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Serving our
customers,
protecting the
environment
SMS Annual report and accounts 2020
Leading the smart
energy revolution
SMS has been at the heart of the
UK energy market for over 25 years.
We are a major smart metering and
energy services business playing
a critical role in transforming and
decarbonising the UK’s energy system.
Find out more about our achievements over
the past 25 years on page 14.
Financial statements
112
Independent auditor’s report
121 Consolidated income statement
122
Consolidated statement
of comprehensive income
123 Consolidated statement
of financial position
124 Consolidated statement
of changes in equity
125
Consolidated statement
of cash flows
126 Accounting policies
139
Notes to the financial statements
172 Parent company balance sheet
173
Parent company statement
of changes in equity
174
Notes to the parent company
financial statements
Contents
Strategic report
01 Our purpose
02 At a glance
04 Our response to COVID-19
08 Chairman’s statement
12 Chief Executive Officer’s statement
16 Our markets
22 Our strategy
28 Our business model
30 Operational review
38 Sustainability
39 Stakeholder engagement
43 The environment
49 Our people
54 Health and safety
56 Ethical business practices
58 Risk report
65 Financial review
Governance
73
Chairman’s introduction
to governance
74 Board of Directors
76 Corporate governance report
88 Audit Committee report
94 Nomination Committee report
96 Remuneration Committee report
107 Directors’ report
110
Statement of Directors’
responsibilities
SMS Annual report and accounts 2020 01
Our purpose: why we exist
Serving our customers, protecting the environment
Delivering smart energy solutions to realise a greener, more sustainable future.
Our strategy: our strategic pillars
Long-term, recurring
cash generation from
secure infrastructure
assets
Customer excellence
and efficient delivery
Efficient capital
allocation to provide
headroom for growth
Sustainable and
socially responsible
business
Find out more on pages 22 to 27
What we do: focus on carbon reduction
Asset Management
Metering
Data
Asset Installation
Energy Management
Find out more on pages 30 to 37
How we do it: our approach
Origination and
ownership of assets
Investing in
our people
Listening to
our customers
Leveraging
our resources
Find out more on page 31
Find out more on page 49
Find out more on page 40
Find out more on page 70
See the report online
sms-plc.com
Strategic reportGovernanceFinancial statements
02 SMS Annual report and accounts 2020
AT A GLANCE
Providing the complete
energy service
We provide an end-to-end service covering all aspects
of metering, utility connections and energy management.
Our vision
Our purpose
To be at the heart of the low-carbon, smart
energy revolution that is pivotal to realising
a greener, more sustainable world.
With over 25 years of heritage and experience, we have
an exceptional understanding of the UK energy market
and how it is changing. As leaders in delivering and
funding smart energy infrastructure and the zero-carbon
technologies required to decarbonise, we are playing
a critical role in achieving our nation’s climate targets.
A trusted partner, we are uniquely positioned to help
effect real and enduring transformation.
Our values
Serving our customers, protecting the
environment.
Our immediate goal is carbon reduction, with the ultimate
target of net-zero carbon emissions.
We use our technology, data, finance and engineering skills
and knowledge to provide innovative energy solutions for
our customers. Through our services we are changing how
businesses and consumers access and use energy. In doing
so, we are delivering value to them, generating long-term
sustainable and recurring revenue streams for the
Company and, above all, reducing carbon emissions.
Our strategic investment in emerging carbon reduction
(’CaRe’) asset classes helps to carve out new market
segments that align with these goals.
Our five core values capture who we are, what we believe
in and what we stand for.
See our business model on pages 28 to 29
Safety
Customer
excellence
Pride
Innovation
Sustainability
A joined up end-to-end energy service
Data and analysis runs throughout the process
Customer
contact
Engineering
training
Asset
installation and
connections
Metering
Data collection
and analysis
Engineering
and operational
delivery
Asset
management
Data and analysis runs throughout the process
CaRe project delivery
Carbon
reduction
(CaRe) asset
solutions
CaRe project delivery
SMS Annual report and accounts 2020 03
Our customers
Listening to and serving our customers is at the heart
of what we do.
We put this into action throughout the business –
be it a meter engineer on the doorstep of a customer,
a customer service adviser on the phone to a customer
or an energy consultant in front of a customer.
Utilities
• Major UK energy suppliers
• Independent energy suppliers
• Rapidly growing new market participants
Developers
• Major UK housebuilders
• UK-wide private and public property development
organisations
Enterprises
• Retail chains
• Large supermarkets
• High street banks
• Major rail and telecomms companies
• Public sector organisations
• Industrial & Commercial (I&C) businesses
What we do
Our complete energy service covers:
Asset Management
Smart metering and data services
Installation, operation and management of meter and
energy infrastructure assets and related data services,
which facilitate a greener and more flexible energy system.
Asset Installation
Smart utility services
Design, installation and management of utility connections
and energy infrastructure.
Energy Management
Smart energy services
Ongoing delivery of energy management and carbon
reduction solutions, including the operation of CaRe assets,
enabling long-term sustainability and lower carbon emissions.
There are no other UK organisations in a position to offer
all these services in house simultaneously, meaning our
customers do not have to worry about finding multiple
partners to deliver their energy-related projects.
See the Operational review on pages 30 to 37
Assets under management
Gas metering assets1
2,469,000 (2019: 2,495,000)
-1%
Electricity metering assets1
863,000 (2019: 779,000)
+11%
Gas data assets
133,000 (2019: 134,000)
Electricity data assets
348,000 (2019: 322,000)
-1%
+8%
1 Includes third-party assets managed by SMS.
Strategic reportGovernanceFinancial statements
04 SMS Annual report and accounts 2020
OUR RESPONSE TO COVID-19
Playing our part to keep the
UK’s gas and electricity flowing
Throughout the global
pandemic, SMS has played
a critical part in maintaining
the UK’s energy supplies.
The security of our energy
supply and metering
infrastructure at an
extraordinary time like this
has never been more
important.
During the crisis we have focused on
the following priorities, while also
ensuring we stay agile and able to
respond to the ongoing volatility and
uncertainty caused by COVID-19:
1 protecting the health, safety
and wellbeing of our customers,
our employees and the wider public;
2 being there for our customers
and all energy consumers, providing
support and continuity of service
in the safest way possible; and
3 strengthening the Group’s
balance sheet and maintaining
operational and financial flexibility.
The perseverance, resilience and
professionalism our people have
shown through this difficult period
has been exceptional. They have
demonstrated an unwavering
commitment to making sure the
country’s essential energy network
remains fully functioning, and we
continue to serve our customers to the
highest standards every single day.
N
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1
9
1 Protecting health, safety and wellbeing
Our number one
core value is safety.
ENSURING A
C-19
BUSI(cid:12)ESS P(cid:10)EDGE
SAFE & HEALTHY
RETUR(cid:12) TO WORK
AMID COVID-19
PROTECTING OUR ENGINEERS & CUSTOMERS
PROTECTING EMPLOYEES & THE GENERAL PUBLIC
As part our COVID-19 Safe & Healthy Return to Work process, we have conducted a
comprehensive business risk assessment in consultation with our employees and put in place
a number of stringent control measures to ensure our employees, our customers and the
general public are protected from virus transmission.
These measures, which are compliant with the UK Government's guidelines for a 'COVID-19
Secure Employer', have been specifically designed to prevent the spread of COVID-19 and
reduce related risks across all areas of our business. These measures include:
Our Return to Work guidelines follow the
UK Government's 5 key points for a
COVID-19 Secure Employer.
Work from home, if you can
Carry out a C(cid:10)(cid:15)ID-19 risk assessment
in consultation with workers
Maintain 2 metres social distancing,
where&er possible
Where people cannot be 2 metres
apart, manage transmission risk
Reinforcing cleaning processes
That is why, on
24 March 2020, we
took the decision
to stand down all
non-essential field
work – including
the planned
installation of
smart meters –
and prioritise only
emergency work.
This decision was a leading one
for our industry, coming hours
before the UK Government’s
announcement of strict national
lockdown measures. It was not
a decision taken lightly, knowing
the disruption it would have on
Hygiene items
our business operations, but it was
Including: antibacterial wipes (cid:13) sanitiser to wash
hands thoroughly before and after visits
a measure we considered essential
to protect the wellbeing of our
key stakeholders.
ON SITE
Social distancing
Strict social distancing guidelines in place to maintain
at least 2 metres between engineer and customer
New (cid:8) updated procedures
Via method statements, risk assessments and e-learning
modules to reduce risk
Personal Protection Equipment (cid:4)PPE)
Including: mask; nitrile disposable gloves; safety glasses;
disposable boot/shoe covers.
STAYING AT HOME
Homeworking
Our employees are re$uested to continue to work from
home, where possible, until notified about our gradual
return to work with plans specific to their location.
Concurrently, the decision was made
to close all offices and warehouses,
except for activities required to
support emergency field activity
and our IT infrastructure, where
these could not be conducted
remotely. The majority of our
remaining workforce continued
to work and seamlessly support
customers from home.
MENTAL HEALTH
PROTECTING OUR GENERAL WELLBEING
Dedicated wellbeing resources
Including:
As part of this change of focus, we
immediately introduced increased
protection measures to ensure
the health and wellbeing of our
staff and supply chain, and our
customers and their consumers.
We took proactive steps to ensure
our national network of staff
were appropriately trained and
this, combined with our robust
Mindfulness workshops (cid:8)e-clusive to SMS)
Home schooling (cid:8)including virtual tours)
Financial support
Bereavement support
Remote working guidance (cid:13) tips
Virtual e-ercise classes (cid:8)e-clusive to SMS)
E-learning modules on Resilience, Homeworking (cid:13)
Wellbeing
Mental Health First Aid Training
Employees across all locations have undertaken certified
Mental Health First Aid training, providing a holistic
approach to wellbeing support offered to staff.
TRAVELLING TO SITE
IT infrastructure, ensured we could
continue to undertake emergency
works whilst reducing the risks
Hygienic tra&elling practices
Guidelines include:
to an absolute minimum.
Avoiding any unnecessary travel
Use of disposable gloves and sanitiser for refuelling
Avoiding unnecessary visits to fuel stations
Paying contactless where possible
Van stocked with sanitiser, antibacterial wipes and PPE
Following the Government’s
announcement detailing the phased
lifting of restrictions, we worked
closely with our energy partners to
develop new COVID-19-secure health
and safety installation protocols and
agreed a phased and progressive
AT THE OFFICE
resumption of all non-essential field
work, commencing from 1 June 2020.
This gradual remobilisation was
governed by our comprehensive
COVID-19 Business Risk Assessment,
PPE
Face masks to be provided to all
with control measures developed
employees. In active roles such as
warehouse activities, where 2m separation
in consultation with our employees,
is not always possible, PPE to be provided
in addition to other separation measures.
contractors and customers.
Social distancing
Strict social distancing guidelines in place to maintain
at least 2 metres between colleagues. One-way flow
system implemented with visual aids and signage.
2m
Start/finish/break times
Staggered start, finish and break times to
ensure people are apart during building entry
and e-it and not in close contact during breaks.
Strict hygiene measures
Including:
Hygiene training, guidance and reminders
Hand washing and surface cleaning
materials provided
Hand shaking and gatherings at work prohibited
Since then, we have seen a
progressive recovery in installation
run rates, despite continued local
restrictions, and by the end of 2020
we were operating at c.80% of the
pre-COVID-19 run rate. Whilst our
warehouses are now open and
operating, our offices remain closed
for the most part, with the majority
of our non-engineering workforce
Illness
continuing to work from the safety
Employees not to leave home if they or any of their
household have any symptoms of COVID-19, including a
of their own homes.
fever.
Only essential business-related travel allowed
All non-essential meetings changed to digital meetups
Avoiding public transport and using alternative modes
where possible: e.g. cycling/walking to work
Car sharing scheme halted until further notice
Masks provided for those who must use public transport
Tra&el guidelines
Including:
PROTECTING THOSE WHO CAN WORK REMOTELY
PROTECTING THOSE WHO CAN'T WORK REMOTELY
W
O
R
KING T O G E
R
H E
T
A Safe & Healthy Return to Work
Our Return to Work guidelines follow the
UK Government's 5 key points for a
'COVID-19 Secure' employer.
Our Safe & Healthy Return to Work guidelines have been formulated in consultation with our
employees and partners, and in compliance with the UK Government’s latest official guidance.
Official advice via UK Government and devolved public health agencies is monitored regularly for
latest details and best practice shared with employees relevant to their roles and locations. Our
employees are kept fully briefed and up to date with latest COVID-19 advice on staying protected
through regular communication.
Please note: the high-level guidelines displayed on this infographic are not exhaustive or fully
indicative of our comprehensive Return to Work measures and risk assessment. You can request
the guidelines in full at info@sms-plc.com or by contacting your dedicated SMS contact.
1 Protecting health, safety and wellbeing
SMS Annual report and accounts 2020 05
2 Being there for our customers
Serving our customers is a core
component of our purpose; we
strive to deliver an exceptional
customer experience. Throughout
the challenges we have faced with
the pandemic, being there for our
customers has been of paramount
importance.
We have kept all our customers
closely updated on our decisions,
maintaining daily communication
with them through dedicated
representatives. Information on our
new procedures and protocols –
including our COVID-19 Business
Risk Assessment – was shared, to
give our customers the reassurance
that their safety, and that of their
own customers, was our number
one priority.
And, when we talk about being
there for our customers, we do not
just mean virtually. Through the
pandemic SMS has, literally and
physically, been there for our
customers, providing full emergency
field services to support critical
national infrastructure and
maintain people’s energy supplies.
Our focus in the year, especially
during times of lockdown, has been
on the most vulnerable consumers,
and also on ensuring the nation’s
front-line services – hospitals, care
homes and the like – have a reliable
flow of gas and power.
We are proud in the knowledge that
the services we deliver are making
a real difference.
Priority in action:
Keeping essential services running smoothly
During the first national lockdown we were approached by a care
services company regarding one of its care homes, which had
been closed since the previous summer due to problems with the
gas supply. As works had been pulled on previous occasions by
another supplier, the company was desperate to get the care home
re-opened in order to provide much-needed beds for COVID-19
patients and medical staff.
Our engineer assigned to the job recognised the importance of this
project and went beyond the call of duty to ensure the care home
was resupplied with gas quickly and thus able to re-open.
This is just one example of the amazing contributions our front-line
engineers and support workforce have made during COVID-19 by
responding to emergency energy situations.
Priority in action:
Investment in
protection and
training
Our front-line engineers are
provided with the protection
and training that they require
to respond to jobs safely,
keeping risk to a minimum.
These stringent measures
include:
• updated procedures – via
a method statement, risk
assessment and e-learning
module;
• revised scripts for our
contact centre staff to
establish whether it is safe
for our engineers to attend
a job;
• additional Personal
Protection Equipment (PPE);
• additional hygiene items
including hand sanitiser and
masks; and
• procedures to reduce risk,
e.g. not passing hand-held
devices to customers.
For the remainder of our
people – our office and
operational support staff –
their wellbeing has been
a priority. We have helped
individuals manage the
transition to home, supplying
the necessary technology
and guidance to do so.
See the Our people section
on page 49.
Strategic reportGovernanceFinancial statements
06 SMS Annual report and accounts 2020
OUR RESPONSE TO COVID-19 continued
3 Maintaining operational and financial flexibility
The completion of the disposal of
a minority of the Group’s meter
assets on 22 April 2020, for gross
cash consideration of £290.6m, was
a demonstration of the strength of
our meter asset class. The proceeds
allowed the Group to reset its
leverage, supporting a £270m
voluntary prepayment of the
Group’s revolving credit facility and
driving a net cash position overall,
which is still maintained as at
31 December 2020. As anticipated,
the disposal provided the Group
with significant headroom to
manage the business going
forward on a low-leverage basis.
Despite the constraints COVID-19
placed on the business during the
year, the Group’s existing index-linked
annualised recurring revenue (ILARR)
of £73.2m at 29 February 2020, just
prior to the first national lockdown,
remained unaffected by the
temporary measures taken.
Throughout the year, the Group has
managed its cash flows carefully, with
a concentrated effort to work with our
customers to ensure orderly debt
collection. The Group’s engineer
capacity has been adapted in order to
manage customer demand, which has
been inherently more volatile through
the pandemic, more efficiently.
Management has also ensured that
the Group’s operating cost base
has remained as streamlined as
possible, suspending any non-
critical business spend.
Whilst the COVID-19 situation will
continue to impact on the short-
term growth of the business, the
combination of the Group’s robust
balance sheet, high-quality,
index-linked recurring revenue
streams and contracted order
pipeline ensures that the longer-
term impact on the Group will be
minimal. This demonstrates the
financial resilience of the Group’s
business model.
Priority in action:
The Coronavirus Job Retention Scheme (CJRS)
Due to significant uncertainties
prevailing in the earlier part of 2020,
and the material impact of the
cessation of activities from March
to June on the roles of many of the
Group’s workforce, we elected to
furlough some of our staff in March
2020 and apply for a grant under
the CJRS.
However, when we emerged from this
uncertain period with a strong cash
position and underlying growth
despite the lockdown, the Board took
the decision in June to return
all funds received from the UK
Government under the CJRS
and to withdraw from the
scheme altogether.
Following positive feedback
from our people and customers
regarding our phased
re-mobilisation, we were able to
accelerate the process over the
summer, and all staff previously
stood down had returned to
work by the end of August.
12 March 2020
• COVID-19 formally
tabled at Board
meeting
19 March 2020
• COVID-19 Business
Risk Assessment
compiled
27 March 2020
• Dedicated Company
wellbeing intranet
page launched to
staff
31 March 2020
• Communication
to employees to
confirm enrolment
in the CJRS
22 April 2020
• Completion of asset
disposal and voluntary
prepayment of the
Group’s revolving
credit facility
17 March 2020
• 2019 final results
announcement
24 March 2020
• Temporary suspension of all
non-essential field work announced
• All offices and warehouses closed
• New health and safety processes
and procedures introduced
13 April 2020
• Lockdown extension
announced by
UK Government.
Customer update
issued
23 April 2020
• Trading
update
SMS Annual report and accounts 2020 07
Looking ahead
Since summer 2020, the UK
Government’s restrictions –
including the most recent national
lockdown initiated at the end of
December 2020 – do not apply to
engineering and construction works
in England, Wales and Northern
Ireland. This means that the rollout
of smart meters across domestic
and commercial sites can continue
as normal in these parts of the
country, in addition to emergency
works and other construction
projects such as energy efficiency
and utility connections works.
For now, therefore, it’s business as
usual as we continue with our mission
to deliver the future of smart energy,
in the safest possible way.
Stakeholder management
Communicating with our key
stakeholders effectively and
transparently through the pandemic
has been critical in ensuring the
continued operation of the business:
Shareholders
We engaged proactively with
shareholders, providing regular updates
and releasing several Regulatory
News Service announcements
through the year. Our share price
reaction has been positive and our
financial results have come in marginally
ahead of market expectations for
the year.
Customers
We have communicated frequently
with customers to provide updates
on our services and risk assessments,
and to give them information on
new health and safety protocols.
We have endeavoured to support
our customers – and the end
consumer – wherever possible.
Employees
Protecting the safety and wellbeing of
our people has been our top priority.
Various forums have been used to
engage with teams across the business
and an extensive suite of wellbeing
initiatives has been implemented.
Staff have remained financially
supported, without exception.
Suppliers
Our long-standing partner
relationships remain stronger than
ever. Our key focus was on vendors
critical to maintaining the operation
of our Asset Installation business. We
engaged early to ascertain potential
risks to the supply chain for key items.
In this way, we were able to respond
quickly to potential PPE shortages,
ensuring we had sufficient access
through alternative suppliers.
Lenders
Our lenders were kept up to date
on key developments during the year
and were directly involved in discussions
around the impact of the disposal
of a minority of meter assets on the
business and, of course, the subsequent
voluntary debt prepayment. Bank
reporting was provided without
exception, with no breaches to our
covenants in the year.
Government and
regulatory bodies
We proactively engaged with
government and regulatory bodies
to come together as an industry,
helping to develop aligned strategies
in response to the crisis. We actively
participated in the COVID-19
Remobilisation Working Group
chaired by the Department for
Business, Energy & Industrial Strategy
(BEIS), and represented Meter
Asset Providers (MAPs) on a Data
Communications Company (DCC)-
chaired Communications Hub Supply
Chain Group, helping to evaluate
how best to slow down deliveries while
keeping supply running.
1 May 2020
• SMS signs up to the
C-19 Business Pledge
(see page 49 for
details)
7 May 2020
• COVID-19 Business
Risk Assessment
finalised and
distributed to key
stakeholders
1 July 2020
• Announcement of
31 August 2020
• All employees returned
17 December 2020
• 2020 trading update
from furlough
decision to return the
furlough funds received
under the CJRS and
withdraw from the
scheme forthwith
confirming an
installation run rate
at c.80% of the
pre-COVID-19 run
rate
23 April 2020
• Trading
update
6 May 2020
• 20 employees became
29 May 2020
• Announcement of
accredited mental
health first aiders
plans for a phased and
progressive resumption
of non-essential field
work from 1 June
30 July 2020
• Half-year trading
update
15 September 2020
• 2020 interim results
announcement
Strategic reportGovernanceFinancial statements
08 SMS Annual report and accounts 2020
CHAIRMAN’S STATEMENT
Protecting value
for our shareholders
2020 presented us all with exceptional
challenges, but the resilience of our business
model was demonstrated once again.
DESPITE THE
UNPRECEDENTED
CIRCUMSTANCES,
I BELIEVE WE HAVE COME
OUT STRONGER, MORE
UNIFIED AS A BUSINESS.”
I was appointed as Chairman
in June 2020, at our first virtual
Annual General Meeting. Against
the backdrop of the COVID-19
pandemic, we have faced
considerable challenges during
the year, as individuals and
as a business. First and foremost,
I would like to thank all of our
people at SMS for the commitment
and resilience that they have shown
over the last year, and as I write.
2020 has, nonetheless, been
a remarkable year for SMS, with
considerable successes. We completed
the largest commercial transaction
in the Company’s history, selling
a minority portfolio of meter assets
in April for over £290m, allowing us
to pay down all our debt and to be
cash-positive through the remainder
of the year. We started the building
of our business in carbon reduction
(‘CaRe’) assets, in our first addressable
market, with our investment in
grid-scale battery storage. We now
have 90MW under construction,
driving forward our strategy of being
at the heart of the energy transition
in the UK. Most importantly, we
announced our aim to be ‘net carbon
zero’ by 2030, supported by an
ambitious implementation plan.
We have established a new Board
committee under my Chairmanship
– the Health, Safety and Sustainability
Committee – which provides enhanced
oversight and governance of these
key drivers of our business.
In unprecedented circumstances, the
determination of our people has been
outstanding, and I am proud of how
we have supported each other to
deliver a highly successful 25th year
for the Company.
SMS Annual report and accounts 2020 09
Financial performance
and dividend
Our results for the year to 31 December
2020 clearly demonstrate the
underlying financial strength of our
business. We have remained profitable
and seen growth in our asset-backed,
index-linked annual recurring revenues,
all underpinned by a strong debt-free
balance sheet.
The unlocking of value from the sale
of a minority of our meter assets has
enabled us to deliver an enhanced
dividend. We have proposed a 25p per
share dividend in respect of FY 2020,
with intended annual growth of 10%
through to the end of the UK smart
meter rollout in 2025. Two of four
equal quarterly instalments have
already been in paid, in October 2020
and January 2021 respectively. The
remaining instalments will be paid
in the coming months.
Progress against our strategy
We have four key strategic priorities,
which are: long-term, recurring cash
generation from secure infrastructure
assets; customer excellence and
efficient delivery; efficient capital
allocation; and sustainable and socially
responsible business. This framework
provides a clear strategic vision for
the Group to ensure that the business
is capable of growing whilst balancing
delivery of long-term value for all
stakeholders.
The business maintains its focus on
operational excellence in the delivery
of the UK smart meter rollout and,
increasingly, a parallel focus on the
development of the next generation
of energy transition assets.
I am pleased to report that progress
against our strategy has continued
apace over the year. Capital
deployment in our contracted order
pipeline in meters and CaRe assets
now stands at c.£450m and c.£180m
respectively, in particular on the
Group’s investment in grid-scale
battery storage projects in the year.
Our pipeline of opportunities is
growing, supporting the global trend
towards decarbonisation.
COVID-19
SMS played an essential part in
keeping the UK’s energy networks
functioning through the various
lockdowns and restrictions that
dominated the year. We ensured
that those most vulnerable in our
society did not go without a reliable
source of gas and electricity
and we were on hand to deliver
emergency utility services to those
operating on the front line.
Protecting the health, safety
and wellbeing of our people, our
customers and the end consumer
has been our number one priority
and, as detailed on pages 4 to 7,
extensive new and enhanced
measures have been introduced
in the year. Protective equipment,
clear protocols and processes,
detailed risk assessments – these
have all been vital. As importantly,
we have focused on supporting
the emotional health of our people,
providing extensive wellbeing
resources as part of a dedicated
programme to improve
awareness around mental health.
You can read more about our
strategic priorities and progress
on pages 22 to 27.
Environmental, social
and governance (ESG)
commitments at the
heart of what we do
Sustainability is embedded within
our culture, principles and values.
Together with our products and
services, it underpins our ability to
create long-standing value for our
stakeholders and achieve our vision
to be at the heart of the low-carbon,
smart energy revolution that is
pivotal to realising a greener, more
sustainable world.
The Our people section on pages
49 to 53 highlights these initiatives
and the accreditations we have
received as a result.
We were able to provide complete
financial support to all employees
through the pandemic, including
those who were temporarily stood
down from their positions during
the first national lockdown, and
most staff retained their full salaries.
Because of the financial strength
and resilience of the business, we
have not needed to rely on any
support from the UK Government
and were one of the first companies
in the UK to return furlough grants
covering the earlier part of the
Coronavirus Job Retention Scheme.
There have been challenges – but
working together, albeit remotely,
we have successfully adapted. The
journey of continuous improvement
does not end here, of course,
and the measures introduced will
form an integral part of our way
of working going forward.
Earlier this year I met, virtually, with
several of our major shareholders and
it was very apparent that sustainability,
and the broader concept of ESG
accountability, is playing a more
significant part in their investment
strategies. We are already well aligned
with this trend, with our development
and delivery of low-carbon assets
and solutions. We have also enhanced
our reporting and published our first
Sustainability Report concurrent with
the Annual report and accounts 2020.
We are working hard to protect the
environment. The recent announcement
of our net-zero carbon target by 2030
demonstrates just how committed
we are to this agenda and I am excited
about the changes to come as we
bring our mission of delivering the
future of smart energy ’in-house’.
Strategic reportGovernanceFinancial statements
Looking to the future
Celebrating 25 years of SMS, I am
proud to be chairing a company built
on such a strong heritage, driven
by a powerful purpose that goes
beyond financial achievements and
shareholder value. This purpose is
striving to make the world a better
place for future generations, and
we are a business that is making
a difference.
The COVID-19 crisis, and its implications
for our business and the wider industry,
will of course continue to be closely
monitored. However, we remain
hopeful that we may be through
the worst of it and on track to return
to business as usual.
Built on secure foundations, and
with a clear strategy for growth,
I am confident that our future is
a bright one.
Miriam Greenwood
Non-executive Chairman
16 March 2021
10 SMS Annual report and accounts 2020
CHAIRMAN’S STATEMENT continued
Board changes
Willie MacDiarmid stepped down
from the Board in June 2020 following
over six years of service as a Non-
executive Director and four years as
Chairman. Throughout his tenure
as Chairman, Willie provided the Board
with wise leadership and strategic
counsel and we are very grateful for
his contributions. On behalf of the
Board, I would like to thank Willie for
his service and wish him a happy
retirement. I am delighted to have
succeeded Willie as Chairman and
very much hope that, with experience
on the Board as a Non-executive
Director, I can bring value to the role.
Graeme Bissett has succeeded me
as Senior Independent Non-executive
Director.
It is my pleasure to welcome Jamie
Richards, who joined the Board as
Independent Non-executive Director
and Chair of the Remuneration
Committee in April 2020. Jamie
brings considerable experience in the
infrastructure and solar sectors, which
will be invaluable as we execute on our
smart meter rollout programme and,
importantly, look to grow our investment
in carbon-reducing assets to create
long-term value for our stakeholders.
Whilst not a 2020 Board change,
I also wish to mention the imminent
departure of our Chief Financial
Officer, David Thompson, at the end
of this month. After almost five years
with SMS, the last three of them as
Chief Financial Officer, David has seen
the Company through a period of
remarkable change and development.
The Board and I wish him all the best
in his new endeavours and thank him
for his very valued contribution. I would
also like to welcome his successor,
Gavin Urwin, who will join the Board
as our new Chief Financial Officer
on 31 March 2021.
Section 172 and stakeholder
engagement
Effective stakeholder engagement
is key to our success, helping the
Board and management make better
decisions. The Board recognises
its responsibility to understand and
consider stakeholder views as part
of its decision-making process and
remains committed to fostering
effective business relationships.
We have categorised our stakeholder
relationships into seven key groups
and ensure that the perspectives
and opinions of these groups taken
account of when key strategic,
financial or operational decisions
are being taken. SMS’s approach
to stakeholder engagement is set out
in more detail on pages 39 to 42 and
our section 172 statement is set out
on page 39.
The Board’s commitment to fulfilling
its section 172 duties has been clearly
demonstrated in its response to
the COVID-19 crisis and how it has
engaged with different stakeholder
groups during this time. The Board has
fully supported the business’s number
one priority of protecting the health
and wellbeing of its staff, customers
and consumers during this time, whilst
also managing the commercial and
financial implications of the pandemic
and preserving the long-term value
of the Company.
A key objective of the Annual report
and accounts is to help stakeholders
assess how effectively the Board,
supported by the executive
management team and other
employees, promoted the success
of SMS during the year, specifically
with respect to our obligations
pursuant to section 172 of the
Companies Act 2006. Case studies
dispersed throughout the Strategic
and Governance reports explain the
principal decisions taken in the year
and how the interests of relevant
stakeholder groups were considered.
A summary of these decisions
is provided opposite.
Corporate governance
Corporate governance remains
a priority and focus of the business
and, whilst we adopt the Quoted
Companies Alliance’s Corporate
Governance Code, we strive to set
ourselves UK Corporate Governance
Code targets and aspirations where
possible and appropriate.
We set out our approach to corporate
governance and compliance in detail
in the Corporate governance report
(see pages 76 to 87).
SMS Annual report and accounts 2020 11
EFFECTIVE
STAKEHOLDER
ENGAGEMENT IS KEY
TO OUR SUCCESS,
HELPING THE BOARD
AND MANAGEMENT
MAKE BETTER
DECISIONS.”
Principal decisions
Principal decisions are those
operational and strategic
decisions which the Board made
during the course of 2020 and
which are considered to be
material to:
(a) The SMS corporate group
This process is streamlined by the fact
that the Directors of SMS and those of
the subsidiary boards comprise the
same individuals; therefore decision-
making is relatively straightforward in
practice, albeit subsidiary directors
still pay due consideration to the
perspective of each legal entity over
all decisions being made.
(b) Stakeholder groups
The table on pages 39 to 42 details
how we established and defined
our stakeholder groups. On the
pages listed in the table below
we have provided examples of how,
in making principal decisions, the
Board duly considered the impact
upon them during the course
of 2020:
Principal decision
Pages
Key stakeholders impacted
Our response to COVID-19
Investment in grid-scale battery storage
Net-zero carbon target
New, enhanced dividend policy
4-7
36
46
69
Sale of a minority of the Group’s meter assets 84-85
Key:
Shareholders
Customers
Employees
Suppliers
Lenders
Government
Regulatory bodies
Strategic reportGovernanceFinancial statements
12 SMS Annual report and accounts 2020
CHIEF EXECUTIVE OFFICER’S STATEMENT
Originating Smart Energy Solutions
2020 has been a transformational year for SMS,
from which we have emerged a stronger, leaner
organisation with a reinforced commitment to
our customers, the environment and our people.
LISTENING TO
CUSTOMERS IS CRITICAL
TO OUR SUCCESS IN
REALISING A GREENER,
MORE SUSTAINABLE
FUTURE.”
I am exceptionally proud of the
way all our staff have responded
to the challenges presented by
the COVID-19 pandemic in 2020,
maintaining our focus on safely
serving our customers every single
day. In delivering for them, and
through all our assets and services,
we also serve to protect the
environment and deliver on our
strategic objectives.
Our people: delivering for
our customers
We have been at the heart of the
UK energy market for 25 years,
transforming and decarbonising the
country’s gas and electricity energy
networks and providing critical
services to maintain essential energy
supplies to consumers. Our people
have always been central to this
delivery and 2020 was no different,
with staff harnessing our cloud-based
technology and data platforms to
seamlessly provide continuity of
services to all our customers through
the year, including from the very start
of the national lockdown in March.
Whilst we led the industry in suspending
non-essential meter exchange and
field activity, our engineers continued
to deliver essential new connections to
care homes and other critical national
infrastructure, keeping vulnerable
customers on supply. We did this whilst
swiftly putting in place robust and
updated procedures, to ensure the
safety of all our staff and those people
in the homes our engineers visit, and
we shared this learning with other
industry participants to ensure best
practice.
The experiences of 2020 have also
proven the strength of our business
model. We raised over £290m from
the sale of a minority of our meter
asset portfolio, enhanced our dividend
policy and began to invest in other
carbon reduction asset classes
enabled by smart meters. Delays
to the deployment of smart meters
SMS Annual report and accounts 2020 13
resulted in lower capital expenditure
in the year which, coupled with the
security of recurring revenues from
our existing asset base, meant that
we exited the year in a very strong
cash-positive position. The financial
resilience of our business also ensured
we were able to look after our staff
without the need for support from
the UK Government.
Now that we are past the early
technical challenges of the UK smart
meter rollout, we have been able to
focus on improved utilisation of our
workforce, supported by continued
investment in our technology
platforms. We remain focused on
delivering for our customers and,
in doing so, generating long-term
recurring cash flows from carbon-
reducing infrastructure assets.
These form a secure platform for
ongoing growth.
Our purpose: customer
service and environmental
benefit
Listening to customers is critical to our
success, and delivering smart energy
solutions to realise a greener, more
sustainable future is why we exist.
Smart meters are the enabler of a
sustainable energy system of which
we can all be proud. But at SMS it is
our end-to-end platform that makes
us different, provides an unparalleled
customer experience and places
us in a unique position in the energy
sector. Our technology platforms
are foundational for the deployment
of these smart meters; but they
also enable judicious use of the
data they produce and the operation,
integration and optimisation of other
vital carbon reduction assets, which
we have the skills to design, deliver,
operate and maintain over their
long lives.
We believe we have a social obligation
to accelerate the transformation to
a carbon-neutral world, and this sense
of duty underpins our pioneering
culture. Whilst all our assets and
services already have a net positive
carbon impact, we strive to lead
by example and have announced
our commitment to neutralise our
own carbon emissions by 2030.
Strategic progress
The significant scale of these
market opportunities in a rapidly
changing energy landscape is
reflected in our evolving strategic
focus, which is now prioritised
around four key pillars:
1. Building long-term recurring
cash flows from secure
infrastructure assets
Our vertically integrated platform
allows us to originate carbon-
reducing assets, with the primary
focus of the business being to grow
index-linked annualised recurring
revenue (ILARR) from our
meter and data portfolio whilst
demonstrating the reliability
and security of our new carbon
reduction (‘CaRe’) asset classes
and the ongoing management
services we provide to them.
2. Customer excellence
and efficient delivery
We have an unrelenting focus on
serving our customers. During the
year, we have worked hard to align
our resources to the extended
UK smart meter rollout, driving the
digital conversion of customers
to smart meters.
Our roadmap to net zero features
a variety of sustainability measures,
including increased adoption of
renewable on-site generation and
battery storage to power the Group’s
UK and Ireland estate, and the
transition of our entire van fleet to
electric vehicles or plug-in hybrids.
At the forefront of this journey will be
our employees, who are fundamental
to our low-carbon goal and who will
help drive our green business
transition through putting into
practice our embedded Company
value of sustainability.
3. Efficient capital allocation to
provide headroom for growth
We are focused on optimal capital
allocation. The disposal of a minority
of our Industrial & Commercial (I&C)
meter assets in April 2020 has
transformed the financial
foundations of our business,
strengthening our growth platform
and demonstrating the inherent
value of the assets we create.
We will maintain prudent leverage
and have announced an enhanced
and sustainable dividend, which
we aim to increase by 10% each
year through to 2024.
4. Sustainable and socially
responsible business
We are proud of our ESG focus,
reflected in the creation of this
new strategic objective. We have
a robust governance structure
including through our newly
established Health, Safety and
Sustainability Board Committee,
which monitors the delivery of our
Safety, Health and Wellbeing action
plan. We take our social obligations
to our staff, our communities and
the environment we share very
seriously, as demonstrated by
our commitment to an ambitious
target of becoming a net-zero
organisation by 2030, to ensure
we are living by our values.
Growth opportunity ahead
Whilst the lockdown impact has
extended the deadline for completion
of the UK smart meter rollout to 1 July
2025, continued increases in our
contracted smart meter order pipeline
since year-end to c.2.5 million means
we have the potential to add c.£50m
ILARR over the remaining rollout
period. This will build on the c.£77m
ILARR we have already established
from our 3.8 million meter and data
asset portfolio at the end of 2020.
6%
Increase in ILARR reflecting continued
growth in our meter estate
Strategic reportGovernanceFinancial statements
14 SMS Annual report and accounts 2020
CHIEF EXECUTIVE OFFICER’S STATEMENT continued
Celebrating 25 years: a transformational journey
2020
Full turnkey
service
proposition
£150m of
additional
equity raised
Solo Energy Limited
acquired, growing our
energy services proposition
Workforce numbers
reach 1,000+
2017
Energy
management
2019
SMS floated
on AIM raising
£27m at IPO
2011
SMS introduced its
ADMTM device to the
market, establishing its
gas data business
Data
management
2009
Asset
management
A full turnkey service
proposition now
available
UK national smart
meter rollout begins
Installation capabilities
brought in-house
through acquisition of
the asset installation
businesses CH4 and
Trojan, and field services
and data security
firm Qton
2016
Electricity and energy
service offerings
launched through
acquisition of UPL
2014
Dual-fuel proposition
now offered to
the market
First bank debt
drawn to fund capital
investment in assets
2008
SMS accredited by
Ofgem as a gas Meter
Asset Manager (MAM)
– the first independent
MAM to enter the market
Creation of
our gas meter
asset portfolio
Asset
installation
2004
1995
SMS established to provide
gas connection services
following the deregulation
of the gas industry
Constant investment in our people and business infrastructure,
reinforcing our platform for growth
SMS Annual report and accounts 2020 15
Reinvestment in our people and our
digital platforms is key and we remain
focused on advancing in areas where
we have proven capability and
long-standing relationships with our
customers, developing infrastructure
assets with annuity-style returns.
As we accelerate our progress
following COVID-19, our immediate
priorities are to leverage our unique
end-to-end platform in order to grow
and safely deliver our c.2.5 million
contracted smart meter order
pipeline, to extend our data services
and to establish new carbon reduction
infrastructure asset classes.
I am grateful for the unwavering
support from all our staff, the
management team and Board, and
our customers to whom we remain
dedicated. I firmly believe that the
platform we have built over the last
25 years gives us the opportunity
to build an even greater business,
providing long-term value to all our
stakeholders over the coming years.
In an unprecedented year and despite
a worldwide pandemic, we have not
slowed down – in fact, we are only just
getting started.
Alan Foy
Chief Executive Officer
16 March 2021
Investment case
At the heart of enabling the
low-carbon revolution
Leaders in delivering and funding
smart energy infrastructure
with over 25 years’ experience.
We have also committed to our
own net-zero ambition by 2030.
See more on pages 43 to 48
Strong growth platform
reinforced by trend towards
decarbonisation
Continued momentum in securing
meter and CaRe assets pipeline
with substantial additional
opportunities underpinned by the
UK Government’s net-zero ambition.
See more on pages 30 to 37
Robust, sustainable dividend
policy underpinned by existing
asset base
Existing long-term, index-linked
cash flows provide strong visibility
to support 10% dividend compound
annual growth rate (CAGR).
See more on pages 65 to 71
Fully integrated, scalable
platform with well-established
industrial partnerships
Industry-leading central, cloud-
based IT and data platform,
nationwide engineering workforce
and decades of strong industrial
relationships.
See more on pages 30 to 37
Highly experienced
management team committed
to delivering shareholder value
A balanced and effective
Board and senior management
team provide the capability
to successfully navigate a fast-
changing energy landscape.
See more on pages 74 to 75
We see substantial opportunity to
expand our data services from these
meters, both in the UK and through the
potential deployment of our proven
ADMTM data logger to water and gas
meters in Australia.
Our developing pipeline of CaRe
infrastructure assets is also accelerating
the adoption of renewable energy,
whilst making the UK’s energy networks
more flexible and resilient. We have
already established exclusivity over
a 470MW pipeline of grid-scale
battery storage projects, of which
90MW is under construction and
forecast to be energised by the end
of 2021. We have the ability to deliver
the projects in their entirety, from
initial construction through to ongoing
operation, trading, maintenance, and
asset management for the 40-year
lifespan of the sites. National Grid
forecasts a requirement for c.10GW
of electricity storage by 20301 –
and our growing pipeline and existing
experience place us in a strong
position to develop a significant
market share in this large electrical
infrastructure asset class.
In addition, we are launching our
Solopower solution to provide smart
solar and storage solutions for local
authorities and housing associations
which, backed by long-term secured
revenues, will significantly reduce
tenants’ energy costs by up to 25%
and decarbonise up to 90% of
a home’s electricity supply. We are
also advancing our electric vehicle
charging solutions and heat network
and metering solutions, all of which
are integrated with our cloud-based
digital technology platforms.
Generating value into
the future
Our recurring revenues and the
efficiency of our business mean
that we can sustainably create and
maintain the financial, technology
and skills capacity to advance
our purpose.
1 Calculated as the average of National Grid’s
four forecast scenarios in its Future Energy
Scenarios 2020.
Strategic reportGovernanceFinancial statements
16 SMS Annual report and accounts 2020
OUR MARKETS
SMS operates right across
the UK energy sector
Our core market areas fall into two
general categories: 1) The UK smart
meter rollout, and 2) The green
economy and ‘net-zero 2050’ challenge.
Our key market opportunities
UK smart meter rollout
SMS operates right across the UK energy
sector, serving energy providers with
meter and data solutions.
See more on pages 16 to 18
The green economy
and ‘net-zero 2050’
challenge
2020 was a watershed year for the
UK’s green economy, marking the first
full year following the UK Government’s
announcement of its ‘net-zero 2050’ target.
See more on pages 19 to 21
The UK smart meter
rollout
Although the UK Government’s
mandated Smart Meter Installation
Programme saw energy suppliers
install record numbers of second-
generation (‘SMETS2’) devices in
January and February 2020, the
restrictions on everyday life due to
the COVID-19 pandemic disrupted
the rollout from the end of March.
With energy companies responding
to the COVID-19 restrictions by
moving in most instances onto
an emergencies-only footing, the
industry saw a sharp decline in
installation rates, bringing the rollout
to a de facto, albeit temporary, halt.
Restrictions force industry
slowdown
Whilst the first lockdown, from
24 March 2020 to the start of June,
saw restrictions for the most part
universally applied across the UK,
installation statistics from the smart
meter rollout in England during this
period demonstrate the extent of
COVID’s impact. According to figures
from the Data Communications
Company (DCC), the first lockdown
in spring 2020 caused a fall of 96.2%
in average daily installations of
SMETS2 meters, or a total of just
658 per day compared to a February
2020 average rate of 17,362 per day.
Due to the pandemic-enforced pause
in installation activity for Q2 2020,
the UK Government subsequently
confirmed a six-month extension to
the ‘all reasonable steps’ obligation
on energy suppliers. The Office of Gas
and Electricity Markets (Ofgem)’s
framework now mandates energy
suppliers to take ‘all reasonable steps’
to roll out smart meters to their
customers by 30 June 2021. The UK
Government also confirmed that, as
a knock-on effect, the overall smart
meter programme deadline would be
put back six months to 1 July 2025.
SMS Annual report and accounts 2020 17
A resounding recovery
Energy suppliers and their smart
meter installation partners were able
to remobilise again from early June
and effectively restart the rollout in
a gradual and phased manner with
new strict health and safety measures
and protocols in place in order to
confidently re-access consumers’
homes and businesses with minimum
risk.
By the end of Q3 2020, official
Government statistics indicated the
success of, and general consumer
confidence in, the safe remobilisation
of activity, with installation rates
reaching c.80% of pre-pandemic
levels (0.85 million domestic smart
meters installed in Q3 2020 compared
to 1.06 million in Q3 2019). October
2020 notably marked a record-
breaking month for the installation
of SMETS2 meters, with an average
of 17,579 fitted each day, signifying
that installation levels were even
surpassing pre-pandemic peaks
by the time Q4 2020 came around.
A tale of two lockdowns
The resounding industry recovery was
demonstrated by the limited impact
on installation rates during the second
nationwide lockdown in November
2020. Installation rates in England
during the period dropped by just
2.5% on the previous month – October
itself already a record for SMETS2
meters installed as detailed above.
The huge disparity in installation rates
between the first and second national
lockdowns demonstrates how
effectively energy companies,
distribution network operators and
asset installation partners adapted
their working practices to enable the
rollout to continue safely in homes
and businesses despite the ongoing
pandemic.
As of 31 December 2020, there were
23.6 million smart meters installed
in homes and small businesses in
Great Britain, of which 19.1 million
were operating in smart mode
(connected to the DCC) or advanced
meters. This means that more than
a third of all meters in the UK are now
smart or advanced, rising to 42% when
including smart meters operating in
traditional mode i.e. first-generation
smart (‘SMETS1’) meters that had
not yet been enrolled by the DCC.
Smart meter rollout – a tale of two lockdowns
Lockdown 1 - daily installations
20K
15K
10K
5K
0K
Fall: 96.2%
February March
April
2020
May
June
Lockdown 2 - daily installations
20K
15K
10K
5K
0K
Fall: 2.5%
October
November
December
2020
Source: the Data Communications Company (DCC)
17,362
Average daily
installs, Feb
658
Average daily
installs during
Lockdown 1
17,579
Average daily
installs, Oct
17,148
Average daily
installs during
Lockdown 2
Q4 2020 statistics continued to
underline the industry’s strong
recovery from the initial impact of
COVID-19, with installation levels
increasing by 14% on Q3 2020.
By the end of 2020, SMS was operating
at c.80% of its pre-COVID-19 run
rate and was well positioned for
a continued increase in installation
activity through 2021 to deliver the
mandated UK smart meter rollout
and its contracted order pipeline.
Progress on SMETS1
Enrolment and Adoption
programme
In December 2020, the DCC reported
much-improved progress on its
Enrolment and Adoption (E&A)
programme, which sees previously
installed SMETS1 meters migrated
to its network. To realise the full
benefits of smart metering, the UK
Government previously decided that
along with a new unified network and
a single smart meter standard, all
older SMETS1 smart meters should be
migrated to this single network rather
than remaining on various unconnected
networks. This will allow seamless
energy supplier switching and smart
operation no matter which variant
of the smart meter consumers have
or who originally installed it.
The DCC started 2020 with very low
volumes of migrated SMETS1 meters
on its network. However, despite
the hugely challenging conditions,
it closed the year with more than
2.7 million migrated SMETS1 meters,
enabling many more consumers to
regain and maintain connectivity and/
or switch suppliers without losing
any of the benefits that smart meters
can bring. The DCC has confirmed that
all SMETS1 smart meters, of which
there are approximately 14 million
in circulation, will be migrated to its
network by the end of the rollout.
Strategic reportGovernanceFinancial statements
18 SMS Annual report and accounts 2020
OUR MARKETS continued
The UK smart meter rollout
Case study:
SMS continues to deliver industry
milestones with UK’s first ever polyphase
SMETS2 installation
Despite the challenges posed to
the energy industry by the pandemic,
SMS remained undeterred in its
mission to innovate and deliver
smart energy solutions for its
customers. In August 2020,
after months of planning and
development with industry partners
amid COVID-19, SMS successfully
installed the UK’s first ever
polyphase SMETS2 smart meter,
marking a significant milestone
in the country’s transition to
a smarter, greener energy system.
The long-awaited device – which
finally provides homes and
businesses connected to a three-
phase electricity supply with the
option of a smart meter – was
installed for a customer of Good
Energy, and has significant
implications for the future of
energy supply. Though most UK
households today have what is
known as a ‘single-phase’ meter,
there are still hundreds of thousands
of sites across the country that
operate on a ‘three-phase’
connection, and which had previously
not been able to use the latest
smart metering technology.
Given that the clean energy system
of the future will rely on domestic
and commercial consumers using
low-carbon technology to generate
and share their power as part of
a smarter grid (requiring their
premises to manage higher loads
of power through a three-phase
supply), this was a current and
future challenge that the energy
industry sorely needed to address.
Working collaboratively across the
sector, including closely with a
meter manufacturer and the DCC,
SMS led the development of the
polyphase SMETS2 smart meter.
This included performing a rigorous
testing and verification process at
our dedicated test lab before the
installation of the first ever such
device in a real-life domestic
setting.
Improved consumer
experience and satisfaction
In January 2021, Ofgem released the
results of its latest quarterly Consumer
Perception Survey (Q3 2020), which
found that more than 70% of consumers
were happy with their smart meter –
the highest level recorded since the
national rollout began.
As well as general improved consumer
satisfaction with the technology,
Ofgem’s survey also showed a
significant increase in satisfaction of
the smart meter installation process,
rising to 80% (matching the record
high set in Q1 2020).
Facilitating the smart
energy revolution
The wealth of data generated by
smart meters and other connected
devices continued to complement and
advance the creation of new green
technologies and ‘energy-as-a-
service’ solutions during 2020; and
these services are helping drive more
efficient use of energy, lower carbon,
and enhanced customer affordability
and experience. Looking forward, the
energy revolution, enabled by smart
meters, is set to continue to develop
a more dynamic energy system in the
years ahead, whilst the continued
development in other technology
areas such as artificial intelligence,
automation, and use of blockchain –
combined with smart meters – will
also dramatically disrupt the
energy market and make significant
contributions to the UK’s low-carbon
transition.
THE YEAR WILL BE
REMEMBERED FOR HOW
CHALLENGES WERE
OVERCOME THROUGH
INDUSTRY COLLABORATION
AND INNOVATION.”
SMS Annual report and accounts 2020 19
The green economy and ‘net-zero 2050’ challenge
Overview
2020 was a watershed year for the
UK’s green economy. With the UK
Government having revealed its
net-zero emissions target in 2019 –
aiming to reach carbon neutrality
by 2050 – 2020 marked the first full
year following this momentous
announcement. It was a period that
would provide a valuable gauge
of initial market reactions and
developments (see Market highlights
on page 21).
Importantly, 2020 also saw the UK
Government reveal its intentions on
how to lead and support the green
economy in meeting the net-zero 2050
target through a binding national
strategy. Details of this strategy were
contained in the long-awaited but
much-delayed Energy White Paper in
December, which gave clarity on the
key policies that will help shape the
UK’s energy and sustainability agenda
for years – indeed decades – ahead.
Alongside the challenge of climate
change that had served as the main
driving force for the country’s greener
ambitions, COVID-19 has brought
unprecedented social, economic and
environmental challenges that have
accentuated the essential and urgent
importance of sustainability in our
society. In this manner, the pandemic
further underlined the central role that
the green economy – and the markets
and industries that contribute to it –
must play in leading the transition to a
low-carbon world. Just as significantly,
it also highlighted the importance of
creating a far more resilient, shock-
proof economy in order to protect
future prosperity.
In responding to the pandemic, the
UK Government has emphasised that
the country must ’build back greener’
and the Energy White Paper put
forward various commitments aimed
at transforming the UK’s power and
heating systems and cutting emissions
from industry, transport and buildings.
Besides renewables growth, a key part
of the plan is around the electrification
of transport and heat, including the
flagship policy to end the sale of
new petrol and diesel cars and vans
from 2030 (10 years earlier than had
previously been planned), and the
provision of a £2.8 billion package
of measures to support industry and
consumers in making the switch to
cleaner vehicles. The UK Government
also committed to supporting the
installation of electric heat pumps
in homes, raising its target from
30,000 per year to 600,000 per year
by 2028 in order to drastically reduce
the use of oil and gas by home heating
systems and to help decarbonise the
housing stock.
Illustrative UK final energy use in 2050
Coal/solid fuels
Gas
Bioenergy
Oil
Hydrogen
Electricity
Additional electricity demand
from Direct Air Carbon
Capture and Sequestration
Other
2019
Illustrative
net-zero
scenario (CCC)
0
200
400
600
800 1,000 1,200 1,400 1,600 1,800
Final energy use TWh
Source: Energy Trends table 1.2; Climate Change Committee (CCC) Net Zero Report
With this energy transformation
requiring unprecedented public
and private investment, the UK
Government recognised its important
role in making regulatory reforms
which place fairness and affordability
at the heart of the net-zero
programme. These reforms include
greater commitments aimed
at protecting the fuel-poor and
supporting the upgrading of home
energy performance through smart
technology. In order to facilitate the
funding, development and deployment
of such cutting-edge technologies,
continued innovation and improved
private finance solutions were
highlighted as crucial to reaching
the net-zero goal.
Driving forward and
responding to the market:
SMS develops pipeline of
carbon reduction assets
In addition to SMS’s core focus on the
UK smart meter market, the Group’s
strategy also includes the financing
and development of green carbon
reduction (‘CaRe’) assets as the
economy transitions towards net-zero
carbon emissions.
During 2020, market demand for green
finance products remained strong
despite the pandemic, as a heightened
awareness of environmental, social
and governance (ESG) pressures
coincided with a raft of regulatory
changes and an uptick in green
capital-market activities.
Accordingly, SMS continued to make
strong progress in developing its
pipeline of CaRe assets across several
verticals, including grid-scale battery
storage, behind-the-meter storage
and solar generation systems, electric
vehicle (EV) charging infrastructure
and heat networks – all of which
are technologies that will play an
increasingly important role in the
UK’s net-zero carbon mix.
This strategy will be delivered by
SMS’s well-established energy services
arm, which for the last 25 years has
been helping businesses to reduce
their carbon footprint and achieve
greater control over the generation,
use and storage of energy.
Strategic reportGovernanceFinancial statements
20 SMS Annual report and accounts 2020
OUR MARKETS continued
The green economy and ‘net-zero 2050’ challenge
Case study:
Solopower – tackling the dual challenge of fuel
poverty and CO2 in the social housing sector
SMS is piloting its first fully-funded
behind-the-meter green energy
asset service. This comprises a
turnkey smart solar generation and
battery storage solution specifically
for local authorities and housing
associations – a potential market
covering up to five million UK homes.
Our productised service, Solopower,
will significantly reduce tenants’
energy costs (by up to 25%) while
simultaneously decarbonising
housing stock (for up to 90% of its
electricity supply). This proposition
has been tested and demonstrated
by trials on housing stock with
four local authorities – and is
therefore expected to make a
significant impact both on reducing
CO2 emissions and in improving
affordability and accessibility
(other central tenets of the energy
transition) in order to lower costs
for consumers.
In addition to design, supply and
installation, SMS remotely operates
the battery systems through
our FlexiGridTM aggregation
technology to maximise each
home’s consumption of renewable
power which is self-generated on
site by solar panels. Solopower
is also able to optimise grid import
and export via smart meters to
deliver the flexible demand-side
management which is essential
for the wider energy network’s
decarbonisation.
As of early 2021, SMS is in the
progress of rolling out its Solopower
model on three social housing
projects with local authorities
in Scotland, which will see the
Company operate battery storage
systems as a virtual power plant
(VPP) across 700 houses.
Supporting the UK’s regional
green economic growth
strategy
SMS continues to take forward its
national approach to carbon reduction
via the Company’s regional bases up
and down the country. This national
installation platform, which underpins
our ability to deliver CaRe assets
at scale across a wide range of low-
and zero-carbon technologies, is
supported by our national training
academy, where our regional
engineering workforces are being
trained and upskilled with the ‘green’
skills that the UK requires for the
carbon transition. This includes an
EV charge point installation course,
accredited by City & Guilds, which was
launched at our academy in 2020. This
approach not only strengthens our
preparation and builds capability for
the net-zero challenge, but crucially
also facilitates our contribution to
investing in local communities, by
creating jobs and supporting regional
economic growth through our regional
CaRe delivery, which includes, but
is not limited to, our asset funding
partnerships with UK local authorities
for behind-the-meter housing stock
solutions.
Leading innovation of the
UK’s smart energy system
SMS is playing a central role at
both national and regional levels in
developing energy innovation through
its finance, technology and engineering
delivery solutions, and is a lead
partner on several UK Research
and Innovation-supported energy
innovation projects.
SMS Annual report and accounts 2020 21
34%
Solar contributed 34% of the nation’s
electricity in 2020, the highest share
to date
10%
Electric vehicles (EVs) delivered record
sales, seizing more than 10% of total
market share in 2020
14GW
14GW of planned battery projects
across 700+ sites in the UK
Market highlights
2020 hailed as greenest
ever year with wind, solar
and coal-free records
broken
• Record for wind generation
broken with maximum
generation of 17.2GW.
• New record for solar
generation achieved at 9.7GW.
• Solar contributed 34% of the
nation’s electricity in 2020, the
highest share to date.
• Longest coal-free period in
the UK: nearly 68 days without
fossil fuel use, between 10 April
and 16 June 2020.
UK electric vehicle market
enjoys best ever year
• Electric vehicles (EVs)
delivered record sales, seizing
more than 10% of total market
share in 2020.
• Sales of pure electric and
plug-in hybrids proved resilient
to the pandemic, whilst new
petrol and diesel registrations
slumped to lowest number
since 1992.
• 108,200 new battery EVs and
66,870 new plug-in hybrids
were registered in total.
• The UK’s EV charging network
grew by more than 20% in
2020 with 38,200 EV charging
points (or connectors)
registered at 24 February
2021 in more than 14,000
UK locations.
Door to large-scale UK
battery projects opened
• UK Government in July 2020
eased planning restrictions for
large-scale battery storage
developments in the UK,
allowing for storage projects
above 50MW in England and
350MW in Wales.
• The UK Government estimates
the move could lead to over
100 large-scale battery
storage developments being
built – three times the amount
already in operation.
• The need for greater grid
balancing provided by
batteries was highlighted
by the COVID-19 lockdown,
as demand fell by around
20%, which led National Grid
to develop additional tools
for flexibility.
• Battery storage development
is seen as the key facilitator
as record levels of renewable
energy sources generate more
and more of the UK’s power.
• The UK currently has over
1GW of storage, an ever-
growing pipeline of battery
projects, and a total of 14GW
of planned battery projects
across 700+ sites in the country.
Strategic reportGovernanceFinancial statements
22 SMS Annual report and accounts 2020
OUR STRATEGY
A clear strategy
for future growth
At SMS, for 25 years we
have striven to deliver
significant value to our
stakeholders and
FY 2020 has been
another transformational
year for the Group,
particularly considering
the unprecedented
challenges presented
by COVID-19.
A fourth strategic objective,
dedicated to sustainability, has
thus been introduced by the Board
in 2020, in recognition of the critical
role sustainability plays in the
long-term success of our business.
The significant scale of the
opportunities available to us,
against a backdrop of a rapidly
changing energy landscape,
requires our strategic framework
and capital allocation strategy
to be highly resilient and nimble
if we are to ensure continuous
delivery of long-term value for all
stakeholders. In this context, both
are reviewed regularly, ensuring we
remain focused on the critical areas
that will ultimately support us in
achieving our purpose of serving
our customers and protecting the
environment.
The Group has delivered a strong,
resilient financial performance in
the year, has reset its balance sheet
to a cash-positive position and has
established an attractive long-term
dividend policy underpinned by our
existing asset base.
Building on this secure platform, we
have substantial growth momentum
from both our contracted smart meter
order pipeline and our other carbon
reduction (‘CaRe’) assets, enabled
by smart meters. This strong and
growing pipeline is reinforced by the
global trends towards decarbonisation
and digitalisation, and SMS is well
positioned at the heart of this agenda.
Our CaRe asset classes have long-
term infrastructure characteristics,
which provides flexibility around
funding options whilst enabling us to
maintain a prudent leverage position.
Environmental, social and governance
(ESG) commitments and sustainability
are embedded in our purpose, our
strategy and our business model
through the development of low-
carbon assets and solutions, which
are operated and optimised by our
cloud-based digital platform. Our
CaRe assets are accelerating the
adoption of renewable energy and
making the energy system more
resilient. And, whilst our assets and
services already provide a substantial
net positive carbon impact, the Group
has set its own commitment to achieve
net-zero carbon emissions by 2030,
two decades ahead of the net-zero
target for the UK as a whole.
ESG COMMITMENTS AND
SUSTAINABILITY ARE
EMBEDDED IN OUR
PURPOSE, OUR
STRATEGY AND OUR
BUSINESS MODEL.”
SMS Annual report and accounts 2020 23
Strategic priorities
Our strategic framework is structured into four key priorities,
underpinned by our focus on continuing to deliver long-term value
for our shareholders whilst also serving our customers, protecting
the environment and looking after our people. This framework
provides a clear strategic vision, built on secure foundations.
These priorities, including progress made against them in 2020,
are summarised on the following pages.
Whilst the COVID-19 pandemic has created unprecedented
challenges globally, the long-term impact on the UK energy
market and on SMS is not expected to be significant. Our vision
and strategic priorities, over both the short term and the long
term, thus remain consistent.
25%
Increase in contracted smart meter
order pipeline at March 2021
470MW
Pipeline in grid-scale battery
storage assets
1
Building long-term,
recurring cash generation
from secure infrastructure
assets
Find out more on page 24
2
Customer excellence
and efficient delivery
Find out more on page 25
Shareholder
value
3
Efficient capital
allocation to provide
headroom for growth
4
Sustainable
and socially
responsible business
Find out more on page 26
Find out more on page 27
Underpinned by our purpose
Serving our customers, protecting the environment
Strategic reportGovernanceFinancial statements
Strategy in Action
• Smart meters: a tale of
two lockdowns – page 17
• Investment in grid-scale
battery storage – page 36
• SMS data services in action
– page 32
24 SMS Annual report and accounts 2020
OUR STRATEGY continued
1
Building long-term, recurring
cash generation from secure
infrastructure assets
2020 priorities
• Focus on obtaining additional
smart meter index-linked
annualised recurring revenue
(ILARR).
• Maintain return expectations
in existing contracts and new
opportunities through delivery of
our valued turnkey service model.
