Results in line with market expectations

RESULTS FOR THE TWELVE MONTHS

ENDED 31 DECEMBER 2018

6 MARCH 2019

"We are pleased to report results which continue the positive momentum demonstrated at the interims. We have delivered results in line with market expectations and ahead of our guidance at the start of the year, with 10% growth in the Group's underlying profits. The overall result was supported by a strong performance in Rental Solutions, which represents 52% of the Group's revenue. With the wide-ranging initiatives we are implementing to improve our operational and capital efficiency, we are confident we can meet our mid-teens ROCE target in 2020."

1Underlying excludes pass-through fuel, currency and 2017 exceptional items (no exceptional items reported in 2018). A reconciliation between reported and underlying performance is detailed on page 11.

2Pre-exceptional items in 2017.

32017 operating profit and profit before tax post-exceptional items were £183 million and £149 million respectively.

· Good underlying1 Group revenue growth of 8%

o Rental Solutions underlying1 revenue up 22% (52% of Group revenue)

o Power Solutions Industrial underlying1 revenue up 7% (27% of Group revenue)

o Power Solutions Utility underlying1 revenue down 14% (21% of Group revenue), reflecting known off-hires

· Profit before tax of £182 million, up 10% on an underlying1 basis and in line with market expectations despite currency headwinds

· ROCE of 10.3% (2017: 10.7%), up 0.5 percentage points on an underlying1 basis

· Operating cash flow of £423 million (2017: £450 million), impacted by cash outflows relating to mobilisation activities on a number of new contracts

· Working capital outflow of £56 million (2017: £53 million), including £60 million outflow on payables

· Fleet capex of £196 million (2017: £246 million), reflecting increased discipline and focus on utilisation

· Full year dividend maintained at 27.1 pence

· Awarded the supply contract for temporary electricity generation for the Olympic and Paralympic Games in Tokyo, worth an expected $200 million revenue in 2020

· Plans to improve ROCE are well under way, including the launch of our £50 million cost reduction programme

OPERATING & FINANCIAL REVIEW

Group trading performance

The Group has adopted IFRS 15 'Revenue from Contracts with Customers' with effect from 1 January 2018. Note 1 to the Accounts explains these changes in detail. Comparative figures for 2017 have been restated to reflect this change.

Underlying1 Group revenue rose 8%, driven primarily by a strong performance in Rental Solutions, offset by a decline in Power Solutions Utility, which now represents only 21% of Group revenue. Underlying1 profit before tax was up 10% at £182 million. The operating margin was 12.5% (2017: 13.2%), up 0.2 percentage points on an underlying1 basis, with improvements in Rental Solutions and Power Solutions Industrial partially offset by a reduction in Power Solutions Utility. Diluted earnings per share (DEPS) were 49.2 pence (2017: 52.4 pence, excluding exceptional items), up 7% on an underlying1 basis.

The Group's return on capital employed (ROCE) decreased to 10.3% (2017: 10.7%) primarily due to the impact of currency. On an underlying1 basis ROCE rose 0.5 percentage points.

Reported financial measures

Reported revenue and operating profit include the translational impact of currency as Aggreko's revenue and profit are earned in different currencies (most notably the US Dollar), which are then translated and reported in Sterling. The movement in exchange rates in the period had the translational impact of decreasing revenue by £112 million and operating profit by £24 million.

In addition, the Group separately reports fuel revenue from certain contracts in the Power Solutions Utility business in Brazil and Sri Lanka, where we manage fuel on a pass-through basis on behalf of our customers. The reason for the separate reporting is that fuel revenue on these contracts is entirely dependent on fuel prices and the volumes of fuel consumed, which can be volatile and may distort the view of the performance of the underlying business. In 2018, fuel revenue from these contracts was £172 million (2017: £139 million).

Reported Group revenue was up 4% on the prior year, with Rental Solutions up 19%, Power Solutions Industrial down 1% and Utility (excluding pass-through fuel) down 22%.

