Just Energy Income Fund (TSX:JE.UN) -
Highlights for the third quarter ended December 31, 2009 included:
- Record Operating Results
-- Sales (seasonally adjusted) - Up 7% per unit
-- Gross Margin (seasonally adjusted) - Up 17% per unit
-- Average margin per customer - Up 11%
-- Distributable Cash after Gross Margin Replacement - Up 2% per unit
-- Distributable Cash after Marketing Expense - Up 7% per unit
-- 37% of all new customer volumes choose our Just Green program
-- $0.20 Special Distribution
- Customer Additions
-- 137,000 gross customers added; 13,000 net customers
- Management Reaffirms Published Financial Guidance for F2010
-- Gross margin growth expected to exceed 5% to 10% target range per unit
-- Trending to lower end of 5% to 10% per unit target range for distributable
cash growth
- Unitholders to Vote on Conversion to Corporation at Annual Meeting
-- Conversion targeted for the fourth quarter of calendar 2010
-- Initial annual dividend policy will be $1.24 ($0.1033 paid monthly), equal to
current distribution
Just Energy Third Quarter Results
Just Energy is an Income Fund and it reports in the attached Management's
Discussion and Analysis a detailed calculation of distributable cash both before
and after marketing expenditures to expand the Fund's customer base.
Just Energy Income Fund announced its results for the three and nine months
ended December 31, 2009.
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Three months ended December 31, F2010 Per unit(2) F2009 Per unit
($ millions except per Unit)
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Sales(1) $654.7 $510.8
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Gross Margin(1) 121.7 87.6 .
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Distributable Cash(1)
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- After Gross Margin Replacement 69.5 $0.52 57.5 $0.51
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- After Marketing Expenses 61.2 $0.46 48.2 $0.43
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Net Income 97.4 $0.73 (49.1) $(0.44)
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Adjusted Net Income 44.2 $0.33 46.7 $0.42
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Regular Distributions 41.3 $0.31 34.9 $0.31
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Special Distribution 26.7 $0.20 18.6 $0.165
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Long Term Customers 2,280,000 1,775,000
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Nine months ended December 31, F2010 Per unit F2009 Per unit
($ millions except per Unit)
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Sales(1) $1,649.4 $1,298.6
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Gross Margin(1) 304.0 209.1
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Distributable Cash(1)
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- After Gross Margin Replacement 164.0 $1.25 123.3 $1.11
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- After Marketing Expenses 138.7 $1.06 106.8 $0.96
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Net Income 310.7 $2.37 (938.9) $(8.52)
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Adjusted Net Income 59.1 $0.45 81.2 $0.73
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Regular Distribution 119.2 $0.91 103.2 $0.93
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Special Distribution 26.7 $0.20 18.6 $0.165
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Annual Distribution per unit $1.24 $1.24
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(1) Seasonally adjusted (Non GAAP measure)
(2) The per unit calculation reflects a fully diluted basis
For the third quarter of fiscal 2010 versus the comparable quarter of fiscal
2009, seasonally adjusted sales increased by 7% per unit, gross margin by 17%
per unit, distributable cash after gross margin replacement increased by 2% per
unit and distributable cash after all marketing expenses increased by 7% per
unit. Adjusted net income (excluding non-cash mark to market on future supply
positions) was $0.33 per unit, down 21% from $0.42 per unit a year prior.
The acquisition of Universal Energy resulted in substantial increases in
operating results for the third quarter. The combination of the two companies
resulted in a significant growth in customer base and a stronger sales force. In
the second full quarter of joint operation, customer additions again exceeded
previous record levels with 137,000 additions up 46% from a year prior, the
second highest quarterly total in Just Energy's history.
Net customer additions were 13,000 reflecting continued high recession-related
attrition in the United States.
