Meeting the
energy challenge
SMS Annual report and accounts 2022
Welcome to our Annual
report and accounts 2022
Meeting the
energy challenge
At SMS, we are delivering on our Carbon Reduction
(‘CaRe’) agenda, originating assets which address
the energy challenges of cost, security of supply and
sustainability. Through these smart energy solutions,
and by serving our customers across the industrial,
commercial and domestic markets, we are building
long-term value for all our stakeholders.
Tim Mortlock
Chief Executive Officer
Strategic report
Performance highlights
01
Our purpose, strategy and culture
02
At a glance
04
Chairman’s statement
06
Chief Executive Officer’s statement
08
Market overview
12
Our business model
18
Our strategy
20
Operating review
22
Sustainability
36
Stakeholder engagement
37
Environment
42
Our people
51
Health and safety
56
Ethical business practices
60
Risk report
62
Financial review
70
Governance
Chairman’s introduction
to governance
77
Board of Directors
78
Corporate governance report
80
Audit Committee report
90
Nomination Committee report
96
Remuneration Committee report
98
Directors’ report
113
Statement of Directors’
responsibilities
116
Financial statements
Independent auditor’s report
118
Consolidated Income Statement
125
Consolidated Statement
of Comprehensive Income
125
Consolidated Statement
of Financial Position
126
Consolidated Statement
of Changes in Equity
127
Consolidated Statement
of Cash Flows
128
Accounting Policies
129
Notes to the Financial Statements
145
Parent Company Balance Sheet
176
Parent Company Statement
of Changes in Equity
177
Notes to the Parent Company
Financial Statements
178
Performance
highlights
Financial
Alternative performance measures1
Index-linked annualised recurring
revenue (ILARR)
£97.1m +13%
(2021: £85.9m)
Pre-exceptional EBITDA
£63.8m +21%
(2021: £52.8m)
Underlying profit before taxation
£24.5m +34%
(2021: £18.3m)
Underlying basic earnings per share
16.06p +67%
(2021: 9.60p)
Statutory performance measures
Revenue
£135.5m +25%
(2021: £108.5m)
Statutory EBITDA
£57.1m +23%
(2021: £46.3m)
Statutory profit before taxation
£16.0m +92%
(2021: £8.3m)
Statutory basic earnings per share
11.16p +248%
(2021: 3.20p)
1 Refer to page 74 for definitions and details of the Group’s alternative performance measures,
which include ILARR, pre-exceptional EBITDA, underlying profit before taxation and underlying
basic earnings per share.
2 At December 2022 and December 2021 respectively.
Operational
Assets under management
Smart meter assets
2,108,000 (2021: 1,668,000)
+26%
I&C meter assets
106,000 (2021: 105,000)
+1%
Traditional meter
assets
251,000 (2021: 277,000)
-9%
Data assets
410,000 (2021: 449,000)
-9%
Third-party assets
1,575,000 (2021: 1,746,000)
-10%
Pipeline
Contracted smart meter order
pipeline net of installations2
c.2.17 million
(2021: c.2.55 million)
0.10 million contract win and
0.48 million installations in 2022
Grid-scale battery storage portfolio2
760MW
(2021: 620MW)
includes 140MW operational (2021: nil)
SMS Annual report and accounts 2022
01
Financial statements
Governance
Strategic report
Our purpose, strategy and culture
Delivering
smart energy
solutions
SMS is 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 technologies required
to decarbonise, we are playing a critical role in achieving
our nation’s climate targets.
As an organisation, we are uniquely positioned to help
effect real and enduring transformation.
“Our strategy is led by our
purpose and values – and
by first investing in our people,
who put our customers at the
heart of what we do, we can
continue to build long-term
value for our shareholders.”
Judy Keir
Chief People Officer
Our purpose is to
serve our customers
and protect the
environment.
Our culture is to put
our people first.
Our five core values
capture who we are,
what we believe in,
and what we stand for.
Our strategy is the
continuous delivery
of long-term value for
all stakeholders.
02
SMS Annual report and accounts 2022
Our purpose is why we exist and it creates an expectation for
our customers and reflects a promise from us. At our core we
are an organisation that cares about people – committed to
our employees, our customers and our communities.
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 thereby
reducing carbon emissions.
Our culture is underpinned by our five core values: safety,
innovation, customer excellence, sustainability and pride.
These capture who we are, what we believe in, and what
we stand for. They drive the behaviours we wish to see
demonstrated throughout our business practices.
We strive to provide an environment and experience that
embeds these values on a consistent basis, building an
enjoyable and healthy workplace that is open and positive
towards change.
We ensure that all employees take responsibility for their
own behaviour at work. A shared understanding of what is
expected and what is acceptable to others, and consistency
of approach from all employees, is essential.
Our values are not just slogans: we believe in them. We stand by them.
Safety
Innovation
Customer
excellence
Sustainability
Pride
Find out more on page 60
Our strategic framework is structured into four key priorities:
1
Expanding long-
term, resilient and
recurring cash
flows from carbon
reduction assets
2
Customer
excellence and
efficient delivery
3
Efficient capital
allocation to
provide
headroom for
growth
4
Sustainable
and socially
responsible
business
These are 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.
Find out more on page 20
SMS Annual report and accounts 2022 03
Financial statements
Governance
Strategic report
A fully integrated
smart energy
infrastructure
company
We are a fully integrated, end-to-end
energy infrastructure company which
owns, installs and manages carbon
reduction (‘CaRe’) assets.
Our established CaRe verticals include:
• Meter assets
• Grid-scale battery storage
• Behind-the-meter smart solar and storage
• Electric vehicle (EV) infrastructure
• Energy services
• Energy data
We intelligently optimise these low-carbon assets
using our in-house technology platform, METIS.
We are helping to build a smarter, greener and more
affordable energy system – and in doing so, we create
recurring revenue streams for our business, long-term
sustainable value for all our stakeholders and, above all,
a positive social and environmental impact.
We are playing a critical role in achieving the UK’s
climate targets.
At a glance
Grid-scale
battery storage
Facilitating the
low-carbon transition
Find out more on page 16
Solar, storage
and heat
Helping consumers
become energy
self-sufficient
Find out more on page 17
760MW1
Portfolio secured
or under
exclusivity
£60m
UK Government
investment in heat
pump innovation
Key
Assets/capability in place
Potential market
1 At December 2022.
04 SMS Annual report and accounts 2022
EV infrastructure
Decarbonising transport
Find out more on page 17
Smart meters
Helping consumers
manage their costs
Find out more on page 16
Energy services
Maximising energy savings
Find out more on page 29
Energy data
Optimising the
energy system
Find out more on page 16
18 million
electric vehicles
on UK roads
by 2030
Over
2 million
Smart meters
owned
Over
20 years
experience in
delivering energy
efficiency
410,000
data assets
SMS Annual report and accounts 2022 05
Financial statements
Governance
Strategic report
Chairman’s statement
Executing
our strategy
We have seen another eventful year in
the energy market with the invasion of
Ukraine creating not only significant
human suffering in that country, but
also unprecedented turmoil and
volatility in the price of energy. The
impact on the cost of living has kept
energy costs front and centre in the
public’s mind. SMS has focused on the
continuing and steady delivery of its
strategy during this challenging period.
Performance
Despite the turbulence across the
energy sector, we kept focused over
2022 on delivering our strategic plan.
The key priorities for the year were
continuing to build our smart meter
portfolio and proving that we could
convert our grid-scale battery storage
pipeline into profitable long-term
assets. We made excellent progress
in both these areas.
We continued to improve our smart
meter installation run-rate installing
480,000 over the year. This has led to
our index-linked annualised recurring
revenue growing 13% year-on-year.
The smart meter roll out is scheduled
to run to 2025 and we currently have
“Our results again demonstrate the resilience of our
business model which is underpinned by recurring
cash flows from long-term assets.”
Miriam Greenwood
Non-executive Chairman
a contracted smart meter order
pipeline of a further c.2.17 million
meters to install which will increase our
long-term revenue-generating assets.
Our first grid-scale battery storage site
at Burwell became operational in
January 2022 and has performed
ahead of our initial expectations. Our
next two sites became operational in
December, and we now have 140MW
of battery storage assets generating
revenue. We have also continued to
build our grid-scale battery pipeline
with our portfolio now standing at
860MW at 28 February 2023.
We also continued to invest in
developing our capabilities in electric
vehicle charging and energy data
management; areas where we can
meet emerging market needs. We can
see the continuing scope for growth in
our established and developing CaRe
asset classes reinforcing the long-term
opportunity for the business.
Health, safety and
sustainability
The safety and welfare of our people
continues to be our first priority and I
am pleased to say that we had zero
reportable injuries for the second year
running. You can read more about our
work in these areas in our Sustainability
section on pages 36 to 61.
Sustainability is at the heart of what we
do at SMS, and our products and
services have carbon reduction as their
goal. We measure this as our ‘handprint’
– the amount of carbon emissions
mitigated by our customers using our
products and services. The positive
impact of our 2022 handprint was
63,495 tonnes of CO₂ emissions which
06
SMS Annual report and accounts 2022
was 14.5 times the negative impact
of our Scope 1 and Scope 2 carbon
footprint (see page 50).
We also made tangible progress over
the year on our ‘net zero by 2030’
target for our business. We have been
upgrading the fabric of our Cardiff site
by installing solar panels and battery
storage. When complete, we expect the
improvements to reduce building
emissions by 70%. We have also tested
hybrid vans and will be commencing
our fleet transition by introducing 100
mild hybrid vans to the fleet in 2023.
Our people
At SMS we recognise that it is our
people that deliver our achievements.
We therefore place great emphasis on
developing our employees and creating
a positive and healthy workplace. Our
commitment to developing and
supporting our staff was recognised
by us achieving Investors in People
Silver accreditation, one of a number of
initiatives we have delivered in this area.
We are also conscious of our
responsibility to provide our employees
the security they need. We have been a
‘Living Wage’ employer since 2020 and
during 2022 also became an accredited
‘Living Hours’ employer. To help our
employees who may be experiencing
pressure from the increased cost of
living, we also made a one-off
discretionary payment to most of our
staff to help them through this winter
and we brought forward implementation
of 2023’s Living Wage increase.
Dividend
Two years ago, we set out our policy
to grow our dividend by 10% each year
through to 2024 and we are therefore,
Principal decisions
On the pages listed in the table below we have provided examples
of how the Board duly considered the impact on stakeholders when
making principal decisions during 2022:
proposing a 30.25p per share dividend
in respect of FY 2022. Two of the four
equal quarterly instalments have
already been paid, in October 2022
and January 2023. We remain confident
of the Group’s prospects and expect
to maintain our dividend policy until
2024 as stated.
Board changes
In October, we announced that Gavin
Urwin was stepping down as Chief
Financial Officer to take up another
opportunity. The Board was pleased to
appoint Gail Blain as Chief Financial
Officer to take over from 1 December
2022. Gail has been with the Group
since 2016 in the role of Group Financial
Controller. Over that time, she has
worked closely with our Chief Executive
Officer, Tim Mortlock, and has
developed an in depth understanding
of our business. She has played a key
role in developing all areas of finance
and in providing strategy support to
the leadership team. Gavin is remaining
available to the Group until 31 March
2023 to ensure a smooth handover.
On behalf of the Board, I would like to
thank Gavin for his contribution to SMS
and I wish him well in his future career.
Gail's appointment is further testament
to our succession planning and ability
to develop internal talent.
Governance
The Board remains committed to
the highest standards of corporate
governance. One feature of this
governance has been the completion of
our annual board self-evaluation process
which this year has been facilitated with
external input to support the Board in
ensuring a rigorous review focused on
continual improvement.
SMS’s approach to stakeholder
engagement is set out in more detail
on pages 37 to 41 and our section 172
statement is set out on page 37.
The Annual report and accounts will
enable stakeholders to assess how
effectively the Board, supported by the
executive leadership 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.
’Decision-making in practice’ case
studies dispersed throughout the Annual
report and accounts 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 above.
Looking to the future
The turbulence of the energy market
in 2022 has focused attention on the
global challenges of energy affordability,
sustainability and security. I believe this
attention has driven much wider
recognition of the benefits that our
carbon reduction assets, such as smart
meters and grid-scale batteries, bring.
SMS will continue to meet this energy
challenge and play its part in
transitioning the UK to a more flexible
and sustainable energy system and
enabling the move to net zero. The
Board therefore continues to focus on
our established strategy, and under the
strong leadership of our executive team
we look to the future with confidence.
Miriam Greenwood
Non-executive Chairman
14 March 2023
Principal decision
Page
Key stakeholders impacted
Strategic investment in n3rgy
data platform
25
Strategic investment in
Clenergy EV
30
Approval of a one-off discretionary
cost-of-living payment to most staff
52
Key
Shareholders
Employees
Lenders
Regulatory bodies
Customers
Suppliers
Government
SMS Annual report and accounts 2022 07
Financial statements
Governance
Strategic report
Chief Executive Officer’s statement
Delivering on our
sustainable promises
“Listening to customers is critical to our success
in realising a greener, more sustainable future.”
Tim Mortlock
Chief Executive Officer
Never has the energy industry
been more at the forefront of the
national agenda than during 2022,
with energy security, affordability
and sustainability proving to be
fundamental challenges affecting
all of society. I am proud that SMS
continues to respond to these
challenges by delivering carbon
reduction (‘CaRe’) assets and
solutions which directly address
each of them, both for our
customers and end consumers.
Like many others, our company
is increasingly judged not only on
its financial performance, which
has again been extremely strong
in 2022, outperforming upgraded
expectations (see more detail in the
Financial review on page 70), but also
on the contribution it makes to society.
For us, sustainability isn’t just a
headline. We see it as being at the
heart of our purpose. We believe
we have an obligation to serve our
customers and to provide solutions
which benefit all of society – but we
can only do this if we continue to
promote the wellbeing of our workforce
alongside providing a secure long-term
return for our shareholders. This starts
by listening to our stakeholders, and
over the last year there were two
priorities for our business – delivering
on our smart meter order pipeline
and proving the returns on grid-scale
batteries. We have operationally and
financially delivered in both these
critical areas in 2022, and I am confident
this gives us the platform to grow
recurring revenues within these core
CaRe assets and beyond.
Smart meter delivery
We are delighted to have grown and
delivered on our smart meter order
pipeline over the last year. We built
our smart meter installation run rate
to c.45,000 per month in the second
half of the year, and installed c.480,000
meters over the course of the year
exceeding our target of 450,000 –
c.12% of all new smart meters in the UK
(2021: 9.4%). This resulted in an increase
in our index-linked annualised recurring
revenue (ILARR) from metering and
data assets to £97.1m at year end.
This success followed continued
investment in our engineering capacity,
particularly in the latter part of 2021
and first half of 2022, which we have
been able to support due to the
long-term security of the recurring
revenues that flow from these assets,
and the strength of our continued
order pipeline.
08
SMS Annual report and accounts 2022
Investment case
01. At the heart of enabling
the low-carbon revolution
Leaders in delivering and funding smart
energy infrastructure assets, with over
25 years’ experience. We have committed
to our own ambition of net zero by 2030.
02. Strong growth platform
reinforced by accelerated
transition towards
decarbonisation
Continued momentum in securing meter,
grid-scale battery and other CaRe assets
pipeline, with substantial additional
opportunities underpinned by the UK
Government’s net zero ambition.
See more on pages 42 to 50
See more on pages 22 to 35
03. Fully integrated, scalable
platform with well-established
industrial partnerships
An industry-leading central, cloud-based
IT and data platform – METIS – backed
by a nationwide engineering workforce and
decades of strong industrial relationships.
04. Strong liquidity position
Low net debt coupled with strong internal
cash generation provides liquidity to fund
the existing pipelines and secure additional
growth opportunities.
See more on pages 22 to 35
See more on pages 70 to 75
05. Robust, sustainable
dividend policy underpinned
by existing asset base
10% compound annual growth rate (CAGR) in
dividends until 2024 is secured by long-term,
sustainable cash flows generated from our
existing portfolio of metering, data and
grid-scale battery assets.
06. 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 70 to 75
See more on pages 78 to 79
SMS Annual report and accounts 2022 09
Financial statements
Governance
Strategic report
Chief Executive Officer’s statement continued
At the year end this pipeline, net of
installations, stood at c.2.17 million. With
annual binding installation targets on
energy suppliers through to the end of
2025 to deliver the smart meter rollout,
we will continue to incrementally invest
in our engineering capacity and supply
chain to deliver this critical infrastructure.
The index-linked nature of our revenues
also ensures we have significant
protection from the current inflationary
environment. Our continued investment
in our supply chain, our meter stock and
the efficiency of our delivery model
together with this index linkage ensures
that, despite the impact of inflation,
the returns on our incremental capital
investment in meters will remain at least
in line with our previous guidance. In this
way, returns from the pipeline are
secured – further reinforcing the
defensive nature of the asset class.
I believe that 2022 also saw a sea
change in the public understanding
of and support for smart metering –
end consumers now demanding smart
meters to allow better visibility and
control over their consumption and
energy costs. At the same time, recent
threats to our energy security have
only increased the need to manage
consumption, particularly at peak
periods or when renewable generation
is low. National Grid’s introduction of
its ‘Demand Flexibility Service’ (DFS),
which pays people with smart meters
to use less energy at times of stress
on the network, is just the start of this
long-term drive to gain flexibility from
using data. You can read more about
the DFS scheme and how we are
enabling energy suppliers to
participate on page 26.
Batteries are critical to
energy security and net zero
We have been talking to our
stakeholders for several years about
how energy storage is critical to the
long-term security and sustainability
of our energy system. We are therefore
delighted that our first 50MW project
went live in January 2022 and that we
ended the year with a total of 140MW
of operational grid-scale battery
storage capacity. A significant highlight
of the year has been proving that this
asset class can help integrate
intermittent renewable generation to
the energy network and can generate
attractive long-term revenues.
Similar to the change in the public’s
perception of smart meters, events
in 2022 have driven a greater
understanding of the long-term need
for grid-scale battery storage. The
war in Ukraine exacerbated concern
about the security of our energy supply
and in its July Future Energy Scenarios
report, National Grid increased its
forecast requirement for grid-scale
battery storage by c.5.8GW to c.14.1GW
by 2030.
Having the capability to rapidly
develop, build and operate these
projects – particularly in the face of grid
connection constraints – to address this
market need is clearly vital, and for that
reason I am delighted that we continued
to grow our portfolio of projects during
2022 to 760MW at 31 December 2022.
Since then, we have added a further
two 50MW projects under exclusivity
bringing the portfolio to 860MW. Within
that portfolio, 610MW has now been
fully secured and is either operational
or ‘shovel-ready’.
We have demonstrated our capability
to develop and deliver on this pipeline
within our capex guidance, but of equal
importance was that in 2022 we proved
the return on investment. We were
delighted therefore that we delivered
revenues significantly ahead of our
previous expectations, equivalent to
an annualised c.£123,000 of EBITDA
per MW. The majority of the revenues
were generated from the provision of
frequency services, and whilst we
expect those to soften over time, there
is a parallel and long-term requirement
to provide balancing services to the
national energy network. This will
enable a smarter and lower-carbon
energy system, reducing peak energy
costs and underpinning national
energy security.
I was delighted to host an investor site
visit to our first 50MW operational site
at Burwell in October, which you can
read about on page 38.
Serving our customers
Listening to and serving our customers
remains at the heart of our purpose –
and this means delivering operational
excellence every single day. This starts
with health and safety where I am
pleased to say we have again shown
industry-leading performance across
our key performance measures:
• zero reportable injuries or dangerous
occurrences (RIDDOR incidents)
• maintained industry-leading
performance on Lost Time, Non-Lost
Time and Total Recordable Incident
Frequency Rates
• continued improvement, and ahead
of target, in group technical
performance
• no significant incidents at our growing
portfolio of grid-scale battery sites
We have also continued to focus
on our Net Promoter Score (NPS),
performance against industry
guaranteed standards and customer
complaints, all of which have again
shown continual improvement and
are ahead of target.
10
SMS Annual report and accounts 2022
The efficiency of our operations is
also clearly important. We grew our
engineering and installation capacity
early in the year while keeping job
completions per engineer in line
with our expectations.
You can read more about our
operational performance on
pages 32 to 35.
CaRe growth
2022 demonstrated the continued
security and stability of our business
model and that we can execute on our
strategic growth plan. Delivering our
existing smart meter and grid-scale
battery pipelines alone will more than
double the EBITDA of our business,
before taking into account the net
positive impact of inflation on our
index-linked recurring revenues.
However, the most exciting part of our
business is the further opportunity to
grow beyond these contracted and
secured pipelines. I have already
referred to the expected grid-scale
battery storage market size by 2030,
but in addition to this, smart meters are
enabling a more dynamic, digital and
flexible smart energy system to be built
– which we will need if we are to resolve
the significant security, affordability
and carbon challenges we face.
The National Grid DFS service points to
a future where half-hourly smart meter
consumption data is central to the
control, management and aggregation
of behind-the-meter solutions, such as
local solar and storage, and to controlling
increasing peak demand from the
electrification of transportation and
heat. Our technology platforms can
facilitate this new energy system, by
delivering on mandatory half-hourly
settlement for energy suppliers whilst
optimising the use of energy to balance
the energy grid and respond to price
signals – just like we do at the grid-
scale level.
Bringing together this technology and
our energy knowledge and engineering
capacity enables us to develop our
asset deployment capability in wider
CaRe solutions. For example, we can
originate, own and operate electric
vehicle charging infrastructure and in
some cases link this to local generation
and storage to optimise the cost and
use of energy. These solutions are
closely aligned to our existing skills and
capabilities, and again address the key
challenges of our time.
The technical solutions to address
these themes of security, affordability
and sustainability already exist and
that is why I feel that at SMS we have
an obligation to use our platform to
deliver these emerging solutions,
support the path to net zero and
reduce energy costs for end
consumers. In doing so we will also
continue to securely grow our business,
our asset base and our returns for the
benefit of all our stakeholders.
Our people
Our values underpin our entire business,
and nowhere is this more apparent
than in our greatest asset – our people.
You can read more about the significant
effort we have made into ‘Putting our
people first’ on pages 51 to 55, but the
highlight for me is being able, post-
pandemic, to see first-hand the pride
our staff take in delivering our services
across the country.
I was also pleased in October to launch,
with the Rt Hon Justine Greening, our
‘Levelling Up Impact Report’ setting
out our commitment, in partnership
with the Purpose Coalition, to levelling
up through the framework of the
Levelling Up Goals.
Sustainability underpins everything we
do at SMS. This means not just doing
what we can to help our environment; it
also means building a long-term secure
business for all our stakeholders, and
contributing to the prosperity of people
and society in general. We aim to
achieve this positive impact through
responsible corporate governance, as
much as through the direct and indirect
effects of our innovative energy
solutions. That means promoting
policies that prioritise wellbeing, open
recruitment, and fair career progression,
as well as nurturing a truly diverse and
inclusive workforce.
Looking forward
Our focus remains on executing
our strategic growth plan over the
coming year:
• installing c.600,000 smart meters
to continue to build our ILARR;
• building out our secured pipeline
of grid-scale battery projects and
continuing to evidence the returns
at least in line with our updated
guidance;
• growing these smart meter and
grid-scale battery pipelines further;
• building the opportunity pipeline in
wider CaRe assets, such as EV
charging infrastructure and behind-
the-meter solutions such as solar
and storage; and
• leveraging our technology platforms
to enable a smart, data-driven,
energy system.
We have consistently demonstrated
our ability to fund and deliver on this
growth agenda and we believe that
the opportunity ahead of us in terms
of market size is very significant. It is
incumbent on us to deliver on those
opportunities for the benefit of all our
stakeholders.
I would once again like to thank all our
staff, leadership team and Board, who
continue to work passionately to help
deliver our purpose – it is a privilege
to lead an organisation with such a
committed workforce. My thanks also
to all our customers for their continued
support and partnership.
I am proud of what we have delivered
this year and excited by the enormous
potential we can achieve in the years
ahead.
Tim Mortlock
Chief Executive Officer
14 March 2023
SMS Annual report and accounts 2022
11
Financial statements
Governance
Strategic report
Market overview
The changing energy
landscape
The net zero 2050 legislation underpins the critical
energy transformation happening in the UK today.
It is clear that increasing intermittent renewable generation will
have a fundamental impact on the future of our energy networks.
Furthermore, in addition to this transition to sustainable generation,
ongoing geopolitical tensions have reinforced the need to deliver
this change in a way that also addresses both energy security and
the cost-of-energy crisis.
The energy landscape is therefore dominated by the need to create
an equilibrium between decarbonisation, energy security and the
cost of energy – and to do so requires significant investments in
technologies and assets which provide flexibility and resilience to
the energy system.
Over the last decade, the UK has been transitioning away from
a system of centralised and highly predictable generation to one
dominated by distributed intermittent renewable generation.
However, given that renewable generation is neither forecastable
nor controllable, this unpredictability is impacting the grid and also
making the energy system less reliable at a time when we see the
potential for increasing peak demand driven by the electrification
of heat and transport. The increasing multi-directional flow of energy
and information increases volatility further.
This is where SMS’s carbon reduction
(‘CaRe’) assets are meeting the
energy challenge. Smart meters
continue to be key to enabling more
efficient energy use, and the data
they provide can facilitate building
a more flexible energy system that
makes it easier to match energy
supply and demand. There is a
mandated national target for an
85% rollout by 2025.
Whilst grid-scale energy storage
is needed to absorb excess energy
generation, demand-side flexible
systems, like distributed solar and
storage, air-sourced heat pumps
and electric vehicle charging
infrastructure not only deliver
low-carbon solutions to our energy
needs but also provide the ability to
power down non-essential equipment
at times of high system load or
power up standby generation
when grid prices peak.
Ultimately, transitioning towards a
cheaper, cleaner, and more secure
renewable energy future requires
local renewable sources of energy
and efficient ways to manage how
and when that energy is used.
1.
Generation
2.
Electricity/
information
flow
3.
End users
4.
Energy
security
The old way
Centralised
One directional
Passive/predictable
Global energy sourcing
Decentralised
Dispatchable
Variable
Multi-directional
Active/unpredictable
Self reliance
The new way
12
SMS Annual report and accounts 2022
“SMS is strongly positioned to provide
the knowledge, engineering, data platforms
and services behind the UK’s move to net zero.”
Tim Mortlock
Chief Executive Officer
Security of supply
The UK remains highly dependent
on fossil fuels, particularly gas,
of which c.50% is imported.
Cost of energy
Disruption in international
gas supplies has pushed
the cost of energy to
record levels.
Our role in meeting net zero
through a decarbonised
energy system
Our range of CaRe solutions enable the generation
of more of our electricity from renewables,
help decarbonise energy consumption and
make energy use more efficient.
Decarbonisation
Reduce carbon emissions to net zero.
SMS Annual report and accounts 2022
13
Financial statements
Governance
Strategic report
Market overview continued
86%
of people with a smart meter say they
have made changes to use less energy
Source: research from Smart Energy GB
£1.2bn per year
Estimated savings on energy bills
by 2030 from efficiencies driven
by smart meters
Source: BEIS smart meter roll-out cost
benefit analysis 2019
Working towards a
low-carbon world
Our grid-scale batteries enable us all to
maximise the use of energy generated
from renewable sources, and to make
the energy system more resilient.
Our smart meters and data services lead
to efficient energy management, local
energy generation and the alignment of
energy demand to renewable generation.
Electric vehicle (EV) charging
infrastructure enables the transition
of the transport sector from fossil-fuel
to low-carbon technologies.
Our behind-the-meter solutions such as
solar, storage and air sourced heat pumps
enable domestic and commercial energy
use to be decarbonised and optimised.
Reducing cost for
consumers
Our smart meters help consumers save
money by enabling them to control and
optimise their energy usage.
Our grid-scale batteries reduce power
price volatility, accelerate adoption of
cheap renewables and reduce the level
of network investment that would
otherwise be required to enable them.
Our ‘behind-the-meter’ solutions allow
consumers to generate their own
energy, sell excess energy to the grid,
automatically move consumption to
when prices are lower and get paid for
reducing demand. Our Solopower
proposition offers local housing
authorities a funded solar generation
and smart battery storage solution
helping to address fuel poverty.
Cost of energy
Decarbonisation
Addressing
the energy
challenge
14
SMS Annual report and accounts 2022
More than 75%
Proportion of low carbon renewable
generation by 2050
Source: National Grid Electricity System Operator
70 million trees
Estimated equivalent carbon
reduction once every home has
a smart meter installed
Source: Smart Energy GB
70% per home
Potential decarbonisation of housing
electricity per home with Solopower
Source: internal SMS estimate
Energy security
SMS Annual report and accounts 2022
15
Financial statements
Governance
Strategic report
Delivering energy
security
Our grid-scale battery storage
assets maintain the security of the
energy network by balancing energy
generation and demand, whilst also
stabilising the frequency of the grid
in the face of more volatile renewable
generation.
Our smart meters and data services
help to balance energy consumption
and supply, enabling new solutions
such as time-of-use tariffs and the
Demand Flexibility Service launched
by the Electricity System Operator
in 2022 to help reduce the risk of
shortages in supply.
Our FlexiGrid platform intelligently
operates distributed energy resources
such as behind-the-meter batteries,
EV chargers, heat pumps and storage
heaters to shift energy demand to
better match supply. These can reduce
peaks in demand that are currently
met by gas-fired power stations.
Our Solopower proposition offers
local housing authorities a funded
solar generation and smart battery
storage solution.
Market overview continued
Our market position
Smart meters and data
The UK Government has mandated
that energy suppliers replace
traditional meters with smart meters
and has set an objective of achieving
85% coverage by the end of 2025. The
significant increase in energy prices
and the increasing understanding of
the benefits to consumers supported
strong demand for smart meters in
2022 - with smart meters installed
across the industry, the highest since
the rollout began.
There are now c.30 million smart
meters installed across the UK
(including 2.1 million owned by SMS)
with c.26 million traditional meters
still to be exchanged for smart ones
by the end of the roll-out period. With
our full end-to-end capabilities, SMS
is perfectly positioned to capitalise
on this opportunity. We have a
c.2.17 million contracted smart
meter order pipeline and we are
currently installing c.12% of all new
smart meters in the UK.
The UK Government has also confirmed
its intention to mandate market-wide
half-hourly settlement from 2026, which
will require the balancing of the electricity
industry on an actual half-hourly
consumption basis rather than an
assumed energy usage profile. This
settlements service provides a
significant opportunity for SMS and
new solutions will also then be enabled
- using smart meter data to drive more
efficient use of energy and save
customers money. This will grow the
current market from c.480,000 Industrial
& Commercial (I&C) electricity metering
points (in which we have c.10% market
share) to c.32 million I&C and domestic
meters. One of the first of these data
driven solutions is The Demand
Flexibility Service (see page 26).
Grid-scale energy storage
The UK’s energy storage capacity
is projected to grow from c.4GW at
31 December 2022 to 38GW by 2050,
with 26.2GW expected to come
from batteries.
With 25 years’ experience delivering
large-scale electrical infrastructure
across the country, SMS remains
unique in its approach to grid-scale
storage, by covering the majority of
the value chain in-house. Our specialist
in-house teams manage the design,
supply, installation, operation,
maintenance and energy trading of
our battery energy storage sites. At
31 December 2022 we had a 760MW
portfolio of projects (of which 610MW
is either commissioned, under
construction or fully secured, with the
remaining under exclusivity) and our
target is to deliver 1.5GW by 2030;
this will provide us with a c.10%
market share.
c.2.17million
SMS contracted smart meter order
pipeline at 31 December 2022
Smart meter rollout
Key
Smart meters
54%
Non-smart meters
46%
SMS market share for grid-scale energy storage
Current
2030
(Based on
SMS’s existing portfolio)
2030
(Based on
SMS’s target market share)
140MW
6.6%
760MW
5.4%
1,500MW
c.10%
16
SMS Annual report and accounts 2022
Electric vehicle charging
The UK Government has announced
that sales of all new petrol and diesel
cars and vans will end in 2030 and
plans to introduce percentage targets
for sales of clean vehicles from 2024.
To support this transition, the UK
Government expects around 480,000
public chargers will be required as a
minimum by 2030 (of which there are
currently just 36,750 installed nationally
as of December 2022). This figure does
not include the potential number of
chargepoints in domestic and private
commercial premises in the UK.
SMS has EV charging solutions
targeting both public and domestic
chargepoints. We offer a fully end-to-
end integrated platform for EV
charging infrastructure to the non-
domestic market – installing, owning
and operating car charging networks
offering a full life cycle proposition,
from initial consultancy and design
of electrical infrastructure, through to
technology procurement, installation,
and ongoing ownership, operation and
maintenance of the assets. In addition
to workplace and public charging,
SMS is also targeting the destination
charging market – which broadly refers
to chargepoints installed at leisure,
retail, and hospitality businesses –
as well as the fleet sector.
SMS has also begun to install domestic
EV chargepoints, an engineering
competency closely aligned to our
existing delivery resource, and we are
developing asset-owning commercial
models to extend our CaRe business
model in this substantial market space.
Distributed (‘behind-the-
meter’) energy resources
FlexiGrid
FlexiGrid is a cloud-based software
platform that monitors and controls
a range of distributed energy resources
(DERs) such as solar panels, home
batteries, electric vehicle chargepoints
and smart heating systems. FlexiGrid
operates these as a virtual power plant
(VPP) and delivers the real-time
flexibility essential for a decarbonised
system. This brings a whole host of
commercial, operational, and
environmental advantages including
balancing renewable generation
locally, managing local grid constraints,
reducing the cost to deliver electricity
and enabling the supply of cheaper,
cleaner renewable energy.
Solopower
Our ‘Solopower’ proposition offers
local housing authorities a funded solar
generation, smart battery storage and
air-sourced heat pump solution that
addresses the dual challenge of carbon
emissions and fuel poverty.
We partner with social housing
providers to upgrade the energy
performance of social accommodation
and their residents at zero upfront cost
- Solopower can decarbonise housing
electricity by approximately 70% per
home, whilst reducing tenant electricity
bills by up to 28%.
The financing and delivery of clean
technology across the UK housing
stock will be essential for meeting the
Government’s Net Zero 2050 target
and alleviating fuel poverty amidst
a cost-of-living crisis. The funded
solution will offer the social housing
sector – which accounts for
approximately five million UK homes –
an opportunity to meet its carbon
reduction and fuel poverty objectives.
480,000
Expected minimum number of public
chargers required by 2030
Source: Competition and Markets Authority
5million
Approximate number of homes
provided by social housing sector
Source: ONS
18.3million
Potential number of domestic
chargepoints based on homes with
access to private, off-street parking
Source: ONS and industry estimates
SMS Annual report and accounts 2022
17
Financial statements
Governance
Strategic report
Our business model
Offering a unique proposition:
an end-to-end integrated service
What we have
What we do
Our strengths
Our core businesses
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. In the UK, c.46%
of meters are yet to be exchanged
as part of the smart meter rollout.
A growing grid-
scale energy
storage portfolio
We have 140MW of grid-scale
battery storage in operation with
a further 620MW pipeline of sites
either secured or under exclusivity.
Engaged
people
We are focused on employee
retention, training and development,
on productivity and, above all, on
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. Fostering innovation and
creativity in what we do is also
critical to allow us to deliver
new and exciting solutions.
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
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 the unrivalled support
we provide and our commitment to
providing successful and innovative
energy solutions.
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. We maintain
prudent but efficient leverage using
internal cash generation, our
available debt facility and other
additional mechanisms as relevant.
Underpinned
by our values
Putting our
people first
Safety
Innovation
Customer
excellence
Asset
management
Energy
management
Asset
installation
18
SMS Annual report and accounts 2022
Who we deliver for
Our strategic priorities
Creating long-term value for our stakeholders
01.
Expanding long-
term, resilient and
recurring cash
flows from carbon
reduction assets
02.
Customer
excellence and
efficient delivery
03.
Efficient capital
allocation to
provide headroom
for growth
04.
Sustainable and
socially responsible
business
Sustainability
Pride
Our shareholders
We deliver attractive and
sustainable returns to our
shareholders through our growing,
sustainable dividend. The Group
intends to pay a 30.25p per share
dividend in respect of FY 2022
(+10% on FY 2021), over four
instalments, with an intended 10%
annual increase through to FY 2024.
30.25p
dividend for FY 2022, with
an intended 10% annual
increase until FY 2024
Our customers
Delivering customer excellence
is a core value underpinning our
business. Our breadth of service
makes us unique in our industry, and
our expertise allows our customers
to have confidence that we will
deliver appropriate solutions.
62%
percentage of Trustpilot
reviews earning a top
5-star rating
Our employees
A motivated workforce encourages
creativity and productivity and is
critical to the execution of our
strategy. We place great emphasis
on creating a positive working
environment for all our people,
and on providing challenging career
opportunities that offer staff the
chance to develop.
#210
Best Large Companies
to work for in the UK
Our partners
We work with a wide range
of partners over the long term,
including suppliers, lenders,
governments and regulatory
bodies. These relationships are
critical in delivering our strategic
objectives and business model.
£420m
revolving
credit facility
The environment
Our goal is carbon reduction
and 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.
63,495tonnes
Our ‘handprint’: TCO2e carbon
mitigation achieved by our
customers from our energy
solutions (see page 50)
Providing a fully managed,
end-to-end metering and
data service to the Industrial
& Commercial and Domestic
markets, including
ownership and operation.
Providing energy-efficient
strategies and specialist
energy management
solutions, including grid-scale
battery storage. Investing in
renewable energy generation,
we continue to pursue several
developing opportunities in
the areas of electric vehicle
charging, heat and behind-
the-meter smart solar
and storage.
See the Operating review
on pages 22 to 35
Providing direct field-force
management and asset
installation, targeting the
domestic smart meter
opportunity. Design,
installation and management
of utility connections and
energy infrastructure.
SMS Annual report and accounts 2022
19
Financial statements
Governance
Strategic report
Our strategy
Securing our energy future
02.
Customer
excellence
2022 priorities
►Ensure an injury-free organisation.
►Focus on digital conversion of customers to smart
meters and continued improvement in guaranteed
standards of service.
►Continue to expand installation services into adjacent
non-metering activities, such as EV charging and other
behind-the-meter solutions.
2022 progress
►Industry-leading performance on all key health
and safety indicators.
►Continued adherence to COVID-19 protocols, protecting
our engineers and customers.
►Average meter installation run rate increased to c.45,000
per month in H2.
►Efficient utilisation of our direct engineering workforce,
supplemented by our network of sub-contractors.
►Trainee scheme for new entrants to meter market
expanded through our accredited training academy.
►Delivered our first upskill training to meter engineers
in the installation of domestic EV chargers.
Future outlook
►Year-on-year improvement in our core health and safety
key performance indicators.
►Continued investment in our capacity, to progressively
increase our meter installation run rates.
►Expand domestic installation capabilities further for
EV chargers and related home energy solutions.
01.
Expanding long-term,
resilient and recurring
cash flows from carbon
reduction (‘CaRe’) assets
2022 priorities
►Convert the meter order pipeline to add to the existing
index-linked annualised recurring revenue (ILARR).
►Target additional domestic smart meter opportunities.
►Grow our half-hourly data services.
►Develop our established portfolio of grid-scale battery
storage projects.
►Establish additional pipeline of opportunities across
several CaRe asset verticals.
2022 progress
►Grew ILARR 13% to £97.1m at 31 December 2022.
►Progressively improved meter installation run rate.
►Ended year with smart meter order pipeline of
c.2.17 million units.
►Acquired n3rgy to accelerate capabilities in smart
energy data solutions.
►Delivered first three grid-scale battery storage projects
totalling 140MW.
►Added further 140MW to grid-scale battery storage
pipeline since March 2022.
►Made strategic investment in EV charging infrastructure.
Future outlook
►Convert the smart meter order pipeline and add to
the existing ILARR.
►Target additional domestic smart meter opportunities.
►Further grow our half-hourly data services.
►Develop and deliver our established portfolio of grid-scale
battery storage projects.
►Establish a pipeline of public EV charging infrastructure
assets.
►Additional pipeline of opportunities across several CaRe
asset verticals.
1 Increase in meter order pipeline net of meters installed during 2022.
20
SMS Annual report and accounts 2022
Our strategic framework is structured into four key priorities, with a focus on continuing
to deliver long-term value, serving our customers and protecting the environment.
04.
Sustainable
and socially
responsible business
2022 priorities
►Continue to enhance disclosures in our Sustainability Report.
►Further improvement in ESG ratings.
►Deliver energy efficiency upgrades at a key office site.
►Commence trial of plug-in hybrids for the Group’s fleet.
►Embed environmental and biodiversity considerations
in the planning of our grid-scale battery storage sites.
►External assessment by ‘Investors in People’.
►Deliver the Safety, Health and Wellbeing action plan.
2022 progress
►Delivered progress in line with our net zero by 2030 carbon
roadmap (see pages 45 to 47).
►Strengthened our ESG ratings and credentials (see page 42).
►Continued to embed the TCFD principles into our strategic
planning and everyday processes.
►Continued to assess our alignment with the EU Taxonomy
ahead of UK taxonomy implementation.
►Accredited with ‘Investors in People’ Silver status.
►Launched our Levelling Up Impact report.
►Became an accredited ‘Living Hours’ Employer.
►Made progress across all safety, health and technical
indicators.
Future outlook
►Continue to progress against our ‘net zero by 2030’
roadmap (see page 47).
►Further enhance reporting of SMS's ESG credentials.
►Drive energy-efficient processes across our operations.
►Continue to participate in activities that make a difference
to local communities.
►Maintain zero cyber security breaches.
►Delivery of behaviour-based safety programme.
03.
Efficient
capital allocation
allowing for growth
2022 priorities
►Maintain strong liquidity to provide adequate funding to
deliver the Group’s pipeline of meters and CaRe assets.
►Maintain a prudent but efficient leverage position.
►Grow dividend by 10% annually, until 2024.
►Continue to evaluate an optimal mix of funding options
for future capital requirements.
2022 progress
►Strong liquidity position with net debt position of £31.2m
at 31 December 2022 and undrawn debt facilities of £355m.
►Continued evaluation of the optimal mix of future
capital requirements both to deliver the existing pipeline
of CaRe assets and to take advantage of additional
growth opportunities.
►FY 2022 dividend proposed at 30.25p per share, a 10%
increase on FY 2021 in line with policy, underpinned by
existing long-term cash flows.
Future outlook
►Maintain strong liquidity to fund the Group’s
pipeline of meters and CaRe assets.
►Maintain efficient capital structure and prudent leverage.
►Grow dividend by 10% annually, until 2024.
►Continue to evaluate an optimal mix of funding options
for future capital requirements.
SMS Annual report and accounts 2022
21
Financial statements
Governance
Strategic report
Key focus areas
Asset management
The asset management division is
focused on growing the long-term,
index-linked, recurring revenues
from smart meters and data.
assets.
Asset installation
The asset installation division is
focused on delivery of our CaRe
asset pipeline, excellence in health
and safety, customer service and
operational efficiency.
Energy management
The energy management division is
focused on the origination, operation
and optimisation of commercial-
scale CaRe products such as
grid-scale battery storage, public
EV charging infrastructure and
distributed generation and storage;
these solutions enable a low-carbon,
more flexible smart energy grid and
reduce energy consumption and
costs for end customers.
Operating review
Delivering growth
During 2022, our operational focus was on further
growing our pipeline of smart meters and grid-scale
batteries and delivering against our existing secured
pipelines of asset deployment, most notably across
both smart meters and grid-scale batteries. At the
same time, we maintained our unrelenting commitment
to safety and customer service.
Whilst no business is immune to
inflationary cost pressures, the
index-linked nature of our metering
and data revenues and the efficiency
of our delivery model have continued
to ensure we manage the capital cost
of originating these assets at least in
line with our guided expectations.
• 50% increase in our smart meter
installation run rate (H2 2022
v H2 2021)
• 13% increase in our ILARR
• Over 110% increase in our fully
secured grid-scale battery portfolio
• 140MW grid scale batteries now
operational; generating
annualised EBITDA performance
of £123,000/MW.
We were pleased during 2022 to add
a further 100,000 meters to our
contracted smart meter order pipeline
which ended the year at c.2.17 million,
while our deployed smart meter
portfolio increased to 2.1 million as a
result of installing over 480,000 smart
meters during the year. This, alongside
an inflation increase, drove our ILARR
to end the year at £97.1m. It is worth
reiterating that these are the
annualised index-linked recurring
revenues which flow from our deployed
meter and data assets.
Our smart meter installation run rate
increased to c.45,000 per month in the
second half of the year and we are now
installing c.14% of all smart meters across
the UK. We invested substantially in our
workforce, particularly in our direct
labour, in the first half of the year but
continue to manage an efficient balance
between direct and sub-contract labour.
We expect to continue to increase our
smart meter installation run rate in 2023
as we seek to deliver on energy suppliers’
mandated requirement for 85% of all
meters to be smart by the end of 2025.
We were also pleased to continue to
grow our overall portfolio of grid-scale
battery projects to 760MW at year end
(31 December 2021: 620MW), and since
then by a further two 50MW projects
under exclusivity to 860MW. Of
particular note, we increased the fully
secured and ‘shovel-ready’ proportion
of this portfolio to 610MW (2021:
290MW). Within this overall portfolio
we were delighted to energise and
bring 140MW into commercial
operation during the year, with a further
150MW in advanced construction.
+37%
increase in number of smart meters
installed year-on-year
+110%
increase in our fully secured grid-scale
battery portfolio (December 2022 v
December 2021)
“Efficient delivery has been
our mantra – our people
have been delivering on
our promises for health
and safety; customer
excellence; and the cost
of CaRe asset origination.”
22
SMS Annual report and accounts 2022
Primary objectives
Performance
• Grow ILARR, driven by:
−recurring rentals from installed smart meter assets; and
−data services provided to energy suppliers and I&C
businesses for industry data flows and half-hourly
energy consumption information.
• Ensure market-leading return on investment, by growing
our meter and data pipelines whilst efficiently delivering
on the capital cost of asset origination.
• Leverage our technology data platforms to enable energy
suppliers and end consumers to benefit from a smarter,
more flexible, energy system.
• Develop complementary subscription based rental
commercial models for behind-the-meter CaRe
assets for end consumers and landlords.
Index-linked annualised
recurring revenue (ILARR)
Revenue
£97.1m +13%
£92.8m +12%
2021: £85.9m
2021: £82.9m
Depreciation-adjusted
gross margin
Depreciation-adjusted
gross profit
92% Flat
£85.5m +12%
2021: 92%
2021: £76.1m
Capex on meters1
£105.0m +27%
2021: £82.4m
• Deliver our ‘Vision Zero’ – our goal of zero accidents,
healthy work and employee wellbeing.
• Excellence in customer services.
• Install our contracted smart meter asset pipeline
and deliver transactional new connection and meter
maintenance services.
• Grow our engineering capacity and installation run rate
whilst maintaining operational efficiency and full utilisation
of the Group’s direct labour workforce.
• Develop our engineering capabilities for other behind-the-
meter CaRe assets, such as domestic EV chargers, solar,
storage and air sourced heat pumps.
• Reduce the carbon footprint of our delivery, in particular
from our fleet, in line with our ‘net zero by 2030’ plan.
Revenue (external)
Pre-exceptional gross margin
£30.5m +39%
23% -13%
2021: £22.0m
2021: 36%
Pre-exceptional
gross profit
Number of engineers inducted
through training academy
£7.0m -12%
399 -24%
2021: £8.0m
2021: 524
• Originate, build and operate our grid-scale energy
storage portfolio, enabling the energy networks to
transition to net zero through the integration of
intermittent renewable generation.
• Originate, build and operate EV charging infrastructure
for destination, workplace, on-street and fleet locations,
enabling the transition to a low-carbon transport system
• Grow our energy management and efficiency delivery
programme on behalf of I&C customers and landlords:
−Solopower: behind-the-meter solar and storage
−Heat pumps
−Smart energy controls
Revenue
Capex on grid-scale
batteries2
£12.2m +239%
£36.3m +48%
2021: £3.6m
2021: £24.5m
Depreciation-adjusted
gross profit
Depreciation-adjusted
gross margin
£6.9m +666%
57% +33%
2021: £0.9m
2021: 24%
Grid-scale batteries
annualised EBITDA/MW
Operational grid-scale
batteries
£123,000/MW
140MW
2021: N/A
2021: Nil
1 2021 measure excludes acquisition of I&C large-power metering and data portfolio.
2 Excludes acquisition-related balances and payments on account to acquire grid-scale battery assets.
SMS Annual report and accounts 2022 23
Financial statements
Governance
Strategic report
Operating review continued
Asset management
The UK smart meter rollout continues
to present a significant opportunity
for us to grow our ILARR, with Ofgem
continuing to place annual binding
installation targets on energy suppliers
to ensure at least 85% of all meters are
changed to smart by the end of 2025.