There were no exceptional items reported in 2018. During 2017 the Group incurred exceptional costs of £41 million relating to the implementation of our Business Priorities programme, split as follows: Rental Solutions £13 million, Power Solutions Industrial £11 million and Power Solutions Utility £17 million.

Divisional headlines

As previously announced, as a result of the Group's increased sector focus, we have refined our segmental reporting and reassigned all non-utility sector customer contracts from within our Power Solutions Utility business into Power Solutions Industrial. The details of the impact of this change are contained in Note 2(a) to the Accounts. Comparative figures for 2017 have been restated to reflect this change.

Rental Solutions underlying1 revenue was up 22% and represented 52% of Group revenue. North America had a strong year with revenue up 25%, including £27 million (2017: £22 million) earned from hurricane related work (net of base business lost due to hurricanes) and a strong performance across several key sectors including oil & gas, petrochemical & refining, utilities and building services & construction. We also achieved good revenue growth of 17% and 16% in Europe and Australia Pacific respectively. Operating margin on an underlying1 basis rose 1.2 percentage points to 12.9%, driven by improved rates and operational efficiency.

Power Solutions Industrial underlying1 revenue (27% of Group revenue) increased 7%, supported by particularly strong growth in Latin America of 31%, Asia up 11% and the Winter Olympics in South Korea. Underlying1 revenue was up 4% excluding the Winter Olympics. Operating margin rose by 0.4 percentage points to 16.6% on an underlying1 basis representing good performance across key sectors in Latin America partially offset by the Middle East with the impact of the ongoing Qatar blockade.

Power Solutions Utility underlying1 revenue (21% of Group revenue) was down 14% primarily due to known off-hires in Zimbabwe, Bangladesh and Japan, and lower volumes and pricing in Argentina. As a result, the Power Solutions Utility margin was down 1.4 percentage points on an underlying1 basis to 13.4%.

Cash flow and balance sheet

During the year cash generated from operations was £423 million (2017: £450 million). The decrease in operating cash flow is mainly driven by cash outflows relating to mobilisation (fulfilments assets) and demobilisation activities, with an outflow of £48 million in 2018 compared to £22 million in 2017. The higher outflows in 2018 relate primarily to mobilisation costs for new contracts in Bangladesh, Brazil and St Croix.

In 2018 we had a working capital outflow of £56 million compared to a £53 million outflow in 2017. This year's outflow consisted of a £10 million outflow from trade and other receivables, and a £60 million outflow from trade and other payables, partially offset by a £14 million inflow from inventory.

The £14 million decrease in inventory was driven by the initiatives we put in place during the year to improve our performance in this area, including reduced levels of manufacturing activity aligned with our more disciplined approach to capital expenditure.

The decrease in trade and other payables balances was primarily as a result of the reduced manufacturing, together with the release of deferred revenue associated with the Winter Olympics in South Korea, and the timing of some contract payments in our Power Solutions Utility business.

The increase in trade and other receivables of £10 million comprised a £9 million increase in Rental Solutions (2017: £47 million increase), a £2 million increase in Power Solutions Industrial (2017: £30 million increase), and a decrease of £1 million in Power Solutions Utility (2017: £86 million increase). The increase in Rental Solutions is driven by revenue growth, principally in North America. In Power Solutions Utility, the level of our bad debt provision is broadly unchanged at $83 million and we remain focused on managing the trade receivables which have risen over recent years, primarily as a result of our customers' liquidity and limited access to foreign currency rather than any dispute or otherwise over the amounts due.

Fleet capital expenditure was £196 million (2017: £246 million), representing 0.7 times fleet depreciation (2017: 0.9 times). Within this overall fleet spend, £79 million was invested in our Rental Solutions business, primarily on new temperature control equipment and the renewal of our oil free air (OFA) fleet, and £117 million in Power Solutions, including £27 million upgrading our G3 diesel engine to the market leading G3+. As we continue to drive increased utilisation, fleet capital expenditure is expected to remain below £200 million in 2019.

