Cityfibre Regulatory News (CITY)

CITYFIBRE INFRASTRUCTURE HOLDINGS PLC

('CityFibre' or the 'Group' or the 'Company')

AUDITED FULL-YEAR RESULTS FOR THE YEAR ENDED 31 DECEMBER 2016

CityFibre (AIM: CITY), a leading designer, builder, owner, and operator of fibre optic infrastructure in UK towns and cities, today reports audited full-year results for the Group for the year ended 31 December 2016.

Financial Highlights:

· Turnover up 140%, to £15.4m (2015: £6.4m)

· Gross profit of £13.5m, up 145%

· Gross margin further expanded to 88% (2015: 86%) 

· Adjusted EBITDA* profit of £2.5m (2015: £2.9m loss)

· Initial Contract Value ('ICV') of £75.5m added in the period, up 225% from £23.2m in 2015

· Net loss after tax of £12.6m (2015: £6.4m loss)

Operating Highlights:

· New connections sold and acquired totalled 5,063, up from 1,100 in 2015

· Direct fibre connected customer premises up to 3,962, from 1,200 in 2015

· Completed route kilometres of ducted fibre increased to 3,383km, from 743km in 2015

· Service provider relationships numbered 54 at period end, up from 41 in 2015

· Readmission to AIM on 14 January 2016 via £80.0m equity placing at 50p per share

· Closing of acquisition of metro and long distance duct and fibre assets from KCOM for £90.0m (the 'Network Assets') on 18 January 2016

· Total funding package of £180.0m secured to fund the acquisition and future development of the assets, comprising £80.0m from the equity placing, alongside £100.0m in committed debt facilities

· Closing of acquisition of metro fibre network assets of Redcentric plc on 23 September 2016

* Adjusted EBITDA is earnings before interest, tax, depreciation and amortisation, also excluding share-based payments and significant non-recurring expenses. Further detail is set out in the Financial Review section of this document.

Greg Mesch, Chief Executive of CityFibre, commented:

"2016 was truly a transformational year for CityFibre. Alongside delivering on our stated growth strategy, the acquired network footprint has accelerated our original business plan by up to seven years. Over the last twelve months we have more than doubled our contracted revenue base, added twenty nine new cities and increased our service provider partner base to 54.

"CityFibre now has significant presence in 42 cities across the UK and the rapid commercialisation of the Group's assets underlines the strong demand for an alternative to BT Openreach at a national level. We continue to see significant levels of demand from both business and public services sectors alongside increasing interest from mobile operators and residential broadband providers.

"With the regulatory and political landscapes now both favouring alternative fibre investment, CityFibre has never been better placed to capitalise on expanding its existing footprint and a growing number of near term strategic opportunities. Current trading continues in line with management's expectations."

The information communicated in this announcement is inside information for the purposes of Article 7 of Regulation 596/2014.

For further information, please contact:

About CityFibre:

CityFibre is the national builder of Gigabit Cities, as the UK's largest alternative provider of wholesale fibre network infrastructure. It has major metro duct and fibre footprints in 42 cities across the UK and a national long distance network that connects these cities to major data-centres across the UK and to key peering points in London.

The company has an extensive customer base spanning service integrators, enterprise and consumer service providers and mobile operators. Providing a portfolio of active and dark fibre services, CityFibre's networks address 28,000 public sites, 7,800 mobile masts, 280,000 businesses and 4 million homes.

CityFibre is based in London, United Kingdom, and its shares trade on the AIM Market of the London Stock Exchange (AIM: CITY). Further information on the company can be found at www.cityfibre.com

Chairman's statement

I am pleased to present this third set of full year financial results for CityFibre. I have joined as Non-executive Chairman at a pivotal moment in the Group's development, as it finds itself at the heart of the "Full Fibre" investment revolution taking shape in the UK. It was a year of great progress for the Group, with significant revenue growth and a move to being EBITDA positive on an adjusted basis. Our footprint expanded to 42 cities driven by organic growth and two significant acquisitions, and we grew our customer base to 54 service providers - both great measures of progress compared with 2015. I was drawn to join the Group by such rapid growth and positive development, and I look forward to leading its Board into an exciting fibre future.

Overview of results

The Group added £75.5m in new ICV1 during the period, an improvement of 225% from 2015, reflecting both strong organic new business as well as the initial revenue commitment on the assets acquired from KCOM in January 2016 and Redcentric in September 2016. Revenue for the period was £15.4m (2015: £6.4m), up 140% versus the prior year. Excluding the contribution from the KCOM and Redcentric revenue commitments, revenue growth was 63%. Gross margin of 88% marks an improvement of two percentage points during the period and demonstrates the improving operating leverage inherent in the business model as we continue to focus on writing highly profitable new business. Adjusted EBITDA2 profit of £2.5m is in line with expectations.

