Jersey Electricity plc       

       Interim Management Report

            for the six months ended 31 March 2020

The Board approved at a meeting on 14 May 2020 the Interim Management Report for the six months ended 31 March 2020 and declared an interim dividend of 6.80p compared to 6.45p for 2019. The dividend will be paid on 26 June 2020 to those shareholders registered in the records of the Company at the close of business on 5 June 2020.

The Interim Management Report is attached and will be available to the public on the Company's website www.jec.co.uk/about-us/investor-relations/financial-figures-and-reports.

The Interim Management Report for 2020 has not been audited, or reviewed, by our external auditors nor have the results for the equivalent period in 2019. The results for the year ended 30 September 2019 were extracted from the statutory accounts. The auditor has reported on those accounts and their report was unmodified. 

M.P. Magee                                                                P.J. Routier

Finance Director                                                       Company Secretary

Direct telephone number : 01534 505201                  Direct telephone number : 01534 505253

Email : mmagee@jec.co.uk                                       Email : proutier@jec.co.uk

14 May 2020

The Powerhouse,

PO Box 45,

Queens Road,

St Helier,

Jersey JE4 8NY

 ****

Jersey Electricity plc

Unaudited Interim Management Report

for the six months to 31 March 2020

COVID-19 - impact on trading performance

Due to the timing of the Interim Report, the period to end March was not materially impacted by the  COVID-19 outbreak. A Stock Exchange announcement in response to the crisis was issued to the market on 31 March. We are continuing to assess trending data on how revenue, working capital and bad debt provisioning might be impacted but it is still too early to establish a clear picture. In our Energy business we are working closely with customers to provide a level of flexibility on payment terms considering each situation on a case-by-case basis where those customers have been directly affected. Bad debts have historically not been a material issue and in the past we have carried specific provisioning against known payment issues of around £0.1m. We have increased this by a further £0.5m to £0.6m in these financial statements and will refine our methodology as the duration and impact of the COVID-19 crisis becomes clearer. Our other business units generally had a strong first six months, but we expect there to be a consequential reduction in revenue in the second half of the year. For example, our Powerhouse Retail saw a spike in activity around the time of lockdown but closed its doors at the end of March and is now trading predominantly online. In our Property business, some tenants have sought flexibility in rental payments, and we have again considered each situation on a case-by-case basis. We will continue to closely monitor the impact of COVID-19 on our full business but our balance sheet, with cash balances and low levels of gearing, remains strong.     

Overall trading performance in the 6 months to 31 March

Group revenue, at £64.0m, was 9% higher for the first half of 2020 compared to the same period last year mainly due to a rise in both Energy and Retail revenue. Profit before tax at £10.0m was £0.8m higher than 2019 with a rise in Energy profits associated with higher unit sales of electricity at a slightly higher price, being the main reasons. Cost of sales at £39.3m was £2.6m higher than last year with the rise in Energy and Retail revenue being the main factor. Operating expenses at £13.9m were £0.9m higher driven primarily by a £0.5m increase in bad debt provisioning in our Energy business and £0.4m of additional depreciation in our Property business. The taxation charge in the period of £2.1m was £0.2m higher than last year due to increased profits. Earnings per share, at 25.95p, were ahead of 23.83p in 2019 due to higher profits. Net debt on the balance sheet, which comprises borrowings less cash and cash equivalents, at 31 March 2020 was £2.9m compared to £12.1m at this time last year (and £5.1m at our last year end on 30 September 2019).     

Energy performance

Unit sales of electricity rose 4% from 357m to 371m kWh, compared with last year. This had been anticipated as milder weather was experienced in the prior year period. Revenues in our Energy business at £49.9m were £3.3m higher than in 2019 with the year-on-year increase in unit sales and the 3.5% tariff rise in April 2019 being the primary drivers. Other income received was £0.8m lower than in 2019 when we received a rebate for subsea cable repair costs. Operating profit at £9.0m was £0.9m higher than in the same period last year due to higher gross margin associated with higher revenue. We imported 96% of our on-island requirement from France and 4% from the Energy from Waste plant, owned by the Government of Jersey. Only 0.2% (less than 1m units) of electricity was generated in Jersey using our own plant due to the availability of our three subsea cables to France. These importation and generation levels were consistent with the same period last year.

Non-Energy performance

Year-on-year revenue in our Powerhouse retail business, rose by 18% to £9.6m (2019: £8.1m) and profits rose by £0.2m to £0.8m with very strong revenue achieved in March linked to COVID-19, and the resultant need of many of our customers to acquire computer equipment to aid work homeworking. Profit for our Property portfolio at £0.5m was £0.4m lower than last year, due to accelerated depreciation of air conditioning equipment which is currently being replaced in our Powerhouse building. JEBS, our contracting and business services unit, saw a £0.3m increase in external revenue to £1.9m and a rise in profitability to £0.1m. Our remaining business units produced profits of £0.4m being at a similar level to that delivered in 2019. 

