The directors present the strategic report for the year ended 31 March 2024.
These financial statements have been prepared under FRS 102 "The Financial Reporting Standard applicable in the UK and Republic of Ireland".
Company objectives
Pyramid Accommodation Services (Cornwall) Limited ("the company") undertakes a Private Finance Initiative (PFI) concession contract to design, build, refurbish, finance and operate fire stations for Cornwall Council ("the Council").
Review of the business
In the reporting year, the company made a profit of £173,000 (2023: £270,000). The results for the year are set out on Page 9.
The company's operations are managed under the supervision of its shareholders and lenders and are largely determined by the detailed terms of the PFI contract with the Council and the subcontracts with Mitie FM Limited which supplies the construction and fabric replacement service and Sodexo Limited who supply facilities management and maintenance services 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 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 was incorporated in Great Britain and registered in England and Wales. The company is domiciled in the United Kingdom.
The company's principal activity as detailed above is risk averse as its trading relationships with its customer, funders and sub-contractors are determined by the terms of their respective detailed PFI contracts. 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 services companies are being monitored. The company's 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 construction company is being monitored. The directors have reviewed the benchmarking information on the lifecycle 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 Council 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 and interest rate swap arrangement 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 abrdn Investments 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 for the life of those arrangements. 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 approval of the financial statements, 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 31 March 2024.
The results for the year are shown in the Profit and Loss Account on Page 9. Ordinary dividends were paid amounting to £400,000 (2023: £-). Following the reporting date dividends of £50,000 were paid on 29 May 2024.
The directors who held office during the year and up to the date of approval of the financial statements were as follows:
Dividends were paid following the reporting period. These have been disclosed in the directors' report under results and dividends.
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.
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.
As explained more fully in the directors' responsibilities statement set out on page 3, 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 auditor's 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 to which 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 monthly income receipts to invoice and bank statements;
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 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 auditor's 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 Accommodation Services (Cornwall) 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 finance debtor 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 Cornwall 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 finance debtor (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.
Loans and receivables
Trade debtors, loans and other receivables that have fixed or determinable payments that are not quoted in an active market are classified as 'loans and receivables'. Loans and receivables are measured at amortised cost using the effective interest rate method, less any impairment.
Interest is recognised by applying the effective interest rate, except for short-term receivables when the recognition of the interest would be immaterial. The effective interest rate method is a method of calculating the amortised cost of a debt instrument and of allocating the interest income over the relevant period. The effective interest rate is the rate that exactly discounts estimated future cash receipts through the expected life of the debt instrument it bet carrying amount on initial recognition.
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.
Where a derivative financial instrument is designated as a hedge of the variability in cash flows of a recognised asset or liability, or a highly probable forecast transaction, the effective part of any gain or loss on the fair value of the derivative financial instrument is recognised directly in the statement of comprehensive income as other comprehensive income or expense. Any ineffective portion of the hedge is recognised immediately in profit or loss.
Where hedge accounting recognises a liability then an associated deferred tax asset is also recognised.
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 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.
The company’s borrowings are linked to SONlA and the company has entered into interest rate swaps to restrict its exposure to future interest rate fluctuations.
In assessing whether the company is entitled to apply cash flow hedge accounting, the directors must apply judgment in considering whether there is appropriate matching between the hedged item (the loan balance) and the hedging instrument (the interest rate swap). The directors must prepare documentation to demonstrate this consideration.
In the director’s judgment, the company has met the criteria for cash flow hedge accounting, accordingly the company has therefore recognised fair value movements on derivatives in effective hedging relationships through other comprehensive income as well as deferred taxation thereon.
The company was established to provide services under certain private finance agreements with the 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.
Accounting for the service concession contract and finance debtor requires estimation of finance debtor interest rates and the associated amortisation profile, which is based on projected trading results for the remainder of the contract term.
Derivative financial instruments are carried at fair value, which required estimation of various factors including future interest rates and credit risk.
Fair values for derivative contracts are based on mark-to-market valuations provided by the contract counterparty. Whilst these can be tested for reasonableness, the exact valuation methodology and forecast assumptions for future interest rates or inflation rates are specific to the counterparty.
Turnover is attributable to one geographical market, the United Kingdom.
The average monthly number of persons (including directors) employed by the company during the year was: nil (2023: 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:
From 1 April 2023, the main rate of Corporation Tax increased from 19% to 25% for business profits made by the Company over £250,000. A small profit rate (SPR) was also 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 deferred tax, relating to the interest rate derivative, have been recognised in other comprehensive income.
The finance debtor is amortised over the length of concession. Interest is charged at 7.53% (2023: 7.53%) and is calculated on the carrying value quarterly.
Included within accruals and deferred income is £- (2023: £117,000) which relates to accrued lifecycle costs under the Project Agreement and FM subcontract.
The secured senior loan represents amounts borrowed under a facility agreement with Sumitomo Mitsui Banking Corporation (SMBC). The loan bears interest at a 0.95% margin over SONIA and is repayable in instalments between 2003 and 2026.
The loan is secured by fixed and floating charges over the property, assets and rights of the company, and has certain covenants attached.
The subordinated loan stock represents amounts borrowed under loan note agreements with the shareholders. The loan notes bear interest at a rate of 13.5% per annum (compound equivalent to 6.54% semi-annual). The loan notes are repayable in March 2028.
In order to hedge against interest variations on the senior secured loan, the company has entered into an interest rate swap agreement with a bank whereby at monthly intervals sums are exchanged reflecting the difference between floating and fixed interest rates, calculated on a predetermined notional principal amount. (See note 16).
The following are the major deferred tax liabilities and assets recognised by the company and movements thereon:
The timing differences giving rise to deferred tax liabilities are expected to reverse over the entire remaining concession period, in line with the accounting amortisation of the finance debtor asset and the utilisation of tax losses.
On the 25 April 2001 the company entered into a twenty four and a half years fixed interest rate swap arrangement to hedge exposure on its senior secured loan to the effect of interest rate fluctuations.
One swap was affected on a notional amount of £8,198,231 at a fixed rate of 5.83% payable bi-annually between 30 September 2003 and 30 September 2025.
The interest rate swap contract is 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.
The company received directors services from PPP Equity PIP LP of £44,000 (2023: £39,000) of which £nil (2023: £nil) was outstanding at the year end.
The company received directors services from Aberdeen Infrastructure Partners LP of £44,000 (2023: £39,000) of which £44,000 (2023: £35,000) was outstanding at the year end.
The company has taken advantage of Section 33 of FRS 102 and has not disclosed transactions with wholly owned entities within the group. The group comprises the company and its parent Pyramid Accommodation Services (Cornwall) Holdings Limited.
Pyramid Accommodation Services (Cornwall) Holdings Limited is regarded by the directors as being the company's ultimate parent company. The financial statements of Pyramid Accommodation Services (Cornwall) Holdings Limited can be accessed at the registered office: 1 Park Row, Leeds, United Kingdom, LS1 5AB.
At the balance sheet date the company was jointly controlled by Browning PFI Holdings Limited and Aberdeen Infrastructure (No.3) Limited. The ultimate parent companies who jointly control the company are PPP Equity PIP LP (acting through its General Partner, Dalmore Capital 6 GP Limited, and its manager Dalmore Capital Limited) and Aberdeen Infrastructure Partners L.P. Inc. (acting by its General Partner, Aberdeen Infrastructure Finance GP Ltd and its manager abrdn Investments Ltd).