Financial position

Cash and cash equivalents at the end of the period totalled £16.7m. The Group had drawn £59.8m of its £100.0m debt facilities as at 31 December 2016. Accordingly, net debt stood at £43.1m at period end.

Strategy

The Group's strategy is to commercialise our network assets via the addition of incremental contracted connections, driving higher asset utilisation and financial returns over time. Additionally, the Group looks to expand its national network coverage footprint further via organic and inorganic development, with a medium-term target of 50 cities. This equates to an addressable market of approximately 10,000 mobile cell site locations, 35,000 public sector sites, 350,000 businesses and across 5 million homes.

Board and employees

There were no changes to the composition of the Group's Board in the period, and committee membership remained unchanged from last year.

Peter Manning announced his intention to step down from his role as Non-Executive Chairman on 26 September 2016 and left on 13 January 2017. The Directors and I would like to thank Peter for his great leadership and support during his tenure at CityFibre and wish him well in his future endeavours.

Whilst we are fundamentally an asset-heavy infrastructure business, the quality of that infrastructure in both design and operation is down to the vision, abilities and commitment of our senior executives, managers and employees. The success of the business so far, and the positioning for a very exciting future, is due to their contribution and I would like to thank them for their consistent hard work and support.  

Outlook

The Group set new milestones in its development and expansion in 2016, and the Board expects this to continue. New initiatives such as the Business Parks FTTP commercialisation programme open up new avenues for activity which we expect to expand the overall market opportunity, and we remain confident that the Group's extensive asset footprint offers a powerful platform for large-scale expansion into both FTTT and FTTH over the longer term. We believe the experience and resources of the Group's executives, management and employees uniquely enable it to become a national force in the rapidly evolving fibre infrastructure arena. Current trading continues in line with management's expectations.

Chris Stone

Non-executive Chairman

24 April 2017

1 Initial contract value (ICV) is the total contracted customer revenues receivable up to the first contract break point

2 Adjusted EBITDA is earnings before interest, tax, depreciation and amortisation, also excluding share-based payments and significant non-recurring expenses. Further detail is set out in the Financial Review section of this document.

Operating review

The Group accelerated its footprint expansion during 2016, via a combination of acquisitions, organic new city growth and incremental sales on existing and acquired assets. In addition, CityFibre completed two landmark network deployments for the UK market - the Fibre-to-the-Tower ('FTTT') network build in Hull and the Fibre-to-the-Home ('FTTH') trial in York.

Operating key performance indicators

Through a combination of organic sales and acquisitions, the Group added 5,063 new connections sold in the period, with initial contract value ('ICV') of £75.5m. This compares to 1,100 connections and ICV of £23.2m in the year to 31 December 2015. Of the new connections added in the period, 58% were organic new sales.

The Company also significantly increased the number of connected premises served to 3,962, from 1,200 in the prior period.

At period end the Group had 3,383 kilometres of network assets in service, up from 743 kilometres at the end of 2015.

Service provider relationships totalled 54 at period end, up from 41 at the end of 2015.

Acquisition of KCOM network assets

On 18 January 2016, the Group closed the transformational acquisition of certain national fibre infrastructure assets of KCOM Group plc for a total consideration of £90.0m, together with an equity placing to raise £80.0 million, as well as the conclusion of an agreement for up to £100.0m of committed debt facilities to part-fund the acquisition and support the commercialisation of the acquired assets.

The national infrastructure acquired by CityFibre comprised approximately 1,100 route kilometres of ducted metro fibre assets in 24 towns and cities, 21 of which were additive markets for the Group, and a national long distance network totalling approximately 1,100 route kilometres of two-way ducting and fibre that connects 22 towns and cities and offers connectivity into key data centres and wholesale internet peering points in London. The cash consideration of £90.0m is estimated by the Directors to represent a 45% discount to costs of replicating the networks.

Under the terms of the acquisition, CityFibre will provide KCOM with access to the acquired infrastructure for a term up to fifteen years, subject to a minimum term of five years and a minimum revenue of £5.0m per annum for those five years. 

The acquisition immediately expanded CityFibre's footprint of deep ducts and fibre to 37 cities and major towns across the UK, providing full fibre connectivity for use by regional and national service providers and mobile operators as a competitive wholesale alternative to BT Openreach.