• Continue to extend existing
framework arrangements with
existing customers across wider
customer portfolios and extend
contracted pipeline.
• Demonstrate reliability and
security of new CaRe asset
classes through pilot project
deployments.
2020 progress
Contracted order pipeline in meters
and CaRe assets increased to
c.£450m and c.£180m respectively
(in capital deployment terms) in
FY 2020.
Meter and data assets
• ILARR grew 6% to £77.0m on
a pro-forma basis.1
• ILARR on our smart meter
portfolio grew 14% to c.£43.8m,
despite COVID-19 related
restrictions.
• Developed new firmware data
services for energy suppliers
to manage second-generation
smart (‘SMETS2’) assets.
• Enhanced contracted smart
meter order pipeline by 25%
to c.2.5 million at March 2021
providing an incremental c.£50m
ILARR opportunity.
• New revenue stream established
in the form of RPI-linked asset
management fees from the
disposed minority I&C asset portfolio.
CaRe assets
• 470MW pipeline in grid-scale battery
storage assets:
– 90MW under construction
– Rights to acquire an additional
100MW obtained post year-end
– In exclusivity to acquire a further
280MW.
• Order pipeline progressing in several
key areas including behind-the-
meter solar and batteries, electric
vehicle (EV) charging, ADMTM
Australia and heat meters and
networks.
Future outlook
• Convert the meter order pipeline
to add to the existing ILARR.
• Target additional domestic smart
meter opportunities with both
existing and new customers.
• Grow our half-hourly data services
to energy suppliers and end
customers.
• Develop our established portfolio of
grid scale battery storage projects.
• Delivery of long-term management
services on energised grid-scale
battery assets, using our technology
platforms.
• Establish additional pipeline of
opportunities across several CaRe
asset verticals, with focus on assets
with infrastructure characteristics
and attractive economics.
1 6% growth based on 2019 ILARR, which has been presented on a pro-forma basis for comparative
purposes, excluding a net contribution of £17.6m from disposed I&C meter assets.
SMS Annual report and accounts 2020 25
2
Customer excellence
and efficient delivery
Strategy in Action
• Supporting our customers
through COVID-19 – page 5
• Working effectively with
regulatory and government
bodies to deliver the UK smart
meter roll out – pages 41 to 42
• Investment in our training
academy – page 51
• Online booking portals and text
messaging services fully functional,
placing the consumer in control.
• Over 60% of all domestic smart
meter appointments now booked
online.
• In-house training facilities expanded
to support EV and domestic battery
installation.
Future outlook
• Ensure an injury-free organisation,
protecting the safety of every
individual involved with our business,
resulting in zero harm realised
across our business.
• Focus on digital conversion of
customers to smart meters.
• Support our customers by
continuing to expand installation
services into adjacent non-metering
utility infrastructure and energy
services activities, such as EV
charging.
2020 priorities
• Introduce SMETS2 meter variants
and work with all customers to
complete Data Communications
Company (DCC) integrations and
systems testing and mobilise their
mass rollouts.
• Align resource and cost base
to the extended smart meter
rollout period.
• Drive efficiency through
continued improvements to
digital customer journey and
automated job scheduling.
• Dedicated focus on engineering
efficiency and cost discipline,
with flexibility in direct labour and
subcontractor model to increase
run rates to support customer
requirements.
2020 progress
• Effective management of
engineering model and cost
discipline in response to
COVID-19 challenges.
• Successful adaptation to new,
stringent health and safety
requirements, with all engineers
re-trained through our training
academy, ensuring effective
protection for both engineers
and the consumer.
• Increased use of technology to
maintain regular communication
with customers, enabling the
provision of essential emergency
and transactional services.
Strategic reportGovernanceFinancial statements
26 SMS Annual report and accounts 2020
OUR STRATEGY continued
3
Efficient capital allocation to
provide headroom for growth
2020 priorities
• Maintain prudent but efficient
leverage.
• Implement a strengthened
sustainable dividend policy due
to the unlocking of value from the
sale of a minority of the Group’s
meter assets.
Future outlook
• Maintain strong liquidity to provide
adequate funding to execute the
Group’s pipeline of meters and
CaRe assets.
• Maintain a prudent but efficient
leverage position.
• Grow dividend by 10% annually,
• Optimal capital allocation with
at least until 2024.
Strategy in Action
• Sale of a minority of our meter
asset portfolio – page 67
• Voluntary prepayment of
our revolving credit facility
– page 70
• Continue to evaluate an optimal mix
of funding options for future capital
requirements.
• Announcement of an
enhanced dividend policy
– page 69
cash flows supporting dividends
and addressing growth
opportunities with attractive
returns.
• Enhance funding flexibility and
ensure sufficient capacity to
maximise growth opportunities.
• Secure funding mechanisms for
new asset classes, resulting in
cash-positive returns to the
Group.
2020 progress
• Disposal of a minority of meter
assets significantly strengthened
the balance sheet, resulting in a
net cash position of £40.2m, at
31 December 2020 and an
unutilised revolving credit facility
of £300m.
• New enhanced dividend policy
established.
• Funding agreement signed with
the Colombia Threadneedle
Sustainable Infrastructure Fund
and discussions with other
infrastructure funds ongoing to
establish alternative sources of
funding for CaRe assets.
• Proven ability to deploy an
optimal mix of debt, equity and
capital recycling for future capital
funding requirements.
SMS Annual report and accounts 2020 27
Strategy in Action
• Announcement of our
net-zero carbon target
– pages 45 to 46
• Establishment of a Health,
Safety and Sustainability
Board Committee – page 77
• Rollout of extensive suite of
employee wellbeing resources
– page 49
4
Sustainable and socially
responsible business
2020 priorities
• Implement a robust governance
structure to monitor, measure
and review progress on
sustainability.
• Commit to an ambitious net-zero
emissions target.
• Full financial support (without
reliance on the UK Government) for
all our staff throughout national and
regional lockdowns.
• Finalist for Employer of the Year
award by Utility Week, amongst
other accreditations (see page 50).
• Establish ESG ratings with
independent agencies.
• Enhance the Group’s ESG
disclosures and reporting.
• Continue to support our
customers in their own carbon
reduction efforts.
• Deploy assets and services which
serve to reduce carbon emissions.
2020 progress
• Dedicated Health, Safety and
Future outlook
• Inaugural Sustainability Report
published.
• Further improvement in ESG
credentials and ESG ratings.
• Continue to enhance disclosures and
reporting of SMS’s ESG credentials.
• Delivery of Safety, Health and
Wellbeing action plan.
• Delivery of Energy Reduction and
Environment action plan.
Sustainability Board Committee
headed by the Group’s Chairman
(see page 77).
• Commence rollout of renewable
energy and efficiency upgrades
at SMS’s key office sites.
• Commence conversion of the
Group’s fleet of vehicles to EV
or plug-in hybrid models.
• Progress focus areas identified from
2020 employee engagement survey
and reassess via 2021 employee
engagement survey.
• Rollout of new Groupwide pay and
reward framework.
• Committed to a net-zero carbon
target by 2030, two decades
ahead of UK’s own net-zero
target.
• Secured strong ESG ratings:
‘A’ by Morgan Stanley Capital
International (MSCI) and ‘B’
by Carbon Disclosure Project
(CDP).
• Became a signatory to the
United Nations Global Compact
and a supporter of the Task Force
on Climate-Related Financial
Disclosures (TCFD).
• Focus on employee wellbeing,
supported by the launch of a
dedicated Company wellbeing
intranet page.
• First Group external employee
engagement survey.
Strategic reportGovernanceFinancial statements
28 SMS Annual report and accounts 2020
OUR BUSINESS MODEL
Providing an integrated service,
using innovative solutions, to generate
long-term value
What we have
Our strengths
A growing
smart meter
portfolio
Our meter assets generate highly
sustainable, annuity-style cash flows
and provide a secure foundation for
the future growth of the business.
42% of all meters covered by the
UK smart meter rollout, including
domestic and non-domestic, were
smart meters at 31 December 2020,
of which 34% were operating in smart
mode and 8% were operating in
traditional mode. Over 50% of meters
are still to be exchanged.
What we do
Our core businesses
Asset
Management
Engaged
people
We are focused on employee
retention, training and development,
productivity and, above all, an
unwavering commitment to health
and safety. We have a nationwide
in-house engineering and expert
consultancy workforce, with a strong
track record of service delivery,
which allows us to make smart
decisions about all aspects of our
customers’ projects. Fostering
innovation and creativity in what
we do is also critical to allow us to
deliver new and exciting solutions.
Asset
Installation
Robust
technology
platforms
We have significant IT software and
data security capabilities, and the
ability to develop new applications
and technologies to the ongoing
benefit of our customers. Delivery of
our integrated services is supported
by our own central cloud-based
IT and data platform.
Long-standing
relationships
with our
customers
With more than two decades of
operations, we enjoy multi-level
relationships with energy suppliers,
developers and enterprises within
the UK industrial and commercial
sectors. The enduring partnerships
we maintain with our customers are
testament to our unrivalled support,
extensive industry knowledge and
commitment to providing successful,
innovative and forward-thinking
energy solutions.
Energy
Management
Effective
capital
management
We continually review our funding
position to ensure that we maintain
an efficient capital structure, with
sufficient capacity and flexibility to
maximise growth. Our primary source
of debt has been Group-level funding
secured on our revenue-generating
assets; however, following the
disposal of a minority of our meter
assets earlier in the year, the business
has reset its leverage, resulting in
a net cash-positive position. We plan
to maintain prudent but efficient
leverage going forward using internal
cash generation, our available debt
facility and additional mechanisms
to fund our secure order pipeline and
new carbon reduction (‘CaRe’) asset
classes.
See the Operational
review on pages 30 to 37
Underpinned
by our values
Putting our
people first
Safety
Customer
excellence
Innovation
Providing a fully managed,
end-to-end metering
and data service to the
industrial and commercial
(I&C) and domestic
markets, including
ownership and operation.
Providing direct field
force management
and asset installation,
targeting the domestic
smart meter opportunity.
Design, installation and
management of utility
connections and energy
infrastructure.
Providing energy-efficient
strategies and specialist
energy management
solutions, which help our
customers to deliver a zero-
carbon future. Investing
in renewable energy
generation, we continue
to pursue CaRe asset
opportunities, including
grid-scale battery storage,
behind-the-meter smart
solar and storage, electric
vehicle (EV) charging, heat
meters and networks, and
energy efficiency measures.
1
2
3
4
Building long-term,
recurring cash
generation from
secure infrastructure
assets
Customer
excellence and
efficient delivery
Efficient capital
allocation to provide
headroom for
growth
Sustainable and
socially responsible
business
What we do
Our core businesses
Asset
Management
Asset
Installation
Energy
Management
See the Operational
review on pages 30 to 37
Our strategic
priorities
1
Building long-term,
recurring cash
generation from
secure infrastructure
assets
2
Customer
excellence and
efficient delivery
3
Efficient capital
allocation to provide
headroom for
growth
4
Sustainable and
socially responsible
business
Providing a fully managed,
end-to-end metering
and data service to the
industrial and commercial
(I&C) and domestic
markets, including
ownership and operation.
Providing direct field
force management
and asset installation,
targeting the domestic
smart meter opportunity.
Design, installation and
management of utility
connections and energy
infrastructure.
Providing energy-efficient
strategies and specialist
energy management
solutions, which help our
customers to deliver a zero-
carbon future. Investing
in renewable energy
generation, we continue
to pursue CaRe asset
opportunities, including
grid-scale battery storage,
behind-the-meter smart
solar and storage, electric
vehicle (EV) charging, heat
meters and networks, and
energy efficiency measures.
Pride
Sustainability
Underpinned
by our values
SMS Annual report and accounts 2020 29
Who we deliver for
Creating value for our stakeholders
As we strive to deliver attractive and sustainable
returns to our shareholders, we are also aware of the
potential value creation we can offer to our diverse range of
stakeholders.
25p
dividend for FY
2020, with an
intended 10%
annual increase
until FY 2024
G
o
v
e
r
n
a
n
c
e
i
F
n
a
n
c
a
i
l
s
t
a
t
e
m
e
n
t
s
£103m
turnover earned
in 2020 from
c.1,000 customers
£46m
of staff
costs in 2020
£300m
revolving
credit facility
2030
Targeting
net-zero carbon
by 2030
Our shareholders
The Group has a growing, sustainable
dividend and intends to pay a 25p per
share dividend in respect of FY 2020
(representing an increase of 3.6x over
FY 2019), to be paid over four instalments.
There is intent to increase the dividend by
10% annually through to FY 2024, which
will generate a more predictable and
attractive return to shareholders.
Our customers
Delivering customer excellence is a core
value underpinning our business. Our
breadth of service makes us unique in
our industry, with our expertise allowing
our customers to have confidence that
we will deliver an appropriate solution.
Our employees
A motivated workforce encourages
creativity and productivity and is critical
to the execution of our strategy. We
place great importance on creating a
positive working environment for all our
people, and in providing interesting and
challenging career opportunities that
offer staff the chance to develop.
Our partners
We work with a wide range of partners
over the long term including suppliers,
lenders, government and regulatory
bodies. These relationships are critical
in delivering our strategic objectives and
business model. Maintaining positive
and open engagement is a key priority.
The environment
As a major energy services and
smart metering company, we place
sustainability at the core of our
business. Through training and
development, the sustainability
culture of the business is instilled in
all staff from the moment they join
the Company.
Strategic report
30 SMS Annual report and accounts 2020
OPERATIONAL REVIEW
At the forefront of change
in the energy industry
Our turnkey vertically-integrated service
proposition and established technology platforms
continue to drive value through the efficient
origination and maintenance of our long-term
infrastructure assets and data services.
THROUGH OUR ASSETS
AND DATA SERVICES WE
CONTINUE TO PLAY A
CRITICAL ROLE IN THE
REALISATION OF A
GREENER, LOW-CARBON
ENERGY NETWORK.”
National and local lockdowns
associated with COVID-19 had a
significant impact on our field-based
activities during the year, from
smart meter installation to energy
efficiency projects.
However, our business responded
effectively and responsibly to these
challenges, with an unparalleled focus
on the health, safety and the wellbeing
of all our staff and customers. We
delivered a seamless transition to
home working with complete continuity
in our services, and followed this with
the rapid and safe remobilisation of
field activity as lockdowns were eased.
Throughout the year, we continued to
provide essential and emergency
services to critical national infrastructure
and maintained energy supplies to
consumers on a national basis.
Providing the necessary financial and
emotional support to all our employees
was critical. The significant majority
of staff retained their full salaries,
supported by our robust financial
performance and with no reliance
on UK Government support. This is
a real demonstration of the resilience
of our business model and of our
unwavering commitment to our staff
and communities.
We have also, importantly, retained
our engineering capacity to ensure we
can accelerate back into the UK smart
meter rollout and continue to build our
asset portfolio and other field-based
services as we progress through 2021.
This includes the extension of our long
track record in designing and delivering
large-scale utility infrastructure
projects to the construction and
maintenance of our first grid-scale
battery storage projects. In 2021
we will also continue to extend our
asset management and installation
services into other asset classes such
as behind-the-meter renewable
generation and storage, electric
vehicle (EV) charging, heat metering
and a range of energy efficiency
measures.
SMS Annual report and accounts 2020 31
Asset Management division
Summary
Index-linked annualised recurring revenue (ILARR)
Revenue
Depreciation-adjusted cost of sales3
Depreciation-adjusted gross profit
Depreciation-adjusted gross margin
Capex on meters
20201
£77.0m
£78.7m
(£5.2m)
£73.5m
93%
£40.3m
2019
£72.6m2
£82.9m
(£5.9m)
£77.0m
93%
£95.2m
Growth
6%
(5%)
(12%)
(5%)
Flat
1 2020 measures only include the financial performance of the disposed I&C portfolio up to the date of sale on 22 April 2020.
2 2019 ILARR is presented on a pro-forma basis for comparative purposes, excluding a net contribution of £17.6m from disposed Industrial &
Commercial (I&C) meter assets.
3 Excludes depreciation on revenue-generating assets, recognised within cost of sales. Refer to the Financial review section for definitions
and details of the Group’s alternative performance measures.
Our focus
The Asset Management division
remains focused on the growth
of long-term, index-linked and
sustainable revenue streams. Our
primary strategic objectives are to:
• grow our core ILARR, driven by
recurring rentals from the UK smart
meter rollout;
• control capital costs required in
deployment of revenue-generating
assets through their life cycle,
providing strong levels of return
on investment;
• continually work to maintain
a capital-efficient structure,
to maximise the opportunity
available to us from the UK smart
meter rollout; and
• develop and grow our Half Hourly
data services, both in the UK
and abroad.
Through our industry-accredited
services, underpinned by extensive
in-house technical expertise and
technology platforms, we continue
to offer effective asset and data
solutions to our customers. We
engage closely with the Department
for Business, Energy and Industrial
Strategy (BEIS), the Data
Communications Company (DCC)
and energy suppliers to assist in the
formulation and delivery of key energy
policies, helping to address existing
issues and future opportunities.
For example, we are addressing the
firmware management requirements
of smart meters and supporting
the enrolment and adoption of
first-generation smart (‘SMETS1’)
meters into the DCC platform.
The UK smart meter rollout continues
to present significant opportunities
for growth in our ILARR from capital
deployment into meter assets, an
increasingly mature and proven
asset class, over the next five years.
We are also able to grow our ILARR
by supporting both I&C customers
and energy suppliers to collect, settle
and benefit from the Half Hourly and
real-time data enabled by our smart
meters, and our ADMTM data logger
solutions. Through our assets and
data services we continue to play
a critical role in the realisation of the
smart energy grid, and a greener,
low-carbon energy network.
Market conditions
The global pandemic had a significant
impact on the UK energy system,
resulting in a severe slowdown of the
UK smart meter rollout.
It was encouraging however to see
the UK Government continue in its
drive to increase smart metering
awareness through its Smart Energy
GB campaign, which is helping the
public understand the benefits of
smart meters by showing how they
can lead to more efficient energy
usage and enable a more flexible,
low-carbon energy system.
We have also seen continued growth
in the independent energy supplier
market, which now supplies nearly
30% of households in the UK. This
independent market segment, with
which SMS is heavily engaged,
benefits the most from our turnkey
approach, including installation, data
and active asset management.
Approximately 40% of energy supplies
have currently been converted to
smart so, in addition to our contracted
order pipeline, there remain significant
opportunities for us to continue to
grow our market share through a focus
on provision of this turnkey service.
The competitive energy supply market
continues to expose some smaller
energy suppliers to financial risk.
Over recent years, a number of small
independent energy suppliers have
entered the Office of Gas and
Electricity Markets (Ofgem)’s Supplier
of Last Resort (SoLR) scheme and it
is reasonable to expect this to remain
a feature of the market, with continued
rapid growth of some suppliers and
challenges for others. We manage
the short-term credit risk this presents
very closely; however, the SoLR industry
process has proven to be effective,
ensuring continuity of service and
revenue collection.
Positive progress has been made
in the maturity of the DCC second-
generation smart (‘SMETS2’) solution
and platform, with the initial industry-
wide radio frequency technical issues
now resolved and energy suppliers
introducing SMETS2 prepayment
solutions. As at 4 March 2021,
c.3.7 million SMETS1 meters had also
been migrated to the DCC systems
through the Enrolment and Adoption
programme, with the cohorts of meter
types which form the Group’s
SMETS1 portfolio commencing
migration in August 2020. This process
is expected to continue through to the
end of 2021.
Strategic reportGovernanceFinancial statements
32 SMS Annual report and accounts 2020
OPERATIONAL REVIEW continued
Supply market shares by company: Domestic (GB)
Gas
Big Six
Independents
Electricity
Big Six
Independents
100
75
50
25
0
2012
2013
2014
2015
2016
2017
2018
2019
2020
Source: www.ofgem.gov.uk/data-portal/retail-market-indicators
Case study:
SMS data
services in action
In 2020, SMS continued to
develop new data solutions
aimed at serving the rapidly
changing needs of the energy
industry. One of these was for
our customer Social Energy,
whose Artificial Intelligence
(AI)-powered platform allows its
customers to trade or sell the
power that they generate and
store, empowering homes and
businesses to take control of
their power supply and maximise
savings. Key to facilitating this
kind of service is elective half-
hourly (EHH) data settlement,
made possible by smart meters
that record the amount of
energy consumed or exported
within every half-hour of the day.
There are an increasing number
of UK energy suppliers facing
greater consumer demand and
market competition for ‘smart’
supply services. Our dedicated
offering in this area is therefore
critical in helping facilitate the
development and competitiveness
of these low-carbon energy
solutions.
Performance summary
• ILARR increased by £4.4m1, a 6%
increase to £77m, providing a stable
foundation for the business.
• Our owned smart meter portfolio
grew 10% to over 1.3 million meters.
• Sale of c.£17.6m net ILARR for
c.£291m, representing 16.4x net
EBITDA.
• Growth in contracted smart meter
order pipeline to c.2.5 million meters
at March 2021.
• Strong capital position ensures
sufficient funding for future
contracted pipeline.
• Development of our Half Hourly
data settlement and firmware
management services.
Throughout the COVID-19 national
and local lockdowns, the cloud-based
asset management and data platforms
we own enabled seamless continuity
of services for our customers –
continuing to track our assets from
installation, through customer churn,
to ensure accurate billing and
management. We continued to collect
and process over 5.1 billion Half Hourly
data packets during the year, again
with complete continuity of services
throughout the year.
1 2019 ILARR is presented on a pro-forma basis
for comparative purposes, excluding a net
contribution of £17.6m from disposed I&C
meter assets.
The resilience of our business model
was further demonstrated as we
delivered strong growth in our ILARR
in line with expectations, despite the
impact of COVID-19. The pandemic
did slow capital deployment into new
smart meter assets, but the corollary
was that the Group’s portfolio of
traditional meters has remained on
the wall for longer than expected and
has continued to generate revenue
over the period through both meter
rental and transactional emergency
work. The slowdown in meter
installations and associated capital
deployment also conversely
demonstrated the cash-generative
nature of our asset base and the
strength of our long-term underlying
recurring revenues.
The sale of c.187,000 I&C meter assets
(representing c.£18.4m gross ILARR;
or c.£17.6m net ILARR including £0.8m
of RPI-linked recurring management
fees to be earned by the Group for the
ongoing management of the portfolio
of disposed assets) in April 2020, with
an average age of 4.7 years, for gross
proceeds of c.£291m demonstrated
the inherent value of the Group’s
meter assets. Further details on the
disposal can be found on page 67.
We exited 2020 with £77m ILARR
and high expectations for accelerated
growth as we continue to deliver our
contracted smart meter order pipeline
for our customers.
Our metering and data assets
provide us with a solid platform for
the future, enabling us to focus on
continued investment in our people,
our technology and our products
and services.
SMS Annual report and accounts 2020 33
Asset Installation division
Summary
Revenue (external)
Pre-exceptional cost of sales
Pre-exceptional gross profit
Pre-exceptional gross margin
Net portfolio additions – smart and I&C meters1
2020
£19.7m
(£16.6m)
£3.1m
16%
139,000
2019
£22.4m
(£28.0m)
(£5.6m)
(25%)
313,000
Growth
(12%)
(41%)
155%
41%
(56%)
1 2020 net portfolio additions of 139,000 exclude the disposal of c.187,000 I&C meters to a third party in April 2020. 2019 net portfolio additions of
313,000 exclude 69,000 smart meters acquired from a customer during the year.
Our focus
The Asset Installation division is
focused on operational excellence
and efficiency. Our primary strategic
objectives are to:
• safely deliver the installation of meter
assets which provide long-term
recurring revenue to our business;
• align our engineering capacity and
installation profile over the extended
BEIS rollout period, using technology
to drive both efficiency improvements
and an improved customer
experience/appointment booking
process;
• expand installation services into
non-metering utility infrastructure
and energy services activities, in
support of new CaRe assets; and
• reduce the carbon footprint of our
delivery – in particular from our fleet
– in line with our ‘net-zero by 2030’
carbon target.
Our nationwide installation business,
supported by our in-house training
academy, has 25 years’ experience
in the design and delivery of a range
of utility infrastructure and metering
solutions.
Leveraging this experience, it is
focused on efficiently delivering the
UK smart meter rollout, and is working
with our customers, and our other
divisions, to trial the installation of
next-generation asset classes, in
particular smart home and domestic
EV charging point devices which can
be installed at the same time as smart
meters.
Market conditions
The COVID-19 crisis has had a direct
impact on the Asset Installation
division, impeding its ability to deploy
meter assets (in particular between
24 March and 1 June 2020), due
to the temporary cessation of all
non-essential meter works between
these dates. Even since this date,
whilst the division has been able
to resume installation activities in
a phased and progressive manner,
ongoing national and regional
restrictions have presented continued
logistical and operational challenges.
The UK Government’s new four-year
regulatory framework for the UK
smart meter rollout, extending the
deadline to 1 July 2025 (which includes
a 6-month extension due to COVID-19),
reaffirms the importance of the smart
meter rollout to the future of the UK
energy system. Crucially, the previous
requirement on energy suppliers for
all ‘reasonable steps’ to be taken by
30 June 2021 has been replaced with
the introduction of annual binding
installation targets from 1 July 2021.
With increasing pressure being applied
to energy suppliers, it is critical that
we continue to invest to help our
customers achieve their targets.
We have taken steps to ensure
the efficiency of our delivery, with
a focus on technology solutions and
optimisation of engineering resources
to allow flexibility in delivering our
contracted meter installation pipeline.
Through our skills and expertise, we
are engaged in industry-wide initiatives
to continually improve health and
safety performance, with smart meter
installations providing an ideal
opportunity to identify any existing
quality issues in the meter or the
incoming electrical/gas supply at the
sites we visit. We are engaged in a
number of BEIS and regulatory forums,
as detailed on pages 41 to 42, to share
best practice across the industry.
Performance summary
• Maintained critical energy supplies
to vulnerable and off-supply
customers, and supported critical
national infrastructure, throughout
the pandemic.
• Implemented new safe working
practices to protect our team and
customers, with increased levels
of investment in procedures,
Personal Protection Equipment
(PPE) and our training academy.
• Continued to drive productivity
and efficiency through investment
in people and systems.
• Implemented new technologies such
as consumer-direct digital bookings
and a new scheduling system to
drive improved levels of service,
efficiency and reduce carbon.
• Maintained a reliable engineering
resource base, supported by our
in-house training academy, which
was expanded in the year to cover
new asset classes such as EV
charging points and batteries.
• Effectively positioned the business
for the remainder of the UK smart
meter rollout, to maximise delivery
and volume in the most efficient way.
• Installed the first live polyphase
smart meter in the UK.
In line with the wider industry,
we commenced 2020 gathering
momentum and growth in our
installation run rates. However, when
the COVID-19 crisis came to the fore,
just hours before the national
Strategic reportGovernanceFinancial statements
34 SMS Annual report and accounts 2020
OPERATIONAL REVIEW continued
lockdown was announced by the UK
Government on 24 March we led the
industry in deciding to cease all
non-essential works. Protecting the
safety and wellbeing of our people,
our customers and the end consumers
was, and remains, paramount. See the
section Our response to COVID-19
on pages 4 to 7 for further details
on what we did next and how we
addressed the various related
challenges during the year.
As we exited the national lockdown in
June, through a phased remobilisation
plan – implemented with the health
and safety of our people and customers
at front of mind – we slowly began
to return to normalised levels of
installation. Although we still had to
navigate ongoing local and regional
restrictions, by December 2020 our
installation levels had recovered to
c.80% of our pre-COVID-19 levels; an
extraordinary achievement, especially
with the continued and rapidly
changing restrictions and lockdowns
in force.
Whilst March through to July saw most
of our engineering workforce stood
down, we used the time to improve the
customer journey and experience, and
to drive innovation. We implemented
two-way texting and new consumer
booking portals, which saw self-serve
(consumer control) bookings increase
to over 60% of all domestic smart
meter appointments generated. New
route scheduling software was also
implemented during the year, following
significant in-house development
and integration with existing systems.
We are already seeing early signs of
reduced levels of travel and improved
efficiency of engineers as a result
of these innovations.
SMS also installed the industry’s first
three-phase SMETS2 meter, in August
2020, which will enable smart meters
to be used for large domestic and
small I&C properties for the first time.
This is a significant milestone for
the industry and demonstrates the
Group’s leading position in developing
and delivering innovative market
solutions in partnership with its
customers and supply chain. See the
Our markets section on page 18 for
further details.
Number of domestic smart meters installed by large energy suppliers,
by fuel type and quarter
All Smart
meters (total)
21.5m
Electricity
meters (total)
12.2m
Gas
meters (total)
9.3m
Q3 2012 to Q4 2020
22.0
17.5
12.0
5.5
0.0
2012
2013
2014
2015
2016
2017
2018
2019
2020
All smart meters
Electricity
Gas
Source: Energy Suppliers reporting to BEIS
Number of domestic meters operated by all energy suppliers to end of 2020
Smart
(smart mode)
7.5m
Smart
(trad mode)
2.1m
Non-smart
meters
14.2m
Gas
meters (total)
23.8m
Smart
(smart mode)
10.2m
Smart
(trad mode)
2.5m
Non-smart
meters
16.0m
Electricity
meters (total)
28.7m
0
5
10
15
20
25
30
Source: Energy Suppliers reporting to BEIS
Following the national lockdown,
we ensured all our engineers were
trained in our COVID-19 Business
Risk Assessment and associated
enhanced processes and protocols
through our in-house training
academy. In support of ongoing
development in CaRe assets within
the Energy Management division, we
also built new facilities in the training
academy to support EV charging
and domestic battery installation.
This positions the business to be
at the forefront of the changes
happening in the energy industry.
SMS Annual report and accounts 2020 35
Energy Management division
Summary
Revenue
Cost of sales
Gross profit
Gross margin
Value of utilities under management1
1 Based on value of utility bills validated on behalf of customers.
2020
£4.6m
(£3.6m)
£1.0m
22%
£334m
2019
£9.0m
(£6.8m)
£2.2m
24%
£320m
Growth
(49%)
(47%)
(55%)
(2%)
4%
Our focus
Our well-established Energy
Management division is focused on
deploying carbon reduction (‘CaRe’)
assets and solutions which reduce
energy consumption and carbon
emissions, and enable a low-carbon,
more flexible energy system. Our
primary strategic objectives are to:
• build and deliver capital projects
to deploy services and assets to
reduce our customers’ carbon
footprints; and
• generate long-term, secure
recurring returns by originating and
managing assets and services in:
– Grid-scale battery storage and
distributed generation
– Behind-the-meter smart solar and
storage solutions (Solopower)
– EV charging infrastructure
– Heat meters and networks
– Energy efficiency measures such
as LED lighting and smart energy
controls.
Whilst COVID-19 has impacted some
of our traditional retail and hospitality
customers, we have extended our
business focus to the opportunities
presented by the low-carbon
transition. To this end, we are focused
on specific low-carbon technologies
and applications including grid-scale
battery storage, Solopower, EV
infrastructure, heat and energy
efficiency. Each of these technologies
will play a big role in decarbonisation,
provide a very significant market
opportunity and enable us to make
use of our existing skills and capabilities,
data and knowledge of sustainability
technologies.
Market conditions
The shutdown of large parts of the
economy due to COVID-19 has
affected the large hospitality and
retail estates which have traditionally
provided much of the demand for
energy and sustainability services,
and this had a short-term impact on
some of our activities in the year.
Conversely, however, the UK
Government’s climate change agenda
supports a range of substantial
market opportunities. This includes
the UK’s commitment to net zero by
2050, the acceleration of the deadline
for ceasing the sale of petrol and
diesel cars to 2030, and the proposals
contained in the Energy White Paper
published in December 2020. The UK
Government’s policy for economic
recovery from the COVID-19 crisis is
also aimed particularly at green
recovery, reinforcing the need to
focus on low-carbon technologies
and improving the potential scope
for deployment of CaRe assets.
See the Our markets section on
pages 16 to 21 for further details.
Performance summary
The priority during this difficult year
has been, where possible, to provide
an uninterrupted service to existing
customers. Despite the economic
effect of COVID-19, we have been
able to maintain service delivery for
all of our customers and service lines.
We continue to provide bureau, energy
management and environmental
consultancy services to a range of
blue-chip, typically multi-site, large
energy users.
Whilst most of these consultancy
and energy management services
proceeded seamlessly, COVID-19
had a significant impact in forcing the
temporary suspension of all site works
between March and June 2020.
The majority of works successfully
resumed from August onwards but
progressed at a slower pace whilst
ongoing local and regional restrictions
continued to be navigated. This
impacted the ability to deploy
energy-saving solutions to customers,
most notably the delivery of an LED
lighting and heating controls project
for a large hotel chain. Revenue in this
division declined in the year as a result.
Fundamentally, however, our contracts
have remained intact and management
is confident that in-progress projects
will successfully continue in 2021.
In addition, we have made progress
in the origination of CaRe assets,
developing our propositions and
customer base in several new low-
carbon technologies and applications.
Most notably, we are now actively
operating within the grid-scale battery
storage sector.
10%
EV sales 10% of market share in 2020
38,200
EV charging points in the UK
at 24 February 2021
14GW
Of planned battery projects across
700+ sites in the UK
Strategic reportGovernanceFinancial statements
36 SMS Annual report and accounts 2020
OPERATIONAL REVIEW continued
Decision-making in practice:
Investment in grid-scale battery storage
The Board’s decision to invest in
grid-scale battery storage – as
a new asset class – was made in
the knowledge that it complements
the Group’s strategy of investment
in assets that have a long-term life
and generate predictable recurring
revenues. It also aligns with the
Group’s wider purpose of investing
capital in assets that help create
a better environment by reducing
overall carbon footprint, because
the benefits of grid-scale battery
storage are central pillars of the
Government’s ‘net-zero by 2050’
target, and our business strategy
is to deliver the network of low-
carbon assets needed to reach
that goal as soon as possible.
The Board made its decision
following review and discussion
of the market opportunity, why
grid-scale battery storage is a
good fit for SMS, the outline
economics and the future expected
returns from the investment.
The Executive Directors presented
a proposal to the full Board to start
originating ‘shovel-ready’ sites
in August 2020, following which
the decision was made to proceed
with the Burwell and Barnsley
projects detailed on page 37.
A complementary approval was
sought from the Board for up to
c.£33m of working capital funding
to develop the acquired sites over
the next 12 months, to be funded
from the Group’s existing financial
resources.
In making this particular
investment decision, the Board
gave consideration to our key
stakeholders, in particular:
Shareholders – our shareholders
want us to maximise returns in
a responsible way. Analysis
demonstrated the attractive returns
anticipated from this type of asset,
which fits well within SMS’s business
model as we have existing expertise
within the utility connections
business to enable us to develop
the projects through to maturity.
The assets contribute strongly to
our low-carbon strategy, and there
is the opportunity over time to build
another significant asset portfolio
with long-term asset management
recurring revenues.
Employees – in making its decision,
the Board understood that there
was a dedicated team established
within the business to manage this
new area of investment, enhanced
through recruitment of subject-
matter experts. The wider workforce
is kept updated on key developments
such as this one via the Company
newsletter and intranet page. It is
also important to the Board that the
employees see strategic growth
and direction aligned to the purpose
of the Group.
SMS Managing Director John Hall (left) and Head of Supply Chain Phil Norrish (right) break
ground at the new 50MW battery storage development in Burwell, Cambridgeshire.
Grid-scale battery storage
The case for battery storage and the
wider benefits this technology delivers
to the grid is undoubted. Grid-scale
battery storage technology enables
power system operators and utilities
to collect energy from the grid
(i.e. charge) and then discharge this
energy at a later time, when required.
It is a critical part of the changing face
of the electricity network, becoming
a practical alternative to new-build
electricity generation or network
reinforcement, as it enables greater
flexibility to connect larger amounts
of renewable energy’s intermittent
generation. An increased capacity of
batteries on the grid will, in many ways,
also contribute to a more affordable
energy system for consumers. It is
estimated that between 2015 and
2050 the renewables market will grow
by 249%, whilst the flexible capacity
market, the segment in which battery
storage sits, is predicted to grow by
545%. National Grid forecasts a
need for c.30GW of electricity storage
by 20501 to help reach net-zero.
We have over 25 years’ experience
in the design and delivery of large-
scale electrical infrastructure projects,
and are accredited for design up to
132kV under the National Electricity
Registration Scheme (NERS). SMS
therefore has the end-to-end
capability to originate, design, build
and operate grid-scale battery
projects.
The economics of this asset class are
attractive with an initial EBITDA yield
of c.11-14%, and margin of c.75%,
against a build cost of c.£380,000
per MW, from an asset whose base
electrical infrastructure has an
expected life in excess of 40 years
(with battery cell replacement around
every 10 years). These forecasts are
supported by independent industry
modelling, both of the revenue and
the long-term growth in system
demand for the asset class to support
the transition to a net-zero electricity
network, and are considered to be
a conservative baseline. The economic
profile of these assets thus provides
secure long-term returns after
a relatively quick construction phase
of typically one year or less.
1 Calculated as the average of National Grid’s
four forecast scenarios in its Future Energy
Scenarios 2020.
SMS Annual report and accounts 2020 37
SMS Integrated Technology Platform
D ATA A S A P L AT F O R M
METIS
Asset Management platform integrating the increasingly complex energy system
HEAT
SOLAR
FSM
Application
& Booking
Engineer Capacity
& CRM
Dynamic Scheduling
Field Management
& Job Completion
DATA
EV CHARGING
BATTERY
ADM Data
Retrieval
Smart Vision
Energy Efficiency & Data
METERS
FlexiGrid
AI Automated
Trading
Balancing &
Optimisation
VPP Aggregation,
Monitoring & Control
Automated
decision making
Consumers
Energy
Suppliers
DATA
Following the business acquisitions
detailed in note 20 to the Financial
statements, we have two projects,
in Burwell and Barnsley, totalling an
initial 90MW storage capacity, that
will be constructed and are forecast
to be energised by the end of 2021.
We will deliver the projects in their
entirety, from initial construction
through to ongoing operation,
trading, maintenance, and asset
management for the 40-year lifespan
of the batteries. In addition, the Group
obtained the rights to acquire 100MW
of grid-scale battery storage projects
post year-end and is in exclusivity
to acquire a further 280MW, giving
a total pipeline of 470MW. The Group
expects this pipeline to continue
to grow over the coming years.
In addition, continued development
has been made in the verticals below:
• Solopower (behind-the-meter
smart solar and storage): focused
initially on the domestic social
housing and I&C market, and backed
by long-term secured revenues,
Solopower uses a combination
of roof-mounted solar panels and
battery storage, supported by our
FlexiGrid™ technology platform,
to deliver both low-carbon energy
(up to 90% of electricity supply) and
reduced energy costs (up to 25%).
See the Our markets section on
pages 16 to 21 for further details.
We have been successfully delivering
pilots for up to 1,500 homes, working
with local authorities and housing
associations, and the Group intends
to launch its fully funded Solopower
solution in 2021.
• EV infrastructure: SMS is an
accredited EV charger installer from
the Office for Low Emission Vehicles
and has been consulting industry-
wide to build upon existing car
charging contracts, and to develop
disruptive models that align with the
UK Government mandate to ban
internal combustion engines whilst
requiring charging infrastructure
to encourage the uptake of electric
vehicles. SMS is also lead
co-ordinator in the Virgin Media
Park and Charge (‘VPACH’) project.
We are in the process of developing
funding models for both the domestic
and destination charging sectors,
and expanding our installation
capability.
• Heat meters and networks: SMS is
working with customers to develop
alternative heat solutions that
include heating controls, air-sourced
heat pumps, waste to energy, and
combined heat and power. Heat
represents a huge challenge across
the UK, with gas as a source of heat
being phased out domestically and
lower-carbon sources of heat needing
to prove they are economically
attractive alternatives. SMS is also
delivering a smart heating controls
project for a nationwide hotel chain
together with addressing the need,
legislated via the Heat Network
(Metering and Billing) Regulations,
for heat meters to be installed on
existing and new heat networks.
• Energy efficiency: a range of energy
efficiency projects are in development
with our telecoms, hospitality, banking
and retail customers, from LED
projects to smart energy controls.
Whilst COVID-19 has impacted on the
development and delivery of these
projects, we confidently expect
acceleration of progress in 2021.
Tim Mortlock
Chief Operating Officer
16 March 2021
Strategic reportGovernanceFinancial statements
38 SMS Annual report and accounts 2020
SUSTAINABILITY
Creating a sustainable and
safe environment for all
Sustainability underpins
our commitment to create
long-term value for our
stakeholders and achieve
our vision to be at the heart
of the low-carbon, smart
energy revolution that
is pivotal to realising a
greener, more sustainable
world.
We have prioritised our
sustainability reporting into
the following main areas:
1
Stakeholder engagement
2
The environment
Building strong and trusting
relationships with our key stakeholders
is critical in managing the business
successfully. If we are to achieve our
goals we must listen to, and collaborate
with, our stakeholders – at both Board
and management level.
As a major energy solutions
company, we are acutely sensitive
to the environmental climate in which
we operate and the impact we have,
both through our customers and in
building our own sustainable energy
infrastructure. In support of delivering
on our purpose, we have set ourselves
a new ambition to become a net-zero
company by 2030 or sooner.
Find out more on page 39
Find out more on page 43
3
Our people
4
Health and safety
5
Ethical business practices
We care. We create a positive and
inclusive working environment, where
each and every employee shares our
values. We are passionate about using
our capabilities and resources to
make a positive impact and the
development of our people is a critical
component of this.
For us, being sustainable also means
being safe, secure and reliable. Our
commitment to health and safety
underpins all our business practices,
ensuring that our employees and
customers are protected.
We believe in behaving responsibly
and with integrity. This is underpinned
by our Code of Conduct and
supporting policies and procedures.
Find out more on page 49
Find out more on page 54
Find out more on page 56
We aim to create a sustainable and safe environment
for all where customer excellence is key, innovation is
encouraged, and employees are proud. In turn, this
will nurture a thriving workplace and a business that
supports the wider society. We ensure diverse and
inclusive environments and promote wellbeing, whilst
empowering communities to take control of their
carbon footprint and tackle local and global issues.
Through the above sections, we share more details
on these key areas, highlighting our developments
throughout 2020 and future priorities as the UK’s
energy system continues its transformation.
For more information on our sustainability performance,
see also the SMS Sustainability Report 2020 at
www.sms-plc.com/corporate/sustainability
SMS Annual report and accounts 2020 39
1 Stakeholder engagement
Engaging our stakeholders
Effective stakeholder engagement
is critical to the long-term success
of our business. It is the process by
which we develop our knowledge and
understanding of each stakeholder
group, and the key drivers for each
of them in their interaction with our
business, so that we can make better
decisions in both our day-to-day
operations and when setting
strategy and making business
decisions.
Our key stakeholder groups are
set out on pages 39 to 42 along with
how the business engages and
key topics of discussion during 2020,
above and beyond COVID-19,
together with any specific outcomes.
SMS’s response to the COVID-19
pandemic and its management of
key stakeholders in this context can
be found on pages 4 to 7. Further
Board engagement is outlined on
pages 82 to 83.
Section 172 statement
The Group has complied with the
requirements of section 414CZA of
the Companies Act 2006 by
including certain information within
the Strategic and Governance
Reports, that informs members of
the Company how the Directors have
considered the matters set out in
section 172(1)(a) to (f) of the
Companies Act 2006 when performing
their duty under section 172 to
promote the success of the Company.
The Board consider, both
individually and together, that they
have acted in the way that they
consider, in good faith, would be
most likely to promote the success
of the Company for the benefit of
its members as a whole.
Shareholders
See the Corporate
governance
report for further
information.
Why effective
engagement is important
Our shareholders provide capital
for our business, which we utilise
to originate sustainable assets
and solutions.
Pages 76 to 87
The long-term strategic plans for
the business necessitate strong
relations with, and support from,
shareholders.
We ultimately seek to promote
an investor base that is
interested in a long-term holding
in the Company. In turn, we
endeavour to foster an open
and transparent relationship with
our shareholders to enable them
to make effective investment
decisions.
Form of engagement
• Discussions at the Annual
General Meeting.
• Investor roadshows following
results announcements.
• Continuous availability of the
Chairman to discuss matters
of concern.
• Ad-hoc meetings between
institutional shareholders and
the Chief Executive Officer,
Chief Financial Officer and
Chief Operating Officer.
Our programme for investor
engagement is detailed in the
Corporate governance report
on pages 76 to 87.
Key topics of engagement
during 2020
• The Group’s minority meter
asset disposal, detailed further
on page 67.
• Our smart meter installation
run rate and index-linked
annualised recurring revenue
(ILARR) progression, which are
key measure for the business.
• The development of carbon
reduction (‘CaRe’) assets, an
exciting growth area that has
generated significant interest
amongst investors.
• Our 2030 net-zero target,
detailed further on page 45.
In addition, responding to our
investors’ focus on corporates’
environmental, social and
governance (ESG) credentials,
we have published our first
Sustainability Report.
Strategic reportGovernanceFinancial statements
40 SMS Annual report and accounts 2020
SUSTAINABILITY continued
1 Stakeholder engagement
Customers
See the
Operational
review for further
information.
Pages 30 to 37
Why effective
engagement is important
Serving our customers is a key
component of our purpose and
we aim to provide an exceptional
customer experience. To deliver
on this, we need to listen and
engage. We need to be a partner
in whom they can trust.
Maintaining open and honest
relationships with our customers
allows us to remain commercially
competitive and secure further
lucrative long-term contracts.
As the energy and utilities
industry navigates the UK smart
meter rollout, it is important that
we work collaboratively with
energy suppliers to ensure we
are meeting their service needs
in an efficient and effective way.
Form of engagement
• Listening and responding to
customer feedback.
• Clear and structured lines of
engagement for core customer
groups.
• All customers are assigned
an account manager – a single
point of contact with whom
items can be discussed.
• For larger customers,
dedicated contact centres are
used to co-ordinate with end
consumers.
• Separate specialist teams
are allocated for planning and
scheduling, commercial billing
and general account
management, ensuring regular
communication is maintained.
• Regular service reviews to
ensure we are addressing
feedback from customers in
a timely manner.
Key topics of engagement
during 2020
The pandemic has provided
more time for us to work with our
customers on their consumer
conversion programmes and the
enhancement of the consumer’s
digital journey. Through virtual
workshops we have explored new
ways of interacting with the end
consumer digitally, successfully
implementing new functions
such as web chat and two-way
texting.
Engagement around information
technology remains crucial
to effectively delivering our
customers’ installation plans.
We have worked closely with our
customers to implement three-
way integration between our own
systems, our customers’ and the
Data Communications Company
(DCC).
Employees
See the Our people
section.
Pages 49 to 53
Why effective
engagement is important
Our experienced and dedicated
workforce is a key asset to the
business.
We believe that engaged, healthy
and safe employees encourage
creativity and productivity,
resulting in enhanced financial
performance, which is paramount
in enabling us to deliver our
strategy and achieve our mission.
It is therefore crucial that we
create the appropriate culture,
leading by example and
providing suitable development
and promotional opportunities
for employees at all levels.
Form of engagement
• An open and collaborative
management structure with
tone set from the top.
• A designated Non-executive
Director provides independent
oversight over employee
engagement, working in
tandem with the Group HR
Director.
• Use of an intranet site.
• Issuance of regular newsletters.
• Ad-hoc Company
presentations by the executive
management team together
with regular videos and email
communications.
• Various wellbeing initiatives.
• Employee surveys.
Key topics of engagement
during 2020
Our employees were engaged
on several significant projects
during the year. Through
discussion forums, their thoughts
and feedback were collated
and evaluated, and they directly
influenced the key outputs.
2020 projects included:
• establishment of a new,
Groupwide pay and reward
structure;
• additional benefits including
enhanced maternity, cycle
scheme and annual leave
provision; and
• creation of a bespoke internal
wellbeing intranet page.
WE ARE NOT JUST AN
OUTSOURCE PARTNER;
WE SEEK TO BECOME
AN EXTENSION OF OUR
CUSTOMERS’ BUSINESSES.”
SMS Annual report and accounts 2020 41
Suppliers
See the
Operational
review for further
information.
Pages 30 to 37
Why effective
engagement is important
Our wide range of partners
provides us with the goods and
services we rely on to deliver
for our customers. This includes
physical plant and equipment
– most notably meter assets –
engineering services and legal
and professional consultancy,
to name but a few.
Reliable supplier relationships
are thus crucial in delivering our
business model and strategy.
Maintaining positive and open
engagement is a key priority.
Health and safety is at the heart
of everything we do and this
extends to services provided to
us by our third-party partners.
Form of engagement
• Comprehensive onboarding
process by skilled procurement
and legal professionals, using
Groupwide procurement
procedures and policies.
• Two-way communication
process.
• Prompt payment practices.
• For larger suppliers, ongoing
engagement through regular
meetings and feedback
sessions. Performance may
also be measured against
key performance indicators.
• Where relevant, thorough
tender and bid processes
are carried out.
Regulatory
bodies
See the
Operational
review for further
information.
Pages 30 to 37
Form of engagement
• Attendance at regular meetings.
• Active participation in
consultations and workshops.
• Representation on several
boards and panels, including:
Meter Asset Managers Code of
Practice (MAMCoP) and Meter
Operation Code of Practice
Agreement (MOCOPA) panels,
the Supply Point Administration
Agreement (SPAA) panel, the
Association of Meter Operators
and the Smart Metering
Operations Group.
• Regular compliance reviews
and audits, both internally and
externally, in respect of the
certifications and accreditations
which we hold under MAMCoP
and MOCOPA, amongst others.
Why effective
engagement is important
The primary government regulator
for the gas and electricity market
in Great Britain is the Office of
Gas and Electricity Markets
(Ofgem). Ofgem is the regulatory
body by which our key customers
are governed.
In conjunction with other
associations, groups and alliances,
Ofgem provides comprehensive
industry codes of practice that
govern the operational, technical
and health and safety issues
associated with the installation
and management of metering
assets, to which both SMS and
its customers must adhere.
Maintaining regulatory compliance
is crucial to our business success
amongst customers who place
substantial reliance on our
reputation as a full-service
provider.
Key topics of engagement
during 2020
Continuous engagement with our
suppliers through 2020 has been
critical in maintaining comfort
that delivery of the goods and
services needed for us to operate
is secure.
Regular performance reviews of
our key vendors were carried out,
with no significant deficiencies
or concerns to note. On the
contrary, service levels generally
remained high despite the added
pressure of the pandemic.
Policies and procedures around
onboarding and prompt
payment have been adhered
to without exception, with the
Group’s procurement team
able to continue to manage the
Group’s supplier relationships
remotely.
Key topics of engagement
during 2020
Discussions in the year have
focused on the effective and
efficient installation of second-
generation smart (‘SMETS2’)
meters, following the technical
challenges overcome by the
industry in the prior year.
Through a working group chaired
by the Company’s Operations
Director, a new Metering Code
of Practice has been established,
which consolidates the existing
MAMCoP and Approved Meter
Installers Code of Practice
(AMICoP) into a single new code
of practice. The demand for
a unified code of practice, used
by all types of meter agents,
has been felt in the industry for
several years and the new code
is a significant achievement led
by SMS.
Representing the Institute of Gas
Engineers and Managers (IGEM),
SMS was selected as an industry
expert to participate in a review
of certain technical standards
requiring enhancement.
Recurring annual audits were
carried out with successful
outcomes and no identified
material non-compliance issues.
Strategic reportGovernanceFinancial statements
42 SMS Annual report and accounts 2020
SUSTAINABILITY continued
1 Stakeholder engagement
Lenders/
financiers
See the Financial
review section for
further information.
Pages 65 to 71
Why effective
engagement is important
Our lenders are providers of
critical funding, supporting the
implementation of the Group’s
operational and strategic goals.
An open and transparent
dialogue is key to allow efficient
responses to the business’s
changing needs.
Form of engagement
• Provision of quarterly financial
and management reporting.
• Regular meetings.
• Ad-hoc phone calls and emails
as needed, ensuring proactive
communication.
Government
bodies
See the Our
markets section for
further information.
Pages 16 to 21
Why effective
engagement is important
We engage with several
government bodies including the
Department for Business, Energy
& Industrial Strategy (BEIS) and
the DCC.
These government bodies use
our expertise and experience
to assist in the formulation and
delivery of key energy policies,
which have a direct impact
upon our customers and our
own business.
We maintain an open and
transparent dialogue and
develop an awareness of the
key decisions being made
within the industry, which are
likely to impact our business.
This engagement allows us
to forward-plan and remain
competitive.
Form of engagement
• A regular meeting programme
with BEIS, including attendance
at round tables and working
groups.
• Review and provision of formal
responses on consultations
issued by BEIS and other
government bodies.
• Extensive engagement with
the DCC, supported by the
assignment of a dedicated
relationship manager.
• Representation on both the
Smart Energy Code (SEC)
panel and Smart Meter Device
Assurance (SMDA) Scheme
to help govern the activities of
the DCC and hold programme
suppliers to account.
Key topics of engagement
during 2020
Meetings were held with the
Group’s syndicate of banks
to provide an update on the
2020 budget and performance
and, specifically, to present
the Group’s financial position
following the sale of a minority
of its meter asset portfolio.
The Chief Financial Officer was
ultimately responsible for the
management of the facility
refinancing in April 2020, together
with the voluntary prepayment
detailed on page 70.
Key topics of engagement
during 2020
We have continued to actively
participate in discussions with
BEIS regarding the technical
performance of SMETS2 meters,
sharing performance statistics
to facilitate analysis, together
with supply chain and regulation
alignment.
Following our response to
the DCC’s consultation on the
derogation mechanism, we have
continued to engage with the
DCC on the measures in place;
specifically advising on the
impact the initial timeframe for
installations of 31 March 2020
would have had on our business if
not extended. A further 12-month
extension was subsequently
granted to the industry through
to 31 March 2021.
Beyond smart meters, we have
been exploring smart electric
vehicle (EV) charging with BEIS
and, with their support, are at the
forefront of designing innovative
new solutions in this space.
SMS Annual report and accounts 2020 43
2 The environment
page 77. The Committee is supported
by our ESG Working Group, which
comprises members of senior
management across key supporting
functions and ensures our objectives
and activities are relevant and
achievable. It also facilitates sharing
of best practices across the Group
and ensures we have the capacity and
capabilities to deliver on our goals.
Assessing and addressing climate-
related risks and opportunities
Our climate-related risks are integrated
into both our business continuity and
our integrated management system
(IMS) risk registers, which facilitates
ongoing monitoring. Through our
well-defined climate change risk and
opportunity process, all relevant
aspects of sustainability impacts are
evaluated, including sales, margins,
costs, reputation, regulations and
continuity of goods and operations.
Full details of our supporting processes,
current risks and related opportunities
can be found within our Sustainability
Report at www.sms-plc.com/
corporate/sustainability which has
been prepared in line with TCFD
reporting recommendations.
Climate-related scenario analysis
SMS conducts qualitative scenario
analysis in order to gain insight into
the potential risks and opportunities
posed by climate change. These
impacts span a wide range of areas
including technology, policy, weather
and many more, with varying severity.
The analysis therefore generates
a broad view of possible outcomes,
allowing SMS to understand and act
upon the likely impacts of climate
change, across its operations and
services.
Key climate-related risks and
opportunities
Our services are a direct response
to climate-related opportunities
within our sector, and the Company
has a significant focus on providing
the crucial assets and services needed
to transition away from carbon-heavy
power systems to renewable sources.
Key climate-related risks include
weather disruption, with potential
safety implications for employees,
and the possibility of fossil fuel taxes
increasing operational costs.
In the face of climate change, an
expanding global population and
rapid urbanisation, achieving a
cleaner, greener and more efficient
energy system has become pivotal to
realising a more sustainable world –
particularly as growing demand is
placing ever greater stress on power
networks while traditional energy
sources dwindle.
After international policy-makers,
it is the energy sector itself, and
companies like SMS, that have the
greatest potential and responsibility
to spearhead change. During a year
of significant disruption, we remained
unrelenting in our commitment to
halting and reversing climate change.
Sustainability governance
Environmental, social and
governance (ESG) disclosures
During 2020 we have focused on
improving our disclosure and data
sets to better share our performance
and improve internal ESG processes
in accordance with industry best
practice. We have sought verification
through appropriate rating agencies,
shared our climate-related risk
processes and aligned our reporting
with global philanthropy organisations
and frameworks.
We are also proud to present our first
stand-alone Sustainability Report,
available for download at
www.sms-plc.com/corporate/
sustainability which brings together
our achievements, monitoring and
targeting across the full spectrum
of our ESG activities.
Supported by our strategic focus
in 2020 we have:
• already achieved an ‘A’ rating from
Morgan Stanley Capital International
(MSCI), a leading independent ESG
rating agency;
• achieved a ‘B’ rating from our
Carbon Disclosure Project (CDP)
submission, which recognises the
management of climate and carbon
impacts and opportunities across
operational and service activities;
• registered as a Task Force on
Climate-Related Financial Discloses
(TCFD) supporter which develops
voluntary, consistent, climate-
related financial risk disclosure
frameworks for use by companies
in providing information to
stakeholders. Following this
registration, we have commenced
our journey to full TCFD compliance
and have a framework in place to
ensure future mandatory reporting
requirements will be met in the
required timeframes; and
• signed the United Nations Global
Compact, which represents our
commitment to upholding and
disclosing ethical principles across
human rights, labour, environment
and anti-corruption.
As our ESG strategy continues to
mature we will look to develop our
disclosure and increase our ratings,
to ensure accurate representation
of our organisation’s activities and
achievements in these areas.
Health, Safety and Sustainability
(HSS) Committee
Our new HSS Committee, including
its role and responsibilities and key
activities in the year, is detailed on
Strategic reportGovernanceFinancial statements
44 SMS Annual report and accounts 2020
SUSTAINABILITY continued
2 The environment
Our contribution to the United Nations Sustainable Development Goals
Our operations and key services contribute to a number of the United Nations Sustainable Development Goals,
and we feel we are strongly positioned to make a positive difference, as summarised below:
SMS RESPONSE
We are committed to being a safe,
secure and reliable organisation
and will act diligently to protect our
employees’ health and safety and
that of others who may be affected
by our activities, at all times.
SMS RESPONSE
SMS supports and encourages
gender diversity in its workforce.
SMS RESPONSE
SMS services are centred on delivering
a full range of energy assets that
enable affordable, reliable, sustainable
and modern energy for all.
SMS RESPONSE
Our wide range of partners provide
us with the goods and services we
rely on to deliver for our customers.
Reliable supplier relationships are
crucial in delivering our strategy.
SMS RESPONSE
We are acting to reduce our climate
impact, taking responsibility for
the carbon emissions generated
by our operations.
SMS RESPONSE
SMS has a culture of strong and
transparent governance and our
culture and principles are driven
from the top.
Further information is available throughout this Sustainability section on pages 38 to 57
However, we have a comprehensive
range of mitigating procedures in
place, and the risk rating after these
interventions is deemed as ‘low’.
Living our values and
reducing our footprint
Impact of COVID-19
During 2020, we have felt the
impact of COVID-19 restrictions and
subsequent changes in business
operations across both our buildings
and fleet. This has, in turn, impacted
on our ability to progress our
sustainability plans for the Company
due to closure of sites, reduction in
fleet movement and the temporary
standing-down of staff. Our energy
and carbon consumption has,
however, significantly reduced,
reflecting the realities of having fewer
staff, offices, and vehicles active
during the ongoing periods of
restriction. We have continued our
fleet operational control initiatives
where possible, as a rolling action plan
under our ISO 50001 management
system, and have controlled building
energy consumption using site closure
check lists for vacated buildings.
COVID-19 has also forced a significant,
accelerated evolution of work practices
with the rapid transition to working
from home for our office-based staff,
bringing with it the opportunity to
reimagine how we work in the future.
We embrace the benefits of the
flexibility and adaptability that have
been brought to the fore over the
past year.
2020’s performance means we have
a challenging benchmark for 2021
reduction targets, but we will be
working hard to leverage our learnings
and ‘build back better’ as we navigate
out of the pandemic.
Beyond the immediate COVID-19
impacts, however, 2020 marked a
significant achievement for the Group
in the context of its sustainability
strategy: the development and
announcement of our new net-zero
target. This is the result of months
of rigorous planning, collaboration
and communication with a broad
range of stakeholders.
Delivering net positive
sustainability through
our products and services
See information on our ‘handprint’
on page 48.
In addition, we have continued our
support of global research and
learning initiatives, contributing
to the following programmes:
• The UK Research and Innovation
(UKRI) ‘Project REMeDY’, which is
focused on creating a new energy
business model using local
microgrids, with the aim to reduce
grid constraints, cut costs and
reduce carbon. Focused primarily
in Southend-on-Sea to begin with,
the plan is to have a fully scalable
and replicable solution for use
across the whole of the UK.
• The European Union-funded
‘Horizon 2020’ research and
innovation project, which is focused
on exploiting thermal inertia in
buildings to enable higher levels
of energy flexibility through the use
of on-site renewable generation
and storage assets.
SMS Annual report and accounts 2020 45
Our net-zero ambition
Driven by the need for urgent action
to reverse climate change, we have
launched an ambitious target to
become a carbon-neutral business by
2030 – two decades ahead of the UK
Government’s target. This is a hugely
significant and positive decision for
the Company. With our vision to be at
the heart of a low-carbon, smart
energy revolution, the commitment
means that we can now confidently
say we are fully living up to our core
value of sustainability.
How will we get there?
Our net-zero roadmap, outlined below,
will be carried out in line with the World
Resources Institute’s Greenhouse Gas
(GHG) Protocol and the Institute of
Environmental Management and
Assessment (IEMA) GHG Management
Hierarchy (Avoid, Reduce, Substitute,
Compensate), with clear objectives
set. The target will be realised through
a variety of sustainability measures,
including increased adoption of
renewable on-site generation and
battery storage to power the Group’s
UK and Ireland estate, and the
transition of our entire fleet to electric
vehicles (EVs). As well as utilising these
low-carbon technologies, over coming
years we’ll also gradually be giving our
core sites full fabric upgrades to ensure
they’re using energy as efficiently and
sustainably as possible.
The HSS Committee will be responsible
for the ongoing monitoring of our
performance against these objectives.
Regular performance reviews will be
carried out, and updates shared with
the Board.
What does ‘net-zero’ mean?
Our ’net-zero by 2030’ target will see
us drastically reduce our organisational
carbon emissions to a point where
our buildings and vehicles remove
as much greenhouse gas from the
atmosphere as they create.
Our journey to
Net Zero Carbon
WE WILL DRASTICALLY REDUCE OUR CARBON
EMISSIONS TO A POINT WHERE OUR BUILDINGS AND
VEHICLES REMOVE AS MUCH GREENHOUSE GASES
FROM THE ATMOSPHERE AS THEY CREATE.”
