The Directors present their annual report and financial statements for the year ended 30 September 2024.
The results of the Company are as set out in the statement of comprehensive income on page 8.
Dividends
The directors did not declared any dividends during the year (2023: £365,000).
The directors who held office during the year and up to the date of signature of the financial statements were as follows:
The company has made qualifying third party indemnity provisions for the benefit of its directors during the year. These provisions remain in force at the reporting date.
The auditor, Johnston Carmichael LLP, is deemed to be reappointed under section 487(2) of the Companies Act 2006.
This report has been prepared in accordance with the provisions applicable to companies entitled to the small companies exemption.
We have audited the financial statements of Pyramid Schools (Plymouth) Limited (the 'company') for the year ended 30 September 2024 which comprise the Statement of Comprehensive Income, Balance Sheet, Statement of Changes in Equity and notes to the financial statements, including significant accounting policies. The financial reporting framework that has been applied in their preparation is applicable law and United Kingdom Accounting Standards, including FRS 102 The Financial Reporting Standard applicable in the UK and Republic of Ireland (United Kingdom Generally Accepted Accounting Practice).
Basis for opinion
Material uncertainty relating to going concern.
We draw attention to note 1.2 in the financial statements which indicates that there have been Events of Default (EoDs) under the combined Construction and Facilities Management Agreement and Loan Facilities Agreement. The company does not have a Parent Company Guarantee (“PCG”) due to the liquidation of Interserve Group Limited. As a consequence of this, the combined Construction and Facilities Management is terminable which in turn triggers a technical default in the Loan Facilities Agreement meaning the lender can recall the senior loan on demand.
As stated within note 1.2, these events or conditions, along with other matters as set forth in note XX, indicate that a material uncertainty exists that may cast significant doubt on the company’s ability to continue as a going concern. Our opinion is not modified in respect of this matter.
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.
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 directors' report for the financial year for which the financial statements are prepared is consistent with the financial statements; and
the directors' report has been prepared in accordance with applicable legal requirements.
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. In areas of the financial statements where the risks were considered to be higher, we performed procedures to address each identified risk. 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.
Pyramid Schools (Plymouth) 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.
These financial statements are prepared on the going concern basis. The Directors have a reasonable expectation that the Company will continue in operational existence for the foreseeable future. However, the Directors are aware of certain matters which may impact the performance of the Company in future.
The Directors have reviewed detailed model forecasts, which forecast financial performance through to project completion in September 2033, incorporating relevant terms of the Project Agreements, subcontracts and Credit Agreements and reasonable, prudent economic assumptions. These forecasts are updated semi-annually and predict that the Company will be profitable and will have sufficient cashflow to meet its liabilities as they fall due through to the end of their concession.
Design and build projects have business models that are reviewed annually and updated to include relevant ongoing works. These are conducted on a breakeven or "cost plus margin" basis and the companies are expected to break even or be profitable to the end of their life.
The Company has positive net assets and net assets. This is due to events of defaults ("EoDs") occurring subsequent to the yearend resulting in senior debt facility being classified as current.
With effect from 5 October 2023, the Company does not have an effective Parent Company Guarantee in place due to the liquidation of Interserve Group Limited (“IGL”). This has led to technical default in the Loan Facilities Agreement which means that the lender could recall the senior debt from the Company on demand.
At the date of signing the financial statements no proceedings had commenced to recall the senior debt earlier than repayment by instalments. The Directors acknowledge that there are significant risks surrounding the EoD which could impact the Company’s ability to continue as a going concern and the future financial performance of the Company. However, appropriate actions are being taken to mitigate these risks and the directors consider the likelihood of the default resulting in the Company no longer being able to continue is remote.
The Directors confirm that there are no plans that would change the future operations of the Company. Consequently, the Directors have prepared the financial statements on a going concern basis however they acknowledge the EoD gives rise to a material uncertainty which may cause significant doubt about the Company’s ability to continue as a going concern and, therefore, that it may be unable to realise its assets and discharge its liabilities in the normal course of business.
Event of default
The Company has failed to have an effective Parent Company Guarantee (“PCG”) in place as a result of the liquidation of Interserve Group Limited which has led to the combined Construction and Facilities Management (“FM”) Contract becoming terminable as well as triggering technical defaults in the Loan Facilities Agreement.
An EoD was triggered when Interserve PLC went into administration on 15 March 2019 as it was parent company guarantor for Interserve (Facilities Management) Ltd and Interserve Construction Limited. Waivers were signed in 2020 accepting the PCG of Interserve Group Limited meaning the Company was no longer in default.
On 5 October 2023 Interserve Group Limited ("IGL") appointed liquidators under a Creditors Voluntary Liquidation. IGL is a Major Project Party as it provides a PCG for Tilbury Douglas Construction Limited ("TDCL") in relation to the combined Construction and FM Contract between the Company and TDCL. Therefore, as a result of IGL's liquidation, the combined Construction and FM Contracts have become terminable. This insolvency event has also triggered a technical default in the Loan Facility Agreement of the Company. This has been known for some time and the Company has been working with ICG, TDCL, Mitie FM and the Lender to find a resolution. The FM services are being carried out by Mitie via a contract with the Company contractor (TDCL), and a PCG is being sought from them.
The Company issued a Reservations of Rights letter to IGL and a notice of this was issued to the lenders and Authority Plymouth City Council in October 2023 in respect of the technical default. The Directors believe this is highly unlikely to cause going concern issues but technically whilst the EoD subsists, there is a risk that the Authority and lenders could exercise their rights to terminate the respective contracts.