Our industry-accredited services, built
on our in-house technology platform
METIS and national engineering
infrastructure, provide a strong basis
from which to efficiently deliver these
asset and data solutions to our
customers. The industry structure
underpinning these accreditations is
evolving as a result of smart meter
deployment and is set to enable all
industry participants, and ultimately
end consumers, to benefit from the
consumption data available from them
and the increasing digitisation of the
energy system.
We therefore continue to invest in our
METIS platform, not only to meet the
requirements of this industry change
but also to address the mandated
settlement of energy on a half-hourly
basis from 2026, which will significantly
increase the market size for these
services from c.480,000 electricity
meters to over 32 million meters by 2026.
However, this increasing opportunity
for data services is not just about
industry settlement processes– it is
about enabling end consumers of
energy to benefit by controlling and
aggregating the use and generation
of energy at different times of day in
response to the needs of the grid. Our
technology platforms are already
beginning to address this long-term
and growing market need. Through
these assets and data services, we
continue to enable the transition to
a low-carbon energy system for a
greener, more sustainable future for all.
2022 performance
ILARR: During 2022 we increased our
meter and data ILARR from £85.9m
to £97.1m, due largely to the application
of a 4.3% RPI increase in April
alongside the addition of 480,000
meters to our smart meter portfolio
- we now own 2.1 million smart meters.
The ILARR from this domestic smart
meter portfolio increased from £50.1m
to £61.0m, with this growth offset by
the expected and continued removal
of traditional meters. Our data
services ILARR increased from
£13.9m to £16.0m.
Pipeline: During 2022 we added a
contract for a further 100,000 meters
to our pipeline, which therefore
increased on a like-for-like basis to
2.65 million meters. Following the
installation of c.480,000 meters
during the year we exited with a
contracted smart meter order pipeline
of c.2.17 million meters, which once
installed is expected to add a further
c.£48m to our ILARR, excluding the
annual indexation also applied on our
pipeline. We continue to see additional
opportunities to grow this pipeline
further, particularly through the
extension of minimum contracted
volume commitments with existing
customers where their customer
base grows as a result of the market
turbulence over the last year.
Our smart meter rentals are index-linked and
not related to the amount of energy consumed
or wholesale energy prices. They therefore
provide a highly defensive, predictable and
secure infrastructure asset class.
All meter points
(Domestic & non-domestic, large & small suppliers, both fuels)
Source: BEIS Smart meters in Great Britain, quarterly update September 2022
56.5m
total
Smart meters
30.3m
Non-smart meters
26.2m
24
SMS Annual report and accounts 2022
We are also developing wider
commercial subscription models for the
ownership and rental of other behind-
the-meter assets to end-consumers
and landlords such as domestic EV
chargers, solar, storage and air-
sourced heat pumps. We are seeking
to partner with our existing and new
customers to offer these broader
CaRe services to end consumers.
SMETS1 Enrolment & Adoption:
The enrolment and adoption of
first-generation (‘SMETS1’) smart
meters into the Data Communications
Company (DCC) continued to accelerate
through 2022, with now c.65%, SMETS1
meters migrated to the DCC platform.
This effectively enables them to remain
smart regardless of who the energy
supplier is and operate like a SMETS2
meter. The migration of our SMETS1
portfolio has progressed marginally
ahead of this industry progress, with
now c.80% of our relevant meters
transferred. This process has now been
extended through to the end of 2023.
Delivery: Following from previous
Brexit and COVID-19 concerns, SMS
made conscious decisions through
2021 and 2022 to further diversify
its supply chain (to four meter
manufacturing partners), to fix the
cost in sterling of a significant
proportion of our forward meter
purchases and to increase the level
of buffer stock we hold in our UK
warehouses. Whilst not without
some impact on working capital,
these decisions have proven prescient.
They have ensured that we minimise
the impact of inflationary increases
on our meter installation and have
ensured that stock availability has
not been an impediment to delivering
or growing our meter pipeline.
This successful management of our
hardware supply chain has gone hand
in hand with the continued efficiency
of our operational delivery, ensuring
we have the capacity to deliver on
our contracted pipeline and take
advantage of further opportunities in
the market. At the same time, we have
continued to deliver on our return
expectations by ensuring that the
capital cost per meter installation
increases by less than the indexation
applied to our rentals.
Decision-making in practice: acquisition
of n3rgy data platform
SMS has been providing half-hourly data services, largely to the Industrial &
Commercial market, from both electricity and gas meters for nearly two
decades. This part of our business grew further in 2021 following the
acquisition of a ‘large-power’ metering and data portfolio from a large
energy supplier. In this market space our data services include collection
of consumption data directly from the meter, which we then provide to
energy suppliers and end users for energy management, billing and
industry settlements purposes.
The regulator has mandated the similar settlement of energy on a half-
hourly basis across all smart metered supply points from 2026,
significantly increasing the market size from c.480,000 electricity meters
to over 32 million meters. However, collection of the consumption data
for these smart meters is undertaken by the DCC.
During 2022 we therefore worked closely with, and ultimately acquired,
n3rgy – a digital technology platform which enables and facilitates the
use of energy consumption, generation and tariff data from smart meters
on the DCC platform.
The acquisition, for an initial case consideration of £1.4m, means that SMS
can effectively, with consumer permission, access half-hourly consumption
data directly from smart meters, therefore enabling us to offer turnkey
settlement services to domestic energy suppliers just like we already do
in the I&C market. The acquisition, together with the Group’s accredited
and scalable technology platforms, will enhance and accelerate SMS’s
capabilities in smart energy data solutions, providing the Group with a
strong competitive position in the significant addressable market as the
industry moves towards mandatory half-hourly settlement. As a platform
for growth, and akin to accelerated IT capex, the Board judged the
acquisition to be in the long-term interest of shareholders.
n3rgy also expands the range of data services we are able to provide, for
example by enabling third parties and end consumers to have direct access
to their energy usage data and costs, facilitating the management of this
usage and enabling them to participate in the energy market in new ways.
For instance, we are already using this capability to enable end consumers
to be paid to use less energy at times of stress on the energy network,
through National Grid’s Demand Flexibility Service (see page 26).
Before approving the transaction, the Board reviewed papers and
challenged management on the business cases, the risks and opportunities
presented by the deal and the continued investment in the platform
required. The Board took specific cognisance of the alternative third-party
routes to obtaining this capability versus such an in-house approach, and
the potential timescale and cost of developing the capability internally.
Customers – the Board noted that the transaction provided opportunities
to expand our data services offering and relationships with domestic energy
suppliers and to facilitate the positioning of our business for both mandatory
half-hourly settlement and the developing data-driven smart energy grid.
Employees – two employees joined the Group as part of the transaction,
with third-party development, support and maintenance arrangements put
in place prior to completing the transaction to ensure our continued ability
to service and grow the platform. An additional £0.8m of contingent
consideration will be payable by SMS subject to n3rgy achieving certain
performance targets.
SMS Annual report and accounts 2022 25
Financial statements
Governance
Strategic report
Operating review continued
Asset management continued
Demand Flexibility Service – enabling a smarter grid
The Demand Flexibility Service (DFS)
has been developed to allow the
Electricity System Operator (National
Grid ESO) to access additional
flexibility when the national power
demand is at its highest – typically
during peak winter days.
It is an additional tool that the ESO
can use to keep the lights on this
winter and has been designed to
reduce pressure on the grid by
providing an incentive for customers
to either reduce consumption or shift
it to different time periods.
Through two core SMS capabilities,
collecting smart meter energy data
via n3rgy and using our flexibility
aggregation platform, FlexiGrid, we
have been supporting energy suppliers
and other businesses offering DFS to
domestic consumers this winter.
As an Approved Provider of DFS
to National Grid ESO, SMS performs
a service whereby end-consumers
are notified, via our partners, of an
upcoming DFS event up to 24-hours
before the event takes place. If a
consumer decides to opt-in and
participate in the event, SMS
calculates the actual demand
reduction during the event period,
relative to their baseline consumption
in the same period, by using FlexiGrid
to automatically poll data from their
smart meters via the n3rgy DCC
adapter. SMS then sends individual
demand reduction figures, for every
MPAN that participated in the event,
to their partners so that incentives,
monetary or otherwise, can be
passed on to their end-customers.
Overall reduction values are
simultaneously sent to National
Grid ESO, who pay Approved
Providers per MWh of demand
reduction during the period.
SMS launched the service in
December 2022 and, as of
31 January 2023, had been
responsible for over 30 MWh of
demand reduction across six events
with our partners, smart meter app
providers Trust Power (Loop) and
Hugo Energy. SMS processed data
for over 14,000 MPANs in National
Grid ESO’s second ‘Live’ event on
24 January 2023. SMS expects
end-customer numbers to increase
significantly by the end of March,
when this service period comes to
an end, due to the onboarding of a
major energy supplier to the service.
Through participation in this essential
new service, SMS is helping National
Grid, energy suppliers, technology
companies and end-consumers to
simultaneously address the combined
challenges of energy security,
affordability and sustainability.
It is also an indication of what can
be achieved if time-of-use tariffs
and incentives are widely adopted
and implemented by industry.
Furthermore, using FlexiGrid’s existing
capabilities, the entire process can be
automated by controlling and
aggregating behind-the-meter
flexibility assets to import and export
energy in response to the needs of the
grid. Given its existing capabilities,
SMS is extremely well positioned to
become a data leader in this space,
working on a B2B2C basis with a wide
pool of energy industry stakeholders.
26
SMS Annual report and accounts 2022
Asset installation
This resource is supported by our
in-house accredited training academy,
which we see as central to promoting
health and safety (H&S) and compliance
standards across our business, and our
ability to train this engineering capability
to extend it into new sectors – such as
the installation of domestic electric
vehicle charging infrastructure.
We also continue to work with developers
for new connections utility infrastructure
and metering, and are accredited to
provide services across all market
segments – partnering with energy
suppliers, businesses and public sector
organisations to deliver the transition
to net zero. A continued and critical
feature of our business is the emergency
call out and maintenance services we
provide to ensure continuity of supply
to end consumers.
2022 performance
Whilst the Omicron variant of COVID-19
continued to present some challenges,
in Q1 in particular, we continued to
abide by amended working practices
and the related PPE and doorstep
protocols where appropriate. However,
we were largely able to focus on scaling
up our installation activities over the
course of the year.
The health and wellbeing of all our
stakeholders comes first however, and
again we reported zero injuries under
the Reporting of Injuries, Diseases and
Dangerous Occurrences Regulations
2013 (RIDDOR) and also maintained
industry-leading performance on our
other key metrics, including technical
quality incidents from our robust
auditing regime which was at 15
incidents per 100,000 installations.
See our Health and safety section
on pages 56 to 59 for more details.
Beyond H&S, we measure our success
across three sets of KPIs: Quality;
Quantity; Efficiency.
Quality:
Helping consumers use less energy
has never been more important. We
refreshed the knowledge of our field
engineers so that they could better
tailor energy efficiency advice to each
customer, and we supported this with
a new range of leave behind materials
and by sending each customer a digital
link to free energy efficiency advice on
our website. We are collaborating with
the Retail Energy Code so that we
continue to make our consumer
conversations more valuable.
In the second half of the year emergency
call-outs were much higher than normal.
The flexibility provided by our direct
and sub-contract workforce however
allowed us to minimise disruption
and maintain our general standards
of service.
We ended 2022 with a net promoter
score of +34.1 based on nearly 8,000
reviews on Trustpilot, and we increased
our Trustpilot rating to 4.1 stars. The
level of upheld complaints was also
low at 0.13% of the total number of jobs.
Quantity:
During the year we were pleased to
increase our installation run rate as
planned to over 45,000 meters per
month in H2 (H2 2021: 30,000 meters
per month). This means that we are
now installing c.14% of all smart meters
across the UK (2021: 9.4%). The industry
as a whole has deployed 30.3 million
smart meters to date, with 26.2 million
left to be deployed – of which 17.7 million
need to be installed by the end of 2025
to meet the Government’s 85%
completion target.
Our vertically integrated model remains
key to our success, and the growth in
our run rates came as a result of
continued investment in our engineering
capacity, particularly in our direct
labour, in the first half of the year.
As a result of these investments, we
successfully increased the run rate and
installed 480,000 smart meters during
the year but continued to maintain an
efficient balance between direct and
sub-contract labour. We expect to
continue to increase our smart meter
installation run rate in 2023 as we
deliver on energy suppliers’ mandated
requirement for the roll out.
We will continue to invest incrementally
in our engineering capacity, and we
expect to install c.600,000 smart
meters in 2023.
We continued to grow our nationwide engineering services
business during 2022, with our in-house engineering labour force
increasing by c.50% from c.330 engineers to c.470 engineers
over the last year. Alongside this internal engineering resource,
we continue to be supported by a wider supply chain such that
we have over 600 engineers in total delivering our smart and
advanced metering services across the country.
Financial statements
Governance
Strategic report
SMS Annual report and accounts 2022
27
Operating review continued
Asset installation continued
Efficiency:
With a balanced approach to direct
and sub-contract labour, we are
continually focused on the efficiency
of our delivery, primarily measured
through:
• the number of completed jobs
per day per engineer
• the cost per job
• the number of engineering
available days
By close control of these measures
and of our back-office activities, and
with the commitment of our dedicated
workforce, we have been pleased to
contain the inflationary increase in
the installation cost per meter in line
with the indexation we applied to
our rentals. Alongside our asset
management division’s management
of hardware costs, this ensures we at
least maintain our expected returns
on capital, and has ensured we
maintain strong gross margins on
our transactional installation services.
Confident in our
continued delivery
We will continue to invest in and grow
our delivery capacity incrementally
to ensure delivery of our CaRe pipeline
over the coming year, particularly in
smart meters, and we are confident
in our ability to grow the run rate and
efficiency of our operation.
To support this, we have embarked on
a refresh of our asset deployment
technology platforms, with the aim of
continually improving their integration
into our asset management and ERP
systems. By doing this we will continue
to improve and digitise the customer
experience, and further automate the
validation and transfer of data
between these systems – ensuring
continued efficiency not only in our
delivery of smart meters, but also in
other CaRe asset classes which we
expect to come to the fore over the
coming years.
We are already engaged in the delivery
on a transactional basis of CaRe assets
such as domestic EV chargers, solar
and storage, and air-source heat
pumps, and are working closely with
the asset management division to
develop the commercial models for
further long-term growth beyond
our smart metering pipeline.
SMS installations as % of industry
(Large suppliers)
0%
2%
4%
6%
8%
10%
12%
14%
16%
18%
Q3
2022
Q2
2022
Q1
2022
Q4
2021
Q3
2021
Q2
2021
Q1
2021
Q4
2020
Q3
2020
Q2
2020
Q1
2020
Q4
2019
Q3
2019
Q2
2019
Q1
2019
Q4
2018
Q3
2018
Q2
2018
Q1
2018
Q4
2017
Q3
2017
Q2
2017
Q1
2017
Market
Electricity market
Gas market
Source: BEIS and SMS data
28
SMS Annual report and accounts 2022
Energy management
Our energy management division, as
well as continuing to support Industrial
& Commercial (I&C) customers to
manage and reduce their energy
consumption, is focused on delivering
this growth agenda.
Grid-scale battery storage
Whilst energy storage has always been
a feature of the energy system, an
exponential increase in short-term-
response grid-scale storage is clearly
a vital requirement of the energy
transition. This increasing requirement
for energy storage is estimated by
National Grid to be 18.7GW by 2030
(of which 14.1GW is expected to come
from battery storage compared to the
c.2.1GW currently deployed), and 38GW
by 2050.
This growth is driven by the increasing
amount of intermittent renewable
generation being connected to the
grid, which creates an imbalance
between generation and demand and
results in price volatility. This imbalance
– which has always existed – increases
the spread between the cost to power
up storage, and the value to discharge
that energy. The spreads obtained by
these balancing services drive the
underlying economic model for our
grid-scale battery storage, although
we are also able to provide frequency
services to the grid where it is value-
accretive to do so.
2022 performance: This has clearly
been a transformational year for our
energy management division, and
specifically our grid-scale battery
business. We grew our portfolio to
760MW at 31 December 2022, of which
610MW has been fully secured. We
were also delighted to bring 140MW
of grid-scale battery capacity through
construction and into commercial
operation, trading at our projected
capex cost of £380,000/MW, and we
currently have a further 150MW in
advanced construction.
Whilst it was important to demonstrate
our decades of experience in the
design and delivery of this kind of
electrical infrastructure, it has been
equally important to prove the long-
term sustainable revenue returns
available to these assets. Our first sites
have exceeded our previous financial
expectations, delivering an annualised
EBITDA of over £100k/MW with this
performance significantly enhanced by
70% of the revenues coming from the
provision of frequency services.
Whilst we expect the revenues from
these frequency services to soften over
time, we are confident in our long-term
guidance of £57,000-£65,000 EBITDA/
MW. And, whilst we expect capex costs
to increase to nearer £450,000/MW for
future projects, the core electrical
infrastructure of these sites has a
40-year expected life (with battery cell
replacement around every ten years)
and the financial returns therefore
remain very strong.
Going forward, we expect to continue
to build our existing pipeline of projects
in this growing market, and to continue
to bring those projects in exclusivity
through to being fully secured and into
construction. We are targeting at least
1.5GW of operational assets by 2030,
which would represent a c.10% market
share. We have proven capability to
originate these projects – from initial
site selection to construction and
through to ongoing operation, trading,
maintenance and asset management
– as part of our end-to-end integrated
model. For further information on our
grid-scale battery storage business
and the investor day we held in
October 2022 at our first 50MW
operational site at Burwell, please
see pages 32 to 35 and page 38.
Energy services
Our traditional consultancy and energy
management activities continue to
grow and in particular, the roll-out of
site-based energy efficiency measures
was able to accelerate again post the
COVID-19 pandemic. These capital
projects are typically built on a
data-led approach, as is the case with
the smart heating control projects
which we have been delivering on
behalf of leisure and hospitality
customers over the last year.
In 2020 SMS launched its CaRe programme, engaging
with stakeholders to consider the long-term assets
required to transition the UK to net zero. To achieve
this UK legislated target requires a fundamental shift
to a smarter, more flexible energy system, capable
of integrating substantial amounts of intermittent
renewable generation whilst accommodating the
increasing electrification of transport and heat.
Financial statements
Governance
Strategic report
SMS Annual report and accounts 2022 29
The increase in wholesale energy prices
has had a substantial impact on many
I&C businesses and has strengthened
the need to optimise the procurement,
management and use of energy. We
therefore see significant opportunity
across our traditional consultancy and
energy efficiency services, which seek
to minimise the cost and volume of
energy used.
During 2022, we began to develop
integrated funded-energy solutions
that materially address the net zero
agenda and the long-term need to
reduce and provide greater certainty
over energy costs. By bringing together
the individual asset classes we
specialise in, such as distributed
generation (e.g: solar PV) and storage,
directly connected to commercial
properties, we are able to reduce
reliance on energy from the grid and
optimise the use of energy on-site.
This approach can also mean that
as other loads are introduced, such
as heat pumps or EV charging
infrastructure, additional infrastructure
upgrade costs can be minimised along
with the input price of energy to this
new infrastructure.
The urgent need for businesses to
address the effect of the increasing
cost of energy on their bottom line, the
continued necessity of reducing their
carbon footprint and our ability to
provide these integrated solutions
across multiple asset classes provides
significant growth opportunity for
asset deployment in this sector.
EV infrastructure
The deployment and funding of EV
charging infrastructure sits well with
SMS’s core skills. We have over two
decades of experience in the design
and delivery of electrical infrastructure,
from small connections to mobile
phone masts to some of the largest
electrical engineering projects in the
country. It is this experience that we
have brought to our grid-scale battery
business over recent years, and which
we are also able to utilise to deploy EV
charging infrastructure.
Having developed our knowledge and
experience of this sector over recent
years through our involvement in projects
such as the Virgin Media Park & Charge
(VPACH) on-street charging scheme, this
Operating review continued
Energy management continued
Decision-making in practice: investment in Clenergy EV
When assessing the market
opportunity to install, own and
operate EV charging infrastructure,
particularly in the public infrastructure
charging market, the SMS Board
took into consideration a range of
factors including our engineering
capability, the quality and
predictability of returns, and the
technology platforms required to
deploy and operate such assets.
With respect to technology platforms,
whilst SMS clearly had the asset
origination and management
capability within our existing business,
we needed to put in place chargepoint
operator (CPO) capability to deploy
firmware to EV chargepoint assets
and to enable end users to operate
and pay for using the infrastructure.
All options were considered,
including:
• outsourcing that CPO management
to a third party;
• licensing that CPO capability from
a third party for SMS to manage /
operate;
• developing our own CPO capability;
• investing in an existing third-party
CPO platform.
After due consideration, and taking
into account our strategic approach
across our business to what we
consider to be core IP technology
requirements to manage assets, the
Board felt that in order to manage
risk and provide the appropriate level
of platform flexibility and integration,
our preference would be to invest in
a CPO platform. The timescales and
costs to develop our own capability
were not considered the preferred
solution, and having worked closely
with Clenergy EV over the last year,
we had identified them as our
preferred third-party CPO partner.
In June we therefore agreed to take
a minority stake in Clenergy,
providing us with a direct interest in
the development and success of their
CPO platform which is now operating
over 2,000 chargepoints across the
country. SMS has invested an initial
£2.0m to acquire a 25% shareholding,
has the option to invest a further
£2.0m after one year for an
additional 26% interest, and has
a further option to acquire the
remaining shares after five years.
The Board believe that on a
standalone basis Clenergy has the
opportunity to grow a substantial
business managing EV chargepoint
infrastructure on behalf of a range
of business and infrastructure owner
customers across the UK, and
potentially beyond. By investing
in the business, not only do we seek
to enable Clenergy to maximise the
opportunity for its own platform, but
also to ensure we have the end-to-
end turnkey capability to address the
deployment and ownership of EV
chargepoint infrastructure over the
coming years.
This investment therefore
complements SMS’s existing EV
installation capabilities and will
enable the Group to deliver a fully
end-to-end integrated platform for
EV charging infrastructure, a model
the Group has already successfully
adopted for its meters, data and
grid-scale battery assets.
30
SMS Annual report and accounts 2022
delivery capability is now being aligned
to the substantial requirement for
destination, workplace, on-street, fleet
and domestic EV charging infrastructure
on a national basis. Commercial models
vary from utilisation-based revenues to
lease rental or subscription-based
revenues. For utilisation-based models,
we recognise that the location, type of
charger (e.g.: rapid or slow) and unit
rate of energy sold, are all critical
considerations which will affect returns
and are factors we will take into account
when considering capital allocation.
As with our other asset classes, we seek
to provide a turnkey solution, bringing
funding together with engineering
capability and technology platforms
that allow us to deploy, manage and
optimise our assets. Whilst much of that
capability already resides within our
METIS platform, during 2022 we also
invested in Clenergy EV, a charge point
operator (CPO) technology platform.
Our partnership with Clenergy allows us
to control both the charge of EV’s from
any chargepoint type using open
protocol software and also the revenue
collection / payments for use of the
chargepoint.
With this end-to-end operational
capability in place, we are now investing
in the development of a pipeline of
activity in this area over the coming
years, addressing the public
(destination, on-street), workplace
and fleet market segments.
We have also begun to extend our
direct labour field capability into the
domestic EV charging space, both
through recruitment of experienced
EV installation engineers and by using
our training academy to train our
meter engineers to address this
market. Commercial models will vary
from transactional to lease rental or
subscription-based revenues.
SMS has been working with external
support both to quantify the market
size and to gain a deeper understanding
of expected EV uptake, customer
behaviour, traffic flows, appropriate
locations for EV charging infrastructure
and utilisation models. We expect the
UK market to have c.500,000 public
charging points by 2030, and for this
number to grow to close to one million
by 2040. The associated capital values
(market size) are expected to be in
excess of £20 billion. These numbers
are consistent with many other forecasts
in the market and give SMS comfort
as to the size of the opportunity, the
utilisation rates and the expected
returns for our role as an asset owner.
Solopower (behind-the-meter
smart solar and storage)
Supported by our FlexiGrid technology
platform, our Solopower solution aims
to reduce carbon emissions radically
within the UK’s social housing stock
through the use and optimisation of
solar generation and battery storage.
The increase in energy costs and
substantial rise in fuel poverty,
alongside the need to decarbonise
housing, make clear the urgent need
for these solutions.
We also seek to extend these solutions
to the private market. We have capability
in asset financing and subscription-
based solutions, and we see the
opportunity to extend this capability
to air-sourced heat pumps and
domestic EV charging.
The UK social housing sector
alone accounts for approximately
five million homes.
In all of these cases our strategy
remains the same: to deliver assets
and services which reduce carbon
emissions, by using our engineering
resources and capability to deploy
them, technology platform to optimise
and manage them and providing
capital where appropriate to fund
them, in order to provide long-term
secure recurring revenues. These
markets also all share two key
characteristics: they reduce carbon
emissions, and they each provide a
substantial growth market opportunity.
SMS Annual report and accounts 2022
31
Financial statements
Governance
Strategic report
Operating review continued
Grid-scale batteries:
enabling the transition to a
low-carbon energy system
The impact of this shift in the generation
and demand mix can already be seen
through the rising volatility of UK power
prices and peak-baseload spreads
over the last five years, which provides
an increasing challenge to manage the
capacity and frequency of the energy
grid. The growing imbalance between
instantaneous generation and demand
is expected to further exacerbate the
volatility spreads.
The growing need for and reliance on renewable
energy to decarbonise electricity grids, alongside
national energy security requirements, accelerates
the fundamental long-term requirement to match
demand with the intermittent supply.
UK power price spread
(£/MWh)
Dec
2022
Aug
2022
Apr
2022
Dec
2021
Aug
2021
Apr
2021
Dec
2020
Aug
2020
Apr
2020
Dec
2019
Aug
2019
Apr
2019
-200
0
200
400
600
800
1,000
Chart capped at £1000/MWh.
Source: Modo. Spread = Difference between the highest and the lowest price in a day.
32
SMS Annual report and accounts 2022
This is where energy storage comes
in to play. Grid-scale battery storage
is needed to absorb excess energy
generation, release power when
demand is greater than supply, shift
energy across time and locations, and
provide real-time grid balancing.
Battery storage also seamlessly
operates with other demand-side
flexible systems, like smart meters,
distributed solar and storage, and
electric vehicle charging infrastructure
that can power down non-essential
equipment at times of high system load
or power up standby generation when
grid prices peak.
1 Calculated as the average of National Grid’s four forecast scenarios in its Future Energy Scenarios 2022.
National Grid has reflected this
increasing requirement for grid-scale
battery storage (from c.1.2GW in 2022)
in its annual Future Energy Scenarios
review. The forecast requirement
has consistently grown each year,
with the latest National Grid forecast
requirement being for 18.7GW of
energy storage by 2030, three-
quarters of which is expected to
come from battery storage. By 2050,
the requirement for total storage
increases to 38GW, of which almost half
is expected to be from battery storage.
14GW
Battery energy storage required
by 2030 to remain on track for
the UK’s net zero target¹
Provide incremental generation by discharging batteries
50Hz
Demand
Supply
Absorb incremental generation by charging batteries
50Hz
Demand
Supply
SMS Annual report and accounts 2022 33
Financial statements
Governance
Strategic report
SMS portfolio of sites
We have developed and are executing
an existing portfolio which we aim to
grow to c.1.5GW (or c.10% market
share) by 2030, in line with what we
are delivering in the metering and
energy data space.
Operating review continued
Grid-scale battery storage continued
760MW
SMS’s portfolio at 31 December 2022
including operational, under-construction,
contracted and exclusive projects
Secured sites
Sites under exclusivity
Early stage development (in-house)
“We aim to grow
to a c.10% market
share by 2030.”
34 SMS Annual report and accounts 2022
In basic terms revenues from grid-scale
battery assets are generated from two
services: balancing services and
frequency services.
Balancing services are where we
manage the timing imbalance between
generation and demand by charging
the battery when there is excess
generation on the grid (and prices
are cheap) and discharging when
there is excess demand on the grid
(and energy prices are high). It is the
spread between these peaks and
troughs from which we earn revenue.
This is similar to the services pumped
hydro stations have provided for many
years, but now in a grid that has a
greater requirement for fast response
times. Frequency services are where
the batteries are operated on behalf
of National Grid to ensure the grid
stays within statutory frequency levels
– protecting the grid against load
fluctuations, blackouts etc.
Our operational portfolio has now
grown to 140MW and has been
generating EBITDA per MW
significantly ahead of our initial
expectations.
In the development and long-term
operation of these projects we take
our ESG responsibilities extremely
seriously. All our supply chain partners
are regularly audited, covering areas
such as welfare, responsible sourcing,
robust practices and environmental
compliance including the recycling of
battery cells at the end of their useful life.
Illustrative revenue streams
Frequency services
Maintain frequency at 50 Hz (+/-1%)
Dynamic Containment
Fast frequency response
Dynamic Modulation & Regulation
Balancing services
Peak-baseload power price spreads
Balancing Mechanism
Capacity Market
Wholesale Trading
Embedded benefits
SMS’s EBITDA guidance
(£’000/MW)
Previous
guidance
Actual
(annualised)
New
guidance
42-53
c.123
57-65
EBITDA
guidance
Upside to
EBITDA guidance
SMS Annual report and accounts 2022 35
Financial statements
Governance
Strategic report
Sustainability
Meeting our responsibilities
to all our stakeholders
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 report on our
sustainability in the
following main areas:
01.
Stakeholder
engagement
Building strong and trusting
relationships with all our
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 all levels,
including the Board and
management.
Find out more on page 37
02.
The environment
As a leading smart energy
infrastructure company in the
UK, we are acutely aware of
the impact we can have on
the environment. Each of our
products and services is aimed
at reducing carbon emissions
and we are actively working
towards becoming a net zero
company by 2030.
Find out more on page 42
03.
Our people
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
continuous development of our
people is critical to this.
Find out more on page 51
04.
Health and safety
For us, being sustainable also
means being safe, secure and
reliable. Our commitment to
health and safety underpins
all our business practices and
ensures that our employees
and customers are protected.
Find out more on page 56
05.
Ethical business practices
We believe in behaving responsibly and with integrity. This is underpinned
by our Code of Conduct and supported by our policies and procedures.
Find out more on page 60
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 nurtures a thriving
workplace and a business that
supports 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.
For more information on our sustainability
performance, see also the SMS
Sustainability Report 2022 at
www.sms-plc.com/sustainability/overview/
36
SMS Annual report and accounts 2022
01.
Stakeholder
engagement
Engaging our stakeholders
Effective stakeholder engagement is
critical to the long-term success of our
business. We seek to understand each
stakeholder group – what they find
important and what how we can be
of value to them. This helps us make
better decisions when setting strategy
and in our day-to-day operations.
Our key stakeholder groups are set out
on pages 38 to 41. We summarise how
we engage with them and the main
topics of discussion and key outcomes
during 2022. Further detail on how the
Board engages with stakeholders is set
out on pages 86 to 89.
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 to inform
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
Directors 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.
Principal decisions
Principal decisions are those
operational and strategic decisions
which are considered to be material to:
• The SMS corporate group
• Stakeholder groups (the table on
pages 38 to 41 details how we define
our stakeholder groups).
On the pages listed in the table below
we have provided examples of how the
Board duly considered the impact on
stakeholders when making principal
decisions during 2022:
Principal decision
Page
Key stakeholders impacted
Strategic investment
in n3rgy data platform
25
Strategic investment
in Clenergy EV
30
Approval of a one-off discretionary
cost-of-living payment to most staff
52
SMS Annual report and accounts 2022
37
Financial statements
Governance
Strategic report
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 products and solutions.
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
aligned with the long-term success of the Group. We
endeavour to foster an open and transparent relationship
with our shareholders, and potential new investors, 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.
• Participation in investor conferences.
• Capital Markets Day and site visits.
• Ad-hoc meetings between institutional shareholders
and the executive leadership team.
Our programme for investor engagement is detailed
in the Corporate governance report on pages 87 to 89.
Key topics of engagement during 2022
• Development of our existing carbon reduction products;
meters and grid-scale batteries.
• The timing and scale of opportunities in other carbon
reduction products including EV charging infrastructure
and behind-the-meter solar and storage.
• Impact on SMS’s meter order pipeline of the recent
turbulence in the UK energy market and the failure
of several independent energy suppliers.
• Progress made in 2022 towards achieving our 2030
net zero target.
• Grid-scale battery storage site visit.
Sustainability continued
Stakeholder engagement continued
Burwell grid-scale
battery site visit
We were pleased with the response to our Capital Markets
Day in June 2021 and so, in October 2022, we followed this
up with a site visit to our first 50MW grid-scale battery
storage project at Burwell. The Group has built a strong
portfolio of grid-scale battery storage within a short
period of time, and we wanted to give our stakeholders
the opportunity to meet the grid-scale battery storage
team, learn more about this asset class and see how these
assets operate in real life. We developed the agenda and
presentation materials taking account of feedback we had
received from shareholders, analysts and advisers.
The presentation included an overview of grid-scale battery
storage and insight into the battery lifecycle and how these
assets are optimised. We also showed videos from Barry
Hatton (Director of Asset Management UKPN) who
explained the importance of grid-scale batteries for
balancing the grid, and from Daniel Greten (Head of Trina
Storage EMEA) who discussed the manufacturing and
sourcing of the batteries. The presentation was followed
by a tour of the Burwell plant.
The event was well attended and received by existing
shareholders, potential investors and other stakeholders.
More than 15 investors attended the presentation live on
the day and many more have since viewed the recording
on the Company’s website.
View the site visit presentation at
www.sms-plc.com/investors/results-reports-presentations/
“Thoroughly enjoyed the
event and found the day to be
extremely useful, putting now
firmly into place all the things
you have. We remain absolutely
happy holders.”
A shareholder
38
SMS Annual report and accounts 2022
Customers
See the Operating review
for further information
Why effective engagement is important
Serving our customers is a key part of our purpose and
we aim to provide an exceptional customer experience.
To deliver this, we listen and engage, and strive to become
a trusted partner.
Maintaining open and honest relationships with our
customers allows us to remain commercially competitive
and secure both new and recurring long-term contracts.
As the energy and utilities industry continues to navigate
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 a strategic account
director – 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 2022
We now ask all consumers for whom we have installed
a meter to review our service via Trustpilot. This gives us
much more feedback allowing us to continually improve
our service. 62% of reviews award us the top 5-star rating.
We have continued to enhance our digital channels to make
it easier for consumers to make bookings and c.60% of
bookings are now digital. We still offer the traditional option
of voice for those who prefer it.
Employees
See the Our people section
Why effective engagement is important
Our employees are critical to our business success. We
understand the impact their positive contribution can make,
and encourage this through listening, supporting them and
acting on feedback and also via new initiatives – all the
while ensuring their wellbeing is paramount.
We believe that engaged, healthy and safe employees
encourage creativity and productivity, and are critical in
attracting, developing, and retaining valuable talent,
fostering customer loyalty, and impacting positively on
organisational performance and stakeholder value. This
is paramount in enabling us to deliver our strategy and
achieve our mission, vision, and purpose.
It is therefore crucial that we continue to build a positive
culture, where employees are listened to, and are inspired
to perform their best work, with our five core values and
behaviours displayed by all.
Form of engagement
• An open and collaborative management structure with
direction set from the Executive.
• ‘Employee Voice’ a bi-monthly forum (with representation
across the Group at all levels from different departments
and locations).
• LOV (Living Our Values) Awards.
• ESG monthly forum.
• Five Employee Resource Groups (dedicated online
communities where employees can connect on
shared interests)
• Short videos on topics including hybrid working, our Share
Incentive Plan, and the results of the Investors in People
assessment.
• Use of a bespoke SMS intranet site (with a dedicated
Wellbeing page and resources).
• Quarterly employee newsletters.
• Annual performance and development reviews for all.
• Corporate induction for all new employees.
• Ad-hoc company presentations by the executive leadership
team, together with regular videos and email communications.
• Various Group wellbeing initiatives.
• Employee engagement surveys (Best Companies and
Investors in People).
• ‘You Said. We Did’ infographics following our engagement
surveys, to update employees on progress.
• ‘Your Thought is Sought’ employee suggestion scheme.
Key topics of engagement during 2022
We engaged with our employees on two significant projects
during the year:
• continuation of hybrid working for office-based
employees; and
• establishment of a further two Employee Resource Groups
(menopause and LGBTQ+).
SMS Annual report and accounts 2022 39
Financial statements
Governance
Strategic report
Sustainability continued
Stakeholder engagement continued
Suppliers
See the Operating review
for further information
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.
Key topics of engagement during 2022
Following a successful tender conducted in late 2021, SMS
continued its journey towards a reduced carbon footprint
by partnering with an alternative service provider providing
shipments of goods to our engineer base. The new locker
network has allowed SMS to double the amount of product
shipped outbound, supporting the growth in our installation
programme. Health and safety remains at the heart of all
we do and so the new locker network also provides a more
ergonomic solution for our engineers.
As in recent years, SMS has experienced some product
shortages due to continued global freight restrictions.
The relocation of our warehouse to a much larger site
has however allowed for greater purchases to be made
to support our installation roll out plan and so has mitigated
some of these challenges.
Policies and procedures around onboarding of vendors and
ensuring prompt payment have continued to be adhered to.
The development of our Electronic Quality Management
system is allowing far greater reporting to support our ESG
goals and aspirations.
Regulatory bodies
See the Operating review
for further information
Why effective engagement is important
The primary government regulator for the gas and
electricity market in the UK 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.
Form of engagement
• Attendance at regular meetings.
• Active participation in consultations and workshops.
• Representation on several boards and panels, including
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 MCoP and MOCOP,
amongst others.
Key topics of engagement during 2022
We continue to participate in gas, electricity infrastructure
and metering forums critical to the industry. These include
several linked to the Retail Energy Code, which brings
together several existing codes of practice and updates
the governance of existing gas and electricity retail
arrangements. As part of this, we have supported our
energy supplier customers in understanding the code
and the potential implications for their operations.
We continue to participate in a new implementation working
group set up by XoServe, which is focused on developing the
role of hydrogen across the UK gas network. In time, SMS will
be involved in developing the technical and training
standards for this.
We continue to sit on several panels of the Institute of Gas
Engineers and Managers, participating in the review and
enhancement of key technical standards.
SMS continues to be a committee member of the
Association of Meter Operators.
Recurring annual audits across infrastructure and metering
were carried out with successful outcomes and no identified
material non-compliance issues.
40 SMS Annual report and accounts 2022
Lenders/financiers
See the Financial review
for further information
Why effective engagement is important
Our lenders are providers of critical funding, supporting the
achievement 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.
Key topics of engagement during 2022
Meetings were held with the Group’s syndicate of banks to
provide an update on the 2022 budget and performance.
Government bodies
See the Market overview
for further information
Why effective engagement is important
We engage with several government bodies including the
Department for Energy Security and Net Zero (formerly part
of BEIS) and the Data Communications Company (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 on 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.
• Representation on both the Smart Energy Code (SEC)
Operational Performance panel and Smart Meter Device
Assurance scheme to help govern the activities of the DCC
and hold programme suppliers to account.
Key topics of engagement during 2022
We continued working with meter manufacturers and
industry to explore how second-generation smart meters
(‘SMETS2’) can be made reusable. This is expected to come
to fruition in 2023.
We were successful in securing five BEIS-funded projects
as part of their £65m overarching programme to enable
large-scale and widespread electricity system flexibility
through smart, flexible, secure, and accessible technologies
and markets.
We also helped BEIS to define options for consideration
when introducing new 4G communication hubs. We played
a thought leadership role, prior to formal consultation that
will aim to define how the new communication hubs will be
funded and deployed.
SMS Annual report and accounts 2022
41
Financial statements
Governance
Strategic report
02.
The environment
2022 saw intense challenges to energy
around the globe with ripple effects for
sustainability across communities and
the environment alike. The issue of
security of energy supply brings focus
to our core purpose of bringing low-
carbon energy to all and drives us to
continuously evolve our services to be
at the forefront of the energy transition.
Sustainability governance
Environmental, social and
governance (ESG) disclosures
We continue to pursue best practice
within our ESG processes and
disclosures, seeking to develop in line
with our specific material issues, and
ensuring relevant information is
available as ESG rating agencies
evolve. We have continued to see
our efforts reflected in our improved
ESG scores and have sought to engage
with new partners to support our
ESG ambitions.
In line with our strategic focus,
in 2022 we:
• continued to improve supporting
scores from 6.6 to 7.1 from MSCI,
achieving an ‘AA’ rating;
• improved our S & P Global score to
50, moving us from the 85th to the
93rd percentile;
• maintained a ‘B’ rating on our Carbon
Disclosure Project (CDP) submission;
• await review of our Sustainalytics
score of 26.6;
• benchmarked our performance
against Science Based Targets;
• continued to be a supporter of the
Task Force on Climate-Related
Financial Disclosures (TCFD) – more
details on our TCFD journey can be
found on page 43;
• had our net zero target recognised by
The Climate Pledge and the UN Race
To Zero campaign, demonstrating our
ambition and achievements;
• submitted our UN Global Compact
annual ‘communication of progress’,
demonstrating alignment with the
UN principles;
• maintained our Green Economy
Mark; and
• assessed the extent of our
alignment with the EU Taxonomy -
70% of revenue and 94% of capital
expenditure aligns with the EU
Taxonomy and Green Economy
Mark classifications.
Health, Safety and
Sustainability Committee
We report on our Health, Safety
and Sustainability (HSS) Committee,
including its role and responsibilities
and key activities in the year on page 81.
This committee is pivotal in facilitating
the sharing of best practice across the
Group and ensuring we have the
capacity and capabilities to deliver
on our goals. 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.
Sustainability continued
42
SMS Annual report and accounts 2022
Assessing and addressing
climate-related risks and
opportunities
SMS first embarked on a journey
to implement the recommendations
of TCFD in 2020. As an organisation
at the leading edge of the low-carbon
transition, we are acutely aware of the
importance of evaluating the impacts
of climate change on our activities
now and into the future. In 2022, we
enhanced our climate change exposure
evaluation by applying an emissions
scenario to evaluate our near, medium
and long-term exposure to the physical
risks of climate change. Further details
of this assessment can be found in the
2022 Sustainability Report.
We will continue to develop our
approach to analysing climate risks
with outputs reviewed by both our ESG
Working Group and HSS Committee
to ensure consideration is embedded
into our decision-making.
We are committed to updating and
sharing information related to our
climate risks and opportunities with our
stakeholders. Our CDP disclosure
outlines our current aligned activities
and further details our journey to best
practice as we fully embed the TCFD
principles into our strategic planning
and everyday processes.
TCFD disclosure aspect
SMS response
Governance
Governance of climate-
related risks and
opportunities
The Board has oversight of climate-related issues through three key channels: active performance
evaluation and management through the Health, Safety and Sustainability (HSS) Committee, system
governance through our audit processes, and our risk and opportunities frameworks. Each of these
channels enable oversight, and the ability to ensure the integrity and integration of climate issues
into all business decisions at top level.
Our HSS Committee monitors short, medium and long-term sustainability risks, alongside their
probability and impact and our corresponding mitigation strategies.
Strategy
Actual and potential
impacts of climate-
related risks and
opportunities on
business strategy
and financial planning
Opportunities:
SMS is well placed to support the UK Government’s ambition to be net zero by 2050. We can do this
by continuing to leverage our well-established energy services as the UK transitions to a more
sustainable and low-carbon economy. We continue to develop new opportunities aimed at
mitigating climate change and these are embedded in our business strategy for the short,
medium and long term. See pages 12 to 17.
Risks:
We are keenly aware of the potential impacts of fuel costs and taxation linked to the cost of operating
our fleet and building estate. To mitigate against future increases in carbon taxation, SMS has
committed to reduce emissions to net zero by 2030. Our net zero roadmap includes transitioning
from internal combustion engine to electric vehicles and installing on-site renewable generation.
We have also identified areas of potential physical climate-related risk, such as extreme weather
events which could affect our physical locations, road-based employees, and our supply chain. In
2022, SMS carried out a quantitative and qualitative physical climate change exposure evaluation
across our facilities (buildings and battery sites) utilising a recognised climate scenario, SSP-4.5.
Whilst climate-related change will have a profound effect on business in the broader sense, the risk
is very low for SMS specifically, with key risks and opportunities detailed within our Sustainability
report and CDP disclosure.
Risk management
The processes used
to identify, assess
and manage climate-
related risks
We have carried out qualitative and quantitative explorations of potential areas of concern utilising
best practice guides as a framework, including detailed climate exposure evaluation of our physical
assets including offices, warehouses and battery sites. Further information can be found within the
Sustainability Report.
Climate risk is integrated into our Group risk register and monitored by the Audit Committee; see the
Risk report on pages 62 to 69 for details on the Group’s risk management processes.
Climate risk currently has a low-risk rating and is therefore not considered a principal risk for risk
reporting purposes.
Metrics and targets
The metrics and targets
used to assess and
manage relevant climate-
related risks and
opportunities
Our Scope 1, 2 and 3 emissions are disclosed within our emissions reporting table, including further
descriptions of sources. See page 48.
Our ‘net zero by 2030’ target, progress and roadmap demonstrate our commitment to reducing
emissions. Transition milestones are embedded into our financial and strategic business planning.
See more details in our Sustainability Report at www.sms-plc.com/sustainability/overview/.
The four core TCFD elements are summarised below:
SMS Annual report and accounts 2022 43
Financial statements
Governance
Strategic report
Sustainability continued
The environment continued
Further details under each of our targets can be found within the 2022 Sustainability Report.
SMS strategy
SMS objectives
UN Global Compact Principles
SDGs
Putting people first:
Create a sustainable and safe
environment for all, nurturing a
thriving workplace and business that
supports wider society. We ensure
diverse, inclusive environments and
promote wellbeing, whilst empowering
communities to take control of their
carbon footprint and tackle local and
global issues.
• Work with our employees to drive
down our injury rate.
• Reduce gender pay gap.
• Continually review and improve
provision of comprehensive,
competitive and equitable reward
and benefits, and ensure all
employees are paid at least the
Real Living Wage.
Principle 1: Businesses should
support and respect the protection
of internationally proclaimed
human rights
Principle 3: Businesses should uphold
the freedom of association and the
effective recognition of the right to
collective bargaining
Principle 6: The elimination of
discrimination in respect of
employment and occupation
Sustainable futures:
Inspired by our core value of
‘sustainability’, we are leading the
UK’s transition to a low-carbon future;
and this work is supported by our
commitment to ’net zero by 2030’
in our own business. We assist our
clients and wider consumers with
their carbon reduction journeys
through the funding and delivery
of sustainably focused services.
• Reduce environmental impacts
across our operations.
Principle 7: Businesses should
support a precautionary approach
to environmental challenges
Principle 8: Undertake initiatives
to promote greater environmental
responsibility
Principle 9: Encourage the
development and diffusion of
environmentally friendly technologies
Operating responsibly
and ethically:
We will uphold our moral and legal
obligations through responsible
and ethical practices, ensuring the
integrity and transparency of all our
activities: from our supply chain to
our people, and from our operations
to our customers and wider society.
• Maintain our ISO-certified
management systems.
• Engage Tier 1 vendors to identify
their ISO14001 status, and work with
key suppliers to obtain improvements
within their ISO14001 accreditation
or their environmental policy.
• Maintain zero cyber security
breaches.
Principle 2: Make sure that they are
not complicit in human rights abuses
Principle 4: The elimination of all
forms of forced and compulsory
labour
Principle 5: The effective abolition
of child labour
Principle 10: Businesses should work
against corruption in all its forms,
including extortion and bribery
Our contribution to the United Nations Sustainable
Development Goals
44 SMS Annual report and accounts 2022
SMS Service Category
% of total
revenue
Asset installation - Smart utility services
Design, installation and management of utility connections and energy infrastructure.
42%
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.
79%
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.
100%
Total EU Taxonomy aligned % Group Activities
73%
% of total capex
94%
UK/EU taxonomy
The EU taxonomy (‘the Taxonomy’)
enables the classification of business
activities as ‘environmentally
sustainable’. The aim of the Taxonomy
is to provide transparency to both
investors and businesses and to
prevent greenwashing. The Taxonomy
supports sustainable investors and
investments, by providing clear
quantitative demonstrations of
business activities and revenues
against specific criteria.
Under the EU’s Taxonomy, a business
must pass three key tests to be classed
as environmentally sustainable. It must:
• make a substantial contribution to
one or more of the Taxonomy’s
environmental objectives;
• do no harm under all environmental
objectives; and
• comply with the minimum safeguards
covering social and governance
standards.
