Jersey Electricity — Update 21 February 2016

Jersey Electricity (LSE: JEL)

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Research: Industrials

Jersey Electricity — Update 21 February 2016

Jersey Electricity

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Industrials

Jersey Electricity

Continued progress

Annual outlook

Utilities

22 February 2016

Price

472.5p

Market cap

£145m

Net debt (£m) at 30 September 2015

17.7

Shares in issue
*”A” shares and ordinary shares

30.6m*

Free float
*Of listed shares

99.6%*

Code

JEL

Primary exchange

LSE

Secondary exchange

N/A

Share price performance

%

1m

3m

12m

Abs

(0.5)

9.9

24.3

Rel (local)

(1.5)

16.9

41.4

52-week high/low

485.0p

380.0p

Business description

Jersey Electricity is the monopoly supplier of electricity to the island of Jersey. It also operates businesses in retail, property and business services on the island.

Next event

AGM

3 March 2016

Analysts

Graeme Moyse

+44 (0)20 3077 5700

Roger Johnston

+44 (0)20 3077 5722

Jersey Electricity is a research client of Edison Investment Research Limited

FY15 results demonstrated that significant investment, particularly in interconnectors, has provided Jersey Electricity (JEL) with a solid platform from which to deliver returns to shareholders and, at the same time, offer its customers attractive prices, improved security of supply and low-carbon electricity. We now expect a period of stable returns on an asset base that should continue to grow as JEL invests.

Year end

Revenue (£m)

PBT*
(£m)

EPS*
(p)

DPS*
(p)

P/E
(x)

Yield
(%)

09/14

98.4

10.0

27.7

12.2

17.1

2.6

09/15

100.5

12.4

32.5

12.8

14.5

2.7

09/16e

101.7

12.1

31.5

13.4

15.0

2.8

09/17e

103.4

13.3

34.9

14.4

13.5

3.0

Note: *PBT and EPS are normalised, excluding intangible amortisation, exceptional items and share-based payments. DPS shown is (net) Edison definition (interim and final). JEL defines DPS as the amount paid during the year.

FY15 improving profitability

JEL’s FY15 results demonstrated a rise in profitability versus FY14 (operating profits +39%), which in turn had marked an improvement on the trough years of FY12 and FY13. Driving the improved performance was a significant increase in the core Energy business’s profitability, where returns were boosted by a fall in electricity purchase costs, due to a rise in the use of cheaper imported electricity and the additional return earned on the enlarged asset base.

Higher profits the new normal

Significant investment in new interconnectors, particularly in FY13 and FY14, bore fruit in FY15 and will continue to benefit the business in the future. This historic investment, taken together with planned expenditure on the N1 interconnector, will allow JEL, via its enhanced import capacity, to minimise electricity purchase costs and make a contribution, along with its hedging programme, to minimising their volatility. Investment in additional interconnector capacity has already helped underpin JEL’s attempts to reduce interruptions to supply and deliver low-carbon electricity to its customers. Crucially, investment will also lead to a rising asset base and, we believe, a period of stable returns and additional profit for shareholders.

Valuation: Rising valuation

We use a SOTP-based approach and comparable company analysis to value JEL. Our SOTP analysis, which does not include any discount to reflect liquidly/minority shareholder discount, indicates a valuation of 527p. Peer group analysis produces a valuation of 585p (based on an average of FY16e and FY17e multiples). This approach does not include any benefit from favourable tax treatment of the dividend available to Channel Island-based shareholders. Despite the significant rise in JEL’s share price over the last year, both approaches produce indicative valuations above the current level.

Investment summary

Company description: Monopoly energy supplier to Jersey

Jersey Electricity (JEL) is the monopoly supplier of electricity to the island of Jersey. The electricity business is responsible for generating more than 80% of group revenues and operating profit. In addition to its core electricity assets, JEL operates a range of other businesses including property rental, retailing and business services. Its largest shareholder is the government of Jersey, with 62% of the issued share capital and 82% of the voting rights.

Valuation: Asset base drives value

We use a SOTP-based approach and comparable company analysis to value JEL. Our SOTP analysis, which does not include any discount to reflect liquidly/minority shareholder discount, indicates a valuation of 527p. Peer group analysis produces a valuation of 585p based on an average of FY16e and FY17e multiples.

Financials: Financial stability

Returns: our forecasts are consistent with the assumption that JEL is successful in generating returns in line with its self-imposed regulatory target of between 6% and 7% on a rolling five-year basis.

Balance sheet and capex: we expect a rise in capital expenditure in FY16 to c £35m, with the majority related to the construction of the N1 interconnector. In FY17 we forecast capex will reduce to c £14m. As a result of the expenditure on N1 in FY16, we forecast that gearing will rise to 24% at year end, falling slightly in FY17 to 21%.

