TIDMUTW
RNS Number : 0665C
Utilitywise plc
17 January 2018
17 January 2018
Utilitywise plc
("Utilitywise" or the "Group")
Final results update
Utilitywise, the leading independent utility cost management
consultancy, announces a further update in respect of its full year
results for the year ended 31 July 2017 ("FY17").
On 15 November 2017, the Group announced a further delay to the
announcement of its final results for FY17. This was due to the
Group's auditor requesting a further independent review of the
Group's methodology for determining revenue recognition on its
utility procurement contracts.
-- The review, which was undertaken by a major accountancy firm,
is now complete and, as a result, Group results will now reflect a
change to the accounting policy of the Group regarding the
estimation and recognition of revenue on contracts.
-- This proposed change will have no impact on the cash flows or
underlying economic performance of the Group.
-- The proposed change will reduce the initial revenue
recognition value of new contracts, which would then positively
impact the final revenue adjustment value at the end of those
contracts, all else being equal.
-- The average level of under-consumption, across all contracts
that reached maturity in the two-year period from 1 August 2015 to
31 July 2017 was 18%, an improvement compared to 19% in the
equivalent period to 31 July 2016.
-- Contracts with lower individual values typically demonstrate
a lower average degree of under-consumption over their life;
contracts of value less than GBP50,000 comprise the substantial
majority of the total value of live contracts as at 31 July
2017.
-- A prior period adjustment will be required upon the adoption
of the new proposed accounting policy. Work is ongoing with the
Group's auditors to finalise the value of amendments in respect of
FY17 and earlier years.
-- The cumulative impact of the non-cash accounting adjustments,
across all historic financial years, is expected to have a material
negative impact on Group equity as at 31 July 2017. It is not yet
known whether there will be a material impact on the profit of the
Group for FY17, due to the requirement to finalise the split
between FY17 and earlier years.
-- There is also likely to be a material impact upon the Group's
reported revenue and accounting profit in the year ending 31 July
2018, with the absolute impact becoming estimable once the revised
accounting policy is finalised.
-- The Group's sole banking lender is aware of all related
developments and discussions are ongoing with the bank. Should it
become necessary, once the financial outcome is known and agreed
with the Group's auditor, efforts will be made to obtain waivers of
any retrospective breaches and amendments to the Group's relevant
banking covenants in future periods.
-- The Group currently expects to complete its year-end audit
process in respect of FY17 and announce its final results by 31
January 2018. However, due to the volume of work required there is
a risk that the audit will not be complete by this date.
-- Further updates will be given to the market, with regard to
the financial implication of the proposed changes in accounting
policy and the date of the final results announcement, as soon as
both are known with more certainty, as the work progresses.
Methodology for estimating and recognising revenue on
contracts
The Group's existing methodology determined initial revenue
recognition on contracts based upon the historic levels of final
values observed on contracts that had previously matured, with the
initial recognition based upon the overall average rate
historically observed and any remaining value adjustment typically
made at the end of the contract, once the final value was
known.
Prior to 1 August 2017, the Group recognised initial revenue on
contracts at c. 85% of the theoretical expected contract value,
i.e. it assumed that contracts would, on average, "under-consume"
at a rate of 15% of the initial contract value over the life of the
contract, based upon historic observed data. The Group's external
auditors have issued unqualified opinions on the financial
statements of the Group for each of the financial years since the
Group was admitted to AIM in June 2012, including the financial
year ended 31 July 2016 ("FY16").
However, it has been observed that, on average, contracts of
higher individual values typically demonstrate a higher average
degree of under-consumption over their life, whilst contracts with
lower individual values typically demonstrate a lower average
degree of under-consumption over their life.
The average level of under-consumption, across all contracts
that reached maturity in the two-year period from 1 August 2015 to
31 July 2017 was 18%. This compared to 19% in the equivalent
two-year period from 1 August 2014 to 31 July 2016, with the
previously stated 15% observed average under-consumption rates on
ended contracts in the financial years ended 31 July 2015 and 31
July 2016 having been erroneously understated due to the way that
the data was extracted from the Group's financial systems. Despite
this error, the restated rates indicate that there was no material
change in the underlying economic position of the maturing contract
base between 31 July 2016 and 31 July 2017, on a like-for-like
basis.
On 1 August 2017, the Group early adopted the new accounting
standard IFRS 15 (Revenue from Contracts with Customers) and
amended its initial revenue recognition value to 80%, i.e. it
assumed 20% under-consumption over the life of the contract,
compared to the actual 18% experienced in the previous two years on
average across all of the Group's contracts.
The additional review, which was carried out by a leading
independent accounting firm, concluded that:
-- The historic methodology of using a single average
under-consumption rate, to be applied equally to contracts of all
sizes, was not an appropriate way of forming a reliable estimate
for the purposes of revenue recognition, in accordance with either
the existing accounting standard, IAS 18 (Revenue), or the new
accounting standard, IFRS 15. This was on the basis that different
value tranches of contracts appear to under-consume at different
rates.
-- It was appropriate to calculate an expected under-consumption
rate for each relevant tranche of contracts, where the tranches had
been determined by the expected initial value of the contracts.
-- It was appropriate to estimate an expected under-consumption
rate based upon the historic trend seen for each tranche over the
preceding three years, with the under-consumption rate based upon
the worst position observed over that period, rather than the
position most recently observed. The worst position observed
differs from year to year and from tranche to tranche but, taking
all tranches of contracts of individual contract value less than
GBP50,000 together, is in the range of 21% to 25% under-consumption
as at FY17.