2025
2030
2030
FLEET
All fleet will be EV
or emit 0g CO2/km
where possible
BUILDINGS
All core sites to have
renewable generation,
fabric and energy
efficiency upgrades
completed
2020
Committed
to Net Zero
Carbon target
22 Jan
2021
2021
2021
BUILDINGS
Commence roll-out
of renewable and
efficiency upgrades
Launched
Sustainability
page on
website
FLEET
All vehicles at the
end of their lifecycle
will be replaced with
plug-in hybrid’s or EV’s
where possible
FLEET
All fleet will
emit the lowest
possible CO2/km
in their category
Beyond 2030 Continuously working with suppliers and customers to reduce Scope 3 Emissions
2030Strategic reportGovernanceFinancial statements
46 SMS Annual report and accounts 2020
SUSTAINABILITY continued
2 The environment
Case study:
Decision-making in practice: net-zero carbon target
The Board’s decision to target
net-zero carbon by 2030 or sooner
represents a significant commitment
for the Group. Through its regular
engagement with shareholders at
both Executive and Non-executive
level, the Board was aware of
the ever-increasing number of
investors for whom sustainability –
and broader ESG issues – plays
a large role in driving investment
decisions. Equally, the Board
operates with the Group’s mission
to deliver the future of smart
energy at front of mind. It was thus
recognised that the decision aligns
with the Group’s purpose and
strategy, which in turn underpin the
long-term success of the Company.
Following months of work by the
business, supported by the HSS
Committee, the Board was presented
with a detailed proposal and plan
in November 2020, focused on the
optimisation of the Group’s two
key sources of emissions: its fleet
of vehicles and its buildings.
In reaching its approval of the plan
presented, the Board discussed the
following aspects with management:
• the incremental costs for the
business of achieving the net-zero
carbon target and any associated
funding requirements as a result;
• the communication and
implementation strategy, recognising
that in order to have coherence and
credibility the target needed to be
embraced and driven forward by
the entire business, at every level;
• how implementation of the target
will affect employees – for example
by potentially introducing a hybrid
model of home and office working;
• the role our customers can play
in helping us achieve this target,
by sharing best practice to deliver
strong outcomes; and conversely,
the positive message the target
conveys alongside our business
objective of delivering net-zero
carbon emissions for our
customers; and
• how to ensure visibility of
progress to key stakeholders,
including customers, employees
and investors through market
announcements, internal
communications, the Company
website and the Group’s
dedicated ESG reporting via
its Sustainability Report.
Following on from its decision, the
Board agreed with management
a communication plan and materials
for both internal and external
stakeholders. Monitoring of the
implementation plan will be the
responsibility of the HSS Committee,
which will report to the main Board
regularly to ensure Directors are
up to date on progress against
the target.
SMS Annual report and accounts 2020 47
Our environmental
performance
We take a holistic view of our
Company sustainability, which
includes quantifying both the positive
impacts from our products and
services, and the negative impacts
from our business estate and fleet
(our footprint), to reach an overarching
understanding of our total
sustainability.
We use this ‘net positive’ perspective
to align our strategy for business
growth, financial benefits and
sustainability gains; investing in the
development of assets which deliver
carbon reductions, including smart
meters and other carbon reduction
(‘CaRe’) assets.
In 2020, the positive impact we were
able to deliver via our products and
services significantly surpassed the
footprint we left behind.
Emissions reporting
Our footprint is the carbon produced
by our operational activities and we
utilise the internationally recognised
GHG Protocol to ensure we provide
standardised data and calculations.
Our Scope 1 footprint covers the
energy consumed by our fleet vehicles
and the gas and oil consumed across
our offices, warehouses and training
centres, as well as fugitive emissions
from air conditioning. Our Scope 2
footprint covers our electricity
consumption.
The table below incorporates our
mandatory Streamlined Energy and
Carbon Reporting (SECR) reporting,
together with certain voluntary
disclosures:
Total Scope 1 (TCO2e)
1,761.5
2,977.3
2,683.4
Scope 1 covers the direct emissions from our operations.
2020
2019
2018
Commentary
Company-owned vehicles
(TCO2e)
Gas (TCO2e)
Gas Oil (TCO2e)1
1,690.0
2,879.7
2,628.4 Our owned and tracked fleet vehicles.
42.0
1.6
50.5
–
55.0 Gas heating serves four of our office buildings across the UK.
– A new building utilising oil heating was added to our
estate in 2020.
F-Gas (TCO2e)1
27.9
47.1
–
F-Gas is the refrigerant used within air conditioning for
cooling workspaces and server rooms.
Scope 2 (TCO2e)
Location-based (TCO2e)
153.7
205.1
167.3
Scope 2 covers indirect emissions from our operations.
Electricity lights, heats and powers our operations
across warehouses, offices and training centres in the UK.
Market based1 (TCO2e)
(including green energy
contracts)
91.9
93.9
38.3 We source green contracts for our electricity where
possible. This excludes shared-lease spaces, where
contracts are controlled by the landlord, and new sites.
Total Scope 3 (TCO2e)
533.8
1,164.3
Vehicle business travel
Diesel upstream supply1
104.3
405.0
444.5
685.0
–
–
Scope 3 covers emissions from up and down our value
chain, including those of suppliers and service providers.
Travel in employee-owned vehicles.
– Upstream production of diesel to supply our vans with
fuel.
Transport and distribution
electricity1
13.2
17.4
– Upstream production of electricity for use on our sites.
‘Well to tank’ water supply1
3.1
7.9
–
The utilities required to provide our warehouses, offices
and training centres with water emit carbon through their
supply and treatment operations.
‘Well to tank’ Gas1
‘Well to tank’ Gas Oil1
Waste1
Total Scope 1, 2 & 3 (TCO2e)
(Scope 2 location-based)
Carbon intensity
Scope 1, 2 & 3 (TCO2e/£m)
Operational energy
consumption (MWh)
5.5
0.4
2.3
6.6
–
2.9
– Upstream production of gas for use on our sites.
– Upstream production of gas oil for use on a site.
–
The processing of waste generated by our sites.
2,449.0
4,346.7
2,850.7
23.8
38.0
28.9
‘Carbon intensity’ shows how many tonnes of GHG gas
emissions are produced per £m of revenue realised.
8,128.7
13,177.0
11,840.5
This is the total energy consumption of our operations,
spanning activities included in Scopes 1 and 2 (excluding
F-Gas).
1 Data is voluntary under SECR but included here for completeness of scope reporting under the GHG Protocol. See our Sustainability Report at
www.sms-plc.com/corporate/sustainability for a full breakdown of all metrics.
Strategic reportGovernanceFinancial statements
48 SMS Annual report and accounts 2020
SUSTAINABILITY continued
2 The environment
Other highlights
Our ‘handprint’
Our ‘handprint’ is the carbon mitigation achieved by our customers through
the impact and delivery of our energy services and solutions, including smart
meters. We currently use savings data from smart meter energy research
and from delivered energy efficiency projects to calculate our total handprint.
Tonnes of carbon mitigated by smart
meters (TCO2e)1
Tonnes of carbon mitigated by energy
efficiency projects (TCO2e)2
2020
2019
2018
9,718
21,337
20,376
5,291
3,444
1,055
1 Derived from annual savings on domestic property consumption as a result of the installation
of a smart meter. Calculated based on the number of smart meters installed by SMS each year.
2 Derived from energy savings achieved by customers as a result of energy efficiency projects
delivered by SMS. This measure records total energy savings in a given year, including the
flow-through impact of projects delivered in a previous period.
Other metrics
60%
Renewable electricity purchased
Recognition
MCSI
A
CDP
B
TCFD
Supporter
UN Global
Compact
Signatory
17%
Further reduction in energy
consumption per vehicle
44%
Reduction in total emissions
(Scopes 1, 2 & 3)
SMS Annual report and accounts 2020 49
3 Our people
April also marked our voluntary
signing of the C-19 Business Pledge,
founded by former UK Cabinet
Minister the Rt Hon. Justine Greening
and UK entrepreneur David Harrison,
with the aim of creating a coalition of
organisations to deliver international
support throughout the pandemic.
The C-19 Business Pledge extends
beyond just mobilising an immediate
response to considering future
recovery and we have a crucial role to
play in helping to rebuild the economy.
May
We continued our commitment to
deliver accredited mental health first
aid training and now have 26 mental
health first aiders among our staff.
We also achieved the Healthy
Working Lives Award (bronze)
awarded by Public Health Scotland –
a programme which helps improve
health, safety and wellbeing in
a structured and productive way.
We also participated in Pieta House’s
sunrise competition to support mental
health and suicide awareness and
to raise funds for the ‘Darkness into
Light Sunrise Appeal’. In addition to
a Company donation, we encouraged
our employees to participate in this
year’s alternative appeal, holding
an internal competition for the best
sunrise photo.
In the middle of the first national
lockdown, we created a ‘Lockdown
Stories’ campaign to encourage
employees to share the positives
they had uncovered during a difficult
and unfamiliar period, including the
benefits of working alongside family
and pets, together with extra time for
leisure activities and new hobbies.
We were sent many submissions
featuring a range of inspiring stories,
which we shared internally via our
newsletter and externally through
a social media campaign.
£20,000
We donated £20,000 each to Beatson
Cancer Care, Velindre Cancer Centre
and Prostate Cancer UK
Health and wellbeing
At SMS we ‘put our people first’. This
is a phrase with strong sentiment,
embedded within our core values.
In 2020, we continued our strong
focus on employee wellbeing through
the provision of dedicated mental,
financial and physical wellbeing
resources, and improved reward
and benefit initiatives.
There were several significant
milestones in the year:
March
We launched regular internal
communications to keep our
employees informed about our
business response to COVID-19, at
a time when providing clarity was key
to helping them maintain a positive
state of mind. These communications
were maintained on a regular basis
throughout 2020, and included:
• weekly COVID-19 updates providing
advice on a broad range of practical
topics;
• video and email messages from
the executive management team to
communicate our business response
to the pandemic and offer thanks
for the levels of dedication, resilience
and professionalism shown by
employees during a difficult situation;
• information on coping mechanisms
for stress and anxiety, supported by
our external Medical Director and
occupational health services;
• a Frequently Asked Questions
document;
• information about our external
Employee Assistance service
managed by a trained counsellor;
and
• dedicated e-learning modules
on resilience, wellbeing and home
working.
April
We introduced a bespoke Company
wellbeing intranet page, developed
with feedback from employees and
making it easier for employees to
access help and support while working
remotely or in the field. The wellbeing
page is regularly updated and curated
to include the leading and latest
content on mental, financial and
physical wellbeing, including online
and offline resources intended to help
employees keep a positive mindset.
Topics include home schooling,
bereavement and domestic violence
support, suicide awareness and
remote working.
Strategic reportGovernanceFinancial statements
50 SMS Annual report and accounts 2020
SUSTAINABILITY continued
3 Our people
DURING LOCKDOWN MY HUSBAND AND I HAVE BEEN
USING OUR LOVE OF BOTH PHOTOGRAPHY AND CRAFT
BEER AS INSPIRATION FOR OUR CREATIVE PROJECT.
AS WE HAVE NOT BEEN ABLE TO GET OUT AND ABOUT
TO TAKE OUR USUAL STYLE OF PHOTOS, IT HAS
BEEN A GREAT WAY TO CONTINUE OUR CREATIVE
PHOTOGRAPHY INDOORS AND ALSO SAMPLE
A RANGE OF DIFFERENT BEERS!”
Lisa Jenkins, Delivery Project Manager
July
We were recognised by ‘Working
Mums’ as a ‘Top Employer’ and were
added to their Top Employer Charter.
This demonstrates our commitment to
flexible working, to building a diverse
and inclusive workforce, and to
enabling employees to develop and
build their careers whatever their
working pattern.
September
We made a voluntary pledge to
Mindful Employer’s ‘Mindful Employer’
charter and, in doing so, making a
public declaration of our ambition to
support the mental wellbeing of our
staff. This reinforces our commitment
to creating a supportive and open
culture, where our people feel able to
talk about mental health confidently.
ALL OUR EMPLOYEES
PLAY A CRUCIAL
ROLE IN DELIVERING
BUSINESS SUCCESS.”
September also saw several
enhancements to our benefits
package including:
• the introduction of a Group cycle
scheme, available to all employees;
• an enhanced maternity scheme; and
• an increase to the standard holiday
entitlement to 25 days plus bank
holidays, with a further five days on
achievement of five years’
continuous service.
We were also re-accredited by the
Tommy’s Pregnancy Scheme.
December
SMS was nominated as an ‘Employer
of the Year’ finalist at the Utility Week
Awards 2020, which recognises
companies that have demonstrated a
commitment to investing in their
employees, and to championing
diversity and inclusion. Whilst we did
not win on this occasion, we are proud
of this external recognition of our
people initiatives, and specifically our
wellbeing initiatives and our response
to the pandemic.
We were also shortlisted for the ‘Best
for Mental Health’ award via Working
Mums and its Top Employer awards.
This award celebrates employers who
have been exemplary in the way they
have sought to protect their employees’
mental health during the pandemic
and, whilst we did not win, we were
delighted to have our efforts for
our people recognised externally.
Employee engagement
This is an ongoing focus for SMS as
we continue to build on and enable
a high-performance, reward and
engagement culture. We look at our
business not only in terms of financial
success but also in terms of how it
benefits all our stakeholders, including
employees, local communities and our
shareholders. In this way we can more
effectively deliver our long-term
objectives.
A designated Non-executive Director
has ultimate responsibility on the
Board for engaging with the workforce
in a structured way, supported by the
Group Human Resources (HR) Director,
to ensure that the importance of,
and plans for culture, reward and the
employee voice are highlighted.
We have undertaken various projects
through 2020 which have helped to
support and embed this approach.
Most significantly, in August we
launched our first ever external
Group employee engagement survey
with the help of Best Companies, an
independent workplace engagement
specialist. Half our employee population
participated in this initial survey,
answering a range of questions
tailored to help us better understand
the current feelings of our people –
to enable us to be aware of and thus
improve how we look after our people.
Several strengths were highlighted
by employees, including our net-zero
ambitions, our potential for future
growth, our effective response to
the pandemic and our enhanced
employee benefits package.
Equally, however, several areas
requiring focus were identified. These
included our corporate
communications, particularly with
regard to Group strategy, and a lack
of standardisation across career
levels and rewards. Based on the
survey findings, an action plan was
created and is currently being
implemented. We intend to conduct
these surveys at least annually,
allowing us to assess progress against
feedback on a regular basis and
reassure our people that they are
being listened to.
SMS Annual report and accounts 2020 51
Talent management
and development
As we continue to invest in our people,
we are reinforcing our culture of
’putting our people first’.
All of our employees play a crucial role
in delivering business success, and to
facilitate this we encourage continuing
professional development by offering
employees opportunities to learn,
grow, have fun along the way, and
utilise their skills more fully to better
achieve their potential.
We continued to expand our learning
and development programme in 2020
with the introduction of 19 new training
courses and the expansion of our
Modern Apprenticeships programme
to include the areas of customer
service, management, warehousing
and storage, and project management.
At the beginning of 2020, the Group
HR team held employee workshops
in all locations with the support of an
external provider, Verditer, to gather
employee feedback on how we
recognise and reward our employees.
Following this, we undertook an
extensive project to develop and
introduce a unified pay and reward
framework across the business. We
continued to work with Verditer, who
helped us benchmark salaries and
benefits. The new framework, which
was rolled out from 1 February 2021,
governs a Groupwide set of career
levels, job families and supporting
pay scales, with the aim of embedding
a consistent approach to the way
we organise our job roles and ensure
that pay decisions and promotions
are made fairly and equitably.
In December, we launched our
inaugural externally-accredited
Management Development
Programme within the Operations
department, following which it is now
being rolled out across the business.
This programme supports new and
promoted managers, ensuring
a consistent approach to learning
and development at manager level.
The SMS training academy, as our
centre of excellence, has continued
its growth and supports all the gas
and electrical training needs for
both SMS and certain clients’ field
operatives and management. Various
enhancements have been made to
the academy in the year, facilitating
bespoke gas maintenance training
and assessment, and new facilities
have been built to support the new
asset classes originating from our
Energy Management division. The
academy continues to offer technical
inductions for our engineers alongside
industry-update training, and also
houses our smart meter test facility.
WE MADE A VOLUNTARY
PLEDGE TO MINDFUL
EMPLOYER’S ‘MINDFUL
EMPLOYER’ CHARTER AND,
IN DOING SO, MAKING
A PUBLIC DECLARATION
OF OUR AMBITION TO
SUPPORT THE MENTAL
WELLBEING OF OUR STAFF.”
Diversity and inclusion
As an organisation we are dedicated
to ensuring a diverse, inclusive work
environment that promotes wellbeing
and supports our communities and
wider society.
We expect our people to live our
values and treat each other with
kindness and respect. All employees
are responsible for their own behaviour
and are expected to consistently
demonstrate our values. Our key
policies, which promote fairness to
all, include:
• equal opportunities, diversity
and inclusion;
• dignity at work; and
• our Code of Conduct.
There have been several notable
developments in the year:
• We made our voluntary ‘Scottish
Business Pledge’, which promotes
fairness, equality and opportunity.
• We continued our ’Disability
Confident’ journey and successfully
achieved the Level 2 Disability
Confident Employer status, which
affirms our intent to ensure that
disabled people and those with
long-term health conditions have
the opportunities to fulfil their
potential and realise their aspirations.
• In support of Black History Month
in October, we ran a month-long
social media campaign to spread
awareness and understanding of
Black history, directing our followers
to educational resources where
they could find out more.
• We signed the ‘Tomorrow’s Engineers
Code’, which is a framework for
organisations hoping to increase the
number and diversity of young people
pursuing engineering careers.
Throughout 2020 we also recognised
and supported various awareness
days, including: National No Smoking,
Suicide Prevention, World Mental
Health, Fuel Poverty, and Baby Loss
Awareness.
Strategic reportGovernanceFinancial statements
52 SMS Annual report and accounts 2020
SUSTAINABILITY continued
3 Our people
Giving something back
Offering practical support to our
communities has never been more
important, with COVID-19 increasing
feelings of isolation and loneliness and
placing financial pressures on many.
Throughout the pandemic we have
actively encouraged our employees,
especially those who were temporarily
stood down from service, to volunteer
and help where possible – including
with food deliveries, collections and
financial assistance for organisations
that specialise in supporting vulnerable
people.
With our ethos of goodwill and integrity
forming a key part of our Company
culture, a continued commitment to
charity is important to us. More than
ever, charities have become critically
dependent on the generosity of the
public and businesses to continue
to support their respective causes.
At SMS, we took the decision to
maintain our charitable efforts in full,
despite the challenging circumstances.
We continued to support our three
nominated regional cancer charities
as part of an overall three-year
commitment from 2019 to 2021. These
are: Beatson Cancer Care, Velindre
Cancer Centre and Prostate Cancer
UK. We donate £20,000 a year directly
to each of these amazing charities. We
have also supported a variety of other
‘staff matching’ fundraising, giving rise
to c.£15,000 in additional donations.
The Group HR Director has also
become a mentor within the Aleto
Foundation, which is focused on
identifying and developing the next
generation of leaders from communities
which may have historically found it
challenging to access jobs, and we
continue to participate in the national
‘Career Ready’ mentoring programme,
working with high-school students
to help them decide on their future
career and study choices.
Awards, memberships and accreditations
Awards/memberships/accreditations obtained in 2020
Memberships/accreditations retained in 2020
SMS Annual report and accounts 2020 53
Gender pay gap reporting1
SMS supports and encourages gender
diversity amongst its workforce. It is
the contributions of our people from
all backgrounds that ensure we are
successful, as only a diverse and
engaged workforce will produce
the solutions we need to tackle the
varying challenges faced by our
business. Industry-leading thinking
will diversify and transition the energy
market and therefore SMS welcomes
and supports gender pay gap
reporting and is committed to equal
opportunities, diversity and inclusion
throughout the business.
We are prioritising the utilisation
of tools, including our new pay and
reward framework, to monitor pay and
ensure there is no bias towards either
gender at any point from recruitment
through to salary conversations
and progression opportunities. We
continue to actively promote gender
balance within the Group.
Being part of the historically male-
dominated engineering industry, it is
no surprise that SMS currently has a
wide gender split between men and
women, and that a gender pay gap
exists. Overall, SMS has a 33% female
and 67% male workforce. We continue
to explore how we can attract women
into our organisation to create a
more even gender balance, although,
as an equal opportunities employer,
we firmly believe in appointing the
best candidate to each role regardless
of gender or other protected
characteristics as specified by the
Equality Act.
The mean gender pay gap for the
consolidated Group is 23.3%, and
the median gender pay gap is 34.5%.
This can be explained within SMS by
the following:
• There are more men than women
within the engineering industry,
from which we source most of our
employees.
• There are more men than women
in senior roles.
• There are more women in part-
time roles.
• There are more women in lower-
paying roles.
• Engineers are eligible for a monthly
health-and-safety-related
performance bonus.
There are significantly more male
employees in senior roles (i.e. in the
upper-middle and top pay quartiles),
which contributes to our gender pay
gap. However, the percentage of
female employees in the lowest pay
quartile of the organisation has
decreased by 7% compared to the
prior year, and there has been an
increase of 6% in the percentage of
female employees in the top quartile,
which is positive.
Most of these issues are, however,
prevalent throughout the UK and
indeed globally. They are therefore
not unique to SMS, as can be seen
via workforce statistics provided by
EngineeringUK. In 2020, overall,
14.5% of those working in engineering
occupations, across all industries,
were women. Encouragingly, this
represented a 2.5% increase on the
12% reported in 2018. Just 11.2%
of those in engineering occupations
within the engineering workforce2
were women, compared to 22.0%
of those in engineering occupations
outside the engineering workforce2.
Importantly, SMS has taken positive
action in 2020 which includes:
• the appointment of a woman –
Miriam Greenwood – as Chairman
of the Board;
• the introduction of a new, unified
Groupwide pay and reward
structure, which ensures equality
and consistency across the Group
based on career levels and
performance;
• the appointment of women into
three senior roles including New
Energy Director, Energy Sector
Specialist and Head of Marketing,
and the appointment of two women
into the management-level roles of
Business Architect and HR Business
Partner. In addition, 2020 saw the
internal promotion of five women to
management and senior level; and
• membership of the ‘Tomorrow’s
Engineers Code’, as detailed above.
1 All statistics calculated using data at
5 April 2020.
2 Engineering workforce is defined as all those
included in the EngineeringUK Standard
Industry Classification (SIC) footprint
(engineering industries) working in any
occupation. Non-engineers working in
engineering industries are included in the
engineering workforce, for example Human
Resource professionals working for
manufacturing companies.
Gender breakdown1
Board of Directors
71% Male
29% Female
Senior Management
71% Male
29% Female
Other Employees
67% Male
33% Female
Strategic reportGovernanceFinancial statements
54 SMS Annual report and accounts 2020
SUSTAINABILITY continued
4 Health and safety
Key highlights
• Adopted and implemented the
C-19 Business Pledge
• Maintained business-critical
operations and emergency
cover during all national
lockdowns
• Delivered the COVID-19-
specific training package ‘A
Safe and Healthy Return to
Work’ to all employees
• All health and safety key
performance indicators are
ahead of target
• Certification for ISO
accreditations 9001,14001
and 27001 maintained
• Successful transition from
OHSAS 18001 to ISO 45001
• Healthy Working Lives Bronze
Award, awarded by Public
Health Scotland
We are committed to being a safe,
secure and reliable organisation
which protects the safety and
wellbeing of our people, our
customers and the end consumer.
Introduction
Protecting the health and safety of
those that matter most to SMS has
never been more important than in
2020, in the face of COVID-19. The
year began with preparations for
the pandemic and resultant national
lockdown, and we were able to lay
foundations for the business to
continue to operate safely during the
crisis. A series of mandatory training
courses were developed and delivered
to mitigate the risk of COVID-19
infection, along with critical
adaptations to our workplaces to
ensure our employees, customers
and other stakeholders were safe.
See pages 4 to 7 for further details.
This focus remained steadfast as
we navigated our way through
ever-changing government guidance
– and continue to do so.
Our scheduled Safety, Health,
Environment and Quality (SHEQ)
training programme was curtailed
due to COVID-19; however, we still
managed to deliver numerous
high-quality courses and briefings via
our virtual platforms. This increased
staff awareness at a critical point in
the development of the business and
further embedded the engagement
and ownership of health and safety
that we have worked on in recent
years. The various SHEQ forums
across the business continued to
operate throughout the pandemic
and we were able to deliver consistently
on our SHEQ strategy and messaging.
Overall, performance has been
excellent, with ongoing progress made
towards our objectives and targets
whilst at the same time strengthening
our customer relationships. We
continue to invest in SHEQ to meet
current and future needs.
Occupational health
Our focus during 2020 has been on the
wellbeing of our people, particularly
those who have spent a significant
period working from home.
Throughout the year we have
distributed training material and
guidance on topics related to personal
wellbeing. We have supplemented
these offerings with bespoke
information from the Company’s
Medical Director on COVID-19-related
issues, whilst maintaining our normal
support for occupational health needs.
ISO certifications
The business maintained all its
ISO certifications in 2020 with no
major non-conformances recorded
during the audit processes. In July,
SMS achieved the International
Standard for Health & Safety at Work,
ISO 45001. ISO 45001 replaces the
current standard (BS OHSAS 18001)
and is awarded to organisations who
are serious about improving employee
safety, reducing workplace risks and
creating better, healthier working
conditions. One of the key differences
is a focus not just on safety, but on
employee health and wellness and
on the importance of leadership
in owning all aspects of health
and safety. As an organisation, we
have worked hard to improve our
free resources and promotion of this
approach.
Industry campaigns
We supported industry campaigns,
including 2020’s Gas Safety Week
which addressed a whole range of
gas safety matters with a focus on
community safety in these difficult
times. We provided advice on how to
stay gas-safe, and raised awareness
of the requirement to use a Gas-Safe-
registered engineer to ensure
consumers do not suffer from the
effects of illegal gas work. We utilised
our training academy and our digital
training platforms to run gas safety
awareness training and encourage
everyone to promote gas safety.
2020 provided a new challenge, not
only to consumers but to the industry
as a whole, with many people unable
or reluctant to invite engineers into
their properties to carry out routine
maintenance operations due to
concerns or restrictions related to the
pandemic.
SMS Annual report and accounts 2020 55
For this reason, we felt Gas Safety
Week had never been more important,
so we ran internal communication and
social media campaigns to further
promote good gas safety.
Systems
Our electronic quality management
system (EQMS) is evolving well, with
three modules now operational.
EQMS is the cornerstone of our risk
management and quality processes
and we are already experiencing
improved reporting and record-
keeping, better action tracking
and the centralisation of our SHEQ
documentation.
Competence
The training delivered in our academy
and regional offices continues to be
supplemented by the Company’s
e-learning platform, Nimble. Several
new training modules were created
this year and the platform’s flexibility
and user-friendly software enabled
the business to react swiftly to the
pandemic and resultant protocols.
All staff were kept up to date on the
requirements for working safely,
in our workplaces and on our
customers’ premises, with refresher
training available and ongoing as
the situation changed.
Our SHEQ training programme was
amended due to COVID-19 restrictions,
with many courses moving to virtual
delivery. Over 50 staff members
completed the National Compliance
and Risk Qualifications (NCRQ) Safety
for Managers course early in the year,
and the virtual method was also used
for various other courses.
Accidents and incidents
Our performance over the year was
excellent and we have met all our
improvement targets. The Accident
Frequency Rate (AFR) has decreased
to 0.05 RIDDORs per 100,000 hours
worked (December 2019: 0.19). Our
Lost Time Incident Frequency Rate
(LTIFR) has decreased to 0.24 per
100,000 hours worked (December
2019: 0.75). We regret to have to
report one injury under the Reporting
of Injuries, Diseases and Dangerous
Occurrences Regulations 2013
(RIDDOR); however, the injury was not
serious, and the injured party returned
to work with no long-term effects
expected.
Operational road risk continues to be
monitored closely and all improvement
targets were achieved in the year.
A new automated scheduling system,
along with other ongoing initiatives,
has contributed to improved driver
safety, behaviour and performance.
Health and safety policy
Our health and safety policy and
associated arrangements are
reviewed annually and published
on the Company’s Intranet in June
each year. Our ISO 45001-accredited
management system and risk
management processes ensure all
key risks are identified and suitably
controlled. All employees undergo
a corporate induction, in which
safety is emphasised as a core value.
A thorough health and safety
induction is also delivered, and this
is supplemented by ongoing refresher
training.
The Company’s annual SHEQ targets
and objectives are endorsed by the
Health, Safety and Sustainability
Committee, with performance updates
published in a monthly Board report.
New and emerging risks are identified
through regional health and safety
forums and addressed in the business
risk register.
2021 and beyond
Our immediate focus remains on
navigating our way through the
changing requirements of COVID-19.
This will continue for the foreseeable
future as the UK Government’s
vaccination programme is rolled out.
Our people, systems and procedures
have coped well to date, but we will
not drop our guard and let the crisis
impact on our pursuit of excellence
in health, safety and wellbeing.
We continue to evolve our SHEQ
policies and processes in line with
the ongoing growth of the business.
Our new business streams in the
smart homes sector and grid battery
storage bring different challenges,
and we are adjusting our systems and
procedures to ensure that we have
robust measures in place to manage
new and emerging risks. There is also
a strong focus on sustainability as we
move to align our SHEQ work with our
environmental, social and governance
(ESG) principles.
We are now seeing the benefits of our
investment in SHEQ over the past few
years, with sophisticated processes
and modern systems in place to
support the needs of the business.
We remain committed to being a safe,
secure and reliable organisation and
look forward confidently to 2021.
Strategic reportGovernanceFinancial statements
56 SMS Annual report and accounts 2020
SUSTAINABILITY continued
5 Ethical business practices
business in an ethical way. Ethical, fair
and diligent governance underpins all
our business activities.
This is supported by extensive training
and the continuous education of our
people, from a full corporate induction
through to ongoing learning and
development.
Our key policies which recognise,
support and protect our employees’
human rights – and thus drive our
ethical business practices – cover the
following areas:
• anti-bribery and corruption
• modern slavery
• whistleblowing (detailed further
on page 87)
• data protection
• equal opportunities, diversity
and inclusion (detailed further
on page 51)
• health and safety (detailed further
on pages 54 to 55)
• discipline
• grievance
• dignity at work.
Our five core values – Safety,
Customer Excellence, Innovation,
Pride and Sustainability – capture
who we are and what we believe in,
and they underpin our commitment
to ’putting our people first’.
for their own behaviour in the
workplace. A shared understanding
of what is expected and what is
acceptable to others, and consistency
of approach from all employees,
is essential.
These values drive the behaviours we
wish to see demonstrated throughout
our business practices. We strive to
provide an environment and
experience that embed these values
on a consistent basis, and to ensure
that all employees take responsibility
Our Code of Conduct further
strengthens the foundations on which
our standards are built and our
approach to ESG, detailed further on
our website at www.sms-plc.com/
corporate/sustainability, sets out
clear expectations of how to conduct
Customer
excellence
Listen and respect
Go the extra mile
Be polite
Show empathy
Safety
Take care of your
wellbeing and others
Take ownership and
responsibility
Be aware
Report and action
Pride
Be trustworthy
Give praise and
recognition
Work to the best
of your ability
Work as one team
Innovation
Share and encourage
new ideas
Find solutions
Be creative
Think for the future
Putting our
people first
Sustainability
Make greener
decisions
Build an enjoyable
and healthy working
environment
Positive towards
change
Encourage others
to act sustainably
Our core values and behaviours
SMS Annual report and accounts 2020 57
Although not fully inclusive of everything we do, the following table demonstrates the key policies that we currently
implement and monitor in this area:
Related policies
Key themes
Implementation and review
Reporting
Human rights
SMS Code of Conduct
Equal opportunities,
diversity and
inclusion policy
Dignity at work policy
Anti-bribery
and corruption
Anti-bribery and
corruption policy
Modern Slavery
and human
trafficking
Modern slavery
policy
Modern Slavery
Statement
We respect the rights
and dignity of all people
when conducting our
business. Our focus
is on ethical business
practices for our people,
customers, and wider
communities.
This policy includes
guidance to employees
on the giving, receiving
and recording of
business gifts and
hospitality, together with
other areas of specific
risk, and is reviewed
regularly to ensure it
remains fit for purpose.
We do not tolerate
the concept of modern
slavery within our
immediate business
or wider supply chain.
Although the risk of
modern slavery and
human trafficking in
relation to SMS is low,
we do monitor our
supply chain to ensure
we fully understand
and mitigate the risk.
Our policies and
approach are
embedded into our
culture. They are
communicated at
induction, through our
employee handbook
and via e-learning
modules.
All employees are
required to accept and
adhere to the policy.
We do not deal with
prospective contractors
or suppliers known to
pay, or suspected of
paying, bribes. This
helps prevent, detect,
and report bribery and
other forms of corruption.
Contracts with new
suppliers now require a
warrant to us that they
are compliant with the
terms of the Modern
Slavery Act 2015.
Our existing suppliers
will be asked to sign up
to our Modern Slavery
Certification.
We will also be reviewing
key staff training,
actions taken on supply
chain auditing and
verification and steps
taken to upskill any
suppliers we consider
high-risk.
Employees are required
to immediately report
any instances of a
breach in human rights
to our Group HR Director.
During the year, there
were no reported
breaches.
Any breaches of policy
are reported to our
General Counsel and
investigated.
During the year, there
were no reported cases
of bribery or corruption.
Any breaches of this
policy are reported to
our General Counsel
and, where required, to
the relevant authorities.
During the year, there
were no reported
breaches.
The Company’s Modern
Slavery Statement can
be found on our website
at www.sms-plc.com/
information-and-
policies/modern-
slavery-act
Political
donations
Charitable and
Political Donations
policy
The Company prohibits
political donations other
than those approved by
the Board.
Donations are
monitored by the
General Counsel.
There were no political
donations made in the
year.
Strategic reportGovernanceFinancial statements
58 SMS Annual report and accounts 2020
RISK REPORT
Risk governance
and management
Our robust risk management approach
continues to evolve in keeping with our
growing business and the developing
macroeconomic environment.
The Board has overall responsibility for
risk management. In support of this,
we operate robust risk management
processes, which are embedded within
everyday business activities throughout
the Group. The risk management
framework below highlights the main
responsibilities for the management
and oversight of risk within the Group.
The evolving COVID-19 pandemic has had an impact on
the risk environment within which the Group operates.
SMS has continued to operate despite unprecedented
circumstances; however, it has been necessary to adapt
our approach to delivering business activities, with the
majority of our workforce continuing to either operate
in the field under more strict safety requirements, or to
support business operations from home. In response
to this, an enhanced control framework has been
implemented and is working well. A comprehensive
description of the Group’s response to the risks arising
from the COVID-19 pandemic is provided on pages 4 to 7.
Group Internal Audit has continued to work closely with
the Audit Committee, executive management team and
departmental teams throughout 2020 to support the
continuous improvement of risk management processes
within the Group. This work has included facilitation of
regular risk workshops, which are used to:
• identify new risks and review and update existing risk
ratings;
• identify appropriate new mitigating actions; and
• assess progress towards completion of identified
mitigating actions.
The Board and Audit Committee receive regular reporting
on the outputs from risk management activities. During
2020, Group Internal Audit performed several internal audit
reviews of specific risk areas within the business, which
have assisted risk management in those areas. These
included reviews of cyber security, procurement and
vendor management, sub-contractor management and
oversight, and Human Resources (HR) data compliance.
Risk management framework
Board/Audit Committee
The Board is responsible for setting the tone at the top
and monitoring business performance. This includes
regularly reviewing risks that could impact on achieving
the Group’s strategic and organisational objectives.
The Board is supported by an effective corporate
governance structure, including the Audit Committee,
which has specific delegated authority to review the
effectiveness of the Group’s internal control mechanisms,
financial reporting, internal audit and risk management
processes.
Executive management team
The executive management team is responsible for
ongoing consideration and management of strategic
risks within the Group and for providing oversight on
departmental operational risks. It provides leadership
and direction to employees on risk-taking activity.
The executive management team also has primary
responsibility for driving the development and enhancement
of the risk management processes used within the Group.
Group Internal Audit
Group Internal Audit develops and delivers the annual
risk-based Group Internal Audit Plan, aligned to the
strategic risks contained within the corporate risk register.
This annual plan is approved by the Audit Committee.
Group Internal Audit provides oversight and advice on
risks and controls to departmental teams as they
manage the risks in their areas.
Safety, Health, Environment and Quality (SHEQ)
and compliance teams
The SHEQ and compliance teams are responsible for
ensuring compliance with codes of practice such as Meter
Asset Managers Code of Practice (MAMCoP) and Meter
Operation Code of Practice Agreement (MOCOPA).
The SHEQ team, in conjunction with the executive
management team, is instrumental in setting the tone
at the top in relation to safety matters.
SHEQ is responsible for obtaining and maintaining the
Group’s ISO certifications, which are supported by
business assurance reviews.
Departmental management
The management teams in each department within the
Group are responsible for the day-to-day management
of risks within their area, ensuring that risks are
appropriately identified, prioritised and mitigated.
SMS Annual report and accounts 2020 59
The Group’s Electronic Quality Management Software
(EQMS) system was launched in 2020 and has been an
effective tool in helping the business to centrally track
internal audit, compliance and SHEQ incidents and
issues should they arise. Continued development of the
EQMS tool is planned for 2021 to optimise its use across
the Group’s full range of activities. This supports our
longer-term goal of enhancing accountabilities for
risk management activities across our business.
Understanding our risks
The organisational risk management framework comprises
the recording and management of ’top-down’ strategic
risks, which are discussed by the Board and executive
management team, as well as ’bottom-up’ risks, which
capture potential operational issues at a departmental
level. Our risk assessment model considers:
• the probability of a risk crystallising; and
• the potential impact if the risk did crystallise.
These principal risks and uncertainties have been scored
and placed on the risk heat map below, which is a matrix
of probability and impact.
Our model considers each risk from two different
perspectives:
• the extent of inherent risk (before mitigating controls
have been implemented); and
• the extent of residual risk (after mitigating controls have
been applied).
The heat map provides a picture of residual (mitigated)
risk at the corporate level and allows us to assess the
effectiveness of our internal control environment and take
further action as appropriate. The matrix also enables the
Group to focus its internal audit activity.
We continually evaluate our principal risks in line with our
strategic priorities and the prevailing industry and market
conditions. Our risk management activities include:
• frequent risk workshops to update corporate and
departmental risk registers;
• detailed reporting of significant strategic risks to the
Board; and
• consideration of new and emerging significant global
and industry risks.
Our principal risks
Our principal risks are assigned a red,
amber or green status depending
on the perceived overall severity
after allowing for effective mitigation.
After categorisation, risks are treated
as follows:
Some action may be required, and
risks are routinely monitored by
management.
Action is required to mitigate the
risk through improved control with
oversight from executive management.
Mitigating actions are required
immediately. Oversight is provided
by the Board, Audit Committee and
executive management directly.
h
g
H
i
t
c
a
p
m
I
w
o
L
23
104
5
911
1
7
8
6
Low
Likelihood
High
1
Potential breach of cyber security
Major health and safety incident
2
3
4
Speed of organisational change
(near term)
Business continuity and disaster
recovery
5
6
7
8
Critical supplier dependency
Funding and working capital
management
Brexit
Loss of environmental, social and
governance (ESG)-related and
regulatory accreditations
9
Potential breach of General Data
Protection Regulation (GDPR)
10
COVID-19
11
Our people
All risks are assigned mitigating actions with an
appropriate business owner and are supported by
an executive sponsor to ensure accountability.
The risks captured in the heat map above are in line
with those identified in the prior year, with the addition
of two new risks as follows:
1. COVID-19, disclosed as an emerging risk in the prior
year, is now reported as a principal risk in light of the
ongoing pandemic and the challenges that have
arisen as a result.
2. Our people, in recognition of the material adverse
effect a loss of key staff, or the failure to attract and
retain strong people for core business roles, could
have on the business.
Strategic reportGovernanceFinancial statements
60 SMS Annual report and accounts 2020
RISK REPORT continued
Our principal risks
and uncertainties
Set out below are the principal risks and uncertainties
which could have a material impact on the Group. The
numbers correspond to the net mitigated risk identified on
the heat map. These risks are continually monitored by the
Board. The degree to which the Board considers that the
likelihood or impact of the risks materialising is increasing,
decreasing or unchanged is shown and the table also
sets out the mitigating actions that have been taken
by the Group.
1 Potential breach of cyber security
Detailed Risk
Potential Impact
Existing Mitigating Controls
Critical information
technology systems
could be subject to
a major external or
internal cyber-attack,
causing a breach of
information security
regulations and/or
service disruption.
Risk level
Risk exposure trend
• Financial penalties under
• ISO 27001 accreditation achieved across the Group
information security
regulations
• Financial loss
• Unauthorised access
to systems and data
in October 2020
• Formal cyber security policy, including phishing
response procedure, communicated to all SMS staff
• Mandatory security awareness training for all SMS staff
• Physical controls in place including firewalls and
• Service disruption
encryption
• Loss of customer and/or
• A dedicated information security team
supplier confidence
• An independent Board-level Information Technology
• Loss of accreditations
Committee
and certifications
• Managed Security Service Provider (MSSP)
arrangement has provided a dedicated Security
Operation Centre (SOC) from November 2020
2 Major health and safety incident
Detailed Risk
Potential Impact
Existing Mitigating Controls
An incident could
occur, leading to
significant injury,
illness or loss of life
to an employee
or third party.
Risk level
Risk exposure trend
• Injury or loss of life
• ISO 45001 accreditation achieved for Glasgow-
• Financial penalties
• Increased scrutiny from
regulatory and oversight
bodies
and Cardiff-based businesses in June 2020
(further accreditation work is planned for 2021)
• The Board has overall accountability for compliance
with health and safety standards and is provided
with regular management reporting
• Board and senior management health and
safety training
• Maintenance of high-quality and mandatory training
standards, driven by job roles
• Rolling internal technical assurance audit programme
• Independent regulatory reviews
Risk exposure key
Risk unchanged
Risk decreased
Risk increased
SMS Annual report and accounts 2020 61
3 Speed of organisational change (near term)
Detailed Risk
Potential Impact
Existing Mitigating Controls
Speed of
organisational
growth in the
short term without
sufficient and
appropriate growth
in infrastructure.
Risk level
Risk exposure trend
• Insufficient engineering
• New capacity planning system introduced in 2020
capacity/resource
available
• Limitations on
organisational back-office
and support functions
• Metering supply and
warehousing operations
cannot meet demand
• IT infrastructure does not
scale up quickly enough
to meet business needs
to support the Group’s engineering workforce
• Robust forecasting processes closely aligned to
commercial and operational management teams
• Well-established supplier onboarding processes
• Strategic and targeted recruitment activity
for engineers
• Subcontractor call-off arrangements in place
across UK
• IT strategy closely aligned to organisational strategy
for growth and future business modelling and includes
regular needs assessment
4 Business continuity and disaster recovery – resilience of IT
infrastructure and failure of critical business systems and processes
Detailed Risk
Potential Impact
Existing Mitigating Controls
Failure of core and/
or critical information
technology
systems could
result in operational
interruption.
Risk level
Risk exposure trend
• Temporary loss of IT
infrastructure/critical
business systems and
processes
• Loss or corruption of data
• Detrimental impact
on customer service
• Potential loss of revenue
through inability to meet
customer orders or issue
invoices
• Business continuity plan in place across Group
• Monitoring of industry data flows and escalation
of issues should they arise
• Disaster recovery plans in place for critical IT systems
• Failover facility available for immediate redeployment
of staff, enabling key operations to be serviced
• Alternative UK sites available to manage core
business operations
• Most of the workforce are able to work from home
to support the Group’s customers
5 Critical supplier dependency
Detailed Risk
Potential Impact
Existing Mitigating Controls
• Unable to fulfil customer
• Growth in the Group’s supplier base continues to
orders
mitigate the risk of over-reliance on critical suppliers
• Business continuity issues
• Business continuity arrangements in place
• Legal and financial
exposure
• Centralised legal function protects commercial
interests through robust contracting process
• Enhanced stock control processes mitigate the risk
of being unable to fulfil customer orders in the event
of failure of a critical supplier
The Group relies
on a limited number
of critical suppliers,
including meter
manufacturers,
and failure of one
critical supplier could
have significant
operational and
financial implications.
Risk level
Risk exposure trend
Strategic reportGovernanceFinancial statements
62 SMS Annual report and accounts 2020
RISK REPORT continued
Our principal risks and uncertainties continued
6 Funding and working capital management
Detailed Risk
Potential Impact
Existing Mitigating Controls
• Default on debt obligations
• Credit control facility and robust commercial billing
• Credit or debt facilities
are withdrawn
• Inability to meet existing
customer or trade
commitments
arrangements
• Regular and formal review of key management
information in relation to cash and debt positions
• Asset portfolio sale in March 2020 reset leverage
to zero
• Increased supply chain
• Revolving credit facility of £300m remains undrawn
costs
and accessible
• Lack of funding to take
advantage of emerging
business opportunities
(including for CaRe assets)
• Partnership agreement signed with the Colombia
Threadneedle Sustainable Infrastructure Fund (ESIF)
Suitable funding
arrangements are
critical to enable the
continued growth of
our asset portfolio,
particularly in relation
to carbon reduction
(‘CaRe’) assets. Poor
management of core
elements of working
capital, particularly
during peak activity
periods, could lead
to inability to meet
creditor requirements
and cause a negative
financial impact.
Risk level
Risk exposure trend
7 Brexit
Detailed Risk
Potential Impact
Existing Mitigating Controls
Potential disruption
to the business as
a result of the UK’s
withdrawal from the
European Union (EU)
on 31 December 2020.
Risk level
Risk exposure trend
• Loss of specialism in
• The Group continues to monitor and assess the
workforce, particularly
amongst engineering and
information technology
staff
• Interruptions or delays to
the supply chain for goods
sourced from within the EU,
delays to customer orders
and potential increased
supplier costs
• Falling value of Sterling
leads to higher import
costs
• Increase in interest
rates and higher cost
of borrowing
impact of Brexit on the Group
• SMS has reviewed the number of EU employees
within its business and considers the potential impact
to be minimal
• We have performed a partner review with our critical
suppliers who source supplies from outside the UK
to ensure there are robust continuity arrangements
in place
• We have sufficient coverage in our supply chain and
inventory arrangements to withstand significant delays
and to honour outstanding customer commitments
• £300m revolving credit facility with banking consortium
• Continual review of hedging arrangements
Risk exposure key
Risk unchanged
Risk decreased
Risk increased
SMS Annual report and accounts 2020 63
8 Loss of ESG-related and regulatory accreditations
Detailed Risk
Potential Impact
Existing Mitigating Controls
• Inability to conduct
business
• Financial penalties
• Reputational damage
• Loss of trained and
qualified engineers
• External investigation(s)
and/or audits
Loss of accreditations
or failure to comply
with key regulatory
requirements could
lead to an inability
to deliver our core
services, leading to
a loss of revenue or
reduction in banking
facilities.
Risk level
Risk exposure trend
• The Board has overall accountability for compliance
with safety, health and environmental standards and
is provided with regular management reporting
• Well-established Group technical assurance team in
place, including an experienced compliance function
with deep industry insight and expertise
• Dedicated training academy for field service engineers
• Rolling training plan in place for all engineering staff
to maintain and upgrade certifications
• Extensive assurance activity performed across the
Group, by specialist assurance teams
• Regular external independent and routine audits
performed by regulators
• Effective HR onboarding process for new staff,
including engineering team
9 Potential breach of the General Data Protection Regulation (GDPR)
Detailed Risk
Potential Impact
Existing Mitigating Controls
There could be
a breach of GDPR
through an internal
failure to follow
protocol and policy
or as a result of
data integrity and
retention issues.
Risk level
Risk exposure trend
• Financial penalties under
GDPR
• The General Counsel is an expert in data protection
and is the appointed Data Protection Officer (DPO)
• External investigation(s)
• The DPO monitors internal GDPR compliance and,
by the Information
Commissioner’s Office
• Loss of customer and/or
supplier confidence
through a series of internal and external
communication platforms, informs and advises staff
and third parties of our obligations and expectations
under GDPR
• Annual GDPR training for all SMS staff
• IT security monitoring controls, including a Security
Operation Centre and Netskope monitoring of external
communications
Strategic reportGovernanceFinancial statements
64 SMS Annual report and accounts 2020
RISK REPORT continued
Our principal risks and uncertainties continued
10 COVID-19
Detailed Risk
Potential Impact
Existing Mitigating Controls
• Health and wellbeing
• Recurring revenue streams on the Group’s existing
The ongoing spread
and development
of COVID-19 globally
presents a potentially
significant risk to
the business, with
the Group’s primary
concern being the
welfare of its people,
customers and the
end consumer.
of workforce, customers
and consumers
• Short-term financial
constraints
• Business continuity issues
• Non-essential travel
ceases
• Potential detrimental
impact on the supply chain
• Counterparties could
default on contractual
obligations
Risk level
Risk exposure trend – n/a new risk
11 Our people
meter and data asset base provide a resilient business
operating model able to withstand short-term
economic shock
• Most of the workforce are able to continue to work
and support the Group’s customers from home
• Temporary closure of offices and warehouses,
in periods where this is necessary
• Maintenance of gas and electricity supply on an
emergency basis for customers
• Engineer pre-visit risk assessments carried out
• Personal Protection Equipment (PPE), regular cleaning
and temperature control checks across sites
• Regular communications with employees and
customers
• Credit control function with regular counterparty
monitoring
Detailed Risk
Potential Impact
Existing Mitigating Controls
An inability to attract,
retain and motivate
the right people
could have a material
adverse effect on
the business and
ultimately lead to a
failure to deliver on its
strategic objectives.
• High levels of employee
• Recruitment, due diligence and onboarding processes
turnover
(contracts include probationary periods)
• Loss of employees
• Succession planning for key leadership and business
with specialist skillsets
to competitors
roles
• Talent and performance management frameworks
• Low employee morale
linked to our values and behaviours
• Failure to take advantage
• Benchmarking of roles with the external market
of emerging business
opportunities
in terms of remuneration and reward
• Harmonised terms of employment, ensuring fairness
• Lack of business continuity
and consistency across the Group
• Competitive rewards and employee benefits package
• Regular, supportive one-to-one meetings between
people leaders and their direct reports
• Regular employee satisfaction surveys, review of
results by management and implementation of actions
to address themes
• Equal opportunities, diversity and inclusion policy
• Gender pay gap reporting
Risk level
Risk exposure trend – n/a new risk
Risk exposure key
Risk unchanged
Risk decreased
Risk increased
FINANCIAL REVIEW
Ahead of market
expectations
We have delivered financial results ahead of
market expectations despite unprecedented
conditions, demonstrating the strength of
our underlying business model.
THE STRENGTH AND
FLEXIBILITY OF OUR
RECURRING INVESTMENT
MODEL WAS MADE CLEAR
IN 2020.”
SMS Annual report and accounts 2020 65
Financial highlights
Alternative performance
measures1
Index-linked annualised recurring
revenue (ILARR)2,3
£77.0m
(2019: £72.6m)2
Pre-exceptional EBITDA2
£49.9m
(2019: £58.9m)
6%
increase
15%
decrease
Underlying profit before taxation2
£15.2m
(2019: £15.6m)
2%
decrease
Underlying basic earnings per share2
9.56p
(2019: 11.30p)
15%
decrease
Statutory performance
measures1
Revenue
£103.0m
(2019: £114.3m)
Statutory EBITDA
£231.6m
(2019: £50.4m)
10%
decrease
360%
increase
Statutory profit before taxation
£195.0m
(2019: £5.5m)
>500%
increase
Statutory basic earnings per share
171.65p
(2019: 3.56p)
>500%
increase
1 2020 measures only include the financial
performance of the disposed Industrial &
Commercial (I&C) up to the date of sale on
22 April 2020.
2 Refer to page 70 for definitions and details
of the Group’s alternative performance
measures, which includes index-linked
annualised recurring revenue, pre-exceptional
EBITDA, underlying profit before taxation
and underlying basic earnings per share.
3 2019 ILARR is presented on a pro-forma
basis for comparative purposes, excluding
a net contribution of £17.6m from disposed
I&C meter assets.
Strategic reportGovernanceFinancial statements
66 SMS Annual report and accounts 2020
FINANCIAL REVIEW continued
We are pleased to report financial results ahead
of market expectations following an exceptionally
challenging year. Throughout the ongoing global
pandemic we have had to remain agile and alert to
the changing restrictions and environment in which
we operate, while supporting our customers, our supply
chain and our highly dedicated and talented teams.
impact of lower meter installations through Q2 and Q3. The
decrease has, in part, been mitigated by the flow-through
effect of installations in 2019 and Q1 2020, together with
an annual RPI increase in April. Whilst COVID-19 restrictions
have slowed growth in the short term, the Group’s installed
portfolio of 3.81 million revenue-generating assets
continues to provide financial resilience.
The careful monitoring of our cash flows has never been
more important. With a concentrated effort to improve
working capital and manage our costs prudently, we have
maintained operational flexibility while navigating through
this uncertain time and have still managed to grow the
business into new areas of carbon reduction assets.
The pandemic curtailed the planned growth in the
business in FY 2020. However, the strength and flexibility
of our recurring investment model was made clear; this
is a resilient business. The Group continued to generate
ILARR from its 3.81 million revenue-generating assets
under management, demonstrating the robust nature
of the metering infrastructure asset class and the resilience
of our investment strategy in assets with a long-term
income stream.
Our liquidity was also significantly strengthened in the
year as the £290.6m gross cash proceeds from the sale of
a minority of meter assets were used to repay the entirety
of the Group’s debt, leaving the business in a cash-positive
position and with access to a £300m revolving credit
facility. The Group’s strong cash position during the 2020
lockdown period enabled the Board to take the decision
in June to return furlough grants covering the earlier part
of the furlough scheme, and we were one of the first
companies in the UK to do so.
Revenue
Asset Management
Asset Installation
Energy Management
Group revenue
31 December
2020
£m
78.7
19.7
4.6
103.0
31 December
2019
£m
82.9
22.4
9.0
114.3
Percentage
change
(5%)
(12%)
(49%)
(10%)
The disposal of c.187,000 of the Group’s meter assets
in April 2020 has resulted in a net ILARR adjustment
of £17.6m, presented on a pro-forma basis as £72.6m at
31 December 2019 for comparative purposes. Like-for-like
ILARR therefore grew 6% to £77.0m as at 31 December 2020,
despite the temporary suspension of all non-essential
site work between 24 March and 1 June in response to
COVID-19. This reflects continued growth in the meter
estate from Q1 smart meter installations, together with
the effect of an annual RPI increase effected in April.
The Group’s remobilisation plan progressed well through
the second half of the year, despite ongoing and varying
local restrictions, and during Q4 2020 we reached
operating levels of c.80% of the pre-COVID-19 run rate.
Asset Management revenues are down on the prior year
due to the loss of revenue from the asset disposal. Growth
in revenue in the year was also lower with the cumulative
Asset Installation revenue has decreased 12% to £19.7m
as compared with the prior year. This is in part due to
legacy installation-only work for third parties coming to
an end, as planned, in the first quarter of 2019 as we
focused our workforce on installing our own smart meter
portfolio. The suspension of all non-essential field work for
part of the year also brought a reduction in revenues from
utility connections and infrastructure services. Despite
remobilisation, there have been ongoing project delays as
we navigate local restrictions; however, customer contracts
remain intact as we head into 2021. The adverse impact
on revenues due to COVID-19 has, in part, been mitigated
by the continued delivery of emergency jobs during
the outbreak.
Of the Group’s operating segments, Energy Management
has experienced the largest decrease in revenue as a result
of COVID-19, with a reduction of 49% to £4.6m (2019: £9.0m).
This is attributable to the suspension of all site work from
mid-March, most notably the suspension of work associated
with the energy-efficient lighting and heating control
project for a large hotel chain. Projects started to resume
in the second half of the year but, as anticipated, site work
continues to run at a lower capacity as the broader
economy recovers.
Gross margins
Overall, the depreciation-adjusted gross margin at the
Group level has increased 7% to 71% (2019: 64%). SMS
includes depreciation on revenue-generating assets within
cost of sales, and removing this from the gross margin
provides a better comparison of the Group’s underlying
trading performance year on year.
Depreciation-adjusted gross profit, in absolute terms, has
decreased by £0.8m due to reduced activity and revenues.
However, a reduction of £17.3m in cost of sales year on year
has favourably offset the £11.3m reduction in revenues,
giving rise to the 7% increase in depreciation-adjusted
gross margin. Although revenues have decreased, the
flow-through impact of the Group’s ILARR has provided
protection against the impacts of COVID-19. Cost of sales,
which includes a substantial variable component, has
decreased due to the initial suspension of non-essential
field work, together with ongoing project delays, and
improved efficiency in our engineering model through
greater use of sub-contractors.
The depreciation-adjusted gross margin for Asset
Management has stayed flat at 93%, with the reduction
in revenues detailed above offset by a reduction in cost
of sales due to lower contractor costs incurred in the
data business as a result of COVID-19. The gross margin for
Asset Management, including depreciation, has increased
by 9% from 55% to 62%, primarily as a result of a change to
SMS Annual report and accounts 2020 67
a depreciation-related accounting estimate, made with
effect from 1 January 2020, in relation to SMS’s traditional
meter assets. With the smart meter exchange programme
being extended to 1 July 2025, management has extended
the estimated economic life of the traditional meters to
match and the depreciation charge therefore reduces.
As a result, there has been a £4.8m reduction recognised
within depreciation in cost of sales – see note 1(a) to the
Financial statements for further details.
The Asset Installation business reported a positive gross
profit margin of 16% (2019: negative 25%). The low margin
in 2019, driven largely by H1 with a negative gross margin
of 48%, was due to the Group’s decision to retain its
installation capacity to ensure the business was appropriately
positioned to benefit from the run rates initially anticipated
from progression to the main second-generation (’SMETS2’)
phase of the smart meter rollout. As initial installation
targets in the market started to look increasingly challenging,
attention was turned to controlling the Group’s operating
cost base in order to increase efficiency in the labour force.
As a result, the gross profit margin improved to negative
6% in H2 2019.
The significant improvement to positive 16% in 2020 reflects
a continued, dedicated focus on cost control, adapting the
Group’s engineer capacity to meet customer demand
efficiently. An increased use of subcontractors has provided
greater operational and financial flexibility during a very
uncertain time. Management has also reduced operating
costs where possible, with staff costs from March to August
that would ordinarily be capitalised recognised within
exceptional costs arising from the effect of the pandemic
(detailed below).
The Energy Management gross margin has decreased to
22% (2019: 24%)due to a project delivered by Solo Energy
in the year at a slightly lower margin. With a predominantly
variable cost of sales base, reductions in revenue have
been largely offset by equivalent reductions in cost of sales.
EBITDA
Statutory EBITDA increased to £231.6m (2019: £50.4m)
largely as a result of the gain of £194.7m recognised upon
disposal of a minority of the Group’s meter assets.
Pre-exceptional EBITDA provides a clearer comparison
of trading, year on year, showing a decrease of c.15%,
or £9.0m, to £49.9m (2019: £58.9m). This, however, does
not readily illustrate the underlying growth on a like-for-like
basis, particularly from the flow-through of the recurring
metering and data asset portfolio, after taking account
of the minority asset disposal. Excluding the effect of
the disposal, we would expect an increase due to the
compounding effect of RPI increases and flow-through
of full-year revenue from previously installed assets.
The Group’s performance fundamentally demonstrates
the financial resilience of the Group’s business model, with
strong ILARR and a dedicated focus on cost control.
Up to March 2020 cost control was focused on right-sizing
the Group’s internal installation capacity, as detailed above.
Towards the end of March, as the pandemic worsened,
management turned its attention to ensuring the Group’s
operating cost base was as streamlined as possible,
suspending any non-critical business spend. This focus has
held strong all the way through the year with cost savings
maximised where possible, mitigating the impact of
COVID-19 on our bottom line.
Disposal of a minority of the Group’s I&C
portfolio (‘the Disposal’)
As previously announced, on 12 March 2020, the Group
conditionally signed an agreement to dispose of a minority
of the Group’s meter assets through the sale of the entire
share capital of Crail Meters Limited (Crail), a wholly owned
subsidiary of the Group. This transaction completed on
22 April 2020.
The meter asset provider (MAP) business that was transferred
comprised c.187,000 I&C meter assets, representing
c.£18.4m gross ILARR.
Total gross cash consideration received by the Group on
22 April 2020 was £290.6m, representing x16.4 net EBITDA
and reinforcing the inherent value of the Group’s meter
assets, which generate highly stable and long-term
index-linked cash flows with limited maintenance
requirements. These proceeds have allowed the Group
to reset its leverage, supporting a £270m voluntary
prepayment of the Group’s revolving credit facility and
resulting in a net cash position of £40.2m at 31 December
2020. Strengthening the balance sheet significantly, the
transaction has enhanced our investment capacity to
accelerate growth of an already-secure asset base.
Overall, the Disposal has given rise to a gross gain
of £201.6m in the year. After the deduction of £6.9m
transaction costs, noting certain transaction costs were
recognised in the prior year as exceptional items, a net gain
on disposal of £194.7m has been recognised separately in
the consolidated statement of comprehensive income as
exceptional. Of this net gain, £6.2m relates to the transfer
of a deferred tax liability on the transferred assets. Further
details can be found in note 4 to the Financial statements.
The Disposal does not constitute a discontinued operation,
as the minority portfolio of I&C assets disposed does not
represent the loss of a separate, major line of business and,
whilst I&C activities have been significantly reduced, they
have not been entirely discontinued. The Group will continue
to pursue new contracts.
The disposed portfolio of assets generates a new recurring
revenue stream for the Group in the form of management
fees. The Group will continue to manage the portfolio of
disposed assets for the new owners, generating annual
RPI-linked recurring management fees of £0.8m for these
services.
Other exceptional items
The operating charge to the income statement in respect
of other exceptional items of £13.1m (2019: £8.5m) is
driven largely by £6.9m of costs attributable to COVID-19
that management has deemed appropriate to classify
as exceptional in line with the Group’s accounting policy.
