Our transformation from a small gas connections business into a large end-to-end utilities company that’s dedicated to excellence.
We were established in 1995 to provide services in the emerging gas connections market following Ofgem’s move to deregulate the gas industry. Since then, the UK gas market has evolved from the original British Gas single monopoly to an unbundled market.
We started out as a UK-wide contracting services business using subcontractors from a main base in Scotland.
In 2004, a meter asset management service was established and we became an Ofgem approved meter asset manager (MAM).
We created a meter asset portfolio, working with all UK gas suppliers.
This was followed by a new smart metering and data management offering for the I&C market and the potential roll-out of smart metering in the domestic market. The UK government’s objective is to have a smart metering solution installed in all domestic gas and electricity consumers’ properties by 2020.
We also floated on the AIM.
2014 was a landmark year for us, as we launched our electricity service offerings through the acquisition of Utility Partnership Limited (UPL).
UPL was a leading manager of electricity meters in the UK and provider of electricity connections, design, meter installation, data management and energy management services. Less than a year after the acquisition of UPL in April 2014, our businesses were fully integrated.
In 2016 we further incorporated installation services directly into our business, with the acquisition and integration of smart meter installation businesses, CH4 and Trojan, and field services software and data security firm, Qton Solutions.
The change in our business model reinforced our credentials to install, own and manage utility metering assets for our energy supplier customers.
This allowed us to provide a complete service from beginning to end. Everything from project managing the installation of the gas and/or electricity supply and connection through to the procurement, installation and management of meter assets, data collection and ongoing energy management solutions. This breadth of service makes us incredibly unique in our industry. There are no other organisations in a position to offer all of these services simultaneously.
2017 has been a year of significant growth and investment in our business. We have seen our portfolio of meter and data assets increase to 2.03 million, which includes 423,000 domestic smart meters.
Equity placing and refinancing of debt facility
To fund our continued growth, we undertook an exercise to raise additional equity investment and we are pleased to report that on 24 November 2017 we successfully placed £150m of additional ordinary shares on the London Stock Exchange’s AIM.
At the same time, we also refinanced our £280m debt facility in November 2017 with our existing syndicate of banks. This extended the maturity date of the existing facility from March 2019 to November 2020 on similarly attractive terms to the existing facility.
The net proceeds of the placing are to be utilised alongside the extended debt facility to give SMS plc the financial and operational flexibility to fully fund the installation of approximately 2.5 million meters.
2018 has, once again, been an excellent year for SMS, with substantial and increased capital investment in metering assets being reflected in the significant growth in annualised recurring revenues and our trading performance.
The Group, as at 31 December 2018, had more than 3.1 million metering and data assets under management, up 54% from 2.0 million at the end of 2017. We have established a substantial source of long-term, index-linked recurring revenues, in a secure and established asset class. We continue to demonstrate that we have proven operational and financial capacity and the platform to deliver the smart domestic meter rollout. As a result, we saw a 32% increase to £75.3m in annualised recurring revenues. This recurring revenue stream, which provides long-term returns, firmly underpins our robust investment proposition.
With further growth anticipated as the UK domestic smart meter rollout continues, we reviewed our longer-term funding during 2018 and decided upon a flexible strategy to allow us the capability to match the pace of the smart rollout. On 21 December 2018 a new banking facility was signed, providing
the business access to £420m on a fully revolving basis over the next five years therefore removing any amortisation in that period. The first drawdown under this new facility was on 3 January 2019, and at that date the Group’s obligations under the existing facility were settled. The support from our new banking syndicate comprising Barclays Bank plc, Santander UK plc, HSBC UK, Clydesdale Bank plc, Bank of Scotland plc and BNP Paribas is invaluable, providing us with significant additional financial capacity.
We ended the year with a net debt position of £142.0m (2017: £36.5m), with the increase in our continued investment in the domestic smart meter estate. The Group’s pre-exceptional Net Debt/EBITDA ratio remains well within covenant at around
2.75x (2017: 0.9x) and as at 31 December 2018 the Group’s available cash and unutilised element of the revolving credit facility stood at £138.0m (2017: £243.5m), increasing to c.£277.0m after the first drawdown under the new facility on 3 January 2019.
2018 has seen us accelerate our annualised recurring revenues and our trading performance, and significantly increase capital investment in metering assets accordingly, making us one of the largest installers of meter assets in the UK.
As we enter 2019, the domestic smart market provides us with a significant opportunity for further growth. We will continue to manage the business change required through the transition from SMETS1 to SMETS2 meters and fully expect our smart meter installation run rates to increase in the second half of 2019 as the smart meter rollout enters its main phase.
In understanding our business, it is crucial to remember that data is at the centre of everything we do. Through the installation of smart meters, we deploy the devices that produce the data essential for managing and understanding energy flows and we use this data across our range of services to help our clients make better decisions and achieve operational efficiency and sustainability. We will continue to develop our capabilities to deliver innovative and integrated energy solutions to our customers, leveraging the foundations we have established in smart meters to grow our service proposition.
We ended the year in line with our expectations and delivered continued growth in our ILARR, despite various industry-wide challenges. The continued volatility in the UK smart meter rollout has seen industry installation run rates lag behind previously anticipated volumes and technical issues, beyond our control, have meant delays to certain customers getting “SMETS2 ready”. As a result, we have had to navigate the knock-on effect of this on our operational activity and financial results.
Despite these challenges, and the resulting impact on our short-term profitability, it is important that we keep sight of the long-term opportunities our business can address. The smart meter rollout remains core to a lower carbon future for the UK. Further, the strategic acquisition of Solo Energy has strengthened our energy services platform to accelerate the delivery of extended energy services to our customers.
We previously announced that we were exploring options to monetise the value of a minority of the Group’s meter assets. On 12 March 2020, the Group conditionally agreed to dispose of a minority of the Group’s meter assets for gross consideration of £291m. This represents £18.4m ILARR and SMS will continue to manage the disposed assets for an RPI-linked management fee of c.£0.8m.
This transaction generates considerable cash returns and demonstrates the substantial value of our smart meter portfolio. The value that this transaction delivers enables the acceleration of shareholder returns, with the proposal of a significant change to our dividend policy, detailed further below.
We remain focused on securing long-term sustainable revenue streams, supported by an efficient capital structure, and are committed to seeking additional opportunities that enable the fulfilment of our mission: to deliver the future of smart energy.
We completed the largest commercial transaction in the Company’s history, selling a minority portfolio of meter assets in April for over £290m, allowing us to pay down all our debt and to be cash-positive through the remainder of the year. We started the building of our business in carbon reduction (‘CaRe’) assets, in our first addressable market, with our investment in grid-scale battery storage. We now have 90MW under construction, driving forward our strategy of being at the heart of the energy transition in the UK. Most importantly, we announced our aim to be ‘net carbon zero’ by 2030, supported by an ambitious implementation plan.
Generating value into the future
Our recurring revenues and the efficiency of our business mean that we can sustainably create and maintain the financial, technology and skills capacity to advance our purpose.
Reinvestment in our people and our digital platforms is key and we remain focused on advancing in areas where we have proven capability and long-standing relationships with our customers, developing infrastructure assets with annuity-style returns.
As we accelerate our progress following COVID-19, our immediate priorities are to leverage our unique end-to-end platform in order to grow and safely deliver our c.2.5 million contracted smart meter order pipeline, to extend our data services and to establish new carbon reduction infrastructure asset classes.