Final Results

RNS Number : 8218S
Smart Metering Systems PLC
14 March 2023
 

14 March 2023

 

Smart Metering Systems plc

 

Strong and resilient 2022 performance; solid foundation to deliver sustainable growth

 

Smart Metering Systems plc (AIM: SMS, "SMS", "the Group"), which installs and manages smart meters, energy data, grid-scale battery storage and other carbon reduction ("CaRe") assets, today publishes its full year results for the year ended 31 December 2022.

 

2022 financial performance

 

£'m (unless stated otherwise)

2022

2021

% Change

Alternative performance measures




Index-linked annualised recurring revenue (ILARR)1

97.1

85.9

+13%

Pre-exceptional EBITDA2

63.8

52.8

+21%

Underlying profit before taxation3

24.5

18.3

+34%

Underlying basic EPS (p)4

16.06

9.60

+67%





Statutory performance measures




Group revenue

135.5

108.5

+25%

EBITDA

57.1

46.3

+23%

Profit before taxation

16.0

8.3

+92%

Basic EPS (p)

11.16

3.20

+248%

Dividend per share (p)

30.25

27.50

+10%

Net (debt)/cash

(31.2)

117.7


1 ILARR is the revenue generated from meter rental and data contracts at a point in time. Includes revenue from third-party managed meters.

2 Pre-exceptional EBITDA is statutory EBITDA excluding exceptional items.

3 Underlying profit before taxation is profit before taxation excluding exceptional items and amortisation of certain intangibles.

4 Underlying basic EPS is underlying profit after taxation divided by the weighted average number of ordinary shares for the purpose of basic EPS.

A reconciliation between statutory and underlying performance is detailed in the Financial Review section. Percentage changes are calculated based on unrounded amounts as shown in the Financial statements.

Highlights

 

Financial

· ILARR at 31 December 2022 up 13% to £97.1m (2021: £85.9m)

· Revenue up 25% to £135.5m (2021: £108.5m)

· Pre-exceptional EBITDA up 21% to £63.8m (2021: £52.8m)

· Underlying profit before taxation up 34% to £24.5m (2021: £18.3m)

· Net debt at 31 December 2022 of £31.2m (2021: net cash of £117.7m)

· Undrawn debt facility of £355m (2021: £420m)

 

Smart meters

· Smart meter portfolio increased to c.2.1m (2021: c.1.7m)

· Contracted smart meter order pipeline of c.2.17m (2021: c.2.55m) reflecting a contract win and net of 480,000 installations

· Continued growth in meter installation run rate, averaging c.45,000 per month in the second half of the year (H2 2021: c.30,000 per month)

 

Grid-scale batteries

· Grid-scale battery portfolio increased to 760MW at the year end (31 December 2021: 620MW), and since then by a further 100MW project under exclusivity to 860MW including:

· 140MW operational which have performed ahead of management expectations

· 470MW fully secured, including 150MW in construction due to be operational in H2 2023

· 250MW under exclusivity

 

Other CaRe assets

· Strategic investments in Clenergy EV and n3rgy Data accelerate the Group's capabilities in electric vehicle (EV) charging infrastructure and energy data management

· The Group continued to build its delivery capability and commercial asset models for the provision of other 'Behind-the-Meter' CaRe assets such as solar and storage, domestic EV chargers and air sourced heat pumps

· The Group continue to see significant long term market opportunity in these sectors

 

Dividend

· 10% increase year-over-year, in line with policy until 2024; covered by long-term, sustainable cash flows generated from existing assets

 

Outlook

· The FY 2023 pre-exceptional EBITDA is expected to be marginally ahead of and underlying PBT to be in line with our previous expectations; confident in the medium term outlook

· The smart meter installation run-rate is expected to progressively improve throughout rest of the year

· Continued delivery and growth of the grid-scale battery pipeline, with EBITDA contribution expected to be at least within our guided range

· Confident in successfully developing offerings and building pipeline in other CaRe assets

 

Tim Mortlock , Chief Executive Officer, commented:

 

"We have delivered another year of strong performance across all our key metrics. This again highlights the attractiveness of our CaRe asset portfolio and the strong execution by our teams. 

 

The strong momentum in our meter and grid-scale batteries businesses provides us with confidence in our 2023 and longer term outlook - we will continue to deliver on our sustainable promises.

 

We also see significant market opportunities to further accelerate our portfolio of CaRe assets, including EV charging infrastructure and Behind-the-meter solar and storage. Meeting the key challenges of energy security, affordability and sustainability - SMS is strongly positioned to provide the knowledge, engineering, data platforms and services behind the UK's move to net zero."

 

Analyst Webcast

 

There will be an analyst webcast at 9.00am today - please contact sms@instinctif.com for details. The full year results presentation will be published on the Group's website.

 

For further information:

 

Smart Metering Systems plc

0141 249 3850

Tim Mortlock, Chief Executive Officer

Gail Blain, Chief Financial Officer

Dilip Kejriwal, Head of Investor Relations




Cenkos Securities plc (Joint Broker and Nomad)

0131 220 6939 / 020 7397 8900

Neil McDonald / Pete Lynch




Investec Bank plc (Joint Broker)

020 7597 5970

Christopher Baird / Henry Reast


 

RBC Capital Markets (Joint Broker)

 

020 7653 4000

Matthew Coakes / Evgeni Jordanov / Jack Wood

 


Tim Linacre / Guy Scarborough / Sarah Hourahane

SMS@instinctif.com

 

Notes to Editors

 

Smart Metering Systems plc ( www.sms-plc.com ) installs and manages smart meters, energy data, grid-scale battery storage and other carbon reduction ("CaRe") assets to facilitate effective energy management. The Group manages and optimises these assets through its in-house technology and data analytical platform.

 

Established in 1995, SMS provides a full end-to-end service, from funding and installation to management and maintenance, with a highly skilled workforce, deep engineering expertise and well-established industrial partnerships.

 

SMS is leading the low carbon, smart energy revolution in the UK and is committed to reducing its own carbon emissions to net zero by 2030. Since 2019, SMS has been awarded the London Stock Exchange Green Economy Mark every year.

 

SMS plc is headquartered in Glasgow with a national presence across several UK locations.

 

SMS shares are quoted on AIM.

 

Overview

The Group delivered another year of exceptional operational and financial performance in 2022, despite a challenging macro environment. This is evidence of the resilience of our business model and the consistent cash flows generated from our existing portfolio of CaRe assets. The momentum across all our CaRe assets and solutions continued to remain strong providing a solid foundation for growth and these assets will continue to facilitate the transformation to a smarter, low carbon and more flexible energy system.

 

The meter and data assets ILARR increased 13% to £97.1m, including the annual RPI adjustment. Pre-exceptional EBITDA, marginally upgraded in the FY 2022 trading statement issued on 26 January 2023, was up 21% to £63.8m and underlying PBT, materially upgraded, was up 34% to £24.5m.

 

The monthly installation run-rate continued to improve throughout the year, with SMS installing 480,000 smart meters in 2022, outperforming the Group's expectations. The Group have a contracted pipeline of c.2.17 million smart meters to install which will further increase ILARR by c.£50m.

 

The Group's first 50MW grid-scale battery site commenced trading in January 2022. Two further sites went live in December 2022 resulting in 140MW operational by end of the year. The financial performance of these sites has been considerably ahead of the Board's initial expectations. The Group's grid-scale battery pipeline currently stands at 860MW (31 December 2022: 760MW, 2021: 620MW), of which 140MW is operational and 470MW fully secured with the remaining 250MW under exclusivity.

 

SMS made two strategic investments in 2022 expanding its offering in energy data management and accelerating the Group's capabilities in EV charging infrastructure. The Board see significant market opportunity in these and other 'Behind-the-Meter' CaRe assets.

 

UK smart meter rollout

The Group increased the meter installation run rate from c.30,000 per month in H2 2021 to c.45,000 per month in H2 2022. This resulted in SMS installing 480,000 smart meters in 2022, exceeding our expectations and growing our smart meter portfolio to 2.1m as at 31 December 2022 (2021: 1.7m). The Group's strong supply chain, inventories, delivery capacity and installation run rate provides the Board confidence in the Group's ability to successfully deliver, and expand, SMS's smart meter pipeline.

 

Net of meters installed and including the benefit of a contract win during the year, the contracted smart meter order pipeline stood at c.2.17m at 31 December 2022 (31 December 2021: c.2.55m).

 

Grid-scale batteries

The Group's first 50MW grid-scale battery site at Burwell commenced trading in January 2022. Two further sites, 40MW at Barnsley and 50MW at Brook Farm, became operational in December 2022.

 

Performance of these sites has been significantly ahead of our initial expectations of £57,000-65,000 EBITDA per MW, generating an annualised EBITDA of c.£123,000 per MW. The majority of the revenue generated from these assets was from the provision of frequency services, such as Dynamic Containment, which we expect to soften over time towards our guided range as the volume of battery storage in the market grows.

 

We are also pleased with the record high pricing achieved by grid-scale battery storage assets during the recent Capacity Market auction in the UK.

 

As at 31 December 2022, the Group's portfolio of grid-scale battery storage assets totalled 760MW (31 December 2021: 620MW), and since then the pipeline has increased by a further 100MW to 860MW, split as follows:

 

· 140MW operational (31 December 2021: nil)

· 470MW fully secured (31 December 2021: 320MW), of which 150MW in construction

· 250MW under exclusivity (31 December 2021: 300MW)

 

Strategic Investments

SMS made two strategic investments in 2022 to accelerate the Group's EV charging infrastructure capabilities and further expanding its service offering in energy data management.

 

The investment in Clenergy EV, a software business with a Charge Point Operator (CPO) platform focused on EV charging infrastructure, complements the SMS EV installation capabilities and has enabled the Group to deliver a fully end-to-end integrated platform for EV charging infrastructure. The CPO platform is currently used in c.2,700 EV charge points across the UK. We are investing further in growing our pipeline of activity in this area over the coming years, addressing the destination, on-street and fleet market segments.

 

The acquisition of n3rgy, a data software company, enhances and accelerates the SMS existing capabilities in smart energy data solutions, providing the Group with a strong competitive position in a considerable addressable market as the electricity industry moves towards mandatory half-hourly settlement. We have integrated this capability with our existing FlexiGrid platform, enabling energy suppliers and other third parties to participate in the National Grid Demand Flexibility Scheme (DFS) over this Winter, which pays end consumers to use less energy at times of stress on the energy network.

 

ESG progress and sustainability

During 2022, SMS continued to make progress in executing on its 2030 net zero roadmap. Our 'handprint' (carbon emissions mitigated through our customers using our products and services) during the year was 14.5 times higher when compared to our total Scope 1 and Scope 2 'footprint' (carbon emissions generated through our operations for the reasons explained below).

 

MSCI upgraded SMS's ESG ratings from A to AA rating in January 2023.

 

Details on SMS's Scope 1 and Scope 2 emissions over the last three years are summarised below:

Scope 1 and 2 emissions (TCO2e)

2022

2021

2020

Scope 1 - Company owned vehicles

3,054.9

1,988.0

1,690.0

Scope 1 - Building related

87.6

136.2

106.8

Scope 2 - Building electricity

122.0

137.5

152.4

Scope 2 - Grid-scale batteries electricity

1,111.2

53.1

-

 

Total Scope 1 and Scope 2 emissions in 2022 were higher than the prior year. The increase was due to emissions from operating our new grid-scale battery assets and from our vehicle fleets. Both 2020 and 2021 were also distorted by the effect of the COVID-19 pandemic.

 

Whilst our fleet related emissions increased because we added vehicles to service the increase in smart meter installations, we improved the overall fuel efficiency with the amount of carbon emissions emitted per vehicle reducing by 5% since 2019. We are now beginning our fleet transition and will introduce 100 mild hybrid vans to the fleet in 2023.

 

Our Scope 2 emissions from grid-scale batteries reflects the electricity used to operate the cooling and communication systems at our grid-scale battery sites. Grid-scale battery storage plays an essential role in enabling the UK to accelerate the adoption of renewables and so, whilst within the scope of our reporting, we report these emissions separately due to the positive contribution these assets make to the net zero transition.

 

Emissions related to our buildings fell 23% from 2021 levels as we continued to introduce solar panels and battery storage across our sites.

 

Dividend

The Board is proposing a 30.25p per share dividend (FY 2021: 27.5p) in line with our stated policy of increasing the dividend +10% year-on-year until 2024. The dividend demonstrates the sustainable growth delivered by our strategy and is covered by long-term, sustainable cash flows generated from our existing portfolio of CaRe assets.

 

Current trading and outlook

 

Meters:

· The Group's ILARR at the end of February 2023 stood at £98.5m (31 December 2022: £97.1m).

· The smart meter installation run-rate is expected to progressively improve throughout rest of the year and we aim to install c.600,000 meters in 2023.

 

Grid-scale battery storage:

· The grid-scale battery storage assets continued to perform well during the first two months of 2023.

· EBITDA contribution expected to be at least within guided range of £57,000 to £65,000 per MW.

· 150MW of assets are under construction, which we expect to become operational in FY 2023. 

 

FY 2023 outlook:

· The Board expects pre-exceptional EBITDA to be marginally ahead of its previous expectations and underlying PBT to remain in line with its previous expectations.

 

Operational review by division

 

Asset management:

During 2022, total meter and data asset ILARR grew 13% to £97.1m (2021: £85.9m). The increase includes an annual RPI adjustment which came into effect on 1 April 2022.

 

A breakdown on ILARR at 31 December 2022 and the % change compared to 31 December 2021 is shown below:

 

Category

% change

ILARR

Portfolio

Domestic smart meters

+ 22.0%

£61.1m

2.1 million

Data assets

+ 15.5%

£16.0m

0.4 million

Industrial & Commercial meters

+ 14.0%

£5.3m

0.1 million

Traditional domestic meters

- 5.3%

£11.2m

0.3 million

Third party assets

- 36.1%

£3.5m

1.6 million

Total

 

£97.1m

4.5 million

 

In 2022, we added a new contract for c.100,000 meters to our pipeline. Following the installation of c.480,000 meters during the year, we ended the year with a contracted smart meter order pipeline of c.2.17 million meters (2021: c.2.55 million)

 

SMS has continued to support the enrolment and adoption of first generation ('SMETS1') smart meters into the Data Communications Company (DCC) platform. The migration of the Group's own SMETS1 portfolio is progressing ahead of the industry with c.80% of our portfolio of SMETS1 meters now enrolled onto the DCC platform. This enrolment and adoption programme has now been extended to the end of 2023.

 

SMS made the decision through 2021 and 2022 to diversify further our supply chain to four meter manufacturing partners, which provided assurance in the near term future cost for a large proportion of our meter purchases and we increased the level of buffer stock we hold in our UK warehouses. Whilst not without some impact on working capital, these decisions have reduced the impact of inflationary cost increases and ensured that stock availability has not been an impediment to delivering our pipeline.

 

The index-linked nature of our meter rentals provides significant protection against the current high levels of inflation. Over time, the installed cost of meters may rise but we expect to at least maintain our initial guided yield on these assets.

 

Looking forward, the acquisition of n3rgy enhances SMS capabilities in smart energy data solutions enabling us to take advantage of the significant new addressable market opportunity created by the move to market-wide half hourly settlement which is mandated from 2026. We are already using this capability in conjunction with our Flexigrid platform by enabling end consumers to get paid to use less energy at times of stress on the energy network, through National Grid's Demand Flexibility service.

 

Asset installation:

We continued to grow our nationwide engineering services business over 2022, increasing our total engineering workforce capacity to over 600 engineers. Our in-house engineers are supplemented by contractors, and we continue to maintain an appropriate balance to meet our installation targets while maximising installation efficiency. We will continue to invest incrementally in our engineering capacity to further increase our installation run-rate in the future.

 

Safety remains our first priority and we again reported zero injuries under the Reporting of Injuries, Diseases and Dangerous Occurrences Regulations. We also maintained industry-leading performance across our other health and safety metrics.

 

Our engineering resource is supported by our in-house accredited training academy which we see as essential to promoting health and safety standards across our business. The training academy also allows us to extend our capabilities into new sectors, such as the installation of EV charging infrastructure.

 

Energy management:

The strong growth in our portfolio of grid-scale battery storage assets has transformed the Energy management division. The trading performance and the growth in these assets are detailed in the grid-scale battery storage section above.

 

The roll-out of site-based energy efficiency measures accelerated during the year following the relaxation of COVID-19 restrictions. Our traditional consultancy and energy management services therefore grew significantly compared to prior year. The substantial increase in energy costs in 2022 makes the case for our energy management and efficiency services even more compelling, and we see significant opportunities to help our Industrial & Commercial customers reduce costs and support them on their path to net-zero.

 

We continued to develop further our capability in the EV charging space, with particular focus on the destination, on-street and fleet market segments. Our partnership with Clenergy EV provides us access to a Charge Point Operator technology platform that allows us to control both the charge of EV's from any chargepoint type and the collection of revenue for use of the chargepoint. With this end-to-end capability in place, we are well positioned to develop a pipeline of activity in these areas over the coming years.

 

We also commenced developing integrated funded-energy solutions that aggregate the individual CaRe asset classes, such as distributed solar generation and storage. Applying these to commercial properties, we are able to reduce reliance on energy from the grid and optimise the use of energy on-site. We see a significant growth opportunity for asset deployment in this sector.

 

Financial review

 

Revenue

 

31 December 2022

£m

31 December 2021

£m

 

Percentage

change

Asset management

92.8

82.9

12%

Asset installation

30.5

22.0

38%

Energy management

12.2

3.6

237%

Group revenue

135.5

108.5

25%

 

Asset management revenues of £92.8m are 12% up on the prior year. This growth reflects the flow-through effect of progressively increasing the rate of meter installations at the end of 2021 and into 2022 and the annual RPI uplift which took effect on 1 April 2022.

 

Asset installation revenues of £30.5m increased 38% on the prior year as a result of increased volume in transactional meter works and increased activity in our connections business. 

 

Energy management revenues of £12.2m were up 237% on the prior year. This includes £7.2m revenue from our grid-scale battery sites which began operating in the year. Our first grid-scale battery site became operational in January 2022 and two further sites went live in December 2022. Revenue from Energy management excluding grid-scale batteries was £5.0m, up 38% on prior year as a key customer project in the hospitality sector picked up momentum with the continued recovery from the effect of COVID-19 and sector focus turning to energy efficiency.

 

Gross margins

SMS includes depreciation on revenue-generating assets within cost of sales for statutory reporting purposes. Removing this from the gross margin provides a better comparison of the Group's underlying trading performance year-on-year.

 

Depreciation-adjusted gross margin for the asset management segment is 92% which is in line with prior year (2021: 92%).

 

The asset installation segment gross margin was 23% (2021: 32%). In H1 2022 the Group continued to grow its engineering workforce in order to support the planned increase in meter installations. Costs associated with this investment in the workforce such as recruitment and training led to additional one-off costs which depressed the margin in the first half. As expected, the margin recovered in the second half of 2022.

 

The energy management segment depreciation-adjusted gross margin has increased to 57% (2021: 24%). This is due to the addition of our grid-scale battery sites which generated an 80% depreciation-adjusted gross margin over the year. Grid-scale batteries delivered revenue of £7.2m and depreciation adjusted gross profit of £5.8m in the year. The gross margin on the segment's other activities remained constant at 24% (2021: 24%).

 

Overall, the depreciation-adjusted gross margin at the Group level fell by 4% to 73% (2021: 77%) due to the investment in our engineer base in H1 2022 in our asset installation division coupled with the increase in battery revenues during 2022.

 

Pre-exceptional EBITDA

Pre-exceptional EBITDA provides a measure of underlying performance that is comparable over time. Pre-exceptional EBITDA of £63.8m was 21% higher than in the prior year (2021: £52.8m).