Strategic reportGovernanceFinancial statements
68 SMS Annual report and accounts 2020
FINANCIAL REVIEW continued
As a result of reduced engineering activity in periods of
lockdown due to COVID-19, management has estimated
that £6.4m of costs that would have ordinarily been
capitalised as directly attributable to the installation of
meter assets – consisting primarily of staff costs – have
remained in underlying profit. As these are material costs,
attributable to a rare macroeconomic event, management
has taken the judgement to recognise these costs as
exceptional. In addition, management has recognised
an exceptional bad debt charge of £0.5m in relation to
a subset of trade receivables which have been identified
as having a potentially elevated credit risk as a direct
consequence of COVID-19, and have been provided for
on a specific basis. This judgement will be revisited as the
economy recovers.
Excluding COVID-19 costs, other operating exceptional
items total £6.1m and primarily comprise £6.0m of losses
on the traditional and first-generation smart (‘SMETS1’)
meter portfolio, a similar charge to prior years. With the
Enrolment and Adoption programme for SMETS1 meters
into the DCC extended into 2021, consistent with 2019 the
Group has continued to see a small proportion of SMETS1
meters removed from the wall. As these removals are
attributable to the temporary industry transition period,
management has taken the judgement to recognise losses
arising on the disposal of these meters as exceptional.
Operational and pre-tax profits
Depreciation costs on general property, plant and
equipment, excluding meter assets, have increased by
£0.8m to £4.4m (2019: £3.6m) due to net additions across
the various asset classes.
Depreciation costs on meter assets have decreased by
£6.8m to £24.7m (2019: £31.5m). This is predominantly due
to management’s revision of the useful economic life of
traditional meter assets through to 1 July 2025 following
the UK Government’s confirmation in June 2020 that it
will introduce a new four-year regulatory framework for
the next phase of the UK smart meter rollout, to be
implemented from 1 July 2021. As a result of this change in
estimate, the depreciation charge in the income statement
for the year ended 31 December 2020 was reduced by
£4.8m. The additional depreciation charged in relation
to newly installed meters has been offset by a decrease
in depreciation as a result of removals, making up the
remaining net £2.0m difference.
The net interest charge in the period is £4.6m (2019: £8.3m),
reflecting the overall lower leveraged position of the Group
following the Disposal.
Underlying profit before taxation has decreased slightly
by 2% to £15.2m due to a flow-through of the above points.
As we navigate out of COVID-19, management is optimistic
that results will start to show an upward trajectory as the
UK Government’s vaccination programme progresses.
Effective tax rate
The effective tax rate on statutory profits was 1%
(2019: 27%). The effective tax rate on pre-exceptional
profits was 31% (2019: 18%) driven primarily by an increase
in the deferred tax rate from 17% to 19%, which has been
applied to the Group’s brought-forward deferred tax
liabilities on its portfolio of meter assets. Excluding the
impact of this rate change, the effective tax rate on
pre-exceptional profits is 19%, which is broadly in line with
the prior year.
The Group’s capital expenditure as it pertains to meter
assets qualifies for capital allowances, providing the Group
with tax relief on such expenditure. These allowances are
claimed in the tax year in which the asset is acquired and
set against taxable profit for that year, thus reducing the
total tax payable. As a result, the Group was not tax-paying
in either the current or prior year.
The Group’s deferred tax balance of £8.5m is primarily
made up of £7.1m in respect of accelerated capital
allowances.
Earnings per share (EPS)
Underlying basic EPS, which excludes exceptional costs,
amortisation of certain intangibles and their associated
tax effect, is 9.56p (2019: 11.30p), reflecting the underlying
profitability of the Group. Statutory earnings per share
increased to 171.65p (2019: 3.56p) as a result of higher
statutory profits for the reasons detailed above.
Diluted EPS does not vary significantly from basic EPS;
a small decrease is seen as a result of the dilutive impact
of shares issuable in the future to settle the Group’s share
scheme obligations.
Dividend
As detailed below, the Group’s liquidity position has
remained strong since the end of the year, despite the
challenges COVID-19 has presented. The second interim
dividend for 2019 of 4.58p per share (£5.2m) was paid
to shareholders on 4 June 2020.
The Group has a growing, sustainable dividend and,
as previously announced, in line with the Board’s policy
SMS proposes to pay a 25p per share dividend in respect
of FY 2020 (representing an increase of 3.6x over FY 2019).
The first two (of three) interim dividend instalments were
paid in October 2020 and January 2021 respectively, in line
with the provisional dividend timetable previously reported.
The third instalment is intended to be paid in April 2021
with a final dividend in July 2021.
The Board intends to grow the dividend annually, with a
10% annual increase for each of the financial years FY 2021,
FY 2022, FY 2023 and FY 2024. SMS thus intends to pay
a 27.5p per share dividend in respect of FY 2021. The Board
will review this regularly with shareholder value in mind,
taking into account a range of factors including expected
business performance.
Future dividend payment amounts are covered by income
from the Group’s existing metering and data asset base
and their long-term index-linked cash flows.
SMS Annual report and accounts 2020 69
Decision-making in practice:
New, enhanced
dividend policy
When completion of the Group’s minority asset
disposal became virtually certain, the Board turned
its attention to evaluating the best use of the
£291m gross cash proceeds due to be received into
the business. With the global pandemic in its early
stages, the Board recognised that this decision
was a sensitive one and therefore needed careful
consideration in the context of key stakeholder groups.
Maintaining a sustainable business was at the centre
of the Board’s decision-making here.
Returning the full value from the disposal to
shareholders, for example via a one-off special
dividend, was quickly concluded as inappropriate
given the £270m debt drawn down and the future
financial uncertainties prevailing as a result of
COVID-19. It was critical that our employees felt
secure and a large upfront dividend to shareholders,
at an already volatile time, would have impaired this.
An in-depth analysis was conducted with our
advisers to investigate an effective capital allocation
of the transaction returns to balance the interests
of all stakeholders. The results of this analysis were
presented to the wider Board in early 2020 and it was
agreed that:
1. the proceeds be initially used to de-lever the business,
establishing a debt-free company with a robust
balance sheet capable of supporting anticipated
growth in the meter estate as we headed into
unknown territory with the pandemic and;
2. the remaining returns be distributed to shareholders
over five years through an enhanced annual
dividend of 25p per share, subject to 10% growth
per annum through to the end of the UK smart
meter rollout.
In this way, an increase in shareholder return was
balanced with the need to retain sufficient capital in
the business to fund future growth and fulfil the smart
meter rollout needs of our customers. Our employees
also remained satisfied in the knowledge that their
jobs were safe and that they would continue to receive
the necessary financial support from the business.
Cash flow
Operating cash inflow in 2020 was £43.9m (2019: £42.4m),
supported by robust operational performance and a
continued focus on cash collection despite the challenges
of COVID-19. This operating cash flow is net of a restricted
cash balance of £1.6m that has been recognised in 2020
in relation to amounts received from energy suppliers
on the I&C assets disposed of. Cash collection forms part
of the Group’s ongoing management of the portfolio of
disposed assets for the new owners and, until this cash has
been allocated, it is held in a restricted trust account. As per
IAS 7, this movement in restricted cash has been classified
as an operating cash flow in line with the operational nature
of the management service being delivered.
Of the £5.6m increase in inventories since 31 December
2019, £4.7m relates to work-in-progress on the Group’s
grid-scale battery storage projects. In H2 2020 the Group
acquired 100% of the share capital of two special purpose
vehicles for £2.9m, enabling SMS to obtain control over the
rights required to develop and commission two grid-scale
battery storage sites totalling 90MW. The acquired sites
are forecast to be energised by the end of 2021. See
note 20 to the Financial statements for further details.
The remaining £0.9m increase, net of provisions, relates to
meter stock in order to fulfil forecast SMETS2 installations.
Capital expenditure on property, plant and equipment
was £41.8m (2019: £101.7m), excluding right-of-use asset
additions of £2.2m in relation to the land leases secured
as part of the acquisitions detailed above. Of this,
£40.3m (2019: £95.2m) has been used to invest in revenue-
generating assets. This capital expenditure is significantly
lower than the prior year as a result of the disruption
caused by COVID-19; predominantly the temporary
suspension of non-essential field work, including smart
meter installations, from 24 March 2020 to 1 June 2020.
Capital expenditure increased through H2 in conjunction
with the Group’s progressive remobilisation plan, but
installations still lagged behind pre-COVID-19 rates.
However, with the UK Government’s vaccination
programme progressing well, management is confident
that installations will recover as consumers become more
willing to permit access to properties and, therefore, capital
expenditure should increase from Q2 2021 onwards.
A further £4.1m (2019: £6.9m) investment has been made
in intangible assets. This includes development of software
to support the installations business, together with
investment in a Groupwide Enterprise Resource Planning
system that went live across the Group in H1 2020 and
consolidates, integrates and updates various business
support systems.
Dividend per share (full year)
25p
(2019: 6.88p)
263%
increase
Net cash balance
£40.2m
(2019: net debt of £219.2m)
Strategic reportGovernanceFinancial statements
70 SMS Annual report and accounts 2020
FINANCIAL REVIEW continued
As detailed above, gross proceeds from the Disposal
were used to make a voluntary prepayment under the
Group’s revolving credit facility, and the total outstanding
principal value at 22 April 2020 of £270m, together with
outstanding interest and commitment fees of £0.6m, was
settled. Drawdowns made since this date were fully repaid
by 31 December 2020. In total, £6.3m of interest and
loan costs have been paid (2019: £9.2m), including £0.1m
of transaction costs incurred in modifying the total
commitments available under the facility.
The Group continues to manage its cash flows carefully
amidst the ongoing disruptions of COVID-19, with a
continued concentrated effort to collect debt from
customers and manage business costs prudently so that
operational flexibility is maintained in this uncertain time.
Financial resources
Concurrent with the voluntary facility prepayment detailed
above, the total available funding under the loan facility
was reduced from £420m to £300m on the same terms
through to the end of 2023. Commencement of any
repayment of the principal by way of a limited excess cash
sweeping mechanism is not required until the end of 2022.
At the end of 2021, the London Inter-Bank Offered Rate
(LIBOR) will be replaced by Sterling Overnight Index
Average (SONIA) but we do not expect any material
change in the overall cost of borrowing as a result. The
Group has not required any new or extended facilities
as a result of COVID-19, nor has it needed to renegotiate
or waive any of its bank covenants. The Group was fully
compliant with all its bank covenants at 31 December 2020.
Throughout the second half of the year the Group operated
entirely within its own cash resources. At 31 December
2020, the Group had no drawn debt with availability of
the full £300m commitment. Arrangement fees of £1.9m
continue to be amortised over the term of the facility and
have been reclassified to other assets on the consolidated
statement of financial position at 31 December 2020, in line
with the Group’s accounting policy.
As a result of the Disposal, together with lower capital
expenditure on revenue-generating assets through the
year, the Group was in a net cash position of £40.2m
at 31 December 2020 (31 December 2019: net debt of
£219.2m). This excludes lease liabilities accounted for under
IFRS 16. Reported net cash at 31 December 2020 also
excludes restricted cash as detailed above. The Group’s
available cash and unutilised element of the revolving
credit facility stood at £340.2m (2019: £200.8m) and the
Group had cash in bank of £40.2m at 31 December 2020
(31 December 2019: £50.1m), again excluding restricted cash.
There is significant headroom to manage the business
going forward on a prudent leveraged basis. The liquidity
of the Group remains strong and provides critical financial
flexibility as the Group navigates out of the pandemic.
The Strategic report on pages 1 to 71 was approved
by the Board of Directors on 16 March 2021 and signed
on its behalf below.
On behalf of the Board
David Thompson
Chief Financial Officer
16 March 2021
Definitions of alternative performance
measures
Alternative
performance measure
Index-linked
annualised recurring
revenue
Depreciation-
adjusted gross profit
Depreciation-
adjusted gross
profit margin
Pre-exceptional
EBITDA
Underlying profit
before taxation
Underlying profit
after taxation
Underlying basic
EPS
Underlying diluted
EPS
Net debt
Definition
The revenue being generated from
meter rental and data contracts
at a point in time. Includes revenue
from third-party managed meters.
Statutory gross profit less
depreciation on revenue-generating
assets, recognised within cost of sales.
Depreciation-adjusted gross profit
divided by statutory revenue.
Statutory EBITDA excluding
exceptional items.
Profit before taxation excluding
exceptional items and amortisation
of certain intangibles1.
Profit after taxation excluding
exceptional items and amortisation
of certain intangibles1 and the tax
effect of these adjustments.
Underlying profit after taxation
divided by the weighted average
number of ordinary shares for the
purposes of basic EPS.
Underlying profit after taxation
divided by the weighted average
number of ordinary shares for the
purposes of diluted EPS.
Total bank loans less cash and cash
equivalents. Excludes lease liabilities
recognised under IFRS 16.
1 Amortisation of the Group’s new Enterprise Resourcing
Planning system, which went live in full in 2020, remains within
the underlying cost base of the business and is therefore a part
of the Group’s underlying profit measures.
SMS Annual report and accounts 2020 71
Reconciliation of statutory to underlying results
SMS uses alternative performance measures, defined on
page 70, to present a clear view of what the Group considers
to be the results of its underlying, sustainable business
operations. Excluding certain items enables consistent
year-on-year comparisons and aids a better understanding
of business performance. A reconciliation of these
performance measures is disclosed below:
Annualised recurring revenue1
Group revenue
Statutory profit from operations
Amortisation of intangibles
Depreciation
Statutory EBITDA
Exceptional items2 (EBITDA-related)
Pre-exceptional EBITDA
Net interest (excl. exceptional)
Depreciation
Amortisation of intangibles included in underlying profit before taxation3
Underlying profit before taxation
Exceptional items2 (EBITDA)
Exceptional items2 (interest)
Amortisation of intangibles excluded in underlying profit before taxation
Statutory profit before taxation
Taxation
Statutory profit after taxation
Amortisation of intangibles excluded in underlying profit after taxation
Exceptional items2 (EBITDA and interest)
Tax effect of adjustments
Underlying profit after taxation
Weighted average number of ordinary shares (basic)
Underlying basic EPS (pence)
Weighted average number of ordinary shares (diluted)
Underlying diluted EPS (pence)
Year ended
31 December
2020
£m
77.0
103.0
199.6
3.0
29.1
231.6
(181.7)
49.9
(4.5)
(29.1)
(1.1)
15.2
181.7
(0.1)
(1.9)
195.0
(1.5)
193.5
1.9
(181.6)
(3.0)
10.8
Year ended
31 December
2019
£m
72.6
114.3
13.8
1.5
35.1
50.4
8.5
58.9
(8.2)
(35.1)
–
15.6
(8.5)
(0.1)
(1.5)
5.5
(1.5)
4.0
1.5
8.6
(1.4)
12.7
112,715,328 112,446,154
11.30
113,637,882 113,269,412
11.22
9.56
9.49
Percentage
change
6%
(10%)
360%
(15%)
(2%)
>500%
>500%
(15%)
1 ILARR for the year ended 31 December 2019 is presented on a pro-forma basis for comparative purposes, excluding a net contribution of £17.6m from
disposed I&C meter assets.
2 Exceptional are those material items of income and expense which, because of the nature or expected infrequency of the events giving rise to them,
merit separate presentation on the consolidated income statement.
3 Amortisation of the Group’s new Enterprise Resourcing Planning system, which went live in full in 2020, remains within the underlying cost base of the
business and is therefore a part of the Group’s underlying profit measures.
Strategic reportGovernanceFinancial statements
72 SMS Annual report and accounts 2020
Governance
73
Chairman’s introduction to governance
74 Board of Directors
76 Corporate governance report
88 Audit Committee report
94 Nomination Committee report
96 Remuneration Committee report
107 Directors’ report
110
Statement of Directors’ responsibilities
SMS Annual report and accounts 2020 73
CHAIRMAN’S INTRODUCTION TO GOVERNANCE
Creating a culture of
strong corporate governance
EFFECTIVE LEADERSHIP HAS
NEVER BEEN MORE IMPORTANT.”
Whilst the Company does not currently adopt the UK
Corporate Governance Code (most recently updated in
2018), it endeavours to stay up to date with its requirements
and continues to adopt elements of it, where appropriate.
During the year, key governance activities included:
• regular meetings with discussion on the Group’s response
to COVID-19, including providing oversight of and
approving several key decisions, new measures and
updates to the market. See pages 4 to 7 for further details;
• approval of the decision in June 2020 to return furlough
grants received from the UK Government under the
Coronavirus Job Retention Scheme and to withdraw
from the scheme altogether;
• review and approval of the Group’s new, enhanced
dividend policy;
• evolution of our strategy, including the introduction
of a fourth strategic pillar focused on sustainable and
socially responsible business practices;
• monitoring and oversight of the Group’s disposal of
a minority of its meter assets through to completion
in April 2020;
• nomination and appointment of Miriam Greenwood as
Chairman and Jamie Richards as a new Non-executive
Director;
• review of the output from the Group’s first formal
employee engagement survey and relevant action
planning as a result; and
• commitment to a net-zero carbon target by 2030, or
sooner, under our environmental, social and governance
(ESG) strategy and the establishment of the Health,
Safety and Sustainability sub-committee of the Board.
Closing thanks
I would like to express my gratitude to the executive
management team, our employees and my board colleagues
for their hard work, commitment and dedication to the
Company and to the health, safety and wellbeing of our
key stakeholders. I look forward to the next chapter of our
journey together.
Miriam Greenwood
Non-executive Chairman
16 March 2021
Dear Shareholder
The past year has seen us face unprecedented challenges
caused by the worldwide COVID-19 pandemic. Effective
leadership has never been more important, and,
as Chairman, it falls to me to ensure that the Board
discharges its responsibilities appropriately, adhering
to a robust corporate governance regime.
2020 has been an exceptionally difficult year for everyone
and SMS has, of course, been affected by the pandemic.
However, the business and its people have shown
considerable resilience. We successfully completed our
largest commercial transaction to date, repaid our revolving
credit facility, made our first investment in grid-scale
battery storage, and announced our net-zero carbon
target. These are all hugely significant events, marking
a successful year. Both my predecessor and I have focused
on ensuring that these important strategic matters,
amongst others, have received adequate time and
attention at Board meetings and that key decisions
have been made effectively and efficiently, taking full
account of the requirements of our many stakeholders.
On behalf of the Board, and in my role as Chairman, I am
pleased to introduce our Governance Report for the year
ended 31 December 2020.
Governance
Consistent with prior years, we adopt the Quoted Companies
Alliance’s Corporate Governance Code (the QCA Code),
published in April 2018.
I am delighted to confirm that the Board has applied the
principles and complied with all the provisions of the QCA
Code throughout FY 2020. Our Corporate governance
report on pages 76 to 87 sets this out.
Strategic reportGovernanceFinancial statements
74 SMS Annual report and accounts 2020
BOARD OF DIRECTORS
Miriam Greenwood OBE DL
Non-executive Chairman
Alan Foy
Chief Executive Officer
David Thompson
Chief Financial Officer
Tim Mortlock
Chief Operating Officer
A N R I H
N
Date of appointment
24 December 2009
Date of appointment
11 September 2017
Date of appointment
17 September 2019
Background and
experience
A Chartered Accountant, David
has extensive experience
in the finance and utility
industries and operated
at both divisional and Group
Finance Director level within
SMS prior to appointment as
Chief Financial Officer. Before
joining SMS, David held senior
finance roles at Energetics
Multi-Utility Group, a company
owned by Macquarie Bank,
and prior to that he held audit
director posts at PwC LLP
and Johnston Carmichael LLP.
External appointments
None.
It was announced on
8 February 2021 that
David Thompson will leave
the Group on 31 March 2021
to pursue another opportunity.
He will be replaced by
Gavin Urwin, who joined the
Group on 8 February 2021
as CFO-Designate.
Background and
experience
A Chartered Director, Tim has
over 20 years’ experience in
the energy and utility industry
across utility connections,
smart metering, data and
energy services. Tim was
previously part of the UPL
business (acquired by SMS in
2014) almost from its inception
and, prior to taking up his
current role as Chief Operating
Officer, he was Managing
Director of SMS’s asset
management, data and energy
management businesses.
Tim has expert knowledge
of electricity and gas smart
metering, having been
responsible for setting up UPL’s
electricity metering business
following deregulation in 2004.
External appointments
None.
Background and
experience
Alan has been Chief Executive
Officer of SMS since 2007.
He led the flotation of the
Company on the London Stock
Exchange AIM in July 2011, and
since then annual turnover and
profits have risen significantly
through a combination of
strategic acquisitions and
organic growth. Prior to
joining SMS in 2004, Alan
worked for Scottish Power
and, in 1997, gained approval
to establish its regulated gas
transportation and metering
business, SP Gas Ltd, which
under his management
grew to become a major
gas transporter in the UK.
He was previously a director
of an international energy
consultancy practice and has
considerable experience in
utility asset ownership, supply
and shipping activities.
A professionally qualified
engineer, Alan places
strong emphasis on team
development, safety,
operational performance
and financial accountability
within an ethos of customer
satisfaction.
External appointments
None.
Date of appointment
3 February 2014,
Chairman 23 June 2020
Background and
experience
With qualifications as
a barrister and in corporate
finance, Miriam has spent
more than 30 years working
for a number of leading
investment banks and other
financial institutions and has
been a non-executive director
of several publicly listed and
private companies. Miriam
has extensive experience in the
energy and utilities industry.
She was, for nine years until
2013, a non-executive director
of the Gas and Electricity
Markets Authority (Ofgem)
and, for seven years until
recently, chair of the Expert
Panel for the Gas Network
Innovation Competition.
External appointments
During 2020, Miriam was
appointed as a non-executive
director at Gulf International
Bank (UK) Limited, the UK
subsidiary of Gulf International
Bank. In addition, she holds
non-executive director
positions at Eclipse Shipping
Limited and at River and
Mercantile Group plc,
where she also chairs the
remuneration committee.
Beyond board roles, Miriam
is an adviser to Ofgem on the
current RIIO-2 price control
and to the Mayor of London’s
Energy Efficiency Fund.
A Deputy Lieutenant of the
City of Edinburgh, Miriam was
awarded an OBE for services
to corporate finance.
SMS Annual report and accounts 2020 75
Graeme Bissett
Senior Independent
Non-executive Director
Ruth Leak
Independent
Non-executive Director
Jamie Richards
Independent
Non-executive Director
A N R I H
A N R I H
A N R I H
Date of appointment
1 June 2016
Date of appointment
29 May 2019
Date of appointment
23 April 2020
Background and
experience
Jamie is a Chartered Accountant
and has 25 years’ experience
in fund management, banking
and corporate recovery with
a focus on the infrastructure
and renewable energy sectors.
He was a partner, executive
committee member and head
of infrastructure at Foresight
Group for 18 years. Previously,
he worked at PwC, Citibank
and Macquarie, both in London
and Sydney.
External appointments
Jamie’s other current roles are
as a non-executive director
and audit committee chair for
the investment trust US Solar
Fund plc and as alternate
chairman of the investment
committee of Community
Owned Renewable Energy,
an investment programme
targeting UK solar farms for
community ownership.
Background and
experience
Graeme is an experienced
corporate financier and qualified
Chartered Accountant, having
previously been a partner
with Arthur Andersen LLP and
finance director of international
groups. He has formerly served
on the boards of a number
of other companies, including
Macfarlane Group plc, Interbulk
plc, The Scottish Futures Trust
Limited and Belhaven Group plc.
External appointments
Graeme is a non-executive
director of Cruden Group
Limited, Calnex Solutions plc,
Anderson Strathern LLP and
Aberforth Split Level Income
Trust plc and undertakes
a number of pro bono
appointments, including as
a member of Court at the
University of Glasgow, trustee
of Citizens Advice Scotland and
trustee of the Entrepreneurial
Scotland Foundation.
Background and
experience
Following a varied early career
in different sectors, Ruth has
specialised in business
transformation through the
use of technology.
Skilled in delivering scaled and
usable systems that make
a difference to companies
and their customers, Ruth
most recently served as chief
information officer for the
Letters and Network division
of Royal Mail, an organisation
where she spent ten years.
Ruth also served as chair of
Royal Mail’s Disability Steering
Group, encouraging open
communication and respect
for diversity at all levels as well
as seeking technology-based
solutions for challenges in
the workplace. Prior to Royal
Mail, Ruth started her career in
operational roles with Procter
& Gamble, and then worked
in consultancy for Coopers &
Lybrand. Following a period
at Debenhams she was part
of the start-up team behind
the British online supermarket
Ocado, before honing her
commercial and delivery skills
further with consultancy Kurt
Salmon Associates.
External appointments
Ruth is an active member
of the ‘Women in Technology’
mentoring programme
operated by Reed, where she
provides one-to-one coaching
and support to women seeking
to further their careers across
a range of roles and industries.
Craig McGinn
Group Company Secretary
and General Counsel for
the Group
Background and
experience
Craig is a qualified corporate
and banking lawyer with
over 20 years of experience
and has responsibility for
the management of all legal
matters affecting the Group,
for ethical risk matters and for
supporting the Board in setting
and maintaining standards
of corporate governance.
He is a Qualified Solicitor
in Scotland, England and
Wales and a member of the
International Association of
Privacy Professionals (IAPP).
Craig joined SMS in October
2016 having previously been
a partner in the international
legal firm CMS Cameron
McKenna, and at Dundas
& Wilson prior to its merger
with CMS.
Key to Committees
A
Audit
N
R
I
H
Nomination
Remuneration
Information Technology
Health, Safety and
Sustainability
Chair
Strategic reportGovernanceFinancial statements
76 SMS Annual report and accounts 2020
CORPORATE GOVERNANCE REPORT
Board structure
Overall framework
The Board has a clear corporate governance framework comprising Board-reserved matters, various Committees with
their Terms of Reference, and appropriate delegated authorities ensuring decision-making at appropriate levels within
the Group.
Board of Directors (the Board)
It is the Board’s role to ensure that the Group is managed
for the long-term benefit of all its stakeholders, by
providing effective leadership and direction to the
business. It sets the Group’s strategy and shapes its
purpose. The Group’s culture and values are cultivated
from the top down, with each Director leading by example.
The Board is responsible for balanced and efficient
decision-making, and for overseeing the overall financial
performance of the Group. Corporate governance is a
critical component of the Group’s strategy and the Board’s
focus on continual improvement of processes, controls and
risk management, alongside supporting the continued
growth of the business, is vital in the ever-evolving
corporate governance regime adhered to.
The Company is led by a strong and experienced Board,
which brings a depth and diversity of expertise to the
leadership of the Company, essential to support delivery
of the Group’s strategy over the medium to long term.
The Board has an appropriate balance of skills, experience
and knowledge of the Group and its markets to enable it to
discharge its responsibilities effectively.
See page 95 for more details on the Board’s composition
Board Committees
The Board delegates certain matters to five Board
Committees, being the Audit, Nomination, Remuneration,
Information Technology and Health, Safety and
Sustainability Committees.
Each Committee has its own Terms of Reference, approved
by the Board, which are reviewed annually and are
available on the Company’s website at www.sms-plc.com/
corporate/investors/aim-rule-26. The Group Company
Secretary acts as Secretary to each of the Committees.
Audit Committee
Has oversight of the Group’s
system of internal control and
risk management, and monitors
and reviews the integrity of the
Group’s financial reporting
and the relationship with the
external auditor.
Nomination Committee
Monitors and reviews the
composition and balance of
the Board and the Committees
and makes recommendations to
ensure SMS has the right structure,
skills and experience in place
for the effective management
of the Group.
Remuneration Committee
Determines the remuneration
for Executive Directors and
oversees the Group’s overall
remuneration policy, strategy
and implementation.
Audit Committee report
pages 88 to 93
Nomination Committee report
Remuneration Committee report
pages 94 to 95
pages 96 to 106
Information Technology Committee
Reviews and approves the information technology
strategy, and monitors priorities and/or structures
implemented throughout the Company and the wider
Group, including allocation of resources and the impact
of and opportunities from emerging changes
in technology.
Health, Safety and Sustainability Committee
Provides oversight to ensure that the Group adopts
a consistent and comprehensive approach to health
and sustainability through the exhibition and promotion
of transparent and responsible behaviours and
practices, and through engagement with key
stakeholders both internally and externally.
Comprises all Non-executive Directors.
The Chief Executive Officer, Chief Operating Officer,
Chief Financial Officer and the Group’s Head of
Information Technology attend by invitation.
Comprises all Non-executive Directors.
The Chief Executive Officer, Chief Operating Officer,
Chief Financial Officer and representatives from the
Group’s sustainability team attend by invitation.
SMS Annual report and accounts 2020 77
Board committee updates
During 2020, the Terms of Reference for the newly
established Health, Safety and Sustainability (HSS)
Committee were ratified, as detailed further below. There
were no amendments to the Terms of Reference for the
other Board Committees.
Upon her appointment as Chairman on 23 June 2020,
Miriam Greenwood stepped down as Chair of the
Remuneration Committee and was replaced by Jamie
Richards, a Non-executive Director. On the same date,
Miriam Greenwood was appointed as Chair of the
Nomination Committee following Willie MacDiarmid’s
resignation.
Jamie Richards joined the Audit, Nomination and
Information Technology Committees following his
appointment as a Non-executive Director on 23 April 2020.
There were no other changes to the Audit, Nomination
and Remuneration Committees. Further details of their
activities in the year can be found in their respective reports
on pages 88 to 106.
Information Technology Committee
The Information Technology Committee continues
to be chaired by Ruth Leak, an information technology
specialist, and comprises all of the Non-executive
Directors. The Chief Executive Officer, Chief Financial
Officer and the Chief Operating Officer attend by invitation.
The Information Technology Committee is responsible for
the review and approval of the SMS information technology
strategy. It reviews and monitors the ongoing allocation of
resources and funding required to deliver the implementation
of this strategy and oversees the development and
implementation of those information technology projects
deemed to be of significant importance to the Group.
It also acts as a forum for consideration of whether current
developments in technology have the potential to offer
value to SMS. The Committee ensures appropriate
information technology standards and procedures are
in place, including those related to the Data Protection
Act 2018 and, in close liaison with the Audit Committee,
it ensures that information and technology risks are
identified, assessed and managed with actions implemented
as appropriate.
The Committee met three times in 2020. During the year,
the Committee oversaw the continued investment the
Group is making in its essential IT infrastructure. The Group
is heavily data-driven, with a significant number of assets
being billed on a monthly basis, and it relies on IT systems
to track the relevant energy supplier responsible for paying
rental on Group assets in cases where end consumers
switch their utility provider.
The Group has a significant IT resource internally to
ensure we continue to develop and maintain our bespoke
end-to-end systems, and it is a primary responsibility of
the Committee to provide a governance framework around
the control and deployment of that resource. The Group’s
IT department made a significant contribution to the
successful continuation of activities through the COVID-19
pandemic via the swift implementation of policies and
infrastructure to enable widespread remote working.
A key milestone was reached in the year when the full
Enterprise Resource Planning system went live, providing
a new platform within the business to report performance
and manage our assets.
HSS Committee
The HSS Committee was formally ratified in 2020 and
was created by the Board for the purpose of ensuring that
the Company’s approach to health and sustainability are
clearly set out and consistently monitored and adapted
to suit the growing needs of the Group. The Committee
is chaired by the Group’s Chair, Miriam Greenwood,
and comprises all the Non-executive Directors. Other
individuals such as the Chief Executive Officer, Chief
Financial Officer, Chief Operating Officer and external
advisers may be invited by the Chair to attend, as and
when appropriate and necessary.
The HSS Committee is responsible for the review and
approval of the SMS health and sustainability strategy
and implementation of the Group’s approach to health
and sustainability throughout the business, including the
creation of policies and procedures. It reviews and monitors
the ongoing allocation of resources and funding required
to deliver the implementation of this strategy and oversees
the development and implementation of those projects
deemed to be of significant importance to the Group.
The Committee reviews the health and sustainability
performance of the Group through monitoring of key
performance indicators, together with the operational,
environment and legal impact on health and sustainability
of decisions taken. The Committee will review and assess
the quality of any public reporting to external stakeholders
on health and sustainability matters, most notably
reviewing and if appropriate recommending to the Board
for approval the annual Sustainability Report. In close
liaison with the Audit Committee, it ensures that health and
sustainability risks are identified, assessed and managed
with actions implemented as appropriate.
The Committee met once in 2020 following its ratification.
During the year, the following key actions were taken:
• The Committee reviewed and approved the Group’s
proposal to implement a target of net-zero carbon by
2030. This target fundamentally supports the Group’s
purpose to protect the environment and aligns with
SMS’s objective of delivering net-zero carbon emissions
for its customers, creating a cleaner and greener future.
In approving this proposal, the Committee was presented
with a detailed management paper outlining the Group’s
implementation plan to achieve this target, including
key priorities and timeline. This will be subject to ongoing
monitoring and scrutiny by the Committee. Further
details were reported in the Sustainability section
on pages 43 to 48.
Strategic reportGovernanceFinancial statements
78 SMS Annual report and accounts 2020
CORPORATE GOVERNANCE REPORT continued
• The Committee engaged with several initiatives to
strengthen the Group’s environmental, social and
governance (ESG) profile, including ongoing work with
ESG rating agencies and a project to enhance and align
the Group’s disclosures of ESG information. Most recently,
in March 2021, the Committee reviewed and approved
the release of the Group’s first Sustainability Report,
available on the Company’s website at www.sms-plc.com/
corporate/sustainability. This is a significant
achievement, demonstrating the commitment at both
management and Board level to improving the quality
of our reporting in this area.
• The Committee approved the Group’s health and safety
plan, underpinned by ten core objectives, and was
updated on the changes implemented in response to
COVID-19, ensuring our employees and workplaces were
compliant.
• The Committee received an update from the Group
Human Resources (HR) Director on the Company’s
approach to managing health and wellbeing and the
various initiatives in place to provide support to our
people, particularly in the context of home and remote
working during the COVID-19 pandemic.
Roles and responsibilities
The Board members have separate and clearly defined roles and responsibilities, as set out in the table below. Each
member of the Board has a range of skills and experience that is relevant to the successful operation of the Group.
Role
Chairman
Chief Executive Officer
Chief Financial Officer
Chief Operating Officer
Senior Independent Director
Independent
Non-executive Directors
Company Secretary
Responsibility
Responsible for leading the Board and its governance, ensuring the effective
engagement and contribution of all Non-executive and Executive Directors.
Ensures that Board meetings take place with a culture of openness and challenge,
with sufficient time made available to debate the matters arising. Sets the agenda
to take full account of the issues and concerns of the Directors and ensuring the
links between shareholders, Board and management are strong.
Responsible for the day-to-day leadership, management and control of the
Group, across all Group businesses; and for recommending the Group strategy
to the Board and ensuring that the strategy and decisions of the Board are
implemented via management. Acts in accordance with the authority delegated
from the Board.
Responsible for the day-to-day financial management and sustainability of the
Group and for providing general support to the Chief Executive Officer, including
the financial and operational performance of the business.
Responsible for supporting the work of the Chief Executive Officer, providing
oversight and leadership to the business divisions of the Group, and taking
responsibility for IT and people management.
Provides a sounding board for the Chairman, acts as an intermediary for the
other Directors when necessary and is available to meet with shareholders.
Constructively challenge the Executive Directors and monitor the delivery of
the Group strategy within the risk and control environment set by the Board.
Supports the Chairman and Chief Executive Officer and is available to all Directors
for advice and support. Informs the Board and Committees on governance
matters and is responsible for development.
Independence of the Non-executive Directors
The Non-executive Directors fulfil a vital role in corporate
accountability and have a particular responsibility to
ensure that the strategies proposed by the Executive
Directors are fully discussed and critically examined, not
only in the best long-term interests of shareholders, but
also in order to take account of the interests of customers,
employees and other stakeholders.
Graeme Bissett is the Senior Independent Non-executive
Director (replacing Miriam Greenwood following her
appointment as Chairman on 23 June 2020). He is available
to shareholders if they have concerns which have not
been resolved via the normal channels of Chairman,
Chief Executive Officer or the other Executive Directors,
or where communication through such channels would
be inappropriate.
The Board considers each of the Non-executive Directors,
being Miriam Greenwood (Chairman), Graeme Bissett,
Ruth Leak and Jamie Richards, to be independent.
The roles of Chairman and Chief Executive Officer are
separate and there is a clear division of responsibilities
between the two roles.
Election of Directors
All of the Directors are subject to election by shareholders
at the first Annual General Meeting (AGM) after their
appointment to the Board and, in response to shareholder
feedback, will be subject to annual re-election.
SMS Annual report and accounts 2020 79
Additional appointments
The Chairman and Non-executive Directors have other
third-party commitments including directorships of other
companies as set out in their biographies. The Company
is satisfied that these associated commitments have
no measurable impact on their ability to discharge their
responsibilities effectively. The Executive Directors have
no third-party commitments.
Independent advice
All Directors are able to take independent professional
advice in the furtherance of their duties, if necessary,
at the Company’s expense.
All Directors have access to the advice and services of
the Company Secretary, who is responsible to the Board
for ensuring that Board procedures are followed, and
that applicable rules and regulations are complied with.
The appointment and removal of the Company Secretary
is a matter for the Board as a whole. All Directors are
supplied with information in a timely manner in a form,
and of a quality, appropriate to enable them to discharge
their duties.
In addition, the Company Secretary ensures that the
Directors receive appropriate training where necessary.
Regular training is provided on relevant topics such as
health and safety, AIM Rules and the Market Abuse
Regulation, and these programmes run continuously
through the year. Refresher training on the AIM Rules and
Market Abuse Regulation was provided by a third party
to the entire Board in the first half of the year. All Directors
are encouraged to keep themselves up to date with regard
to changes in industry, practice and regulations and the
Company continuously assesses its training programmes
to ensure they are relevant and up to date.
How the Board operates
Meetings and attendance
Board meetings are scheduled to be held eight times each
year. Between these meetings, additional Board meetings
and Board Committee meetings may be held as and when
circumstances required. During 2020 several such meetings
were held in consideration of the COVID-19 outbreak and
the business’s response.
Directors are provided with detailed and comprehensive
papers in advance of each Board or Committee meeting,
and meeting packs are accessed from a Board portal. For
each scheduled Board meeting, the papers include updates
on financial and operational performance together with
additional papers on specific topics as relevant.
In 2020, the Board held eight scheduled meetings. At each
meeting the Board received reports from:
• the Chief Executive Officer on health and safety,
strategic, operational and business developments, and
investor relations;
• the Chief Financial Officer on the financial performance
of the business: budget, funding and capital;
• each of the Board Committees on matters discussed at
their meetings; and
• any additional papers on specific topics as relevant.
A part of each Board meeting is dedicated to the
discussion of specific strategy matters. Any conflicts of
interest are declared at the start of each Board meeting
and appropriate action is taken where necessary to
ensure independent judgement is not overridden. Half
of the Board, excluding the Chairman, are considered
independent, which helps to address any conflicts of
interest that may arise. There were no registered potential
conflicts during 2020.
The Chairman also holds meetings with the Non-executive
Directors during the year without the Executive Directors
being present. These meetings provide the Non-executive
Directors with a forum in which to share experiences and
discuss wider business topics.
The attendance of Directors at scheduled Board and
Committee meetings in the year to 31 December 2020 is
set out below. All of the Directors who were entitled to
attend those Board meetings attended each Board meeting.
Board
Maximum 8
Audit
Committee
Maximum 3
Remuneration
Committee
Maximum 4
Nomination
Committee
Maximum 2
Information
Technology
Committee
Maximum 3
Health,
Safety and
Sustainability
Committee
Maximum 1
Executive Directors
A H Foy1
D Thompson1
T Mortlock1
Non-executive Directors
W MacDiarmid2
M Greenwood
G Bissett
R Leak
J Richards3
–
–
–
–
–
1 A H Foy, D Thompson and T Mortlock attended the Audit Committee meetings and Information Technology Committee meetings by invitation. A H Foy
also attended the Remuneration Committee meetings by invitation.
2 W MacDiarmid resigned as Chairman and Non-executive Director on 23 June 2020 and attended all the Board and Board Committee meetings that
took place up to this date.
3 J Richards was appointed as a Non-executive Director on 23 April 2020 and attended all the Board and Board Committee meetings that took place
from that date.
Strategic reportGovernanceFinancial statements
80 SMS Annual report and accounts 2020
CORPORATE GOVERNANCE REPORT continued
Matters reserved for the Board
The Board is responsible to shareholders for the proper
management of the Group, and has identified key financial
and operational areas that require regular reporting and
which enable the performance of senior management
to be reviewed and monitored.
These are set out in a formal schedule of matters reserved
for the Board, which is reviewed on a regular basis to
ensure it remains fit for purpose. The schedule outlines all
matters requiring specific consent of the Board, including
approval of:
• the Group’s annual budget;
• the Group’s strategy;
• acquisitions, disposals and capital expenditure or
investment projects above certain thresholds;
• the Annual report and accounts and any reports or
information to be issued to shareholders of the Company;
• the Company’s share-dealing policy;
• the appointment of the Company’s independent auditor;
• the Company’s dividend policy and borrowing powers;
• any material changes to the Company’s accounting
policies or insurance policies;
• remuneration of Directors, executive officers and
senior employees;
• alterations to the constitutional documents of the
Company;
• the adoption of any new, or amendments to, major
employee benefit plans;
• legal actions brought by or against the Group above
certain thresholds;
• political and charitable donations; and
• the scope of delegations and appointments to Board
Committees and subsidiary boards.
Responsibility for the development of policy and strategy
and operational management is then delegated to the
Executive Directors and senior management team.
Board activities
Board activities are structured to develop the Group’s
strategy and to enable the Board to then support
management on the delivery of the strategy within
a transparent governance framework. The Board also
regularly discusses governance, risk and reputation
management, and financial performance.
The Company Secretary is responsible to the Board for
the timeliness and quality of information provided to it.
The information below is a non-exhaustive list of the
key areas of focus for the Board’s activities and topics
discussed during the year to 31 December 2020:
• Fit for growth – the Board oversaw the preparation
and approval of the 2021 budget, amendments to the
dividend policy to augment total shareholder return,
and discussion of business development opportunities
and product strategy. During 2020, the Board has been
engaged in evaluating the ongoing strategic direction
for the business. Carbon reduction (CaRe) assets present
an opportunity to invest significant capital in new asset
classes with attractive long-term returns in the energy
and utility sector that align with our core values of
reducing the impact of carbon emissions on the
environment. The Board has been extensively reviewing
the business case for investment, to ensure that the
inherent returns are accretive to overall shareholder
value and add diversity to the asset portfolio in which
capital is deployed.
• Performance – at every meeting, the Board discussed
the Chief Executive Officer’s report on performance
of operations, the Chief Financial Officer’s report on
financial performance, and quarterly market metrics.
Performance was assessed against the approved
budget and variances understood in the context of
market and industry developments.
• Governance – the Board discussed the full-year
preliminary results, Annual report and accounts, Notice
of AGM and final dividend recommendation, half-yearly
results and interim dividend recommendation, Modern
Slavery Act reporting, matters reserved for the Board,
Committees’ terms of reference, Board effectiveness
review and gender pay gap reporting.
• Risk and regulatory – the Board received annual
compliance and risk reports and the year-end
assessment of internal control systems, and
presentations on General Data Protection Regulation
(GDPR), risk tolerance and risk.
SMS Annual report and accounts 2020 81
FY 2020 Board evaluation
During 2020 an internally facilitated evaluation was
carried out by the Company Secretary, using an online
self-evaluation questionnaire. The participants were
asked to score 25 statements on a scale of 1 to 5 and
to provide written comments, including areas for
improvement.
All Directors responded to the questionnaire, answering
80 questions through a combination of multiple-choice
selections and free text, which gave Directors the
opportunity to provide written comments, including
on areas for improvement. The questionnaire covered
all aspects of Board performance including: Board/
Committee structure and composition; conduct of
meetings; meeting dynamics; governance; strategy;
financial reporting and risk management; health and
safety; and stakeholders. The Company Secretary
collated the responses from the questionnaire and initial
feedback from the evaluation was presented to the Board
for discussion.
The overall assessment is that the Board continues
to operate effectively and it has performed well during
the year, especially in light of COVID-19 and the resulting
restrictions, which mean that the Board has not been
able to meet in person since March 2020.
We are in the process of reviewing focus areas arising
from the 2020 evaluation process. Key actions will be
agreed, and these will form part of the Board’s agenda
for the coming year.
There were no significant additional focus areas arising
from the 2019 feedback process.
Internal control
The Board has overall responsibility for the Group’s system
of internal control and risk management and for reviewing
the effectiveness of this system. It is supported in this work
by the Audit Committee, which reviews the effectiveness
of the Group’s risk process and internal control systems.
Such systems can only be designed to manage, rather than
eliminate, the risk of failure to achieve business objectives
and can therefore only provide reasonable and not
absolute assurance against material misstatement or loss.
Business performance is regularly reviewed by the Board
through the monitoring of:
• progress towards strategic objectives;
• the Group’s financial performance, including budgeting
and forecasting, financial reporting, analysis of variances
against plan and the taking of appropriate management
action;
• capital investment; and
• principal risks and the process by which these are
evaluated and managed on a continuous basis.
The Board has reviewed the effectiveness of the Group’s
risk management and internal control systems, including
financial, operational and compliance controls. A robust
assessment of the principal risks faced by the Group has
also been undertaken.
Board evaluation
Each year, the Company carries out a performance
evaluation of the Board, its Committees and individual
Directors. This process gives the Directors the opportunity
to identify areas for improvement both jointly and individually
using questionnaires, one-to-one sessions with the
Chairman, and open discussion.
As part of the annual performance evaluation of the Board,
the Senior Independent Director led an assessment of
the Chairman’s performance. There were also discussions
between the Chairman and the Non-executive Directors,
without the Executive Directors present, to discuss feedback
for each Executive Director in advance of their appraisals.
No significant concerns were raised.
The intention is that an external performance evaluation of
the Board, the Board Committees and individual Directors
will be undertaken in 2021.
Strategic reportGovernanceFinancial statements
82 SMS Annual report and accounts 2020
CORPORATE GOVERNANCE REPORT continued
How the Board engages with
stakeholders
Engaging with our stakeholders strengthens our
relationships and helps the business make better
decisions, which enable it to deliver on its
commitments. Much of the day-to-day decision-
making and stakeholder engagement is carried
out at a business level.
Further details are set out on pages 39 to 42. The Board
is regularly updated on wider stakeholder engagement
by the Executive Directors and via the reports it receives
from senior management in the Board and Committee
papers, allowing it to stay abreast of the topics that
matter most to stakeholders and to the business, and
to enable the Board to understand and consider these
issues in its decision-making. We explain below how,
during the year, the Board has engaged with our
stakeholders. Details of specific engagement in
response to COVID-19 can be found on pages 4 to 7.
Material matters requiring the Board’s consideration
are outlined on page 11. The case study on pages 84 to 85
explains how the Board considered the matters
specified in section 172 of the Companies Act 2006
when approving the sale of a minority of the Group’s
meter assets for c.£291m, which was the Company’s
largest commercial transaction to date.
Shareholders
The Board receives updates from the Investor Relations
Manager where relevant and appropriate, providing an
overview of market sentiment, share price performance
and key meetings held with investors.
The Chief Executive Officer and the Chairman hosted
virtual meetings with eight major shareholders in July
2020, enabling the introduction of Miriam Greenwood as
Chairman and providing clearer communication around
our corporate governance. Such meetings provide a more
open line of engagement between Board members and
key investors and its intended that these will take place
again in the coming year.
The Board and management regularly receive and
respond to queries from shareholders on a wide range
of ESG topics. During the year, the views of investors
helped inform the Board’s decisions on certain ESG
developments, including the release of the Group’s
first-ever Sustainability Report.
The AGM is also an important opportunity for the
Board to share directly with shareholders the performance
and strategic direction of the Company. See further
details in the section The Board’s relationship with
shareholders below.
Customers
Most of the Company’s engagement with customers is
at the operational level. The Chief Operating Officer holds
regular calls with senior representatives of our largest
customer accounts, as part of overall contract governance
and monitoring. The Board receives regular updates from
the Chief Operating Officer and the senior management
team on sales and service delivery. The Board also reviews
material customer contracts prior to finalisation.
At the request of the Non-executive Directors, a project
was undertaken in the year to corroborate the Group’s
contracted smart meter order pipeline. This portfolio
analysis was presented by the Chief Operating Officer
and Managing Director of the metering business, providing
the wider Board with assurance that statistics quoted
to the market are accurate and appropriate.
SMS Annual report and accounts 2020 83
Employees
The Board closely monitors and reviews the results of
all of its employee engagement, as well as any other
feedback it receives, to ensure alignment of interests.
During the year, the Remuneration Committee received
updates from the Group HR Director on gender pay
analysis and a proposed new grading structure for staff.
The wider Board also received a presentation on the
results of the Group’s first-ever employee engagement
survey. See further details on page 50.
In 2019, the Board approved the appointment of Miriam
Greenwood as Non-executive Director for workforce
engagement. Following her appointment as Chairman, this
responsibility has been transferred to Jamie Richards who
also chairs the Remuneration Committee. COVID-19 has
unfortunately meant that original intentions for Jamie to
meet with employees and attend certain events have not
so far come to fruition. A plan for 2021 is under review.
The wider Board has remained engaged with employees
throughout the year via video updates and results
presentations.
Lenders/financiers
Through regular financial reporting, the Board receives
information about the Group’s revolving credit facility
and our compliance with key covenants. The Chief
Financial Officer reviews and approves quarterly
reports that are issued to the Group’s lending agent
in accordance with the terms of the Group’s facility.
During the year, all three Executive Directors participated
in meetings with the Group’s syndicate of banks to
provide an update on the 2020 budget and performance
and, specifically, to present the Group’s financial position
following the sale of a minority of its meter asset
portfolio. This direct engagement promotes an open
and transparent relationship, which is key in supporting
the continued growth of the business.
The Chief Financial Officer was ultimately responsible
for the management of the facility refinancing in
April 2020, together with the voluntary prepayment
detailed on page 70. As part of this process, he
participated in numerous meetings with our syndicate
of lenders and reported back to the wider Board
on discussions and developments.
Suppliers
Supplier information is typically reported to the Board by
exception, upon the specific request of one or more Board
members or concurrent with a significant event or change.
All material supply contracts also require Board approval.
During the year, the Board was presented with an analysis
of spend on professional services vendors to understand
the key vendors engaged with, services delivered and
typical costs. Upon feedback received from the Board
following this presentation, management agreed to
broaden the mix of vendors used to provide professional
services to the Company, in order to mitigate concentration
risk and ensure it secures the most competitive prices.
Group Internal Audit presented the results from its review
of sub-contractor management and oversight.
Most recently, the Board has been engaged in reviewing
and approving contracts to procure batteries as part of
the Group’s grid-scale battery storage projects currently
under construction. The Group’s Chief Operating Officer
has also been heavily involved in this process.
Government and regulatory bodies
The UK Government issued an Energy White Paper in
2020, outlining its strategy and plan for achieving its
2050 net-zero carbon target. Our sustainability strategy
is strongly aligned to this and, during the year, the newly
formed HSS Committee presented to the Board the
Group’s own ambitious plans to achieve a net-zero
carbon target by 2030 or sooner, with a detailed action
plan of how we intend to achieve this. The Board was
responsible for approving this target, which was
subsequently ratified and announced to the market
in late 2020.
The Board receives information about the Company’s
regulatory and technical compliance, including progress
on the UK smart meter rollout and the first-generation
smart meter (‘SMETS1’) Enrolment and Adoption
programme, as part of its regular operational reporting.
Strategic reportGovernanceFinancial statements
84 SMS Annual report and accounts 2020
CORPORATE GOVERNANCE REPORT continued
Board in action
One of the major decisions made by the Group in the year
was to sell a minority of its meter portfolio (the ‘Disposal’),
consisting of Industrial & Commercial (I&C) meter assets,
to funds managed by Equitix. Completing on 22 April 2020,
the disposed portfolio represented £17.6m of net index-
linked annualised recurring revenue (ILARR) and was sold
for gross proceeds of £290.6m, following which the Group
has reported a gross gain on disposal of £194.7m in the
year. See page 67 for further details.
of and the impact on all stakeholders. The Board was
presented with multiple papers, and given detailed briefings,
on the transaction. It was recognised that, whilst the
transaction was evidently an effective way of recycling
capital in order to enhance long-term shareholder value,
the business needed to ensure that the requirements it
would place on staff were manageable, that the service
delivered to existing customers would not be impaired
and that the Group’s relationship with its lenders was
safeguarded.
This significant transaction required Board approval and,
in making its decision, the Board considered the interests
To provide insight into the approach taken by the Board,
a summary of relevant stakeholder views and conclusions
is set out below.
Stakeholder
Stakeholder views
Conclusions
Shareholders
Our shareholders want
us to maximise returns in
a sustainable way and want
to see us progressing our
strategy, which includes
a strategic focus on the
efficient management
of capital.
Customers
Our customers want
the complete customer
experience, with efficient
and exceptional service
delivery.
Due to continued growth, particularly in domestic meter assets,
the Group’s leverage at the end of 2019 was in excess of 3x. At this
point, the Group’s financing strategy looked to manage leverage
by introducing either equity (via placement or realising assets)
or by developing longer term financial structuring solutions. It is
important for the Group to demonstrate that it has access to
significant amounts of capital to deploy on behalf of energy suppliers.
Whilst SMS has successfully raised equity through placement and
has historically used the debt market to fund growth, the recycling
of capital via the sale of a portfolio of assets to an infrastructure
fund was another attractive way to raise capital.
After careful consideration of the different valuation dynamics
of either raising equity, structuring debt or realising the inherent
value in a minority of assets, the disposal route showed the best
return for shareholders. The sale of £17.6m of net ILARR for gross
proceeds of £291m implies an attractive multiple of 16.4x EBITDA,
which reinforced the inherent value present within our meter
assets with their index-linked long-term cash flows. After the Disposal,
the Group still retained £77.0m ILARR at 31 December 2020.
The sale has also enabled SMS to increase its dividend by 3.6x to
25p per share, with the intention of 10% annual growth until 2024,
thereby significantly enhancing total shareholder return. The
Board’s decision to increase the dividend is considered further
on page 69.
First and foremost, the Board recognised that, in completing
this transaction, it was critical that our existing customers – I&C
energy suppliers, some of them customers of SMS for nearly
25 years – were not impacted. Although ownership of the meters
was transferring, SMS would continue to provide the same
services to these meters. Therefore, significant focus was placed
on ensuring a seamless transition.
Given the ongoing asset management arrangement in place
with Equitix, including the provision of additional administration
and operational services, Equitix were to become a new, major
customer for SMS. New teams, processes and controls were
implemented to ensure SMS continues to provide the excellent
customer service it is known for in the industry.
SMS Annual report and accounts 2020 85
Stakeholder
Stakeholder views
Conclusions
Employees
Our employees want us to
engage with them and
to keep them informed
of any changes in the
business that may affect
them and their teams.
Lenders/
financiers
Our lenders are key to our
business model, providing
critical financial support
essential to the continued
growth of the business. They
want to be kept updated
on the strategic direction
of the Company, including
any changes that may affect
its debt requirements.
Government
and regulatory
bodies
Governments and regulators
want us to comply with laws
and regulations and operate
in a sustainable manner.
From an early stage in the project, key members of staff involved
in the transaction – those providing support in the negotiations
and finalisation of contractual, financial and operational
arrangements – were engaged, ensuring they understood the
strategic rationale for the transaction.
Once full announcement was permitted, the Chief Executive
Officer informed all staff of the transaction, providing reassurance
that there would be no change to our operations and that we
would remain ‘business as usual’, with SMS providing continued
management of the meters on behalf of Equitix. Staff were
encouraged to ask questions as needed.
The transaction provided additional job opportunities, with the
establishment of a dedicated service delivery team for the portfolio.
In the early stages of the project, the Board approved the use of
various third-party advisers to provide critical technical expertise
to support the key individuals internally involved in the transaction.
The proceeds from the sale allowed the Group to reset its
leverage and return to a net cash-positive position, supporting
a £270m voluntary prepayment of the Group’s revolving credit
facility and driving a net cash position of £40.2m at 31 December
2020. Concurrently, the total available funding under the loan
facility was reduced from £420m to £300m, on the same terms,
through to the end of 2023.
As the impact on our lending arrangements was expected to
be significant, the Executive Directors engaged early on with our
syndicate of lenders, who were kept up to date on the transaction
throughout the process. There were extensive discussions prior
to the final decision to reduce the total commitments available,
which received Board-wide approval alongside the decision to
proceed with voluntary prepayment.
The transaction will maximise the long-term potential of the
Company, which is in the public interest.
As part of the ongoing management of the meter portfolio on
behalf of Equitix, the Group will ensure that all regulatory obligations
relevant to both the Company and the new owners of the assets
are fulfilled.
The transaction, which completed on 22 April 2020 – almost
a month into the first national COVID-19 lockdown – enabled the
Group to return grants covering the earlier part of the furlough
scheme, and supported the subsequent withdrawal of the Group
from the scheme altogether. Both decisions received unanimous
Board approval.
Strategic reportGovernanceFinancial statements
86 SMS Annual report and accounts 2020
CORPORATE GOVERNANCE REPORT continued
The Board’s relationship with shareholders
The Board recognises the importance of maintaining open,
transparent and two-way communication with shareholders.
This ensures a mutual understanding of objectives: for
shareholders to understand the Group’s strategy, and for
the Board to be aware of shareholders’ feedback and any
issues raised.
During 2020 the Executive Directors, assisted by the
Investor Relations team, attended several online
meetings, conferences and roadshows to maintain regular
communication with both institutional and private investors.
The feedback from such investor engagement was
regularly reported to the Board.
The Group’s Non-executive Directors have also been
available to meet shareholders should they wish to raise
issues. During the year, the Group Chair met with eight
major shareholders over video conference. A variety
of topics were discussed.
The Board receives monthly updates from the Investor
Relations team, Chief Executive Officer and Chief Financial
Officer on shareholder engagement. These updates
include share price performance, composition of the
shareholder register, key topics of discussion with
shareholders, peer group comparison, and feedback from
analyst reports, brokers and public relations partners.
On the day of interim and full-year results announcements,
equity research analysts are invited to attend management’s
presentation, which is followed by a question and answer
session addressed by the Chief Executive Officer, Chief
Financial Officer and Chief Operating Officer. One-to-one
and Group meetings are then held with existing institutional
shareholders and potential new investors.
Results and news releases on topics such as contract wins,
significant accreditations, acquisitions and new strategic
initiatives are published via the London Stock Exchange
Regulatory News Service and on the Company’s investor
website at www.sms-plc.com/corporate/investors.
The Group’s website also provides a full spectrum of
history, news, business developments and investor relations
topics, including a repository of past presentations and
announcements.
We will continue to disclose information appropriately to
satisfy the needs of shareholders and investors, thereby
enhancing understanding of our business.
Shareholder
activities in the year
March
2020
Full-year 2019 results presentation
Full-year 2019 results online roadshow
May
2020
Private client fund manager
online roadshow
Citi Small/Mid-Cap and Growth Conference
June
2020
AGM
July
2020
Yellowstone Advisory retail
investors’ webinar
H1 2020 trading update and calls
with investors
Aug
2020
Proactive investors retail
investors’ webinar
Sept
2020
H1 2020 results presentation
H1 2020 results online roadshow
Citi Small/Mid-Cap
and Growth Conference
Peel Hunt Building, Industrials & Support
Services Conference
Investec Best Ideas Conference
Bank of America Small/Mid-cap
conference
FY 2020 trading update
and calls with investors
Oct
2020
Nov
2020
Jan
2021
Feb
2021
SMS Annual report and accounts 2020 87
UK withdrawal from the European Union
After months of negotiation, the UK and the European
Union finally agreed an exit deal that came into effect
on 31 December 2020.
The Board has followed developments through the year
and maintained an active dialogue to identify and address
any potential risks for the Group. Our analysis of the new
rules shows that Brexit should not have a material impact
on our business activities, which predominantly take place
within the UK (see the detailed risk assessment on page 62).
Going concern
The Group’s business activities, together with the factors
likely to affect its future development, performance and
position, are set out in the Strategic report on pages 1 to 71.
The financial position of the Group, its cash flows, liquidity
position and borrowing facilities are described in the
Financial review section on pages 65 to 71 together
with the impact of the asset disposal that completed on
22 April 2020 and the subsequent prepayment of the
Group’s facility.
The Directors confirm that, having given consideration
to various outcomes of future performance and forecast
capital expenditure, including further potential impacts
of COVID-19 whilst the UK Government’s vaccination plan
is executed, they are satisfied that the Company and the
Group have adequate resources to continue in business
for the foreseeable future (for the period from the balance
sheet date to 31 March 2022). For this reason, they consider
it appropriate to adopt the going concern basis in
preparing the Financial statements.
On behalf of the Board
Miriam Greenwood
Non-executive Chairman
16 March 2021
Annual General Meeting
The 2020 AGM will be held in May 2021 in Glasgow,
COVID-19 restrictions permitting. Full information will be
provided in the Notice of AGM, to be posted separately
to shareholders, and will be available to download from
the Company’s website at www.sms-plc.com/corporate/
investors/shareholder-information.
The AGM is an important forum for shareholders,
particularly private shareholders, to hear more about the
general development of the business. The Chairman and
the Chairs of the Audit and Remuneration Committees will
be present at the AGM, allowing shareholders an opportunity
to ask questions, engage with members of the Board and
learn more about the Company.
The Chairman is also available to answer questions
throughout the year, upon request by investors. If investors
have any matters that they wish to raise outside the forum
of the AGM these can be raised using the contact details
on the Group’s website.
Other matters
Promoting an ethical corporate culture
Various indicators are used to monitor and provide insight
into the Group’s culture, including employee engagement,
health, safety and wellbeing measures and diversity
indicators. See further details on pages 49 to 53. The state
of the Group’s culture is assessed through compliance
reviews, internal audits and the provision of formal and
informal channels for employees to speak up, including
a whistleblowing hotline that allows employees to make
disclosures in confidence. The Company ensures action
is taken to address behaviour that falls short of the
Company’s expectations. The Board believes that in
a fast-growing business like the Group, both in terms
of employee numbers and overall size of the business,
the mix of informal and formal channels provides a faster
and more robust process to address matters raised by the
workforce. If Directors have concerns about the operation
of the Board or the management of the Company that
cannot be resolved, their concerns are recorded in the
minutes of the Board meetings. On his or her resignation,
a Non-executive Director has the opportunity to provide
a written statement to the Chairman, for circulation to the
Board, if he or she has any concerns about the operation
of the Board or the management.
Whistleblowing
The Group encourages staff to report any concerns which
they feel need to be brought to the attention of management
concerning any possible impropriety, financial or otherwise.
The Group has put in place a whistleblowing procedure
where employees can confidentially report any concerns
or wrongdoing. This procedure may be used to report
incidents of fraud, bribery and corruption, discrimination,
bullying or harassment, breaches of the Group’s health and
safety or quality compliance, or environmental concerns.
