Utilitywise plc Projected under-consumption of energy contracts (5050J)

TIDMUTW

RNS Number : 5050J

Utilitywise plc

29 June 2017

29 June 2017

Utilitywise plc

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

Projected under-consumption of energy contracts

The Board of Utilitywise, a leading independent utility cost management consultancy, announces that it has been made aware of apparent material levels of under-consumption in certain contracts placed with one of the major energy companies dealt with by the Group (the "Energy Company").

Utilitywise remains in positive discussions with the Energy Company and has agreed to make repayments of commissions, previously paid to Utilitywise, totalling GBP7.6m between June 2017 and December 2020. As a result of changes in internal controls by both the Group and the Energy Company since August 2016, which mitigate the risk of significant under consumption in the contracts versus the estimated usage agreed at the outset, The Board is confident that contracts placed after August 2016 with the Energy Company will show more normal levels of consumption over the lives of those contracts.

The Board however feels it is prudent to reflect the full potential impact of the payments in the financial statements of the Group at this stage, though is confident Utilitywise will receive some of the cash back from the Energy Company at the conclusion of the contracts. The majority of the contracts in question are ordinarily due to end in the calendar years 2020 and 2021, at which point the final value of commissions due to Utilitywise will be determined and the final cash position between the two parties then settled. Accordingly, the Group will recognise an accounting charge for the full potential impact, estimated at GBP11.2m, subject to external audit, in its income statement in the year ended 31 July 2017. GBP7.7m of this charge is expected to be recognised as an exceptional item, with the remaining GBP3.5m reducing the underlying profit before tax of the Group in the same period.

The Board expects to fund this recovery from the Group's operating cash flow and available banking facilities, including a substantial offset of the negative cash flow in the year ended 31 July 2017. This will be through a combination of the corporation tax impact of the above noted accounting charge and working capital management. Accordingly, the Board does not change its expectations in respect of net debt of the Group as at 31 July 2017.

The Board is satisfied that this issue is materially specific to those contracts placed with the Energy Company and that the risk of similar issues arising with other energy suppliers is low following changes in internal controls at the Group. Accordingly, the Board does not anticipate a risk to the future revenues, profits and cash flows of the Group as a result of a recurrence of this issue in other contracts.

Brendan Flattery, Chief Executive Officer, Utilitywise, commented: "Along with the Board, the management and I are confident that the risk of similar issues with other suppliers is minimal. We have been working hard in terms of preparing Utilitywise for its next phase of growth. Part of this process has been increasing the transparency of the balance sheet, including the decision to discontinue cash advances from suppliers as well as improving our internal controls and methodology for estimating future energy usage when determining contracts with our energy suppliers. With an extensive portfolio of services in place and a focus on providing a great customer experience, Utilitywise has a strong platform for continued growth."

Under-consumption issue

The Energy Company has assessed the latest consumption levels on its total portfolio of c. 4,400 live contracts placed by Utilitywise. The Board understands that the consumption levels have been determined by the Energy Company to be, on average, significantly lower than initially expected at the inception of the contracts. This determination is based in part upon actual consumption levels partway through contracts but also on a projection of actual consumption levels for the rest of the contracts.

The Group receives 80% of its expected total commission on each new business contract from the Energy Company upon the commencement of supply of energy under the contract. The final level of commission is typically assessed at the end of the contract, with a balancing payment then made between the parties to align the correct amount of commission ultimately due to the Group in respect of each contract. On average, this is typically a further payment to Utilitywise as overall consumption exceeds 80% of the initially expected value. However, in the event of consumption of less than 80%, this would cause a partial reclaim of commission from the Group in respect of commissions already paid at the start of the contract, to reflect the lower level of energy usage and hence the value of those contracts.

The expected level of consumption on a new energy contract is ordinarily determined by reference to historic bills and other documentary evidence from the previous energy supplier. Excluding business written with the Energy Supplier, this has typically made up more than 90% of contracts placed.

Where it is not possible to determine the expected level of consumption using historic evidence, for example if the underlying energy customer has taken a lease over a new property, the expected level of energy consumption is instead estimated by reference to facts that are available at that point in time. These include, inter alia, building plans, comparison to and benchmarking against other sites of similar size and/or activity. The proportion of contracts using this estimated consumption (the "Nominated Quantity") method has historically made up less than 10% of new contracts overall, but was significantly higher than this level with the Energy Company, compared to other energy suppliers. This gave rise to an increased inherent risk of estimation inaccuracy/error in the original contract values placed with the Energy Company, compared to the other energy suppliers that the Group deals with.