We have assessed the extent of our
alignment with the EU Taxonomy, in
order to support our investors and
prepare for the UK Taxonomy. Our
assessment shows strong correlation
between all our services and the
Taxonomy requirements, summarised
in the table below.
We will continue to align with the
requirements of the Taxonomy as
these develop, and disclose our
alignment, assessing the technical
screening criteria and revenue from
applicable activities.
Our net zero ambition
Our ‘net zero by 2030’ target will see us
drastically reduce our organisational
carbon emissions. It encompasses
Scope 1 and 2 carbon emissions that
derive from our building estate as a
result of heating, cooling and electricity
use, and the consumption of fuel by
our tracked fleet. Our ambition is to
achieve a 100% absolute reduction in
these emissions by 2030, which aligns
with the level of ambition required to
limit global warming to 1.5°C.
Our net zero target currently excludes
the emissions associated with
operating our grid-scale battery
storage sites, the first of which became
operational in January 2022. Once we
have achieved a full year of data we
will establish a baseline from which we
can set an intensity-based target that
aligns with the Science Based Targets
Initiative (SBTi) in 2023.
2022 progress
In line with our net zero strategy, during
2022 we implemented a range of
sustainability upgrades at one of our
core sites in Cardiff. This project has
focused on reducing energy
requirements through upgrading the
building fabric to improve thermal
performance, generating renewable
energy with 30kWp capacity of solar
photovoltaic and providing a level of
self-sufficiency with battery energy
storage. The final step will involve the
installation of an air-source heat pump
and mechanical cooling and ventilation
system that will mitigate the effects of
increasing summer temperatures.
Upon completion, this project is
expected to reduce building emissions
by up to 70%, exceeding Science Based
Target requirements, and will serve as
a blueprint for upgrading modest office
buildings to achieve significant
decarbonisation and climate change
adaptation.
SMS Annual report and accounts 2022 45
Financial statements
Governance
Strategic report
Our net
zero
journey
►Transition a 100 fleet vehicles
to mild hybrid vehicles
►First site sustainability
upgrades complete
►Continuation of sustainability
upgrades and renewable
energy installation across sites
2023
►Company cars at the end of
their lifecycle replaced with
PHEV or EV where possible
►Scoping of site sustainability
upgrades
►11 plug in hybrid vans received
2021
►Implemented EV salary
sacrifice scheme
►Extended the scope of
our ISO 50001 EnMS
►The first EV van received
►Appointment of a net zero
energy manager
►Sustainability site works
commence
Sustainability continued
The environment continued
Our journey to net zero carbon
2022
46 SMS Annual report and accounts 2022
►Continue to transition ICE
fleet vans to mild hybrid
or full electric vehicles
2024
►2030 Target: All core sites
to have completed
sustainability upgrades
►2030 Target: All domestic
fleet to have transitioned to
EV and will emit 0g CO₂ /km
per vehicle
2030
Target Beyond
2030:
SMS to focus on
reducing Scope 3 carbon
emissions across the
value chain
►2025 Target: All domestic
fleet to have transitioned
to PHEV and EV, or adhere
to maximum of 60g CO₂/km
per vehicle
Our fleet net zero transition saw 11
hybrid vans received at the end of 2021
tested as trial vehicles to evaluate their
viability, distance capabilities and
suitability for our business purposes.
Following the trial, we have decided to
move forward with replacing the first
quota of Internal Combustion Engine
(ICE) vehicles with mild-hybrids, which
use a battery-powered electric motor
in support of a conventional petrol or
diesel engine to improve fuel economy
and reduce emissions. This marks
another milestone in our net zero
roadmap, as these vehicles will allow
us to continue to improve the efficiency
of the fleet before transitioning fully
to zero-emission vehicles.
We launched in 2021, the DriveGreen
Scheme, a salary sacrifice scheme that
has supported a further 11 car drivers
migrating to full EV cars or PHEVs.
2023 outlook and priorities
The first half of 2023 will see the
sustainability upgrades at our office
in Cardiff finalised, leading us into the
next phase at our second site which
will include determining the bespoke
solutions we need to implement based
on the completed 3D performance
simulation modelling of the building.
In the first half of 2023 we will also be
welcoming 100 mild hybrid vans into
our fleet and trialling one full EV van.
This full EV van will be fully fitted with
all the equipment carried by a dual-fuel
engineer to ensure true-to-life
evaluation of performance. The trial
will enable us to evaluate the currently
available EV technology, focusing on
distance capabilities, charging
arrangements and infrastructure
required to enable a full roll out.
2025
SMS Annual report and accounts 2022
47
Financial statements
Governance
Strategic report
Our environmental
performance
Emissions reporting
Our footprint is the carbon produced
by our operational activities. We utilise
the internationally recognised GHG
Protocol to ensure comprehensive
and standardised data calculations.
Our reporting covers all emissions
from our business activities, and all
sites and operations during calendar
year 2022. Full methodology can be
found on our website.
Our Scope 1 calculation looks at the
energy consumed by our fleet vehicles,
gas and oil consumed across our
offices, warehouses and training
centre, and fugitive emissions from air
conditioning. Our Scope 2 calculation
looks at our electricity consumption.
Scope 3 accounts for the emissions
generated within our value chain.
In 2022 we worked with our assurance
providers to ensure accuracy and
completeness of our Scope 1, 2 and 3
carbon reporting. Further details can
be found within our Sustainability
report and the assurance statement
is available on our website.
The table below incorporates our
mandatory Streamlined Energy and
Carbon Reporting (SECR) reporting,
together with material voluntary
disclosures:
2022
2021
2020
Commentary
Total Scope 1 (TCO₂e)
3,142.5
2,124.2
1,796.8
Scope 1 comprises the direct emissions from
our operations.
Company-owned vehicles
3,054.9
1,988.0
1,690.0 Our owned and tracked fleet vehicles.
Gas
69.3
78.53
77.93 Gas heating serves six of our properties across
the UK.
Burning oil
1.9
2.2
1.5 Oil heating is used in one office building.
F-gas
16.4
55.5
27.4 F-gas is the refrigerant used in air conditioning
for cooling workspaces and server rooms.
Total Scope 2
Location-based (TCO₂e)
1,233.2
190.6
152.4 Scope 2 comprises the indirect emissions
associated with our operations.
Electricity (Buildings)
122.0
137.52
152.4
Electricity lights, heats and powers our operations
across warehouses, offices and training centres in
the UK and Ireland.
Electricity (Battery sites)
1,111.2
53.1
0.0 Net electricity used to operate cooling and
communication systems at our grid battery site.
Total Scope 2 Market-based (TCO₂e)1
(including green energy contracts)
2,100.5
173.42
68.32 We source green contracts for our electricity
where possible.
Total Scope 3 (TCO₂e)
4,258.5
1,022.3
851.0
Scope 3 comprises emissions from up and down
our value chain, including those of suppliers and
service providers.
Category 1: Purchased Goods & Services
Water supply1
0.5
0.52
1.1
The utilities which serve our warehouses, offices
and training centres with water, emit carbon
through their supply operations.
Category 3: Fuel- and energy-related activities (not included in Scope 1 or Scope 2)
Diesel upstream supply1
715.3
482.62
405.02 Upstream emissions for the production of diesel
to supply employee-owned vehicles and
company-owned fleet.
Petrol upstream supply1
15.5
0.0
0.0 Upstream emissions for the production of petrol
to supply employee-owned vehicles and
company-owned fleet.
Business travel upstream supply1
15.2
7.22
12.52 Upstream emissions for the production of petrol
and diesel to supply employee-owned vehicles.
‘Well to tank’ gas1
11.8
13.43
10.13 Upstream emissions for the production processes
of gas for use on our sites.
‘Well to tank’ burning oil1
0.4
0.5
0.3 Upstream emissions for the production processes
of burning oil for use on a site.
‘Transport and distribution’ electricity1
112.8
16.9
13.1 Upstream emissions of purchased electricity
for use on our sites.
Generation of purchased electricity
that is sold to end users
2,949.0
0.0
0.0
Upstream emissions of purchased electricity
for our grid-scale batteries which is sold back
to the grid.
Sustainability continued
The environment continued
48 SMS Annual report and accounts 2022
2022
2021
2020
Commentary
Category 5: Waste generated in operations
Waste1
3.6
3.3
2.3 The processing of our waste from our sites.
Water treatment1
0.9
0.92
2.3
The utilities which serve our warehouses,
offices and training centres with water emit
carbon through their supply and waste water
treatment operations.
Category 6: Business travel
Vehicle business travel
57.9
27.52
48.92 Business travel in employee-owned vehicles.
Category 7: Employee commuting
Employee teleworking1
374.2
469.52
355.42 The carbon emissions associated with energy
used to power office equipment and for heating
by employees working from home.
Category 8: Upstream leased assets
Emissions from leased buildings1
1.4
-
- Emissions from energy consumption at shared
leased office spaces.
Total Scope 1, 2 & 3 (TCO₂e)
(Scope 2 Location-based)
8,634.2
3,337.1
2,800.2
Carbon intensity
Scope 1, 2 (TCO₂e/£m)
32.3
21.3
18.9
Carbon intensity
Scope 1, 2 & 3 (TCO₂e/£m)
63.7
30.8
27.2
Shows the amount of emissions produced
to achieve the revenue realised, per £m.
Operational energy
consumption (MWh)
19,446.5
9,728.9
8,108.1
This is the total energy consumption of our
operations, spanning activities included in
Scope 1 and 2 (excluding F-gas).
1 Data disclosure is voluntary under SECR, but included for completeness of Scope reporting under the GHG Protocol. As our business grows, we are
developing our ability to decouple operational growth and energy consumption. See our Sustainability Report for a full breakdown of all metrics.
2 We have improved the accuracy of our reporting through the addition of new and best practice emissions sources, updated methodologies, receiving
actual consumption data from service suppliers and newly released carbon conversion factors, which has led to a restatement of data within the table.
3 Figure has been corrected based on supplier information which has led to a restatement of data within the table.
2022 ‘footprint’
We saw a significant increase in smart
meter installations during 2022, which
resulted in an increase of 54% in our
fleet-related carbon footprint on the
previous year, as an additional 175
vehicles were added to the fleet to
service this demand. We have
continued to de-couple business
growth from emissions and have been
successful in improving overall fuel
efficiency with the amount of carbon
emissions emitted per vehicle reducing
by 5% since 2019.
The full operation of our first battery
site in Burwell and the commissioning
of our second site in Barnsley in 2022
has changed the landscape of our
business emissions. The emissions
resulting from the net consumption of
electricity from our battery assets, also
known as the operational emissions,
are now reported under our Scope 2.
The development of batteries will
support the integration of more
renewable sources of electricity into
the grid and will enable a low-carbon
energy system for all in future. As this
is realised we will see a sustained
reduction in emissions generated by
our battery sites.
SMS Annual report and accounts 2022 49
Financial statements
Governance
Strategic report
Total Scope 1 and 2 footprint
4,376 TCO₂e
Total Handprint
63,495 TCO₂e
Smart Meters
59,066 TCO₂e
Energy Projects
4,429 TCO₂e
Our ‘handprint’
To reach an understanding of our
total sustainability we take a holistic
view of our company sustainability,
which includes quantifying both the
positive impacts from our products
and services (our handprint), and the
negative impacts from our business
operations (our footprint). We use this
‘net positive’ perspective to align our
strategy for business growth, financial
benefits and sustainability gains:
investing in the development of assets
and services which deliver carbon
reductions for our customers and their
end consumers.
Our ‘handprint’ is the carbon mitigation
achieved by our customers through the
impact and delivery of our energy
services and solutions, such as smart
meters. We use savings data from
smart meter energy research and from
delivered energy efficiency projects to
calculate our total handprint.
Sustainability continued
The environment continued
50
SMS Annual report and accounts 2022
03.
Our people
Health and wellbeing
We proactively support a holistic
wellbeing agenda at SMS. Good health
and wellbeing are paramount. We
believe the happiest colleagues are
those who are engaged and included,
whose wellbeing is priority, and who
feel part of the Company’s mission
and purpose. We therefore provide
a host of wellbeing-focused benefits
for all employees including access to
an employee assistance programme
which offers 24/7 confidential support;
SmartHealth, a free support package
for employees including online GP
appointments and access to health
experts; the My Healthy Advantage
app, which gives access to a wealth
of health and wellbeing resources, and
Medicash, which supports employees
with day-to-day medical expenses.
As part of ‘putting our people first,’ it is
important to us that employees are not
only supported whilst at work but also
in their lives outside work. This includes
supporting employees through their life
changes as they grow their families,
develop their careers, or encounter
difficulties. We therefore have a
bespoke wellbeing intranet page with
resources across three pillars: mental,
physical, and financial health, and have
enhanced wellbeing policies, some of
which include fertility treatment,
maternity, and adoption leave.
In 2022, we launched bespoke internal
training workshops for line managers
on employee health and wellbeing to
equip them with the knowledge and
tools to support their employees
through life challenges. And we
upskilled a further eleven of our
employees to become accredited
mental health first-aiders taking our
number of trained employees to 31.
To support effective leadership and
management across the Company and
to further embed and maintain health
and wellbeing as part of everyday
activities, our bespoke ILM/CMI
recognised Management Development
Programme includes a module titled
‘Being A Mindful Manager’, which over
100 managers have completed.
We also offered all our employees
the opportunity to attend an external
training course on ‘Talking Wellbeing’
delivered by Mindful Employer. This
three-hour workshop is designed to
improve the understanding of mental
health conditions, build team and
individual resilience, and develop
the skills and confidence to have
constructive discussions about
mental health within the workplace.
80 of our employees participated.
SMS Annual report and accounts 2022
51
Financial statements
Governance
Strategic report
Employee engagement
At SMS, we are committed to putting
our people first – a philosophy
embedded within our company culture
and our five core values. We can only
do this by actively listening to our
employees and encouraging feedback
and discussion on the topics that
matter most to them.
We hold a bi-monthly forum, The Voice,
which gives our people a platform to
express their views and make
suggestions on how we can make
SMS a great place to work. We also
launched ‘Your Thought is Sought’,
our employee suggestion scheme.
We carried out our third
external employee
engagement survey from
Best Companies. The
response rate once again
rose, and we were delighted
to retain our ‘One to Watch’
accreditation from Best
Companies for good levels of
employee engagement.
We also consulted with our staff on
hybrid working using a survey. This
informed our hybrid working policy
which we then introduced using a short
video which gave staff helpful guidance
on how to maintain wellbeing and keep
SMS culture and values alive.
Recognition and reward
We have been a ‘Living Wage’
employer since 2020. The Living Wage
is scheduled to go up in May 2023,
but to give further support to our
employees on entry-level salaries,
we brought in the increase six months
early, increasing their rates to £10.90
per hour from 1 November 2022.
As well as being a ‘Living Wage’
employer, in 2022 we also became an
accredited ‘Living Hours’ employer.
This reflects our commitment to
provide our employees with the
security of hours that they need.
To reinforce our culture, we also
continued our Living Our Values (LOV)
Awards which, each quarter, recognise
staff who have consistently displayed
one or more of the five SMS core values
and associated behaviours.
Sustainability continued
Our people continued
Our activities
Throughout 2022 we partnered
with a number of organisations
and launched initiatives to raise
employees’ awareness across
a range of topics and signpost
them to further specialist
support.
For example, we:
• relaunched the SMS Wellbeing
page on our intranet which
provides lots of free support
and advice, with external
signposting;
• renewed our two-year
voluntary pledge to Mindful
Employer and their Charter for
Employers Positive about
Mental Health;
• invested again in the Tommy’s
Pregnancy and Parenting at
Work programme;
• supported Baby Loss
Awareness Week 2022 and
National Fertility Awareness
Week;
• supported Mental Health
Awareness Week, National No
Smoking Day, World Mental
Health Day, and International
Men’s Health Week;
• joined the Employers Initiative
on Domestic Abuse;
• joined the National Suicide
Prevention Alliance;
• supported National
Schizophrenia Awareness Day;
and
• committed to being a
Menopause Friendly Employer.
Decision-making in practice:
discretionary cost-of-living payment
We were aware of the impact of
the rising cost of living on our staff
as we approached winter, and in
November 2022, we made a one-off
discretionary payment to all but our
highest paid employees to help
them through this time.
The Board approved this payment
after balancing the interests of
employees and shareholders. The
payment demonstrates one of our
core values – putting our people
first. The Board judged this action
would be in the long-term interests
of the Company and would help
meet its responsibility to the
Group’s staff.
“Given the current climate of finances and how much everything has
shot up in price, SMS couldn’t have timed the payment for all staff
below senior management any better. I know a lot of staff will have
been having serious concerns due to the time of year, Christmas,
and needing to use more energy. Personally I’ve never worked for
a company that thinks about its staff like this. I’m sure we have all had
a nice voucher at work and maybe been given a flyer on a Friday, but
the amount of money SMS has shared back into the business direct
to its staff is outstanding! Whoever was involved in this decision has
made more of an impact than they realise, and they have satisfied
a lot of families affected by the country’s situation.”
Matthew Hopkins
Field Service Delivery Manager.
52
SMS Annual report and accounts 2022
Website
We launched our new Group website,
integrating our refreshed brand and
creating an online space that reflects
the full scale of our ambition. We wanted
our website to bring our people and
culture to the very forefront of our brand.
Talent management and
development
We strive for best practice when it
comes to leading, developing, and
supporting our people and therefore
we invited Investors in People to assess
us. We were delighted to achieve Silver
accreditation across the Group.
Over the year we built on our activities
to develop our people at all levels
within the organisation:
• we continued the rollout of our Talent
Management and Succession
Planning Framework which helps
us find and then develop, nurture,
and retain our future leaders;
• we developed more of our
managers and team leaders
through our bespoke Management
Development Programme which
is recognised by the Institute of
Leadership & Management (ILM)
and the Chartered Management
Institute (CMI);
• we launched new training courses;
topics requested included resilience
leadership, and giving and receiving
feedback; and
• we expanded our apprenticeship
offering, with twelve of our people
obtaining their apprenticeship
qualification in 2022, and we currently
have a further 21 working towards
their professional qualification.
Equality, diversity,
and inclusion
In October, we unveiled our ‘Levelling
Up Impact Report’, which has been
developed in partnership with The
Purpose Coalition. The report, which
was presented to business leaders
and MPs in Westminster, outlined
how we are making a positive social
and environmental impact, which has
become even more important amid
the current cost-of-living challenges.
The Levelling Up Goals provide a
framework to help organisations
identify gaps in access to opportunity,
address common socio-economic
barriers that prevent people from
achieving their potential, and hence
help narrow regional inequality and
improve overall living standards in
the communities in which they operate.
The way we embrace diversity and
inclusion in our recruitment and people
management was recognised when
SMS won ‘Best Diversity & Inclusion
Initiative’ at the S1 Awards. We are
also proud to announce that we have
signed up to a company partnership
with the Women’s Engineering Society.
This partnership helps us to support
women in engineering careers and
to encourage young girls to view
engineering as a career option.
We have also introduced a reverse
mentoring programme via Disability
Connect. Disability Connect provides
organisations with disabled mentors
who help raise awareness of the issues
disabled people face in the workforce
and provide insight that we will use to
ensure SMS is accessible and
welcoming to all.
Industry recognition
• Winner ‘Entrepreneur of the
Year’ – AIM Awards 2022 –
Alan Foy (former CEO)
• Winner ‘Best Investor Relations
Officer’ – The Investor Relations
Society Best Practice Awards
– Dilip Kejriwal, Head of Investor
Relations
• Winner ‘Best Corporate
Website’ – Corporate and
Financial Awards 2022
• Winner ‘Net Zero Leaders
Award’ – The Energy Live
Consultancy Awards 2022
• Shortlisted ‘Large Consultancy
of the Year’ – The Energy Live
Consultancy Awards 2022
• Winner ‘Best Diversity &
Inclusion Initiative’ – the S1
Awards 2022
• Finalist ‘Best Employer’ –
the S1 Awards 2022
• Finalist ‘Best In-House
Recruitment Team’ –
the S1 Awards 2022
• Short-listed ‘Best for Diversity &
Inclusion’ – the WM People Top
Employer Awards
SMS Annual report and accounts 2022 53
Financial statements
Governance
Strategic report
Giving something back
We are mindful of our responsibility not
only to our employees, but also to the
communities within which they live. With
this in mind, in 2022 we enhanced our
support for our local communities
through several initiatives:
• Three of our senior leaders became
mentors on our continued programme
with the Aleto Foundation charity.
This is focused on identifying and
developing the next generation of
leaders from BAME communities
who may historically have found it
challenging to access opportunities
due to their backgrounds.
• We committed to support charities
within the local communities close
to our offices and for the next three
years will donate £90,000.
• We matched the charity fundraising
efforts of many employees through
one-off corporate donations to their
chosen causes.
• SMS employees volunteered their
time to provide career advice at
several local schools, the HR team
helped improve a school play area
near Bolton, and a group of our
senior managers volunteered their
time at the Bolton NICE foodbank
and at a Cardiff nursing home.
• We participated in various local
school engagement activities such
as mock interview days, careers fairs,
and career networking.
• We continued to support Career
Ready with their mentoring
programme.
Sustainability continued
Our people continued
Awards, accreditations,
awareness
New
• Investors in People Silver
accreditation
• Living Hours Employer
• Member of Women’s
Engineering Society (WES)
• Social Mobility Pledge
• Member of Employers’ Initiative
on Domestic Abuse
• Member of the National Suicide
Prevention Alliance
• Cornerstone Employer within
South Yorkshire
• Young Person’s Guarantee
Employer within Glasgow
• Best Companies One to Watch
2022 (2nd year in a row)
• Made our commitment to
become a Menopause
Friendly Employer
Maintained
• Accredited Living Wage
Employer status
• Disability Confident Leader
status (Level 3)
• Race at Work Charter signatory
• Employers Network for Equality
& Inclusion accreditation
• Mindful Employer pledge
• Member of the Tomorrow’s
Engineers Code to increase the
diversity and number of young
people entering engineering
• Partnership with Tommy’s
Pregnancy and Parenting
at Work
• Member of the Pregnancy
Loss Pledge
Giving something back
As part of our commitment to ‘Levelling Up’ and sustainability, we have
targeted our social responsibility efforts at those communities that need
help the most, particularly in deprived areas close to where we operate as
a business around the UK. For example, a team of SMS volunteers spent the day
at Bolton NICE foodbank, which provides support to children, families, and
individuals who are experiencing difficulties. Also, members of our HR team
volunteered at Wesley Primary School, situated near our training academy
and contact centre site in Bolton, as part of a social community activity.
We have also confirmed our commitment to support charities within local
communities close to some of our offices, and for the next three years we
will donate £90,000, between Beatson Cancer, Velindre Cancer Centre,
The Bluebell Wood Hospice and Bolton Hospice. Following this commitment,
we will undertake a company-wide survey to decide which new charities will
receive our support.
54 SMS Annual report and accounts 2022
Gender pay gap
reporting 2022
SMS supports and encourages gender
diversity amongst its workforce and
welcomes the requirement for gender
pay gap reporting, introduced to
increase pay transparency, and is
committed to diversity and inclusion
throughout the business.
Gender within SMS1
Overall, the SMS Group workforce is
30% female and 70% male. As we are
part of the historically male-dominated
engineering industry, it is no surprise
that our organisation has such a wide
gender split (weighted towards men),
and that a gender pay gap exists.
The mean gender pay gap in hourly
pay for the SMS Group is 22.4%, and
the median gender pay gap is 37.2%.
Specifically within SMS:
• most of our employees are engineers,
and this is a profession with more
men than women;
• there are more men than women
in senior roles;
• there are more women in part-time
roles; and
• there are more women in lower-
paying roles.
It is worth noting that most of these
issues are prevalent throughout the
UK and internationally, so are not
unique to SMS.
As can be seen via ‘Engineering UK’
(published online via Women’s
Engineering Society) who provide
workforce statistics, in March 2022:
• Women make up 16.5% of all
engineers, compared to 10.5%
reported in 2010.
• This represents a 6 percentage point
increase in the proportion of women
in the engineering workforce.
• The actual number of women working
in engineering roles also increased
from 562,000 in 2010 to 936,000
in 2021.
The percentage of female employees
has decreased in the lower middle pay
quartile by 11% as during the data set
period, there was a significant increase
in headcount in engineering roles, which
is predominantly a male dominated
field, and the upper middle pay grade
has 2% more women. However, there
continued to be significantly more male
employees (in senior roles) in the upper
middle and top quartiles, which
exacerbates our gender pay gap.
That said, for the SMS Consolidated
Group, the mean hourly pay gap has
decreased and thus improved by
1.2% which is a positive.
During 2022, we promoted 13 women
internally into management and
senior level positions and appointed
4 women externally into management
level positions.
Taking action – our strategy
SMS supports and encourages a
culture of gender diversity amongst its
workforce. It is through the contribution
of ‘Our People’ from of all backgrounds
that ensures our business is successful,
as only a diverse, inclusive, and
engaged workforce will produce the
solutions we need to tackle the varying
challenges faced by our business, and
industry leading thinking will transition
the energy market.
We are prioritising the following
areas for action: diversity and inclusion
will remain a strategic driver. We will
utilise external accreditations and
memberships for support (i.e. WES),
together with internal tools including
the SMS voluntary EDI monitoring form,
with a focus on increasing completion
rates. We will also continue to use our
group pay and reward framework.
This will help ensure there is no bias
towards either gender from the point
of recruitment, through to salary
conversations and progression
opportunities. We continue to actively
promote gender balance within the
SMS Group and explore how we can
continue to attract women into our
organisation, to create a more even
gender balance, specifically within
our engineering workforce.
1 We collected our data on 5 April 2022, when the total workforce for the consolidated Group consisted of 388 women and 896 men
(including Non-executive Directors).
2 Senior management is defined as employees (including executive directors) who have responsibility for planning, directing and controlling
the activities of the Group.
Gender breakdown1
Board of Directors
67%
33%
Senior management2
89%
11%
All employees
70%
30%
Key
Male
Female
SMS Annual report and accounts 2022 55
Financial statements
Governance
Strategic report
Sustainability continued
04.
Health and
safety
Overall, 2022 was a positive year for
safety, health, environment and quality
(SHEQ) performance across the Group.
We continued to build on the momentum
of the previous years with wide-ranging
improvement targets across our SHEQ
metrics. Our rolling action plans ensured
we stayed on course and again we
delivered some excellent results.
The contractors on our multiple
grid-scale battery storage sites
have also overcome many challenges,
most notably weather-related, during
the construction phases on our sites.
Again, we are pleased to report zero
RIDDORs on our five construction
sites during 2022.
“We remain committed to being
a safe, secure and reliable
organisation which protects
the safety and wellbeing of
our people and our customers.”
Key highlights
• Zero injury RIDDORs, including
during the construction of our
grid-scale battery storage sites.
• Maintained certification for the
ISO 9001, 14001, 27001, 45001
and 50001 standards.
• Successfully extended the
scope of ISO 50001 to include
additional SMS sites.
• Extended the scope of Safe
Contractor accreditation to
include SMS Connections
and CH4 Ltd.
• IOSH Contractor Management
Training commenced.
• More live dashboards for
monitoring performance.
56
SMS Annual report and accounts 2022
Accidents and incidents
For 2022, we are again delighted
to report zero injury RIDDORs. Our
rates for other less serious incidents
were in line with last year’s
outstanding results.
• No injury RIDDORs were reported,
resulting in an Accident Frequency
Rate (AFR) of zero for the second
year running.
• Lost Time Incident Frequency Rate
(LTIFR) at 0.21 per 100,000 hours
worked (2021: 0.17).
• Non-Lost Time Incident Frequency
Rate (NLTIFR) at 0.53 per 100,000
hours worked (2021: 0.52).
• Total Recordable Incident Frequency
Rate (TRIFR) at 0.74 per 100,000
hours worked (2021: 0.69).
• Group technical performance has
improved significantly over the year
finishing at 15 incidents per 100,000
installs (2021: 28). This is commendable
given the significant increase in
installations and the associated
works in the year.
Grid-scale battery storage
During 2022, the construction and
operation of our grid-scale battery
storage (GSBS) sites continued at pace.
We currently have three sites under
construction and three operational.
The sites have been closely monitored
by the SHEQ and GSBS teams and we
are again pleased to report that there
have been no significant injuries or
incidents on any of the GSBS sites
in the period.
The collaborative ethos that exists
between all stakeholders has ensured
that the site workers are safe and
healthy, and the works are having
minimal impact on the public and the
local environment. We are also pleased
with the biodiversity improvements
that are either in place at our live sites
or planned at our sites under
construction. Planning is also underway
for lessons learned forums with our
contractors as we strive to continually
improve our understanding of how best
to construct and operate our assets.
Occupational health
We continue to maintain a strong focus
on occupational health, particularly
mental health, and have a number
of tools and services at our disposal
to assist our employees. We are also
acutely aware of the pressures facing
our emergency services nationally and
have invested heavily in emergency
response training for our employees
as well as equipment within each of
our workplaces. This will ensure that
we can deal with many of the issues
that we would otherwise normally rely
on the emergency services to cover.
Our employees have come forward
in significant numbers to volunteer for
the various training packages on offer
and again demonstrated their total
commitment to playing their part in
keeping our workplaces as safe and
healthy as possible.
Mental health issues remain a global
concern and we have continued to
focus on these and related issues. By
drawing on the latest evidence and
using examples of good practice from
around the world we are highlighting
and informing our employees on steps
they can take to maintain and improve
mental health. We are also working
with our stakeholders to deepen the
commitment given to mental health,
reshape the environments that
influence mental health, and strengthen
the systems that care for mental
health. These efforts will ensure that
our people remain healthy and are fully
aware of the multitude of conditions
that are directly and indirectly related
to mental health. Our support to our
employees is unwavering.
Employee forums
At SMS, we have a number of employee
forums that contribute to our ongoing
SHEQ improvement journey. The
forums are led by other functions
including human resources, compliance
and operations. They allow employees
to raise and discuss SHEQ issues
openly with feedback provided from
SHEQ if required. The business also
benefits from the many ideas that are
presented at the forums by employees.
A recent example of this is a high-
impact messaging service, using
Microsoft Teams, that was
implemented after discussions on
communications at a forum.
Industry campaigns and
communications
Our communication programme is a
crucial part of our SHEQ management
system. Throughout the year, we
participated in industry campaigns
and delivered a range of internal
communications via our numerous
media platforms. In 2022, we introduced
two new communication channels
designed for speedy delivery of
messaging, high impact and effective
collaboration. These channels
supplement what we already have in
place and ensure that our employees
are kept up to date on health and
safety issues by various means.
Unfortunately, Gas Safety Week 2022
was cancelled due to the death of Her
Majesty Queen Elizabeth II. Our
participation in the campaign is an
annual highlight and we decided to
dedicate the time and resource to
other improvement initiatives including
a new award for safety and quality for
our engineering workforce. This was
well received and maintained a focus
on safety and quality long after the
usual Gas Safety Week activities.
SMS Annual report and accounts 2022
57
Financial statements
Governance
Strategic report
“We again reported
zero injuries under
the Reporting of
Injuries, Diseases
and Dangerous
Occurrences
Regulations.”
Systems
Our embedded systems are key to
continual improvement and this year
we have further utilised Power BI for
our reporting. The Power BI dashboards
offer up-to-date information on
performance and enable us to focus
on any areas that require attention
immediately. We have dedicated
resource monitoring and improving
all our systems with detailed action
plans and targets. This year has seen
wide-ranging improvements to our
Technical Helpdesk, Compliance, Fleet,
SHEQ and Technical reporting
dashboards which enable swift
interventions when risks are flagged.
Work is continuing to further develop
the dashboards and metrics to keep
pace with changes and new
business streams.
ISO certifications
The business maintained all its ISO
certifications in 2022 with no significant
non-conformance recorded during the
audit processes. Our management
reviews, held in the first quarter every
year, are the starting point of our
annual ISO journeys. These forums
bring together a cross-section of the
workforce and are used to instil the
behaviours required to operate a
modern, evolving integrated
management system.
Sustainability continued
Health and safety continued
Fleet, SHEQ and Technical dashboards
58
SMS Annual report and accounts 2022
The SHEQ targets and objectives are
revised annually based on the previous
year’s performance and any other
notable events. Once approved by
the Health, Safety and Sustainability
Committee, they are cascaded through
the business and published monthly for
internal and external consumption. We
are constantly on the lookout for new
and emerging risks and participate in
various industry groups where existing
and new business streams are discussed.
For example, in 2022 we visited the site
of a proposed hydrogen village and
look forward to further developments
in the use of hydrogen across the UK.
2023 and beyond
As usual, our priority for 2023 is to keep
our people and those affected by our
undertakings safe and healthy. Our
ambitious targets and action plans will
continue to drive improvements across
the business. We continually adapt to
new work streams. In 2022 our grid-
scale battery storage facilities moved
to an operation and maintenance
status and we are now preparing for
a major leap forward in domestic
settings that will include electric vehicle
charging points, heat pumps and solar
photovoltaic. We have also embarked
on a major sustainability-focussed
refurbishment of our Cardiff office.
We remain committed to being a safe,
secure and reliable organisation and
look forward confidently to 2023.
Health and safety policy
The annual review of our health
and safety policy and associated
arrangements was carried out in
April 2022 and published on the
Company’s intranet. The policy,
which is a statement of intent,
drives improvements across our
management systems and other
related processes. For example,
a number of working groups were
established during 2022 to review
personal protective equipment (PPE),
training and our fleet. The outputs
from the groups included new higher-
grade PPE, an induction training
review and a revised procedure for
company vehicles.
SMS Annual report and accounts 2022 59
Financial statements
Governance
Strategic report
05.
Ethical business
practices
Our five core values
Safety, customer excellence, innovation, pride
and sustainability underpin our commitment to
‘putting our people first’ and drive the behaviours
we wish to see demonstrated throughout our
business practices.
Our core values and behaviours
Putting our
people first
Sustainability
Make greener
decisions
Build an enjoyable
and healthy working
environment
Positive towards
change
Encourage others
to act sustainably
Safety
Take care of your
wellbeing and others
Take ownership
and responsibility
Be aware
Report and action
Pride
Celebrate our
differences
Be trustworthy
Give praise and
recognition
Work to the best
of your ability
Work as one team
Customer
excellence
Listen and respect
Go the extra mile
Be polite
Show empathy
Innovation
Share and encourage
new ideas
Find solutions
Be creative
Think for the future
60
SMS Annual report and accounts 2022
Putting our people first
Our core values and behaviours
Our Code of Conduct provides the
foundation on which our standards are
built and our approach to environmental,
social and governance issues, detailed
further on our website at www.sms-plc.
com/corporate/sustainability, sets out
clear expectations of how to conduct
business in an ethical way.
Although not fully inclusive of everything we do, the following table demonstrates the key policies that we currently
implement and monitor in this area:
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
Related policies
Key themes
Implementation
and review
Reporting
Human rights
SMS Code of Conduct
Equal opportunities,
diversity and inclusion
policy
Dignity at work policy
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.
Our policies and
approach are
embedded in our culture.
They are communicated
at induction, through our
employee handbook and
via e-learning modules.
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.
Anti-bribery
and
corruption
Anti-bribery and
corruption policy
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.
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
bribery and other forms
of corruption.
Any breaches of policy
are reported to our
General Counsel and
investigated.
During the year, there
were no reported cases
of bribery or corruption.
Modern
slavery and
human
trafficking
Modern slavery policy
Modern Slavery
Statement
We do not tolerate
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.
Contracts with new
suppliers require a
warrant to us that they
are compliant with the
terms of the Modern
Slavery Act 2015.
Existing agreements in
place for our Tier 1
vendors already cover
modern slavery.
Key staff training is
regularly reviewed.
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/
modern-slavery
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.
• whistleblowing (detailed further
on page 89)
• data protection
• equal opportunities, diversity and
inclusion (detailed further on page 53)
• health and safety (detailed further
on pages 56 to 59)
• discipline
• grievance
• dignity at work.
SMS Annual report and accounts 2022
61
Financial statements
Governance
Strategic report
Risk report
Our established risk management framework, and the wider system of internal
control, continues to adapt in line with our growing business and the challenging
macroeconomic environment. The Board has overall responsibility for governance,
risk management and internal control. In support of this, we operate robust risk
management processes, which are embedded within everyday business activities
throughout the Group. The risk management framework on page 63 highlights the
main responsibilities for the management and oversight of risk within the Group.
The macro-economic environment
presented several external challenges
during the year, including continued
volatility within energy markets, high
inflation and the remaining impact of
the pandemic. The ongoing conflict in
Ukraine has placed additional pressure
on the global energy supply chain.
Rising energy prices, subsequent
cost-of-living increases, and the risk
of supplier insolvency remain key
challenges.
Our customer exposure is inherently
mitigated due to the Supplier of Last
Resort (SoLR) process, whereby Ofgem
directs a gas or electricity licensee to
take over responsibility for a failed
energy supplier’s customer portfolio.
This protects future metering charges,
which are raised to the newly
appointed energy supplier regardless
of whether they are an existing
contracted customer with the Group,
and so caps our financial exposure at
amounts already accrued or billed, but
not yet settled.
In addition, we have robust commercial
billing arrangements, an established
credit control function and significant
available funding under our debt
facility which help to absorb market
shocks like this. The Board closely
monitors the situation and receives
regular reports on the Group’s cash
and debtor positions.
Group internal audit continued to work
closely with the Audit Committee,
executive leadership team and
departmental teams throughout 2022
to support the continuous
improvement of risk management
processes within the Group. This work
included facilitating 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
2022, Group internal audit performed
several internal audit reviews of
specific risk areas including cyber
security, grid-scale batteries, treasury
management, financial controls over
billing and fixed asset management
and disaster recovery planning.
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 leadership
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.
Risk governance
and management
62
SMS Annual report and accounts 2022
These principal risks and uncertainties
have been scored and placed on the
risk heat map on the next page, 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, industry and
economic risks.
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 achievement of 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 leadership team
The executive leadership team is responsible for reviewing and managing the 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 leadership 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, which is aligned to the strategic
risks contained within the corporate risk register. This annual plan, which includes a three-year outlook, 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 the Code of Practice
for Meter Asset Managers and Approved Meter Installers (‘MCoP’) and the Electricity Meter Operations Code of Practice
Agreement (‘MOCoP’).
The SHEQ team, in conjunction with the executive leadership team and the Board, is instrumental in setting the tone at the top
in relation to safety matters.
The SHEQ team 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 2022 63
Financial statements
Governance
Strategic report
Low
High
Low
Likelihood
High
Impact
2
1
5
4
6
7
8
10
9
11
3
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 leadership.
Mitigating actions are required
immediately. Oversight is provided
by the Board, Audit Committee and
executive leadership directly.
1 Potential breach of cyber security
2 Major incident risk
3 Speed of organisational change
(near term)
4 Business continuity and
disaster recovery
5 Metering and grid-scale
batteries supply chain
6 Funding and working capital
management
7 Loss of environmental, social and
governance (ESG)-related and
regulatory accreditations
8 Potential breach of General Data
Protection Regulation (GDPR)
9 COVID-19
10 Our people
11 Stability of energy suppliers
All risks are assigned mitigating
actions with an appropriate
business owner and are supported
by an executive sponsor to ensure
accountability. Our principal risks
remain unchanged from those
reported in last year’s Annual report
and accounts. The risk rating for our
funding and working capital
management risk has increased
from green to amber due to the
changing macro-economic
environment. This risk continues
to be monitored by Board.
Risk report continued
Risk governance and management continued
Our principal risks
64 SMS Annual report and accounts 2022
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 table
shows whether the Board considers that the likelihood or impact of the risks
materialising is increasing, decreasing or unchanged and also sets out the
mitigating actions that have been taken by the Group.
Risk exposure key
Risk unchanged
Risk decreased
Risk increased
Detailed risk
Potential impact
Existing mitigating controls
1. Potential breach
of cyber security
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
information security
regulations
• Financial loss
• Unauthorised access
to systems and data
• Service disruption
• Loss of customer and/or
supplier confidence
• Loss of accreditations
and certifications
• ISO 27001 accreditation
• 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 encryption
• A dedicated information security team
• An independent Board-level Information Technology
Committee
• Managed Security Service Provider arrangement
provides a dedicated Security Operation Centre (SOC)
• Annual audit by independent third party of cyber
security procedures against internationally
recognised framework
2. Major
incident risk
A major incident could
occur, with severe
consequences for people,
the environment, revenue
and company reputation.
Risk level
Risk exposure trend
• Injury or loss of life
• Loss of business operations
• Financial penalties or lost
revenue
• Reputational damage
• Breach of IT systems and
loss of data
• Incident response and communications plan
• Dedicated incident management response team
• The Board has overall accountability for compliance
with health and safety standards and is provided with
regular management reporting
• Group wide ISO certifications
• Independent regulatory reviews
• Business continuity and disaster recovery plans
• Maintenance of high-quality and mandatory training
standards, driven by job roles
• Rolling internal technical assurance audit programme
• Penetration testing across the Group’s IT estate
Our principal risks
and uncertainties
SMS Annual report and accounts 2022 65
Financial statements
Governance
Strategic report
Detailed risk
Potential impact
Existing mitigating controls
3. Speed of
organisational
change (near term)
Speed of organisational
growth in the short term
without sufficient and
appropriate growth
in infrastructure.
Risk level
Risk exposure trend
• Insufficient engineering
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
• Capacity planning system 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
• Dedicated senior roles in place to lead growth in carbon
reduction (‘CaRe’) verticals
• Economies of scale from warehouse amalgamation
4. Business
continuity and
disaster recovery
– resilience of IT
infrastructure and
failure of critical
business systems
and processes
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 the Group
• Monitoring of industry data flows and escalation
of issues should they arise
• Disaster recovery plans and testing schedules in place
for critical IT systems
• Failover facility available for immediate redeployment
of staff, enabling key operations to be maintained
• Alternative UK sites available to manage core business
operations
• Most of the workforce able to work from home to
support the Group’s customers
• N+1 (parallel redundancy) backup to ensure an
uninterruptible power supply and system availability
• Current IT roadmap to 2025
5. Metering and
grid-scale batteries
supply chain
The Group relies on a
limited number of critical
suppliers for meters and
grid-scale batteries, and
failure of critical suppliers
could have significant
operational and financial
implications.
Risk level
Risk exposure trend
• Delays in importing meters
and grid-scale batteries
• Stock shortages and inability
to fulfil customer orders or
projects on time
• Business continuity issues
• Increased commodity prices
• Legal and financial exposure
• Unenforceable contracts
and financial penalties
• Growth in the Group’s supplier base continues to
mitigate the risk of over-reliance on critical suppliers
• Business continuity arrangements in place
• Centralised in-house 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
• Monitoring of stock levels in warehouses to ensure
sufficient meter stock is held to meet customer
obligations
• Dedicated senior roles with responsibility for stock
and logistics and delivery of grid-scale battery
storage projects
• Enhanced due diligence on grid-scale battery suppliers
Risk report continued
Our principal risks and uncertainties continued
66
SMS Annual report and accounts 2022
Detailed risk
Potential impact
Existing mitigating controls
6. Funding and
working capital
management
Suitable funding
arrangements are critical
to enable the continued
growth of our asset
portfolio, particularly in
relation to ‘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 increased in 2022
as now drawing on the
loan facility.
Risk level
Risk exposure trend
• Default on debt obligations
• Credit or debt facilities
are withdrawn
• Inability to meet existing
customer or trade
commitments
• Increased supply chain costs
• Lack of funding to take
advantage of emerging
business opportunities
(including for CaRe assets)
• Credit control function and robust commercial billing
arrangements
• Regular and formal review of key management
information on cash and debt positions
• Revolving credit facility of £420m through
to December 2025
• Regular long-term forecasting of funding required
• Board monitoring of the funding required to meet
the Group’s growth plans
7. Loss of ESG-
related and
regulatory
accreditations
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
• Not achieving our ESG or
regulatory accreditations
• Inability to conduct business
• Financial penalties
• Reputational damage
• Loss of trained and qualified
engineers
• External investigation(s) and/
or audits
• The Board has overall accountability for compliance
with safety, health and environmental standards and
is provided with regular management reporting
• Board-approved sustainability strategy with a clear
roadmap to achieving ‘net zero’ status by 2030
• Dedicated Health, Safety and Sustainability Committee,
supported by ESG Working Group
• Regular sustainability reporting to relevant agencies
and other external stakeholders including release of
annual Sustainability Report
• 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
SMS Annual report and accounts 2022
67
Financial statements
Governance
Strategic report
Detailed risk
Potential impact
Existing mitigating controls
8. Potential breach
of General Data
Protection
Regulation (GDPR)
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
• External investigation(s)
by the Information
Commissioner’s Office
• Loss of customer and/or
supplier confidence
• The General Counsel is an expert in data protection
and is the appointed Data Protection Officer (DPO)
• The DPO monitors internal GDPR compliance and,
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 SOC and
Netskope monitoring of external communications
9. COVID-19
The ongoing development
of COVID-19 globally
presents a risk to the
business, with the Group’s
primary concern being the
welfare of its people,
customers and end
consumers.
Risk level
Risk exposure trend
• Health and wellbeing of
workforce, customers and
consumers
• Short-term financial
constraints
• Business continuity issues
• Cessation of non-essential
travel
• Potential detrimental impact
on the supply chain
• Delayed and/or slow delivery
of the Group’s contracted
pipelines in smart meters
and grid-scale batteries
• Counterparties could default
on contractual obligations
• Personal protection equipment (PPE) worn as required
• Employees encouraged to be fully vaccinated
• Regular communications with employees
and customers
• Recurring revenue streams on the Group’s existing
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 work and support the
Group’s customers from home (including those in
shielding categories)
• Temporary closure of offices and warehouses,
in periods where this is necessary
• Maintenance of gas and electricity supply on
an emergency basis for customers
• Credit control function with regular counterparty
monitoring
• Regular review of corporate forecasts and
scenario modelling
Risk report continued
Our principal risks and uncertainties continued
68
SMS Annual report and accounts 2022
Detailed risk
Potential impact
Existing mitigating controls
10. Our people
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.
Risk level
Risk exposure trend
• High levels of employee
turnover
• Loss of employees with
specialist skill sets to
competitors
• Low employee morale
• Failure to take advantage
of emerging business
opportunities
• Lack of business continuity
• Recruitment, due diligence and onboarding processes
(contracts include probationary periods)
• Succession planning for key leadership and
business roles
• Talent and performance management frameworks
linked to our values and behaviours
• Benchmarking of roles with the external market in terms
of remuneration and reward
• Harmonised terms of employment, ensuring fairness
and consistency across the Group
• Competitive rewards and employee benefits package
aligned to pay and reward framework
• 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
• Sponsorship approved for key roles
• Proactive cost-of-living increases (particularly for entry
level roles)
11. Stability of
energy suppliers
Rising wholesale energy
costs could result in
multiple energy suppliers
entering administration or
becoming insolvent,
leading to unpaid debts
and loss of pipeline
revenue.
Risk level
Risk exposure trend
• Customers (energy suppliers)
enter administration or
become insolvent
• Unpaid debts not transferred
as part of the SoLR process
are irrecoverable
• Loss of contracted smart
meter order pipeline and
future revenue potential
• Experienced credit control function and robust
commercial billing arrangements
• Regular and formal Board review of key management
information on the Group’s cash and debtor positions
• Monitoring of market developments, through formal
and informal channels
• Contracts in place with larger energy suppliers, which
has already resulted in some positive results from the
SoLR process
SMS Annual report and accounts 2022 69
Financial statements
Governance
Strategic report
Alternative
performance
measures1
Statutory
performance
measures1
Index-linked annualised
recurring revenue (ILARR)
£97.1m+13%
(2021: £85.9m)
Revenue
£135.5m+25%
(2021: £108.5m)
Pre-exceptional EBITDA
£63.8m+21%
(2021: £52.8m)
Statutory EBITDA
£57.1m+23%
(2021: £46.3m)
Underlying profit before
taxation
£24.5m+34%
(2021: £18.3m)
Statutory profit before
taxation
£16.0m+92%
(2021: £8.3m
Underlying basic earnings
per share
16.06p+67%
(2021: 9.60p)
Statutory basic earnings
per share
11.16p+248%
(2021: 3.20p)
Financial review
Strong operational and
financial performance
1 Refer to page 74 for definitions and
details of the Group’s alternative
performance measures, which include
ILARR, pre-exceptional EBITDA,
underlying profit before taxation and
underlying basic earnings per share.
“We have delivered
growth across all
our key revenue and
profit measures.”
Gail Blain
Chief Financial Officer
Financial highlights
70
SMS Annual report and accounts 2022
We have again delivered
strong financial results in
2022 while continuing to
invest in our revenue
generating asset base.
