Jersey Electricity — Strong cash generation

Jersey Electricity (LSE: JEL)

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Research: Industrials

Jersey Electricity — Strong cash generation

Jersey Electricity (JEL) delivered for both shareholders and customers in FY17. After an extended period of heavy investment in infrastructure, we believe JEL is well placed to continue to provide secure, sustainable and affordable electricity for its customers, generate attractive returns for shareholders and adapt to any regulatory changes. JEL has established an impressive track record of DPS growth (five-year CAGR c 5%) and shareholders should look forward to continuing growth in the DPS (we forecast c 5% pa) underpinned by a strengthening balance sheet.

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Written by

Graeme Moyse

Industrials

Jersey Electricity

Strong cash generation

Annual outlook

Utilities

5 March 2018

Price

490p

Market cap

£150m

Net debt* (£m) at 30 September 2017
*Company definition

21.9

Shares in issue
“A” shares and ordinary shares

30.6m*

Free float

*of “A” shares

99%*

Code

JEL

Primary exchange

LSE

Secondary exchange

N/A

Share price performance

%

1m

3m

12m

Abs

(2.2)

8.3

12.6

Rel (local)

2.5

11.6

15.9

52-week high/low

507.5p

420.0p

Business description

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

Next events

AGM

March 2018

Interim results

May 2018

Analyst

Graeme Moyse

+44 (0)20 3077 5700

Jersey Electricity is a research client of Edison Investment Research Limited

Jersey Electricity (JEL) delivered for both shareholders and customers in FY17. After an extended period of heavy investment in infrastructure, we believe JEL is well placed to continue to provide secure, sustainable and affordable electricity for its customers, generate attractive returns for shareholders and adapt to any regulatory changes. JEL has established an impressive track record of DPS growth (five-year CAGR c 5%) and shareholders should look forward to continuing growth in the DPS (we forecast c 5% pa) underpinned by a strengthening balance sheet.

Year end

Revenue (£m)

PBT*
(£m)

EPS*
(p)

DPS
(p)

P/E
(x)

Yield
(%)

09/16

103.4

14.8

37.7

13.5

13.0

2.8

09/17

102.3

13.5

34.6

14.2

14.2

2.9

09/18e

104.1

13.6

34.8

14.9

14.1

3.0

09/19e

107.5

13.8

35.3

15.7

13.9

3.2

Note: *PBT and EPS are normalised, excluding amortisation of intangibles, 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.

Stable returns for shareholders in FY17

JEL posted another year of stable returns in FY17. PBT before exceptional items rose by 2.5% to £13.5m, (our forecast: £13.4m), despite a c 1% decline in revenues. Due to the significant fall in capex, from £32.4m in FY16 to £15.1m in FY17, net debt reduced from £29.0m to £21.9m over the period. We expect another year of stable profits and capex in FY18 and forecast a fall in net debt to £16.9m. The FY17 DPS was increased by 5% to 14.2p, in line with our forecasts. We expect further growth in the DPS of 5% pa, but the improving balance sheet position will allow JEL greater flexibility in determining the level of the payment.

Service delivery for customers

Over the last 12 months there has been some debate on the efficacy of the current regulatory regime, particularly in relation to the absence of significant deployment of renewable generation on the island. The existence of subsidy regimes in other jurisdictions has been critical in the promotion of renewable generation and we believe the absence of a government-backed incentive regime is the most important factor in explaining the lacklustre growth in renewable generation and vehicle electrification on the island of Jersey. However, we believe that with sustainable, reliable and competitively priced electricity, JEL will continue to make an important contribution to the delivery of the island’s Energy Plan. Given the significant investment in infrastructure over the last 10 years and the prudent management of its financial resources, JEL is well placed to adapt to regulatory changes arising from the ongoing debate.

Valuation: Further upside potential

We have examined a range of valuation techniques (SOTP, peer group multiples and DCF) to provide an indicative valuation guide for JEL. The average valuation produced by our analysis indicates a potential share price of 546p (was 563p), c. 10% above the level of the current share price.

Investment summary

Company description: Electricity supplier to Jersey

Jersey Electricity (JEL) is the sole supplier of electricity to the island of Jersey. The electricity business is responsible for generating around 80% of group revenues and operating profit. JEL also operates a range of other businesses including property rental, retailing and business services. The government of Jersey remains the largest shareholder, with 62% of the ordinary share capital and 86.4% of the voting rights.

Valuation: Upside remains despite strength in share price

JEL’s share price has performed strongly over the last year and it now stands close to its all-time high at c 500p (c 14.4x FY18e EPS). We continue to use a range of techniques to provide indicative valuations for JEL. Our valuation analysis indicates further potential upside and an average valuation of c 546p per share, versus 563p previously.

Financials: Stable profits and improving cash flow

Returns: we model JEL on the basis that it continues to earn returns in line with its target of 6-7% (operating profits/regulatory assets on a rolling five year basis).

Capex: capex in FY17 was £15.1m, versus £32.4m in FY16. Following the completion of the interconnectors, we expect capital expenditure to remain at c £15m in FY18 declining to c £11m thereafter.

Balance sheet: as a result of the lower capex, we expect gearing (net debt/equity) to decline from 13% in FY17, to 4% by FY19. We assume that JEL continues to increase the level of cash on its balance sheet rather than paying down the long-term debt.

Dividends: we continue to forecast 5% pa growth in DPS, although falling gearing allows for greater flexibility in determining the payment. We forecast DPS cover to be c 2.2x in FY19.

Exhibit 1: Changes to forecasts

EPS (p)

PBT (£m)

DPS (p)

Old

New

% chg.

Old

New

% chg.

Old

New

% chg.

2018e

35.2

34.8

(1.1)

13.8

13.6

(1.4)

14.9

14.9

0

2019e

N/A

35.3

N/A

N/A

13.8

N/A

N/A

15.7

N/A

Source: Edison Investment Research

Sensitivities: Regulation and security of supply

Regulation: JEL would be sensitive to changes in regulation, although the impact is hard to assess without knowing the nature of the proposed changes. To provide some indication of the potential sensitivity of profits to changes in allowed returns, we estimate that a 0.5% reduction/increase in allowed return, with no other compensating changes, would reduce/increase operating profits by c £0.9m (c 6% of FY18e group operating profits).

Interconnector failure: interconnector failure poses a threat to security of supply and would increase the requirement to use on-island, oil-fired generation. However, recent investment in interconnectors has reduced the likelihood of a total failure of imported electricity.

FX: JEL takes measures to hedge its currency exposure on a one- to three-year view. However, a 20% increase in purchase costs (c 50% of the final bill) as a result of a devaluation of sterling vs the euro would increase the final customer bill by c 10% (eg 50% x 20%).

Minority: The States of Jersey retains the majority of voting rights in JEL. Other shareholders bear the risk associated with the position of a minority shareholder.

FY17 results: Improved cash generation

JEL recorded another solid performance in FY17. PBT before exceptional items rose by 2.5%, to £13.5m (our forecast: £13.4m), despite a c 1% decline in revenues. Due to a significant fall in capex, from £32.4m in FY16 to £15.1m in FY17, net debt reduced from £29.0m in FY16, to £21.9m in FY17 (our forecast: £27m). The better than anticipated cash generation was due to a stronger performance at the operating cash flow line. Favourable working capital movements, lower payments to the pension fund and lower tax paid, thanks to capital allowances relating to investment in the interconnectors, contributed to the better than expected performance relative to our estimates. The DPS was increased by 5%, to 14.2p, in line with our forecasts.