The Group provides the Audit Committee with information
in relation to matters reported, any subsequent
investigation and follow-up actions.
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88 SMS Annual report and accounts 2020
AUDIT COMMITTEE REPORT
Members and attendance
Meetings
Graeme Bissett (Chair)
Willie MacDiarmid1
Miriam Greenwood
Ruth Leak
Jamie Richards2
Attending by invitation
Chief Executive Officer
Chief Financial Officer
Chief Operating Officer
Head of Internal Audit3
External auditor
1 Willie MacDiarmid resigned on 23 June 2020 and attended
all Audit Committee meetings up to his resignation.
2 Jamie Richards was appointed on 23 April 2020 and attended
all Audit Committee meetings following his appointment.
3 The Senior Internal Audit Manager attended the remaining
two meetings.
Role of the Committee
• Monitoring the integrity of the financial statements,
including reviewing significant financial reporting issues
and judgements alongside the findings of the external
auditor.
• Advising the Board on the appropriateness of the ‘fair,
balanced and understandable’ statement in relation
to the Annual report and accounts.
• Overseeing the relationship with the external auditor,
the external audit process and the nature and scope of
the external audit, including the auditor’s appointment,
effectiveness, independence and fees.
• Overseeing the nature and scope of internal audit and
co-ordination with the activities of the external auditor.
• Reviewing the effectiveness of the Group’s systems
for internal financial control, financial reporting and
risk management.
Main activities in 2020
• Review and approval of interim and year-end financial
statements and supporting schedules, including
management papers on significant areas of judgement.
• Review of reports prepared by the external auditor,
including its annual audit plan and a report on the
year-end financial statements.
• Review and approval of the Group’s annual Internal Audit
Plan and oversight of the evolution of the Group’s risk
management and internal audit policies and procedures.
• Review of the recognition and reporting of the Group’s
disposal of a minority of its assets in April 2020, including
relevant tax matters.
• Monitoring of the impact of COVID-19 on the Group,
including management’s reporting of this through market
communications, the Interim Report and the Annual
report and accounts.
Audit Committee membership
The Committee comprises all the independent Non-executive
Directors. It was chaired during the year under review
by Graeme Bissett, who is a Chartered Accountant with
recent and relevant financial experience. Jamie Richards,
appointed to the Committee on 23 April 2020, is also
a Chartered Accountant and has held senior executive
positions, which included financial responsibility. The other
independent Non-executive Directors who served during
the year are all deemed to have the necessary ability
and experience to understand financial statements.
The Committee meets at least three times a year, generally
just prior to Board meetings, to facilitate immediate and
efficient reporting to the Board, with additional meetings
where necessary. The external auditor, Head of Group
Internal Audit or Senior Internal Audit Manager, the
Chief Executive Officer, the Chief Financial Officer and
the Chief Operating Officer attend Committee meetings
by invitation. The Committee also meets privately with
the external auditor without management being present.
The Chairman of the Committee maintains a regular
dialogue with the Chief Financial Officer and his team, and
with the Head of Group Internal Audit and Senior Internal
Audit Manager.
Objectives and responsibilities
The Committee’s key objectives are: to provide effective
governance over the Group’s financial reporting and the
performance of the external auditor; to provide oversight
of the Group’s systems of internal financial control; and
to report to the Board on these matters.
In fulfilment of these objectives the Committee:
• reviews the effectiveness of the Group’s internal financial,
operational and compliance controls and risk management
processes, including arrangements for employees
to raise concerns (in confidence);
• reviews the annual internal audit programme and the
consideration of findings of any internal investigations
and management’s response;
SMS Annual report and accounts 2020 89
• reviews SMS’s financial statements and announcements
and considers whether these statements and
announcements provide a fair, balanced and
understandable view of the strategy, business model and
performance of the Group and of the associated risks;
The Committee is satisfied that the Group’s whistleblowing
policies and procedures, detailed further on page 87,
are effective, facilitate the independent investigation of
reported matters and allow appropriate follow-up action
to be taken.
• considers the appropriateness of accounting policies
and significant accounting judgements and the disclosure
of these in the financial statements; and
• recommends the appointment of the external auditor,
approves their remuneration and oversees their work
and overall effectiveness, including their relationship
with management.
Internal control and risk management
The Committee has primary responsibility for the
oversight of the Group’s internal control, including the
risk management framework and the work of the Group
Internal Audit function.
The Group has in place an internal control environment
to protect the business from the material risks which
have been identified. Policies and procedures, including
clearly defined levels of delegated authority, are clearly
communicated across the Group. Management is
responsible for establishing and maintaining adequate
internal controls and the Committee has responsibility for
monitoring the effectiveness of these controls. It achieves
this through reports received from the Company, along
with those from both the internal and external auditors.
Risk registers are maintained and regularly reviewed by
management. The Board, including the Audit Committee,
considers the principal risks, the nature and extent
of the Company’s risk management framework and the
risk profile that is acceptable in order to achieve the
Company’s strategic objectives.
The Group’s system of internal control is designed to manage,
rather than eliminate, the risk of failure to achieve business
objectives, and it must be recognised that it can only
provide reasonable and not absolute assurance against
material misstatement or loss.
During the year, the Committee has not identified, nor
been advised of, any failings or weaknesses in the internal
control systems or risk management processes that are
determined to be significant.
Whistleblowing
The Board has overall responsibility for monitoring the
Group’s whistleblowing arrangements. It has delegated this
to the Committee, which updates the Board on a regular
basis on all significant whistleblowing matters raised.
The Committee receives reporting by exception when there
has been a whistleblowing case raised to a line manager,
the Group General Counsel or Group HR Director, or
through the Group’s independent whistleblowing hotline.
During the year, there were no incidents reported.
Internal audit
The Group Internal Audit function is independent and
objective and its role, as defined in the Internal Audit
Charter, is to add value and improve the organisation’s
operations and controls. The leader of Group Internal
Audit reports functionally to the Audit Committee and
administratively to the executive management team.
The Chair meets with the leader of Group Internal Audit
periodically without executive management present
to set annual objectives and discuss any significant or
emerging issues. Group Internal Audit uses a risk-based
approach to conduct several strategic and operational
audits throughout the year and these are reported and
discussed at each Audit Committee meeting. Monitoring
the scope, extent and effectiveness of the Group’s internal
audit activities is an agenda item at each Committee
meeting. Group Internal Audit is also responsible for
confirming that management actions and improvement
points raised within each audit report have been
implemented effectively and in a timely manner.
Throughout 2020, Group Internal Audit has worked
with the Board, the executive management team and
members of management to support the continued
development of a robust risk management framework
upon which it can place reliance for identifying areas of
risk to be considered for inclusion in the annual Internal
Audit Plan.
A full risk-based annual Internal Audit Plan for 2020 was
reviewed and approved by the Committee in November
2019. The programme was focused on addressing several
key risk areas including cyber security, sub-contractor
management and oversight, inventory, and the
implementation of the Group’s new Enterprise Resource
Planning system. Reviews were carried out, findings
reported to the Committee, recommendations tracked
and their close-out monitored. No significant weaknesses
were identified from the reviews undertaken by Group
Internal Audit during the reporting period and throughout
the financial year.
The Audit Plan for 2021 was approved by the Committee
at the end of 2020.
The Committee has remained in active discussion with
Group Internal Audit about the existing risks the Group
faces as it continues to grow, including the impact of
industry and regulatory changes, systems development
and pervasive external risks such as cyber and data
security. During 2020, Group Internal Audit was also
heavily involved in assessing the risk posed by COVID-19,
and its associated business impact. See further details
in the Principal risks and uncertainties section on page 64.
Strategic reportGovernanceFinancial statements
90 SMS Annual report and accounts 2020
AUDIT COMMITTEE REPORT continued
Financial reporting
The Committee has reviewed with both management
and the external auditor the annual Financial statements,
focusing on: the overall truth and fairness of the results and
financial position, including the clarity of disclosures shown
in the statements and their compliance with best-practice
requirements; the appropriateness of the accounting
policies and practices used in arriving at those results;
the resolution of significant accounting judgements or of
matters raised by the external auditor during the course
of the annual statutory audit; and the quality of the Annual
report and accounts taken as a whole, including disclosures
on governance, strategy, risks and remuneration, and
whether it gives a fair, balanced and understandable
picture of the Group.
In particular, the Committee considered the impact of
COVID-19 on the Group and the reporting of these impacts
throughout the Annual report and accounts. To assist
in this process, the Committee reviewed comments arising
from the review of the Financial statements by the
Executive Directors and comments raised by the Group’s
external auditor.
The Committee also considered the use of alternative
performance measures by the Group, including the
appropriateness of their current use and their disclosure
in the Financial statements and Strategic report.
Process
In reaching its conclusions the Audit Committee considered
the thorough process in place to create the Annual report
and accounts 2020, including:
• the involvement of the Committee in the preparation
of the Annual report and accounts 2020 which enabled
it to provide input into the overall messages and tone;
• the input provided by Group senior management and
the process of review, evaluation and verification to
ensure balance, accuracy and consistency;
• the review by the Committee of management’s papers
on critical accounting judgements and assumptions,
including key sources of estimation uncertainty, detailing
the approach taken and conclusions reached;
• the opportunity for the Non-executive Directors to meet
the external auditor without any executive of the Group
being present via the private sessions of the Committee;
• review of the external auditor’s report on the Annual
report and accounts 2020, presented to the Committee
prior to final sign-off;
• review and consideration of the draft Annual report and
accounts 2020 in advance of the final sign-off; and
• the final sign-off process by the Board.
Fair, balanced and understandable – what does this mean?
Below are the key considerations the Committee makes when assessing these three components:
Fair
• Is the whole story presented?
• Is the narrative reporting in the front of the Annual report and accounts 2020 consistent with the reporting in the
Financial statements?
• Are the key messages in the narrative reporting reflective of the financial reporting?
• Is there sufficient information included to understand the underlying performance of the Group and its divisions?
Balanced
• Is there a good level of consistency between the narrative reporting in the front and the financial reporting in the
back and is the messaging in each consistent when read independently of each other?
• Does the narrative reporting reflect both the positive and negative aspects of performance?
• Are both the statutory and adjusted financial measures explained clearly with appropriate prominence?
• Are the key judgements referred to in the narrative reporting and the significant issues reported in the Audit
Committee report consistent with the disclosures of key estimation uncertainties and critical judgements set out
in the Financial statements?
• How do the significant issues identified compare with the risks that the external auditor plans to include in its report?
Understandable
• Is there a clear and understandable structure to the report?
• Are the important messages highlighted appropriately and consistently throughout the document?
• Is the narrative within the Annual report and accounts 2020 straightforward and transparent?
• Is the layout clear with good linkage throughout?
SMS Annual report and accounts 2020 91
Going concern
The Committee reviewed management’s paper on going concern. The Committee assessed and challenged the Group’s
forecasts and cash flow projections, including consideration of various possible outcomes of future performance and
forecast capital expenditure and the potential impact of uncertainties including the COVID-19 pandemic. The Committee
also considered the Group’s financing facilities and future funding plans. Based on this, the Committee is satisfied that the
Financial statements should be prepared on a going concern basis.
Significant matters considered in relation to the Annual report and accounts 2020
Significant areas considered by the Committee in relation to the 2020 Financial statements are set out in the below table:
Area of judgement
Matter considered
Action
Impact of
COVID-19
The presentation of costs attributable to
COVID-19 as exceptional. This includes costs
that would ordinarily be capitalised as directly
attributable to the installation of meters,
together with additional reasonably expected
credit losses arising on trade receivables
as a result of the pandemic.
During the year and throughout the Group’s year-end
processes, the Committee gave particular focus to the impact
of COVID-19 on the business. This is explained here and through
the significant matters set out below.
Where relevant, the Committee received papers from
management setting out its approach and recommendations.
The Committee reviewed and challenged management’s
approach, analysis and recommendations, taking into
account input from the external auditor in order to conclude
on the appropriateness of the treatment in the Financial
statements.
All matters reviewed were concluded to the satisfaction
of the Committee. The classification of certain costs as
exceptional was deemed to be consistent with the Group’s
accounting policy as material costs attributable to a rare
macroeconomic event.
Appropriateness
of capitalisation
of overheads
and other expenses
within meter assets
SMS continues to carry out a significant
level of in-house installation of meter
assets, certain costs of which are capitalised
and depreciated as part of fixed asset
depreciation.
The Committee considered management’s capitalisation
process and the assumptions and judgements used when
determining which costs are directly attributable
to bringing the meter assets into use and therefore eligible
for capitalisation.
The impact of COVID-19 on management’s capitalisation
process was also assessed, and the Committee reviewed
management’s analysis of costs that would ordinarily be
capitalised as directly attributable to the installation of meter
assets, but have remained in the consolidated
income statement as a result of the lower installation
volumes caused by the pandemic.
The Committee was satisfied that the costs identified by
management for capitalisation were appropriate, being
directly attributable labour costs and an appropriate
allocation of overheads. In addition, the Committee was
satisfied that the decision to classify costs recorded in the
consolidated income statement, that would ordinarily
be capitalised, as exceptional, was appropriate.
Strategic reportGovernanceFinancial statements
92 SMS Annual report and accounts 2020
AUDIT COMMITTEE REPORT continued
Significant matters considered in relation to the Annual report and accounts 2020 continued
Area of judgement
Matter considered
Action
Identification
of indicators of
impairment of
the meter asset
portfolio in
accordance
with IAS 36 and
assumptions
applied in
determining the
carrying value
of the portfolio
of meter assets
Due to the uncertainties associated with the
timing of the domestic smart meter rollout,
the expected useful life and carrying value
of traditional meters requires significant
judgement, as does the level of recoverability
of termination income. These assumptions
are used in deriving the depreciation rates
applied and the impairment calculation
performed on carrying value.
Several factors are considered in assessing
the expected pace of the smart meter
replacement programme, including the
number of smart meters still to be installed
and the churn of assets.
The new regulatory framework for the next
phase of the UK smart meter rollout, to be
implemented from 1 July 2021, has been
assessed by the Group in relation to these
carrying value considerations.
The Committee considered the judgements made by
management, including the quantum and disclosure of
relevant amounts.
The Committee confirmed with management that the
Financial statements include a reduced charge for
depreciation on the domestic traditional meter asset
portfolio, as a result of a change in estimate to extend
the useful life of all opening assets from 31 December 2022
to 1 July 2025. The Committee is satisfied that this change
is consistent with the UK Government’s confirmation
in the year that a new four-year framework will be
implemented from 1 July 2021, effectively extending the
smart meter rollout to 1 July 2025. This extension also
supports the installation delays caused by COVID-19
restrictions. The Committee considered that judgements
and estimates used in support of this revised estimate were
reasonable. It was confirmed with management that there
have been no other changes to accounting estimates with
regard to property, plant and equipment.
The Committee considered the accounting estimates and
judgements used to arrive at the expected useful economic
life of the traditional meter assets and their carrying value
at 31 December 2020.
The Committee understands, and agrees with, management’s
view that no impairment review was considered necessary
at 31 December 2020 as the previous impairment review at
31 December 2019 showed a significant excess of recoverable
amount over carrying amount, and management concluded
that there were no reasonably possible changes in the key
assumptions that would cause the carrying amounts of the
traditional meter portfolio to exceed the value in use. There
have also been no material events during the year that would
eliminate this excess. As a result of COVID-19, and the
temporary suspension of all smart meter installation activity,
there has been a lower volume of traditional meter asset
removals. In addition, as detailed above, the useful economic
life of traditional meter assets has been extended to 1 July 2025.
The Financial statements provide appropriate commentary
on this and the Committee considers that the position
presented in the Financial statements provides a reasonable
view of the carrying value of traditional meter assets.
The Committee is satisfied that charges for losses on disposal,
net of termination income, and for impairment of this asset
class, should be recorded as exceptional items, as this
classification will assist understanding of the performance
of the continuing meter estate comprising Industrial &
Commercial (I&C) meters and domestic smart meters
(as distinct from the effect of discontinued traditional meter
assets). The Committee is also satisfied that amounts arising
in relation to the loss of first-generation smart meter assets
(‘SMETS1’ meter assets) should be recorded as exceptional
items, on the basis that these disposals are attributable
to the temporary industry transition period.
Overall, the Committee is satisfied that the approach taken
by management to review the expected useful life and
estimate the carrying value of meter assets is appropriate
and the assumptions applied are sensible and supportable.
SMS Annual report and accounts 2020 93
The Committee recognises that the independence of the
external auditor is an essential part of the audit framework
and the assurance that it provides. The external auditor
confirms its independence at least annually. As a matter of
principle, the Group’s auditor is not engaged for non-audit
services, thus ensuring that its independence and
objectivity are not impaired.
Having completed this review, the Committee concluded
that the audit process, independence and quality of the
external auditor was satisfactory, and has recommended
to the Board that EY be reappointed as the Company’s
auditor for FY 2021. Accordingly, a resolution proposing
EY’s reappointment will be tabled at the forthcoming
Annual General Meeting.
Graeme Bissett
Chair of the Audit Committee
16 March 2021
External auditor
Ernst & Young LLP (EY) has remained in place as auditor
since 2015, when the practice was appointed following
a formal tender process undertaken by the Group for
FY 2015. The external auditor is required to rotate the
audit engagement partner every five years. The current
engagement partner, Kevin Weston, began his
appointment from FY 2017 and therefore FY 2021 will
be his last year.
External auditor appointment, independence and
effectiveness
The Committee’s primary responsibility is to make
a recommendation on the appointment, reappointment
and/or removal of the external auditor. The Committee
considers a number of areas when reviewing the external
auditor appointment, namely the auditor’s performance
in discharging the audit, the scope of the audit and terms
of engagement, auditor independence and objectivity,
criteria for auditor reappointment, and auditor remuneration.
Every year, the Committee assesses the effectiveness
of the audit process and the external auditor. In carrying
out its assessment in 2020 it considered:
• feedback from the Chief Financial Officer and his team,
who monitor the external auditor’s performance,
behaviour and effectiveness during the exercise of
its duties;
• all key external auditor plans and reports, which were
discussed and challenged;
• the regular engagement with the external auditor
during Committee meetings and ad-hoc meetings,
including meetings without any member of management
being present;
• how the auditors support the work of the Committee
and how the audit contributes insights and adds value;
• the Committee Chair’s discussions with the Senior
Statutory Auditor ahead of each Committee meeting;
and
• the independence and objectivity of the external auditor.
The Committee also reviewed the proposed audit fee and
terms of engagement for FY 2020. Details of the fees
paid to the external auditor during the financial year can
be found in note 3 to the Financial statements.
Strategic reportGovernanceFinancial statements
94 SMS Annual report and accounts 2020
NOMINATION COMMITTEE REPORT
Members and attendance
Meetings
Willie MacDiarmid (Chair)1
Miriam Greenwood (Chair)2
Graeme Bissett
Ruth Leak
Jamie Richards3
Alan Foy
1 Willie MacDiarmid resigned on 23 June 2020. He chaired the
Nomination Committee, and attended all Nomination Committee
meetings, up to his resignation.
2 Miriam Greenwood was appointed Chair of the Nomination
Committee on 23 June 2020.
3 Jamie Richards was appointed on 23 April 2020 and attended
all Nomination Committee meetings following his appointment.
Role of the Committee
• To review the structure, size and composition (including
skills, knowledge, experience, diversity and balance of
Executive and Non-executive Directors) of the Board
and its Committees and make recommendations to the
Board with regard to any changes.
• Identify and nominate, for the approval of the Board,
candidates to fill Board vacancies or expand the Board.
• Keep under review the time commitment expected from
the Chairman and the Non-executive Directors.
Main activities in 2020
• The appointment of Miriam Greenwood, an existing
Non-executive Director, as Chairman to succeed
Willie MacDiarmid from 23 June 2020.
• The appointment of Jamie Richards as a new
Non-executive Director from 23 April 2020.
Nomination Committee membership
The Nomination Committee is currently made up of one
Executive Director, namely the Chief Executive Officer,
and all the independent Non-executive Directors, each
of whom is independent.
The Committee is chaired by the Chairman, unless the
matter under discussion is his or her own succession.
Other Directors are invited to attend as appropriate
and only if they do not have a conflict of interest. The
Committee is also assisted by executive search consultants
as and when required.
The Committee generally meets at least twice a year,
with additional meetings where necessary. During 2020,
the Committee met on two occasions. However, in addition,
several informal meetings and discussions were held with
the Chief Executive Officer and others as part of the key
appointment processes that took place in the year.
Chairman succession
Willie MacDiarmid was appointed to the position
of Chairman in May 2016, having joined the Board as
a Non-executive Director in April 2014. Over the past
five years he has chaired SMS through a period of
sustained growth, overseeing the development of the
Group’s strategy against a backdrop of extensive change
in the UK energy market. Following the completion of the
Group’s sale of a minority of its meter portfolio and the
announcement of its new, enhanced dividend policy and
investment plan into carbon reduction (‘CaRe’) assets,
the Annual General Meeting felt like an appropriate time
to step down.
Having been a member of the Board of the Company
for over six years in a Non-executive Director capacity,
I was recommended to the Board as Willie’s successor and
I am pleased to confirm that my proposed appointment
received unanimous agreement. I am delighted to be
stepping up as Chairman at such a pivotal point in the
Company’s journey and hope that, through my extensive
knowledge of the business and the industry, and my
experience outside SMS, I can bring value to the role.
Appointment of new Non-executive
Director
With the continued success of the business in investing
in long-term infrastructure assets, the Board wished to
further strengthen the Non-executive directorship with
an experienced infrastructure investment background.
After discussion, the Committee therefore agreed that the
appointment of a new Non-executive Director with relevant
capabilities would be appropriate and would both enhance
and preserve the Board’s collective experience.
A rigorous search process was initiated, which resulted in
the recommendation to appoint Jamie Richards with effect
from 23 April 2020. Jamie’s biographical details are set out
on page 75.
Board inclusion and diversity
The Nomination Committee focuses on the leadership
required for SMS to fulfil its purpose, achieve its vision and
execute its strategy. This requires a clear focus on inclusion
and diversity to maximise the skills and capabilities from
which SMS can benefit. Our policy is to have a broad range
of skills, backgrounds and experience on the Board.
SMS Annual report and accounts 2020 95
Board composition
Gender
Tenure
Board composition
5
Male
2
Female
3
1-3 years
2
3-6 years
2
>6 years
3
Executive Directors
3
Independent
Non-executive
Directors
1
Independent
Non-executive
Chairman
Sector experience
Technology
Finance
Mergers and acquisitions
Marketing
Sales
4
3
4
2
3
We do not set any specific targets, but we fully recognise
the benefits of greater diversity and will continue to
take account of this when considering any particular
appointment. We will continue to ensure that we appoint
the best people for the relevant roles.
As the Group continues to develop, all Directors will be
consulted on the composition of the Board in the context
of this growth. This includes its size, the appropriate
range of skills and the balance between Executive and
Non-executive Directors, all of which are assessed as
part of the annual Board evaluation process.
Miriam Greenwood
Chair of the Nomination Committee
16 March 2021
Non-executive Director search and
appointment timeline
November 2019
• Nomination Committee confirmed the rationale for
the appointment of an additional Non-executive
Director to the Board.
• Sapphire Partners1 was engaged to support the
search process and a detailed candidate
specification was agreed.
January 2020
• Sapphire Partners conducted a search against the
candidate specification.
• Discussions were held with prospective candidates
to generate a long-list for Committee review.
• Through Committee discussion, and with views
invited from the Executive Directors, a shortlist was
agreed for interview.
March 2020
• Shortlisted individuals were initially interviewed by
the members of the Committee and the Executive
Directors.
• Three individuals were selected for a final-stage
interview with a panel of other Directors (Executive
and Non-executive). Jamie Richards was identified
to be a strong fit for the role specification, with
considerable experience in the infrastructure
and solar sectors.
• Directors who had not yet met Jamie were invited
to do so, following which the Committee agreed
an appropriate recommendation for the Board.
• After confirmation that Jamie was able to devote
the required time to the role and had no actual or
potential conflicts of interest to declare, the
Committee recommended, and the Board approved,
his appointment with effect from 23 April 2020.
Jamie joined all the Group’s Board committees
and was appointed Chair of the Remuneration
Committee at the same time.
1 Sapphire Partners, an external recruitment consultancy, have
no other connection with the Group, or with other individual
Directors, except for the provision of Non-executive Director
recruitment services.
Strategic reportGovernanceFinancial statements
96 SMS Annual report and accounts 2020
REMUNERATION COMMITTEE REPORT
Members and attendance
Meetings
Jamie Richards (Chair)1
Miriam Greenwood2
Graeme Bissett
Ruth Leak
Willie MacDiarmid3
1 Jamie Richards was appointed on 23 April 2020 and chaired
all Remuneration Committee meetings following his appointment
as Chair on 23 June 2020.
2 Miriam Greenwood chaired all Remuneration Committee
meetings until she stepped down as Chair on 23 June 2020.
3 Willie MacDiarmid attended all Remuneration Committee
meetings until his resignation on 23 June 2020.
Miriam Greenwood stepped down as Chair of the
Remuneration Committee on 23 June 2020 to assume
the duties of Chair of the Company. I replaced Miriam
as Chair of the Remuneration Committee from this date
and I would like to thank her for both her contribution
to the Remuneration Committee over the years and her
support during the handover.
As Chair of the Remuneration Committee, I am pleased to
present the Directors’ Remuneration Report (the Report)
for the financial year ended 31 December 2020. The report
has been prepared by the Committee and approved by the
Board of Directors (the Board).
The Committee endeavours to ensure transparency in
respect of the Company’s policies for Executive Director
and senior management remuneration and aims to provide
clear reporting on both past remuneration and future policy.
The report has been arranged in the following three parts:
• The Annual statement from the Chair of the
Remuneration Committee, summarising and explaining
the major decisions on, and any substantial changes to,
Executive Directors’ remuneration in the year.
• The Directors’ remuneration policy (‘the Policy’), which
sets out the Group’s forward-looking policy for Executive,
Non-executive Directors and senior management and
the key factors which were taken into account in setting
the Executive Directors’ and senior management
remuneration policy.
• The Annual report on remuneration, which sets out
details of Executive Directors’ remuneration for the
financial year ended 31 December 2020. The Annual
report on remuneration is subject to an advisory
shareholder vote at the Annual General Meeting (AGM),
due to be held in May 2021.
Membership of the Committee and
attendance
The Committee comprises independent Non-executive
Directors and is chaired by Jamie Richards, with Graeme
Bissett, Miriam Greenwood and Ruth Leak also being
members. The Remuneration Committee met four times
during the year and the attendance at those meetings is
shown on page 79. The Company Secretary attends all the
Committee meetings as Secretary to the Committee and,
by invitation, they are also attended by the Chief Executive
Officer, Chief Operating Officer, Chief Financial Officer,
Group Human Resources (HR) Director and external
professional advisers, for all or part of any meeting as and
when appropriate and necessary. No Executive Director is
involved in any decision relating to their own remuneration.
Role and responsibilities of the Committee
The Committee is primarily responsible for determining
and making recommendations to the Board on the policy
for the remuneration and employment terms of the
Executive Directors, and for the effective implementation
of that policy. The Committee has a formal and transparent
procedure for developing policy on remuneration, taking
into account all relevant factors such as individual and
Group performance and remuneration payable by
companies of a comparable size and complexity. The
Committee reports to the Board on its activities and makes
recommendations, all of which have been accepted under
the period of review. The Committee is also responsible
for the review of, and making recommendations to the
Board in connection with, share incentive plans and
performance-related pay schemes and their associated
targets as well as the oversight of employee benefit
structures across the Group.
Advisers
FIT Remuneration Consultants LLP (FIT) provides
advice to the Committee on matters relating to Executive
remuneration and all-employee share awards. The
Committee also engaged Verditer Consulting Limited
to assist with a Groupwide review of employee career
bandings and grading structures. Both Verditer Consulting
and FIT Remuneration Consultants are considered to be
independent of both the Board and each of the Executive
and Non-executive Directors. They have not provided
any other services to the Directors or to the company
and their advice is therefore considered to be objective
and independent.
SMS Annual report and accounts 2020 97
Annual statement from the Chair of the Remuneration Committee
• Approved option award to senior management.
• Discussed and considered gender pay gap reporting.
• Discussed and considered the design of a new long-term
incentive plan scheme.
Remuneration outcomes for the year ended
31 December 2020
The Company’s remuneration policy is designed to ensure
that the Executive Directors and senior management
are fairly and responsibly rewarded for their individual
contribution to the overall long-term performance of the
Company, in a manner that ensures that the Company
is able to attract, motivate and retain Executives of the
quality necessary to ensure the success and sustainability
of the Company.
The remuneration of Executive Directors and senior
management is structured to ensure that:
• the fixed elements of pay, salary, pension and benefits
are benchmarked against comparable companies of
similar size and complexity;
• Executive Directors and senior management are entitled
to both short-term and long-term incentives, in the form
of cash bonuses and share options. Both the short-term
and long-term incentives are underpinned by
performance criteria linked to the Group’s performance;
and
• remuneration rewards the achievement of specific KPIs
which include, inter alia, the delivery of long-term value
to shareholders, at all times underpinned by a safe
operating environment, compliance with relevant health
and safety policies, and outstanding service to customers.
In determining the remuneration of Executive Directors, the
Remuneration Committee also ensures that remuneration
arrangements are:
• transparent and measurable;
• not excessive, thus mitigating the reputational and
behavioural risks that could arise from target-based
incentive plans; and
• aligned to our culture, such that they drive behaviours
consistent with our core values.
The Group’s strategy is designed to enable the business
to continue to grow both its profitability and market share
by striving to deliver smart energy solutions to realise
a greener, more sustainable future. The Remuneration
Committee is committed to structuring executive
remuneration that is competitive, enables the Group
to attract, retain and motivate Executives of the calibre
required to further develop and execute the Group’s
strategy successfully, and which rewards good performance.
A proportion of total remuneration is performance-based
and linked to the achievement of current-year and longer-
term performance measures. Short-term performance
is incentivised via an annual bonus scheme which is based
on Company financial objectives as well as personal
performance objectives, which typically support strategic
initiatives. Long-term performance is incentivised by
a share option scheme, which is typically based on
delivering strong returns for the benefit of all stakeholders.
The Committee’s remit is as follows:
• To determine and recommend to the Board for approval
the policy on total remuneration of the Executive
Directors, and to monitor the effectiveness of the policy.
• To agree the key performance indicators (KPIs), and
corresponding targets, underpinning performance-
related pay schemes for the Executive Directors and
senior management.
• To approve the total annual payments made under
such schemes.
• To review and approve the design of all share incentive
plans for approval by the Board and shareholders. For
any plan, to determine each year the overall number of
awards and the individual awards to Executive Directors
and senior management.
• To determine the level of any payment made to the
Executive Directors or members of senior management
by way of compensation for, or otherwise in connection
with, loss of office or employment.
• To review and approve Groupwide salary increases.
• To review any major changes in employee benefit
structures throughout the Group.
Areas of activity in 2020
• Reviewed and approved the Directors’ Remuneration
Report in the FY 2019 Annual report and accounts.
• Reviewed the financial and strategic FY 2020 bonus
metrics and targets.
• Discussed and approved the FY 2020 Executive individual
cash bonus payments.
• Discussed and approved the enhanced maternity policy.
• Supported the review of employee banding and grading
structures.
Strategic reportGovernanceFinancial statements
98 SMS Annual report and accounts 2020
REMUNERATION COMMITTEE REPORT continued
Annual statement from the Chair of the Remuneration Committee continued
The remuneration policy includes a discretionary annual
bonus designed to incentivise Executive Directors
to achieve demanding annual targets relating to the
Company’s financial and operational performance,
as well as strategic and personal objectives. The policy
also includes an individual cash bonus for exceptional
contribution to projects outside the ordinary course of
business. The Group’s remuneration policies are weighted
according to various financial performance, operational
and strategic objectives, and the Committee continues
to be of the view that the policies support the objectives
of the Group and are aligned with the interests of our
shareholders and the wider workforce.
As set out in detail on pages 65 to 71, the Group achieved
a strong trading performance in 2020, despite Executives
and senior management dealing with difficult operating
conditions due to the COVID-19 pandemic. Notwithstanding
these challenges, the Group continued to grow annualised
recurring revenue, one of our key financial metrics, ahead
of expectations. As at 31 December 2020, the Group
had over 3.8 million metering and data assets under
management, of which 1.3 million are domestic smart
meters. Most importantly, there have been no significant
health and safety incidents in the year – especially pleasing
at a time when a core priority of the Group has been to
provide a safe and secure operating environment for all
our staff (see pages 54 to 55 for details). In addition, at
the start of the year the Company completed the largest
commercial transaction in its history, selling a minority
portfolio of meter assets in April for over £290m. The
introduction of this capital to the business has been pivotal
in transforming the capital structure, as it allowed the
business to repay its revolving credit facility and remain
cash positive for the remainder of the year. This transaction
substantially took place during FY 2019, but with the
executive management team in the business investing
significant effort in its successful conclusion at the start
of FY 2020. This was in addition to leading the Company in
the context of particularly challenging operating conditions
of FY 2019 in relation to technical challenges in the smart
meter market. In FY 2020 the executive management
team had to manage the impact of COVID-19. Despite
the continuing uncertain macroeconomic conditions, the
Group delivered a strong performance in FY 2020. This is
testament to the Group’s growing order pipeline, continued
focus on cost discipline ensuring operational excellence
in delivery of the UK smart meter rollout and, increasingly,
on the development of the next generation of energy
transition assets.
Remuneration payable for performance
in 2020
The sale of a minority portfolio of meter assets significantly
changed the capital structure of the Company and enabled
progress on a number of the Company’s key strategic
objectives. Each of the Executive Directors demonstrated
considerable effort and commitment in assessing the
appropriate financing structure to manage leverage and
develop longer term financial structuring solutions. This
was demonstrated in the sale of £17.6m of net index-linked
annualised recurring revenue (ILARR) for gross proceeds
of £291m with an implied multiple of 16.4x EBITDA. This has
subsequently reinforced the inherent value present within
our meter assets with their index-linked long-term cash
flows. The proceeds from the sale allowed the Group to
reset its leverage and return to a net cash-positive position.
The sale also enabled SMS to increase its dividend by 3.6x
to 25p per share, with the intention of 10% annual growth
until 2024, thereby significantly enhancing total shareholder
return. In addition, the successful completion of the
transaction has provided a financial platform for the
Company to begin to invest in other carbon reduction
(‘CaRe’) asset classes, a key strategic objective as we
believe our CaRe assets will accelerate the adoption
of renewable energy and make the energy system more
resilient. The Committee therefore felt it was appropriate
to award a discretionary individual cash bonus to the
Executive Directors and the senior management who
were heavily involved in the transaction. The Committee
awarded 40% of base salary in recognition of the
significant impact the transaction has made to the
Company and the exceptional contribution, commitment
and effort made in the completion of this landmark
transaction.
The Group delivered a performance that was slightly
ahead of market expectations, despite the difficult trading
conditions. Against the financial targets that were set for
the annual bonus, there was strong performance across
all areas. Looking at the wider context, good progress
was also made on many of our KPIs, including our strategic
objectives and the Executive Directors’ personal objectives.
Reflecting this strong performance during the year, the
annual bonuses paid to the Chief Executive Officer (CEO),
Chief Operating Officer (COO) and Chief Financial Officer
(CFO) were 75.0%, 80.5% and 73.5% of the maximum
respectively. These were in addition to the 40% discretionary
individual cash bonuses awarded in respect of the portfolio
sale detailed above.
SMS Annual report and accounts 2020 99
The Committee has considered whether the formula-
driven payouts under the incentive plans and resultant
total remuneration for Executives is appropriate, looking
at the broader context within which the performance has
been delivered. In particular, the Committee has noted
the following points:
majority of our people, been flexible with our leave and
working hours policies, and provided health and wellbeing
support across our business. Accordingly, our remuneration
policies and practices remain unchanged and the Committee
is delighted that our employees will continue to be properly
rewarded for their exceptional efforts at this time.
• Underlying profit performance represents a strong
achievement, demonstrating growth in challenging
conditions, coupled with the business delivering complete
continuity in our services and retaining our operational
capacity under an ever-developing environment as
a result of COVID-19.
• A secure platform for growth has been established from
both our contracted smart meter order pipeline and
our other CaRe assets.
• Sound progress has been made across a number
of key strategic initiatives. These include significantly
strengthening the balance sheet by the disposal of a
minority of meter assets allowing an optimal mix of debt,
equity and capital recycling for future capital funding
requirements, commitment to a net-zero carbon target
by 2030, or sooner, under our environmental, social and
governance (ESG) strategy, establishing an enhanced
and sustainable dividend policy generating a more
predictable return to shareholders. In addition in ensuring
an effective cost discipline in response to COVID-19
challenges and providing full financial support (without
participation in Government furlough scheme) for all
our staff throughout national and regional lockdowns.
The Committee is satisfied that there has been a robust
link between remuneration and performance and that
there is no need to use discretion to adjust the level of
remuneration payable. Full details of the annual bonus,
performance against targets and the resultant payments
are set out in the Annual report on remuneration.
Other Committee activities for the year
Our priority as a business throughout the impact of
COVID-19 has been, and will continue to be, the safety
and welfare of our colleagues and customers. It has been
heartening to see our people work together over the past
year to ensure this priority is met. It is in times of volatility
that embracing our purpose and values is most important,
and the Board has seen colleagues from across the
business live the SMS values during these testing times.
There is an economic impact from COVID-19, and both the
Committee and the wider Board are acutely aware of the
impact this unforeseen event has had on all businesses.
Unlike many, however, our business has remained relatively
resilient during this period. Throughout the impact of the
pandemic we provided full financial support (without
participation in the UK Government’s furlough scheme)
to all our staff and all employees were awarded a 2.5%
cost of living increase on 1 October 2020, which had been
delayed from 1 April 2020 due to the rapidly developing
situation at this time. In terms of commitments to our
colleagues, we have enabled home working for the vast
The Committee is periodically updated on wider employee
matters for example our wider workforce pay and
conditions, our gender pay statistics and our diversity
initiatives. The Committee has reviewed these elements
and is satisfied that the Executive remuneration structure
remains appropriate. In the coming year the Company
seeks to engage with employees as part of the process of
formulating the Directors’ remuneration policy or reviewing
Executive pay, and during FY 2020 the Company ran
several initiatives to obtain insights from the broader
employee population, including an employee engagement
survey. Further detail on engagement with employees
is given in the Our people section on page 50. The Group
HR Director supports the Committee by providing
oversight of workforce remuneration and related policies,
and at the July meeting of the Committee provided an
overview of annual remuneration across SMS. The
Committee members, as members of the Board, have
oversight of the employment surveys and going forward
will have direct engagement with the workforce through
employee forums to enable the Committee to advise the
Board whether Company policies and practices support
culture and strategy.
Our current employee engagement is through the following
areas:
• Share ownership – all employees across the Group are
offered the opportunity to participate in our Sharesave
plan.
• Pay and bonus budgets – the Committee, as members
of the Board, notes the total budgeted salary and bonus
expenditure for all SMS employees, ensuring reward
principles are aligned throughout the business.
• Direct engagement with our people – we will
communicate a link to the Annual report and accounts
2020 through our all-employee communication vehicle.
Employees will be invited to comment or ask questions.
The Committee continued to focus on the Company’s
reporting in relation to the gender pay gap, and continued
to promote equality and diversity amongst our employees.
SMS employs around 1,100 people across the UK. Women
make up 32% of our total workforce reflecting the historically
male dominated engineering industry. We have taken
positive action by becoming a member of the Tomorrow’s
Engineers Code, with a shared aim to increase the number
and diversity of those entering engineering. We recognise
we have more to do in increasing the representation of
women at all levels of the business, particularly at a senior
management level. Full gender pay gap reporting was
achieved in 2020, and further details can be found on the
Company’s website.
Strategic reportGovernanceFinancial statements
100 SMS Annual report and accounts 2020
REMUNERATION COMMITTEE REPORT continued
Annual statement from the Chair of the Remuneration Committee continued
Our ambition is to increase the number of women in our
business, while continuing to pay fairly, and to this end
we are committed to improving how we attract, engage
and develop women, as well as other under-represented
groups. During the year the Committee approved an
enhanced maternity policy following feedback from
employees during face-to-face values workshops and
‘temperature check’ sessions, coupled with analysis of the
gender pay gap results. The enhanced maternity policy is
one of a number of benefits and initiatives the SMS Group
is developing which benefit existing employees and will
provide an advantage in sourcing and attracting talented
people, by encouraging them to build rewarding long-term
careers with SMS.
The Committee is aware that the remuneration landscape
is evolving, and we will continue to monitor developments
and make recommendations to the Board as required.
Towards the end of FY 2020 the Committee initiated
a review of the long-term incentives on offer for Executive
Directors and other senior members of staff. Given the
development of the business and the need to incentivise
and reward long-term, sustainable performance, the
Committee is currently considering the introduction of
a Long-Term Incentive Plan (LTIP) to align the interests
of management with those of shareholders in growing the
value of the business over the long term. The final design
will be agreed and presented to the Board for consideration
during FY 2021.
We will continue to look for ways to enhance our proposition
as an employer of choice, while ensuring that we align the
interests of our staff with those of our shareholders. We
believe that our approach of rewarding carefully targeted
and stretching performance metrics will help deliver our
full potential value. As we continue to grow the business,
we will review compensation practices to ensure that we
can attract the best talent to our business. We aim for our
remuneration policies to encourage our staff to think and
act like business owners, with a real vested interest in the
success of our Company. The Committee unanimously
recommends that shareholders vote to accept the Annual
report on remuneration.
On behalf of the Board
Jamie Richards
Chair of the Remuneration Committee
16 March 2021
Another key area of focus for the Company has been the
structure of remuneration within the business, to ensure
there is a strong competitive reward framework that
has a solid foundation and is transparent and fair to
all employees. During the year, an external market
benchmarking exercise was conducted with Verditer
Consulting Limited to assess our employment grading
structure. Verditer’s recommendation is for a single grading
system that has clear and transparent remuneration
structures and will allow us to develop a pay model to aid
implementation and decision-making. In conjunction
with the employee grading structure review the Committee
also conducted an external benchmarking review of
Executive remuneration. This exercise entailed reviewing
the remuneration packages for all Executives taking into
consideration the responsibilities and scope of each role,
and the current and potential size of the business. Having
considered comparable roles, with assistance from our
advisers, the Committee concluded that all Executives
were paid in line with the market and, because of the
current economic environment no changes, out with
a cost of living increase, were proposed to the Executives’
remuneration at this time.
The Committee awarded share options to senior
management in June 2020 and February 2021 under the
existing Unapproved Share Option Plan. As with previous
grants under the Plan, share options are subject to market
capitalisation targets and non-market performance
criteria, which include the achievement of financial metrics
and personal objectives.
SMS Annual report and accounts 2020 101
Directors’ remuneration policy (the Policy)
This part of the Directors’ Remuneration
Report sets out the Group’s remuneration
policy with regard to its Executive and
Non-executive Directors.
The Company welcomes dialogue with its shareholders
over matters of remuneration. The Chairman of the
Remuneration Committee is available for contact with
institutional investors concerning the approach to
remuneration. The Policy will be displayed on the Group’s
website (www.sms-plc.com), in the Investor Relations
section.
Executive Directors’ remuneration
The main components of the Policy for the year ended
31 December 2020, and how they link to and support the
Company’s business strategy, are summarised below.
We do not disclose full details of the operational and
personal strategic objectives for the Executive Directors,
as we consider them to be commercially sensitive.
Our remuneration structure can be summarised as follows:
Fixed
1. Base Salary
2. Benefits
3. Pension
Variable 4. Annual Bonus
5. Discretionary Individual Cash Bonus
6. Share Options
Fixed – 1. Base Salary
Purpose and link to strategy
Operation
Link to performance
Base salaries are set to recognise
individual skill, experience and
performance, as well as the market
value of the role, so as to attract, retain
and motivate the best qualified staff to
deliver against the strategy and KPIs,
implement our business model, manage
our risks and exploit our opportunities,
while remaining disciplined about fixed
cost management.
Salaries are typically reviewed annually,
and take into account:
• Company performance
• the scope of role, and the experience
and performance of the individual
Director
• average workforce salary adjustments
within the Company
• the size, complexity and growth rate
of the Company.
Limitation:
Maximum increases are no greater than
inflation unless: (a) there has been a
material increase in industry rates; (b)
changes in role have taken place with
enhanced responsibility; or (c) there has
been a reward for individual development.
Base Salary is not conditional on
performance, any salary increases will
generally be in line with those awarded
to salaried employees. In certain
circumstances (including, but not limited
to, changes in role and responsibilities,
market levels, individual and Company
performance) higher increases may
be made.
2020 application
Inflation-linked pay rises of 2.5% were granted to Executive Directors. Due to the developing COVID-19 situation at the time, this
increase was suspended from 1 April 2020 until 1 October 2020.
Executive remuneration was reviewed in line with market trends and remained unchanged. This has been the case for the past
three years, with only inflationary increases awarded.
Fixed – 2. Benefits
Purpose and link to strategy
Operation
Link to performance
To complement base salary by providing
market-competitive benefits to attract
and retain Executives.
Reviewed from time-to-time to ensure
that benefits, when taken together with
other elements of remuneration, remain
market-competitive.
Benefits are not conditional on
performance, but we believe they enhance
recruitment and retention of talent and
improve staff wellbeing.
Limitation:
Benefits are set by the Committee at levels
appropriate for our business relative to the
market.
The cost of providing these benefits varies
year-on-year depending on the schemes’
premiums. The Remuneration Committee
monitors the overall cost of the benefits
package.
Strategic reportGovernanceFinancial statements
102 SMS Annual report and accounts 2020
REMUNERATION COMMITTEE REPORT continued
Directors’ remuneration policy (the Policy) continued
Fixed – 3. Pension
Purpose and link to strategy
Operation
Link to performance
To provide retirement benefits which, when
taken together with other elements of the
remuneration package, will enable the
Company to attract and retain Executives
of a high calibre.
The Executive Directors (together with all
other eligible staff) are able to participate
in the Company’s defined contribution
(money purchase) pension scheme.
Pension contributions are not conditional
on performance, but we believe that they
enhance recruitment and retention
of talent and improve staff wellbeing.
Limitation:
Contributions are based on percentage
of salary, ranging from the statutory
minimum to a maximum of 5% of salary.
Variable – 4. Annual Bonus
Purpose and link to strategy
Operation
Link to performance
To reward Executives for achieving key
financial, operational and strategic annual
goals, by selecting measures that drive
long-term shareholder value.
The Executive Directors (together with the
senior management team) participate in
a discretionary, annual, performance-
related bonus scheme. Targets are set
at the beginning of each year based on the
recommendations of the Remuneration
Committee.
For the Executive Directors, the maximum
potential bonus is 100% of annual base
salary.
The Committee applies discretion to the
final bonus payout, taking into account
performance against targets and
underlying performance of the Company.
Bonuses are paid in cash based on the
audited financial results.
The Committee determines annual metrics
based on approved budgets and priorities
for the forthcoming year. The annual
bonus is based on three weighted areas:
financial performance, operational targets
and strategic objectives. All three areas
encompass business and personal
elements. Performance measures under
each area are determined annually
and the Committee is able to adjust the
weighting of the areas annually based
on prevailing business needs.
2020 application
Details of the measures, to the extent they are not commercially sensitive, are shown below.
Financial performance
As a result of strong underlying financial performance, the Group exceeded the threshold of underlying profit before tax, ILARR and
cash collection targets for the purposes of awarding the 2020 annual bonuses allocated to the Executive Directors.
Underlying profit before taxation (PBT)
ILARR
Working capital management
Threshold
£m
14.2
77.0
-
Maximum
£m
15.6
83.0
-
Actual
£m Actual payout (Maximum payout)
15.2 CEO 20% (25%), COO 16% (20%), CFO 8% (10%)
77.0 CEO 12.5% (25%), COO 10% (20%), CFO 5% (10%)
- CEO n/a (n/a),
COO 2% (2.5%), CFO 20% (25%)
Operational performance
The operational performance targets for each Executive Director were set against a range of strategic targets at the start of the year
covering health and safety, sales development, leadership and delivery of major projects, and strategic planning. Due to differing
objectives between Executive Directors, total operational results are shown below for each Executive.
Operational objectives
CEO 25% (30%), COO 21% (22.5%), CFO 25% (30%)
Individual strategic performance
The personal element of the bonus is focused on the Executive Directors’ individual contributions in each of the following categories:
leadership, structure, team, culture and behaviour. The Committee assesses each element against targets set at the start of the year.
Individual strategic objectives
CEO 17.5% (20%), COO 31.5% (35%), CFO 15.5% (25%)
SMS Annual report and accounts 2020 103
Variable – 5. Discretionary Individual Cash Bonus
Purpose and link to strategy
Operation
Link to performance
Only paid to recognise an exceptional
contribution to a discrete project outside
the ordinary course of business, requiring
the Executive Director to commit time and
effort significantly over and above their
normal duties.
Bonus to be paid at the discretion of
the Remuneration Committee and based
on the formal recommendation of the
Committee.
Maximum potential bonus is at the
discretion of the Remuneration
Committee.
The Committee evaluates the contribution
of the Executive Director to any project
outside the ordinary course of the
business, with a particular emphasis
on the level of commitment made by the
Executive Director.
2020 application
An award of 40% of base salary was made to each Executive Director due to the successful completion of the disposal of a minority
portfolio of our assets, which resulted in transformation of the Company’s capital structure by allowing the business to repay all
outstanding debt on its revolving credit facility, while demonstrating the inherent value present within our meter assets. The transaction
allowed the enhancement of shareholder return by way of a revised dividend policy and also allowed the Company to invest in CaRe
asset classes. The Committee also took into account the exceptional contribution, commitment and effort that this required from all
three Executive Directors, over and above their normal duties during what has been an exceptional year.
Variable – 6. Share Options
Purpose and link to strategy
Operation
Link to performance
To motivate Executive Directors and
incentivise the delivery of sustained
performance over the long term, and to
promote alignment with shareholders’
interests.
Options vest in annual tranches. The
vesting of each annual tranche takes
place by reference to distinct annual
performance period.
The Committee will determine market
capitalisation targets, financial targets
and individual objectives to ensure they
are aligned with the corporate strategy.
The share options cannot be exercised for
a period of five years from the grant date,
other than in specific circumstances.
The Committee will review the metrics,
financial targets and where applicable
individual objectives prior to grant to
ensure they are aligned with the long-term
strategic goals.
Non-executive Directors
The remuneration of the Non-executive Directors, including the Chairman, is determined by the Executive Directors
after external benchmarking. Non-executive Directors and the Chairman do not participate in incentive arrangements
or receive other remuneration in addition to their fees.
Each of the Non-executive Directors has a letter of appointment stating their annual fee and that their appointment
is for a term of three years. Their appointment may be terminated on three months’ written notice at any time.
Purpose and link to strategy
Fees
To attract and retain Non-
executive Directors with an
appropriate degree of skills,
experience, independence and
knowledge of the Company and
its business.
Operation
Potential remuneration
Performance
metrics
Any fee increases are applied in
line with the outcome of the
annual review. Non-executive
Directors did not receive a
cost-of-living increase in FY 2020.
n/a
Fee levels for Non-executive Directors are
generally reviewed by the Board annually.
Remuneration comprises an annual fee for
acting as a Non-executive Director and
serving as a member of any Committees.
Additional fees are paid in respect
of service as Chairman of a Committee
or as Senior Independent Director. When
reviewing fees, reference is made to fees
for the same comparator group as is
used for Executive Directors, as well as
information gathered from a number
of remuneration surveys, and assessment
of the extent of the duties performed and
the size of the Company.
Strategic reportGovernanceFinancial statements
104 SMS Annual report and accounts 2020
REMUNERATION COMMITTEE REPORT continued
Directors’ remuneration policy (the Policy) continued
Service contracts and policy on payment
for loss of office
It is the Company’s policy to provide six months’ notice for
termination of employment for Executive Directors, to
be given by either party. The Company’s policy is to limit
severance payments on termination to pre-established
contractual arrangements, if the Company believes this
appropriate to protect its interests, it may also make
additional payments in exchange for non-compete/
non-solicitation or other terms which extend beyond those
in the Director’s contract of employment. The Committee
has discretion to contribute towards outplacement
services and the legal fees for any departing Director
to the extent it considers appropriate. Under normal
circumstances, the Company may terminate the
employment of an Executive Director by making a
payment in lieu of notice equivalent to basic salary and
benefits for the notice period at the rate current at the
date of termination. In case of gross misconduct,
a provision is included in the Executive’s contract for
immediate dismissal with no compensation payable.
The terms applied to the Executive Directors’ share options
are consistent with those applied to all option holders
under the rules of the Group’s Unapproved Share Option
Plan (‘the Plan’). Options are subject to a five-year service
condition, which commences from the grant date of the
first tranche. The Plan rules contain provisions for good
and bad leavers and an Executive Director would only
retain rights to exercise share options, in respect of shares
for which performance conditions have been met at the
leaving date, where they are deemed a good leaver. There
is no entitlement to compensation or damages for any
loss or potential loss which may be suffered by reason
of being or becoming unable to exercise an option as
a consequence of loss of office or employment.
There were no resignations of Executive Directors during
the year, however on 8 February 2021 it was announced
that David Thompson (CFO) will leave the Group on
31 March 2021 to pursue another opportunity. He will
be replaced by Gavin Urwin, who joined the Group on
8 February 2021 as CFO-Designate.
Treatment of annual bonus on termination
of employment
The Committee has discretion to determine that in the
event an Executive Director leaves the Company, bonus
payments may be paid once performance has been
measured and on a pro-rated basis for the time spent
in active employment with the Company.
Shareholder views
The Committee welcomes the views of shareholders
in respect of pay policy as well as those views expressed
on behalf of shareholders by their respective proxy
advisers. The Committee documents all remuneration-
related comments made at the Company’s AGM and within
feedback received during consultation with shareholders
throughout the year. Any feedback received is fully
considered by the Committee and amendments may be
made to the remuneration policy where thought necessary.
The Committee seeks to build an active and productive
dialogue with investors on developments in the
remuneration aspects of corporate governance generally.
Discretion of the Committee
The Committee has discretion in various areas of policy,
as set out in this report. The Committee may also exercise
discretion under the rules of the Plan approved by
shareholders, as set out in those rules. In addition, the
Committee has the discretion to amend the implementation
of the Policy with regard to minor or administrative
matters where it would be, in the opinion of the Committee,
disproportionate to seek or await shareholder approval.
Differences in remuneration policy for all employees
All employees of the Group are entitled to base salary
and benefits. The Group also operates a pension plan
for employees which it operates in line with local market
practice. Some employees are entitled to participate in
an annual discretionary bonus scheme. The remuneration
policy for other employees is based on principles broadly
consistent with those described above. Annual salary
reviews across the Company take into account Company
performance, market conditions and salary levels for
similar roles in comparable companies. The Company
operates discretionary bonus schemes for eligible groups
of employees under which a bonus is payable subject to the
achievement of appropriate targets. All eligible employees
may participate in the Company’s Share Incentive Plan on
identical terms.
SMS Annual report and accounts 2020 105
Annual report on remuneration
Directors’ remuneration emoluments for the financial year ended 31 December 2020
Executive
A H Foy
D Thompson
T Mortlock1
Non-executive
M Greenwood2
G Bissett
R Leak3
J Richards4
W MacDiarmid5
Total
Fees/
basic salary
£
360,796
222,844
222,844
69,968
45,900
45,900
31,836
44,252
1,044,340
Annual
bonus
£
Individual
cash bonus
£
Pension
contribution
£
275,639
166,843
182,733
140,000
86,000
86,000
–
–
–
–
–
625,215
–
–
–
–
–
312,000
–
8,914
8,914
–
–
–
–
–
17,828
Benefits
in kind
£
19,371
1,707
7,825
–
–
–
–
–
28,903
2020
Total
£
2019
Total
£
795,805
486,308
508,316
377,097
231,011
69,454
69,968
45,900
45,900
31,836
44,252
2,028,286
45,900
45,900
26,775
–
91,800
887,937
1 T Mortlock’s remuneration for 2019 is from the date of appointment as a Director, which was 17 September 2019.
2 M Greenwood’s remuneration for 2020 reflects the date of appointment to Chairman, which was on 23 June 2020.
3 R Leak’s remuneration for 2019 is from the date of appointment as a Director, which was 29 May 2019.
4 J Richards’ remuneration for 2020 is from the date of appointment as a Director, which was 23 April 2020.
5 W MacDiarmid resigned as a Director on 23 June 2020.
With the exception of the bonuses, both annual and
individual, which are discretionary as detailed in the
remuneration policy on pages 102 to 103, all other elements
of Directors’ remuneration are fixed.
On 23 April 2020 Jamie Richards was appointed as a
Non-executive Director, and he took over as Chair of the
Remuneration Committee of the Board on 23 June 2020.
Willie MacDiarmid resigned as a Non-executive Director
and Chairman of the Company with effect from 23 June
2020. Miriam Greenwood assumed the duties of Chairman,
Chair of the Nomination Committee and Chair of the
Health, Safety and Sustainability Committee on 23 June 2020.
This report reflects their remuneration and rewards from
the date of their respective appointments/resignations.
Details of each of the elements included in the table above
are as follows:
Base salary
Base salary increases across the Group are effective
from 1 April each year. Executive Directors received
a cost-of-living increase as at 1 April 2020, but payment
was suspended until 1 October 2020. The base salary/
fee numbers shown in the table therefore include
twelve months’ pay based on the individual Director’s
salary/fee from 1 January 2020 – with the exception of
Jamie Richards and Willie MacDiarmid, whose figures are
disclosed from the dates of their respective appointment/
resignation as noted above.
Pension contributions
The Chief Executive Officer does not participate in the
Company pension scheme. An amount is paid to the
Eco Retirement Benefit Scheme, of which the Chief
Executive Officer is a trustee. See note 22 (d) to the
Financial statements for further details.
A contribution of up to 5% per annum of base salary
is paid into the Company pension scheme by the
Company, on behalf of the Chief Financial Officer and
Chief Operating Officer.
Bonus
The amounts awarded were calculated as described
below:
Awards based on financial measures
Underlying profit (which excludes exceptional items and
amortisation of intangibles), ILARR, and positive cash
collection through working capital management are used
for the purposes of the bonus.
Awards based on operational objectives
Each of the Executive Directors has individual operational
objectives, including in relation to health and safety, which
is a top priority throughout the Group.
Awards based on strategic objectives
Each of the Executive Directors has individual strategic
objectives, with the maximum incentive opportunity linked
to performance against these objectives.
The Committee may use discretion to adjust payments
where necessary.
Strategic reportGovernanceFinancial statements
106 SMS Annual report and accounts 2020
REMUNERATION COMMITTEE REPORT continued
Annual report on remuneration continued
Benefits in kind
The Company pays for private healthcare for each Executive Director and their immediate family. The Company provides
a Company car allowance for the Chief Executive Officer and Chief Operating Officer. The Executive Directors also
currently participate in the Company’s life assurance scheme.
Directors’ interests
The Directors who held office at 31 December 2020 had the following interests in the shares of the Company:
Executive
A H Foy1
D Thompson
T Mortlock
Non-executive
M Greenwood
G Bissett
J Richards
W MacDiarmid2
Ordinary shares
2020
£0.01 each
2019
£0.01 each
5,953,201
3,000
5,263
5,380,608
1,335
5,263
23,350
15,316
3,909
–
6,004,039
16,661
5,300
–
5,923
5,415,090
1 Includes 900,000 ordinary shares held by The Metis Trust, of which A H Foy is a trustee but not a beneficiary, and; 5,053,201 ordinary shares held by
Metis Investments Limited, of which A H Foy is a director and shareholder.
2 This includes shares held by a connected person.
Directors’ share options
Aggregate emoluments disclosed above do not include any amounts for the value of options to acquire ordinary shares
in the Company granted to or held by the Directors. Details of options for Directors who served during the year are as follows:
Executive
A H Foy
D Thompson
T Mortlock
Number
of shares
under option
Type
Exercise
price
Date of
grant
Unapproved
Unapproved
Unapproved
Unapproved
Unapproved
500,000
100,000
300,000
133,250
333,333
700p
529p
700p
350p
700p
13/07/18
01/09/16
13/07/18
12/11/14
13/07/18
Earliest
date
exercisable
01/01/23
01/09/21
01/01/23
12/11/19
01/01/23
The share price at 31 December 2020 was 711p. The
range in the period 1 January to 31 December 2020 was
437p to 739p.
The plan is structured with options vesting in annual
tranches. The vesting of each annual tranche takes place
by reference to a distinct annual performance period and is
subject to annual targets including a market capitalisation
target, non-market performance criteria based on financial
targets and individual objectives, which are set at the
beginning of the corresponding performance period.
market capitalisation target will subsequently automatically
vest in future years if the market capitalisation target is
met at a later point or on the occurrence of certain events
which would cause all tranches to vest. The Remuneration
Committee has discretion in relation to the vesting of
awards where certain other criteria are not met. The
Remuneration Committee additionally has the power
to make changes to existing granted share options (for
example in relation to the option price or number of options
granted) where changes are made to the capital structure
of the Company.
The share options cannot be exercised for a period of
five years from the grant date, other than in specific
circumstances. Tranches which did not vest due to a missed
Further details of share options granted by the Company
at 31 December 2020 are given in note 24 to the Financial
statements.
DIRECTORS’ REPORT
The Directors submit their Annual report
on the affairs of the Group together with
the Financial statements and Independent
auditor's report for the year ended
31 December 2020.
Principal activities
SMS plc is the ultimate parent company of the Group
and trades principally through its subsidiary undertakings.
Its principal activity is that of a holding company.
The principal activities of the Group are: the installation,
operation and management of meter and energy
infrastructure assets and related data services; the design,
installation and management of utility connections and
energy infrastructure; and the delivery of energy
management and carbon reduction solutions, including
the operation of carbon reduction assets.
Subsidiaries of the Company are listed on page 165 of the
Annual report and accounts 2020.
Statutory information
This Directors’ report sets out the information required
to be disclosed by the Company in compliance with the
Companies Act 2006.
The Strategic report (found on pages 1 to 71) and the
Corporate governance report (found on pages 76 to 87)
are incorporated by reference into this Directors’ report
and should be read as part of this Report. The Strategic
report contains details of the Group’s business model and
strategic priorities and enables shareholders to assess how
the Directors have discharged their duty under section 172
of the Companies Act 2006.
Articles of Association
The Company’s Articles of Association, which may only
be amended by a special resolution at a general meeting
of the shareholders, can be found on our website at
www.sms-plc.com/corporate/investors/aim-rule-26.
Branches outside the UK
Two subsidiaries of the Group operate in countries outside
the UK, in the Republic of Ireland and Australia respectively.
