CONNECTING THE NATION Fulcrum Utility Services Limited Annual Report and Accounts 2019 F u l c r u m U t i l i t y S e r v i c e s L i m i t e d A n n u a l R e p o r t a n d A c c o u n t s 2 0 1 9 VISION THE NATION’S FIRST CHOICE UTILITY PARTNER Fulcrum is the UK’s market-leading independent multi-utility infrastructure and services provider and is committed to achieving its aim of being the nation’s first choice utility partner. Strategic Report 01 Highlights 02 Fulcrum at a glance 04 Business model 06 Divisional spotlights 08 Chairman’s statement 10 Chief Executive Officer’s statement 14 Strategy 15 Key performance indicators 16 Principal risks and uncertainties 18 Chief Financial Officer’s statement 20 Sustainability Corporate Governance 22 Board of Directors 24 Executive Committee 25 Chairman’s introduction to governance 26 Corporate governance report 30 Remuneration report 31 Group Directors’ report Financial Review 33 Independent auditor’s report 39 Consolidated statement of comprehensive income 40 Consolidated statement of changes in equity 41 Consolidated balance sheet 42 Consolidated cash flow statement 43 Notes to the consolidated financial statements 68 Advisers and Group trading companies For the latest news and investor information, visit fulcrum.co.uk OUR VALUES Six values that express the spirit of Fulcrum and its people. The Spirit of heart, mind and commitment to be the best, for our customers, shareholders, ourselves and within our sector. HIGHLIGHTS A YEAR OF PROGRESS Financial performance • Revenue up 20.4% to £48.9m (2018 restated: £40.6m) Operational highlights • Sustained growth in the order book, up 41.4% since March 2018 • Adjusted EBITDA* up 16.8% to £10.0m (2018 restated: £8.6m) • Profit before tax of £6.0m (2018 restated: £6.9m) and adjusted profit before tax* of £8.6m (2018 restated: £7.9m) • Net cash inflows from operations of £3.5m (2018: £3.1m) • Adjusted earnings per share of 3.5p (2018 restated: 4.3p) and basic earnings per share of 2.3p (2018 restated: 3.7p) • Net cash of £3.8m as at 31 March 2019 (2018: £9.4m) • Net assets per share up 17.8% to 20.5p Dividend • Final dividend of 1.5p per share (2018: 1.4p per share) resulting in a full year dividend of 2.25p per share (2018: 2.1p), up 7.1% to £60.5m (2018: £42.8m) • In FY2019, our housing team secured £18.7m in new multi-utility housing project orders, up 74.0% on the prior year • Asset estate transportation revenues up by 53.0% to £3.0m, with external capital commitments up by 84.0% to £18.7m (2018: £10.4m), providing forward visibility of asset earnings • Smart meter accreditations gained and first installation contract secured for 90,000 smart meters, forecast to generate revenues of £12.0m over a three year period • Electric vehicle charging infrastructure projects secured at £1.0m with our joined-up design, build and connect service * Adjusted EBITDA is operating profit excluding the impact of exceptional items, depreciation, amortisation and equity-settled share based payment charges. Adjusted profit before tax is profit before tax excluding the impact of exceptional items and the amortisation of acquired intangibles. Full reconciliation of Alternative Performance Measures (APMs) are provided in note 3. Financial KPIs Revenue Adjusted EBITDA* Profit before tax £48.9m £10.0m £6.0m 48.9 37.7 40.6 7.1 10.0 8.6 6.3 6.9 6.0 Total dividends per share 2.25p 2.25 2.1 1.9 Operating cash flow Net assets £3.5m £45.5m 6.0 3.1 3.5 45.5 36.6 10.4 17 18† 19 17 18† 19 17 18† 19 17 18 19 17 18 19 17† 18† 19 Read the Chief Financial Officer’s Statement on page 18 * Adjusted EBITDA is operating profit excluding the impact of exceptional items, depreciation, amortisation and equity-settled share based payment charges. See note 3 for full reconciliation. Adjusted profit before tax is profit before tax excluding the impact of exceptional items and the amortisation of acquired intangibles. † Restated. Safe We always put safety first and never compromise. Partnership We deliver the best performance through collaboration. Improvement We continuously move forward, innovate and improve. Reliability We get things right first time, every time. Integrity We operate with the highest standards. Together We work as one team to make a difference. 01 Fulcrum Utility Services Limited Annual Report and Accounts 2019 FULCRUM AT A GLANCE CONNECTING THE NATION Our growth INFRASTRUCTURE: DESIGN AND BUILD UTILITY ASSETS: OWN AND OPERATE THOUSANDS MORE PROJECTS COMPLETED New utility infrastructure installed in FY2019 A GROWING ASSET BASE New utility assets adopted in FY2019 GROWTH STRATEGY GROWTH STRATEGY • To offer the full range of utility services that our customers • To offer sustainable gas pipeline, electric cable and smart want, nationally meter asset values • To consistently provide a high level of customer service • To acquire utility assets from utility providers without asset • To challenge and streamline our cost of delivery, to always be able to offer competitive prices adoption licences Read more on page 14 Read more on page 14 DESIGN AND BUILD SERVICES OWN AND OPERATE SERVICES Multi-utility connections Gas asset ownership High voltage (HV) electricity infrastructure Electricity asset ownership Specialist gas connections Meter provision and asset management Smart metering 02 Strategic Report What sets us apart The Group is in a strong position to achieve our vision of being the nation’s first choice utility provider. INVESTMENT PROPOSITION CUSTOMER DIFFERENTIATORS Proven track record of consistent, profitable performance Growth strategy established and delivering returns Positive underlying profit growth drivers in commercial markets Sustained focus on sales growth and customer service Full national coverage Multi-utility solutions for projects of any scale End-to-end delivery through a single brand Asset ownership ability Diversifying into new growth markets Maintaining and improving operational disciplines Creating long-term secure income by increasing our ownership of utility assets Committed to sustainably increasing dividends Consistently delivering a safe, right first time service On time and on budget delivery Commitment to customer service excellence Expertise drawn from our business heritage Our Group companies The Group offers utility infrastructure and asset ownership solutions for a mix of domestic and industrial and commercial developments across the nation via our specialist Group businesses. 03 Fulcrum Utility Services Limited Annual Report and Accounts 2019 BUSINESS MODEL INFRASTRUCTURE: DESIGN AND BUILD We offer a complete range of design and build services for all types of customers, nationally. Specialist divisions deliver this across gas (including multi-utility housing connections), electricity and metering. GAS Design and build of gas and multi-utility infrastructure for industrial, commercial and domestic housing developments for all types of customer. ELECTRICITY Design and build electricity services for all sizes of development, from larger, higher voltage sites (up to 132kV) to electric vehicle (EV) charging infrastructure. Maintenance services for electrical infrastructure on industrial and commercial sites. METERING Installation of all types of meters on behalf of energy suppliers. Management of smart meter exchange programmes. Read more on page 6 Read more on page 6 Read more on page 7 How we create value Safety We commit to developing a zero harm culture where we continuously improve and maintain the highest standards of safety and health for employees, contractors and members of the public. RIDDOR incident rate 0.00 Customer excellence We are committed to being the nation’s first choice utility partner through consistently delivering a high level of service. We are committed to understanding the needs of each customer to ensure that we deliver tailored solutions that set us apart from our competitors. Customer satisfaction 80% Read more about our safety on page 20 Read more about our customer excellence on page 20 04 Strategic Report UTILITY ASSETS: OWN AND OPERATE The utility assets owned and adopted by the Group generate income from the transportation of gas and electricity. As a MAM (Meter Asset Manager) and MOP (Meter Operator), the Group receives a monthly income for every meter owned or maintained. Fulcrum Pipelines Limited (FPL) is an Independent Gas Transporter (iGT), owning and operating domestic, industrial and commercial gas infrastructure. UTILITY ASSETS Fulcrum Electricity Assets Limited (FEAL) is an Independent Distribution Network Operator (iDNO) owning and operating domestic, industrial and commercial electrical infrastructure. Read more on page 7 FPL and FEAL acquire utility assets internally built by Fulcrum and from external utility partners. People We have a high performance culture where individuals and teams have objectives that are focused on delivering our strategic priorities and financial targets. We commit to ensuring people feel involved, respected and connected, as we recognise that a talented and diverse workforce is critical to the long-term success of our business. Read more about our people on page 21 Headcount at year end 287 Operational excellence We will operate as a cost focused, engaged, informed and commercially aware workforce and management team, who treat every pound as their own, take pride in our workmanship and see continual improvement as positive to the success of the business. Adjusted EBITDA £10.0m 05 Fulcrum Utility Services Limited Annual Report and Accounts 2019 DIVISIONAL SPOTLIGHTS 06 INFRASTRUCTURE: DESIGN AND BUILD GAS Overview The Group designs and constructs gas infrastructure for industrial and commercial developments of all sizes and complexity, nationwide. Our gas division offers dual fuel and multi-utility solutions for new housing developments of all sizes. With the acquisition of CDS in 2018, we brought more specialist gas construction services in house. Growth strategy • To build on our established market share by continually growing our customer base in the UK gas market. • Fulcrum uses its heritage in the gas market as leverage to identify opportunities to cross-sell and secure dual fuel and multi-utility projects for the Group. Progress in FY2019 74% Growth in housing multi-utility orders Specialist gas construction services brought in house INFRASTRUCTURE: DESIGN AND BUILD ELECTRICITY Overview The Group is one of only a limited number of businesses accredited to design and construct all types of electrical infrastructure including high voltage (up to 132kV), and provides a comprehensive range of ongoing electrical maintenance and operational services. Growth strategy • The electrical infrastructure market represents a significant growth opportunity, particularly given the increasing preference for customers to seek dual fuel installation services from one provider. • We are diversifying our electrical offering via the design and delivery of industrial, commercial and electric vehicle (EV) charging infrastructure projects in addition to the more complex 132kV sites. Progress in FY2019 £1.0m In EV charging infrastructure contracts secured Diversification to electricity projects of all scales Strategic Report INFRASTRUCTURE: DESIGN AND BUILD METERING Overview The Group secured its Meter Operator (MOP) accreditation in September 2018, and now has all of the accreditations required to underpin its strategic plans to install, adopt, own and operate smart meters. Growth strategy • Growth will be achieved through building relationships and securing incremental agreements to deliver domestic meter exchange programmes with a number of UK energy suppliers. • The Group will establish and grow its long-term meter operator/manager income streams and consider ownership of smart meters where it demonstrates the most efficient allocation of capital. Progress in FY2019 90,000 Contract secured to install 90,000 smart meters Smart metering accreditations gained UTILITY ASSETS: OWN AND OPERATE UTILITY ASSETS Overview The Group’s utility asset owning licences complement its design and build services. The Group continues to create long-term, secure income by increasing its ownership of utility assets by adopting the assets it constructs, alongside assets purchased from external utility contractors. Growth strategy • The buoyant housing market continues to present a significant opportunity to grow, particularly given the increasing desire of customers to seek gas and electrical installation services from one provider. • We continue to work with a core portfolio of external utility contractors to purchase the utility assets they construct. • The strategy is supported by our net cash of £3.8 million and our debt facility for up to £20.0 million (£3.0 million drawn at the year end). Progress in FY2019 41,000 Live supply points (up by 76.0%) 53% Increase in transportation revenue 07 Fulcrum Utility Services Limited Annual Report and Accounts 2019 CHAIRMAN’S STATEMENT A YEAR OF PROGRESS The Board believes that Fulcrum’s breadth of services in the multi-utility, gas and electrical markets sees it well positioned to capitalise on opportunities across the infrastructure and asset ownership sectors. Adjusted EBITDA* Net cash £10.0m £3.8m (2018 restated: £8.6m) (2018: £9.4m) 08 Results The 2019 financial year was a period of change and development for the Fulcrum Group with improvements in both operational and financial performance. Revenues increased 20.4% to £48.9 million and, although profit before tax reduced from £6.9 million to £6.0 million, this was principally due to a £1.7 million increase in non-cash depreciation and amortisation. Adjusted profit before tax** increased by 8.8% to £8.6 million. Adjusted EBITDA increased by 16.8% to £10.0 million. The Group also adopted IFRS 15, the impact of which is described more fully in the Chief Financial Officer’s Statement on page 18. Over the year, Fulcrum strategically and significantly enhanced its business capabilities. While the unexpected suspension of the UK capacity market in late 2018 significantly impacted on its delivery of large projects linked to electricity generation, the acquisition of Dunamis has provided the Group with strategically critical capabilities. Firstly, we are now more competitive in the large and medium electric connections market and we have an increasing pipeline of opportunities to provide these connections, both stand-alone and alongside large gas connections. It fits well with Fulcrum’s existing strong position in providing gas infrastructure across a range of sectors, nationally, and enables the Group to offer a full multi-utility service to domestic, commercial and industrial customers. Secondly, the acquisition means that the Group is now established as a provider of electrical installation and maintenance in areas embedded in the delivery of the UK’s accelerating transition to a low carbon economy – solar farms, wind generation, battery storage, electric vehicle (EV) charging, smart meters, etc. This is already a large market and one that is expanding each year. Specifically, EV new vehicle registrations are increasing at more than 50.0% per annum. This growth is already driving a high demand for EV charging points, and this in turn will require significant additions and changes to the electricity network and more electricity generation capacity. Fulcrum’s iDNO and iGT licences enable the Group to offer competitive rates through its ability to own and maintain the assets it has installed, providing a long-term secure income stream, alongside the revenues from infrastructure projects. Under these licences the Group is also able to acquire utility assets from third party contractors. During the year, the value of utility assets owned (including assets built, under construction and acquired) increased by £19.3 million. This reflects increased activity in building and acquiring utility assets and a net increase of £8.0 million arising from an external independent valuation. The total annualised recurring utility asset revenue run rate is now £3.6 million. The Group applies strict financial disciplines to the funding of assets owned, whether built out or acquired. Future asset growth will be funded by existing debt facilities and the sale of assets. Cash generated by the infrastructure business will be retained within that business for reinvestment and dividends. * Adjusted EBITDA is operating profit excluding the impact of exceptional items, depreciation, amortisation and equity-settled share based payment charges. ** Adjusted profit before tax is profit before tax excluding the impact of exceptional items and amortisation of acquired intangibles. See note 3 for full reconciliation. Strategic Report Dividend The Board remains confident in the strength of the Group’s capabilities and its balanced position within its chosen markets. We have maintained our progressive dividend policy and I am pleased to report that the Board recommends a final dividend of 1.5p per share, giving a full year dividend of 2.25p per share for the year ended 31 March 2019, a 7.1% increase on the prior year (2018: 2.1p). Board and corporate governance At the end of the financial year, Ian Foster (Chief Operating Officer) retired from the Board after a distinguished career in the UK utilities industry. Post the year end, Hazel Griffiths (Chief Financial Officer) announced her intention to step down from the role and left the business on 28 June 2019. I would like to thank Ian and Hazel for the valuable contribution they have made to the Group. A new Chief Financial Officer, Daren Harris, has been appointed and joined the Group and Board on 24 June 2019. The Board remains committed to the highest standards of corporate governance and to operating in accordance with strong ethical and corporate social responsibility principles. The Board and its Committees play an active role in guiding the Group and leading its strategy. In a business evolving at pace, we maintain a governance structure that underpins and encourages growth, while ensuring effective controls and safeguards are in place. Our people The Group’s performance during the year would not have been possible without the expertise, drive and dedication of our employees. In addition to our colleagues in the Dunamis Group, we have strengthened our in-house talent with the addition of new skillsets. Also, Terry Dugdale was appointed Chief Operating Officer (gas and multi-utility) to replace Ian Foster. This ongoing commitment to talent enables us to underpin our expansion into smart metering and electric vehicle infrastructure, alongside enhancing our expertise in the multi-utility and asset ownership sectors. There is a real drive to deliver our core values amongst the workforce and to grow the business. On behalf of the Board, I would like to thank all our employees for their continued hard work and contribution. Outlook The Board believes that Fulcrum’s breadth of services across multi-utility, gas and electrical markets sees it well positioned to capitalise on opportunities across the infrastructure and utility asset ownership sectors and are encouraged by the incremental smart metering and cross-selling opportunities for the Group. Further, compelling electric vehicle infrastructure, photovoltaics (PV), wind and solar opportunities are afforded to the Group by the push for the decarbonisation of energy. In the short term, the softening construction market and the continued suspension of the capacity market present challenges but we remain confident that the successful execution of the Group’s strategy and balanced approach to the industrial, commercial and residential markets will deliver long-term, sustainable growth for our shareholders. Philip Holder Non-Executive Chairman 19 September 2019 09 CHIEF EXECUTIVE OFFICER’S STATEMENT A BALANCED GROUP WITH A BROAD RANGE OF GAS AND ELECTRICAL CAPABILITIES • Sustained growth in the order book, up 41.4% since March 2018 to £60.5m • Asset estate transportation revenues up by 53.0% to £3.0m • Smart meter accreditations gained and first installation contract secured • Housing multi-utility sales orders secured, up by 74.0% to £18.7m • Net assets per share increased by 17.8% to 20.5p per share 10 2019 review The Group has successfully developed its strategy to align Fulcrum with its key sector opportunities and now has a balanced exposure to the different energy supply elements of the UK residential and industrial and commercial construction markets. We have a broad and deep in-house technical capability to design and build low, medium and intermediate gas pressure projects, together with high and low voltage electrical projects, including renewables, solar and electric vehicles. This breadth and depth of our expertise has provided us with an excellent foundation to enhance our collaborative gas and electrical opportunities, ensuring we continue to deliver against our growth strategy and strengthen our market position. We remain committed to safety, providing excellent customer service, enhancing our in-house multi-utility and infrastructure services capabilities and growing the utility asset base. The combination of the £20.0 million debt facility (£3.0 million drawn as at 31 March 2019) and our net cash of £3.8 million positions us well for investing in the long-term gas and electricity utility assets. A further £3.0 million was drawn after the year end. The facility is structured as an “accordion” facility so that £10.0 million is committed and a further £10.0 million is available by request from the Group to the bank. We have a robust platform for continued growth over the coming years and remain confident for the future. Financial performance Year-on-year Group revenue increased by £8.3 million or 20.4% to £48.9 million (2018 restated: £40.6 million), benefiting from both organic growth in our core infrastructure and utility asset businesses and a full year’s contribution from Dunamis and CDS (acquired in February and March 2018 respectively). Adjusted EBITDA* for the Group increased by £1.4 million or 16.8% to a record £10.0 million (2018 restated: £8.6 million). Although profit before tax reduced from £6.9 million to £6.0 million this was principally due to a £1.7 million increase in non-cash depreciation and amortisation. Adjusted profit before tax increased from £7.9 million to £8.6 million. On a like-for-like basis***, after adjusting for the acquisitions, revenues from infrastructure services amounted to £34.8 million (2018 restated: £36.3 million), a decrease of £1.5 million or 4.0%. The decrease is due to the change in accounting policy described in the Chief Financial Officer’s Statement. Asset ownership revenues increased by 53.0% to £3.0 million (2018: £2.0 million). With its low cost to serve, this long-term, regulated annuity income stream represents a stable, secure, profitable and cash-generative component of the Group’s current and future financial performance. Continue reading the Chief Executive Officer’s Statement on page 12 * Adjusted EBITDA is operating profit excluding the impact of exceptional items, depreciation, amortisation and equity-settled share based payment charges. ** Adjusted profit before tax is profit before tax before exceptional items and amortisation of acquired intangibles. See note 3 for full reconciliation. *** Like-for-like revenue is Group revenue excluding acquisitions and utility asset ownership. See note 3 for full reconciliation. Strategic Report Q&A WITH MARTIN HARRISON 1 2 3 How would you describe the year in review? It has been a year of progress for the Fulcrum Group. We have achieved a solid performance through organic growth within our core infrastructure business, complemented by acquisitive growth delivered by Dunamis and CDS. We continue to accelerate our growth in the utility asset estate and there continues to be an encouraging level of opportunity within the electric vehicle (EV) charging market. The results have been made possible by the expertise, drive and dedication of our employees and I would like to thank them for their hard work and contribution. What new initiatives have you undertaken in the year? In the period we have expanded our range of utility services. The Group has now increased our accreditations to install, own and operate smart meters and we are pleased that we have entered into an agreement with an energy supplier to provide our services. The expansion of our services alongside our expertise in multi-utility, gas and electrical markets gives us confidence in the successful execution of the Group’s strategy. Our aim is to be the nation’s first choice utility partner and our approach sets us apart in the market. What threats do you see to the business in the coming year? The Group has successfully developed its strategy to align with the sector opportunities and has a balanced exposure to the different elements of the UK residential and industrial and commercial construction markets. As with all UK companies, we remain vigilant of the short-term impacts of economic and political uncertainty; however, we believe that we have mitigated risk and have an opportunity to develop our position within the multi-utility market. 4 What is the core focus for the year ahead? Safety is at the heart of everything we do. We aim to attract, develop and retain the best people so that we can meet and exceed our clients’ expectations. We were delighted to receive the Royal Society for the Prevention of Accidents (RoSPA) Order of Distinction, which recognises 16 years of health and safety excellence and demonstrates our commitment to the health and safety of our customers, each other, suppliers, the public and the environment. We always seek to improve and invest in the business to ensure we deliver the highest standards of health and safety in the Group. This will continue to be a focus and remains a cornerstone of the Group’s culture and ability to deliver returns for stakeholders. 5 What is the outlook for the Group? We have created a market-leading business which is positioned to benefit from the UK’s ongoing requirement for investment in new utility infrastructure. With our expertise in multi-utility infrastructure construction, smart metering installation and utility asset ownership, we are confident the future of the Group remains strong. We remain confident that the successful execution of the Group’s strategy and balanced approach to the industrial, commercial and residential markets will deliver long-term, sustainable growth for our shareholders. 