Exhibit 2: Evolution of JEL’s cash balance during FY17 (before currency effects)

Source: Source Jersey Electricity, Edison Investment Research

The energy business increased profit marginally, to £11.72m from £11.65m, despite holding prices to customers flat for another year and a 0.6% decline in units sold. The lower turnover was offset by increased imports of electricity and reduced reliance on expensive on-island, oil-fired generation. However, increased depreciation, the result of recent investment in the interconnector and an increased pension provision, limited the rise in divisional profits. The return on assets fell year-on-year, but the key five-year rolling average remains within JEL’s targeted range. Beyond the core energy division, there was a strong improvement in the performance of the retail business. Turnover in retail rose by 9.2% and operating profits increased by c 62%, to £0.7m. The property business, which ranks as the second most important contributor to group operating profits, reported broadly flat operating profits at £1.6m. Increased rental income was offset by a rise in costs, mainly related to maintenance. We estimate that JEL’s achieved five-year rolling average return remains within its target range of 6-7% (pre-tax).

Exhibit 3: JEL operating profit by division

£000s

2008

2009

2010

2011

2012

2013

2014

2015

2016

2017

Energy

6,277.0

6,679.0

7,742.0

7,678.0

4,240.0

3,229.0

7,952.0

11,514.0

11,650.0

11,723.0

Building Services

274.0

176.0

240.0

220.0

300.0

104.0

(44.0)

(58.0)

134.0

131.0

Retail

450.0

292.0

465.0

476.0

64.0

188.0

(86.0)

334.0

452.0

731.0

Property

953.0

1,263.0

1,858.0

1,652.0

1,609.0

1,609.0

1,415.0

1,562.0

1,683.0

1,645.0

Other

540.0

404.0

1,539.0

840.0

708.0

623.0

659.0

592.0

695.0

525.0

Total

8,494

8,814

11,844

10,866

6,921

5,753

9,896

13,944

14,614

14,755

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

This rise in profitability and improved cash flow was achieved while providing its customers with a reliable, affordable and sustainable source of electricity. In this report we examine JEL’s profitability and provision of customer service in the context of the current regulatory framework, the wider regulatory debate and the Energy Plan.

Delivery of returns and customer service

FY17 results from JEL demonstrated that the company continues to deliver attractive returns for its shareholders (5% pa increase in the DPS) and at the same time supply its customers with secure, affordable and sustainable electricity. Both customers and shareholders should continue to benefit from JEL’s significant investment over the last 10 years. While the current regulatory debate, which we analyse in more depth in the following section of the note, introduces some uncertainty, we believe JEL is operationally and financially well placed to adapt to any potential changes arising from the current debate.

Current regulatory framework

JEL continues to operate on a self-regulated basis and aims to meet two self-imposed regulatory targets. JEL seeks to earn both a return of 6-7% (pre-tax) on its energy business (net of customer contributions) on a rolling five year basis and to ensure that its tariffs remain within ±10% of the EU-15 average (inclusive of all taxes).

Our analysis indicates that JEL has either met, or exceeded, its regulatory objectives. We calculate the current rolling five-year average rate of return to be c 6.3%, with below target returns in 2013 and 2014 due to a requirement to run more expensive island-based, oil-fired generation, but improved performance in the period 2015-17, thanks to the increased use of cheaper imported electricity. In the UK water sector, which is currently in the middle of its periodic review process, Ofwat’s proposed rates of return are marginally below those used by JEL. Ofwat is currently proposing a pre-tax nominal rate of return of c 5.5% for the appointed water business. However, we would caution against an over-simplistic comparison of headline rates of return. The methodology for calculating invested regulatory capital can differ significantly between industries and, in addition, the UK water sector benefits from an annual inflation-linked increase in its regulatory capital value; JEL does not.

Exhibit 4: JEL energy business – evolution of operating profit and return on assets

Source: Jersey Electricity, Edison Investment Research

With no tariff increases since April 2014 and a decline in value of sterling versus the euro since the Brexit vote, international comparisons show that JEL’s tariffs, despite the disadvantages associated with its status as a small island operator, are c 15% lower than the EU-15 average currently, and below the lower end of JEL’s target range of ±10%. JEL claims that its standard tariff is 14% below the UK average, although recently some of the tariffs in the UK have been increased so the discount could be larger than it is claimed.

Exhibit 5: JEL General Domestic Tariff versus EU-15 median for medium-sized domestic customers (inclusive of taxes) H117 (p/kWh)

Source: Eurostat, Department for Business, Energy & Industrial Strategy, Edison Investment Research

The regulatory debate

JEL has successfully delivered on its own regulatory objectives, as well as playing a key role in significantly reducing carbon emissions on the island. However, there has been a discussion in recent months as to whether the regulatory framework should be allowed to continue in its present form.

The regulatory debate arose from initial criticism by one of the deputies in the States of Jersey (Deputy of Grouville) of JEL’s proposed extension of standby charges on embedded generation although, at present, this applies to only very few customers. Standby charges are levied on commercial customers who generate their own power but require standby power and grid services for when they are not able to generate sufficient power to cover their own needs. Criticism of the standby charge, first made last May (in particular as it related to renewable generation) then expanded into a more general discussion of JEL’s role and the current regulatory regime. Much of the criticism has been focused on the island’s failure, despite abundant renewable resources, to encourage the development of renewable electricity generation. During the course of the initial discussions in the States of Jersey, the Minister for Treasury and Resources pointed out that the standby charges were lower than those prevailing in the Isle of Man. In response to questions, the minister further opined that JEL’s tariffs were some of the lowest currently on offer in the UK, offer good value by European standards (see above) and deliver electricity with one-tenth of the carbon intensity of the UK system. The minister also suggested that, if there were a need for subsidies to encourage renewable generation, this would be a matter for the government and not for JEL.

However, in October the Deputy of Grouville lodged a series of propositions in the States of Jersey, which were subsequently amended and debated by the States of Jersey at the end of January 2018. The propositions were as follows:

a)

That the Minister for Treasury and Resources should request JEL not to impose standby charges on commercial customers that generate their own power until the opportunity had been provided to a qualified body to research the implications of the charge and report back to the States.

b)

That the Minister for Treasury and Resources should appoint a qualified body to undertake research into the implications of the standby charge for the competitiveness of generation and supply in Jersey.

c)

For the Council of Ministers to bring forward legislation to permit the Channel Islands Competition and Regulatory Authority (CICRA) to become the economic regulator of JEL.

d)

For the Council of Ministers to bring forward proposals to update the Electricity (Jersey) Law 1937 and thereby open up a debate on locally generated renewable electricity targets.

e)

A request for the Minister for Economic Development, Tourism, Sport and Culture to bring forward an Action Plan by 31 March 2018 setting out a strategy for the development of the renewable energy sector in Jersey.

In line with the recommendations of the Council of Ministers, all propositions were duly passed, with the exception of c) above.

Regulatory outlook

In response to the propositions, JEL agreed to delay the imposition of the standby charge until 1 May 2018, by which time it is expected that the independent body appointed to review the level of the charges (flat rate of £3.25p/month) and their implications for competition on the island will have had sufficient time to complete its report. Given the limited number of customers to which the charge will apply, the financial implications associated with the delay are inconsequential in the short term. The Minister of the Environment has committed to a review of the Electricity (Jersey) Law 1937 and work is scheduled to begin in mid-2018 (expected to continue to the end of 2019). Among other things, the review will conclude whether there is a requirement to introduce economic regulation for JEL. The Action Plan for the development of a renewable generation sector will commence once answers to part a) and b) above have been completed.

As we have noted, part c) of the propositions was ultimately withdrawn by the Deputy of Grouville after a number of concerns were raised, not least that it pre-empted the findings of the other parts of the propositions (eg review of the electricity law) and was not supported by sufficient evidence to suggest that economic regulation was a necessary step. The Council of Ministers cautioned that “economic regulation can be costly, ineffective and wide-ranging in its impacts and this is a substantial step that should only be taken if the Island’s Energy Plan (see below) aspirations can’t be achieved through an update and extension of the Law supported by appropriate policy levers”. The requirement for additional funding of CICRA, in the event of its assumption of the role of economic regulator of JEL, was also seen as problematic.

