PYRAMID_SCHOOLS_(SOUTHAMP - Accounts
PYRAMID_SCHOOLS_(SOUTHAMP - Accounts
The directors present the strategic report for the year ended 28 February 2023.
These financial statements have been prepared under FRS 102 "The Financial Reporting Standard applicable in the UK and Republic of Ireland".
Principal activities
The company was formed to enter into a Private Finance Initiative ("PFI") concession contract with the Southampton City Council to design, build, finance and operate schools. The contract was signed on 15 March 2005, construction commenced immediately, and full services started 7 January 2007. The contract will run until 31 December 2034. There have not been any changes in the company's activities in the year under review and the directors are not aware, at the date of this report, of any likely changes in activity for the foreseeable future.
The company was incorporated in Great Britain, registered in England and Wales and is domiciled in the United Kingdom.
In the year the company made a profit of £504,000 (2022: loss £636,000).
The company's operations are managed under the supervision of its shareholders and funders and are largely determined by the detailed terms of the key performance indicators in the PFI contract with the Council. Mitie FM Limited, formerly Interserve (facilities Management) Ltd, provides Fabric Replacement services and is the FM service provider throughout the life of the concession. For this reason, the company's directors believe that no other key performance indicators apart from profit are necessary or appropriate for an understanding of the performance or position of the business.
The PFI contract with the Council and subcontracts with Mitie FM Limited follow a set formula for the life of the contract and this enables the company to have a high degree of certainty over its net income and major expenses until 31 December 2034. Furthermore, the company has a Credit Agreement with its lender which fixes the level of borrowing and repayments due until the loan is fully repaid in 2029.
The directors do not anticipate a change in the company's activity for the foreseeable future.
The directors, in preparing this strategic report, have complied with s414C of the Companies Act 2006.
The company's principal activity as detailed above is considered low risk as its trading relationships with its customer, funders, and contracts with ICL and IFM are determined by the terms of their respective detailed PFI contracts. Its main exposure is to financial risks as detailed in the following section.
One of the risks of the company is that services may not be able to continue due to the financial failure of one of the company's subcontractors. The financial stability of the facilities management and management service companies is being monitored. The directors have reviewed the benchmarking information on the facilities management contract fee and are comfortable that this is a market rate which would enable replacement of the contractor for a similar fee.
The company has exposures to a variety of financial risks which are managed with the purpose of minimising any potential adverse effect on the company's performance.
The board has policies for managing each of these risks and they are summarised below:
Interest rate risk
The company hedged its interest rate risk at the inception of the project by swapping its variable rate debt into fixed rate by the use of an interest rate swap. Interest is recognised on the accruals basis at the appropriate date.
Inflation risk
The company hedged its inflation risk at the inception of the project by entering into RPI linked contracts for services provided to the Local Authority and for services received for facilities management.
Liquidity risk
The company adopts a prudent approach to liquidity management by maintaining sufficient cash and liquid resources to meet its obligations. Due to the nature of the project, cash flows are reasonably predictable and so this is not a major risk area for the company.
Credit risk
The company receives the bulk of its revenue from a Council and therefore is not exposed to significant credit risk. Cash investments, interest rate swap arrangement and inflation swap arrangements are with institutions of a suitable credit quality.
Ownership
In the directors' opinion there is no controlling party. At the balance sheet date the ultimate parent companies who jointly control the company are PPP Equity PIP LP (acting by its General Partner Dalmore Capital 6 GP Limited and its manager Dalmore Capital Limited), and Aberdeen Infrastructure Partners LP Inc acting by its manager Aberdeen Asset Managers Limited.
The directors have prepared a detailed model forecast to project completion incorporating the relevant terms of the PFI contract, subcontracts and Credit Agreement and reasonably prudent economic assumptions. This forecast and associated business model, which is updated regularly, predicts that the Company will remain profitable and will have sufficient cash resources to operate within the terms of the PFI contract, Subcontract and Credit agreement. Therefore, the directors, having considered the financial position of the Company and its expected future cash flows, for at least 12 months from the date of signing the accounts, and have prepared the financial statements on a going concern basis. The directors confirm that they do not intend to liquidate the Company or cease trading as they consider they have realistic alternatives to doing so.
The directors confirm the completeness of the information provided regarding events and conditions relating to going concern at the date of approval of the financial statements, including plans for future actions.
On behalf of the board
The directors present their annual report and financial statements for the year ended 28 February 2023.
