Utilitywise Regulatory News (UTW)

31 July 2017

Utilitywise plc

("Utilitywise", the "Company" or the "Group")

Early Adoption of IFRS 15

Utilitywise, a leading independent utility cost management consultancy, today announces that it will adopt the accounting standard IFRS 15 (Revenue from Contracts with Customers) on 1 August 2017. The adoption of IFRS 15 is mandatory from 1 August 2018.

Highlights:

· New accounting standard, IFRS 15 to be adopted on 1 August 2017

· Main changes:

o Recognition of revenue from same supplier renewals ("Renewal Contracts") upon contract commencement rather than contract signature;

o Initial recognition value of procurement contracts (new business and Renewal Contracts) at 80% rather than 85%;

· No impact on commercial activities or cash flows but change expected to lead to close correlation between accounting earnings and operating cash flows;

· Material impact on future accounting revenue recognition and, therefore, profits;

· Utilitywise will now have an increased future order book as at 30 June 2017 of £43.3 million;

· Due to impact on retained earnings, Utilitywise will not pay a final dividend in respect of the year ended 31 July 2017.

o Intention to recommence the payment of dividends in respect of the year ended 31 July 2018, subject to successful process to create sufficient distributable reserves.

To ensure shareholders have the highest level of visibility, the Board has decided, in accordance with the early-adoption provisions of IFRS 15, to implement the standard, one year ahead of schedule. Therefore, the results for the year ended 31 July 2017, expected to be published on 17 October 2017, will be the last results presented under the existing accounting standard, IAS 18 (Revenue) and will also include a reconciliation of the results to the equivalent position presented in accordance with IFRS 15.

The year ended 31 July 2018 will be the first financial year of the Group to be prepared under IFRS 15. The financial statements for earlier years will also be restated to reflect the change in accounting policy. Restated summary income statement and balance sheet information for the years ended 31 July 2014, 31 July 2015 and 31 July 2016, respectively, is set out below.

Following the decision to adopt early, and after taking appropriate professional advice including from an independent accounting firm, the Board has determined that the revenue and profit of the Group will be materially impacted by the implementation of IFRS15 as set out below. However, there will also be a significant reduction in the level of accrued revenue carried in the Group's balance sheet.

There is no impact on the commercial activities or cash flows of the Group, as a result of the adoption of this accounting standard. Following the changes, the Board anticipates that the Group will report EBITDA and operating cash flows that are closely aligned in future years.

There will be a meeting for analysts at 11.00am today at the offices finnCap, 60 New Broad Street, London EC2M 1JJ. To register to attend, please contact Redleaf Communications at utilitywise@redleafpr.com or 020 7382 4730.

Revenue recognition criteria

The Group currently recognises revenue in accordance with IAS 18, which requires that revenue is recognised at "fair value" when it is "probable that future economic benefit will flow" to the Group. The Group currently recognises 85% of the estimated total value of procurement contracts as revenue upon the initial revenue recognition point for those contracts, being the commencement of a new customer contract or upon the signature of a Renewal Contract, respectively.

IFRS 15 requires that revenue is recognised at the "transaction price" when certain contractual obligations are met but with any "variable consideration" elements of the price recognised when it is "highly probable" that there will be no reversal of that revenue.

Timing of revenue recognition on Renewal Contracts

As detailed above, the Group currently recognises revenue upon the signature by a customer of a Renewal Contract with their existing supplier. This is on the grounds that it is considered "probable" that the renewed contract will ultimately be honoured by the customer, which meets the recognition requirements of the existing accounting standard, IAS 18, the Group having no further contractual obligations in respect of those transactions. Renewal Contract revenue typically comprises 20%-25% of Group revenue, of which 10%-15% of the value of those Renewal Contracts typically commences in the same year that the Renewal Contracts are signed.

Given that there can be a significant time delay between the signature of a Renewal Contract and the contract subsequently commencing, it is considered that the delay means that the likelihood of the contract being honoured remains probable but does not meet the "highly probable" condition of IFRS 15. It is determined that the highly probable condition is met when the renewed contract comes into effect, rather than upon the signature of the Renewal Contract. This has the effect of deferring revenue to later accounting periods, as a result of the adoption of IFRS 15. Separately identifiable, incremental costs associated with this deferred revenue, primarily relating to attributable commission payments, will also be deferred and recognised in the same accounting period as the revenue to which they directly relate.

The adoption of IFRS 15 causes the de-recognition of an aggregate value of Renewal Contracts of £24.3m from the financial periods ending 31 July 2014, 31 July 2015 and 31 July 2016, which is then expected to be recognised as revenue in the future periods in which those contracts subsequently commence.