 

The £14.5m increase in depreciation-adjusted gross profit (excluding exceptional cost of sales in 2021 arising from the result of COVID-19) was partly offset by a £3.5m increase in net operating costs, excluding depreciation and amortisation. This is being driven by a cost-of-living payment made to our employees in H2 2022 in response to inflationary and other pressures experienced in the wider economic environment, further investment in our IT and support systems and small increases across our cost base to support growth in other CaRe assets.

 

Underlying profit before tax

Depreciation costs on meter assets increased 15% to £28.3m (2021: £24.7m) due to the increase in the meter asset portfolio.

 

Depreciation cost on grid-scale battery sites increased to £1.0m (2021: nil) due to the commencement of depreciation on operational grid-scale battery sites in the year.

 

Depreciation costs on general property, plant and equipment, excluding meter assets and grid-scale battery sites, has reduced by £0.5m to £3.5m (2021: £4.0m) due to some computer equipment and fixtures and fittings now being fully depreciated.

 

Amortisation costs on our intangible assets of £4.1m (2021: £4.1m) mainly consist of software amortisation and were in line with prior year.

 

Net finance costs increased £0.4m to £3.9m (2021: £3.5m). Finance costs relating to our loan facility increased £0.7m as we started drawing on the facility in the second half, and interest on leases also increased £0.5m as we leased land for our new grid-scale battery sites. The impact was however partly offset by £0.3m interest income earned.

 

As a result, underlying profit before taxation increased by 34% to £24.5m (2021: £18.3m).

 

Exceptional items

Exceptional items of £6.6m (2021: £8.2m) mainly comprise a £5.7m loss on the traditional and first-generation smart meter ('SMETS1') portfolio (2021: £5.9m). In line with the Group's established policy, these losses are shown separately as exceptional items in order to enhance disclosure of underlying continuing profitability. Acquisition-related costs and other exceptional operating items amounted to £0.9m (2021: £0.6m). Exceptional items in 2021 also included £1.7m exceptional finance costs comprising the acceleration of unamortised arrangement fees relating to the Group's previous loan facility which was refinanced in 2021.

 

Effective tax rate

The Group's capital expenditure on meter assets qualifies for capital allowances, providing the Group with tax relief on such expenditure. These allowances are claimed in the tax year in which the asset is acquired and set against taxable profit for that year, thus reducing the total tax payable. As a result, the Group was not tax-paying in either the current or prior year.

 

The effective tax rate on pre-exceptional profits for the year is 11.3% (2021: 39%). This represents the announced rate of UK corporation tax of 25% from 1 April 2023, which is the rate that will apply when the deferred tax liability generated by the capital allowances unwinds, less the impact of c.£2.5m benefit of the tax super-deduction that has been assessed on our qualifying meter assets and grid scale battery capital expenditure during 2022. The super-deduction is only available on qualifying capital expenditure until 31 March 2023, therefore it is expected that our effective tax rate will increase to a more normalised level in 2023.

 

It should also be noted that the effective rate on pre-exceptional profits in 2021 was high, due to a change in the deferred tax rate, following the UK Government's enactment of the Finance Bill 2021 in May, which confirmed the increase in the rate of corporation tax from 19% to 25% from 1 April 2023. This was applied to the Group's brought-forward deferred tax liabilities on its portfolio of meter assets increasing the charge in 2021. The full-year effective tax rate on 2021 pre-exceptional profits excluding the impact of this rate change, was 18.5%.

 

Earnings per share

Underlying basic earnings per share (EPS), which excludes exceptional items, amortisation of certain intangibles and their associated tax effect, was 16.06p (2021: 9.60p), reflecting the underlying profitability of the Group. Statutory earnings per share increased to 11.16p (2021: 3.20p). As noted above our 2022 tax charge also includes the benefit of the tax super-deduction available on qualifying capital expenditure since April 2021. Our effective tax rate for 2022 is therefore abnormally low, and this has resulted in a particularly high growth in our earnings per share.

 

Dividend

A 27.5p per share dividend in respect of FY 2021 was approved at the Group's Annual General Meeting in May, and the fourth and final instalment of this was paid in July 2022.

 

In line with the Group's policy to grow dividends at 10% per annum, a 30.25p per share dividend is proposed in respect of FY 2022. This is expected to be settled in four equal quarterly instalments. Two instalments have already been paid, in October 2022 and January 2023 with the following provisional timetable for the remaining instalments:

 

Instalment

Ex-dividend date

Record date

Payment date

3

06 April 2023

11 April 2023

27 April 2023

4

06 July 2023

07 July 2023

27 July 2023

 

The Board remains comfortable that future dividend payment amounts are sufficiently secured by long-term, sustainable cash flows generated from our existing portfolio of metering, data and grid-scale battery assets.

 

Cash flow and capex investment

Operating cash inflow in 2022 was £63.8m (2021: £61.8m). The cash inflow reflects £63.8m pre-exceptional EBITDA, £5.5m of non-cash costs included in EBITDA and a £4.3m cash outflow on working capital net of tax receipts, largely due to a deliberate build-up of inventory levels to mitigate the risk of delays in the supply chain and ensure that meters are available to grow our installation run rate.

 

The Group also drew down £65.0m under its loan facility.

 

The cash generated from operations and from our borrowing has been used to continue investment in our revenue generating meter and grid-scale battery assets.

 

Capital expenditure on property, plant and equipment was £143.4m (2021: £108.2m). Of this, £105.0m was invested in meter and data assets, £36.3m in developing grid-scale battery sites and £1.1m relates to the purchase of land at one of our grid-scale sites.

 

Investing activities also include payments of £14.6m to acquire battery sites (2021: £4.7m) and a further £12.3m of instalment payments made for grid-scale batteries which have not yet been delivered (2021: £nil). On the balance sheet, the sites under development are classified as assets under construction within property, plant and equipment and the instalment payments for batteries are classified as other non-current receivables.

 

A further £2.2m (2021: £2.8m) investment has been made in intangible assets, mainly relating to the development of software to support the metering and installations business.

 

Investing cash outflows also include a £1.4m payment to acquire n3rgy and a £2.1m investment (including transaction costs) to acquire a 25% stake in Clenergy EV Ltd. See note 24 and note 12 to the consolidated financial statements for further details.

 

Financial resources

Net debt at 31 December 2022 was £31.2m (31 December 2021: Net cash £117.7m). This excludes restricted cash and lease liabilities accounted for under IFRS 16.

 

The Group has in place a £420m debt facility which matures in December 2025 and was fully compliant with all its bank covenants throughout the year. The Group has £32.8m available in cash and £355m in unutilised facilities (31 December 2021: £420m) and therefore continues to have the financial flexibility required to maximise growth potential in a capital-efficient way.

 

Definitions of alternative performance measures

 

Alternative performance measure

Definition

Index-linked annualised recurring revenue

The revenue being generated from meter rental and data contracts at a point in time. Includes revenue from third-party managed meters.

Depreciation-adjusted gross profit

Statutory gross profit less depreciation on revenue-generating assets, recognised within cost of sales.

Depreciation-adjusted gross
profit margin

Depreciation-adjusted gross profit divided by statutory revenue.

Pre-exceptional EBITDA

Statutory EBITDA excluding exceptional items.

Underlying profit before taxation

Profit before taxation excluding exceptional items and amortisation of certain intangibles1.

Underlying profit after taxation

Profit after taxation excluding exceptional items and amortisation of certain intangibles1 and the tax effect of these adjustments.

Underlying basic EPS

Underlying profit after taxation divided by the weighted average number of ordinary shares for the purposes of basic EPS.

Underlying diluted EPS

Underlying profit after taxation divided by the weighted average number of ordinary shares for the purposes of diluted EPS.

Net debt/cash

Total bank loans less cash and cash equivalents, excluding restricted cash. Excludes lease liabilities recognised under IFRS 16.

1 Amortisation of the Group's Enterprise Resource Planning system, which went live in full in 2020, remains within the underlying cost base of the business and is therefore a part of the Group's underlying profit measures.

 

Reconciliation of statutory to underlying results

SMS uses alternative performance measures, defined above, to present a clear view of what the Group considers to be the results of its underlying, sustainable business operations. Excluding certain items enables consistent year-on-year comparisons and aids a better understanding of business performance. A reconciliation of these performance measures is disclosed below:

 


Year

ended

31 December

2022

£m

Year ended

31 December

2021

£m

Percentage

 change

Index-linked annualised recurring revenue

97.1

85.9

13%

Group revenue

135.5

108.5

25%

Statutory profit from operations

20.1

13.5


Amortisation of intangibles

4.2

4.1


Depreciation

32.9

28.7


Statutory EBITDA

57.1

46.3

23%

Exceptional items1 (EBITDA-related)

6.6

6.5


Pre-exceptional EBITDA

63.8

52.8

21%

Share of loss of associate

(0.2)

-


Net interest (excluding exceptional)

(3.9)

(3.5)


Depreciation

(32.9)

(28.7)


Amortisation of intangibles included in underlying profit before taxation2

(2.3)

(2.3)


Underlying profit before taxation

24.5

18.3

34%

Exceptional items1 (EBITDA)

(6.6)

(6.5)


Exceptional items1 (interest)

-

(1.7)


Amortisation of intangibles excluded in underlying profit before taxation

(1.8)

(1.8)


Statutory profit before taxation

16.0

8.3

92%

Taxation

(1.1)

(4.5)


Statutory profit after taxation

14.9

3.8

292%

Amortisation of intangibles excluded in underlying profit after taxation

1.8

1.8


Exceptional items1 (EBITDA and interest)

6.6

8.2


Tax effect of adjustments

(2.0)

(2.4)


Underlying profit after taxation

21.4

11.4

88%

Weighted average number of ordinary shares (basic)

133,241,113

118,330,817


Underlying basic EPS (pence)

16.06

9.60

67%

Weighted average number of ordinary shares (diluted)

133,857,082

118,972,527


Underlying diluted EPS (pence)

15.98

9.55

67%

1 Exceptional items are those material items of income and expense which, because of the nature or expected infrequency of the events giving rise to them, merit separate presentation on the consolidated income statement.

2 Amortisation of the Group's Enterprise Resource Planning system remains within the underlying cost base of the business and is therefore a part of the Group's underlying profit measures.

 


Year

ended

31 December

2022

£m

Year ended

31 December

2021

£m

Percentage

 change

Statutory gross profit

70.0

59.4

18%

Depreciation included in cost of sales

29.3

24.7


Depreciation-adjusted gross profit

99.4

84.1

18%

Depreciation-adjusted gross margin

73%

77%


 

 

Financial tables and notes

 

CONSOLIDATED INCOME STATEMENT

For the year ended 31 December 2022

 

 


Notes

2022

Before

exceptional

items

£'000

2022

Exceptional

items1

£'000

2022

Total

£'000

2021

Before

exceptional

items

£'000

2021

Exceptional

items

£'000

2021

Total

£'000

Revenue

2

135,520

-

135,520

108,480

-

108,480

Cost of sales

3

(65,498)

-

(65,498)

(48,316)

(829)

(49,145)

Gross profit


70,022

-

70,022

60,164

(829)

59,335

Administrative expenses

3

(45,222)

(6,646)

(51,868)

(41,866)

(5,649)

(47,515)

Other operating income

3

1,936

-

1,936

1,696

-

1,696

Profit from operations

3

26,736

(6,646)

20,090

19,994

(6,478)

13,516

Share of loss of associate

12

(186)

-

(186)

-

-

-

Finance costs

5

(4,273)

-

(4,273)

(3,488)

(1,742)

(5,230)

Finance income

5

324

-

324

7

-

7

Profit before taxation


22,601

(6,646)

15,955

16,513

(8,220)

8,293

Taxation

6

(2,557)

1,473

(1,084)

(6,479)

1,978

(4,501)

Profit for the year attributable to owners
of the parent


20,044

(5,173)

14,871

10,034

(6,242)

3,792

1  Refer to note 3 for details of exceptional items.

 

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

 

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

 


Notes

2022

2021

Basic earnings per share (pence)

7

11.16

3.20

Diluted earnings per share (pence)

7

11.11

3.19

 

 

CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME

For the year ended 31 December 2022

 


2022

Before

exceptional

items

£'000

2022

Exceptional

items

£'000

2022

Total

£'000

2021

Before

exceptional

items

£'000

2021

Exceptional

items

£'000

2021

Total

£'000

Profit for the year

20,044

(5,173)

14,871

10,034

(6,242)

3,792

Other comprehensive income1

 

 

 




Exchange differences on translation
of foreign operations

9

-

9

(46)

-

(46)

Other comprehensive income
for the year, net of tax

9

-

9

(46)

-

(46)

Total comprehensive income
for the year attributable to owners
of the parent

20,053

(5,173)

14,880

9,988

(6,242)

3,746

1  May be reclassified to profit or loss.

 

 

CONSOLIDATED STATEMENT OF FINANCIAL POSITION

As at 31 December 2022

 


Notes

2022

£'000

2021

£'000

Assets


 


Non-current assets


 


Intangible assets

9, 10

25,832

25,463

Property, plant and equipment

11

533,240

415,901

Investments


40

75

Investment in associate

12

1,940

-

Other assets


-

1,651

Trade and other receivables

14

12,347

-

Total non-current assets


573,399

443,090

Current assets


 


Inventories

13

37,438

22,980

Other assets


-

550

Trade and other receivables

14

52,935

47,631

Cash and cash equivalents

15

32,770

117,687

Cash and cash equivalents - restricted

15

307

1,299

Total current assets


123,450

190,147

Assets held for sale

16

513

-

Total assets


697,362

633,237

Liabilities


 


Current liabilities


 


Trade and other payables

17

69,378

56,489

Bank loans and overdrafts

18

591

-

Lease liabilities

19

885

999

Other liabilities

21

1,388

638

Total current liabilities


72,242

58,126

Non-current liabilities


 


Bank loans

18

63,349

-

Lease liabilities

19

11,476

7,574

Provisions

20

2,033

798

Other liabilities

21

1,280

750

Deferred tax liabilities

22

13,496

12,199

Total non-current liabilities


91,634

21,321

Total liabilities


163,876

79,447

Net assets


533,486

553,790

Equity


 


Share capital

27

1,334

1,333

Share premium


332,332

332,048

Other reserve

29

9,562

9,562

Own share reserve

27

(955)

(825)

Foreign currency translation reserve


(36)

(45)

Retained earnings


191,249

211,717

Total equity attributable to owners of the parent


533,486

553,790

 

 

CONSOLIDATED STATEMENT OF CHANGES IN EQUITY

For the year ended 31 December 2022

 

Attributable to the owners of the parent company:

Share

capital

£'000

Share

premium

 '000

Other

reserve

£'000

Own share

reserve

£'000

Foreign currency translation

reserve

£'000

Retained

earnings

£'000

Total

£'000

As at 1 January 2021

1,129

160,471

9,562

(749)

1

236,028

406,442

Total profit for the year

-

-

-

-

-

3,792

3,792

Total other comprehensive
income for the year

-

-

-

-

(46)

-

(46)

Transactions with owners in their capacity as owners








Dividends (note 8)

-

-

-

-

-

(29,060)

(29,060)

Shares issued (note 27)

204

171,577

-

-

-

-

171,781

Movement in own shares (note 27)

-

-

-

(76)

-

(203)

(279)

Share-based payments (note 28)

-

-

-

-

-

841

841

Income tax effect of share options

-

-

-

-

-

319

319

As at 31 December 2021

1,333

332,048

9,562

(825)

(45)

211,717

553,790

Total profit for the year

-

-

-

-

-

14,871

14,871

Total other comprehensive income
for the year

-

-

-

-

9

-

9

Transactions with owners in their capacity as owners

 

 

 

 

 

 

 

Dividends (note 8)

-

-

-

-

-

(37,592)

(37,592)

Shares issued (note 27)

1

284

-

-

-

-

285

Movement in own shares (note 27)

-

-

-

(130)

-

(265)

(395)

Share-based payments (note 28)

-

-

-

-

-

2,611

2,611

Income tax effect of share options

-

-

-

-

-

(93)

(93)

As at 31 December 2022

1,334

332,332

9,562

(955)

(36)

191,249

533,486

 

See notes 27 and 29 for details of the Own share reserve and Other reserve.

 

 

CONSOLIDATED STATEMENT OF CASH FLOWS

For the year ended 31 December 2022


2022

£'000

2021

(restated)

£'000

Operating activities

 


Profit before taxation

15,955

8,293

Share of loss of associate

186

-

Finance costs

4,273

3,488

Finance income

(324)

(7)

Foreign exchange loss

-

29

Exceptional items: other1

5,716

7,288

Depreciation

32,876

28,712

Amortisation of intangibles

4,152

4,060

Share-based payment expense

2,612

841

RDEC income

(280)

(489)

Loss on disposal of property, plant and equipment

2,937

2,457

Movement in inventories

(12,481)

3,359

Movement in trade and other receivables

(5,369)

(7,671)

Movement in trade and other payables

13,009

11,078

Movement in provisions

(5)

-

Cash generated from operations

63,257

61,438

Income tax received

568

403

Net cash generated from operations

63,825

61,841

Investing activities

 


Payments for asset acquisitions

(14,627)

(4,749)

Payment for acquisition of new business, net of cash acquired

(1,346)

(8,433)

Payment for acquisition of associate

(2,126)

-

Payments to acquire property, plant and equipment

(143,399)

(108,214)

Payments on account to acquire grid-scale battery assets

(12,347)

-

Proceeds on disposal of property, plant and equipment

3,131

2,508

Payments to acquire intangible assets

(2,172)

(2,831)

Finance income received

324

7

Net cash used in investing activities

(172,562)

(121,712)

Financing activities

 


New borrowings

65,000

53,250

Borrowings repaid

-

(53,250)

Principal elements of lease payments

(1,500)

(1,247)

Finance costs paid

(2,975)

(4,200)

Net proceeds from share issue

285

171,781

Purchase of own shares

(395)

(279)

Dividends paid

(37,592)

(29,060)

Net cash generated from financing activities

22,823

136,995

Net increase/(decrease) in cash and cash equivalents

(85,914)

77,124

Exchange (gain)/loss on cash and cash equivalents

5

(1)

Cash and cash equivalents at the beginning of the financial year

118,986

41,863

Cash and cash equivalents at the end of the financial year (note 15) 2

33,077

118,986

1  Other exceptional items comprise £5,716,000 for losses on our meter portfolio. In 2021, non-cash exceptional items included £5,546,000 for losses on our meter portfolio and the £1,742,000 exceptional finance cost.

2  Cash and cash equivalents includes restricted cash following an IFRIC agenda decision in March 2022. Amounts shown for 2021 have been restated on a comparable basis.

 

 

Cash and cash equivalents comprise:

 


2022

£'000

2021

£'000

Cash and cash equivalents

32,770

117,687

Cash and cash equivalents - restricted cash

307

1,299

Total cash and cash equivalents

33,077

118,986

 

 

ACCOUNTING POLICIES

 

The significant accounting policies adopted in the preparation of these consolidated financial statements are set out below. These policies have been consistently applied to all the years presented, unless otherwise stated. The consolidated financial statements of the Group for the year ended 31 December 2022 were approved and authorised for issue in accordance with a resolution of the Directors on 14 March 2023. Smart Metering Systems plc (SMS) is a public limited company limited by shares and incorporated in Scotland, with its registered office at 2nd Floor, 48 St. Vincent Street, Glasgow G2 5TS. The Company's ordinary shares are traded on AIM.

 

Basis of preparation

The consolidated financial statements have been prepared in accordance with UK-adopted international accounting standards.