11 Financial performance continued The sustained growth in the infrastructure order book demonstrates the successful delivery of our sales growth strategy. The infrastructure sales order book increased by 41.4% year on year to £60.5 million at 31 March 2019, up from £42.8 million at 31 March 2018. The March 2019 order book includes the smart metering exchange contract announced in March 2019 that will be delivered over the following three years. Delivering contracts safely, efficiently and profitably Maintaining the highest standards of health and safety remains a cornerstone of the Group’s culture and we are committed to the continual improvement in health and safety performance. In the period, we received the Royal Society for the Prevention of Accidents (RoSPA) Order of Distinction, which recognises 16 years of health and safety excellence and demonstrates our commitment to the health and safety of our customers, each other, suppliers, the public and the environment. The Group continues to invest in the business to improve operational capacity and drive efficiencies to optimise profits. In the period, we have increased our direct delivery offering, focusing on strengthening our electrical and multi-utility capabilities to support the growth in electrical and housing sales orders. We continue to use accredited subcontractors to supplement our direct labour teams, notably on longer duration, larger contracts or in more remote geographies around the UK. Underpinned by a continuous improvement philosophy and the aim to make all operational processes simple, standardised, effective and nationally consistent, we continue to refine our operational systems and processes to make it easier to do business and deliver on the ground, challenging and streamlining our cost of delivery to be able to offer the most competitive prices. We evolve and develop low-cost applications for the mobile devices used by the construction teams to improve communications with customers and streamline internal processes to help drive down the cost of delivery. For example, we have introduced a new hand-held system for maintenance reporting and site survey capture that replaces numerous manual forms, reduces printing costs and saves administration time. We listen to our experienced teams and encourage them to develop efficient and innovative ways of working. Our method of delivery across all functions (direct, indirect and support) will continue to be tested to consistently provide a high level of customer service that meets customers’ expectations on process delivery, communications and timescales. 12 Design and Build – infrastructure services Our multi-disciplined approach to infrastructure services provides a balanced stance within the residential and industrial and commercial sectors and enables us to design and build projects of any scale across the whole of mainland UK with our in-house design, project management and build expertise. Our routes to market are well established, with dedicated teams covering major projects, key accounts and technical sales, housing, low and high voltage electricity, renewables, battery storage and electric vehicle charging. We aim to be recognised as the leading utilities services business in the industry through consistently delivering a high level of service, understanding customer requirements and providing tailored solutions to meet their needs. Our brands position the Group as leaders in our markets and ensure that we are visible to new and existing customers. All of our people recognise the vital role they play in being the face of Fulcrum and in developing strong stakeholder relationships at all levels, from site based local teams through to the senior management team. In the spirit of continuous improvement, we seek feedback on how well we engage, perform and deliver for our customers, which we use to develop our services. Our performance over the past year has been consistently positive, with 80.0% of customers rating our service as “great” (9 or 10 out of 10), an improvement of 2.0% on the prior year (2018: 78.0%). We listen to what went well and how we can improve, which we share via continuous learning and knowledge sharing across all functions, so we can push for ever higher levels of satisfaction and build trusted relationships between Fulcrum and our customers at all levels. Our sector approach to infrastructure services is detailed below. Gas and multi-utility Our gas and multi-utility expertise is well recognised and we continue to generate incremental quote opportunities through our dedicated sales, design and technical teams and secure a broad base of projects from £5,000 to over £0.5 million project value. Our responsive teams support a wide variety of customers from a myriad of sources (for example, web, main contractors, mechanical and engineering consultants and housing developers) throughout the design to delivery process, taking the sales leads and converting the opportunities into customer-led projects, with their knowledgeable and integrated design and sales approach. The housing market continues to present a significant growth opportunity. We are working with national, regional and local house builders and during the period our housing teams secured £18.7 million in new multi-utility housing schemes, a notable 74.0% increase on the prior year. These schemes will be built out and utilities connected in the months and years ahead, providing an internal feed to the own and operate utility asset ownership part of the business. With our established and growing customer base, clearly focused and incentivised work-winning approach, competitive pricing model, trusted delivery and a significant utility market to penetrate, we are confident that sales will continue to grow in the long term. Electricity The electrical infrastructure market is strategically important for Fulcrum and represents a significant growth opportunity, particularly given the increasing desire of customers to seek gas and electrical installation services from one integrated provider. Our ability to design and build and then adopt, own and operate electrical connections under our Independent Distribution Network Operator (iDNO) licence provides a cohesive service and enhances our ability to build a valuable portfolio of stable, secure and low risk regulated long-term income-generating assets. The acquisition of the Dunamis Group in February 2018 significantly expanded and extended Fulcrum’s capabilities and specialist knowledge in the electrical infrastructure services sector creating one of the UK’s leading gas and electrical infrastructure services groups. The Fulcrum Group is able to offer an extensive range of electrical infrastructure services, including the design of connections to the Distribution Network Operators’ (DNO) technical standard, accredited construction and installation up to 132kV and a comprehensive range of maintenance and operational services. The integration of Dunamis has progressed well during the period and in line with plans, with increasing numbers of collaborative gas and electricity opportunities being generated, secured and delivered. During the period, some of the larger infrastructure projects were influenced by external factors, such as the suspension of the UK capacity market, which has resulted in certain projects being delayed. Despite these headwinds presenting current challenges for the sector, the Board remains confident in the longer-term prospects for Dunamis due to our customer relationships, our technical expertise and the fundamental need for investment to enhance and efficiently manage electricity grid distribution and capacity. As part of the integration plan, Dunamis has been reducing its reliance on larger infrastructure projects and now offers the end-to-end design and delivery of industrial, commercial and electric vehicle (EV) charging infrastructure projects. The EV charging service offers an integrated design, build, own and operate solution to help meet the UK’s need to build the infrastructure needed to charge the growing number of electric vehicles. In the year, the Group won projects with a combined value of £1.0 million, ranging from individual installations to frameworks with national chains. The Group is now delivering new EV charging infrastructure across the nation, at locations including supermarkets, public houses, forecourts and retail parks whilst also continuing to tender on new potential EV charging sites. Smart metering The Group secured its Meter Operator (MOP) accreditation in September 2018, and we now have all of the accreditations required to underpin our strategic plans to install, adopt, own and operate smart meters. In March 2019 we entered into our first agreement with an energy supplier to provide services as an integrated smart meter installer, Meter Operator (MOP) and Meter Asset Manager (MAM). The agreement provides Fulcrum with the opportunity to supply and install 90,000 SMETS2 domestic meters over a three year period commencing in summer 2019 and is forecast to generate over £12.0 million revenue in total. Our aim is to build relationships and secure incremental agreements with a number of energy suppliers to create smart meter installation revenue streams as we participate in the domestic exchange programme in the years ahead. We will also seek to establish and grow the long-term meter operator/manager income streams and will consider ownership of the smart meters where customers want this provision and where it demonstrates the most efficient allocation of our capital. Own and Operate – utility asset ownership Our gas (iGT) and electricity (iDNO) asset owning licences complement our Design and Build services and the Group continues to create long-term, secure income and cash flows, expanding its ownership of regulated utility assets by adopting the assets it constructs, and contracting to purchase and adopt assets from external utility contractors which are unable to adopt, own and operate the connections and networks they install. During the year, the fair value of completed utility assets increased by 108% from £16.7 million to £34.7 million. This was largely due to a net increase of £8.0 million arising from an independent external valuation of the portfolio, £3.6 million of assets adopted from external third parties and £7.1 million (net) of internally constructed assets that were completed in the year. Asset ownership transportation revenues for the year were £3.0 million, and as at the year end, the annualised transportation revenue run rate from the asset portfolio was approximately £3.6 million. The Group’s iDNO electrical asset licence has been operational for its first full year and at the year end was approaching 1,000 live supply points; the annual fixed cost of the iDNO licence/system is approximately £0.3 million. Similarly, the gas pipeline estate has expanded significantly during the past year and had over 40,000 live gas supply points as at the year end (almost double the number at the start of the financial year), of which 93% were domestic connections and 7.0% were industrial and commercial connections. We have forward visibility over both our internal gas and electrical sales orders and the utility assets we have contracted to acquire from external utility contractors (£18.7 million external spend committed as at 31 March 2019). We expect that the transportation revenues associated with both of these alone will approximately double Fulcrum’s transportation revenues over the next four year period, with the associated EBITDA margin increasing over time as the fixed costs in the utility asset ownership business are spread over an expanding asset base. The growth strategy in utility asset ownership is supported by our net cash of £3.8 million and our debt facility for up to £20.0 million (£3.0 million drawn at the year end). We will commit these resources as necessary over the coming months and years ahead as these contracted residential and industrial and commercial schemes are developed and utility connections completed. Outlook The nature of the UK’s ongoing requirement for investment in its new utility infrastructure networks provides us with long-term prospects for continued growth. The Group has established a positive reputation across its markets through a track record of reliable and responsive delivery, evidenced through our relationships with customers. This strong platform, and our strategy to broaden our range of services, will continue to provide growth opportunities. The balanced exposure that Fulcrum has to multi-utility infrastructure construction, smart metering installation and utility asset ownership positions the Group well and the fundamentals of the Group and the markets it operates in remain strong. While we remain vigilant of the short-term impacts of economic and political uncertainty in our markets, and expect a softening of the infrastructure services markets in FY2020, we look forward to progressing on our strategic priorities over the next 12 months. With our combined expertise across the Group, we have a real opportunity to rapidly develop our position within the utility services market. We remain confident in our ability to deliver incremental value to our stakeholders. Martin Harrison Chief Executive Officer 19 September 2019 13 Fulcrum Utility Services Limited Annual Report and Accounts 2019 STRATEGY OUR GROWTH STRATEGY Our strategic objectives 1 2 3 4 To continue to grow the Group’s established share in the nation’s gas and multi-utility infrastructure markets To utilise the Group’s enhanced electrical capabilities to capitalise on growth opportunities in the electricity infrastructure market, including the rapid expansion of the UK’s electrical vehicle charging infrastructure To capitalise on the market opportunities now available via the Group’s newly developed smart metering business To continue to sustainably grow the Group’s utility asset base through internal and external asset purchases, whilst closely managing the Group’s working capital Read about how our strategic objectives link to risk on pages 16 and 17 The delivery of the Group’s strategic objectives is underpinned by “One Fulcrum”, a framework which defines how the Group operates and differentiates itself in the UK’s infrastructure and utility assets markets. Operational excellence One Fulcrum Customer excellence Powered by People Safe • Zero harm culture • Fully embedded safety processes and systems • Continual improvements in sustainability • Focus on asset integrity and compliance Customer excellence • Customer vision to be the nation’s first choice utility partner • Differentiated service offering • Committed to customer engagement and feedback • Robust and balanced customer and commercial focus People • High performance culture • Strong succession planning and talent management focus • Commitment to the best employee engagement • Learning and development linked to strategy Operational excellence • Industry leading quality, cost and value management • Optimised resources and supply chains • Continuous improvement culture 14 Strategic Report KEY PERFORMANCE INDICATORS MEASURING OUR PERFORMANCE Revenue £48.9m 48.9 37.7 40.6 Adjusted EBITDA* £10.0m 10.0 8.6 7.1 Profit before tax £6.0m 6.9 6.3 6.0 Total dividends per share 2.25p 2.1 2.25 1.9 17 18† 19 17 18† 19 17 18† 19 17 18 19 Definition Operating profit excluding the impact of exceptional items, depreciation, amortisation and equity-settled share based payment charges. Performance Adjusted EBITDA up by 16.8%, or £1.4 million, to £10.0 million. Definition Profit before tax arising from ongoing operations. Definition The total dividend declared for each financial year. Performance Profit before tax has decreased by £0.9 million, principally due to non-cash depreciation and amortisation charges increasing by £1.7 million. Performance Full year dividend of 2.25p per share for the year ended 31 March 2019, a 7.1% increase on the prior year. Definition The total amount the Group earns from utility infrastructure services and utility asset ownership. Performance Year-on-year Group revenue increased by £8.3 million or 20.4% to £48.9 million, benefiting from both organic growth in our core infrastructure and utility asset businesses and a full year’s contribution from Dunamis and CDS (acquired in February and March 2018 respectively). Group order book Operating cash flow External asset commitment Net assets £60.5m £3.5m 60.5 6.0 42.8 31.9 3.1 3.5 £18.7m 18.7 10.4 2.9 £45.5m 45.5 36.6 10.4 17 18 19 17 18 19 17 18 19 17† 18† 19 Definition The amount of secured infrastructure work representing the construction value and the utility asset value. Performance The infrastructure sales order book increased by 41.4% year-on-year to £60.5 million at 31 March 2019, up from £42.8 million at 31 March 2018. Definition The operating cash flow generated by the Group. Definition The Group’s total contracted commitment to acquire external utility assets. Performance Operating cash flow increased by £0.4 million, principally due to improved working capital management. Performance External asset commitment is up £8.3 million, or 80.0%, to £18.7 million. Definition The net assets of the Group. Performance Net assets increased by £8.9 million, or 24.4%. * Adjusted EBITDA is operating profit excluding the impact of exceptional items, depreciation, amortisation and equity-settled share based payment charges. See note 3 for full reconciliation. † Restated. 15 Fulcrum Utility Services Limited Annual Report and Accounts 2019 PRINCIPAL RISKS AND UNCERTAINTIES MANAGING RISK How we manage risk The Board considers risk assessment, identification of mitigating actions and internal control to be fundamental to achieving the Group’s strategic objectives. The Corporate Governance Report on pages 22 to 32 describes the systems and processes through which the Directors manage and mitigate risks. Our principal risks The Board recognises that the nature and scope of the risks can change and so regularly reviews the risks faced by the Group as well as the systems and processes in place to mitigate them. The principal risks to achieving the Group’s objectives are set out below. The risk factors described are not an exhaustive list or an explanation of all risks. Additional risks and uncertainties relating to the Group, including those that are not currently known to the Group or that the Group currently deems immaterial, may individually or cumulatively also have a material adverse effect on the Group’s business operations, results and/or financial condition. Risks within the Company’s control In its Annual Report and Accounts for the year ended 31 March 2018, the Company reported on the principal risks and uncertainties affecting the Group and actions taken to mitigate these risks. This report has been updated, with new risks included, together with an update on mitigating actions. Growth and strategy execution Retention and recruitment Macroeconomic conditions Description The Board has adopted its growth strategy, as it believes it is the one most likely to add the greatest sustainable value for shareholders and stakeholders. It is possible that, with time, factors become known that indicate that the strategy currently being pursued is not the most effective or efficient and that alternative strategies may be more appropriate. Description Success depends on the continued retention and performance of the Group’s valued and talented employees across all business units and support functions to ensure that the business meets its strategic goals. The Group operates in markets with ongoing demand for high calibre personnel. Description The Group derives all of its revenues from mainland UK and is therefore predominantly dependent on the macroeconomic conditions in the UK. As the UK negotiates the terms of its exit from the European Union, there remains a degree of uncertainty on the outlook for the UK economy. Also, the suspension of the Capacity Market auction process has delayed certain infrastructure projects. Mitigating actions The Group’s strategy is agreed by the Board at an annual strategy meeting and thereafter regularly reviewed at Board meetings and by the Executive Directors. The Board engages with management and employees to ensure the strategy is communicated and understood and that all employees have a clear understanding of the potential benefits and risks of the strategy. Mitigating actions The Group has put in place suitable reward and recognition packages to all, comprising a blend of short and long-term incentives for senior managers and Executives. Appropriate staff development programmes are in place to assess, manage and develop the leadership skills of employees throughout the organisation. In addition, we invest in succession planning and improving learning and development, giving opportunities for employees to upgrade skills. Mitigating actions We continue to closely monitor the impact of the uncertainty on the UK economy and the Capacity Market auctions and how these factors could impact the sectors in which we operate. The Group’s multi-channel, multi-utility strategy and the increasingly diversified market position resulting from the Group’s acquisitions in 2018 create a more balanced revenue base. Furthermore, we have been reducing reliance on larger electrical infrastructure projects and now offer the end-to-end design and delivery of lower voltage, industrial, commercial and electric vehicle charging infrastructure projects. Competitive environment and reliance on key customers Description The business strategy relies fundamentally on the ability to increase revenues and ensuring that the cost base remains under control. However, the markets in which the Group operates are competitive. The actions of the Group’s competitors, and/or our own inaction, can have a significant and adverse impact on the Group including those from organisations that may be larger and/or have greater capital resources. Mitigating actions Our increasingly diversified position, including the addition of Dunamis and CDS, has reduced our exposure to volatility in individual competitive markets. These risks are managed through the corporate planning and review processes. Risk status Risk status Risk status Risk status Link to strategy Link to strategy Link to strategy Link to strategy 1 2 3 4 16 1 3 1 2 2 Strategic Report Key Our strategic objectives No change Risk increased Risk decreased We have included a cross-reference to our strategic objectives and how they link to risk: 1 Continue to grow established share in gas and multi-utility markets 2 Capitalise on growth opportunities in the electric infrastructure market 3 Capitalise on the Group’s newly developed smart metering business 4 Continue to sustainably grow the utility asset base Gas and electricity connections market and regulatory environment Description Operating in the gas industry carries with it inherent risks, such as reliance on ageing infrastructure, potential injury to, or loss of, human life or equipment, as well as the risk of downtime or low productivity caused by weather interruptions or equipment failures. Losses could result from litigation or interruption of the Group’s business should these risks materialise. There are also associated regulatory risks relating to the Group’s reliance on a number of different licences, which it requires in order to carry out the design and project management of connections to gas pipelines and the electric grid. Fulcrum Pipelines Limited, as an Independent Gas Transporter (iGT), and Fulcrum Electricity Assets Limited, as an Independent Network Distribution Operator (iDNO), are licensed by Ofgem. This brings with it the risk that the regulatory environment could change, which may have a direct and significant impact on the Group’s regulated activities. Mitigating actions The Group seeks to reduce the risk of losses arising from these circumstances through careful planning, robust operational guidelines and the sharing of risk with client and supplier organisations and by putting in place suitable insurance arrangements. Health and safety Description The health and safety of our employees, subcontractors, suppliers and customers is of paramount importance to us. Accidents on our sites could lead to reputational damage and financial penalties. Working capital management and funding IT systems and cyber security Description A changing mix of new contract sales, moving away from payments in advance towards credit terms, may place a strain on working capital as the volume of credit sales increases. The Group needs to ensure that it has the funding required to deliver on its strategy and future growth plans and that it manages its debt and cash balances effectively. Description Fulcrum uses a range of computer systems across the Group. Outages and interruptions could affect the ability to conduct day-to-day operations, which could result in loss of sales and delays to cash flow. Key systems could be breached causing financial loss, data loss, disruption or damage. In addition, any theft or misuse of data held within the Group’s systems could have both reputational and financial implications for the Group. Mitigating actions We ensure that the Board’s health and safety strategy is implemented by our comprehensive management systems and controls, overseen by our Group health and safety department to minimise the likelihood and impact of accidents. Mitigating actions In granting commercial credit terms, careful attention is paid to the timing of cash receipts and payments over the period of contract delivery. Where necessary, a deposit is requested from customers prior to commencing work and invoicing milestones with customers are matched where possible to the invoicing patterns with contractors. To support the forecast growth in utility asset ownership of gas and electricity assets, the Group has a debt facility of up to £20.0 million with its existing bank, Lloyds Banking Group plc. £3.0 million had been drawn down at the year end and all covenants had been complied with. Mitigating actions The Group’s IT strategies are reviewed regularly to ensure they remain appropriate, with business continuity and disaster recovery testing performed. We have a dedicated internal IT support team which works closely with our external support providers to ensure that regular updates to technology, infrastructure, communications and application systems occur. The Group has advanced centralised hardware and software security in place to ensure protection of commercial and sensitive data. For new IT projects, external consultants are utilised in conjunction with internal project management, restricting access to data, systems and code and ensuring all systems are secure and up to date. Risk status Risk status Risk status Risk status Link to strategy Link to strategy Link to strategy Link to strategy 4 1 2 3 4 3 17 Fulcrum Utility Services Limited Annual Report and Accounts 2019 CHIEF FINANCIAL OFFICER’S STATEMENT CONTINUED PROGRESS Financial results Total revenue increased by £8.3 million or 20.4% to £48.9 million (2018 restated: £40.6 million) benefiting from a full year’s contribution from Dunamis and growth in the asset business. Revenues from infrastructure services (excluding Dunamis) amounted to £34.8 million (2018 restated: £36.3 million), down £1.5 million due to changes arising on the adoption of IFRS 15. On a pro forma basis (i.e. using the accounting policies adopted in prior years) infrastructure services revenue would have increased by £2.5 million. Revenue from Dunamis was £11.1 million reflecting a full year of operations (2018: £2.4 million) and revenue from asset ownership was £3.0 million (2018: £2.0 million). Adjusted EBITDA* for the period has increased to £10.0 million (2018 restated: £8.6 million). On a like-for-like basis, after adjusting for Dunamis, adjusted EBITDA was £9.3 million, a year-on-year increase of £1.0 million or 12.0%. Basic earnings per share reduced to 2.3p compared to 3.7p in 2018, with the decrease largely due to the business growth being offset by the increased amortisation charge and increase in the issued share capital to fund the strategically important acquisition of Dunamis. Adjusted basic earnings per share, before charging exceptional items, have decreased to 3.5p (2018 restated: 4.3p). Impact of implementation of IFRS 15: Revenue from contracts with customers The impact of IFRS 15 on the 2019 consolidated statement of comprehensive income is summarised in the table opposite – the pro forma column shows the financial results on a pre-IFRS 15 basis. In summary, the Group no longer recognises revenue in relation to the value of the assets as they are deemed, under IFRS 15, to control the assets throughout construction. Accordingly, the utility asset is recognised as it is being constructed and consequently these costs are not in cost of sales. Where the value of the asset is greater than the construction cost, this element of profit is now taken directly to other comprehensive income rather than via the income statement. Where the asset value is lower than the cost of construction, an impairment is recorded in cost of sales representing the difference and ultimately leading to a lower cost of sale than recognised previously for construction costs. Revenue Cost of sales Gross profit Gross profit (%) As reported Adjustments £’000 £’000 Pro forma £’000 48,905 30,591 18,314 37.4% 8,151 7,051 1,100 – 57,056 37,642 19,414 34.0% Adjusted EBITDA* 10,025 1,100 11,125 Underlying performance These results include both statutory and adjusted measures of performance, the latter of which, in management’s view, reflects the performance of the business and provides a more meaningful comparison of how the business is managed and measured on a day-to-day basis. Our Alternative Performance Measures (APMs) and Key Performance Indicators (KPIs) are aligned to our strategy and together are used by the Board to measure and monitor the performance of our business and form the basis of the performance measures for remuneration. Adjusted results exclude certain items because, if included, these items could distort the understanding of our performance for the year and the comparability between periods. The APMs used by the Group are discussed in note 3, page 50. The APMs exclude exceptional items of £1.3 million and comprise £0.9 million of non-cash impairment charges arising on the external revaluation of the utility assets portfolio where those assets have not been previously revalued, together with one-off restructuring and legal costs of £0.4 million. Investment in revenue-generating assets During the year, the fair value of completed utility assets increased by 108% from £16.7 million to £34.7 million. This was largely due to a net increase of £8.0 million arising from an independent external valuation of the portfolio, £3.6 million of assets adopted from external third parties and £7.1 million (net) of internally constructed assets that were completed in the year. We are seeing the continued growth in our asset ownership reflected in the revenue, with 53.0% growth delivered from the prior year. With its low costs to serve, this annuity income stream represents a secure and profitable component of the Group’s future financial stability. * Adjusted EBITDA (£10.0 million) – this is operating profit (£6.0 million) excluding exceptional items (£1.3 million), depreciation and amortisation (£2.6 million) and equity-settled share based payment charges (£0.1 million), a reconciliation of which is included on the face of the consolidated statement of comprehensive income. 