Net debt was £686 million at 31 December 2018, £34 million higher than the prior year. This resulted in net debt to EBITDA on a rolling 12-month basis of 1.3 times compared to 1.2 times at December 2017. We remain committed to reducing our leverage over time, despite the adverse impact of IFRS 16.

Dividends

The Group is proposing to maintain the final dividend at 17.7 pence per share. Subject to shareholder approval, this will result in a full year dividend of 27.1 pence (2017: 27.1 pence) per Ordinary Share; this equates to dividend cover of 1.8 times (2017: 1.9 times, pre-exceptional items). Dividend cover is calculated as basic earnings per share for the period divided by the full year dividend per share. We remain committed to a sustainable dividend.

Outlook

We will continue to build on the work we have done over the last three years to drive efficiency and strengthen the foundations of the business and the improvements we have seen in 2018.

Our outlook for the Group in 2019 is in line with the market's expectations, despite currency headwinds and the impact of IFRS 16, although with a greater weighting to the second half than in 2018. In addition, the performance initiatives we announced in August, to drive operational and capital efficiency, are beginning to take effect and we expect to make progress this year towards our mid-teens ROCE target in 2020.

Additional performance metrics

* pre-exceptional items 

BUSINESS UNIT PERFORMANCE REVIEW

RENTAL SOLUTIONS

· Our Rental Solutions business had a very good year, with improvements across all key metrics.

· Underlying1 revenue and operating profit up 22% and 34% respectively

· Improved operating margin of 12.9%, up 1.2 percentage points on an underlying1 basis

· ROCE of 14.7% reflects an underlying1 increase of 2.7 percentage points driven by profit growth in North America

· Strong performance in key sectors, notably oil & gas (representing 13% of Rental Solutions revenue), Petrochemicals & Refining and Utilities

· Successful execution of the Commonwealth Games in Australia, with revenue of £7 million

North American underlying1 revenue rose 25% on the prior year. Our sector focus continued to drive growth, and we saw good performance in most of our key sectors, in particular oil and gas, petrochemical & refining, building services & construction and utilities.

In our Australia Pacific business, underlying1 revenue increased 16% excluding the Commonwealth Games, supported by good growth in the mining sector and a 100 MW contract delivering emergency power to Melbourne over the summer months.

Our Continental European business grew underlying1 revenue 24%, with good growth in most countries, in particular the Netherlands and Belgium, as well as benefiting from the Ryder Cup in France in September. Key sectors included petrochemical & refining, where we have leveraged our experience and expertise in North America to expand our market footprint, and in the utilities sector, where we have supported renewable energy build out as well as responding to the power shortages in Belgium.

The Northern European business also delivered good growth with underlying1 revenue increasing 8%, driven by our Next Generation Gas contracts in Ireland and an increase in activity in the oil & gas sector.

Operating profit rose significantly, driven by higher rates and our measures to improve operational efficiency. This is reflected in the 1.2 percentage point underlying1 increase in operating margin to 12.9%.

Operational summary

POWER SOLUTIONS

· Power Solutions Industrial

− Underlying1 revenue and profit increased 7% and 10% respectively, supported by the Winter Olympics in South Korea and good growth in Latin America and Asia

− Underlying1 revenue excluding the Winter Olympics rose 4%

− Operating margin at 16.6% is up slightly on the prior year on an underlying1 basis

− ROCE of 10.7% is broadly flat

· Power Solutions Utility

− Underlying1 revenue was down 14% and operating profit down 23%

− Overall performance reflects the impact of known off-hires in Zimbabwe, Bangladesh and Japan and lower volumes and pricing in Argentina

− ROCE down 1.6 percentage points to 6.2% on an underlying1 basis, reflecting our reduced profitability

Power Solutions Industrial

Underlying1 revenue increased by 7%. In Eurasia revenue grew 7%, with good growth in its key sector of oil & gas. Revenue in Latin America increased 31%, supported by an emergency contract in Argentina for a local utility distribution company. In the Middle East revenue decreased 8% with weakness in most areas, notably in Qatar and the UAE, largely as a result of the ongoing Qatar blockade. Revenue in Africa decreased 4%, driven by East Africa and off-hire of certain mining projects, while revenue in Asia excluding the Winter Olympics increased 11% with good performances from Japan and Singapore.