Operational performance was strong
in 2022. We saw continued growth in
our meter installation run-rate, and
the performance of our first 50MW
grid-scale battery site exceeded our
initial expectations. This has driven
growth across all our key revenue and
profit measures. Our 2022 tax charge
also includes the benefit of the tax
super-deduction available on
qualifying capital expenditure since
April 2021. Our effective tax rate for
2022 is therefore abnormally low, and
this has resulted in a particularly high
growth in our earnings per share.
Over the year we continued to invest
in our established revenue-generating
carbon reduction (CaRe) assets,
growing our meter assets and
developing our portfolio of grid-scale
battery sites. At the same time, we
also made smaller but strategic
investments to develop our capabilities
in energy data management and electric
vehicle charging infrastructure. In 2022,
we in total invested £172.6m net cash in
investing activities (2021: 121.7m).
We ended the year with net debt of
£31.2m (31 December 2021: net cash
£117.7m) and £355m available on our
debt facility. We are therefore in a
strong position to continue to deliver our
meter and grid-scale battery pipelines.
Revenue
31 December
2022
£m
31 December
2021
£m
Percentage
change
Asset management
92.8
82.9
12%
Asset installation
30.5
22.0
38%
Energy management
12.2
3.6
237%
Group revenue
135.5
108.5
25%
Asset management revenues of
£92.8m are 12% up on the prior year.
This growth reflects the flow-through
effect of progressively increasing the
rate of meter installations at the end of
2021 and into 2022 and the annual RPI
uplift which took effect on 1 April 2022.
Asset installation revenues of
£30.5m increased 38% on the prior
year as a result of increased volume
in transactional meter works and
increased activity in our connections
business.
Energy management revenues of
£12.2m were up 237% on the prior year.
This includes £7.2m revenue from our
grid-scale battery sites which began
operating in the year. Our first grid-
scale battery site became operational
in January 2022 and two further sites
went live in December 2022. Revenue
from Energy management excluding
grid-scale batteries was £5.0m, up 38%
on prior year as a key customer project
in the hospitality sector picked up
momentum with the continued recovery
from the effect of COVID-19 and sector
focus turning to energy efficiency.
Gross margins
SMS includes depreciation on revenue-
generating assets within cost of sales
for statutory reporting purposes.
Removing this from the gross margin
provides a better comparison of the
Group’s underlying trading
performance year-on-year.
Depreciation-adjusted gross margin
for the asset management segment
is 92% which is in line with prior year
(2021: 92%).
The asset installation segment gross
margin was 23% (2021: 32%). In H1 2022
the Group continued to grow its
engineering workforce in order to
support the planned increase in meter
installations. Costs associated with this
investment in the workforce such
as recruitment and training led to
additional one-off costs which
depressed the margin in the first half.
As expected, the margin recovered
in the second half of 2022.
The energy management segment
depreciation-adjusted gross margin
has increased to 57% (2021: 24%). This
is due to the addition of our grid-scale
battery sites which generated an 80%
depreciation-adjusted gross margin
over the year. Grid-scale batteries
delivered revenue of £7.2m and
depreciation adjusted gross profit
of £5.8m in the year. The gross margin
on the segment’s other activities
remained constant at 24% (2021: 24%).
Overall, the depreciation-adjusted
gross margin at the Group level fell
by 4% to 73% (2021: 77%) due to the
investment in our engineer base in
H1 2022 in our asset installation division
coupled with the increase in battery
revenues during 2022.
Pre-exceptional EBITDA
Pre-exceptional EBITDA provides
a measure of underlying performance
that is comparable over time. Pre-
exceptional EBITDA of £63.8m was
21% higher than in the prior year
(2021: £52.8m).
The £14.5m increase in depreciation-
adjusted gross profit (excluding
exceptional cost of sales in 2021
arising from the result of COVID-19)
was partly offset by a £3.5m increase
in net operating costs, excluding
depreciation and amortisation.
This is being driven by a cost-of-living
payment made to our employees in
H2 2022 in response to inflationary
and other pressures experienced in the
wider economic environment, further
investment in our IT and support
systems and small increases across
our cost base to support growth in
other CaRe assets.
SMS Annual report and accounts 2022
71
Financial statements
Governance
Strategic report
Financial review continued
Underlying profit before-tax
Depreciation costs on meter assets
increased 15% to £28.3m (2021: £24.7m)
due to the increase in the meter asset
portfolio.
Depreciation cost on grid-scale
battery sites increased to £1.0m
(2021: nil) due to the commencement
of depreciation on operational
grid-scale battery sites in the year.
Depreciation costs on general
property, plant and equipment,
excluding meter assets and grid-scale
battery sites, has reduced by £0.5m
to £3.5m (2021: £4.0m) due to some
computer equipment and fixtures and
fittings now being fully depreciated.
Amortisation costs on our intangible
assets of £4.1m (2021: £4.1m) mainly
consist of software amortisation
and were in line with prior year.
Net finance costs increased £0.4m
to £3.9m (2021: £3.5m). Finance costs
relating to our loan facility increased
£0.7m as we started drawing on the
facility in the second half, and interest
on leases also increased £0.5m as
we leased land for our new grid-scale
battery sites. The impact was however
partly offset by £0.3m interest income
earned.
As a result, underlying profit before
taxation increased by 34% to £24.5m
(2021: £18.3m).
Exceptional items
Exceptional items of £6.6m
(2021: £8.2m) mainly comprise a
£5.7m loss on the traditional and
first-generation smart meter
(‘SMETS1’) portfolio (2021: £5.9m). In
line with the Group’s established policy,
these losses are shown separately as
exceptional items in order to enhance
disclosure of underlying continuing
profitability. Acquisition-related costs
and other exceptional operating items
amounted to £0.9m (2021: £0.6m).
Exceptional items in 2021 also included
£1.7m exceptional finance costs
comprising the acceleration of
unamortised arrangement fees
relating to the Group’s previous loan
facility which was refinanced in 2021.
Effective tax rate
The Group’s capital expenditure on
meter assets qualifies for capital
allowances, providing the Group with
tax relief on such expenditure. These
allowances are claimed in the tax year
in which the asset is acquired and set
against taxable profit for that year,
thus reducing the total tax payable. As
a result, the Group was not tax-paying
in either the current or prior year.
The effective tax rate on pre-
exceptional profits for the year is
11.3% (2021: 39%). This represents the
announced rate of UK corporation tax
of 25% from 1 April 2023, which is the
rate that will apply when the deferred
tax liability generated by the capital
allowances unwinds, less the impact
of c.£2.5m benefit of the tax super-
deduction that has been assessed on
our qualifying meter assets and grid
scale battery capital expenditure
during 2022. The super-deduction
is only available on qualifying capital
expenditure until 31 March 2023,
therefore it is expected that our
effective tax rate will increase to
a more normalised level in 2023.
It should also be noted that the
effective rate on pre-exceptional
profits in 2021 was high due to a
change in the deferred tax rate,
following the UK Government’s
enactment of the Finance Bill 2021
in May, which confirmed the increase
in the rate of corporation tax from 19%
to 25% from 1 April 2023. This was
applied to the Group’s brought-
forward deferred tax liabilities on its
portfolio of meter assets increasing the
charge in 2021. The full-year effective
tax rate on 2021 pre-exceptional
profits excluding the impact of this
rate change, was 18.5%.
Earnings per share
Underlying basic earnings per share
(EPS), which excludes exceptional
items, amortisation of certain
intangibles and their associated tax
effect, was 16.06p (2021: 9.60p),
reflecting the underlying profitability
of the Group. Statutory earnings per
share increased to 11.16p (2021: 3.20p).
As noted above our 2022 tax charge
also includes the benefit of the tax
super-deduction available on
qualifying capital expenditure since
April 2021. Our effective tax rate for
2022 is therefore abnormally low, and
this has resulted in a particularly high
growth in our earnings per share.
Dividend
A 27.5p per share dividend in respect
of FY 2021 was approved at the
Group’s Annual General Meeting in
May, and the fourth and final instalment
of this was paid in July 2022.
In line with the Group’s policy to grow
dividends at 10% per annum, a 30.25p
per share dividend is proposed in
respect of FY 2022. This is expected
to be settled in four equal quarterly
instalments.
72
SMS Annual report and accounts 2022
Two instalments have already been paid, in October 2022 and January 2023
with the following provisional timetable for the remaining instalments:
Instalment
Ex-dividend date
Record date
Payment date
3
06 April 2023
11 April 2023
27 April 2023
4
06 July 2023
07 July 2023
27 July 2023
The Board remains comfortable that
future dividend payment amounts are
sufficiently secured by long-term,
sustainable cash flows generated
from our existing portfolio of metering,
data and grid-scale battery assets.
Cash flow
Operating cash inflow in 2022 was
£63.8m (2021: £61.8m). The cash inflow
reflects £63.8m pre-exceptional
EBITDA, £5.5m of non-cash costs
included in EBITDA and a £4.3m cash
outflow on working capital net of tax
receipts, largely due to a deliberate
build-up of inventory levels to mitigate
the risk of delays in the supply chain
and ensure that meters are available
to grow our installation run rate.
The Group also drew down £65.0m
under its loan facility.
The cash generated from operations
and from our borrowing has been used
to continue investment in our revenue
generating meter and grid-scale
battery assets.
Capital expenditure on property, plant
and equipment was £143.4m (2021:
£108.2m). Of this, £105.0m was invested
in meter and data assets, £36.3m in
developing grid-scale battery sites
and £1.1m relates to the purchase of
land at one of our grid-scale sites.
Investing activities also include
payments of £14.6m to acquire battery
sites (2021: £4.7m) and a further £12.3m
of instalment payments made for
grid-scale batteries which have not
yet been delivered (2021: £nil). On
the balance sheet, the sites under
development are classified as assets
under construction within property,
plant and equipment and the instalment
payments for batteries are classified
as other non-current receivables.
A further £2.2m (2021: £2.8m) investment
has been made in intangible assets,
mainly relating to the development
of software to support the metering
and installations business.
Investing cash outflows also include
a £1.4m payment to acquire n3rgy
and a £2.1m investment (including
transaction costs) to acquire a 25%
stake in Clenergy EV Ltd. See note 24
and note 12 to the consolidated
financial statements for further details.
Financial resources
Net debt at 31 December 2022 was
£31.2m (31 December 2021: Net cash
£117.7m). This excludes restricted cash
and lease liabilities accounted for
under IFRS 16.
The Group has in place a £420m debt
facility which matures in December
2025 and was fully compliant with all
its bank covenants throughout the
year. The Group has £32.8m available
in cash and £355m in unutilised
facilities (31 December 2021: £420m)
and therefore continues to have the
financial flexibility required to
maximise growth potential in a
capital-efficient way.
The Strategic report on pages 1 to 75
was approved by the Board of
Directors on 14 March 2023 and
signed on its behalf below.
On behalf of the Board
Gail Blain
Chief Financial Officer
14 March 2023
SMS Annual report and accounts 2022
73
Financial statements
Governance
Strategic report
Financial review continued
Definitions of alternative performance measures
Alternative performance measure
Definition
Index-linked annualised recurring revenue
The revenue being generated from meter rental and data
contracts at a point in time. Includes revenue from third-
party managed meters.
Depreciation-adjusted gross profit
Statutory gross profit less depreciation on revenue-
generating assets, recognised within cost of sales.
Depreciation-adjusted gross profit margin
Depreciation-adjusted gross profit divided by
statutory revenue.
Pre-exceptional EBITDA
Statutory EBITDA excluding exceptional items.
Underlying profit before taxation
Profit before taxation excluding exceptional items
and amortisation of certain intangibles1.
Underlying profit after taxation
Profit after taxation excluding exceptional items and
amortisation of certain intangibles1 and the tax effect
of these adjustments.
Underlying basic EPS
Underlying profit after taxation divided by the weighted
average number of ordinary shares for the purposes
of basic EPS.
Underlying diluted EPS
Underlying profit after taxation divided by the weighted
average number of ordinary shares for the purposes
of diluted EPS.
Net cash/debt
Total bank loans less cash and cash equivalents, excluding
restricted cash. Excludes lease liabilities recognised under
IFRS 16.
1 Amortisation of the Group’s Enterprise Resource Planning system remains within the underlying cost base of the business and is therefore a part of the
Group’s underlying profit measures.
74
SMS Annual report and accounts 2022
Reconciliation of statutory to underlying results
SMS uses alternative performance measures, defined on page 74, to present a clear view of what the Group considers to
be the results of its underlying, sustainable business operations. Excluding certain items enables consistent year-on-year
comparisons and aids a better understanding of business performance. A reconciliation of these performance measures
is disclosed below:
Year ended
31 December
2022
£m
Year ended
31 December
2021
£m
Percentage
change
Index-linked annualised recurring revenue
97.1
85.9
13%
Group revenue
135.5
108.5
25%
Statutory profit from operations
20.1
13.5
Amortisation of intangibles
4.2
4.1
Depreciation
32.9
28.7
Statutory EBITDA
57.1
46.3
23%
Exceptional items1 (EBITDA-related)
6.6
6.5
Pre-exceptional EBITDA
63.8
52.8
21%
Share of loss of associate
(0.2)
-
Net interest (excluding exceptional)
(3.9)
(3.5)
Depreciation
(32.9)
(28.7)
Amortisation of intangibles included in underlying profit before taxation2
(2.3)
(2.3)
Underlying profit before taxation
24.5
18.3
34%
Exceptional items1 (EBITDA)
(6.6)
(6.5)
Exceptional items1 (interest)
-
(1.7)
Amortisation of intangibles excluded in underlying profit before taxation
(1.8)
(1.8)
Statutory profit before taxation
16.0
8.3
92%
Taxation
(1.1)
(4.5)
Statutory profit after taxation
14.9
3.8
292%
Amortisation of intangibles excluded in underlying profit after taxation
1.8
1.8
Exceptional items1 (EBITDA and interest)
6.6
8.2
Tax effect of adjustments
(2.0)
(2.4)
Underlying profit after taxation
21.4
11.4
88%
Weighted average number of ordinary shares (basic)
133,241,113
118,330,817
Underlying basic EPS (pence)
16.06
9.60
67%
Weighted average number of ordinary shares (diluted)
133,857,082
118,972,527
Underlying diluted EPS (pence)
15.98
9.55
67%
1 Exceptional items are those material items of income and expense which, because of the nature or expected infrequency of the events giving rise to them,
merit separate presentation on the consolidated income statement.
2 Amortisation of the Group’s Enterprise Resource Planning system remains within the underlying cost base of the business and is therefore a part of the
Group’s underlying profit measures.
Year ended
31 December
2022
£m
Year ended
31 December
2021
£m
Percentage
change
Statutory gross profit
70.0
59.4
18%
Depreciation included in cost of sales
29.3
24.7
Depreciation-adjusted gross profit
99.4
84.1
18%
Depreciation-adjusted gross margin
73%
77%
SMS Annual report and accounts 2022
75
Financial statements
Governance
Strategic report
Governance
Chairman’s introduction
to governance
77
Board of Directors
78
Corporate governance report
80
Audit Committee report
90
Nomination Committee report
96
Remuneration Committee report
98
Directors’ report
113
Statement of Directors’
responsibilities
116
76
SMS Annual report and accounts 2022
Chairman’s introduction to governance
“We are firm believers in the
importance of maintaining
the highest standards of
corporate governance.”
Miriam Greenwood
Non-executive Chairman
Dear Shareholder
On behalf of the Board, I am pleased
to introduce our Corporate governance
report for this year.
The Board’s focus over 2022 was on
overseeing the delivery of the Group’s
strategy to build its base of long-term
revenue-generating assets and
develop new carbon reduction (CaRe)
asset classes. As well as monitoring
the growth in the Group’s grid-scale
battery portfolio, the Board approved
two strategic investments to improve
the Group’s capabilities in smart
energy data and electric vehicle
charging infrastructure.
There were two key changes to the
Board during the year. Tim Mortlock,
who had been Chief Operating Officer
and a full Board member since 2019,
took over as Chief Executive Officer
in March 2022. We also welcomed
Gail Blain to the Board when she took
over as Chief Financial Officer from
Gavin Urwin in December 2022. Both
Tim and Gail have many years’
experience with SMS and have been
central to driving the Group’s strategy.
We are firm believers in the importance
of maintaining the highest standards
of corporate governance. We continue
to adopt the Quoted Companies
Alliance’s Corporate Governance
Code (the QCA Code) and I am pleased
to confirm that the Board has applied
the principles and complied with all the
provisions of the QCA Code throughout
FY 2022. This is set out in our Corporate
governance report on pages 80 to 89.
Whilst the Company does not currently
adopt the UK Corporate Governance
Code, it endeavours to stay up to date
with its requirements and continues to
adopt elements of it, where appropriate.
I am also delighted that MSCI upgraded
SMS from A to AA rating in its January
2023 update to their MSCI ESG Ratings.
MSCI’s report stated that SMS falls into
the highest scoring range on corporate
governance practices, indicating that
these practices are generally well
aligned with shareholder interests.
The Board continues to look for ways
in which it can improve and develop.
We therefore commissioned an external
review of the Board’s effectiveness.
The review concluded that the Board
was effective and provided independent
oversight and strong leadership to the
business. The report raised a number
of recommendations for further
improvement which we will be taking
forward in the coming year. You can
read more about this in the Nomination
Committee report on page 96.
Finally, I would like to thank our
shareholders for their support. I, along
with the Board, will be available to
meet with shareholders and respond
to any questions at our Annual General
Meeting and I look forward to seeing
you there.
Miriam Greenwood
Non-executive Chairman
14 March 2023
Key governance
activities in the
year included:
• Approval to purchase a further
320MW of grid-scale battery
storage sites from the Group’s
established pipeline
• Approval to acquire n3rgy Data
Limited to enhance the Group’s
capabilities in smart energy
data solutions
• Approval to acquire a 25%
interest in Clenergy EV Ltd,
a software business with a
chargepoint operator platform
• Appointment of Tim Mortlock
as Chief Executive Officer
• Appointment of Gail Blain
as Chief Financial Officer
and Executive Director
• Monitoring the potential
impact of rises in energy
costs, inflation and interest
rates on the business
• Review of progress against
the Group’s ‘net zero by
2030’ roadmap
• Approval of LTIP
• Approval of a one-off
discretionary cost-of-living
payment to the majority of staff
SMS Annual report and accounts 2022
77
Financial statements
Governance
Strategic report
Board of Directors
Miriam Greenwood OBE DL
Non-executive Chairman
Tim Mortlock
Chief Executive Officer
Gail Blain
Chief Financial Officer
Graeme Bissett
Senior Independent
Non-executive Director
A N R I H
A N R I H
Date of appointment
Non-executive Director
February 2014
Chairman 23 June 2020
Date of appointment
Director 17 September 2019
Chief Executive Officer
1 March 2022
Date of appointment
1 December 2022
Date of appointment
1 June 2016
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
Miriam is a non-executive
director of Aquila Energy
Efficiency Trust Plc. In addition,
she holds non-executive
director positions at Gulf
International Bank (UK)
Limited, the UK subsidiary
of Gulf International Bank,
at Eclipse Shipping Limited
and at River and Mercantile
Group plc, where she also
chairs the remuneration
committee. Beyond board
roles, Miriam is a member of
both the Council of Advisers
and Committee of the
Authority on the 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.
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 and now SMS Energy
Services Limited) almost
from its inception and, prior
to taking up his current role
as Chief Executive Officer he
was Chief Operating Officer.
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
Gail is a member of the Institute
of Chartered Accountants of
Scotland with over 15 years’
experience working across
various industries, latterly
focusing specifically on the
energy and utility sector. Prior to
being appointed Chief Financial
Officer, Gail spent six years as
Group Financial Controller and
has been instrumental in
supporting SMS through its
growth over this time.
Before joining the Company,
Gail held a variety of financial
and management positions at
Aggreko PLC and BAA Group,
working at both a corporate
and operational level.
External appointments
None.
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, Belhaven Group plc, Scottish
Futures Trust Limited and
Anderson Strathern LLP, and
was formerly a member of Court
at the University of Glasgow.
External appointments
Graeme is a non-executive
director of Cruden Holdings
Limited, Calnex Solutions plc,
and Aberforth Split Level
Income Trust plc. He also
undertakes a number of
pro-bono appointments,
including as trustee of The
Scottish Association of Citizens
Advice Bureau, The
Entrepreneurial Scotland
Foundation and Pitlochry
Festival Theatre.
78
SMS Annual report and accounts 2022
Ruth Leak
Independent
Non-executive Director
Jamie Richards
Independent
Non-executive Director
Craig McGinn
Group Company Secretary,
General Counsel and
Data Protection Officer
for the Group
A N R I H
A N R I H
Date of appointment
29 May 2019
Date of appointment
23 April 2020
Key to Committees
A Audit
N Nomination
R Remuneration
I
Information
Technology
H Health, Safety and
Sustainability
Chair
Background and experience
Ruth most recently served as
chief information officer for the
Letters and Network division of
Royal Mail, where she was also
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 had operational
roles with Procter & Gamble,
and then worked in consultancy
and the retail sector including
as part of the start-up team
behind the British online
supermarket Ocado.
External appointments
Ruth also serves as a non-
executive director and chair of
the Quality Committee at the
Financial Ombudsman Service.
She is also an active member of
the ‘Women in Technology’
mentoring programme
operated by Reed.
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, in both 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
Craig is a qualified corporate
and banking lawyer with over
25 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 the highest
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 LLP, and at Dundas
& Wilson prior to its merger
with CMS.
External appointments
During 2022 Craig was
appointed as a non-executive
director to the Beatson Cancer
Charity which is an
unremunerated role.
SMS Annual report and accounts 2022
79
Financial statements
Governance
Strategic 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.
Corporate governance report
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 97 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/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.
Comprises all Non-executive
Directors. The Chief Executive
Officer and Chief Financial Officer
attend by invitation.
Audit Committee report
pages 90 to 95
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.
Comprises all Non-executive Directors
and the Chief Executive Officer.
Nomination Committee report
pages 96 to 97
Remuneration Committee
Determines the remuneration for
Executive Directors and oversees
the Group’s overall remuneration
policy, strategy and implementation.
Comprises all Non-executive
Directors. The Chief Executive
Officer and Chief Financial Officer
attend by invitation.
Remuneration Committee report
pages 98 to 112
Information Technology Committee
Reviews and approves the information technology strategy
and monitors priorities and/or structures implemented
throughout the Group, including allocation of resources
and the impact of and opportunities arising from emerging
changes in technology.
Comprises all Non-executive Directors. The Chief Executive
Officer, Chief Financial Officer and Chief Information Officer
attend by invitation.
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 Financial Officer and representatives from
the Group’s sustainability team attend by invitation.
80
SMS Annual report and accounts 2022
Board Committee updates
During 2022, the terms of reference
for each of the Board Committees
were reviewed with minor
amendments made.
There were no changes to the
Committees. Further details of their
activities in the year can be found
below and in their respective reports
on pages 90 to 112.
Information Technology
Committee
The Information Technology Committee
is chaired by Ruth Leak, an information
technology specialist, and comprises
all the Non-executive Directors. The
Chief Executive Officer, Chief Financial
Officer and Chief Information 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
implement 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 which
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
2022. During the year, the Committee
undertook the following key activities:
• reviewed the information systems
strategy, which sets out the overall
approach to technology, data and
digital required to support the wider
business strategy over the next
three years;
• discussed and supported
management’s plans to commence
implementation of a new platform
to support the ‘Sales to Service’
lifecycle, including the platform
to be used for customer contact
management, scheduling and field
service management; and
• reviewed the progress being made
on improving the security and
resilience of the IT estate, including
enhanced backup solutions, platform
migration and other significant
control improvements in the cyber
security domain.
Health, Safety and
Sustainability Committee
The Health, Safety and Sustainability
(HSS) Committee is chaired by Miriam
Greenwood and comprises all the
Non-executive Directors. Other
individuals such as the Chief Executive
Officer, Chief Financial Officer,
representatives from the Group’s
sustainability team 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
implement 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 by monitoring key performance
indicators and by monitoring the
operational, environmental and legal
impact on health and sustainability
of decisions taken. The Committee
reviews and assesses 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 during 2022.
During the year, the Committee
undertook the following key activities:
• reviewed the proposed ESG targets
for material operational aspects
including health and safety, human
resources, sustainability, governance,
purchasing and cyber security;
• following the announcement of
the Group’s ‘net zero by 2030’ target
in 2020, the Committee closely
monitored progress against the
Group’s roadmap and associated
milestones. This included a review
of projections of long-term carbon
performance;
• the Committee received an overview
of performance across core health
and safety, and human resources
indicators and initiatives; and
• the Committee received updates on
the Group’s activities to analyse its
exposure to climate change, including
on definition of scope and timescales,
and on areas for further investigation.
SMS Annual report and accounts 2022
81
Financial statements
Governance
Strategic report
Corporate governance report continued
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
Responsibility
Chairman
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 tabled. Sets the agenda
to take full account of the issues and concerns of the Directors and ensures that
the links between shareholders, the Board and management are strong.
Chief Executive Officer
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.
Chief Financial Officer
Responsible for the day-to-day financial management and sustainability of the
Group and for providing general support to the Chief Executive Officer, including
in relation to the financial and operational performance of the business.
Senior Independent Director
Provides a sounding board for the Chairman, acts as an intermediary for the
other Directors when necessary and is available to meet with shareholders.
Independent Non-executive
Directors
Constructively challenge the Executive Directors and monitor the delivery of the
Group strategy within the risk and control environment set by the Board.
Company Secretary
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 to make sure they are in the best
long-term interests of shareholders,
but also in order to take account of the
interests of customers, employees and
other stakeholders.
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.
Graeme Bissett is the Senior
Independent Non-executive Director.
He is available to shareholders if they
have concerns which have not been
resolved via the normal channels of
Chairman, Chief Executive Officer
or Chief Financial Officer, or where
communication through such
channels would be inappropriate.
Election of Directors
All 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,
were and shall continue to be subject
to annual re-election.
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. 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.
82
SMS Annual report and accounts 2022
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 required.
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 2022, 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;
and
• management 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. A majority of the Board are
considered independent, which helps to
address any conflicts of interest that
may arise. There were no registered
potential conflicts during 2022.
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 2022 is set out below.
Executive Directors
Board
Maximum 8
Audit
Committee
Maximum 3
Remuneration
Committee
Maximum 6
Nomination
Committee
Maximum 2
Information
Technology
Committee
Maximum 3
Health,
Safety and
Sustainability
Committee
Maximum 1
Alan Foy2
–
–
–
–
–
Tim Mortlock1
Gavin Urwin1,3
-
–
Gail Blain4
–
–
-
–
–
–
Non-executive Directors
Miriam Greenwood
Graeme Bissett
Ruth Leak
Jamie Richards
1 Tim Mortlock and Gavin Urwin attended the Audit, Information Technology Committee and Health, Safety and Sustainability Committee meetings
by invitation. Tim Mortlock also attended the Remuneration Committee meetings by invitation.
2 Alan Foy resigned as Chief Executive Officer on 28 February 2022. He attended all the Board meetings that took place up to this date.
3 Gavin Urwin resigned as Chief Financial Officer on 1 December 2022. He attended all the Board and Board Committee meetings that took place
up to this date.
4 Gail Blain was appointed as Chief Financial Officer on 1 December 2022. No Board or Board Committee meetings took place between that date
and 31 December 2022. She however attended one Board meeting and Audit Committee meeting as an observer prior to her appointment.
SMS Annual report and accounts 2022 83
Financial statements
Governance
Strategic report
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 and topics discussed
during the year to 31 December 2022:
• Fit for growth – the Board oversaw
the preparation and approval of the
2023 budget and reviewed the Group’s
updated corporate forecast following
the budget process. Discussion of
business development opportunities
and engagement in evaluating the
ongoing strategic direction for the
business remained key focus areas,
with ongoing review of the Group’s
investment in grid-scale battery
storage and exploration of developing
carbon reduction (‘CaRe’) asset
classes. The Board reviewed and
approved the decisions to acquire
N3rgy and invest in Clenergy EV.
Following announcement of the
Group’s ‘net zero by 2030’ target in
2020, the Board has tracked progress
against the planned roadmap.
• 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 following: appointment of Tim
Mortlock as Chief Executive Officer,
appointment of Gail Blain as Chief
Financial Officer, full-year preliminary
results, Annual report and accounts,
Notice of AGM and dividend
recommendation, investor site visit
to Burwell, half-yearly results, 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, risk and risk tolerance.
84 SMS Annual report and accounts 2022
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 review
Each year, the Company
carries out a review of the
Board’s operations, its
Committees and individual
Directors. This process gives
the Directors the opportunity
to identify areas for improvement
both jointly and individually.
As part of reviewing the Board,
the Senior Independent Director
also leads an assessment of the
Chairman’s performance.
FY 2022 Board evaluation
For 2022 the Board
commissioned an external review
by an independent consultant,
Satori. Details of this review are
given in the Nomination
Committee report on page 97.
SMS Annual report and accounts 2022 85
Financial statements
Governance
Strategic report
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 38 to 41. 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 Board
members to stay abreast of the topics that matter most to stakeholders and to the business. This enables the Board
to understand and consider these issues in its decision-making. We explain here how, during the year, the Board
engaged with our stakeholders.
Material matters requiring the Board’s consideration are outlined on page 37.
Corporate governance report continued
How the Board engages with stakeholders
Suppliers
Lenders/
financiers
Government and
regulatory bodies
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.
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, both Executive
Directors participated in meetings
with the Group’s syndicate of banks
to provide an update on the 2022
budget and performance, and
discuss the Group’s growth
strategy. This direct engagement
promotes an open and transparent
relationship, which is key in
supporting the continued growth
of the business.
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.
86
SMS Annual report and accounts 2022
Shareholders
Customers
Employees
The Board receives updates from the
Head of Investor Relations where
relevant and appropriate, providing
an overview of market sentiment,
share price performance and key
meetings held with investors.
The Chairman hosted meetings
with major shareholders in 2022
to provide a general update on the
business. Such meetings provide
a more open line of engagement
between Board members and key
investors and it is intended that these
will take place on a regular basis.
On 4 October 2022, the Chief
Executive Officer hosted a
presentation and site visit for investors
to our first operational grid-scale
battery facility at Burwell. The wider
Board was extensively involved in
the preparation process for this
event, reviewing and advising on
the presentation and supporting
script. The event was very well
received and gave investors much
greater insight into this important new
asset class for the Group. See page 38
for more details on the event.
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
incorporation of various best
practices in further defining the
Group’s ESG framework such as
commencing a review of our EU
Taxonomy alignment and enhancing
disclosure of our ESG credentials.
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
entitled The Board’s relationship
with shareholders on page 89.
Most of the Company’s
engagement with customers is at
the operational level. The Chief
Executive 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
Executive Officer and the senior
management team on sales and
service delivery. The Board also
reviews material customer
contracts prior to finalisation.
Over the year, the Board monitored
the impact of the rises in energy
costs, inflation and interest rates on
the Group’s customers. The Chief
Financial Officer provided regular
updates to the Board on the status
of the Group’s customer debt at risk
of non-collection, and subsequent
potential impact on net profit.
The Board closely monitors and
reviews the results of the Group’s
employee engagement activity,
as well as any other feedback it
receives, to ensure alignment
of interests.
During the year, the Remuneration
Committee received an update on
gender pay reporting. The results of
the 2022 Best Companies external
employee engagement survey were
shared and the proposed action
plan, together with progress made
on actions following the 2021
survey, were discussed.
The Board Committee meetings
also provide an opportunity for
employee engagement, with
attendance by senior employees
to present updates, host discussion
and obtain feedback to share with
the business.
SMS Annual report and accounts 2022
87
Financial statements
Governance
Strategic report
Corporate governance report continued
Shareholder activities in the year
March 2022
Full-year 2021 results presentation
March 2022
Full-year 2021 results roadshow
May 2022
Liberum Green Economy conference
May 2022
Investec ESG conference
May 2022
AGM
June 2022
Peel Hunt Industrials & Support Services conference
July 2022
H1 2022 trading update and calls with investors
Sept 2022
H1 2022 results presentation
Sept 2022
H1 2022 results roadshow
Oct 2022
Burwell grid-scale battery storage site visit
Nov 2022
Investec Best Ideas conference
Nov 2022
Berenberg Pan-European Discovery Conference
Jan 2023
FY 2022 trading update and calls with investors
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 2022 the Executive Directors,
assisted by the investor relations team,
attended several 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
Chairman and the Chief Executive
Officer met with major shareholders.
A variety of topics were discussed.
The Board receives regular 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 and from 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 and Chief Financial
Officer. One-to-one and group
meetings are then held with existing
institutional shareholders and potential
new investors.
88
SMS Annual report and accounts 2022
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/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.
Annual General Meeting
The 2022 AGM will be held in May 2023
in Glasgow. 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/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, giving 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 this
can be done 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 pages
51 to 59 for further details. 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 business like the Group,
which is growing rapidly both in
employee numbers and size of
operations, a mix of informal and
formal channels provides a fast and
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 also 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, and any environmental
concerns or breaches of the Group’s
health and safety or quality compliance.
The Group provides the Audit
Committee with information in relation
to matters reported, any subsequent
investigation and follow-up actions.
All issues raised are fully investigated
and appropriate action taken.
There were two whistleblowing
reports made in the year ended
31 December 2022, and both instances
were investigated by our General
Counsel. One report was found to
have no substance, while the other
report was substantiated and senior
management took appropriate action
to rectify the situation.
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 75. The financial
position of the Group, its cash flows,
liquidity position and borrowing
facilities are described in the Financial
review on pages 70 to 75.
The Directors confirm that, having
considered various scenarios of future
performance and forecast capital
expenditure, 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 December 2024). 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
14 March 2023
SMS Annual report and accounts 2022 89
Financial statements
Governance
Strategic report
Audit Committee Report
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.
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 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, the
Head of Internal Audit, the Chief
Executive Officer and the Chief Financial
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 her team,
and with the Head of Internal Audit.
Members and attendance
Meetings
Graeme Bissett (Chair)
Miriam Greenwood
Ruth Leak
Jamie Richards
Attending by invitation
Chief Executive Officer
Chief Financial Officer1
Head of Internal Audit
External auditor
1 Gavin Urwin attended all three Audit Committee meetings, all of which took place prior to his
resigning as Chief Financial Officer on 1 December 2022.
Main activities in 2022
• 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 key transactions in
the year, including a business combination, several asset acquisitions, an
investment in an associate and the development of new business verticals.
• Monitoring the impact on the Group of energy price rises in the market
and the increases in inflation and interest rates, including management’s
reporting of these through market communications and the Annual report
and accounts.
90
SMS Annual report and accounts 2022
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 considers the
findings of any internal investigations
and management’s response;
• 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;
• 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 and 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 did
not identify, nor was it advised of, any
failings or weaknesses in the internal
control systems or risk management
processes that were 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 through the Group’s
independent whistleblowing hotline.
There were two whistleblowing
reports made in the year ended
31 December 2022, and both
instances were investigated by our
General Counsel. One report was
found to have no substance, while the
other report was substantiated and
senior management took appropriate
action to rectify the situation.
The Committee is satisfied that the
Group’s whistleblowing policies and
procedures, detailed further on page 89,
are effective, facilitate the independent
investigation of reported matters and
allow appropriate follow-up action to
be taken.
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 Head of Internal Audit reports
functionally to the Audit Committee
and administratively to the executive
leadership team. The Chair of the Audit
Committee meets with the Head of
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 2022, Group internal audit
worked with the Board, the executive
leadership 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 2022, which included a three-
year outlook, was reviewed and
approved by the Committee in
November 2021. The programme
focused on addressing several key risk
areas including cyber security, grid-
scale batteries, post-acquisition
performance, treasury management,
payroll, financial controls over billing and
fixed asset management and disaster
recovery planning. 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.
SMS Annual report and accounts 2022
91
Financial statements
Governance
Strategic report
Audit Committee Report continued
Following the commencement of
trading of our first grid-scale battery
site, internal audit carried out a review
of the electricity trading process and
the associate controls, and of the
financial reporting of grid-scale
battery performance. No significant
weaknesses were identified.
The Internal Audit Plan for 2023
was approved by the Committee
in November 2022.
The Committee has remained in active
discussion with Group internal audit
about the existing risks the Group
faces as it continues to grow, including
those in relation to carbon reduction
(‘CaRe’) verticals, the impact of
industry and regulatory changes,
systems development and pervasive
external risks such as cyber and data
security. See further details in the
Our principal risks and uncertainties
section on pages 65 to 69.
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. 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.
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.
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 2022, including:
• the involvement of the Committee in
the preparation of the Annual report
and accounts 2022 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, 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
2022, presented to the Committee
prior to final sign-off;
• review and consideration of the draft
Annual report and accounts 2022 in
advance of the final sign-off; and
• the final sign-off process by the Board.
92
SMS Annual report and accounts 2022
Below are the key considerations the Committee has in mind when assessing these three components:
Fair
Balanced
Understandable
• Is the whole story presented?
• Is the narrative reporting in
the front of the Annual report
and accounts 2022 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?
• 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
alternative performance
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?
• 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
2022 straightforward and
transparent?
• Is the layout clear with good
linkage throughout?
Fair, balanced and understandable – what does this mean?
SMS Annual report and accounts 2022 93
Financial statements
Governance
Strategic report
Audit Committee Report continued
Significant matters considered in relation to the Annual report and accounts 2022
Significant areas considered by the Committee in relation to the 2022 Financial statements are set out in the below table:
Area of judgement
Matter considered
Action
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 are therefore eligible for
capitalisation.
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.
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 Committee considered the judgements
made by management, including the quantum
and disclosure of relevant amounts.
The Committee confirmed with management
that there have been no changes to accounting
estimates with regard to meter assets. The
Committee considered market and UK
Government developments regarding the smart
meter rollout and concluded that this was
reasonable.
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 2022.
Losses on disposal of de-appointed meters
have been recognised after allowance for
termination income and, following
management’s impairment assessment of
traditional meter assets, no impairment charge
was recorded at the end of the year. The
financial statements provide detailed
commentary on the estimates and judgements
involved and on the financial effect. 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.
94
SMS Annual report and accounts 2022
Climate change
The Audit Committee discussed the
impact of climate change on the Group.
These considerations did not have
a material impact on the financial
reporting judgements and estimates,
consistent with the assessment that
climate change is not expected to
have a significant impact on the
Group’s going concern assessment
to 31 December 2024. Qualitative
exploration of potential areas of
concern, including an evaluation of
climate exposure on our physical
assets such as offices, warehouses
and vehicles, has been carried out
and we have identified areas of
potential climate-related risk, such
as extreme weather events which
could affect our physical locations
and road-based employees. Overall,
the risk of climate-related change
on the Group is considered low.
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.
Kevin Weston began his appointment
as engagement partner from FY 2017
and therefore FY 2021 was his last year.
A new engagement partner, Paul
Copland, was appointed with effect
from FY 2022.
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, and
auditor remuneration.
Every year, the Committee assesses
the effectiveness of the audit process
and the external auditor. In carrying out
its assessment in 2022 it considered:
• feedback from the Chief Financial
Officer and her 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 2022. Details of the
fees paid to the external auditor during
the financial year can be found in note 3
to the financial statements.
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 2023.
Accordingly, a resolution proposing
EY’s reappointment will be tabled
at the forthcoming Annual General
Meeting.
Graeme Bissett
Chair of the Audit Committee
14 March 2023
SMS Annual report and accounts 2022 95
Financial statements
Governance
Strategic report
Nomination Committee Report
Nomination Committee
membership
The Nomination Committee is currently
made up of one Executive Director,
namely the Chief Executive Officer,
and all the 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.
During 2022, the Committee met on
two occasions. In addition, several
informal meetings and discussions
were held as part of the process to
appoint a new Chief Executive Officer
and Chief Financial Officer.
Role of the Committee
Appointments to the Board are the
responsibility of the full Board, upon the
recommendation of the Nomination
Committee and after appropriate
external search/consultation, bearing
in mind the Board’s existing balance of
skills, knowledge and experience, the
specific role/capability needs identified,
and with due regard to diversity, including
gender. Succession plans are regularly
reviewed by the Committee in order
to ensure an orderly progression/
refreshment of senior management/
Board members and maintain an
appropriate balance of skills, experience
and diversity both within the Company
and on the Board.
Succession planning
An integral part of the work of the
Nomination Committee is to establish
and maintain a stable leadership
framework and to proactively manage
changes. Ensuring the right leaders are
in place enables the organisation to
compete effectively in the marketplace
and therefore to meet its various
obligations to its stakeholders. The
Nominations Committee has managed
succession programmes for both the
Board and senior management,
ensuring that the necessary skills,
expertise and experience are present.
Members and attendance
Meetings
Miriam Greenwood (Chair)
Graeme Bissett
Ruth Leak
Jamie Richards
Tim Mortlock
Main activities in 2022
• The appointment of Tim Mortlock as Chief Executive Officer to succeed
Alan Foy from 1 March 2022.
• The appointment of Gail Blain as Chief Financial Officer to succeed
Gavin Urwin from 1 December 2022.
• Review of the succession plans for Executive and senior management
roles, including potential candidates for such roles, their backgrounds
and experience, and how such candidates would contribute towards
the Company’s objectives.
• Consideration of succession plans for Non-executive directors
approaching nine years appointment to the Board.
96
SMS Annual report and accounts 2022
Gender
Male
3
Female
3
Tenure
1–3 years
2
3–6 years
2
>6 years
2
Board composition
Executive
Directors
2
Independent
Non-executive
Directors
3
Independent
Non-executive
Chairman
1
Early in 2022 Alan Foy, who had
served on the Board since the listing
of the Company in 2011, stepped
down as Chief Executive Officer.
The Committee oversaw a search
for a new Chief Executive Officer, and
we were delighted that Tim Mortlock
assumed the role ensuring continuity
and minimising disruption to the
business. After consideration
against potential market candidates
the Committee recommended that
Tim Mortlock should be appointed
as Chief Executive Officer and his
appointment was confirmed on
1 March 2022.
During October 2022, Gavin Urwin
informed the Board of his intention
to resign as Chief Financial Officer.
As part of the succession strategy
Gail Blain, then Group Financial
Controller, had been identified as
the natural successor to Gavin Urwin.
On the recommendation of the
Nomination Committee after assessing
other potential candidates in the
market, Gail Blain was appointed as
Chief Financial Officer and joined the
Board on 1 December 2022. Gail has
a wealth of experience, has been at
the heart of SMS’s financial strategy
and has played a pivotal role in
delivering the Group's strategy
over the past six years.
In readiness for the ninth anniversaries
of appointments to the Board, the
Committee has started the search to
identify my successor as Chairman (and
Chair of the Nominations Committee)
and a successor for the Audit Committee
Chair. The Nominations Committee has
engaged Russell Reynolds to conduct
the external search. The Committee
requested that a diverse long-list of
candidates, in respect of gender,
ethnicity and background, be produced.
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.
Alongside the Board, the Committee
continues to champion the benefits
of diversity, be it religious, ethnic or
gender diversity, or diversity of social
backgrounds or cognitive and personal
strengths at Board, Committee and
senior management level. We are
pleased that half of the Board of
Directors of SMS are female, but we
are aware that gender representation
is not the only means by which a board
achieves diversity. We also understand
the need to improve gender, racial and
other imbalances throughout our
organisation, but particularly in senior
leadership roles. Appointments are
always based on merit and we continue
to challenge our external search
consultants where necessary, to ensure
that diversity is always considered
when drawing up candidate shortlists.
The Nomination Committee
recognises the importance of having
complementary and diverse skills
and backgrounds within the Board,
enabling rich and effective discussions
and decision-making. The Committee
continuously reviews the Board
composition against a skills matrix
to ensure that the Board and its
Committees have and maintain the
skills needed to deliver the Group’s
strategic priorities.
Board evaluation
For the three years prior to this reporting
period, we have carried out internal
reviews of the Board’s effectiveness.
This year we commissioned an external
review by an independent consultant,
Satori. Other than carrying out this
evaluation, Satori have no connection
with SMS. The Chair provided a
comprehensive brief to Satori and the
review was undertaken in Quarter 3 2022.
Satori had access to a number of Board
and Committee papers during 2022 and
observed the November Board and
Committee meetings. Individual
interviews were conducted with all Board
Directors and the Company Secretary.
A report was prepared by Satori with
final results and recommendations being
presented to the Board in February 2023.
We were pleased Satori felt the Board
was highly professional and effective,
with good levels of commitment to the
success of the business and its people,
and with an open, honest and
collaborative dynamic.
The report observed that the Board
was providing good leadership and
support to the business, noting there
was clarity and alignment on the role
of the Board and of the immediate
strategic priorities. The decision-
making processes work well and Board
processes are effective, efficient and
thorough. The Board Committees also
worked well. Based on Satori’s review,
the Board agreed a number of forward-
looking areas for focus and action
which will further support our continuous
development. These include:
• considering a five-year board
development plan linked directly
to forward strategy;
• enhancing the Board view of ‘what
good to great’ means and identifying
any metrics to enable this; and
• continually reviewing structures to
stimulate contact between the
Board and the wider organisation.
Miriam Greenwood
Chair of the Nomination Committee
14 March 2023
Board composition
SMS Annual report and accounts 2022 97
Financial statements
Governance
Strategic report
Remuneration Committee Report
Introduction by Jamie
Richards, Remuneration
Committee Chair
On behalf of the Board and the
Remuneration Committee, I am pleased
to present the Remuneration Committee
Report (the Report) for the financial
year ended 31 December 2022. This
report includes my annual statement,
the directors’ remuneration policy
(the Policy) and our annual report on
remuneration. As no changes are
proposed to the existing Policy, only
one remuneration resolution will be
tabled at the AGM in May 2023,
namely the advisory shareholder
vote on the Directors’ Annual report
on remuneration.
The aim of the Remuneration
Committee
The Remuneration Committee is
committed to structuring Executive
remuneration that is competitive,
that incentivises and rewards good
performance, and that will support the
Group’s growth and ambitions, thereby
creating value for shareholders. In
addition, the Committee reviews and
considers remuneration of the wider
workforce and monitors related policies,
satisfying itself that incentives and
rewards are aligned with the Group’s
strategy and culture. The Remuneration
Committee is appointed by the Board
and comprises four independent
Non-executive Directors.
Our approach to
remuneration
The Remuneration policy is designed to:
• include a competitive mix of base
pay and both short and long-term
incentives, with an appropriate
proportion of the package
determined by stretching targets
linked to the Group’s performance;
• promote the long-term success of the
Group, in line with our strategy and
focus on growth and shareholder
value; and
• provide appropriate alignment
between the interests of shareholders
and executives and, where
appropriate, the wider workforce.
Members and attendance
Meetings
Jamie Richards (Chair)
Miriam Greenwood
Graeme Bissett
Ruth Leak
Main activities in 2022
• Reviewed and approved the Directors’ Remuneration Report in the
FY 2021 Annual report and accounts.
• Discussed and approved the FY 2021 Executive annual bonus payments.
• Reviewed and approved vesting levels for existing long-term incentive
awards for FY 2021.
• Reviewed and approved the financial and strategic FY 2022 bonus
metrics and targets.
• Gained approval from shareholders for a revised Remuneration Policy.
• Approved an additional cost-of-living bonus, paid in November 2022,
to the majority of the wider workforce.
• Made awards to certain Executives and senior management under the
new LTIP scheme.
• Reviewed and recommended the Gender Pay Gap report to the Board
for approval.
98
SMS Annual report and accounts 2022
Aligning remuneration
to Group strategy
The Group’s ongoing vision is to be
at the heart of the low-carbon, smart
energy revolution. Our remuneration
arrangements are designed to support
management in its growth plan and
strategy, and to enable the Group to
be flexible and agile, considering the
fast pace of our growth in a normal
trading environment.
Remuneration Policy
during the year
At the 2022 AGM the Committee put
forward our Directors’ Remuneration
Policy (the ‘Policy’) to shareholders.
The Policy was largely based on the
same principles as the previous
Directors’ Remuneration Policy;
however, the Committee made a
number of changes to align with best
practice. We were pleased that over
92% of shareholders voted in support
of the Policy and the Committee believes
it remains appropriate in supporting
the Company’s execution of its strategy
and long-term shareholder value
creation. The Committee is confident
that there continues to be a strong link
between the Remuneration Policy and
the business strategy.
Annual bonus for the year
ended 31 December 2022
During FY 2022 trading was above
our expectations and our Executive
team has performed extremely well,
ensuring that the Group is well
positioned to take advantage of
opportunities. Our Group results in
FY 2022 were very strong, with
underlying profit before tax of £24.5m,
representing growth of 34%, ILARR
increasing by 13% year on year and
over 480,000 smart meter installations.