 

The consolidated financial statements have been prepared on a historical cost basis, modified by the revaluation of certain financial assets and financial liabilities that have been measured at fair value.

 

The consolidated financial statements are presented in British Pounds Sterling (£), which is Smart Metering System plc's functional and presentation currency, and all values are rounded to the nearest thousand (£'000) except where otherwise indicated.

 

Following an IFRIC agenda decision in March 2022 cash and cash equivalents now include restricted cash. Amounts shown for 2021 have been restated on a comparable basis.

 

In preparing the consolidated financial statements management has considered the impact of climate change, particularly in the context of the disclosures included in the Strategic report and the Group's net-zero carbon target. Our net-zero plans are to electrify our vehicle fleet and carry out sustainability upgrades to our building estate. The fleet will be replaced at the end of the useful life. These considerations did not have a material impact on the financial reporting judgements and estimates, consistent with the assessment that climate change is not expected to have a significant impact on the Group's going concern assessment to December 2024. Qualitative explorations of potential areas of concern, including an evaluation of climate exposure on our physical assets such as offices, warehouses and vehicles, has been carried out and we have identified areas of potential climate-related risk, such as extreme weather events which could affect our physical locations and road-based employees. Overall, the risk of climate-related change on the Group is considered low.

 

Going concern

Management prepares budgets and forecasts on a five-year forward-looking basis. These forecasts cover operational cash flows and investment capital expenditure and are prepared based on management's estimation of installation run rates through the UK smart meter rollout. The Directors have performed their assessment of the entity's ability to continue as a going concern, from the date of issue of these financial statements to 31 December 2024.

 

Management has modelled several different meter installation and grid-scale battery storage scenarios, including a downside scenario which assumed a reduced rollout of new meter installations over the five-year period and delayed the energisation of grid-scale battery storage sites. The scenario proved that the business would still have sufficient cash flow to continue to operate, banking covenants would remain satisfied with adequate headroom, and adequate cash would be available to cover liabilities and operating costs. This modelling provides confidence to management that, even in adverse circumstances, the business will still have sufficient resources to continue to operate.

 

In September 2021, the Group completed the refinancing of its revolving credit facility in order to support ongoing investment in its established carbon reduction ('CaRe') assets. The total available funding under the new loan facility is £420m and the maturity date is December 2025. In October 2021, the Group completed a successful equity placing, raising proceeds of c.£175m. These proceeds were used to make a voluntary prepayment under the Group's refinanced loan facility of the full outstanding principal of c.£53m. At 31 December 2022, the Group had a drawn-down amount of £65m (31 December 2021: £nil). 

 

The Group was compliant with all its debt covenants at 31 December 2022. The financial covenants attached to the facility are that EBITDA should be no less than 4.00x interest and net debt should be no more than 4.75x EBITDA. At 31 December 2022 these stood at 18.84x and 0.45x respectively, demonstrating significant headroom. The Group does not expect to breach these covenants in the period from the date of release of these financial statements to 31 December 2024, being the period for the going concern assessment.

 

The Group balance sheet shows consolidated net assets of £533.5m (31 December 2021: £553.8m), of which £429.7m (31 December 2021: £366.7m) relates to revenue-generating meter and data assets. The liquidity of the Group thus remains strong and continues to provide the financial flexibility required to support the Group's long-term growth prospects.

 

With significant coverage provided by existing long-term, inflation-linked and recurring cash flows, the Group remains committed to its enhanced dividend policy. It proposes a 30.25p per share annualised dividend in respect of FY 2022. The first of four cash instalments, a total of £10.1m, was paid in October 2022.

 

Based on the current cash flow projections and facilities in place and having given consideration to various outcomes of future performance and forecast capital expenditure, including extreme downside scenarios, the Directors consider it appropriate to continue to prepare the financial statements on a going concern basis and are of the view that there are no material uncertainties regarding the Group's going concern status.

 

Basis of consolidation

The consolidated accounts of the Group include the assets, liabilities and results of the Company and subsidiary undertakings in which Smart Metering Systems plc has a controlling interest. Control is achieved when the Group is exposed, or has rights, to variable returns from its involvement with the investee and has the ability to affect those returns through its power over the investee. Specifically, the Group controls an investee if, and only if, the Group has all the following: power over the investee (i.e. existing rights that give it the current ability to direct the relevant activities of the investee); exposure, or rights, to variable returns from its involvement with the investee; and the ability to use its power over the investee to affect its returns. Subsidiaries are fully consolidated from the date on which control is transferred to the Group. They are deconsolidated from the date that control ceases.

 

The acquisition method of accounting is used to account for business combinations by the Group.

 

When necessary, adjustments are made to the financial statements of subsidiaries to bring their accounting policies into line with the Group's accounting policies.

 

All intra-group assets and liabilities, equity, income, expenses and cash flows relating to transactions between members of the Group are eliminated in full on consolidation.

 

Foreign currency translation

Group companies

The results and financial position of foreign operations (none of which has the currency of a hyperinflationary economy) that have a functional currency different from the presentation currency are translated into the presentation currency as follows:

 

· assets and liabilities for each balance sheet presented are translated at the closing rate at the date of that balance sheet;

· non-monetary assets at the date of acquisition are translated at the historical rate and are not subsequently revalued;

· income and expenses for each statement of profit or loss and statement of comprehensive income are translated at average exchange rates (unless this is not a reasonable approximation of the cumulative effect of the rates prevailing on the transaction dates, in which case income and expenses are translated at the dates of the transactions); and

· all resulting exchange differences are recognised in Other comprehensive income and accumulated in a separate reserve within equity.

 

Goodwill and fair value adjustments arising on the acquisition of a foreign operation are treated as assets and liabilities of the foreign operation and translated at the closing rate.

 

Transactions and balances

Foreign currency transactions are translated into the functional currency using the exchange rates at the dates of the transactions. Foreign exchange gains and losses resulting from the settlement of such transactions, and from the translation of monetary assets and liabilities denominated in foreign currencies at year-end exchange rates, are generally recognised in profit or loss. They are deferred in equity if they relate to qualifying cash flow hedges and qualifying net investment hedges or are attributable to part of the net investment in a foreign operation.

 

Foreign exchange gains and losses that relate to borrowings are presented in the statement of profit or loss, within Finance costs. All other foreign exchange gains and losses are presented in the statement of profit or loss on a net basis within Administrative expenses.

 

Use of estimates and judgements

The Directors are required to make judgements, estimates and assumptions about the carrying amount of assets and liabilities that are not readily apparent from other sources. These estimates and associated assumptions are based on historical experience and other factors considered to be relevant. Actual results may differ from these estimates. The estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to accounting estimates are recognised in the period in which the estimate is revised if the revision affects only that period, or in the period of the revision and future periods if the revision affects both current and future periods.

 

Critical accounting judgements

The following are the critical judgements that the Directors have made in the process of applying the Group's accounting policies and that have the most significant effect on the amounts recognised in the financial statements:

 

· capitalisation of internal installation costs:

· a significant level of in-house installation of meter assets is carried out by the Group, certain costs of which are capitalised (2022: £51.8m, 2021: £38.2m) and depreciated as part of property, plant and equipment depreciation. Judgement is required by management to ascertain the appropriate categories and proportion of overheads and other expenses that are directly attributable to installation of meter assets. Typically, capitalised costs will include staff costs, and a systematic allocation of any production overheads deemed to be directly attributable to the process of installing a meter owned by the Group. Other general and administrative overheads, such as sales, marketing and training costs, are expensed directly to profit and loss;

 

· presentation of losses on disposal of certain meter assets as exceptional items:

· as a result of the inherent volatility associated with the UK smart meter rollout, and removal of traditional meter assets as part of this, management has taken the decision to show losses arising on disposal of these meters - being the net book value less the associated termination income received representing proceeds on disposal - as exceptional administrative expenses. By disclosing these amounts separately, the traditional meter asset portfolio can be better tracked to assist users of the financial statements to better understand the premature retirement of these revenue-generating assets that is outside the Group's control. On disposal, the receipt of termination income which is recognised as a component of the net gain or loss on the disposal of these meter assets, will vary depending on the energy supplier and is therefore not within our control. As the receipt of proceeds from disposal is inherently volatile, a loss on disposal can still arise in certain circumstances; and

· the Group has continued to see a small proportion of SMETS1 meters removed from the wall. As these removals are attributable to the temporary industry transition period, management has made the judgement to recognise losses arising on the disposal of these meters as exceptional until resolution by the Enrolment and Adoption programme is complete.; and

 

· identification of indicators of impairment of the meter asset portfolio in accordance with IAS 36 and assumptions applied in determining the carrying value of the portfolio of meter assets:

· due to the uncertainties associated with the timing of the UK domestic smart meter rollout, the expected useful life and carrying value of traditional meters requires significant judgement, as does the level of recoverability of termination income. These assumptions are used in deriving the depreciation rates applied and the impairment calculation performed on carrying value. For the traditional meters, as the UK smart meter rollout progresses, our portfolio of traditional meter assets is diminishing. It is therefore crucial that the recoverability of the carrying value of these meter assets, recognised in Property, plant and equipment, be assessed. The two main drivers for assessing this recoverability are:

1)  the timing of the removals of these meters - this decision lies with the end consumer and removals are largely undertaken by third parties, which means we have little control over the timing and quantity of these removals; and

2)  the estimated future cash flows from termination income - these are derived using historical data and analysis around the risk of churn between contracted and non-contracted customers. The assessment includes consideration of the extent to which termination income and future rental income are received as traditional meters continue to be removed from the wall.

 
In 2022, this assessment has identified that the carrying value of the traditional meter assets portfolio is recoverable and, therefore, no impairment charge has been recognised (2021: £nil).

 

· potential indicators of impairment have also been assessed in relation to our smart and I&C meters, including consideration of the temporary industry transitional issues experienced with some SMETS1 assets as detailed above. Management has concluded that there is no significant risk of impairment with regards to the Group's smart and I&C meters at 31 December 2022, consistent with the prior year.

 

Key sources of estimation uncertainty

The Group has no key sources of estimation uncertainty at the reporting date that may have a significant risk of causing material adjustment to the carrying amounts of assets and liabilities within the next financial year.

 

Revenue recognition

(i) Metering

Meter rental

The Group acts as a gas and electricity Meter Asset Provider (MAP), providing and installing meters to energy suppliers on behalf of the end consumer.

 

As a result of the Group's assessment of contracts on implementation of IFRS 16, and any potential interaction with IFRS 15, it was determined that the arrangements the Group has in place to act as MAP do not constitute a lease of the meter asset to the energy supplier. Therefore, the related income for the service of providing a fitted meter is recognised in accordance with IFRS 15.

 

The provision of meter assets to energy suppliers ('MAP services'), together with the initial installation, is considered a distinct and single performance obligation on the basis that, as MAP, the Group has an obligation to its customers to provide a fitted meter. This is a separately identifiable service to which a stand alone selling price is typically allocated. Over the course of the contract term, which runs in perpetuity, the Group delivers a series of monthly services for which benefits are simultaneously received and consumed by the customer.

 

Charges for MAP services are calculated daily based on the number of installed meters and invoiced to customers monthly once validation checks have been completed. As revenue from MAP charges is attributed to services provided daily, revenue is always based on the actual level of service provided and, therefore, any uncertainty at the end of each reporting period is limited to the extent that validation checks are still being completed. Revenue is thus recognised over time based on our right to invoice and includes contract Retail Price Index (RPI) uplifts.

 

As a result of industry regulations, and subject to specific contract terms with a customer, the Group may be required to make payments to customers for shortfalls in the level of service provided. These charges are directly related to the service being provided to the customer and thus are recognised as a reduction to revenue in the month in which the service failure occurred. Where service levels are set based on annual targets, charges are estimated monthly and subsequently finalised at the end of the year. Uncertainty, as it pertains to these payments to customers, is thus typically resolved by the end of the reporting period.

 

If a MAP contract is cancelled, termination fees may be levied on the energy supplier. There has been no change in the accounting for these termination fees and they continue to be classified within Other operating income unless they have arisen on the loss of the meter assets, in which case they are reported within Administrative expenses as a component of net gain or loss on disposal.

 

If the services rendered by the Group exceed the payment received, then accrued income is recognised. This is subsequently reclassified to receivables at the point at which the Group has an unconditional right to payment.

 

Asset management services

The Group provides meter asset management and operations services to energy suppliers. These services are considered a distinct performance obligation from the meter rental on the basis that these are separately identifiable services to which a stand-alone selling price is allocated, and they are not necessary to bring the meter asset into use.

 

Over the course of the contract term, which can either be fixed or in perpetuity, the Group delivers a series of monthly services for which the benefits are simultaneously received and consumed by a customer. Therefore, these are accounted for as a single performance obligation.

 

Service charges are calculated based on the number of meters appointed and are accrued monthly. As revenue from service charges is attributed to services provided periodically, revenue is always based on the actual level of service provided and, therefore, there is no uncertainty at the end of each reporting period. For charges invoiced to customers monthly revenue is thus recognised over time based on our right to invoice and includes contract RPI uplifts. For charges invoiced to customers annually in advance, including contract RPI uplifts, a contract liability is recognised and subsequently released to the income statement over the year on a straight-line basis. The Group uses the practical expedient under IFRS 15 from adjusting revenue for any significant financial components of one year or less.

 

The Group's meter asset management contracts also include the provision of transactional meter works. These are considered further in section (iv) below.

 

If the services rendered by the Group exceed the payment received, then a contract asset is recognised. This is subsequently reclassified to receivables at the point at which the Group has an unconditional right to payment.

 

Third-party management services

The Group provides management services to a third party to whom it sold a minority of its meter asset portfolio in April 2020. These services include accounting and treasury, portfolio asset management and other administrative tasks.

 

The various activities that make up these management services are provided to the third party on an integrated basis. Over the course of the contract term, which runs for as long as there are meters within the scope of the services, the Group delivers a series of monthly services for which the benefits are simultaneously received and consumed by the customer. Therefore, these are accounted for as a single performance obligation.

 

Service charges are currently based on a fixed annual fee, subject to contract RPI uplifts, and are invoiced to the customer monthly. Revenue is thus recognised over time based on our right to invoice.

 

If the services rendered by the Group exceed the payment received, then a contract asset is recognised. This is subsequently reclassified to receivables at the point at which the Group has an unconditional right to payment.

 

(ii) Data services

The Group provides data collection and aggregation services to Industrial & Commercial (I&C) electricity customers and, through use of the ADMTM unit, to I&C gas customers. Over the course of the contract term, which can either be fixed or in perpetuity, the Group delivers a series of monthly services for which the benefits are simultaneously received and consumed by a customer. Therefore, these are accounted for as a single performance obligation.

 

Service charges are calculated based on the number of meters/ADM™ units appointed and are accrued monthly. As revenue from service charges is attributed to services provided periodically, revenue is always based on the actual level of service provided and, therefore, there is no uncertainty at the end of each reporting period. Service charges, including contract RPI uplifts, are billed to clients annually in advance and therefore a contract liability is recognised and subsequently released to the income statement over the year on a straight-line basis. The Group uses the practical expedient under IFRS 15 from adjusting revenue for any significant financial components of one year or less.

 

The ADM™ device is a proprietary product for the Group and there are no other market providers of this device. A customer cannot therefore benefit from the data services without installation, and the installation is not separately identifiable as it is integral to the subsequent data services. This is therefore accounted for along with the data services as a single performance obligation and any corresponding charges are recognised over the term of the contract.

 

(iii) Utility connections services (gas and electricity)

Gas and electricity connections services are provided under fixed-price contracts with I&C customers and can be delivered to a single site or multiple sites. Whilst each service consists of multiple activities, the Group's promise in the contract is to deliver an integrated end-to-end service to which the underlying activities are inputs. Where services are delivered to multiple sites, and these are substantially the same, a series of services is being provided. In all cases, therefore, these contracts give rise to a single performance obligation to which the fixed price is allocated. Subsequent variations to this price, due to changes in the inputs required, are accounted for as contract modifications and recognised on a cumulative catch-up basis.

 

Services are transferred over time on the basis that these are customised services with no alternative use and the Group has an enforceable right to payment for work completed to date.

 

Revenue is recognised on the stage of completion with reference to the actual services provided as a proportion of the total service expected to be provided under the contract, as the services can enhance a work-in-progress asset for the customer and have no alternative use. This is determined on a contract-by-contract basis using a milestone approach with reference to the milestones set out in the contract or otherwise agreed. Where relevant, consideration is also given to material services provided between milestones. Estimates of revenues, costs or extent of progress towards completion are revised if circumstances change and any resulting increases or decreases in estimated revenues or costs are reflected in profit or loss in the period in which the circumstances that give rise to the revision become known to management.

 

The customer pays the fixed amount based on a payment schedule. In certain circumstances the customer pays in advance and therefore a contract liability is recognised and subsequently released to the income statement based on the measure of progress detailed above. As the contract is cancellable at the customer's discretion, subject to settlement for services provided to the date of cancellation, a contract liability is not recognised until the cash has been received.

 

If the services rendered by the Group exceed the payment received, then a contract asset is recognised. This is subsequently reclassified to receivables at the point at which the Group has an unconditional right to payment.

 

The Group utilises the practical expedient available under IFRS 15 for costs to obtain a contract. Commissions paid as part of obtaining a contract are expensed as incurred on the basis that the contract term is typically less than twelve months.

 

(iv) Transactional meter works

Transactional works, which include emergency, adversarial and other maintenance services, and are typically short term in nature, are accounted for as a separate performance obligation to asset management services (see section (i) above) on the basis that these works are separately identifiable and can be performed by another party. A customer, being the energy supplier, is legally obligated to appoint a meter asset manager and can therefore benefit from this service in isolation, without the subsequent transactional works which are initiated on an ad-hoc basis upon demand by the customer.

 

In 2020, the Group also started to provide transactional meter works to the third party to whom the Group sold a minority of its meter asset portfolio in April 2020.

 

The transaction price allocated to transactional works is based on stand-alone selling prices (per unit, where relevant) and revenue is recognised at a point in time when the transaction has been completed and accepted by the customer. This is the point at which the customer is charged for the service and a receivable is recognised by the Group as we have an unconditional right to payment. The customer will settle the transaction price for these services as part of the regular monthly billing cycle for metering and asset management services.

 

The customer pays the fixed amount based on the transactional services provided and this is charged once the service has been completed and accepted by the customer.

 

For segmental purposes, this transactional, non-recurring revenue is recognised within asset installation.

 

(v) Grid-scale batteries

Grid-scale battery assets generate revenue by providing several services.

 

Capacity market

SMS enters into longer term contracts with the National Grid. During the contract period, which may last from one to 15 years, SMS's only obligation is to make itself available to provide the capacity agreed in the contract when notification is received from National Grid. Pricing is fixed at an auction.

 

There is a single performance obligation to be available to provide capacity to the National Grid. Revenue is recognised over time.

 

Wholesale market

SMS trades power with a counterparty on an exchange on the EPEX GB Day Ahead and Intraday markets, with the intention of buying power at a low off-peak price and selling at a high peak price. All trades take place at spot price and there are no forward or future contracts. All trades are settled daily.

 

There is a single performance obligation for SMS to buy or sell power on the exchange. Revenue is recognised for each transaction at a point in time.

 

Balancing mechanism

SMS enters into short-term contracts with Elexon BSC to help balance the demands of the National Grid by increasing or decreasing generation (or consumption). Contracts range for a length of one to 60 minutes and prices are fixed when a bid is submitted. Elexon accepts only the cheapest bids needed to balance the grid.

 

There is a single performance obligation for SMS to increase or decrease its battery asset output. Revenue is recognised over time. However, due to the short-term nature of the contracts, there would be no material difference between recognition over time or at a point in time.

