The directors present the strategic report for the year ended 31 March 2023.
The company's principal activity is undertaking a Private Finance Initiative (PFI) concession contract with the Dudley Group of Hospitals NHS Trust to design, build, refurbish, finance and operate various hospital facilities in Dudley, West Midlands. The contract was signed on 17 May 2001 with building activities commencing immediately and completed in March 2005. Service operations on the existing buildings also commenced from May 2001 and will run for 40 years from that date.
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 the next year.
As shown in the company's statement of comprehensive income on page 10, the company's turnover increased by £2.97m (2022: decreased by £3.7m), mainly due to an increase in variation income received in the year coupled with the standard annual uplift.
The operating profit increased by £2m in the year (2022: decreased by £0.5m) for the same reason.
Financing charges were a net charge of £14.9m (2022: charge of £3.9m).
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. For this reason, the company's directors believe that further key performance indicators for the company are not necessary or appropriate for an understanding of the performance or financial position of the business.
The PFI contract and related subcontracts are fixed for the life of the contract and this enables the company to have reasonable certainty over its income and expenditure for this year. In addition, the company has loan agreements in place with its lenders via its fellow subsidiary company, Dudley Summit PLC, which state the level of borrowing and repayments due, subject to Retail Price Index (RPI) movements published by the Office of National Statistics, until the loan and bonds are fully repaid by 2038. These agreements subject the company to various covenants. The company remains in compliance with all covenants.
However, as noted in previous years, the decline in the credit rating of AMBAC (the Monoline Guarantor) in November 2008 led to its 'Loss of Qualifying status' under the agreement with the European Investment Bank (EIB) and represented a 'Guarantor Event of Default'. The EIB continues to hold the right to request a replacement guarantor. If a replacement were requested and not provided within 45 days of the request, the EIB would have the right to call in their loan. The EIB has been levying an additional 'default' interest charge since the downgrade of AMBAC but has not made any request for a replacement guarantor. Whilst the EIB has reserved its right to request a replacement guarantor, the directors have not received any indication that this right will be exercised and do not believe this will be exercised in the foreseeable future.
As the underlying contract outlook is profitable and revenue is being generated from a long-term government contract, the directors are confident that there will be no changes to the situation outlined above and in any event are confident that there will be no changes to the situation outlined above and in any event are confident that alternative replacement loans could be arranged if required.
Therefore the directors, having considered the financial position of the company and its expected future cash flows, have prepared the financial statements on the going concern basis.
The company was incorporated in Great Britain, registered in England and Wales, and is domiciled in the United Kingdom.
The company's principal activity as detailed above is largely risk averse as its trading relationships with its customer, lenders and subcontractors are determined by the terms of their respective detailed PFI contracts. Its main exposure is to financial risks as detailed in the following section, and to inadequate provision for long term maintenance obligations under the contract.
One of the risks of the company is that services may not continue due to the financial failure of one of the company's subcontractors. The financial stability of the facilities management company is being monitored. The directors have reviewed the benchmarking information on the facilities management contract service fee and are comfortable that this is a market rate which would enable replacement of the subcontractor for a similar fee.
Financial instruments and financial risk management
The company's principal financial instruments comprise its finance contract debtor receivable, cash, guaranteed secured bonds and loans, and subordinated unsecured loan stock. The main purpose of these financial instruments has been to finance the design, build and operation of various hospitals under the Government's Private Finance Initiative (PFI). The company has various other financial instruments such as trade debtors and trade creditors that arise directly from its operations.
The main risks arising from the company's financial instruments are interest rate, inflation, liquidity and credit. The board has policies for managing each of these risks and they are summarised below:
Interest and inflation rate risk
The company's main borrowings are at fixed rates of interest adjusted by RPI movements and it also received income linked to RPI. The company also invests in cash deposits at floating rate.
The company's exposure to interest and RPI fluctuations will continue to be monitored.
Liquidity risk
The company adopts a prudent approach to liquidity management by maintaining enough cash and liquid resources to meet its obligations. As the contract cash flows are reasonably predictable and, subject to the matter regarding the downgraded credit rating of AMBAC and the impact on the EIB loan as detailed on page 1, this is not a major risk area for the company.
Credit risk
The company receives its revenue from the Dudley Group of Hospitals NHS Trust which is backed by government and therefore is not exposed to significant credit risk. Cash investments and borrowings are with institutions of a suitable credit quality.
The board of directors of the company, both individually and collectively, consider they have acted appropriately and in such a way as to promote the long-term success of the company for the benefit of its members.
The company has no direct employees as the company is managed under a Managed Service Agreement. The board of Directors is satisfied that those people employed under the MSA are appropriately qualified and have the support systems in place to carry out their role. The directors are engaged with each team under the MSA to ensure the ongoing management of the underlying contracts of the company and they work collaboratively with the teams to achieve success.
The company is a special purpose company which has a finite lifespan with a defined set of obligations under Concession Agreements. The company delivers its objectives through effective relationships with its stakeholders including suppliers and customers. This is affected by regular reporting and reviews with suppliers and customers to ensure delivery of the company's objectives, whilst considering those stakeholders' needs. The directors of the company meet regularly to review strategies for effective risk mitigation and service delivery in the context of its impact on all stakeholder interests, including shareholders, suppliers, customers and the wider community.
Due to the nature of the company's operations, their impact on the community and environment is of paramount importance to the company's success. Operating safely is the company's primary objective and is as such integrated in everything the company undertakes. A safe environment is managed through effective leadership, implementation of robust policies, procedures and instructions, safety management review processes both internally and externally with relevant stakeholders, reporting, audit and monitoring. An independent safety advisor is appointed by the company, who reports directly to the board of directors.