Despite agreeing to delay the implementation of the standby charges, JEL robustly defended the rationale for such charges (which cover the cost of on-island back-up generation and the financing, installation and maintenance of generation and network assets). JEL argues that if embedded renewable generation did not pay its share of these costs then the costs would have to be paid by others, perhaps not in a financial position to install renewable generation. In support of its position, JEL reiterated the warning of the CEO of Ofgem that “there was a risk that those who could afford to harvest their own energy and avoid network charges and avoid policy costs that are passed on via bills would leave a shrinking pool of less wealthy customers to shoulder the costs”. JEL also highlighted that introducing green subsidies, which are added to the bills of customers, inevitably increases the price of electricity. Specifically, JEL cited Ofgem’s calculation that customers in the UK are estimated to be paying an extra £110 pa on energy bills to finance renewable energy.

The Energy Plan

We believe that JEL’s high levels of network reliability, supply of low-carbon electricity and relatively low prices to customers mean it is well placed to withstand any regulatory changes. However, in light of this intensification of the regulatory debate, we revisit the Energy Plan 2050, published in March 2014, reviewing some of the key operational objectives and JEL’s progress towards these targets. The Energy Plan, written by the Department of the Environment in conjunction with the States of Jersey, commits Jersey to an 80% reduction in carbon emissions by 2050 (in line with the UK) and calls for the provision of “secure, affordable and sustainable energy”. JEL reflects the ambitions of the Energy Plan in its corporate strategy, which aims to “sustainably serve our community with affordable, secure and low carbon energy, today and long into the future”. It is worth prefacing our analysis of the Energy Plan by emphasising that of the projected reduction in emissions it sets out, only 4% of the required total was targeted to arise from the deployment of micro renewables in the domestic sector. The majority of savings was expected to arise from improving the energy efficiency of the housing stock, lower emissions from cars and an increase in the use of electric vehicles (EVs).

Affordable: Energy pricing

According to JEL’s customer surveys, tariffs are the single most important issue for its customers. As we have noted, JEL has kept its prices stable since April 2014 and its customer tariffs compare well to other European countries (14% below the UK standard tariff and 15% below the EU average). This provides JEL with some headroom to increase tariffs, should it be required, to reflect the decline in the value of sterling versus the euro.

Exhibit 6: Evolution of principal exchange rates

 

30/09/2013

30/09/2014

30/09/2015

30/09/2016

30/09/2017

€/£

1.20

1.28

1.35

1.16

1.13

$/£

1.62

1.62

1.51

1.30

1.34

Source: Bloomberg

JEL’s tariffs also compare favourably with other island jurisdictions such as Guernsey and the Isle of Man. JEL is exceeding its own regulatory objectives on pricing currently and during FY17 took additional steps to enhance price predictability in the future by extending its supply agreement with EDF by five years, taking it out to 2027. According to JEL, the deal includes a fixed-price component with the additional ability to fix prices on a rolling three-year basis related to a market mechanism linked to the European Energy Exchange (EEX).

Secure: Security of supply and capex

Security of supply is measured by average customer minutes lost and is the second most important element of JEL’s service package, as ranked by its customers. JEL has delivered high levels of security of supply in recent years, thanks to significant investment in the network, back up generation and the expansion in the capacity of its interconnectors with France.

Exhibit 7: JEL customer minutes lost (CML)

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

2017

CML

59

5

9

10

45

293

13

110

7

24

8

Source: Jersey Electricity

Exhibit 7 shows that last year JEL reported only eight customer minutes lost, compared to an average figure for the Big Six energy distributors in the UK of 74 customer minutes lost. JEL’s average number of customer minutes lost over the last five years is only 32 minutes. As we have noted, the strong performance on customer minutes lost has been underpinned by JEL’s infrastructure investment. Exhibit 8 illustrates the significant investment made by JEL in recent years including, most notably but not solely, expenditure related to the replacement and maintenance of interconnectors. In total, in the period 2008-17 JEL spent £195m, significantly more than the figure of £100-150m anticipated by JEL in 2008 for the next 10-year period. The figure is also in excess of the depreciation charged (c £86m) over the same period.

Exhibit 8: JEL – evolution of capex 2008-17 (10-year profile)

£m

2008

2009

2010

2011

2012

2013

2014

2015

2016

2017

Average

Capex

13.60

12.80

8.40

15.60

18.50

25.70

39.90

13.20

32.40

15.1 

19.5

Source: Jersey Electricity

Effectively JEL assumes a one-in-eight winter peak demand and the failure of the largest single component of the system. With three interconnectors now in operation, JEL enjoys an import capacity of 190MW, almost 20% higher than peak demand of 161MW registered in 2012. The margin (capacity over peak demand) of 20%, which does not include La Collette and other on-island generating capacity, compares to an overall margin standard for the UK system of c 10%. In addition to investment in interconnector capacity, JEL has made significant investment in back-up generation and generation with ‘black start’ capability. JEL now has four 11MW Sulzer turbines at La Collette, in addition to a fifth 5.5MW ‘black start’ Sulzer generator. JEL acquired the engine in 2016 and refurbished and installed it in 2017. The ‘black start’ capability will allow JEL, in the event of system failure, to restore power to La Collette power station without the engine requiring its own supply of electricity. JEL continues to enhance the network with the construction of its £17m St Helier West substation. The site was handed over to the contractors, Engie INEO, in September 2017 and the build is expected to take about a year.

Sustainable: Renewables, emissions and sustainability

JEL contracts with EDF (in excess of 30% renewable energy in FY17) to ensure that, while there is little indigenous renewable generation, the island of Jersey derives a significant proportion of its energy requirements from renewable energy sources (UK = 29% in 2017). Total low-carbon generation, including nuclear, comprised c 93% of the total electricity supplied in FY17 (vs c 50% in the UK in 2017). JEL’s importation of nuclear and renewables electricity has allowed for a reduction in the use of oil as a feedstock for electricity generation. In the early 1990s JEL typically used c 60,000 tonnes of oil to generate electricity, whereas in recent years this has reduced to less than 5,000 tonnes. As a result of this shift, the carbon intensity of the energy supplied has fallen considerably, to 35g CO2e/kWh in 2017 (latest UK figures for 2016 show 242g/kWh versus 680g/kWh in 1990). The carbon intensity of JEL’s electricity is not only significantly below the average for the UK as a whole but considerably lower than the estimated 250g CO2e/kWh achieved by oil-fired central heating systems, the principal on-island competition to the electricity-powered heating systems offered by JEL.

In large part, due to the significant reduction in the carbon intensity of the electricity supplied by JEL, Jersey has reduced its greenhouse gas emissions by c 40% over the period 1990-2015. By way of comparison, in 2016 the UK emitted 467 megatonnes of greenhouse gases, a 42% reduction over 1990 levels. Strikingly JEL and the wider energy supply industry have been at the forefront of emissions reduction (Exhibit 9). In 1990 energy supply was responsible for 34.2% of total emissions, but by 2015 this had declined to 7%. In total energy supply reduced emissions by 88% over the period compared to a 40% reduction for the island as a whole. As a result, Jersey’s per capita emissions of greenhouse gases, at 3.56 tonnes per capita, is less than half the figure for the UK as a whole (7.61 tonnes per capita). In terms of reducing carbon emissions, the energy supply industry has clearly outperformed the most significant contributor to the islands emissions – transport – which in 2015 accounted for 45% of total island emissions. We examine the reasons for the failure of the transport sector to match the reductions of the energy sector in a later section of this report.