Since the acquisition closed, CityFibre has successfully completed agreements with service provider launch partners on 14 of the acquired city footprints, including Bristol, Leeds, Bradford, Milton Keynes, Northampton, Reading, Bracknell, Sheffield, Rotherham, Doncaster, Leicester, Nottingham, Maidenhead and Slough. This equates to 1,786 connections sold and total ICV of £23.7m. When all connections are delivered across the 14 cities, management estimates average business penetration of 5.0%.

Acquisition of Redcentric network assets

On 26 September 2016 the Group announced the acquisition of the entire portfolio of metro fibre network assets of Redcentric plc, for a cash consideration of £5.0m. The networks comprise 137km of duct and fibre networks serving 188 Redcentric customer connections, with principal footprints covering Cambridge, Portsmouth, and Southampton, along with complementary incremental coverage in the existing CityFibre footprints of Nottingham, Derby and Northampton.

Under the terms of the acquisition, the vendor agreed to a lease-back revenue commitment of £4.5m over 10 years, for the ongoing delivery of service to its existing customers. With this agreement, CityFibre expanded its metro fibre presence to 40 cities, including 25 of the top 30 cities outside Greater London.

New city expansion

CityFibre signed two new city anchor contracts in 2016:

· In March CityFibre signed a £3.2m, 10-year deal with Southend-on-Sea Borough Council to provide 120 connections to key council sites over a newly-built 50km network. This project is the largest in the UK based on Passive Infrastructure Access ('PIA') to the BT Openreach network, and to date has made promising progress.

· In December, the Group signed a seven-year, £1.7m contract with new partner MLL Telecom to deliver 33 connections over 20km of newly-built network on behalf of Stirling Council.

Incremental sales on existing assets

During 2016 CityFibre sold a total of 1,060 new connections on its legacy network assets (i.e., those not acquired from either KCOM or Redcentric), for a total ICV of £17.2m. Principal transactions among these were:

· A 20-year, £2.0m contract with Serco for 220 CCTV and urban traffic control sites on behalf of Peterborough City Council on the Company's existing network in Peterborough. This deployment extends the network into a number of new business parks in the city;

· A 10-year, £2.0m contract with Capita for 109 school connections on the existing network asset in Aberdeen;

· A five-year, £0.7m, 63-site contract on its existing Coventry network with partner Pinacl Solutions on behalf of the Coventry Clinical Commissioning Group. This is CityFibre's largest contract to date in the healthcare segment. The NHS has 209 clinical commissioning groups across the UK.

Partner channel expansion

The Group grew its service provider partner universe from 41 to 54 during the year, marking another year of significant channel expansion. Significant new partners added in 2016 included Exa Networks, Gamma Communications, KCOM, Level3, Onecom, Redcentric, and SSE Enterprise Telecoms. The Group also made great strides in its channel management systems, implementing a range of new online tools and services under its Partner First programme and introducing standard products, pricing and service level agreements (SLAs) across its entire enlarged footprint. Continued expansion of the partner channel remains a key strategic priority of the Group.

Fibre-to-the Tower (Mobile)

In July 2016 the final sites went live on CityFibre's 56 kilometre Hull network constructed on behalf of MBNL, Three UK and EE. Three UK subsequently reported a 380% increase in data throughput on the new network, taking the city's 4G experience from the UK's worst to amongst the best in the world. CityFibre's existing footprint is capable of addressing an estimated 7,800 macro cell sites, and the Company anticipates that the number of small cells required under the future 5G specification may be five times the number of macro sites in service today. A dark fibre-based solution for cell site connectivity is gaining broader adoption in the global industry as it offers better long-range visibility on opex and complete control of technology roadmap versus a managed leased line service.

Fibre-to-the-Premises in business parks

In November 2016, the Group announced a commercial initiative to deploy Fibre-to-the-Premises ('FTTP') in business parks across its footprint. Company analysis shows that within its footprint there are over 500 business parks classified as "near-net," with 300 of these "on-net." The Company estimates there are 22,000 businesses located within these 500 parks, many of which suffer from poor internet connectivity today, in some cases as low as 10Mbps. CityFibre will make its full range of products available to business parks but is also introducing an entry-level lower cost product which is anticipated to retail at £120 per month, in order to respond to demand in the market sitting between poor quality copper products and dedicated fibre leased lines.