Further discussion of the above results with the Group's auditor
has led to the following position:
-- For tranches of contracts of individual contract value less
than GBP50,000, which make up the substantial majority of the total
value of live contracts at 31 July 2017, the rate of expected
under-consumption should be set at a level more conservative than
the worst position observed in the previous three years. This
prudent position is to provide a further contingency for the
purposes of determining that the probability of that level of
initially recognised revenue not subsequently reversing was
sufficiently high as to satisfy the requirements of accounting
standards.
-- For contracts of individual value greater than GBP50,000 the
volume of historically matured contracts is not large enough to be
used as the basis for forming an estimate of the likely consumption
of equivalent contracts that remain live. Accordingly, the value of
initial revenue recognition on these contracts must be determined
on a contract-by-contract basis, through the use of available data,
including, inter alia, consumption data obtained from energy
suppliers (e.g. available meter reading data).
Therefore, having taken expert advice from a leading independent
firm of accountants, having also had lengthy discussions with the
Group's external auditor as well as having taken appropriate legal
advice, the Board has concluded that the previous accounting
policies of the Group, in respect of revenue recognition, were
inappropriate and should be amended, as set out above. This is
subject to final agreement of the amended policies and their final
financial impacts with the Group's auditor.
Impact on financial statements
The change in accounting policy represents only a change in
timing between the initial value of revenue, recognised at the
start of the contract, and the final value recognised at the end,
rather than any change in the underlying economic position of a
contract over its life, all else being equal.
In accordance with accounting standards, such a change in
accounting policy requires both a change to the FY17 financial
statements and a prior period adjustment, as well as the revenue
recognition values in future years. In FY17 and FY16, this means a
reduction in the value of revenue initially recognised at the start
of new contracts in each year, offset by additional revenue
recognised upon contracts that had commenced in earlier financial
years and subsequently matured in FY17 and FY16.
The following work remains outstanding before the financial
outcome of the proposed change in accounting policy can be
known:
-- Agreement of initial revenue recognition levels and rates
with the Group's auditor, once all of the underlying data
supporting those rates has been audited, in respect of FY17 and
also in respect of earlier year, to allow the calculation of the
prior period restatements
-- Update of balance sheet positions, also all still subject to
external audit, including revaluation of the initial values of some
330,000 individual contracts over several financial years, along
with the offsetting amendments to final values of any of those
contracts that have matured in a subsequent year, as well as
amendments to long-dated accrued receivable and payables balances
and consequential accounting discounting thereon.
It is likely that the cumulative negative impact on the equity
of the Group as at 31 July 2017, taking into account the impact of
earlier financial years, will be material. However, a significant
proportion of that is likely to be reflected as a prior period
adjustment, in respect of FY16 and earlier periods. Accordingly,
until the proposed revised accounting policy is finalised, it is
not yet possible to conclude on the impact of these adjustments in
respect of FY17 revenue and, therefore, profit.
Impact on cash flows
It is not anticipated that this non-cash change in accounting
policy will have any material impact on the cash flows or other
underlying economic performance of the Group.
Banking covenants
The Group has two financial banking covenants, which are:
-- Ratio of earnings before interest, taxation, depreciation and
amortisation (EBITDA) to net debt ("leverage") not to exceed
2.0x
-- Ratio of earnings before interest, taxation and amortisation
(EBITA) to interest charges ("interest cover") not to be less than
5.0x
The non-cash accounting adjustments that will arise from the
adoption of the above new accounting policies may have a
significant impact upon the outcome of, and compliance with, these
covenants, both retrospectively at 31 July 2017 and on subsequent
quarterly positions. The Group's sole banking lender is aware of
all related developments and discussions are ongoing with the bank.
Should it become necessary, once the financial outcome is known and
agreed with the Group's auditor, efforts will be made to obtain
waivers of any retrospective breaches and amendments to the
relevant covenants in future periods.
Timing of announcement of final results
The Group must now complete its year-end audit process in
respect of FY17 and currently expects to complete this and announce
its final results by 31 January 2018. However, due to the volume of
work required to complete the process on a contract-by-contract
basis in the financial systems of the Group and for the Group's
auditor to complete its audit work, as explained above, there is a
risk that the audit will not be complete by this date.
Further updates will be given to the market, with regard to the
financial implication of the proposed changes in accounting policy
and the confirmed date of final results announcement, as soon as
both are known with more certainty, as the work progresses.
For further information
Utilitywise plc 0330 303 0233
Brendan Flattery (CEO)
Richard Laker (CFO)
finnCap (NOMAD and broker) 020 7220 0500
Matt Goode / Henrik Persson (Corporate
Finance)
Simon Johnson (Corporate Broking)
Liberum (Joint broker) 020 3100 2000
Robert Morton / Steve Pearce
Redleaf Communications 020 7382 4747
Robin Tozer / Elisabeth Cowell
Utilitywise is a leading independent utility cost management
consultancy, which has established trading relationships with a
number of major UK and European energy suppliers and provides
services to its customers designed to assist them in achieving
better value out of their energy contracts, reduced energy
consumption and lower carbon footprint.
Utilitywise is a UK company quoted on the AIM market of the
London Stock Exchange. For more information, please visit
www.utilitywise.com.
This information is provided by RNS
The company news service from the London Stock Exchange
END
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