Exhibit 9: Jersey – evolution of carbon emissions 1990-2015

kt CO2

1990

Share

2015

Share

% change

Waste Mgmt

8.6

1.4%

11.1

3.1%

29.1%

Agriculture

20.1

3.3%

15.3

4.3%

-23.9%

Residential

100.1

16.7%

62.1

17.3%

-38.0%

Business

85

14.2%

88

24.5%

3.5%

Transport

183.4

30.0%

162.1

45.1%

-11.6%

Energy Supply

204.2

34.2%

25.1

7.0%

-87.7%

Land Use Change

0

0.2%

-3.9

-1.1%

N/A

Total

601.4

100.0%

359.8

100.0%

-40.2%

Source: States of Jersey, Aether

Despite, or maybe in part because of the significant reduction in the island’s greenhouse gas emissions (GHGs) in the power sector, on-island renewable generation has failed to flourish, despite significant growth in renewable generation elsewhere (eg the UK, where in 2016 renewable comprised c 25% of total output). According to Eurostat figures for 2015, renewables accounted for 28.8% of gross electricity consumption. EU installed capacity figures for solar and wind show that capacity has risen at a CAGR of c 20% in the period 1990-2014 and now amounts to c 22% of total installed capacity.

We believe the lack of progress with indigenous renewable schemes (either large-scale utility projects or smaller embedded micro generation) has been exacerbated, despite a buyback tariff (6.5p/kWh, broadly in line with electricity purchase costs) put in place by JEL, by the relatively high cost of renewables compared to the cost of electricity supplied by JEL and the lack of subsidies available to encourage developers. In the UK, Ofgem has emphasised that the rapid growth in renewable electricity has relied on subsidies. It estimates that the annual gross cost of carbon prices and subsidies for renewable electricity reached £7.4bn in 2016.

Despite a recent solar project being constructed in the UK without the aid of subsidies, the cost of support for low-carbon electricity is expected to grow over the next five years and Ofgem estimates that, by 2021-22, the cost of low-carbon subsidies passed onto consumers will rise to £11.8bn. However, the cost of building and operating renewable generation is falling. According to Ofgem, the middle rate provided to new solar panels under Feed-in Tariffs (FiTs) has fallen from £360-442/MWh in 2011, to between £18-19/MWh in 2017. The weighted clearing price for renewable projects under Contracts for Difference auctions of £62.62/MWh in 2017 compares to £101.85/MWh recorded in 2015. The UK also saw the opening of its first solar farm without a subsidy in 2017, although site-specific advantages suggest this is unlikely to set a precedent in the short term.

In addition to direct subsidies and carbon prices, the expense of integrating intermittent sources of generation to the network can also increase overall costs. The UK Energy Research Centre has estimated that 15% of electricity in 2016 came from intermittent sources and that the cost of integrating these new sources of electricity within the network is between £5/MWh and £10/MWh. Although Ofgem believes that the market may soon be able to provide electricity without a government framework it concludes that “given the high fixed costs and low marginal costs of most low-carbon generators, a scheme that provides certainty of revenues to investors…could still be beneficial”.

JEL believes that grid-based solar PV has interesting potential on the island and claims to be close to launching a scheme to facilitate this opportunity. JEL has also stated that it remains “committed to connecting smaller-scale generators to its network”, but that this should be done on equitable terms that allow JEL to charge for the provision of back-up power. In the absence of this ability, as we have already noted, JEL argues that customers from lower income groups who cannot afford to invest in renewable schemes would incur a greater proportion of grid costs.

Energy efficiency and demand growth

We also examine JEL’s efforts to improve energy efficiency and manage demand growth, both important subsidiary components in ensuring the provision of secure affordable and sustainable electricity to its customer base.

JEL’s Powerhouse retail outlet on the island offers a range of energy-efficient washing machines and fridges that play an important role in improving energy efficiency. Also of importance in promoting energy efficiency has been JEL’s SmartSwitch programme of installing smart meters across the island. At the end of FY17 SmartSwitch meters totalled 36,000 (c 75% of all customers) vs 26,000 at the end of FY16. The programme is expected to continue in 2018 and is scheduled for completion by 2019. The introduction of the new meters has enabled JEL to introduce its first 24-hour uninterrupted heating tariff, Economy 20 Plus (E20+) by allowing it to switch over its customers to its higher general domestic rate during four peak hours of the day, which were formerly an interruption to the heating supply. In FY17 JEL also launched Smart Account, an online portal specifically designed for its customers.

The effect of JEL’s initiatives can be seen in the customer consumption figures. We calculate that in 2008 JEL’s average customer consumed 13,750kWh of electricity, while in 2017 the figure had fallen to 12,492kWh (based on average customer numbers for the year). In any one year consumption figures can be influenced by weather/temperature conditions, but a clear downward trend is discernible. Absolute figures (not on a per-customer basis) for final energy consumption (published in Energy Trends 2015), which include all forms of energy consumption, also show a decline in energy consumed (electricity comprises c 35% of the total) over the period 2011-15.

JEL’s work on tariffs and smart meters has enabled it to restrain the growth in peak demand, which has risen more slowly than overall demand growth. As a major driver of network capex, more muted growth in peak demand has enabled JEL to reduce network expenditure below the level that otherwise might have been required. Lower capex ultimately has a beneficial impact on tariffs.

Exhibit 10: Selected energy trends 2008-17

2008

2009

2010

2011

2012

2013

2014

2015

2016

2017

Customer numbers

46,587

47,072

47,494

47,990

48,452

48,263

48,941

49,320

49,532

49,894

Average customer numbers

46,472

46,830

47,283

47,742

48,221

48,358

48,602

49,131

49,426

49,713

Units sold (GWh)

639

642

645

651

637

663

621

627

625

621

Average consumption (kWh)

13,750

13,709

13,641

13,636

13,210

13,710

12,777

12,758

12,645

12,492

Peak demand

156

153

158

154

161

155

139

148

149

154

Source: Jersey Electricity, Jersey Energy Trends 2015, Edison Investment Research

Long-term drivers of demand

In our last report on JEL we examined three potential drivers of long-term demand growth; switching from oil-fired central heating, the installation of rooftop solar and vehicle electrification. In the following section we review the progress made in each of these areas.

Switching

As well as reducing the island’s CO2 emissions, switching customers from oil-fired central heating to electric heating is perhaps the most significant potential driver of long-term demand growth for JEL. The energy solutions team, established in 2015, has put in place a range of tariffs and incentives to encourage customers to switch. In 2017 the team achieved over 170 fuel switches in the domestic sector, an important component of the additional 320 customers signed to electric heating tariffs during the year. According to JEL, the team accounted for a new load of 1.7m kWh (c 10,000kWh per customer versus our assumption of 8,000kWh/customer). Applying JEL’s average selling price per unit (13p/kWh), this amounts to extra revenue of c £0.2m. In reality, JEL’s electricity heating tariffs are lower than its average selling price, so the additional revenue would be less than the £0.2m estimated above. We calculate that if JEL were able to increase the number of electricity customers by c 250 pa (with 5% of these new customers installing solar panels), the NPV of additional revenue over the period would be worth £13.7m (45p/share).

Rooftop solar

As we have already highlighted, there has been little take-up of rooftop solar panels in Jersey, despite the success in the UK and elsewhere in Europe. We estimate that the number of systems on the island is currently less than 10. For our sensitivity analysis we assume the number of rooftop PV installations rises to 1,430 by 2030 (5kWp, load factor 12%). Assuming each installation consumes all electricity on site, we calculate the discounted value of revenue lost to be worth 14p/share to JEL over the period. This analysis does not include any potential revenue from the imposition of standby charges.