Beginning Ending Ending
Sept 30, Failed Dec 31, Dec 31,
RCEs 2009 Additions Attrition To Renew 2009 2008
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Natural Gas
Canada 791,000 14,000 (21,000) (25,000) 759,000 756,000
United
States 385,000 44,000 (35,000) (1,000) 393,000 238,000
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Total gas 1,176,000 58,000 (56,000) (26,000) 1,152,000 994,000
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Electricity
Canada 785,000 18,000 (24,000) (2,000) 777,000 581,000
United
States 306,000 61,000 (16,000) - 351,000 200,000
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Total
electricity 1,091,000 79,000 (40,000) (2,000) 1,128,000 781,000
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Combined 2,267,000 137,000 (96,000) (28,000) 2,280,000 1,775,000
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While the customer base was up 28% year over year due both to the Universal
acquisition and record new customer additions, gross margin was up 39%. This was
due to an 11% increase in average margin per customer. Just Energy has been
steadily adding new customers at higher margins over past quarters with
increasing sales of Just Green (formerly "Green Energy Option") electricity and
gas contributing to this growth. The improvement in gross margin is even
greater, as a 14% year over year decline in the U.S. versus Canadian dollar
reduced reported gross margins for the quarter.
Sales of Just Energy's innovative Just Green products remain strong. During the
quarter, 43% of all customers signed contracted for Just Green supply taking on
average 86% of their commodity needs from green sources. Accordingly, 37% of all
new customer volumes choose green supply. Just Green is still a small proportion
of the overall customer base with 5% of electricity customers and 3% of gas
customers. However, Just Green electricity sales more than tripled year over
year and Just Green gas sales were up six-fold.
Higher customer numbers and improved margins were offset by increased general
and administrative costs for the quarter. Management anticipated general and
administrative synergies of $10 million from the Universal acquisition. This
target will be exceeded by the end of the fourth quarter. Not all of these
savings were in place in the third quarter and there were substantial one-time
expenses related to the Fund's conversion plan and other corporate development
activities. In addition, general and administrative costs for the start-up
phases of National Home Services' water heater sales and rental business and
Terra Grain Fuels ethanol plant were not offset by revenues. Both businesses are
expected to generate distributable cash in fiscal 2011.
Higher general and administrative costs combined with an increase in bad debt
expense and taxes from Universal operations resulted in distributable cash after
gross margin replacement of $69.5 million for the three months ended December
31, 2009, up 21% from last year and up 2% on a per unit basis. Management is
confident that Universal is an accretive acquisition and that the growth will be
clearly seen once the merger of operations is completed in the coming year.
The Fund has provided guidance that both gross margin and distributable cash
after gross margin replacement would be up 5% to 10% per unit for fiscal 2010.
After nine months, gross margin is up 23% per unit while distributable cash
after margin replacement is up 13% per unit.
As was discussed in the last quarterly release, the fourth quarter should see a
slowing of gross margin growth for several reasons. The U.S. dollar is likely to
be down sharply year over year against the Canadian dollar reducing margins in
U.S. markets. As well, there were 145,000 customers acquired from Universal who
were not expected to renew their contracts because they were either in markets
Just Energy does not currently intend to pursue, or had contract terms which
made renewal unlikely. These customers generated margins of approximately $9.5
million per quarter and the majority of them will no longer be flowing in the
fourth quarter. In the last quarter of fiscal 2009, the Fund benefitted from
extremely cold weather and it is unlikely that the margin on weather related
excess consumption will be repeated this year. With the impact of all of these
factors, management expects gross margin growth of more than the 5% to 10% per
unit guidance but less than 20% for fiscal 2010.
Distributable cash after gross margin replacement growth is expected to be
negative on a per unit basis in the fourth quarter. Higher general and
administrative costs will remain in place for another quarter and the company
continues to pay tax in the United States and on Universal's Canadian operations
while relatively little tax was paid in fiscal 2009. The result is currently
expected to be distributable cash growth for fiscal 2010 at the lower end of the
5% to 10% per unit guidance range.
The Fund paid not only its regular monthly distribution of $0.1033 per month
during the quarter but Canadian operating performance for calendar 2009 resulted
in a Special Distribution of $0.20 over and above the base $1.24 annual payout.
Just Energy has announced its intention to reorganize its income trust structure
into a high dividend paying corporation. Unitholders will be asked to approve,
by way of a plan of arrangement, the reorganization at the Fund's annual and
special meeting of Unitholders scheduled for June 29, 2010. Upon completion of
the reorganization, Just Energy intends to pay monthly dividends equal to the
$0.1033 distribution currently paid ($1.24 per year). It is expected that the
reorganization will be completed in the fourth quarter of calendar 2010.