In a turbulent market, delivering this
growth across all our key metrics
reaffirms the Group’s strategy and
the continued efforts by the Executive
team to build a long-term, sustainable,
and successful business. This strong
performance is reflected in the
outcome of the annual bonus plan.
Remuneration Policy for the
year ending 31 December 2023
The Remuneration Committee is
aware of ongoing developments
in corporate governance and best
practice in executive remuneration,
and will continually review its executive
remuneration arrangements to align
with these where appropriate for
the business.
The Remuneration Policy is set out
on pages 103 to 109 and details of
how this Policy will be implemented
for the financial year ahead is set
out on page 102.
I hope that you will find this report
helpful and informative and agree
that the determinations made by the
Committee are appropriate and in the
long-term interests of the Group, its
employees and our shareholders. I look
forward to your support at our AGM in
May 2023 and encourage you to submit
any questions you may have regarding
the work of the Committee in advance.
Annual statement from the Chair of the Remuneration Committee
Application of the new Remuneration Policy
Key reward component
Key features
Base salary and core benefits
CEO salary £435,000. CFO salary £300,000. Pension contribution: 5% of salary for CEO
and CFO in line with the wider UK workforce.
Annual bonus
• 50% Group financial targets
• 35% operational objectives
• 15% individual strategic objectives
Maximum of 150% of salary for CEO and 130% for CFO, with an element of any bonus
award paid in shares and held for two years.
LTIP award
• Pre-exceptional EBITDA
• TSR
• ESG/H&S
Annual awards of nil-cost options with opportunity levels aligned to the market, at a
maximum of 175% of base salary for CEO and 150% for CFO with deferred components.
Annual awards are subject to performance against stretching financial, TSR and ESG
targets measured over a three-year period.
Shareholding guidelines
The CEO is expected to move towards maintaining a shareholding of two times salary
and the CFO is expected to move towards maintaining a shareholding of 1.5 times salary
while they are a Director of the Company.
SMS Annual report and accounts 2022 99
Financial statements
Governance
Strategic report
Policy
At the start of 2022 the Committee
undertook a thorough review of
all elements of the Executives’
remuneration package, including
base salary, pension, annual bonus
and wider benefits. The review was
fully informed by independent advice.
At the 2022 AGM shareholders approved
the new Remuneration Policy, which
is intended to apply for three years
from that date. There was widespread
support, as evidenced by over 92%
voting in favour. This reinforces our
view that our Remuneration Policy
continues to reflect our business
strategy, with remuneration payments
that are strongly linked to performance.
Fixed elements of the remuneration
packages are set so that they reflect
the calibre and experience of the
individuals and the complexity of their
roles. The annual bonus measures are
based on specific areas that require
immediate focus, whereas our long-
term incentive plan (LTIP) looks to drive
sustainable improvements at a more
macro level over the longer term.
Culturally, the setting of both financial
and broader non-financial measures
serves to focus Executives on a more
holistic view of business success and
hence serves to drive performance on
a broad, sustainable front.
The main changes to the Policy are
summarised below and were applied
during FY 2022.
Long-term incentive plan (LTIP)
The LTIP is structured in the form
of annual awards of nil-cost options
to the Company’s senior employees.
Maximum opportunity levels are
aligned to the market, at 175% of base
salary for the CEO and 150% of base
salary for the CFO. All awards will be
satisfied within a 10% dilution limit
within any rolling ten-year period.
The awards will be subject to stretching
financial and non-financial performance
targets, measured over a three-year
period, with phased vesting over
an overall five-year term in line with
market best practice and to provide
further alignment with shareholders.
Performance measures for the awards
granted in 2022 were incremental
EBITDA growth, delivery of absolute
shareholder return, and ESG measures
which are core to SMS’s strategy,
including health and safety and
progress against our net zero targets.
Annual bonus
Alongside the introduction of the
long-term incentive plan, the
Committee revised the annual bonus
to align the terms with appropriate
market benchmarks. The maximum
bonus opportunity increased from
100% to 150% for the CEO and 130% for
the CFO with this being a maximum of
100% delivered in cash and the balance
deferred into shares for a period of two
years. The same award weighting is
applied to both elements.
Shareholding guidelines
The Committee introduced a
shareholding guideline for Executives
with the CEO being expected to
maintain a shareholding of 2 times
salary and the CFO being expected
to maintain a shareholding of 1.5 times
salary while they are a Director of the
Company. Given that both Executive
Directors are relatively new in post, the
expectation is that this shareholding
will be established over five years and
is expected to apply for a period of one
year following cessation of employment.
The guidelines will apply to shares from
incentive awards vesting from the date
of adoption of the Policy.
Remuneration for
performance in 2022
As set out in detail on pages 70 to 75,
the Group achieved a strong trading
performance in 2022, with double digit
growth in our index-linked annualised
recurring revenue, supported by the
480,000 smart meter installations.
140MW of operational battery sites
were live by 31 December 2022 with
operational performance of the sites
significantly ahead of market
expectations and a largely secured
grid-scale battery pipeline with 470MW
secured and a further 150MW under
exclusivity. Most importantly, there
have been no significant health and
safety incidents in the year, reflecting
the core priority of the Group to
provide a safe and secure operating
environment for all our staff (see pages
56 to 59 for details). The Committee
determined that there had been a
robust link between remuneration
and performance.
Base salary
Executive Director salaries were
subject to an annual review process.
Following this review at the start of
2022, the Committee agreed to
increase the salary of Tim Mortlock
to £435,000 effective 1 March 2022
and from 1 April 2022 Gavin Urwin’s
salary increased to £300,000 to align
with market benchmarking. Gail Blain
was awarded the same salary as
Gavin Urwin when appointed as CFO
from 1 December 2022.
Annual bonus
The targets for the 2022 annual bonus
for Executive Directors were set by the
Committee in January of last year and
remained unchanged throughout the
year. The strong and resilient financial
performance of the Group in 2022 is
reflected in the 2022 annual bonus
outcomes; the financial measures,
underlying profit before tax and ILARR,
have contributed 40% to the overall
bonus. Both Executives made good
progress across all other objectives,
as detailed on page 111; however the
CEO has received a slightly lower bonus
percentage compared to the CFO,
Remuneration Committee Report continued
Annual statement from the Chair of the Remuneration Committee continued
100 SMS Annual report and accounts 2022
solely due to a specific objective
in relation to absolute share price
performance that does not feature
in the CFO’s objectives. Overall, the
annual bonuses paid to the CEO and
CFO were 75% (2021: 82%), and 79%
(2021: 82%) of the maximum respectively.
The Committee considered whether
the formula-driven pay-outs under the
incentive plans and the resultant total
remuneration for Directors were
appropriate, looking at the broader
context within which the performance
was delivered.
Long term incentive plans
After the new LTIP scheme received
approval at the AGM, the Committee
awarded LTIP awards to Executives
and senior management under the
plan rules and falling within a 10%
dilution limit over a rolling ten-year
period. The LTIP is designed to
encourage management to focus
on executing the strategy to position
SMS at the forefront of delivering
smart energy solutions and provide the
flexibility to make the right investments
at the right time and to discourage the
use of levers to increase revenue and
profit in the short-term at the expense
of long-term shareholder value. Our
people are also eligible to participate in
our Sharesave plans which promote
share ownership by giving employees
an opportunity to invest in SMS shares.
The Committee assessed performance
against the annual vesting criteria for
share options awarded to Executives
and senior management, under the
extant Option Plan, noting that the plan
has now expired for new awards and
reflecting the Committee’s responsibility
under the plan rules to exercise discretion
to ensure a fair outcome for all parties
including the careful evaluation of
formulaic components. Similarly to last
year, the Committee took into account
a range of critical factors.
In the context of the plan rules, the
Committee concluded that for all
option holders the final and fifth
tranche of the 2018 awards and the
third tranche of the 2020 awards would
vest at 84% of the maximum, with the
balance of 16% lapsing. The second
tranche of the 2021 option awards
would vest in full at 100% in line with
the annual vesting criteria.
Wider workforce
When setting the Executive Directors’
remuneration policy, the Committee
takes into account the pay and
conditions of employees more
generally and, at least once a year, is
given full details of the remuneration
policy across the Group, with any
changes highlighted. While the balance
of the elements of remuneration may
differ, there is a consistent overall
principle that all colleagues should be
paid competitively against the relevant
pay benchmark.
Continuing to support our employees
has been a priority this year, from both
a wellbeing and financial perspective.
In April 2022 a pay award was
implemented for all employees.
A standard 3% increase was applied
to employees within four of our career
bandings (excluding those on the Real
Living Wage who increased by 10.6%),
and a reduced 2% increase was
awarded to employees within the top
career bandings. All eligible employees
within the Company also received an
additional discretionary bonus payment
for FY 2021. As we moved towards the
winter months we were acutely aware
of the continued inflationary pressures
that society was facing, and we were
cognisant that our employees would
be experiencing the same pressure
of rising daily costs.
Therefore, a decision was made to
award a one-off discretionary bonus
of £500 to all employees within the
lower three career levels (C, D and E)
as we understood that employees
within these career levels were most
affected by the impact of the increase
in cost of living. In addition, as an
accredited Living Wage employer, we
are committed to ensuring we pay the
Living Wage as a minimum to our
employees. From May 2023 the Living
Wage is due to increase from £9.90
per hour to £10.90 per hour. To ensure
that our employees continue to be
supported during this difficult time, we
increased our entry-level hourly rate to
£10.90 per hour as of 1 November 2022.
Implementing this increase six months
early helped to show our commitment
to supporting our employees on
entry-level salaries during this
challenging time.
Executive changes
At the start of 2022 it was announced
that Alan Foy would step down from
the Board as CEO and he ceased to
be a Director on 1 March 2022. In line
with the remuneration policy at the
time, it was agreed that Alan Foy would
receive his current salary and benefits
up to 1 March 2022, his 2021 bonus
award, payment in lieu of notice and
any vested options due under the
Group’s Unapproved 2018 and 2021
Share Option awards. Alan Foy did
not receive any portion of 2022 bonus
award.
As announced on 13 October 2022,
Gavin Urwin stepped down from the
Board as CFO on 1 December 2022.
In line with the current Remuneration
Policy, Gavin Urwin will receive his
current salary and benefits to 31 March
2023 and the cash element of the 2022
bonus. The Committee concluded that
no bonus should be awarded in shares
due to this element being designed for
retention. LTIP’s that were awarded to
Gavin Urwin during 2022, the first year
of the scheme, were not accepted and
so were forfeited.
SMS Annual report and accounts 2022 101
Financial statements
Governance
Strategic report
Policy implementation
for 2023
Following careful consideration and
taking into account information from
the Company’s remuneration adviser,
the Committee decided not to increase
the base salaries for the CEO and CFO
for 2023.
The Committee have reviewed the
performance metrics and for the
2023 financial year the mix of measures
for the annual bonus scheme has been
updated to include an element within
the core objectives relating to the
operational battery sites. The
Committee felt it was important
to bring this element into the core
objectives to maintain focus
and delivery.
The 2023 Executive bonus objectives
reflect the following features, flexed
to be appropriate to each individual:
• core objectives – KPI’s of underlying
PBT, ILARR, pipeline targets across
the material business lines,
operational battery sites and health
and safety
• personal financial objectives –
examples include growth of pipeline
and appropriate long-term capital
strategy
• personal non-financial objectives
specific to individual roles
The LTIP will continue to be based on
SMS’s performance over three years
and subject to a two-year holding
period post-vesting. For 2023, the
grant level will be unchanged at 175%
of base salary for the CEO and 150%
of base salary for the CFO. It is again
proposed that the performance
measures should be pre-exceptional
EBITDA, TSR and ESG/H&S strategic
measures. The Committee retains
discretion to adjust annual bonus
payments and vested LTIP awards if
the formula-driven outturn does not
reflect the broader overall performance
of the business.
Advisers
PricewaterhouseCoopers (PwC)
provided advice to the Committee
on matters relating to Executive
remuneration, all-employee share
awards and proposed long-term
incentive awards. PwC remuneration
consultants are considered to be
independent of both the Board and
each of the Executive and Non-
executive Directors. Their advice is
considered to be objective and
independent. PwC is a member of the
Remuneration Consultants Group and
the voluntary code of conduct of that
body is designed to ensure objective
and independent advice is given to
remuneration committees.
The Committee operates according to
its terms of reference which have been
prepared to comply with relevant
statutory, regulatory and corporate
governance requirements and best
practice. During 2022 the terms of
reference were reviewed by the
Committee and updated to reflect
changes in corporate governance
requirements and best practice.
The revised terms of reference are
available for review on our website
at www.sms-plc.com.
The Committee appreciates the
support received from shareholders
to date on its executive remuneration
and governance approach and looks
forward to this continued support for
the resolution to approve the Annual
report on remuneration at the AGM
in May 2023.
The report has been prepared by the
Committee and approved by the Board
of Directors.
Jamie Richards
Chair of the Remuneration Committee
14 March 2023
Remuneration Committee Report continued
Annual statement from the Chair of the Remuneration Committee continued
102 SMS Annual report and accounts 2022
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.
Principles
Considerations within the Policy
Clarity: remuneration arrangements
should be transparent and promote
effective engagement with shareholders
and the workforce.
We clearly communicate our approach to remuneration in this report and in all
communications with shareholders, providing transparency over our rationale.
This also allows straightforward engagement with the wider workforce.
Simplicity: remuneration structures should
avoid complexity and their rationale and
operation should be easy to understand.
We have structured the Remuneration Policy to be as simple as possible, within the
confines of ensuring arrangements are in line with the business strategy, create a
robust link between pay and performance and are designed after consideration of
investor expectations.
Risk: remuneration arrangements should
ensure reputational and other risks from
excessive rewards, and behavioural risks
that can arise from target-based incentive
plans, are identified and mitigated.
We mitigate these risks through a carefully designed Policy which includes a balance
between financial and non-financial bonus metrics, incentives plans that are based on
long-term performance and the option for the Committee to exercise discretion if
doing so achieves a fairer outcome taking all stakeholders into account.
Predictability: the range of possible values
of rewards to individual directors and any
other limits or discretions should be
identified and explained at the time of
approving the policy.
We carefully consider the range of likely performance outcomes for incentive plans
when setting performance target ranges and at the time of assessment would use
discretion where necessary if the formulaic result were considered inappropriate.
Proportionality: the link between
individual awards, the delivery of strategy
and the long-term performance of the
Company should be clear. Outcomes
should not reward poor performance.
The opportunity under incentive plans is based on a proportion of salary with the
quantum selected to ensure an appropriate link between pay and performance.
The performance conditions applying to the incentives are aligned with the Company’s
strategy and are reviewed on an annual basis to ensure they continue to work
effectively.
There are provisions to override the formula-driven outcome of incentive plans
if necessary to ensure that there is not reward for poor performance and that fairness
is achieved for all parties.
Alignment to culture: incentive schemes
should drive behaviours consistent with
Company purpose, values and strategy.
The annual bonus and LTIP performance measures are based on both financial and
non-financial metrics aligned with all key aspects of strategy including long-term
sustainable shareholder value growth, maintaining a focus on our customers and the
quality of our service and ensuring adherence to wider ESG and H&S responsibilities.
Policy principles
Remuneration Committee Report continued
Directors’ Remuneration Policy (The Policy)
SMS Annual report and accounts 2022 103
Financial statements
Governance
Strategic report
Remuneration Committee Report continued
Directors’ Remuneration Policy (The Policy) continued
Objectives of
Remuneration Policy
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
interests. 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 strictly target-
based incentive plans; and
• aligned to our culture, such that they
drive behaviours consistent with our
core values.
Consideration of employment
conditions elsewhere in the Group
The Committee actively considers pay
structures across the wider Group
when setting policy for Executive
Directors to ensure that a consistent
approach to reward is adopted which
is in line with our values. There is a
particular focus in relation to any base
salary review. Overall, compared to
most employees, the Remuneration
Policy for Executive Directors is
weighted more to long-term share-
based incentives. This is to ensure
that the relatively higher pay levels
are justifiable internally and externally
to shareholders by a clear link between
the long-term value created for
shareholders and the remuneration
received by Executives.
Our reward framework across the
Group is based on a consistent set
of principles for all: that overall
remuneration should be competitive
when compared to similar roles in
other organisations. Colleague pay is
therefore determined using the same
principles as the pay for our Executive
Directors. All employees of the Group
are entitled to base salary and
benefits. The Group also operates a
pension plan for employees in line with
local market practice. Annual salary
reviews for other employees across
the Company are based on broadly
consistent principles, taking 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.
Decision-making process
The Committee is responsible for
the determination of the Directors’
Remuneration Policy and how it is
implemented. In addressing this
responsibility the Committee works
with management and external
advisers to develop proposals and
recommendations. The Committee
considers the source of information
presented to it, analyses the detail,
and ensures that independent
judgement is exercised when making
decisions. Information is independently
verified where there are conflicts of
interest, and no individual is present
when their remuneration is being
discussed.
Incentive plan discretions
The Committee will operate the annual
bonus plan and LTIP in accordance with
their respective rules. As part of the rules
the Committee holds certain discretions
which are required for an efficient and
fair operation and administration of
these plans and which are consistent with
standard market practice. Any use of the
discretions would, where relevant, be
explained in the Annual report on
remuneration and may, as appropriate,
be the subject of consultation with the
Company’s major shareholders.
Service contracts and policy
on payment for loss of office
It is the Company’s policy to require
twelve 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 it 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
legal fees for any departing Director
to the extent it considers appropriate.
104 SMS Annual report and accounts 2022
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’ LTIP and share options are
consistent with those applied to all LTIP
and option holders under the rules of
the schemes. In relation to the LTIP if an
employee leaves employment, or is on
notice to leave, on or before the vesting
date, the employee will forfeit their
award. 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.
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.
Period for Policy
The Policy came into effect at the date
of the 2022 AGM and will apply for a
period of three years. The Committee is
satisfied that the Remuneration Policy
is in the best interests of shareholders
and does not promote excessive
risk-taking. The Committee retains
discretion to make non-significant
changes to the Policy without reverting
to shareholders.
Share ownership guidelines
The Committee have introduced
a policy of encouraging Executive
Directors to acquire and retain
shares in the Company, with the
objective of further aligning their
long-term interests with those of other
shareholders. The CEO will be expected
to maintain a shareholding of 2 times
salary and the CFO will be expected
to maintain a shareholding of 1.5 times
salary while they are a Director of the
Company. Shares that count towards
achieving these guidelines include
shares beneficially owned by an
Executive Director or by a connected
person, as recognised by the Committee,
deferred bonus shares and share
options / LTIP awards which have
vested and so are no longer subject
to performance conditions but are
subject to post-vesting deferral
provisions. Executive Directors are
expected to build their shareholding
over a five-year period but are not
required to make personal share
purchases if awards do not vest through
failing to meet performance conditions,
and so a newly-appointed Director may
not reach the required level within the
period, depending on the Company’s
performance against target over the
period. In this situation, the Committee
will review the circumstances and agree
an appropriate forward plan. The
Committee retains the discretion to grant
dispensation from these requirements in
exceptional circumstances. After ceasing
employment Executive Directors
must retain a level of shareholding
for one year. There is no particular
requirement for Non-executive Directors
to hold shares but they are encouraged
to acquire a holding over time.
SMS Annual report and accounts 2022 105
Financial statements
Governance
Strategic report
Remuneration Committee Report continued
Directors’ Remuneration Policy (The Policy) continued
Executive Directors’ remuneration
The main components of the Policy for the year ended 31 December 2022, 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. Long-term incentive plan
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 most
qualified staff to deliver against our
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 the
role, and the experience and performance
of the individual Director; average workforce
salary adjustments within the Company;
and 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.
2023 application
Based on last year’s benchmarking of AIM50 companies and advice from our remuneration adviser, no inflationary increase
will be awarded to Executive Directors in 2023.
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 include car
allowance and private medical healthcare.
Other benefits may be introduced to
ensure benefits overall are competitive
and appropriate to the circumstances.
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.
Benefits are not conditional on
performance, but we believe they
enhance recruitment and retention
of talent and improve staff wellbeing.
106 SMS Annual report and accounts 2022
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.
Limitation:
Company contributions are based on
percentage of salary, ranging from the
statutory minimum to a maximum of
5% of salary.
Pension contributions are not
conditional on performance.
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 2022 the maximum opportunity was
equal to 150% of salary for the CEO and
130% of salary for the CFO, with a
maximum of 100% being delivered in
cash and the balance being deferred
into shares for a period of two years, and
the same award weighting being applied
to both elements.
The Committee applies discretion to the
final bonus payout, taking into account
performance against targets and
underlying performance of the Company.
Bonus may be subject to clawback or
malus being applied, if appropriate, in
the event of financial misstatement, error,
misconduct, reputational damage or
corporate failure, which has led to an
over-payment.
The Committee determines annual
metrics based on approved budgets
and priorities for the forthcoming year.
The annual bonus is based on three
weighted areas: core objectives,
personal financial objectives and
personal non-financial objectives.
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.
Targets are considered to be
commercially sensitive and will be
disclosed retrospectively following
completion of the relevant financial year.
2023 application
Core performance measures are the same for both the CEO and CFO and are aligned to the Company’s KPIs of underlying PBT,
ILARR, operational battery sites and health and safety. The financial element of the bonuses start to be earned for threshold
performance rising on a straight-line basis to the maximum for exceeding budget performance.
Personal financial performance measures will vary each year depending on business context and strategy. For 2023, the CEO’s
are to further grow our battery and meter asset pipeline, develop our sales pipeline and products in developing CaRe products
and increase our absolute share price performance. The CFO’s personal financial objectives for 2023 are set to ensure the
business has a clear long-term capital strategy for sound funding of its business growth and operations.
Personal non-financial performance measures focus on leadership, structure, team, culture and behaviour.
For 2023 the maximum opportunity is equal to 150% of salary for the CEO and 130% of salary for the CFO, with a maximum of 100%
being delivered in cash and the balance being deferred into shares for a period of two years, and the same award weighting being
applied to both elements.
SMS Annual report and accounts 2022 107
Financial statements
Governance
Strategic report
Variable – 5. Long-term incentive plan (LTIP)
Purpose and link to strategy
Operation
Link to performance
Incentivises and rewards Executives for
the delivery of longer-term strategic
objectives and substantial relative and
absolute increases in shareholder value.
LTIP awards may be granted each year in
the form of a conditional award of shares,
with vested awards released to
participants in tranches.
Annual awards of nil-cost options over plc
shares will be granted to participants.
Awards will be subject to a three-year
performance period.
Subject to the achievement of
performance targets, the options will then
vest in tranches after three, four and five
years subject to continued employment
until the relevant vesting date (75% on the
third anniversary of grant, 12.5% on the
fourth anniversary, and 12.5% on the
fifth anniversary).
The maximum award is 175% of salary
for CEO and 150% of salary for CFO.
The Remuneration Committee will have
customary discretion rights and the ability
to override formulaic outcomes in line with
corporate governance principles to
achieve fairness to all parties.
All awards will be satisfied within a
10% dilution limit within any rolling
ten-year period.
Targets are reviewed annually ahead
of each grant to ensure they are
aligned to the business strategy
and performance outlook.
The majority of the awards will be
based on financial performance
and shareholder return.
The Remuneration Committee retains
discretion in exceptional circumstances
to change performance measures and
targets and the weightings attached
to performance measures part-way
through a performance period if there
is a significant and material event
which causes the Remuneration
Committee to believe the original
measures, weightings and targets
are no longer appropriate.
Discretion may also be exercised
in cases where the Remuneration
Committee believe that the vesting
outcome is not a fair and accurate
reflection of business performance.
2023 application
2023 LTIP awards were approved in March 2023. Performance conditions are consistent with LTIPs that were previously awarded,
focusing on pre-exceptional EBITDA, TSR and ESG strategic metrics, each applied independently, and there will be a straight-line
sliding scale between points.
Remuneration Committee Report continued
Directors’ Remuneration Policy (The Policy) continued
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 a distinct annual
performance period.
The share options cannot be exercised for
a period of five years from the grant date,
other than in specific circumstances.
The Committee reviewed the metrics,
financial targets and where applicable
individual objectives prior to grant to
ensure they were aligned with the long-
term strategic goals. The Committee will
apply discretion if appropriate to achieve
fairness to all parties and will consider
carefully the outcome of formulaic
components.
The Committee determined market
capitalisation targets, financial
targets and individual objectives
to ensure they were aligned with
the corporate strategy.
2023 application
No further awards to be made under this plan as the plan has lapsed having reached the end of its 10-year award period
at the end of 2021.
108 SMS Annual report and accounts 2022
Remuneration Committee Report continued
Non-executive Directors’ remuneration
Non-executive Directors fees
Purpose and link to strategy
Operation
Link to performance
To attract and retain Non-executive
Directors with appropriate skills,
experience, independence and knowledge
of the Company and its business.
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.
None
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.
During 2022 the Executive Directors approved an increase to the Non-executive Director fees on 1 April 2022.
No increase to the annual fees of Non-executive Directors will be made in 2023.
SMS Annual report and accounts 2022 109
Financial statements
Governance
Strategic report
Remuneration Committee Report continued
Annual Report on remuneration
Directors’ remuneration emoluments for the financial year ended 31 December 2022:
Fees/
basic salary
£
Annual
bonus
£
Pension
contribution
£
Benefits
in kind
£
2022
Total
£
2021
Total
£
Executive
Tim Mortlock1
403,333
489,375
20,167
8,113
920,988
460,270
Gavin Urwin2
255,711
217,250
2,786
7,299
483,046
317,395
Gail Blain3
25,000
20,219
1,250
1,560
48,029
—
Alan Foy4
61,866
—
—
2,833
64,699
694,142
David Thompson5
—
—
—
—
—
59,855
Non-executive
Miriam Greenwood
113,827
—
—
—
113,827
96,390
Graeme Bissett
64,227
—
—
—
64,227
45,900
Ruth Leak
52,725
—
—
—
52,725
45,900
Jamie Richards
52,725
—
—
—
52,725
45,900
Total
1,029,414
726,844
24,203
19,805
1,800,266
1,765,752
1 Tim Mortlock will receive £163,125 of his bonus in deferred shares that must be held for a period of two years.
2 Gavin Urwin’s remuneration for 2022 is up to the date of his resignation as a Director, which was on 1 December 2022. Gavin Urwin’s bonus has been
pro-rated to reflect his date of resignation.
3 Gail Blain’s remuneration for 2022 is from the date of her appointment as a Director, which was on 1 December 2022. Gail Blain’s bonus has been pro-rated
to reflect her date of appointment.
4 Alan Foy’s remuneration for 2022 is up to the date of his resignation as a Director, which was on 1 March 2022.
5 David Thompson resigned on 31 March 2021.
With the exception of the bonus, which is discretionary as detailed in the Remuneration Policy on page 107, all other elements
of Directors’ remuneration are fixed.
On 1 March 2022 Tim Mortlock was appointed as a Chief Executive Officer. Alan Foy resigned as a Director of the Company
with effect from 1 March 2022. This Report reflects their remuneration and rewards from the date of their respective
appointment/resignation.
On 1 December 2022 Gail Blain was appointed as a Director and Chief Financial Officer. Gavin Urwin resigned as a Director
of the Company with effect from 1 December 2022. This Report reflects their remuneration and rewards from the date of
their respective appointment/resignation.
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. Gavin Urwin was awarded a bonus of £217,250 for his performance in 2022 up to the date of his resignation
as a Director. No 2022 bonus was awarded to Alan Foy.
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 remuneration was reviewed in 2022
in line with market trends and as a result, the CEO salary increased to £435,000 and the CFO salary increased to £300,000.
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 2022 – with the exception of Alan Foy, Gavin Urwin and Gail Blain, whose figures are disclosed
from the dates of their respective appointment/resignation as noted above.
110 SMS Annual report and accounts 2022
Bonus
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 (PBT), and ILARR for the purposes of awarding the 2022 annual bonuses allocated to the Executive Directors.
Threshold
£m
Maximum
£m
Actual
£m
Actual payout (Maximum payout)
Underlying PBT
20.9
24.2
24.5
CEO 25% (25%), CFO 25% (25%)
ILARR
93.0
99.5
97.1
CEO 15% (25%), CFO 15% (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.
Actual payout (Maximum payout)
Operational objectives
CEO 20% (35%), CFO 29% (35%)
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.
Actual payout (Maximum payout)
Individual strategic objectives
CEO 15% (15%), CFO 10% (15%)
The Committee may use discretion to adjust payments where necessary.
Pension contributions
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 Executive Officer and Chief Financial Officer.
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 Financial Officer. The Executive Directors also currently
participate in the Company’s life assurance scheme.
Directors’ interests
The Directors who held office at 31 December 2022 had the following interests in the shares of the Company:
Ordinary shares
2022
of £0.01 each
2021
of £0.01 each
Executive
Tim Mortlock
35,260
7,485
Gavin Urwin
–
2,222
Alan Foy1
–
5,953,201
Non-executive
Miriam Greenwood
29,031
25,461
Graeme Bissett
22,911
18,093
Jamie Richards
5,254
3,909
Ruth Leak
2,825
–
95,281
6,010,371
1 At 31 December 2021 this included 900,000 ordinary shares held by The Metis Trust, of which Alan Foy is a trustee but not a beneficiary and 372,350
ordinary shares held by Metis Investments Ltd, of which Alan Foy is a Director.
SMS Annual report and accounts 2022 111
Financial statements
Governance
Strategic report
Directors’ LTIP awards and share options
Aggregate emoluments disclosed on page 110 do not include any amounts for the value of LTIP awards or options to acquire
ordinary shares in the Company granted to or held by the Directors.
Executive Directors’ awards outstanding under the LTIP are set out in the table below. Awards are currently structured
as conditional awards of shares, with no exercise price. Awards are granted as nil-cost options, and are exercisable
and released to participants in tranches between three and ten years from grant.
Date of LTIP
grant/award
Number
of shares
awarded
Market price of
grant/award
Face
value
Vesting
date
Remaining
unexercised at
31 December 2022
Executive
Tim Mortlock
19/05/22
90,733
847p
£768,508
18/05/25
90,733
Details of options for Directors who served during the year are as follows:
Type
Number
of shares
under option
Exercise
price
Date of
grant
Earliest
date
exercisable
Executive
Tim Mortlock1
Unapproved
133,250
350.0p
12/11/14
12/11/19
Unapproved
333,333
700.0p
13/07/18
01/01/23
Unapproved
250,000
705.4p
10/02/21
01/01/26
Gail Blain2
Unapproved
50,000
529.0p
26/09/16
26/09/21
Unapproved
50,000
700.0p
13/07/18
01/01/23
Unapproved
70,000
705.4p
10/02/21
01/01/26
1 Tim Mortlock holds 133,250 share options as part of the 2014 Share Option Plan and 309,333 share options as part of the 2018 Share Option Plan,
these share options are fully vested and to date have not been exercised.
2 Gail Blain holds 50,000 share options as part of the 2016 Share Option Plan, and 46,400 share options as part of the 2018 Share Option Plan,
these share options are fully vested and to date have not been exercised.
The share price at 31 December 2022 was £7.82. The weighted average share price at the date of exercise of options
exercised during the year ended 31 December 2022 was £8.02 (2021: £8.36).
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.
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 market capitalisation target will subsequently automatically vest in future years
if the future-year market capitalisation target is met 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 vesting outcome of the outstanding 2018 and 2021 options held by the Executive Directors was assessed by the
Committee as described on page 101. The Committee concluded that the final tranche of the 2018 award would vest at 84%
of the maximum, with the balance of 16% lapsing. The second tranche of the 2021 option awards would vest in full at 100% in
line with the annual vesting criteria. The earliest exercisable date is 1 January 2023 for the 2018 options and 1 January 2026
for the 2021 options.
Further details of LTIPs and options granted by the Company at 31 December 2022 are given in note 28 to the financial
statements.
Remuneration Committee Report continued
Annual Report on remuneration continued
112 SMS Annual report and accounts 2022
Directors’ Report
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 construction and operation
of grid-scale battery energy storage
systems, 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
(‘CaRe’) assets.
Subsidiaries of the Company are listed
on page 173.
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 75) and the Corporate governance
report (found on pages 76 to 116) 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/
investors/aim-rule-26.
Branches outside the UK
One subsidiary of the Group operates
outside the UK in the Republic of Ireland.
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 2022,
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.
Any related-party interests applicable
to the Directors are shown in note 26
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
wish to continue, that they offer
themselves for election.
The Company has voluntarily
implemented a policy where each
Director stands for re-election at
every AGM.
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.
Directors’ 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 which could be
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
In line with the Group’s dividend policy,
SMS currently intends to pay a 30.25p
per share dividend in respect of FY 2022
(a 10% increase on the 27.5p per share
dividend issued in respect of FY 2021),
with the intention of continuing to
annually increase this by 10% for
each of the financial years FY 2023 and
FY 2024. The FY 2022 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 2023 and July 2023 respectively.
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 2022.
SMS Annual report and accounts 2022 113
Financial statements
Governance
Strategic report
Directors’ Report continued
The Board will review this regularly,
with shareholder value in mind and
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.
Further details are provided in note 8
to the financial statements regarding
the level of distributable reserves in the
parent company at 31 December 2022.
Employees
Employee involvement and
communication is paramount to the
Company’s success. 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, with a
condensed employee version of the
Annual report and accounts made
available to all staff.
The marketing team manages internal
communications, maintaining an
informative network throughout our
national organisation which ensures
our people remain up to date on all
aspects of the SMS journey.
Communication tools include quarterly
newsletters, podcasts, employee
resource groups, videos, emails and
various forms of social media, providing
employees with industry insights and
key information on Group activity such
such, SMS is a ‘Disability-Confident’,
‘Mindful’ and ‘Accredited Living Wage
and Living Hours’ employer and is also
a proud signatory of the Race at Work
Charter as well as the Pregnancy Loss
Pledge via the Miscarriage Association.
External auditor
As detailed on page 95, 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 2022 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 23 to the financial
statements contained in this Annual
report and accounts 2022, which are
incorporated by reference into this
Directors’ report.
as hybrid working, wellbeing initiatives,
charitable donations and progress
towards our net zero target.
Business updates are currently
delivered by video or email by the
executive leadership team.
The Group seeks to engage with
employees on matters affecting them,
through channels including employee
surveys (internal and external), an
employee forum, written feedback and
face-to-face sessions. The Stakeholder
engagement section on pages 38 to 41
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 51 to 55.
The involvement and support of
employees in maximising the Company’s
performance is encouraged through its
Share Incentive Plan, which is open to
all qualifying employees at all levels.
As 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 on page 115. 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 28
to the financial statements, which
is incorporated by reference into
this Report.
The Group operates an equal
opportunities, diversity, and inclusion
policy, supported by face-to-face and
eLearning, detailed further on page 53.
It is the policy of the Group to support
the employment of people with
protected characteristics and to
ensure that recruitment, training,
career development and promotion
opportunities are available to all. As
FY 2022 dividend provisional timetable:
Instalment Ex-dividend date
Record date
Payment date
Dividend per
share
1
06 October 2022
07 October 2022
28 October 2022
7.5625p
2
05 January 2023
06 January 2023
26 January 2023
7.5625p
3
06 April 2023
11 April 2023
27 April 2023
7.5625p
4
06 July 2023
07 July 2023
27 July 2023
7.5625p
114 SMS Annual report and accounts 2022
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 (for the period
from the balance sheet date to
31 December 2024). 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 129 to 130, which is
incorporated by reference here.
Political contributions
No political contributions were made
during the year (2021: £nil).
Post balance sheet events
There are no post balance sheet
events requiring disclosure.
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.
Share capital
The Company’s issued share capital
comprises ordinary shares of £0.01 each
which are listed on AIM, a market
operated by the London Stock Exchange
(AIM: SMS.L). As at 31 December 2022,
the issued share capital of the Company
was £1,333,970 comprising 133,397,009
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 27 to the
financial statements. All the information
detailed in note 27 forms part of this
Directors’ report and is incorporated
into it by reference.
The Company was authorised at the
AGM in May 2022 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 £444,546. 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 2022 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.
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.
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’).
During the year, the Company
purchased 48,900 of its own shares
(2021: 34,191) from the market for the
purpose of satisfying its Matching Share
obligations under the SIP. The nominal
value of the shares purchased was
£489 (2021: £342) and the aggregate
amount of consideration paid was
£0.4m (2021: £0.3m).
Approved by the Board of Directors
on 14 March 2023 and signed on its
behalf below.
On behalf of the Board
Gail Blain
Chief Financial Officer
14 March 2023
Substantial shareholdings
On 1 February 2023, 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
Number
% held
Liontrust Investment Management LLP
20,777,813
15.57%
PrimeStone Capital LLP
13,050,265
9.78%
Fidelity Investments
6,295,464
4.72%
Steve Timoney
5,344,344
4.01%
Bank Julius Baer & Co
5,053,201
3.79%
Hargreave Hale Ltd
4,250,000
3.19%
Canaccord Genuity Wealth Management (CI)
3,743,754
2.81%
abrdn Investment Management Ltd
3,687,021
2.76%
Soros Fund Management LLC
3,662,730
2.75%
Aegon Asset Management
3,505,446
2.63%
Rathbones
3,269,054
2.45%
SMS Annual report and accounts 2022 115
Financial statements
Governance
Strategic report
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 UK-adopted
international accounting standards
(‘IFRSs’), 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, 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 UK-
adopted international accounting
standards and, for the Company
financial statements, state whether
applicable UK accounting standards
including FRS 102 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.
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 14 March 2023 and signed on its
behalf below.
By order of the Board
Craig McGinn
Company Secretary
and General Counsel
14 March 2023
Statement of Directors’ Responsibilities
in the preparation of financial statements
116 SMS Annual report and accounts 2022
Financial
statements
Independent auditor’s report
118
Consolidated Income Statement
125
Consolidated Statement
of Comprehensive Income
125
Consolidated Statement
of Financial Position
126
Consolidated Statement
of Changes in Equity
127
Consolidated Statement
of Cash Flows
128
Accounting Policies
129
Notes to the Financial Statements
145
Parent Company Balance Sheet
176
Parent Company Statement
of Changes in Equity
177
Notes to the Parent Company
Financial Statements
178
SMS Annual report and accounts 2022 117
Financial statements
Governance
Strategic report
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 2022 and of the group’s profit for the year then ended;
• the group financial statements have been properly prepared in accordance with UK adopted international
accounting standards;
• 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 2022 which comprise:
Group
Parent company
Consolidated balance sheet as at 31 December 2022
Balance sheet as at 31 December 2022
Consolidated income statement for the year then ended
31 December 2022
Statement of changes in equity for the year then ended
31 December 2022
Consolidated statement of comprehensive income for the
year then ended 31 December 2022
Statement of cash flows for the year then ended
31 December 2022
Consolidated statement of changes in equity for the year
then ended 31 December 2022
Related notes 1 to 8 to the financial statements including
a summary of significant accounting policies
Consolidated statement of cash flows for the year then
ended 31 December 2022
Related notes 1 to 32 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 UK adopted international accounting standards. 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,
FRS 101 “Reduced Disclosure Framework” (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 and parent company 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.
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 forecasts and covenant calculations for the
going concern period ending 31 December 2024. 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. We have reviewed the facility agreement and confirmed compliance with covenants at the year end and
that the model show no breach throughout the going concern period.
118 SMS Annual report and accounts 2022
• We also verified credit facilities available to the group to signed agreements with lenders. The group has access to
committed bank facilities of £420m, which is £65m drawn down as at 31 December 2022. The full amount of these facilities
matures in 2025.
• EY performed reverse stress testing which demonstrated that if there were no new meter installations from
December 2022, SMS plc could still continue to invest in their planned grid scale capital expenditure. This is not deemed
a plausible scenario.
• 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.
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 for a period of when the financial statements are authorised for issue until 31 December 2024.
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 twelve 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),
99% of revenue and 97% 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 £1.1m which represents 5% of the group’s profit before tax (PBT) before
exceptional items
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,
the potential impact of climate change, 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 31 reporting components of the Group,
we selected 16 components covering entities within the UK and Ireland, which represent the principal business units
within the Group.
Of the 16 components selected, we performed an audit of the complete financial information of 4 components (“full scope
components”) which were selected based on their size or risk characteristics. For the remaining 12 components (“specific
scope components”), we performed audit procedures on specific accounts within that component that we considered had
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% (2021: 100%) of the Group’s Profit
before tax before exceptional items, 99% (2021: 100%) of the Group’s Revenue and 97% (2021: 98%) of the Group’s Total
assets. For the current year, the full scope components contributed 92% (2021: 92%) of the Group’s Profit before tax before
exceptional items used to calculate materiality, 89% (2021: 94%) of the Group’s Revenue and 83% (2021: 94%) of the Group’s
Total assets. The specific scope component contributed 8% (2021: 8%) of the Group’s Profit before tax before exceptional
items, 10% (2021: 6%) of the Group’s Revenue and 14% (2021: 4%) 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.
SMS Annual report and accounts 2022 119
Financial statements
Governance
Strategic report
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 continued
Tailoring the scope continued
The remaining 12 components that together represent 0% of the Group’s Profit before tax 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.
Group’s Profit before tax before
exceptional items
Revenue
Total assets
Full scope
components 92%
Specific scope
components 8%
Other
procedures
0%
Full scope
components 89%
Specific scope
components 10%
Other
procedures
1%
Full scope
components 83%
Specific scope
components 14%
Other
procedures
3%
Changes from the prior year
The grid scale battery entities – East Anglia Grid Storage One Limited; Newtonwood Energy Storage Limited; Brook Farm
Energy Limited; Brentwood Energy Storage Limited; ADD Renewables No.3 Limited; and Berkley Battery Storage Limited
have been brought into specific scope in the current year.
Involvement with component teams
All audit work performed for the purposes of the audit was undertaken by the Group audit team.
Climate change
There has been increasing interest from stakeholders as to how climate change will impact the group. Given the nature of
the business management does not consider there to be a material impact from climate change. These considerations are
explained on page 95 in the Audit Committee Report, which forms part of the “Other information,” rather than the audited
financial statements. Our procedures on these disclosures therefore consisted solely of considering whether they are
materially inconsistent with the financial statements or our knowledge obtained in the course of the audit or otherwise
appear to be materially misstated.
As explained in the Basis of Preparation note, climate change risks are still developing, and are interdependent upon
each other, and consequently financial statements cannot capture all possible future outcomes as these are not yet
known. The degree of certainty of these changes may also mean that they cannot be taken into account when
determining asset and liability valuations and the timing of future cash flows under the requirements of UK adopted
international accounting standards.
Based on our work we have not identified the impact of climate change on the financial statements to be a key audit matter
or to impact a key audit matter.
120 SMS Annual report and accounts 2022
Key audit matters
Key audit matters are those matters that, in our professional judgment, 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.
Risk
Our response to the risk
Key observations communicated
to the Audit Committee
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 (£430m
value of risk, PY comparative
£367m).
Refer to the Audit Committee
Report (page 94); Accounting
policies (page 131); 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 which indicated
that there remained significant
headroom in relation to the
traditional meter portfolio.
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 31 December
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.
We obtained management’s impairment assessment which
concluded that there are impairment indicators present due to the
declining nature of the traditional meter portfolio.
We identified controls designed by management to determine the
appropriateness of the assumptions included within the impairment
model.
EY reviewed and challenged management’s accounting paper
assessing if there are impairment indicators in accordance with
IAS36 for each category of meters.
We have performed procedures to independently identify potential
impairment indicators including reviewing publicly available information.
Management has concluded that there remains no significant risk of
impairment with regards to the first-generated SMETS1 smart meter,
as a result of the required Enrolment & Adoption process into the DCC,
which has seen SMETS1 meters removed from the wall. This process is
now expected to continue through to the end of 2023 following an
extension issued by BEIS. It’s anticipated that the removal rate will
reduce significantly over this period given that ~79% of SMS’ SMETS1
meters have now enrolled and adopted. We therefore concluded that
management’s assessment was reasonable.
There were no indicators or impairment or matters of consideration for
SMETS2 or I&C meters.
Consistent with management’s assessment, we concur that there
were impairment indicators in relation to the traditional meter
portfolio given the smart meter roll out which results in traditional
meters being removed from the wall. EY have assessed and
challenged management’s impairment model to corroborate
management’s conclusion that no impairment is required. This
included challenging the key assumptions:
• The profile of removal of meters from the wall;
• The recoverability and issuance of termination income for the
meters remaining on the wall;
• The expected churn in customers between energy suppliers
determining the termination income earned;
• The expected increase in annual rental income in line with RPI as
defined in the contract
• The discount rate applied in order to determine the net present
value of future cashflows.
• EY have tested the integrity of the underlying data for the
customer churn and termination income assumptions.
We have performed sensitivity testing of the key assumptions.
We have reviewed the disclosures made around the judgements
management have taken in assessing the indicators of impairment
within the meter portfolio.
The group team performed full scope audit procedures over this
risk area, which covered 100% of the risk amount.
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.
SMS Annual report and accounts 2022 121
Financial statements
Governance
Strategic report
Independent auditor’s report
to the Members of Smart Metering Systems plc continued
Key audit matters continued
Risk
Our response to the risk
Key observations communicated
to the Audit Committee
Appropriateness of
capitalisation of overheads
and other expenses within
the total of costs capitalised
within meter assets (£430m
value of total meter assets,
PY comparative £367m)
Refer to Audit Committee
Report (page 94); Accounting
policies (page 131) and note 11
in the Consolidated Financial
Statements.
As at 31 December 2022,
the group carried total meter
assets amounting to £430m
(2021: £367m). This includes
internal operational costs
that have been capitalised
in the current year.
A significant proportion of
the group’s smart meters
are fitted by its in-house
engineering team. 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 are capitalised
in line with IAS 16.
The significant risk relates
to 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.
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;
• Testing of the time recording data utilised to determine
the proportion of engineers’ time spent installing;
• Agreement of the costs to the audited trial balance; and
• Testing of categorisation of 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.
• Benchmarking the average installation cost capitalised
to contracted third party installation costs to assess
the reasonableness of the amount capitalised.
• Reviewing the subsequent depreciation applied to the capitalised
costs and their presentation within the financial statements.
• We performed full and specific scope audit procedures over
this risk area, which covered 100% of the risk amount.
Based on the results of our
audit procedures, we consider
the amounts capitalised for
meters installed by in-house
engineers to be appropriate.
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 the 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 £1.1million (2021: £0.8 million), which is 5% (2021: 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.
We determined materiality for the Parent Company to be £8.6million (2021: £9.3 million), which is 2% (2021: 2%) of equity.
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% (2021: 75%) of our planning materiality, namely £0.6m (2021: £0.6m).
122 SMS Annual report and accounts 2022
We have set performance materiality at this percentage due to our expectation of the 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 £0.4 million (2021: £0.1 million to £0.4 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 £0.06m
(2021: £0.04m), 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 1 to 118, 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. 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 this gives rise to 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.
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 statements 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 116, 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.
SMS Annual report and accounts 2022 123
Financial statements
Governance
Strategic report
Independent auditor’s report
to the Members of Smart Metering Systems plc continued
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 parent
company and determined that the most significant are those that relate to the reporting framework (IFRS, FRS 102,
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 directors, 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;
• 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 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.
Paul Copland (Senior statutory auditor)
for and on behalf of Ernst & Young LLP, Statutory Auditor
Edinburgh
14h March 2023
124 SMS Annual report and accounts 2022
Notes
2022
Before
exceptional
items
£’000
2022
Exceptional
items1
£’000
2022
Total
£’000
2021
Before
exceptional
items
£’000
2021
Exceptional
items
£’000
2021
Total
£’000
Revenue
2
135,520
–
135,520
108,480
–
108,480
Cost of sales
3
(65,498)
–
(65,498)
(48,316)
(829)
(49,145)
Gross profit
70,022
–
70,022
60,164
(829)
59,335
Administrative expenses
3
(45,222)
(6,646)
(51,868)
(41,866)
(5,649)
(47,515)
Other operating income
3
1,936
–
1,936
1,696
–
1,696
Profit from operations
3
26,736
(6,646)
20,090
19,994
(6,478)
13,516
Share of loss of associate
12
(186)
–
(186)
–
–
–
Finance costs
5
(4,273)
–
(4,273)
(3,488)
(1,742)
(5,230)
Finance income
5
324
–
324
7
–
7
Profit before taxation
22,601
(6,646)
15,955
16,513
(8,220)
8,293
Taxation
6
(2,557)
1,473
(1,084)
(6,479)
1,978
(4,501)
Profit for the year attributable
to owners of the parent
20,044
(5,173)
14,871
10,034
(6,242)
3,792
1 Refer to note 3 for details of exceptional items.
The profit from operations arises from the Group’s continuing operations.