Vehicle electrification

Although sales of EVs remain a relatively small part of total vehicle sales (c 1% in Europe), the global move towards electrification of vehicle fleets has gained further momentum over the last year. Both the UK and France have committed to phasing out new petrol and diesel vehicles by 2040, existing car makers have announced their intention to increase the range of electric models in the next five to six years (eg Mercedes plans to offer electric versions of all models by 2025) and new players, like Dyson, are preparing to enter the market. Large oil companies have also begun to plan for the electrification of the vehicle market, with Shell announcing the acquisition of NewMotion, a Dutch company providing charging infrastructure.

As we have written previously, the geographical dimensions of Jersey (9 x 5 miles) appear to offer favourable setting for the roll-out of vehicle electrification. However, as with renewable generation, the absence of government subsidies has meant that EVs have yet to establish a significant presence on the island. In 2016, JEL estimated that there were only c 215 EVs on the island (cars 131, other 84, all EVs 215 + 424 hybrids). At the end of 2017 the figure for pure electric vehicles had risen to 271, a year-on-year increase of 56.

JEL continues to believe that vehicle fleet electrification offers the next significant opportunity for the island to reduce CO2 emissions and this is supported by the original projections contained in the Energy Plan. JEL has made representations to the government on the need for subsidies to increase the rate of electrification, but the States of Jersey has yet to respond. In the meantime, JEL is collaborating with Jersey Post on the electrification of its vehicle fleet (a further 15 EVs in 2017), has set up an Evolve electric car club and installed electric charging points in St Helier. In 2017 JEL also acquired a further five EVs, taking its total fleet to 15.

The pace of adoption of EV technology on Jersey remains slow. Our analysis suggests that unless EV adoption accelerates, the impact of vehicle electrification on JEL’s profitability is likely to be small.

Foreign exchange

As we have noted in our previous reports, JEL hedges its currency exposure related to the purchase price of electricity (€ related) on a one- to three-year view. In certain cases JEL also hedges the cost of large capital projects (€ related). However, permanently weaker sterling versus the euro and the dollar would have a number of implications, both positive and negative, for JEL.

Exhibit 11: JEL hedging positions 2013-16

£000s

2013

2014

2015

2016

Outstanding FX contracts one to three years

62,550

82,879

96,469

84,226

Total net asset/(liability)

930

(4,246)

(5,120)

8,745

Unrealised gain/loss on hedges net of tax (to reserves)

2,968

(3,654)

(699)

11,092

Source: Jersey Electricity

The most significant result of weaker sterling versus the euro (see Exhibit 6) is to increase electricity purchase costs from France. We have previously estimated that the electricity purchase costs comprise c 60% of the customer’s final bill, but we now believe that a figure of 50% would be more appropriate. A 20% increase in purchase costs as a result of a devaluation of sterling versus the euro would therefore increase the final bill by c 10% (50% x 20%). Although sterling has rallied modestly in recent months, the relatively lower levels of sterling for sustained periods post the Brexit referendum will have impacted on JEL’s electricity purchase costs and we would expect some upward revision to customer tariffs in due course to reflect this. Weaker sterling could also increase the cost of some of JEL’s capital projects. Given the lower profile for capex that we now assume (post the construction of the interconnectors with France) and as JEL moves to implement a strategy of asset optimisation, this is likely to be of less significance.

In two other areas weaker sterling has more positive implications for JEL. Weaker sterling versus the dollar, while carrying potentially negative implications for the cost of JEL’s capital projects, would also push up the cost of heating oil, raising the cost of domestic oil-fired central heating, the principal competitor to JEL’s electricity-based central heating systems. Sterling weakness versus the euro pushes up electricity purchase costs, as we have seen, but is beneficial when making international comparisons to JEL’s tariffs. As we have already noted, maintaining its tariffs ±10% of the average for the EU-15 is one of JEL’s self-imposed regulatory targets, so weaker sterling has beneficial consequences for JEL in this regard.

Management

The Board of Directors comprises eight members: two executives and six non-executives. The executive team remained unchanged during 2017. Chris Ambler continues as CEO (since 2008) and Martin Magee remains CFO (since 2002). Geoffrey Grime, chairman and board member since 2003, also remains in post. However, with the retirement of Mike Liston (former CEO) in December 2016, Tony Taylor was appointed as a non-executive director in September 2017. Mr Taylor brings experience of the marketing and communications sector.

There has been no change to the shareholding structure (ordinary, “A” shares and preference shares) during the year. The States of Jersey continues to hold all of the ordinary shares (62% of total share capital but 86.4% of the voting rights). Ordinary shares (19m in issue) entitle holders to one vote for every 20 shares held, whereas “A” shares (11.64m in issue) entitle the holder to one vote for every 100 shares held. Of the listed shares, Huntress (CI) Nominees owns 5% of the total voting rights. JEL understands that the underlying owners of the shares are private Channel Islands-based investors.

Sensitivities

Regulation: we have discussed the issues surrounding regulation in some detail in this report. The impacts of changes in regulation are hard to evaluate without guidance on the contents of the proposed changes. We estimate that the energy business has regulatory assets, after the deduction of customer contributions and working capital, of c £176m. Simplistically, therefore, a 0.5% reduction/increase in allowed return, with no other compensating changes, would reduce/increase profitability by c £0.9m, equivalent to c 6% of predicted FY18 group profits.

Interconnector failure: the failure of the interconnectors with France would pose a threat to security of supply and would increase the requirement to use on-island, oil-fired generation. However, given the significant investment made by JEL in interconnectors in recent years, the risk of a complete suspension of imports is less likely than was the case historically. The cost of the indigenous generation is determined, in part, by the oil price, although in most scenarios the cost is likely to be substantially above the cost of imported electricity. Although, in theory, JEL would be at liberty to raise tariffs to recoup the additional costs, in practice it might be constrained by political opinion from doing so.

FX: we have also examined the potential impact of currency movements on the profitability of JEL. A 20% increase in purchase costs as a result of a devaluation of sterling versus the euro would therefore increase the final bill by c 10% (50% x 20%). Although sterling weakness versus the euro pushes up electricity purchase costs, it is beneficial when making international comparisons to JEL’s tariffs. As we have also pointed out, JEL takes measures to hedge its currency exposure on a one- to three-year view.

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

Renewables: given that JEL’s existing regulatory framework operates on the basis of a return on energy assets, a diminution in volumes as a result of a growth in domestic renewables would not necessarily lead to a reduction in JEL’s revenues. Under existing regulation, JEL would be free to charge customers more to preserve returns.

Valuation

JEL’s share price has performed strongly over the last year and it now stands close to its all-time high (c 500p). We continue to employ a range of techniques to provide indicative valuations for JEL. The average of our analysis indicates a valuation of c 546p/share versus 563p previously.

Exhibit 12: JEL Valuation metrics

Source: Edison Investment Research

SOTP

Our SOTP analysis, which does not reflect any adjustments for liquidity or minority-related issues, takes the regulatory asset base, less working capital adjustments, as its starting point. Currently, we estimate the regulated electricity assets to be in the region of £176m and assume, for the purposes of our analysis, that WACC = allowed returns. The property business is valued at balance sheet and the other businesses are valued at a multiple of 15x earnings. In total, our SOTP approach produces a valuation of 552p versus 520p previously. The uplift in valuation reflects, in large part, a lower net debt figure (+17p) and higher values for the unregulated business (+13p). If we were to assume that WACC was in fact 10% lower than the targeted return, and this return spread were to last for 10 years, in broad terms, JEL could be worth an additional c 25p.