18 Strategic Report Movement in cash Design and Build Own and Operate Group 1.8 5.6 -0.9 0.4 9.4 -3.6 m £ 18.0 16.0 14.0 12.0 10.0 8.0 6.0 4.0 2.0 0.0 3.0 1.7 1.8 0.5 6.8 -7.4 -0.6 -4.7 -0.2 March 2018 Profit before tax Working capital Other capex Profit before tax External asset purchase Internal asset purchase Working capital Non- cash items Borrow- ings Dividend Capex Non- cash items Issue of share capital March 2019 There has been sustained growth in the utility assets secured from outside the Group, with the capital commitment increasing by £8.3 million, from £10.4 million as at 31 March 2018 to £18.7 million as at 31 March 2019. Liquidity and net cash Working capital management continues to be a key area of focus, with the close management throughout the period resulting in a positive operating cash flow from trading activities of £3.5 million (2018 restated: £3.1 million). On 4 June 2018, the Group entered into a new revolving credit facility agreement with Lloyds Banking Group for up to £20.0 million. The new revolving credit facility replaces the previous £4.0 million debt facility which was undrawn on 4 June 2018. The new facility supports the expected growth in utility asset ownership of gas and electricity assets by the Group, with drawdowns secured against the acquired utility assets. At 31 March 2019, the Group had drawn down £3.0 million from the new facility to fund utility asset purchases and a further £3.0 million was drawn down after the year end. The facility is structured as an “accordion” facility so that £10.0 million is committed and a further £10.0 million is available by request from the Group to the bank. At 31 March 2019, the Group had net cash of £3.8 million (2018: £9.4 million), a £5.6 million decrease against the prior period, after investing £3.6 million in external utility asset purchases (2018: £0.9 million) and £4.7 million in dividend payments (2018: £3.5 million). The cash at bank and added financial security with the revolving credit facility both position the Group with sufficient funds to facilitate its growth plans and adequate access to cash to cover contractual obligations. Reserves and net assets Net assets increased by £8.9 million during the period, reflecting the utility asset net revaluation increase of £8.0 million, retained profit for the period of £4.9 million and share based payment movements of £0.5 million, offset by the final 2018 dividend and 2019 interim dividend paid totalling £4.7 million. Net assets per share at 31 March 2019 were 20.5p per share (2018 restated: 17.4p per share). In February 2019, a capital transfer was performed of £16.6 million from the share premium account to retained earnings. Under Cayman Law, distributions can be made out of share premium unlike in the UK. As such, the transfer was performed to provide better clarity to the reader of the accounts. During the year, 10,646,798 ordinary shares (2018: 7,775,940 ordinary shares) were issued with a nominal value of £10,647 (2018: £7,776) to employees exercising vested share options (an Enterprise Management Incentive (EMI), and Employee Shareholder Status (ESS) and a Growth Share Scheme (GSS) plan fully vested). The associated cash consideration for the exercise prices was £521,000. As at 31 March 2019, the issued share capital of the Company was 221,303,106 ordinary shares (2018: 210,656,308) with a nominal value of £221,303. At the end of the year, the Group operated a Growth Share Scheme (GSS) plan and four SAYE schemes. The principal terms of the remaining share option schemes are summarised in note 18. Dividends The Group continues to maintain a progressive dividend policy. Our aim is to operate a policy within the context of broadly two times dividend cover. In determining dividend cover, non-cash item inflow and exceptional items are excluded. The cash generated during the year, supported by the continued organic growth of our business, enables returns to be made to our shareholders whilst allowing for future investment and growth. As such, a final dividend of 1.5p per share (2018: 1.4p per share) has been proposed, giving a total dividend for the year of 2.25p per share (2018: 2.1p per share). This final dividend is expected to be paid on 25 October 2019 to shareholders on the register on 4 October 2019 with an ex-dividend date of 3 October 2019 subject to approval at the Annual General Meeting. Summary We have continued to grow our service offerings, delivered increased revenues, profitability and continued growth in our investment in utility asset ownership, all whilst balancing working capital requirements. With net cash at the bank and the availability of the revolving credit facility, we believe that the Group remains well placed to deliver on its strategy. Daren Harris Chief Financial Officer 19 September 2019 19 Fulcrum Utility Services Limited Annual Report and Accounts 2019 SUSTAINABILITY COMMITTED TO CORPORATE RESPONSIBILITY We take the responsibilities we have to our people, our customers and the environments we work in seriously and approach each with the spirit of being the nation’s first choice utility partner. Safety We always put safety first and are committed to promoting and demonstrating excellence in our approach to health, safety and care for the environment as we connect the nation. How we achieve this: • We display the spirit of SAFE at all times and commit to developing a zero harm culture • We embed our commitment to safety in our culture through strong safety leadership and the active contribution to excellence in health, safety, environmental, engineering and quality management wherever we work • We recognise and reward the people and teams who go above and beyond to demonstrate safe behaviours with our quarterly “Safety Champion” awards Our safety policy It is our policy to organise and maintain, so far as is reasonably practicable, safe working arrangements and to protect the environment from unnecessary damage whilst we achieve strong profit growth. We work in an industry that contains inherent risks so we ensure that safety comes first in all that we do and this is reflected in the spirit of which we operate and the plans we have put in place. Customer service Community and charity We are committed to being the first choice utility partner for our customers. How we achieve this: • We are committed to consistently delivering market-leading levels of service • We offer and deliver competitive utility services to a broad and diverse range of sectors and customers, nationally • Our people take a proactive approach to developing relationships that strengthen the bonds between Fulcrum and our customers • We listen to our customers and seek feedback from them on every project we deliver to help inform continual improvements We have continued our partnership with Bluebell Wood Children’s Hospice and supported them with our “Community Spirit” initiative in the year. Community Spirit is a community volunteering scheme which sees Fulcrum people provide a range of support activities. 80% 276 Of customers rated us as “great” in FY2019 (2018: 78.0%) Hours volunteered by our people in FY2019 (2018: 120) 20 Strategic Report Our people We recognise that a talented and diverse workforce is critical to the long-term success of our business and we are committed to ensuring that we have the best people working with us. We have created a culture that values our employees’ differences and allows equal opportunities for all. Employee engagement For our business to be effective, every individual must be involved and engaged in the development or delivery of our strategy. How we achieve this: • We maintain communication with our employees through a number of forums, including sessions with the Chief Executive Officer, an Employee Business Forum and whole Group “Spirit” updates • We undertake a bi-annual people survey to achieve a greater understanding of employee experience • We have invested in leadership development to ensure our people managers have the skills needed to create high performing and engaged teams Learning and development We want our people to achieve their full potential and we invest in their development and welfare to ensure we have a skilled, motivated and multifaceted workforce for the future. How we achieve this: • All people have clearly defined learning and development paths, linked to succession planning and our talent management process • Learning and development priorities are clear and linked to the skills and behaviours required for the delivery of our strategy • We continue to invest in training and development across a wide range of disciplines Reward and benefits We link reward to performance to attract new talent and recognise people who go above and beyond to truly demonstrate Fulcrum Spirit. How we achieve this: • We continue to evolve our incentive and reward schemes to underpin a high performance culture and our growth • Our complete benefits package has proven a differentiator in attracting and retaining the best people in the industry • Fulcrum launched a fourth Sharesave scheme for its employees in January 2019. 59.0% of all people in the Group are now enrolled in Sharesave schemes People composition as at 31 March 2019 Female Male 1 4 57 4 Board 20% Female (2018: 17.0%) 21 230 41% 59% Senior management All employees Sharesave participation 16% Female (2018: 22.0%) 20% Female (2018: 24.0%) 59% Participation (2018: 59.0%) 21 Fulcrum Utility Services Limited Annual Report and Accounts 2019 BOARD OF DIRECTORS PHILIP HOLDER (aged 70) MARTIN HARRISON (aged 50) DAREN HARRIS (aged 54) STEPHEN GUTTERIDGE WAYNE HAYES (aged 64) (aged 57) Non-Executive Chairman A R Chief Executive Officer Chief Financial Officer Non-Executive Director Non-Executive Director Experience Philip has spent over 30 years in the utilities and related services sectors. From 1997 to March 2007, Philip was Managing Director of East Surrey Holdings (ESH), with responsibility for its water and gas divisions. Until March 2010, Philip was full time Operational Adviser to The Infrastructure Partnership. Other appointments He is also an Operational Adviser to Harwood Private Equity and a Director of companies in the Phoenix Energy Group. Experience Martin has experience gained from a range of senior finance leadership roles from within the infrastructure services and construction products sectors. Prior to joining Fulcrum, he was Divisional Finance Director of Lafarge Tarmac Contracting from 2010 to 2014 with financial responsibility for the UK and Middle East markets. Previously, Martin spent three years with KPMG working on merger and acquisitions transactions and corporate restructuring projects and 11 years with Saint Gobain/BPB plc. Martin is a member of the Institute of Chartered Accountants in England and Wales. Experience Daren brings significant experience gained from various senior financial roles in the construction, mechanical and electrical engineering, defence and energy services sectors. His most recent role was as Group Finance Officer and primary board member of The Byrne Group. Prior to this, Daren held the position of Group Finance Director at leading independent engineering and services business, NG Bailey. He also spent four years in Switzerland as Vice President of Finance for utilities provider TXU Europe and was CFO for both Serco (Defence and Aerospace) and Raytheon Systems Limited. Daren spent 12 years with KPMG and KPMG Corporate Finance and is a member of the Institute of Chartered Accountants in England and Wales. Skills Experienced in strategic business management in the gas, electricity and water sectors. Skills Experienced in corporate strategy and leadership, with proven capability in developing culture to support the execution of our growth strategy. Skills Experienced in financial strategy, planning and commercial leadership. Experience Experience Stephen has over 35 years’ experience in Wayne has nearly 40 years’ experience energy and utilities, beginning with Shell in in the electricity industry across a variety of marketing and oil trading. In 1988 he joined engineering and management roles. Wayne Amerada Hess, managing its oil trading began his career at Eastern Electricity Board, and its UK gas businesses. From 1992 to where he held various senior management 1997 he was Managing Director of Supply positions including Head of Engineering when at Seeboard plc. Stephen held Executive Eastern merged with London Electricity to and Non-Executive positions in Ferguson become 24seven Utility Services. Following International, the International Petroleum this, Wayne joined Lamva, a privately owned Exchange and CORGI and was Chairman utility services provider which subsequently of Star Energy, President Petroleum and became part of the Freedom Group Nighthawk Energy. Other appointments He is currently Senior Independent Director at BCA Marketplace plc. Skills Track record in advising boards on strategy, remuneration policy and corporate governance. of Companies, owned by Spice plc, and Wayne became Group Managing Director for Freedom. Wayne co-founded Matrix Networks Renewables in 2012, and led the business as CEO and latterly as Chairman through a period of ambitious growth, having acquired Maintech, and formed the Dunamis Group. Wayne is a member of the Institution of Engineering and Technology. Skills Electrical industry expertise and experience in acquisitions. Appointment date 25 January 2011 Appointment date 29 September 2014 Appointment date 24 June 2019 Appointment date 25 January 2011 Appointment date 5 February 2018 Meetings attended Meetings attended Meetings attended Meetings attended Meetings attended Daren was appointed after all meetings had taken place. 22 Corporate Governance PHILIP HOLDER (aged 70) MARTIN HARRISON (aged 50) DAREN HARRIS (aged 54) STEPHEN GUTTERIDGE (aged 64) WAYNE HAYES (aged 57) Non-Executive Chairman Chief Executive Officer Chief Financial Officer Non-Executive Director A R Non-Executive Director Experience Experience Experience Philip has spent over 30 years in the Martin has experience gained from a range Daren brings significant experience gained utilities and related services sectors. From of senior finance leadership roles from within from various senior financial roles in the 1997 to March 2007, Philip was Managing the infrastructure services and construction construction, mechanical and electrical Director of East Surrey Holdings (ESH), products sectors. Prior to joining Fulcrum, engineering, defence and energy services with responsibility for its water and gas he was Divisional Finance Director of sectors. His most recent role was as Group divisions. Until March 2010, Philip was Lafarge Tarmac Contracting from 2010 to Finance Officer and primary board member full time Operational Adviser to The 2014 with financial responsibility for the UK of The Byrne Group. Prior to this, Daren Infrastructure Partnership. and Middle East markets. Previously, Martin held the position of Group Finance Director Other appointments He is also an Operational Adviser to Harwood Private Equity and a Director of companies in the Phoenix Energy Group. spent three years with KPMG working on at leading independent engineering and merger and acquisitions transactions and services business, NG Bailey. He also spent corporate restructuring projects and 11 years four years in Switzerland as Vice President with Saint Gobain/BPB plc. Martin is a of Finance for utilities provider TXU Europe member of the Institute of Chartered and was CFO for both Serco (Defence and Accountants in England and Wales. Aerospace) and Raytheon Systems Limited. Daren spent 12 years with KPMG and KPMG Corporate Finance and is a member of the Institute of Chartered Accountants in England and Wales. Skills Skills Skills Experienced in strategic business management in the gas, electricity and water sectors. Experienced in corporate strategy Experienced in financial strategy, and leadership, with proven capability planning and commercial leadership. in developing culture to support the execution of our growth strategy. Experience Stephen has over 35 years’ experience in energy and utilities, beginning with Shell in marketing and oil trading. In 1988 he joined Amerada Hess, managing its oil trading and its UK gas businesses. From 1992 to 1997 he was Managing Director of Supply at Seeboard plc. Stephen held Executive and Non-Executive positions in Ferguson International, the International Petroleum Exchange and CORGI and was Chairman of Star Energy, President Petroleum and Nighthawk Energy. Other appointments He is currently Senior Independent Director at BCA Marketplace plc. Experience Wayne has nearly 40 years’ experience in the electricity industry across a variety of engineering and management roles. Wayne began his career at Eastern Electricity Board, where he held various senior management positions including Head of Engineering when Eastern merged with London Electricity to become 24seven Utility Services. Following this, Wayne joined Lamva, a privately owned utility services provider which subsequently became part of the Freedom Group of Companies, owned by Spice plc, and Wayne became Group Managing Director for Freedom. Wayne co-founded Matrix Networks Renewables in 2012, and led the business as CEO and latterly as Chairman through a period of ambitious growth, having acquired Maintech, and formed the Dunamis Group. Wayne is a member of the Institution of Engineering and Technology. Skills Track record in advising boards on strategy, remuneration policy and corporate governance. Skills Electrical industry expertise and experience in acquisitions. Appointment date 25 January 2011 Appointment date 29 September 2014 Appointment date 24 June 2019 Appointment date 25 January 2011 Appointment date 5 February 2018 Meetings attended Meetings attended Meetings attended Meetings attended Meetings attended Daren was appointed after all meetings had taken place. Committee key A R Audit Committee Remuneration Committee Committee Chair 23 Fulcrum Utility Services Limited Annual Report and Accounts 2019 EXECUTIVE COMMITTEE RICHARD JUPP (aged 55) Chief Operating Officer (Electricity) Experience Richard has been in the electricity industry for 38 years, starting with The CEGB as a Student Engineer. Richard moved into high voltage contracting in 1996 and has held several senior positions, including Managing Director of Maintech Power, for the past seven years. Skills Extensive industry and operational knowledge and a proven record of compliant delivery. TERRY DUGDALE (aged 45) Chief Operating Officer (Gas and Multi-Utility) Experience Terry has over 28 years’ experience in the utilities industry, starting his career with British Gas and progressing into several senior operational management roles. He joins Fulcrum from Wolseley UK, where he was Trading Director of Wolseley Infrastructure Companies. Skills Performance history in leading and implementing strategic business change management and corporate growth. TIM HOUTBY (aged 51) Director of Smart Metering Experience Tim has over 20 years’ experience in the UK utilities metering sector, formerly as Managing Director of Meter Provida Ltd, and latterly as Managing Director of Stark Utility Funding Ltd, a successful MAM/MAP business. He joins Fulcrum as Director of Smart Metering, responsible for the development and operation of Fulcrum’s Smart Metering businesses. Skills Knowledge of sector and understanding of government legislation. Experience in leading innovative teams with a track record of delivery. CARLY GILCHRIST (aged 33) CRAIG BAUGH (aged 37) Director of Asset Director of Sales and Marketing Experience Craig has been in the utility industry for 18 years, previously working for Transco and National Grid. He has spent the last 12 years specialising in sales, marketing, communications and customer engagement strategy. Skills Experienced leadership qualities, corporate strategy, marketing, communications and public relations expertise. Experience Carly has been in the utility industry for 10 years, beginning her career at National Grid. She was the first recruit on Fulcrum’s graduate programme and quickly progressed to lead the Commercial, Delivery and then Asset divisions in senior roles. Carly was the gas industry’s Young Person of the Year in 2015 and Manager of the Year in 2019. Skills Strong experience and leadership skills with a proven record of strategic development and implementation. 