Dividends: JEL pursues a dividend policy of “medium-term real increases”. We assume increases of c 5% for FY16 and FY17, leaving dividend cover at 2.4x.

Sensitivities: Regulation and importation are the principal risks

Regulation: JEL is a self-regulated utility with a target rate of return of 6-7%. Changes to the regulatory structure could pose a threat to profitability.

Interconnectivity: JEL imports more than 90% of its electricity from France via two subsea interconnectors. Failure of these interconnectors (as occurred in 2012) would force JEL to rely on indigenous generation, the cost of which is highly influenced by oil prices. There is a risk that any extra cost of generation may not be recoverable via the tariff setting process, leading to sub-target returns.

Minority shareholding: the States of Jersey retains 86% of the voting rights. All other shareholders bear the risk associated with a minority position.

Foreign exchange: the price at which JEL sells electricity is set in sterling, but its purchase costs, for the large part, are denominated in euros, creating a foreign exchange risk. However, this FX risk is minimised, as by the time JEL announces tariffs for the following year it will usually have purchased over 90% of the electricity for that period, allowing it to control risks associated with purchase costs.

Micro generation: in the event that subsidies for micro generation are introduced, or costs for generation (eg solar) and storage, over time, become competitive with grid-supplied electricity, this could pose a threat to supply volumes. Pathway 2050: An Energy Plan for Jersey (States of Jersey 2014) envisages that 9,527 properties could have installed micro-renewables by 2050. There are currently c 44,700 households on Jersey, of which c 19,000 use hydrocarbons for space and water heating.

Company description: Integrated supplier

Jersey Electricity’s (JEL) core business remains the supply of electricity to the island. The business is “self-regulated” and vertically integrated across the electricity industry value chain, encompassing generation, transmission, distribution and supply. In generation JEL operates two power plants (Queens Road, 46MW, and La Collette, 121MW) during winter demand peaks and when the interconnectors with France are unavailable. The commissioning of a new interconnector in September 2014 (Normandie 3) has allowed JEL to increase the proportion of electricity it imports from France back to levels (c 95%) previously seen before the interconnector failure in 2012. JEL also manages the island distribution network of c 1,500km (>90% underground) and at the end of 2015 had 49,320 supply customers. In 2015 it sold 627m kWh of electricity at an average price of 12.8p/kWh. Beyond the core electricity operations JEL operates a number of other businesses including Building Services, retail, property, software development for utilities (Jendev) and an environmental and building services company (Jersey Energy). The Energy business remains the largest contributor to group profits (Exhibit 1).

Exhibit 1: Jersey Electricity operating profit by division (£000s)

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

Energy

4,277

4,493

6,277

6,679

7,742

7,678

4,240

3,229

7,952

11,514

Building Services

241

305

274

176

240

220

300

104

(44)

(58)

Retail

383

479

450

292

465

476

64

188

(86)

334

Property

442

954

953

1,263

1,858

1,652

1,609

1,609

1,415

1,562

Other

(49)

437

540

404

1,539

840

708

623

659

592

Total

5,294

6,668

8,494

8,814

11,844

10,866

6,921

5,753

9,896

13,944

Source: Jersey Electricity, Edison Investment Research. Note: Operating profit is shown before exceptional items and profit from property revaluations.

Focus on the core

JEL is seeking to grow its share of the Jersey energy market by maintaining electricity price stability and affordability and by supplying its customers with low-carbon electricity. In FY15, in line with this strategy, the carbon intensity of the electricity distributed by JEL fell to 33g CO2e/kWh, an all-time low, and c 10x lower than the average UK level. Customer tariffs also remained stable and at a discount to EU levels. In addition, JEL is focused on its position in energy services, enhancing the security and reliability of supply via investment in its energy infrastructure and strengthening its relationship with customers. A co-operative agreement with Guernsey Electricity, as in the case of the Normandie 3 interconnector, form part of its operational strategy, but JEL currently has no ambitions to extend its corporate reach beyond the Channel Islands.

States of Jersey remains the dominant shareholder

JEL operates with an unusual shareholding structure, with four classes of shares: 11.64m ordinary “A” shares, 19m ordinary shares and two tranches of preference shares. Each class of shares carries different voting rights, but by virtue of its holding of the entire class of ordinary shares, the States of Jersey retains 86% of the voting rights. In 2015 the States of Jersey received £7.3m from JEL in the form of dividends (£2.4m), goods and services tax (£4.1m) and social security (£0.8m). No corporation tax was paid in either FY14 or FY15 due to the capital allowances associated with its capex programme.


Electricity business positioning improved

JEL posted a further improvement in profitability in FY15 due to lower electricity supply costs and additional returns on newly commissioned assets. Increased interconnector capacity facilitated the use of cheaper imported electricity, allowing returns to rise, while holding tariffs at a discount to European levels and reducing the carbon intensity of the business. Thanks to the substantial investment programme of recent years, JEL is now well positioned to continue to earn normalised returns for shareholders after the trough years of FY12 and FY13.