Fibre-to-the-Home (Residential)

The Group completed construction of the York Fibre-to-the-Home ('FTTH') trial in its joint venture with Sky and TalkTalk in 2016, passing approximately 14,000 homes. Use of the existing CityFibre York metro network asset, in constructing the FTTH distribution network, delivered significant savings in terms of time and deployment costs. As at 31 December 2016, active customer penetration on the footprint had reached 21.4% on a blended basis and continues its strong growth in 2017, reaching 26.1% as at 31 March 2017. With over 2,250km of metro assets under management, the Directors believe CityFibre's existing assets form a unique and compelling platform for a large-scale FTTH rollout potentially addressing 4m homes.

National long distance network

The Group has seen encouraging interest from carriers in its acquired 1,100km national network. In April 2016 the Group signed a £2.3m regional capacity agreement with SSE Enterprise Telecoms for a connection between Reading and Slough, and in December it signed a 25-year national dark fibre core network migration agreement with Gamma Telecom, utilising the Company's national long-distance network and metro interconnects to provide a 1,300 kilometre national route connecting 15 major data centres and BT exchanges in London and major regional hubs. The Directors believe the national network to be a very significant strategic asset for the Group, with the potential to accelerate commercial opportunities in the national carrier and mobile arenas, and in the metro networks themselves.

Employees 

The Group ended the year with 143 full-time equivalent staff (FTEs), versus 105 as at the end of 2015.

Greg Mesch

Chief Executive Officer

24 April 2017

Financial Review 

Financial results for 2016 reflect a year of strong organic and acquisition growth and a move to positive Adjusted EBITDA, reflecting the scale benefits of the enlarged Group. The Group continued to invest in resourcing the business to commercialise its expanded footprint. A summary of the financial performance for the year is given below.

Profit and loss

Revenue increased by 140% to £15.4m (2015: £6.4m), driven by the continued expansion in footprint, incremental revenues from both existing and new cities, and contributions from the KCOM and Redcentric leaseback agreements, as shown in the table below. Excluding commitments from KCOM and Redcentric, revenue growth was 63%. Key drivers of organic revenue growth included a greater contribution from the Edinburgh project, which was completed in 2016, as well as continued strong incremental sales on existing assets, including revenue from those assets acquired during the year.

Gross margin increased by two percentage points, to 88%, from 86% in 2015, reflecting the continuing addition of highly profitable new business on the assets during the period.

Administrative costs increased to £18.7m from £11.7m in the prior period. Excluding non-recurring costs, depreciation and amortisation, and share-based payments charges, underlying administrative costs were £11.1m, representing growth of 31% from £8.4m in the prior year. The movements in headline administrative costs include:

· Staff costs, excluding share-based payments and the one-off bonuses paid with respect to work performed on the KCOM transaction, increased by 30% to £7.9m (2015: £6.1m). Average headcount was 116 staff, up from 83 in 2015. The increase is primarily due to the addition of engineering and operational staff, reflecting the expanded number of projects under way on the organic and acquired network footprints.

· Other general administrative costs increased by £1.0m as a result of the expanded number of new and in-life projects.

Total non-recurring costs, depreciation and amortisation, and share-based payments charges were £7.6m (2015: £3.2m) and are detailed below:

· Depreciation increased by £1.9m, to £3.6m, due to the substantial increase in the asset base through acquisitions and completed construction projects. The Group conducted a review of its network asset depreciation policy during the year. Duct assets are typically the longest lived assets in telecommunications networks, with asset lives now typically assessed by companies in the industry, including the largest UK company, to be of the order of 40 years. Taking into account these assets are relatively new, have a long life and there is now enhanced evidence of the durability of these assets, CityFibre updated its accounting estimate accordingly. If this change in useful economic life had not been made depreciation would have been £6.6m, 3.0m greater than the actual charge for the year.

· During the year the Group incurred acquisition and integration costs totalling £1.9m. These costs were incurred primarily to execute the KCOM asset acquisition.

· Non-recurring costs also included £0.9m of legal and professional fees relating to the presentation of the Group's position on regulatory activities particularly pertinent to CityFibre. During 2016 Ofcom launched the Strategic review of Digital Communications (including a review of the structure of BT and Openreach) and the Business Connectivity Market Review (including consideration of availability and pricing of fibre products). Fees included additional work required in relation to a referral to the Competition Appeal Tribunal ('CAT') following on from the Group's original appeal. The Group will continue to engage advisors and take actions necessary to ensure its position is properly presented and protected.

· Share-based payment charges increased to £0.9m, up from £0.3m in 2015 due to an LTIP award in the year and a full year's charge for share options awarded in the prior year.