24 Corporate Governance CHAIRMAN’S INTRODUCTION TO GOVERNANCE COMMITTED TO HIGH STANDARDS The Board is accountable to our shareholders and stakeholders for the Company’s activities and is responsible for the effectiveness of corporate governance. Committed to high standards Fulcrum remains committed to the highest standards of corporate governance. The Board and its Committees play an active role in guiding the Group and leading its strategy and we are determined to ensure that we have the right skillset to steer the Group forward. In a business evolving at pace, we maintain a governance structure that underpins and encourages growth, while ensuring effective controls and safeguards are in place. The values and ethical standards of the Group rest upon principles of fairness, respect and integrity and the Board seeks to promote and exemplify these values in discharging its responsibilities. These principles are both ethically based and commercially essential to delivering our strategic and growth objectives and to the long-term success of the Group. Statement of compliance with the Quoted Companies Alliance (QCA) Corporate Governance Code The Company’s shares are quoted on the AIM Market of the London Stock Exchange (AIM) and the Company is subject to the continuing requirements of the AIM Rules. Following the changes to AIM Rule 26, from 28 September 2018, the Company is required to apply a recognised corporate governance code and report on how it complies with that code. The Board has elected to adopt the QCA Corporate Governance Code. The Board is aware of its responsibility for overall corporate governance and for supervising the general affairs and business of the Company. Exceptions to compliance with the QCA Code are provided on page 26. Our Board As Chairman, I am responsible for the leadership and effective working of the Board and for ensuring that it fulfils its responsibilities to all of the Group’s stakeholders. I am also responsible for promoting a culture of openness and debate, in addition to ensuring productive relations between Executive and Non-Executive Directors. The Board also seeks to have constructive dialogue with external stakeholders and take account of shareholder feedback. Fulcrum continues to maintain and review its systems, processes and policies to support its governance practices. Philip Holder Non-Executive Chairman 19 September 2019 25 Fulcrum Utility Services Limited Annual Report and Accounts 2019 CORPORATE GOVERNANCE REPORT DELIVERING STRONG GOVERNANCE The Board recognises the value and importance of high standards of corporate governance and observes the requirements of the Corporate Governance Code published by the Quoted Companies Alliance (QCA). Compliance The Company complies with all the provisions of the QCA with the exception of the following: • Nomination Committee: The Company does not have a separate Nomination Committee as the Board is small and relatively stable. Any appointments are for the matter of the Board as a whole. • Audit Committee: The roles and responsibilities of the Audit Committee can be found on page 29 and a separate Audit Committee Report is not produced. • Board evaluation: There has been no formal evaluation of the Board. It is anticipated that this will occur in the future. Principle 1: Establish a strategy and business model which promote long-term value for shareholders Fulcrum is the UK’s market-leading independent multi-utility infrastructure and services provider and is committed to achieving its aim of being the nation’s first choice utility partner. Business model: • Infrastructure: Design and Build: Growing the Group’s gas, electricity and metering infrastructure sales across mainland UK. • Utility Assets: Own and Operate: Creating long-term, secure income by increasing our ownership of utility assets internally built by Fulcrum and acquired externally from external utility partners. Our strategic objectives: • To continue to grow the Group’s established share in the nation’s gas and multi-utility infrastructure markets. • To utilise the Group’s enhanced electrical capabilities to capitalise on growth opportunities in the electricity infrastructure market, including the rapid expansion of the UK’s EV charging infrastructure. • To capitalise on the market opportunities now available via the Group’s newly developed smart metering business. • To continue to sustainably grow the Group’s utility asset base through internal and external asset purchases, whilst closely managing the Group’s working capital. We remain confident in our ability to deliver incremental value to our stakeholders and a progressive dividend. Our full investment proposition can be found on our website: http://www.fulcrumutilityserviceslimited.co.uk/investment-proposition. Further detail on the Group’s strategy and business model are provided on pages 2 to 7 Governance structure The Board Philip Holder (Chairman) Martin Harrison Hazel Griffiths (resigned 31 May 2019) Stephen Gutteridge Wayne Hayes Ian Foster (resigned 20 March 2019) Daren Harris (appointed 24 June 2019) Audit Committee Remuneration Committee Philip Holder (Chairman) Stephen Gutteridge Stephen Gutteridge (Chairman) Philip Holder 26 Corporate Governance Principle 2: Seek to understand and meet shareholder needs and expectations The Board is committed to establishing and maintaining good relations with the Company’s shareholders as they provide good perspectives on, inter alia, corporate governance matters and strategy. Martin Harrison has responsibility for maintaining appropriate communications with shareholders and analysts, advised by the Group’s broker, Cenkos Securities plc, and financial PR consultants, Camarco. The Company maintains regular dialogue with investors to discuss the Group’s performance and strategy, through regular results roadshows, deal specific meetings, Annual General Meetings and other corporate events. The Non-Executive Chairman is also available for discussions with shareholders as required or requested. The Company monitors the constituents of its share register to ensure that its investor relations communications are appropriately co-ordinated with its shareholder base. The Board is provided with reports produced by equity analysts and the results of consultations are discussed at Board meetings. In addition, the feedback received following investor presentations or meetings with shareholders and analysts is shared with the Board. The Group responds formally to all queries and requests for information from existing and prospective shareholders. In addition, the Group seeks to regularly update shareholders through stock exchange announcements and wider press releases on its activities. All Directors attend the Company’s Annual General Meeting and are available to answer questions at the meeting or privately. The Chairman is also available for discussions with shareholders as required or requested. Published information, including regulatory news, is available on the Group’s website, http://www.fulcrumutilityserviceslimited.co.uk. Principle 3: Take into account wider stakeholder and social responsibilities and their implications for long-term success Engaging with our stakeholders strengthens our relationships and helps us make better business decisions to deliver on our commitments. The Board is regularly updated on wider stakeholder engagement feedback to stay abreast of stakeholder insights into the issues that matter most to them and our business, and to enable the Board to understand and consider these issues in decision-making. The Strategic Report in the Group’s Annual Report provides further details on the Group’s business model and our commitment to sustainability and corporate responsibility. The Group’s employees are at the heart of all that we achieve and we are committed to ensuring that we have the right people working with us and we manage this process through a robust people strategy. Their skill, commitment, drive and enthusiasm are vitally important to the long-term success of our business and we believe that sustained investment in our people’s development and welfare builds a stronger business. We maintain communication with our employees through a number of formats, including individual one-to-one sessions, informal cross-functional sessions with the Chief Executive Officer, team meetings and whole Group “Spirit” updates. The Employee Business Forum, which contains representatives from all areas of the business, meets on a quarterly basis, with the Chief Executive Officer and other members of the Executive Team invited to attend. We continue to evolve our approach to employee engagement and undertook two people surveys in the year. Their purpose is to achieve a greater understanding of employee experience. Safety is paramount in our organisation. Our SAFE initiative details the fundamental safety behaviours expected of all Fulcrum people. It is our policy to organise and maintain safe working arrangements and to protect the environment from unnecessary damage whilst we achieve profit growth. We work in an industry that contains inherent risks, so ensuring safety comes first in all that we do is paramount. We remain committed to promoting safe behaviour and demonstrate care for the environment, actively demonstrating excellence in health, safety, environmental, engineering and quality management wherever we work, and displaying the spirit of SAFE at all times. We continually challenge and evolve internal and external constraints with the aim of simplifying the way we work, embedding systems and automation to drive efficiencies and encouraging our people to propose innovative ways of working. We continue to develop low-cost applications for the mobile devices used by the construction teams to improve communications with customers and streamline internal processes to help drive down the cost of delivery. In line with our aim of being the nation’s first choice utility partner, we are committed to being the most customer-focused utility services partner. To gauge how well our customer-centric approach is being received, we request feedback on our performance on every project we deliver, which we use to develop our services. We continue to achieve an encouraging result, with 80.0% of customers rating our service as “great” (9 or 10 out of 10) (2018: 78.0%), and whilst we are pleased that an increasing number of customers rated us as “great” we continue to push for ever higher levels of customer satisfaction. We work as one team, in partnership with our suppliers and subcontractors, to share knowledge and expertise and improve working practices for all parties where possible. We are in regular dialogue with our suppliers and subcontractor base and are committed to ensuring the integrity of our supply chain, which we confirmed in our anti-slavery and anti-human trafficking statement in early 2018. Principle 4: Embed effective risk management, considering both opportunities and threats, throughout the organisation The Directors are responsible for the Group’s system of internal control and for reviewing its effectiveness, whilst the role of management is to implement Board policies on risk management and control. It should be recognised that the Group’s system of internal control is designed to manage, rather than eliminate, the risk of failure to achieve the Group’s business objectives and can only provide reasonable, and not absolute, assurance against material misstatement or loss. The Group operates a series of controls to meet its needs. These controls include, but are not limited to, a clearly defined organisational structure, written policies, a comprehensive annual strategic planning and budgeting process and detailed monthly reporting. The annual budget is approved by the Board as part of its normal responsibilities. In addition, the budget figures are regularly reforecast to facilitate the Board’s understanding of the Group’s overall position throughout the year and this reforecast is reported to the Board in addition to the reporting of actual results during the year. In terms of risk management, the Audit Committee receives reports as and when required from management and the external auditors concerning the system of internal control and any material control weaknesses. Any significant risk issues are referred to the Board for consideration. The Board has considered the need for an internal audit function but has concluded that, at this stage in the Group’s development, the internal control systems in place are appropriate for the size and complexity of the Group. 27 Fulcrum Utility Services Limited Annual Report and Accounts 2019 CORPORATE GOVERNANCE REPORT CONTINUED Principle 5: Maintaining the Board as a well-functioning, balanced team led by the Chair The Board currently comprises the Non-Executive Chairman, two Executive Directors and two other Non-Executive Directors. The Executive Directors are supported by independent Non-Executive Directors with wide-ranging experience; the Board profiles are provided on pages 22 and 23. Recently there have been changes to the Board. Ian Foster, Chief Operating Officer (Gas), resigned from the Board on 20 March 2019 and retired on 31 March 2019. Hazel Griffiths resigned on 31 May 2019 and left the business on 28 June 2019. A new Chief Financial Officer, Daren Harris, has been appointed and joined the Group and its Board on 24 June 2019. Of the Non-Executive Board members, Philip Holder and Stephen Gutteridge are considered to be independent. Wayne Hayes is deemed not to be independent due to his shareholdings. The Board is satisfied that it has a suitable balance between independence and knowledge of the Group, to enable it to discharge its duties and responsibilities effectively. The Board operates both formally, through Board and Committee meetings, and informally, through regular contact amongst Directors and senior executives. The Board has a formal schedule of matters reserved for its consideration and decision, which is reviewed annually by the Board. The schedule includes the approval of the Group’s strategy, approval of capex over £100k, annual and half year results and trading updates, review of performance, dividend policy, monitoring risk and ensuring adequate financial controls are available. The Board is supplied with information in a timely manner, in a form and quality appropriate to enable it to discharge its duties. The Board meets regularly (at least nine times a year), and there is contact between meetings to progress the Company’s business. Attendance by Directors at meetings of the Board and various Committees is set out on pages 22 and 23. Following the acquisition of Dunamis, Board meetings are held at subsidiary offices at least twice a year. These visits include meeting with employees and updates from senior leaders. The Company has effective procedures in place to monitor and deal with conflicts of interest. The Board is aware of the other commitments and interests of its Directors, and changes to these commitments and interests are reported to and, where appropriate, agreed with the rest of the Board. Principle 6: Ensure that between them the Directors have the necessary up-to-date experience, skills and capabilities The Board is satisfied that between the Directors, it has an appropriate balance of industry, financial and public market experience to operate effectively. During the year females comprised 20.0% of the Board. Company secretarial services are outsourced to TMF Global Services (UK) Limited. All Directors retire by rotation at regular intervals in accordance with the Company’s Articles of Association. The Board makes decisions regarding the appointment and removal of Directors. The Company’s Articles of Association require that all Directors must stand for re-election at least once every three years and that any new Directors appointed during the year must stand for election at the AGM immediately following their appointment. In the current year, Martin Harrison and Daren Harris will stand for re-election. The Executive Directors are expected to devote the whole of their time, attention and ability to their duties, whereas the Non-Executives have a lesser time commitment. Training is available on request, where appropriate, and the Directors can obtain independent professional advice at the Group’s expense in the performance of their duties as Directors. The Board is kept up to date with legal, regulatory and governance matters by the Company Secretary. The same Non-Executive Directors also have other external appointments which help keep their skillset up to date. The biographies of the current Directors are provided on pages 22 and 23. Principle 7: Evaluate Board performance based on clear and relevant objectives, seeking continuous improvement The Board has, to date, informally reviewed the effectiveness of its performance as a unit, as well as that of its Committees and the individual Directors. This year, a formal internal evaluation of the Board’s performance and that of its two principal Committees will be performed by the Senior Non-Executive Director and an evaluation of the performance of individual Directors will be undertaken. The review will include: • assessment and monitoring of the Company’s strategy; • monthly Board meeting agenda and information flow; • evaluation of risk and social responsibilities including anti-bribery policies and environmental risks; and • the role and performance of the Board Committees. Following the results of the review, the Board objectives for 2019/20 will be evaluated and updated as necessary. We nurture a culture that drives and supports the achievement of the Group’s strategic objectives. Divisional, team and individual objectives are set in line with these wider Group objectives and our Spirit values. Performance against these criteria is monitored regularly and the Group promotes a high performance culture that not only drives and incentivises operation in line with its strategic objectives and values, but also recognises and rewards people and teams who go above and beyond to demonstrate this. Succession planning both at Board level and within our senior management team is vital to the stability and continued growth of the Group and we place significant emphasis on this. All employees have contracts of employment which have notice periods commensurate with their seniority to ensure sufficient time to recruit and ensure a smooth handover where required. 28 Corporate Governance Principle 8: Promote a culture that is based on ethical values and behaviours The Board understands the importance of setting the right culture within the Group. One of the ways we ensure that the Board’s strategy and good governance are instilled into the culture of our business is through regular communications with our senior employees. The Executive Directors regularly meet with operational management teams and employees across our operating businesses. To monitor and promote a healthy corporate culture, the Board clearly communicates the Group’s strategic objectives, values and expectations to its people and places strong emphasis on its corporate responsibility. In particular, the Board promotes a culture that has a clear focus on safety, customer service and people. The Board aims to lead by example and do what is in the best interest of the Company and regularly meets with employees in our open plan head office or at formal meetings or events. The specific activities promoted to achieve the desired culture are described on pages 20 and 21. Our leaders and managers play a pivotal role in employee engagement and we have invested in leadership development that is focused on ensuring our people managers have the skills and tools they need to create highly motivated, high performing and engaged teams. We continue to evolve our approach to employee engagement and undertook two people surveys in the year. Their purpose is to achieve a greater understanding of employee experience. We launched our new values in June 2017; these six values express the Spirit of Fulcrum and its people: Safe, Partnership, Improvement, Reliability, Integrity and Together. There are regular business-wide communications, including a monthly “Spirit” presentation led by Martin Harrison, and supported by the Executive Team. Principle 9: Maintain governance structures and processes that are fit for purpose and support good decision-making by the Board All corporate policies are approved by the Chief Executive, to highlight to all employees the importance to the Board of high levels of governance and business conduct. The Board is responsible for the long-term success of the Company. There is a formal schedule of matters reserved to the Board. It is responsible for overall Group strategy, approval of capex over £100k, approval of the annual and interim results, annual and quarterly budgets, dividend policy, and Board structure. It monitors the exposure to key business risks and reviews the strategic direction of the operating divisions. The Chairman is responsible for running the business of the Board and for ensuring appropriate strategic focus and direction. The Chief Executive Officer is responsible for proposing the strategic focus to the Board, implementing it once it has been approved and overseeing the management of the Company through the Executive Team. The Board is supported by the Audit and Remuneration Committees. As the Board is small, there is and will be no separate Nominations Committee and the appointment of new Directors and succession planning are considered by the Board as a whole. Each Committee has access to such resources, information and advice as it deems necessary, at the cost of the Company, to enable the Committee to discharge its duties. The Chairman of the Audit Committee is Philip Holder, with Stephen Gutteridge as the other Non-Executive member. No one other than the Audit Committee’s Chairman and Non-Executive member is entitled to be present at a meeting of the Audit Committee but the Group’s external auditors, together with the Chief Executive Officer and the Chief Financial Officer, are also invited to attend the meetings. Other Directors and Non-Executives may be invited to attend. The Audit Committee operates under terms of reference agreed with the Board and meets at least twice a year. The Audit Committee considers the adequacy and effectiveness of the risk management and control systems of the Group. It reviews the scope and results of the external audit, its cost effectiveness and the objectivity of the auditors. It also reviews, prior to publication, the interim results, the preliminary announcement and the Annual Report and financial statements. The Chairman of the Remuneration Committee is Stephen Gutteridge, with Philip Holder as the other Non-Executive member. The Chief Executive Officer and Wayne Hayes may be invited to attend. The Committee meets periodically as required and is responsible for overseeing the policy regarding Executive remuneration and for approving the remuneration packages for the Group’s Executive Directors and senior management, including all personnel receiving a salary exceeding £100k per annum and/or a bonus potential of 50% of salary (2018: same). It is also responsible for reviewing incentive schemes for the Group as a whole. Principle 10: Communicate how the Company is governed and is performing by maintaining a dialogue with shareholders and other relevant stakeholders The Group communicates with shareholders through the Annual Report and Accounts, full year and half year announcements, the Annual General Meeting, regulatory news and one-to-one meetings with existing or potential new shareholders throughout the year. Principles 2 and 3 describe our approach to stakeholder engagement in more detail. A range of corporate information is available to shareholders, investors and the public on the Group’s corporate website: http://www.fulcrumutilityserviceslimited.co.uk. By order of the Board Philip Holder Non-Executive Chairman 19 September 2019 29 Fulcrum Utility Services Limited Annual Report and Accounts 2019 REMUNERATION REPORT for the year ended 31 March 2019 Remuneration Committee The Remuneration Committee reviews the performance of each Executive Director and sets the scale and structure of their remuneration and the basis of their service agreement with due regard to the interests of shareholders. To ensure that the Group’s remuneration practices are market competitive, the Committee takes advice from various independent sources. The Board determines the remuneration of each of the Non-Executive Directors with the support of external professional advice if required. No Director participates in any discussion regarding his/her own remuneration. Policy on Executive Directors’ remuneration The policy of the Board is to provide an Executive remuneration package designed to attract, motivate, reward and retain the Executive Directors. The aim of the Group’s remuneration policy is to ensure that the key Executives are appropriately rewarded for their individual contribution to the Group’s performance, commensurate with their duties and responsibilities. The Remuneration Committee believes that shareholders’ interests are best served by providing Executives with remuneration packages which have a significant emphasis on performance related pay through long-term incentive schemes. The Board considers that packages of this nature are consistent with prevailing practice and are necessary to retain and reward Executives of the calibre the Group requires. The Committee meets periodically as required and is responsible for overseeing the policy regarding Executive remuneration and for approving the remuneration packages for the Group’s Executive Directors and senior management, including all personnel receiving a salary exceeding £100k per annum and/or a bonus potential of 50% of salary (2018: same). It is also responsible for reviewing incentive schemes for the Group as a whole. Directors’ interests in share options Martin Harrison Hazel Griffiths Ian Foster The main components of Executive Directors’ remuneration, which can be mirrored with certain senior executives, are basic salary, annual performance related bonus and share options. Basic annual salary Each Executive Director’s basic salary is reviewed regularly by the Committee. In deciding upon an appropriate level of remuneration, the Committee believes that the Group should offer levels of base pay that reflect individual responsibilities compared to similar jobs in comparable companies. Annual bonus payments The Committee establishes the objectives that must be met for an annual cash bonus to be paid. Currently these objectives relate to year-on-year growth in EBITDA and sales order margin. Share option incentives During the year three of the Group’s share schemes: an Enterprise Management Incentive (EMI), an Employee Shareholder Status (ESS) and a Growth Share Scheme (GSS) plan fully vested. At the end of the year the Group operated a Growth Share Scheme (GSS) plan and four SAYE schemes (see note 18). The Committee has responsibility for supervising the schemes and the grant of share options under the schemes. Additional benefits Each Executive Director receives private medical insurance and life assurance cover, pension contributions and a company car or car allowance. Each Non-Executive Director receives life assurance cover. GSS 659,615 376,923 – Directors’ emoluments The remuneration of each of the Directors for the year ended 31 March 2019 is set out as follows: 2019 2018 Salary, fees and bonus £’000 Other benefits £’000 Pension £’000 2019 total £’000 Salary, fees and bonus £’000 Other benefits £’000 Pension £’000 2018 total £’000 Executive Martin Harrison Ian Foster Hazel Griffiths Martin Donnachie Non-Executive Philip Holder Stephen Gutteridge Wayne Hayes Total 291 195 159 – 76 40 36 797 15 17 12 – 4 4 4 56 10 10 8 – – – – 316 222 179 – 80 44 40 28 881 270 173 18 201 72 36 6 776 13 10 2 6 4 4 1 10 6 1 4 – – – 293 189* 21** 211**** 76 40 7*** 40 21 837 * Ian Foster was appointed to the Board on 31 July 2017; as such the remuneration included is for an eight month period in 2018. ** Hazel Griffiths was appointed to the Board on 31 January 2018; as such the remuneration is included for a two month period in 2018. *** Wayne Hayes was appointed to the Board on 5 February 2018; as such the remuneration is included for a two month period in 2018. **** Martin Donnachie resigned in July 2017; as such the remuneration is included for a four month period in 2018. 