Improvements to Controls

Prior to August 2016, the responsibility for monitoring, checking and approving Nominated Quantity levels sat within the commercial function of the Group. In August 2016, the responsibility was moved from the commercial function to the finance function of the Group, and the process for approving Nominated Quantity amounts was significantly strengthened, given that Nominated Quantity amounts are not based upon historic actual billings.

Other energy suppliers dealt with by the Group have much lower levels of business placed with them using the Nominated Quantity estimation method, with the vast majority of contracts being based upon documentary evidence of historic consumption from previous energy suppliers. The Board is confident that this primary methodology for estimating future energy usage (that is to say, where historic bills and other documentary evidence are used to determine expected future consumption) is not as vulnerable to similar issues as the Nominated Quantity methodology.

Changes in internal controls by both the Group and the Energy Company, along with the substantial cessation of placement of business to the Energy Supplier using the Nominated Quantity estimation method, leads the Group to now believe that the risk of recurrence of this issue on new contracts to be substantially mitigated. Accordingly, the Board does not anticipate a material risk to the future revenues, profits and cash flows of the Group as a result of a recurrence of this issue.

Value of the Claim

The Energy Company has projected an aggregate over-payment of commissions, previously paid to Utilitywise, of GBP7.6m and has entered into discussions with the Group with the intention to recover this total amount. In determining this value, the Energy Company has taken the stated consumption level to date on each live contract and extrapolated that consumption on a straight-line basis across the remaining life of each contract, then aggregating the individual amounts to form the basis of the Claim. Approximately GBP5.7m of this amount relates to contracts that commenced prior to September 2016, the majority of which relates to the period January 2015 to August 2016, with the balance of GBP1.9m made up of contracts that were placed after that date.

The Group has received data from the Energy Company in support of the claim and continues to work with the Energy Supplier to fully understand the accuracy of the data and consumption levels, although believes GBP7.6m to be the Group's maximum potential aggregate repayment.

The majority of the contracts in question are ordinarily due to end in the calendar years 2020 and 2021, at which point the final value of commissions due to Utilitywise will be determined and the final cash position between the two parties then settled. However, it is now agreed that the value of commission repayments to the Energy Supplier will be material ahead of the expiry of those contracts.

Income statement impact

In light of the above, the Board has determined that it is appropriate to make full provision in the financial statements of the Group, in respect of this issue. However, the Board also anticipates that contracts placed after August 2016 will show a normalised level of consumption by the time they expire, with any such associated financial upside then recognised should it occur in future.

The current accounting policy of the Group is to recognise 85% of the initially expected value of the contract upon those contracts commencing. The profit impact of the GBP7.6m cash repayment is an expense of GBP11.2m, of which GBP7.7m is expected to be recognised as an exceptional item in the income statement of the Group in the year ended 31 July 2017 with the remaining GBP3.5m reducing the underlying profit before tax of the Group in the same period.

Cash flow impact

As noted above, the Energy Company has requested that Utilitywise repay commissions, previously paid to the Group in respect of those contracts, of c. GBP7.6m. It is the current expectation of the Group that this total repayment will be made in several agreed stages, being GBP4.8m during the year ended 31 July 2017, GBP1.0m in each of December 2018 and December 2019 and GBP0.9m in December 2020. This is ahead of the expiry of the majority of the contracts concerned during 2020 and 2021, when the final positions will be determined and residual cash flows will occur between the two parties to ensure that Utilitywise ultimately receives the correct amount of commission due from the Energy Supplier.

The Board expects to fund this recovery from the Group's operating cash flow and available banking facilities, including a substantial offset of the negative cash flow in the year ended 31 July 2017 through a combination of the corporation tax impact of the above noted accounting charge and working capital management. Accordingly, the Board does not change its expectations in respect of net debt of the Group as at 31 July 2017.

The information communicated within this announcement is deemed to constitute inside information as stipulated under the Market Abuse Regulations (EU) No. 596/2014. Upon the publication of this announcement, this inside information is now considered to be in the public domain.

For further information please contact:

 
 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 4730 
 Rebecca Sanders-Hewett/Robin Tozer/David 
  Ison 
 

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.

This information is provided by RNS

The company news service from the London Stock Exchange

END

MSCOKFDKDBKBKAB

(END) Dow Jones Newswires

June 29, 2017 02:01 ET (06:01 GMT)