· The amortisation charge for the year increased to £0.4m (2015: £0.2m), reflecting further development of the Group's network and financial management systems.

Operating loss improved to £5.1m (2015: £6.2m), largely driven by increased gross profit of £13.5m (2015: £5.5m), countered by the increase in administrative costs outlined above.

The adjusted EBITDA profit of £2.5m is in line with expectations and a significant improvement on the prior period adjusted EBITDA loss of £2.9m. A reconciliation of operating profit to adjusted EBITDA appears below.

Loss after tax was £12.6m (2015: £6.4m), which includes financing costs of £7.3m (2015: £0.3m).

Balance sheet

The increase in property, plant and equipment (PPE), excluding those acquired from KCOM and Redcentric, totalled £23.0m, comprising £22.0m of network assets. These consisted primarily of the £19.3m construction of the Group's key Gigabit City projects in Hull, Kirklees, Aberdeen, Edinburgh, and Glasgow. The remaining £2.7m of network asset build was to support additional customer connections in existing cities, as well as enabling the assets acquired during the year.

Total amount spent on the acquisition of assets from KCOM was £90.6m, which included £0.6m of transaction costs. Of this, £86.9m was classified as PPE, while £3.7m was classified as inventory. £5.0m was spent acquiring the network assets of Redcentric plc, of which was £0.1m was classified as inventory.

In evaluating accounting treatment it was concluded that the KCOM and Redcentric transactions qualified as an acquisition of assets due to CityFibre only acquiring assets, not the associated business processes. Furthermore, the assets were not revenue generating without the separate commercial agreements.

Inventory increased by £3.8m to £4.0m during the year. The principal cause of this increase was the classification of £3.6m of network assets as inventory, on the basis that these assets will be made available for IRU sales in future years.

Intangible assets additions in the year totalled £0.7m (2015: £0.6m). This primarily reflects expenditure on systems required to manage the network assets and the end to end purchasing and sales processes.

Cash flow

Operating cashflow for the period was a net outflow of £2.4m, compared to a net outflow of £5.4m in 2015. However, when excluding the £3.6m classification of network assets acquired from KCOM as inventory, the adjusted net inflow of £1.2m reflects a £6.6m improvement versus the prior year on a like-for-like basis. £2.4m of this improvement relates to phasing of construction projects spanning the 2015 year end which led to a working capital requirement not replicated in 2016. At the year-end the cash balance was £16.7m.

During the year the Group drew down £59.8m on the capex facility entered into with Proventus Capital Partners III AB.

KCOM asset acquisition

On 18 January 2016 the Group completed the transformational £90.0m acquisition of network assets from KCOM Group plc. 

The acquisition constituted a reverse takeover under Rule 14 of the AIM Rules for Companies, requiring re-admission to AIM, which occurred on 14 January 2016.

The acquisition was funded by an £80.0m equity placing of 160,000,000 new Ordinary Shares at 50p per Ordinary Share, along with committed debt facilities of £100.0m extended by Proventus AB, of which £35.0m was utilised in the asset purchase.

Under the terms of the acquisition, CityFibre will provide KCOM with access to the acquired infrastructure for a term up to fifteen years, subject to a minimum term of five years and minimum revenue of £5.0m per annum for those five years. 

The acquired assets have been recognised on the enlarged Group's balance sheet principally as network assets, with £3.6m attributable to inventory which reflects the opportunity for sales of indefeasible rights of use over the national network.

Credit facilities

On 14 December 2015, Group subsidiary company CityFibre Limited (as borrower) entered into a facility agreement with Proventus Capital Partners III AB (as agent and security agent) (the 'Facility Agreement'). The lenders are funds managed by Proventus Capital Management AB or Proventus Capital Partners III and affiliated funds.

The facility agreement comprises three main facilities:

· a £35.0m term loan facility which was drawn upon deal completion to partly fund the Acquisition;

· a £35.0m term capex facility which will be used to finance permitted growth capital expenditure by reference to contracted revenues under customer contracts and permitted acquisitions and which will be available for two years; and

· a £30.0m super senior revolving credit facility ('RCF') which will be used for the same purposes as the capex facility and up to £5.0m towards general corporate and working capital purposes and which will be available for five years and 11 months.

In addition, the Facility Agreement contains a £65.0m accordion facility which may be made available by any lender under the term facilities at its discretion to refinance loans under the RCF.

The term loan facilities carry a margin of 10% above LIBOR, and the RCF carries a margin of 4.5% above LIBOR. A ratchet mechanism based on leverage levels may bring these margins down to 8% and 4% respectively.