Exhibit 13: Asset-based SOTP valuation

 

£m

p/share

Comments

Total electricity valuation

176

573

Est. electricity business net regulatory assets (Sep 17)

Total unregulated valuation

38

123

Multiple of 15x earnings

Total asset value

213

696

 

Net (debt)/cash

(22)

(72)

B/S values at September 2017

Other Adjustments

(22)

(72)

Def tax liabilities, derivatives, pref shares

Total equity value

169

552

 

Source: Edison Investment Research

DCF

The DCF valuation, as always, remains very sensitive to assumptions of WACC, terminal growth rates and capex levels and, as a result, is the least preferred of our approaches. Our DCF base case scenario assumes capex of c £15m pa in FY18 and c. £11m in the period 2018-25. Exhibit 14 illustrates the sensitivity of the DCF to changes in the discount and terminal growth rates. Using a WACC of 6.6% and a terminal growth rate of 2% would indicate a valuation for JEL of 501p.

Exhibit 14: DCF sensitivities

Perpetuity growth

1%

1.5%

2.0%

2.5%

WACC

5.55%

535

589

659

752

6.05%

475

517

570

638

6.55%

426

460

501

552

7.05%

385

412

445

484

7.55%

350

373

399

432

Source: Edison Investment Research

Comparable multiples

Our updated analysis shows that JEL’s peers are trading on P/E multiples of 13.4x (FY1e) and 12.7x (FY2e). EV/EBITDA multiples are 10.7x (FY1e) and 10.3x (FY2e). On average, the stocks yield 5.8% (FY1e) and 6.1% (FY2e). Simply placing JEL shares on peer group average multiples would indicate a share price of 528p. As we have stated previously, the yield valuation does not include the additional yield that may be available to Channel Island-domiciled shareholders arising from favourable tax treatment of the dividend. However, the analysis does reflect a yield based on normalised sector dividend cover.

Exhibit 15: Peer group multiple analysis

Currency

Market cap

P/E (x)

EV/EBITDA (x)

Yield (%)

(m)

FY1

FY2

FY1

FY2

FY1

FY2

National Grid

£

25,633

12.9

12.5

9.7

9.5

6.0

6.2

Pennon

£

2,659

13.3

11.9

11.4

10.5

6.1

6.5

Severn Trent

£

4,178

14.8

13.7

10.5

10.0

4.9

5.3

United Utilities

£

4,656

15.1

13.3

11.8

11.1

5.7

5.9

Terna

9,252

13.6

13.3

10.7

10.4

4.6

4.9

Snam Rete Gas

13,085

13.7

13.1

12.2

11.7

5.9

5.9

Enagas

5,114

11.7

12.1

10.1

10.3

7.1

7.5

Red Electrica

8,744

12.4

11.9

9.1

8.9

6.0

6.4

Average UK and European regulated utilities

 

13.4

12.7

10.7

10.3

5.8

6.1

Jersey Electricity (Edison)

Clean EPS

p/share

 

34.8

35.3

EBITDA

£m

26.4

26.7

DPS

p/share

14.9

15.7

Adj. DPS

p/share

20.5

20.4

Valuation of Jersey Electricity at

p/share

500

14.4

14.2

6.5

6.0

3.0%

3.1%

Implied value of Jersey Electricity

 

 

468

449

864

872

258

258

Source: Edison Investment Research. Note: Prices taken from Bloomberg on 27 February 2018.

Financials

Returns: we model JEL on the basis that it continues to earn returns in line with its target of 6-7% (operating profits/regulatory assets) on a rolling five-year basis.

Capex: capex in FY17 was £15.1m vs £32.4m in FY16 and a 10-year average spend of £19.5m. We expect capex of c £15m in FY18 and c £11m thereafter.

Tax: we use a P&L tax rate of 21% for the purposes of our forecasts (FY17: 21%). We assume a rise in tax paid in FY18 and FY19 as the capital allowances generated as a result of the investment in interconnectors decline.

Pension fund: for FY18 and FY19 we forecast that actual payments to the pension fund are c £1m less than the charge to the P&L.

Balance sheet: chiefly as a result of the lower capital expenditure profile, we forecast gearing (net debt/equity) declining from 13% in FY17 to 2% by FY19. We assume that JEL continues to increase the level of cash on its balance sheet rather than paying down the long-term debt.

Dividends: JEL’s dividend policy remains one of delivering sustainable real growth. In FY17 JEL increased the declared dividend by 5%, with cover at 2.5x. We continue to forecast 5% growth, although falling gearing allows for greater flexibility in determining the payment.

Exhibit 16: Financial summary

Accounts: IFRS, Year-end: September, £000s

 

2016

2017

2018e

2019e

2020e

Income statement

 

 

 

 

 

 

 

Total revenues

 

 

103,361

102,320

104,121

107,507

107,859

Cost of sales

 

 

(65,249)

(63,186)

(64,542)

(67,500)

(67,146)

Gross profit

 

 

38,112

39,134

39,579

40,007

40,713

SG&A (expenses)

 

 

(13,203)

(13,684)

(13,218)

(13,327)

(14,368)

R&D costs

 

 

0

0

0

0

0

Other income/(expense)

 

 

(350)

40

0

0

0

Exceptionals and adjustments

 

0

0

0

0

0

Depreciation and amortisation

 

(10,295)

(10,695)

(11,405)

(11,542)

(11,247)

Reported EBIT

 

14,264

14,795

14,956

15,138

15,097

Finance income/(expense)

 

(1,132)

(1,337)

(1,344)

(1,325)

(1,327)

Other income/(expense)

 

0

0

0

0

0

Exceptionals and adjustments

 

1,676

0

0

0

0

Reported PBT

 

 

14,808

13,458

13,613

13,813

13,770

Income tax expense (includes exceptionals)

 

 

(3,166)

(2,834)

(2,867)

(2,909)

(2,900)

Reported net income

 

 

11,642

10,624

10,746

10,904

10,870

Basic average number of shares, m

 

 

30.6

30.6

30.6

30.6

30.6

Basic EPS

 

 

37.7

34.6

34.8

35.3

35.2

DPS

 

 

13.5

14.2

14.9

15.7

17.4

Adjusted EBITDA

 

 

24,559

25,490

26,361

26,679

26,345

Adjusted EBIT

 

 

14,264

14,795

14,956

15,138

15,097

Adjusted PBT

 

 

13,132

13,458

13,613

13,813

13,770

Adjusted EPS

 

 

32.2

34.6

34.8

35.3

35.2

Adjusted diluted EPS

 

 

32.2

34.6

34.8

35.3

35.2

Balance sheet

 

 

 

 

 

 

 

Property, plant and equipment

 

 

209,168

211,921

216,419

216,713

217,019

Goodwill

 

 

0

0

0

0

0

Intangible assets

 

 

162

1,110

787

456

413

Other non-current assets

 

 

26,755

23,537

23,537

23,537

23,537

Total non-current assets

 

 

236,085

236,568

240,743

240,706

240,969

Cash and equivalents

 

 

1,925

8,076

13,113

22,367

29,686

Inventories

 

 

5,962

6,825

6,972

7,291

7,253

Trade and other receivables

 

 

16,583

15,782

16,060

16,582

16,636

Other current assets

 

 

2,788

4,454

4,454

4,454

4,454

Total current assets

 

 

27,258

35,137

40,598

50,694

58,029

Non-current loans and borrowings

 

 

30,000

30,000

30,000

30,000

30,000

Other non-current liabilities

 

 

51,788

48,522

51,617

54,793

56,923

Total non-current liabilities

 

 

81,788

78,522

81,617

84,793

86,923

Trade and other payables

 

 

16,084

15,885

16,226

16,970

16,881

Current loans and borrowings

 

 

943

0

0

0

0

Other current liabilities

 

 

420

1,034

1,046

1,061

1,058

Total current liabilities

 