Earnings per share attributable to owners of the parent during the year:
Notes
2022
2021
Basic earnings per share (pence)
7
11.16
3.20
Diluted earnings per share (pence)
7
11.11
3.19
Consolidated Income Statement
For the year ended 31 December 2022
2022
Before
exceptional
items
£’000
2022
Exceptional
items
£’000
2022
Total
£’000
2021
Before
exceptional
items
£’000
2021
Exceptional
items
£’000
2021
Total
£’000
Profit for the year
20,044
(5,173)
14,871
10,034
(6,242)
3,792
Other comprehensive income1
Exchange differences on translation
of foreign operations
9
–
9
(46)
–
(46)
Other comprehensive income
for the year, net of tax
9
–
9
(46)
–
(46)
Total comprehensive income
for the year attributable to owners
of the parent
20,053
(5,173)
14,880
9,988
(6,242)
3,746
1 May be reclassified to profit or loss.
Consolidated Statement of Comprehensive Income
For the year ended 31 December 2022
SMS Annual report and accounts 2022 125
Financial statements
Governance
Strategic report
Consolidated Statement of Financial Position
As at 31 December 2022
Notes
2022
£’000
2021
£’000
Assets
Non-current assets
Intangible assets
9, 10
25,832
25,463
Property, plant and equipment
11
533,240
415,901
Investments
40
75
Investment in associate
12
1,940
–
Other assets
–
1,651
Trade and other receivables
14
12,347
–
Total non-current assets
573,399
443,090
Current assets
Inventories
13
37,438
22,980
Other assets
–
550
Trade and other receivables
14
52,935
47,631
Cash and cash equivalents
15
32,770
117,687
Cash and cash equivalents – restricted
15
307
1,299
Total current assets
123,450
190,147
Assets held for sale
16
513
–
Total assets
697,362
633,237
Liabilities
Current liabilities
Trade and other payables
17
69,378
56,489
Bank loans and overdrafts
18
591
–
Lease liabilities
19
885
999
Other liabilities
21
1,388
638
Total current liabilities
72,242
58,126
Non-current liabilities
Bank loans
18
63,349
–
Lease liabilities
19
11,476
7,574
Provisions
20
2,033
798
Other liabilities
21
1,280
750
Deferred tax liabilities
22
13,496
12,199
Total non-current liabilities
91,634
21,321
Total liabilities
163,876
79,447
Net assets
533,486
553,790
Equity
Share capital
27
1,334
1,333
Share premium
332,332
332,048
Other reserve
29
9,562
9,562
Own share reserve
27
(955)
(825)
Foreign currency translation reserve
(36)
(45)
Retained earnings
191,249
211,717
Total equity attributable to owners of the parent
533,486
553,790
The financial statements on pages 125 to 175 were approved and authorised for issue by the Board of Directors
and signed on its behalf by:
Gail Blain
Director
14 March 2023
Company registration number
SC367563
126 SMS Annual report and accounts 2022
Consolidated Statement of Changes in Equity
For the year ended 31 December 2022
Attributable to the owners of the parent company:
Share
capital
£’000
Share
premium
£’000
Other
reserve
£’000
Own share
reserve
£’000
Foreign
currency
translation
reserve
£’000
Retained
earnings
£’000
Total
£’000
As at 1 January 2021
1,129
160,471
9,562
(749)
1
236,028
406,442
Total profit for the year
–
–
–
–
–
3,792
3,792
Total other comprehensive
income for the year
–
–
–
–
(46)
–
(46)
Transactions with owners in their capacity
as owners
Dividends (note 8)
–
–
–
–
–
(29,060)
(29,060)
Shares issued (note 27)
204
171,577
–
–
–
–
171,781
Movement in own shares (note 27)
–
–
–
(76)
–
(203)
(279)
Share-based payments (note 28)
–
–
–
–
–
841
841
Income tax effect of share options
–
–
–
–
–
319
319
As at 31 December 2021
1,333
332,048
9,562
(825)
(45)
211,717
553,790
Total profit for the year
–
–
–
–
–
14,871
14,871
Total other comprehensive income
for the year
–
–
–
–
9
–
9
Transactions with owners in their capacity
as owners
Dividends (note 8)
–
–
–
–
–
(37,592)
(37,592)
Shares issued (note 27)
1
284
–
–
–
–
285
Movement in own shares (note 27)
–
–
–
(130)
–
(265)
(395)
Share-based payments (note 28)
–
–
–
–
–
2,611
2,611
Income tax effect of share options
–
–
–
–
–
(93)
(93)
As at 31 December 2022
1,334
332,332
9,562
(955)
(36)
191,249
533,486
See notes 27 and 29 for details of the Own share reserve and Other reserve.
SMS Annual report and accounts 2022 127
Financial statements
Governance
Strategic report
Consolidated Statement of Cash Flows
For the year ended 31 December 2022
2022
£’000
2021
(restated)
£’000
Operating activities
Profit before taxation
15,955
8,293
Share of loss of associate
186
–
Finance costs
4,273
3,488
Finance income
(324)
(7)
Foreign exchange loss
–
29
Exceptional items: other1
5,716
7,288
Depreciation
32,876
28,712
Amortisation of intangibles
4,152
4,060
Share-based payment expense
2,612
841
RDEC income
(280)
(489)
Loss on disposal of property, plant and equipment
2,937
2,457
Movement in inventories
(12,481)
3,359
Movement in trade and other receivables
(5,369)
(7,671)
Movement in trade and other payables
13,009
11,078
Movement in provisions
(5)
–
Cash generated from operations
63,257
61,438
Income tax received
568
403
Net cash generated from operations
63,825
61,841
Investing activities
Payments for asset acquisitions
(14,627)
(4,749)
Payment for acquisition of new business, net of cash acquired
(1,346)
(8,433)
Payment for acquisition of associate
(2,126)
–
Payments to acquire property, plant and equipment
(143,399)
(108,214)
Payments on account to acquire grid-scale battery assets
(12,347)
–
Proceeds on disposal of property, plant and equipment
3,131
2,508
Payments to acquire intangible assets
(2,172)
(2,831)
Finance income received
324
7
Net cash used in investing activities
(172,562)
(121,712)
Financing activities
New borrowings
65,000
53,250
Borrowings repaid
–
(53,250)
Principal elements of lease payments
(1,500)
(1,247)
Finance costs paid
(2,975)
(4,200)
Net proceeds from share issue
285
171,781
Purchase of own shares
(395)
(279)
Dividends paid
(37,592)
(29,060)
Net cash generated from financing activities
22,823
136,995
Net increase/(decrease) in cash and cash equivalents
(85,914)
77,124
Exchange (gain)/loss on cash and cash equivalents
5
(1)
Cash and cash equivalents at the beginning of the financial year
118,986
41,863
Cash and cash equivalents at the end of the financial year (note 15)2
33,077
118,986
1 Other exceptional items comprise £5,716,000 for losses on our meter portfolio. In 2021, non-cash exceptional items included £5,546,000 for losses
on our meter portfolio and the £1,742,000 exceptional finance cost.
2 Cash and cash equivalents includes restricted cash following an IFRIC agenda decision in March 2022. Amounts shown for 2021 have been restated
on a comparable basis.
Cash and cash equivalents comprise
2022
£’000
2021
£’000
Cash and cash equivalents
32,770
117,687
Cash and cash equivalents – restricted cash
307
1,299
Total cash and cash equivalents
33,077
118,986
128 SMS Annual report and accounts 2022
The significant accounting policies adopted in the preparation of these consolidated financial statements are set out below.
These policies have been consistently applied to all the years presented, unless otherwise stated. The consolidated financial
statements of the Group for the year ended 31 December 2022 were approved and authorised for issue in accordance with a
resolution of the Directors on 14 March 2023. Smart Metering Systems plc (SMS) is a public limited company limited by shares
and incorporated in Scotland, with its registered office at 2nd Floor, 48 St. Vincent Street, Glasgow G2 5TS. The Company’s
ordinary shares are traded on AIM.
Basis of preparation
The consolidated financial statements have been prepared in accordance with UK-adopted international accounting standards.
The consolidated financial statements have been prepared on a historical cost basis, modified by the revaluation of certain
financial assets and financial liabilities that have been measured at fair value.
The consolidated financial statements are presented in British Pounds Sterling (£), which is Smart Metering Systems plc’s
functional and presentation currency, and all values are rounded to the nearest thousand (£’000) except where otherwise indicated.
Following an IFRIC agenda decision in March 2022 cash and cash equivalents now include restricted cash. Amounts shown
for 2021 have been restated on a comparable basis.
In preparing the consolidated financial statements management has considered the impact of climate change, particularly
in the context of the disclosures included in the Strategic report and the Group’s net-zero carbon target. Our net-zero plans
are to electrify our vehicle fleet and carry out sustainability upgrades to our building estate. The fleet will be replaced at the
end of the useful life. These considerations did not have a material impact on the financial reporting judgements and
estimates, consistent with the assessment that climate change is not expected to have a significant impact on the Group’s
going concern assessment to December 2024. Qualitative explorations of potential areas of concern, including an evaluation
of climate exposure on our physical assets such as offices, warehouses and vehicles, has been carried out and we have
identified areas of potential climate-related risk, such as extreme weather events which could affect our physical locations
and road-based employees. Overall, the risk of climate-related change on the Group is considered low.
Going concern
Management prepares budgets and forecasts on a five-year forward-looking basis. These forecasts cover operational
cash flows and investment capital expenditure and are prepared based on management’s estimation of installation run
rates through the UK smart meter rollout. The Directors have performed their assessment of the entity’s ability to continue
as a going concern, from the date of issue of these financial statements to 31 December 2024.
Management has modelled several different meter installation and grid-scale battery storage scenarios, including a
downside scenario which assumed a reduced rollout of new meter installations over the five-year period and delayed the
energisation of grid-scale battery storage sites. The scenario proved that the business would still have sufficient cash flow
to continue to operate, banking covenants would remain satisfied with adequate headroom, and adequate cash would be
available to cover liabilities and operating costs. This modelling provides confidence to management that, even in adverse
circumstances, the business will still have sufficient resources to continue to operate.
In September 2021, the Group completed the refinancing of its revolving credit facility in order to support ongoing
investment in its established carbon reduction (‘CaRe’) assets. The total available funding under the new loan facility
is £420m and the maturity date is December 2025. In October 2021, the Group completed a successful equity placing,
raising proceeds of c.£175m. These proceeds were used to make a voluntary prepayment under the Group’s refinanced
loan facility of the full outstanding principal of c.£53m. At 31 December 2022, the Group had a drawn-down amount of
£65m (31 December 2021: £nil).
The Group was compliant with all its debt covenants at 31 December 2022. The financial covenants attached to the facility
are that EBITDA should be no less than 4.00x interest and net debt should be no more than 4.75x EBITDA. At 31 December 2022
these stood at 18.84x and 0.45x respectively, demonstrating significant headroom. The Group does not expect to breach
these covenants in the period from the date of release of these financial statements to 31 December 2024, being the period
for the going concern assessment.
The Group balance sheet shows consolidated net assets of £533.5m (31 December 2021: £553.8m), of which £429.7m
(31 December 2021: £366.7m) relates to revenue-generating meter and data assets. The liquidity of the Group thus
remains strong and continues to provide the financial flexibility required to support the Group’s long-term growth prospects.
With significant coverage provided by existing long-term, inflation-linked and recurring cash flows, the Group remains
committed to its enhanced dividend policy. It proposes a 30.25p per share annualised dividend in respect of FY 2022.
The first of four cash instalments, a total of £10.1m, was paid in October 2022.
Accounting Policies
SMS Annual report and accounts 2022 129
Financial statements
Governance
Strategic report
Going concern continued
Based on the current cash flow projections and facilities in place and having given consideration to various outcomes
of future performance and forecast capital expenditure, including extreme downside scenarios, the Directors consider
it appropriate to continue to prepare the financial statements on a going concern basis and are of the view that there
are no material uncertainties regarding the Group’s going concern status.
Basis of consolidation
The consolidated accounts of the Group include the assets, liabilities and results of the Company and subsidiary
undertakings in which Smart Metering Systems plc has a controlling interest. Control is achieved when the Group is exposed,
or has rights, to variable returns from its involvement with the investee and has the ability to affect those returns through its
power over the investee. Specifically, the Group controls an investee if, and only if, the Group has all the following: power over
the investee (i.e. existing rights that give it the current ability to direct the relevant activities of the investee); exposure, or
rights, to variable returns from its involvement with the investee; and the ability to use its power over the investee to affect
its returns. Subsidiaries are fully consolidated from the date on which control is transferred to the Group. They are
deconsolidated from the date that control ceases.
The acquisition method of accounting is used to account for business combinations by the Group (refer to policy on page 139).
When necessary, adjustments are made to the financial statements of subsidiaries to bring their accounting policies into line
with the Group’s accounting policies.
All intra-group assets and liabilities, equity, income, expenses and cash flows relating to transactions between members
of the Group are eliminated in full on consolidation.
Foreign currency translation
Group companies
The results and financial position of foreign operations (none of which has the currency of a hyperinflationary economy) that
have a functional currency different from the presentation currency are translated into the presentation currency as follows:
• assets and liabilities for each balance sheet presented are translated at the closing rate at the date of that balance sheet;
• non-monetary assets at the date of acquisition are translated at the historical rate and are not subsequently revalued;
• income and expenses for each statement of profit or loss and statement of comprehensive income are translated at
average exchange rates (unless this is not a reasonable approximation of the cumulative effect of the rates prevailing
on the transaction dates, in which case income and expenses are translated at the dates of the transactions); and
• all resulting exchange differences are recognised in Other comprehensive income and accumulated in a separate reserve
within equity.
Goodwill and fair value adjustments arising on the acquisition of a foreign operation are treated as assets and liabilities
of the foreign operation and translated at the closing rate.
Transactions and balances
Foreign currency transactions are translated into the functional currency using the exchange rates at the dates of the
transactions. Foreign exchange gains and losses resulting from the settlement of such transactions, and from the translation
of monetary assets and liabilities denominated in foreign currencies at year-end exchange rates, are generally recognised in
profit or loss. They are deferred in equity if they relate to qualifying cash flow hedges and qualifying net investment hedges
or are attributable to part of the net investment in a foreign operation.
Foreign exchange gains and losses that relate to borrowings are presented in the statement of profit or loss, within Finance
costs. All other foreign exchange gains and losses are presented in the statement of profit or loss on a net basis within
Administrative expenses.
Use of estimates and judgements
The Directors are required to make judgements, estimates and assumptions about the carrying amount of assets and
liabilities that are not readily apparent from other sources. These estimates and associated assumptions are based on
historical experience and other factors considered to be relevant. Actual results may differ from these estimates. The
estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to accounting estimates are recognised
in the period in which the estimate is revised if the revision affects only that period, or in the period of the revision and future
periods if the revision affects both current and future periods.
Accounting Policies continued
130 SMS Annual report and accounts 2022
Critical accounting judgements
The following are the critical judgements that the Directors have made in the process of applying the Group’s accounting
policies and that have the most significant effect on the amounts recognised in the financial statements:
• capitalisation of internal installation costs:
−a significant level of in-house installation of meter assets is carried out by the Group, certain costs of which are
capitalised (2022: £51.8m, 2021: £38.2m) and depreciated as part of property, plant and equipment depreciation.
Judgement is required by management to ascertain the appropriate categories and proportion of overheads and other
expenses that are directly attributable to installation of meter assets. Typically, capitalised costs will include staff costs,
and a systematic allocation of any production overheads deemed to be directly attributable to the process of installing
a meter owned by the Group. Other general and administrative overheads, such as sales, marketing and training costs,
are expensed directly to profit and loss;
• presentation of losses on disposal of certain meter assets as exceptional items:
−as a result of the inherent volatility associated with the UK smart meter rollout, and removal of traditional meter assets
as part of this, management has taken the decision to show losses arising on disposal of these meters – being the net
book value less the associated termination income received representing proceeds on disposal – as exceptional
administrative expenses. By disclosing these amounts separately, the traditional meter asset portfolio can be better
tracked to assist users of the financial statements to better understand the premature retirement of these revenue-
generating assets that is outside the Group’s control. On disposal, the receipt of termination income which is recognised
as a component of the net gain or loss on the disposal of these meter assets, will vary depending on the energy supplier
and is therefore not within our control. As the receipt of proceeds from disposal is inherently volatile, a loss on disposal
can still arise in certain circumstances; and
−the Group has continued to see a small proportion of SMETS1 meters removed from the wall. As these removals are
attributable to the temporary industry transition period, management has made the judgement to recognise losses arising
on the disposal of these meters as exceptional until resolution by the Enrolment and Adoption programme is complete; and
• identification of indicators of impairment of the meter asset portfolio in accordance with IAS 36 and assumptions applied
in determining the carrying value of the portfolio of meter assets:
−due to the uncertainties associated with the timing of the UK domestic smart meter rollout, the expected useful life and
carrying value of traditional meters requires significant judgement, as does the level of recoverability of termination income.
These assumptions are used in deriving the depreciation rates applied and the impairment calculation performed on
carrying value. For the traditional meters, as the UK smart meter rollout progresses, our portfolio of traditional meter
assets is diminishing. It is therefore crucial that the recoverability of the carrying value of these meter assets, recognised
in Property, plant and equipment, be assessed. The two main drivers for assessing this recoverability are:
1. the timing of the removals of these meters – this decision lies with the end consumer and removals are largely undertaken
by third parties, which means we have little control over the timing and quantity of these removals; and
2. the estimated future cash flows from termination income – these are derived using historical data and analysis around the
risk of churn between contracted and non-contracted customers. The assessment includes consideration of the extent to
which termination income and future rental income are received as traditional meters continue to be removed from the wall.
In 2022, this assessment has identified that the carrying value of the traditional meter assets portfolio is recoverable and,
therefore, no impairment charge has been recognised (2021: £nil).
−potential indicators of impairment have also been assessed in relation to our smart and I&C meters, including
consideration of the temporary industry transitional issues experienced with some SMETS1 assets as detailed above.
Management has concluded that there is no significant risk of impairment with regards to the Group’s smart and I&C
meters at 31 December 2022, consistent with the prior year.
Key sources of estimation uncertainty
The Group has no key sources of estimation uncertainty at the reporting date that may have a significant risk of causing
material adjustment to the carrying amounts of assets and liabilities within the next financial year.
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Revenue recognition
i. Metering
Meter rental
The Group acts as a gas and electricity Meter Asset Provider (MAP), providing and installing meters to energy suppliers on
behalf of the end consumer.
As a result of the Group’s assessment of contracts on implementation of IFRS 16, and any potential interaction with IFRS 15,
it was determined that the arrangements the Group has in place to act as MAP do not constitute a lease of the meter asset
to the energy supplier. Therefore, the related income for the service of providing a fitted meter is recognised in accordance
with IFRS 15.
The provision of meter assets to energy suppliers (‘MAP services’), together with the initial installation, is considered a
distinct and single performance obligation on the basis that, as MAP, the Group has an obligation to its customers to provide
a fitted meter. This is a separately identifiable service to which a stand-alone selling price is typically allocated. Over the
course of the contract term, which runs in perpetuity, the Group delivers a series of monthly services for which benefits are
simultaneously received and consumed by the customer.
Charges for MAP services are calculated daily based on the number of installed meters and invoiced to customers monthly
once validation checks have been completed. As revenue from MAP charges is attributed to services provided daily, revenue
is always based on the actual level of service provided and, therefore, any uncertainty at the end of each reporting period is
limited to the extent that validation checks are still being completed. Revenue is thus recognised over time based on our
right to invoice and includes contract Retail Price Index (RPI) uplifts.
As a result of industry regulations, and subject to specific contract terms with a customer, the Group may be required
to make payments to customers for shortfalls in the level of service provided. These charges are directly related to the
service being provided to the customer and thus are recognised as a reduction to revenue in the month in which the service
failure occurred. Where service levels are set based on annual targets, charges are estimated monthly and subsequently
finalised at the end of the year. Uncertainty, as it pertains to these payments to customers, is thus typically resolved by the
end of the reporting period.
If a MAP contract is cancelled, termination fees may be levied on the energy supplier. There has been no change in the
accounting for these termination fees and they continue to be classified within Other operating income unless they have
arisen on the loss of the meter assets, in which case they are reported within Administrative expenses as a component of net
gain or loss on disposal.
If the services rendered by the Group exceed the payment received, then accrued income is recognised. This is subsequently
reclassified to receivables at the point at which the Group has an unconditional right to payment.
Asset management services
The Group provides meter asset management and operations services to energy suppliers. These services are considered
a distinct performance obligation from the meter rental on the basis that these are separately identifiable services to which
a stand-alone selling price is allocated, and they are not necessary to bring the meter asset into use.
Over the course of the contract term, which can either be fixed or in perpetuity, the Group delivers a series of monthly
services for which the benefits are simultaneously received and consumed by a customer. Therefore, these are accounted
for as a single performance obligation.
Service charges are calculated based on the number of meters appointed and are accrued monthly. As revenue from service
charges is attributed to services provided periodically, revenue is always based on the actual level of service provided and,
therefore, there is no uncertainty at the end of each reporting period. For charges invoiced to customers monthly revenue is
thus recognised over time based on our right to invoice and includes contract RPI uplifts. For charges invoiced to customers
annually in advance, including contract RPI uplifts, a contract liability is recognised and subsequently released to the income
statement over the year on a straight-line basis. The Group uses the practical expedient under IFRS 15 from adjusting
revenue for any significant financial components of one year or less.
The Group’s meter asset management contracts also include the provision of transactional meter works. These are
considered further in section (iv) below.
If the services rendered by the Group exceed the payment received, then a contract asset is recognised. This is subsequently
reclassified to receivables at the point at which the Group has an unconditional right to payment.
Accounting Policies continued
132 SMS Annual report and accounts 2022
Third-party management services
The Group provides management services to a third party to whom it sold a minority of its meter asset portfolio in
April 2020. These services include accounting and treasury, portfolio asset management and other administrative tasks.
The various activities that make up these management services are provided to the third party on an integrated basis.
Over the course of the contract term, which runs for as long as there are meters within the scope of the services, the Group
delivers a series of monthly services for which the benefits are simultaneously received and consumed by the customer.
Therefore, these are accounted for as a single performance obligation.
Service charges are currently based on a fixed annual fee, subject to contract RPI uplifts, and are invoiced to the customer
monthly. Revenue is thus recognised over time based on our right to invoice.
If the services rendered by the Group exceed the payment received, then a contract asset is recognised. This is subsequently
reclassified to receivables at the point at which the Group has an unconditional right to payment.
ii. Data services
The Group provides data collection and aggregation services to Industrial & Commercial (I&C) electricity customers and,
through use of the ADM™ unit, to I&C gas customers. Over the course of the contract term, which can either be fixed or in
perpetuity, the Group delivers a series of monthly services for which the benefits are simultaneously received and consumed
by a customer. Therefore, these are accounted for as a single performance obligation.
Service charges are calculated based on the number of meters/ADM™ units appointed and are accrued monthly. As revenue
from service charges is attributed to services provided periodically, revenue is always based on the actual level of service
provided and, therefore, there is no uncertainty at the end of each reporting period. Service charges, including contract RPI
uplifts, are billed to clients annually in advance and therefore a contract liability is recognised and subsequently released to
the income statement over the year on a straight-line basis. The Group uses the practical expedient under IFRS 15 from
adjusting revenue for any significant financial components of one year or less.
The ADM™ device is a proprietary product for the Group and there are no other market providers of this device. A customer
cannot therefore benefit from the data services without installation, and the installation is not separately identifiable as it is
integral to the subsequent data services. This is therefore accounted for along with the data services as a single
performance obligation and any corresponding charges are recognised over the term of the contract.
iii. Utility connections services (gas and electricity)
Gas and electricity connections services are provided under fixed-price contracts with I&C customers and can be delivered to
a single site or multiple sites. Whilst each service consists of multiple activities, the Group’s promise in the contract is to deliver an
integrated end-to-end service to which the underlying activities are inputs. Where services are delivered to multiple sites, and
these are substantially the same, a series of services is being provided. In all cases, therefore, these contracts give rise to a single
performance obligation to which the fixed price is allocated. Subsequent variations to this price, due to changes in the inputs
required, are accounted for as contract modifications and recognised on a cumulative catch-up basis.
Services are transferred over time on the basis that these are customised services with no alternative use and the Group
has an enforceable right to payment for work completed to date.
Revenue is recognised on the stage of completion with reference to the actual services provided as a proportion of the total
service expected to be provided under the contract, as the services can enhance a work-in-progress asset for the customer
and have no alternative use. This is determined on a contract-by-contract basis using a milestone approach with reference
to the milestones set out in the contract or otherwise agreed. Where relevant, consideration is also given to material services
provided between milestones. Estimates of revenues, costs or extent of progress towards completion are revised if
circumstances change and any resulting increases or decreases in estimated revenues or costs are reflected in profit or loss
in the period in which the circumstances that give rise to the revision become known to management.
The customer pays the fixed amount based on a payment schedule. In certain circumstances the customer pays in advance
and therefore a contract liability is recognised and subsequently released to the income statement based on the measure
of progress detailed above. As the contract is cancellable at the customer’s discretion, subject to settlement for services
provided to the date of cancellation, a contract liability is not recognised until the cash has been received.
If the services rendered by the Group exceed the payment received, then a contract asset is recognised. This is subsequently
reclassified to receivables at the point at which the Group has an unconditional right to payment.
The Group utilises the practical expedient available under IFRS 15 for costs to obtain a contract. Commissions paid as part
of obtaining a contract are expensed as incurred on the basis that the contract term is typically less than twelve months.
SMS Annual report and accounts 2022 133
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Revenue recognition continued
iv. Transactional meter works
Transactional works, which include emergency, adversarial and other maintenance services, and are typically short term in
nature, are accounted for as a separate performance obligation to asset management services (see section (i) above) on
the basis that these works are separately identifiable and can be performed by another party. A customer, being the energy
supplier, is legally obligated to appoint a meter asset manager and can therefore benefit from this service in isolation,
without the subsequent transactional works which are initiated on an ad-hoc basis upon demand by the customer.
In 2020, the Group also started to provide transactional meter works to the third party to whom the Group sold a minority
of its meter asset portfolio in April 2020.
The transaction price allocated to transactional works is based on stand-alone selling prices (per unit, where relevant)
and revenue is recognised at a point in time when the transaction has been completed and accepted by the customer.
This is the point at which the customer is charged for the service and a receivable is recognised by the Group as we have
an unconditional right to payment. The customer will settle the transaction price for these services as part of the regular
monthly billing cycle for metering and asset management services.
The customer pays the fixed amount based on the transactional services provided and this is charged once the service
has been completed and accepted by the customer.
For segmental purposes, this transactional, non-recurring revenue is recognised within asset installation.
v. Grid-scale batteries
Grid-scale battery assets generate revenue by providing several services.
Capacity market
SMS enters into longer term contracts with the National Grid. During the contract period, which may last from one to
15 years, SMS’s only obligation is to make itself available to provide the capacity agreed in the contract when notification
is received from National Grid. Pricing is fixed at an auction.
There is a single performance obligation to be available to provide capacity to the National Grid. Revenue is recognised over time.
Wholesale market
SMS trades power with a counterparty on an exchange on the EPEX GB Day Ahead and Intraday markets, with the intention
of buying power at a low off-peak price and selling at a high peak price. All trades take place at spot price and there are no
forward or future contracts. All trades are settled daily.
There is a single performance obligation for SMS to buy or sell power on the exchange. Revenue is recognised for each
transaction at a point in time.
Balancing mechanism
SMS enters into short-term contracts with Elexon BSC to help balance the demands of the National Grid by increasing or
decreasing generation (or consumption). Contracts range for a length of one to 60 minutes and prices are fixed when a bid
is submitted. Elexon accepts only the cheapest bids needed to balance the grid.
There is a single performance obligation for SMS to increase or decrease its battery asset output. Revenue is recognised
over time. However, due to the short-term nature of the contracts, there would be no material difference between
recognition over time or at a point in time.
Ancillary services market
SMS enters into contracts with the National Grid to help maintain frequency on the grid. During the contract period SMS
is required to use the grid-scale battery asset following the Grid’s instructions. The price is fixed at auction.
Revenue is recognised over time. However, due to the short-term nature of the contracts, there would be no material
difference between recognition over time or at a point in time.
Embedded benefits
SMS enters into contracts with the National Grid and the Distribution Network Operator under which SMS is paid based
on the amount of electricity exported during Triad or peak periods.
There is a single performance obligation to export capacity during Triad or peak periods. Revenue is recognised over time.
However, due to the short-term nature of the contracts, there would be no material difference between recognition over time
or at a point in time.
Accounting Policies continued
134 SMS Annual report and accounts 2022
Imbalance
Elexon BSC is obliged to purchase or sell electricity generated or sold in any half-hour period which is not otherwise
contracted for. SMS buys or sells power to meet its requirements for the other revenue streams. The purchase and selling
prices are at a spot price set by a formula.
There is a single performance obligation for SMS to export or import power. Revenue is recognised for each transaction
at a point in time.
vi. Energy management services
Energy management services provided mainly to I&C customers include utility bureau and bill validation services, risk
management and procurement services and energy reduction and environmental management services.
Certain services, such as utility bureau and bill validation, are delivered through a series of monthly services over the course
of the contract term, for which the benefits are simultaneously received and consumed by a customer. These are accounted
for as a single performance obligation. The transaction price allocated includes a fixed monthly service charge together with
a variable component for specific activities that may not be carried out every month. As revenue from charges is attributed
to services provided monthly, revenue is always based on the actual level of service provided and, therefore, there is no
uncertainty at the end of each reporting period. Revenue is thus recognised over time based on our right to invoice.
Contracts for specialist consultancy services may include multiple projects. Where these projects are separately identifiable
within the contract and are not interrelated, they are accounted for as separate performance obligations. The transaction
price is allocated based on the stand-alone charges for each project.
Other energy reduction and environmental management services are typically longer-term, multi-site contracts and, therefore,
the revenue recognition is consistent with that detailed above for utility connections – see details in section (iii) above.
vii. Assets and liabilities arising from contracts with customers
Costs to fulfil a contract
In certain circumstances, the Group may incur costs to fulfil its obligations under a contract once it is obtained, but before
transferring goods or services to the customer. These costs are assessed on a contract-by-contract basis and, where they
are considered to meet the definition of fulfilment costs under IFRS 15, they are recognised as an asset and amortised on
a systematic basis consistent with the pattern of transfer of the services to which the asset relates.
Contract assets and liabilities
We receive payments from customers based on a billing schedule, as established in our contracts.
The timing of revenue recognition, billing and cash collections results in:
• billed and unbilled accounts receivable, which are recognised when our right to consideration becomes unconditional,
and classified as trade receivables and accrued income respectively;
• unbilled amounts, where we have a conditional right to consideration based on future performance, recognised as contract
assets. These amounts will be billed in accordance with the agreed-upon contractual terms; and
• payments received in advance of performance under a contract, recognised as contract liabilities. Contract liabilities are
recognised as revenue as (or when) we perform under a contract.
For project-based services, work in progress is billed in accordance with the agreed-upon contractual terms with the
customer. We typically receive interim payments as work progresses, which can give rise to a billed or unbilled accounts
receivable, where our right to payment is unconditional, or a contract asset, where revenue has been recognised based
on progress completed but our right to payment is still conditional on future performance. For some contracts, we may
be entitled to receive advance payments. We recognise a contract liability for these advance payments in excess of
revenue recognised.
Cancellation terms can vary but typically include provisions that allow the customer to terminate the contract at their
discretion subject to a penalty or settlement of amounts for work completed prior to termination. Contracts allow both
parties to cancel without penalty in the case of a material breach of contract.
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Exceptional items and separately disclosed items
The Group presents as exceptional items on the face of the consolidated statement of comprehensive income those items
of income and expense which, because of the material nature or expected infrequency of the events giving rise to them,
merit separate presentation to allow shareholders to better understand the elements of financial performance in that year
facilitating comparison with prior periods and to better assess trends in financial performance.
Termination fee income is reported as part of Other operating income in the consolidated statement of comprehensive
income given its materiality and nature. Any termination fee income arising on the loss of meter assets is reported within
Administrative expenses as a component of net gain or loss on disposal. Termination fee income does not arise from the
principal activities of the Group. Any such gain or loss on disposal relating to traditional meter assets and SMETS1 meter
assets is disclosed as an exceptional item.
Government grants
Grants from governments are recognised at their fair value where there is reasonable assurance that the grant will be
received and the Group will comply with all attached conditions, usually on submission of a valid claim for payment.
Government grants relating to costs are deferred and recognised in profit or loss over the period necessary to match them
with the costs that they are intended to compensate. Government grants relating to capital expenditure are included in
liabilities as deferred income and they are credited to profit or loss on a straight-line basis over the expected lives of the
related assets. Amounts credited to profit or loss are recognised as part of Other operating income in the consolidated
statement of comprehensive income.
The R&D expenditure credit (RDEC) scheme is a UK Government tax incentive which allows qualifying companies to claim
R&D expenditure credits (RDECs) equal to 12% of their qualifying research and development expenditure. The credit is
taxable at the corporation tax rate and is included in the company’s taxable trading profits. RDECs are accounted for by
the Group in accordance with IAS 20 Government Grants and recognised within Other operating income in the consolidated
statement of comprehensive income. Outstanding amounts receivable are recognised in the consolidated balance sheet
within Trade and other receivables.
Financial assets
The Group’s financial assets include cash and cash equivalents and trade and other receivables. Investments consist
of an immaterial debt investment held at amortised cost.
Classification
The Group classifies its financial assets in the following measurement categories:
• those to be measured subsequently at fair value, either through other comprehensive income (FVOCI) or through profit
or loss (FVPL); and
• those to be measured at amortised cost.
The classification depends on the Group’s business model for managing the financial assets and the contractual terms
of the cash flows.
For investments in equity instruments that are not held for trading, this will depend on whether the Group has made an
irrevocable election at the time of initial recognition to account for the equity investment at FVOCI. The Group reclassifies
debt investments when and only when its business model for managing those assets changes.
Recognition and derecognition
Financial assets are initially recognised on trade date. Financial assets are derecognised when the rights to receive cash
flows from the financial assets have expired or have been transferred and the Group has transferred substantially all the
risks and rewards of ownership.
Measurement
At initial recognition, the Group measures a financial asset at its fair value plus, in the case of a financial asset not at FVPL,
transaction costs that are directly attributable to the acquisition of the financial asset. Transaction costs of financial assets
carried at FVPL are expensed in profit or loss.
Trade and other receivables
Trade and other receivables are recognised initially at the IFRS 15 transaction price and subsequently measured at amortised
cost. They are generally due for settlement within 30 days and are therefore all classified as current. Due to their short-term
nature, carrying value is considered to approximate fair value.
Accounting Policies continued
136 SMS Annual report and accounts 2022
Cash and cash equivalents
Refer to accounting policy on Cash and cash equivalents.
Impairment
The Group assesses, on a forward-looking basis, the expected credit losses associated with its debt instruments carried at
amortised cost and FVOCI. The impairment methodology applied depends on whether there has been a significant increase
in credit risk. For trade receivables and accrued income, which include contract assets and billed and unbilled receivables
arising from contracts with customers, the Group applies the simplified approach permitted by IFRS 9, which requires
expected lifetime losses to be recognised from initial recognition of the receivables.
Trade receivables and accrued income are written off, and derecognised, where there is no reasonable expectation of recovery.
Indicators that there is no reasonable expectation of recovery include, amongst others, the customer ceasing trading and
entering administration with no expected recovery from the Supplier of Last Resort process, or a failure by the customer to
make contractual payments for a period of greater than or equal to 365 days past due. Indicators are assessed on an individual
customer basis. Impairment losses, including the loss allowance, on trade receivables and accrued income are presented within
Administrative expenses. Subsequent recoveries of amounts previously written off are credited against the same line item.
Further information about the impairment of trade receivables and accrued income, and the Group’s exposure to credit risks,
can be found in note 23.
Financial liabilities
The Group’s financial liabilities include trade and other payables, bank loans and overdrafts, and leases.
Classification
Financial liabilities are classified as financial liabilities at fair value through profit or loss or loans and borrowings,
as appropriate. The Group determines the classification of its financial liabilities at initial recognition.
Recognition
All financial liabilities are recognised initially at fair value and, in the case of bank loans, net of directly attributable
transaction costs.
Measurement
Trade and other payables and bank overdrafts
Trade and other payables, and overdrafts, are subsequently measured at amortised cost using the effective interest rate
method. Trade and other payables are presented as current liabilities unless payment is not due within twelve months after
the reporting period. Due to their short-term nature, carrying value is considered to approximate fair value.
Bank loans
Bank loans are subsequently measured at amortised cost. Interest expense on bank loans is recognised in the consolidated
income statement using the effective interest rate method.
Transaction costs on revolving credit facilities are recognised as transaction costs of the loan to the extent that it is probable
that some or all the facility will be drawn down. In this case, the fee is deferred within Other assets until the drawdown occurs.
Upon drawdown of the first loan, these costs are reclassified from Other assets to Bank loans and subsequently amortised
over the term of the facility.
Borrowings are removed from the balance sheet when the obligation specified in the contract is discharged or cancelled or
has expired. The difference between the carrying amount of a financial liability that has been extinguished or transferred to
another party and the consideration paid, including any non-cash assets transferred, or liabilities assumed, is recognised in
profit or loss as Other income or Finance costs.
If a facility is modified, then it is assessed whether the modification is significant enough to constitute an extinguishment either
qualitatively or quantitatively (defined as a change in the present value of cash flows, including any transaction costs paid,
exceeding 10%). If a modification is considered an extinguishment of the initial loan, the new modified loan is recorded at fair
value and a gain/loss is recognised immediately in the consolidated income statement for the difference between the carrying
amount of the old loan and the new loan. Any costs incurred are recognised in profit or loss. Where a modification is not
significant enough to be an extinguishment, the cash flows under the modified loan are rediscounted at the original effective
interest rate and an immediate gain or loss is recognised accordingly in the consolidated income statement on the date of
modification. Any costs incurred are recognised over the remaining period of the modified debt, within the effective interest rate.
Borrowings are classified as current liabilities unless the Group has an unconditional right to defer settlement of the liability
for at least twelve months after the reporting period.
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Offsetting of financial instruments
Financial assets and financial liabilities are offset, and the net amount reported in the consolidated statement of financial
position, if, and only if, there is a currently enforceable legal right to offset the recognised amounts and there is an intention
to settle on a net basis, or to realise the assets and settle the liabilities simultaneously.
Leases
Group as lessor
The arrangements the Group has in place to act as Meter Asset Provider do not constitute a lease of the meter asset to the
energy supplier. SMS controls the meter as the Group retains legal title and obtains substantially all the economic benefit.
The assets are recognised as property, plant and equipment when in use under contract with an energy supplier and the
related income for the service of providing a fitted meter is recognised in accordance with IFRS 15. Further information about
the Group’s accounting policy for revenue recognition is given above, and for property, plant and equipment in note 11.
Group as lessee
The Group leases land, offices, warehouses and motor vehicles. For offices, warehouses and motor vehicles rental contracts
are typically made for fixed periods of three to ten years. For land, rental contracts are typically made for fixed periods of
20 to 40 years. Contracts may have extension or early termination options. Lease terms are negotiated on an individual
basis and contain a wide range of different terms and conditions. The lease agreements do not impose any covenants,
but leased assets may not be used as security for borrowing purposes.
Leases are recognised as a right-of-use asset and a corresponding liability at the date at which the leased asset is available
for use by the Group.
In determining the lease term, management considers all facts and circumstances that create an economic incentive to
exercise an extension option, or not exercise a termination option. Extension options (or periods after termination options)
are only included in the lease term if the lease is reasonably certain to be extended (or not terminated). The lease term is
reassessed if an option is actually exercised (or not exercised) or the Group becomes obliged to exercise (or not exercise) it.
The assessment of reasonable certainty is only revised if a significant event or a significant change in circumstances occurs,
which affects this assessment, and that is within the control of the lessee.
Assets and liabilities arising from a lease are initially measured on a present value basis. Lease liabilities include the net
present value of the following lease payments:
• fixed payments (including in-substance fixed payments), less any lease incentives receivable;
• variable lease payments that are based on an index or a rate, initially measured using the index or rate as at the
commencement date;
• amounts expected to be payable by the lessee under residual value guarantees;
• the exercise price of a purchase option if the lessee is reasonably certain to exercise that option; and
• payments of penalties for terminating the lease, if the lease term reflects the lessee exercising that option.
Lease payments to be made under reasonably certain extension options are also included in the measurement of the liability.
The lease payments are discounted using the interest rate implicit in the lease. If that rate cannot be determined, the lessee’s
incremental borrowing rate is used, being the rate that the lessee would have to pay to borrow the funds necessary to obtain
an asset of similar value in a similar economic environment with similar terms and conditions. The weighted average lessee’s
incremental borrowing rate applied to the lease liabilities at 31 December 2022 was 5% (31 December 2021: 4.7%).
The Group is exposed to potential future increases in variable lease payments based on an index or rate, which are not
included in the lease liability until they take effect. When adjustments to lease payments based on an index or rate take
effect, the lease liability is reassessed and adjusted against the right-of-use asset.
Lease payments are allocated between principal and finance cost. The finance cost is charged to profit or loss over the
lease period so as to produce a constant periodic rate of interest on the remaining balance of the liability for each period.
Right-of-use assets are measured at cost comprising the following:
• the amount of the initial measurement of lease liability;
• any lease payments made at or before the commencement date less any lease incentives received;
• any initial direct costs; and
• restoration costs.
Accounting Policies continued
138 SMS Annual report and accounts 2022
The Group is required to restore the land leased as part of its grid-scale battery storage business, and certain leased warehouses,
to the condition required by the terms and conditions of the lease at the end of the respective lease terms. Under IFRS 16, the
estimated liability for such restoration costs is recognised as a provision under IAS 37 at initial recognition and is not included as
part of the lease liability. As right-of-use assets are measured subsequent to initial recognition using a cost model, any change in
the estimate of such costs after initial recognition is added to, or deducted from, the cost of the right-of-use asset.
Right-of-use assets are generally depreciated over the shorter of the asset’s useful life and the lease term, on a straight-line basis.
Payments associated with short-term leases and leases of low-value assets are recognised on a straight-line basis as an
expense in profit or loss. Short-term leases are leases with a lease term of twelve months or less. Low-value assets comprise
IT equipment and small items of office furniture, where the value of the asset on inception is less than c.US$5,000.
Payments for services are separated from the lease components of a contract and accounted for as an administrative expense.
Provisions
Provisions are recognised when the Group has a present legal or constructive obligation as a result of a past event, it is probable
that an outflow of resources embodying economic benefits will be required to settle the obligation, and a reliable estimate can be
made of the amount of the obligation.
The amount recognised as a provision is the best estimate of the consideration required to settle the present obligation at the end
of the reporting period, taking into account the risks and uncertainties surrounding the obligation.
If the effect of the time value of money is material, provisions are determined by discounting the expected future cash flows at
a discount rate that reflects the current market assessments of the time value of money. Where discounting is used, the increase
in the provision due to the passage of time is recognised within finance costs.
Provisions are split between amounts expected to be settled within 12 months of the balance sheet date (current) and amounts
expected to be settled later (non-current).
Decommissioning and restoration provisions
Provisions for decommissioning and restoration costs arise in connection with the Group’s grid-scale battery storage business,
and with certain leased warehouses. The Group is required to restore the land leased as part of its grid-scale battery storage sites,
and certain leased warehouses, to the condition required by the terms and conditions of the lease at the end of the respective
lease terms (which range between three to ten years for warehouses, and 20 to 40 years for land). The amount recognised is the
present value of the estimated future expenditure determined in accordance with current conditions, requirements, and price
levels, discounted over the useful economic life of the asset where appropriate. The effects of changes resulting from revisions to
the timing or amount of the original estimate of the provision are reflected on a prospective basis, generally by adjustment to the
carrying amount of the related right-of-use asset recorded within property, plant and equipment.
An amount equivalent to the decommissioning provision is recognised as part of the corresponding right-of-use asset, which is
subsequently depreciated at the same rate as the rest of the asset. Other than the unwinding of discount on or utilisation of the
provision, any change in present value of the estimated expenditure is reflected as an adjustment to the provision and the
corresponding asset.
Provisions also include the estimated cost to decommission grid-scale battery assets at the end of their life. These costs have
been capitalised as part of the related asset within property, plant and equipment, and are depreciated over the life of the asset.
Changes in the provision arising from revised estimates that relate to the asset are recorded as adjustments to the carrying value
of the asset.
Business combinations
The acquisition method of accounting is used to account for all business combinations, regardless of whether equity
instruments or other assets are acquired. The consideration transferred for the acquisition of a subsidiary comprises the:
• fair values of the assets transferred;
• liabilities incurred to the former owners of the acquired business;
• equity interests issued by the Group;
• fair value of any asset or liability resulting from a contingent consideration arrangement; and
• fair value of any pre-existing equity interest in the subsidiary.
Identifiable assets acquired and liabilities and contingent liabilities assumed in a business combination are, with limited
exceptions, measured initially at their fair values at the acquisition date. The Group recognises any non-controlling interest
in the acquired entity on an acquisition-by-acquisition basis either at fair value or at the non-controlling interest’s
proportionate share of the acquired entity’s net identifiable assets.
SMS Annual report and accounts 2022 139
Financial statements
Governance
Strategic report
Business combinations continued
Acquisition-related costs are expensed as incurred.
The excess of the:
• consideration transferred;
• amount of any non-controlling interest in the acquired entity; and
• acquisition-date fair value of any previous equity interest in the acquired entity
over the fair value of the net identifiable assets acquired is recorded as goodwill. If those amounts are less than the fair value
of the net identifiable assets of the business acquired, the difference is recognised directly in profit or loss as a bargain
purchase. Where settlement of any part of cash consideration is deferred, the amounts payable in the future are discounted
to their present value as at the date of exchange. The discount rate used is the entity’s incremental borrowing rate, being the
rate at which a similar borrowing could be obtained from an independent financier under comparable terms and conditions.
Contingent consideration is classified either as equity or a financial liability. Amounts classified as a financial liability
are subsequently remeasured to fair value, with changes in fair value recognised in profit or loss.
If the business combination is achieved in stages, the acquisition date carrying value of the acquirer’s previously held equity
interest in the acquiree is remeasured to fair value at the acquisition date. Any gains or losses arising from such
remeasurement are recognised in profit or loss.
Investments in associates
An associate is an entity in which the Group has significant influence, but not control or joint control, over the financial and
operating policies. Interests in associates are accounted for using the equity method. They are initially recognised at cost,
which includes transaction costs. Subsequent to initial recognition, the consolidated financial statements include the Group’s
share of the profit or loss and other comprehensive income of the associated undertakings, until the date on which
significant influence ceases.
Asset acquisitions
Asset acquisitions include the acquisition of a group of assets that does not constitute a business.
The relevant IFRS is applied when accounting for the acquisition of an individual asset.
Where the acquisition involves a group of assets and liabilities, the individual assets and liabilities acquired are identified
and recognised. The cost of the transaction is allocated to the assets acquired, and liabilities assumed, based on their
relative fair values at the date of purchase. No goodwill arises on the transaction.
The cost of the transaction is measured at the fair value of the consideration transferred at the acquisition date. This can
include cash payments, financial liabilities incurred, equity interests issued by the Group and the fair value of any asset or
liability arising from a contingent or deferred consideration arrangement. Non-monetary assets might be exchanged as
part of the consideration for the transaction. The cost of an item acquired in exchange for a non-monetary asset or assets
is generally measured at fair value.
Contingent consideration is classified either as equity or a financial liability. Amounts classified as a financial liability
are subsequently remeasured to fair value, with changes in fair value recognised in profit or loss.
Transaction costs are capitalised as a component of the cost of the assets acquired.
Research and development
Expenditure on pure and applied research activities is recognised in the consolidated statement of comprehensive income
as an expense as incurred.
Expenditure on product and system development activities is capitalised if the product or process is technically and
commercially feasible and the Group intends and has the technical ability and sufficient resources to complete development;
if future economic benefits are probable; and if the Group can measure reliably the expenditure attributable to the intangible
asset during its development. The expenditure capitalised includes the cost of materials, direct labour and an appropriate
proportion of overheads.
Capitalised development expenditure is stated at cost less accumulated amortisation and accumulated impairment losses.
Accounting Policies continued
140 SMS Annual report and accounts 2022
Amortisation is calculated when the asset is available for use, so as to write off its cost, less its estimated residual value, over
the useful economic life of that asset as follows:
• Development of ADM™ units
10% on cost, straight line
• Development of internally generated information technology systems (‘IT development’)
20% and 50% on cost,
straight line
Capitalised development expenditure on ADM™ units is disclosed within Property, plant and equipment as part of Meter
assets and amortised over the same useful economic life as that applied to the tangible ADM™ unit.