 

Ancillary services market

SMS enters into contracts with the National Grid to help maintain frequency on the grid. During the contract period SMS is required to use the grid-scale battery asset following the Grid's instructions. The price is fixed at auction.

 

Revenue is recognised over time. However, due to the short-term nature of the contracts, there would be no material difference between recognition over time or at a point in time.

 

Embedded benefits

SMS enters into contracts with the National Grid and the Distribution Network Operator under which SMS is paid based on the amount of electricity exported during Triad or peak periods.

 

There is a single performance obligation to export capacity during Triad or peak periods. Revenue is recognised over time. However, due to the short-term nature of the contracts, there would be no material difference between recognition over time or at a point in time.

 

Imbalance

Elexon BSC is obliged to purchase or sell electricity generated or sold in any half-hour period which is not otherwise contracted for. SMS buys or sells power to meet its requirements for the other revenue streams. The purchase and selling prices are at a spot price set by a formula.

 

There is a single performance obligation for SMS to export or import power. Revenue is recognised for each transaction at a point in time.

 

(vi) Energy management services

Energy management services provided mainly to I&C customers include utility bureau and bill validation services, risk management and procurement services and energy reduction and environmental management services.

 

Certain services, such as utility bureau and bill validation, are delivered through a series of monthly services over the course of the contract term, for which the benefits are simultaneously received and consumed by a customer. These are accounted for as a single performance obligation. The transaction price allocated includes a fixed monthly service charge together with a variable component for specific activities that may not be carried out every month. As revenue from charges is attributed to services provided monthly, revenue is always based on the actual level of service provided and, therefore, there is no uncertainty at the end of each reporting period. Revenue is thus recognised over time based on our right to invoice.

 

Contracts for specialist consultancy services may include multiple projects. Where these projects are separately identifiable within the contract and are not interrelated, they are accounted for as separate performance obligations. The transaction price is allocated based on the stand-alone charges for each project.

 

Other energy reduction and environmental management services are typically longer-term, multi-site contracts and, therefore, the revenue recognition is consistent with that detailed above for utility connections - see details in section (iii) above.

 

(vii) Assets and liabilities arising from contracts with customers

Costs to fulfil a contract

In certain circumstances, the Group may incur costs to fulfil its obligations under a contract once it is obtained, but before transferring goods or services to the customer. These costs are assessed on a contract-by-contract basis and, where they are considered to meet the definition of fulfilment costs under IFRS 15, they are recognised as an asset and amortised on a systematic basis consistent with the pattern of transfer of the services to which the asset relates.

 

Contract assets and liabilities

We receive payments from customers based on a billing schedule, as established in our contracts.

 

The timing of revenue recognition, billing and cash collections results in:

 

· billed and unbilled accounts receivable, which are recognised when our right to consideration becomes unconditional, and classified as trade receivables and accrued income respectively;

· unbilled amounts, where we have a conditional right to consideration based on future performance, recognised as contract assets. These amounts will be billed in accordance with the agreed-upon contractual terms; and

· payments received in advance of performance under a contract, recognised as contract liabilities. Contract liabilities are recognised as revenue as (or when) we perform under a contract.

 

For project-based services, work in progress is billed in accordance with the agreed-upon contractual terms with the customer. We typically receive interim payments as work progresses, which can give rise to a billed or unbilled accounts receivable, where our right to payment is unconditional, or a contract asset, where revenue has been recognised based on progress completed but our right to payment is still conditional on future performance. For some contracts, we may be entitled to receive advance payments. We recognise a contract liability for these advance payments in excess of revenue recognised.

 

Cancellation terms can vary but typically include provisions that allow the customer to terminate the contract at their discretion subject to a penalty or settlement of amounts for work completed prior to termination. Contracts allow both parties to cancel without penalty in the case of a material breach of contract.

 

Exceptional items and separately disclosed items

The Group presents as exceptional items on the face of the consolidated statement of comprehensive income those items of income and expense which, because of the material nature or expected infrequency of the events giving rise to them, merit separate presentation to allow shareholders to better understand the elements of financial performance in that year facilitating comparison with prior periods and to better assess trends in financial performance.

 

Termination fee income is reported as part of Other operating income in the consolidated statement of comprehensive income given its materiality and nature. Any termination fee income arising on the loss of meter assets is reported within Administrative expenses as a component of net gain or loss on disposal. Termination fee income does not arise from the principal activities of the Group. Any such gain or loss on disposal relating to traditional meter assets and SMETS1 meter assets is disclosed as an exceptional item.

 

Government grants

Grants from governments are recognised at their fair value where there is reasonable assurance that the grant will be received and the Group will comply with all attached conditions, usually on submission of a valid claim for payment. Government grants relating to costs are deferred and recognised in profit or loss over the period necessary to match them with the costs that they are intended to compensate. Government grants relating to capital expenditure are included in liabilities as deferred income and they are credited to profit or loss on a straight-line basis over the expected lives of the related assets. Amounts credited to profit or loss are recognised as part of Other operating income in the consolidated statement of comprehensive income.

 

The R&D expenditure credit (RDEC) scheme is a UK Government tax incentive which allows qualifying companies to claim R&D expenditure credits (RDECs) equal to 12% of their qualifying research and development expenditure. The credit is taxable at the corporation tax rate and is included in the company's taxable trading profits. RDECs are accounted for by the Group in accordance with IAS 20 Government Grants and recognised within Other operating income in the consolidated statement of comprehensive income. Outstanding amounts receivable are recognised in the consolidated balance sheet within Trade and other receivables. 

 

Financial assets

The Group's financial assets include cash and cash equivalents and trade and other receivables. Investments consist of an immaterial debt investment held at amortised cost.

 

Classification

The Group classifies its financial assets in the following measurement categories:

 

· those to be measured subsequently at fair value, either through other comprehensive income (FVOCI) or through profit or loss (FVPL); and

· those to be measured at amortised cost.

 

The classification depends on the Group's business model for managing the financial assets and the contractual terms of the cash flows.

 

For investments in equity instruments that are not held for trading, this will depend on whether the Group has made an irrevocable election at the time of initial recognition to account for the equity investment at FVOCI. The Group reclassifies debt investments when and only when its business model for managing those assets changes.

 

Recognition and derecognition

Financial assets are initially recognised on trade date. Financial assets are derecognised when the rights to receive cash flows from the financial assets have expired or have been transferred and the Group has transferred substantially all the risks and rewards of ownership.

 

Measurement

At initial recognition, the Group measures a financial asset at its fair value plus, in the case of a financial asset not at FVPL, transaction costs that are directly attributable to the acquisition of the financial asset. Transaction costs of financial assets carried at FVPL are expensed in profit or loss.

 

Trade and other receivables

Trade and other receivables are recognised initially at the IFRS 15 transaction price and subsequently measured at amortised cost. They are generally due for settlement within 30 days and are therefore all classified as current. Due to their short-term nature, carrying value is considered to approximate fair value.

 

Cash and cash equivalents

Refer to accounting policy on Cash and cash equivalents.

 

Impairment

The Group assesses, on a forward-looking basis, the expected credit losses associated with its debt instruments carried at amortised cost and FVOCI. The impairment methodology applied depends on whether there has been a significant increase in credit risk. For trade receivables and accrued income, which include contract assets and billed and unbilled receivables arising from contracts with customers, the Group applies the simplified approach permitted by IFRS 9, which requires expected lifetime losses to be recognised from initial recognition of the receivables.

 

Trade receivables and accrued income are written off, and derecognised, where there is no reasonable expectation of recovery. Indicators that there is no reasonable expectation of recovery include, amongst others, the customer ceasing trading and entering administration with no expected recovery from the Supplier of Last Resort process, or a failure by the customer to make contractual payments for a period of greater than or equal to 365 days past due. Indicators are assessed on an individual customer basis. Impairment losses, including the loss allowance, on trade receivables and accrued income are presented within Administrative expenses. Subsequent recoveries of amounts previously written off are credited against the same line item.

 

Further information about the impairment of trade receivables and accrued income, and the Group's exposure to credit risks, can be found in note 23.

 

Financial liabilities

The Group's financial liabilities include trade and other payables, bank loans and overdrafts, and leases.

 

Classification

Financial liabilities are classified as financial liabilities at fair value through profit or loss or loans and borrowings, as appropriate. The Group determines the classification of its financial liabilities at initial recognition.

 

Recognition

All financial liabilities are recognised initially at fair value and, in the case of bank loans, net of directly attributable transaction costs.

 

Measurement

Trade and other payables and bank overdrafts

Trade and other payables, and overdrafts, are subsequently measured at amortised cost using the effective interest rate method. Trade and other payables are presented as current liabilities unless payment is not due within twelve months after the reporting period. Due to their short-term nature, carrying value is considered to approximate fair value.

 

Bank loans

Bank loans are subsequently measured at amortised cost. Interest expense on bank loans is recognised in the consolidated income statement using the effective interest rate method.

 

Transaction costs on revolving credit facilities are recognised as transaction costs of the loan to the extent that it is probable that some or all the facility will be drawn down. In this case, the fee is deferred within Other assets until the drawdown occurs. Upon drawdown of the first loan, these costs are reclassified from Other assets to Bank loans and subsequently amortised over the term of the facility.

 

Borrowings are removed from the balance sheet when the obligation specified in the contract is discharged or cancelled or has expired. The difference between the carrying amount of a financial liability that has been extinguished or transferred to another party and the consideration paid, including any non-cash assets transferred, or liabilities assumed, is recognised in profit or loss as Other income or Finance costs.

 

If a facility is modified, then it is assessed whether the modification is significant enough to constitute an extinguishment either qualitatively or quantitatively (defined as a change in the present value of cash flows, including any transaction costs paid, exceeding 10%). If a modification is considered an extinguishment of the initial loan, the new modified loan is recorded at fair value and a gain/loss is recognised immediately in the consolidated income statement for the difference between the carrying amount of the old loan and the new loan. Any costs incurred are recognised in profit or loss. Where a modification is not significant enough to be an extinguishment, the cash flows under the modified loan are rediscounted at the original effective interest rate and an immediate gain or loss is recognised accordingly in the consolidated income statement on the date of modification. Any costs incurred are recognised over the remaining period of the modified debt, within the effective interest rate.

 

Borrowings are classified as current liabilities unless the Group has an unconditional right to defer settlement of the liability for at least twelve months after the reporting period.

 

Offsetting of financial instruments

Financial assets and financial liabilities are offset, and the net amount reported in the consolidated statement of financial position, if, and only if, there is a currently enforceable legal right to offset the recognised amounts and there is an intention to settle on a net basis, or to realise the assets and settle the liabilities simultaneously.

 

Leases

Group as lessor

The arrangements the Group has in place to act as Meter Asset Provider do not constitute a lease of the meter asset to the energy supplier. SMS controls the meter as the Group retains legal title and obtains substantially all the economic benefit. The assets are recognised as property, plant and equipment when in use under contract with an energy supplier and the related income for the service of providing a fitted meter is recognised in accordance with IFRS 15. Further information about the Group's accounting policy for revenue recognition is given above, and for property, plant and equipment in note 11.

 

Group as lessee

The Group leases land, offices, warehouses and motor vehicles. For offices, warehouses and motor vehicles rental contracts are typically made for fixed periods of three to ten years. For land, rental contracts are typically made for fixed periods of 20 to 40 years. Contracts may have extension or early termination options. Lease terms are negotiated on an individual basis and contain a wide range of different terms and conditions. The lease agreements do not impose any covenants, but leased assets may not be used as security for borrowing purposes.

 

Leases are recognised as a right-of-use asset and a corresponding liability at the date at which the leased asset is available for use by the Group.

 

In determining the lease term, management considers all facts and circumstances that create an economic incentive to exercise an extension option, or not exercise a termination option. Extension options (or periods after termination options) are only included in the lease term if the lease is reasonably certain to be extended (or not terminated). The lease term is reassessed if an option is actually exercised (or not exercised) or the Group becomes obliged to exercise (or not exercise) it. The assessment of reasonable certainty is only revised if a significant event or a significant change in circumstances occurs, which affects this assessment, and that is within the control of the lessee.

 

Assets and liabilities arising from a lease are initially measured on a present value basis. Lease liabilities include the net present value of the following lease payments:

 

· fixed payments (including in-substance fixed payments), less any lease incentives receivable;

· variable lease payments that are based on an index or a rate, initially measured using the index or rate as at the commencement date;

· amounts expected to be payable by the lessee under residual value guarantees;

· the exercise price of a purchase option if the lessee is reasonably certain to exercise that option; and

· payments of penalties for terminating the lease, if the lease term reflects the lessee exercising that option.

 

Lease payments to be made under reasonably certain extension options are also included in the measurement of the liability.

 

The lease payments are discounted using the interest rate implicit in the lease. If that rate cannot be determined, the lessee's incremental borrowing rate is used, being the rate that the lessee would have to pay to borrow the funds necessary to obtain an asset of similar value in a similar economic environment with similar terms and conditions. The weighted average lessee's incremental borrowing rate applied to the lease liabilities at 31 December 2022 was 5% (31 December 2021: 4.7%).

 

The Group is exposed to potential future increases in variable lease payments based on an index or rate, which are not included in the lease liability until they take effect. When adjustments to lease payments based on an index or rate take effect, the lease liability is reassessed and adjusted against the right-of-use asset.

 

Lease payments are allocated between principal and finance cost. The finance cost is charged to profit or loss over the lease period so as to produce a constant periodic rate of interest on the remaining balance of the liability for each period.

 

Right-of-use assets are measured at cost comprising the following:

 

· the amount of the initial measurement of lease liability;

· any lease payments made at or before the commencement date less any lease incentives received;

· any initial direct costs; and

· restoration costs.

 

The Group is required to restore the land leased as part of its grid-scale battery storage business, and certain leased warehouses, to the condition required by the terms and conditions of the lease at the end of the respective lease terms. Under IFRS 16, the estimated liability for such restoration costs is recognised as a provision under IAS 37 at initial recognition and is not included as part of the lease liability. As right-of-use assets are measured subsequent to initial recognition using a cost model, any change in the estimate of such costs after initial recognition is added to, or deducted from, the cost of the right-of-use asset.

 

Right-of-use assets are generally depreciated over the shorter of the asset's useful life and the lease term, on a straight-line basis.

 

Payments associated with short-term leases and leases of low-value assets are recognised on a straight-line basis as an expense in profit or loss. Short-term leases are leases with a lease term of twelve months or less. Low-value assets comprise IT equipment and small items of office furniture, where the value of the asset on inception is less than c.US$5,000.

 

Payments for services are separated from the lease components of a contract and accounted for as an administrative expense.

 

Provisions

Provisions are recognised when the Group has a present legal or constructive obligation as a result of a past event, it is probable that an outflow of resources embodying economic benefits will be required to settle the obligation, and a reliable estimate can be made of the amount of the obligation.

 

The amount recognised as a provision is the best estimate of the consideration required to settle the present obligation at the end of the reporting period, taking into account the risks and uncertainties surrounding the obligation.

 

If the effect of the time value of money is material, provisions are determined by discounting the expected future cash flows at a discount rate that reflects the current market assessments of the time value of money. Where discounting is used, the increase in the provision due to the passage of time is recognised within finance costs.

 

Provisions are split between amounts expected to be settled within 12 months of the balance sheet date (current) and amounts expected to be settled later (non-current).

 

Decommissioning and restoration provisions

Provisions for decommissioning and restoration costs arise in connection with the Group's grid-scale battery storage business, and with certain leased warehouses.

 

The Group is required to restore the land leased as part of its grid-scale battery storage sites, and certain leased warehouses, to the condition required by the terms and conditions of the lease at the end of the respective lease terms (which range between three to ten years for warehouses, and 20 to 40 years for land).

 

The amount recognised is the present value of the estimated future expenditure determined in accordance with current conditions, requirements, and price levels, discounted over the useful economic life of the asset where appropriate.

 

The effects of changes resulting from revisions to the timing or amount of the original estimate of the provision are reflected on a prospective basis, generally by adjustment to the carrying amount of the related right-of-use asset recorded within property, plant and equipment.

An amount equivalent to the decommissioning provision is recognised as part of the corresponding right-of-use asset, which is subsequently depreciated at the same rate as the rest of the asset. Other than the unwinding of discount on or utilisation of the provision, any change in present value of the estimated expenditure is reflected as an adjustment to the provision and the corresponding asset.

 

Provisions also include the estimated cost to de-commission grid-scale battery assets at the end of their life. These costs have been capitalised as part of the related asset within property, plant and equipment, and are depreciated over the life of the asset. Changes in the provision arising from revised estimates that relate to the asset are recorded as adjustments to the carrying value of the asset.

 

Business combinations

The acquisition method of accounting is used to account for all business combinations, regardless of whether equity instruments or other assets are acquired. The consideration transferred for the acquisition of a subsidiary comprises the:

 

· fair values of the assets transferred;

· liabilities incurred to the former owners of the acquired business;

· equity interests issued by the Group;

· fair value of any asset or liability resulting from a contingent consideration arrangement; and

· fair value of any pre-existing equity interest in the subsidiary.

 

Identifiable assets acquired and liabilities and contingent liabilities assumed in a business combination are, with limited exceptions, measured initially at their fair values at the acquisition date. The Group recognises any non-controlling interest in the acquired entity on an acquisition-by-acquisition basis either at fair value or at the non-controlling interest's proportionate share of the acquired entity's net identifiable assets.

 

Acquisition-related costs are expensed as incurred.

 

The excess of the:

· consideration transferred;

· amount of any non-controlling interest in the acquired entity; and

· acquisition-date fair value of any previous equity interest in the acquired entity

 

over the fair value of the net identifiable assets acquired is recorded as goodwill. If those amounts are less than the fair value of the net identifiable assets of the business acquired, the difference is recognised directly in profit or loss as a bargain purchase. Where settlement of any part of cash consideration is deferred, the amounts payable in the future are discounted to their present value as at the date of exchange. The discount rate used is the entity's incremental borrowing rate, being the rate at which a similar borrowing could be obtained from an independent financier under comparable terms and conditions.

 

Contingent consideration is classified either as equity or a financial liability. Amounts classified as a financial liability are subsequently remeasured to fair value, with changes in fair value recognised in profit or loss.

 

If the business combination is achieved in stages, the acquisition date carrying value of the acquirer's previously held equity interest in the acquiree is remeasured to fair value at the acquisition date. Any gains or losses arising from such remeasurement are recognised in profit or loss.

 

Investments in associates

An associate is an entity in which the Group has significant influence, but not control or joint control, over the financial and operating policies. Interests in associates are accounted for using the equity method. They are initially recognised at cost, which includes transaction costs. Subsequent to initial recognition, the consolidated financial statements include the Group's share of the profit or loss and other comprehensive income of the associated undertakings, until the date on which significant influence ceases.

 

Asset acquisitions

Asset acquisitions include the acquisition of a group of assets that does not constitute a business.

 

The relevant IFRS is applied when accounting for the acquisition of an individual asset.

 

Where the acquisition involves a group of assets and liabilities, the individual assets and liabilities acquired are identified and recognised. The cost of the transaction is allocated to the assets acquired, and liabilities assumed, based on their relative fair values at the date of purchase. No goodwill arises on the transaction.

 

The cost of the transaction is measured at the fair value of the consideration transferred at the acquisition date. This can include cash payments, financial liabilities incurred, equity interests issued by the Group and the fair value of any asset or liability arising from a contingent or deferred consideration arrangement. Non-monetary assets might be exchanged as part of the consideration for the transaction. The cost of an item acquired in exchange for a non-monetary asset or assets is generally measured at fair value.

 

Contingent consideration is classified either as equity or a financial liability. Amounts classified as a financial liability are subsequently remeasured to fair value, with changes in fair value recognised in profit or loss.

