Utilitywise Regulatory News (UTW)

22 March 2018

Utilitywise plc

("Utilitywise" or "the Company")

Questions and answers for shareholders

Utilitywise plc (AIM:UTW), a leading independent utility cost management consultancy, published its full year results for the year ended 31 July 2017 ("FY17") on 22 March 2018. In light of the delay in publication of those results and related suspension of the Company's shares, the Board has published the following Q&A to provide answers to frequently asked questions by investors about the situation. If investors have further questions, they should email InvestorRelations@utilitywise.com

Why were the full-year results delayed so significantly?

On 15 November 2017, Utilitywise announced a delay to the announcement of its final results for FY17. This delay was due to the Group's external auditor requesting a further independent review from another leading firm of Utilitywise's methodology and accounting policy for recognising revenue on its energy procurement contracts.

A further update was given to the market on 17 January 2018 regarding the outcome of that review, including the material impact on the financial results of the Group. A substantial amount of work was then required to update and restate a large number of historic energy procurement contract values to cater for the change in accounting policy.

Despite all efforts, the volume of work that was subsequently required, including a significant additional amount of audit work from the external auditor, it was not possible to complete that work until 21 March 2018. At that point, the Board moved to immediately approve the accounts and announce the results for the year ended 31 July 2017.

What is the outcome of the changes?

The key changes are set out in a separate section in the Strategic Report section of the FY17 year-end results announcement and FY17 Annual Report.

In summary, Utilitywise is adopting what the Board considers to be a very conservative recognition policy in respect of revenue on energy procurement contracts. It is more conservative than the advice received from the independent accounting firm, after subsequent discussions with the Group's auditors, due to the adoption of additional contingency under-consumption rates over and above those recommended by the independent firm for contracts of value less than £50,000.

Is this issue related to the previous announcement regarding repayments of commissions to an energy supplier?

No. That was a separate one-off issue (which was announced on 29 June 2017) where the Group agreed to make repayments of commissions totalling £7.6m between June 2017 and December 2020 to one energy supplier, of which £4.8m was paid in FY17.

There have been improvements in the internal controls of both Utilitywise and the energy supplier since August 2016, which mitigate the risk of significant under-consumption in the energy procurement contracts versus the estimated usage of those contracts agreed at the outset. The Board is confident that contracts placed after August 2016 with the customer will show more normal levels of consumption over the lives of those contracts and that the risk of similar issues with other suppliers is minimal.

What is the impact on the revenue and profit of the Group?

The revised accounting policy can be seen to have a material negative impact on the reported revenue and accounting profit of the Group in the short-term. However, the revised accounting policy changes affect the timing of revenue recognition rather than the absolute value of the energy procurement contracts that the Group places, in particular for contracts less than £50,000, which make up the substantial majority of the aggregate live contract value of the Group. It has had no impact on the cash flows of the Group. Furthermore, the Directors do not anticipate that there will be any future impact on the cash flows of the Group as a result of the revised accounting policy.

How will the changes to the accounting policy impact the day-to-day management of the business in the future?

Internally, management use a constant assumed under-consumption rate of 20% across all of its energy procurement contracts to take account of the fact that, whilst contracts more than £50,000 typically under-consume at significantly more than 20% (52.2% in FY16/17), contracts less than £50,000, which make up the majority of the live book, on average have been observed to under-consume at less than 20% (17.7% in FY16/17), meaning that the overall average across all maturing contracts in recent years has been around 20% (21.0% in FY16/17 and 19.3% in FY15/16).

Importantly, this is also now the basis upon which the Group declares its performance against its interest cover covenant with the bank and is the level at which management observes its EBITDA to be broadly analogous to operating cash flow.

What about cash flow?

The accounting policy changes do not have any impact on the historic or future cash flows of the Group.

The negative operating cash flow of the Group in the year ended 31 July 2017 is unrelated to these policy changes and was due to the repayment of £4.8m to an energy supplier, as explained below, plus a further £2.8m of payments for non-trading items, such as legal costs and restructuring. Without these non-recurring items, the Group had positive operating cash flow in the year.