Executive Chair Rebecca MacDonald noted: "As we move toward life as a
corporation following our reorganization this coming fall, I am very pleased
with our progress in absorbing the Universal acquisition. The merger of the two
operations is right on schedule and the $10 million per year in administrative
synergy we expected to realize will be exceeded. We still have one-time costs
coming through in Q4 as well as the final cleanup of their customer book. As I
stated last quarter, fiscal 2011 will show the benefits of this acquisition."
"I am pleased that we have been able to grow our business sufficiently to allow
us to maintain our current payout as dividend following conversion this fall. We
are one of very few trusts to be able to maintain its payout and we have done so
without having to resort to purchasing tax losses. I have always described Just
Energy as a unique growth trust and this is another example of that description
being borne out. Our $0.20 Special Distribution out of our Canadian profits is
further evidence of our solid operating performance so far this year."
CEO Ken Hartwick stated: "This was a solid quarter in the face of continued
challenges due to very weak economic conditions in many of our US markets. Our
near record level of customer additions was overshadowed by continued high
attrition in the US as customer non-payment of utility bills and shut offs
remain at unprecedented levels. We continue to be optimistic that the eventual
economic turnaround will result in even greater growth of our customer base.
While customer additions in Canada remain slow, it is important to note that
independent contractors redeployed into our National Home Services water heater
business have generated the equivalent of 45,000 gas or electricity customers in
the early stages of that business."
"I am particularly pleased with our success in marketing Just Green electricity
and gas. This is an important product for a number of reasons. It builds a
firmer relationship with our customers who have willingly paid a premium for
their commodity to benefit the environment. It is a popular product with
governments and regulators who view it as an innovative approach to aiding one
of their key public policy objectives. Lastly, it has allowed us to increase our
margins at a time when attrition and merger costs might otherwise curtail our
growth. Just Energy has again proven to be a resilient engine of growth and
income regardless of economic conditions. The fourth quarter of fiscal 2010 will
see us continue to build a strong base for fiscal 2011 and beyond."
The Fund
Just Energy's business involves the sale of natural gas and/or electricity to
residential and commercial customers under long-term fixed-price and
price-protected contracts. By fixing the price of natural gas or electricity
under its fixed-price or price-protected program contracts for a period of up to
five years, Just Energy's customers offset their exposure to changes in the
price of these essential commodities. Just Energy, which commenced business in
1997, derives its margin or gross profit from the difference between the fixed
price at which it is able to sell the commodities to its customers and the fixed
price at which it purchases the associated volumes from its suppliers.
The Fund also offers "green" products through its Just Green program. The
electricity Just Green product offers the customer the option of having all or a
portion of his or her electricity sourced from renewable green sources such as
wind, run of the river hydro or biomass. The gas Just Green product offers
carbon offset credits which will allow the customer to reduce or eliminate the
carbon footprint for their home or business. Management believes that these
products will not only add to profits, but also increase sales receptivity and
improve renewal rates.
In addition, through National Home Services, the Fund sells and rents high
efficiency and tankless water heaters and produces and sells wheat-based ethanol
through its subsidiary Terra Grain Fuels.
Non GAAP Measures
Adjusted net income (loss) represents the net income (loss) excluding the impact
of mark-to-market gains (losses) arising from Canadian GAAP requirements for
derivative financial instruments on our future supply positions. Just Energy
ensures that customer margins are protected by entering into fixed-price supply
contracts. In accordance with GAAP, the customer margins are not
marked-to-market but there is a requirement to mark-to-market the future supply
contracts. This creates unrealized gains (losses) depending upon current supply
pricing volatility. Management believes that these short-term mark-to-market
non-cash gains (losses) do not impact the long-term financial performance of the
Fund.
Management also believes the best basis for analyzing both the Fund's operating
results and the amount available for distribution is to focus on amounts
actually received ("seasonally adjusted"). Seasonally adjusted analysis applies
solely to the Canadian gas market (excluding Alberta and B.C.). Just Energy
receives payment from the LDCs upon delivery of the commodity not when the
customer actually consumes the gas. Seasonally adjusted analysis eliminates
seasonal commodity consumption variances and recognizes amount available for
distribution based on cash received from the LDCs.