Liquidity and cashflow

Net cash generated in the period was £2.2m (2019: £2.1m) post the continued investment in infrastructure of £5.1m (2019: £6.4m). The net debt figure fell to £2.9m at 31 March 2020 compared to £12.1m at this time last year (and £5.1m at 30 September 2019). Net debt consists of £30.0m of long-term debt offset by cash balances of £27.1m. We also have an unused £10m revolving credit facility and a £2m overdraft facility.

Forward hedging of electricity and foreign exchange, and customer tariffs

We continue to focus on delivering secure, low-carbon electricity supplies and our goal is to maintain relative stability in customer tariffs, despite volatility in both European wholesale electricity and foreign exchange markets. Our electricity purchases are materially, albeit not fully, hedged for the period 2020-23. As these are contractually denominated in the Euro, we enter into forward foreign currency contracts to reduce the volatility of our cost base and aid tariff planning. In February 2020 we announced a below inflation average rise in tariffs of 2.5% from 1 April, largely driven by a weakening of Sterling relative to the Euro and other inflationary factors. We subsequently deferred this rise to 1 October in response to the COVID-19 outbreak at an approximate cost of £1m for this financial year. The tariffs payable by an average customer continue to benchmark well against other jurisdictions. The 'default maximum tariff', introduced by Ofgem (the electricity Regulator) to cap prices payable in the UK, is set at a level that is over 30% higher than the average price a customer would pay in Jersey. 

Pension scheme

The defined benefit pension scheme surplus (without deduction of deferred tax) on our balance sheet at 31 March 2020 stood at £14.3m, compared to a surplus of £10.4m level at 30 September 2019 (and a deficit of £3.4m at 31 March 2019). Since the last financial year end scheme liabilities have materially decreased by approximately £15m (to £129m). This fall was primarily due to a substantial widening of credit spreads in the 6 weeks prior to 31 March resulting in a significant increase in the discount rate (from 1.9% at the last financial year end to 2.4% at 31 March 2020). Assets in the Scheme fell by around £13m (to £142m). The defined benefit scheme has been closed to new members since 2013. The next triennial valuation of the pension scheme, as at 31 December 2021, will be performed in 2022. 

Impact of new accounting standard

Adoption of IFRS 16 has resulted in an increase in Group operating profit of £43,000 (representing a £92,000 reduction in rental expense offset by a £49,000 increase in depreciation). Finance costs have increased by £65,000 resulting in a decrease in Profit from Operations before Taxation of £22,000. At 31 March 2020 the net value of right of use assets under IFRS 16 totaled £2.9m with a corresponding lease liability of £2.9m. There is no impact on total cash and cash equivalents.

Dividend

Your Board proposes to pay an interim net dividend for 2020 of 6.80p (2019: 6.45p). As previously stated, we continue to aim to deliver sustained real growth each year over the medium-term.  At this time, we do not expect the COVID-19 outbreak to influence our dividend strategy, but we will continue to review the position as the impact of COVID-19 becomes clearer through the remainder of 2020. The final dividend for 2019 of 9.25p, paid in late March in respect of the last financial year, was an increase of 5% on the previous year.

Risk and outlook

The principal risks and uncertainties identified in our last Annual Report, issued in January 2020, have not materially altered in the interim period, except for matters associated with COVID-19 principally concerning reduced demand for electricity, and the ability of customers to pay. We reported on Brexit considerations in the 2019 Annual Report and in relation to Brexit, our view has not altered since then.

Your Board is satisfied that Jersey Electricity plc has sufficient resources to continue in operation for the foreseeable future, a period of not less than 12 months from the date of approval of this report. Accordingly, we continue to adopt the going concern basis in preparing the condensed financial statements.

Responsibility statement

We confirm to the best of our knowledge:

(a) the condensed set of financial statements has been prepared in accordance with IAS 34 'Interim Financial Reporting';

(b) the Interim Directors Statement includes a fair review of the information required by the Disclosure and Transparency Rule DTR 4.2.7R (indication of important events during the first six months and description of principal risks and uncertainties for the remaining six months of the year); and

(c) the Interim Directors Statement includes a fair review of the information required by the Disclosure and Transparency Rule DTR 4.2.8R (disclosure of related party transactions and changes therein); and

(d) this half yearly interim report contains certain forward-looking statements with respect to the operations, performance and financial condition of the Group. By their nature, these statements involve uncertainty since future events and circumstances can cause results and developments to differ materially from those anticipated. The forward-looking statements reflect knowledge and information available at the date of preparation of this half yearly financial report and the Company undertakes no obligation to update these forward-looking statements. Nothing in this half yearly financial report should be construed as a profit forecast.