 

Transaction costs are capitalised as a component of the cost of the assets acquired.

 

Research and development

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

 

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

 

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

 

Amortisation is calculated when the asset is available for use, so as to write off its cost, less its estimated residual value, over the useful economic life of that asset as follows:

 

· Development of ADM™ units

10% on cost, straight line

· Development of internally generated information technology systems ('IT development')

20% and 50% on cost, straight line

 

Capitalised development expenditure on ADM™ units is disclosed within Property, plant and equipment as part of Meter assets and amortised over the same useful economic life as that applied to the tangible ADM™ unit.

 

Capitalised IT development expenditure is disclosed within Intangible assets as part of IT development and software. All costs capitalised within this category relate to information technology and, in general, are amortised over an economic life of five years. A new system was integrated and brought into use during 2020 and associated development costs are amortised over the remaining contract term of two years.

 

Intangible assets

Intangible assets acquired separately from third parties consist of software costs, including licence fees. These are recognised as assets, measured at cost and classified as part of IT development and software.

 

Internally generated intangible assets relate to IT development and are recognised as part of IT development and software. Refer to further details in the research and development accounting policy above.

 

Intangible assets acquired as part of a business combination are recognised outside goodwill if the asset is separable or arises from contractual or other legal rights. They are recognised at their fair value at the date of acquisition and are subsequently amortised on a straight line basis over their estimated useful lives.

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

 

Intangible assets are amortised over their useful lives as follows:

 

· IT development and software

20% and 50% on cost, straight line

· Intangibles recognised upon acquisition:

· Customer contracts

· Trademarks

 

20% on cost, straight line

33% on cost, straight line

 

Useful lives are examined on an annual basis and adjustments, where applicable, are made on a prospective basis.

 

Goodwill

Goodwill represents the excess of the consideration transferred over the fair value of the identifiable assets and liabilities of the acquiree at the date of acquisition. Goodwill on acquisitions of subsidiaries is included in intangible assets. Goodwill is not amortised but is tested annually for impairment, or if there is an indication of impairment, and is carried at cost less accumulated impairment losses. Impairment losses are not subsequently reversed.

 

Goodwill is allocated to cash-generating units (CGUs) for the purpose of impairment testing. The allocation is made to those CGUs or groups of CGUs that are expected to benefit from the business combination in which the goodwill arose. The units or groups of units are identified at the lowest level at which goodwill is monitored for internal management purposes.

 

If the recoverable amount of an asset (or CGU) is estimated to be less than its carrying amount, the carrying amount of the asset (or CGU) is reduced to its recoverable amount. An impairment loss is recognised as an expense immediately.

 

Where an impairment loss subsequently reverses, the carrying amount of the asset (or CGU) is increased to the revised estimate of its recoverable amount, but so that the increased carrying amount does not exceed the carrying amount that would have been determined had no impairment loss been recognised for the asset (or CGU) in prior years. A reversal of an impairment loss is recognised as income immediately.

 

Contingent consideration is recorded initially at fair value and classified as equity or a financial liability. Contingent consideration classified as equity is not remeasured, but contingent consideration classified as a financial liability is subsequently remeasured at fair value through profit or loss.

 

Adjustments to provisional fair values of identifiable assets and liabilities (and to estimates of contingent consideration) arising from additional information, obtained within the measurement period (no more than one year from the acquisition date), about facts and circumstances existing at the acquisition date, are adjusted against goodwill. Other adjustments to provisional fair values or changes in contingent consideration are recognised through profit or loss.

 

Impairment of tangible and intangible assets other than goodwill

At each reporting date, the Group reviews the carrying amounts of its property, plant and equipment and intangibles to determine whether there is any indication that those assets have suffered an impairment loss. If any such indication exists, the recoverable amount of the asset is estimated in order to determine the extent of the impairment loss (if any). Where the asset does not generate cash flows that are independent from other assets, the Group estimates the recoverable amount of the CGU to which the asset belongs.

 

The recoverable amount is the higher of fair value less costs to sell and value in use. In assessing value in use, the estimated future cash flows are discounted to their present value using a discount rate that reflects current market assessments of the time value of money and the risks specific to the asset for which the estimates of future cash flows have been adjusted.

 

An impairment loss is recognised for the amount by which the asset's carrying amount exceeds its recoverable amount.

 

Property, plant and equipment

Property, plant and equipment is stated at cost, net of accumulated depreciation and any accumulated impairment losses.

 

Property, plant and equipment is initially recorded at cost. Such cost includes the cost of replacing part of the property, plant and equipment. When significant parts of property, plant and equipment are required to be replaced in intervals, the Group recognises such parts as individual assets with specific useful lives and depreciation. Pursuant to the acquisition of the meter installation businesses on 18 March 2016 certain internal costs to the Group are also capitalised where they are demonstrated as being directly attributable to bringing the meter assets into their usable condition.

 

Acquired development and construction rights together with directly attributable costs incurred in relation to the construction of the grid-scale battery storage sites are accounted for under IAS 16: Property, plant and equipment. These are recorded at cost and classified as part of Assets under construction within Property, plant and equipment. Whilst under construction no depreciation is recorded.

 

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

 

For each asset depreciation is calculated using the straight-line method to allocate its cost, net of its residual value if applicable, over its estimated useful life as follows:

 

· Freehold property

2%

· Short-leasehold property

Shorter of the lease term or 15% and 20%

· Meter assets

Smart meters and Industrial & Commercial meters 5%

ADM™ units 10%

Traditional meters to 1 July 2025

· Plant and machinery

33%

· Fixtures, fittings and equipment

20% and 33%

· Motor vehicles

25%

· Grid-scale assets

Shorter of the lease term or 2.5% to 10%

Battery assets 10%

· Right-of-use assets

Shorter of the asset's useful life and the lease term

 

An item of property, plant and equipment and any significant part initially recognised is derecognised upon disposal or when no future economic benefits are expected from its use or disposal. Any gain or loss arising on derecognition of the asset (calculated as the difference between the net disposal proceeds and the carrying amount of the asset) is included in the consolidated statement of comprehensive income when the asset is derecognised. The asset's residual values, useful lives and methods of depreciation are reviewed at each financial year end and adjusted prospectively, if appropriate.

 

See the Leases accounting policy for further details on the recognition and measurement of right-of-use assets under IFRS 16.

 

Inventories

Finished goods and consumables are stated at the lower of cost and net realisable value. Cost comprises direct materials and purchases of meter assets and ADM™ units at cost. Costs of purchased inventory are determined after deducting rebates and discounts. Net realisable value represents the estimated selling price for inventories in the ordinary course of business less the estimated costs necessary to make the sale.

 

Cash and cash equivalents

Cash and cash equivalents in the consolidated statement of financial position comprises cash at bank and in hand and short-term deposits with an original maturity of three months or less. For the purpose of the consolidated statement of cash flows, cash and cash equivalents consists of cash and short-term deposits as defined above, net of outstanding bank overdrafts.

 

Restricted cash

Restricted cash in the consolidated statement of financial position comprises amounts collected from customers on behalf of a third party, as part of a services arrangement, that have not yet been allocated. These monies are held in a trust account whilst awaiting allocation and, per the terms of the account, cannot be used by the Group to meet other short-term cash commitments. They have thus been disclosed separately on the statement of financial position.

 

Pension costs

The Group operates a defined contribution pension scheme for employees. The assets of the scheme are held separately from those of the Group. The annual contributions payable are charged to the consolidated statement of comprehensive income.

 

Share-based payments

IFRS 2 Share-based Payment has been applied to all grants of equity instruments. The Group issues equity-settled share-based payments to certain employees under the terms of the Group's various employee share and option schemes. Equity-settled share-based payments are measured at fair value at the date of the grant. The fair value determined at the grant date of equity-settled share-based payments is expensed on a straight-line basis over the vesting period, based on an estimate of the shares that will ultimately vest.

 

Share capital

Ordinary shares are classified as equity. Incremental costs directly attributable to the issue of new ordinary shares or options are shown in equity as a deduction from the proceeds.

 

Own share reserve

The Group offers a Share Incentive Plan for all employees and has established a trust to facilitate the delivery of SMS shares under this plan. The holdings of this trust include shares that have not vested unconditionally to employees of the Group. These shares are recorded at cost and are classified as own shares. The cost to the Company of acquiring these own shares held in trust is shown as a deduction from shareholders' equity.

 

Dividends

Dividend distributions to the Company's shareholders are recognised in the accounting period in which the dividends are paid.

 

Taxation

Tax currently payable is based on the taxable profit for the year and any adjustment to tax payable in respect of prior years. Taxable profit differs from accounting profit as reported in the consolidated statement of comprehensive income because it excludes items of income or expense that are taxable or deductible in other years and it further excludes items that are never taxable or deductible. The Group's liability for current tax is measured using tax rates that have been enacted or substantively enacted by the reporting date.

 

Deferred tax is the tax expected to be payable or recoverable on temporary differences between the carrying amount of assets and liabilities in the financial statements and the corresponding tax bases used in the computation of taxable profit, and is accounted for using the balance sheet liability method. Deferred tax is recognised in respect of all temporary differences that have originated but not reversed at the balance sheet date, where transactions or events that result in an obligation to pay more tax in the future or a right to pay less tax in the future have occurred at the balance sheet date.

 

Deferred tax is measured at the tax rates that are expected to apply in the periods in which the asset or liability is settled based on tax rates (and tax laws) that have been enacted or substantively enacted at the balance sheet date. It is recognised in the income statement except when it relates to items recognised in other comprehensive income or directly in equity, such as share-based payments. In this case, the deferred tax is also recognised in other comprehensive income or directly in equity, respectively.

 

Deferred tax assets are recognised to the extent that it is probable that future taxable profit will be available against which the temporary difference can be utilised. Their carrying amount is reviewed at each balance sheet date on the same basis.

 

Deferred tax liabilities are recognised for all temporary differences, except in respect of:

 

· temporary differences arising from the initial recognition of goodwill or an asset or liability in a transaction that is not a business combination and at the time of the transaction affects neither the accounting profit nor taxable profit or loss; and

· temporary differences associated with investments in subsidiaries where the timing of the reversal of the temporary differences can be controlled and it is probable that the temporary difference will not reverse in the foreseeable future.

 

Deferred tax assets and liabilities are offset where there is a legally enforceable right to offset current tax assets and liabilities and where the deferred tax balances relate to the same taxation authority. Current tax assets and tax liabilities are offset where the entity has a legally enforceable right to offset and intends either to settle on a net basis, or to realise the asset and settle the liability simultaneously.

 

Standards and interpretations

New and amended standards adopted by the Group

The Group has applied the following standards and amendments for the first time for its annual reporting period commencing 1 January 2022:

 

Standard or interpretation


Effective date

 

IFRS 3 (amendment)

Business Combinations Reference to the Conceptual Framework

1 January 2022

 

IAS 16 (amendment)

Property, Plant and Equipment - Proceeds Before Intended Use 

1 January 2022

IAS 37 (amendment)

Provisions, Contingent Liabilities, Contingent Assets, Onerous Contracts - Cost of Fulfilling a Contract

1 January 2022

 

 

The amendments listed above did not have any material impact on the amounts recognised in prior periods or the current period and are not expected to affect future periods significantly.

New standards and interpretations not yet adopted:

 

Certain new accounting standards and interpretations have been published that are not mandatory for 31 December 2022 reporting periods and have not been early-adopted by the Group. The amendments to IAS 12 Income Taxes, regarding deferred tax related to assets and liabilities arising from a single transaction, will apply to the Group as a lessee under IFRS 16. These amendments are effective for periods beginning on or after 1 January 2023 and their potential effects are under consideration. All other standards are not expected to have a material impact on the entity in the current or future reporting periods, or on foreseeable future transactions.

 

 

NOTES TO THE FINANCIAL STATEMENTS

For the year ended 31 December 2022

 

1 Segmental reporting

For management purposes, the Group is organised into three core divisions, as follows:

 

· Asset management, which comprises regulated management of gas and electric meters, ADM™ units and energy data assets within the UK;

· Asset installation, which comprises installation of domestic and I&C gas meters and electricity meters throughout the UK; and

· Energy management, which comprises the building and operation of grid-scale batteries, the provision of energy consultancy services and the management of distributed energy resources (DER).

 

For the purpose of making decisions about resource allocation and performance assessment, it is the operating results of the three core divisions listed above that are monitored by management and the Group's chief operating decision-maker, being the SMS Board. It is these divisions, therefore, that are defined as the Group's reportable operating segments.

 

Segment performance is mainly evaluated based on gross profit.

 

The following segment information is presented in respect of the Group's reportable segments together with additional balance sheet information:

 

31 December 2022

Asset

management

£'000

Asset

installation

£'000

Energy

management

£'000

Unallocated

£'000

Total

operations

£'000

Segment revenue

92,815

83,752

12,213

-

188,780

Inter-segment revenue

-

(53,260)

-

-

(53,260)

Revenue from external customers

92,815

30,492

12,213

-

135,520

Cost of sales

(35,698)

(23,530)

(6,270)

-

(65,498)

Segment gross profit

57,117

6,962

5,943

-

70,022

Other operating costs/income

-

-

611

(36,204)

(35,593)

Depreciation

-

(69)

(240)

(3,232)

(3,541)

Amortisation of intangibles

(1,828)

-

(20)

(2,304)

(4,152)

Profit/(loss) from operations - pre-exceptional operating items

55,289

6,893

6,294

(41,740)

26,736

Exceptional items (operating)

(5,789)

(30)

-

(827)

(6,646)

Profit/(loss) from operations

49,500

6,863

6,294

(42,567)

20,090

Share of loss of associate

 

 

 

 

(186)

Net finance costs: other

 

 

 

 

(3,949)

Profit/(loss) before tax

 

 

 

 

15,955

Tax expense

 

 

 

 

(1,084)

Profit for year

 

 

 

 

14,871

 

31 December 2021

Asset

management

£'000

Asset

installation

£'000

Energy

management

£'000

Unallocated

£'000

Total

operations

£'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

-

59,355

Other operating costs/income

-

-

1,256

(33,373)

(32,117)

Depreciation

-

(196)

-

(3,797)

(3,993)

Amortisation of intangibles

(1,725)

-

(31)

(2,304)

(4,060)

Profit/(loss) from operations - pre-exceptional operating items

49,624

6,926

2,089

(39,474)

19,165

Exceptional items (operating)

(6,213)

-

-

564

(5,649)

Profit/(loss) from operations

43,411

6,926

2,089

(38,910)

13,516

Net finance costs: other





(3,481)

Net finance costs: exceptional





(1,742)

Profit/(loss) before tax





8,293

Tax expense





(4,501)

Profit for year





3,792

 

Inter-segment revenue relates to installation services provided by the asset installation segment to the asset management segment.

 

Depreciation associated with meter assets in the asset management segment and grid-scale battery assets in the energy management segment has been reported within Cost of sales as these assets directly drive revenue (see note 3).

 

All material operations are based in the UK and revenue generated in the UK. Following the acquisition of Solo Energy Limited in 2019, a small minority of operations are based in the Republic of Ireland.

 

The Group has two major customers that each generated 10% or more of total Group turnover, as listed below by segment:

 


2022

£'000

2021

£'000

Customer 1 - Asset management

17,574

12,647

Customer 1 - Asset installation

5,052

2,644

Customer 2 - Asset management

8,056

8,900

Customer 2 - Asset installation

8,784

8,025


39,466

32,216

 

Segment assets and liabilities

31 December 2022

Asset

management

 '000

Asset

installation

£'000

Energy

management

£'000

Unallocated

£'000

Total

operations

£'000

Assets reported by segment

 

 

 

 

 

Intangible assets

13,550

3,497

3,161

5,624

25,832

Property, plant and equipment

429,709

71

95,225

8,235

533,240

Investment in associate

-

-

1,940

-

1,940

Trade and other receivables - non-current

-

-

12,347

-

12,347

Inventories

37,136

302

-

-

37,438

Contract assets

-

10

277

-

287


480,395

3,880

112,950

13,859

611,084

Assets not by segment

 

 

 

 

86,278

Total assets

 

 

 

 

697,362

Liabilities by segment

 

 

 

 

 

Contract liabilities

1,518

1,805

80

-

3,403

Lease liabilities

-

-

8,405

3,956

12,361

Provisions

-

-

1,963

70

2,033

Other liabilities

606

-

2,062

-

2,668

 

2,124

1,805

12,510

4,026

20,465

Liabilities not by segment

 

 

 

 

143,411

Total liabilities

 

 

 

 

163,876

 

31 December 2021

Asset

management

 '000

Asset

installation

£'000

Energy

management

£'000

Unallocated

£'000

Total

operations

£'000

Assets reported by segment






Intangible assets

11,540

3,497

2,497

7,929

25,463

Property, plant and equipment

366,702

128

38,868

10,203

415,901

Inventories

22,763

215

2

-

22,980

Contract assets

-

46

-

-

46

Other assets (bank loans)

2,201

-

-

-

2,201


403,206

3,886

41,367

18,132

466,591

Assets not by segment





166,646

Total assets





633,237

Liabilities by segment






Contract liabilities

1,527

2,084

121

-

3,732

Lease liabilities

-

-

4,060

4,513

8,573

Other liabilities

-

-

638

-

638

Other long-term liabilities

-

-

1,473

75

1,548


1,527

2,084

6,292

4,588

14,491

Liabilities not by segment





64,956

Total liabilities





79,447

Assets not by segment include cash and cash equivalents, trade and other receivables and investments.

 

Liabilities not by segment include trade and other payables and deferred tax liabilities, and in 2022 also include bank loans.

 

Additions to non-current assets within each segment are listed below:

 


Asset

Management

£'000

Asset

Installation

£'000

Energy

Management

£'000

Unallocated

 

£'000

Total

Operations

£'000

Additions to non-current assets






2022

106,626

14

43,003

2,263

151,906

2021

84,779

90

27,720

3,686

116,275

 

2 Revenue from contracts with customers

(a) Disaggregation of revenue from contracts with customers

Segment revenue by type of service delivered and by timing of revenue recognition is as follows:

 

Year ended 31 December 2022

Asset

management

£'000

Asset

installation

£'000

Energy

management

£'000

Total

operations

£'000

Major service lines

 

 

 

 

Metering

80,634

-

-

80,634

Data management

12,181

-

-

12,181

Utility connections

-

7,129

-

7,129

Transactional meter works

-

23,059

-

23,059

Grid-scale batteries

-

-

7,211

7,211

Energy management

-

304

5,002

5,306


92,815

30,492

12,213

135,520

Timing of revenue recognition

 

 

 

 

Services transferred at a point in time

-

23,059

1,533

24,592

Services transferred over time

92,815

7,433

10,680

110,928


92,815

30,492

12,213

135,520

 

Year ended 31 December 2021

Asset

management

£'000

Asset

installation

£'000

Energy

management

£'000

Total

operations

£'000

Major service lines





Metering

74,358

-

-

74,358

Data management

8,470

-

-

8,470

Utility connections

-

5,852

-

5,852

Transactional meter works

-

15,649

-

15,649

Energy management

-

531

3,620

4,151


82,828

22,032

3,620

108,480

Timing of revenue recognition





Services transferred at a point in time

-

15,649

-

15,649

Services transferred over time

82,828

6,383

3,620

92,381


82,828

22,032

3,620

108,480

 

(b) Assets and liabilities related to contracts with customers

The Group has recognised the following assets and liabilities related to contracts with customers:

 

 

 

2022

£'000

2021

£'000

Current contract assets

287

46

Total contract assets

287

46

Current contract liabilities

3,403

3,732

Total contract liabilities

3,403

3,732

 

Trade receivables and unbilled receivables are disclosed in note 14.