Directors and their interests
The Directors of the Company, including their biographies,
are shown within the Board of Directors section of the
Annual report and accounts 2020, with further details
of Board Committee membership being set out in the
Corporate governance report. All Directors served
throughout the financial year, except as disclosed.
Other than employment contracts and interests in shares
and options, none of the Directors had a material interest
in any contract with the Company or any of its subsidiary
undertakings. Key terms of the Directors’ service contracts
and their interests in shares and options are disclosed
in the Directors’ Remuneration Report.
SMS Annual report and accounts 2020 107
Any related party interests applicable to the Directors
are shown in note 22 to the Financial statements.
The Company’s Articles of Association provide that
all Directors will stand for re-election every three years.
A Director may be appointed by an ordinary resolution
of shareholders in a general meeting, following
recommendation by the Nomination Committee in
accordance with its Terms of Reference, as approved
by the Board or by a member (or members) entitled to
vote at such a meeting. Alternatively, a Director may be
appointed following retirement by rotation if the Director
chooses to seek re-election at a general meeting.
In addition, the Directors may appoint a Director to fill
a vacancy or act as an additional Director, provided that
the individual retires at the next Annual General Meeting
(AGM) and, if they are to continue, that they offer
themselves for election.
A Director may be removed by the Company in
circumstances set out in the Company’s Articles of
Association or by an ordinary resolution of the Company.
Director qualifying indemnity provisions
As permitted by the Companies Act 2006, the Company
purchases and maintains Directors’ and Officers’
insurance cover against certain legal liabilities and
costs incurred by the Directors and officers of the Group
companies in the performance of their duties. The
Company has also granted an indemnity to each of its
Directors in relation to the Directors’ exercise of their
powers, duties and responsibilities as Directors of the
Company, the terms of which are in accordance with
the Companies Act 2006.
Dividends
As detailed on page 68, 2020 saw the introduction of
a new and enhanced Group dividend policy. In line with
the Board’s policy, SMS intends to pay a 25p per share
dividend in respect of FY 2020, with the intention of
annually increasing the dividends by 10% for each of the
financial years FY 2021, FY 2022, FY 2023 and FY 2024.
The FY 2020 dividend is being paid in four instalments
as summarised in the table below. Two instalments have
already been paid at the date of this Report, with the third
interim and final instalments due to be paid in April 2021
and July 2021 respectively.
FY 2020 dividend timetable:
Instalment
1
2
3
4
Ex-dividend
date
1 October
2020
7 January
2021
1 April
2021
1 July
2021
Record
date
2 October
2020
8 January
2021
6 April
2021
2 July
2021
Payment
date
29 October
2020
28 January
2021
29 April
2021
29 July
2021
Dividend
per share
6.25p
6.25p
6.25p
6.25p
Strategic reportGovernanceFinancial statements
108 SMS Annual report and accounts 2020
DIRECTORS’ REPORT continued
The Board will review this regularly, with shareholder value
in mind, taking into account a range of factors. These will
include expected business performance, the Company’s
ability to continue as a going concern and meet its debt
obligations, the distributable reserves in the parent
company, the availability of cash resources, the dividend
and operational cash flow cover, future cash commitments
and investment plans in line with the Group’s overall
strategy.
An HMRC-approved, tax-efficient plan, the Share Incentive
Plan supports the engagement and retention of our
workforce by providing returns that are driven by the
performance of the Company. The terms of this arrangement
are detailed further below. In addition, share options may
be granted at the discretion of the Board, typically to
senior management employees. Further details can be
found in note 24 to the Financial statements, which is
incorporated by reference into this Report.
Further details are provided in note 9 to the Financial
statements regarding the level of distributable reserves
in the parent company at 31 December 2020.
Employees
The Group places considerable emphasis on the
involvement of its employees and is firmly committed to
the continuation and strengthening of communication lines
with all its employees. The Group’s policy of operating
through subsidiaries helps ensure close communication
and sharing of information with employees on matters
likely to affect their interests. In addition, the workforce
is kept up to date on the various financial and economic
factors affecting the performance of the Group. Periodic
updates on Group performance are circulated, typically
following the announcement of both interim and annual
financial results.
The marketing team manages internal communications,
maintaining a steadfast and informative network
throughout our national organisation which ensures our
people remain up to date on all aspects of the SMS journey.
Communication tools include monthly newsletters, videos,
email and various forms of social media, and provide
employees with industry insights and key information
on Group activity, such as charitable donations and the
UK smart meter rollout, as well as ensuring a consistent
message of support by linking to our Wellbeing intranet
page. FY 2020 also saw regular COVID-19 updates form
a crucial aspect of our internal communications: from
information on installations work, through to lighter
engagement such as our series of ‘Lockdown Stories’ which
aimed to highlight the positive aspects of our restricted
circumstances.
Business updates are currently delivered by video, every
quarter, by the executive management team.
The Group seeks to engage with employees on matters
affecting them, through several channels such as employee
surveys (internal and external), employee workshops,
written feedback and drop-in sessions. The Stakeholder
engagement section on pages 39 to 42 provides examples
of projects delivered during the year, where an open
dialogue was facilitated with the workforce, and further
details can also be found in the Our people section on
pages 49 to 53.
The involvement of employees in the Company’s
performance is encouraged through its Share Incentive
Plan, which is open to all qualifying employees at all levels.
The Group operates an equal opportunity, diversity,
and inclusion policy, detailed further on page 51.
It is the policy of the Group to support the employment
of people with protected characteristics and to ensure that
training, career development and promotion opportunities
are available to all employees. As such, SMS is a ‘Disability-
Confident’, ‘Mindful’ and ‘Accredited Living Wage’ employer.
External auditor
As detailed on page 93, the Audit Committee
recommended, and the Board approved, the proposal
that the current auditor, Ernst & Young LLP, be reappointed
as auditor of the Company at the AGM. Ernst & Young LLP
has expressed its willingness to continue in office as
auditor and a resolution to reappoint Ernst & Young LLP
as the Company’s auditor will therefore be proposed
to shareholders at the AGM.
Directors’ statement as to disclosure of information
to auditor
Each of the Directors at the date of approval of the Annual
report and accounts 2020 confirms that:
• so far as the Director is aware, there is no relevant audit
information of which the Company’s auditor is unaware;
and
• he or she has taken all the steps that ought to be taken
by a Director in order to make himself or herself aware
of any relevant audit information and to establish that
the Company’s auditor is aware of that information.
This confirmation is given and should be interpreted
in accordance with the provisions of section 418 of the
Companies Act 2006.
Financial instruments
Details of the use of financial instruments and financial
risk management are included in note 19 to the Financial
statements contained in this Annual report and accounts
2020, which are incorporated by reference into this
Directors’ report.
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
pages 126 to 127, which is incorporated by reference here.
SMS Annual report and accounts 2020 109
Political contributions
No political contributions were made during the year
(2019: £Nil).
There are various rules as to the period of time that the
shares must be held in trust, but after five years the shares
can be released tax-free to the participant.
Post balance sheet events
Relevant post balance sheet events requiring disclosure
are included in note 30 to the Financial statements.
Under the terms of this scheme, the Matching Shares will be
forfeited if the participant leaves the employment of the
Company within three years of the award (unless they are
classed as a ‘good leaver’).
Research and development
The main research and development activities relate
to IT systems development to support the metering and
installations business. In addition, the Group continues
to invest in future technologies related to decarbonisation
and energy efficiency.
During the year, the Company purchased 28,354 of its own
shares (2019: 67,220) from the market for the purpose of
satisfying its Matching Share obligations under the SIP.
The nominal value of the shares purchased was £284
(2019: £672) and the aggregate amount of consideration
paid was £0.2m (2019: £0.3m).
Share capital
The Company’s issued share capital comprises ordinary
shares of 0.01p each which are listed on AIM, a market
operated by the London Stock Exchange (AIM: SMS.L).
As at 31 December 2020, the issued share capital of the
Company was £1,129,463 comprising 112,946,331 ordinary
shares of £0.01 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 23 to the Financial
statements. All the information detailed in note 23 forms
part of this Directors’ report and is incorporated into it
by reference.
The Company was authorised at the 2019 AGM to allot
shares or grant rights to or subscribe for or convert
any security into shares in the Company up to a nominal
amount of £376,156. This aligns with the institutional
investor guideline recommended figure of an amount equal
to one-third of the total issued share capital. This authority
is valid for a period expiring five years from the date the
resolution was approved at the 2019 AGM; however, this
authority is revised on an annual basis at each AGM,
at which point the previous year’s resolution is generally
superseded.
Share Incentive Plan
The Group’s Share Incentive Plan (SIP) is HMRC-approved
and is open to all qualifying employees, including Executive
Directors.
The Partnership Share element provides that for every
share a participant purchases in the Company, up to
a current maximum contribution of £1,800 per year, the
Company will purchase one Matching Share. The Matching
Shares purchased are held in trust in the name of the
individual. Dividends received on shares held in the SIP are
reinvested to acquire Matching Shares at their market value.
Substantial shareholdings
On 1 February 2021, the Company had been notified, in
accordance with sections 791 to 828 of the Companies Act,
of the following interests in the ordinary share capital of the
Company:
Name of holder
Liontrust Asset Management
Primestone Capital LLP
Fidelity Investments
Hargreave Hale Ltd
Alan Foy and persons
closely associated1
Steve Timoney
Merian Global Investors (UK) Ltd
River & Mercantile Asset
Management Ltd
Canaccord Genuity Wealth
Management (CI)
Brooks Macdonald Asset
Management
Number
16,562,966
13,244,160
8,216,967
6,495,030
5,953,201
5,644,344
3,860,292
% held
14.66%
11.72%
7.27%
5.75%
5.27%
5.00%
3.42%
3,507,057
3.10%
2,888,744
2.56%
2,681,855
2.37%
1 Persons closely associated to Alan Foy include Metis Investments Ltd, of
which Alan Foy is a director and shareholder, and the Metis Trust of which
Alan Foy is a trustee but not a beneficiary.
Approved by the Board of Directors on 16 March 2021 and
signed on its behalf below.
On behalf of the Board
David Thompson
Chief Financial Officer
16 March 2021
Strategic reportGovernanceFinancial statements
110 SMS Annual report and accounts 2020
STATEMENT OF DIRECTORS’ RESPONSIBILITIES
IN THE PREPARATION OF FINANCIAL STATEMENTS
The Directors are responsible for keeping adequate
accounting records that are sufficient to show and explain
the Group’s and the Company’s transactions and disclose
with reasonable accuracy at any time the financial position
of the Group and the Company. They are also responsible
for safeguarding the assets of the Group and the Company
and hence for taking reasonable steps for the prevention
and detection of fraud and other irregularities.
The Directors are responsible for the maintenance and
integrity of the corporate and financial information
included on the Smart Metering Systems plc website.
Legislation in the UK governing the preparation and
dissemination of financial statements may differ from
legislation in other jurisdictions.
This responsibility statement was approved by the Board
of Directors on 16 March 2021 and signed on its behalf below.
By order of the Board
Craig McGinn
Company Secretary and General Counsel
16 March 2021
The Directors are responsible for preparing
the Directors’ report, the Strategic report,
the Directors’ remuneration report,
the separate Corporate governance
statement and the Financial statements
in accordance with applicable law
and regulations.
Company law requires the Directors to prepare Group
and Company financial statements for each financial year.
The Directors are required by the AIM Rules of the London
Stock Exchange to prepare Group financial statements
in accordance with International Financial Reporting
Standards (IFRSs) in conformity with the Companies Act 2006,
and have elected under company law to prepare the
Company financial statements in accordance with
United Kingdom Generally Accepted Accounting Practice
(United Kingdom Accounting Standards and applicable
law), including FRS 102 The Financial Reporting Standard
Applicable in the UK and Republic of Ireland.
The Group financial statements are required by law, and
by IFRSs in conformity with the Companies Act 2006, to
present fairly the financial position and performance of the
Group; and the Companies Act 2006 provides in relation
to such financial statements that references in the relevant
part of that Act to financial statements giving a true and
fair view are references to their achieving a fair presentation.
Under company law the Directors must not approve the
Financial statements unless they are satisfied that they
give a true and fair view of the state of affairs of the Group
and the Company and of the profit or loss of the Group
for that period.
In preparing each of the Group and Company financial
statements, the Directors are required to:
• select suitable accounting policies and then apply
them consistently;
• make judgements and accounting estimates that are
reasonable;
• present information, including accounting policies, in
a manner that provides relevant, reliable, comparable
and understandable information;
• for the Group financial statements, state whether they
have been prepared in accordance with IFRSs in
conformity with the Companies Act 2006 and, for the
Company financial statements, state whether applicable
UK accounting standards have been followed, subject to
any material departures disclosed and explained in the
Company financial statements; and
• prepare the financial statements on the going concern
basis unless it is inappropriate to presume that the Group
and the Company will continue in business.
Financial
statements
112
Independent auditor’s report
121 Consolidated income statement
122
Consolidated statement of comprehensive income
123 Consolidated statement of financial position
124 Consolidated statement of changes in equity
125
Consolidated statement of cash flows
126 Accounting policies
139
Notes to the financial statements
172 Parent company balance sheet
173
Parent company statement of changes in equity
174
Notes to the parent company financial statements
SMS Annual report and accounts 2020 111
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112 SMS Annual report and accounts 2020
INDEPENDENT AUDITOR’S REPORT
TO THE MEMBERS OF SMART METERING SYSTEMS PLC
Opinion
In our opinion:
• Smart Metering Systems plc’s group financial statements
and parent company financial statements (the “financial
statements”) give a true and fair view of the state of
the group’s and of the parent company’s affairs as at
31 December 2020 and of the group’s profit for the year
then ended;
• the group financial statements have been properly
prepared in accordance with International Accounting
Standards in conformity with the requirements of the
Companies Act 2006;
Group
Consolidated statement of financial position as at
31 December 2020
Consolidated income statement and consolidated
statement of comprehensive for the year then ended
Consolidated statement of changes in equity for the year
then ended
Consolidated statement of cash flows for the year then
ended
Related notes 1 to 30 to the financial statements, including
a summary of significant accounting policies
The financial reporting framework that has been applied in
the preparation of the group financial statements is
applicable law and international accounting standards in
conformity with the requirements of the Companies Act
2006. The financial reporting framework that has been
applied in the preparation of the parent company financial
statements is applicable law and United Kingdom
Accounting Standards, including FRS 102 “The Financial
Reporting Standard applicable in the UK and Republic of
Ireland” (United Kingdom Generally Accepted Accounting
Practice).
Basis for opinion
We conducted our audit in accordance with International
Standards on Auditing (UK) (ISAs (UK)) and applicable law.
Our responsibilities under those standards are further
described in the Auditor’s responsibilities for the audit of
the financial statements section of our report. We are
independent of the group in accordance with the ethical
requirements that are relevant to our audit of the financial
statements in the UK, including the FRC’s Ethical Standard
as applied to listed entities, and we have fulfilled our other
ethical responsibilities in accordance with these
requirements.
We believe that the audit evidence we have obtained is
sufficient and appropriate to provide a basis for our
opinion.
• the parent company financial statements have been
properly prepared in accordance with United Kingdom
Generally Accepted Accounting Practice; and
• the financial statements have been prepared in
accordance with the requirements of the Companies
Act 2006.
We have audited the financial statements of Smart
Metering Systems plc (the ‘parent company’) and its
subsidiaries (the ‘group’) for the year ended 31 December
2020 which comprise:
Parent company
Balance sheet as at 31 December 2020
Statement of changes in equity for the year then ended
Related notes 1 to 8 to the financial statements including a
summary of significant accounting policies
Conclusions relating to going concern
In auditing the financial statements, we have concluded
that the directors’ use of the going concern basis of
accounting in the preparation of the financial statements is
appropriate. Our evaluation of the directors’ assessment of
the group and parent company’s ability to continue to
adopt the going concern basis of accounting included:
• In conjunction with our walkthrough of the Group’s
financial close process, we confirmed our understanding
of management’s Going Concern assessment process
and also engaged with management early to ensure all
key factors were considered in their assessment.
• We obtained management’s going concern assessment,
including the cash forecast and covenant calculation for
the going concern period ending 31 March 2022. The
Group has modelled adverse scenarios in their cash
forecasts and covenant calculations in order to
incorporate severe but plausible changes in key
assumptions to the forecasted liquidity of the Group.
• We have tested the factors and assumptions included in
each modelled scenario for the cash forecast and
covenant calculation and we have tested the impact of
Covid-19 included in each forecasted scenario.
SMS Annual report and accounts 2020 113
• We considered the appropriateness of the methods used
to calculate the cash forecasts and covenant calculations
and determined through inspection and testing of the
methodology and calculations that the methods utilised
were appropriately sophisticated to be able to make an
assessment for the entity.
• We considered the mitigating factors included in the cash
forecasts and covenant calculations that are within
control of the Group. This included assessing the
Company’s non-operating cash outflows and evaluating
the Company’s ability to control these outflows as
mitigating actions if required. We also verified credit
facilities available to the Group to signed agreements
with lenders.
• We have performed reverse stress testing in order to
identify what factors, either in isolation or in combination
with other factors, would lead to the Group utilising all
liquidity or breaching the financial covenant during the
going concern period.
• We read the Group’s going concern disclosures included
in the annual report in order to assess that the disclosures
were appropriate and in conformity with the reporting
standards.
The majority of the Group’s revenue and profits during
2020 have not been significantly impacted by Covid-19, and
therefore the continuation of this global pandemic is not
expected to have a significant impact over the going
concern assessment period.
Further, the Group has access to committed bank facilities
of £300m, which is undrawn as at 31 December 2020, with
only £70m of these facilities forecast to be used in the
going concern period. The full amount of these facilities
matures in 2023.
Based on the work we have performed, we have not
identified any material uncertainties relating to events or
conditions that, individually or collectively, may cast
significant doubt on the group and parent company’s
ability to continue as a going concern from when the
financial statements are authorised for issue until 31 March
2022.
Our responsibilities and the responsibilities of the directors
with respect to going concern are described in the relevant
sections of this report. However, because not all future
events or conditions can be predicted, this statement is not
a guarantee as to the group’s ability to continue as a going
concern.
Overview of our audit approach
Audit scope
• We performed an audit of the complete financial information of four components and audit
procedures on specific balances for a further seven components.
• The components where we performed full or specific audit procedures accounted for 100%
of pre-tax profit before exceptional items (our audit testing covers 100% of exceptional
items), 100% of Revenue and 100% of Total assets.
Key audit matters
• Identification of indicators of impairment of the meter asset portfolio in accordance with IAS
36 and assumptions applied in determining the carrying value of the portfolio of meter
assets if indicators are present.
• Appropriateness of capitalisation of overheads and other expenses within the total of costs
capitalised within meter assets.
Materiality
• Overall group materiality of £0.6m which represents 5% of the group’s profit before tax
(PBT) before exceptional items.
Strategic reportGovernanceFinancial statements
114 SMS Annual report and accounts 2020
INDEPENDENT AUDITOR’S REPORT
TO THE MEMBERS OF SMART METERING SYSTEMS PLC continued
An overview of the scope of the parent
company and group audits
Tailoring the scope
Our assessment of audit risk, our evaluation of materiality
and our allocation of performance materiality determine
our audit scope for each company within the group.
Taken together, this enables us to form an opinion on the
consolidated financial statements. We take into account
size, risk profile, the organisation of the group and
effectiveness of group-wide controls, changes in the
business environment and other factors such as recent
Internal audit results when assessing the level of work
to be performed at each company.
In assessing the risk of material misstatement to the
group financial statements, and to ensure we had
adequate quantitative coverage of significant accounts
in the financial statements, of the 15 (2019: 14) reporting
components of the group, we selected 11 (2019: 10)
components covering entities which represent the
principal business units within the group.
the potential for the greatest impact on the significant
accounts in the financial statements either because of the
size of these accounts or their risk profile.
The reporting components where we performed audit
procedures accounted for 100% (2019: 100%) of the group’s
PBT before exceptional items measure used to calculate
materiality, 100% (2019: 100%) of the group’s Revenue and
100% (2019: 99%) of the group’s Total assets. We tested
100% of exceptional items (2019: 100%). For the current
year, the full scope components contributed 87% (2019:
86%) of the group’s PBT before exceptional items used to
calculate materiality, 91% (2019: 93%) of the group’s
Revenue and 94% (2019: 93%) of the group’s Total assets.
The specific scope component contributed 13% (2019: 14%)
of the group’s PBT before exceptional items used to
calculate materiality, 9% (2019: 7%) of the group’s Revenue
and 6% (2019: 6%) of the group’s Total assets. The audit
scope of these components may not have included testing
of all significant accounts of the component but will have
contributed to the coverage of significant accounts tested
for the group.
Of the eleven components selected, we performed an
audit of the complete financial information of 4 (2019: 3)
components (“full scope components”) which were
selected based on their size or risk characteristics.
For the remaining 7 (2019: 7) components (“specific scope
components”), we performed audit procedures on specific
accounts within those components that we considered had
Of the remaining 4 components (2019: 4) did not contribute
to the group’s Profit before tax and before exceptional
items. For these components, we performed other
procedures, including analytical review, testing of
consolidation journals and intercompany eliminations
to respond to any potential risks of material misstatement
to the group financial statements.
The charts below illustrate the coverage obtained from the work performed by our audit teams.
Revenue
Profit before tax and exceptional items
Assets
■ 91% Full scope
components
(2019: 86%)
■ 9% Specific scope
components
(2019: 14%)
■ 0% Other procedures
(2019: 0%)
■ 87% Full scope
components
(2019: 86%)
■ 13% Specific scope
components
(2019: 14%)
■ 0% Other procedures
(2019: 0%)
■ 94% Full scope
components
(2019: 93%)
■ 6% Specific scope
components
(2019: 6%)
■ 0% Other procedures
(2019: 1%)
Involvement with component teams
• All audit work performed for the purposes of the audit was undertaken by the group audit team, with our approach to
the audit being adapted to allow for fully remote working given the travel restrictions in place.
SMS Annual report and accounts 2020 115
Key audit matters
Key audit matters are those matters that, in our
professional judgement, were of most significance in our
audit of the financial statements of the current period and
include the most significant assessed risks of material
misstatement (whether or not due to fraud) that we
identified. These matters included 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. These matters were addressed in the
context of our audit of the financial statements as a whole,
and in our opinion thereon, and we do not provide a
separate opinion on these matters.
Key observations communicated
to the Audit Committee
Based on the audit
procedures performed
in relation to the meter
portfolio, we consider the
year-end carrying value
to be appropriate.
In relation to SMETS1 meters,
until the enrolment and
adoption programme is
completed, there may be
removal of further meters
which would represent a
small proportion of the total
portfolio of meters. We do
not consider this to represent
an impairment risk to the
wider SMETS1 portfolio.
We consider the disclosures
made around the traditional
meter assets to be adequate.
Our response to the risk
i/ Traditional meters
We obtained management’s assessment
of potential impairment indicators which
concluded there were no indicators of
impairment on traditional meters that would
eliminate the excess headroom and that
in line with IAS 36, a full impairment review
was not required.
We evaluated the design effectiveness
of controls in relation to their impairment
assessment. We did not rely on controls
in our assessment.
We challenged management’s assessment,
by reviewing our prior year conclusions
reached on management’s impairment
calculation from 2019, in order to identify
the assumptions that the model was most
sensitive to.
We confirmed that sensitivity testing of the
key assumptions would not have a material
impact on the headroom in the current year.
Further, we performed procedures to
independently identify contradictory
evidence of potential impairment indicators
which included research of publicly available
industry information and consideration of
our audit work in relation to Property, plant
and equipment.
We considered the appropriateness of the
related disclosures in the group Financial
Statements.
Risk
Identification of indicators of
impairment of the meter asset
portfolio in accordance with
IAS 36 and assumptions applied
in determining the carrying value
of the portfolio of meter assets
if impairment indicators are
present (£315m value of risk,
PY comparative £399m)
Refer to the Audit Committee
report (page 88); Accounting
policies (page 129); and Note 11
of the Consolidated Financial
Statements.
i/ Traditional meters
Management prepared an
assessment of potential
impairment indicators in relation
to the traditional meter portfolio.
A full impairment assessment was
performed as at 31 December 2019
which indicated that there
remained significant headroom in
relation to the traditional meter
portfolio. In line with IAS 36,
management do not consider
there to be any events that would
eliminate the excess headroom
and therefore a full review was not
required in 2020.
Management concluded that it
would not be appropriate to
recognise a reversal of the
historical impairment charge on
consideration of the declining
nature of the portfolio, with the
smart meter roll out still in place,
albeit extended to 1 July 2025, and
the uncertainty as to whether the
rollout period changing will have a
major impact on the behaviour of
energy suppliers and the knock on
impact on installation run rates.
Therefore management conclude
that the above noted components
that triggered the impairment,
remain prevalent in the current year.
Strategic reportGovernanceFinancial statements
116 SMS Annual report and accounts 2020
INDEPENDENT AUDITOR’S REPORT
TO THE MEMBERS OF SMART METERING SYSTEMS PLC continued
Key observations communicated
to the Audit Committee
Risk
ii/ Other meters – smart, industrial
and commercial (I&C)
Management prepared an
assessment of potential
impairment indicators in relation to
the smart and I&C meter portfolio.
This included consideration of the
temporary industry transitional
issues experienced with certain
SMETS1 meters.
Our response to the risk
ii/ Other meters – smart, industrial and
commercial
We obtained management’s assessment
of potential impairment indicators which
concluded there were no indicators of
impairment on other meters that would
eliminate the excess headroom and that
in line with IAS 36, a full impairment review
was not required.
We evaluated the design effectiveness
of controls in relation to their impairment
assessment. We did not rely on controls
in our assessment.
We challenged management on the
potential impairment indicators identified.
Our procedures included verifying
assumptions to independent supporting
evidence.
Further, we performed procedures to
independently identify any contradictory
evidence of potential impairment indicators
which included research of publicly available
industry information and consideration of
our audit work in relation to fixed assets.
We challenged management over the losses
arising on the SMETS1 meters removed from
the wall during the year and whether this
indicated a potential impairment indicator
across the wider portfolio of SMETS1 meters.
We obtained evidence that indicated that
the meters removed earlier in the year arose
due to the uncertainty surrounding the
transitional issues. We confirmed that the
Data Communications Company has issued
a timeline for the Enrolment and Adoption
programme which brought clarity to the
technical issues that have been encountered
to date and consideration that the meters
removed from the wall can be re-used.
The primary team performed full scope audit
procedures over this risk area in two locations,
which covered 100% of the risk amount.
SMS Annual report and accounts 2020 117
Key observations communicated
to the Audit Committee
Based on the results of our
audit procedures, we
consider the amounts
capitalised for meters
installed by in-house
engineers to be appropriate.
Risk
Appropriateness of capitalisation
of overheads and other expenses
within the total of costs
capitalised within meter assets
(£19.8m, PY comparative £39.7m)
Refer to Audit Committee report
(page 88); Accounting policies
(page 128) and note 11 in the
Consolidated Financial
Statements.
As at 31 December 2020, the group
carried total meter assets
amounting to £315m (2019: £399m).
This includes internal operational
costs that have been capitalised in
the current year.
As a result of Covid-19, the level of
smart meter installations has
significantly reduced during the
year, particularly between March
and August 2020, following SMS
temporarily stopping all non-
essential field work, which included
the installation of smart meters.
A significant proportion of the
group’s smart meters are fitted by
its in-house engineering team, with
the costs directly attributable to
bringing the asset to the condition
and location necessary for it to be
capable of operating in the
manner intended by management,
being capitalised in line with the
requirements of IAS 16.
The significant risk relates to the
appropriateness of the
judgements made by
management when assessing the
appropriate categories and
proportion of direct costs of
installation, overheads and other
expenses directly attributable to
the installation of each meter.
Our response to the risk
We identified controls designed by
management to determine the categories
and proportion of direct costs of installation,
overheads and other expenses directly
attributable to bringing the meter assets into
use by the group’s in-house engineering
teams and evaluated the design
effectiveness of these controls.
We evaluated the judgement applied by
management to assess the appropriate
categories and proportion of direct costs of
installation, overheads and other expenses
directly attributable to installation of meter
assets. This included:
• Assessment of the capitalisation
methodology applied and testing of the
mathematical integrity of the model;
• Assessed the judgements made in relation
to the impact of COVID-19 on the costs to
be capitalised and the increase in the time
taken to install meters during 2020 as
a result of the additional health and safety
requirements, challenging management
to ensure that they had only capitalised
appropriate costs;
• Testing of the time recording data utilised
to determine the proportion of engineer’s
time spent installing;
• Agreement of the costs to the audited trial
balance; and
• On a sample basis we tested those costs
capitalised to ensure they related to
directly attributable costs of fitting the
meter. Costs that did not relate to the
meter fitting were excluded. The excluded
costs included inefficiencies in meter fitting,
time spent on training and time spent on
transactional work.
• We benchmarked the average installation
cost capitalised to contracted third party
installation costs to assess the
reasonableness of the amount capitalised.
• We assessed the classification of costs for
capitalisation, costs to be included in
exceptional items as a direct consequence
of Covid-19 and costs remaining in the P&L.
We performed full and specific scope audit
procedures over this risk area in one location,
which covered 100% of the risk amount.
Strategic reportGovernanceFinancial statements
118 SMS Annual report and accounts 2020
INDEPENDENT AUDITOR’S REPORT
TO THE MEMBERS OF SMART METERING SYSTEMS PLC continued
Our application of materiality
We apply the concept of materiality in planning and
performing the audit, in evaluating the effect of identified
misstatements on the audit and in forming our audit
opinion.
Materiality
The magnitude of an omission or misstatement that,
individually or in aggregate, could reasonably be expected
to influence the economic decisions of the users of the
financial statements. Materiality provides a basis for
determining the nature and extent of our audit procedures.
We determined materiality for the group to be £0.6 million
(2019: £0.7 million), which is 5% (2019: 5%) of PBT before
exceptional items. We believe that pre-tax profits before
exceptional items provides us with an appropriate
materiality threshold for the users of the financial
statements as the exceptional costs are considered
non-recurring costs in the normal course of business.
The impact of Covid-19 did not impact the results such
that no significant judgement was necessary in determining
materiality.
We determined materiality for the Parent Company to
be £3.7million (2019: £3.7 million), which is 2% (2019: 2%)
of total equity.
During the course of our audit, we reassessed initial
materiality from forecast pre-tax profits to actual pre-tax
profits after exceptional items and maintained our
materiality at £0.6 million.
Performance materiality
The application of materiality at the individual account
or balance level. It is set at an amount to reduce to an
appropriately low level the probability that the aggregate
of uncorrected and undetected misstatements exceeds
materiality.
On the basis of our risk assessments, together with our
assessment of the group’s overall control environment,
our judgement was that performance materiality was 50%
(2019: 50%) of our planning materiality, namely £0.3 million
(2019: £0.4 million). We have set performance materiality
at this percentage due to our expectation and likelihood
of misstatements taking into account the internal control
environment, accounting systems and level of estimation
in the financial statements.
Audit work at component locations for the purpose of
obtaining audit coverage over significant financial
statement accounts is undertaken based on a percentage
of total performance materiality. The performance
materiality set for each component is based on the relative
scale and risk of the component to the group as a whole
and our assessment of the risk of misstatement at that
component. In the current year, the range of performance
materiality allocated to components was £0.1 million to
£0.3 million (2019: £0.1 million to £0.3 million).
Reporting threshold
An amount below which identified misstatements are
considered as being clearly trivial.
We agreed with the Audit Committee that we would report
to them all uncorrected audit differences in excess of £0.03
million (2019: £0.04 million), which is set at 5% of planning
materiality, as well as differences below that threshold that,
in our view, warranted reporting on qualitative grounds.
We evaluate any uncorrected misstatements against both
the quantitative measures of materiality discussed above
and in light of other relevant qualitative considerations in
forming our opinion.
Other information
The other information comprises the information included
in the annual report set out on pages 1 to 110, other than
the financial statements and our auditor’s report thereon.
The directors are responsible for the other information
within the annual report.
Our opinion on the financial statements does not cover the
other information and, except to the extent otherwise
explicitly stated in this report, we do not express any form
of assurance conclusion thereon.
In connection with our audit of the financial statements, our
responsibility is to read the other information and, in doing
so, consider whether the other information is materially
inconsistent with the financial statements or our knowledge
obtained in the course of the audit or otherwise appears
to be materially misstated. If we identify such material
inconsistencies or apparent material misstatements,
we are required to determine whether there is a material
misstatement in the financial statements themselves.
If, based on the work we have performed, we conclude that
there is a material misstatement of the other information,
we are required to report that fact.
We have nothing to report in this regard.
Opinions on other matters prescribed
by the Companies Act 2006
In our opinion, based on the work undertaken in the course
of the audit:
• the information given in the Strategic report and the
Directors’ report for the financial year for which the
financial statements are prepared is consistent with
the financial statements; and
• the Strategic report and Directors’ report have been
prepared in accordance with applicable legal
requirements.
SMS Annual report and accounts 2020 119
Matters on which we are required to report
by exception
In the light of the knowledge and understanding of the
group and the parent company and its environment
obtained in the course of the audit, we have not identified
material misstatements in the Strategic report or the
Directors’ report.
We have nothing to report in respect of the following
matters in relation to which the Companies Act 2006
requires us to report to you if, in our opinion:
• adequate accounting records have not been kept by the
parent company, or returns adequate for our audit have
not been received from branches not visited by us; or
• the parent company financial are not in agreement with
the accounting records and returns; or
• certain disclosures of directors’ remuneration specified
by law are not made; or
• we have not received all the information and
explanations we require for our audit
Responsibilities of directors
As explained more fully in the directors’ responsibilities
statement set out on page 110, the directors are
responsible for the preparation of the financial statements
and for being satisfied that they give a true and fair view,
and for such internal control as the directors determine
is necessary to enable the preparation of financial
statements that are free from material misstatement,
whether due to fraud or error.
In preparing the financial statements, the directors are
responsible for assessing the group and parent company’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 the directors
either intend to liquidate the group or the parent company
or to cease operations, or have no realistic alternative but
to do so.
Auditor’s responsibilities for the
audit of the financial statements
Our objectives are to obtain reasonable assurance about
whether the financial statements as a whole are free from
material misstatement, whether due to fraud or error, and
to issue an auditor’s report that includes our opinion.
Reasonable assurance is a high level of assurance, but is
not a 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 the
aggregate, they could reasonably be expected to influence
the economic decisions of users taken on the basis of these
financial statements.
Explanation as to what extent the audit
was considered capable of detecting
irregularities, including Fraud
Irregularities, including fraud, are instances of non-
compliance with laws and regulations. We design
procedures in line with our responsibilities, outlined above,
to detect irregularities, including fraud. The risk of not
detecting a material misstatement due to fraud is higher
than the risk of not detecting one resulting from error, as
fraud may involve deliberate concealment by, for example,
forgery or intentional misrepresentations, or through
collusion. The extent to which our procedures are capable
of detecting irregularities, including fraud, is detailed below.
However, the primary responsibility for the prevention and
detection of fraud rests with both those charged with
governance of the company and management.
• We obtained an understanding of the legal and
regulatory frameworks that are applicable to the group
and determined that the most significant are those that
relate to the reporting framework (IFRS, Companies Act
2006, AIM Rules for Company; QCA Code) and the
relevant tax compliance regulations in the UK and Ireland.
In addition, we concluded that there are certain
significant laws and regulations that may have an effect
on the determination of the amounts and disclosures in
the financial statements and those laws and regulations
relating to health and safety, employee matters,
environmental and bribery and corruption practices;
• We understood how SMS is complying with those
frameworks by making enquiries of management,
internal audit, those responsible for legal and compliance
procedures and the Company Secretary. We
corroborated our enquires through our review of the
board minutes and papers provided to the Audit
Committee, as well as consideration of the results of our
audit procedures across the Group to either corroborate
or provide contrary evidence which was then followed up;
• We assessed the susceptibility of the group’s financial
statements to material misstatement, including how
fraud might occur, by meeting with management within
various parts of the business to understand where they
considered there was susceptibility to fraud. We also
considered performance targets and their influence on
efforts made by management to manage earnings or
influence the perceptions of analysts. Where this risk was
considered higher, we performed audit procedures to
address the fraud risk. These procedures included testing
manual journals and were designed to provide
reasonable assurance that the financial statements were
free from fraud or error;
Strategic reportGovernanceFinancial statements
120 SMS Annual report and accounts 2020
INDEPENDENT AUDITOR’S REPORT
TO THE MEMBERS OF SMART METERING SYSTEMS PLC continued
• Based on this understanding we designed our audit
procedures to identify non-compliance with such laws
and regulations. Our procedures involved enquiries of
Group management and those charged with governance,
those responsible for legal and compliance procedures
and internal audit; journal entry testing with a focus on
manual consolidation journals and journals indicating
large or unusual transactions based on our understanding
of the business and a review of Board and Audit Committee
minutes to identify any non-compliance with laws
and regulations.
A further description of our responsibilities for the audit
of the financial statements is located on the Financial
Reporting Council’s website at https://www.frc.org.uk/
auditorsresponsibilities. This description forms part of
our auditor’s report.
Use of our report
This report is made solely to the company’s members,
as a body, in accordance with Chapter 3 of Part 16 of the
Companies Act 2006. Our audit work has been undertaken
so that we might state to the company’s members those
matters we are required to state to them 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 and the
company’s members as a body, for our audit work, for
this report, or for the opinions we have formed.
Kevin Weston (Senior statutory auditor)
for and on behalf of Ernst & Young LLP, Statutory Auditor
Glasgow
16 March 2021
Notes:
1. The maintenance and integrity of the Smart Metering Systems plc’s
website is the responsibility of the directors; the work carried out by the
auditors does not involve consideration of these matters and,
accordingly, the auditors accept no responsibility for any changes that
may have occurred to the financial statements since they were initially
presented on the website.
2. Legislation in the United Kingdom governing the preparation and
dissemination of financial statements may differ from legislation in other
jurisdictions.
CONSOLIDATED INCOME STATEMENT
For the year ended 31 December 2020
SMS Annual report and accounts 2020 121
Revenue
Cost of sales
Gross profit
Administrative expenses
Other operating income
Gain on disposal of subsidiary
Profit from operations
Finance costs
Finance income
Profit before taxation
Taxation
Profit for the year
attributable to owners
of the parent
2020
Before
exceptional
items
£’000
102,982
(49,980)
53,002
(36,845)
1,723
–
17,880
(4,705)
166
13,341
(4,103)
2020
Exceptional
items1
£’000
–
(4,890)
(4,890)
(8,085)
–
194,713
181,738
(115)
–
181,623
2,618
2019
Before
exceptional
items
£’000
114,281
(72,217)
42,064
(25,514)
5,726
–
22,276
(8,461)
278
14,093
(2,584)
2019
Exceptional
items
£’000
–
–
–
(8,527)
–
–
(8,527)
(104)
–
(8,631)
1,119
2020
Total
£’000
102,982
(54,870)
48,112
(44,930)
1,723
194,713
199,618
(4,820)
166
194,964
(1,485)
Notes
2
3
3
3
4
3
6
6
7
2019
Total
£’000
114,281
(72,217)
42,064
(34,041)
5,726
–
13,749
(8,565)
278
5,462
(1,465)
9,238
184,241
193,479
11,509
(7,512)
3,997
1 Refer to note 3 for details of exceptional items.
The profit from operations arises from the Group’s continuing operations.
Earnings per share attributable to owners of the parent during the year:
Basic earnings per share (pence)
Diluted earnings per share (pence)
Notes
8
8
2020
171.65
170.26
2019
3.56
3.53
Strategic reportGovernanceFinancial statements
122 SMS Annual report and accounts 2020
CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME
For the year ended 31 December 2020
2020
Before
exceptional
items
£’000
9,238
2020
Exceptional
items
£’000
184,241
2020
Total
£’000
193,479
2019
Before
exceptional
items
£’000
11,509
2019
Exceptional
items
£’000
(7,512)
67
67
–
–
67
67
(66)
(66)
–
–
2019
Total
£’000
3,997
(66)
(66)
9,305
184,241
193,546
11,443
(7,512)
3,931
Profit for the year
Other comprehensive income1
Exchange differences on
translation of foreign operations
Other comprehensive income
for the year, net of tax
Total comprehensive income
for the year attributable to owners
of the parent
1 May be reclassified to profit or loss.
CONSOLIDATED STATEMENT OF FINANCIAL POSITION
As at 31 December 2020
SMS Annual report and accounts 2020 123
Assets
Non-current assets
Intangible assets
Property, plant and equipment
Investments
Other assets
Trade and other receivables
Total non-current assets
Current assets
Inventories
Other assets
Trade and other receivables
Income tax recoverable
Cash and cash equivalents
Restricted cash
Total current assets
Total assets
Liabilities
Current liabilities
Trade and other payables
Lease liabilities
Other liabilities
Bank loans and overdrafts
Total current liabilities
Non-current liabilities
Bank loans
Lease liabilities
Deferred tax liabilities
Total non-current liabilities
Total liabilities
Net assets
Equity
Share capital
Share premium
Other reserve
Own share reserve
Foreign currency translation reserve
Retained earnings
Total equity attributable to owners of the parent
Notes
10, 13
11
12
18
15
14
18
15
16
16
17
18
18
18
18
18
21
23
25
23
2020
£’000
2019
£’000
24,923
328,338
75
1,308
12
354,656
27,650
641
37,164
576
40,236
1,627
107,894
462,550
41,958
936
388
–
43,282
–
4,315
8,511
12,826
56,108
406,442
1,129
160,471
9,562
(749)
1
236,028
406,442
23,743
412,658
75
–
232
436,708
22,061
–
48,287
227
50,092
–
120,667
557,375
46,796
1,013
–
1,724
49,533
267,536
2,950
13,779
284,265
333,798
223,577
1,128
160,106
9,562
(768)
(66)
53,615
223,577
The financial statements on pages 121 to 171 were approved and authorised for issue by the Board of Directors and
signed on its behalf by:
David Thompson
Director
16 March 2021
Company registration number
SC367563
Strategic reportGovernanceFinancial statements
124 SMS Annual report and accounts 2020
CONSOLIDATED STATEMENT OF CHANGES IN EQUITY
For the year ended 31 December 2020
Attributable to the owners of the parent company:
As at 1 January 2019
Total profit for the year
Total other comprehensive
income for the year
Transactions with owners
in their capacity as owners
Dividends (note 9)
Shares issued (note 23)
Movement in own shares (note 23)
Share-based payments (note 24)
Income tax effect of share options
As at 31 December 2019
Total profit for the year
Total other comprehensive income
for the year
Transactions with owners
in their capacity as owners
Dividends (note 9)
Shares issued (note 23)
Movement in own shares (note 23)
Share-based payments (note 24)
Income tax effect of share options
As at 31 December 2020
Share
capital
£’000
1,125
–
Share
premium
£’000
158,861
–
Other
reserve
£’000
9,562
–
Own share
reserve
£’000
(588)
–
Foreign
currency
translation
reserve
£’000
–
–
Retained
earnings
£’000
57,173
3,997
Total
£’000
226,133
3,997
–
–
–
–
(66)
–
(66)
–
3
–
–
–
1,128
–
–
1,245
–
–
–
160,106
–
–
–
–
–
–
9,562
–
–
–
(180)
–
–
(768)
–
–
–
–
–
–
–
–
–
–
(66)
–
67
(7,079)
(829)
(169)
671
(149)
53,615
193,479
(7,079)
419
(349)
671
(149)
223,577
193,479
–
67
–
1
–
–
–
1,129
–
365
–
–
–
160,471
–
–
–
–
–
9,562
–
–
19
–
–
(749)
–
–
–
–
–
1
(12,226)
–
(180)
626
714
236,028
(12,226)
366
(161)
626
714
406,442
See notes 23 and 25 for details of the own share reserve and other reserve.
CONSOLIDATED STATEMENT OF CASH FLOWS
For the year ended 31 December 2020
SMS Annual report and accounts 2020 125
Operating activities
Profit before taxation
Finance costs
Finance income
Foreign exchange loss
Exceptional items: gain on disposal of subsidiary (note 4)
Exceptional items: other1
Depreciation
Amortisation of intangibles
Share-based payment expense
RDEC income
Loss on disposal of property, plant and equipment
Loss on disposal of intangible assets
Movement in inventories
Movement in trade and other receivables2
Movement in restricted cash
Movement in trade and other payables2
Cash generated from operations
Income tax received
Net cash generated from operations
Investing activities
Proceeds on disposal of subsidiary, gross
Payments to dispose of subsidiary3
Proceeds on disposal of subsidiary, net of payments to dispose
Payment for acquisition of subsidiary, net of cash acquired
Payments to acquire property, plant and equipment
Proceeds on disposal of property, plant and equipment
Payments to acquire intangible assets
Finance income received
Net cash generated from/(used in) investing activities
Financing activities
New borrowings
Borrowings repaid
Principal elements of lease payments
Finance costs paid
Net proceeds from share issue
Purchase of own shares
Dividends paid
Net cash generated (used in)/from financing activities
Net (decrease)/increase in cash and cash equivalents
Exchange gain on cash and cash equivalents
Cash and cash equivalents at the beginning of the financial year
Cash and cash equivalents at the end of the financial year (note 16)
2020
£’000
2019
£’000
194,964
4,705
(166)
4
(194,713)
6,148
29,057
2,957
626
(536)
1,028
12
(648)
6,461
(1,627)
(4,361)
43,911
–
43,911
290,615
(11,589)
279,026
(2,438)
(41,796)
4,779
(4,056)
166
235,681
15,000
(285,000)
(1,155)
(6,272)
362
(161)
(12,226)
(289,452)
(9,860)
4
50,092
40,236
5,462
8,461
(278)
–
–
6,326
35,137
1,483
603
–
2,280
421
(10,049)
(17,503)
–
9,989
42,332
56
42,388
–
–
–
(1,027)
(101,698)
6,407
(6,936)
278
(102,976)
270,000
(172,114)
(1,075)
(9,149)
419
(349)
(7,079)
80,653
20,065
–
30,027
50,092
1 Other non-cash exceptional items include £6,033,000 for losses on our meter portfolio and the £115,000 exceptional finance cost. In 2019, non-cash
exceptional items included a £6,837,000 loss on disposal on our meter portfolio, £68,000 cost relating to deferred remuneration arising on the acquisition
of a subsidiary in 2016 settled in shares in April 2019, £751,000 stock write-back for returned SMETS1 meters, £93,000 acceleration of loan arrangement
fees in relation to the refinancing of the loan facility and £79,000 for non-recurring impairment charges.
2 Movement in trade and other receivables includes an adjustment of £4,922,000 and movement in trade and other payables includes an adjustment
of £237,000 for working capital disposed of as part of the subsidiary sale.
3 Payments to dispose of subsidiary of £11,589,000 include cash disposed of £4,681,000 and transaction costs paid in the year of £6,908,000.
Strategic reportGovernanceFinancial statements
126 SMS Annual report and accounts 2020
ACCOUNTING POLICIES
This note provides a list of the significant accounting policies adopted in the preparation of these consolidated financial
statements. These policies have been consistently applied to all the years presented, unless otherwise stated. The
consolidated financial statements of the Group for the year ended 31 December 2020 were approved and authorised for
issue in accordance with a resolution of the Directors on 16 March 2021. Smart Metering Systems plc is a public limited
company limited by shares and incorporated in Scotland, with its registered office at 2nd Floor, 48 St. Vincent Street,
Glasgow G2 5TS. The Company’s ordinary shares are traded on AIM.
Basis of preparation
The consolidated financial statements have been prepared in accordance with international accounting standards
in conformity with the requirements of the Companies Act 2006.
The financial statements have been prepared on a historical cost basis, modified by the revaluation of certain financial
assets and financial liabilities that have been measured at fair value.
The consolidated financial statements are presented in British Pounds Sterling (£), which is Smart Metering System plc’s
functional and presentation currency, and all values are rounded to the nearest thousand (£’000) except where otherwise
indicated.
Going concern
Management prepares budgets and forecasts on a five-year forward-looking basis. These forecasts cover operational
cash flows and investment capital expenditure and are prepared based on management’s estimation of installation run
rates through the UK smart meter rollout. The Directors have performed their assessment of the entity’s ability to
continue as a going concern, from the date of issue of these financial statements to 31 March 2022.
Following the outbreak of COVID-19, forecasts have been reviewed in detail based on the estimated potential impact
of COVID-19 restrictions and regulations, along with the Group’s proposed responses. Non-essential field work, including
planned installations of smart meters, was suspended from 24 March 2020. However, this was a temporary response
measure and, following the UK Government’s announcement detailing phased lifting of restrictions, a progressive
resumption of all non-essential field work commenced from 1 June 2020. Through the second half of 2020, the Group
continued to see a recovery in installation run rates, despite continued local restrictions, and by Q4 2020 was operating
at c.80% of the pre-COVID-19 run rate. Where permitted under the UK Government’s guidelines, installation activity
has continued in the early part of 2021 through the second national lockdown. However, access to consumer properties
has been limited and the Group has seen a fall in installation rates as a result. Although these events will impact Group
revenues and index-linked annualised recurring revenue (ILARR) in the short term, management is of the view that,
subject to no further setbacks with the pandemic, smart meter installations should return to normal levels by the end
of 2021. Through all of this, the Group continued to generate ILARR from its 3.8 million revenue-generating assets already
on the wall, demonstrating the robust nature of the metering infrastructure asset class.
Management has modelled several different meter installation scenarios, including an extreme downside scenario arising
solely from a COVID-19 protracted national lockdown, which assumed that no new installations took place for a period
of six months. The scenario proved that the business would still have sufficient cash flow to continue to operate, banking
covenants would remain satisfied with adequate headroom, and adequate cash would be available to cover liabilities
and operating costs. This modelling provides confidence to management that, even in extreme circumstances, the
business will still have sufficient resources to continue to operate. Overall, the main impact of COVID-19 is one of timing
and, longer term, management does not anticipate any significant effects on the business as a result of the pandemic.
Management has concluded that no significant structural changes to the business are needed as a result of COVID-19.
Following the disposal of a minority of the Group’s meter assets, effected by the sale of a wholly owned subsidiary of the
Group on 22 April 2020 (the ‘Disposal’), gross cash consideration of £290.6m was received (see note 4 for further details).
These proceeds were used to make a voluntary prepayment under the Group’s existing loan facility of the full outstanding
principal of £270m. Concurrently, the total available funding under the loan facility was reduced from £420m to £300m
on the same terms through to the end of 2023 (see note 18 for further details). At the date of approving the financial
statements, the Group had access to its full £300m revolving credit facility, with no amounts drawn on the facility. The
Group has not required any new or extended facilities as a result of COVID-19, nor has it needed to renegotiate or waive
any of its bank covenants.
The Group was compliant with all its debt covenants at 31 December 2020. The financial covenants attached to
this facility are that EBITDA should be no less than 4.00x interest and net debt should be no more than 5.75x EBITDA.
At 31 December 2020 these stood at 8.58x and -1.05x respectively, on account of a net cash-positive position, demonstrating
significant headroom. The Group does not expect to breach these covenants in the year from the date of approval of
this report.
SMS Annual report and accounts 2020 127
Going concern continued
As a result of the Disposal and the subsequent voluntary prepayment of its loan facility, the Group was in a net cash
position of £40.2m at 31 December 2020 (31 December 2019: net debt of £219.2m) and, at that date, undrawn facilities
were £300.0m (31 December 2019: £150.0m). The Group balance sheet shows consolidated net assets of £406.4m
(31 December 2019: £223.6m), of which £315.5m (31 December 2019: £398.7m) relates to revenue-generating meter
and data assets. The liquidity of the Group thus remains strong and continues to provide the financial flexibility required
in order to support the Group’s long-term growth prospects.
The Group’s cash generation over the period from 24 March to 1 June 2020, from its already installed asset portfolio,
enabled the return of funds received from the UK Government under the Coronavirus Job Retention Scheme (CJRS),
together with withdrawal from the scheme altogether. The Group has not had to rely on any other government support
schemes as a result of COVID-19. With confidence in the Group’s liquidity position, despite COVID-19, the Directors elected
not to suspend payment of the second interim dividend for 2019 and £5.2m was paid out to shareholders on 4 June 2020.
With significant coverage provided by existing long-term, inflation-linked and recurring cash flows, the Group also
remains committed to its revised dividend policy and proposes a 25p per share annualised dividend in respect of FY 2020.
The first of four cash instalments, a total of £7.1m, was paid in October 2020.
Based on the current cash flow projections and facilities in place and having given consideration to various outcomes
of future performance and forecast capital expenditure, including extreme downside scenarios, the Directors consider
it appropriate to continue to prepare the financial statements on a going concern basis and are of the view that there
are no material uncertainties regarding the Group’s going concern status.
Basis of consolidation
The consolidated accounts of the Group include the assets, liabilities and results of the Company and subsidiary
undertakings in which Smart Metering Systems plc (SMS) has a controlling interest. Control is achieved when the Group
is exposed, or has rights, to variable returns from its involvement with the investee and has the ability to affect those
returns through its power over the investee. Specifically, the Group controls an investee if, and only if, the Group has all
of the following: power over the investee (i.e. existing rights that give it the current ability to direct the relevant activities
of the investee); exposure, or rights, to variable returns from its involvement with the investee; and the ability to use
its power over the investee to affect its returns. Subsidiaries are fully consolidated from the date on which control is
transferred to the Group. They are deconsolidated from the date that control ceases.
The acquisition method of accounting is used to account for business combinations by the Group (refer to policy
on page 133).
When necessary, adjustments are made to the financial statements of subsidiaries to bring their accounting policies
into line with the Group’s accounting policies.
All intra-group assets and liabilities, equity, income, expenses and cash flows relating to transactions between members
of the Group are eliminated in full on consolidation.
Foreign currency translation
Group companies
The results and financial position of foreign operations (none of which has the currency of a hyperinflationary economy)
that have a functional currency different from the presentation currency are translated into the presentation currency
as follows:
• assets and liabilities for each balance sheet presented are translated at the closing rate at the date of that balance
sheet;
• non-monetary assets at the date of acquisition are translated at the historical rate and are not subsequently revalued;
• income and expenses for each statement of profit or loss and statement of comprehensive income are translated at
average exchange rates (unless this is not a reasonable approximation of the cumulative effect of the rates prevailing
on the transaction dates, in which case income and expenses are translated at the dates of the transactions); and
• all resulting exchange differences are recognised in other comprehensive income and accumulated in a separate
reserve within equity.
Goodwill and fair value adjustments arising on the acquisition of a foreign operation are treated as assets and liabilities
of the foreign operation and translated at the closing rate.
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128 SMS Annual report and accounts 2020
ACCOUNTING POLICIES continued
Foreign currency translation continued
Transactions and balances
Foreign currency transactions are translated into the functional currency using the exchange rates at the dates of the
transactions. Foreign exchange gains and losses resulting from the settlement of such transactions, and from the
translation of monetary assets and liabilities denominated in foreign currencies at year-end exchange rates, are generally
recognised in profit or loss. They are deferred in equity if they relate to qualifying cash flow hedges and qualifying net
investment hedges or are attributable to part of the net investment in a foreign operation.
Foreign exchange gains and losses that relate to borrowings are presented in the statement of profit or loss, within
Finance costs. All other foreign exchange gains and losses are presented in the statement of profit or loss on a net basis
within Administrative expenses.
Use of estimates and judgements
The Directors are required to make judgements, estimates and assumptions about the carrying amount of assets and
liabilities that are not readily apparent from other sources. These estimates and associated assumptions are based on
historical experience and other factors that are considered to be relevant. Actual results may differ from these estimates.
The estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to accounting estimates are
recognised in the period in which the estimate is revised if the revision affects only that period, or in the period of the
revision and future periods if the revision affects both current and future periods.
Critical accounting judgements
The following are the critical judgements that the Directors have made in the process of applying the Group’s accounting
policies and that have the most significant effect on the amounts recognised in the financial statements:
• presentation of costs attributable to COVID-19 as exceptional:
– as a result of reduced engineering activity in periods of lockdown due to COVID-19, management has estimated that
£6.4m of costs that would ordinarily be capitalised as directly attributable to the installation of meter assets –
consisting primarily of staff costs – have remained in underlying profit. Consistent with the Group’s accounting policy
on exceptional items (see below), these material costs are attributable to a rare macroeconomic event, being the
COVID-19 pandemic, and therefore management has taken the judgement to recognise these costs as exceptional;
and
– at 31 December 2020, management has assessed the expected credit losses for trade receivables. COVID-19 has
generated global financial uncertainty; however, the potential impact of this on the Group’s credit risk is mitigated by
the highly regulated nature of the utilities industry and the extensive support made available to energy – and other
infrastructure – suppliers by the UK Government. As a result, management has not increased the expected loss rates
for the trade receivables portfolio as a whole. Instead, a subset of trade receivables has been identified as having
a potentially elevated credit risk, due to a greater risk of administration as a direct consequence of COVID-19.
This subset of trade receivables has been provided for on a specific basis and has resulted in an additional £0.5m
impairment loss. Given the continued uncertainty regarding the impact of COVID-19 on customer default risk,
management will continue to monitor the situation and reassess its expected credit losses at each reporting period
end. Management has taken the judgement to recognise this incremental impairment loss as exceptional on the same
basis as that outlined above;
• capitalisation of internal installation costs:
– a significant level of in-house installation of customers’ meter assets is carried out by the Group, certain costs of which
are capitalised (2020: £19.8m, 2019: £39.7m) and depreciated as part of property, plant and equipment depreciation.
Judgement is required by management to ascertain the appropriate categories and proportion of overheads and
other expenses that are directly attributable to installation of meter assets. Typically, capitalised costs will include
staff costs, and a systematic allocation of any production overheads deemed to be directly attributable to the
process of installing a meter owned by the Group. Other general and administrative overheads, such as sales,
marketing and training costs, are expensed directly to profit and loss; and
SMS Annual report and accounts 2020 129
Use of estimates and judgements continued
Critical accounting judgements continued
• presentation of losses on disposal of certain meter assets as exceptional items:
– as a result of the inherent volatility associated with the UK smart meter rollout, and removal of traditional meter assets
as part of this, management has taken the decision to show losses arising on disposal of these meters – being the net
book value less the associated termination income received representing proceeds on disposal – as exceptional
administrative expenses. By disclosing these amounts separately, the traditional meter asset portfolio can be better
tracked to assist the users of the financial statements to better understand this premature retirement of these
revenue-generating assets that is outside the Group’s control. A loss on disposal of traditional meter assets was
recognised as an exceptional cost in the year ended 31 December 2020. In 2019, the change in accounting policy to
reduce the residual value of the traditional meter asset portfolio to £nil (see note 11 for further details) was designed to
reflect the consumption of economic benefit from installed assets, being the income earned from the provision of the
meter. On disposal, the receipt of termination income, recognised as a component of the net gain or loss on the
disposal of these meter assets, will vary depending on the energy supplier and is therefore not within our control. As
the receipt of proceeds from disposal is inherently volatile, a loss on disposal can still arise in certain circumstances;
and
– technical communication issues for some first-generation smart meter assets (SMETS1 meters) on supplier churn have
continued through 2020, with the DCC Enrolment and Adoption programme now due to extend into 2021. As a result,
the Group has continued to see a small proportion of SMETS1 meters removed from the wall. As these removals are
attributable to the temporary industry transition period, management has taken the judgement to recognise losses
arising on the disposal of these meters as exceptional until resolution by the Enrolment and Adoption programme is
complete.
Key sources of estimation uncertainty
The key assumptions concerning the future and other key sources of estimation uncertainty at the reporting date that
may have a significant risk of causing material adjustment to the carrying amounts of assets and liabilities within the
next financial year are discussed below:
• recoverability of carrying value of meter assets portfolio:
– as the UK smart meter rollout progresses, our portfolio of traditional meter assets is diminishing. It is therefore crucial
that the recoverability of the carrying value of our meter assets, recognised in property, plant and equipment, be
assessed. The two main drivers for assessing this recoverability are:
1) the timing of the removals of these meters – given this decision lies with the end consumer and removals are
largely undertaken by third parties. We thus have little control over the timing and quantity of these removals; and
2) the estimated future cash flows from termination income, which are derived using historical data and analysis
around the risk of churn between contracted and non-contracted customers. This assessment includes
consideration of the extent to which termination income and future rental income are received as traditional
meters continue to be removed from the wall.
No impairment review was considered necessary at 31 December 2020 for the reasons detailed within note 11. The
carrying value of the traditional meter assets portfolio is thus considered recoverable and, therefore, no impairment
charge has been recognised.
Revenue recognition
Refer to details in note 2.
Exceptional items and separately disclosed items
The Group presents as exceptional items on the face of the consolidated statement of comprehensive income those
items of income and expense which, because of the material nature or expected infrequency of the events giving rise
to them, merit separate presentation to allow shareholders to understand better the elements of financial performance
in that year, so as to facilitate comparison with prior periods and to assess better trends in financial performance.
Termination fee income is reported as part of Other operating income on the consolidated statement of comprehensive
income given its materiality and nature. Any termination fee income arising on the loss of meter assets is reported within
Administrative expenses as a component of net gain or loss on disposal. Termination fee income does not arise from the
principal activities of the Group. Any such gain or loss on disposal relating to traditional meter assets and SMETS1 meter
assets is disclosed as an exceptional item.
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130 SMS Annual report and accounts 2020
ACCOUNTING POLICIES continued
Government grants
Grants from governments are recognised at their fair value where there is a reasonable assurance that the grant will be
received and the Group will comply with all attached conditions, usually on submission of a valid claim for payment.
Government grants relating to costs are deferred and recognised in profit or loss over the period necessary to match
them with the costs that they are intended to compensate. Government grants relating to capital expenditure are
included in liabilities as deferred income and they are credited to profit or loss on a straight-line basis over the expected
lives of the related assets. Amounts credited to profit or loss are recognised as part of Other operating income on the
consolidated statement of comprehensive income.
The R&D expenditure credit (RDEC) scheme is a UK Government tax incentive which allows qualifying companies to claim
R&D expenditure credits (RDECs) equal to 12% of their qualifying research and development expenditure. The credit is
taxable at the corporation tax rate and is included in the company’s taxable trading profits. RDECs are accounted for by
the Group in accordance with IAS 20 Government Grants and recognised within Other operating income on the
consolidated statement of comprehensive income. Outstanding amounts receivable or payable are recognised on the
consolidated balance sheet within the corporation tax asset or corporation tax liability respectively.
Financial assets
The Group’s financial assets include cash and cash equivalents and trade and other receivables. Investments consist of
an immaterial debt investment held at amortised cost.