Strong performance in FY15

The FY15 results demonstrated a further rise in profitability, with operating profits +39% versus FY14 (before £0.8m of exceptional items). The improvement was, in large part, due to a rise in operating profitability in the core Energy business (FY15 £11.5 m vs FY14 £8.0m). Boosting core profitability was a fall in electricity purchase costs (-£3.9m), thanks to an increased use of cheaper imported electricity (94% in FY15 vs 80% in FY14) and the additional return earned on the enlarged asset base. Greater use of the interconnectors also allowed JEL to reduce the carbon intensity of the power it distributes to an all-time low of 33g CO2e/kWh. Although the Building Services business continued to record small losses (<£0.1m), due to competitive pressures, the retail business reaped the benefit of the previous year’s restructuring, converting an operating loss of £0.1m in FY14 into an operating profit of £0.3m in FY15. Thanks mainly to the benefit of higher occupancy levels, the property business recorded a further rise in profitability from £1.4m to £1.6m. Capex, which had been boosted by expenditure on the N3 interconnector, fell significantly (49.1%) versus FY14. Lower capex, combined with improved profitability, allowed for improved cash flow, with net debt falling from £20.2m to £17.5m. JEL remains modestly geared, with net debt/equity at c 12%.

Exhibit 2: JEL evolution of key operating metrics – 2015 versus 2014

 

 

2014

2015

%

Turnover

£m

98.4

100.5

+2.1%

Operating profit (before exceptional items and intangible amortisation)

£m

10.0

13.9

+39.0%

PBT

£m

6.5

13.2

+103.1%

EPS (After exceptional items)

p

16.1

35.0

+117.4%

DPS

p

12.20

12.85

+5.3%

Net (debt)/cash (incl prefs & debt)

£m

(20.2)

(17.5)

-13.4%

Capex

£m

(33.1)

(16.8)

-49.1%

Source: Jersey Electricity

Jersey energy market – market trends

Demand growth over the last 15 years has been modest (CAGR of c 0.8% over the period 2000-15). A secular move to energy efficiency (more efficient appliances/lighting) and JEL’s strategy of encouraging the use of high-efficiency, lower-cost off-peak heating has helped restrain overall demand growth and moderate the growth in peak demand. The 2015 maximum demand figure of 148MW shows that there has been little growth in peak demand since 2005 (2005-15 CAGR 0.4%). JEL’s policy of seeking to flatten the load curve has helped to limit infrastructure costs and keep prices to customers lower than would otherwise have been the case. We believe the outlook for demand growth is likely to remain modest and, with the scheduled commissioning of N1 in Q117, we expect JEL to be able to satisfy incremental demand via imports from France.

Jersey energy market – regulation

Electricity Law and Competition Law exist to govern corporate behaviour, but JEL continues to operate as a self-regulated business. JEL aims to earn a 6-7% return (pre-tax) on its energy assets (net of customer contributions and working capital adjustments) on a rolling five-year basis. In extreme circumstances, such as with the interconnector failures of 2012, unexpected costs may arise that cannot be recovered through the tariff setting process, leading to sub-target returns for the year. Equally, in some years (such as in FY15), returns may rise above the upper end of the targeted range.

Exhibit 3: JEL – total electricity supplied and evolution of peak demand

Source: Jersey Electricity, Edison Investment Research

JEL also aims to ensure that tariffs remain within ±10% of the EU-15 average once all taxes are included. Currently, JEL’s general domestic tariff is 14.5p/kWh including the goods and services tax (GST). At an exchange rate of €0.72/£, JEL’s tariffs translate to a price of €0.201/kWh. Eurostat data show that the average EU-15 domestic tariff in H115 was €0.215/kWh, leaving JEL’s prices at a c 6% discount to the EU average. In broad terms, this accords with JEL’s own study, which shows prices at a 5% discount.

Exhibit 4: EU-15 electricity prices for domestic consumers H115 (€ per kilowatt hour)

Source: Eurostat

There appears to be little appetite to change the regulatory framework. In December 2012 CICRA published a review of the electricity market in Jersey, which found that JEL earned a return on its assets comparable to the UK utilities and offered a reasonable level of service to its customers. The report also found that the risk of inefficiencies appeared low and concluded that it was not minded to recommend modification to the existing regime. In addition, a recent review of the Jersey regulatory and competition framework prepared by Oxera for the Government of Jersey concluded that “in some parts of the economy the role of the regulator is essentially taken on by the government, and, in many cases, the regulatory cost is (or at least appears to be) relatively low. Although a full analysis of the approach of government as ‘regulator’ is outside the scope of this review, it is noticeable that one element of this approach appears to be a much simpler regulatory system”. In our view, sub-peer group tariffs, high levels of system reliability and a simple low-cost system of regulation reduce the likelihood of regulatory change.