The company delivers contracts to support essential services to the public sector and takes its responsibility for ensuring that an appropriate environment is managed and maintained extremely seriously, ensuring the highest quality service is delivered from the assets under the company's management.
The company uses less than 40,000 kWh of energy in a year and on that basis it is exempt from making the detailed energy and carbon reporting disclosures.
On behalf of the board
The directors present their annual report and financial statements for the year ended 31 March 2023.
The results for the year are set out in the statement of comprehensive income on page 10.
No ordinary dividends were paid. The directors do not recommend payment of a final dividend (2022: £nil).
The directors who held office during the year and up to the date of signature of the financial statements were as follows:
The company recognises the importance of its environmental responsibilities, monitors its impact on the environment, and implements policies via its subcontractors to reduce any damage that might be caused by the company's activities.
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 the 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 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.
Summit Healthcare (Dudley) 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.
This company is a qualifying entity for the purposes of FRS 102, being a member of a group where the parent of that group prepares publicly available consolidated financial statements, including this company, which are intended to give a true and fair view of the assets, liabilities, financial position and profit or loss of the group. The company has therefore taken advantage of exemptions from the following disclosure requirements:
• Section 7 ‘Statement of Cash Flows’: Presentation of a statement of cash flow and related notes and disclosures;
• Section 11 ‘Basic Financial Instruments’ and Section 12 ‘Other Financial Instrument Issues: Interest income/expense and net gains/losses for financial instruments not measured at fair value; basis of determining fair values; details of collateral, details of hedges, hedging fair value changes recognised in profit or loss and in other comprehensive income;
• Section 33 ‘Related Party Disclosures’: Compensation for key management personnel and related party transactions with wholly owned subsidiaries within the group.
The financial statements of the company are consolidated in the financial statements of Summit Holdings (Dudley) Ltd. These consolidated financial statements are available from its registered office at 1 Park Row, Leeds, LS1 5AB.
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.
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 method, except for short-term receivables when the recognition of 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 to the net carrying amount on initial recognition.
Financial assets are derecognised only when the contractual rights to the cash flows from the asset expire, or when the company 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 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.
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.
Derivatives, including interest rate swaps and forward foreign exchange contracts, 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 hedge accounting is applied and the hedge is a cash flow hedge.
Debt instruments that do not meet the conditions in FRS 102 paragraph 11.9 are subsequently measured at fair value through profit or loss. Debt instruments may be designated as being measured at fair value through profit or loss to eliminate or reduce an accounting mismatch or if the instruments are measured and their performance evaluated on a fair value basis in accordance with a documented risk management or investment strategy.
Financial liabilities are derecognised when the company’s contractual obligations expire or are discharged or cancelled.
In the application of the company’s accounting policies, the directors are required to make judgements, estimates and assumptions about the carrying amount of assets and liabilities that are not readily apparent from other sources. The estimates and associated assumptions are based on historical experience and other factors that are considered to be relevant. 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 where the revision affects only that period, or in the period of the revision and future periods where the revision affects both current and future periods.
Critical accounting judgements made in applying the accounting policies are considered to include accounting for the service concession contract and finance contract debtor which requires an estimate of service margins, finance debtor interest rates and the associated amortisation profile which is based on forecast results of the PFI contract.
The company's turnover is derived from activities in the United Kingdom and represents amounts invoiced, excluding VAT, for services rendered 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 under Note 1).
Operating profit is stated after charging auditor's remuneration of £10,870 in relation to the audit of the company accounts (2022: £9,350). Fees of £10,245 (2022: £8,800) are also paid to the company's auditors in respect of the audits of the other group companies.
Operating profit is also stated after charging £9,000 (2022: £9,000) in respect of corporation tax compliance not provided by the company's auditors, and £7,000 in depreciation (2022: £11,000).
The company does not have any direct employees (2022: none). Any staff working for the company are seconded from other companies in accordance with the management services agreement.
From 1st April 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 that the full rate of 25% will apply.
The actual (credit)/charge for the year can be reconciled to the expected credit for the year based on the profit or loss and the standard rate of tax as follows:
The terms of the bonds and of the loan are such that all payments of principal and interest are indexed to retail price inflation. The payment schedule above is based on the net cost indexed principal outstanding at 31 March 2023 and the issue costs. The bond and loan are each secured under the terms of a Security Trust Deed on the assets and liabilities of the group. The bond costs are net of all issue costs of £549,000 (2022: £562,000). The loan costs are net of all issue costs of £410,000 (2022: £441,000).
During late 2008 the credit rating of AMBAC (the Monoline Guarantor) declined which led to a 'Loss of Qualifying Status' under the finance agreement and represents a 'Guarantor Event of Default'. As disclosed on page 1, since November 2008 the European Investment Bank, the loan provider, whilst reserving the right to request a replacement guarantor, have not done so and therefore to date there is no default on the loan. EIB continues to make the loan available, but have levied additional 'default' interest charges.
The following are the major deferred tax liabilities and assets recognised by the company and movements thereon:
The deferred tax liability set out above is expected to reverse by March 2031 in respect of taxable losses carried forward and by March 2041 in respect of accelerated capital allowances.
In the directors' opinion there is no ultimate controlling party. At the date of the statement of financial position the company was a 100% subsidiary of Summit Holdings (Dudley) Limited, which is the largest and smallest company to consolidate these financial statements. Its registered office is the same as the company and is shown on page 1. Copies of its financial statements can be obtained from Companies House, Crown Way, Maindy, Cardiff CF14 3UZ.