Forward-Looking Statements
The Fund's press releases may contain forward-looking statements including
statements pertaining to customer revenues and margins, customer additions and
renewals, customer attrition, customer consumption levels, distributable cash
and treatment under governmental regulatory regimes. These statements are based
on current expectations that involve a number of risks and uncertainties which
could cause actual results to differ from those anticipated. These risks
include, but are not limited to, levels of customer natural gas and electricity
consumption, rates of customer additions and renewals, rates of customer
attrition, fluctuations in natural gas and electricity prices, changes in
regulatory regimes and decisions by regulatory authorities, competition and
dependence on certain suppliers. Additional information on these and other
factors that could affect the Fund's operations, financial results or
distribution levels are included in the Fund's annual information form and other
reports on file with Canadian securities regulatory authorities which can be
accessed through the SEDAR website at www.sedar.com or through the Fund's
website at www.justenergy.com.
MANAGEMENT'S DISCUSSION AND ANALYSIS ("MD&A") - February 10, 2010
Overview
The following discussion and analysis is a review of the financial condition and
results of operations of Just Energy Income Fund ("Just Energy" or the "Fund")
for the three and nine months ended December 31, 2009 and has been prepared with
all information available up to and including February 10, 2010. This analysis
should be read in conjunction with the unaudited interim consolidated financial
statements for the three and nine months ended December 31, 2009, as well as the
audited consolidated financial statements and related MD&A for the year ended
March 31, 2009, contained in the Fund's 2009 Annual Report. The financial
information contained herein has been prepared in accordance with Canadian
Generally Accepted Accounting Principles ("GAAP"). All dollar amounts are
expressed in Canadian dollars. Quarterly reports, the annual report and
supplementary information can be found under "reports and filings" on our
corporate website at www.justenergy.com. Additional information can be found on
SEDAR at www.sedar.com.
Just Energy is an open-ended, limited-purpose trust established under the laws
of the Province of Ontario to hold securities and to distribute the income of
its directly or indirectly owned operating subsidiaries and affiliates: Just
Energy Ontario L.P., Just Energy Manitoba L.P., Just Energy Quebec L.P., Just
Energy (B.C.) Limited Partnership, Just Energy Alberta L.P. ("JE Alberta"),
Alberta Energy Savings L.P. ("AESLP"), Just Energy Illinois Corp. ("JEIC"), Just
Energy New York Corp. ("JENYC"), Just Energy Indiana Corp., Just Energy Texas
L.P., Just Energy Exchange Corp. ("JEEC"), Universal Energy Corp., Universal Gas
and Electric Corp., Commerce Energy, Inc. ("Commerce"), National Energy Corp.
("NEC") operating under the trade name of National Home Services ("NHS"), and
Terra Grain Fuels Inc. ("TGF"), collectively, the "Just Energy Group".
Just Energy's business involves the sale of natural gas and/or electricity to
residential and commercial customers under long-term fixed-price and
price-protected contracts. By fixing the price of natural gas or electricity
under its fixed-price or price-protected program contracts for a period of up to
five years, Just Energy's customers offset their exposure to changes in the
price of these essential commodities. Just Energy, which commenced business in
1997, derives its margin or gross profit from the difference between the fixed
price at which it is able to sell the commodities to its customers and the fixed
price at which it purchases the associated volumes from its suppliers. In
addition, through NHS, the Fund sells and rents high efficiency and tankless
water heaters. TGF, an ethanol producer, operates an ethanol facility in Belle
Plaine, Saskatchewan.
The Fund also offers green products through its Just Green program formerly
known as the Green Energy Option or "GEO". The electricity Just Green product
offers the customers the option of having all or a portion of their electricity
sourced from renewable green sources such as wind, run of the river hydro or
biomass. The gas Just Green product offers carbon offset credits, which will
allow the customer to reduce or eliminate the carbon footprint of their homes or
business. Management believes that these new products will not only add to
profits but also increase sales receptivity and improve renewal rates.