Capitalised IT development expenditure is disclosed within Intangible assets as part of IT development and software.
All costs capitalised within this category relate to information technology and, in general, are amortised over an economic
life of five years. A new system was integrated and brought into use during 2020 and associated development costs were
amortised over the contract term of two years.
Intangible assets
Intangible assets acquired separately from third parties consist of software costs, including licence fees. These are
recognised as assets, measured at cost and classified as part of IT development and software.
Internally generated intangible assets relate to IT development and are recognised as part of IT development and software.
Refer to further details in the research and development accounting policy above.
Intangible assets acquired as part of a business combination are recognised outside goodwill if the asset is separable
or arises from contractual or other legal rights. They are recognised at their fair value at the date of acquisition and are
subsequently amortised on a straight line basis over their estimated useful lives.
Following initial recognition, intangible assets are measured at cost at the date of acquisition less any amortisation and any
impairment losses. Amortisation costs are included within Administrative expenses disclosed in the consolidated statement
of comprehensive income.
Intangible assets are amortised over their useful lives as follows:
• IT development and software
20% and 50% on cost, straight line
• Intangibles recognised upon acquisition:
−Customer contracts
20% on cost, straight line
−Trademarks
33% on cost, straight line
Useful lives are examined on an annual basis and adjustments, where applicable, are made on a prospective basis.
Goodwill
Goodwill represents the excess of the consideration transferred over the fair value of the identifiable assets and liabilities
of the acquiree at the date of acquisition. Goodwill on acquisitions of subsidiaries is included in intangible assets. Goodwill
is not amortised but is tested annually for impairment, or if there is an indication of impairment, and is carried at cost less
accumulated impairment losses. Impairment losses are not subsequently reversed.
Goodwill is allocated to cash-generating units (CGUs) for the purpose of impairment testing. The allocation is made to those
CGUs or groups of CGUs that are expected to benefit from the business combination in which the goodwill arose. The units
or groups of units are identified at the lowest level at which goodwill is monitored for internal management purposes.
If the recoverable amount of an asset (or CGU) is estimated to be less than its carrying amount, the carrying amount of the
asset (or CGU) is reduced to its recoverable amount. An impairment loss is recognised as an expense immediately.
Where an impairment loss subsequently reverses, the carrying amount of the asset (or CGU) is increased to the revised
estimate of its recoverable amount, but so that the increased carrying amount does not exceed the carrying amount
that would have been determined had no impairment loss been recognised for the asset (or CGU) in prior years. A reversal
of an impairment loss is recognised as income immediately.
Contingent consideration is recorded initially at fair value and classified as equity or a financial liability. Contingent
consideration classified as equity is not remeasured, but contingent consideration classified as a financial liability is
subsequently remeasured at fair value through profit or loss.
SMS Annual report and accounts 2022 141
Financial statements
Governance
Strategic report
Goodwill continued
Adjustments to provisional fair values of identifiable assets and liabilities (and to estimates of contingent consideration)
arising from additional information, obtained within the measurement period (no more than one year from the acquisition
date), about facts and circumstances existing at the acquisition date, are adjusted against goodwill. Other adjustments
to provisional fair values or changes in contingent consideration are recognised through profit or loss.
Impairment of tangible and intangible assets other than goodwill
At each reporting date, the Group reviews the carrying amounts of its property, plant and equipment and intangibles to
determine whether there is any indication that those assets have suffered an impairment loss. If any such indication exists,
the recoverable amount of the asset is estimated in order to determine the extent of the impairment loss (if any). Where the
asset does not generate cash flows that are independent from other assets, the Group estimates the recoverable amount
of the CGU to which the asset belongs.
The recoverable amount is the higher of fair value less costs to sell and value in use. In assessing value in use, the estimated
future cash flows are discounted to their present value using a discount rate that reflects current market assessments of the
time value of money and the risks specific to the asset for which the estimates of future cash flows have been adjusted.
An impairment loss is recognised for the amount by which the asset’s carrying amount exceeds its recoverable amount.
Property, plant and equipment
Property, plant and equipment is stated at cost, net of accumulated depreciation and any accumulated impairment losses.
Property, plant and equipment is initially recorded at cost. Such cost includes the cost of replacing part of the property, plant
and equipment. When significant parts of property, plant and equipment are required to be replaced in intervals, the Group
recognises such parts as individual assets with specific useful lives and depreciation. Pursuant to the acquisition of the meter
installation businesses on 18 March 2016 certain internal costs to the Group are also capitalised where they are demonstrated
as being directly attributable to bringing the meter assets into their usable condition.
Acquired development and construction rights together with directly attributable costs incurred in relation to the construction
of the grid-scale battery storage sites are accounted for under IAS 16: Property, plant and equipment. These are recorded at
cost and classified as part of Assets under construction within Property, plant and equipment. Whilst under construction no
depreciation is recorded.
All other repair and maintenance costs are recognised in the consolidated statement of comprehensive income as incurred.
For each asset depreciation is calculated using the straight-line method to allocate its cost, net of its residual value
if applicable, over its estimated useful life as follows:
• Freehold property
2%
• Short-leasehold property
Shorter of the lease term or 15% and 20%
• Meter assets
Smart meters and Industrial & Commercial meters 5%
ADM™ units 10%
Traditional meters to 1 July 2025
• Plant and machinery
33%
• Fixtures, fittings and equipment 20% and 33%
• Motor vehicles
25%
• Grid-scale assets
Shorter of the lease term or 2.5% to 10%
Battery assets 10%
• Right-of-use assets
Shorter of the asset’s useful life and the lease term
An item of property, plant and equipment and any significant part initially recognised is derecognised upon disposal or when
no future economic benefits are expected from its use or disposal. Any gain or loss arising on derecognition of the asset
(calculated as the difference between the net disposal proceeds and the carrying amount of the asset) is included in the
consolidated statement of comprehensive income when the asset is derecognised. The asset’s residual values, useful lives
and methods of depreciation are reviewed at each financial year end and adjusted prospectively, if appropriate.
See the Leases accounting policy for further details on the recognition and measurement of right-of-use assets
under IFRS 16.
Accounting Policies continued
142 SMS Annual report and accounts 2022
Inventories
Finished goods and consumables are stated at the lower of cost and net realisable value. Cost comprises direct materials
and purchases of meter assets and ADM™ units at cost. Costs of purchased inventory are determined after deducting
rebates and discounts. Net realisable value represents the estimated selling price for inventories in the ordinary course
of business less the estimated costs necessary to make the sale.
Cash and cash equivalents
Cash and cash equivalents in the consolidated statement of financial position comprises cash at bank and in hand and short-
term deposits with an original maturity of three months or less. For the purpose of the consolidated statement of cash flows,
cash and cash equivalents consists of cash and short-term deposits as defined above, net of outstanding bank overdrafts.
Restricted cash
Restricted cash in the consolidated statement of financial position comprises amounts collected from customers on behalf
of a third party, as part of a services arrangement, that have not yet been allocated. These monies are held in a trust
account whilst awaiting allocation and, per the terms of the account, cannot be used by the Group to meet other short-term
cash commitments. They have thus been disclosed separately on the statement of financial position.
Pension costs
The Group operates a defined contribution pension scheme for employees. The assets of the scheme are held separately from
those of the Group. The annual contributions payable are charged to the consolidated statement of comprehensive income.
Share-based payments
IFRS 2 Share-based Payment has been applied to all grants of equity instruments. The Group issues equity-settled
share-based payments to certain employees under the terms of the Group’s various employee share and option schemes.
Equity-settled share-based payments are measured at fair value at the date of the grant. The fair value determined at the
grant date of equity-settled share-based payments is expensed on a straight-line basis over the vesting period, based on
an estimate of the shares that will ultimately vest.
Share capital
Ordinary shares are classified as equity. Incremental costs directly attributable to the issue of new ordinary shares or options
are shown in equity as a deduction from the proceeds.
Own share reserve
The Group offers a Share Incentive Plan for all employees and has established a trust to facilitate the delivery of SMS shares
under this plan. The holdings of this trust include shares that have not vested unconditionally to employees of the Group.
These shares are recorded at cost and are classified as own shares. The cost to the Company of acquiring these own shares
held in trust is shown as a deduction from shareholders’ equity.
Dividends
Dividend distributions to the Company’s shareholders are recognised in the accounting period in which the dividends are paid.
Taxation
Tax currently payable is based on the taxable profit for the year and any adjustment to tax payable in respect of prior years.
Taxable profit differs from accounting profit as reported in the consolidated statement of comprehensive income because
it excludes items of income or expense that are taxable or deductible in other years and it further excludes items that are
never taxable or deductible. The Group’s liability for current tax is measured using tax rates that have been enacted or
substantively enacted by the reporting date.
Deferred tax is the tax expected to be payable or recoverable on temporary differences between the carrying amount
of assets and liabilities in the financial statements and the corresponding tax bases used in the computation of taxable
profit, and is accounted for using the balance sheet liability method. Deferred tax is recognised in respect of all temporary
differences that have originated but not reversed at the balance sheet date, where transactions or events that result in
an obligation to pay more tax in the future or a right to pay less tax in the future have occurred at the balance sheet date.
Deferred tax is measured at the tax rates that are expected to apply in the periods in which the asset or liability is settled based on
tax rates (and tax laws) that have been enacted or substantively enacted at the balance sheet date. It is recognised in the income
statement except when it relates to items recognised in other comprehensive income or directly in equity, such as share-based
payments. In this case, the deferred tax is also recognised in other comprehensive income or directly in equity, respectively.
Deferred tax assets are recognised to the extent that it is probable that future taxable profit will be available against which
the temporary difference can be utilised. Their carrying amount is reviewed at each balance sheet date on the same basis.
SMS Annual report and accounts 2022 143
Financial statements
Governance
Strategic report
Taxation continued
Deferred tax liabilities are recognised for all temporary differences, except in respect of:
• temporary differences arising from the initial recognition of goodwill or an asset or liability in a transaction that is not
a business combination and at the time of the transaction affects neither the accounting profit nor taxable profit or loss; and
• temporary differences associated with investments in subsidiaries where the timing of the reversal of the temporary
differences can be controlled and it is probable that the temporary difference will not reverse in the foreseeable future.
Deferred tax assets and liabilities are offset where there is a legally enforceable right to offset current tax assets and
liabilities and where the deferred tax balances relate to the same taxation authority. Current tax assets and tax liabilities
are offset where the entity has a legally enforceable right to offset and intends either to settle on a net basis, or to realise
the asset and settle the liability simultaneously.
Standards and interpretations
New and amended standards adopted by the Group
The Group has applied the following standards and amendments for the first time for its annual reporting period
commencing 1 January 2022:
Standard or interpretation
Effective date
IFRS 3 (amendment)
Business Combinations Reference to the Conceptual Framework
1 January 2022
IAS 16 (amendment)
Property, Plant and Equipment – Proceeds Before Intended Use
1 January 2022
IAS 37 (amendment)
Provisions, Contingent Liabilities, Contingent Assets, Onerous
Contracts – Cost of Fulfilling a Contract
1 January 2022
The amendments listed above did not have any material impact on the amounts recognised in prior periods or the current
period and are not expected to affect future periods significantly.
New standards and interpretations not yet adopted
Certain new accounting standards and interpretations have been published that are not mandatory for 31 December 2022
reporting periods and have not been early-adopted by the Group. The amendments to IAS 12 Income Taxes, regarding
deferred tax related to assets and liabilities arising from a single transaction, will apply to the Group as a lessee under
IFRS 16. These amendments are effective for periods beginning on or after 1 January 2023 and their potential effects are
under consideration. All other standards are not expected to have a material impact on the entity in the current or future
reporting periods, or on foreseeable future transactions.
Accounting Policies continued
144 SMS Annual report and accounts 2022
1 Segmental reporting
For management purposes, the Group is organised into three core divisions, as follows:
• Asset management, which comprises regulated management of gas and electric meters, ADM™ units and energy data
assets within the UK;
• Asset installation, which comprises installation of domestic and I&C gas meters and electricity meters throughout the UK; and
• Energy management, which comprises the building and operation of grid-scale batteries, the provision of energy
consultancy services and the management of distributed energy resources (DER).
For the purpose of making decisions about resource allocation and performance assessment, it is the operating results of
the three core divisions listed above that are monitored by management and the Group’s chief operating decision-maker,
being the SMS Board. It is these divisions, therefore, that are defined as the Group’s reportable operating segments.
Segment performance is mainly evaluated based on gross profit.
The following segment information is presented in respect of the Group’s reportable segments together with additional
balance sheet information:
31 December 2022
Asset
management
£’000
Asset
installation
£’000
Energy
management
£’000
Unallocated
£’000
Total
operations
£’000
Segment revenue
92,815
83,752
12,213
–
188,780
Inter-segment revenue
–
(53,260)
–
–
(53,260)
Revenue from external customers
92,815
30,492
12,213
–
135,520
Cost of sales
(35,698)
(23,530)
(6,270)
–
(65,498)
Segment gross profit
57,117
6,962
5,943
–
70,022
Other operating costs/income
–
–
611
(36,204)
(35,593)
Depreciation
–
(69)
(240)
(3,232)
(3,541)
Amortisation of intangibles
(1,828)
–
(20)
(2,304)
(4,152)
Profit/(loss) from operations –
pre-exceptional operating items
55,289
6,893
6,294
(41,740)
26,736
Exceptional items (operating)
(5,789)
(30)
–
(827)
(6,646)
Profit/(loss) from operations
49,500
6,863
6,294
(42,567)
20,090
Share of loss of associate
(186)
Net finance costs: other
(3,949)
Profit/(loss) before tax
15,955
Tax expense
(1,084)
Profit for year
14,871
Notes to the Financial Statements
For the year ended 31 December 2022
SMS Annual report and accounts 2022 145
Financial statements
Governance
Strategic report
1 Segmental reporting continued
31 December 2021
Asset
management
£’000
Asset
installation
£’000
Energy
management
£’000
Unallocated
£’000
Total
operations
£’000
Segment revenue
82,828
74,208
3,620
–
160,656
Inter-segment revenue
–
(52,176)
–
–
(52,176)
Revenue from external customers
82,828
22,032
3,620
–
108,480
Cost of sales
(31,479)
(14,081)
(2,756)
–
(48,316)
Segment gross profit – pre-exceptional
cost of sales
51,349
7,951
864
–
60,164
Exceptional items (cost of sales)
–
(829)
–
–
(829)
Segment gross profit
51,349
7,122
864
–
59,355
Other operating costs/income
–
–
1,256
(33,373)
(32,117)
Depreciation
–
(196)
–
(3,797)
(3,993)
Amortisation of intangibles
(1,725)
–
(31)
(2,304)
(4,060)
Profit/(loss) from operations –
pre-exceptional operating items
49,624
6,926
2,089
(39,474)
19,165
Exceptional items (operating)
(6,213)
–
–
564
(5,649)
Profit/(loss) from operations
43,411
6,926
2,089
(38,910)
13,516
Net finance costs: other
(3,481)
Net finance costs: exceptional
(1,742)
Profit/(loss) before tax
8,293
Tax expense
(4,501)
Profit for year
3,792
Inter-segment revenue relates to installation services provided by the asset installation segment to the asset management
segment.
Depreciation associated with meter assets in the asset management segment and grid-scale battery assets in the energy
management segment has been reported within Cost of sales as these assets directly drive revenue (see note 3).
All material operations are based in the UK and revenue generated in the UK. Following the acquisition of Solo Energy
Limited in 2019, a small minority of operations are based in the Republic of Ireland.
The Group has two major customers that each generated 10% or more of total Group turnover, as listed below by segment:
2022
£’000
2021
£’000
Customer 1 – Asset management
17,574
12,647
Customer 1 – Asset installation
5,052
2,644
Customer 2 – Asset management
8,056
8,900
Customer 2 – Asset installation
8,784
8,025
39,466
32,216
Notes to the Financial Statements continued
For the year ended 31 December 2022
146 SMS Annual report and accounts 2022
Segment assets and liabilities
31 December 2022
Asset
management
£’000
Asset
installation
£’000
Energy
management
£’000
Unallocated
£’000
Total
operations
£’000
Assets reported by segment
Intangible assets
13,550
3,497
3,161
5,624
25,832
Property, plant and equipment
429,709
71
95,225
8,235
533,240
Investment in associate
–
–
1,940
–
1,940
Trade and other receivables – non-current
–
–
12,347
–
12,347
Inventories
37,136
302
–
–
37,438
Contract assets
–
10
277
–
287
480,395
3,880
112,950
13,859
611,084
Assets not by segment
86,278
Total assets
697,362
Liabilities by segment
Contract liabilities
1,518
1,805
80
–
3,403
Lease liabilities
–
–
8,405
3,956
12,361
Provisions
–
–
1,963
70
2,033
Other liabilities
606
–
2,062
–
2,668
2,124
1,805
12,510
4,026
20,465
Liabilities not by segment
143,411
Total liabilities
163,876
31 December 2021
Asset
management
£’000
Asset
installation
£’000
Energy
management
£’000
Unallocated
£’000
Total
operations
£’000
Assets reported by segment
Intangible assets
11,540
3,497
2,497
7,929
25,463
Property, plant and equipment
366,702
128
38,868
10,203
415,901
Inventories
22,763
215
2
–
22,980
Contract assets
–
46
–
–
46
Other assets (bank loans)
2,201
–
–
–
2,201
403,206
3,886
41,367
18,132
466,591
Assets not by segment
166,646
Total assets
633,237
Liabilities by segment
Contract liabilities
1,527
2,084
121
–
3,732
Lease liabilities
–
–
4,060
4,513
8,573
Other liabilities
–
–
638
–
638
Other long-term liabilities
–
–
1,473
75
1,548
1,527
2,084
6,292
4,588
14,491
Liabilities not by segment
64,956
Total liabilities
79,447
Assets not by segment include cash and cash equivalents, trade and other receivables and investments.
Liabilities not by segment include trade and other payables and deferred tax liabilities, and in 2022 also include bank loans.
SMS Annual report and accounts 2022 147
Financial statements
Governance
Strategic report
1 Segmental reporting continued
Additions to non-current assets within each segment are listed below:
Asset
management
£’000
Asset
installation
£’000
Energy
management
£’000
Unallocated
£’000
Total
operations
£’000
Additions to non-current assets
2022
106,626
14
43,003
2,263
151,906
2021
84,779
90
27,720
3,686
116,275
2 Revenue from contracts with customers
(a) Disaggregation of revenue from contracts with customers
Segment revenue by type of service delivered and by timing of revenue recognition is as follows:
Year ended 31 December 2022
Asset
management
£’000
Asset
installation
£’000
Energy
management
£’000
Total
operations
£’000
Major service lines
Metering
80,634
–
–
80,634
Data management
12,181
–
–
12,181
Utility connections
–
7,129
–
7,129
Transactional meter works
–
23,059
–
23,059
Grid-scale batteries
–
–
7,211
7,211
Energy management
–
304
5,002
5,306
92,815
30,492
12,213
135,520
Timing of revenue recognition
Services transferred at a point in time
–
23,059
1,533
24,592
Services transferred over time
92,815
7,433
10,680
110,928
92,815
30,492
12,213
135,520
Year ended 31 December 2021
Asset
management
£’000
Asset
installation
£’000
Energy
management
£’000
Total
operations
£’000
Major service lines
Metering
74,358
–
–
74,358
Data management
8,470
–
–
8,470
Utility connections
–
5,852
–
5,852
Transactional meter works
–
15,649
–
15,649
Energy management
–
531
3,620
4,151
82,828
22,032
3,620
108,480
Timing of revenue recognition
Services transferred at a point in time
–
15,649
–
15,649
Services transferred over time
82,828
6,383
3,620
92,381
82,828
22,032
3,620
108,480
(b) Assets and liabilities related to contracts with customers
The Group has recognised the following assets and liabilities related to contracts with customers:
2022
£’000
2021
£’000
Current contract assets
287
46
Total contract assets
287
46
Current contract liabilities
3,403
3,732
Total contract liabilities
3,403
3,732
Trade receivables and unbilled receivables are disclosed in note 14.
Notes to the Financial Statements continued
For the year ended 31 December 2022
148 SMS Annual report and accounts 2022
Significant changes in contract assets and liabilities
Contract assets and contract liabilities have not changed significantly, and movements reflect the general timing of revenue
recognition and status of services in progress at the end of the year.
Revenue recognised in relation to contract liabilities
The following table shows how much of the revenue recognised in the current period relates to carried-forward contract liabilities:
2022
£’000
2021
£’000
Revenue recognised that was included in the contract liability balance
at the beginning of the period
3,107
2,636
No revenue was recognised in 2022 in relation to performance obligations satisfied in previous periods.
Transaction price for which performance obligations not satisfied
All our utilities connections and energy management contracts are either for periods of one year or less or are billed
periodically based on time and resources incurred, or other unit measures. As permitted under IFRS 15, the transaction price
allocated to these performance obligations unsatisfied at the end of the reporting period is not disclosed.
3 Profit from operations
2022
£’000
2021
(restated)
£’000
Profit from operations is stated after (charging)/crediting:
Cost of sales:
Direct staff and subcontractor costs
(31,207)
(22,338)
Depreciation of meter assets
(28,340)
(24,719)
Depreciation of grid-scale assets
(994)
—
Inventory costs
(3,316)
(995)
Short-term lease expense – restated1
(1,641)
(264)
Total cost of sales (before exceptional items)
(65,498)
(48,316)
Administrative expenses:
Staff costs
(20,924)
(17,842)
Depreciation:
– owned assets
(2,477)
(3,087)
– leased assets
(1,064)
(906)
Amortisation of intangibles
(4,152)
(4,060)
Auditor’s remuneration (note 3a)
(405)
(392)
Loss on disposal
(2,937)
(2,457)
Low-value lease expense
(37)
(29)
Research and development costs
(55)
(39)
Other operating charges
(13,171)
(13,054)
Total administrative expenses (before exceptional items)
(45,222)
(41,866)
Exceptional items (note 3b)
(6,646)
(6,478)
Other operating income (note 3c)
1,936
1,696
Total operating costs
(115,430)
(94,964)
1 Short-term lease expense relating to vans has been reclassified from Administrative expenses to Cost of sales in line with current year disclosure.
SMS Annual report and accounts 2022 149
Financial statements
Governance
Strategic report
3 Profit from operations continued
(a) Auditor’s remuneration
Auditor’s remuneration can be analysed as:
2022
£’000
2021
£’000
Audit of the parent company and consolidated financial statements
141
133
Audit of the financial statements of the Company’s subsidiaries
234
229
Other services – audit-related assurance services
30
30
405
392
(b) Exceptional items
2022
£’000
2021
£’000
Exceptional operating items
Losses on the traditional and SMETS1 meter portfolio
(5,716)
(5,906)
Acquisition-related costs
(205)
(307)
Costs attributable to COVID-19
—
(265)
Other non-recurring professional fees
(725)
—
(6,646)
(6,478)
Exceptional finance items
Facility fees
—
(1,742)
—
(1,742)
Total exceptional items
(6,646)
(8,220)
In 2021 exceptional finance costs of £1,742,000 comprised the acceleration of unamortised arrangement fees relating to the
existing facility of £1,506,000 together with £236,000 of legal and professional fees attributable to the extinguishment.
The tax effect of exceptional items charged in 2022 is a credit of £1,473,000 (2021: credit of £1,978,000).
(c) Other operating income
2022
£’000
2021
£’000
Termination fee income
—
103
Government grant income
891
1,255
Other income
1,045
338
1,936
1,696
Of the government grant income of £891,000 (2021: £1,255,000) recognised in the year ended 31 December 2022, £280,000
relates to RDECs (2021: £489,000) which are detailed in the Accounting policies. A further £611,000 (2021: £766,000) relates
to grant income received on government-funded energy efficiency projects within the energy management business.
4 Particulars of employees
The average number of staff employed by the Group during the financial year, including Executive Directors, by activity was:
2022
Number
2021
Number
Administrative staff
539
488
Operational staff
729
548
Sales staff
6
5
IT staff
85
81
Directors (excluding 4 (2021: 4) Non-executive Directors)
2
3
1,361
1,125
Notes to the Financial Statements continued
For the year ended 31 December 2022
150 SMS Annual report and accounts 2022
The aggregate payroll costs of the employees were:
2022
£’000
2021
£’000
Wages and salaries
58,823
42,973
Social security costs
5,050
4,694
Staff pension costs
1,426
1,365
Share-based payment (note 28)
2,612
841
Director pension costs
24
21
67,935
49,894
5 Finance costs and finance income
2022
£’000
2021
£’000
Finance costs
Bank loans and overdrafts
3,833
3,132
Lease liabilities
552
75
Unwind of discount on liabilities
19
—
Foreign exchange (gain)/loss on intra-group borrowings
(131)
281
Total pre-exceptional finance costs
4,273
3,488
Exceptional finance costs
—
1,742
Total finance costs
4,273
5,230
Finance income
Bank interest receivable
324
7
Total finance income
324
7
6 Taxation
2022
£’000
2021
£’000
Analysis of charge in the year
Current tax:
Current income tax expense
53
93
Adjustment to tax charge in respect of previous periods
2
–
Total current income tax
55
93
Deferred tax:
Origination and reversal of temporary differences
1,322
2,087
Adjustment to tax charge in respect of prior periods
(293)
(127)
Adjustment attributable to change in tax rates
—
2,448
Tax on profit
1,084
4,501
SMS Annual report and accounts 2022 151
Financial statements
Governance
Strategic report
6 Taxation continued
The charge for the period can be reconciled to the profit per the consolidated statement of comprehensive income as follows:
2022
£’000
2021
£’000
Profit before tax
15,955
8,293
Tax at the UK corporation tax rate of 19.00% (2021: 19.00%)
3,031
1,576
Expenses not deductible for tax purposes
277
171
Income not taxable
(28)
–
Impact of super-deduction permanent benefit
(2,294)
–
Adjustments to tax charge in respect of previous periods
(291)
(127)
Impact of deferred tax not recognised
47
(99)
Impact of overseas tax rates
25
24
Change in tax rate1
317
2,956
Tax expense in the income statement
1,084
4,501
1 See note 22 for further details.
Current tax credit through equity in the year was £nil (2021: £nil).
7 Earnings per share
The calculation of earnings per share (EPS) is based on the following data and number of shares:
2022
£’000
2021
£’000
Profit for the year used for calculation of basic EPS
14,871
3,792
Number of shares
2022
2021
Weighted average number of ordinary shares for the purposes of basic EPS
133,241,113
118,330,817
Effect of potentially dilutive ordinary shares:
– share options
615,969
641,710
Weighted average number of ordinary shares for the purposes of diluted EPS
133,857,082
118,972,527
EPS:
– basic (pence)
11.16
3.20
– diluted (pence)
11.11
3.19
8 Dividends
Year
ended
31 December
2022
£’000
Year
ended
31 December
2022
Per share
(pence)
Year
ended
31 December
2021
£’000
Year
ended
31 December
2021
Per share
(pence)
FY 2020 second interim dividend paid
—
—
7,059
6.2500
FY 2020 third interim dividend paid
—
—
7,065
6.2500
FY 2020 final dividend paid
—
—
7,107
6.2500
FY 2021 first interim dividend paid
—
—
7,829
6.8750
FY 2021 second interim dividend paid
9,166
6.8750
—
—
FY 2021 third interim dividend paid
9,169
6.8750
—
—
FY 2021 final dividend paid
9,170
6.8750
—
—
FY 2022 first interim dividend paid
10,087
7.5625
—
—
Total dividends
37,592
28.1875
29,060
25.6250
Per the Group’s dividend policy, a 27.5p per share dividend was approved in respect of FY 2021 payable in four instalments of
6.875p per share to shareholders in four cash instalments.
Notes to the Financial Statements continued
For the year ended 31 December 2022
152 SMS Annual report and accounts 2022
A 30.25p per share dividend is proposed in respect of FY 2022 payable in four instalments of 7.5625p per share which are
intended to be paid as follows:
Instalment
Ex-dividend date
Record date
Payment date
1
06 October 2022
07 October 2022
28 October 2022
2
05 January 2023
06 January 2023
26 January 2023
3
06 April 2023
11 April 2023
27 April 2023
4
06 July 2023
07 July 2023
27 July 2023
The second, third and fourth instalments will amount to c.£30m and will be accounted for in 2023.
Under the dividend policy, the second interim dividend is paid out of profits recognised in the year prior to the year in which
the dividends are declared and reported. As at 31 December 2022, the distributable profits in the parent company were
adequate to cover the proposed second interim dividend of c.£10m.
9 Intangible assets
Goodwill
£’000
Intangibles
recognised
upon
acquisition
£’000
IT
development
and software
£’000
Total
£’000
Cost
As at 1 January 2021
8,607
2,261
28,518
39,386
Additions
–
–
2,831
2,831
Acquisitions (note 24)
859
1,010
–
1,869
Exchange adjustments
(66)
(3)
(31)
(100)
As at 31 December 2021
9,400
3,268
31,318
43,986
Additions
–
–
2,222
2,222
Acquisitions (note 24)
737
–
1,479
2,216
Exchange adjustments
51
–
32
83
As at 31 December 2022
10,188
3,268
35,051
48,507
Amortisation
As at 1 January 2021
–
2,203
12,260
14,463
Charge for year
–
179
3,881
4,060
As at 31 December 2021
–
2,382
16,141
18,523
Charge for year
–
223
3,929
4,152
As at 31 December 2022
–
2,605
20,070
22,675
Net book value
As at 31 December 2022
10,188
663
14,981
25,832
As at 31 December 2021
9,400
886
15,177
25,463
As at 1 January 2021
8,607
58
16,258
24,923
10 Impairment of goodwill
The goodwill arising in a business combination is allocated, at acquisition, to the CGUs that are expected to benefit from that
business combination. Goodwill is allocated to CGUs as follows:
Asset
management
£’000
Asset
installation
£’000
Solo Energy
£’000
Total
£’000
Cost
As at 1 January 2022
4,971
3,497
932
9,400
Acquisitions (note 24)
737
–
–
737
Exchange adjustments
–
–
51
51
As at 31 December 2022
5,708
3,497
983
10,188
SMS Annual report and accounts 2022 153
Financial statements
Governance
Strategic report
10 Impairment of goodwill continued
Additional goodwill of £737,000 has been recognised in the year on the acquisition of n3rgy Data Limited and is recognised
in the Asset management CGU.
The Group tests goodwill for impairment annually or more frequently if there are indications that goodwill might be impaired.
Goodwill is tested for impairment by comparing the carrying amount of each CGU, including goodwill, with the recoverable
amount. The recoverable amounts are determined based on value-in-use calculations which require assumptions. The
calculations use cash flow projections based on financial budgets approved by the Board covering a one-year period,
together with management forecasts for a further four-year period. These budgets and forecasts have regard to historical
performance and knowledge of the current market, together with the Group’s views on the future achievable growth and the
impact of committed cash flows. Cash flows beyond this are extrapolated using the estimated growth rates stated below.
The cash flows used in the value-in-use calculation for the asset management segment include all costs incurred in the
provision of meter assets to energy suppliers, together with the initial installation. The cash flows used in the value-in-use
calculation for the asset installation segment exclude installation costs incurred to fit an owned meter. For the purpose of
the value-in-use calculation, these are instead allocated to the asset management segment, being the segment to which
the corresponding revenues are allocated.
The annual impairment test was performed for the three CGUs identified above that have goodwill allocated to them.
No evidence of impairment was found at the balance sheet date.
The key assumptions used in the value-in-use calculations for those CGUs that have goodwill allocated to them are as follows:
• Perpetual growth rate – the terminal cash flows are extrapolated in perpetuity using a growth rate of 2.25% for asset
management (2021: 2.25%) and 1.0% for asset installation and Solo Energy (2021: 1.0% for asset installation and Solo
Energy). The rate of 2.25% applied to asset management is derived from historical Retail Price Index increases applied to
the segment’s index-linked meter rentals. This is not considered to be higher than the average long-term industry growth
rate. The rate of 1.0% applied to asset installation and Solo Energy is aligned to the Group's corporate forecast model and
is lower than the rate applied to asset management as revenues in these segments are not always index-linked.
• Discount rate – the discount rate is initially based on the weighted average cost of capital (WACC) which would be
anticipated for a market participant investing in the Group. A specific discount rate is then calculated for each operating
segment, taking into account the time value of money, the segment’s risk profile and the impact of the current economic
climate. The pre-tax discount rates applied are 8.0%, 10.0% and 19.4% for asset management, asset installation and Solo
Energy respectively (2021: 6.8% for asset management, 8.6% for asset installation and 18.2% for Solo Energy) and the
post-tax discount rates applied are 6.0%, 7.5% and 15.0% for asset management, asset installation and Solo Energy
respectively (2021: 5.5% for asset management, 7.00% for asset installation and 15.0% for Solo Energy). The risk premium
assigned to the asset installation CGU reflects the shorter-term nature of the underlying revenues within this segment, as
compared to the annually recurring revenue generated by an installed asset. The risk premium assigned to the Solo Energy
CGU reflects the pre-revenue status of this part of the business, in which the underlying system is still undergoing
development.
Management has performed sensitivity analysis on the key assumptions both with other variables held constant and with
other variables simultaneously changed. Management has concluded that there are no reasonably possible changes in
the key assumptions that would cause the carrying amounts of goodwill to exceed the value in use for any of the CGUs.
Notes to the Financial Statements continued
For the year ended 31 December 2022
154 SMS Annual report and accounts 2022
11 Property, plant and equipment
Land and
buildings
£’000
Meter
assets
£’000
Plant and
machinery
£’000
Fixtures,
fittings and
equipment
£’000
Motor
vehicles
£’000
Right-of-
use assets
£’000
Grid-scale
assets
£’000
Assets under
construction
£’000
Total
£’000
Cost
As at 1 January 2021
2,807
392,146
1,044
7,148
5,305
7,010
–
–
415,460
Reclassification1
–
–
–
–
–
–
–
4,071
4,071
Additions
–
82,401
126
1,117
28
5,267
–
24,505
113,444
Acquisitions
–
6,682
–
–
–
–
–
5,414
12,096
Disposals
(2)
(19,889)
–
(52)
(202)
–
–
–
(20,145)
Exchange adjustments
–
–
–
(6)
–
(4)
–
–
(10)
As at 31 December 2021
2,805
461,340
1,170
8,207
5,131
12,273
–
33,990
524,916
Reclassification
–
–
–
1
–
–
54,048
(54,049)
–
Reclassified as held for sale
(688)
–
–
–
–
–
–
–
(688)
Additions
1,105
105,004
18
994
719
5,509
84
36,251
149,684
Acquisitions
–
–
–
1
–
–
–
15,190
15,191
Disposals
(4)
(20,773)
(2)
(8)
(494)
(785)
–
–
(22,066)
Exchange adjustments
–
–
–
3
–
3
–
–
6
As at 31 December 2022
3,218
545,571
1,186
9,198
5,356
17,000
54,132
31,382
667,043
Depreciation
As at 1 January 2021
679
76,683
790
4,721
2,387
1,862
–
–
87,122
Charge for year
171
24,719
204
1,555
1,157
1,032
–
–
28,838
Disposals
1
(6,767)
–
(43)
(134)
–
–
–
(6,943)
Exchange adjustments
–
–
–
(1)
–
(1)
–
–
(2)
As at 31 December 2021
851
94,635
994
6,232
3,410
2,893
–
–
109,015
Reclassified as held for sale
(174)
–
–
–
–
–
–
–
(174)
Charge for year
172
28,340
91
1,176
1,038
1,264
994
–
33,075
Disposals
(3)
(7,116)
–
(7)
(391)
(599)
–
–
(8,116)
Exchange adjustments
–
–
–
2
–
1
–
–
3
As at 31 December 2022
846
115,859
1,085
7,403
4,057
3,559
994
–
133,803
Net book value
As at 31 December 2022
2,372
429,712
101
1,795
1,299
13,441
53,138
31,382
533,240
As at 31 December 2021
1,954
366,705
176
1,975
1,721
9,380
–
33,990
415,901
As at 1 January 2021
2,128
315,463
254
2,427
2,918
5,148
–
–
328,338
1 The reclassification of £4,071,000 within Assets under construction relates to costs previously recorded within Inventories at 31 December 2020.
Meter assets
In 2021, meter asset acquisitions include the c.15,000 assets acquired as part of the Industrial & Commercial large-power
half-hourly electricity business acquisition. See note 24 for details.
Included within the closing Meter assets net book value of £429,712,000 (2021: £366,705,000) is £11,173,000 (2021: £16,246,000)
relating to the traditional meter portfolio. In accordance with our accounting policy these assets will be written down to
zero by 1 July 2025. In the 2022 consolidated financial statements the traditional meter portfolio generated £10,198,000
(2021: £12,781,000) of revenue with a corresponding £4,383,000 (2021: £5,071,000) depreciation charge. As at 31 December 2022,
£11,168,000 (2021: £11,787,000) of annualised recurring revenue arises from the owned traditional meter portfolio.
The assets are secured by a bond and floating charge.
SMS Annual report and accounts 2022 155
Financial statements
Governance
Strategic report
11 Property, plant and equipment continued
Meter assets continued
For the purpose of impairment testing the traditional meter asset portfolio recognised within “Meter assets” is assessed as a
stand alone cash-generating unit (CGU) and its carrying amount is compared with the recoverable amount. See background
information provided in the “Key sources of estimation uncertainty” section in the accounting policies. The recoverable
amount is determined based on a value-in-use calculation, which uses the following key assumptions:
• estimated future cash flows from rental income, which decline based on the forecast for when meters are replaced;
• estimated future cash flows from termination income, which are derived using historical data and analysis around the risk
of churn between contracted and non-contracted customers and the risk of non-recoverability once issued; and
• a pre-tax discount rate of 6.45%, which reflects the risk attached to the time value of these specific cash flows and is
deemed to be best represented by the Group’s incremental cost of borrowing on the basis that cash flows are secured by
the installed meter and the risk inherent in the decline of the cash flows is already accounted for through the assumptions
detailed above.
The impairment test indicated that the value in use of the traditional meter assets CGU exceeded its carrying value and
therefore no impairment has been recognised in the year to 31 December 2022.
Management has performed sensitivity analysis on the key assumptions both with other variables held constant and with
other variables simultaneously changed. Management has concluded that there are no reasonably possible changes in
the key assumptions that would cause the carrying amounts of the traditional meter portfolio to exceed the value in use
for either CGU.
No impairment on other meter assets was recognised in 2022 or 2021.
Right-of-use assets
A breakdown of right-of-use assets is presented below:
Carrying value
2022
£’000
2021
£’000
Properties1
3,840
4,502
Land
9,601
4,878
13,441
9,380
1 Properties include office and warehouse space.
The statement of profit or loss shows the following amounts relating to leases:
Depreciation charge on right-of-use assets
2022
£’000
2021
£’000
Properties
1,024
919
Motor vehicles
-
6
Land
240
107
1,264
1,032
12 Investment in associate
2022
£’000
2021
£’000
At 1 January
–
–
Additions
2,126
–
Share of loss for the period
(186)
Dividends received
–
–
At 31 December
1,940
–
On 15 June 2022, the Group acquired a 25% shareholding in Clenergy EV Ltd, a software business with a chargepoint
operator (CPO) platform focused on electric vehicle charging infrastructure. The agreement also gives the Group the option
to invest a further £2.0m after one year to acquire an additional 26% interest and an option to acquire the remaining shares
after five years.
Notes to the Financial Statements continued
For the year ended 31 December 2022
156 SMS Annual report and accounts 2022
Summarised financial information for Clenergy EV Ltd for the period since investment and after adjustment for fair value
adjustments at acquisition and differences in accounting policies is set out below:
2022
£’000
2021
£’000
Revenue
723
–
Operating profit excluding depreciation and amortisation (EBITDA)
(88)
–
Depreciation and amortisation
(868)
–
Taxation
214
–
Loss after taxation
(742)
–
Group’s share of associate’s loss for the period
(186)
–
2022
£’000
2021
£’000
Non-current assets
8,627
–
Current assets
1,609
–
Current liabilities
(482)
–
Non-current liabilities
(1,996)
–
Net assets
7,758
–
Group’s share of associate’s net assets
1,940
–
13 Inventories
2022
£’000
2021
£’000
Finished goods
36,888
22,476
Consumables
550
504
37,438
22,980
14 Trade and other receivables
2022
£’000
2021
£’000
Current
Trade receivables
25,297
22,451
Prepayments and deferred costs
3,112
2,520
Accrued income
19,385
19,265
Other receivables
4,517
1,463
VAT recoverable
624
1,932
52,935
47,631
Amounts falling due after more than one year:
2022
£’000
2021
£’000
Payments on account to acquire grid-scale battery assets
12,347
–
Accrued income is made up of the following balances:
2022
£’000
2021
£’000
Unbilled receivables
18,714
18,915
Contract assets
287
46
Other accrued income
384
304
19,385
19,265
The Directors consider that the carrying amount of trade and other receivables approximates to their fair value.
SMS Annual report and accounts 2022 157
Financial statements
Governance
Strategic report
14 Trade and other receivables continued
The Group’s credit risk is primarily attributable to trade receivables and accrued income. The amounts presented in the
consolidated statement of financial position are net of any loss allowance. The total loss allowance for trade receivables
and accrued income at 31 December 2022 was £4,182,000 (2021: £4,370,000). See note 23 for further details. The ageing
profile of trade receivables past due date is shown below:
2022
£’000
2021
£’000
Current
15,894
13,019
1-30 days
7,069
3,728
31-60 days
1,128
1,615
61-90 days
639
1,499
91-120 days
597
1,705
Over 120 days
4,782
5,812
30,109
27,378
Loss allowance
(3,026)
(3,969)
Amounts offset (see note 23)
(1,786)
(958)
25,297
22,451
Trade receivables are non-interest-bearing and are generally on 30 to 90-day terms. Trade receivables due from related
parties at 31 December 2022 amounted to £nil (2021: £nil).
Substantially all trade receivables are denominated in Sterling.
Accrued income, which is made up of unbilled receivables and contract assets, is presented net of any loss allowance and
impairment, with amounts being invoiced periodically and customers being the same as those within trade receivables.
The loss allowance for accrued income at 31 December 2022 was £1,156,000 (2021: £401,000) and the charge recognised
in profit or loss during the year was £755,000.
15 Cash and cash equivalents
Cash and cash equivalents comprise cash held by the Group. The carrying amount of the asset approximates the fair value.
Substantially all balances are held in Sterling.
For the purposes of the cash flow statement, cash and cash equivalents comprises:
2022
£’000
2021
£’000
Cash at bank
32,770
67,687
Short-term deposits
–
50,000
Cash and cash equivalents
32,770
117,687
Cash and cash equivalents – restricted
307
1,299
Total cash and cash equivalents
33,077
118,986
16 Assets held for sale
The Group classifies non-current assets as held for sale if the assets are available immediately for sale in their present
condition, management is committed to a plan to sell the assets under usual terms, it is highly probable that their carrying
amounts will be recovered principally through a sale transaction rather than through continuing use and the sale is expected
to be completed within one year from the date of the initial classification.
Assets classified as held for sale are presented separately in the consolidated statement of financial position and are
measured at the lower of their carrying amount and fair value less costs to sell. Property, plant and equipment are not
depreciated once classified as held for sale.
2022
£’000
2021
£’000
Property awaiting disposal
513
–
A warehouse, which is no longer required following the consolidation of the Group’s warehouse operations, is classified as
held for sale as at 31 December 2022.
Notes to the Financial Statements continued
For the year ended 31 December 2022
158 SMS Annual report and accounts 2022
17 Trade and other payables
2022
£’000
2021
£’000
Current
Trade payables
28,447
16,638
Other payables
5,350
4,097
Other taxes
1,725
1,519
Deferred income
2,806
2,898
Advance payments
995
1,185
Accruals
30,055
30,152
69,378
56,489
Deferred income and advance payments are made up of the following balances:
2022
£’000
2021
£’000
Contract liabilities
3,403
3,732
Other deferred income
398
351
3,801
4,083
The Directors consider that the carrying amount of trade and other payables approximates to their fair value.
Trade payables are classified at amortised cost, are non-interest-bearing and are normally settled on 30 to 45-day terms.
Substantially all trade liabilities are denominated in Sterling.
18 Bank loans
2022
£’000
2021
£’000
Current
591
–
Non-current
63,349
–
63,940
–
The Group has a £420m revolving credit facility which matures in December 2025. Interest is payable at a rate of 1.85% over
SONIA and 0.65% is payable on undrawn funds.
The loans drawn under the facility are all denominated in Pounds Sterling. The balance as at 31 December 2022 is stated net
of £1,651,000 of unamortised transaction costs.
No principal or interest was outstanding as at 31 December 2021 and the amount recognised as Bank loans was therefore nil.
Unamortised transaction costs of £2,201,000 that would ordinarily be deducted from the carrying value of bank loans were
therefore classified as Other assets (£550,000 was classified as current Other assets, with the balance of £1,651,000
classified as non-current, in line with the remaining term of the facility).
The movement in bank loans is:
2022
£’000
2021
£’000
As at 1 January
(2,201)
(1,949)
Cash flows – proceeds of new borrowings
65,000
–
Cash flows – payments of interest
(212)
(554)
Cash flows – payments of arrangement fees
(227)
(2,077)
Non-cash changes – accrual of interest
803
246
Non-cash changes – amortisation of arrangement fees
777
2,133
As at 31 December
63,940
(2,201)
Presentational reclassification to Other assets
–
2,201
Bank loans as at 31 December
63,940
–
SMS Annual report and accounts 2022 159
Financial statements
Governance
Strategic report
18 Bank loans continued
The Group has the following committed facility:
2022
£’000
2021
£’000
Undrawn committed borrowing facility
323,450
404,650
Bank loans drawn
65,000
–
Utilised in respect of guarantees
31,550
15,350
Total facility
420,000
420,000
The Group has complied with the financial covenants of its borrowing facility during the current and prior reporting periods.
19 Lease liabilities
2022
£’000
2021
£’000
Current
885
999
Non-current
11,476
7,574
12,361
8,573
The movement in lease liabilities is:
2022
£’000
2021
£’000
As at 1 January
8,573
5,251
Cash flows – lease payments
(1,500)
(1,247)
Non-cash changes – accrued lease payments
(22)
–
Non-cash changes – new leases
3,654
4,230
Non-cash changes – changes in lease terms and foreign exchange impact
1,107
58
Non-cash changes – interest charge
549
281
As at 31 December
12,361
8,573
20 Provisions
Provisions comprise:
2022
£’000
2021
£’000
Non-current
Provision for restoration and decommissioning costs
2,033
798
2,033
798
The movement in provisions is:
2022
£’000
2021
£’000
As at 1 January
798
–
Provisions recognised
1,240
798
Utilised in the year
(5)
–
As at 31 December
2,033
798
The Group is required to restore the land leased as part of its grid-scale battery storage business, and certain leased
warehouses, to the condition required by the terms and conditions of the lease at the end of the respective lease terms
(which range between three to ten years for warehouses and 20 to 40 years for land). A provision has been recognised for the
present value of the estimated expenditure required to carry out this restoration. These costs have been capitalised as part
of the cost of right-of-use assets and are depreciated over the shorter of the term of the lease and the useful life of the
assets. Provisions also include the estimated cost to decommission grid-scale batteries at the end of their life.
Notes to the Financial Statements continued
For the year ended 31 December 2022
160 SMS Annual report and accounts 2022
21 Other liabilities
Other liabilities comprise:
2022
£’000
2021
£’000
Current
Deferred consideration on acquisitions
1,388
638
1,388
638
Non-current
Deferred consideration on acquisitions
674
750
Contingent consideration on acquisitions
606
–
1,280
750
Refer to notes 24 and 25 for further details on the contingent and deferred consideration.
22 Deferred taxation
The movement in the deferred taxation liability during the year was:
2022
£’000
2021
£’000
Opening deferred tax liability
12,199
8,511
Increase in provision through consolidated statement of comprehensive income
1,029
4,408
Increase/(decrease) in provision through equity
93
(319)
Deferred tax in respect of acquisitions and disposals
175
(401)
Closing deferred tax liability
13,496
12,199
The Group’s provision for deferred taxation consists of the tax effect of temporary differences in respect of:
2022
£’000
2021
£’000
Excess of taxation allowances over depreciation on property, plant and equipment
13,527
11,036
Tax losses available
(115)
(51)
Deferred tax asset on share options
(1,519)
(1,438)
Deferred tax on intangibles acquired
1,240
1,168
Other temporary differences1
363
1,484
13,496
12,199
The deferred tax included in the consolidated statement of comprehensive income is as follows:
2022
£’000
2021
£’000
Accelerated capital allowances
2,491
3,902
Tax losses
(9)
74
Deferred tax asset on share options
(175)
558
Movement in fair value of intangibles
(157)
256
Other temporary differences1
(1,121)
(382)
1,029
4,408
1 Other temporary differences predominately relate to deferred tax on provisions and accruals.
At 31 December 2022, the main rate of corporate tax applying to the profits of the Group was 19%. In the spring Budget 2021,
the UK Government announced that from 1 April 2023 the corporation tax rate would increase to 25% (rather than remaining
at 19%, as previously enacted). This new law was substantively enacted on 24 May 2021. Deferred taxes at the balance sheet
date have been measured using these enacted tax rates and reflected in these financial statements.