Classification
The Group classifies its financial assets in the following measurement categories:
• those to be measured subsequently at fair value, either through other comprehensive income (FVOCI) or through profit
or loss (FVPL); and
• those to be measured at amortised cost.
The classification depends on the Group’s business model for managing the financial assets and the contractual terms of
the cash flows.
For investments in equity instruments that are not held for trading, this will depend on whether the Group has made an
irrevocable election at the time of initial recognition to account for the equity investment at FVOCI. The Group reclassifies
debt investments when and only when its business model for managing those assets changes.
Recognition and derecognition
Financial assets are initially recognised on trade date. Financial assets are derecognised when the rights to receive cash
flows from the financial assets have expired or have been transferred and the Group has transferred substantially all the
risks and rewards of ownership.
Measurement
At initial recognition, the Group measures a financial asset at its fair value plus, in the case of a financial asset not at
FVPL, transaction costs that are directly attributable to the acquisition of the financial asset. Transaction costs of
financial assets carried at FVPL are expensed in profit or loss.
Trade and other receivables
Trade and other receivables are recognised initially at fair value and subsequently measured at amortised cost. They are
generally due for settlement within 30 days and are therefore all classified as current. Due to their short-term nature,
carrying value is considered to approximate fair value.
Cash and cash equivalents
Refer to accounting policy.
SMS Annual report and accounts 2020 131
Financial assets continued
Impairment
The Group assesses, on a forward-looking basis, the expected credit losses associated with its debt instruments carried
at amortised cost and FVOCI. The impairment methodology applied depends on whether there has been a significant
increase in credit risk. For trade receivables and accrued income, which include contract assets and billed and unbilled
receivables arising from contracts with customers, the Group applies the simplified approach permitted by IFRS 9, which
requires expected lifetime losses to be recognised from initial recognition of the receivables.
Trade receivables and accrued income are written off, and derecognised, where there is no reasonable expectation of
recovery. Indicators that there is no reasonable expectation of recovery include, amongst others, the customer ceasing
trading and entering administration with no expected recovery from the Supplier of Last Resort process, or a failure by
the customer to make contractual payments for a period of greater than or equal to 365 days past due. Indicators are
assessed on an individual customer basis. Impairment losses, including the loss allowance, on trade receivables and
contract assets are presented within Administrative expenses. Impairment losses on accrued termination income are
presented within Other operating income. Subsequent recoveries of amounts previously written off are credited against
the same line item.
Further information about the impairment of trade receivables and accrued income, and the Group’s exposure to credit
risks, can be found in note 19.
Financial liabilities
The Group’s financial liabilities include trade and other payables, bank loans and overdrafts, and leases.
Classification
Financial liabilities are classified as financial liabilities at fair value through profit or loss or loans and borrowings, as
appropriate. The Group determines the classification of its financial liabilities at initial recognition.
Recognition
All financial liabilities are recognised initially at fair value and, in the case of bank loans, net of directly attributable
transaction costs.
Measurement
Trade and other payables and bank overdrafts
Trade and other payables, and overdrafts, are subsequently measured at amortised cost using the effective interest
rate method. Trade and other payables are presented as current liabilities unless payment is not due within 12 months
after the reporting period. Due to their short-term nature, carrying value is considered to approximate fair value.
Bank loans
Bank loans are subsequently measured at amortised cost. Interest expense on bank loans is recognised in the
consolidated income statement using the effective interest rate method.
Transaction costs on revolving credit facilities are recognised as transaction costs of the loan to the extent that it is
probable that some or all the facility will be drawn down. In this case, the fee is deferred within Other assets until the
drawdown occurs. Upon drawdown of the first loan, these costs are reclassified from other assets to bank loans and
subsequently amortised over the term of the facility.
Borrowings are removed from the balance sheet when the obligation specified in the contract is discharged or cancelled
or has expired. The difference between the carrying amount of a financial liability that has been extinguished or
transferred to another party and the consideration paid, including any non-cash assets transferred, or liabilities
assumed, is recognised in profit or loss as other income or finance costs.
If a facility is modified, then it is assessed whether the modification is significant enough to constitute an extinguishment
either qualitatively or quantitatively, where the change in present value of cash flows, including any transaction costs
paid, exceeds 10%. If a modification is considered an extinguishment of the initial loan, the new modified loan is recorded
at fair value and a gain/loss recognised immediately in the consolidated income statement for the difference between
the carrying amount of the old loan and the new loan. Any costs incurred are recognised in profit or loss. Where a
modification is not significant enough to be an extinguishment, the cash flows under the modified loan are rediscounted
at the original effective interest rate and an immediate gain or loss is recognised accordingly in the consolidated income
statement on the date of modification. Any costs incurred are recognised over the remaining period of the modified
debt, within the effective interest rate.
Borrowings are classified as current liabilities unless the Group has an unconditional right to defer settlement of the
liability for at least 12 months after the reporting period.
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132 SMS Annual report and accounts 2020
ACCOUNTING POLICIES continued
Offsetting of financial instruments
Financial assets and financial liabilities are offset, and the net amount reported in the consolidated statement of financial
position, if, and only if, there is a currently enforceable legal right to offset the recognised amounts and there is an
intention to settle on a net basis, or to realise the assets and settle the liabilities simultaneously.
Leases
Group as lessor
The arrangements the Group has in place to act as meter asset provider do not constitute a lease of the meter asset to
the energy supplier. SMS controls the meter as the Group retains legal title and obtains substantially all the economic
benefit. The assets are recognised as property, plant and equipment when in use under contract with an energy supplier
and related income for the service of providing a fitted meter is recognised in accordance with IFRS 15. Further
information about the Group’s accounting policy for revenue recognition is given in note 2, and for property, plant and
equipment in note 11.
Group as a lessee
The Group leases various offices, warehouses and motor vehicles and, following the business combinations disclosed in
note 20, land. For offices, warehouses and motor vehicles rental contracts are typically made for fixed periods of three to
10 years. For land, rental contracts are typically made for fixed periods of 20 to 40 years. Contracts may have extension or
early termination options. Lease terms are negotiated on an individual basis and contain a wide range of different terms
and conditions. The lease agreements do not impose any covenants, but leased assets may not be used as security for
borrowing purposes.
From 1 January 2019, leases are recognised as a right-of-use asset and a corresponding liability at the date at which the
leased asset is available for use by the Group.
In determining the lease term, management considers all facts and circumstances that create an economic incentive to
exercise an extension option, or not exercise a termination option. Extension options (or periods after termination options)
are only included in the lease term if the lease is reasonably certain to be extended (or not terminated). The lease term is
reassessed if an option is actually exercised (or not exercised) or the Group becomes obliged to exercise (or not exercise)
it. The assessment of reasonable certainty is only revised if a significant event or a significant change in circumstances
occurs, which affects this assessment, and that is within the control of the lessee.
Assets and liabilities arising from a lease are initially measured on a present value basis. Lease liabilities include the net
present value of the following lease payments:
• fixed payments (including in-substance fixed payments), less any lease incentives receivable;
• variable lease payments that are based on an index or a rate, initially measured using the index or rate as at the
commencement date;
• amounts expected to be payable by the lessee under residual value guarantees;
• the exercise price of a purchase option if the lessee is reasonably certain to exercise that option; and
• payments of penalties for terminating the lease, if the lease term reflects the lessee exercising that option.
Lease payments to be made under reasonably certain extension options are also included in the measurement of the
liability.
The lease payments are discounted using the interest rate implicit in the lease. If that rate cannot be determined,
the lessee’s incremental borrowing rate is used, being the rate that the lessee would have to pay to borrow the funds
necessary to obtain an asset of similar value in a similar economic environment with similar terms and conditions.
The weighted average lessee’s incremental borrowing rate applied to the lease liabilities at 31 December 2020 was 4.8%
(31 December 2019: 4%), representing a small increase due to the new lease liabilities recognised in the year in relation
to land acquired as part of the grid-scale business acquisitions detailed in note 20.
The Group is exposed to potential future increases in variable lease payments based on an index or rate, which are not
included in the lease liability until they take effect. When adjustments to lease payments based on an index or rate take
effect, the lease liability is reassessed and adjusted against the right-of-use asset.
Lease payments are allocated between principal and finance cost. The finance cost is charged to profit or loss over the
lease period so as to produce a constant periodic rate of interest on the remaining balance of the liability for each period.
SMS Annual report and accounts 2020 133
Leases continued
Group as a lessee continued
Right-of-use assets are measured at cost comprising the following:
• the amount of the initial measurement of lease liability;
• any lease payments made at or before the commencement date less any lease incentives received;
• any initial direct costs; and
• restoration costs.
Right-of-use assets are generally depreciated over the shorter of the asset’s useful life and the lease term, on a straight-
line basis.
Payments associated with short-term leases and leases of low-value assets are recognised on a straight-line basis as an
expense in profit or loss. Short-term leases are leases with a lease term of 12 months or less. Low-value assets comprise
IT equipment and small items of office furniture, where the value of the asset on inception is less than c.US$5,000.
Payments for services are separated from the lease components of a contract and accounted for as an administrative
expense.
Business combinations
The acquisition method of accounting is used to account for all business combinations, regardless of whether equity
instruments or other assets are acquired. The consideration transferred for the acquisition of a subsidiary comprises the:
• fair values of the assets transferred;
• liabilities incurred to the former owners of the acquired business;
• equity interests issued by the Group;
• fair value of any asset or liability resulting from a contingent consideration arrangement; and
• fair value of any pre-existing equity interest in the subsidiary.
Identifiable assets acquired and liabilities and contingent liabilities assumed in a business combination are, with limited
exceptions, measured initially at their fair values at the acquisition date. The Group recognises any non-controlling
interest in the acquired entity on an acquisition-by-acquisition basis either at fair value or at the non-controlling interest’s
proportionate share of the acquired entity’s net identifiable assets.
Acquisition-related costs are expensed as incurred.
The excess of the:
• consideration transferred;
• amount of any non-controlling interest in the acquired entity; and
• acquisition-date fair value of any previous equity interest in the acquired entity
over the fair value of the net identifiable assets acquired is recorded as goodwill. If those amounts are less than the
fair value of the net identifiable assets of the business acquired, the difference is recognised directly in profit or loss as
a bargain purchase. Where settlement of any part of cash consideration is deferred, the amounts payable in the future
are discounted to their present value as at the date of exchange. The discount rate used is the entity’s incremental
borrowing rate, being the rate at which a similar borrowing could be obtained from an independent financier under
comparable terms and conditions.
Contingent consideration is classified either as equity or a financial liability. Amounts classified as a financial liability
are subsequently remeasured to fair value, with changes in fair value recognised in profit or loss.
If the business combination is achieved in stages, the acquisition date carrying value of the acquirer’s previously held
equity interest in the acquiree is remeasured to fair value at the acquisition date. Any gains or losses arising from such
remeasurement are recognised in profit or loss.
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134 SMS Annual report and accounts 2020
ACCOUNTING POLICIES continued
Research and development
Expenditure on pure and applied research activities is recognised in the consolidated statement of comprehensive
income as an expense as incurred.
Expenditure on product and system development activities is capitalised if the product or process is technically and
commercially feasible and the Group intends and has the technical ability and sufficient resources to complete
development; if future economic benefits are probable; and if the Group can measure reliably the expenditure
attributable to the intangible asset during its development. The expenditure capitalised includes the cost of materials,
direct labour and an appropriate proportion of overheads.
Capitalised development expenditure is stated at cost less accumulated amortisation and accumulated impairment
losses.
Amortisation is calculated when the asset is available for use, so as to write off its cost, less its estimated residual value,
over the useful economic life of that asset as follows:
• Development of ADMTM units
10% on cost, straight line
• Development of internally generated information technology systems (‘IT development’)
20% and 50% on cost,
straight line
Capitalised development expenditure on ADMTM units is disclosed within Property, plant and equipment as part of Meter
assets and amortised over the same useful economic life as that applied to the tangible ADMTM unit.
Capitalised IT development expenditure is disclosed within Intangible assets as part of IT development and software.
Development and software were previously disclosed separately, but were combined into a single asset class for the year
ended 31 December 2019 as all costs capitalised within these categories relate to information technology and, with effect
from 1 January 2019, costs were amortised over the same useful economic life of five years. A new system was integrated
and brought into use during 2020 and associated development costs are amortised over the remaining contract term
of two years. All other costs continue to be amortised over five years.
Intangible assets
Intangible assets acquired separately from third parties consist of software costs, including licence fees. These are
recognised as assets, measured at cost and classified as part of IT development and software.
Internally generated intangible assets relate to IT development and are recognised as part of IT development and
software. Refer to further details in the research and development accounting policy above.
Intangible assets acquired as part of a business combination are recognised outside goodwill if the asset is separable
or arises from contractual or other legal rights. They are recognised at their fair value at the date of acquisition and
are subsequently amortised on a straight line based on the timing of projected cash flows of the contracts over their
estimated useful lives.
Following initial recognition, intangible assets are measured at cost at the date of acquisition less any amortisation and
any impairment losses. Amortisation costs are included within Administrative expenses disclosed in the consolidated
statement of comprehensive income.
Intangible assets are amortised over their useful lives as follows:
• IT development and software
20% and 50% on cost, straight line
• Intangibles recognised upon acquisition:
- Customer contracts
- Trademarks
10% on cost, straight line
33% on cost, straight line
Useful lives are examined on an annual basis and adjustments, where applicable, are made on a prospective basis.
SMS Annual report and accounts 2020 135
Goodwill
Goodwill represents the excess of the consideration transferred over the fair value of the identifiable assets and liabilities
of the acquiree at the date of acquisition. Goodwill on acquisitions of subsidiaries is included in intangible assets. Goodwill
is not amortised but is tested annually for impairment, or if there is an indication of impairment, and is carried at cost less
accumulated impairment losses. See note 13 for detailed assumptions and methodology. Impairment losses are not
subsequently reversed.
Goodwill is allocated to cash-generating units (CGUs) for the purpose of impairment testing. The allocation is made to
those CGUs or groups of CGUs that are expected to benefit from the business combination in which the goodwill arose.
The units or groups of units are identified at the lowest level at which goodwill is monitored for internal management
purposes, being the operating segments.
If the recoverable amount of an asset (or CGU) is estimated to be less than its carrying amount, the carrying amount
of the asset (or CGU) is reduced to its recoverable amount. An impairment loss is recognised as an expense immediately.
Where an impairment loss subsequently reverses, the carrying amount of the asset (or CGU) is increased to the revised
estimate of its recoverable amount, but so that the increased carrying amount does not exceed the carrying amount that
would have been determined had no impairment loss been recognised for the asset (or CGU) in prior years. A reversal
of an impairment loss is recognised as income immediately.
Detailed assumptions used in the annual impairment test for goodwill, with regard to discount, growth and inflation rates,
are set out in note 13.
Contingent consideration is recorded initially at fair value and classified as equity or a financial liability. Contingent
consideration classified as equity is not remeasured, but contingent consideration classified as a financial liability is
subsequently remeasured at fair value through profit or loss.
Adjustments to provisional fair values of identifiable assets and liabilities (and to estimates of contingent consideration)
arising from additional information, obtained within the measurement period (no more than one year from the acquisition
date), about facts and circumstances existing at the acquisition date, are adjusted against goodwill. Other adjustments
to provisional fair values or changes in contingent consideration are recognised through profit or loss.
Impairment of tangible and intangible assets other than goodwill
At each reporting date, the Group reviews the carrying amounts of its property, plant and equipment and intangibles to
determine whether there is any indication that those assets have suffered an impairment loss. If any such indication exists,
the recoverable amount of the asset is estimated in order to determine the extent of the impairment loss (if any). Where
the asset does not generate cash flows that are independent from other assets, the Group estimates the recoverable
amount of the CGU to which the asset belongs.
The recoverable amount is the higher of fair value less costs to sell and value in use. In assessing value in use, the
estimated future cash flows are discounted to their present value using a discount rate that reflects current market
assessments of the time value of money and the risks specific to the asset for which the estimates of future cash flows
have been adjusted.
Detailed assumptions used in the impairment test for meter assets, namely traditional meter assets, are set out in note 11.
An impairment loss is recognised for the amount by which the asset’s carrying amount exceeds its recoverable amount.
Strategic reportGovernanceFinancial statements
136 SMS Annual report and accounts 2020
ACCOUNTING POLICIES continued
Property, plant and equipment
Property, plant and equipment is stated at cost, net of accumulated depreciation and any accumulated impairment
losses. Such cost includes the cost of replacing part of the property, plant and equipment. When significant parts of
property, plant and equipment are required to be replaced in intervals, the Group recognises such parts as individual
assets with specific useful lives and depreciation, respectively. Pursuant to the acquisition of the meter installation
businesses on 18 March 2016 certain internal costs to the Group are also capitalised where they are demonstrated
as being directly attributable to bringing the meter assets into their usable condition.
All other repair and maintenance costs are recognised in the consolidated statement of comprehensive income
as incurred.
For each asset depreciation is calculated using the straight-line method to allocate its cost, net of its residual value
if applicable, over its estimated useful life as follows:
• Freehold property
2%
• Short leasehold property
Shorter of the lease term or 15% and 20%
• Meter assets
Smart meters and I&C meters 5%
ADMTM units 10%
Traditional meters to 1 July 2025
• Plant and machinery
33% on cost
• Fixtures, fittings and equipment 20% and 33% on cost
• Motor vehicles
25% on cost
• Right-of-use assets
Shorter of the asset’s useful life and the lease term.
An item of property, plant and equipment and any significant part initially recognised is derecognised upon disposal or
when no future economic benefits are expected from its use or disposal. Any gain or loss arising on derecognition of the
asset (calculated as the difference between the net disposal proceeds and the carrying amount of the asset) is included in
the consolidated statement of comprehensive income when the asset is derecognised. The asset’s residual values, useful
lives and methods of depreciation are reviewed at each financial year end and adjusted prospectively, if appropriate.
Property, plant and equipment is initially recorded at cost.
The following changes in estimates with regard to property, plant and equipment were made with effect from 1 January 2020:
• With respect to the domestic traditional meter asset portfolio, the useful life of all opening assets has been extended
from 31 December 2022 to 1 July 2025 to reflect the UK Government’s confirmation on 18 June 2020 that it will introduce
a new regulatory framework, first proposed in September 2019, for the next phase of the UK smart meter rollout. The
new four-year framework will be implemented from 1 July 2021, effectively extending the smart meter rollout to 1 July
2025. It is accepted that the rate of meter exchange to smart meters will vary year by year as the rollout proceeds, but
there is currently no reliable basis on which to predict the annual profile. Accordingly, a straight-line approach to
depreciation of these assets continues to be adopted. As a result of this change in estimate, the consolidated income
statement for the year ended 31 December 2020 reflected a reduced charge for depreciation of £4.8m, recognised
within depreciation in Cost of sales. It is not practicable to estimate the effect of this change on future periods because
the future removal profile of the domestic traditional meter asset portfolio is volatile and outside our control.
The following changes in estimates with regard to property, plant and equipment were made with effect from 1 January 2019:
• Subsequent to the impairment review carried out at 31 December 2018, the estimate of residual value on the domestic
traditional meter asset portfolio has been reduced to 0% to reflect management’s updated forecasts and assumptions
regarding the recoverability of value on these assets. As a result, the income statement has been charged with an
additional c.£7.3m, recognised within depreciation in Cost of sales.
See the Leases accounting policy for further details on the recognition and measurement of right-of-use assets under
IFRS 16.
SMS Annual report and accounts 2020 137
Inventories
Finished goods and consumables
Finished goods and consumables are stated at the lower of cost and net realisable value. Cost comprises direct materials
and purchases of meter assets and ADMTM units at cost. Costs of purchased inventory are determined after deducting
rebates and discounts. Net realisable value represents the estimated selling price for inventories in the ordinary course of
business less the estimated costs necessary to make the sale.
Work in progress: grid-scale batteries
Work in progress is stated at the lower of cost and net realisable value. Cost includes:
• work in progress recognised as a result of business combinations;
• direct materials, including the purchase of batteries at cost (after deducting rebates and discounts); and
• the cost of development, including direct labour and an appropriate proportion of overhead expenditure.
Net realisable value is the estimated selling price in the ordinary course of business less the estimated costs of completion
and the estimated costs necessary to make the sale.
Cash and cash equivalents
Cash and cash equivalents in the consolidated statement of financial position comprises cash at bank and in hand and
short-term deposits with an original maturity of three months or less. For the purpose of the consolidated statement of
cash flows, cash and cash equivalents consists of cash and short-term deposits as defined above, net of outstanding
bank overdrafts.
Restricted cash
Restricted cash in the consolidated statement of financial position comprises amounts collected from customers on
behalf of a third party, as part of a services arrangement, that have not yet been allocated. These monies are held in
a trust account whilst awaiting allocation and, per the terms of the account, cannot be used by the Group to meet other
short-term cash commitments. They have thus been disclosed separately from cash and cash equivalents.
Any movement in restricted cash is classified as an operating cash flow in the consolidated statement of cash flows, in line
with the operational nature of the management service being delivered.
Pension costs
The Group operates a defined contribution pension scheme for employees. The assets of the scheme are held separately
from those of the Group. The annual contributions payable are charged to the consolidated statement of comprehensive
income.
Share-based payments
IFRS 2 Share-based Payment has been applied to all grants of equity instruments. The Group issues equity-settled
share-based payments to certain employees under the terms of the Group’s various employee share and option
schemes. Equity-settled share-based payments are measured at fair value at the date of the grant. The fair value
determined at the grant date of equity-settled share-based payments is expensed on a straight-line basis over the
vesting period, based on an estimate of the shares that will ultimately vest.
Share capital
Ordinary shares are classified as equity. Incremental costs directly attributable to the issue of new ordinary shares or
options are shown in equity as a deduction from the proceeds.
Own share reserve
The Group offers a Share Incentive Plan for all employees and has established a trust to facilitate the delivery of SMS
shares under this plan. The holdings of this trust include shares that have not vested unconditionally to employees of the
Group. These shares are recorded at cost and are classified as own shares. The cost to the Company of acquiring these
own shares held in trust is shown as a deduction from shareholders’ equity.
Strategic reportGovernanceFinancial statements
138 SMS Annual report and accounts 2020
ACCOUNTING POLICIES continued
Dividends
Dividend distributions to the Company’s shareholders are recognised in the accounting period in which the dividends
are paid.
Taxation
Tax currently payable is based on the taxable profit for the year and any adjustment to tax payable in respect of prior
years. Taxable profit differs from accounting profit as reported in the consolidated statement of comprehensive income
because it excludes items of income or expense that are taxable or deductible in other years and it further excludes items
that are never taxable or deductible. The Group’s liability for current tax is measured using tax rates that have been
enacted or substantively enacted by the reporting date.
Deferred tax is the tax expected to be payable or recoverable on temporary differences between the carrying amount
of assets and liabilities in the financial statements and the corresponding tax bases used in the computation of taxable
profit, and is accounted for using the balance sheet liability method. Deferred tax is recognised in respect of all temporary
differences that have originated but not reversed at the balance sheet date, where transactions or events that result in
an obligation to pay more tax in the future or a right to pay less tax in the future have occurred at the balance sheet date.
Deferred tax is measured at the tax rates that are expected to apply in the periods in which the asset or liability is settled
based on tax rates (and tax laws) that have been enacted or substantively enacted at the balance sheet date. It is
recognised in the income statement except when it relates to items recognised in other comprehensive income or directly
in equity, such as share-based payments. In this case, the deferred tax is also recognised in other comprehensive income
or directly in equity, respectively.
Deferred tax assets are recognised to the extent that it is probable that future taxable profit will be available against
which the temporary difference can be utilised. Their carrying amount is reviewed at each balance sheet date on the
same basis.
Deferred tax liabilities are recognised for all temporary differences, except in respect of:
• temporary differences arising from the initial recognition of goodwill or an asset or liability in a transaction that is not
a business combination and at the time of the transaction affects neither the accounting profit nor taxable profit or loss;
and
• temporary differences associated with investments in subsidiaries where the timing of the reversal of the temporary
differences can be controlled and it is probable that the temporary difference will not reverse in the foreseeable future.
Deferred tax assets and liabilities are offset where there is a legally enforceable right to offset current tax assets and
liabilities and where the deferred tax balances relate to the same taxation authority. Current tax assets and tax liabilities
are offset where the entity has a legally enforceable right to offset and intends either to settle on a net basis, or to realise
the asset and settle the liability simultaneously.
Standards and interpretations
New and amended standards adopted by the Group
The Group has applied the following standards and amendments for the first time for its annual reporting period
commencing 1 January 2020:
Standard or interpretation
IFRS 3 (amendment)
IAS 1 and IAS 8 (amendment)
CF
Definition of a Business
Definition of Material
Conceptual Framework for Financial Reporting
Effective date
1 January 2020
1 January 2020
1 January 2020
The amendments listed above did not have any impact on the amounts recognised in prior periods or the current period,
and are not expected to significantly affect future periods.
New standards and interpretations not yet adopted
Certain new accounting standards and interpretations have been published that are not mandatory for 31 December 2020
reporting periods and have not been early-adopted by the Group. These standards are not expected to have a material
impact on the entity in the current or future reporting periods, or on foreseeable future transactions.
SMS Annual report and accounts 2020 139
NOTES TO THE FINANCIAL STATEMENTS
For the year ended 31 December 2020
1 Segmental reporting
For management purposes, the Group is organised into three core divisions, as follows:
• Asset Management, which comprises regulated management of gas meters, electric meters and ADM™ units within the UK;
• Asset Installation, which comprises installation of domestic and I&C gas meters and electricity meters throughout the
UK; and
• Energy Management, which comprises the provision of energy consultancy services and, following the acquisition
of Solo Energy Limited, the management of Distributed Energy Resources (DER) assets.
For the purpose of making decisions about resource allocation and performance assessment, it is the operating results of
the three core divisions listed above that are monitored by management and the Group’s chief operating decision-maker,
being the SMS Board. It is these divisions, therefore, that are defined as the Group’s reportable operating segments.
Segment performance is evaluated based on gross profit.
The following segment information is presented in respect of the Group’s reportable segments together with additional
balance sheet information:
31 December 2020
Segment revenue
Inter-segment revenue
Revenue from external customers
Cost of sales
Segment gross profit – pre-exceptional
cost of sales
Exceptional items (cost of sales)
Segment gross profit/(loss)
Other operating costs/income
Depreciation
Amortisation of intangibles
Profit/(loss) from operations – pre-exceptional
operating items
Exceptional items (operating)
Profit/(loss) from operations
Net finance costs: other
Net finance costs: exceptional
Profit/(loss) before tax
Tax expense
Profit for year
Asset
Management
£’000
78,675
–
78,675
(29,825)
Asset
Installation
£’000
49,011
(29,287)
19,724
(16,591)
Energy
Management
£’000
4,583
–
4,583
(3,564)
Unallocated
£’000
–
–
–
–
48,850
–
48,850
–
(1,385)
(2,925)
44,540
188,612
233,152
(4,399)
(115)
228,638
–
3,133
(4,890)
(1,757)
–
–
–
(1,757)
(928)
(2,685)
–
–
(2,685)
–
1,019
–
1,019
–
(21)
(32)
966
–
966
(33)
–
933
–
–
–
–
(27,780)
(2,979)
–
(30,759)
(1,056)
(31,815)
(107)
–
(31,922)
–
Total
operations
£’000
132,269
(29,287)
102,982
(49,980)
53,002
(4,890)
48,112
(27,780)
(4,385)
(2,957)
12,990
186,628
199,618
(4,539)
(115)
194,964
(1,485)
193,479
Strategic reportGovernanceFinancial statements
140 SMS Annual report and accounts 2020
NOTES TO THE FINANCIAL STATEMENTS continued
For the year ended 31 December 2020
1 Segmental reporting continued
31 December 2019
Segment revenue
Inter-segment revenue
Revenue from external customers
Cost of sales
Segment gross profit/(loss)
Other operating costs/income
Depreciation
Amortisation of intangibles
Exceptional items
Profit/(loss) from operations
Net finance costs: exceptional
Net finance costs: other
Profit/(loss) before tax
Tax expense
Profit for year
Asset
Management
£’000
82,907
–
82,907
(37,389)
45,518
–
(1,347)
(1,473)
(8,085)
34,613
(104)
(8,065)
26,444
–
Asset
Installation
£’000
59,968
(37,618)
22,350
(27,981)
(5,631)
–
–
–
(51)
(5,682)
–
–
(5,682)
–
Energy
Management
£’000
9,024
–
9,024
(6,847)
2,177
–
–
(10)
–
2,167
–
–
2,167
–
Unallocated
£’000
–
–
–
–
–
(14,659)
(2,299)
–
(391)
(17,349)
–
(118)
(17,467)
–
Total
operations
£’000
151,899
(37,618)
114,281
(72,217)
42,064
(14,659)
(3,646)
(1,483)
(8,527)
13,749
(104)
(8,183)
5,462
(1,465)
3,997
Inter-segment revenue relates to installation services provided by the Asset Installation segment to the Asset
Management segment.
Depreciation of £24.7m (2019: £31.5m) associated with meter assets has been reported within Cost of sales, in the Asset
Management segment, as the meter assets directly drive revenue.
All material revenues and operations are based and generated in the UK. Following the acquisition of Solo Energy Limited
in September 2019, a small minority of operations are based in the Republic of Ireland.
The Group has two major customers that each generated turnover of 10% or more of total Group turnover, as listed below
by segment:
Customer 1 – Asset Management
Customer 1 – Asset Installation
Customer 2 – Asset Management
Customer 2 – Asset Installation
2020
£’000
12,876
359
7,816
6,251
27,302
2019
£’000
14,030
796
–
–
14,826
SMS Annual report and accounts 2020 141
1 Segmental reporting continued
Segment assets and liabilities
31 December 2020
Assets reported by segment
Intangible assets
Property, plant and equipment
Inventories
Contract assets
Other assets (bank loans)
Assets not by segment
Total assets
Liabilities by segment
Contract liabilities
Lease liabilities
Bank loans
Liabilities not by segment
Total liabilities
31 December 2019
Assets reported by segment
Intangible assets
Property, plant and equipment
Inventories
Contract assets
Assets not by segment
Total assets
Liabilities by segment
Contract liabilities
Lease liabilities
Other liabilities
Bank loans
Liabilities not by segment
Total liabilities
Asset
Management
£’000
Asset
Installation
£’000
Energy
Management
£’000
Unallocated
£’000
Total
operations
£’000
19,308
318,979
22,676
–
1,949
362,912
1,254
727
–
1,981
3,497
235
273
–
–
4,005
2,216
–
–
2,216
2,118
2,222
4,701
47
–
9,088
219
2,276
–
2,495
–
6,902
–
–
–
6,902
–
2,248
–
2,248
24,923
328,338
27,650
47
1,949
382,907
79,643
462,550
3,689
5,251
–
8,940
47,168
56,108
Asset
Management
£’000
Asset
Installation
£’000
Energy
Management
£’000
Unallocated
£’000
Total
operations
£’000
18,417
403,948
21,734
–
444,099
1,360
893
269,260
271,513
3,493
518
327
11
4,349
2,010
–
–
2,010
1,833
–
–
–
1,833
124
–
–
124
–
8,192
–
–
8,192
–
3,072
–
3,072
23,743
412,658
22,061
11
458,473
98,902
557,375
3,494
3,965
269,260
276,719
57,079
333,798
Assets not by segment include cash and cash equivalents, trade and other receivables and investments.
Liabilities not by segment include trade and other payables and deferred tax liabilities.
Additions to non-current assets within each segment are listed below:
Additions to non-current assets
2020
2019
Asset
Management
£’000
Asset
Installation
£’000
Energy
Management
£’000
Unallocated
£’000
Total
operations
£’000
44,080
106,452
2
509
2,568
67
1,467
6,495
48,117
113,523
Strategic reportGovernanceFinancial statements
142 SMS Annual report and accounts 2020
NOTES TO THE FINANCIAL STATEMENTS continued
For the year ended 31 December 2020
2 Revenue from contracts with customers
(a) Disaggregation of revenue from contracts with customers
The Group reports the following segments: Asset Management, Asset Installation and Energy Management,
in accordance with IFRS 8 Operating Segments. We have determined that, to meet the objective of the disaggregation
disclosure requirement in paragraph 114 of IFRS 15, which is to disaggregate revenue from contracts with customers
into categories that depict how the nature, amount, timing and uncertainty of revenue and cash flows are affected by
economic factors, further disaggregation is required into the major types of services offered. The following table thus
discloses segmental revenue by type of service delivered and timing of revenue recognition, including a reconciliation
of how this disaggregated revenue ties in with the Asset Management, Asset Installation and Energy Management
segments, in accordance with paragraph 115 of IFRS 15.
Year ended 31 December 2020
Major service lines
Metering
Data management
Utility connections
Transactional meter works
Energy management
Timing of revenue recognition
Services transferred at a point in time
Services transferred over time
Year ended 31 December 2019
Major service lines
Metering
Data management
Utility connections
Transactional meter works
Energy management
Timing of revenue recognition
Services transferred at a point in time
Services transferred over time
Asset
Management
£’000
Asset
Installation
£’000
Energy
Management
£’000
Total
operations
£’000
70,780
7,895
–
–
–
78,675
–
78,675
78,675
–
–
8,817
10,275
632
19,724
10,275
9,449
19,724
–
–
–
–
4,583
4,583
–
4,583
4,583
70,780
7,895
8,817
10,275
5,215
102,982
10,275
92,707
102,982
Asset
Management
£’000
Asset
Installation
£’000
Energy
Management
£’000
Total
operations
£’000
75,472
7,435
–
–
–
82,907
–
82,907
82,907
–
–
8,406
13,295
649
22,350
13,172
9,178
22,350
–
–
–
–
9,024
9,024
–
9,024
9,024
2020
£’000
47
47
3,689
3,689
75,472
7,435
8,406
13,295
9,673
114,281
13,172
101,109
114,281
2019
£’000
11
11
3,494
3,494
(b) Assets and liabilities related to contracts with customers
The Group has recognised the following assets and liabilities related to contracts with customers:
Current contract assets
Total contract assets
Current contract liabilities
Total contract liabilities
Trade receivables and unbilled receivables are disclosed in note 15.
SMS Annual report and accounts 2020 143
2 Revenue from contracts with customers continued
(b) Assets and liabilities related to contracts with customers continued
Significant changes in contract assets and liabilities
Contract assets and contract liabilities have not changed significantly, and movements reflect the general timing of
revenue recognition and status of services in progress at the end of the year.
Revenue recognised in relation to contract liabilities
The following table shows how much of the revenue recognised in the current period relates to carried-forward contract
liabilities:
Revenue recognised that was included in the contract liability balance
at the beginning of the period
2020
£’000
2019
£’000
2,991
3,057
No revenue was recognised in 2020 in relation to performance obligations satisfied in previous periods.
Transaction price for which performance obligations not satisfied
All our utilities connections and energy management contracts are either for periods of one year or less or are billed
periodically based on time and resources incurred, or other unit measures. As permitted under IFRS 15, the transaction
price allocated to these performance obligations unsatisfied at the end of the reporting period is not disclosed.
(c) Accounting policies and significant judgements
(i) Metering
Meter rental
The Group acts as a gas and electricity meter asset provider, providing and installing meters to energy suppliers on behalf
of the end consumer.
As a result of the Group’s assessment of contracts on implementation of IFRS 16, and any potential interaction with
IFRS 15, it was determined that the arrangements the Group has in place to act as meter asset provider do not constitute
a lease of the meter asset to the energy supplier. Therefore, the related income for the service of providing a fitted meter
is recognised in accordance with IFRS 15.
The provision of meter assets to energy suppliers (‘MAP services’), together with the initial installation, is considered a
distinct and single performance obligation on the basis that, as Meter Asset Provider (MAP), the Group has an obligation
to its customers to provide a fitted meter. This is a separately identifiable service to which a stand-alone selling price is
typically allocated. Over the course of the contract term, which runs in perpetuity, the Group delivers a series of monthly
services for which benefits are simultaneously received and consumed by the customer.
Charges for MAP services are calculated daily based on the number of installed meters and invoiced to customers
monthly once validation checks have been completed. As revenue from MAP charges is attributed to services provided
daily, revenue is always based on the actual level of service provided and, therefore, any uncertainty at the end of each
reporting period is limited to the extent that validation checks are still being completed. Revenue is thus recognised over
time based on our right to invoice and includes contract RPI uplifts.
As a result of industry regulations, and subject to specific contract terms with a customer, the Group may be required
to make payments to customers for shortfalls in the level of service provided. These charges are directly related to the
service being provided to the customer and thus recognised as a reduction to revenue in the month in which the service
failure occurred. Where service levels are set based on annual targets, charges are estimated monthly and subsequently
finalised at the end of the year. Uncertainty, as it pertains to these payments to customers, is thus typically resolved by the
end of the reporting period.
If a MAP contract is cancelled, termination fees may be levied on the energy supplier. There has been no change in the
accounting of these termination fees and they continue to be classified within Other operating income unless they have
arisen on the loss of the meter assets, in which case they are reported within Administrative expenses as a component
of net gain or loss on disposal.
If the services rendered by the Group exceed the payment received, then accrued income is recognised. This is
subsequently reclassified to receivables at the point at which the Group has an unconditional right to payment.
Strategic reportGovernanceFinancial statements
144 SMS Annual report and accounts 2020
NOTES TO THE FINANCIAL STATEMENTS continued
For the year ended 31 December 2020
2 Revenue from contracts with customers continued
(c) Accounting policies and significant judgements continued
(i) Metering continued
Asset management services
The Group provides meter asset management and operations services to energy suppliers. These services are
considered a distinct performance obligation from the meter rental on the basis that these are separately identifiable
services to which a stand-alone selling price is allocated, and they are not necessary to bring the meter asset into use.
Over the course of the contract term, which can either be fixed or in perpetuity, the Group delivers a series of monthly
services for which the benefits are simultaneously received and consumed by a customer. Therefore, these are accounted
for as a single performance obligation.
Service charges are calculated daily based on the number of meters appointed and invoiced to customers monthly.
As revenue from service charges is attributed to services provided daily, revenue is always based on the actual level
of service provided and, therefore, there is no uncertainty at the end of each reporting period. Revenue is thus recognised
over time based on our right to invoice and includes contract RPI uplifts.
The Group’s meter asset management contracts also include the provision of transactional meter works. These are
considered further under section (iv) below.
If the services rendered by the Group exceed the payment received, then a contract asset is recognised. This is
subsequently reclassified to receivables at the point at which the Group has an unconditional right to payment.
Third-party management services
The Group provides management services to a third party to whom it sold a minority of its meter asset portfolio in
April 2020. These services include accounting and treasury, portfolio asset management and other administrative tasks.
The various activities that make up these management services are provided to the third party on an integrated basis.
Over the course of the contract term, which runs for as long as there are meters within the scope of the services, the Group
delivers a series of monthly services for which the benefits are simultaneously received and consumed by the customer.
Therefore, these are accounted for as a single performance obligation.
Service charges are currently based on a fixed annual fee, subject to contract RPI uplifts, and are invoiced to the customer
monthly. Revenue is thus recognised over time based on our right to invoice.
If the services rendered by the Group exceed the payment received, then a contract asset is recognised. This is
subsequently reclassified to receivables at the point at which the Group has an unconditional right to payment.
(ii) Data services
The Group provides data collection and aggregation services to I&C electricity customers and, through use of the ADMTM
unit, to I&C gas customers. Over the course of the contract term, which can either be fixed or in perpetuity, the Group
delivers a series of monthly services for which the benefits are simultaneously received and consumed by a customer.
Therefore, these are accounted for as a single performance obligation.
Service charges are calculated based on the number of meters/ADMTM units appointed and invoiced to customers
monthly. As revenue from service charges is attributed to services provided periodically, revenue is always based on
the actual level of service provided and, therefore, there is no uncertainty at the end of each reporting period. Service
charges, including contract RPI uplifts, are billed to clients annually in advance and therefore a contract liability is
recognised and subsequently released to the income statement over the year on a straight-line basis. The Group uses
the practical expedient under IFRS 15 from adjusting revenue for any significant financial components of one year or less.
The ADMTM device is a proprietary product for the Group and there are no other market providers of this device. A
customer cannot therefore benefit from the data services without installation, and the installation is not separately
identifiable as it is integral to the subsequent data services. This is therefore accounted for along with the data services as
a single performance obligation and any corresponding charges are recognised over the term of the contract.
SMS Annual report and accounts 2020 145
2 Revenue from contracts with customers continued
(c) Accounting policies and significant judgements continued
(iii) Utility connections services (gas and electricity)
Gas and electricity connections services are provided under fixed-price contracts with I&C customers and can be
delivered to a single site or multiple sites. Whilst each service consists of multiple activities, the Group’s promise in the
contract is to deliver an integrated end-to-end service to which the underlying activities are inputs. Where services are
delivered to multiple sites, and these are substantially the same, a series of services is being provided. In all cases,
therefore, these contracts give rise to a single performance obligation to which the fixed price is allocated. Subsequent
variations to this price, due to changes in the inputs required, are accounted for as contract modifications and recognised
on a cumulative catch-up basis.
Services are transferred over time on the basis that these are customised services with no alternative use and the Group
has an enforceable right to payment for work completed to date.
Revenue is recognised on the stage of completion with reference to the actual services provided as a proportion of the
total service expected to be provided under the contract, as the services can enhance a work-in-progress asset for the
customer and have no alternative use. This is determined on a contract-by-contract basis using a milestone approach
with reference to the milestones set out in the contract or otherwise agreed. Where relevant, consideration is also given
to material services provided between milestones. Estimates of revenues, costs or extent of progress towards completion
are revised if circumstances change and any resulting increases or decreases in estimated revenues or costs are reflected
in profit or loss in the period in which the circumstances that give rise to the revision become known by management.
The customer pays the fixed amount based on a payment schedule. In certain circumstances the customer pays in
advance and therefore a contract liability is recognised and subsequently released to the income statement based on the
measure of progress detailed above. As the contract is cancellable at the customer’s discretion, subject to settlement for
services provided to the date of cancellation, a contract liability is not recognised until the cash has been received.
If the services rendered by the Group exceed the payment received, then a contract asset is recognised. This is
subsequently reclassified to receivables at the point at which the Group has an unconditional right to payment.
The Group utilises the practical expedient available under IFRS 15 for costs to obtain a contract. Commissions paid as
part of obtaining a contract are expensed as incurred on the basis that the contract term is typically less than 12 months.
(iv) Transactional meter works
Transactional works, which include emergency, adversarial and other maintenance services, and are typically short term
in nature, are accounted for as a separate performance obligation to asset management services (see section (i) above)
on the basis that these are separately identifiable and can be performed by another party. A customer, being the energy
supplier, is legally obligated to appoint a meter asset manager and can therefore benefit from this service in isolation,
without the subsequent transactional works which are initiated on an ad-hoc basis upon demand by the customer.
In 2020, the Group also started to provide transactional meter works to the third party to whom the Group sold a minority
of its meter asset portfolio in April 2020. In 2019, transactional meter works also included contracts with customers for
installation-only services.
The transaction price allocated to transactional works is based on stand-alone selling prices (per unit, where relevant)
and revenue is recognised at a point in time when the transaction has been completed and accepted by the customer.
This is the point at which the customer is charged for the service and a receivable is recognised by the Group as we have
an unconditional right to payment. The customer will settle the transaction price for these services as part of the regular
monthly billing cycle for metering and asset management services.
The customer pays the fixed amount based on the transactional services provided and this is charged once the service
has been completed and accepted by the customer.
For segmental purposes, this transactional, non-recurring revenue is recognised within Asset Installation.
Strategic reportGovernanceFinancial statements
146 SMS Annual report and accounts 2020
NOTES TO THE FINANCIAL STATEMENTS continued
For the year ended 31 December 2020
2 Revenue from contracts with customers continued
(c) Accounting policies and significant judgements continued
(v) Energy management services
Energy management services provided mainly to I&C customers include utility bureau and bill validation services, risk
management and procurement services and energy reduction and environmental management services.
Certain services, such as utility bureau and bill validation, are delivered through a series of monthly services over the
course of the contract term, for which the benefits are simultaneously received and consumed by a customer. These are
accounted for as a single performance obligation. The transaction price allocated includes a fixed monthly service charge
together with a variable component for specific activities that may not be carried out every month. As revenue from
charges is attributed to services provided monthly, revenue is always based on the actual level of service provided and,
therefore, there is no uncertainty at the end of each reporting period. Revenue is thus recognised over time based on our
right to invoice.
Contracts for specialist consultancy services may include multiple projects. Where these projects are separately identifiable
within the contract and are not interrelated, they are accounted for as separate performance obligations. The transaction
price is allocated based on the stand-alone charges for each project.
Other energy reduction and environmental management services are typically longer-term, multi-site contracts and,
therefore, the revenue recognition is consistent with that detailed above for utility connections – see details under section
(iii) above.
(vi) Assets and liabilities arising from contracts with customers
Costs to fulfil a contract
In certain circumstances, the Group may incur costs to fulfil its obligations under a contract once it is obtained, but before
transferring goods or services to the customer. These costs are assessed on a contract-by-contract basis and, where
they are considered to meet the definition of fulfilment costs under IFRS 15, they are recognised as an asset and amortised
on a systematic basis consistent with the pattern of transfer of the services to which the asset relates.
Contract assets and liabilities
We receive payments from customers based on a billing schedule, as established in our contracts.
The timing of revenue recognition, billing and cash collections results in:
• billed and unbilled accounts receivable, which are recognised when our right to consideration becomes unconditional,
and classified as trade receivables and accrued income respectively;
• unbilled amounts, where we have a conditional right to consideration based on future performance, recognised as
contract assets. These amounts will be billed in accordance with the agreed-upon contractual terms; and
• payments received in advance of performance under a contract, recognised as contract liabilities. Contract liabilities
are recognised as revenue as (or when) we perform under a contract.
For project-based services, work in progress is billed in accordance with the agreed-upon contractual terms with the
customer. We typically receive interim payments as work progresses, which can give rise to a billed or unbilled accounts
receivable, where our right to payment is unconditional, or a contract asset, where revenue has been recognised based
on progress completed but our right to payment is still conditional on future performance. For some contracts, we may
be entitled to receive advance payments. We recognise a contract liability for these advance payments in excess of
revenue recognised.
Cancellation terms can vary but typically include provisions that allow the customer to terminate the contract at their
discretion subject to a penalty or settlement of amounts for work completed prior to termination. Contracts allow both
parties to cancel without penalty in the case of a material breach of contract.
SMS Annual report and accounts 2020 147
3 Profit from operations
The Group has identified a number of items which are material due to the significance of their nature and/or amount.
These are listed separately here to provide a better understanding of the financial performance of the Group.
Profit from operations is stated after (charging)/crediting:
Cost of sales:
Direct subcontractor costs
Depreciation of meter assets
Direct staff and other costs
Inventory costs
Total cost of sales (before exceptional items)
Administrative expenses:
Staff costs
Depreciation:
– owned assets
– leased assets
Amortisation of intangibles
Auditor’s remuneration (note 3a)
Loss on disposal
Operating lease rentals1
Research and development costs
Other operating charges
Total administrative expenses (before exceptional items)
Exceptional items (note 3b)
Other operating income (note 3c)
Total operating costs
2020
£’000
2019
£’000
(7,183)
(24,672)
(16,569)
(1,556)
(49,980)
(7,195)
(31,491)
(31,212)
(2,319)
(72,217)
(18,306)
(12,380)
(3,403)
(982)
(2,957)
(346)
(1,040)
(346)
(76)
(9,389)
(36,845)
181,738
1,723
96,636
(2,729)
(917)
(1,483)
(300)
(2,701)
(1,032)
–
(3,972)
(25,514)
(8,527)
5,726
(100,532)
1 2020 operating lease rentals include £314,000 on short-term leases (2019: £1,010,000) and £32,000 on leases of low-value assets (2019: £22,000).
(a) Auditor’s remuneration
Auditor’s remuneration can be analysed as:
Audit of the parent company and consolidated financial statements
Audit of the financial statements of the Company’s subsidiaries
Other services – audit-related assurance services
2020
£’000
144
172
30
346
2019
£’000
95
155
50
300
(b) Exceptional items
An exceptional gain on the disposal of a subsidiary of £194,713,000 has been recognised separately on the consolidated
income statement for the year ended 31 December 2020. See note 4 for details.
There are total other exceptional items on the consolidated income statement of £13,090,000. Exceptional operating
costs comprise £6,857,000 of costs directly attributable to COVID-19 (see accounting policies – Critical accounting
judgements on page 128 for further details), £6,033,000 of losses on disposal of our traditional and SMETS1 meter
portfolio (£9,521,000 net book value less £3,488,000 termination income) and £85,000 of other miscellaneous costs.
Exceptional finance costs of £115,000 comprise break costs incurred on full voluntary prepayment of the Group’s loan
facility (see note 18 for details).
In 2019, there were total exceptional items on the consolidated income statement of £8,631,000. Exceptional operating
costs comprised £6,837,000 for losses on disposal of our meter portfolio (£11,819,000 net book value less £4,982,000
termination income), £1,999,000 of legal and professional fees incurred as part of the conditional sale of a minority
of our assets, £751,000 SMETS1 meters stock write-back, £96,000 of redundancy costs relating to the reorganisation
of subsidiaries, £92,000 of costs incurred in relation to the acquisition of Solo Energy Limited, £82,000 of costs that the
Company has agreed to settle in relation to a former legacy Employee Benefit Trust, £68,000 of deferred remuneration
arising on the acquisition of a subsidiary in 2016 settled in shares in April 2019 and £104,000 impairment charges.
Strategic reportGovernanceFinancial statements
148 SMS Annual report and accounts 2020
NOTES TO THE FINANCIAL STATEMENTS continued
For the year ended 31 December 2020
3 Profit from operations continued
(b) Exceptional items continued
Exceptional finance costs of £104,000 included £98,000 accelerated amortisation of loan arrangement fees in relation
to the refinancing of the loan facility and £6,000 of bank break fees.
The tax effect of exceptional items charged in 2020 is a credit of £2,618,000 (2019: credit of £1,119,000).
(c) Other operating income
Termination fee income
Other contractual charges levied on customers
Government grant income
2020
£’000
985
–
738
1,723
2019
£’000
2,415
3,301
10
5,726
Of the government grant income of £738,000 recognised in the year ended 31 December 2020, £536,000 relates to RDECs.
4 Disposal of subsidiary
On 12 March 2020, the Group conditionally signed an agreement to dispose of a minority of the Group’s meter assets
through the sale of the entire share capital of Crail Meters Limited (‘Crail’), a wholly owned subsidiary of the Group.
The meter asset provision (MAP) business carried on by two existing operating subsidiaries of the Group (the ‘Meter
Managers’) was transferred to Crail on 12 March 2020. The business transferred included c.187,000 Industrial & Commercial
(I&C) meter assets, amongst other working capital balances. Crail continued to trade from 12 March 2020 through to
22 April 2020.
On 22 April 2020 the entire share capital of Crail was sold to an unconnected third party. Total gross cash consideration
of £290.6m was received, comprising a payment for the sale of the shares in Crail and the repayment of an intercompany
debt owed by Crail to the Meter Managers. There was no contingent or non-cash consideration.
The total carrying amount of net assets disposed was £89.0m, including £86.1m of meter assets, a £9.1m net receivable
of working capital balances and £6.2m of deferred tax liabilities, giving rise to a gross gain of £201.6m. After the deduction
of £6.9m transaction costs, a net gain on disposal of £194.7m has been recognised separately in the consolidated income
statement. Excluding deferred taxation and transaction costs, the gain is £195.4m.
Crail does not meet the definition of a discontinued operation under IFRS 5 on the basis that the minority portfolio of
I&C assets disposed does not represent the loss of a separate, major line of business and, although I&C activities have
been significantly reduced, they have not been entirely discontinued.
SMS will continue to manage the disposed I&C meter portfolio on behalf of the purchaser, for which it will receive annual
RPI-linked management fees of £0.8m.
5 Particulars of employees
The average number of staff employed by the Group during the financial year, including Executive Directors, by activity was:
Administrative staff
Operational staff
Sales staff
IT staff
Directors (excluding 4 (2019: 4) Non-executive Directors)
The aggregate payroll costs, including Executive Directors, of the employees were:
Wages and salaries
Social security costs
Staff pension costs
Share-based payment (note 24)
Director pension costs
2020
Number
497
546
4
73
3
1,123
2020
£’000
39,880
4,103
1,229
626
18
45,856
2019
Number
487
669
4
62
3
1,225
2019
£’000
39,817
4,400
1,115
671
11
46,014
6 Finance costs and finance income
Finance costs
Bank loans and overdrafts
Lease liabilities
Foreign exchange (gain)/loss on intra-group borrowings
Total pre-exceptional finance costs
Exceptional finance costs
Total finance costs
Finance income
Bank interest receivable
Total finance income
7 Taxation
Analysis of charge in the year
Current tax:
Current income tax expense
Adjustment to tax charge in respect of previous periods
Total current income tax
Deferred tax:
Origination and reversal of temporary differences
Adjustment to tax charge in respect of prior periods
Adjustment attributable to change in tax rates
Tax on profit
SMS Annual report and accounts 2020 149
2020
£’000
4,556
172
(23)
4,705
115
4,820
166
166
2019
£’000
8,255
157
49
8,461
104
8,565
278
278
2020
£’000
2019
£’000
331
92
423
(198)
(304)
1,564
1,485
(81)
2
(79)
1,405
–
139
1,465
The charge for the period can be reconciled to the profit per the consolidated statement of comprehensive income
as follows:
Profit before tax
Tax at the UK corporation tax rate of 19.00% (2019: 19.00%)
Expenses not deductible for tax purposes
Income not taxable
Adjustments to tax charge in respect of previous periods
Impact of overseas tax rates
Change in tax rate1
Tax expense in the income statement
1 See note 21 for further details.
Current tax credit through equity in the year was £nil (2019: £nil).
2020
£’000
194,964
37,043
1,565
(38,495)
(212)
20
1,564
1,485
2019
£’000
5,462
1,038
420
–
142
–
(135)
1,465
Strategic reportGovernanceFinancial statements
150 SMS Annual report and accounts 2020
NOTES TO THE FINANCIAL STATEMENTS continued
For the year ended 31 December 2020
8 Earnings per share (EPS)
The calculation of EPS is based on the following data and number of shares:
Profit for the year used for calculation of basic EPS
Number of shares
Weighted average number of ordinary shares for the purposes of basic EPS
Effect of potentially dilutive ordinary shares:
– share options
Weighted average number of ordinary shares for the purposes of diluted EPS
EPS:
– basic (pence)
– diluted (pence)
9 Dividends
2020
£’000
193,479
2019
£’000
3,997
2020
2019
112,715,328 112,446,154
922,554
823,258
113,637,882 113,269,412
171.65
170.26
3.56
3.53
Paid final dividend
Paid second interim dividend
Paid first interim dividend
Total dividends
Year
ended
31 December
2020
£’000
–
5,168
7,058
12,226
Year
ended
31 December
2020
Per share
(pence)
–
4.58
6.25
10.83
Year
ended
31 December
2019
£’000
4,485
–
2,594
7,079
Year
ended
31 December
2019
Per share
(pence)
3.98
–
2.30
6.28
The paid second interim dividend is in respect of FY 2019. The paid first interim dividend is in respect of FY 2020.
Per the Group’s revised dividend policy, a 25p per share dividend is proposed in respect of FY 2020. This will be paid to
shareholders in four cash instalments.
The first instalment of £7.1m was paid on 29 October 2020 to shareholders on the register at 2 October 2020, with an
ex-dividend date of 1 October 2020. The remaining instalments are intended to be paid as follows:
Instalment
Second interim
Third interim
Final
Ex-dividend date
7 January 2021
1 April 2021
1 July 2021
Record date
8 January 2021
6 April 2021
2 July 2021
Payment date
28 January 2021
29 April 2021
29 July 2021
These remaining instalments will amount to c.£21m and will be accounted for in 2021.
Under the new dividend policy, the second interim dividend is paid out of profits recognised in the year prior to the year in
which the dividends are declared and reported. As at 31 December 2020, the distributable profits in the parent company
were adequate to cover the proposed second interim dividend of c.£7m.
10 Intangible assets
Cost
As at 1 January 2019
Additions
Acquisitions
Reclassifications1
Exchange adjustments
Disposals
As at 31 December 2019
Additions
Acquisitions
Disposals
Exchange adjustments
As at 31 December 2020
Amortisation
As at 1 January 2019
Reclassifcations1
Disposals
Charge for year
As at 31 December 2019
Disposals
Charge for year
As at 31 December 2020
Net book value
As at 31 December 2020
As at 31 December 2019
As at 1 January 2019
SMS Annual report and accounts 2020 151
Intangibles
recognised
upon acquisition
£’000
IT development
and software
£’000
Goodwill
£’000
7,609
–
995
–
(57)
–
8,547
–
–
–
60
8,607
–
–
–
–
–
–
–
–
8,607
8,547
7,609
2,166
–
96
–
(5)
–
2,257
–
–
–
4
2,261
2,034
–
–
137
2,171
–
32
2,203
58
86
132
17,678
6,936
697
(205)
(22)
(639)
24,445
4,056
–
(12)
29
28,518
8,281
(74)
(218)
1,346
9,335
–
2,925
12,260
16,258
15,110
9,397
Total
£’000
27,453
6,936
1,788
(205)
(84)
(639)
35,249
4,056
–
(12)
93
39,386
10,315
(74)
(218)
1,483
11,506
–
2,957
14,463
24,923
23,743
17,138
1 Capitalised development expenditure on ADMTM units has been reallocated from IT development and software within Intangible assets to Meter assets
within Property, plant and equipment, to align with the Group’s accounting policy.
No goodwill or intangible assets were recognised as a result of acquisitions during the year. The acquisition of Solo
Energy Limited in September 2019 resulted in the recognition of goodwill of £995,000, which was assigned to the Energy
Management operating segment. In addition, the trademarks of Solo Energy Limited and its FlexiGridTM platform were
valued at £96,000 and were recognised as additions within the acquired intangibles asset class. See note 20 for further
details on business acquisitions.
Strategic reportGovernanceFinancial statements
152 SMS Annual report and accounts 2020
NOTES TO THE FINANCIAL STATEMENTS continued
For the year ended 31 December 2020
11 Property, plant and equipment
Freehold/
leasehold
property
£’000
Meter
assets
£’000
Plant and
machinery
£’000
Fixtures,
fittings and
equipment
£’000
Motor
vehicles
£’000
Right-of-use
assets
£’000
Total
£’000
Cost
As at 1 January 2019
Additions
Acquisitions
Reclassifications1
Impairment
Disposals
As at 31 December 2019
Additions
Acquisitions
Impairment
Disposals
Exchange adjustments
As at 31 December 2020
Depreciation
As at 1 January 2019
Charge for year
Reclassifications1
Impairment
Disposals
As at 31 December 2019
Charge for year
Impairment
Disposals
Exchange adjustments
As at 31 December 2020
Net book value
As at 31 December 2020
As at 31 December 2019
As at 1 January 2019
2,536
215
–
–
–
–
2,751
56
–
–
–
–
2,807
519
(14)
–
–
–
505
174
–
–
–
679
410,128
95,186
–
205
–
(21,991)
483,528
40,349
–
–
(131,731)
–
392,146
59,766
31,491
74
–
(6,520)
84,811
24,672
–
(32,800)
–
76,683
2,128
2,246
2,017
315,463
398,717
350,362
504
520
–
–
–
–
1,024
20
–
–
–
–
1,044
233
267
–
–
–
500
290
–
–
–
790
254
524
271
4,248
2,498
6
–
–
(894)
5,858
1,329
–
–
(43)
4
7,148
2,618
1,337
–
–
(841)
3,114
1,639
–
(37)
5
4,721
2,427
2,744
1,630
2,814
3,279
–
–
–
(65)
6,028
42
–
–
(765)
–
5,305
362
1,139
–
–
(35)
1,466
1,300
–
(379)
–
2,387
2,918
4,562
2,452
–
4,889
–
–
(90)
(54)
4,745
2,265
–
–
–
–
7,010
–
917
–
(37)
–
880
982
–
–
–
1,862
5,148
3,865
–
420,230
106,587
6
205
(90)
(23,004)
503,934
44,061
–
–
(132,539)
4
415,460
63,498
35,137
74
(37)
(7,396)
91,276
29,057
–
(33,216)
5
87,122
328,338
412,658
356,732
1 Capitalised development expenditure on ADMTM units was reallocated in 2019 from IT development and software within Intangible assets to Meter assets
within Property, plant and equipment, to align with the Group’s accounting policy.
Meter assets
Meter asset disposals in the year include the c.187,000 assets disposed of as part of the sale of a subsidiary on 22 April 2020.
The assets disposed of had a net book value of £86,103,000.
Included within the closing Meter assets net book value of £315,463,000 (2019: £398,717,000) is £22,627,000 (2019:
£30,298,000) relating to the traditional meter portfolio. In accordance with our accounting policy these assets will be
written down to zero by 1 July 2025. In the 2020 consolidated financial statements the traditional meter portfolio
generated £13,140,000 (2019: £12,965,000) revenue with a corresponding £5,668,000 (2019: £11,184,000) depreciation
charge. £13,333,000 (2019: £13,928,000) annualised recurring revenue as at 31 December 2020 arises from the owned
traditional meter portfolio.
SMS Annual report and accounts 2020 153
11 Property, plant and equipment continued
Meter assets continued
The assets are secured by a bond and floating charge (note 18).
For the purpose of impairment testing, the traditional meter asset portfolio recognised within Meter assets is assessed
as a stand-alone cash-generating unit (CGU) and its carrying amount is compared with the recoverable amount. In line
with IAS 36, no impairment review was considered necessary at 31 December 2020 as the previous impairment review at
31 December 2019 showed a significant excess of recoverable amount over carrying amount and management concluded
that there were no reasonably possible changes in the key assumptions that would cause the carrying amounts of the
traditional meter portfolio to exceed the value in use. There have also been no events during 2020 that would eliminate
this excess or any new material indicators of impairment in the year. As a result of COVID-19, and the reduced smart meter
installation activity, there has been a lower volume of traditional meter asset removals. In addition, as detailed in the
accounting policies, the useful economic life of traditional meter assets has been extended to 1 July 2025 following the
UK Government’s announcement of its new framework for the UK smart meter rollout.
Therefore, no impairment has been recognised in the period ended 31 December 2020 (31 December 2019: £nil). No
impairment on other meter assets was recognised in 2020 or 2019.
Right-of-use assets
In 2019, right-of-use assets were recognised following the implementation of IFRS 16. Of the £4,889,000 additions
reported above, £3,820,000 related to right-of-use assets recognised upon implementation on 1 January 2019.
