values.

FOREIGN CURRENCY RISK

The Group's exposure to the risk of changes in foreign exchange rates is insignificant as primarily all of the Group's operating activities are denominated in pound Sterling.

LIQUIDITY RISK

The Group manages its cash in a manner designed to ensure maximum benefit is gained whilst ensuring security of investment sources. The Group's policy on investment of surplus funds is to place deposits at institutions with strong credit ratings.

The ageing and maturity profile of the Group's material liabilities are covered within the relevant liability note.

CREDIT RISK

Credit risk with respect to trade receivables and accrued income is due to the Group trading with a limited number of companies who are generally large utility companies or financial institutions. Therefore, the Group does not expect, in the normal course of events, that these debts are at significant risk. The Group's maximum exposure to credit risk equates to the carrying value of cash held on deposit and trade, other receivables and accrued income.

The Group's maximum exposure to credit risk from its customers is £5,211,000 (2012: £2,786,000, 2011: £1,445,000) as disclosed in note 13 - trade and other receivables, and accrued income.

The Group regularly monitors and updates its cash flow forecasts to ensure it has sufficient and appropriate funds to meet its ongoing operational requirements whilst maintaining adequate headroom on its facilities to ensure no breach in its banking covenants.

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 EBITDA. Net debt is calculated as total borrowings less cash. EBITDA is calculated as operating profit before any significant non-recurring items, interest, tax, depreciation and amortisation.

20 Deferred taxation

The movement in the deferred taxation asset during the period was:

	2013	2012
	£'000	£'000
Opening deferred tax liability	2,510	1,873
Increase in provision through income statement	885	637
Closing deferred tax liability	3,395	2,510

All movements identified have gone through the income statement.

The Group's provision for deferred taxation consists of the tax effect of temporary differences in respect of: 

	2013	2012
	£'000	£'000
Excess of taxation allowances over depreciation on fixed assets	3,385	2,788
Tax losses available	(38)	(239)
Fair value of interest rate swaps (net)	48	(39)
	3,395	2,510

The deferred tax included in the income statement is as follows:

	2013	2012
	£'000	£'000
Accelerated capital allowances	597	459
Tax losses	201	132
Movement in fair value of interest rate swaps	87	46
	885	637

21 RELATED PARTY TRANSACTIONS

A number of key management personnel hold positions in other entities that result in them having control or significant influence over the financial or operating policies.

A number of these entities transacted with the Group in the reporting period. The terms and conditions of the transactions with key management personnel and their related parties were no more favourable than those available, or which might reasonably be expected to be available, on similar transactions to non-key management personnel and related entities on an arm's length basis.

During the period, the Group entered into the following transactions with related parties:

During the year the Group paid rent amounting to £41,500 (2012: £41,500, 2011: £41,500) to the Directors' pension scheme, Eco Retirement Benefit Scheme, for the use of certain premises. Both Stephen Timoney and Alan Foy are trustees of the scheme. At the year-end date, an amount of £4,150 (2012: £4,150, 2011: £4,150) was outstanding in this regard.

During the year, the Group paid dividends to Stephen Timoney and Alan Foy of £428,170 and £164,464 respectively.

Remuneration of key management which includes executive and non-executive directors together with certain management personnel:

	At	At
	31 December 2013	31 December 2012
	£'000	£'000
Salaries and other short term employee benefits	1,101	754

22 SHARE CAPITAL

	2013	2012
	£'000	£'000
Allotted and called up:
83,877,872 ordinary shares of £0.01 each
(2012 and 2011: 83,339,747 ordinary shares of £0.01 each)	839	833

On 4 July 2013 538,125 ordinary share options were exercised and issued to Kevin Lyon and Nigel Christie.

23 SHARE-BASED PAYMENTS

On 20 June 2011 the Company adopted both an Approved Company Share Option Plan (the CSOP) and an Unapproved Company Share Option Plan (the Unapproved Plan).

CSOP

The CSOP is open to any employee of any member of the Group up to a maximum value of £30,000 per employee. No option can be exercised within three years of its date of grant.

UNAPPROVED PLAN

The Unapproved Plan is open to any employee, Executive Director or Non-executive Director of the Company or any other Group company who is required to devote substantially the whole of his time to his duties under his contract of employment. Except in certain specified circumstances no option will be exercisable within five years of its grant.

					At 31	Exercise
	At 1 January				December	price	Date
Plan	2013	Granted	Exercised	Lapsed	2013	(pence)	exercisable	Expiry date
CSOP	572,373	-	-	(6,579)	565,794	76.0	15/7/14	15/7/21
CSOP	39,088	-	-	-	39,088	153.5	28/5/15	28/5/22
CSOP	12,097	-	-	(12,097)	-	248.0	3/12/15	3/12/22
Unapproved	3,083,333	-	-	104,273	2,979,060	60.0	20/6/16	20/6/21
Unapproved	717,500	-	538,125	179,375	-	60.0	20/6/12*	20/2/21
Unapproved	1,162,629	-	-	-	1,162,629	153.5	28/5/17	28/5/22
Unapproved	805,660	-	-	805,660	-	248.0	3/12/17	3/12/22
Unapproved	-	179,375	-	-	179,375	60.0	28/6/13	28/06/23

*   Only 50% of the options can be exercised at this date.

VALUATION

The fair value of all options granted has been estimated using the Black-Scholes option model, taking into account the terms and conditions upon which the options were granted. The following table lists the inputs to the model used for the year ended 31 December 2013:

		Unapproved
		plan
Option strike price (£)		60p
Share price (£)		309

Options granted during the year are immediately exercisable.

The weighted average fair value of share options issued during the year was £2.65. 

24 OTHER RESERVE

This is a non-distributable reserve that arose by applying merger relief under s162 CA06 to the shares issued in 2008 in connection with the Group restructuring. This was previously recognised as a merger reserve under UK GAAP. Under IFRS, this has been classed as an "other reserve".

25 COMMITMENTS UNDER OPERATING LEASES

The Group has entered into commercial leases for office space. These leases have lives between one and 15 years with no renewal option included in the contracts. There are no restrictions placed upon the Group by entering into these leases.

Future minimum rentals payable under non-cancellable operating leases as at each year end are as follows:

	2013	2012
	£'000	£'000
Future minimal commitments under operating lease agreements are as follows:
Payable within one year	205	65
Payable within two and five years	411	704
Payable after five years	135	176
	751

26 ULTIMATE CONTROLLING PARTY

There is no ultimate controlling party by virtue of the structure of shareholdings in the Group.

27 CONTINGENT LIABILITY

The Group is the subject of an ongoing HMRC enquiry in respect of payments made to Employee Benefit Trusts in prior years. Whilst the outcome of the enquiry is, as yet, uncertain, the beneficiaries of the Trusts have provided the Company with indemnities against any additional tax that may become payable as a result of these enquiries.

 

END

 

 

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