The results for the year are shown in the Statement of Comprehensive Income on page 11. Ordinary dividends were paid amounting to £- (2022: £1,012,000). The directors do not propose the payment of a final dividend and no dividends have been paid following the year end.
The directors who held office during the year and up to the date of signature of the financial statements were as follows:
JS Gordon resigned on 30 June 2023 and was reappointed on 30 June 2023. He continues to hold office at the date of signature of the financial statements.
There are no post balance sheet events to declare.
Pursuant to section 487 of the Companies Act 2006, the auditor will be deemed to be reappointed and Johnston Carmichael LLP will therefore continue in office.
select suitable accounting policies and then apply them consistently; make judgements and accounting estimates that are reasonable and prudent; prepare the financial statements on the going concern basis unless it is inappropriate to presume that the company will continue in business. State whether applicable United Kingdom Accounting standards, comprising FRS 102, have been followed, subject to any material departures disclosed and explained in the Annual Report and financial statements.
Give a true and fair view of the state of the company's affairs as at 28 February 2023 and of its profit for the year then ended; Have been properly prepared in accordance with United Kingdom Generally Accepted Accounting Practice; and Have been prepared in accordance with the requirements of the Companies Act 2006.
Basis for opinion
Conclusions relating to going concern
In auditing the financial statements, we have concluded that the directors' use of the going concern basis of accounting in the preparation of the financial statements is appropriate.
Based on the work we have performed, we have not identified any material uncertainties relating to events or conditions that, individually or collectively, may cast significant doubt on the company's ability to continue as a going concern for a period of at least twelve months from when the financial statements are authorised for issue.
Our responsibilities and the responsibilities of the directors with respect to going concern are described in the relevant sections of this report.
Other information
Opinions on other matters prescribed by the Companies Act 2006
In our opinion, based on the work undertaken in the course of our audit:
The information given in the strategic report and the directors' report for the financial year for which the financial statements are prepared is consistent with the financial statements; and
The strategic report and the directors' report have been prepared in accordance with applicable legal requirements.
A T C directors' remuneration specified by law are not made; or W
As explained more fully in the directors' responsibilities statement set out on page 5, the directors are responsible for the preparation of the financial statements and for being satisfied that they give a true and fair view, and for such internal control as the directors determine is necessary to enable the preparation of financial statements that are free from material misstatement, whether due to fraud or error. In preparing the financial statements, the directors are responsible for assessing the company's ability to continue as a going concern, disclosing, as applicable, matters related to going concern and using the going concern basis of accounting unless the directors either intend to liquidate the company or to cease operations, or have no realistic alternative but to do so.
Our objectives are to obtain reasonable assurance about whether the financial statements as a whole are free from material misstatement, whether due to fraud or error, and to issue an auditors' report that includes our opinion. Reasonable assurance is a high level of assurance but is not a guarantee that an audit conducted in accordance with ISAs (UK) will always detect a material misstatement when it exists. Misstatements can arise from fraud or error and are considered material if, individually or in the aggregate, they could reasonably be expected to influence the economic decisions of users taken on the basis of these financial statements.
A further description of our responsibilities is available on the Financial Reporting Council’s website at: https://www.frc.org.uk/auditorsresponsibilities. This description forms part of our auditor's report.
Extent the audit was considered capable of detecting irregularities, including fraud
Irregularities, including fraud, are instances of non-compliance with laws and regulations. We design procedures in line with our responsibilities, outlined above, to detect material misstatements in respect of irregularities, including fraud. The extent to which our procedures are capable of detecting irregularities, including fraud, is detailed below.
We assessed whether the engagement team collectively had the appropriate competence and capabilities to identify or recognise non-compliance with laws and regulations by considering their experience, past performance and support available.
All engagement team members were briefed on relevant identified laws and regulations and potential fraud risks at the planning stage of the audit. Engagement team members were reminded to remain alert to any indications of fraud or non-compliance with laws and regulations throughout the audit.
We obtained an understanding of the legal and regulatory frameworks that are applicable to company and the sector in which it operates, focusing on provisions that had a direct effect on the determination of material amounts and disclosures in the financial statements. The most relevant frameworks we identified include:
UK Generally Accepted Accounting Practice, including FRS 102;
Companies Act 2006;
UK Corporation Tax legislation; and
VAT legislation
We gained an understanding of how the company is complying with these laws and regulations by making enquiries of management and those charged with governance. We corroborated these enquiries through our review of relevant correspondence with regulatory bodies and board meeting minutes.