Additions to right-of-use assets during the 2020 financial year were £2,265,000 (2019: £1,069,000, excluding right-of-use
assets recognised upon implementation on 1 January 2019).
A breakdown of right-of-use assets is presented below:
Carrying value
Properties1
Motor vehicles
Land
1 Properties include office and warehouse space.
The statement of profit or loss shows the following amounts relating to leases:
Depreciation charge on right-of-use assets
Properties
Motor vehicles
Land
2020
£’000
2,918
7
2,223
5,148
2020
£’000
948
13
21
982
2019
£’000
3,846
19
–
3,865
2019
£’000
907
10
–
917
Strategic reportGovernanceFinancial statements
154 SMS Annual report and accounts 2020
NOTES TO THE FINANCIAL STATEMENTS continued
For the year ended 31 December 2020
12 Financial asset investments
Cost
As at 1 January 2019 and 1 January 2020
Impairment
As at 31 December 2019 and 31 December 2020
Unlisted
investments
£’000
75
–
75
Total
£’000
75
–
75
13 Impairment of goodwill
The goodwill acquired in a business combination is allocated, at acquisition, to the CGUs that are expected to benefit from
that business combination. Goodwill is monitored by management at the level of the CGUs (defined as the three
operating segments) identified in note 1.
A segment-level summary of the goodwill allocation is presented below:
Cost
As at 1 January 2020
Acquisitions (note 20)
Exchange adjustments
As at 31 December 2020
Asset
Management
£’000
Asset
Installation
£’000
Energy
Management
£’000
4,112
–
–
4,112
3,497
–
–
3,497
938
–
60
998
Total
£’000
8,547
–
60
8,607
No goodwill was recognised in the year as a result of business combinations. The goodwill recognised in Energy Management
at 31 December 2019 of £938,000 arose on the acquisition of Solo Energy Limited, a blockchain energy flexibility IT platform.
See note 20 for further details. Goodwill was allocated entirely to Energy Management on the basis that this is the operating
segment that will receive the benefits from the acquisition.
The Group tests goodwill annually for impairment or more frequently if there are indications that goodwill might be
impaired. Goodwill is tested for impairment by comparing the carrying amount of each CGU, including goodwill, with the
recoverable amount. The recoverable amounts are determined based on value-in-use calculations which require
assumptions. The calculations use cash flow projections based on financial budgets approved by the Board covering a
one-year period, together with management forecasts for a further four-year period. These budgets and forecasts have
regard to historical performance and knowledge of the current market, together with the Group’s views on the future
achievable growth and the impact of committed cash flows. Specifically, budgets and forecasts used in the assessment of
goodwill at 31 December 2020 include the estimated impact of COVID-19 and incorporate the effects of the extended
deadline for the UK smart meter rollout to 1 July 2025. Cash flows beyond this are extrapolated using the estimated
growth rates stated below.
The cash flows used in the value-in-use calculation for the Asset Management segment include all costs incurred in the
provision of meter assets to energy suppliers, together with the initial installation. The cash flows used in the value-in-use
calculation for the Asset Installation segment exclude installation costs incurred to fit an owned meter. For the purpose of
the value-in-use calculation, these are instead allocated to the Asset Management segment, being the segment to which
the corresponding revenues are allocated.
The annual impairment test was performed for the three CGUs identified above that have goodwill allocated to them.
No evidence of impairment was found at the balance sheet date.
SMS Annual report and accounts 2020 155
13 Impairment of goodwill continued
The key assumptions used in the value-in-use calculations for those CGUs that have goodwill allocated to them are as follows:
• Perpetual growth rate – the terminal cash flows are extrapolated in perpetuity using a growth rate of 2% for Asset
Management (2019: 3.0%) and 1.5% for Asset Installation and Energy Management (2019: 0.5%). The rate of 2% applied
to Asset Management is derived from historical Retail Price Index increases applied to the segment’s index-linked meter
rentals, with a small reduction in recognition of the impact of COVID-19 on macroeconomic growth. This is not
considered to be higher than the average long-term industry growth rate. The rate of 1.5% applied to Asset Installation
and Energy Management is prudently aligned with the UK rate of inflation as revenues in these segments are not always
index-linked.
• Discount rate – the discount rate is initially based on the weighted average cost of capital (WACC) which would be
anticipated for a market participant investing in the Group. A specific discount rate is then calculated for each operating
segment, taking into account the time value of money, the segment’s risk profile and the impact of the current economic
climate. The pre-tax discount rates applied are 6.8%, 9.0% and 11.0% for Asset Management, Asset Installation and
Energy Management respectively (2019: 7.1%, 10.7% and 10.7%) and the post-tax discount rates applied are 5.5%, 7.25%
and 8.9% for Asset Management, Asset Installation and Energy Management respectively (2019: 5.9%, 8.9% and 8.9%).
The risk premium assigned to the Asset Installation and Energy Management segments reflects the shorter-term
nature of the underlying revenues within these segments, as compared to the annually-recurring revenue generated
by an installed asset.
Management has performed sensitivity analysis on the key assumptions both with other variables held constant and
with other variables simultaneously changed. Management has concluded that there are no reasonably possible changes
in the key assumptions that would cause the carrying amounts of goodwill to exceed the value in use for either CGU.
14 Inventories
Finished goods
Work in progress
Consumables
2020
£’000
22,676
4,701
273
27,650
2019
£’000
21,734
–
327
22,061
Work in progress relates to the construction of grid-scale battery storage sites. Of the total work-in-progress balance
of £4,701,000 at 31 December 2020, £3,438,000 relates to the acquisition of the companies detailed in note 20 and
£1,262,000 relates to the subsequent capitalisation of directly attributable construction costs.
15 Trade and other receivables
Trade receivables
Prepayments and deferred costs
Accrued income
Other receivables
VAT recoverable
2020
£’000
20,272
4,263
10,404
1,245
980
37,164
2019
£’000
28,596
1,944
15,490
1,655
602
48,287
Trade receivables and accrued income include billed and unbilled receivables relating to our meter rental contracts.
Amounts falling due after more than one year:
Accrued income
2020
£’000
12
2019
£’000
232
Strategic reportGovernanceFinancial statements
156 SMS Annual report and accounts 2020
NOTES TO THE FINANCIAL STATEMENTS continued
For the year ended 31 December 2020
15 Trade and other receivables continued
Accrued income is made up of the following balances:
Unbilled receivables
Contract assets
Other accrued income
2020
£’000
10,357
47
–
10,404
2019
£’000
15,455
11
24
15,490
Unbilled receivables include receivables relating to our meter rental contracts.
The Directors consider that the carrying amount of trade and other receivables approximates to their fair value.
The Group’s credit risk is primarily attributable to trade receivables and accrued income. The amounts presented in the
consolidated statement of financial position are net of any loss allowance. The total loss allowance for trade receivables
and accrued income at 31 December 2020 was £4,904,000 (2019: £4,413,000). See note 19 for further details. The ageing
profile of trade receivables past due date is shown below:
Current
1-30 days
31-60 days
61-90 days
91-120 days
Over 120 days
Loss allowance
2020
£’000
13,608
3,208
1,914
1,090
328
4,868
25,016
(4,744)
20,272
2019
£’000
19,669
6,624
2,228
1,309
719
2,331
32,880
(4,284)
28,596
Trade receivables are non-interest-bearing and are generally on 30–90-day terms. Trade receivables due from related
parties at 31 December 2020 amounted to £nil (2019: £nil).
Receivables are all in Sterling denominations.
Accrued income, which is made up of unbilled receivables and contract assets, is presented net of any loss allowance and
impairment, with amounts being invoiced periodically and customers being the same as those within trade receivables.
16 Cash and cash equivalents
Cash and cash equivalents comprise cash held by the Group. The carrying amount of the asset approximates the fair
value. All balances are held in Sterling.
During each period, there were no amounts of cash placed on short-term deposit.
For the purposes of the cash flow statement, cash and cash equivalents comprises:
Cash
2020
£’000
40,236
40,236
2019
£’000
50,092
50,092
Restricted cash is excluded from cash and cash equivalents, in line with the Group’s accounting policy on page 137,
and is disclosed separately in the consolidated statement of financial position.
SMS Annual report and accounts 2020 157
17 Trade and other payables
Current
Trade payables
Other payables
Other taxes
Deferred income
Advance payments
Accruals
Deferred income and advance payments are made up of the following balances:
Contract liabilities
Other deferred income
2020
£’000
2019
£’000
10,215
3,815
3,894
2,498
1,422
20,114
41,958
2020
£’000
3,689
231
3,920
16,466
2,420
4,788
2,487
1,335
19,300
46,796
2019
£’000
3,494
328
3,822
The Directors consider that the carrying amount of trade and other payables approximates to their fair value.
Trade payables are classified at amortised cost, are non-interest-bearing and are normally settled on 30–45-day terms.
All trade liabilities are denominated in Sterling.
18 Financial liabilities
Current
Lease liabilities
Other liabilities
Bank loans
Non-current
Lease liabilities
Other liabilities
Bank loans
2020
£’000
936
388
–
1,324
4,315
–
–
4,315
2019
£’000
1,013
–
1,724
2,737
2,950
–
267,536
270,486
Bank loans at 31 December 2019 related to the Group’s revolving credit facility of £420m, with a five-year term ending
December 2023 (the facility). The Group had a total outstanding principal of £270m at 31 December 2019 and, as
commencement of any repayment of the principal by way of a limited excess-cash sweeping mechanism is not required
until 2022 under the terms of the contract, this balance was classified as non-current. Accrued interest of £1.7m was
recognised as part of the carrying value of Bank loans at 31 December 2019 together with a deduction of £2.5m for
unamortised transaction costs. In 2019, the facility attracted interest at a rate of 1.85% over the three-month LIBOR and
0.65% was payable on undrawn funds. The interest is required to be settled quarterly and was thus classified as current
at 31 December 2019.
Following the Group’s sale of a wholly owned subsidiary on 22 April 2020, the gross proceeds received of £290.6m were
used to make a voluntary prepayment and the total outstanding principal value at 22 April 2020 of £270m, together with
outstanding interest and commitment fees of £0.6m, was settled. Concurrently, the total commitments available under
the facility were reduced from £420m to £300m. There were no other material changes to the terms and conditions. This
amendment does not substantially change the existing revolving credit facility, nor does it discharge any obligations.
As such, this is deemed to be a modification. There has been no impact to the consolidated income statement in the year
ended 31 December 2020 as a result of the modification.
A drawdown of £15.0m was made in May 2020 but this was subsequently settled at the end of the three-month term. No
subsequent drawdowns have been made by the Group and, therefore, as at 31 December 2020 there was no outstanding
principal or interest. The amount recognised against Bank loans is thus £nil.
Strategic reportGovernanceFinancial statements
158 SMS Annual report and accounts 2020
NOTES TO THE FINANCIAL STATEMENTS continued
For the year ended 31 December 2020
18 Financial liabilities continued
Unamortised transaction costs from the initial establishment of the revolving credit facility in December 2018 continue
to be amortised over the remaining duration of the facility to 2023, together with additional transaction costs of £0.1m
directly attributable to the modification of the loan on 22 April 2020. For the year ended 31 December 2020, £0.7m of
transaction costs have been recognised within the consolidated income statement.
Unamortised transaction costs of £1.9m that would ordinarily be deducted against the carrying value of Bank loans have
been recorded as Other assets at 31 December 2020. In line with the Group’s accounting policy, these will be reclassified to
Bank loans upon the next drawdown.
£0.1m of break costs incurred as a result of the voluntary prepayment have been recognised as an exceptional finance
cost in the year ended 31 December 2020.
The Group has complied with the financial covenants of its borrowing facility during the current and prior reporting
periods.
(a) Changes in liabilities arising from financing activities
Financial liabilities
At 1 January 2019
Cash flows (i)
New leases
Other non-cash changes (i)
At 31 December 2019
Cash flows (i)
New leases
Other non-cash changes (i)
At 31 December 2020
Presentational reclassification to Other assets
At 31 December 2020
Lease liabilities
£’000
3,868
(1,075)
1,040
130
3,963
(1,155)
2,260
183
5,251
–
5,251
Bank loans
£’000
172,016
90,149
–
7,095
269,260
(274,143)
–
2,934
(1,949)
1,949
–
(i) Cash flows and other non-cash changes
Cash flows on lease liabilities include £1,155,000 of lease payments. Cash flows on bank loans include £15,000,000 of
new borrowings less £285,000,000 of borrowings repaid, interest payments of £4,000,000 and a payment of £143,000
for arrangement fees.
Other non-cash changes in lease liabilities include £172,000 of interest charges plus £11,000 arising from changes in lease
terms and foreign exchange impact in the year. Other non-cash changes in bank loans include £2,276,000 of interest
charges and £658,000 amortisation of arrangement fees.
At 31 December 2020, there were no outstanding amounts under the Group’s revolving credit facility. Therefore, unamortised
arrangement fees of £1,949,000 have been classified separately as Other assets in the consolidated statement of
financial position in line with the Group’s accounting policy. Unamortised arrangement fees of £641,000 have been
classified as current Other assets, with the balance of £1,308,000 classified as non-current, in line with the remaining
term of the facility.
In 2019, cash flows on lease liabilities included £1,075,000 of lease payments. Cash flows on bank loans included
£270,000,000 of new borrowings less £172,114,000 of borrowings repaid, interest payments of £4,632,000 and a payment
of £3,105,000 for arrangement fees.
Other non-cash changes in lease liabilities included £157,000 of interest charges less £27,000 arising from changes
in lease terms in the year. Other non-cash changes in bank loans included £6,356,000 of interest charges, of which
£1,724,000 were unpaid at 31 December 2019, and £739,000 amortisation of arrangement fees.
SMS Annual report and accounts 2020 159
19 Financial risk management
The Board reviews and agrees policies for managing the risks associated with interest rate, credit and liquidity risk.
The Group has in place a risk management policy that seeks to minimise any adverse effect on the financial performance
of the Group by continually monitoring the following risks:
(a) Interest rate risk
The Group’s main interest rate risk arises from its floating rate bank loan, which was undrawn at 31 December 2020
(2019: £269,260,000). See note 18 for further details.
There were no overdrafts at 31 December 2020 (2019: none) and the interest charge arising on lease liabilities, recognised
from 1 January 2019 upon implementation of IFRS 16, does not represent a cash interest rate risk for the Group.
The Group’s financial assets at 31 December 2020 comprise cash and trade receivables. The cash balance of £40,236,000
(2019: £50,092,000) is a floating rate financial asset, but interest income is not typically material.
Interest rate sensitivity
The following table demonstrates the sensitivity to a change in interest rates on the Group’s floating rate bank loan.
The Group’s profit before tax is affected through the impact on floating rate borrowings as follows:
2020
2019
Increase/
(decrease)
in basis points
+70bps
+70bps
Effect on profit
before tax
£’000
–
(1,885)
Management believes that a movement in interest rates of 70 bps gives a reasonable measure of the Group’s sensitivity
to interest rate risk. The table above demonstrates the sensitivity to a possible change in interest rates, with all other
variables held constant, of the Group’s profit before tax.
(b) Fair values of financial liabilities and financial assets
The Group’s bank loan is measured at amortised cost. For fair value disclosure purposes, the bank loan is considered
to be a level 2 financial instrument on the basis that it is not traded in an active market. The fair values, based upon the
market value or discounted cash flows of financial liabilities and financial assets held in the Group, were not materially
different from their book values.
(c) Foreign currency risk
The Group’s exposure to the risk of changes in foreign exchange primarily arises from a single subsidiary acquired in the
prior year, operating in Euros. With the exception of this entity, all of the Group’s operating activities are denominated
in Pounds Sterling and, therefore, the Group’s overall exposure is not significant.
(d) Liquidity risk
The Group manages its cash in a manner designed to ensure maximum benefit is gained whilst ensuring security of
investment sources. The Group’s policy on investment of surplus funds is to place deposits at institutions with strong credit
ratings; this is considered to be institutions with a credit rating of AA– and above. Currently, all of the chosen investment
institutions are in line with these criteria.
The ageing and maturity profile of the Group’s material financial liabilities is disclosed in the table below. The amounts
disclosed are the contractual undiscounted cash flows.
31 December 2020
Contractual maturities of financial liabilities
Trade payables
Bank loan
Other liabilities
Lease liabilities
Less than
one year
£’000
10,215
–
388
1,172
11,775
Between
two and
five years
£’000
Over
five years
£’000
Total
contractual
cash flows
£’000
–
–
–
2,657
2,657
–
–
–
4,222
4,222
10,215
–
388
8,051
18,654
Strategic reportGovernanceFinancial statements
160 SMS Annual report and accounts 2020
NOTES TO THE FINANCIAL STATEMENTS continued
For the year ended 31 December 2020
19 Financial risk management continued
(d) Liquidity risk continued
31 December 2019
Contractual maturities of financial liabilities
Trade payables
Bank loan
Lease liabilities
Less than
one year
£’000
16,466
7,049
1,153
24,668
Between
two and
five years
£’000
–
290,954
2,748
293,702
Over
five years
£’000
Total
contractual
cash flows
£’000
–
–
456
456
16,466
298,003
4,357
318,826
The contractual undiscounted cash flows on the bank loan reflect the contractual arrangements in place at the year-end
date. At 31 December 2019, of the £290,954,000 disclosed in the 2019 Bank loan time band ‘Between two and five years’,
the Group had assumed that the entire principal balance would be settled upon maturity of the loan facility at the end
of 2023.
As disclosed in note 18, the Group subsequently made a full voluntary prepayment on its loan facility in April 2020. It had
no outstanding principal at 31 December 2020 and therefore the contractual undiscounted cash flows at 31 December 2020
are £nil in the table above.
(e) Credit risk
The Group’s credit risk primarily arises from credit exposures to energy suppliers (our customers), including outstanding
receivables, due to the Group trading with a limited number of companies, which are generally large utility companies
or financial institutions.
Credit risk is managed on a Group basis. For banks and financial institutions, only independently rated parties with a
minimum rating of AA– are accepted. With regard to customers, the Group assesses the credit quality of the customer,
considering its financial position, past experience and other factors. The Group does not expect, in the normal course of
events, that debts due from customers are at significant risk. The Group’s maximum exposure to credit risk equates to the
carrying value of cash and cash equivalents, trade and other receivables, contract assets and investments. The Group’s
maximum exposure to credit risk from its customers is £30,688,000 (2019: £44,318,000), being the sum of the carrying
value of trade receivables and accrued income, including contract assets, as disclosed within Trade and other receivables
in note 15. The Group regularly monitors and updates its cash flow forecasts to ensure it has sufficient and appropriate
funds to meet its ongoing operational requirements.
Impairment of financial assets
The Group has two types of financial assets that are subject to IFRS 9’s expected credit loss model:
• trade receivables, which consist of billed receivables arising from contracts with customers, for the provision of meter
asset installation, management and energy services; and
• accrued income, which consists of contract assets and unbilled receivables arising from contracts with customers.
While cash and cash equivalents, and debt investments held at amortised cost, are also subject to the impairment
requirements of IFRS 9, the identified impairment loss was immaterial.
The Group applies the IFRS 9 simplified approach to measuring forward-looking expected credit losses (ECL), which uses
a lifetime expected loss allowance for all trade receivables and accrued income, including contract assets.
To measure the ECL, trade receivables and accrued income have been grouped based on shared credit risk
characteristics and the days past due. Accrued income relates to rights to consideration for performance, and other
operating charges, before payment is due from customers, and consists of unbilled receivables and contract assets (see
note 2 for details). These have substantially the same risk characteristics as the trade receivables for the same types of
contracts. The Group has therefore concluded that the expected loss rates for trade receivables are a reasonable
approximation of the loss rates for accrued income.
The Group has established a provision matrix based on the payment profiles of sales, over the most recent 12-month
period that is an appropriate representation of loss patterns, and the corresponding historical credit losses experienced
within this period. The historical loss rates are adjusted to reflect current and forward-looking information that might
affect the ability of customers to settle the receivables, including macroeconomic factors as relevant. In calculating the
loss rates, certain historical losses arising from specific circumstances with customers have been removed where these
are not indicative of future loss patterns.
SMS Annual report and accounts 2020 161
19 Financial risk management continued
(e) Credit risk continued
Impairment of financial assets continued
COVID-19 has generated global financial uncertainty; however, the potential impact of this on the Group’s credit risk
is mitigated by the highly regulated nature of the utilities industry and the extensive support made available to energy –
and other infrastructure – suppliers by the UK Government. As a result, management has not increased the expected loss
rates for the trade receivables portfolio as a whole. Instead, a subset of trade receivables has been identified as having
a potentially elevated credit risk, due to a greater risk of administration as a direct consequence of COVID-19. This subset
has been provided for on a specific basis and has resulted in an additional £495,000 impairment loss. Given the continued
and changing uncertainty regarding the impact of COVID-19 on customer default risk, management will continue to
monitor the situation and reassess its ECL at each reporting period end accordingly. Management has made the
judgement to recognise this incremental impairment loss as exceptional on the basis outlined in the accounting policies.
On that basis, the loss allowance at 31 December 2020 was determined as £4,904,000 (2019: £4,413,000) for trade
receivables and accrued income. A reconciliation of these balances is provided as follows:
At 1 January 2020
Increase in loss allowance recognised in profit or loss
during the year – underlying
Increase in loss allowance recognised in profit or loss
during the year - exceptional
Amounts reversed/written off during the year
At 31 December 2020
Accrued
income
£’000
129
Trade
receivables
£’000
4,284
Total
£’000
4,413
31
–
–
160
2,703
2,734
495
(2,738)
4,744
495
(2,738)
4,904
The underlying increase in loss allowance recognised at 31 December 2020 is largely attributable to certain individual
trade receivables that have been impaired as a result of specific circumstances with customers. It also reflects the
application of updated loss rates. As detailed above, an additional £495,000 impairment loss has been recognised in the
year in relation to COVID-19.
Total net impairment losses on financial and contract assets were £3,229,000 in 2020 (2019: £3,824,000) including the
£495,000 exceptional charge. Of this amount, £3,229,000 (2019: £3,824,000) relates to amounts arising from trade
receivables and accrued income.
Fair value
There is no material difference between the book value and the fair value of any financial asset or liability.
(f) Capital management
Capital is the equity attributable to the equity holders of the parent. The primary objective of the Group’s capital
management is to ensure that it maintains a strong credit rating and healthy capital ratios in order to support its business
and maximise shareholder value. The Group manages its capital structure, and makes adjustments to it, in light of
changes in economic conditions. To maintain or adjust the capital structure, the Group may adjust the dividend payment
to shareholders, sell assets, return capital to shareholders or issue new shares.
The Group monitors capital on the basis of a leverage ratio. This ratio is calculated as net debt divided by pre-exceptional
EBITDA. Net debt is calculated as total borrowings less cash. Pre-exceptional EBITDA is calculated as operating profit
before any significant exceptional items, interest, tax, depreciation and amortisation.
The objective of SMS’s strategy is to deliver long-term value to its shareholders whilst maintaining a balance sheet
structure that safeguards the Group’s financial position. Earlier in the year, SMS announced its intention to pay a 25p per
share dividend in respect of FY 2020 and the first of three interim dividend instalments was paid in October 2020. It also
announced that the long-term index-linked cash flows from its existing asset base are able to support an intended annual
increase of 10% in dividends for each of the financial years FY 2021, FY 2022, FY 2023 and FY 2024. This will result in a
more predictable return to shareholders and reflects the forecast growth of the business over and above RPI in that
period. The Group’s strong liquidity position supports the funding of its contracted smart meter order pipeline, which will
further add to its long-term index-linked cash flows.
Strategic reportGovernanceFinancial statements
162 SMS Annual report and accounts 2020
NOTES TO THE FINANCIAL STATEMENTS continued
For the year ended 31 December 2020
20 Business combinations
Year ended 31 December 2020
During the year ended 31 December 2020, the Group acquired 100% of the issued share capital of the following companies:
Name of acquired company Company number
East Anglia Grid
Storage One Limited 11110483
Burwell Power Limited 12028663
Add Renewables
No.3 Limited
10042216
Registered office prior
to acquisition
Salisbury House
Station Road
Cambridge
CB1 2LA
16a Suite 18
Oakham Enterprise Park
Ashwell Road
Oakham, Rutland
LE15 7TU
Purchase
consideration
£
Acquisition date
£
1,575,882
16 October 2020
1,344,000 30 September 2020
Nature of the
company
Special purpose
vehicle
Holding company1
Special purpose
vehicle
1 Burwell Power Limited is the direct parent of East Anglia Grid Storage One Limited (the ’subsidiary’).
All three companies report in British Pounds Sterling. The acquisitions enable SMS to obtain control over the rights
required to develop and commission two grid-scale battery storage sites, totalling 90MW, as part of the Group’s
investment strategy in CaRe assets. Grid-scale battery storage is a key asset class required by the UK energy system
to provide flexibility services to balance the grid and support the continued introduction of more intermittent renewable
generation. The acquired sites will be constructed over the next 12 months.
Details of the purchase consideration are as follows:
Name of acquired company
Burwell Power Limited and its subsidiary
East Anglia Grid Storage One Limited (together, ‘Burwell’)
Add Renewables No.3 Limited (‘Barnsley’)
Total purchase consideration
Cash paid
£
1,375,882
1,156,500
2,532,382
Contingent
consideration
£
200,000
187,500
387,500
In the event that total connection costs per MW fall below various set thresholds, total additional consideration of up to
£387,500 may be payable in cash upon energisation (when energy is first sold to the grid). Target energisation is currently
end of 2021. The fair value of the contingent consideration recognised of £387,500 was estimated by calculating the
present value of the future expected cash flows based on current budgets and forecasts. The estimate ignores the
impact of discounting on the basis that the anticipated payment date is within 12 months of the current reporting date.
The assets and liabilities recognised as a result of the acquisitions were as follows:
Cash and cash equivalents
Inventories: work in progress1
Trade and other receivables
Trade and other payables
Deferred tax liability
Net identifiable assets acquired
Add: goodwill
Net assets acquired
Burwell
fair value
£’000
94
1,757
39
–
(314)
1,576
–
1,576
Barnsley
fair value
£’000
–
1,681
–
(22)
(315)
1,344
–
1,344
Total
fair value
£’000
94
3,438
39
(22)
(629)
2,920
–
2,920
1 Total inventories of £3,438,000 include a fair value uplift of £2,683,000.
No contingent assets or liabilities were acquired.
A total fair value uplift of £2.7m (net of tax) was applied to the acquisition balance sheets in relation to development
and construction rights, which have been included within work in progress and recorded as part of Inventories on the
consolidated balance sheet. The acquisitions therefore resulted in goodwill of £nil.
SMS Annual report and accounts 2020 163
20 Business combinations continued
Year ended 31 December 2020 continued
The entities acquired contributed £nil turnover or profit to the Group’s results in the year ended 31 December 2020.
If the acquisitions had occurred on 1 January 2020, consolidated pro-forma revenue and profit for the year ended
31 December 2020 would also have been £nil. No further adjustments were required as there were no material
differences in the accounting policies between the Group and the entities acquired.
Acquisition-related costs of £0.1m were incurred and have been recorded as part of Administrative costs in the
consolidated statement of comprehensive income. These have not been classified as exceptional on the basis that,
through these acquisitions, the Group is establishing a trade of constructing and selling grid-scale batteries.
As part of the acquisition, lease liabilities of £2.2m were recognised relating to leases of land held by the acquired
companies. Associated right-of-use assets of the same amount were recognised on the Group’s consolidated balance
sheet within Property, plant and equipment.
Year ended 31 December 2019
On 5 September 2019 the Group acquired 100% of the issued share capital of Solo Energy Limited (company number
566746), a blockchain energy flexibility IT platform. The acquisition will enable SMS to utilise Solo’s IT platform, which
was still under development at 31 December 2019, to establish new long-term revenue streams from a decentralised
energy grid.
The company’s registered office address is West Building, Carrigaline Industrial Estate, Carrigaline, Co. Cork,
Republic of Ireland, and it reports in Euros.
Purchase consideration consisted of cash only. Total cash paid was 1,152,000 EUR (equivalent to £1,032,000 using
an exchange rate of 1.1163 at 5 September 2019).
The assets and liabilities recognised as a result of the acquisition were as follows:
Intangible assets: capitalised development
Intangible assets: trademarks
Plant and equipment
Cash and cash equivalents
Trade and other receivables
Trade and other payables
Deferred income: government grants
Borrowings
Deferred tax liability
Net identifiable assets acquired
Less: pre-existing relationship
Add: goodwill
Net assets acquired
Fair value
£’0001
697
96
6
5
4
(230)
(24)
(334)
(16)
204
(167)
995
1,032
1 All net assets acquired have been translated using an exchange rate of 1.1163 at 5 September 2019.
No contingent assets or liabilities were acquired.
In addition to the borrowings acquired above of £334,000 Solo Energy Limited had a short-term loan of £167,000 due
to an SMS subsidiary company at the date of acquisition. In accordance with IFRS 3, this pre-existing relationship was
accounted for as effectively settled on acquisition by increasing the consideration transferred for the acquisition.
The acquisition of Solo Energy Limited and the effective settlement of the receivable were recorded as separate
transactions. No gain or loss was recognised as the receivable due from Solo Energy Limited was effectively settled
at the recorded amount.
Strategic reportGovernanceFinancial statements
164 SMS Annual report and accounts 2020
NOTES TO THE FINANCIAL STATEMENTS continued
For the year ended 31 December 2020
20 Business combinations continued
Year ended 31 December 2019 continued
The goodwill is attributable to management expertise and the new, long-term revenue opportunities expected from
the deployment of Solo Energy’s IT platform. Goodwill will not be deductible for tax purposes.
The IT platform acquired was still under development at 31 December 2019. Therefore, for the period from 5 September
to 31 December 2019, the acquired business contributed immaterial revenues and a net loss before taxation of £120,000
to the Group. If the acquisition had occurred on 1 January 2019, consolidated pro-forma revenue for the year ended
31 December 2019 would also have been immaterial and consolidated pro-forma loss for the year ended 31 December 2019
would have been approximately £384,000. No further adjustments were required as there were no material differences
in the accounting policies between the Group and the entities acquired.
Acquisition-related costs of £92,000 were incurred and were included as part of exceptional Administrative costs in the
consolidated statement of comprehensive income.
21 Deferred taxation
The movement in the deferred taxation liability during the period was:
Opening deferred tax liability
Increase in provision through consolidated statement of comprehensive income
Increase/(decrease) in provision through equity
Deferred tax in respect of acquisitions and disposals
Closing deferred tax liability
2020
£’000
13,779
1,061
(714)
(5,615)
8,511
The Group’s provision for deferred taxation consists of the tax effect of temporary differences in respect of:
Excess of taxation allowances over depreciation on property, plant and equipment
Tax losses available
Deferred tax asset on share options
Deferred tax on intangibles acquired
Other
The deferred tax included in the consolidated statement of comprehensive income is as follows:
Accelerated capital allowances
Tax losses
Deferred tax asset on share options
Movement in fair value of intangibles
Other
2020
£’000
7,134
(125)
(1,676)
684
2,494
8,511
2020
£’000
1,688
(124)
29
626
(1,158)
1,061
2019
£’000
12,070
1,544
149
16
13,779
2019
£’000
11,691
(1)
(992)
58
3,023
13,779
2019
£’000
(478)
95
(85)
(106)
2,118
1,544
At 31 December 2019, the main rate of corporate taxation was expected to reduce from 19% to 17% effective 1 April 2020,
as a result of the Finance Act 2016, which was substantively enacted on 6 September 2016. Deferred tax at 31 December
2019 was thus predominantly provided at 17%, being the tax rate at which temporary differences are expected to reverse.
However, the March 2020 Budget announced that the rate of 19% would continue to apply with effect from 1 April and this
change was substantively enacted on 17 March 2020. The opening deferred tax liability of £13,779,000 has thus been
remeasured at 19% giving rise to a deferred tax charge of £1,564,000 in the current year.
Further to the Budget announcement on 3 March 2021, the Chancellor has stated the UK Government’s intention to raise
the future corporate tax rate to 25%, effective post 1 April 2023. If this change to the UK tax rate were to be substantively
enacted, it would result in an increase to the Group’s closing deferred tax liability of up to £2,688,000.
The Group had unrecognised tax losses of £954,000 (2019: £763,000) in a subsidiary undertaking at 31 December 2020.
The Group also had unrecognised capital losses of £729,000 (2019: £729,000) in subsidiary undertakings at 31 December 2020.
SMS Annual report and accounts 2020 165
22 Related party transactions
(a) Subsidiaries
The Group’s subsidiaries at 31 December 2020 are set out below. Unless otherwise stated, they have share capital
consisting solely of ordinary shares, and the proportion of ownership interests held equals the voting rights held by the
Group. The country of registration is also their principal place of business.
Registered
office
Holding
Proportion of
shares held
Nature of business
1
1
2
2
1
4
SMS Connections Limited
SMS Meter Assets Limited
SMS MAPCO 1 Limited
SMS MAPCO 2 Limited
SMS Data Management Limited
Smart Metering Systems PTY Limited
(Australia)
UKMA (AF) Limited*
SMS Corporate Services Limited
SMS Asset Management Limited*
SMS Energy Services Limited
CH4 Gas Utility and Maintenance
Services Limited*
2
SMS Utilities Academy Limited*
2
Trojan Utilities Limited*
2
Qton Solutions Limited*
2
Smart Battery Systems Limited
1
Solo Energy Limited (UK)*
3
Solo Energy Limited (Ireland)*
2
Care Assets Limited
2
Add Renewables No.3 Limited*
Burwell Power Limited*
2
East Anglia Grid Storage One Limited* 2
2
1
2
2
2
Ordinary shares
Ordinary shares
Ordinary shares
Ordinary shares
Ordinary shares
Ordinary shares
Ordinary shares
Ordinary shares
Ordinary shares
Ordinary shares
Ordinary shares
Ordinary shares
Ordinary shares
Ordinary shares
Ordinary shares
Ordinary shares
Ordinary shares
Ordinary shares
Ordinary shares
Ordinary shares
Ordinary shares
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
Gas utility connections
Gas and electric asset management
Gas and electric asset management
Gas and electric asset management
Data management
Data management
Funding
Administrative services
Gas and electric third-party asset management
Electricity utility connections and management
Meter installation
Engineer training and development
Meter installation
Business and domestic software development
Holding company
Renewable asset management
Renewable asset management
Holding company
Renewable asset management
Holding company
Renewable asset management
* The shareholding in this company is indirect, via a subsidiary company.
1 Registered office address: 2nd Floor, 48 St. Vincent Street, Glasgow G2 5TS.
2 Registered office address: Prennau House, Copse Walk, Cardiff Gate Business Park, Cardiff CF23 8XH.
3 Registered office address: West Building, Carrigaline Industrial Estate, Carrigaline, Co. Cork, Republic of Ireland.
4 Registered office address: KPMG, ‘Tower 3’ Level 38, 300 Bangaroo Avenue, Sydney, NSW 2000, Australia.
(b) Key management personnel compensation
The Group has determined that key management personnel constitute the Executive Directors, Non-executive Directors
and certain senior management personnel. The aggregate compensation paid or payable to key management is
shown below:
Short-term employee benefits
Post-employment benefits
Share-based payments
2020
£’000
3,024
28
219
3,271
2019
£’000
1,557
22
186
1,765
Strategic reportGovernanceFinancial statements
166 SMS Annual report and accounts 2020
NOTES TO THE FINANCIAL STATEMENTS continued
For the year ended 31 December 2020
22 Related party transactions continued
(c) Directors
Directors’ emoluments
Aggregate remuneration for both Executive and Non-executive Directors in respect of qualifying services was:
Aggregate emoluments
Company contributions to money purchase pension scheme
Company contributions to private pension plan
2020
£’000
2,010
18
–
2,028
2019
£’000
877
11
–
888
In 2020, no amount was payable to Directors as settlements following resignation (2019: no amount was payable to
Directors).
Detailed remuneration disclosures are also provided in the in the Annual report on remuneration on pages 105 to 106.
Emoluments of highest paid Director
Emoluments
2020
£’000
796
2019
£’000
377
In addition, rent was paid into the highest paid Director’s personal pension scheme. See note 22 (d) for further details.
Number of Directors who accrued benefits under Company pension schemes
Money purchase schemes
2020
Number
2
2019
Number
2
(d) Other transactions with related parties
A number of key management personnel hold positions in other entities that result in them having control or significant
influence over the financial or operating policies.
A number of these entities transacted with the Group in the reporting period. The terms and conditions of the transactions
with key management personnel and their related parties were no more favourable than those available, or which might
reasonably be expected to be available, on similar transactions to non-key management personnel and related entities
on an arm’s-length basis.
During the period, the Group entered into the following transactions with related parties:
• Rent amounting to £41,500 (2019: £41,500) was paid to the Directors’ pension scheme, Eco Retirement Benefit Scheme,
for the use of certain premises. Alan Foy is a trustee of the scheme. At the year-end date, an amount of £nil (2019: £nil)
was outstanding in this regard.
• The Group paid dividends to Alan Foy of £441,930 (2019: £281,382), The Metis Trust1 of £97,470 (2019: £56,520), Metis
Investments Limited2 of £105,332 (2019: £nil), Tim Mortlock of £570 (2019: £121), David Thompson of £325 (2019: £84),
Miriam Greenwood of £2,529 (2019: £1,046), Willie MacDiarmid3 of £271 (2019: £372), Graeme Bissett of £901 (2019: £333)
and Jamie Richards of £244 (2019: £nil).
• During 2019, SMS Utilities Academy Limited purchased a group of assets and liabilities for £27,500 from Utilities
Academy Limited – a third-party smart meter training facility in which another subsidiary undertaking, Trojan Utilities
Limited, had a minority shareholding. The net assets purchased were previously used by Utilities Academy Limited in its
business of providing training to dual-fuel smart meter engineers on behalf of third-party customers. Utilities Academy
Limited went into administration on 28 March 2019, at which point the cost of Trojan Utilities Limited’s minority
investment in the company was written off.
1 Alan Foy is a trustee but not a beneficiary.
2 Alan Foy is a Director and shareholder.
3 Paid to a connected person.
SMS Annual report and accounts 2020 167
23 Share capital
Allotted and called up:
112,946,331 ordinary shares of £0.01 each (2019: 112,811,122 ordinary shares of £0.01 each)
2020
£’000
2019
£’000
1,129
1,128
During the year 134,793 (2019: 125,519) ordinary share options were exercised in relation to the Group’s employee share
plans which are described in note 24. The ordinary shares issued have a nominal value of £1,000 (2019: £1,000) and
aggregate consideration of £362,000 (2019: £419,000) was received.
In addition, a scrip dividend was offered to shareholders in respect of the first interim dividend, paid on 29 October 2020,
which allowed shareholders to elect to receive ordinary shares of 1p each in the Company in lieu of a cash dividend.
Based on a scrip dividend reference price of 634.6p a total of 416 new ordinary shares were issued with a nominal value
of £4. The excess value of the shares over their nominal value of £3,000 has been recognised within Share premium.
In 2019, 137,553 shares were issued during the year in relation to deferred remuneration arising on the acquisition of a
subsidiary in 2016, settled in shares in April 2019. The ordinary shares issued had a nominal value of £2,000 and a fair value
of £829,000. No consideration was received for these shares. The total fair value of £829,000 was recognised directly
within Retained earnings and the difference between the fair value and nominal value of £827,000 was recognised within
Share premium.
The Group’s Share Incentive Plan is administered by the Smart Metering Systems SIP Trust, which acquires shares in SMS
(own shares) to satisfy awards under this plan and facilitate the delivery of shares to participants. At 31 December 2020,
140,695 (2019: 146,412) own shares were held in trust with a carrying value of £749,000 (2019: £768,000) and a market value
of £1,000,000 (2019: £827,000). The Company purchased 28,354 shares (2019: 67,220) from the market during 2020 with
a weighted average fair value of £5.68 per share (2019: £5.20).
24 Share-based payments
(a) Employee option plans
On 20 June 2011 the Company adopted both the Approved Company Share Option Plan (CSOP) and the Unapproved
Share Option Plan (the ‘Unapproved Plan’).
The CSOP is open to any employee of any member of the Group up to a maximum value of £30,000 per employee. The
Unapproved Plan is open to any employee, including Executive Directors, of the Company or any other Group company
who is required to devote substantially the whole of their time to their duties under their contract of employment.
Under the plans, participants are granted options which, except in certain specified circumstances, only vest if certain
performance conditions are met and the employee is still in service within five years of the date of grant. The performance
conditions for awards are based on market capitalisation and individual performance targets. Once vested, the options
remain exercisable for a period of up to 10 years from the date of grant. The exercise price of the options is determined
by the Directors but shall not be less than the closing price at which the Company’s shares are traded on the date of grant.
Strategic reportGovernanceFinancial statements
168 SMS Annual report and accounts 2020
NOTES TO THE FINANCIAL STATEMENTS continued
For the year ended 31 December 2020
24 Share-based payments continued
(a) Employee option plans continued
Summary of options
The table below summarises options granted under the CSOP and Unapproved Plan:
Plan
CSOP
Unapproved
Unapproved
Unapproved
Unapproved
Unapproved
Unapproved
Unapproved
Unapproved
Unapproved
Unapproved
Unapproved1
Unapproved2
Unapproved1
Unapproved2
Unapproved
Unapproved1
Unapproved2
Unapproved3
Total
At
1 January
2020
25,853
321,666
380,000
40,000
657,878
34,099
38,586
90,706
100,000
50,000
9,091
479,001
12,000
479,000
12,000
370,000
–
–
–
3,099,880
Granted Exercised Forfeited
Expired
At
31 December
2020
Exercise
price
(pence)
–
–
–
–
–
–
–
–
–
–
–
–
–
(55,000)
–
(79,793)
–
–
–
–
–
–
–
–
–
–
–
469,000
12,000
76,000
–
–
–
–
–
–
–
–
557,000 (134,793)
–
–
–
–
–
(8,033)
–
(32,186)
–
–
(9,091)
(10,000)
–
(10,000)
–
–
–
–
–
(69,310)
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
25,853
321,666
325,000
40,000
578,085
26,066
38,586
58,520
100,000
50,000
–
469,001
12,000
469,000
12,000
370,000
469,000
12,000
76,000
3,452,777
76.0
60.0
153.5
350.0
350.0
391.8
410.0
470.0
529.0
529.0
550.0
700.0
602.8
700.0
602.8
454.6
700.0
602.8
577.4
Date
exercisable
15 Jul 2014
20 Jun 2016
28 May 2017
12 Nov 2019
12 Nov 2019
20 Mar 2021
4 Jul 2021
18 Aug 2021
1 Sep 2021
26 Sep 2021
28 Nov 2021
1 Jan 2023
13 Sep 2023
1 Jan 2023
13 Sep 2023
5 Sep 2024
1 Jan 2023
13 Sep 2023
26 Jun 2025
Expiry
date
Fair value
at grant
(pence)
15 Jul 2021
20 Jun 2021
28 May 2022
12 Nov 2024
12 Nov 2024
19 Mar 2026
3 Jul 2026
17 Aug 2026
31 Aug 2026
25 Sep 2026
28 Nov 2026
13 Jul 2028
12 Sep 2028
13 Jul 2028
12 Sep 2028
4 Sep 2029
13 Jul 2028
12 Sep 2028
25 Jun 2030
17.1
13.0
40.0
84.8
84.8
61.5
114.3
87.2
141.5
142.4
141.0
125.2
154.3
34.6
98.0
111.5
37.2
105.6
59.3
1 These options relate to the first three, of five, tranches.
2 These options relate to the first three, of five, tranches.
3 Options of 76,000 relate to the first of five tranches.
The weighted average share price at the date of exercise of options exercised during the year ended 31 December 2020
was £6.06 (2019: £5.39).
Fair value of options granted
The assessed fair value at the valuation date of options granted during the year ended 31 December 2020 ranged from
37.2p to 105.6p, as disclosed in the table above (2019: 34.6p to 111.5p). The fair value of options granted is estimated using
appropriate option pricing models, taking into account the exercise price, the term of the option, the share price at grant
date and expected price volatility of the underlying share, the expected dividend yield, the risk-free interest rate for the
term of the option, and the market-based performance conditions. The expected price volatility is based on historical
volatility, adjusted for any expected changes to future volatility due to publicly available information.
The total fair value of these options is recognised over the period from their grant date until they become exercisable.
SMS Annual report and accounts 2020 169
24 Share-based payments continued
(a) Employee option plans continued
Fair value of options granted continued
The following table lists the range of assumptions applied to options granted under the Unapproved Plan during the
current and prior years:
Dividend yield (%)
Expected volatility (%)
Risk-free interest rate (%)
Expected option life (years)
Exercise price (£)
Share price at grant date (£)
Fair value at grant date (£)
4.3
31 December 2020
31 December 2019
1.00 to 1.37
35.70 to 39.04 30.32 to 30.55
0.43 to 0.60
(0.05) to (0.06)
4.04 to 5.00
3.03 to 5.00
4.55 to 7.00
5.77 to 7.00
4.64 to 5.31
5.79 to 5.81
0.35 to 1.12
0.37 to 1.06
Where the options granted have a market performance condition attached, the Group has used a Monte Carlo model
in order to allow for the impact of this condition. Where there is no market performance condition attached, the Group
has used the traditional Black-Scholes model. The dividend yield was determined using the published yield at the date of
grant. The expected volatility reflects the assumption that historical volatility, as measured over several different periods,
is indicative of future trends, which may not necessarily be the actual outcome. The risk-free interest rate is taken from
a government bond yield rate with a redemption period consistent with the corresponding vesting period of the options.
The expected life of the options is based on historical data and is not necessarily indicative of exercise patterns that may
occur.
The expense recognised in 2020 for all options is £357,000 (2019: £353,000).
(b) Share Incentive Plan (SIP)
The Company introduced the SIP in October 2014. All employees of the Group (including Executive Directors) are eligible
to participate in the SIP. Participants may each acquire Partnership Shares worth up to £1,800 per year from their pre-tax
earnings at market value. The Company awards participants one Matching Share for each Partnership Share which they
acquire. Dividends received on shares held in the SIP are reinvested to acquire Dividend Shares at market value. Matching
Shares may be forfeited if the participant disposes of the corresponding Partnership Shares or leaves the employment
of the Group within three years of the award date.
The table below shows the number of shares held in the SIP at the beginning and end of the year.
Type of award
Partnership
Matching
Dividend
Total
At 1 January
2020
203,247
200,915
8,290
412,452
Awarded
shares
59,992
59,992
7,179
127,163
Sold/
transferred
(41,120)
(18,971)
(1,062)
(61,153)
Forfeited
–
(22,048)
–
(22,048)
At 31 December
2020
222,119
219,888
14,407
456,414
Weighted
average
acquisition price
5.40
5.40
5.80
The SIP is administered by the Smart Metering Systems SIP Trust (the ‘Trust’). To the extent sufficient shares are not
already held by the Trust, Matching Shares awarded by the Trust to employees are acquired in the market prior to the
award. Matching Shares held by the Trust which have not yet vested unconditionally at the end of the reporting period
are shown as own shares in the financial statements.
The fair value of the Matching Shares at the award date is equal to the share price at the award date. The weighted
average fair value per share of the Matching Shares awarded during 2020 was approximately £6.08 per share (2019: £5.26).
The total fair value of Matching Shares awarded is recognised over the three-year period starting on the respective
award dates.
The expense recognised in 2020 for all Matching Shares is £269,000 (2019: £250,000). No expense is recognised for the
Partnership Shares and Dividend Shares because the participants pay full market value for these shares.
Strategic reportGovernanceFinancial statements
170 SMS Annual report and accounts 2020
NOTES TO THE FINANCIAL STATEMENTS continued
For the year ended 31 December 2020
25 Other reserve
This is a non-distributable reserve that initially arose by applying merger relief under section 612 of the Companies Act 2006
to the shares issued in 2009 in connection with the Group restructuring. Additionally, the premium of £4,189,000 and
£1,115,000 arising on the issue of shares as part of the acquisitions of CH4 Gas Utility and Maintenance Services Limited
(‘CH4’), Trojan Utilities Limited (‘Trojan’) and Qton Solutions Limited (‘Qton’) has been credited to this reserve.
26 Commitments under operating leases
The Group’s commercial leases for certain vehicles, offices and warehouse space are accounted for under IFRS 16
with effect from 1 January 2019 and are thus excluded from the below operating lease commitments disclosure.
Commitments under operating leases include the Group’s commercial leases for its fleet vans and items of office
equipment. These leases are either short-term (the contract term is less than 12 months) or low-value (underlying asset
less than $5,000) and, therefore, meet the exemption criteria under IFRS 16. They continue to be expensed through the
consolidated statement of comprehensive income. These leases have lives between one and three years and some have
renewal options included in the contracts. There are no restrictions placed upon the Group by entering into these leases.
Future minimum rentals payable under non-cancellable operating leases as at each year end are as follows:
Future minimum commitments under operating lease agreements are as follows:
Payable within one year
Payable within two and five years
Payable after five years
2020
£’000
59
41
–
100
27 Capital commitments
Significant capital expenditure contracted for at the end of the reporting period but not recognised as liabilities is
as follows:
Property, plant and equipment
Intangible assets
Inventory – work in progress
2020
£’000
–
160
9,370
2019
£’000
61
19
–
80
2019
£’000
579
1,233
–
Capital expenditure of £9,370,000 contracted for in relation to inventory relates to the Group’s grid-scale battery storage
projects that are currently under construction.
Included within the capital expenditure on intangible assets in 2019 was £1,041,000 in relation to the implementation
of a new ERP system across the Group.
28 Contingencies
The Group has a contingent success fee arrangement in place with a supplier totalling £0.75m that becomes payable
should certain contractual conditions be met. At the date of signing these financial statements, the conditions had not
been met.
29 Ultimate controlling party
There is no ultimate controlling party by virtue of the structure of shareholdings in the Group.
SMS Annual report and accounts 2020 171
30 Post balance sheet events
(a) Acquisition of I&C Half Hourly (HH) electricity meter portfolio
As announced on 3 March 2021, the Group concluded an agreement to acquire a portfolio of c.15,000 I&C large power
HH electricity meters for cash consideration of £8.25m.
The assets have an average life of 4.6 years and will add £1.1m meter rental to the Group’s ILARR. As part of the
transaction, which is scheduled to complete in early April 2021, SMS will also take ownership of the data service contracts
associated with over 20,000 meters, which will initially generate a further net £2m of data annualised recurring revenue.
(b) Acquisitions of grid-scale battery storage projects
On 9 March 2021 the Group entered into arrangements to acquire the rights to 100MW of grid-scale battery storage
projects.
Strategic reportGovernanceFinancial statements
172 SMS Annual report and accounts 2020
PARENT COMPANY BALANCE SHEET
As at 31 December 2020
Fixed assets
Investments
Current assets
Debtors
Creditors
Amounts falling due within one year
Net current assets
Total assets less current liabilities
Capital and reserves
Called-up share capital
Share premium account
Other reserves
Own share reserve
Profit and loss account
Equity shareholders’ funds
Notes
2020
£’000
2019
£’000
2
3
4
6
7
20,853
20,227
301,957
163,978
–
301,957
322,810
1,129
160,471
14,594
(749)
147,365
322,810
–
163,978
184,205
1,128
160,106
13,968
(768)
9,771
184,205
No profit and loss account is presented by the Company, as permitted by section 408 of the Companies Act 2006. The
profit after taxation dealt with in the financial statements of the Company was £150,000,000 for the financial year ended
31 December 2020 (2019: £14,696,000).
The parent company financial statements on pages 172 to 176 were approved and authorised for issue by the Board of
Directors and signed on its behalf by:
David Thompson
Director
16 March 2021
Company registration number
SC367563
PARENT COMPANY STATEMENT OF CHANGES IN EQUITY
For the year ended 31 December 2020
SMS Annual report and accounts 2020 173
Attributable to the owners of the parent company
As at 1 January 2019
Total comprehensive income
for the year
Transactions with owners
in their capacity as owners
Dividends (note 8)
Share-based payments (note 7)
Movement in own shares
Shares issued
As at 31 December 2019
Total comprehensive income
for the year
Transactions with owners
in their capacity as owners
Dividends (note 8)
Share-based payments (note 7)
Movement in own shares
Shares issued
As at 31 December 2020
Share
capital
£’000
1,125
Share
premium
account
£’000
158,861
Other
reserves
£’000
13,297
Own share
reserve
£’000
(588)
Retained
earnings
£’000
3,152
Total
£’000
175,847
–
–
–
–
14,696
14,696
–
–
–
3
1,128
–
–
–
1,245
160,106
–
671
–
–
13,968
–
–
(180)
–
(768)
(7,079)
–
(169)
(829)
9,771
(7,079)
671
(349)
419
184,205
–
–
–
–
150,000
150,000
–
–
–
1
1,129
–
–
–
365
160,471
–
626
–
–
14,594
–
–
19
–
(749)
(12,226)
–
(180)
–
147,365
(12,226)
626
(161)
366
322,810
Strategic reportGovernanceFinancial statements
174 SMS Annual report and accounts 2020
NOTES TO THE PARENT COMPANY FINANCIAL STATEMENTS
For the year ended 31 December 2020
The parent company financial statements of Smart Metering Systems plc (the ‘Company’) for the year ended
31 December 2020 were authorised for issue by the Board of Directors on 16 March 2021 and the balance sheet was
signed on the Board’s behalf by David Thompson. Smart Metering Systems plc is a public limited company limited
by shares and incorporated and domiciled in Scotland, with its registered office at 2nd Floor, 48 St. Vincent Street,
Glasgow G2 5TS. The Company’s ordinary shares are traded on AIM.
1 Parent company accounting policies
Basis of accounting
These financial statements were prepared in accordance with Financial Reporting Standard 102 (FRS 102). The financial
statements are prepared under the historical cost convention.
The accounting policies of the parent company financial statements follow those policies which apply in preparing
the consolidated financial statements for the year ended 31 December 2020. The financial statements are prepared
in Sterling and are rounded to the nearest thousand Pounds (£’000).
The Company has taken advantage of the following disclosure exemptions under FRS 102:
• section 7 Statement of Cash Flows;
• section 3 Financial Statement Presentation, paragraph 3.17(d);
• section 11 Basic Financial Instruments, paragraphs 11.42, 11.44, 11.45, 11.47, 11.48(a)(iii), 11.48(a)(iv), 11.48(b) and 11.48(c);
• section 26 Share-based Payments, paragraphs 26.18(b), 26.19 to 26.21 and 26.23; and
• section 33 Related Party Disclosures, paragraph 33.7.
Disclosure of auditor remuneration for non-audit fees is not given in the individual financial statements as the Group
accounts are required to comply with regulation 5(1)(b) of the Companies (Disclosure of Auditor Remuneration and
Liability Limitation Agreements) Regulations 2008 and present the information on a consolidated basis.
The Company is a guarantor in respect of the Group’s revolving credit facilities.
Going concern
Based on the current projections and facilities in place, the Directors consider it appropriate to continue to prepare
the financial statements on a going concern basis.
Investments
Investments in subsidiary undertakings are stated in the balance sheet of the Company at cost, or nominal value of the
shares issued as consideration where applicable, less provision for any impairment in value.
Share-based payments
The grant by the Company of options and share awards over its equity instruments to the employees of subsidiary
undertakings in the Group is treated as a capital contribution. The fair value of employee services rendered, measured
by reference to the grant date fair value, is recognised over the vesting period as an increase to the investments in
subsidiary undertakings, with a corresponding credit to equity in the Company financial statements. The credit to equity
is recognised within Other reserves, as these amounts are non-distributable at the Company level.
2 Investments
Carrying value
At 1 January
Share-based payments (note 7)
Impairment
At 31 December
2020
£’000
20,227
626
–
20,853
2019
£’000
19,784
671
(228)
20,227
During 2020 and 2019, a number of subsidiary companies granted options and share awards to their employees over
the shares of SMS. For accounting purposes, these grants are recorded as investments by the Company in its subsidiary
undertakings.
Investments in subsidiaries are assessed annually to determine if there is any indication that any of the investments might
be impaired. There were no material indicators of impairment at 31 December 2020 and therefore no impairment charge
has been recognised in the year ended 31 December 2020.
SMS Annual report and accounts 2020 175
2 Investments continued
An impairment charge of £228,000 was recognised in 2019. As part of a strategic Group-wide decision to use the
previously acquired installation and IT resource internally to support the domestic smart meter rollout, the three trading
entities acquired in 2016 no longer plan to trade externally to the Group over the medium term. These three subsidiaries
have become cost centres to support the Group’s operations and were in a net liabilities position at 31 December 2019.
Therefore, management recognised an impairment charge, writing down the carrying value of the Company’s investment
in these three subsidiary undertakings to £nil.
Subsidiary undertakings
Registered
office
Holding
Proportion of
shares held
Nature of business
1
1
2
2
1
4
SMS Connections Limited
SMS Meter Assets Limited
SMS MAPCO 1 Limited
SMS MAPCO 2 Limited
SMS Data Management Limited
Smart Metering Systems PTY Limited
(Australia)
UKMA (AF) Limited*
SMS Corporate Services Limited
SMS Asset Management Limited*
SMS Energy Services Limited
CH4 Gas Utility and Maintenance
Services Limited*
SMS Utilities Academy Limited*
2
Trojan Utilities Limited*
2
Qton Solutions Limited*
2
Smart Battery Systems Limited
2
Solo Energy Limited (UK)*
1
Solo Energy Limited (Ireland)*
3
Care Assets Limited
2
Add Renewables No.3 Limited*
2
2
Burwell Power Limited*
East Anglia Grid Storage One Limited* 2
2
1
2
2
2
Ordinary shares
Ordinary shares
Ordinary shares
Ordinary shares
Ordinary shares
Ordinary shares
Ordinary shares
Ordinary shares
Ordinary shares
Ordinary shares
Ordinary shares
Ordinary shares
Ordinary shares
Ordinary shares
Ordinary shares
Ordinary shares
Ordinary shares
Ordinary shares
Ordinary shares
Ordinary shares
Ordinary shares
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
Gas utility connections
Gas and electric asset management
Gas and electric asset management
Gas and electric asset management
Data management
Data management
Funding
Administrative services
Gas and electric third-party asset management
Electricity utility connections and management
Meter installation
Engineer training and development
Meter installation
Business and domestic software development
Holding company
Renewable asset management
Renewable asset management
Holding company
Renewable asset management
Holding company
Renewable asset management
* The shareholding in this company is indirect, via a subsidiary company.
1 Registered office address: 2nd Floor, 48 St. Vincent Street, Glasgow G2 5TS.
2 Registered office address: Prennau House, Copse Walk, Cardiff Gate Business Park, Cardiff CF23 8XH.
3 Registered office address: West Building, Carrigaline Industrial Estate, Carrigaline, Co. Cork, Republic of Ireland.
4 Registered office address: KPMG, ‘Tower 3’ Level 38, 300 Bangaroo Avenue, Sydney, NSW 2000, Australia.
3 Debtors: amounts falling due within one year
Amounts owed by Group undertakings
Amounts owed by Group undertakings are payable on demand.
2020
£’000
301,957
2019
£’000
163,978
Strategic reportGovernanceFinancial statements
176 SMS Annual report and accounts 2020
NOTES TO THE PARENT COMPANY FINANCIAL STATEMENTS continued
For the year ended 31 December 2020
4 Creditors: amounts falling due within one year
Amounts due to Group undertakings
2020
£’000
–
2019
£’000
–
5 Related party transactions
During the year, the Group paid dividends to Alan Foy of £441,930 (2019: £281,382), The Metis Trust1 of £97,470 (2019:
£56,520), Metis Investments Limited2 of £105,332 (2019: £nil), Tim Mortlock of £570 (2019: £121), David Thompson of £325
(2019: £84), Miriam Greenwood of £2,529 (2019: £1,046), Willie MacDiarmid3 of £271 (2019: £372), Graeme Bissett of £901
(2019: £333) and Jamie Richards of £244 (2019: £nil).
1 Alan Foy is a trustee but not a beneficiary.
2 Alan Foy is a Director and shareholder.
3 Paid to a connected person.
6 Share capital
Allotted and called up:
112,946,331 ordinary shares of £0.01 each (2019: 112,811,122 ordinary shares of £0.01 each)
2020
£’000
2019
£’000
1,129
1,128
During the year 134,793 (2019: 125,519) ordinary share options were exercised in relation to the Group’s employee share
plans, which are described in note 24. The ordinary shares issued have a nominal value of £1,000 (2019: £1,000) and
aggregate consideration of £362,000 (2019: £419,000) was received.
In addition, a scrip dividend was offered to shareholders in respect of the first interim dividend, paid on 29 October 2020,
which allowed shareholders to elect to receive ordinary shares of 1p each in the Company in lieu of a cash dividend.
Based on a scrip dividend reference price of 634.6p a total of 416 new ordinary shares were issued with a nominal value
of £4. The excess value of the shares over their nominal value of £3,000 has been recognised within Share premium.
In 2019, 137,553 shares were issued during the year in relation to deferred remuneration arising on the acquisition
of a subsidiary in 2016, settled in shares in April 2019. The ordinary shares issued had a nominal value of £2,000 and
a fair value of £829,000. No consideration was received for these shares. The total fair value of £829,000 was recognised
directly within Retained earnings and the difference between the fair value and nominal value of £827,000 was recognised
within Share premium.
The Group’s Share Incentive Plan is administered by the Smart Metering Systems SIP Trust, which acquires shares in SMS
(own shares) to satisfy awards under this plan and facilitate the delivery of shares to participants. At 31 December 2020,
140,695 (2019: 146,412) own shares were held in trust with a carrying value of £749,000 (2019: £768,000) and a market value
of £1,000,000 (2019: £827,000). The Company purchased 28,354 shares (2019: 67,220) from the market during 2020 with
a weighted average fair value of £5.68 per share (2019: £5.20).
7 Other reserves
Other reserves are non-distributable and include the following items:
• a reserve that initially arose by applying merger relief under section 612 of the Companies Act 2006 to the shares
issued in 2009 in connection with the Group restructuring. Additionally, the premium of £4,189,000 and £1,115,000 arising
on the issue of shares as part of the acquisitions of CH4 Gas Utility and Maintenance Services Limited (‘CH4’), Trojan
Utilities Limited (‘Trojan’) and Qton Solutions Limited (‘Qton’) has been credited to this reserve; and
• a share-based payment reserve, arising as a result of the grant by the Company of options and share awards over
its equity instruments to the employees of subsidiary undertakings in the Group.
8 Dividends
Please refer to details in note 9 of the notes to the Group financial statements.
If you have finished reading this report and no longer
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readers, return it to SMS or recycle it. Thank you.
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Smart Metering Systems plc
2nd Floor
48 St. Vincent Street
Glasgow G2 5TS
www.sms-plc.com