30 Corporate Governance GROUP DIRECTORS’ REPORT for the year ended 31 March 2019 The Directors present their Annual Report and the audited consolidated financial statements of the Group for the year ended 31 March 2019. Registered office The registered office of Fulcrum Utility Services Limited is PO Box 309, Ugland House, Grand Cayman, KY1-1 104, Cayman Islands. Dividends The Board has proposed a final dividend in respect of FY2019 of 1.5p per share, subject to shareholder approval at the AGM. Directors The Directors who served throughout the year, except as noted below, were as follows: Martin Harrison Hazel Griffiths (resigned from the Board on 31 May 2019) Ian Foster (retired 31 March 2019) Daren Harris (appointed 24 June 2019) Philip Holder Stephen Gutteridge Wayne Hayes Employees The Group’s executive management regularly delivers Company-wide briefings on the Group’s strategy and performance. These briefings contain details of the Group’s financial performance where appropriate. In addition, monthly “Spirit” briefings contain detailed information on the Group’s operational performance for the previous month, as well as updates on customer activity. The Group remains committed to fair treatment of people with disabilities in relation to job applications, training, promotion and career development. Every effort is made to find alternative jobs for those who are unable to continue in their existing job due to disability. The Group takes a positive approach to equality and diversity. The Group promotes equality in the application of reward policies, employment and development opportunities, and aims to support employees in balancing work and personal lifestyles. Substantial shareholdings The Company’s issued share capital comprises ordinary shares of £0.001 each which are listed on AIM, a market operated by the London Stock Exchange (AIM: FCRM). As at 31 March 2019, the issued share capital of the Company was £221,303 comprising 221,303,106 ordinary shares of £0.001 each. Details of the issued share capital of the Company, together with movements in the issued share capital during the year, can be found in note 18 to the financial statements. In accordance with AIM Rule 26, the Company discloses substantial shareholdings on its website: https://www.fulcrumutilityserviceslimited.co.uk/aim-rule-26. Annual General Meeting The Annual General Meeting of the Group is to be held on 9 October 2019. The notice of meeting appears in the document accompanying this report and financial statements. Directors’ interests The Directors and their connected parties held interests in the following number of ordinary shares at 1 April 2018, 31 March 2019 and 31 May 2019. Further information about the Directors’ interests is provided in the Remuneration Report. Philip Holder Stephen Gutteridge Wayne Hayes Martin Harrison Hazel Griffiths Ian Foster * Ian Foster retired on 31 March 2019 and, as such, was not a Director at these dates. Number of ordinary shares 31 May 2019 31 March 2019 1 April 2018 1,004,666 954,666 954,666 149,166 119,166 214,166 4,883,935 4,883,935 4,883,935 3,482,330 3,425,787 208,054 87,345 87,345 49,163 * * – 31 Fulcrum Utility Services Limited Annual Report and Accounts 2019 GROUP DIRECTORS’ REPORT CONTINUED for the year ended 31 March 2019 Auditor The audit was last tendered in 2012 and since then, lead audit partners have been appointed in accordance with audit partner rotation requirements. In line with good governance, the Audit Committee plans to conduct a full audit tender process in respect of the year ending 31 March 2020. Directors’ indemnities and insurance Fulcrum Utility Services Limited indemnifies its officers and officers of its subsidiary companies against liabilities arising from the conduct of the Group’s business, to the extent permitted by law, by the placing of Directors’ and officers’ insurance. The insurance policy indemnifies individual Directors’ and officers’ personal legal liability and cost for claims arising out of actions taken in connection with Group business. Statement of Directors’ responsibilities The Directors of Fulcrum Utility Services Limited (“the Directors”) have accepted responsibility for the preparation of the Annual Report, the Strategic Report, the Directors’ Report and the non-statutory consolidated accounts for the year ended 31 March 2019, which are intended by them to give a true and fair view of the state of affairs of the Group and of the profit for that period. They have decided to prepare the non-statutory consolidated accounts in accordance with International Financial Reporting Standards as adopted by the European Union (“IFRSs as adopted by the EU”). In preparing these non-statutory consolidated accounts, the Directors have: • selected suitable accounting policies and applied them consistently; • made judgements and estimates that are reasonable and prudent; • stated whether they have been prepared in accordance with IFRSs as adopted by the EU; • assessed the Company’s ability to continue as a going concern, disclosing, as applicable, matters related to going concern; and • used the going concern basis of accounting unless they either intend to liquidate the Company or to cease operations, or have no realistic alternative but to do so. The Directors are responsible for such internal control as they determine is necessary to enable the preparation of non-statutory consolidated accounts that are free from material misstatement, whether due to fraud or error, and have general responsibility for taking such steps as are reasonably open to them to safeguard the assets of the Company and to prevent and detect fraud and other irregularities. The Directors are responsible for the maintenance and integrity of the corporate and financial information included on the Company’s website. Legislation in the UK governing the preparation and dissemination of financial statements may differ from legislation in other jurisdictions. The Company is incorporated in the Cayman Islands and domiciled in the UK. The Company is not required to prepare audited financial statements under Cayman Islands company law; however, the Company is required under AIM Rule 19 to provide shareholders with annual audited consolidated financial statements for the year ended 31 March 2019. The Directors have requested KPMG LLP (KPMG) to undertake a non-statutory audit of the Company’s consolidated financial statements in order to discharge their obligations under AIM Rule 19. The audit report issued by KPMG has therefore been addressed to the Company and not the members, as would be the case with a statutory audit. Statement of disclosure of information to auditor As at the date this report was signed, so far as each of the Directors is aware, there is no relevant information of which the auditor is unaware and each Director has taken all steps that he or she ought to have taken as a Director in order to make himself or herself aware of any relevant audit information and to establish that the auditor is aware of that information. Going concern After making enquiries, we, the Directors, have a reasonable expectation that the Group has adequate resources to continue in operational existence for the foreseeable future. We therefore continue to adopt the going concern basis in preparing the financial statements. The basis on which this conclusion has been reached is set out on page 43 which is incorporated by reference here. On behalf of the Board Martin Harrison Chief Executive Officer 19 September 2019 32 Corporate Governance Independent auditor’s report to the members of Fulcrum Utility Services Limited 1. Our opinion is unmodified We have audited the non-statutory financial statements of Fulcrum Utility Services Limited (“the Group”) for the year ended 31 March 2019 which comprise the consolidated statement of comprehensive income, consolidated statement of changes in equity, consolidated balance sheet, consolidated cash flow statement, and the related notes, including the accounting policies in note 1. In our opinion: – the Group non-statutory financial statements give a true and fair view of the state of the Group’s affairs as at 31 March 2019 and of the Group’s profit for the year then ended; and Overview Materiality: Group non-statutory financial statements as a whole Key audit matters Recurring risks – the Group non-statutory financial statements have been properly prepared in accordance with International Financial Reporting Standards as adopted by the European Union (“IFRSs as adopted by the EU”). New Basis for opinion We conducted our audit in accordance with International Standards on Auditing (UK) (ISAs (UK)) and applicable law. Our responsibilities are described below. We have fulfilled our ethical responsibilities under, and are independent of the Group in accordance with, UK ethical requirements including the FRC Ethical Standard as applied to listed entities. We believe that the audit evidence we have obtained is a sufficient and appropriate basis for our opinion. £360k (2018: £385k) 5.0% (2018: 5.0%) of consolidated profit before exceptional items and tax vs 2018 Revenue recognition on contracts ongoing at the year end Valuation of goodwill and intangible assets The impact of uncertainties due to the UK exiting the European Union on our audit Going concern Valuation of utility assets and assets under construction 33 Fulcrum Utility Services Limited Annual Report and Accounts 2019 INDEPENDENT AUDITOR’S REPORT CONTINUED to the members of Fulcrum Utility Services Limited 2. Key audit matters: including our assessment of risks of material misstatement Key audit matters are those matters that, in our professional judgement, were of most significance in the audit of the financial statements and include the most significant assessed risks of material misstatement (whether or not due to fraud) identified by us, including those which had the greatest effect on: the overall audit strategy; the allocation of resources in the audit; and directing the efforts of the engagement team. We summarise the key audit matters in arriving at our audit opinion below. These matters were addressed in the context of our audit of the non-statutory financial statements as a whole, and in forming our opinion thereon, and we do not provide a separate opinion on these matters. In the prior year we had valuation of acquired intangible assets as a Key Audit Matter given the judgement in respect of the recognition and valuation of intangible assets. This risk is covered in our Key Audit Matter in relation to valuation of goodwill and intangibles in the current year. The risk Our response The impact of uncertainties due to the UK exiting the European Union on our audit Refer to page 16 (principal risks). Unprecedented levels of uncertainty All audits assess and challenge the reasonableness of estimates, in particular as described in revenue recognition on contracts ongoing at the year end and valuation of goodwill and intangible assets below, and related disclosures and the appropriateness of the going concern basis of preparation of the financial statements (see below). All of these depend on assessments of the future economic environment and the Group’s future prospects and performance. Brexit is one of the most significant economic events for the UK and at the date of this report its effects are subject to unprecedented levels of uncertainty of outcomes, with the full range of possible effects unknown. We developed a standardised firm-wide approach to the consideration of the uncertainties arising from Brexit in planning and performing our audits. Our procedures included: – Our Brexit knowledge – considered the Directors’ assessment of Brexit related sources of risk for the Group’s business and financial resources compared with our own understanding of the risks. We considered the Directors’ plans to take action to mitigate the risks. – Sensitivity analysis – when addressing valuation of goodwill and intangible assets and other areas that depend on forecasts, we compared the Directors’ analysis to our assessment of the full range of reasonably possible scenarios resulting from Brexit uncertainty and, where forecast cash flows are required to be discounted, considered adjustments to discount rates for the level of remaining uncertainty. – Assessing transparency – as well as assessing individual disclosures as part of our procedures on revenue recognition on contracts ongoing at the year end and valuation of goodwill and intangible assets, we considered all of the Brexit related disclosures together, including those in the Strategic Report, comparing the overall picture against our understanding of the risks. However, no audit should be expected to predict the unknowable factors or all possible future implications for a Group and this is particularly the case in relation to Brexit. Going concern Disclosure quality Our procedures included: – Funding assessment – assessed the committed level of financing available to the Group for at least the next 12 months through consideration of the facility agreement. We challenged the Directors’ assumptions by considering our own expectations based on our knowledge of the entity and experience of the industry in which it operates. – Historical comparisons – considered the Group’s historical budgeting accuracy, by assessing actual performance against budget. – Benchmarking assumptions – benchmarked the assumptions behind the cash flow forecasts to third party evidence and compared management’s assumed growth to economic forecasts. – Sensitivity analysis – considered sensitivities over the level of available financial resources indicated by the Group’s financial forecasts taking account of reasonably possible (but not unrealistic) adverse effects that could arise from these risks individually and collectively. Refer to note 1 on page 43 (accounting policy). The financial statements explain how the Board has formed a judgement that it is appropriate to adopt the going concern basis of preparation for the Group. That judgement is based on an evaluation of the inherent risks to the Group’s business model and how those risks might affect the Group’s financial resources or ability to continue operations over a period of at least a year from the date of approval of the financial statements. The risk most likely to adversely affect the Group’s available financial resources over this period is: – the delays to infrastructure projects following suspension of the capacity market auction process. There are also less predictable but realistic second order impacts, such as the outlook of the macroeconomic conditions of the UK, following Brexit, which could result in a rapid reduction of available financial resources. 34 Financial Review 2. Key audit matters: including our assessment of risks of material misstatement continued The risk Our response Going concern continued Revenue recognition on contracts ongoing at the year end (£14.0 million; 2018 restated: £18.0 million) Refer to page 46 (accounting policy) and page 52 (financial disclosures). The risk for our audit was whether or not those risks were such that they amounted to a material uncertainty that may have cast significant doubt about the ability to continue as a going concern. Had they been such, then that fact would have been required to have been disclosed. Subjective estimate Revenue is recognised based on a measure of progress towards satisfaction of the performance obligation, by reference to costs incurred as a percentage of total expected costs. There is a level of judgement involved in determining this percentage completion as well as estimation in determining the expected outcome of the contract, both in terms of costs to complete and consideration to be received, resulting in a greater risk of error. The risk is specific to contracts which are ongoing at the year end as changes to these estimates and judgements could give rise to material variances in the amount of revenue recognised at the year end. IFRS 15: Revenue Recognition is effective for the first time in the current year. As this is the first year of adoption, inherently there is a risk of error occurring. – Evaluating Directors’ intent – evaluated the achievability of the actions the Directors consider they would take to improve the position should the risks materialise. – Assessing transparency – assessed the completeness and accuracy of the matters covered in the going concern disclosure by assessing the reasonableness of risks and uncertainties specified by the disclosure against our findings from our evaluation of management’s assessment of going concern. Using a variety of quantitative and qualitative criteria we selected a sample of contracts to assess and challenge the most significant contract assumptions. These criteria included total project value and % completion. Our procedures included: – Historical comparisons – evaluated the financial performance of contracts against budget and historical trends and investigated unexplained variances identified for a sample of open contracts at the previous year end; this included comparing total costs incurred versus estimated costs. – Test of detail – analysed costs allocated to a sample of contracts, assessing the appropriateness of allocation and agreed a sample of costs to date to supporting documentation, such as purchase invoices or payroll records. – Personnel interviews – for a sample of contracts challenged the estimated costs to completion through discussion with the relevant project quantitative surveyors and their assessment of project status. – Test of detail – inspected a sample of contract agreements for key clauses and considered whether these have been appropriately reflected in the amounts recognised, including evidencing signed customer acceptance forms and signed contractual variations. – Reperformance – recalculated revenue recognised for a sample of contracts based on the % completion assessed through costs incurred to date versus estimated costs to complete. – Accounting analysis – assessed the Group’s revenue recognition policy in light of the adoption of IFRS 15 in the year. Tested a sample of contracts to assess if the transition adjustments made were recorded appropriately. – Assessing transparency – assessed the adequacy of the Group’s disclosures in respect of revenue recognition, the impact of adopting IFRS 15 and the judgements and estimates set out in note 1. Valuation of goodwill and intangible assets (£27.1 million; 2018: £27.8 million) Refer to page 45 (accounting policy) and pages 59 and 60 (financial disclosures). Subjective estimate Our procedures included: The Group has goodwill and intangible assets totalling £27.1 million. The estimated recoverable amount of a cash-generating unit (to which goodwill and other intangible assets are allocated) is subjective due to the inherent uncertainty involved in forecasting and discounting future cash flows. The effect of these matters is that, as part of our risk assessment, we determined that the value in use of goodwill has a high degree of estimation uncertainty, with a potential range of reasonable outcomes greater than our materiality for the financial statements as a whole, and possibly many times that amount. The financial statements (note 14) disclose the sensitivity estimated by the Group. – Our sector experience – evaluated assumptions used, in particular those relating to forecast revenue growth, profit margins and discount rates, using our own valuation specialists. – Benchmarking assumptions – compared the Group’s assumptions to externally derived data in relation to key inputs such as projected economic growth, cost inflation and discount rates. – Sensitivity analysis – performed breakeven analysis on the assumptions noted above. – Comparing valuations – compared the sum of the discounted cash flows to the Group’s market capitalisation to assess the reasonableness of those cash flows. – Assessing transparency – assessed whether the Group’s disclosures about the sensitivity of the outcome of the impairment assessment to changes in key assumptions reflected the risks inherent in the valuation of goodwill. 35 Fulcrum Utility Services Limited Annual Report and Accounts 2019 INDEPENDENT AUDITOR’S REPORT CONTINUED to the members of Fulcrum Utility Services Limited 2. Key audit matters: including our assessment of risks of material misstatement continued Valuation of utility assets and assets under construction (Utility assets: £34.7 million; 2018 restated: £16.7 million; Utility assets under construction: £3.9 million; 2018: £2.6 million) Refer to page 44 (accounting policy) and pages 57 and 58 (financial disclosures). The risk Our response Subjective valuation Our procedures included: Utility assets and assets under construction are held at fair value at the balance sheet date, which is established with reference to future earnings. No quoted market price is available. Due to the magnitude of the balance and the subjective nature of the valuations, there is a significant risk over the application of estimates and judgements inherent in the valuation, and therefore one of the key areas that our audit focused on. Utility assets are subject to annual revaluation. An independent, third party valuation has been completed as at 31 March 2019 and has been used to determine the fair value of completed Utility assets held at the balance sheet date. Pipeline assets under construction at the balance sheet date were not part of the third party valuation and management has assessed the fair value using its own valuation model. The fair value requires significant judgement over the choice of valuation methodology to apply, as well as significant estimation, in particular over the key assumptions of the estimated price and the volume of gas transportation. – Methodology choice – held discussions with the Group’s external Utility asset valuers to determine the valuation methodology used and challenged the appropriateness of the valuation basis selected. We involved our own valuation specialists to assist the audit team to critically assess the methodology used in the valuation appraisal. – Our valuations experience – with the assistance of our internal valuation specialist, challenged the Group’s external Utility asset valuer on key judgements affecting utility asset valuations, such as discount rates, the calculation of the free cash flows of the assets and useful economic lives. – Benchmarking assumptions – compared key underlying financial data inputs to the utility asset valuation by benchmarking these to independent market data, such as published gas transportation prices. – External valuer’s credentials – evaluated the competence, capabilities, objectivity and professional qualifications of the valuer engaged by the Group through discussion with the valuers, evidenced relevant qualifications, reviewed the terms of the engagement and read and analysed its valuation report, using our own valuation specialists. – Tests of detail – for Utility assets under construction, assessed the methodology used by management in determining fair value and obtained evidence of the inputs and assumptions used in the calculation, agreeing inputs to external, third party evidence where possible, such as published gas transportation prices. – Tests of detail – for Utility assets under construction, assessed the percentage of completion for a sample of contracts ongoing at the year end through obtaining support for the estimate of the total costs to complete and agreed a sample of costs to date to supporting documentation, such as purchase invoices or payroll records. – Re-performance – for Utility assets under construction, assessed the accuracy of management’s own fair value assumptions by replicating the valuation methodology using an independent model, and considering the accuracy of the key assumptions against the actual outcome such as gas transportation volumes, gas prices, etc. – Assessing transparency – assessed the adequacy of the Group’s disclosures in respect of the valuation techniques and significant unobservable inputs employed in the valuation set out in note 12. 36 Financial Review 3. Our application of materiality and an overview of the scope of our audit Materiality for the Group financial statements as a whole was set at £360k (2018: £385k), determined with reference to a benchmark of profit before tax adding back exceptional items (of which it represents 5.0% (2018: 5.0%)). Profit before exceptional items and tax £7.3m (2018: £7.7m) Group materiality £360k (2018: £385k) £360k Whole financial statements materiality (2018: £385k) We agreed to report to the Audit Committee any corrected or uncorrected identified misstatements exceeding £18k (2018: £19k), in addition to other identified misstatements that warranted reporting on qualitative ground. The Group team performed the audit of the Group as if it was a single aggregated set of financial information. The audit was performed using the materiality level set out above. The Group team performed procedures on the exceptional items excluded from profit before exceptional items and tax. 95+5+I 4. We have nothing to report on going concern The Directors have prepared the non-statutory financial statements on the going concern basis as they do not intend to liquidate the Group or to cease their operations, and as they have concluded that the Group’s financial position means that this is realistic. They have also concluded that there are no material uncertainties that could have cast significant doubt over their ability to continue as a going concern for at least a year from the date of approval of the non-statutory financial statements (“the going concern period”). Our responsibility is to conclude on the appropriateness of the Directors’ conclusions and, had there been a material uncertainty related to going concern, to make reference to that in this audit report. However, as we cannot predict all future events or conditions and as subsequent events may result in outcomes that are inconsistent with judgements that were reasonable at the time they were made, the absence of reference to a material uncertainty in this auditor’s report is not a guarantee that the Group will continue in operation. We identified going concern as a key audit matter (see section 2 of this report). Based on the work described in our response to that key audit matter, we are required to report to you if: – we have concluded that the use of the going concern basis of accounting is inappropriate or there is an undisclosed material uncertainty that may cast significant doubt over the use of that basis for a period of at least a year from the date of approval of the non statutory financial statements. We have nothing to report in these respects. Normalised profit before tax Group materiality £18k Misstatements reported to the Audit Committee (2018: £19k) 37 Fulcrum Utility Services Limited Annual Report and Accounts 2019 INDEPENDENT AUDITOR’S REPORT CONTINUED to the members of Fulcrum Utility Services Limited 5. We have nothing to report on the other 7. The purpose of our audit work and to whom we owe our responsibilities Our report has been prepared for the Group solely in connection with the requirement of Rule 19 of the AIM Rules for Companies (“AIM Rules”) that the Group publish annual audited accounts which must be sent to its shareholders and the requirements of Rules 20 and 26 of the AIM Rules that any document provided to shareholders be made available by the Group on a website. Our audit work has been undertaken so that we might state to the Company those matters we are required to state to it in an auditor’s report and for no other purpose. To the fullest extent permitted by law, we do not accept or assume responsibility to anyone other than the Company’s members, as a body, for our audit work, for this report, or for the opinions we have formed. Frances Simpson (Senior Statutory Auditor) for and on behalf of KPMG LLP, Statutory Auditors Chartered Accountants 1 Sovereign Square Sovereign Street Leeds LS1 4DA 19 September 2019 information in the Annual Report The Directors are responsible for the other information presented in the Annual Report together with the non-statutory financial statements. Our opinion on the non-statutory financial statements does not cover the other information and, accordingly, we do not express an audit opinion or, except as explicitly stated below, any form of assurance conclusion thereon. Our responsibility is to read the other information and, in doing so, consider whether, based on our non-statutory financial statements audit work, the information therein is materially misstated or inconsistent with the non-statutory financial statements or our audit knowledge. Based solely on that work we have not identified material misstatements in the other information. Strategic Report and Directors’ Report Based solely on our work on the other information: – we have not identified material misstatements in the Strategic Report and the Directors’ Report; and – in our opinion the information given in those reports for the financial year is consistent with the non-statutory financial statements. 6. Respective responsibilities Directors’ responsibilities As explained more fully in their statement set out on page 32, the Directors are responsible for: the preparation of the non-statutory financial statements including being satisfied that they give a true and fair view; such internal control as they determine is necessary to enable the preparation of non-statutory financial statements that are free from material misstatement, whether due to fraud or error; assessing the Group’s ability to continue as a going concern, disclosing, as applicable, matters related to going concern; and using the going concern basis of accounting unless they either intend to liquidate the Group or to cease operations, or have no realistic alternative but to do so. Auditor’s responsibilities Our objectives are to obtain reasonable assurance about whether the non-statutory financial statements as a whole are free from material misstatement, whether due to fraud or error, and to issue our opinion in an auditor’s report. Reasonable assurance is a high level of assurance, but does not guarantee that an audit conducted in accordance with ISAs (UK) will always detect a material misstatement when it exists. Misstatements can arise from fraud or error and are considered material if, individually or in aggregate, they could reasonably be expected to influence the economic decisions of users taken on the basis of the non-statutory financial statements. A fuller description of our responsibilities is provided on the FRC’s website at www.frc.org.uk/auditorsresponsibilities. 