We assessed the susceptibility of the financial statements to material misstatement, including how fraud might occur, by meeting with management and those charged with governance to understand where it was considered there was susceptibility to fraud. This evaluation also considered how management and those charged with governance were remunerated and whether this provided an incentive for fraudulent activity. We considered the overall control environment and how management and those charged with governance oversee the implementation and operation of controls. We identified a heightened fraud risk in relation to:
Revenue recognition; and
Management override of controls.
In addition to the above, the following procedures were performed to provide reasonable assurance that the financial statements were free of material fraud or error:
Recalculating the unitary charge received by taking the base charge per the project agreement and uplifting for RPI;
Agreeing a sample of months' income receipts to invoice and bank statements;
Performing an assessment on the service margins used in the year and agreeing margins used to the active financial models;
Reconciling the finance income and amortisation to the finance debtor reconciliation to ensure allocation methodology is in line with contractual terms and relevant accounting standards;
Reviewing minutes of meetings of those charged with governance for reference to: breaches of laws and regulation or for any indication of any potential litigation and claims; and events or conditions that could indicate an incentive or pressure to commit fraud or provide an opportunity to commit fraud;
Reviewing the level of and reasoning behind the company’s procurement of legal and professional services;
Performing audit work procedures over the risk of management override of controls, including testing of journal entries and other adjustments for appropriateness, evaluating the business rationale of significant transactions outside the normal course of business and reviewing judgements made by management in their calculation of accounting estimates for potential management bias;
Completion of appropriate checklists and use of our experience to assess the company's compliance with the Companies Act 2006; and
Agreement of the financial statement disclosures to supporting documentation.
Our audit procedures were designed to respond to the risk of material misstatements in the financial statements, recognising that the risk of not detecting a material misstatement due to fraud is higher than the risk of not detecting one resulting from error, as fraud may involve intentional concealment, forgery, collusion, omission or misrepresentation. There are inherent limitations in the audit procedures performed and the further removed non-compliance with laws and regulations is from the events and transactions reflected in the financial statements, the less likely we are to become aware of it.
Use of our report
This report is made solely to the company's members, as a body, in accordance with Chapter 3 of Part 16 of the Companies Act 2006. Our audit work has been undertaken so that we might state to the company's members those matters we are required to state to them in an auditors' report and for no other purpose. To the fullest extent permitted by law, we do not accept or assume responsibility to anyone other than the company and the company's members, as a body, for our audit work, for this report, or for the opinions we have formed.
The profit and loss account has been prepared on the basis that all operations are continuing operations.
Pyramid Schools (Southampton) Limited is a private company limited by shares incorporated in England and Wales. The registered office is 1 Park Row, Leeds, United Kingdom, LS1 5AB.
The financial statements are prepared in sterling, which is the functional currency of the company. Monetary amounts in these financial statements are rounded to the nearest £'000.
Accounting for PFI contracts
In prior years the company took advantage of exemptions made available under section 35 10 (i) of FRS 102, and as such there has been no substantial change to the treatment of the financial asset receivable due to the adoption of the standard.
Under the terms of the contract, substantially all the risks and rewards of ownership of the property remain with Southampton City Council (“the Council”).
During the period of construction, costs incurred as a direct consequence of financing, designing and constructing the schools, including finance costs, are capitalised and shown as work in progress. On completion of the construction, credit is taken for the deemed sale, which is recorded within turnover. The construction expenditure and associated costs are reallocated to cost of sales. Amounts receivable are classified as a financial asset receivable (PFI debtor).
Revenues received from the customer are apportioned between:
capital repayments;
finance income; and
operating revenue.
Basic financial assets, which include debtors and cash and bank balances, are initially measured at transaction price including transaction costs and are subsequently carried at amortised cost using the effective interest method unless the arrangement constitutes a financing transaction, where the transaction is measured at the present value of the future receipts discounted at a market rate of interest. Financial assets classified as receivable within one year are not amortised.
Financial liabilities and equity instruments are classified according to the substance of the contractual arrangements entered into. An equity instrument is any contract that evidences a residual interest in the assets of the company after deducting all of its liabilities.
Basic financial liabilities, including creditors, bank loans and loans from fellow group companies are initially recognised at transaction price unless the arrangement constitutes a financing transaction, where the debt instrument is measured at the present value of the future payments discounted at a market rate of interest. Financial liabilities classified as payable within one year are not amortised.
Debt instruments are subsequently carried at amortised cost, using the effective interest rate method.
