Energy - turmoil in markets

In our 2022 Annual Report we highlighted that the turmoil that beset energy markets had intensified further due to the conflict between Russia and Ukraine, and that Jersey Electricity was not immune to those challenges. However, despite those challenges we have shown resilience, and largely protected our customers from the material rise in retail prices seen elsewhere, without the need for any Government intervention/subsidy.  We continue to monitor developments on both volatility, and security of supply, in energy markets. Europe experienced relatively benign weather over the winter, relatively good production from the French nuclear fleet, and much lower gas usage in the EU industrial sector which, when combined, have resulted in healthier than expected gas storage levels.  There are however sensitivities, such as the lack of snow and rain in the last 6 months impacting predictions for the availability of hydro power during the remainder of this year. This, combined with the uncertain timing of a resolution to the Ukraine conflict, mean volatility in European energy markets looks set to continue. We have strong relationships with our French partners, EDF (as supplier) and RTE (as network operator) that span nearly 40 years and the Company benefits from legal and contractual arrangements which cover imported electricity supplies to the end of 2027.

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. This is however extremely challenging in the current climate. Our electricity purchases are materially, but not fully, price capped for the calendar years 2023 and 2024. We also have around one third of our expected 2025-27 requirements hedged at largely fixed prices. As these are contractually denominated in the Euro, we also enter into forward foreign currency contracts, on a three-year rolling basis, to reduce the volatility of our cost base, and to aid tariff planning. In January 2023 we implemented a 5% rise in customer tariffs and do not anticipate further rises during the remainder of 2023. However, we are planning forward, and considering options for 2024 and beyond, as we come out of our current advantageous hedged position and are faced with higher market prices.

Even with the rises implemented to date, the tariffs payable by our customers continue to benchmark well against other jurisdictions.  Domestic customers in Jersey currently pay around half what equivalent customers pay in the UK for their electricity. Other UK Islands are implementing material rises in customer tariffs with the Isle of Man having instigated a 25% increase on 1 April 2023, and a further 25% rise from 1 July 2023. Guernsey Electricity has also applied to raise tariffs by 14.25% from 1 July 2023, subject to regulatory approval.

Overall trading performance in the 6 months to 31 March

Group revenue, at £69.4m, was 6.7% higher for the first half of 2023 compared with £65.0m for the same period last year mainly due to a rise in both Energy and Retail revenue. Profit before tax was £10.3m but included an unexpected receipt of £3.6m which has been classified as 'Rebate of past energy costs - non-recurring item' for disclosure purposes within gross profit in these financial statements. This was a rebate from the French network operator (RTE) in respect of payments made in 2022 which they were instructed to return to us in early 2023 as part of a regulatory decision due to volatility in the energy marketplace during 2022. In addition, a non-cash cost of £1.4m for an ex-gratia award for pensions in service was granted. If these two items were excluded the underlying profit before tax was £8.1m compared to £7.0m in 2022. Cost of sales, excluding the rebate of past energy costs, at £46.5m was £3.6m higher than last year with the rise in wholesale energy costs, and increased levels of importation from the local Energy from Waste plant, which was out of service for much of the comparative period last year, being the main factors. Operating expenses at £16.1m were £1.7m higher than last year due mainly to higher non-cash pension costs and general inflationary pressures. The taxation charge in the period of £2.2m was £0.7m higher than last year due mainly to the unexpected rebate from RTE. Earnings per share, at 26.23p, were above the 17.78p in 2022 due to higher profits. Net cash on the balance sheet, which comprises borrowings less cash and cash equivalents, at 31 March 2023, was £16.8m compared with £13.1m at this time last year (and £17.4m of net cash at our last year end on 30 September 2022).

Energy performance

Unit sales of electricity fell marginally by 1% from 359.4m to 355.7m kWh, compared with the same period last year. Revenue in our Energy business at £54.8m was £4.0m higher than in 2022 with the year-on-year increase being largely attributable to a 5% tariff rise in both July 2022 and January 2023. Operating profit, excluding the £3.6m RTE rebate, and the non-cash cost of £1.4m for an ex-gratia award for pensions in service, at £6.5m was £0.6m higher than the corresponding period last year due to the increased revenue offset by increased wholesale import prices, higher volumes of electricity received from the local Energy from Waste plant, recruitment of new employees, and other inflationary pressures. 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 0.4% (just over 1m units) of electricity was generated in Jersey using our traditional oil-fired plant (which is run during testing regimes) and our solar generation. These importation and generation levels were materially consistent with the same period last year, albeit the imports from the Energy from Waste plant were back to a more historical levels, as last year maintenance work was performed for an extended time in that period.

Non-Energy performance

Year-on-year revenue in our Powerhouse retail business, increased by 5% to £10.0m (2022: £9.5m) but profits were maintained at around the same level at £0.7m. Profit from our Property portfolio at £0.8m was £0.1m higher than in 2022 due to a combination of higher rental and slightly lower maintenance costs. JEBS, our building services unit, saw external revenue fall marginally to £1.7m, with profitability at a breakeven level. Our remaining business units produced profits of £0.2m compared to £0.3m in 2022.