SMS Annual report and accounts 2022 161
Financial statements
Governance
Strategic report
22 Deferred taxation continued
Further, the UK Government announced legislation in respect of the ‘super-deduction’ for qualifying capital expenditure
incurred during a two-year period commencing 1 April 2021. This new law was also substantively enacted on 24 May 2021.
The Group has recognised an estimated permanent benefit of £2,294,000 on qualifying assets when calculating the tax
charge for the current year, as well as a permanent benefit in respect of the prior year of £230,000.
The Group had unrecognised trading losses of £1,762,000 (2021: £1,456,000) in subsidiary undertakings at 31 December 2022.
The Group also had unrecognised capital losses of £729,000 (2021: £729,000) in subsidiary undertakings at 31 December 2022.
23 Financial risk management
The Board reviews and agrees policies for managing the risks associated with interest rate, credit and liquidity risk.
The Group has in place a risk management policy that seeks to minimise any adverse effect on the financial performance
of the Group by continually monitoring the following risks:
(a) Interest rate risk
The Group’s main interest rate risk arises from its floating rate bank loan. See note 18 for further details.
There were no overdrafts at 31 December 2022 (2021: none) and the interest charge arising on lease liabilities does not
represent a cash interest rate risk for the Group.
The Group’s financial assets at 31 December 2022 comprise cash and trade receivables. The cash balance of £32,770,000
(2021: £117,687,000) is a floating rate financial asset, but interest income is not typically material.
Interest rate sensitivity
The following table shows how a change in interest rates applied to the average level of borrowings would have affected the
Group’s interest cost and profit before tax:
Increase/(decrease)
in interest rate in
basis points
(Decrease) in profit
before tax
£’000
2022
+100bps
(198)
2021
+70bps
–
(b) Fair values of financial liabilities and financial assets
The Group’s bank loan is measured at amortised cost. For fair value disclosure purposes, the bank loan is considered to be a
level 2 financial instrument on the basis that it is not traded in an active market. The fair values, based upon the market value
or discounted cash flows of financial liabilities and financial assets held in the Group, were not materially different from their
book values.
(c) Foreign currency risk
The Group’s exposure to the risk of changes in foreign exchange primarily arises from a single subsidiary, operating in Euros.
With the exception of this entity, all of the Group’s operating activities are denominated in Pounds Sterling and, therefore,
the Group’s overall exposure is not significant.
(d) Liquidity risk
The Group manages its cash in a manner designed to ensure maximum benefit is gained whilst ensuring security of
investment sources. The Group’s policy on investment of surplus funds is to place deposits at institutions with strong credit
ratings; this is considered to be institutions with a credit rating of AA– and above. Currently, all of the chosen investment
institutions are in line with these criteria.
Notes to the Financial Statements continued
For the year ended 31 December 2022
162 SMS Annual report and accounts 2022
The ageing and maturity profile of the Group’s material financial liabilities is disclosed in the table below. The amounts
disclosed are the contractual undiscounted cash flows.
31 December 2022
Less than
one year
£’000
Between
two and
five years
£’000
Over
five years
£’000
Total
contractual
cash flows
£’000
Contractual maturities of financial liabilities
Trade payables
28,447
–
–
28,447
Bank loan
591
–
–
591
Other liabilities
1,388
1,280
–
2,668
Lease liabilities
1,133
3,104
5,648
9,885
31,559
4,384
5,648
41,591
31 December 2021
Less than
one year
£’000
Between
two and
five years
£’000
Over
five years
£’000
Total
contractual
cash flows
£’000
Contractual maturities of financial liabilities
Trade payables
16,638
–
–
16,638
Bank loan
–
–
–
–
Other liabilities
638
–
–
638
Other long-term liabilities
–
750
–
750
Lease liabilities
1,280
3,232
5,965
10,477
18,556
3,982
5,965
28,503
(e) Credit risk
The Group’s credit risk primarily arises from credit exposures to energy suppliers (our customers), including outstanding
receivables, due to the Group trading with a limited number of companies, which are generally large utility companies
or financial institutions.
Credit risk is managed on a Group basis. For banks and financial institutions, only independently rated parties with a
minimum rating of AA– are accepted. With regard to customers, the Group assesses the credit quality of the customer,
considering its financial position, past experience and other factors. The Group does not expect, in the normal course of
events, that debts due from customers are at significant risk. The Group’s maximum exposure to credit risk equates to the
carrying value of cash and cash equivalents, trade and other receivables, contract assets and investments. The Group’s
maximum exposure to credit risk from its customers is £44,682,000 (2021: £41,716,000), being the sum of the carrying value of
trade receivables and accrued income, including contract assets, as disclosed within Trade and other receivables in note 14.
The Group regularly monitors and updates its cash flow forecasts to ensure it has sufficient and appropriate funds to meet
its ongoing operational requirements.
Impairment of financial assets
The Group has two types of financial assets that are subject to IFRS 9’s expected credit loss model:
• trade receivables, which consist of billed receivables arising from contracts with customers, for the provision of meter asset
installation, management and energy services; and
• accrued income, which consists of contract assets and unbilled receivables arising from contracts with customers.
While cash and cash equivalents, and debt investments held at amortised cost, are also subject to the impairment
requirements of IFRS 9, the identified impairment loss was immaterial.
The Group applies the IFRS 9 simplified approach to measuring forward-looking expected credit losses, which uses a lifetime
expected loss allowance for all trade receivables and accrued income, including contract assets.
To measure the ECL, trade receivables and accrued income have been grouped based on shared credit risk characteristics
and the days past due. Accrued income relates to rights to consideration for performance, and other operating charges,
before payment is due from customers, and consists of unbilled receivables and contract assets (see note 2 for details).
These have substantially the same risk characteristics as the trade receivables for the same types of contracts. The Group
has therefore concluded that the expected loss rates for trade receivables are a reasonable approximation of the loss rates
for accrued income.
SMS Annual report and accounts 2022 163
Financial statements
Governance
Strategic report
23 Financial risk management continued
(e) Credit risk continued
The Group has established a provision matrix based on the payment profiles of sales, over the most recent twelve-month
period that is an appropriate representation of loss patterns, and the corresponding historical credit losses experienced
within this period. The historical loss rates are adjusted to reflect current and forward-looking information that might affect
the ability of customers to settle the receivables, including macroeconomic factors as relevant. In calculating the loss rates,
certain historical losses arising from specific circumstances with customers have been removed where these are not
indicative of future loss patterns.
During the second half of 2021, the global energy market suffered from unprecedented increases in wholesale gas prices,
creating significant volatility within the UK energy market and leading to a number of independent energy suppliers entering
administration and exiting the market. This crisis notably impacted the smaller independent energy suppliers and, as a
result, management did not increase the expected loss rates for the trade receivables portfolio as a whole. Instead, a subset
of trade receivables has been identified as having a potentially elevated credit risk, due to a greater risk of administration as
a direct consequence of the crisis. This subset of trade receivables has been provided for on a specific basis and has resulted
in an additional £0.2m impairment loss in the year. Given the continued and changing uncertainty regarding the impact of
this crisis on customer default risk, management will continue to monitor the situation and reassess its ECL at each reporting
period end accordingly.
On that basis, the loss allowance at 31 December 2022 was determined as £4,182,000 (2021: £4,370,000) for trade
receivables and accrued income. A reconciliation of these balances is provided as follows:
Accrued
income
£’000
Trade
receivables
£’000
Total
£’000
At 1 January 2022
401
3,969
4,370
Increase/(decrease) in loss allowance recognised in profit or loss
during the year – underlying
755
(192)
563
Amounts reversed/written off during the year
–
(751)
(751)
At 31 December 2022
1,156
3,026
4,182
The overall loss allowance has decreased at 31 December 2022. Whilst the crisis in the energy market has given rise to
an additional impairment loss in the year, as detailed above, only one energy supplier entered administration during 2022
in comparison to the high number of insolvencies seen in the prior year.
Total net impairment losses on financial and contract assets were £563,000 in 2022 (2021: £2,964,000). Of this amount,
£563,000 (2021: £2,964,000) relates to amounts arising from trade receivables and accrued income.
Fair value
There is no material difference between the book value and the fair value of any financial asset or liability.
(f) Capital management
Capital is the equity attributable to the equity holders of the parent. The primary objective of the Group’s capital
management is to ensure that it maintains a strong credit rating and healthy capital ratios in order to support its business
and maximise shareholder value. The Group manages its capital structure, and makes adjustments to it, in light of changes
in economic conditions. To maintain or adjust the capital structure, the Group may adjust the dividend payment to
shareholders, sell assets, return capital to shareholders or issue new shares.
The Group monitors capital on the basis of a leverage ratio. This ratio is calculated as net debt divided by pre-exceptional
EBITDA. Net debt is calculated as total borrowings less cash. Pre-exceptional EBITDA is calculated as operating profit
before any significant exceptional items, interest, tax, depreciation and amortisation.
The objective of SMS’s strategy is to deliver long-term value to its shareholders whilst maintaining a balance sheet structure
that safeguards the Group’s financial position. Under the Group’s enhanced dividend policy, SMS declared a 27.5p per share
dividend in respect of FY 2021 and proposes a 30.25p per share dividend in respect of FY 2022. The Group’s long-term
index-linked cash flows from its existing asset base are able to support an intended annual increase of 10% in dividends for
each of the financial years FY 2022, FY 2023 and FY 2024. This results in a more predictable return to shareholders and
reflects the forecast growth of the business over and above RPI in that period. The Group’s strong liquidity position supports
the funding of its contracted smart meter order pipeline, which will further add to its long-term index-linked cash flows.
Notes to the Financial Statements continued
For the year ended 31 December 2022
164 SMS Annual report and accounts 2022
(g) Disclosure of offsetting arrangements
31 December 2022
Gross
balances1
£’000
Amounts
offset2
£’000
Balance
sheet3
£’000
Financial assets
Trade receivables
27,083
(1,786)
25,297
Accrued income
23,138
(3,753)
19,385
Financial liabilities
Trade payables
28,579
(132)
28,447
Accruals
35,463
(5,408)
30,055
31 December 2021
Gross
balances1
£’000
Amounts
offset2
£’000
Balance
sheet3
£’000
Financial assets
Trade receivables
23,409
(958)
22,451
Accrued income
20,313
(1,048)
19,265
Financial liabilities
Trade payables
16,770
(132)
16,638
Accruals
32,026
(1,874)
30,152
1 The gross amounts of the recognised financial assets and liabilities.
2 Amounts are offset where there is a legally enforceable right to offset the recognised amounts and there is an intention to settle on a net basis or realise
the asset and liability simultaneously, in accordance with IAS 32.
3 The net amounts presented in the consolidated statement of financial position.
24 Business combinations
Year ended 31 December 2022
On 25 May 2022, the Group acquired 100% of the issued share capital of n3rgy Data Limited, a data software company, for
cash consideration of £1.4m and additional contingent consideration subject to the company achieving certain performance
targets. n3rgy Data Limited’s software enables and facilitates the use of energy consumption, generation and tariff data
from smart meters. The acquisition is expected to enhance and accelerate the Group’s capabilities in smart energy data
solutions and is reported in the Group’s asset management segment.
The fair values of the assets and liabilities acquired and of the consideration are as follows:
Fair value
£’000
Intangible assets: software
1,479
Trade and other receivables
149
Cash
86
Trade and other payables
(202)
Deferred tax liabilities
(229)
Net identifiable assets acquired
1,283
Add: goodwill
737
Net assets acquired
2,020
Satisfied by:
Cash
1,432
Contingent consideration
588
Total consideration
2,020
The net outflow of cash in respect of the purchase of the business is:
£’000
Cash consideration
1,432
Cash and cash equivalents acquired
(86)
Net cash outflow in respect of the purchase of the business
1,346
No contingent assets or liabilities were acquired.
SMS Annual report and accounts 2022 165
Financial statements
Governance
Strategic report
24 Business combinations continued
Year ended 31 December 2022 continued
If n3rgy Data Limited’s EBITDA over a five year earn-out period exceeds a threshold, then contingent consideration
becomes payable based on the amount by which the EBITDA exceeds the threshold. The minimum payment is therefore nil
and the maximum payment is unlimited. The fair value of the contingent consideration at the acquisition date of £588,000
represents the estimated most likely pay-out based on management's future forecast of future trading (level 3) discounted
at the Group’s incremental borrowing rate.
The goodwill is mainly attributable to synergies and the opportunity to accelerate growth of the Group’s data business.
Goodwill will not be deductible for tax purposes.
The acquisition contributed £127,000 to the Group’s revenue and reduced the Group’s profit before tax by £406,000 between
the date of acquisition and 31 December 2022.
If the acquisition had been completed on 1 January 2022, the Group’s revenue would have been £135,591,000 and profit
before tax would have been £15,786,000 for the year ended 31 December 2022.
Acquisition-related costs of £20,000 have been included as part of exceptional Administrative costs in the consolidated
statement of comprehensive income.
Year ended 31 December 2021
On 6 April 2021 the Group acquired a portfolio of c.15,000 Industrial & Commercial large-power half-hourly electricity meters
from a third party. The Group also took ownership of the Meter Operator (MOP) and data service contracts associated with
a portfolio of electricity meters. This is reported through the Group’s asset management segment.
As part of the transaction, a workforce was transferred with the skills, knowledge and experience to generate revenues from
the assets and contracts acquired, and potentially grow the acquired business for the Group. Such a workforce meets the
definition of a substantive process under IFRS 3. On the basis that the Group has obtained inputs, a substantive process and
outputs, management has concluded that the acquisition meets the definition of a business combination and should be
accounted for as such under IFRS 3.
Purchase consideration consisted of cash only. Total cash paid was £8,433,000.
The assets and liabilities recognised as a result of the acquisition were as follows:
31 December 2021
Fair value
£’000
Intangible assets: customer contracts
1,010
Property, plant and equipment: meter assets
6,682
Inventories
700
Trade and other receivables
1,778
Trade and other payables
(2,368)
Deferred tax liability
(228)
Net identifiable assets acquired
7,574
Add: goodwill
859
Net assets acquired
8,433
No contingent assets or liabilities were acquired. The customer contracts acquired were valued using a multi-period excess
earnings method, which assesses the present value of the after-tax cash flows attributable only to these contracts.
The goodwill is attributable to the opportunity to grow this part of the business for the Group. Goodwill will not be deductible
for tax purposes.
For the year ended 31 December 2021, the acquired business contributed a net profit before taxation of £1.7m to the Group.
If the acquisition had occurred on 1 January 2021, consolidated pro-forma profit for the year ended 31 December 2021 would
have been approximately £2.2m.
Acquisition-related costs of £0.3m have been incurred to date, including transaction costs and mobilisation costs to
integrate the newly-acquired business into the Group, and have been included as part of exceptional Administrative costs in
the consolidated statement of comprehensive income.
Notes to the Financial Statements continued
For the year ended 31 December 2022
166 SMS Annual report and accounts 2022
25 Asset acquisitions
Year ended 31 December 2022
During the year ended 31 December 2022, the Group acquired 100% of the issued share capital of the seven special purpose
vehicle companies listed below. Details of the purchase consideration are as follows:
Name of acquired company
Company
number
Acquisition date
Cash
consideration
£’000
Deferred
consideration
£’000
Total
consideration
£’000
Balance Energy 2 Limited
12266348
14 February 2022
856
—
856
Fen Power 1 Limited
12875930
26 April 2022
600
274
874
Drumcross Energy Storage Limited
SC679835
8 July 2022
2,815
—
2,815
Erskine Energy Storage Limited
SC690064
17 August 2022
2,654
—
2,654
Balance Energy 3 Ltd
12341398
1 October 2022
2,780
400
3,180
Balance Energy 1 Ltd
11894406
1 October 2022
3,031
200
3,231
Bramford Power Limited
12480700
7 October 2022
1,826
—
1,826
Total purchase consideration
14,562
874
15,436
All seven companies report in British Pounds Sterling. The acquisitions enable SMS to obtain control over the rights required
to develop and commission seven grid-scale battery storage sites, totalling 320MW, as part of the Group’s strategy of
investment in CaRe assets. Grid-scale battery storage is reported through the Group’s energy management segment and
is a key asset class required by the UK energy system to provide flexibility services to balance the grid and support the
continued introduction of more intermittent renewable generation.
In respect of one of the companies, deferred consideration of £274,000 is payable in cash upon energisation (when the
grid-scale battery storage asset is connected to the grid). Deferred consideration of a further £600,000 is payable on the
execution of certain property deeds. The payments have been measured at fair value at the acquisition date, ignoring the
impact of discounting on the basis that the anticipated payment date is within 24 months of the current reporting date and
management consider the impact of discounting over this period to be immaterial.
Management has concluded that these acquisitions do not meet the definition of a business combination under IFRS 3 on
the basis that no substantive processes have been transferred. Therefore, these transactions have been accounted for as
acquisitions of a group of assets. No goodwill thus arises on the transactions.
The individual assets and liabilities acquired have been identified and the cost of the transactions has been allocated to the
assets acquired, and liabilities assumed, based on their relative fair values at the date of purchase as follows:
Total
£’000
Assets under construction
15,190
Trade and other receivables
248
Trade and other payables
(2)
Total purchase consideration
15,436
The majority of the value gained from acquiring the sites is attributable to development and construction rights
and therefore most of the total cost of the transaction has been allocated to Assets under construction.
No contingent assets or liabilities were acquired.
The cash outflow in 2022 relating to asset acquisitions is as follows:
Total
£’000
Cash consideration
14,562
Less: payments made in advance in earlier years
(135)
Add: deferred consideration paid in 2022 on acquisitions in earlier years
200
Cash outflow on asset acquisitions in 2022
14,627
SMS Annual report and accounts 2022 167
Financial statements
Governance
Strategic report
25 Asset acquisitions continued
Year ended 31 December 2021
During the year ended 31 December 2021, the Group acquired 100% of the issued share capital of the following companies:
Name of acquired company
Company
number
Registered office prior
to acquisition
Purchase
consideration
£'000
Acquisition
date
Nature of the
company
Newtonwood Energy
Storage Limited
11257609
Unit 9, the Green Easter Park,
Benyon Road, Reading,
Berkshire RG7 2PQ
1,471
9 March 2021
Special
purpose
vehicle
Brook Farm Energy
Storage Limited
10780034
Unit 9, the Green Easter Park,
Benyon Road, Reading,
Berkshire RG7 2PQ
1,572
11 June 2021
Special
purpose
vehicle
Berkeley Battery
Storage 2 Limited
10942601
Suite 4D Drake House,
Dursley, Gloucestershire
GL11 4HH
1,306
15 June 2021
Special
purpose
vehicle
Brentwood Energy
Storage Limited
11516707
Unit 8-9 Benyon Road,
Silchester, Reading, Berkshire
RG7 2PQ
1,401
1 October 2021
Special
purpose
vehicle
All four companies report in British Pounds Sterling. The acquisitions enable SMS to obtain control over the rights required
to develop and commission four grid-scale battery storage sites, totalling 200MW, as part of the Group’s strategy of
investment in CaRe assets. Grid-scale battery storage is reported through the Group’s energy management segment
and is a key asset class required by the UK energy system to provide flexibility services to balance the grid and support
the continued introduction of more intermittent renewable generation.
Details of the purchase consideration are as follows:
Name of acquired company
Cash paid
£’000
Deferred
consideration
£’000
Total
consideration
£’000
Newtonwood Energy Storage Limited
1,221
250
1,471
Brook Farm Energy Storage Limited
1,572
—
1,572
Berkeley Battery Storage 2 Limited
1,056
250
1,306
Brentwood Energy Storage Limited
901
500
1,401
Total purchase consideration
4,750
1,000
5,750
In respect of three of the four companies, total additional consideration of £750,000 is payable in cash upon energisation
(when the grid-scale battery storage asset is connected to the grid). In addition, in respect of one of the four companies,
total additional consideration of £250,000 is payable in cash upon the full execution of an extension of the term of the land
lease. The payments have been measured at fair value at the acquisition date, ignoring the impact of discounting on the
basis that the anticipated payment date is within 24 months of the current reporting date and management consider the
impact of discounting over this period to be immaterial.
Management has concluded that these acquisitions do not meet the definition of a business combination under IFRS 3 on
the basis that no substantive processes have been transferred. Therefore, these transactions have been accounted for as
acquisitions of a group of assets. No goodwill thus arises on the transactions.
The individual assets and liabilities acquired have been identified and the cost of the transactions has been allocated to the
assets acquired, and liabilities assumed, based on their relative fair values at the date of purchase as follows:
Newtonwood
£’000
Brook Farm
£’000
Berkeley
£’000
Brentwood
£’000
Total
£’000
Assets under construction
1,272
1,596
1,290
1,256
5,414
Trade and other receivables
199
76
16
145
436
Trade and other payables
—
(100)
—
—
(100)
Total purchase consideration
1,471
1,572
1,306
1,401
5,750
No contingent assets or liabilities were acquired.
Notes to the Financial Statements continued
For the year ended 31 December 2022
168 SMS Annual report and accounts 2022
The majority of the value gained from acquiring the four sites is attributable to development and construction rights and
therefore a significant portion of the total cost of the transaction has been allocated to Assets under construction due to
its higher fair value relative to the other net assets acquired.
Transaction costs of £0.2m were incurred and have been capitalised as a component of the cost of the assets acquired,
classified as part of Assets under construction within Property, plant and equipment.
26 Related party transactions
(a) Key management personnel compensation
The Group has determined that its key management personnel comprise the Executive Directors, Non-executive Directors and
certain senior management personnel. The aggregate compensation paid or payable to key management is shown below:
2022
£’000
2021
£’000
Short-term employee benefits
3,154
2,747
Post-employment benefits
50
35
Termination benefits
273
146
Share-based payments
1,661
262
5,138
3,190
(b) Directors
Directors’ emoluments
Aggregate remuneration for both Executive and Non-executive Directors in respect of qualifying services was:
2022
£’000
2021
£’000
Aggregate emoluments
1,776
1,744
Company contributions to money purchase pension scheme
24
21
1,800
1,765
In 2022, £273,000 was payable to a Director as settlement following resignation (2021: £146,000 was payable to a Director
as settlement following resignation).
Detailed remuneration disclosures are also provided in the in the Annual Report on remuneration on pages 110 to 112.
Emoluments of highest paid Director
2022
£’000
2021
£’000
Emoluments
901
694
Company contributions to money purchase pension scheme
20
–
921
694
Number of Directors who accrued benefits under Company pension schemes
2022
Number
2021
Number
Money purchase schemes
3
3
SMS Annual report and accounts 2022 169
Financial statements
Governance
Strategic report
26 Related party transactions continued
(c) Other transactions with related parties
During the year, the Group entered into the following transactions with related parties:
• Rent amounting to £nil (2021: £10,375) paid to the Directors’ pension scheme, Eco Retirement Benefit Scheme, for the use
of certain premises. Alan Foy is a trustee of the scheme.
The Group paid dividends to Alan Foy (whilst a Director) of £321,809 (2021: £906,915), The Metis Trust1 of £61,875
(2021: £230,625), Metis Investments Limited2 of £25,599 (2021: £387,968), Tim Mortlock of £5,033 (2021: £1,501),
Gavin Urwin (whilst a Director) of £458 (2021: £153), Miriam Greenwood of £7,177 (2021: £6,129), Graeme Bissett of £5,796
(2021: £4,116) and Jamie Richards of £1,389 (2021: £1,002).
1 Alan Foy is a trustee but not a beneficiary.
2 Alan Foy is a Director and shareholder.
27 Share capital
2022
£’000
2021
£’000
Allotted and called up:
133,397,009 ordinary shares of £0.01 each (2021: 133,321,555 ordinary shares of £0.01 each)
1,334
1,333
During the year 75,454 (2021: 921,447) ordinary share options were exercised in relation to the Group’s employee share plans
which are described in note 28. The ordinary shares issued have a nominal value of £755 (2021: £9,000) and aggregate
consideration of £285,000 (2021: £1,627,000) was received.
The Group’s Share Incentive Plan is administered by the Smart Metering Systems SIP Trust, which acquires shares in SMS
(own shares) to satisfy awards under this plan and facilitate the delivery of shares to participants. At 31 December 2022,
145,821 (2021: 139,055) own shares were held in trust with a carrying value of £955,000 (2021: £825,000) and a market value
of £1,140,000 (2021: £1,169,000). The Company purchased 48,900 shares (2021: 34,191) from the market during 2022 with
a weighted average fair value of £8.08 per share (2021: £8.15).
28 Share-based payments
(a) Employee option plans
The Group operates the Unapproved Share Option Plan (the ‘Unapproved Plan’) and the Long-Term Incentive Plan (LTIP).
The Unapproved Plan is open to any employee, including Executive Directors. Participants are granted options which,
except in certain specified circumstances, only vest if certain performance conditions are met and the employee is still in
service five years from the date of grant. The performance conditions for awards are based on market capitalisation and
individual performance targets. Once vested, the options remain exercisable for a period of up to ten years from the date
of grant. The exercise price of the options is determined by the Directors but shall not be less than the closing price at which
the Company’s shares are traded on the date of grant.
The LTIP is open to senior employees. Participants are granted nil-cost options which are subject to performance conditions
and remaining employed up to the vesting date. The performance conditions are based on the total shareholder return and
meeting financial and non-financial targets over a three-year performance period. The vesting period varies from three to
five years. Once vested, the options remain exercisable for a period of up to ten years from the date of award.
Notes to the Financial Statements continued
For the year ended 31 December 2022
170 SMS Annual report and accounts 2022
Summary of options
The table below summarises options granted under the Unapproved Plan and LTIP:
Plan
At
1 January
2022
Granted
Exercised
Forfeited
Expired
At
31 December
2022
Exercise
price
(pence)
Date
exercisable
Expiry
date
Fair value
at grant
(pence)
Unapproved
437,832
–
(57,898)
–
–
379,934
350.0
12 Nov 2019
11 Nov 2024
84.8
Unapproved
43,890
–
(17,556)
–
–
26,334
470.0
18 Aug 2021
17 Aug 2026
87.2
Unapproved
50,000
–
–
–
–
50,000
529.0
26 Sep 2021
25 Sep 2026
142.4
Unapproved
409,001
–
–
(16,000)
–
393,001
700.0
1 Jan 2023
13 Jul 2028
125.2
Unapproved
12,000
–
–
–
–
12,000
602.8
13 Sep 2023
12 Sep 2028
154.3
Unapproved
409,000
–
–
(16,000)
–
393,000
700.0
1 Jan 2023
13 Jul 2028
34.6
Unapproved
12,000
–
–
–
–
12,000
602.8
13 Sep 2023
12 Sep 2028
98.0
Unapproved
370,000
–
–
–
–
370,000
454.6
5 Sep 2024
4 Sep 2029
111.5
Unapproved
409,000
–
–
(16,000)
–
393,000
700.0
1 Jan 2023
13 Jul 2028
37.2
Unapproved
12,000
–
–
–
–
12,000
602.8
13 Sep 2023
12 Sep 2028
105.6
Unapproved1
76,000
–
–
–
–
76,000
577.4
26 Jun 2025
25 Jun 2030
59.3
Unapproved
408,999
–
–
(16,000)
–
392,999
700.0
01 Jan 2023
13 Jul 2028
134.3
Unapproved
12,000
–
–
–
–
12,000
602.8
13 Sep 2023
12 Sep 2028
266.1
Unapproved1
76,000
–
–
–
–
76,000
577.4
26 Jun 2025
25 Jun 2030
191.4
Unapproved2 290,000
–
–
–
–
290,000
705.4
10 Feb 2026
09 Feb 2031
210.8
Unapproved
–
408,999
–
(16,000)
–
392,999
700.0
1 Jan 2023
13 Jul 2028
11.1
Unapproved
–
12,000
–
–
12,000
602.8
13 Sep 2023
12 Sep 2028
195.5
Unapproved1
–
76,000
–
–
76,000
577.4
26 Jun 2025
25 Jun 2030
144.4
Unapproved2
–
290,000
–
–
290,000
705.4
10 Feb 2026
09 Feb 2031
181.4
LTIP
–
57,701
–
–
57,701
nil
18 May 2025 18 May 2032
631.1
LTIP
–
19,234
–
–
19,234
nil
18 May 2025 18 May 2032
313.0
LTIP
–
9,617
–
–
9,617
nil
18 May 2026 18 May 2032
604.1
LTIP
–
3,206
–
–
3,206
nil
18 May 2026 18 May 2032
301.0
LTIP
–
9,617
–
–
–
9,617
nil
18 May 2027 18 May 2032
578.3
LTIP
–
3,205
–
–
–
3,205
nil
18 May 2027 18 May 2032
290.1
Total
3,027,722 889,579 (75,454) (80,000)
–
3,761,847
1 These options relate to the first three of five tranches.
2 These options relate to the first two of five tranches.
The weighted average share price at the date of exercise of options exercised during the year ended 31 December 2022
was £8.02 (2021: £8.37).
Fair value of options granted
Awards subject to a market capitalisation or total shareholder return condition are valued using a Monte Carlo simulation.
Other awards are valued using the Black-Scholes model.
The principal assumptions used in these valuations were:
31 December 2022
31 December 2021
Dividend yield (%)
3.5 to 4.3
3.3
Expected volatility (%)
30.03 to 38.48
35.96 to 41.33
Risk-free interest rate (%)
1.25 to 4.16
0.09 to 0.39
Expected option life (years)
1.28 to 4.87
2.28 to 4.87
Exercise price (£)
nil to 7.05
5.77 to 7.05
Share price at grant date (£)
7.08 to 7.89
8.30
Fair value at grant date (£)
0.11 to 6.31
1.34 to 2.66
The expected price volatility is based on historical volatility, adjusted for any expected changes to future volatility due to
publicly available information.
SMS Annual report and accounts 2022 171
Financial statements
Governance
Strategic report
28 Share-based payments continued
(a) Employee option plans continued
In January 2022, the Remuneration Committee assessed performance of the first four tranches of the 2018 awards and the
first two tranches of the 2020 awards under the Unapproved Plan against vesting criteria. These awards did not meet the
market capitalisation targets set when they were originally granted. The Remuneration Committee exercised the discretion
available to it under the plan and, after taking into account a range of factors, concluded that these awards would vest at
95% of the maximum. This has been accounted for as a modification of the awards. In accordance with IFRS 2, the options
were valued as at the date of modification based on the original terms using a Monte Carlo simulation, and based on the
modified terms using the Black-Scholes model. The incremental fair value granted as a result of the modifications was
£1,067,000, all of which was recognised as an expense in 2022.
The expense recognised in 2022 for all options, including the effect of the modifications, is £2,262,000 (2021: £563,000).
(b) Share Incentive Plan (SIP)
The Company introduced the SIP in October 2014. All employees of the Group (including Executive Directors) are eligible
to participate in the SIP. Participants may each acquire Partnership Shares worth up to £1,800 per year from their pre-tax
earnings at market value. The Company awards participants one Matching Share for each Partnership Share which they
acquire. Dividends received on shares held in the SIP are reinvested to acquire Dividend Shares at market value. Matching
Shares may be forfeited if the participant disposes of the corresponding Partnership Shares or leaves the employment
of the Group within three years of the award date.
The table below shows the number of shares held in the SIP at the beginning and end of the year.
Type of award
At
1 January
2022
Awarded
shares
Sold/
transferred
Forfeited
At
31 December
2022
Weighted
average
acquisition
price
Partnership
230,315
61,103
(36,545)
–
254,873
6.10
Matching
228,943
61,103
(23,875)
(14,437)
251,734
6.10
Dividend
25,204
12,327
(2,826)
–
34,705
7.24
Total
484,462
134,533
(63,246)
(14,437)
541,312
The SIP is administered by the Smart Metering Systems SIP Trust (the ‘Trust’). To the extent sufficient shares are not already
held by the Trust, Matching Shares awarded by the Trust to employees are acquired in the market prior to the award.
Matching Shares held by the Trust which have not yet vested unconditionally at the end of the reporting period are shown
as own shares in the financial statements.
The fair value of the Matching Shares at the award date is equal to the share price at the award date. The weighted average
fair value per share of the Matching Shares awarded during 2022 was approximately £8.02 per share (2021: £8.18). The total
fair value of Matching Shares awarded is recognised over the three-year period starting on the respective award dates.
The expense recognised in 2022 for all Matching Shares is £350,000 (2021: £278,000). No expense is recognised for the
Partnership Shares and Dividend Shares because the participants pay full market value for these shares.
29 Other reserve
This is a non-distributable reserve that initially arose by applying merger relief under section 612 of the Companies Act 2006
to the shares issued in 2009 in connection with the Group restructuring. Additionally, the premium of £4,189,000 and
£1,115,000 arising on the issue of shares as part of the acquisitions of CH4 Gas Utility and Maintenance Services Limited
(‘CH4’), Trojan Utilities Limited (‘Trojan’) and Qton Solutions Limited (‘Qton’) has been credited to this reserve.
30 Capital commitments
Significant capital expenditure contracted for at the end of the reporting period but not recognised as liabilities is as follows:
2022
£’000
2021
£’000
Property, plant and equipment
38,930
27,746
Capital expenditure of £35,901,000 (2021: £27,746,000) contracted for in relation to property, plant and equipment relates
to the Group’s grid-scale battery storage projects under construction. The remaining £3,029,000 (2021: £nil) relates to the
purchase of motor vehicles.
Notes to the Financial Statements continued
For the year ended 31 December 2022
172 SMS Annual report and accounts 2022
31 Ultimate controlling party
There is no ultimate controlling party by virtue of the structure of shareholdings in the Group.
32 Subsidiary undertakings
A full list of the Group’s subsidiaries and associated undertakings (as defined in the Large and Medium-sized Companies and
Groups (Accounts and Reports) Regulations 2008) as at 31 December 2022 is detailed 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 (see
key below
table)
Holding
Proportion of
shares held
Nature of business
SMS Connections Limited
1
Ordinary shares
100%
Gas utility connections
SMS Meter Assets Limited
1
Ordinary shares
100%
Gas and electric asset management
SMS MAPCO 1 Limited
2
Ordinary shares
100%
Gas and electric asset management
SMS MAPCO 2 Limited
2
Ordinary shares
100%
Gas and electric asset management
SMS Data Management Limited
1
Ordinary shares
100%
Data management
Smart Metering Systems PTY Limited
(Australia) (in liquidation)
4
Ordinary shares
100%
Data management
UKMA (AF) Limited*
2
Ordinary shares
100%
Funding
SMS Corporate Services Limited
1
Ordinary shares
100%
Administrative services
SMS Asset Management Limited*
2
Ordinary shares
100%
Gas and electric third-party asset
management
SMS Energy Services Limited
2
Ordinary shares
100%
Electricity utility connections and
management
SMS Data Services Limited*
2
Ordinary shares
100%
Electric asset and data management
CH4 Gas Utility and Maintenance
Services Limited*
2
Ordinary shares
100%
Meter installation
SMS Utilities Academy Limited*
2
Ordinary shares
100%
Engineer training and development
Trojan Utilities Limited*
2
Ordinary shares
100%
Meter installation
Qton Solutions Limited*
2
Ordinary shares
100%
Business and domestic software
development
Smart Battery Systems Limited
2
Ordinary shares
100%
Holding company
Solo Energy Limited (UK)*
1
Ordinary shares
100%
Renewable asset management
Solo Energy Limited (Ireland)*
3
Ordinary shares
100%
Renewable asset management
Care Assets Limited
2
Ordinary shares
100%
Holding company
Add Renewables No.3 Limited*
2
Ordinary shares
100%
Renewable asset management
Burwell Power Limited*
2
Ordinary shares
100%
Holding company
East Anglia Grid Storage One
Limited*
2
Ordinary shares
100%
Renewable asset management
Newtonwood Energy Storage
Limited*
2
Ordinary shares
100%
Renewable asset management
Brook Farm Energy Storage Limited* 2
Ordinary shares
100%
Renewable asset management
Berkeley Battery Storage 2 Limited*
2
Ordinary shares
100%
Renewable asset management
Brentwood Energy Storage Limited*
2
Ordinary shares
100%
Renewable asset management
Balance Energy 1 Ltd*
2
Ordinary shares
100%
Renewable asset management
Balance Energy 2 Ltd*
2
Ordinary shares
100%
Renewable asset management
Balance Energy 3 Ltd*
2
Ordinary shares
100%
Renewable asset management
Bramford Power Limited*
2
Ordinary shares
100%
Renewable asset management
Drumcross Energy Storage Limited*
1
Ordinary shares
100%
Renewable asset management
Erskine Energy Storage Limited*
1
Ordinary shares
100%
Renewable asset management
Fen Power 1 Limited*
2
Ordinary shares
100%
Renewable asset management
N3rgy Data Limited*
2
Ordinary shares
100%
Renewable asset management
SMS Annual report and accounts 2022 173
Financial statements
Governance
Strategic report
Registered
office (see
key below
table)
Holding
Proportion of
shares held
Nature of business
Clenergy EV Ltd
5
Ordinary Shares
25%
Renewable asset management
Metering Limited
2
Ordinary shares
100%
Dormant
Cosmos AMR Limited*
2
Ordinary shares
100%
Dormant
Carbon Reduction Assets Limited*
2
Ordinary shares
100%
Dormant
Savano Limited*
2
Ordinary shares
100%
Dormant
Metering 1 Limited
1
Ordinary shares
100%
Dormant
Metering 2 Limited*
1
Ordinary shares
100%
Dormant
SMS Installations (Midlands) Limited* 1
Ordinary shares
100%
Dormant
Eco Project Management Limited
1
Ordinary shares
100%
Dormant
Smart Meter Systems Limited
1
Ordinary shares
100%
Dormant
UK Data Management Limited
1
Ordinary shares
100%
Dormant
UK Water Connection Limited
1
Ordinary shares
100%
Dormant
Utility Partnership Limited
1
Ordinary shares
100%
Dormant
SMS IP Limited
1
Ordinary shares
100%
Dormant
Smart Home Systems Limited
2
Ordinary shares
100%
Dormant
UK Gas Connection Limited
1
Ordinary shares
100%
Dormant
The UK Meter Exchange Limited
1
Ordinary shares
100%
Dormant
UK Electricity Connection Limited
1
Ordinary shares
100%
Dormant
UK Meter Assets Limited
1
Ordinary shares
100%
Dormant
UK Smart Metering Group Limited
1
Ordinary shares
100%
Dormant
Smart Charging Systems Limited
2
Ordinary shares
100%
Dormant
Smart EV Systems Limited
2
Ordinary shares
100%
Dormant
Smart Install Systems Limited
2
Ordinary shares
100%
Dormant
Smart Solar Systems Limited
2
Ordinary shares
100%
Dormant
Care Data Management Limited
2
Ordinary shares
100%
Dormant
Smart Carbon Reduction Limited
2
Ordinary shares
100%
Dormant
Care Energy Services Limited
2
Ordinary shares
100%
Dormant
Care Utility Connections Limited
2
Ordinary shares
100%
Dormant
Care Energy Limited
2
Ordinary shares
100%
Dormant
Care Power Limited
2
Ordinary shares
100%
Dormant
* 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: Unit 4 Joyce House, Barrack Square, Ballincollig, Cork, P31HW35, Republic of Ireland.
4 Registered office address: KPMG, ‘Tower 3’ Level 38, 300 Bangaroo Avenue, Sydney, NSW 2000, Australia.
5 Registered office address: The Mill House Erw Hir, Llantrisant, Pontyclun, Wales, CF72 8BY.
Notes to the Financial Statements continued
For the year ended 31 December 2022
32 Subsidiary undertakings continued
174 SMS Annual report and accounts 2022
The following UK subsidiaries will take advantage of the audit exemption set out within section 479A of the Companies Act
2006 for the year ended 31 December 2022.
Name
Registration number
SMS Utilities Academy Limited
11896547
Care Assets Limited
12475528
Berkeley Battery Storage 2 Limited
10942601
Brook Farm Energy Storage Limited
10780034
Drumcross Energy Storage Limited
SC679835
Erskine Energy Storage Limited
SC690064
Newtonwood Energy Storage Limited
11257609
Add Renewables No.3 Limited
10042216
Bramford Power Limited
12480700
Fen Power 1 Limited
12875930
N3rgy Data Limited
11712674
Trojan Utilities Limited
07790830
UKMA (AF) Limited
07130739
SMS Asset Management Limited
12285853
SMS Data Services Limited
13166529
Metering Limited
13160823
Balance Energy 1 Limited
11894406
Balance Energy 2 Limited
12266348
Balance Energy 3 Limited
12341398
Brentwood Energy Storage Limited
11516707
SMS Annual report and accounts 2022 175
Financial statements
Governance
Strategic report
Notes
2022
£’000
2021
(restated)
£’000
Non-current assets
Investments
2
24,306
21,694
Debtors
3
407,125
444,828
Total non-current assets
431,431
466,522
Creditors
Amounts falling due within one year
4
(429)
(429)
Net current (liabilities)
(429)
(429)
Total assets less current liabilities
431,002
466,093
Capital and reserves
Called-up share capital
6
1,334
1,333
Share premium account
332,332
332,048
Other reserves
7
18,046
15,435
Own share reserve
(955)
(825)
Profit and loss account
80,245
118,102
Equity shareholders’ funds
431,002
466,093
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 £nil for the financial year ended 31 December 2022
(2021: £nil).
The parent company financial statements on pages 176 to 180 were approved and authorised for issue by the Board
of Directors and signed on its behalf by:
Gail Blain
Director
14 March 2023
Company registration number
SC367563
Parent Company Balance Sheet
For the year ended 31 December 2022
176 SMS Annual report and accounts 2022
Attributable to the owners
of the parent company
Share
capital
£’000
Share
premium
account
£’000
Other
reserves
£’000
Own share
reserve
£’000
Retained
earnings
£’000
Total
£’000
As at 1 January 2021
1,129
160,471
14,594
(749)
147,365
322,810
Total comprehensive income
for the year
–
–
–
–
–
–
Transactions with owners
in their capacity as owners
Dividends (note 8)
–
–
–
–
(29,060)
(29,060)
Share-based payments (note 7)
–
–
841
–
–
841
Movement in own shares
–
–
–
(76)
(203)
(279)
Shares issued
204
171,577
–
–
–
171,781
As at 31 December 2021
1,333
332,048
15,435
(825)
118,102
466,093
Total comprehensive income
for the year
–
–
–
–
–
–
Transactions with owners
in their capacity as owners
Dividends (note 8)
–
–
–
–
(37,592)
(37,592)
Share-based payments (note 7)
–
–
2,611
–
–
2,611
Movement in own shares
–
–
–
(130)
(265)
(395)
Shares issued
1
284
–
–
–
285
As at 31 December 2022
1,334
332,332
18,046
(955)
80,245
431,002
Parent Company Statement of Changes in Equity
For the year ended 31 December 2022
SMS Annual report and accounts 2022 177
Financial statements
Governance
Strategic report
The parent company financial statements of Smart Metering Systems plc (the ‘Company’) for the year ended 31 December
2022 were authorised for issue by the Board of Directors on 14 March 2023 and the balance sheet was signed on the Board’s
behalf by Gail Blain. 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 are the first financial statements of the parent Company to be prepared under FRS 101. The
financial statements of the parent Company for the year ended 31 December 2021 were prepared under FRS 102. The date
of transition to FRS 101 is 1 January 2021. As a result of the transition to FRS 101 the Company’s amounts owed by Group
undertakings of £407,125,000 (2021: £444,828,000) have been reclassified from current to non-current assets as the amounts
owed are not expected to be settled within 12 months after the reporting period. There is no further impact on the previously
reported results for the parent Company for the year ended 31 December 2021 or for the current year’s results arising from
the transition to FRS 101. The financial statements are prepared under the historical cost convention. The Company took
advantage of the deemed cost exemption to carry over investments carried at cost at the previous GAAP carrying amount.
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 2022. The financial statements are prepared in Sterling
and are rounded to the nearest thousand Pounds (£’000).
The following exemptions from the requirements of IFRS have been applied in the preparation of these financial statements,
in accordance with FRS 101:
• Paragraphs 45(b) and 46 to 52 of IFRS 2, ‘Share-based payment’ (details of the number and weighted average exercise
prices of share options, and how the fair value of goods or services received was determined).
• IFRS 7, ‘Financial instruments: Disclosures’.
• Paragraphs 91 to 99 of IFRS 13, ‘Fair value measurement’ (disclosure of valuation techniques and inputs used for fair value
measurement of assets and liabilities).
• Paragraph 38 of IAS 1, ‘Presentation of financial statements’ – comparative information requirements in respect of
paragraph 79(a)(iv) of IAS 1.
• The following paragraphs of IAS 1, ‘Presentation of financial statements’:
−10(d) (statement of cash flows);
−16 (statement of compliance with all IFRS);
−38A (requirement for minimum of two primary statements, including cash flow statements);
−38B–D (additional comparative information);
−111 (cash flow statement information); and
−134–136 (capital management disclosures).
• IAS 7, ‘Statement of cash flows’.
• Paragraphs 30 and 31 of IAS 8, ‘Accounting policies, changes in accounting estimates and errors’ (requirement for the
disclosure of information when an entity has not applied a new IFRS that has been issued but is not yet effective).
• Paragraph 17 of IAS 24, ‘Related party disclosures’ (key management compensation).
• The requirements in IAS 24, ‘Related party disclosures’, to disclose related party transactions entered into between two
or more members of a group.
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.
Notes to the Parent Company Financial Statements
For the year ended 31 December 2022
178 SMS Annual report and accounts 2022
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
2022
£’000
2021
£’000
At 1 January
21,694
20,853
Share-based payments (note 7)
2,612
841
At 31 December
24,306
21,694
During 2022 and 2021, 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 2022 and therefore no impairment charge has
been recognised in the year ended 31 December 2022.
Subsidiary undertakings
Details of the subsidiary undertakings of the Company, including those that are held indirectly, are listed in note 32 to the
consolidated financial statements.
3 Debtors: amounts falling due after one year
2022
£’000
2021
(restated)
£’000
Amounts owed by Group undertakings
407,125
444,828
4 Creditors: amounts falling due within one year
2022
£’000
2021
£’000
Amounts owed to Group undertakings
429
429
5 Related party transactions
The Group paid dividends to Alan Foy (whilst a Director) of £321,809 (2021: £906,915), The Metis Trust1 of £61,875 (2021: £230,625),
Metis Investments Limited2 of £25,599 (2021: £387,968), Tim Mortlock of £5,033 (2021: £1,501), Gavin Urwin (whilst a Director) of
£458 (2021: £153), Miriam Greenwood of £7,177 (2021: £6,129), Graeme Bissett of £5,796 (2021: £4,116) and Jamie Richards of
£1,389 (2021: £1,002).
1 Alan Foy is a trustee but not a beneficiary.
2 Alan Foy is a Director and shareholder.
3 Paid to a connected person.
SMS Annual report and accounts 2022 179
Financial statements
Governance
Strategic report
6 Share capital
2022
£’000
2021
£’000
Allotted and called up:
133,397,009 ordinary shares of £0.01 each (2021: 133,321,555 ordinary shares of £0.01 each)
1,334
1,333
During the year 75,454 (2021: 921,447) ordinary share options were exercised in relation to the Group’s employee share plans
which are described in note 28 to the consolidated financial statements. The ordinary shares issued have a nominal value of
£755 (2021: £9,000) and aggregate consideration of £285,000 (2021: £1,627,000) was received.
The Group’s Share Incentive Plan is administered by the Smart Metering Systems SIP Trust, which acquires shares in SMS
(own shares) to satisfy awards under this plan and facilitate the delivery of shares to participants. At 31 December 2022,
145,821 (2021: 139,055) own shares were held in trust with a carrying value of £955,000 (2021: £825,000) and a market value
of £1,225,000 (2021: £1,169,000). The Company purchased 48,900 shares (2021: 34,191) from the market during 2022 with
a weighted average fair value of £8.08 per share (2021: £8.15).
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 8 to the Group financial statements.
Notes to the Parent Company Financial Statements continued
For the year ended 31 December 2022
180 SMS Annual report and accounts 2022
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