38 Financial Review CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME for the year ended 31 March 2019 Revenue Cost of sales – underlying Cost of sales – exceptional items Total cost of sales Gross profit Administrative expenses – underlying Administrative expenses – exceptional items Total administrative expenses Operating profit Net finance (expense)/income Profit before taxation Taxation Profit for the period attributable to equity holders of the parent Other comprehensive income Items that will never be reclassified to profit: Revaluation of utility assets Surplus arising on utility assets internally adopted in the year Reversal of prior increase of utility assets Deferred tax on items that will never be reclassified to profit or loss Total comprehensive income for the year Profit per share attributable to the owners of the business Basic Diluted Year ended 31 March 2019 £’000 Notes Restated Year ended 31 March 2018 £’000 2,4 48,905 40,634 (29,708) (24,232) 5 (883) – (30,591) (24,232) 18,314 16,402 (11,874) (8,747) (411) (823) (12,285) (9,570) 6,029 6,832 (60) 59 5,969 (1,035) 6,891 (235) 4,934 6,656 11,380 1,100 (2,544) (1,848) 334 813 – (62) 13,022 7,741 2.3p 2.2p 3.7p 3.5p 5 6 9 21 12 21 9 11 11 Adjusted EBITDA is the basis that the Board uses to measure and monitor the Group’s financial performance as it is a more accurate reflection of the commercial reality of the Group’s business. Further details of Alternative Performance Measures are included in note 3. Operating profit Equity-settled share based payment charges Exceptional items Depreciation and amortisation Adjusted EBITDA 18 5 12,14 Surplus arising on utility assets internally adopted in the year included within other comprehensive income 21 Adjusted EBITDA plus increase in value of internally adopted utility assets included within other comprehensive income 6,029 115 1,294 2,587 10,025 1,100 6,832 35 823 890 8,580 813 11,125 9,393 39 Fulcrum Utility Services Limited Annual Report and Accounts 2019 CONSOLIDATED STATEMENT OF CHANGES IN EQUITY for the year ended 31 March 2019 Balance at 1 April 2017 as previously reported Adjustment for IFRS 15 Restated balance at 1 April 2017 Total comprehensive income for the period (restated) Profit for the year Revaluation surplus Surplus arising on utility assets internally adopted in the year Revaluation reserve transfer Deferred tax liability Transactions with equity shareholders Equity-settled share based payment Dividends Issue of new shares Restated balance at 31 March 2018 Total comprehensive income for the period Profit for the year Revaluation surplus on independent valuation Surplus arising on utility assets internally adopted in the year Exceptional items – fixed asset impairment Deferred tax liability Transactions with equity shareholders Equity-settled share based payment Dividends Capital transfer Issue of new shares Balance at 31 March 2019 Notes 6,23 21 21 21 9,21 18 10,20 19,20 23 21 21 21 9,21 18 10,20 20,23 19,20 Share capital £’000 167 – 167 – – – – – – – 44 211 – – – – – – – – 10 221 Share premium £’000 Revaluation reserve £’000 Merger reserve £’000 Retained earnings £’000 Total equity £’000 14,101 – 3,343 229 14,101 3,572 – – – – – – (3,494) 10,435 – 334 813 (8) (62) – – – – – – – – – – – – – 11,347 (7,165) 10,446 (229) – (7,394) 10,446 6,656 – – 8 – 35 – – 6,656 334 813 – (62) 35 (3,494) 21,826 21,042 4,649 11,347 (695) 36,554 – – – – – – (4,738) (16,605) 511 210 – 11,380 1,100 (2,544) (1,848) – – – – – – – – – – – – – 4,934 – – – – 115 – 16,605 – 4,934 11,380 1,100 (2,544) (1,848) 115 (4,738) – 521 12,737 11,347 20,959 45,474 40 Financial Review CONSOLIDATED BALANCE SHEET as at 31 March 2019 Non-current assets Property, plant and equipment Intangible assets Deferred tax assets Current assets Contract assets Inventories Trade and other receivables Cash and cash equivalents Total assets Current liabilities Trade and other payables Contract liabilities Borrowings Provisions Non-current liabilities Deferred tax liabilities Total liabilities Net assets Equity Share capital Share premium Revaluation reserve Merger reserve Retained earnings Total equity 31 March 2019 £’000 Notes Restated 31 March 2018 £’000 Restated 1 April 2017 £’000 12 14 9 15 16 27 24 25 26 28 39,314 27,069 1,707 19,921 27,797 2,194 13,199 2,567 1,921 68,090 49,912 17,687 9,132 607 6,392 6,824 10,377 3,512 209 6,777 9,431 – 4,797 12,561 22,955 26,794 20,870 91,045 76,706 38,557 (10,946) (10,743) (5,516) (26,343) (25,900) (21,910) (3,000) (96) – (98) – – (40,385) (36,741) (27,426) 9 (5,186) (3,411) (5,186) (3,411) (685) (685) (45,571) (40,152) (28,111) 45,474 36,554 10,446 19 20 21 22 23 221 210 12,737 11,347 20,959 211 21,042 4,649 11,347 167 14,101 3,572 – (695) (7,394) 45,474 36,554 10,446 The financial statements were approved by the Board of Directors on 19 September 2019 and were signed on its behalf by: Martin Harrison Chief Executive Officer 41 Fulcrum Utility Services Limited Annual Report and Accounts 2019 CONSOLIDATED CASH FLOW STATEMENT for the year ended 31 March 2019 Cash flows from operating activities Profit for the period after tax Tax charge Profit for the period before tax Adjustments for: Depreciation Amortisation of intangible assets Exceptional items – fixed asset impairment Utility assets internally adopted (gross construction cost less impairment) Net finance expense/(income) Equity-settled share based payment charges Decrease/(increase) in contract assets Decrease/(increase) and other receivables Increase in inventories (Increase)/decrease in trade and other payables Decrease in contract liabilities Increase in provisions Cash inflow from operating activities Tax paid Net cash inflow from operating activities Cash flows from investing activities Acquisition of external utility assets Acquisition of plant and equipment Acquisition of intangibles Acquisition of subsidiaries, net of cash acquired* Finance income received Net cash outflow from investing activities Cash flows from financing activities Dividends paid Borrowings Finance costs paid Year ended 31 March 2019 £’000 Notes Restated Year ended 31 March 2018 £’000 12 14 5 12 18 15 16 28 12 12 14 10 25 4,934 1,035 5,969 975 1,612 883 6,656 235 6,891 532 358 – (7,374) (4,173) 60 115 1,245 385 (399) (374) 443 (2) (59) 35 (4,138) (1,648) (209) 3,420 2,091 (23) 3,538 3,077 (42) – 3,496 3,077 (3,566) (1,539) (376) (884) (170) (955) – (10,587) 13 61 (4,813) (13,190) (4,738) (3,494) 3,000 (73) 521 – (2) 10,479 (1,290) 6,983 (2,607) (3,130) 9,431 12,561 Proceeds from issue of share capital 19,20 Net cash (outflow)/inflow from financing activities Decrease in net cash and cash equivalents Cash and cash equivalents at 1 April 2018 Cash and cash equivalents at 31 March 2019 27 6,824 9,431 * Costs predominantly relate to the acquisition of Fulcrum Metering Services Limited and final payment in respect of the CDS acquisition that completed on 27 March 2018. 42 Financial Review NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 1. Accounting policies The principal accounting policies adopted in the preparation of these financial statements are set out below. Reporting entity Fulcrum Utility Services Limited (“the Company”) is incorporated in the Cayman Islands and domiciled in the UK. The ordinary shares are traded on AIM on the London Stock Exchange. The consolidated financial statements of the Company for the year ended 31 March 2019 comprise the Company and its subsidiaries (together referred to as “the Group”). Statement of compliance Under Cayman Island company law, the Company is not required to prepare audited financial statements; however, the Company is required under AIM Rule 19 to provide shareholders with audited consolidated financial statements for the year ended 31 March 2019. There is no requirement to provide parent company information so this has not been presented. The financial statements have been prepared in accordance with International Financial Reporting Standards (IFRS) as endorsed by the EU and International Financial Reporting Interpretations Committee (IFRIC) interpretations. Basis of preparation The financial statements have been prepared on the historical cost basis except for the revaluation of certain non-current assets. Historical cost is generally based on the fair value of the consideration given in exchange for assets. Going concern The Group’s business activities, together with the factors likely to affect future development, performance and position, are set out in the Strategic Report on pages 2 to 21. The financial position of the Group, its cash flows, liquidity position and borrowing facilities are described in the Chief Financial Officer’s Statement on pages 18 and 19. In addition, note 29 to the financial statements includes the Group’s processes for managing its capital and its exposure to credit and liquidity risks. On 4 June 2018, the Group entered into a new three year revolving credit facility agreement with Lloyds Banking Group for up to £20 million. The new debt facility replaces the previous £4.0 million debt facility which was undrawn on 4 June 2018. The first drawdown on the facility was made in January 2019 and at the end of March 2019 the Group had drawn down a total of £3.0 million and at the date of the accounts had drawn down a further £3.0 million. The new facility supports the forecast growth in utility asset ownership of gas and electricity assets by the Group, with drawdowns secured against the acquired utility assets. The facility is structured as an “accordion” facility so that £10.0 million is committed and a further £10.0 million is available by request from the Group to the bank. The Group has complied with the financial covenants (interest cover and leverage covenants) relating to the facilities and is forecast to continue comply over the next 15 months. As at 31 March 2019 the Group had net assets of £45.5 million (2018 restated: £36.6 million), including net cash of £3.8 million (2018: £9.4 million) as set out in the consolidated balance sheet on page 41 and note 27. In the year ended 31 March 2019, the Group generated a profit after tax of £4.9 million and had net cash outflows of £2.6 million after investing £3.6 million in external utility assets, £4.7 million paid in dividends and £3.0 million of borrowings. The Group’s forecasts and projections, after taking account of sensitivity analysis of changes in trading performance and corresponding mitigating actions, show that the Group has adequate cash resources (taking account of the Group’s cash balance and new revolving credit facility described above) for the foreseeable future. As a consequence, the Directors have a reasonable expectation that the Group has adequate resources to fund its operations for the foreseeable future. Accordingly, they continue to adopt the going concern basis in preparing the Group financial statements. Basis of consolidation Subsidiaries are entities controlled by the Company. The Group controls an entity when it is exposed to, or has rights to, variable returns from its involvement with the entity and when it has the ability to affect those returns through its power over the entity. In assessing control the Group takes into consideration potential voting rights that are currently exercisable. The acquisition date is the date on which control is transferred to the acquirer. The financial statements of subsidiaries are included in the consolidated financial statements from the date that control commences until the date that control ceases. All intra-group transactions, balances and expenses are eliminated on consolidation. Accounting estimates and judgements The preparation of financial statements in conformity with IFRS requires management to make judgements, estimates and assumptions that affect the application of accounting policies and the reported amounts of assets, liabilities, income and expenses. Actual results could differ from these estimates. Estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to accounting estimates are recognised in the period in which the estimates are revised and in any future periods affected. Information about significant areas of estimation uncertainty in applying accounting policies that have the most significant effect on the amounts recognised in the consolidated financial statements is included in the following areas: • Note 4: Revenue recognition on contracts – For longer projects the stage of completion of the works is assessed when considering recognition of revenue. Use of this percentage completion method requires the Group to estimate the services performed to date as a proportion of the total services to be performed. At 31 March 2019, £14.0 million (2018 restated: £18.0 million) of revenue related to contracts ongoing at the year end. See revenue recognition policy for further details. • Note 9: Deferred tax – The Group recognises a deferred tax asset for tax losses carried forward which requires an estimation of the forecast profitability of the relevant entities. • Note 12: Utility asset valuation, including assets under construction – Assets are revalued annually. These calculations require the use of estimates, as detailed in note 12. 43 Fulcrum Utility Services Limited Annual Report and Accounts 2019 1. Accounting policies continued Accounting estimates and judgements continued • Note 14: Goodwill and other intangibles – The Group tests annually whether tangible and intangible fixed assets have suffered any impairment, based on discounted future cash flows of the assets and the total business of the Group. These calculations require the use of estimates, as detailed in note 11. Business combinations All business combinations are accounted for by applying the acquisition method. Business combinations are accounted for using the acquisition method as at the acquisition date, which is the date on which control is transferred to the Group. Acquisitions on or after 1 January 2010 For acquisitions on or after 1 January 2010, the Group measures goodwill at the acquisition date as: • the fair value of the consideration transferred; plus • the recognised amount of any non-controlling interests in the acquiree; plus • the fair value of the existing equity interest in the acquiree; less • the net recognised amount (generally fair value) of the identifiable assets acquired and liabilities assumed. When the excess is negative, a bargain purchase gain is recognised immediately in profit or loss. Costs related to the acquisition, other than those associated with the issue of debt or equity securities, are expensed as incurred. Property, plant and equipment Property, plant and equipment excluding utility assets and assets under construction are stated at cost less accumulated depreciation and accumulated impairment losses. Utility assets and assets under construction are initially recognised at cost. The Group has elected to value utility assets (except meters) and utility assets under construction at fair value at each reporting date. Meters are carried at cost, an impairment loss is recognised if the carrying amount of an asset exceeds its estimated fair value. Impairment losses are recognised within cost of sales in the income statement. A revaluation upwards is recognised if the estimated fair value exceeds its carrying amount. Revaluations upwards are recognised within other comprehensive income. An impairment loss is reversed if, and only if, the reasons for the impairment have ceased to apply. An impairment loss or uplift in value is reversed only to the level that the asset’s carrying amount, net of depreciation, would have been had it not been previously revalued. Assets are revalued annually. Leases in which the Group assumes substantially all the risks and rewards of ownership of the leased asset are classified as finance leases. Where land and buildings are held under leases the accounting treatment of the land is considered separately from that of the buildings. Leased assets acquired by way of finance lease are stated at an amount equal to the lower of their fair value and the present value of the minimum lease payments at inception of the lease, less accumulated depreciation and less accumulated impairment losses. Payments made under operating leases are recognised in profit or loss on a straight-line basis over the term of the lease. Minimum lease payments made under finance leases are apportioned between the finance expense and the reduction of the outstanding liability. The finance expense is allocated to each period so as to produce a constant periodic rate of interest on the remaining balance of the liability. Depreciation is recognised on a straight-line basis from the date assets are available for use, over the estimated useful lives of each part of an item of property, plant and equipment. Leased assets are depreciated over the shorter of the lease term and their useful lives unless it is reasonably certain that the Group will obtain ownership by the end of the lease term. The estimated useful lives are as follows: Utility assets (excluding meters) 40 years Classic domestic meters Fully depreciated by December 2020 Classic industrial and commercial meters 5 years Fixtures and fittings Computer equipment 2–5 years 3–5 years Depreciation methods, useful lives and residual values are reviewed at each balance sheet date. Intangible assets Intangible assets acquired separately from third parties are recognised as assets and measured at cost. Following initial recognition, intangible assets are measured at cost at the date of acquisition less any amortisation and any impairment losses. Amortisation costs are included within the administrative expenses disclosed in the consolidated statement of comprehensive income. 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. Intangible assets are amortised over their useful lives as follows: Brand and customer relationships 5–12 years Software Development costs 5 years 5 years Useful lives are examined on an annual basis and adjustments, where applicable, are made on a prospective basis. 44 Financial ReviewNOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS CONTINUED 1. Accounting policies continued 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 and is carried at cost less accumulated impairment losses. See note 14 for detailed assumptions and methodology. Impairment losses are not subsequently reversed. Goodwill is allocated to cash-generating units (CGUs) for the purpose of impairment testing. The allocation is made to those cash-generating units or groups of cash-generating units that are expected to benefit from the business combination in which the goodwill arose. The units or groups of units are identified at the lowest level at which goodwill is monitored for internal management purposes, being the operating segments. Adjustments to provisional fair values of identifiable assets and liabilities 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 At each reporting date, the Group reviews the carrying amounts of its property, plant and equipment and intangibles, including goodwill, 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. 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. Detailed assumptions used in the annual impairment test for goodwill, with regard to discount, growth and inflation rates, are set out in note 14 to the accounts. Inventories Work in progress is valued at the lower of cost and net realisable value. Net realisable value is the estimated selling price in the ordinary course of business less applicable costs to complete and variable selling expenses. Employee benefits Pension plans The Group operates a defined contribution pension plan for the benefit of its employees under which the Company pays a fixed contribution into a separate entity and will have no legal or constructive obligation to pay further amounts. Contributions are recognised in the income statement as they become payable in accordance with the rules of the scheme. Short-term benefits Short-term employee benefit obligations are measured on an undiscounted basis and are expensed as the related service is provided. A liability is recognised for the amount expected to be paid under short-term cash bonus or profit-sharing plans if the Group has a present legal or constructive obligation to pay this amount as a result of past service provided by the employee and the obligation can be estimated reliably. Share based payment transactions Share based payment arrangements in which the Group receives goods or services as consideration for its own equity instruments are accounted for as equity-settled share based payment transactions, regardless of how the equity instruments are obtained by the Group. The grant date fair value of share based payment awards granted to employees is recognised as an employee expense, with a corresponding increase in equity, over the period that the employees become unconditionally entitled to the awards. The fair value of the options granted is measured using an option valuation model, taking into account the terms and conditions upon which the options were granted. The amount recognised as an expense is adjusted to reflect the actual number of awards for which the related service and non-market vesting conditions are expected to be met, such that the amount ultimately recognised as an expense is based on the number of awards that do meet the related service and non-market performance conditions at the vesting date. For share based payment awards with non-vesting conditions, the grant date fair value of the share based payment is measured to reflect such conditions and there is no true-up for differences between expected and actual outcomes. No cash-settled share based payment awards have been granted to employees. Provisions A provision is recognised in the balance sheet when the Group has a present legal or constructive obligation as a result of a past event that can be reliably measured and it is probable that an outflow of economic benefits will be required to settle the obligation. 45 Fulcrum Utility Services Limited Annual Report and Accounts 2019 1. Accounting policies continued Revenue Multi-utility infrastructure activities are recognised as “infrastructure revenue”. The majority of projects are completed in a short timeframe and, as such, revenue is recognised on project completion. For revenue recognised on maintenance contracts, revenue is recognised throughout the duration of the contract. For longer projects, revenue is recognised over time. Revenue is estimated based on the proportion that contract costs incurred for work performed to date bear to the estimated total contract costs, except where this would not be representative of the stage of completion. Variations in contract work, claims and incentive payments are recognised only to the extent that the amount can be measured reliably and its receipt is considered probable. Where the outcome of a contract cannot be estimated reliably, contract revenue is recognised to the extent of contract costs incurred where it is probable they will be recoverable. When it is probable that total contract costs will exceed total contract revenue, the total expected loss is recognised as an expense immediately. Infrastructure revenue is recognised excluding VAT and other indirect taxes. An accrual is made for infrastructure revenue in respect of work completed where invoices are yet to be generated. When payment is received in advance of the provision of services, these receipts are recorded as deferred income. Utility asset ownership revenue Conveyance of gas and use of electricity network is recognised as “Utility asset ownership revenue” from the date the meter is connected and made available for use and is based on Ofgem regulated usage rates. The performance obligation is the transportation of gas and revenue is recognised over time. Contract costs Costs to obtain a contract are expensed unless they are incremental, i.e. they would not be incurred if the contract had been obtained, and the contract is expected to be sufficiently profitable for them to be recovered. Exceptional items Exceptional items are those that in management’s judgement need to be disclosed separately by virtue of their size or incidence in order to provide greater visibility of the underlying results of the business and which management believes provide additional meaningful information in relation to ongoing operational performance. Taxation Tax on the profit or loss for the year comprises current and deferred tax. Tax is recognised in the income statement except to the extent that it relates to items recognised directly in equity, in which case it is recognised in equity. Current tax is the expected tax payable or receivable on the taxable income or loss for the year, using tax rates enacted or substantively enacted at the balance sheet date, and any adjustment to tax payable in respect of previous years. Deferred tax is provided on temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for taxation purposes. The following temporary differences are not provided for: the initial recognition of goodwill; the initial recognition of assets or liabilities that affect neither accounting nor taxable profit other than in a business combination; and differences relating to investments in subsidiaries to the extent that they will probably not reverse in the foreseeable future. The amount of deferred tax provided is based on the expected manner of realisation or settlement of the carrying amount of assets and liabilities, using tax rates enacted or substantively enacted at the balance sheet date. A deferred tax asset is recognised only to the extent that it is probable that future taxable profits will be available against which the temporary difference can be utilised. Financial assets The Group’s financial assets include cash and cash equivalents and trade and other receivables. 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. Recognition and derecognition Regular purchases and sales of financial assets are recognised on trade. 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. Cash and cash equivalents Cash and cash equivalents comprise cash balances and call deposits. Bank overdrafts that are repayable on demand and form an integral part of the Group’s cash management are included as a component of cash and cash equivalents for the purpose only of the cash flow statement. 46 Financial ReviewNOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS CONTINUED 1. Accounting policies continued Financial assets continued Trade and other receivables Trade and other receivables are recognised initially at fair value and subsequent to initial recognition they are measured at amortised cost using the effective interest method, less any impairment losses. 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. Financial liabilities The Group’s financial liabilities include trade and other payables, bank loans and overdrafts. Upon adoption of IFRS 9 from 1 April 2018, there has been no change in the accounting policies previously applied. 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. Trade and other payables Trade and other payables are recognised initially at fair value. Subsequent to initial recognition they are measured at amortised cost using the effective interest method. Trade and other payables are presented as current liabilities unless payment is not due within 12 months after the reporting period. Due to their short-term nature, carrying value is considered to approximate fair value. Interest-bearing borrowings Interest-bearing borrowings are recognised initially at fair value less attributable transaction costs. Subsequent to initial recognition, interest-bearing borrowings are stated at amortised cost using the effective interest method, less any impairment losses. 