Operating margin on an underlying1 basis was up slightly on the prior year at 16.6%, with a good performance in Latin America partially offset by the impact of the continued Qatar blockade in the Middle East on competition and pricing in that region, particularly in the first half.

Power Solutions Industrial order intake (excluding Eurasia) for the year was 271 MW (2017: 137 MW). Eurasia order intake was in line with the prior year at 333 MW (2017: 333 MW). While revenue in Eurasia showed good growth in 2018, we are experiencing increased competition in this market and expect to see a reduced level of growth in 2019.

Reported revenue and operating profit decreased by 1% and 3% respectively, while underlying revenue and operating profit increased 7% and 10% respectively with the difference due to exchange rate movements.

Power Solutions Utility 

Underlying1 revenue decreased 14%, due primarily to lower rates and volume in Argentina and off-hires in Zimbabwe, Bangladesh and Japan. Consequently, the operating margin on an underlying1 basis was down 1.4 percentage points to 13.4%. During the year we initiated a cost reduction programme to deliver savings of £50 million in 2021, the majority of which will be in our Power Solutions Utility business.

Average megawatts on hire was 2,683 (2017: 3,098), with the reduction reflecting an increased off-hire rate of 42% (2017: 34%), driven by known off-hires in Japan, Zimbabwe and Bangladesh. Order intake in the year was 398 MW (2017: 662 MW), including most notably a 50 MW HFO contract in Burkina Faso and a 70MW diesel contract in the Philippines. In addition, we have agreed contract extensions on a number of key contracts, including our 117MW contract in Yemen and our 100MW contract in Benin.

Managing the trade receivables in our Power Solutions Utility business continues to be a major focus, with active ongoing engagement with our customers a key priority. The primary reason for delay in receiving payments remains our customers' liquidity position and their limited access to foreign currency, with the situation in parts of Africa, Venezuela and Yemen being the most difficult. Resolving these situations remains a key part of our strategy to improve returns in this business.

Operational summary

FINANCIAL REVIEW

A summarised Income Statement for 2018 is set out below, together with the comparative results for 2017 (both excluding and including the effects of exceptional items).

Currency translation

The movement in exchange rates in the period had the translational impact of decreasing revenue by £112 million and operating profit by £24 million. This was driven by the strength against Sterling in the majority of the principal currencies impacting the Group. Currency translation also gave rise to a £24 million decrease in the value of the Group's net assets. Set out in the table below are the principal exchange rates which affected the Group's profit and net assets.

(Source: Bloomberg)

Reconciliation of reported to underlying results

The tables below reconcile the reported and underlying revenue and operating profit movements:

Revenue

Operating profit

Notes:

1. The currency impact is calculated by taking the 2017 results in local currency and retranslating them at 2018 average rates.

2. The currency impact line included in the tables above excludes the currency impact on pass-through fuel in PSU, which in 2018 was £21 million on revenue and £nil million on operating profit.

Interest

The net interest charge of £37 million was £3 million higher than last year, reflecting higher average net debt year on year, an increase in the effective interest rate and the net interest cost relating to the Defined Benefit Pension Scheme (previously reported within administrative expenses). Interest cover measured against rolling 12-month EBITDA (Earnings before Interest, Taxes, Depreciation and Amortisation) remained strong at 14 times (2017: 15 times) relative to the financial covenant attached to our borrowing facilities that EBITDA should be no less than 4 times interest.

Taxation

Tax charge

The Group's effective corporation tax rate for the year was 31% (2017: 29%, pre-exceptional items) based on a tax charge of £57 million (2017: £56 million, pre-exceptional items) on a profit before taxation of £182 million (2017: £190 million, pre-exceptional items). The increase in the Group's effective tax rate in 2018 is largely due to a one-off tax credit in 2017 following the revaluation of our deferred tax liabilities in respect of the US business as a result of US tax reform.