The term loan facilities may be drawn subject to certain ratios relating to capex coverage and yield, and are thus aligned with the interests of shareholders, in that the Group may only make use of the facilities to fund projects with expected returns above the set hurdle rates.

The term facilities do not amortise and are payable in full seven years from the date of the Facility Agreement. The RCF will terminate six years from the date of the Facility Agreement.

Reconciliation of operating profit to adjusted EBITDA

consolidated statement of comprehensive income

For the Year Ended 31 December 2016

Consolidated Statement of Financial Position

Company number 08772997

As at 31 December 2016

Consolidated Statement of Changes in Equity

For the Year Ended 31 December 2016

Consolidated statement of cash flows

For the Year Ended 31 December 2016

ACCOUNTING POLICIES

The financial information for the years ended 31 December 2016 and 2015 presented in this preliminary announcement does not constitute the company's statutory accounts for those periods. The financial information for those periods has, however, been derived from the company's statutory accounts. The company's Annual Report and Accounts for the year ended 31 December 2015 has been audited and filed with the Registrar of Companies. The company's Annual Report and Accounts for the year ended 31 December 2016 has been audited and will be filed with the Registrar of Companies in due course. The Independent Auditors' Report on the company's Annual Report and Accounts for the years ended 31 December 2016 and 2015 was unqualified and did not draw attention to any matters by way of emphasis and did not contain statements under s498(2) or (3) of the Companies Act 2006.

The principal accounting policies applied in the preparation of these consolidated financial statements are summarised below. They have all been applied consistently throughout the year and preceding period.

Nature of Group

CityFibre Infrastructure Holdings PLC (the "Company") is a company registered in England and Wales. The consolidated financial statements for the year ended 31 December 2016 comprise the Company and its subsidiaries (together referred to as the "Group").

Basis of accounting

The financial statements have been prepared on a going concern basis and in accordance with International Financial Reporting Standards ("IFRS") and their interpretations issued by the International Accounting Standards Board ("IASB"), as adopted by the European Union. They have also been prepared with those parts of the Companies Act 2006 applicable to companies reporting under IFRS.

Adoption of new and revised standards

New standards and amendments to existing standards that have been published and are mandatory for the first time for the financial year beginning 1 January 2016 have been adopted but had no significant impact on the Group and Company. New standards, amendments to standards and interpretations which have been issued but are not yet effective (and in some cases had not been adopted by the EU) for the financial year beginning 1 January 2016 have not been early adopted in preparing these financial statements. The implications of these new accounting standards on the Group and Company have not yet been fully evaluated. The main accounting standards which may be relevant to the Group are set out below:

IFRS 9 "Financial Instruments"- (effective for 2019 financial report)

IFRS 9 is applicable retrospectively and includes revised requirements for the classification and measurement of financial instruments, as well as recognition and de-recognition requirements for financial instruments. Key changes to accounting requirements under IFRS 9 which may be relevant to the group and company include the requirement to apply a new impairment model based on expected loss in recognising impairment of financial assets including current receivables and loans to related parties. This may result in the recognition of additional impairment losses against the carrying values of these financial assets, at a point in time which is earlier than under the current accounting policies.

IFRS 15 "Revenue from Contracts with Customers"- (effective for 2018 financial report)

IFRS 15 was issued in May 2014 and establishes a five step model to account for revenue arising from contracts with customers. Under IFRS 15, revenue is recognised at an amount that reflects the consideration to which an entity expects to be entitled in exchange for transferring goods or services to a customer.

In applying IFRS 15, the company's initial views on the key changes to accounting requirements under IFRS 15 which may be relevant to the group include:

(a) Sale of goods

In relation to IRU contracts with customers in which sale of inventory assets are the only performance obligation, revenue recognition under IFRS 15 is likely to occur at a point in time when control of the asset has transferred to the customer; this generally occurs on execution of the IRU contracts with customers. This would not be a material change from the current accounting treatment.

(b) Installation services

Contracts with customers in which installation services are provided over the period of construction of the asset could be subject to future changes in accounting treatment. The group considers these revenues would continue to be recognised over time under IFRS 15. Further analysis needs to be performed on the appropriate timing of revenue recognition.

(c) Network lease services

Contracts with customers in which network lease services are provided to customers are likely to be recognised over time under IFRS 15 from the time that the network service becomes available for use by the customer. This would not be a material change from the current accounting treatment.