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. Interest-bearing 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. Non-derivative financial instruments Non-derivative financial instruments comprise investments in equity and debt securities, trade and other receivables, cash and cash equivalents, loans and borrowings, and trade and other payables. Impairment A financial asset not carried at fair value through profit or loss is assessed at each reporting date to determine whether there is objective evidence that it is impaired. A financial asset is impaired if objective evidence indicates that a loss event has occurred after the initial recognition of the asset, and that the loss event had a negative effect on the estimated future cash flows of that asset that can be estimated reliably. An impairment loss in respect of a financial asset measured at amortised cost is calculated as the difference between its carrying amount and the present value of the estimated future cash flows discounted at the asset’s original effective interest rate. Interest on the impaired asset continues to be recognised through the unwinding of the discount. When a subsequent event causes the amount of impairment loss to decrease, the decrease in impairment loss is reversed through profit or loss. Adoption of new and revised International Financial Reporting Standards (IFRSs) and interpretations (IFRICs) The following relevant new standards and amendments to standards are mandatory for the first time for the financial year beginning 31 March 2018: • IFRS 9: Financial Instruments • IFRS 15: Revenue from Contracts with Customers • Annual Improvements to IFRS Standards 2014–2016 Cycle With the exception of IFRS 15: Revenue from Contracts with Customers, the effects of the implementation of these standards have been limited to presentational and disclosure amendments. Following the implementation of IFRS 15: Revenue from Contracts with Customers, our accounting policy for revenue has been amended as follows: IFRS 15 adoption The Group has adopted IFRS 15: Revenue from Contracts with Customers for the current reporting period and retrospectively to each prior reporting period previously presented in accordance with IAS 8: Accounting Policies. The Group has not elected to take any practical expedients available on transition to IFRS 15. In assessing the appropriate application of IFRS 15, the Group has reconsidered the previous approach of recognising revenue in respect of the fair value of the infrastructure assets that it constructs and then owns and concluded that the asset is controlled by the Group throughout construction. 47 Fulcrum Utility Services Limited Annual Report and Accounts 2019 1. Accounting policies continued Adoption of new and revised International Financial Reporting Standards (IFRSs) and interpretations (IFRICs) continued IFRS 15 adoption continued Accordingly the utility asset is recognised as it is being constructed within property, plant and equipment at the construction cost as incurred and consequently these costs are not in cost of sales. The Group has elected to value assets under the course of construction at fair value in accordance with IAS 16: Property, Plant and Equipment in line with the existing policy for utility assets and, as a result, in those cases where the fair value is less than the construction cost an impairment is recorded in cost of sales. Where the fair value is greater than the construction cost an uplift in value is recorded in other comprehensive income and disclosed as “Surplus arising on utility assets internally adopted in year”. Impact of change on adoption of IFRS 15 Consolidated statement of financial position 1 April 2017 Property, plant and equipment Contract assets Inventories Trade and other receivables Trade and other payables Contract liabilities Impact on net assets Revaluation reserve Retained reserves Impact on equity 31 March 2018 Property, plant and equipment Contract assets Inventories Trade and other receivables Trade and other payables Contract liabilities Deferred tax liabilities Impact on net assets Revaluation reserve Retained reserves Impact on equity Consolidated statement of comprehensive income For the year ended 31 March 2018 Revenue Cost of sales Gross margin Adjusted EBITDA Tax charge Surplus arising on internally adopted utility assets Total comprehensive income for the year 48 Impact of change on adoption of IFRS 15 As previously reported £’000 Reclassification £’000 Adjustments £’000 As restated £’000 12,297 – 1,647 7,129 (26,991) – 3,979 (1,647) (2,332) 21,910 902 (467) – – 13,199 3,512 – 4,797 (435) (5,516) – (21,910) 3,343 (7,165) 16,025 – 4,114 15,289 (35,525) – (2,926) 3,607 94 – – – – – 12,417 (3,905) (8,512) 25,900 (25,900) – – – – – (21,910) 3,572 (7,394) – – 229 (229) – 3,896 (2,040) – – 19,291 10,377 209 6,777 (1,118) (10,743) – (25,900) (485) (3,411) 253 1,042 (789) 253 4,649 (695) Impact of change on adoption of IFRS 15 As previously reported £’000 Adjustments £’000 As restated £’000 44,847 (4,213) 40,634 (28,370) 4,138 (24,232) 16,477 8,655 250 – 7,488 (75) (75) (485) 813 253 16,402 8,580 (235) 813 7,741 Financial ReviewNOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS CONTINUED 1. Accounting policies continued Adoption of new and revised International Financial Reporting Standards (IFRSs) and interpretations (IFRICs) continued Impact of change on adoption of IFRS 15 continued Consolidated statement of cash flows For the year ended 31 March 2018 Profit before tax for the period Adjustments for: Capitalisation of utility assets Increase in contract assets Increase in trade and other receivables Increase in inventories Increase in trade and other payables Increase in contract liabilities Acquisition of external utility assets Net impact on cash from operating activities As previously reported £’000 Impact of change on adoption of IFRS 15 Reclassification £’000 Adjustments £’000 As restated £’000 6,966 – (75) 6,891 (2,611) (596) – (5,660) (6,174) (1,396) 4,830 – (920) 4,472 1,187 (1,559) 2,156 – – (966) 1,522 54 – 149 (65) (619) – (4,173) (4,138) (1,648) (209) 3,420 2,091 (1,539) IFRS 9: Financial Instruments came into effect on 1 January 2018 replacing IAS 39: Financial Instruments: Recognition and Measurement and requires changes to the classification and measurement of certain financial instruments from that under IAS 39. The new standard has been applied fully retrospectively and on review the majority of the Group’s financial assets and liabilities will continue to be accounted for on an identical basis under IFRS 9 as they were under IAS 39. There is no material effect from applying IFRS 9 for expected credit losses. The Group has not applied the following new standards and amendments to standards which are EU endorsed but not yet effective: • IFRS 16: Leases (see note 30) • IFRIC 23: Uncertainty over Income Tax Treatments 2. Operating segments The Board has been identified as the Chief Operating Decision-Maker (CODM) as defined under IFRS 8: Operating Segments. The Directors consider there to be three operating segments, Infrastructure Services, Utility Asset Ownership and Dunamis, which was acquired on 5 February 2018. Fulcrum’s Infrastructure Services provides utility infrastructure and connections services. Utility Asset Ownership comprises both the ownership of gas, electrical and meter assets and the safe and efficient conveyance of gas and electricity through its transportation networks. Gas transportation services are provided under the iGT licence granted from Ofgem in June 2007 and electricity services are provided under the iDNO licence granted from Ofgem in November 2017. The information provided to the Board includes management accounts comprising operating profit before exceptional items for each segment and other financial and non-financial information used to manage the business on a consolidated basis. Year ended 31 March 2019 Restated Year ended 31 March 2018 Infrastructure Services £’000 Utility Asset Ownership £’000 Dunamis £’000 Total Group £’000 Infrastructure Services £’000 Utility Asset Ownership £’000 34,815 7,510 (115) (1,813) 2,984 1,792 – (701) 11,106 723 – (73) 48,905 10,025 (115) (2,587) 36,256 6,737 (35) (435) 1,951 1,583 – (411) Dunamis £’000 Total Group £’000 2,427 260 – (44) 40,634 8,580 (35) (890) 5,582 – 1,091 (883) 650 – 7,323 (883) – 6,267 1,172 216 7,655 (354) (15) (42) (411) (823) 5,228 (64) 5,164 193 2 195 608 2 610 6,029 (60) 5,969 5,444 25 5,469 – – 1,172 32 1,204 – – 216 2 218 – (823) 6,832 59 6,891 Reportable segment revenue Adjusted EBITDA* Share based payment charge Depreciation and amortisation Reportable segment operating profit before exceptional items Cost of sales – exceptional items Administrative expenses – exceptional items Reporting segment operating profit Net finance (expense)/ income Profit before tax * Adjusted EBITDA is operating profit excluding the impact of exceptional items, depreciation, amortisation and equity-settled share based payment charges. Full reconciliation of Alternative Performance Measures (APMs) are provided in note 3. 49 Fulcrum Utility Services Limited Annual Report and Accounts 2019 2. Operating segments continued The Group derives all of its revenue from the UK and all of the Group’s customers are based in the UK. The Group’s revenue is derived from contracts with customers. Year ended 31 March 2019 Restated Year ended 31 March 2018 Infrastructure Services £’000 Utility Asset Ownership £’000 Dunamis £’000 Total Group £’000 Infrastructure Services £’000 Utility Asset Ownership £’000 Dunamis £’000 Total Group £’000 Assets reported by segment: Property, plant and equipment Assets not by segment: Goodwill and brand and customer relationships Other intangible assets Deferred tax assets Contract assets Inventories Trade and other receivables Cash and cash equivalents 628 38,594 92 39,314 530 19,296 95 19,921 3,351 292 1,361 7,809 425 3,411 2,498 – 21,942 25,293 1,444 346 305 – 1,433 1,443 40 – 1,018 182 1,548 2,883 1,776 1,707 9,132 607 6,392 6,824 3,457 264 1,833 9,662 96 4,540 4,245 – 871 361 – – 865 1,543 23,187 26,644 18 – 715 113 1,372 3,643 1,153 2,194 10,377 209 6,777 9,431 Total assets 19,775 43,565 27,705 91,045 24,627 22,936 29,143 76,706 Year ended 31 March 2019 Restated Year ended 31 March 2018 Infrastructure Services £’000 Utility Asset Ownership £’000 Dunamis £’000 Total Group £’000 Infrastructure Services £’000 Utility Asset Ownership £’000 Dunamis £’000 Total Group £’000 Liabilities by segment Trade and other payables Contract liabilities Borrowings Provisions Deferred tax liability (7,461) (24,306) – – – (2,390) (200) (3,000) – (5,186) (1,095) (1,837) – (96) – (10,946) (26,343) (3,000) (96) (5,186) (6,069) (24,990) (2,150) (160) (2,524) (10,743) (750) (25,900) – – – – – (3,411) – (98) – – (98) (3,411) Total liabilities (31,767) (10,776) (3,028) (45,571) (31,059) (5,721) (3,372) (40,152) 3. Alternative Performance Measures As detailed in the Chief Financial Officer’s Statement, the Group uses Alternative Performance Measures (APMs), as listed below, to present users of the accounts with a clear view of what the Group considers to be the results of its underlying, sustainable business operations, thereby enabling consistent period-on-period comparisons and making it easier for users of the accounts to identify trends. Alternative Performance Measure Definition Like-for-like revenue Like-for-like revenue is Group revenue excluding the acquisitions. Like-for-like adjusted revenue Like-for-like adjusted revenue is Group revenue excluding the acquisitions and adding asset value revenue previously credited to revenue, now credited to cost of sales. Annualised recurring utility asset revenue run rate The revenue being generated from gas transportation, use of electricity network and meter rental at a point in time. Adjusted EBITDA Operating profit excluding exceptional items, amortisation and depreciation and equity-settled share based payments. Like-for-like adjusted EBITDA Like-for-like adjusted EBITDA is Group adjusted EBITDA excluding the acquisitions. Adjusted profit before taxation Profit before taxation excluding exceptional items and amortisation of acquired intangibles. Net assets per share Net assets divided by the number of shares in issue at the financial reporting date. 50 Financial ReviewNOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS CONTINUED 3. Alternative Performance Measures continued A reconciliation of these Alternative Performance Measures has been disclosed in the tables below: (a) Like-for-like revenue Revenue Adjusted for: Acquisitions Like-for-like revenue (b) Reconciliation of “like-for-like revenue” to “like-for-like adjusted revenue” Like-for-like revenue Adjusted for: Asset value revenue previously credited to revenue prior to adoption of IFRS 15; now credited to cost of sales (see note 1) Like-for-like adjusted revenue (c) Reconciliation of operating profit to “adjusted EBITDA” Operating profit Adjusted for: Exceptional items (note 5) Amortisation and depreciation Equity-settled share based payments Adjusted EBITDA (d) Like-for-like adjusted EBITDA Adjusted EBITDA Adjusted for: Acquisitions Like-for-like adjusted EBITDA (e) Reconciliation of profit before tax to “adjusted profit before tax” Profit before tax Adjusted for: Exceptional items (note 5) Amortisation of acquired intangibles Adjusted profit before tax 31 March 2019 £’000 Restated 31 March 2018 £’000 48,905 40,634 (11,106) (2,427) 37,799 38,207 31 March 2019 £’000 Restated 31 March 2018 £’000 37,799 38,207 8,151 4,213 45,950 42,420 31 March 2019 £’000 Restated 31 March 2018 £’000 6,029 6,832 1,294 2,587 115 823 890 35 10,025 8,580 31 March 2019 £’000 Restated 31 March 2018 £’000 10,025 8,580 (723) (260) 9,302 8,320 31 March 2019 £’000 Restated 31 March 2018 £’000 5,969 6,891 1,294 1,354 8,617 823 208 7,922 51 Fulcrum Utility Services Limited Annual Report and Accounts 2019 3. Alternative Performance Measures continued (f) Net assets per share Net assets at end of period Issued shares at end of period Net assets per share 4. Revenue Infrastructure revenue Utility asset ownership revenue Total revenue 31 March 2019 £’000 Restated 31 March 2018 £’000 45,474 36,554 221,303 210,656 20.5p 17.4p Year ended 31 March 2019 £’000 Restated Year ended 31 March 2018 £’000 45,921 38,683 2,984 1,951 48,905 40,634 (a) Disaggregation of revenue In the following table, revenue is disaggregated by primary geographic market, service lines and timing of revenue recognition. The table also includes a reconciliation of the disaggregated revenue with the Group reportable segments (see note 2): £’000 Primary geographic markets United Kingdom Service line Service revenue on long-term contracts Service revenue on short-term contracts Maintenance contracts Utility asset ownership Timing of revenue recognition Services transferred over time Infrastructure Services Utility Assets Dunamis 2019 2018 2019 2018 2019 2018 34,815 36,256 34,815 36,256 2,984 2,984 1,951 1,951 11,106 11,106 17,620 17,195 18,344 17,912 – – – – 34,815 36,256 34,815 36,256 34,815 36,256 – – – 2,984 2,984 2,984 2,984 – – – 1,951 1,951 1,951 1,951 2,427 2,427 1,640 672 115 – 7,505 3,073 528 – 11,106 2,427 11,106 11,106 2,427 2,427 (b) Contracting balances The following table provides information about receivables, contract assets and contract liabilities from contracts with customers: Receivables, which are included in “trade and other receivables” Contract assets Contract liabilities Year ended 31 March 2019 £’000 Year ended 31 March 2018 £’000 3,972 9,132 26,343 5,834 10,377 25,900 The contract assets primarily relate to work in progress on infrastructure projects. The contract liabilities primarily relate to deferred income. Deferred income represents contracted sales for which services to customers will be provided in future periods. 52 Financial ReviewNOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS CONTINUED 5. Exceptional items Exceptional items included in cost of sales Exceptional items included in administrative expenses (a) Exceptional items included in cost of sales Fixed asset impairment arising on external revaluation Fixed asset impairment relates to the impairment of utility assets not previously revalued upwards. (b) Exceptional items included in administrative expenses Restructuring costs One-off legal and adviser costs Acquisition costs in respect of The Dunamis Group Limited Acquisition costs in respect of CDS PSL Holdings Limited Restructuring costs relate to employee exit and severance costs. 6. Operating profit Included in operating profit are the following charges: Amortisation of intangible assets Depreciation of property, plant and equipment Operating leases – plant and machinery Operating leases – land and buildings Amounts receivable by the auditors, KPMG LLP, and their associates in respect of: Audit fees: Audit of the Group financial statements The audit of the Company’s subsidiaries pursuant to legislation Total fees for the audit of the Group and its subsidiaries Non-audit fees: – Audit related services – Taxation compliance services – Other tax advisory services – Other advisory services Year ended 31 March 2019 £’000 Year ended 31 March 2018 £’000 883 411 1,294 – 823 823 Year ended 31 March 2019 £’000 Year ended 31 March 2018 £’000 883 883 – – Year ended 31 March 2019 £’000 Year ended 31 March 2018 £’000 276 135 – – 411 29 – 686 108 823 Year ended 31 March 2019 £’000 Year ended 31 March 2018 £’000 1,612 975 743 281 91 73 164 9 – – – 358 532 713 234 59 42 101 7 25 50 115 Fees paid to firms of accountants other than KPMG LLP and its affiliated entities for non-audit services amounted to £25k (2018: £nil). 53 Fulcrum Utility Services Limited Annual Report and Accounts 2019 7. Staff numbers and costs Wages and salaries Social security costs Other pension costs Share based payments Year ended 31 March 2019 £’000 Year ended 31 March 2018 £’000 13,028 1,405 553 115 10,628 1,231 308 35 15,101 12,202 The average monthly number of persons employed by the Group (including Directors) during the period, analysed by category, was as follows: Number of employees Operational Support 2019 121 125 246 2018 109 102 211 Details of the remuneration, share options and pension entitlement of the Directors are included in the Remuneration Report on page 30. 8. Finance costs and finance income Finance costs Finance costs paid in respect of revolving credit facility Banking charges Total finance costs Finance income Bank interest receivable Total finance income 9. Taxation Current tax Deferred tax Total tax charge Year ended 31 March 2019 £’000 Year ended 31 March 2018 £’000 (72) (1) (73) 13 13 – (2) (2) 61 61 Year ended 31 March 2019 £’000 Restated Year ended 31 March 2018 £’000 620 415 1,035 23 212 235 Reductions in the UK corporation tax rate to 19.0% (effective from 1 April 2017) and to 17.0% (effective from 1 April 2020) were substantively enacted on 6 September 2016. This will reduce the Group’s future current tax charge accordingly. The deferred taxation balance at 31 March 2019 has been calculated based on the rate of 19.0% for amounts anticipated to unwind in the year ending 31 March 2020 and then at 17.0% thereafter (2018: 19.0% for FY19 and 20, then 17.0% onwards). The Group has a further £10.0 million (2018: £11.4 million) of tax losses of which a deferred tax asset of £1.7 million (2018: £2.2 million) has been recognised. During the period £0.3 million of the deferred tax asset was utilised against taxable profits. The deferred tax asset is expected to be recovered over 12 years. 54 Financial ReviewNOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS CONTINUED 9. Taxation continued Reconciliation of effective tax rate Profit before taxation Tax using the UK corporation tax rate of 19.0% (2018: 19.0%) Non-deductible expenses Capital allowances in excess of depreciation Effect of change in rate of corporation tax Tax deductions for share options Adjustment to tax charge in respect of previous year’s corporation tax Adjustment to tax charge in respect of previous year’s deferred tax Recognition of tax effect of previously unrecognised tax losses Total tax charge Movement in deferred tax balances At the beginning of the period Effect of implementation of IFRS 15 At beginning of period – as restated Recognised in profit or loss Over provided in prior year Tax losses utilised Effect of change in rate of corporation tax Newly recognised deferred tax asset/(liability) Released tax asset Recognised in other comprehensive income Revaluation of property, plant and equipment Acquisition of subsidiaries At the end of the period Year ended 31 March 2019 £’000 Restated Year ended 31 March 2018 £’000 5,969 6,891 (1,134) (1,309) (27) – (109) 788 (122) (431) – (9) 34 (198) 431 – – 816 (1,035) (235) 31 March 2019 Restated 31 March 2018 Deferred tax assets £’000 Deferred tax liabilities £’000 Deferred tax assets £’000 Deferred tax liabilities £’000 1,921 – (685) (485) 2,194 (3,411) 1,921 (1,170) (203) (258) (26) – – – – (228) – (54) 98 257 (1,848) – – (904) (76) 1,253 – – – – – – – – (62) (2,179) 1,707 (5,186) 2,194 (3,411) 55 Fulcrum Utility Services Limited Annual Report and Accounts 2019 10. Dividends In the year, dividends of 2.15p per share (2018: 2.0p per share) were paid: Equity dividend Paid during the year: Final dividend in respect of 2017: 1.3p per share Interim dividend in respect of 2018: 0.7p per share Final dividend in respect of 2018: 1.4p per share Interim dividend in respect of 2019: 0.75p per share Total dividends Year ended 31 March 2019 £’000 Year ended 31 March 2018 £’000 – – 3,085 1,653 2,271 1,223 – – 4,738 3,494 After the balance sheet date, a final dividend of 1.5p per qualifying ordinary share was proposed by the Board, creating a full year dividend for FY2019 of 2.25p per qualifying ordinary share (2018: 2.1p per qualifying share). The dividends have not been provided for. 11. Earnings per share (EPS) (a) Basic earnings per share The calculation of basic and diluted earnings per share has been based on the following profit attributable to ordinary shareholders and weighted average number of ordinary shares outstanding: Year ended 31 March 2019 £’000 Restated Year ended 31 March 2018 £’000 4,934 6,656 1,294 (246) 1,612 823 (156) 358 7,594 7,681 31 March 2019 Number of shares 31 March 2018 Number of shares 217,205 178,653 9,838 13,887 227,043 192,540 2.3p 2.2p 3.5p 3.3p 3.7p 3.5p 4.3p 4.0p Profit for the year used for calculation of basic EPS Exceptional items (note 5) Remove tax relief on exceptional items Amortisation of intangibles Profit for the year used for calculation of adjusted EPS Number of shares (‘000): Weighted average number of ordinary shares for the purpose of basic EPS Effect of potentially dilutive ordinary shares Weighted average number of ordinary shares for the purpose of diluted EPS EPS Basic Diluted basic Adjusted basic Adjusted diluted basic 56 Financial ReviewNOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS CONTINUED 12. Property, plant and equipment (a) Reconciliation of carrying amount Cost At 1 April 2017 as previously reported Adjustment to recognise assets under construction Restated at 1 April 2017 Additions Assets completed in period Surplus arising on internally adopted assets Acquisition of subsidiary Restated at 31 March 2018 Additions Assets completed in period Surplus arising on internally adopted assets Uplift arising from external revaluation At 31 March 2019 Accumulated depreciation At 1 April 2017 as previously reported Adjustment to recognise assets under construction Restated at 1 April 2017 Depreciation charge for the period Impairment Assets completed in period Revaluation Restated at 31 March 2018 Depreciation charge for the period Impairment arising on external valuation Impairment Assets completed in period At 31 March 2019 Net book value At 31 March 2019 Restated at 31 March 2018 Restated at 1 April 2017 At 1 April 2017 as previously reported Utility assets under construction £’000 Utility assets £’000 12,305 276 12,581 – 4,150 4,150 1,539 15,483 10,922 (10,922) – – 813 – 25,042 3,566 9,524 17,343 19,922 (19,922) – 1,100 11,380 – Fixtures and fittings £’000 Computer equipment £’000 Total £’000 486 – 486 110 – – 225 821 234 – – – 1,017 13,808 – 4,426 1,017 60 18,234 17,192 – – – 1,077 142 – – – – 813 225 36,464 21,285 – 1,100 11,380 59,910 8,045 1,055 1,219 70,229 (368) – (375) (768) – (3,524) (368) (402) (3,524) – – (11,310) (7,896) 7,896 334 – (8,332) (6,938) (694) (3,428) – – – (9,969) (12,780) 12,780 – (375) (51) – – – – (768) (79) – – – (426) (165) (847) (116) – – – – – – (1,511) (3,524) (5,035) (532) (11,310) – 334 (16,543) (975) (3,428) (9,969) – (25,234) (4,127) (591) (963) (30,915) 34,676 3,918 16,710 2,586 12,213 11,937 626 – 464 395 111 111 256 230 249 249 39,314 19,921 13,199 12,297 Utility assets includes £1.2 million (2018: £0.5 million) of meter assets valued at cost less depreciation to date. 57 Fulcrum Utility Services Limited Annual Report and Accounts 2019 12. Property, plant and equipment continued (b) Measurement of fair values (i) Fair value of hierarchy The fair value of utility assets (excluding meters) was determined by external, independent specialist valuers, having appropriate recognised professional qualifications and recent experience in the assets being valued. The valuation established the fair value of the assets at 31 March 2019. The valuation technique used is classified as a Level 3 fair value (based on unobservable inputs) under IFRS 13. (ii) Valuation technique and significant unobservable inputs. Valuation technique Significant unobservable inputs Utility assets: • Income approach: Is determined by considering the net present value of the future cash flows generated by the assets, taking into account the expected transportation income, expected asset life and growth rate. The expected net cash flows are discounted using risk-adjusted discount rates. • Market approach: For externally acquired assets after 1 April 2018, the price recently paid, with adjustment made to the indicated market prices, to reflect time, condition and utility of the appraised assets. Utility assets: • Assumes that the asset income streams will continue at the current rate for the life of the asset with growth rate. • Asset life assumed at 40 years, with the total useful economic life from the age of the asset at valuation date. • Growth rate has been based on trend for the last four year of percentage changes based on rates set by Ofgem resulting in growth of 0.3%. • Risk-adjusted discount rate of 7.4%. Inter-relationship between key unobservable inputs and fair value measurement The estimated fair value would increase/ (decrease) if: Utility assets: • Income streams arising from the assets were higher or (lower). • Growth rate applied to the assets’ income were 1.0% higher results in an increase of £2,637k and 1.0% lower results in a decrease of £2,078k. • The expected life of the assets were five years longer results in an increase of £454k and five years shorter results in a decrease of £652k. • The risk-adjusted discount rate were 1.0% higher or lower it would result in a £2.0 million decrease/increase. The fair value of utility assets under construction was determined internally and is based upon the same principles as the external valuation. When performing the valuation, management has used judgement in assessing the key assumptions used in the valuation model including asset life and occupancy rates. The valuation technique used is classified as a Level 3 fair value (based on unobservable inputs) under IFRS 13. The utility assets and utility assets under construction are the only financial assets that are held at fair value in the financial statements. (c) Impairment loss Following the external valuation of the utility asset estate an impairment charge of £3.4 million was recorded. £2.5 million of the loss was offset against the revaluation reserve, see note 21, as it related to amounts previously increased with the uplift going through the revaluation reserve. The remaining £0.9 million has been include in the consolidated statement of comprehensive income as an exceptional item. 13. Capital commitments The Group has entered into contracts to purchase property, plant and equipment in the form of utility assets from external parties; at 31 March 2019 the balance was £18.7 million (2018: £10.4 million). 