Trade creditors are obligations to pay for goods or services that have been acquired in the ordinary course of business from suppliers. Amounts payable are classified as current liabilities if payment is due within one year or less. If not, they are presented as non-current liabilities. Trade creditors are recognised initially at transaction price and subsequently measured at amortised cost using the effective interest method.
Equity instruments issued by the company are recorded at the proceeds received, net of transaction costs. Dividends payable on equity instruments are recognised as liabilities once they are no longer at the discretion of the company.
The preparation of the financial statements in conformity with FRS 102 requires management to make judgements, estimates and assumptions that affect the application of policies and reported amounts of assets, liabilities, income and expenses. The estimates and associated assumptions are based upon historical experience and various other factors that are believed to be reasonable under the circumstances, the result of which form the basis of making judgements about carrying values of assets and liabilities that are not readily available from other sources. Actual results may differ from these estimates. The estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to accounting estimates are recognised in the period in which the estimate is revised if the revision affects only that period or in the period of revision and future periods if the revision affects both current and future periods.
Critical judgements in applying the company's accounting policies
▪ Derivative financial instruments are held at fair value.
▪ Applicability of hedge accounting.
Key sources of estimation uncertainty
▪ Accounting for the service concession contract and finance asset require an estimation of service margins, finance asset's interest rate and associated amortisation profile which is based on forecast results of the PFI contract.
The following judgements (apart from those involving estimates) have had the most significant effect on amounts recognised in the financial statements.
The company holds derivative financial instruments which have the effect of fixing the interest rate payable on bank borrowings. Amounts payable or receivable in respect of interest rate derivatives are recognised as adjustments to interest over the period of the contract. See hedge accounting below for how the derivative is accounted for.
The company designates certain derivatives as hedging instruments in cash flow hedges.
At the inception of the hedge relationship, the entity documents the economic relationship between the hedging instrument and the hedged item, along with its risk management objectives, and clear identification of the risk in the hedged item that is being hedged by the hedging instrument. Furthermore, at the inception of the hedge the entity determines and documents causes for hedge ineffectiveness. Where hedge accounting recognises a liability then an associated deferred tax asset is also recognised.
Cash flow hedges
The effective portion of changes in the fair value of derivatives that are designated and qualify as cash flow hedges is recognised in other comprehensive income. The gain or loss relating to the ineffective portion is recognised immediately in profit or loss. Amounts previously recognised in other comprehensive income and accumulated in equity are reclassified to profit or loss in the periods in which the hedged item affects profit or loss or when the hedging relationship ends.
Hedge accounting is discontinued when the entity revokes the hedging relationship, the hedging instrument expires or is sold, terminated, or exercised, or no longer qualifies for hedge accounting. Any gain or loss accumulated in equity at that time is reclassified to profit or loss when the hedged item is recognised in profit or loss. When a forecast transaction is no longer expected to occur, any gain or loss that was recognised in other comprehensive income is reclassified immediately to profit or loss.
The estimates and assumptions which have a significant risk of causing a material adjustment to the carrying amount of assets and liabilities are as follows.
The company has been established to provide services under certain private finance agreements with Southampton City Council. Under the terms of these Agreements, the Council (as grantor) controls the services to be provided by the company over the contract term. Based on the contractual arrangements, the company has classified the project as a service concession arrangement, and has accounted for the principal assets, of and income streams from, the project in accordance with FRS 102, Section 34.12 Service Arrangements.
The company has chosen to adopt the transitional arrangements available within FRS 102, Section 35.10 (i) and as such the service concession arrangement has continued to be accounted for using the same accounting policies being applied at the date of transition to FRS 102 (1 March 2014). The nature of the asset has therefore not changed.
Under the terms of the arrangement, the company has the right to receive a baseline contractual payment stream for the provision of the services from or at the direction of the grantor (the Council), and as such the asset is accounted for as a financial asset. The financial asset has initially been recognised at the fair value of the consideration received, based on the fair value of the construction (or upgrade) services, plus any directly attributable transaction costs, provided in line with FRS 102.
Revenue is recognised from the supply of services, which represents the timing of services provide under contracts to the extent that there is a right to consideration and is recorded at the fair value of the consideration received or receivable.
Turnover is attributable to one geographical market, the United Kingdom.
Auditors remuneration is payable to Johnston Carmichael LLP.
The average monthly number of persons (including directors) employed by the company during the year was: nil (2022: nil).