(d) Finance costs on upfront payments from customers

Deferred revenue is currently recognised within liabilities when customers are invoiced by the group in advance of services being provided. Under IFRS 15, there may be a requirement to recognise a finance cost in connection with payments received up front from customers ahead of services being provided.

IFRS 16 "Leases" - (effective for 2019 financial report)

IFRS 16 will require the Group to recognise leases on its premises as both an asset and a rental commitment in its consolidated statement of financial position, but is not expected to have material effect on the Group's results.

The implications of these accounting standards on CityFibre Infrastructure Holdings plc are expected to be evaluated in more detail during the financial year 2017.

Basis of consolidation

The consolidated financial statements incorporate the results of CityFibre Infrastructure Holdings PLC and all of its subsidiary undertakings as at 31 December 2016. The results of subsidiary undertakings are included from the date of acquisition.

CityFibre Infrastructure Holdings PLC was incorporated on 13 November 2013, and on 11 January 2014 it acquired the issued share capital of CityFibre Holdings Limited by way of a share-for-share exchange. The latter had five wholly owned subsidiaries: CityFibre Networks Limited, Fibrecity Holdings Limited, Gigler Limited, CityFibre Metro Networks Limited and Fibrecity Bournemouth Limited. The consideration for the acquisition was satisfied by the issue of 115,383 Ordinary Shares in CityFibre Infrastructure Holdings PLC to the shareholders of CityFibre Holdings Limited.

The accounting treatment in relation to the addition of CityFibre Infrastructure Holdings plc as a new UK holding Company of the Group falls outside the scope of the IFRS 3 'Business Combinations'. The share scheme arrangement constituted a combination of entities under common control. The reconstructed Group was consolidated using merger accounting principles as outlined in Financial Reporting Standard 6 ("FRS") Acquisitions and Mergers (UK) and treated the reconstructed Group as if it had always been in existence. Any difference between the nominal value of shares issued in the share exchange and the book value of the shares obtained is recognised in a merger reserve.

The Company has taken advantage of merger relief available under Companies Act 2006 in respect of the share for share exchange as the issuing company has secured more than 90% equity in the other entity.

Revenue

Revenue represents network lease sales and installation sales to external customers, sales of internet services to residential customers, and recharge of work performed for the joint venture at invoiced amounts less value added tax or local taxes on sales. Where revenue arising from installation and connection services is separable from network lease services, these elements are recognised as if they were separate contracts.

Network lease revenue is recognised evenly over the period to which the services are provided, and is recognised from the date at which the network service becomes available for use by the customer.

Installation revenue is recognised on a percentage completion basis over the period of construction of the asset, from post-contract signature mobilisation to customer handover. Management apply a straight line basis as this closely approximates revenue recognised on a stage of completion basis and the effort required to deliver services to customers.

It is considered by management that the above revenue recognition policies are suitable for recognising revenue arising from the Group's key market verticals.

Revenue attributable to infrastructure sales in the form of Indefeasible-Rights-of-Use ("IRUs") with characteristics which qualify the transaction as an outright sale, or transfer of title agreements, are recognised at the later of delivery or acceptance by the customer.

Accrued income is recognised when services are provided in advance of the customer being invoiced.

Deferred revenue is recognised when services are invoiced in advance of the period over which the services are provided.

Revenue from internet services provided to residential customers is recognised on a monthly basis, commencing when services are provided.

Revenue from work performed for the JV is recognised during the period to which the work relates.

All revenue streams are wholly attributable to the principal activity of the Group and arise solely within the United Kingdom.

Property, plant and equipment

Property, plant and equipment are stated at cost, net of depreciation and any provisions for impairment. Where network assets are acquired as part of a contract including a provision of services, the asset is initially recognised at fair value to include the value of these services. Depreciation is calculated so as to write off the cost of an asset, less its estimated residual value, over the useful economic life of that asset as follows:

Useful economic lives and residual values are assessed annually. Any impairment in value is charged to the statement of comprehensive income.

During the year the estimated useful economic life of Duct was changed from 20 years to 40 years, as management considered this to be a better reflection of the period over which economic benefit is derived from the assets. Taking into account these assets are relatively new, have a long life and there is now enhanced evidence of the durability of these assets, CityFibre updated its accounting estimate during the year. Using the previous useful economic life, the depreciation for the year would have been £6,595,000, which is £3,023,000 greater than the depreciation recognised during the year.

Intangible assets

Customer contracts, which have arisen through business combinations, are assessed by reviewing their net present value of future cash flows. Customer contracts are amortised over their useful life not exceeding six years.