Total cash taxes

In 2018, the Group's worldwide operations resulted in direct and indirect taxes of £241 million (2017: £228 million) being paid to tax authorities. This amount represents all corporate taxes paid on operations, payroll taxes paid and collected, import duties, sales taxes and other local taxes.

Capital structure & dividends

The objective of our strategy is to deliver long-term value to shareholders while maintaining a balance sheet structure that safeguards the Group's financial position through economic cycles. Given the operational risk profile of the Group we believe gearing of around one times net debt to EBITDA is appropriate, recognising that from time to time it may be higher for a period of time as investment opportunities present themselves.

From a capital allocation perspective our priority is to invest in organic growth. As well as investing organically, there are opportunities for growth through acquisition, both for scale and capability, including into product adjacencies such as temperature control and loadbanks. Acquisitions are subject to our disciplined capital allocation process and will have to meet appropriate hurdle rates of return. While our first priority is investment to generate growth, we recognise the importance of the dividend in providing value to our shareholders. Finally, as and when the opportunity arises, we will look at returning surplus capital to shareholders. The retained earnings of the Company as at 31 December 2018 were £374 million and the majority of these earnings are distributable.

Subject to shareholder approval, the proposed final dividend of 17.7 pence will result in a full year dividend of 27.1 pence (2017: 27.1 pence) per Ordinary Share, giving dividend cover (basic EPS divided by full year declared dividend) of 1.8 times (2017: 1.9 times, pre-exceptional items).

Cash flow

During the year cash generated from operations was £423 million (2017: £450 million). The decrease in operating cash flow is mainly driven by cash outflows relating to mobilisation (fulfilments assets) and demobilisation activities, with an outflow of £48 million in 2018 compared to £22 million in 2017. The higher outflows in 2018 relate primarily to mobilisation costs for new contracts in Bangladesh, Brazil and St Croix. In 2018 we had a working capital outflow of £56 million compared to a £53 million outflow in 2017. The working capital movements in the period are explained in more detail on page 5. Capital expenditure in the year was £216 million (2017: £272 million), of which £196 million (2017: £246 million) was spent on fleet assets.

Net operating assets

The net operating assets of the Group (including goodwill) at 31 December 2018 totalled £2,159 million, £85 million higher than 31 December 2017, as detailed in the table below.

A key measure of our performance is the return generated from the Group's average net operating assets (ROCE). We calculate ROCE by taking the operating profit (pre-exceptional items) for the year and expressing it as a percentage of the average net operating assets at 31 December, 30 June and the previous 31 December. In 2018 ROCE decreased to 10.3% compared with 10.7% in 2017, primarily driven by a lower return in our Power Solutions Utility business.

Property, plant and equipment

Our rental fleet accounts for £1,057 million, which is around 91% of the net book value of property, plant and equipment used in our business. The majority of equipment in the rental fleet is depreciated on a straight-line basis to a residual value of zero over eight years, with some classes of rental fleet depreciated over 10 and 12 years. The annual fleet depreciation charge of £273 million (2017: £275 million) reflects the estimated service lives allocated to each class of fleet asset. Asset lives are reviewed at the start of each year and changed, if necessary, to reflect their remaining lives in light of technological change, prospective economic utilisation and the physical condition of the assets. No changes were made in 2018.

Acquisitions

The Group completed two acquisitions during the year, details of which are contained in Note 13 to the Accounts.

On 15 February 2018 the Group acquired the business and assets of A Contact Electric Rentals (A Contact) in North America. A Contact specialises in the rental of medium and high voltage electrical distribution equipment across North America and furthers Aggreko's leadership position in the speciality rental market in the region. The cost of the acquisition was £21 million.

On 31 May 2018 the Group acquired the business and assets of Generator Hire Service in Australia, for a total consideration of £3 million.