JEL: Strategy

JEL’s strategy is focused on continuing to grow its share of the Jersey energy market by replacing other sources of energy. In pursuit of its strategic objectives, JEL seeks to ensure high levels of network reliability (minimising customer minutes lost) and affordability of supply for its customers by sourcing cheaper off-island electricity (no tariff rises in 2015), and, by building a relationship with the customer, to embrace other aspects of energy provision (maintenance/installation) via its Building Services division. In addition, the import agreements with EdF have enabled JEL to reduce the carbon intensity of the electricity it supplies, making a valuable contribution to the States of Jersey’s long-term carbon reduction targets and allowing it to offer substantially cleaner energy than other on-island sources (heating oil 265g CO2e/kWh, LPG 234g CO2e/kWh). JEL’s strategy appears to be bearing fruit, with the third successive year of improved customer service ratings according to its annual survey. Co-operative agreements with Guernsey Electricity also form part of its strategy, as for example in the case of the N3 interconnector, but JEL currently has no ambitions to extend its reach beyond the Channel Islands. In the event that renewable investment grows in importance on the island, JEL will seek to provide the required infrastructure to facilitate the proposed investment rather than invest directly itself, as it believes the risks associated with large offshore investment are too great for a utility of its scale.

JEL: Asset base and capex

JEL’s gross asset base of the energy business of c £191m has been growing at a CAGR of c 7% over the last 10 years. Gross energy assets differ from JEL’s regulatory asset base, which deducts customer contributions and working capital items. Since 2005 depreciation has averaged c £7.1m pa compared to capital expenditure of c £14.8m. For the early part of the period 2005-10, depreciation and capex were more closely aligned (capex £8.6m/depreciation £6.6m), although post-2012 capex rose sharply, in large part due to heavy expenditure on a new interconnector with France (N3 total project cost £70m), but also reflecting the repair of the connection with Guernsey, on-island network refurbishment and the installation of two 11MW diesel gensets.

Exhibit 5: JEL – energy business capex, depreciation and gross asset base (2005-15)

Source: Jersey Electricity, Edison Investment Research

Future capex is likely to be focused on two areas: the installation of additional interconnector capacity with France (N1, £40m – 30% payable by Guernsey Electricity) and the construction of a new primary substation (£17m) to reinforce the on-island network. The N1 interconnector will replace the original EdF1 (55MW) interconnector, which failed in 2012. The old cable (EdF1) is scheduled for removal in the spring, with the surface lay of the new cable anticipated for summer 2016, and commissioning possible in Q117. JEL has also acquired a site from the Parish of St Helier for a new 90kV primary substation (granted planning permission in May 2014). Groundworks have started and commissioning is scheduled for 2018. We also expect JEL to continue to roll out its smart metering programme. We expect capex to return to relatively high levels in FY16 due to forecast expenditure in N1 and the substation. In FY17 we expect expenditure to decline to c £16m. Beyond 2017 we expect that capex will return to normalised levels of £10-15m pa.

Generation

The main plank of Jersey Electricity’s strategy for ensuring continuity of power supply has been to focus on maintaining and expanding the interconnectors with France, particularly after the failures that occurred in the summer of 2012. We expect this strategy to enable Jersey to import c 95% of its electricity in the future (similar to the level achieved in FY15). However, to meet its security of supply standards, JEL maintains its on-island generation capacity. Although some uneconomic and inflexible capacity at La Collette was decommissioned during the year, during 2016 JEL is installing a ‘black start’ diesel generator (5.5MW) at La Collette and £12m was spent in 2012 on a project to install two 11MW diesel gensets (now four in total). The remaining capacity at La Collette, taken together with the fast-start capacity at Queens Road and the States of Jersey’s EfW plant, mean that on-island capacity exceeds the island’s all-time peak demand of 161MW. Given the additional interconnector capacity scheduled to be commissioned in 2016/17, we do not expect significant expenditure on generating capacity in the near term.

Exhibit 6: Jersey Electricity – percentage of imported electricity 2007-15

2006/07

2007/08

2008/09

2009/10

2010/11

2011/12

2012/13

2013/14

2014/15

% of units imported

88.7

96.3

92.3

93.5

95.6

92.1

75.4

80.2

94.0

Source: Jersey Electricity

Interconnection

Interconnectors remain critical to the profitability and carbon intensity of JEL’s business, but no less important in ensuring the reliability and affordability of electricity supply. As part of its infrastructure plan, JEL aims to deliver three submarine cables between Jersey and France. The significance of the interconnectors was underlined by the impact of the N3 cable on the FY15 results. The new 32km Normandie 3 (N3) interconnector (100MW) first began importing power in September 2014, entering service ahead of schedule and below budget at around £60m (project total shared with Guernsey Electricity). The new interconnector follows a different route and is connected to a different part of the French network to the existing N2 interconnector, enhancing security of supply beyond the headline additional capacity. In February 2015 JEL also supported Guernsey Electricity in a pre-emptive repair to the Jersey-Guernsey link (GJI).