 

17,447

16,919

17,272

18,031

17,939

Equity attributable to company

 

 

164,048

176,238

182,404

188,503

194,037

Non-controlling interest

 

 

60

26

49

73

99

Cash flow statement

 

 

 

 

 

 

 

EBIT

 

 

14,264

14,795

14,956

15,138

15,097

Depreciation and amortisation

 

 

10,295

10,695

11,405

11,542

11,247

Share based payments

 

 

56

73

80

85

90

Other adjustments

 

 

1,686

1,554

1,057

1,338

1,334

Movements in working capital

 

 

822

1,259

221

711

(655)

Interest paid / received

 

 

(1,522)

(1,494)

(1,350)

(1,350)

(1,350)

Income taxes paid

 

 

(396)

(421)

(1,250)

(2,000)

(1,994)

Cash from operations (CFO)

 

 

25,205

26,461

25,119

25,464

23,770

Capex

 

 

(32,395)

(15,088)

(15,580)

(11,505)

(11,510)

Acquisitions & disposals net

 

 

19

4

0

0

0

Other investing activities

 

 

0

0

0

0

0

Cash used in investing activities (CFIA)

 

 

(32,376)

(15,084)

(15,580)

(11,505)

(11,510)

Net proceeds from issue of shares

 

 

0

0

0

0

0

Movements in debt

 

 

0

(943)

0

0

0

Dividends paid

 

 

(4,295)

(4,285)

(4,502)

(4,706)

(4,941)

Cash from financing activities (CFF)

 

 

(4,295)

(5,228)

(4,502)

(4,706)

(4,941)

Currency translation differences and other

 

 

0

0

0

0

0

Increase/(decrease) in cash and equivalents

 

 

(11,466)

6,149

5,037

9,254

7,319

Currency translation differences and other

 

 

888

2

0

0

0

Cash and equivalents at end of period

 

 

1,925

8,076

13,113

22,367

29,686

Net (debt) cash

 

 

(29,018)

(21,924)

(16,887)

(7,633)

(314)

Movement in net (debt) cash over period

 

 

(11,521)

7,094

5,037

9,254

7,319

Source: Company accounts, Edison Investment Research

Contact details

Revenue by geography

The Powerhouse
PO Box 45
Queen’s Road
St. Helier
Jersey JE4 8NY
+ 44 (0)1534 505460
www.jec.co.uk

Contact details

The Powerhouse
PO Box 45
Queen’s Road
St. Helier
Jersey JE4 8NY
+ 44 (0)1534 505460
www.jec.co.uk

Revenue by geography

Management team

Chairman: Geoffrey Grime

Chief Executive: Chris Ambler

Mr Grime joined the board of JEL in 2003 and has served as chairman since 2008. He was formerly a deputy in the States of Jersey and senior partner of Coopers & Lybrand Channel Islands. In September 2014 Mr Grime was elected as a Jurat of the Royal Court of Jersey, where he sits as a lay judge.

Mr Ambler has served as chief executive since 2008, having previously held senior positions in the utility and materials sectors. He is a chartered engineer with the Institution of Mechanical Engineers and holds an MBA from Insead. Mr Ambler is a NED of Apax Global Alpha 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. Martin Magee is also non-executive chairman of the Standard Life Offshore Strategy Fund.

Management team

Chairman: Geoffrey Grime

Mr Grime joined the board of JEL in 2003 and has served as chairman since 2008. He was formerly a deputy in the States of Jersey and senior partner of Coopers & Lybrand Channel Islands. In September 2014 Mr Grime was elected as a Jurat of the Royal Court of Jersey, where he sits as a lay judge.

Chief Executive: Chris Ambler

Mr Ambler has served as chief executive since 2008, having previously held senior positions in the utility and materials sectors. He is a chartered engineer with the Institution of Mechanical Engineers and holds an MBA from Insead. Mr Ambler is a NED of Apax Global Alpha 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. Martin Magee is also non-executive chairman of the Standard Life Offshore Strategy Fund.

Principal shareholders* (listed shares only)

(%)

Ravenscroft

50.8%

Miton Asset Management

8.3%

*The above was taken from Bloomberg on 7 February 2018 (from page 37 of the Report & Accounts 2017): 62% of the ordinary share capital of the company is owned by the States of Jersey with the remaining 38% held by c 600 shareholders via a full listing on the LSE. Of the holders of the listed shares, Huntress (CI) Nominees owns 5.3m (46%) of the “A” ordinary shares, representing 18% of our overall shares and around 5% of the voting rights. This nominee company is held within the broker firm Ravenscroft, which has placed our stock with a number of private clients, and a fund, residing largely in the Channel Islands.

Companies named in this report

EDF, National Grid, Pennon, Severn Trent, United Utilities, Terna, Snam Rete Gas, Enagas and Red Electrica

Edison is an investment research and advisory company, with offices in North America, Europe, the Middle East and AsiaPac. The heart of Edison is our world-renowned equity research platform and deep multi-sector expertise. At Edison Investment Research, our research is widely read by international investors, advisers and stakeholders. Edison Advisors leverages our core research platform to provide differentiated services including investor relations and strategic consulting. Edison is authorised and regulated by the Financial Conduct Authority. Edison Investment Research (NZ) Limited (Edison NZ) is the New Zealand subsidiary of Edison. Edison NZ is registered on the New Zealand Financial Service Providers Register (FSP number 247505) and is registered to provide wholesale and/or generic financial adviser services only. Edison Investment Research Inc (Edison US) is the US subsidiary of Edison and is regulated by the Securities and Exchange Commission. Edison Investment Research Pty Limited (Edison Aus) [46085869] is the Australian subsidiary of Edison. Edison Germany is a branch entity of Edison Investment Research Limited [4794244]. www.edisongroup.com