From 5 October 2023 to the date of signing there has been no formal waiver put in place from the lender relating to the events of default. From Directors and management discussions there is no evidence the Authority intends to cancel the concession agreement. Directors and management also note that there is no evidence that the lender intends to recall the debt earlier than the repayment terms that would otherwise prevail without an event of default. However, under the Loan Facilities Agreement it is within the lender's control to recall the outstanding loan balance. The Company’s cash position and future cash flow forecasts evidence that it would not be possible for the Company to meet its liabilities if the debt were recalled for repayment in full rather than instalments. Despite this course of action being available to the lender, the Directors consider the possibility to be so remote that they deem the application of the going concern basis of preparation of the financial statements to be appropriate.
Basic financial assets, which include trade and other receivables and cash and bank balances are initially measured at transaction price including transaction costs and are subsequently carried at amortised costs 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 market rate interest.
Impairment of financial assets
Financial assets, other than those held at fair value through profit and loss, are assessed for indicators of impairment at each reporting end date.
Financial assets are impaired where there is objective evidence that, as a result of one or more events that occurred after the initial recognition of the financial asset, the estimated future cash flows have been affected. The impairment loss is recognised in profit or loss.
Financial assets are derecognised only when the contractual rights to the cash flows from the asset expire, or when it transfers the financial asset and substantially all the risks and rewards of ownership to another entity.
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 its liabilities.
Basic financial liabilities, including trade and other payables, bank loans, 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 receipts discounted at a market rate interest.
Debt instruments are subsequently carried at amortised cost, using the effective interest rate method.
Trade payable are obligations to pay for goods or services that have been acquired in the ordinary course of the business from suppliers. Accounts payable are classified as current liabilities if payment is due within one year or less. If not, they are present as non-current liabilities. Trade payables are recognised initially at transaction price and subsequently measured at amortised cost using the effective interest method.
Derivatives, including interest rate swaps, are not basic financial instruments. Derivatives are initially recognised at fair value on the date a derivative contract is entered into and are subsequently re-measured at their fair value. Changes in the fair value of derivatives are recognised in profit or loss in finance costs or finance income as appropriate, unless they are included in a hedging arrangement.
Financial liabilities are derecognised when, and only when, the obligation specified in the contract is discharged, cancelled, or expires.
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 the 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.
Cash flow hedges
The effective portion of the 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 and 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, exercised or no longer qualifies for hedge accounting. Any gain or loss accumulated in equity at the 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.
Lifecycle
Under the terms of the PFI contract, the company has a programme of expenditure for the maintenance of and replacement of non-moveable assets in the facilities. The company recognises such expenses as incurred, with any committed expenditure at the balance sheet dates being appropriately accrued for with the associated expense recognised through the Statement of Comprehensive Income.
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.
Key sources of estimation uncertainty
Accounting for the service concession contract and financial assets require and estimation of the service margins, finance debtors interest rate and associated amortisation profile which is based on forecast results of the PFI contract.
Critical judgements in applying the Company's accounting policies
Derivative financial instruments are held at fair value;
Applicability of hedge accounting; and
Cashflow certainty of hedges.
The Company was established to provide services under certain private finance agreements with Leeds 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 Concession 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 October 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 provided 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.
Financial Instruments
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.
Hedge accounting
Where a derivative financial instrument is designated as a hedge of the variability in the 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 derivative porting of the hedge is recognised immediately in statement of comprehensive income.
Applicability of hedge accounting
The application of hedge accounting has remained unaffected. The remaining repayments are anticipated to be made as per the original repayment schedule in the bank and swap agreements.
The turnover and profit before taxation are attributable to the one principal activity of the Company.
Turnover, which is stated net of value added tax, represents amounts invoiced for services provided, and is recognised each year as the applicable portions of the amounts receivable relating to finance and operating costs calculated on a consistent basis (see accounting policies).
Turnover is attributable to one geographical market, the United Kingdom. Turnover from pass throughs in the current year and previous year relate to deductions and variations.
The Company had no employees (2023: nil) during the year. Service fees of £59,105 (2023: £54,760) were charged to the Company's ultimate shareholders for the directors' services to the Company during the year.
The Directors did not declared any dividends during the year (2023: £365,000). Dividends proposed post year end total £373,000.
Interest is charged on the subordinated loan stock balances at the rate of 13%. The loans are unsecured and repayable in instalments over a period of 25 years, which commenced in 2009.
The secured senior loan represents amounts borrowed under a facility agreement with Barclays Bank PLC. The loan bears interest at a margin over SONIA of 0.65% and is repayable in instalments between 2009 and 2032. The loan is secured by fixed and floating charges over the property, assets and rights of the Company, and has certain covenants attached. Included within the bank loan is an amount of £133,211 (2023: £144,734) relating to unamortised issue costs.
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 bi-annually sums are exchanged reflecting the difference between floating and fixed interest rates, calculated on a predetermined notional principal amount. The swap liability and related deferred tax asset have been classified between current and non-current for this financial year.
On incorporation 1,000 shares were issued at £1 each. They carry no right to fixed income.
The hedging reserve comprises the effective portion of the cumulative net change in the fair value of cash flow hedge instruments related to hedged transactions that have not yet occurred.
The Company has taken advantage of exemption, under the small companies regime, not to disclose related party transactions that have been concluded under normal market conditions.