In the summer of 2015, JEL signed a contract for a third power cable link (100MW) with France, known as Normandie 1 (N1). N1 is designed as a direct replacement for EdF1 (55MW, 1984), which failed in 2012. N1 is also a Channel Islands Electricity Grid (CIEG) project and is expected to cost £40m in total. The project, on a £/MW basis, is significantly cheaper than N3, helped by the fact that N1 will follow the same route as EdF1, minimising the need for additional infrastructure. In addition, the cable will be laid on the surface of the seabed (rather than buried like N3), reducing installation time. It is expected that the existing cable will be removed in the spring of 2016, with new cable laying occurring in the summer. JEL anticipates full commissioning of N1 in Q117.

Networks

JEL operates a transmission (90kV) and distribution network (>33kV) of c 1,600km (90% underground). The network is well maintained and enjoys high levels of availability and low levels of customer minutes lost (7 minutes in FY15 c 10x better than the UK average), an important service indicator for JEL. Independent research into energy security on islands concluded that, of the 25 jurisdictions studied, JEL was placed in the top four for security of supply. 2012 and 2014 were exceptions to the high level of network reliability, although a large proportion of the total minutes lost can be attributed to problems with interconnectors. In 2012 the failure of EdF1 and EdF2 dominated, while in 2014 (January) a lightning strike in France severed supplies to the sole operational interconnector and accounted for 97 of the 110 minutes lost. JEL continues to invest in strengthening the resilience of the distribution network (around 34km of new cable and 6MVA of new transformer capacity in FY15) and will invest in a new primary substation in St Helier over the next two to three years.

Exhibit 7: JEL – Customer minutes lost (2007-15)

2007

2008

2009

2010

2011

2012

2013

2014

2015

Customer minutes lost

59

5

9

10

45

293

13

110

7

Source: Jersey Electricity, Edison Investment Research

Renewables

Jersey has a target of reducing carbon emissions by 80% by 2050 (compared to 1990). Jersey has made progress in reducing CO2e emissions, in large part due to JEL’s supply agreement with EdF, which guarantees power from low carbon sources (nuclear 65%, hydro 35%). In FY15 JEL achieved its lowest ever annual carbon intensity – 33g CO2e/kWh – more than 10 times cleaner than the UK electricity system. While carbon intensity has been reduced, little has been done to encourage investment in renewable energy despite significant indigenous renewable resources (wind/tidal/solar). Although the States of Jersey Energy Plan’s (2012) key objective was to “introduce an Energy Policy to move towards a low-carbon economy”, no subsidy or incentive arrangement was established. Given the already low-carbon intensity of electricity supplied on the island, developing a case for a programme of renewable subsidy remains difficult and, as a consequence, investment in on-island renewable generation has been negligible. In the event that either suitable incentive arrangements are provided to encourage large-scale renewable investment, or renewable generation costs become competitive (more difficult at current low commodity prices), JEL would seek to participate through the provision of network services rather than via direct investment in renewable infrastructure. In short, JEL believes it could play an important facilitation role in the introduction of renewable energy to Jersey and thereby develop an opportunity to create value.

Other businesses

Retail: due to the significant restructuring programme (reduced retail floor space, reduction in staff numbers and revised terms and conditions, completed in February 2014) and the enhanced online platform (powerhouse.je), in FY15 JEL achieved a return to profitability in retailing (FY15 £0.3m vs
-£0.1m FY14). However, the market is said to remain challenging, and in our view it is unrealistic to expect a further significant rise in profitability.

Property: the property business generates income from both the residential and commercial market. Residential income is generated from legacy properties, originally built to house staff, while commercial income comes from developments adjacent to JEL’s offices on the Powerhouse Retail Park. Over the last 10 years, the profitability of this business has increased by c 2.5% annually and we expect a similar rate of growth going forward (facilitated by rent reviews).

Building Services: the Building Services division (JEBS) includes the provision of services in the following areas: public lighting, heating installation, air conditioning and maintenance work, and is designed to strengthen JEL’s relationship with the customer “beyond the meter”, as well as helping to build load for the core electricity business. Competitive pressure on margins and the limited scale of the market suggest that JEBS will find it challenging to make a positive contribution to group profits.