Liquidity and cashflow

A net cash outflow of £0.6m was experienced in the period (2022: £0.0m) post the continued investment in infrastructure of £4.5m (2022: £6.0m). The net cash figure of £13.1m at 31 March 2022 moved to a net cash figure of £16.8m at 31 March 2023 (£17.4m at 30 September 2022). Net cash consists of cash and cash equivalents of £46.8m offset by £30.0m of long-term debt.

Pension scheme

The defined benefit pension scheme surplus (without deduction of deferred tax) on our balance sheet at 31 March 2023 stood at £30.1m, compared with a surplus of £26.4m at 30 September 2022 (and a surplus of £22.0m at 31 March 2022). Since the last financial year end, scheme liabilities have increased by approximately £5m to £91m. This rise was primarily due to a decrease of the discount rate assumptions from 5.2% at the last financial year end to 4.7% at 31 March 2023 associated with a fall in UK AA corporate bond yields in the interim. Assets in the Scheme rose by around £8m to £121m. Unlike most UK schemes, the Jersey Electricity pension scheme is not funded to pay mandatory annual rises on retirement. The Pension Scheme Trustees asked the Company to consider the granting of a 3% rise to pensions in service in light of the level of the surplus and the impact of current high levels of inflation on the pensioner community.  This was agreed by the Board in March. The capital cost of this award was £1.4m and the cash will be paid by the Scheme, rather than the Company, but generated a £1.4m charge against our Income Statement. This is reflected in the half-year surplus figure of £30.1m. The defined benefit scheme has been closed to new members since 2013 and the next triennial valuation of the scheme, as at 31 December 2024, will be carried out in 2025.

Dividends

Your Board proposes to pay an interim net dividend for 2023 of 8.0p (2022: 7.60p). As stated in previous years, we aim to deliver sustained real growth each year over the medium-term. The final dividend for 2022 of 10.80p, 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 December 2022, have not materially altered in the interim period. As highlighted earlier in this report, there is continued volatility in energy markets. This continues to be closely monitored by the Board as it adds unpredictability into the price we will pay for any unhedged elements of our future electricity costs. 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 looks at 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

17 May 2023

1               Accounting policies

           Basis of preparation

       The interim accounts for the six months ended 31 March 2023 have been prepared on the basis of the accounting policies set out in the 30 September 2022 annual report and accounts using accounting policies consistent with International Financial Reporting Standards (IFRS) as adopted by the EU and in accordance with IAS 34 'Interim Financial Reporting'. There have been no changes 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 2023.

       Jersey Electricity plc has considerable financial resources and, consequently, the directors believe that the Group is well placed to manage its business risks successfully despite the current uncertain economic outlook. The directors have a reasonable expectation that the Group 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 annual financial statements.

2              Revenue and profit

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

*Other segment includes Jersey Energy, Jendev (both divisions) and Jersey Deep Freeze Limited, the Group's sole subsidiary.

Materially, all the Groups operations are conducted within the Channel Islands. All transfers between divisions are on an arm's length basis.

Revenues disclosed by the business segments above are recognised both on a point in time and over time basis. The treatment of revenue recognition in accordance with IFRS 15 is detailed in the 30 September 2022 annual report.

3 Taxation

For the period ended 31 March 2023 and subsequent periods, the Company is taxable at the rate applicable to utility companies in Jersey of 20%. (2022: 20%).

4 Dividends paid and proposed

The distribution to equity holders in respect of the final dividend for 2022 of £3,309,120 (10.20p net of tax per share) was paid on 23 March 2023.

The Directors have declared an interim dividend of 8.00p per share, net of tax (2022: 7.60p) for the six months ended 31 March 2023 to shareholders on the register at the close of business on 2 June 2023. This dividend was approved by the Board on 17 May 2023 and has not been included as a liability at 31 March 2023.

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 also consideration has been given as to whether there have been any other events that would significantly affect the pension liabilities.

      The Pension Scheme Trustees asked the Company to consider the granting of a 3% rise to pensions in service in light of the level of the surplus and the impact of current high levels of inflation on the pensioner community.  This was approved by the Board in March 2023 and the capital cost of this award was £1.4m. The cash will be paid by the Scheme, rather than the Company, but generated a £1.4m charge against our Income Statement.

6 Financial Instruments

            The Group held the following derivative contracts, classified as level 2 financial instruments at 31 March 2023.

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 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 based on 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

       The Government of Jersey (the "Government") treats the Company as a strategic investment. Whilst it holds the majority voting rights in the Company, the Government does not view the Company as being under its control and as such, it is not consolidated within the Government accounts. The Government is understood by the Directors to have significant influence but not control of the Company.

      The Company has elected to take advantage of the disclosure exemptions available in IAS 24, paragraphs 25 and 26.  All transactions are undertaken on an arms-length basis in the ordinary course of business.