Software costs that are directly attributable to IT systems controlled by the Group are recognised as intangible assets and the costs are amortised over their useful lives not exceeding three years. Amortisation is included in general administrative costs in the statement of comprehensive income.

Impairment of non-current assets

Whenever events or changes in circumstance indicate that the carrying amount of an asset may not be recoverable an asset is reviewed for impairment. An asset's carrying value is written down to its estimated recoverable amount (being the higher of the fair value less costs to sell and value in use) if that is less than the asset's carrying amount.

Inventory

Inventory is stated at the lower of cost and net realisable value. Cost is based on the cost of purchase on a first in, first out basis. Inventory includes equipment necessary to install fibre optic networks and also includes the cost of specific network assets allocated for sale under indefeasible right of use (IRU) agreements.

Net realisable value is based on estimated selling price less additional costs to completion and disposal.

Certain network assets were classified as inventory assets during the year. The Group intends to sell these network capacity assets on a regular basis where it is considered to be a strategically viable product.

Finance costs

Finance costs are charged to profit over the term of the debt so that the amount charged is at a constant rate on the carrying amount. Finance costs include issue costs, which are initially recognised as a reduction in the proceeds of the associated capital instrument.

Financial liabilities and equity

Financial liabilities, including trade payables and bank loans, are recognised when the Group becomes party to the contractual arrangements of the instrument and are recorded at amortised cost using the effective interest method. All related interest charges on loans are recognised as an expense in 'finance cost' in the statement of comprehensive income.

Financial liabilities and equity are classified according to the substance of the financial instrument's contractual obligations, rather than the financial instrument's legal form.

Financial instruments issued by the Group are classified as equity only to the extent that they do not meet the definition of a financial liability. The Group's ordinary shares are classified as equity instruments. Incremental costs directly attributable to the issue of ordinary shares are recognised as a deduction from equity, net of any tax effects.

Financial assets

Trade and other receivables are initially recorded at their fair value and subsequently carried at amortised cost, less provision for impairment.

A provision for impairment of trade receivables is established when there is objective evidence that the Group will not be able to collect all amounts due according to the original terms of the receivable. Bad debts are written off when identified.

Cash and cash equivalents

Cash and cash equivalents comprise cash at bank and cash in hand and short-term highly liquid investments with an original maturity of three months or less.

Key judgements and sources of estimation uncertainty

The preparation of the financial statements in conformity with IFRS requires management to make judgements, estimates and assumptions that affect application of policies and reported amounts in the financial statements. The areas involving a higher degree of judgement or complexity, or where assumptions or estimates are significant to the financial statements are detailed below.

Assessment of useful economic lives of property, plant and equipment

The Group depreciates the property, plant and equipment, using the straight-line method, over their estimated useful lives. The estimated useful life reflects management's estimate of the period that the Group intends to derive future economic benefits from the use of the Group's property, plant and equipment. Changes in the expected level of usage and technological developments could affect the useful economic lives of these assets which could then consequentially impact future depreciation charges. The carrying amounts of the Group's and the Company's property, plant and equipment at 31 December 2016 are disclosed in note 9 to the financial statements.

Impairment of non-current assets

Property, plant and equipment is recorded at historical cost less accumulated depreciation and any accumulated impairment losses. Network assets comprises assets purchased at cost and fair value and built at cost, together with capitalised labour directly attributable to the cost of construction. 

The carrying values of property, plant and equipment and intangible assets other than goodwill, within a cash generating unit, are reviewed for impairment only when events indicate the carrying value may be impaired. Impairment indicators include both internal and external factors. Examples of internal factors include analysing performance against budgets and assessing absolute financial measures for indicators of impairment. Examples of external considerations assessed for indications of impairment include wider economic factors.

Where impairment indicators are present, the recoverable amounts of assets are measured. Asset recoverability requires assessment as to whether the carrying value of assets can be supported by the net present value of future cash flows derived from such assets, using cash flow projections which have been discounted at an appropriate rate. In calculating the net present value of the future cash flows, certain assumptions are required to be made in respect of uncertain matters. In particular, management has regard to assumptions in respect of revenue mix and growth rates.

Classification of network assets as inventory

Certain network assets have been classified as inventory assets during the year. Management believes this classification is appropriate given that the Group intends to sell network capacity assets on a regular basis where it is considered to be a strategically viable product.

Revenue recognition of installation revenues

Installation revenues are a proportion of the total contract value; management assess this and give appropriate consideration to a range of factors in determining installation revenues on a contract by contract basis. Factors include contract length, technical challenges in delivering the contract and assessment of any associated local economic issues.