Other: other businesses contributed c £0.6m to group profits in FY15 (£0.7m in FY14). Jendev focuses on software development for utilities and generated turnover in excess of £1m in FY15. JEL envisages a period of sustainable revenue for the business and Jendev is currently exploring commercial opportunities with partners. Jersey Energy provides environmental and building services expertise for developers and architects and continues to perform satisfactorily, achieving revenue of £0.5m in FY15, with profits said to be “ahead of expectations”.

Management and shareholding structure

From 17 December 2015, Alan Bryce joined the board as a non-executive director. Mr Bryce is also a non-executive director of Scottish Water and chair of Viking Energy Shetland. He will replace Clive Chaplin, who will stand down at the next AGM. Other board positions remain unchanged.

There have been no changes to the shareholding structure. JEL retains 30.6m ordinary shares in issue (nominal value 5p) and 235k preference shares. However, there are two classes of ordinary shares, with only the “A” shares listed on the London Stock Exchange. The 11.6m “A” shares carry one vote for every 100 shares held. The other ordinary shares (19m) are held directly by the States of Jersey and entitle it to five votes for every 100 shares held. In addition to the ordinary shares, there are two classes of preference shares, both with a par value of £1, but with different voting entitlements. The 0.1m 5% cumulative participating preference shares carry 20 votes per 100 shares, while the 0.135m 3.5% cumulative non-participating preference shares carry 10 votes for every 100 shares held. The States of Jersey continues to control 86% of all the voting rights of JEL.

Exhibit 8: JEL’s shareholding structure and voting rights

Class of share

Shares in issue

Votes per 100 shares

Total votes per class

% of votes

Ordinary shares

19,000,000

5

950,000

86.4%

Ordinary “A” shares

11,640,000

1

116,400

10.6%

Preference shares 5%

100,000

20

20,000

1.8%

Preference shares 3.5%

134,760

10

13,476

1.2%

Total

30,874,760

 

1,099,876

100.0%

Source: Jersey Electricity

Sensitivities

Regulation: failure to earn the targeted pre-tax return would pose a threat to profitability and valuation. The energy business has gross assets of c £191m but regulatory assets (after deduction of customer contributions and working capital) of c £150m. A 0.5% variation in the return would reduce/increase profitability by c £750k.

Interconnector failure: interconnector failure with France poses a threat to security of supply and enforces reliance on indigenous generation – the cost of which is dictated by oil prices. Higher generation costs may not necessarily be recoverable through the tariff setting process.

FX: the largest item of expenditure for JEL is the cost of purchasing electricity. It incurs a significant proportion of its costs in euros, while its principal source of revenue is denominated in sterling. However, the potential effect of this currency mismatch is mitigated by the fact that by the time JEL announces its tariffs for the following year (setting a significant proportion of its revenue base), it will already have contracted for over 90% of its electricity needs.

Minority: the States of Jersey owns the majority of the shares and retains the majority of the voting rights. Other shareholders bear the risk associated with the position of a minority shareholder.

Micro generation: there are no subsidies available for the installation of micro generation technologies currently available on Jersey, so in the short term JEL’s supply volumes should remain robust. In the event that subsidies are introduced, or costs for generation (eg solar) and storage, over time, become competitive with grid supplied electricity, then this could pose a threat to supply volumes. Pathway 2050: An Energy Plan for Jersey (States of Jersey 2014) envisages that by 2050 9,527 properties could have installed micro-renewables. There are currently c 44,700 households on Jersey, of which c 19,000 use hydrocarbons currently for space and water heating.

Valuation

Our SOTP analysis, which does not include any discount to reflect liquidly/minority shareholder discount, indicates a valuation of 527p. Peer group analysis produces a valuation of 585p based on an average of FY16e and FY17e multiples. This approach does not reflect the value of advantageous tax treatment that may be available to Channel Island-based shareholders.

Sum-of-the-parts

We continue to believe that a sum-of-the parts (SOTP) serves as a useful guide to valuation. We value the electricity business with reference to its asset base and assume JEL’s cost of capital is equal to its return. As previously, we include the property business at balance sheet value. The other businesses have been valued on a P/E basis, applying industry-specific or market multiples to determine a valuation. The result of this approach produces a SOTP valuation of 527p.

Exhibit 9: Jersey Electricity SOTP

Year end September

£m

p/share

Comments

Electricity business assets

190.1

620

2015 Electricity Business net assets

Retail

2.7

9

2016e operating profit taxed on a multiple of 10x

Property

20.5

67

At b/s value

Building Services

1.8

6

2016e operating profit taxed on a multiple of 15x

Other businesses

5.9

19

2016e operating profit taxed on a multiple of 10x

Total asset value

221.0

721

 

Net (debt)/cash and investments

(37.4)

(122)

2016e b/s valuation

Other Liabilities

(22.0)

(72)

2016e b/s valuation

Total other adjustments

(59.4)

(194)

 

Total equity value

162

527

 

Source: Edison Investment Research

Comparable company valuation analysis

Comparable companies trade on average P/E multiples of 17.6x (FY16e) and 17.7x (FY17e). The average EV/EBITDA multiples for the peer group are 11.6x (FY16e) and 11.5x (FY17e), while dividend yields are 4.4% (FY16e) and 4.6% (FY17e). Placing JEL on these multiples yields an average valuation of 585p.