DISCLAIMER
Copyright 2018 Edison Investment Research Limited. All rights reserved. This report has been commissioned by Jersey Electricity and prepared and issued by Edison for publication globally. All information used in the publication of this report has been compiled from publicly available sources that are believed to be reliable, however we do not guarantee the accuracy or completeness of this report. Opinions contained in this report represent those of the research department of Edison at the time of publication. The securities described in the Investment Research may not be eligible for sale in all jurisdictions or to certain categories of investors. This research is issued in Australia by Edison Investment Research Pty Ltd (Corporate Authorised Representative (1252501) of Myonlineadvisers Pty Ltd (AFSL: 427484)) and any access to it, is intended only for "wholesale clients" within the meaning of the Corporations Act 2001 of Australia. The Investment Research is distributed in the United States by Edison US to major US institutional investors only. Edison US is registered as an investment adviser with the Securities and Exchange Commission. Edison US relies upon the "publishers' exclusion" from the definition of investment adviser under Section 202(a)(11) of the Investment Advisers Act of 1940 and corresponding state securities laws. As such, Edison does not offer or provide personalised advice. We publish information about companies in which we believe our readers may be interested and this information reflects our sincere opinions. The information that we provide or that is derived from our website is not intended to be, and should not be construed in any manner whatsoever as, personalised advice. Also, our website and the information provided by us should not be construed by any subscriber or prospective subscriber as Edison’s solicitation to effect, or attempt to effect, any transaction in a security. The research in this document is intended for New Zealand resident professional financial advisers or brokers (for use in their roles as financial advisers or brokers) and habitual investors who are “wholesale clients” for the purpose of the Financial Advisers Act 2008 (FAA) (as described in sections 5(c) (1)(a), (b) and (c) of the FAA). This is not a solicitation or inducement to buy, sell, subscribe, or underwrite any securities mentioned or in the topic of this document. This document is provided for information purposes only and should not be construed as an offer or solicitation for investment in any securities mentioned or in the topic of this document. A marketing communication under FCA Rules, this document has not been prepared in accordance with the legal requirements designed to promote the independence of investment research and is not subject to any prohibition on dealing ahead of the dissemination of investment research.
Edison has a restrictive policy relating to personal dealing. Edison Group does not conduct any investment business and, accordingly, does not itself hold any positions in the securities mentioned in this report. However, the respective directors, officers, employees and contractors of Edison may have a position in any or related securities mentioned in this report. Edison or its affiliates may perform services or solicit business from any of the companies mentioned in this report. The value of securities mentioned in this report can fall as well as rise and are subject to large and sudden swings. In addition it may be difficult or not possible to buy, sell or obtain accurate information about the value of securities mentioned in this report. Past performance is not necessarily a guide to future performance. Forward-looking information or statements in this report contain information that is based on assumptions, forecasts of future results, estimates of amounts not yet determinable, and therefore involve known and unknown risks, uncertainties and other factors which may cause the actual results, performance or achievements of their subject matter to be materially different from current expectations. For the purpose of the FAA, the content of this report is of a general nature, is intended as a source of general information only and is not intended to constitute a recommendation or opinion in relation to acquiring or disposing (including refraining from acquiring or disposing) of securities. The distribution of this document is not a “personalised service” and, to the extent that it contains any financial advice, is intended only as a “class service” provided by Edison within the meaning of the FAA (ie without taking into account the particular financial situation or goals of any person). As such, it should not be relied upon in making an investment decision. To the maximum extent permitted by law, Edison, its affiliates and contractors, and their respective directors, officers and employees will not be liable for any loss or damage arising as a result of reliance being placed on any of the information contained in this report and do not guarantee the returns on investments in the products discussed in this publication. FTSE International Limited (“FTSE”) © FTSE 2018. “FTSE®” is a trade mark of the London Stock Exchange Group companies and is used by FTSE International Limited under license. All rights in the FTSE indices and/or FTSE ratings vest in FTSE and/or its licensors. Neither FTSE nor its licensors accept any liability for any errors or omissions in the FTSE indices and/or FTSE ratings or underlying data. No further distribution of FTSE Data is permitted without FTSE’s express written consent.

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

295 Madison Avenue, 18th Floor

10017, New York

US

Sydney +61 (0)2 8249 8342

Level 12, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

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

295 Madison Avenue, 18th Floor

10017, New York

US

Sydney +61 (0)2 8249 8342

Level 12, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

Edison is an investment research and advisory company, with offices in North America, Europe, the Middle East and AsiaPac. The heart of Edison is our world-renowned equity research platform and deep multi-sector expertise. At Edison Investment Research, our research is widely read by international investors, advisers and stakeholders. Edison Advisors leverages our core research platform to provide differentiated services including investor relations and strategic consulting. Edison is authorised and regulated by the Financial Conduct Authority. Edison Investment Research (NZ) Limited (Edison NZ) is the New Zealand subsidiary of Edison. Edison NZ is registered on the New Zealand Financial Service Providers Register (FSP number 247505) and is registered to provide wholesale and/or generic financial adviser services only. Edison Investment Research Inc (Edison US) is the US subsidiary of Edison and is regulated by the Securities and Exchange Commission. Edison Investment Research Pty Limited (Edison Aus) [46085869] is the Australian subsidiary of Edison. Edison Germany is a branch entity of Edison Investment Research Limited [4794244]. www.edisongroup.com

DISCLAIMER
Copyright 2018 Edison Investment Research Limited. All rights reserved. This report has been commissioned by Jersey Electricity and prepared and issued by Edison for publication globally. All information used in the publication of this report has been compiled from publicly available sources that are believed to be reliable, however we do not guarantee the accuracy or completeness of this report. Opinions contained in this report represent those of the research department of Edison at the time of publication. The securities described in the Investment Research may not be eligible for sale in all jurisdictions or to certain categories of investors. This research is issued in Australia by Edison Investment Research Pty Ltd (Corporate Authorised Representative (1252501) of Myonlineadvisers Pty Ltd (AFSL: 427484)) and any access to it, is intended only for "wholesale clients" within the meaning of the Corporations Act 2001 of Australia. The Investment Research is distributed in the United States by Edison US to major US institutional investors only. Edison US is registered as an investment adviser with the Securities and Exchange Commission. Edison US relies upon the "publishers' exclusion" from the definition of investment adviser under Section 202(a)(11) of the Investment Advisers Act of 1940 and corresponding state securities laws. As such, Edison does not offer or provide personalised advice. We publish information about companies in which we believe our readers may be interested and this information reflects our sincere opinions. The information that we provide or that is derived from our website is not intended to be, and should not be construed in any manner whatsoever as, personalised advice. Also, our website and the information provided by us should not be construed by any subscriber or prospective subscriber as Edison’s solicitation to effect, or attempt to effect, any transaction in a security. The research in this document is intended for New Zealand resident professional financial advisers or brokers (for use in their roles as financial advisers or brokers) and habitual investors who are “wholesale clients” for the purpose of the Financial Advisers Act 2008 (FAA) (as described in sections 5(c) (1)(a), (b) and (c) of the FAA). This is not a solicitation or inducement to buy, sell, subscribe, or underwrite any securities mentioned or in the topic of this document. This document is provided for information purposes only and should not be construed as an offer or solicitation for investment in any securities mentioned or in the topic of this document. A marketing communication under FCA Rules, this document has not been prepared in accordance with the legal requirements designed to promote the independence of investment research and is not subject to any prohibition on dealing ahead of the dissemination of investment research.
Edison has a restrictive policy relating to personal dealing. Edison Group does not conduct any investment business and, accordingly, does not itself hold any positions in the securities mentioned in this report. However, the respective directors, officers, employees and contractors of Edison may have a position in any or related securities mentioned in this report. Edison or its affiliates may perform services or solicit business from any of the companies mentioned in this report. The value of securities mentioned in this report can fall as well as rise and are subject to large and sudden swings. In addition it may be difficult or not possible to buy, sell or obtain accurate information about the value of securities mentioned in this report. Past performance is not necessarily a guide to future performance. Forward-looking information or statements in this report contain information that is based on assumptions, forecasts of future results, estimates of amounts not yet determinable, and therefore involve known and unknown risks, uncertainties and other factors which may cause the actual results, performance or achievements of their subject matter to be materially different from current expectations. For the purpose of the FAA, the content of this report is of a general nature, is intended as a source of general information only and is not intended to constitute a recommendation or opinion in relation to acquiring or disposing (including refraining from acquiring or disposing) of securities. The distribution of this document is not a “personalised service” and, to the extent that it contains any financial advice, is intended only as a “class service” provided by Edison within the meaning of the FAA (ie without taking into account the particular financial situation or goals of any person). As such, it should not be relied upon in making an investment decision. To the maximum extent permitted by law, Edison, its affiliates and contractors, and their respective directors, officers and employees will not be liable for any loss or damage arising as a result of reliance being placed on any of the information contained in this report and do not guarantee the returns on investments in the products discussed in this publication. FTSE International Limited (“FTSE”) © FTSE 2018. “FTSE®” is a trade mark of the London Stock Exchange Group companies and is used by FTSE International Limited under license. All rights in the FTSE indices and/or FTSE ratings vest in FTSE and/or its licensors. Neither FTSE nor its licensors accept any liability for any errors or omissions in the FTSE indices and/or FTSE ratings or underlying data. No further distribution of FTSE Data is permitted without FTSE’s express written consent.

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

295 Madison Avenue, 18th Floor

10017, New York

US

Sydney +61 (0)2 8249 8342

Level 12, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

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

295 Madison Avenue, 18th Floor

10017, New York

US

Sydney +61 (0)2 8249 8342

Level 12, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

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