Why is the balance sheet of the Group now negative (net liabilities)?

The revised revenue accounting policies of the Group have caused a significant non-cash impact on the net assets of the Group. As explained in the Strategic Report in the FY17 results:

· If provision for under-consumption on contracts less than £50,000 had been made at 31 July 2017 at the rate of under-consumption observed in the two-year period to 31 July 2017, the net assets of the Group would be c. £15m higher

· The new accounting policy for contracts greater than £50,000 means that no revenue has been recognised on approximately £7m of live contracts until a minimum number of energy consumption data points (i.e. meter readings) are obtained from the energy supplier. At the under-consumption rate observed in FY17, this would correspond to an increase in the net assets of the Group of c. £3m.

· As a result of the revenue policy changes, the Group also has significant additional tax losses which will be used to offset future taxable profits of the Group. This deferred tax asset is c. £7m and is not recognised on the balance sheet as at 31 July 2017.

The above items total c. £25m, which exceeds the net liabilities position of the Group as at 31 July 2017.

Has the Group breached its banking covenants?

The Group certified compliance with its main financial bank covenants for the year ended 31 July 2017 based upon the Group's management accounts at that time. The subsequent review and non-cash amendment to revenue accounting policies mean that the Group then fell into a technical retrospective breach of those covenants, which had initially been set based on the previous accounting policies of the Group. However, as announced to the market on 1 February 2018, the Group agreed certain amendments to its banking facility agreement with its lending bankers.

The new terms aligned Utilitywise's banking facility with the non-cash accounting changes anticipated in the financial statements for the year ended 31 July 2017 and beyond, as outlined in the announcements on 17 January 2018 and 29 January 2018. The facility amendments included the replacement and amendment of certain covenants to take account of the Group's amended accounting policies and also included waivers by the bank of all of the retrospective technical breaches as part of those amendments.

Has Utilitywise incurred additional costs as a result of this delay?

Additional costs of c. £0.8m were incurred by the Group in bringing the year-end matters to a conclusion. This includes an additional £0.5m of audit fees, over and above the normal fee agreed by the Audit Committee. These costs have been charged as exceptional items in the FY17 income statement. However, they will be FY18 cash flows and, therefore, increase the expected net debt of the Group by a similar amount as at 31 July 2018 as a result.

When will you start paying dividends again?

Due to the evolution of our capital structure and the recent amendments to our accounting policies, the Company is not able to declare a final dividend for the year ended 31 July 2017. As previously announced, once the Company has sufficient distributable reserves out of which to pay dividends, the Board intends to recommence the payment of dividends at an expected dividend cover of 4x, subject to this being supported by the Group's capital structure and free cash flow at that time.

Why do the FY17 results not include any financial analysis of the impact of the adoption of IFRS15?

As previously announced, the Group early-adopted IFRS15 on 1 August 2017. The financial results include a qualitative explanation of the key changes that arise as a result of the early-adoption, the main one being that the Group will recognise revenue on same supplier renewal contracts when they go-live, rather than when they are signed, which was the position prior to 1 August 2017.

Best practice in this area is to give the full quantitative analysis of the impact. However, the Board considered that it was more important to finalise the accounts as quickly as possible, given the already significant delay to have the suspension of the Company's shares from trading on AIM lifted as soon as possible. As a result, the decision was taken to give the qualitative disclosures that meet the minimum requirements of accounting standards with the intention of issuing the quantitative analysis in the near future.

When will the annual report be published?

The annual report for FY17 is already available on the Group's website at www.utilitywise.com. The annual report will also be mailed to shareholders, and the Company will convene an Extraordinary General Meeting to seek shareholder approval of the accounts.

When will the interim results be announced?

It is expected that the interim results of the Group for the six months ending 31 January 2018 will be announced on 23 April 2018.

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