Shareholders' equity

Shareholders' equity increased by £53 million to £1,367 million, represented by the net assets of the Group of £2,053 million less net debt of £686 million. The movements in shareholders' equity are analysed in the table below:

4 Reflects the final dividend for 2017 of 17.7 pence per share (2016 17.7 pence) that was paid during the period.

Pensions

Pension arrangements for our employees vary depending on best practice and regulation in each country. The Group operates a defined benefit scheme for UK employees, which was closed to new employees joining the Group after 1 April 2002. Most of the other schemes in operation around the world are defined contribution schemes.

Under IAS 19: 'Employee Benefits', Aggreko has recognised a pre-tax pension surplus of £1 million at 31 December 2018 (2017: £25 million deficit) which is determined using actuarial assumptions. The improvement in pension funding is primarily driven by lower life expectancies (reflecting the latest evidence), the impact of a higher discount rate, lower expectations for future salary increases, and the additional contributions paid by the Company during the year. These were partially offset by the lower than expected returns on the scheme's assets and incorporating an allowance in the liabilities for the impact of guaranteed minimum pension equalisation.

The sensitivities regarding the main valuation assumptions are shown in the table below.

Treasury

The Group's operations expose it to a variety of financial risks that include liquidity, the effects of changes in foreign currency exchange rates, interest rates, and credit risk. The Group has a centralised treasury operation whose primary role is to ensure that adequate liquidity is available to meet the Group's funding requirements as they arise, and that financial risk arising from the Group's underlying operations is effectively identified and managed.

The treasury operations are conducted in accordance with policies and procedures approved by the Board and are reviewed annually. Financial instruments are only executed for hedging purposes, and transactions that are speculative in nature are expressly forbidden. Monthly reports are provided to senior management and treasury operations are subject to periodic internal and external review.

Liquidity and funding

The Group maintains sufficient facilities to meet its funding requirements over the medium term. At 31 December 2018, these facilities totalled £1,191 million in the form of committed bank facilities arranged on a bilateral basis with several international banks and private placement lenders. The financial covenants attached to these facilities are that EBITDA should be no less than 4 times interest and net debt should be no more than 3 times EBITDA; at 31 December 2018, these stood at 14 times and 1.3 times respectively. The Group does not expect to breach these covenants in the year from the date of approval of these financial statements.

The Group expects to be able to arrange sufficient finance to meet its future funding requirements. It has been the Group's custom and practice to refinance its facilities in advance of their maturity dates, providing that there is an ongoing need for those facilities.

Net debt amounted to £686 million at 31 December 2018 (2017: £652 million) and, at that date, un-drawn committed facilities were £465 million.

Further detail can be found in the Going Concern disclosure within Note 1 to the Annual Report and Accounts.

Interest rate risk

The Group's policy is to manage its exposure to interest rates by ensuring an appropriate balance of fixed and floating rate debt. At 31 December 2018, £591 million of the net debt of £686 million was at fixed rates of interest resulting in a fixed to floating rate net debt ratio of 86:14 (2017: 94:6). The proportion of our debt with fixed interest rates was higher than usual at the 2018 and 2017 year ends due to some fixed rate debt maturities in the first half of 2018 and 2019.

The Group is subject to currency exposure on the translation into Sterling of its net investments in overseas subsidiaries. In order to reduce the currency risk arising, the Group uses direct borrowings in the same currency as those investments. Group borrowings are predominantly drawn down in the currencies used by the Group.

The Group manages its currency flows to minimise foreign exchange risk arising on transactions denominated in foreign currencies and uses forward contracts and forward currency options, where appropriate, in order to hedge net currency flows.

Cash deposits and other financial instruments give rise to credit risk on amounts due from counterparties. The Group manages this risk by limiting the aggregate amounts and their duration depending on external credit ratings of the relevant counterparty. In the case of financial assets exposed to credit risk, the carrying amount in the balance sheet, net of any applicable provision for loss, represents the amount exposed to credit risk.

Insurance

The Group operates a policy of buying cover against the material risks which the business faces, where it is possible to purchase such cover on reasonable terms. Where this is not possible, or where the risks would not have a material impact on the Group as a whole, we self-insure.