Exhibit 10: Comparative valuations

Currency

Price

P/E (x)

EV/EBITDA (x)

Yield (%)

FY16e

FY17e

FY16e

FY17e

FY16e

FY17e

National Grid

p

963

15.9

15.7

10.7

10.5

4.5

4.6

Pennon

p

834

22.4

20.9

13.6

12.9

4.0

4.3

Severn Trent

p

2137

21.7

22.3

11.6

11.5

3.8

3.8

United Utilities

p

930

20.0

20.3

13.0

12.5

4.1

4.2

Terna

4.7

16.2

17.4

11.1

11.4

4.3

4.4

Snam Rete Gas

4.9

14.6

15.7

10.9

11.3

5.1

5.1

Enagas

25.4

14.4

14.3

11.5

11.5

5.5

5.7

Red Electrica

€ 

71.5

15.7

14.6

10.7

10.4

4.5

4.8

Average UK and European regulated utilities

 

17.6

17.7

11.6

11.5

4.4

4.6

Implied value of Jersey Electricity (p)

 

 

555

615

851

867

308

312

Source: Edison Investment Research, Bloomberg. Note: Prices as at 19 February 2016.


Financials

Returns: our forecasts are based on an assumption that JEL is successful in generating returns in line with its self-imposed regulatory target (6-7%) on a rolling five-year basis.

Tax: we apply a tax rate of c 20% going forward, in line with FY15.

Balance sheet and capex: we expect a rise in capital expenditure in FY16 to c £35m, with the majority related to the construction of the N1 interconnector. In FY17 we forecast capex will reduce to c £14m. As a result of the capex programme, we forecast that gearing will rise to 24% at year-end FY16, falling slightly in FY17 to 21%.

Dividends: JEL pursues a dividend policy of “medium-term real increases”. We assume increases of c 5% for FY16 and FY17, leaving dividend cover at 2.4x.

Exhibit 11: Financial summary

£000s

2014

2015

2016e

2017e

Year-end 30 September

IFRS

IFRS

IFRS

IFRS

PROFIT & LOSS

Revenue

 

 

98,443

100,479

101,729

103,438

Cost of Sales

(68,468)

(64,604)

(64,284)

(64,523)

Gross Profit

29,975

35,875

37,445

38,915

EBITDA

 

 

18,303

23,825

23,931

26,296

Operating Profit (before GW and except.)

10,055

13,914

14,024

15,704

Intangible Amortisation

(14)

(15)

(21)

(465)

Exceptionals

(3,548)

789

0

0

Other

0

0

0

0

Operating Profit

6,493

14,688

14,003

15,239

Net Interest

(37)

(1,519)

(1,937)

(2,425)

Profit Before Tax (norm)

 

 

10,018

12,395

12,087

13,279

Profit Before Tax (FRS 3)

 

 

6,456

13,169

12,067

12,814

Tax

(1,478)

(2,397)

(2,413)

(2,563)

Profit After Tax (norm)

8,540

9,998

9,674

10,716

Profit After Tax (FRS 3)

4,978

10,772

9,653

10,251

Average Number of Shares Outstanding (m)

30.6

30.6

30.6

30.6

EPS – normalised (p)

 

 

27.7

32.5

31.5

34.9

EPS – FRS 3 (p)

 

 

16.1

35.0

31.4

33.4

Dividend per share (p)

12.2

12.8

13.4

14.4

Gross Margin (%)

30.4

35.7

36.8

37.6

EBITDA Margin (%)

18.6

23.7

23.5

25.4

Operating Margin (before GW and except.) (%)

10.2

13.8

13.8

15.2

BALANCE SHEET

Fixed Assets

 

 

153,446

175,582

206,214

209,268

Intangible Assets

20

227

236

(199)

Tangible Assets

184,846

187,845

212,937

215,845

Investments

20,365

21,348

21,196

21,196

Current Assets

 

 

33,584

34,713

35,075

39,535

Stocks

7,334

6,239

6,208

6,231

Debtors

16,474

14,777

14,838

15,087

Cash

9,776

12,503

12,834

17,022

Current Liabilities

 

 

(28,921)

(24,315)

(24,228)

(24,293)

Creditors

(28,921)

(23,911)

(23,824)

(23,889)

Short term borrowings

0

0

0

0

Long Term Liabilities

 

 

(64,738)

(71,939)

(91,951)

(92,989)