58 Financial ReviewNOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS CONTINUED 14. Intangible assets Reconciliation of carrying amount Cost At 1 April 2017 Additions Acquisition of subsidiary At 31 March 2018 Additions At 31 March 2019 Accumulated amortisation and impairment At 1 April 2017 Amortisation for the period At 31 March 2018 Amortisation for the period At 31 March 2019 Net book value At 31 March 2019 At 31 March 2018 At 1 April 2017 Brand and customer relationships £’000 Software and development costs £’000 – – 12,607 12,607 – 2,601 936 19 3,556 884 Goodwill £’000 2,225 12,026 – 14,251 – Total £’000 4,826 12,962 12,626 30,414 884 14,251 12,607 4,440 31,298 – – – – – – (208) (208) (1,354) (2,259) (150) (2,409) (258) (2,259) (358) (2,617) (1,612) (1,562) (2,667) (4,229) 14,251 11,045 1,773 27,069 14,251 12,399 1,147 27,797 2,225 – 342 2,567 (a) Amortisation The amortisation of brand, customer relationships and software (including development costs) is included in administrative expenses. (b) Impairment testing The Group tests goodwill annually for impairment or more frequently if there are indications that intangibles might be impaired. Goodwill is tested for impairment by comparing the carrying amount of each CGU with the recoverable amount. Goodwill brought forward at the start of the year relates to the acquisition of Fulcrum Group Holdings Limited on 8 July 2010, the acquisition of Dunamis Group Limited on 5 February 2018 and the acquisition of CDS PSL Holdings Limited on 27 March 2018. The carrying amount of the intangible asset is allocated across cash-generating units (CGUs). The goodwill held by the Group relates to either the Infrastructure Services CGU, Dunamis which has two CGUs or the CDS CGU. A segment-level summary of the goodwill allocation is presented below: As at 31 March 2018 and 31 March 2019 Goodwill Fulcrum £’000 Dunamis £’000 CDS £’000 Total £’000 2,225 11,331 695 14,251 The recoverable amounts are determined based on value in use calculations which require assumptions. The annual impairment test was performed for the four CGUs identified above that have goodwill allocated to them. The fair value measurement was categorised as a Level 3 fair value based on the inputs in the valuation technique used. The recoverable amounts of the above CGUs have been determined from value in use calculations which have been predicated on discounted cash flow projections from financial budgets approved by the Board covering a one year period, together with management forecasts for a further four year period. The values assigned to the key assumptions represent management’s assessment of future trends in the relevant industries and have been based on historical data from both external and internal sources, 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 long-term growth rates summarised in the table below. The pre-tax cash flows that these projections produced were discounted at pre-tax discount rates based on the Group’s beta adjusted cost of capital reflecting management’s assessment of specific risks related to each cash-generating unit. Pre-tax discount rates of between 8.2% and 13.3% (2018: between 8.7% and 20.0%) have been used in the impairment calculations which the Directors believe fairly reflect the risks inherent in each of the CGUs. The terminal cash flows are extrapolated in perpetuity using a growth rate of 2.0% (2018: 2.0%). This is prudently aligned with the inflation rate and is not considered to be higher than the long-term industry growth rate. 59 Fulcrum Utility Services Limited Annual Report and Accounts 2019 14. Intangible assets continued (b) Impairment testing continued Fulcrum Dunamis CDS Weighted average risk adjusted discount rate Long-term growth rate 8.2% 13.3% 8.2% 2.0% 2.0% 2.0% The value in use assessment is sensitive to changes in the key assumptions used. Sensitivity analysis has been performed on the individual CGUs with a 1.0% increase in discount rate and a 1.0% reduction in long-term growth rate. Based on this analysis, no reasonably possible changes to these assumptions resulted in an impairment charge being required. Management has identified that for the electrical infrastructure CGUs, Dunamis and Maintech, a reasonably possible change in the revenue growth assumptions in years one to five could cause the carrying amount to exceed the recoverable amount. Under management’s base case, the recoverable amounts exceed the carrying value by £1.8 million for Maintech and £15.0 million for Dunamis. The revenue growth rate for the combined electrical infrastructure CGUs for year one is -9.0% (Dunamis: -6.0%; Maintech: -13.0%) and the average revenue growth rate for years two to five is 47.0% (Dunamis: 63.0%; Maintech: 21.0%), based on the rapidly expanding renewable energy and electric vehicle markets (business, energy, industrial strategy, paper: electric vehicles – driving the transition dated October 2018). Other key assumptions include maintaining the gross margin at a consistent level whilst the growth in overhead costs is below the level of revenue growth considered above for both CGUs. If the average revenue growth rate for years two to five was reduced to 28.0% for the Dunamis CGU, the estimated recoverable amount would equal the carrying amount and if it was reduced to 16.0% for the Maintech CGU, the estimated recoverable amount would equal the carrying amount. 15. Contract assets Work in progress Contract receivables Total 31 March 2019 £’000 3,227 5,905 31 March 2018 £’000 3,905 6,472 9,132 10,377 The work in progress balances reflect direct works costs including direct labour and other attributable variable costs relating to jobs classed as incomplete. Work in progress recognised as cost of sales in the period amounted to £29.5 million (2018: £26.2 million). There have been no write-downs in the year (2018: nil) – contract receivables relate to infrastructure revenue completed but not invoiced. 16. Trade and other receivables Trade receivables Other receivables and prepayments 31 March 2019 £’000 3,972 2,420 6,392 Restated 31 March 2018 £’000 5,834 943 6,777 Trade and other receivables are non-interest bearing. Due to the activities and diversified customer structure of the Group, there is no significant concentration of credit risk. The Group applies a simplified approach in calculating expected credit losses. The credit risk associated with this receivable is managed through the Group’s standard credit processes. The Directors consider that the carrying amount of trade receivables approximates to their fair value. Ageing trade receivables Not past due Past due less than one month Past due one to two months More than two months past due 60 31 March 2019 31 March 2018 Gross £’000 Impairment £’000 Gross £’000 Impairment £’000 1,122 2,131 456 276 3,985 – – – (13) (13) 2,806 2,643 308 217 5,974 – – – (140) (140) Financial ReviewNOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS CONTINUED 16. Trade and other receivables continued The carrying value of trade and other receivables is stated after the following allowance for doubtful debts: At the beginning of the period Impairment losses charged Impairment losses reversed At the end of the period 31 March 2019 £’000 31 March 2018 £’000 140 – (127) 13 106 101 (67) 140 Information about the Group’s exposure to credit and market risk is included in note 29. 17. Pension benefits The Group operates a defined contribution pension plan; the total expense relating to this plan in the current year was £553,674 (2018: £250,566). 18. Share based payments Details of the existing schemes and schemes granted in the year and the inputs that were entered into the Monte Carlo valuation model are provided below: EMI 2015 option plan ESS 2015 option plan GSS 2016 option plan EMI 2016 option plan GSS 2018 option plan Status Grant date Existing plan Existing plan Existing plan Existing plan 19 January 2015 27 March 2015 7 March 2016 7 March 2016 Number of options 5,006,335 9,513,845 3,913,000 7.75p £nil £nil Average share price of 12.75p over 20 consecutive working days Average share price of 24.0p over 20 consecutive working days Average share price of 40.0p over 20 consecutive working days Average share price of 40.0p over 20 consecutive working days 3,243,149 28.125p Exercise price Vesting criteria Volatility Dividend yield Option life Annual risk free rate Outstanding at the beginning of the year Exercised during the year Lapsed during the year* Outstanding at the end of the year Exercisable at the end of the year 30.00% nil 3 years 0.74% 29.30% nil 3 years 0.41% 56.60% 2.49% 1 year 0.45% 3,000,000 (3,000,000) 3,733,089 (3,733,089) 1,926,000 (1,926,000) – – – – – – – – – * Lapsed shares relate to two employees who have left the Group during the year. 56.60% 2.49% 1 year 0.45% 248,421 (248,421) – – – New plan 3 August 2018 3,944,064 £nil Hurdle one: Average share price of 100.0p over 20 consecutive working days Hurdle two: Average share price of 130.0p over 20 consecutive working days 236.8% 3.17% 3 years 0.82% 3,944,064 – (715,077) 3,228,987 – 61 Fulcrum Utility Services Limited Annual Report and Accounts 2019 18. Share based payments continued Status Grant date Number of options Exercise price Vesting criteria Volatility Dividend yield Expected life Annual risk free rate Outstanding at the beginning of the year Granted during the year Exercised during the year Lapsed during the year* Outstanding at the end of the year Exercisable at the end of the year SAYE 2016 option plan SAYE 2017 option plan SAYE 2018 option plan SAYE 2019 option plan Existing plan Existing plan Existing plan New plan 3 February 2016 3 February 2017 5 February 2018 5 February 2019 2,678,416 22.1p 513,000 50.0p 749,520 50.0p 3,992,769 35.1p Maturity date of 1 March 2019 Maturity date of 1 March 2020 Maturity date of 1 March 2021 Maturity date of 1 March 2022 56.6% 2.49% 3 years 0.45% 2,678,416 – (952,644) – 1,725,772 1,725,772 119.6% 1.92% 3 years 0.11% 513,000 – – – 513,000 – 230.1% 3.20% 3 years 0.74% 749,520 – – (581,400) 168,120 – 281.3% 4.90% 3 years 1.61% – 3,992,769 – – 3,992,769 – * Lapsed shares are primarily a result of employees cancelling their holdings in the SAYE 2018 scheme in favour of the SAYE 2019 scheme. No cash-settled share based payment awards have been granted to employees. The volatility was determined by calculating the historical volatility of the Group’s share price since the Group’s listing on AIM in December 2009. The expected useful life used in the model has been adjusted, based on best estimates, to reflect exercise restrictions and behavioural considerations. In the year, the Group recognised total expense before tax of £115,000 (2018: £35,000) in relation to equity-settled share based payment transactions in the statement of comprehensive income. These options have been credited against retained earnings reserve. 19. Share capital Authorised 500,000,000 ordinary shares of £0.001 each Allotted, issued and fully paid 221,303,106 (2018: 210,656,308) ordinary shares of £0.001 each 31 March 2019 £’000 31 March 2018 £’000 500 500 221 211 Ordinary shareholders are entitled to dividends as declared. During the year 10.6 million ordinary shares (2018: 43.4 million ordinary shares) were issued with a nominal value of £10,647 (2018: £43,414) to employees exercising vested share options. 20. Share premium At the beginning of the period Dividends paid Capital transfer to retained earnings Shares issued At the end of the period 31 March 2019 £’000 31 March 2018 £’000 21,042 (4,738) (16,605) 511 210 14,101 (3,494) – 10,435 21,042 In February 2019, a capital transfer was performed of £16.6 million from the share premium account to retained earnings. Under Cayman law, distributions can be made out of share premium unlike in the UK. As such, the transfer was performed to provide better clarity to the reader of the accounts. 62 Financial ReviewNOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS CONTINUED 21. Revaluation reserve The revaluation reserve relates to the revaluation of the Group’s utility asset estate. At the beginning of the period Revaluation in the period Surplus arising on utility assets internally adopted in the year Asset impairment Revaluation reserve transfer Recognition of deferred tax liability At the end of the period 31 March 2019 £’000 4,649 11,380 1,100 (2,544) – (1,848) Restated 31 March 2018 £’000 3,572 334 813 – (8) (62) 12,737 4,649 As at 31 March 2019, an independent valuation was performed on the Group’s utility asset estate resulting in a net increase to the value of the estate of £8.0 million. Further details are provided in note 12. 22. Merger reserve Relates to the premium arising on the issue of shares as part of the acquisition of The Dunamis Group Limited on 5 February 2018 and CDS PSL Holdings Limited on 27 March 2018. At the beginning of the period Issue of shares At the end of the period 23. Retained earnings At the beginning of the period as previously reported Adjustment for change in accounting policy Restated at the beginning of the period Retained profit in the period Revaluation reserve transfer Capital transfer* Equity-settled share based payment transactions At the end of the period * See note 20: share premium for details. 24. Trade and other payables Trade payables Other payables 31 March 2019 £’000 11,347 31 March 2018 £’000 – – 11,347 11,347 11,347 31 March 2019 £’000 Restated 31 March 2018 £’000 (7,165) (229) (695) (7,394) 4,934 6,656 – 16,605 115 8 – 35 20,959 (695) 31 March 2019 £’000 5,881 5,065 Restated 31 March 2018 £’000 4,261 6,482 10,946 10,743 63 Fulcrum Utility Services Limited Annual Report and Accounts 2019 25. Contract liabilities Contract liabilities 31 March 2019 £’000 31 March 2018 £’000 26,343 25,900 26,343 25,900 Of the £26.3 million of contract liabilities, £20.9 million (2018: £20.4 million) relates to deferred income. Deferred income represents contracted sales for which services to customers will be provided in future periods. Information about the Group’s exposure to liquidity risks is included in note 28. 26. Interest-bearing loans and borrowings On 4 June 2018, the Group entered into a new three year revolving credit facility agreement with Lloyds Banking Group for up to £20 million. The new debt facility replaces the previous £4.0 million debt facility which was undrawn on 4 June 2018. The new facility supports the forecast growth in utility asset ownership of gas and electricity assets by the Group, with drawdowns secured against the acquired utility assets. The facility is structured as an “accordion” facility so that £10.0 million is currently committed and a further £10.0 million is available by request from the Group to the bank. When the facility was entered into, the transaction costs and arrangement fee totalling £83.6k were capitalised. Following the first drawdown in January the costs have been amortised over the remaining life of that facility, i.e. until 4 June 2021. (a) Changes in liabilities arising from financing activities At the beginning of the period New borrowings Finance costs paid (b) Terms and repayment schedule Borrowings 31 March 2019 £’000 31 March 2018 £’000 (2) 3,000 (73) 2,925 – – (2) (2) Currency Nominal interest rate Year of maturity 31 March 2019 £’000 31 March 2018 £’000 GBP LIBOR + 2.0% 2021 3,000 – The Group has complied with the financial covenants (interest cover and leverage covenants) relating to the above facilities. 27. Reconciliation to net funds Cash and cash equivalents Borrowings Net funds 31 March 2019 £’000 31 March 2018 £’000 6,824 (3,000) 9,431 – 3,824 9,431 64 Financial ReviewNOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS CONTINUED 28. Provisions At the beginning of the period Utilised during the period Provision created during the period At the end of the period 31 March 2019 £’000 31 March 2018 £’000 98 (2) – 96 – – 98 98 The provision relates to warranty provisions held in Dunamis Infrastructure Services Limited. The provision has been estimated based on historical warranty data associated with similar products and services and is expected to be utilised over two years. 29. Financial risk management The Group has exposure to the following risks from its use of financial instruments: • market risk; • liquidity risk; • capital risk; and • credit risk. This note presents basic information regarding the Group’s exposure to these risks and the Group’s objectives, strategy and processes. The Board has overall responsibility for risk management of the Group and agrees policies for managing the risks associated. Market risk Market risk represents the potential for changes in interest rates and foreign exchange prices to affect the Group’s profit and the value of its financial instruments. It also incorporates the effect of the overall UK construction/utilities industry on the Group. The Group’s objective in market risk management is to minimise its exposures to fluctuations within such variables whilst optimising returns. Interest rate risk The Group’s interest rate risk generally arises from its borrowing facility. The Group agreed a new debt facility of up to £20.0 million with our existing bank, Lloyds Banking Group plc, on 4 June 2018, to support the forecast growth in utility asset ownership of gas and electricity assets. During the year £3.0 million was drawn at an interest rate of 2.0% plus LIBOR. There would need to be a significant movement in the LIBOR rate to impact the Group. The Group’s exposure to the risk of changes in foreign exchange is low as the Group operates within the UK. UK capacity market During the year some of the Group’s infrastructure projects were influenced by external pressures, such as the sudden suspension of the UK capacity market, which has resulted in certain projects commencing later than expected. Despite these headwinds presenting current challenges for the sector, the Board remains confident in the longer-term prospects due to our customer relationships, our technical expertise and the fundamental need for investment to enhance and efficiently manage the electricity grid capacity. Liquidity risk Liquidity risk is the risk that the Group will not be able to meet its financial obligations as they fall due. The Board is responsible for ensuring that the Group has sufficient liquidity to meet its financial liabilities as they fall due without incurring unacceptable losses or risking damage to the Group and does so by monitoring cash flow forecasts and budgets. The Group’s exposure to liquidity risk reflects its ability to readily access the funds to support its operations. Liquidity forecasts are produced on a regular basis and include the expected cash flows that will occur on a weekly, monthly and quarterly basis. This information is used in conjunction with the weekly reporting of actual cash balances at bank in order to calculate the level of funding that will be required in the short and medium term. To support the forecast growth in utility asset ownership of gas and electricity assets, the Group agreed a new debt facility of up to £20.0 million in June 2018. At 31 March 2019 the Group had drawn down £3.0 million from the facility to fund the acquisition of utility assets; the loan is secured against the assets acquired. The facility and close working capital management are deemed to be sufficient to meet projected liquidity requirements. Cash deposits The Group has a policy of ensuring cash deposits are made with the primary objective of security of principal. Accordingly deposits are made only with approved, respected, high credit rating financial institutions. Deposits are made on a short-term basis only to preserve liquidity. 65 Fulcrum Utility Services Limited Annual Report and Accounts 2019 29. Financial risk management continued Capital risk The capital structure of the Group consists of net cash/debt (borrowings as detailed in note 26 offset by cash balances) and equity of the Group. The Group’s objective in managing capital is primarily to ensure the continued ability of the Group to meet its liabilities as they fall due whilst also maintaining an appropriate balance of equity and borrowings and minimising costs of capital. In order to maintain or adjust the capital structure, the Group may adjust the amount of dividends paid to shareholders, return capital to shareholders or issue new shares. Decisions regarding the balance of equity and borrowings, dividend policy and all major borrowing facilities are reserved for the Board. Credit risk Credit risk arises from cash and cash equivalents and credit exposure to the Group’s customers. A high proportion of the Group’s customers pay in advance of works commencing, with the remaining profile consisting of established or listed businesses which typically pay on stage payment terms with cash received in advance of works commencing. The creditworthiness of new customers is assessed by taking into account their financial position, past experience and other factors. It is considered that the failure of any single counterparty would not materially impact the financial wellbeing of the Group. 30. Operating leases (a) Operating lease commitments Non-cancellable operating lease rentals are payable as follows: Less than one year Between one and five years In more than five years Land and buildings Other operating leases 2019 £’000 272 1,042 583 1,897 2018 £’000 271 924 842 2019 £’000 432 683 0 2018 £’000 559 722 0 2,037 1,115 1,281 Operating lease rentals relate to property rents and short-term vehicle and plant hire. (b) Transition to IFRS 16 IFRS 16: Leases (effective for annual periods beginning on or after 1 January 2019) will replace IAS 17 and related interpretations and requires entities to apply a single lessee accounting model, with lessees recognising right-of-use-assets and lease liabilities on the balance sheet for all applicable leases. In addition, the nature of expenses related to those leases will change because IFRS 16 replaces the straight- line operating lease expense with a depreciation charge for the right-of-use-assets and an interest expense relating to lease liabilities. The Group intends to adopt a full retrospective application of the standard applying the practical expedient available on transition not to reassess whether a contract existing at the date of initial application contains a lease. The Group currently anticipates the approximate impact on the financial statements as follows: Statement on financial position (restatement impact as at 31 March 2019) IFRS 16 right-of-use assets IFRS 16 lease liabilities Net IFRS 16 lease recognition Remove operating lease related prepayments and accruals Net impact at 31 March 2019 FY19 income statement (restatement impact) Remove operating lease charges Replace with IFRS 16 depreciation and finance charge FY19 profit before tax decrease under IFRS 16 versus IAS 17 Estimated impact £’000 Range of outcomes * +/- £’000 2,464 (2,709) (245) 112 (133) 659 (682) (23) 100 100 10 10 10 * All estimates are rounded to the nearest £100,000 and presented as a range of outcomes as they remain subject to refinement of judgements, estimates and assumptions, further detailed review and full audit of the transition amounts in the year of transition. Any revisions to estimates, notably in respect of lease terms and discount rates, would include a degree of offset between right-of-use assets and lease liabilities. Consequently the range of outcomes for the total net impact is lower than the sum of individual ranges of outcomes. 66 Financial ReviewNOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS CONTINUED 30. Operating leases continued (b) Transition to IFRS 16 continued The reduction in net assets on transition to IFRS 16 reflects the timing of finance charges under a full retrospective application, whereby the finance charge is greatest at the start of each lease resulting in higher cumulative historical income statement charges prior to the date of transition versus those reported under IAS 17. Consequently the Group anticipates total future income statement charges in respect of existing leases to be slightly higher under IFRS 16 than would have been reported on a straight-line basis under IAS 17, reflecting the gradual reversal of the opening restatement impact on net assets. This will be partially offset by higher initial income statement charges on new leases. The estimated impact on the FY19 income statement is shown above. 31. Related parties The Group has a related party relationship with its subsidiaries and with its Directors. Details of the remuneration, share options and pension entitlement of the Directors are included in the Remuneration Report on pages 30 and 31. Ian Foster’s wife is a Director of TQM Ltd. In the year ended 31 March 2019, TQM provided consulting services to the value of £15k. 67 Fulcrum Utility Services Limited Annual Report and Accounts 2019 ADVISERS Nominated adviser and broker Cenkos Securities PLC 6.7.8 Tokenhouse Yard London EC2R 7AS Financial PR adviser Capital Market Communications (Camarco) Limited 107 Cheapside London EC2V 6DN Auditors KPMG LLP 1 Sovereign Square Sovereign Street Leeds LS1 4DA Solicitors to the Company as to English law Shoosmiths LLP Witan Gate House 500–600 Witan Gate West Milton Keynes MK9 1SH GROUP TRADING COMPANIES Solicitors to the Company as to Cayman Islands law Maples and Calder 11th Floor 200 Aldersgate Street London EC1A 4HD Registrars Link Market Services (Guernsey) Limited Longue Hougue House St. Sampson Guernsey GY2 4JN Channel Islands Bankers Lloyds Banking Group 1st Floor 14 Church Street Sheffield S1 1HP Independent Gas Transporter (iGT) Fulcrum Pipelines Limited Independent Connection Providers (ICPs) The Dunamis Group Limited Independent Distribution Network Operator (iDNO) Fulcrum Electricity Assets Limited Meter Asset Provider (MAP) Fulcrum Smart Metering Limited Meter Operator (MOP) Fulcrum Metering Services Limited Utility Infrastructure Providers (UIPs) Fulcrum Infrastructure Services Limited CDS Pipe Services Limited Dunamis Infrastructure Services Limited Matrix Professional Services Limited Matrix Network (Eastern) Limited Maintenance Services Provider Maintech Power Services Limited 68 Financial Review Fulcrum 2 Europa View Sheffield Business Park Sheffield South Yorkshire S9 1XH Tel: 03330 146 466 Email: enquiries@fulcrum.co.uk Websites: www.fulcrum.co.uk www.fulcrumutilityserviceslimited.co.uk www.dunamisgroup.co.uk F u l c r u m U t i l i t y S e r v i c e s L i m i t e d A n n u a l R e p o r t a n d A c c o u n t s 2 0 1 9