Value of initial revenue recognition on procurement contracts

Following the adoption of IFRS15, the initial revenue recognition point will be the point at which contracts commence for both acquisition and Renewal Contracts, as detailed above. Based on a number of factors, including commercial terms with suppliers and the market generally, the Board has determined that, whilst 85% remains probable, only 80% of the value is "highly probable" for the purposes of revenue recognition in accordance with the requirements of IFRS 15. Accordingly, the Board has determined that the Group's initial revenue recognition value should change from 85% to 80% of the estimated total value of each procurement contract, upon the adoption of IFRS 15.

The £24.3m aggregate Renewal Contract revenue referred to above (from the financial periods ending 31 July 2014, 31 July 2015 and 31 July 2016) is based upon 85% initial recognition value under existing accounting policies. After adjusting this to 80% initial recognition value upon the adoption of IFRS 15, the aggregate Renewal Contract value reduces to £22.9m. This updated initial recognition value is then expected to be recognised in future financial years as follows:

Impact on Group future order book

The changes to accounting policies gives rise to a future order book as at 30 June 2017 of £43.4m, split between £20.4m of secured revenue from contracts secured with new customers and £23.0m of secured revenue from same supplier renewal contracts, both of which will be recognised at the point of contract commencement upon the adoption of IFRS 15.

Dividend payments

It is expected that the adoption of IFRS 15 will leave the Group with negative retained earnings on 1 August 2017. That is based upon the restated retained earnings position as at 31 July 2016, set out below, and then taking into account distributions made since that date, along with expected post-tax losses in FY17. Those losses are stated after, inter alia, exceptional items detailed in the Group's 2017 interim results and the further accounting charges announced in respect of projected under-consumption of contracts in June 2017.

Accordingly, the Board hereby announces that it will not declare a final dividend in respect of the year ended 31 July 2017, which would ordinarily have been payable in December 2017, subject to shareholder approval at the Annual General Meeting (AGM). This is due to the fact that the Group will have insufficient distributable profits out of which to pay a dividend. Furthermore, the Group will not be in a position to declare interim or final dividends in respect of subsequent financial years, until such time as it has sufficient distributable reserves out of which to make such payments.

The Board remains confident in the future prospects of the business and confirms its intention to recommence the payment of dividends at the earliest opportunity. Accordingly, the Board confirms its intention to explore all options available to the Group to create sufficient distributable reserves out of which future dividends could be paid. Subject to being able to do this, including seeking shareholder approval where relevant, for the year ended 31 July 2018 and beyond the Board intends to distribute one quarter of the Group's retained post-tax profits per annum to shareholders as a dividend. One third of such dividend would be payable following the announcement of the interim results and the remaining two thirds would be paid following the announcement of the full year results and subsequent shareholder approval at the AGM. The Directors believe that this represents an attractive but sustainable dividend policy, having regard to the availability of the Company's distributable profits and operating cash flow.

Summary impact on financial statements of transition to IFRS 15

The summary impacts on the Group's income statement, Adjusted(1) profit before tax, net assets and accrued income for the years ended 31 July 2014 ("FY14"), 31 July 2015 ("FY15") and 31 July 2016 ("FY16") are set out below:

Corporate tax impact

It is expected that the aggregate reduction in net assets as at 1 August 2017 will be tax deductible in the year ended 31 July 2018, being the financial year in which IFRS 15 is adopted by the Group. It is expected that the associated aggregate corporate tax recovery will occur during FY18 and FY19.

Banking covenants

The Group has a £25m revolving credit facility with a single UK lender, which expires in April 2019. The facility has two main financial covenants, which are tested quarterly and are as follows:

· Maximum ratio of net debt to EBITDA(2) (leverage) of 2x; and

· Minimum ratio of EBITA(3) to interest charges (interest cover) of 5x.

The Group has obtained confirmation from the lender that these covenants will continue to be tested using the financial results of the Group as if IFRS 15 has not been adopted. The first such covenant test date after the adoption of IFRS 15 by the Group will be 31 October 2017.

Other impacts

No other material impacts are noted upon the adoption of IFRS 15.

(1) Adjusted profit before tax is stated before exceptional income and costs, non-cash accounting charges for share based payments and amortisation of intangible assets acquired through business combinations

(2) EBITDA means earnings before interest, taxation, depreciation and amortisation, stated before exceptional income and costs, non-cash accounting charges for share based payments and amortisation of intangible assets acquired through business combinations

(3) EBITA means earnings before interest, taxation and amortisation, stated before exceptional income and costs, non-cash accounting charges for share based payments and amortisation of intangible assets acquired through business combinations

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About Utilitywise

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.