 

Significant changes in contract assets and liabilities

Contract assets and contract liabilities have not changed significantly, and movements reflect the general timing of revenue recognition and status of services in progress at the end of the year.

 

Revenue recognised in relation to contract liabilities

The following table shows how much of the revenue recognised in the current period relates to carried-forward contract liabilities:

 

 

2022

£'000

2021

£'000

Revenue recognised that was included in the contract liability balance
at the beginning of the period

3,107

2,636

 

No revenue was recognised in 2022 in relation to performance obligations satisfied in previous periods.

 

Transaction price for which performance obligations not satisfied

All our utilities connections and energy management contracts are either for periods of one year or less or are billed periodically based on time and resources incurred, or other unit measures. As permitted under IFRS 15, the transaction price allocated to these performance obligations unsatisfied at the end of the reporting period is not disclosed.

 

3 Profit from operations

 


2022

£'000

2021

(restated)

£'000

Profit from operations is stated after (charging)/crediting:

 


Cost of sales:

 


Direct staff and subcontractor costs

(31,207)

(22,338)

Depreciation of meter assets

(28,340)

(24,719)

Depreciation of grid-scale assets

(994)

-

Inventory costs

(3,316)

(995)

Short-term lease expense - restated 1

(1,641)

(264)

Total cost of sales (before exceptional items)

(65,498)

(48,316)

Administrative expenses:

 


Staff costs

(20,924)

(17,842)

Depreciation:

 


- owned assets

(2,477)

(3,087)

- leased assets

(1,064)

(906)

Amortisation of intangibles

(4,152)

(4,060)

Auditor's remuneration (note 3a)

(405)

(392)

Loss on disposal

(2,937)

(2,457)

Low-value lease expense

(37)

(29)

Research and development costs

(55)

(39)

Other operating charges

(13,171)

(13,054)

Total administrative expenses (before exceptional items)

(45,222)

(41,866)

Exceptional items (note 3b)

(6,646)

(6,478)

Other operating income (note 3c)

1,936

1,696

Total operating costs

(115,430)

(94,964)

1 Short-term lease expense relating to vans has been reclassified from Administrative expenses to Cost of sales in line with current year disclosure.

 

(a) Auditor's remuneration

Auditor's remuneration can be analysed as:


2022

£'000

2021

£'000

Audit of the parent company and consolidated financial statements

141

133

Audit of the financial statements of the Company's subsidiaries

234

229

Other services - audit-related assurance services

30

30


405

392

 

(b) Exceptional items


2022

£'000

2021

£'000

Exceptional operating items

 


Losses on the traditional and SMETS1 meter portfolio

(5,716)

(5,906)

Acquisition-related costs

(205)

(307)

Costs attributable to COVID-19

-

(265)

Other non-recurring professional fees

(725)

-


(6,646)

(6,478)

Exceptional finance items

 


Facility fees

-

(1,742)


-

(1,742)

Total exceptional items

(6,646)

(8,220)

 

In 2021 exceptional finance costs of £1,742,000 comprised the acceleration of unamortised arrangement fees relating to the existing facility of £1,506,000 together with £236,000 of legal and professional fees attributable to the extinguishment.

 

The tax effect of exceptional items charged in 2022 is a credit of £1,473,000 (2021: credit of £1,978,000).

 

(c) Other operating income

 


2022

£'000

2021

£'000

Termination fee income

-

103

Government grant income

891

1,255

Other income

1,045

338


1,936

1,696

 

Of the government grant income of £891,000 (2021: £1,255,000) recognised in the year ended 31 December 2022, £280,000 relates to RDECs (2021: £489,000) which are detailed in the Accounting policies. A further £611,000 (2021: £766,000) relates to grant income received on government-funded energy efficiency projects within the energy management business.

 

4 Particulars of employees

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

 


2022

Number

2021

Number

Administrative staff

539

488

Operational staff

729

548

Sales staff

6

5

IT staff

85

81

Directors (excluding 4 (2021: 4) Non-executive Directors)

2

3


1,361

1,125

 

The aggregate payroll costs of the employees were:

 


2022

£'000

2021

£'000

Wages and salaries

58,823

42,973

Social security costs

5,050

4,694

Staff pension costs

1,426

1,365

Share-based payment (note 28)

2,612

841

Director pension costs

24

21


67,935

49,894

 

5 Finance costs and finance income


2022

£'000

2021

£'000

Finance costs

 


Bank loans and overdrafts

3,833

3,132

Lease liabilities

552

75

Unwind of discount on liabilities

19

-

Foreign exchange (gain)/loss on intra-group borrowings

(131)

281

Total pre-exceptional finance costs

4,273

3,488

Exceptional finance costs

-

1,742

Total finance costs

4,273

5,230

Finance income

 


Bank interest receivable

324

7

Total finance income

324

7

 

6 Taxation


2022

£'000

2021

£'000

Analysis of charge in the year

 


Current tax:

 


Current income tax expense

53

93

Adjustment to tax charge in respect of previous periods

2

-

Total current income tax

55

93

Deferred tax:

 


Origination and reversal of temporary differences

1,322

2,087

Adjustment to tax charge in respect of prior periods

(293)

(127)

Adjustment attributable to change in tax rates

-

2,448

Tax on profit

1,084

4,501

 

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

 


2022

£'000

2021

£'000

Profit before tax

15,955

8,293

Tax at the UK corporation tax rate of 19.00% (2021: 19.00%)

3,031

1,576

Expenses not deductible for tax purposes

277

171

Income not taxable

(28)

-

Impact of super-deduction permanent benefit

(2,294)

-

Adjustments to tax charge in respect of previous periods

(291)

(127)

Impact of deferred tax not recognised

47

(99)

Impact of overseas tax rates

25

24

Change in tax rate1

317

2,956

Tax expense in the income statement

1,084

4,501

1  See note 22 for further details.

 

Current tax credit through equity in the year was £nil (2021: £nil).

 

7 Earnings per share

The calculation of earnings per share (EPS) is based on the following data and number of shares:

 


2022

£'000

2021

£'000

Profit for the year used for calculation of basic EPS

14,871

3,792

 

Number of shares

2022

2021

Weighted average number of ordinary shares for the purposes of basic EPS

133,241,113

118,330,817

Effect of potentially dilutive ordinary shares:

 


- share options

615,969

641,710

Weighted average number of ordinary shares for the purposes of diluted EPS

133,857,082

118,972,527

EPS:

 


- basic (pence)

11.16

3.20

- diluted (pence)

11.11

3.19

 

8 Dividends


Year

ended

31 December

2022

£'000

Year

ended

31 December

2022

Per share

(pence)

Year

ended

31 December

2021

£'000

Year

ended

31 December

2021

Per share

(pence)


 

 



FY 2020 second interim dividend paid

-

-

7,059

6.2500

FY 2020 third interim dividend paid

-

-

7,065

6.2500

FY 2020 final dividend paid

-

-

7,107

6.2500

FY 2021 first interim dividend paid

-

-

7,829

6.8750

FY 2021 second interim dividend paid

9,166

6.8750

-

-

FY 2021 third interim dividend paid

9,169

6.8750

-

-

FY 2021 final dividend paid

9,170

6.8750

-

-

FY 2022 first interim dividend paid

10,087

7.5625



Total dividends

37,592

28.1875

29,060

25.6250

 

Per the Group's dividend policy, a 27.5p per share dividend was approved in respect of FY 2021 payable in four instalments of 6.875p per share to shareholders in four cash instalments.

 

A 30.25p per share dividend is proposed in respect of FY 2022 payable in four instalments of 7.5625p per share which are intended to be paid as follows:

 

Instalment

Ex-dividend date

Record date

Payment date

1

06 October 2022

07 October 2022

28 October 2022

2

05 January 2023

06 January 2023

26 January 2023

3

06 April 2023

11 April 2023

27 April 2023

4

06 July 2023

07 July 2023

27 July 2023

 

The second, third and fourth instalments will amount to c.£30m and will be accounted for in 2023.

 

Under the dividend policy, the second interim dividend is paid out of profits recognised in the year prior to the year in which the dividends are declared and reported. As at 31 December 2022, the distributable profits in the parent company were adequate to cover the proposed second interim dividend of c.£10m.

 

9 Intangible assets


Goodwill

£'000

Intangibles recognised upon acquisition

£'000

IT development and software

£'000

Total

£'000

Cost





As at 1 January 2021

8,607

2,261

28,518

39,386

Additions

-

-

2,831

2,831

Acquisitions (note 24)

859

1,010

-

1,869

Exchange adjustments

(66)

(3)

(31)

(100)

As at 31 December 2021

9,400

3,268

31,318

43,986

Additions

-

-

2,222

2,222

Acquisitions (note 24)

737

-

1,479

2,216

Exchange adjustments

51

-

32

83

As at 31 December 2022

10,188

3,268

35,051

48,507

Amortisation





As at 1 January 2021

-

2,203

12,260

14,463

Charge for year

-

179

3,881

4,060

As at 31 December 2021

-

2,382

16,141

18,523

Charge for year

-

223

3,929

4,152

As at 31 December 2022

-

2,605

20,070

22,675

Net book value





As at 31 December 2022

10,188

663

14,981

25,832

As at 31 December 2021

9,400

886

15,177

25,463

As at 1 January 2021

8,607

58

16,258

24,923

 

10 Impairment of goodwill

The goodwill arising in a business combination is allocated, at acquisition, to the CGUs that are expected to benefit from that business combination. Goodwill is allocated to CGUs as follows:

 


Asset

management

 '000

Asset

installation

£'000

Solo Energy

£'000

Total

£'000

Cost





As at 1 January 2022

4,971

3,497

932

9,400

Acquisitions (note 24)

737

-

-

737

Exchange adjustments

-

-

51

51

As at 31 December 2022

5,708

3,497

983

10,188

 

Additional goodwill of £737,000 has been recognised in the year on the acquisition of n3rgy Data Limited and is recognised in the Asset management CGU.

 

The Group tests goodwill for impairment annually or more frequently if there are indications that goodwill might be impaired. Goodwill is tested for impairment by comparing the carrying amount of each CGU, including goodwill, with the recoverable amount. The recoverable amounts are determined based on value-in-use calculations which require assumptions. The calculations use cash flow projections based on financial budgets approved by the Board covering a one-year period, together with management forecasts for a further four-year period. These budgets and forecasts have regard to historical performance and knowledge of the current market, together with the Group's views on the future achievable growth and the impact of committed cash flows. Cash flows beyond this are extrapolated using the estimated growth rates stated below.

 

The cash flows used in the value-in-use calculation for the asset management segment include all costs incurred in the provision of meter assets to energy suppliers, together with the initial installation. The cash flows used in the value-in-use calculation for the asset installation segment exclude installation costs incurred to fit an owned meter. For the purpose of the value-in-use calculation, these are instead allocated to the asset management segment, being the segment to which the corresponding revenues are allocated.

 

The annual impairment test was performed for the three CGUs identified above that have goodwill allocated to them. No evidence of impairment was found at the balance sheet date.

 

The key assumptions used in the value-in-use calculations for those CGUs that have goodwill allocated to them are as follows:

 

· Perpetual growth rate - the terminal cash flows are extrapolated in perpetuity using a growth rate of 2.25% for asset management (2021: 2.25%) and 1.0% for asset installation and Solo Energy (2021: 1.0% for asset installation and energy management). The rate of 2.25% applied to asset management is derived from historical Retail Price Index increases applied to the segment's index-linked meter rentals. This is not considered to be higher than the average long-term industry growth rate. The rate of 1.0% applied to asset installation and Solo Energy is aligned to the Group's corporate forecast model and is lower than the rate applied to asset management as revenues in these segments are not always index-linked.

· Discount rate - the discount rate is initially based on the weighted average cost of capital (WACC) which would be anticipated for a market participant investing in the Group. A specific discount rate is then calculated for each operating segment, taking into account the time value of money, the segment's risk profile and the impact of the current economic climate. The pre-tax discount rates applied are 8.0%, 10.0% and 19.4% for asset management, asset installation and Solo Energy respectively (2021: 6.8% for asset management, 8.6% for asset installation and 18.2% for Solo Energy) and the post-tax discount rates applied are 6.0%, 7.5% and 15.0% for asset management, asset installation and Solo Energy respectively (2021: 5.5% for asset management, 7.00% for asset installation and 15.0% for Solo Energy). The risk premium assigned to the asset installation CGU reflects the shorter-term nature of the underlying revenues within this segment, as compared to the annually recurring revenue generated by an installed asset. The risk premium assigned to the Solo Energy CGU reflects the pre-revenue status of this part of the business, in which the underlying system is still undergoing development.

 

Management has performed sensitivity analysis on the key assumptions both with other variables held constant and with other variables simultaneously changed. Management has concluded that there are no reasonably possible changes in the key assumptions that would cause the carrying amounts of goodwill to exceed the value in use for any of the CGUs.

 

11 Property, plant and equipment


Land and buildings

£'000

Meter

assets

£'000

Plant and

machinery

£'000

 Fixtures,

fittings and

equipment

£'000

Motor

vehicles

£'000

Right-of-use

assets

£'000

Grid-scale assets
£'000

Assets under

 construction

£'000

Total

£'000

Cost










As at 1 January 2021

2,807

392,146

1,044

7,148

5,305

7,010

-

-

415,460

Reclassification1

-

-

-

-

-

-

-

4,071

4,071

Additions

-

82,401

126

1,117

28

5,267

-

24,505

113,444

Acquisitions

-

6,682

-

-

-

-

-

5,414

12,096

Disposals

(2)

(19,889)

-

(52)

(202)

-

-

-

(20,145)

Exchange adjustments

-

-

-

(6)

-

(4)

-

-

(10)

As at 31 December 2021

2,805

461,340

1,170

8,207

5,131

12,273

-

33,990

524,916

Reclassification

-

-

-

1

-

-

54,048

(54,049)

-

Reclassified as held for sale

(688)

-

-

-

-

-

-

-

(688)

Additions

1,105

105,004

18

994

719

5,509

84

36,251

149,684

Acquisitions

-

-

-

1

-

-

-

15,190

15,191

Disposals

(4)

(20,773)

(2)

(8)

(494)

(785)

-

-

(22,066)

Exchange adjustments

-

-

-

3

-

3

-

-

6

As at 31 December 2022

3,218

545,571

1,186

9,198

5,356

17,000

54,132

31,382

667,043

Depreciation










As at 1 January 2021

679

76,683

790

4,721

2,387

1,862

-

-

87,122

Charge for year

171

24,719

204

1,555

1,157

1,032

-

-

28,838

Disposals

1

(6,767)

-

(43)

(134)

-

-

-

(6,943)

Exchange adjustments

-

-

-

(1)

-

(1)

-

-

(2)

As at 31 December 2021

851

94,635

994

6,232

3,410

2,893

-

-

109,015

Reclassified as held for sale

(174)

-

-

-

-

-

-

-

(174)

Charge for year

172

28,340

91

1,176

1,038

1,264

994

-

33,075

Disposals

(3)

(7,116)

-

(7)

(391)

(599)

-

-

(8,116)

Exchange adjustments

-

-

-

2

-

1

-

-

3

As at 31 December 2022

846

115,859

1,085

7,403

4,057

3,559

994

-

133,803

Net book value

 

 

 

 

 

 

 

 

 

As at 31 December 2022

2,372

429,712

101

1,795

1,299

13,441

53,138

31,382

533,240

As at 31 December 2021

1,954

366,705

176

1,975

1,721

9,380

-

33,990

415,901

As at 1 January 2021

2,128

315,463

254

2,427

2,918

5,148

-

-

328,338

 

1. The reclassification of £4,071,000 within Assets under construction relates to costs previously recorded within Inventories at 31 December 2020.

 

Meter assets

In 2021, meter asset acquisitions include the c.15,000 assets acquired as part of the Industrial & Commercial large-power half-hourly electricity business acquisition. See note 24 for details.

 

Included within the closing Meter assets net book value of £429,712,000 (2021: £366,705,000) is £11,173,000 (2021: £16,246,000) relating to the traditional meter portfolio. In accordance with our accounting policy these assets will be written down to zero by 1 July 2025. In the 2022 consolidated financial statements the traditional meter portfolio generated £10,198,000 (2021: £12,781,000) of revenue with a corresponding £4,383,000 (2021: £5,071,000) depreciation charge. As at 31 December 2022, £11,168,000 (2021: £11,787,000) of annualised recurring revenue arises from the owned traditional meter portfolio.

 

The assets are secured by a bond and floating charge.

 

For the purpose of impairment testing the traditional meter asset portfolio recognised within "Meter assets" is assessed as a stand alone cash-generating unit (CGU) and its carrying amount is compared with the recoverable amount. See background information provided in the "Key sources of estimation uncertainty" section in the accounting policies. The recoverable amount is determined based on a value-in-use calculation, which uses the following key assumptions:

 

· estimated future cash flows from rental income, which decline based on the forecast for when meters are replaced;

· estimated future cash flows from termination income, which are derived using historical data and analysis around the risk
of churn between contracted and non-contracted customers and the risk of non-recoverability once issued; and

· a pre-tax discount rate of 6.45%, which reflects the risk attached to the time value of these specific cash flows and is deemed to be best represented by the Group's incremental cost of borrowing on the basis that cash flows are secured by the installed meter and the risk inherent in the decline of the cash flows is already accounted for through the assumptions detailed above.

 

The impairment test indicated that the value in use of the traditional meter assets CGU exceeded its carrying value and therefore no impairment has been recognised in the year to 31 December 2022.

 

Management has performed sensitivity analysis on the key assumptions both with other variables held constant and with other variables simultaneously changed. Management has concluded that there are no reasonably possible changes in the key assumptions that would cause the carrying amounts of the traditional meter portfolio to exceed the value in use for either CGU.

 

No impairment on other meter assets was recognised in 2022 or 2021.

 

Right-of-use assets

A breakdown of right-of-use assets is presented below:

Carrying value

2022

£'000

2021

£'000

Properties1

3,840

4,502

Land

9,601

4,878


13,441

9,380

1 Properties include office and warehouse space.

 

The statement of profit or loss shows the following amounts relating to leases:

Depreciation charge on right-of-use assets

2022

£'000

2021

£'000

Properties

1,024

919

Motor vehicles

-

6

Land

240

107


1,264

1,032

 

12 Investment in associate

 

2022

£'000

2021

£'000

At 1 January

-

-

Additions

2,126

-

Share of loss for the period

(186)


Dividends received

-

-

At 31 December

1,940

-

 

On 15 June 2022, the Group acquired a 25% shareholding in Clenergy EV Ltd, a software business with a chargepoint operator (CPO) platform focused on electric vehicle charging infrastructure. The agreement also gives the Group the option to invest a further £2.0m after one year to acquire an additional 26% interest and an option to acquire the remining shares after five years.

 

Summarised financial information for Clenergy EV Ltd for the period since investment and after adjustment for fair value adjustments at acquisition and differences in accounting policies is set out below:

 

 

2022

£'000

2021

£'000

Revenue

723

-

Operating profit excluding depreciation and amortisation (EBITDA)

(88)

-

Depreciation and amortisation

(868)

-

Taxation

214

-

Loss after taxation

(742)

-

Group's share of associate's loss for the period

(186)

-

 

 

2022

£'000

2021

£'000

Non-current assets

8,627

-

Current assets

1,609

-

Current liabilities

(482)

-

Non-current liabilities

(1,996)

-

Net assets

7,758

-

Group's share of associate's net assets

1,940

-

 

13 Inventories


2022

£'000

2021

£'000

Finished goods

36,888

22,476

Consumables

550

504


37,438

22,980

 

14 Trade and other receivables


2022

£'000

2021

£'000

Current

 


Trade receivables

25,297

22,451

Prepayments and deferred costs

3,112

2,520

Accrued income

19,385

19,265

Other receivables

4,517

1,463

VAT recoverable

624

1,932


52,935

47,631

 

Amounts falling due after more than one year:


2022

£'000

2021

£'000

Payments on account to acquire grid-scale battery assets

12,347

-

 

Accrued income is made up of the following balances:


2022

£'000

2021

£'000

Unbilled receivables

18,714

18,915

Contract assets

287

46

Other accrued income

384

304


19,385

19,265

 

The Directors consider that the carrying amount of trade and other receivables approximates to their fair value.