Principal risks and uncertainties

In the day to day operations of the Group, we face various risks and uncertainties. We seek both to prevent these risks from materialising and to mitigate their impact if they do arise. The Board has developed a risk management framework to facilitate this. The principal risks that we believe could potentially affect the Group are summarised below:

· Global macroeconomic uncertainty;

· Market dynamics;

· Disruptive technology;

· Talent management;

· New technology market introduction;

· Change management;

· Cyber security;

· Escalating sanctions;

· Health and safety;

· Security;

· Failure to conduct business dealings with integrity and honesty; and

· Failure to collect payments or to recover assets.

This year three risks were promoted to the Group's register of principal risks and two risks were relegated.

Risks promoted to the Group's register this year:

· Global macroeconomic uncertainty: Geopolitical and global macroeconomic uncertainty may result in lower than expected GDP growth, reducing demand for our services.

· Change management: One of our strategic priorities is to update Rental Solutions' systems and processes to better meet the needs of our customers. We are in a critical period of implementation during which the likelihood of disruption to operations is highest.

· Escalating sanctions: Sanctions have been extended in some countries in which we operate. Further extensions to sanctions could restrict our ability to service existing customers and win new work.

Risks relegated from last year's Group register:

· Equipment obsolescence: While we have been introducing new fleet and technologies into our business we have focused on ensuring the continued utilisation of our older fleet. We have successfully identified applications which best utilise this fleet and, as a result, the risk that this equipment becomes obsolete before the end of its useful life has now reduced.

· Funding our strategic plan: The risk that an unexpected funding requirement for working capital affects our ability to fund the strategic plan has fallen as a result of initiatives to improve the forecasting and management of working capital.

UK withdrawal from the European Union

At this point we do not know whether the UK will leave the EU with a deal, without a deal or whether the decision to leave will be revoked and we will continue to monitor the situation closely. However, as a business with over 80% of revenues derived from territories outside the UK and the European Union, we do not expect the UK's withdrawal from the European Union to have a material impact on the Group's underlying trading performance. Notwithstanding this, a material change in the relative strength of Sterling could give rise to significant volatility in the Group's reported results.

Shareholder information

Our website can be accessed at www.plc.aggreko.com. This contains a large amount of information about our business. The website also carries copies of recent investor presentations, as well as London Stock Exchange announcements.

GROUP INCOME STATEMENT

FOR THE YEAR ENDED 31 DECEMBER 2018

GROUP STATEMENT OF COMPREHENSIVE INCOME

FOR THE YEAR ENDED 31 DECEMBER 2018

GROUP BALANCE SHEET(COMPANY NUMBER: SC177553)

AS AT 31 DECEMBER 2018

The financial statements on pages 18 to 42 were approved by the Board of Directors on 6 March 2019 and were signed on its behalf by:

GROUP CASH FLOW STATEMENT

FOR THE YEAR ENDED 31 DECEMBER 2018

Cash flows for the purchase and sale of rental fleet assets are presented as arising from investing activities because the acquisition of new fleet assets represents a key investment decision for the Group, the assets are expected to be owned and operated by the Group to the end of their economic lives, the disposal process (when the assets are largely depreciated) is not a major part of the Group's business model and the assets in the rental fleet are not specifically held for subsequent resale.

(i) Loss on disposal of £1 million was included in exceptional items in 2017.

RECONCILIATION OF NET CASH FLOW TO MOVEMENT IN NET DEBT

FOR THE YEAR ENDED 31 DECEMBER 2018

FOR THE YEAR ENDED 31 DECEMBER 2017

GROUP STATEMENT OF CHANGES IN EQUITY

FOR THE YEAR ENDED 31 DECEMBER 2018

GROUP STATEMENT OF CHANGES IN EQUITY

FOR THE YEAR ENDED 31 DECEMBER 2018

NOTES TO THE ACCOUNTS

For the year ended 31 December 2018

1. CHANGES IN ACCOUNTING POLICY AND DISCLOSURES

(a) New and amended standards adopted by the Group

The Group has adopted IFRS 15 'Revenue from Contracts with Customers' and IFRS 9 'Financial Instruments' from 1 January 2018 therefore this is the first set of the Group's annual financial statements where IFRS 15 and IFRS 9 have been applied. Changes to significant accounting policies are described below.

