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Utilitywise – it was wise to red flag, as (Utility)unwise energy consumption projections see the shares crash

By Steve Moore | Thursday 29 June 2017

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from ShareProphets). I have no business relationship with any company whose stock is mentioned in this article.

Previously writing on Utilitywise (UTW), I concluded continue to avoid as the shares recovered a bit from sub 130p - Flattery from the company for Brendan, but will he be able to rectify the red flags ahoy? There is today a “Projected under-consumption of energy contracts” announcement – and the shares are currently crashing below 80p.

The under-consumption issue is noted to relate to certain contracts placed with one of the major energy companies dealt with by the group – and is particularly problematic since Utilitywise significantly recognises expected values on contracts commencing and, in this case, notes “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”.

It has here “agreed to make repayments of commissions, previously paid to Utilitywise, totalling £7.6m between June 2017 and December 2020” and “will recognise an accounting charge for the full potential impact, estimated at £11.2m, subject to external audit, in its income statement in the year ended 31 July 2017”, though argues further risk substantially mitigated by “changes in internal controls by both the group and the energy company since August 2016”, as well as a “substantial cessation of placement of business to the energy supplier using the Nominated Quantity estimation method”.

This estimation method is used where it is not possible to determine the expected level of consumption using historic evidence – and the company notes the proportion of contracts using it “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” and that it “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”.

The internal control changes see “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”, but of the noted £7.6 million, “approximately £5.7m of this amount relates to contracts that commenced prior to September 2016… with the balance of £1.9m made up of contracts that were placed after that date”.

The company though argues it anticipates financial upside from the contracts placed after August 2016 at their conclusion (mainly in 2020 and 2021) - as it expects them to have shown “a normalised level of consumption”. Hmmm. October 2016-commenced CEO Brendan Flattery summarises;

“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.”

Hmmm. Is there anything else to emerge from the changes required to ‘increase transparency’? The visibility here sees me continue to avoid.

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