C.J. AMBLER - Chief Executive       M.P. MAGEE - Finance Director       14 May 2020       

INVESTOR TIMETABLE FOR 2020

Condensed Consolidated Income Statement (Unaudited)

Condensed Consolidated Balance Sheet (Unaudited)

Condensed Consolidated Statement of Changes in Equity (Unaudited)

Condensed Consolidated Cash Flow Statement (Unaudited)

Notes to the Condensed Interim Accounts (Unaudited)

1.         Accounting policies

Basis of preparation

The interim financial statements for the six months ended 31 March 2020 have been prepared on the basis of the accounting policies set out in the 30 September 2019 annual report and accounts using accounting policies consistent with International Financial Reporting Standards and in accordance with International Accounting Standard 34 'Interim Financial Reporting'. There has been one change to accounting standards during the current financial period that has impacted the disclosures in these financial statements and the full year financial statements that will be prepared for 30 September 2020:

IFRS 16 'Leases' has been endorsed by the EU and is effective for periods commencing on or after 1 January 2019. It replaces IAS 17 'Leases' and sets out the principles for the recognition, measurement, presentation and disclosure of leases.

For the purposes of the transition when applying IFRS 16, the Group has adopted the modified retrospective approach, including the application of the following practical expedients:

●     Reliance on the previous identification of a lease (under the previous IAS 17 standard) for all contracts that existed on the date of initial application;

●     Reliance on previous assessments (under IAS 37) on whether leases are onerous rather than performing an impairment review;

●     The application of a single discount rate to a portfolio of leases with similar characteristics;

●     Exclusion of initial direct costs from the measurement of the right-of-use assets at the date of initial application;

●     The measurement of the lease liability as at 1 October 2019 and the creation of an equal value right of use asset as at that date (where accrual and prepayment adjustments are not material).

Furthermore, the Group has applied the exemptions within the standard whereby both leases with a contractual duration of 12 months or less and leases for assets which are deemed "low value" will continue to be expensed to the income statement over the remainder of the lease term.

Where the Group is lessor of freehold properties, these leases have been determined to be operating leases in accordance with the substance of such lease transactions. The accounting for these leases does not change following the adoption of IFRS 16 with lease revenue being recognised on a straight-line basis.

The current lease charges have been used to establish a present value of the lease liabilities existing as at 1 October 2019. For the purposes of discounting, the Group has made use of the practical expedient in selecting the interest rate used. Given the portfolio of leases materially relate to long term leases of land for the Group's Energy division it has been determined that the average rate of 4.47% on the £30m borrowings from Pricoa, which is considered to be incremental rate of borrowing for the Group, is used in the calculation of the lease liability.

The Group has two covenants with its lenders, neither of which will be materially impacted by IFRS 16.

The directors have a reasonable expectation that the Group (being the Company, Jersey Electricity plc and its subsidiary, Jersey Deep Freeze Ltd) has adequate resources to continue in operational existence for the foreseeable future. Thus they continue to adopt the going concern basis of accounting in preparing the interim financial statements.

2.         Revenue and profit

The contributions of the various activities to Group revenue and profit are listed below:

          Materially, all of the Group's operations are conducted within the Channel Islands. All transactions between divisions are on an arm's-length basis. The assets and liabilities of the Group are not reported on as there has been no significant movement in the values in the six months to 31 March 2020.

3.         Taxation

          For the period ended 31 March 2020 and subsequent periods, the Company is taxable at the rate applicable to utility companies in Jersey of 20% (2019: 20%).

4.         Dividends paid and proposed

The distribution to equity holders in respect of the final dividend for 2019 of £2,833,284 (9.25p net of tax per share) was paid on 26 March 2020.

The Directors have declared an interim dividend of 6.80p per share, net of tax (2019: 6.45p) for the six months ended 31 March 2020 to shareholders on the register at the close of business on 5 June 2020. This dividend was approved by the Board on 14 May 2020 and has not been included as a liability at 31 March 2020.

5.         Pensions

In consultation with the independent actuaries to the scheme, the valuation of the pension scheme assets and liabilities has been updated to reflect current market discount rates, current market values of investments and actual investment returns applicable under IAS 19 'Employee Benefits', and consideration has also been given as to whether there have been any other events that would significantly affect the pension liabilities.

6.         Financial instruments

The Group held the following derivative contracts, classified as level 2 financial instruments at 31 March 2020. 

All financial instruments for which fair value is recognised or disclosed are categorised within the fair value hierarchy. This hierarchy is based on the underlying assumptions used to determine the fair value measurement as a whole and is categorised as follows:

Level 1 financial instruments are those with values that are immediately comparable to quoted (unadjusted) market prices in active markets for identical assets or liabilities;

Level 2 financial instruments are those with values that are determined using valuation techniques for which the basic assumptions used to calculate fair value are directly or indirectly observable (such as to readily available market prices);

Level 3 financial instruments are shown at values that are determined by assumptions that are not based on observable market data (unobservable inputs).

The derivative contracts for foreign currency shown above are classified as level 2 financial instruments and are valued using a discounted cash flow valuation technique. Future cash flows are estimated based on forward exchange rates (from observable forward exchange rates at the end of the reporting period) and contract forward rates, discounted at a rate that reflects the credit risk of various counterparties.

7.         Related party transactions

Jersey Electricity plc conducts a variety of transactions with the Government of Jersey and its associated entities:

The Government of Jersey is the Group's majority and controlling shareholder. Related entities include companies that remain wholly owned by, or controlled by, the Government of Jersey.