IFRS 15

IFRS 15 deals with revenue recognition and establishes principles for reporting useful information to users of financial statements about the nature, amount, timing and uncertainty of revenue and cash flows arising from an entity's contracts with customers. Revenue is recognised in accordance with the five-step model included in IFRS 15 which specifies that revenue should be recognised when (or as) an entity transfers control of goods or services to a customer at an amount to which the entity expects to be entitled.

The Group has applied IFRS 15 retrospectively using the practical expedient not to restate for contract extensions before 1 January 2017. Comparative numbers for the year ended 31 December 2017 have been restated. The main changes from adopting IFRS 15 are detailed below.

Mobilisation and demobilisation

Mobilisation costs are classified as fulfilment costs where they are separately identifiable and specific to a project and where the mobilisation does not itself form a separate performance obligation. In these circumstances, mobilisation costs are capitalised as they relate to future performance obligations, i.e. the provision of power is the future performance obligation, which begins when the power starts to be generated. During the phase of mobilisation this service has not yet started and as such represents a future performance obligation. The costs incurred during mobilisation are directly related to the contract and enable Aggreko to earn revenue from the provision of power. They are expected to be recovered because the contract is profitable although they will be reviewed carefully for any indication of impairment.

With respect to demobilisation costs the Group has a legal obligation to incur demobilisation costs once the assets are installed on site, as this is required by the contract. This creates a legal obligation from a past event. The majority of these costs can be measured reliably and therefore they meet the definition of a provision. These costs are capitalised as a fulfilment cost asset as they are incurred in relation to a performance obligation (delivering power) and are expected to be recovered and generate or enhance resources because they facilitate Aggreko's delivery of the contract.

The fulfilment costs (mobilisation and demobilisation costs) are amortised to the income statement over the period of the initial contract. The amortisation starts when we start to earn revenue and stops when the initial contract period ends. If there is a signed extension, the unamortised amount left in the balance sheet when the extension is signed is then amortised over the remaining period of the initial contract and the extension period.

In contracts where mobilisation and demobilisation income timing is specifically stipulated in the contract in order to match the timing of associated costs, then this income is now recognised during the period of provision of power.

The financial impact of these items for the year ended 31 December 2017 is detailed below (Note references refer to tables below):

· Note 1: Revenue for the year ended 31 December 2017 is £2 million higher reflecting revenue now being recognised during the provision of power. Deferred revenue in the balance sheet also increases by £2 million

· Note 2: Cost of sales for the year ended 31 December 2017 is £7 million higher reflecting mobilisation and demobilisation costs amortised to the income statement over the period of the contract

· Note 5: A fulfilment asset of £8 million was recognised as at 31 December 2017, with £5 million less than one year and £3 million greater than one year

· Note 6: A demobilisation provision of £10 million was recognised as at 31 December 2017, with £9 million less than one year and £1 million greater than one year

· Note 11: IFRS 9 requires any impairment loss on trade receivables to be shown separately on the face of the income statement

1. CHANGES IN ACCOUNTING POLICY AND DISCLOSURES CONTINUED

Rehire arrangements (Principal vs. Agent)

Aggreko will sometimes hire equipment from a third party to use on a contract. Before IFRS 15 the revenue and cost associated with this was accounted for separately as Aggreko was the principal. Under IFRS 15 Aggreko is acting as an agent rather than principal in this instance mainly because Aggreko does not control the provision of the service due to factors such as the fact that the third party is still responsible for repairs to the equipment. Under IFRS 15 the cost of the rehire is netted against revenue.

· Note 3: The impact of this for the year ended 31 December 2017 was to reduce revenue and cost of sales by £34 million. There is no impact on operating profit.

IMPACT ON FINANCIAL STATEMENTS

GROUP INCOME STATEMENT