The actual charge for the year can be reconciled to the expected charge for the year based on the profit or loss and the standard rate of tax as follows:
In addition to the amount charged to the profit and loss account, the following amounts relating to tax have been recognised directly in other comprehensive income:
Corporation tax will remain at 19% until March 2023. From 2023 the main rate will increase to 25% for business profits made by the company over £250,000. A small profit rate (SPR) will also be introduced for companies with profits of £50,000 or less so that they will continue to pay corporation tax at 19%. Companies with profits between £50,000 and £250,000 will pay tax at the main rate reduced by a marginal relief providing a gradual increase in the effective corporation tax rate. The company has assessed the impact of this change and consider the full rate of 25% will apply.
There is a deferred tax asset relating to the interest rate derivative, calculated at 25%, which will unwind over the term of the hedging arrangement. All movements in the deferred tax asset have been recognised in other comprehensive income.
The finance debtor is amortised over the length of concession. Interest is charged at 6% (2022: 6%) and is calculated on the carrying value quarterly.
Included with accruals and deferred income is £1,987,000 (2022: £1,309,000) which relates to lifecycle underspend. The timing of the unwinding of this accrual is uncertain.
The senior secured loan and standby loan represents amounts borrowed under two facilities agreements with Bank of Scotland. The loans bear interest at a margin over SONIA of 0.9000% and are payable in instalments between 2004 and 2029.
In order to hedge against interest variations on the loans, the company has entered into two interest rate swaps agreements whereby at six monthly intervals sums are exchanged reflecting the difference between floating and fixed interest rates, calculated on a predetermined notional principal amount. Details of the interest rate swap is included within note 16.
Interest on the subordinated loan stock balance is paid at 13.08% per annum, principal is repayable upon expiry of the contract or earlier at the company's discretion.
The following are the major deferred tax liabilities and assets recognised by the company and movements thereon:
On 14 November and 22 February 2006, the group entered into two fixed interest rate swaps, one for 28 years and the other for 24 years, arrangements to hedge its exposure to the effect of interest rate fluctuations. The interest rate swap contracts are designated as a hedge of variable interest rate risk of the company’s floating rate borrowings. The hedged cash flows are expected to occur and to affect profit or loss over the period to maturity of the swap. One swap was effected on a notional amount of £39.9m at a fixed rate of 5.41% payable bi-annually between November 2001 and August 2029 and the other on a notional amount of £0.7m at a fixed rate of 4.51% payable bi-annually between February 2007 and August 2029.
The fair value of the interest rate swap liability in the current and prior years has been determined by Bank of Scotland PLC who have used relevant market data to determine their valuations .
At the year end PPP Equity PIP LP was due £2,008,000 (2022: £2,008,000) for subordinated debt. During the year the company was charged £259,000 (2022: £263,000) for subdebt interest of which £130,000 (2022: £130,000) was outstanding at the year end. The company received directors services from PPP Equity PIP LP of £8,000 (2022: £8,000).
At the year end Aberdeen Infrastructure Partners LP was due £2,008,000 (2022: £2,008,000) for subordinated debt. During the year the company was charged £259,000 (2022: £263,000) for subdebt interest of which £130,000 (2022: £130,000) was outstanding at the year end. The company received directors services from Aberdeen Infrastructure Partners LP of £8,000 (2022: £8,000).
The company is incorporated and domiciled in Great Britain. The immediate controlling party is Pyramid Schools (Southampton) Holdings Limited which is the smallest and largest entity to consolidate these financial statements. Copies of the financial statements of Pyramid Schools (Southampton) Holdings Limited are available from Companies House, Crown Way, Maindy, Cardiff, CF14 3UZ. The registered office is 1 Park Row, Leeds, United Kingdom, LS1 5AB.
At the balance sheet date, the immediate parent companies are Browning PFI Holdings Limited (previously known as Interserve PFI Holdings Limited) and Aberdeen Infrastructure (No.3) Limited which each holds 50% of the share capital of the Company. The registered offices of these companies are 1 Park Row, Leeds, England, LS1 5AB and 280 Bishopsgate, London, EC2M 4RB, respectively. In the opinion of the directors no company is a controlling party. At the balance sheet date, the ultimate parent companies who jointly control the company are PPP Equity PIP LP (acting by its General Partner, Dalmore Capital 6 GP Limited and its Manager, Dalmore Capital Limited) and Aberdeen Infrastructure Partners LP Inc. (acting by its General Partner, Aberdeen Infrastructure Finance GP Ltd and its manager, abrdn Investments Ltd).