Long term borrowings

(30,235)

(30,235)

(50,235)

(50,235)

Other long term liabilities

(34,503)

(41,704)

(41,716)

(42,754)

Net Assets

 

 

146,139

147,727

153,266

159,095

CASH FLOW

Operating Cash Flow

 

 

20,168

24,939

23,752

26,948

Net Interest

(28)

(1,519)

(1,937)

(2,425)

Tax

0

0

(2,413)

(2,563)

Capex

(33,054)

(16,840)

(35,030)

(13,530)

Acquisitions/disposals

1,595

3

0

0

Financing

0

0

0

0

Dividends

(3,703)

(3,859)

(4,041)

(4,242)

Net Cash Flow

(15,022)

2,727

(19,669)

4,188

Opening net debt/(cash)

 

 

5,437

20,459

17,732

37,401

HP finance leases initiated

0

0

0

0

Other

0

0

0

0

Closing net debt/(cash)

 

 

20,459

17,732

37,401

33,213

Source: Edison Investment Research, Jersey Electricity accounts

Contact details

Revenue by geography

The Powerhouse
PO Box 45
Queen’s Road
St Helier
Jersey JE4 8NY
+44 1534 505460
www.jec.co.uk

Contact details

The Powerhouse
PO Box 45
Queen’s Road
St Helier
Jersey JE4 8NY
+44 1534 505460
www.jec.co.uk

Revenue by geography

Management team

Chairman: Geoffrey Grime

Chief Executive: Chris Ambler

A qualified accountant, former senior partner of Coopers & Lybrand Channel Islands and a former deputy in the States of Jersey, Mr Grime joined the board of JEL in 2003 and has served as chairman of JEL since that date.

Mr Ambler has served as chief executive since 2008, having previously held senior positions in the utility and chemical sectors. He is a chartered engineer with the Institution of Mechanical Engineers and holds an MBA from Insead. Mr Ambler is a NED of Santander Private Banking and Foresight Solar Fund.

Finance Director: Martin Magee

Mr Magee is a qualified accountant and previously worked for Stakis and Scottish Power in a variety of senior financial roles. He joined JEL as finance director in 2002 and has served in this role since that date.

Management team

Chairman: Geoffrey Grime

A qualified accountant, former senior partner of Coopers & Lybrand Channel Islands and a former deputy in the States of Jersey, Mr Grime joined the board of JEL in 2003 and has served as chairman of JEL since that date.

Chief Executive: Chris Ambler

Mr Ambler has served as chief executive since 2008, having previously held senior positions in the utility and chemical sectors. He is a chartered engineer with the Institution of Mechanical Engineers and holds an MBA from Insead. Mr Ambler is a NED of Santander Private Banking and Foresight Solar Fund.

Finance Director: Martin Magee

Mr Magee is a qualified accountant and previously worked for Stakis and Scottish Power in a variety of senior financial roles. He joined JEL as finance director in 2002 and has served in this role since that date.

Principal shareholders* (listed shares only)

(%)

Cenkos Channel Islands Ltd.

50%

Ingot Capital Management

42%

Miton Asset Management

8%

*The figures above were taken from Bloomberg (19 February 2016). According to JEL’s recently issued 2015 Report & Accounts, Huntress (CI) Nominees owns 5.8m (50%) of the“A” shares, which represents 19% of the overall ordinary shares and around 5% of the voting rights. The nominee company is held within the broking firm Ravenscroft.

Companies named in this report

National Grid (NG LN), Pennon (PNN LN), Severn Trent (SVT LN), United Utilities (UU LN), Terna (TRN IM), Snam (SRG IM), Enagas (ENG SM) , Red Electrica (REE SM), EdF (EDF FP)

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Frankfurt +49 (0)69 78 8076 960

Schumannstrasse 34b

60325 Frankfurt

Germany

London +44 (0)20 3077 5700

280 High Holborn

London, WC1V 7EE

United Kingdom

New York +1 646 653 7026

245 Park Avenue, 39th Floor

10167, New York

US

Sydney +61 (0)2 9258 1161

Level 25, Aurora Place

88 Phillip St, Sydney

NSW 2000, Australia

Wellington +64 (0)48 948 555

Level 15, 171 Featherston St

Wellington 6011

New Zealand

Frankfurt +49 (0)69 78 8076 960

Schumannstrasse 34b

60325 Frankfurt

Germany

London +44 (0)20 3077 5700

280 High Holborn

London, WC1V 7EE

United Kingdom

New York +1 646 653 7026

245 Park Avenue, 39th Floor

10167, New York

US

Sydney +61 (0)2 9258 1161

Level 25, Aurora Place

88 Phillip St, Sydney

NSW 2000, Australia

Wellington +64 (0)48 948 555

Level 15, 171 Featherston St

Wellington 6011

New Zealand

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