 

The Group's credit risk is primarily attributable to trade receivables and accrued income. The amounts presented in the consolidated statement of financial position are net of any loss allowance. The total loss allowance for trade receivables and accrued income at 31 December 2022 was £4,182,000 (2021: £4,370,000). See note 23 for further details. The ageing profile of trade receivables past due date is shown below:


2022

£'000

2021

£'000

Current

15,894

13,019

1-30 days

7,069

3,728

31-60 days

1,128

1,615

61-90 days

639

1,499

91-120 days

597

1,705

Over 120 days

4,782

5,812


30,109

27,378

Loss allowance

(3,026)

(3,969)

Amounts offset (see note 23)

(1,786)

(958)


25,297

22,451

 

Trade receivables are non-interest-bearing and are generally on 30 to 90-day terms. Trade receivables due from related parties at 31 December 2022 amounted to £nil (2021: £nil).

 

Substantially all trade receivables are denominated in Sterling.

 

Accrued income, which is made up of unbilled receivables and contract assets, is presented net of any loss allowance and impairment, with amounts being invoiced periodically and customers being the same as those within trade receivables. The loss allowance for accrued income at 31 December 2022 was £1,156,000 (2021: £401,000) and the charge recognised in profit or loss during the year was £755,000.

 

15 Cash and cash equivalents

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

 

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


2022

£'000

2021

£'000

Cash at bank

32,770

67,687

Short-term deposits

-

50,000

 Cash and cash equivalents

32,770

117,687

Cash and cash equivalents - restricted

307

1,299

Total cash and cash equivalents

33,077

118,986

 

16 Assets held for sale

The Group classifies non-current assets as held for sale if the assets are available immediately for sale in their present condition, management is committed to a plan to sell the assets under usual terms, it is highly probable that their carrying amounts will be recovered principally through a sale transaction rather than through continuing use and the sale is expected to be completed within one year from the date of the initial classification.

 

Assets classified as held for sale are presented separately in the consolidated statement of financial position and are measured at the lower of their carrying amount and fair value less costs to sell. Property, plant and equipment are not depreciated once classified as held for sale.

 


2022

£'000

2021

£'000

Property awaiting disposal

513

-


513

-

 

A warehouse, which is no longer required following the consolidation of the Group's warehouse operations, is classified as held for sale as at 31 December 2022.

 

17 Trade and other payables


2022

£'000

2021

£'000

Current

 


Trade payables

28,447

16,638

Other payables

5,350

4,097

Other taxes

1,725

1,519

Deferred income

2,806

2,898

Advance payments

995

1,185

Accruals

30,055

30,152


69,378

56,489

 

Deferred income and advance payments are made up of the following balances:

 


2022

£ '000

2021

£'000

Contract liabilities

3,403

3,732

Other deferred income

398

351


3,801

4,083

 

The Directors consider that the carrying amount of trade and other payables approximates to their fair value.

 

Trade payables are classified at amortised cost, are non-interest-bearing and are normally settled on 30 to 45-day terms.

 

Substantially all trade liabilities are denominated in Sterling.

 

18 Bank loans


2022

£'000

2021

£'000

Current

591

-

Non-current

63,349

-


63,940

-

 

The Group has a £420m revolving credit facility which matures in December 2025. Interest is payable at a rate of 1.85% over SONIA and 0.65% is payable on undrawn funds.

 

The loans drawn under the facility are all denominated in Pounds Sterling. The balance as at 31 December 2022 is stated net of £1,651,000 of unamortised transaction costs.

 

No principal or interest was outstanding as at 31 December 2021 and the amount recognised as Bank loans was therefore nil. Unamortised transaction costs of £2,201,000 that would ordinarily be deducted from the carrying value of bank loans were therefore classified as Other assets (£550,000 was classified as current Other assets, with the balance of £1,651,000 classified as non-current, in line with the remaining term of the facility).

 

The movement in bank loans is:


2022

£'000

2021

£'000

As at 1 January

(2,201)

(1,949)

Cash flows - proceeds of new borrowings

65,000

-

Cash flows - payments of interest

(212)

(554)

Cash flows - payments of arrangement fees

(227)

(2,077)

Non-cash changes - accrual of interest

803

246

Non-cash changes - amortisation of arrangement fees

777

2,133

As at 31 December

63,940

(2,201)

Presentational reclassification to Other assets

-

2,201

Bank loans as at 31 December

63,940

-

 

The Group has the following committed facility:


2022

£'000

2021

£'000

Undrawn committed borrowing facility

323,450

404,650

Bank loans drawn

65,000

-

Utilised in respect of guarantees

31,550

15,350

Total facility

420,000

420,000

 

The Group has complied with the financial covenants of its borrowing facility during the current and prior reporting periods.

 

19 Lease liabilities


2022

£'000

2021

£'000

Current

 


Current

885

999

Non-current

11,476

7,574


12,361

8,573

 

The movement in lease liabilities is:


2022

£'000

2021

£'000

As at 1 January

8,573

5,251

Cash flows - lease payments

(1,500)

(1,247)

Non-cash changes - accrued lease payments

(22)

-

Non-cash changes - new leases

3,654

4,230

Non-cash changes - changes in lease terms and foreign exchange impact

1,107

58

Non-cash changes - interest charge

549

281

As at 31 December

12,361

8,573

 

20 Provisions

Provisions comprise:


2022

£'000

2021

£'000

Non-current

 


Provision for restoration and decommissioning costs

2,033

798


2,033

798

 

The movement in provisions is:


2022

£'000

2021

£'000

As at 1 January

798

-

Provisions recognised

1,240

798

Utilised in the year

(5)

-

As at 31 December

2,033

798

 

The Group is required to restore the land leased as part of its grid-scale battery storage business, and certain leased warehouses, to the condition required by the terms and conditions of the lease at the end of the respective lease terms (which range between three to ten years for warehouses and 20 to 40 years for land). A provision has been recognised for the present value of the estimated expenditure required to carry out this restoration. These costs have been capitalised as part of the cost of right-of-use assets and are depreciated over the shorter of the term of the lease and the useful life of the assets. Provisions also include the estimated cost to decommission grid-scale batteries at the end of their life.

 

21 Other liabilities

Other liabilities comprise:


2022

£'000

2021

£'000

Current

 


Deferred consideration on acquisitions

1,388

638


1,388

638

Non-current

 


Deferred consideration on acquisitions

674

750

Contingent consideration on acquisitions

606

-


1,280

750

 

Refer to notes 24 and 25 for further details on the contingent and deferred consideration.

 

22 Deferred taxation

The movement in the deferred taxation liability during the year was:


2022

£'000

2021

£'000

Opening deferred tax liability

12,199

8,511

Increase in provision through consolidated statement of comprehensive income

1,029

4,408

Increase/(decrease) in provision through equity

93

(319)

Deferred tax in respect of acquisitions and disposals

175

(401)

Closing deferred tax liability

13,496

12,199

 

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


2022

£'000

2021

£'000

Excess of taxation allowances over depreciation on property, plant and equipment

13,527

11,036

Tax losses available

(115)

(51)

Deferred tax asset on share options

(1,519)

(1,438)

Deferred tax on intangibles acquired

1,240

1,168

Other temporary differences1

363

1,484


13,496

12,199

 

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


2022

£'000

2021

£'000

Accelerated capital allowances

2,491

3,902

Tax losses

(9)

74

Deferred tax asset on share options

(175)

558

Movement in fair value of intangibles

(157)

256

Other temporary differences1

(1,121)

(382)


1,029

4,408

 

1  Other temporary differences predominately relate to deferred tax on provisions and accruals.

 

At 31 December 2022, the main rate of corporate tax applying to the profits of the Group was 19%. In the spring Budget 2021, the UK Government announced that from 1 April 2023 the corporation tax rate would increase to 25% (rather than remaining at 19%, as previously enacted). This new law was substantively enacted on 24 May 2021. Deferred taxes at the balance sheet date have been measured using these enacted tax rates and reflected in these financial statements.

 

Further, the UK Government announced legislation in respect of the 'super-deduction' for qualifying capital expenditure incurred during a two-year period commencing 1 April 2021. This new law was also substantively enacted on 24 May 2021. The Group has recognised an estimated permanent benefit of £2,294,000 on qualifying assets when calculating the tax charge for the current year, as well as a permanent benefit in respect of the prior year of £230,000.

 

The Group had unrecognised trading losses of £1,762,000 (2021: £1,456,000) in subsidiary undertakings at 31 December 2022. The Group also had unrecognised capital losses of £729,000 (2021: £729,000) in subsidiary undertakings at 31 December 2022.

 

23 Financial risk management

The Board reviews and agrees policies for managing the risks associated with interest rate, credit and liquidity risk. The Group has in place a risk management policy that seeks to minimise any adverse effect on the financial performance of the Group by continually monitoring the following risks:

 

(a) Interest rate risk

The Group's main interest rate risk arises from its floating rate bank loan. See note 18 for further details.

 

There were no overdrafts at 31 December 2022 (2021: none) and the interest charge arising on lease liabilities does not represent a cash interest rate risk for the Group.

 

The Group's financial assets at 31 December 2022 comprise cash and trade receivables. The cash balance of £32,770,000 (2021: £117,687,000) is a floating rate financial asset, but interest income is not typically material.

 

Interest rate sensitivity

The following table shows how a change in interest rates applied to the average level of borrowings would have affected the Group's interest cost and profit before tax:

 


Increase/(decrease)

in interest rate in basis points

(Decrease) in profit

before tax

£'000

2022

+100bps

(198)

2021

+70bps

-

 

(b) Fair values of financial liabilities and financial assets

The Group's bank loan is measured at amortised cost. For fair value disclosure purposes, the bank loan is considered to be a level 2 financial instrument on the basis that it is not traded in an active market. The fair values, based upon the market value or discounted cash flows of financial liabilities and financial assets held in the Group, were not materially different from their book values.

 

(c) Foreign currency risk

The Group's exposure to the risk of changes in foreign exchange primarily arises from a single subsidiary, operating in Euros. With the exception of this entity, all of the Group's operating activities are denominated in Pounds Sterling and, therefore, the Group's overall exposure is not significant.

 

(d) Liquidity risk

The Group manages its cash in a manner designed to ensure maximum benefit is gained whilst ensuring security of investment sources. The Group's policy on investment of surplus funds is to place deposits at institutions with strong credit ratings; this is considered to be institutions with a credit rating of AA- and above. Currently, all of the chosen investment institutions are in line with these criteria.

 

The ageing and maturity profile of the Group's material financial liabilities is disclosed in the table below. The amounts disclosed are the contractual undiscounted cash flows.

 

31 December 2022

Less than

one year

£'000

Between

two and

 five years

£'000

Over

 five years

£'000

Total contractual cash flows

£'000

Contractual maturities of financial liabilities

 

 

 

 

Trade payables

28,447

-

-

28,447

Bank loan

591

-

-

591

Other liabilities

1,388

1,280

-

2,668

Lease liabilities

1,133

3,104

5,648

9,885


31,559

4,384

5,648

41,591

 

31 December 2021

Less than

one year

£'000

Between

two and

 five years

£'000

Over

five years

£'000

Total contractual cash flows

£'000

Contractual maturities of financial liabilities





Trade payables

16,638

-

-

16,638

Bank loan

-

-

-

-

Other liabilities

638

-

-

638

Other long-term liabilities

-

750

-

750

Lease liabilities

1,280

3,232

5,965

10,477


18,556

3,982

5,965

28,503

 

(e) Credit risk

The Group's credit risk primarily arises from credit exposures to energy suppliers (our customers), including outstanding receivables, due to the Group trading with a limited number of companies, which are generally large utility companies or financial institutions.

 

Credit risk is managed on a Group basis. For banks and financial institutions, only independently rated parties with a minimum rating of AA- are accepted. With regard to customers, the Group assesses the credit quality of the customer, considering its financial position, past experience and other factors. The Group does not expect, in the normal course of events, that debts due from customers are at significant risk. The Group's maximum exposure to credit risk equates to the carrying value of cash and cash equivalents, trade and other receivables, contract assets and investments. The Group's maximum exposure to credit risk from its customers is £44,682,000 (2021: £41,716,000), being the sum of the carrying value of trade receivables and accrued income, including contract assets, as disclosed within Trade and other receivables in note 14. The Group regularly monitors and updates its cash flow forecasts to ensure it has sufficient and appropriate funds to meet its ongoing operational requirements.

 

Impairment of financial assets

The Group has two types of financial assets that are subject to IFRS 9's expected credit loss model:

 

· trade receivables, which consist of billed receivables arising from contracts with customers, for the provision of meter asset installation, management and energy services; and

· accrued income, which consists of contract assets and unbilled receivables arising from contracts with customers.

 

While cash and cash equivalents, and debt investments held at amortised cost, are also subject to the impairment requirements of IFRS 9, the identified impairment loss was immaterial.

 

The Group applies the IFRS 9 simplified approach to measuring forward-looking expected credit losses, which uses a lifetime expected loss allowance for all trade receivables and accrued income, including contract assets.

 

To measure the ECL, trade receivables and accrued income have been grouped based on shared credit risk characteristics and the days past due. Accrued income relates to rights to consideration for performance, and other operating charges, before payment is due from customers, and consists of unbilled receivables and contract assets (see note 2 for details). These have substantially the same risk characteristics as the trade receivables for the same types of contracts. The Group has therefore concluded that the expected loss rates for trade receivables are a reasonable approximation of the loss rates for accrued income.

 

The Group has established a provision matrix based on the payment profiles of sales, over the most recent twelve-month period that is an appropriate representation of loss patterns, and the corresponding historical credit losses experienced within this period. The historical loss rates are adjusted to reflect current and forward-looking information that might affect the ability of customers to settle the receivables, including macroeconomic factors as relevant. In calculating the loss rates, certain historical losses arising from specific circumstances with customers have been removed where these are not indicative of future loss patterns.

 

During the second half of 2021, the global energy market suffered from unprecedented increases in wholesale gas prices, creating significant volatility within the UK energy market and leading to a number of independent energy suppliers entering administration and exiting the market. This crisis notably impacted the smaller independent energy suppliers and, as a result, management did not increase the expected loss rates for the trade receivables portfolio as a whole. Instead, a subset of trade receivables has been identified as having a potentially elevated credit risk, due to a greater risk of administration as a direct consequence of the crisis. This subset of trade receivables has been provided for on a specific basis and has resulted in an additional £0.2m impairment loss in the year. Given the continued and changing uncertainty regarding the impact of this crisis on customer default risk, management will continue to monitor the situation and reassess its ECL at each reporting period end accordingly.

 

On that basis, the loss allowance at 31 December 2022 was determined as £4,182,000 (2021: £4,370,000) for trade receivables and accrued income. A reconciliation of these balances is provided as follows:

 


Accrued

income

£'000

Trade

receivables

£'000

Total

£'000

At 1 January 2022

401

3,969

4,370

Increase in loss allowance recognised in profit or loss
during the year - underlying

755

(192)

563

Decrease in loss allowance recognised in profit or loss
during the year - exceptional

-

-

-

Amounts reversed/written off during the year

-

(751)

(751)

At 31 December 2022

1,156

3,026

4,182

 

The overall loss allowance has decreased at 31 December 2022. Whilst the crisis in the energy market has given rise to an additional impairment loss in the year, as detailed above, only one energy supplier entered administration during 2022 in comparison to the high number of insolvencies seen in the prior year.

 

Total net impairment losses on financial and contract assets were £563,000 in 2022 (2021: £2,964,000). Of this amount, £563,000 (2021: £2,964,000) relates to amounts arising from trade receivables and accrued income.

 

Fair value

There is no material difference between the book value and the fair value of any financial asset or liability.

 

(f) Capital management

Capital is the equity attributable to the equity holders of the parent. The primary objective of the Group's capital management is to ensure that it maintains a strong credit rating and healthy capital ratios in order to support its business and maximise shareholder value. The Group manages its capital structure, and makes adjustments to it, in light of changes in economic conditions. To maintain or adjust the capital structure, the Group may adjust the dividend payment to shareholders, sell assets, return capital to shareholders or issue new shares.

 

The Group monitors capital on the basis of a leverage ratio. This ratio is calculated as net debt divided by pre-exceptional EBITDA. Net debt is calculated as total borrowings less cash. Pre-exceptional EBITDA is calculated as operating profit before any significant exceptional items, interest, tax, depreciation and amortisation.

 

The objective of SMS's strategy is to deliver long-term value to its shareholders whilst maintaining a balance sheet structure that safeguards the Group's financial position. Under the Group's enhanced dividend policy, SMS declared a 27.5p per share dividend in respect of FY 2021 and proposes a 30.25p per share dividend in respect of FY 2022. The Group's long-term index-linked cash flows from its existing asset base are able to support an intended annual increase of 10% in dividends for each of the financial years FY 2022, FY 2023 and FY 2024. This results in a more predictable return to shareholders and reflects the forecast growth of the business over and above RPI in that period. The Group's strong liquidity position supports the funding of its contracted smart meter order pipeline, which will further add to its long-term index-linked cash flows.

 

(g) Disclosure of offsetting arrangements

31 December 2022

Gross balances1

£'000

Amounts offset2

£'000

Balance sheet3

£'000

Financial assets

 

 

 

Trade receivables

27,083

(1,786)

25,297

Accrued income

23,138

(3,753)

19,385

Financial liabilities

 

 

 

Trade payables

28,579

(132)

28,447

Accruals

35,463

(5,408)

30,055

 

 

31 December 2021

Gross balances1

£'000

Amounts offset2

£'000

Balance sheet3

£'000

Financial assets

 

 

 

Trade receivables

23,409

(958)

22,451

Accrued income

20,313

(1,048)

19,265

Financial liabilities




Trade payables

16,770

(132)

16,638

Accruals

32,026

(1,874)

30,152

1  The gross amounts of the recognised financial assets and liabilities.

2  Amounts are offset where there is a legally enforceable right to offset the recognised amounts and there is an intention to settle on a net basis or realise the asset and liability simultaneously, in accordance with IAS 32.

3  The net amounts presented in the consolidated statement of financial position.

 

24 Business combinations

Year ended 31 December 2022

On 25 May 2022, the Group acquired 100% of the issued share capital of n3rgy Data Limited, a data software company, for cash consideration of £1.4m and additional contingent consideration subject to the company achieving certain performance targets. n3rgy Data Limited's software enables and facilitates the use of energy consumption, generation and tariff data from smart meters. The acquisition is expected to enhance and accelerate the Group's capabilities in smart energy data solutions and is reported in the Group's asset management segment.

 

The fair values of the assets and liabilities acquired and of the consideration are as follows:


Fair value

£'000

Intangible assets: software

1,479

Trade and other receivables

149

Cash

86

Trade and other payables

(202)

Deferred tax liabilities

(229)

Net identifiable assets acquired

1,283

Add: goodwill

737

Net assets acquired

2,020

Satisfied by:


Cash

1,432

Contingent consideration

588

Total consideration

2,020

 

The net outflow of cash in respect of the purchase of the business is:


£'000

Cash consideration

1,432

Cash and cash equivalents acquired

(86)

Net cash outflow in respect of the purchase of the business

1,346

 

No contingent assets or liabilities were acquired.

 

If n3rgy Data Limited's EBITDA over a five year earn-out period exceeds a threshold, then contingent consideration becomes payable based on the amount by which the EBITDA exceeds threshold. The minimum payment is therefore nil and the maximum payment is unlimited. The fair value of the contingent consideration at the acquisition date of £588,000 represents the estimated most likely pay-out based on management's future forecast of future trading (level 3) discounted at the Group's incremental borrowing rate.

 

The goodwill is mainly attributable to synergies and the opportunity to accelerate growth of the Group's data business. Goodwill will not be deductible for tax purposes.

 

The acquisition contributed £127,000 to the Group's revenue and reduced the Group's profit before tax by £406,000 between the date of acquisition and 31 December 2022.

 

If the acquisition had been completed on 1 January 2022, the Group's revenue would have been £135,591,000 and profit before tax would have been £15,786,000 for the year ended 31 December 2022.

 

Acquisition-related costs of £20,000 have been included as part of exceptional Administrative costs in the consolidated statement of comprehensive income.

 

Year ended 31 December 2021

On 6 April 2021 the Group acquired a portfolio of c.15,000 Industrial & Commercial large-power half-hourly electricity meters from a third party. The Group also took ownership of the Meter Operator (MOP) and data service contracts associated with a portfolio of electricity meters. This is reported through the Group's asset management segment.

 

As part of the transaction, a workforce was transferred with the skills, knowledge and experience to generate revenues from the assets and contracts acquired, and potentially grow the acquired business for the Group. Such a workforce meets the definition of a substantive process under IFRS 3. On the basis that the Group has obtained inputs, a substantive process and outputs, management has concluded that the acquisition meets the definition of a business combination and should be accounted for as such under IFRS 3.

 

Purchase consideration consisted of cash only. Total cash paid was £8,433,000.

 

The assets and liabilities recognised as a result of the acquisition were as follows:

31 December 2021

Fair value

£'000

Intangible assets: customer contracts

1,010

Property, plant and equipment: meter assets

6,682

Inventories

700

Trade and other receivables

1,778

Trade and other payables

(2,368)

Deferred tax liability

(228)

Net identifiable assets acquired

7,574

Add: goodwill

859

Net assets acquired

8,433

No contingent assets or liabilities were acquired. The customer contracts acquired were valued using a multi-period excess earnings method, which assesses the present value of the after-tax cash flows attributable only to these contracts.

 

The goodwill is attributable to the opportunity to grow this part of the business for the Group. Goodwill will not be deductible for tax purposes.

 

For the year ended 31 December 2021, the acquired business contributed a net profit before taxation of £1.7m to the Group.
If the acquisition had occurred on 1 January 2021, consolidated pro-forma profit for the year ended 31 December 2021 would have been approximately £2.2m.

 

Acquisition-related costs of £0.3m have been incurred to date, including transaction costs and mobilisation costs to integrate the newly-acquired business into the Group, and have been included as part of exceptional Administrative costs in the consolidated statement of comprehensive income.

 

25 Asset acquisitions

Year ended 31 December 2022

During the year ended 31 December 2022, the Group acquired 100% of the issued share capital of the seven special purpose vehicle companies listed below. Details of the purchase consideration are as follows:

Name of acquired company

Company number

Acquisition date

 

Cash consideration

£'000

Deferred consideration

£'000

Total consideration

£'000

Balance Energy 2 Limited

12266348

14 February 2022

856

-

856

Fen Power 1 Limited

12875930

26 April 2022

600

274

874

Drumcross Energy Storage Limited

SC679835

8 July 2022

2,815

-

2,815

Erskine Energy Storage Limited

SC690064

17 August 2022

2,654

-

2,654

Balance Energy 3 Ltd

12341398

1 October 2022

2,780

400

3,180

Balance Energy 1 Ltd

11894406

1 October 2022

3,031

200

3,231

Bramford Power Limited

12480700

7 October 2022

1,826

-

1,826

Total purchase consideration

 

 

14,562

874

15,436

 

All seven companies report in British Pounds Sterling. The acquisitions enable SMS to obtain control over the rights required to develop and commission seven grid-scale battery storage sites, totalling 320MW, as part of the Group's strategy of investment in CaRe assets. Grid-scale battery storage is reported through the Group's energy management segment and is a key asset class required by the UK energy system to provide flexibility services to balance the grid and support the continued introduction of more intermittent renewable generation.

 

In respect of one of the companies, deferred consideration of £274,000 is payable in cash upon energisation (when the grid-scale battery storage asset is connected to the grid). Deferred consideration of a further £600,000 is payable on the execution of certain property deeds. The payments have been measured at fair value at the acquisition date, ignoring the impact of discounting on the basis that the anticipated payment date is within 24 months of the current reporting date and management consider the impact of discounting over this period to be immaterial.

 

Management has concluded that these acquisitions do not meet the definition of a business combination under IFRS 3 on the basis that no substantive processes have been transferred. Therefore, these transactions have been accounted for as acquisitions of a group of assets. No goodwill thus arises on the transactions.

 

The individual assets and liabilities acquired have been identified and the cost of the transactions has been allocated to the assets acquired, and liabilities assumed, based on their relative fair values at the date of purchase as follows:

 






Total

£'000

Assets under construction





15,190

Trade and other receivables





248

Trade and other payables





(2)

Total purchase consideration

 

 

 

 

15,436

 

The majority of the value gained from acquiring the sites is attributable to development and construction rights and therefore most of the total cost of the transaction has been allocated to Assets under construction.

 

No contingent assets or liabilities were acquired.

 

The cash outflow in 2022 relating to asset acquisitions is as follows:





Total

£'000

Cash consideration




14,562

Less payments made in advance in earlier years




(135)

Add deferred consideration paid in 2022 on acquisitions in earlier years




200

Cash outflow on asset acquisitions in 2022

 

 

 

14,627

 

Year ended 31 December 2021

During the year ended 31 December 2021, the Group acquired 100% of the issued share capital of the following companies:

Name of acquired company

Company number

Registered office prior

to acquisition

Purchase

consideration

£

Acquisition date

£

Nature of the

company

Newtonwood Energy Storage Limited

11257609

Unit 9, the Green Easter Park, Benyon Road, Reading, Berkshire

RG7 2PQ

1,471

9 March 2021

Special purpose vehicle

Brook Farm Energy Storage Limited

10780034

Unit 9, the Green Easter Park, Benyon Road, Reading, Berkshire

RG7 2PQ

1,572

11 June 2021

Special purpose vehicle

Berkeley Battery Storage 2 Limited

10942601

Suite 4D Drake House, Dursley, Gloucestershire

GL11 4HH

1,306

15 June 2021

Special purpose vehicle

Brentwood Energy Storage Limited

11516707

Unit 8-9 Benyon Road, Silchester, Reading, Berkshire RG7 2PQ

1,401

1 October 2021

Special purpose vehicle

 

All four companies report in British Pounds Sterling. The acquisitions enable SMS to obtain control over the rights required to develop and commission four grid-scale battery storage sites, totalling 200MW, as part of the Group's strategy of investment in CaRe assets. Grid-scale battery storage is reported through the Group's energy management segment and is a key asset class required by the UK energy system to provide flexibility services to balance the grid and support the continued introduction of more intermittent renewable generation.

 

Details of the purchase consideration are as follows:

Name of acquired company

Cash paid

£'000

Deferred consideration

£'000

Total consideration

£'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

£'000

Brook Farm

£'000

Berkeley

£'000

Brentwood

£'000

Total

£'000

Assets under construction

1,272

1,596

1,290

1,256

5,414

Trade and other receivables

199

76

16

145

436

Trade and other payables

-

(100)

-

-

(100)

Total purchase consideration

1,471

1,572

1,306

1,401

5,750

 

No contingent assets or liabilities were acquired.

 

The majority of the value gained from acquiring the four sites is attributable to development and construction rights and therefore a significant portion of the total cost of the transaction has been allocated to Assets under construction due to its higher fair value relative to the other net assets acquired.

 

Transaction costs of £0.2m were incurred and have been capitalised as a component of the cost of the assets acquired, classified as part of Assets under construction within Property, plant and equipment.

 

26 Related party transactions

(a) Key management personnel compensation

The Group has determined that its key management personnel comprise the Executive Directors, Non-executive Directors and certain senior management personnel. The aggregate compensation paid or payable to key management is shown below:

 


2022

£'000

2021

£'000

Short-term employee benefits

3,154

2,747

Post-employment benefits

50

35

Termination benefits

273

146

Share-based payments

1,661

262


5,138

3,190

 

(b) Directors

Directors' emoluments

Aggregate remuneration for both Executive and Non-executive Directors in respect of qualifying services was:

 


2022

£'000

2021

£'000

Aggregate emoluments

1,776

1,744

Company contributions to money purchase pension scheme

24

21


1,800

1,765

 

In 2022, £273,000 was payable to a Director as settlement following resignation (2021: £146,000 was payable to a Director as settlement following resignation).

 

Emoluments of highest paid Director


2022

£'000

2021

£'000

Emoluments

901

694

Company contributions to money purchase pension scheme

20

-


921

694

 

Number of Directors who accrued benefits under Company pension schemes

 


2022

Number

2021

Number

Money purchase schemes

3

3

 

(c) Other transactions with related parties

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

 

Rent amounting to £nil (2021: £10,375) paid to the Directors' pension scheme, Eco Retirement Benefit Scheme, for the use of certain premises. Alan Foy is a trustee of the scheme.

 

The Group paid dividends to Alan Foy (whilst a Director) of £321,809 (2021: £906,915), The Metis Trust1 of £61,875 (2021: £230,625), Metis Investments Limited2 of £25,599 (2021: £387,968), Tim Mortlock of £5,033 (2021: £1,501), Gavin Urwin (whilst a Director) of £458 (2021: £153), Miriam Greenwood of £7,177 (2021: £6,129), Graeme Bissett of £5,796 (2021: £4,116) and Jamie Richards of £1,389 (2021: £1,002).

 

1   Alan Foy is a trustee but not a beneficiary.

2  Alan Foy is a Director and shareholder.

 

27 Share capital


2022

£'000

2021

£'000

Allotted and called up:

 


133,397,009 ordinary shares of £0.01 each (2021: 133,321,555 ordinary shares of £0.01 each)

1,334

1,333

 

During the year 75,454 (2021: 921,447) ordinary share options were exercised in relation to the Group's employee share plans which are described in note 28. The ordinary shares issued have a nominal value of £755 (2021: £9,000) and aggregate consideration of £285,000 (2021: £1,627,000) was received.

 

The Group's Share Incentive Plan is administered by the Smart Metering Systems SIP Trust, which acquires shares in SMS (own shares) to satisfy awards under this plan and facilitate the delivery of shares to participants. At 31 December 2022, 145,821 (2021: 139,055) own shares were held in trust with a carrying value of £955,000 (2021: £825,000) and a market value of £1,140,000 (2021: £1,169,000). The Company purchased 48,900 shares (2021: 34,191) from the market during 2022 with a weighted average fair value of £8.08 per share (2021: £8.15).

 

28 Share-based payments

(a) Employee option plans

The Group operates the Unapproved Share Option Plan (the 'Unapproved Plan') and the Long-Term Incentive Plan (LTIP).

 

The Unapproved Plan is open to any employee, including Executive Directors. Participants are granted options which, except in certain specified circumstances, only vest if certain performance conditions are met and the employee is still in service five years from the date of grant. The performance conditions for awards are based on market capitalisation and individual performance targets. Once vested, the options remain exercisable for a period of up to ten years from the date of grant. The exercise price of the options is determined by the Directors but shall not be less than the closing price at which the Company's shares are traded on the date of grant.

 

The LTIP is open to senior employees. Participants are granted nil-cost options which are subject to performance conditions and remaining employed up to the vesting date. The performance conditions are based on the total shareholder return and meeting financial and non-financial targets over a three-year performance period. The vesting period varies from three to five years. Once vested, the options remain exercisable for a period of up to ten years from the date of award.

 

Summary of options

The table below summarises options granted under the Unapproved Plan and LTIP:

Plan

At

1 January

2022

Granted

Exercised

Forfeited

Expired

At

31 December

2022

Exercise

price

(pence)

Date

exercisable

Expiry

date

Fair value

at grant

(pence)

Unapproved

437,832

-

(57,898)

-

-

379,934

350.0

12 Nov 2019

11 Nov 2024

84.8

Unapproved

43,890

-

(17,556)

-

-

26,334

470.0

18 Aug 2021

17 Aug 2026

87.2

Unapproved

50,000

-

-

-

-

50,000

529.0

26 Sep 2021

25 Sep 2026

142.4

Unapproved

409,001

-

-

(16,000)

-

393,001

700.0

1 Jan 2023

13 Jul 2028

125.2

Unapproved

12,000

-

-

-

-

12,000

602.8

13 Sep 2023

12 Sep 2028

154.3

Unapproved

409,000

-

-

(16,000)

-

393,000

700.0

1 Jan 2023

13 Jul 2028

34.6

Unapproved

12,000

-

-

-

-

12,000

602.8

13 Sep 2023

12 Sep 2028

98.0

Unapproved

370,000

-

-

-

-

370,000

454.6

5 Sep 2024

4 Sep 2029

111.5

Unapproved

409,000

-

-

(16,000)

-

393,000

700.0

1 Jan 2023

13 Jul 2028

37.2

Unapproved

12,000

-

-

-

-

12,000

602.8

13 Sep 2023

12 Sep 2028

105.6

Unapproved1

76,000

-

-

-

-

76,000

577.4

26 Jun 2025

25 Jun 2030

59.3

Unapproved

408,999

-

-

(16,000)

-

392,999

700.0

01 Jan 2023

13 Jul 2028

134.3

Unapproved

12,000

-

-

-

-

12,000

602.8

13 Sep 2023

12 Sep 2028

266.1

Unapproved1

76,000

-

-

-

-

76,000

577.4

26 Jun 2025

25 Jun 2030

191.4

Unapproved2

290,000

-

-

-

-

290,000

705.4

10 Feb 2026

09 Feb 2031

210.8

Unapproved

-

408,999

-

(16,000)

-

392,999

700.0

1 Jan 2023

13 Jul 2028

11.1

Unapproved

-

12,000

-


-

12,000

602.8

13 Sep 2023

12 Sep 2028

195.5

Unapproved1

-

76,000

-


-

76,000

577.4

26 Jun 2025

25 Jun 2030

144.4

Unapproved2

-

290,000

-


-

290,000

705.4

10 Feb 2026

09 Feb 2031

181.4

LTIP

-

57,701

-


-

57,701

nil

18 May 2025

18 May 2032

631.1

LTIP

-

19,234

-


-

19,234

nil

18 May 2025

18 May 2032

313.0

LTIP

-

9,617

-


-

9,617

nil

18 May 2026

18 May 2032

604.1

LTIP

-

3,206

-


-

3,206

nil

18 May 2026

18 May 2032

301.0

LTIP

-

9,617

-

-

-

9,617

nil

18 May 2027

18 May 2032

578.3

LTIP

-

3,205

-

-

-

3,205

nil

18 May 2027

18 May 2032

290.1

Total

3,027,722

889,579

(75,454)

(80,000)

-

3,761,847





1  These options relate to the first three of five tranches.

2  These options relate to the first two of five tranches.

 

The weighted average share price at the date of exercise of options exercised during the year ended 31 December 2022 was £8.02 (2021: £8.37).

 

Fair value of options granted

Awards subject to a market capitalisation or total shareholder return condition are valued using a Monte Carlo simulation. Other awards are valued using the Black-Scholes model.

 

The principal assumptions used in these valuations were:

 


31 December 2022

31 December 2021

Dividend yield (%)

3.5 to 4.3

3.3

Expected volatility (%)

30.03 to 38.48

35.96 to 41.33

Risk-free interest rate (%)

1.25 to 4.16

0.09 to 0.39

Expected option life (years)

1.28 to 4.87

2.28 to 4.87

Exercise price (£)

nil to 7.05

5.77 to 7.05

Share price at grant date (£)

7.08 to 7.89

8.30

Fair value at grant date (£)

0.11 to 6.31

1.34 to 2.66

 

The expected price volatility is based on historical volatility, adjusted for any expected changes to future volatility due to publicly available information.

 

In January 2022, the Remuneration Committee assessed performance of the first four tranches of the 2018 awards and the first two tranches of the 2020 awards under the Unapproved Plan against vesting criteria. These awards did not meet the market capitalisation targets set when they were originally granted. The Remuneration Committee exercised the discretion available to it under the plan and, after taking into account a range of factors, concluded that these awards would vest at 95% of the maximum. This has been accounted for as a modification of the awards. In accordance with IFRS 2, the options were valued as at the date of modification based on the original terms using a Monte-Carlo simulation, and based on the modified terms using the Black Scholes model. The incremental fair value granted as a result of the modifications was £1,067,000, all of which was recognised as an expense in 2022.

 

The expense recognised in 2022 for all options, including the effect of the modifications, is £2,262,000 (2021: £563,000).

 

(b) Share Incentive Plan (SIP)

The Company introduced the SIP in October 2014. All employees of the Group (including Executive Directors) are eligible to participate in the SIP. Participants may each acquire Partnership Shares worth up to £1,800 per year from their pre-tax earnings at market value. The Company awards participants one Matching Share for each Partnership Share which they acquire. Dividends received on shares held in the SIP are reinvested to acquire Dividend Shares at market value. Matching Shares may be forfeited if the participant disposes of the corresponding Partnership Shares or leaves the employment of the Group within three years of the award date.

 

The table below shows the number of shares held in the SIP at the beginning and end of the year.

 

Type of award

At 1 January 2022

Awarded

 shares

Sold/transferred

Forfeited

At 31 December

2022

Weighted average

acquisition price

Partnership

230,315

61,103

(36,545)

-

254,873

6.10

Matching

228,943

61,103

(23,875)

(14,437)

251,734

6.10

Dividend

25,204

12,327

(2,826)

-

34,705

7.24

Total

484,462

134,533

(63,246)

(14,437)

541,312


 

The SIP is administered by the Smart Metering Systems SIP Trust (the 'Trust'). To the extent sufficient shares are not already held by the Trust, Matching Shares awarded by the Trust to employees are acquired in the market prior to the award. Matching Shares held by the Trust which have not yet vested unconditionally at the end of the reporting period are shown as own shares in the financial statements.

 

The fair value of the Matching Shares at the award date is equal to the share price at the award date. The weighted average fair value per share of the Matching Shares awarded during 2022 was approximately £8.02 per share (2021: £8.18). The total fair value of Matching Shares awarded is recognised over the three-year period starting on the respective award dates.

 

The expense recognised in 2022 for all Matching Shares is £350,000 (2021: £278,000). No expense is recognised for the Partnership Shares and Dividend Shares because the participants pay full market value for these shares.

 

29 Other reserve

This is a non-distributable reserve that initially arose by applying merger relief under section 612 of the Companies Act 2006 to the shares issued in 2009 in connection with the Group restructuring. Additionally, the premium of £4,189,000 and £1,115,000 arising on the issue of shares as part of the acquisitions of CH4 Gas Utility and Maintenance Services Limited ('CH4'), Trojan Utilities Limited ('Trojan') and Qton Solutions Limited ('Qton') has been credited to this reserve.

 

30 Capital commitments

Significant capital expenditure contracted for at the end of the reporting period but not recognised as liabilities is as follows:

 


2022

£'000

2021

£'000

Property, plant and equipment

38,930

27,746

 

Capital expenditure of £35,901,000 (2021: £27,746,000) contracted for in relation to property, plant and equipment relates to the Group's grid-scale battery storage projects under construction. The remaining £3,029,000 (2021: £nil) relates to the purchase of motor vehicles.

 

31 Ultimate controlling party

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

 

 

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