Forward-looking information
This MD&A contains certain forward-looking information pertaining to customer
additions and renewals, customer consumption levels, distributable cash and
treatment under governmental regulatory regimes. These statements are based on
current expectations that involve a number of risks and uncertainties which
could cause actual results to differ from those anticipated. These risks
include, but are not limited to, levels of customer natural gas and electricity
consumption, rates of customer additions and renewals, fluctuations in natural
gas and electricity prices, changes in regulatory regimes and decisions by
regulatory authorities, competition and dependence on certain suppliers.
Additional information on these and other factors that could affect the Fund's
operations, financial results or distribution levels are included in the Fund's
annual information form and other reports on file with Canadian security
regulatory authorities, which can be accessed on our corporate website at
www.justenergy.com or on SEDAR website at www.sedar.com.
Policy Change
Effective July 1, 2008, the Fund changed its practice from treating future
supply hedging positions to hedges for accounting purposes. Accordingly, all
mark to market adjustments for supply contracts are reflected in the
consolidated statements of operations. In the view of management, the previous
practice offered no greater clarity for the financial statement user and was
very labour-intensive and costly to produce. The new accounting practice
consolidates all the unrealized, non-cash changes in value of future supply into
a single line on the consolidated statements of operations. The Fund's MD&A
reports the adjusted net income excluding all non-cash mark to market
adjustments for all supply-related derivative instruments and the related tax
effect. The expected future net margin is set based on the derivative
instruments and is effectively unchanged with commodity market movements. Given
commodity volatility and the size of the Fund, the annual swings in mark to
market on these positions can be in the hundreds of millions of dollars.
Just Energy believes that the result of this practice change and the associated
MD&A disclosure is that actual period operating results will be more transparent
for investors.
Key terms
"Attrition" means customers whose contracts were terminated primarily due to
relocation or death, or cancelled by Just Energy due to delinquent accounts.
"Delivered volume" represents the actual volume of gas and electricity provided
on behalf of customers to the LDCs for the period.
"Failed to renew" means customers who did not renew expiring contracts at the
end of their term.
"Gross margin per RCE" represents the gross margin realized on Just Energy's
customer base, including both low margin customers acquired through various
acquisitions and gains/losses from sales of excess commodity supply.
"LDC" means a local distribution company, the natural gas or electricity
distributor for a regulatory or governmentally defined geographic area.
"RCE" means residential customer equivalent or the "customer", which is a unit
of measurement equivalent to a customer using, as regards natural gas, 2,815 m3
(or 106 GJs or 1,000 Therms or 1,025 CCFs) of natural gas on an annual basis
and, as regards electricity, 10 MWh (or 10,000 kWh) of electricity on an annual
basis, which represents the approximate amount of gas and electricity,
respectively, used by a typical household in Ontario.
Non-GAAP financial measures
All non-GAAP financial measures do not have standardized meanings prescribed by
GAAP and are therefore unlikely to be comparable to similar measures presented
by other issuers.
Seasonally adjusted sales and seasonally adjusted gross margin
Management believes the best basis for analyzing both the Fund's results and the
amount available for distribution is to focus on amounts actually received
("seasonally adjusted") because this figure provides the margin earned on all
deliveries to the utilities. Seasonally adjusted sales and gross margin are not
defined performance measures under Canadian GAAP. Seasonally adjusted analysis
applies solely to the gas markets and specifically to Ontario, Quebec, Manitoba
and Michigan.
No seasonal adjustment is required for electricity as the supply is balanced
daily. In the other gas markets, payments for supply by the LDCs are aligned
with customer consumption.
Cash Available for Distribution
"Distributable cash after marketing expense" refers to the net cash available
for distribution to Unitholders. Seasonally adjusted gross margin is the
principal contributor to Cash Available for Distribution. Distributable cash is
calculated by the Fund as seasonally adjusted gross margin, adjusted for cash
items including general and administrative expenses, marketing expenses, bad
debt expense, interest expense, corporate taxes, capital taxes and other items.
This non-GAAP measure may not be comparable to other income funds.
"Distributable cash after gross margin replacement" represents the net cash
available for distribution to Unitholders as defined above. However, only the
marketing expenses associated with maintaining the Fund's gross margin at a
stable level equal to that in place at the beginning of the period are deducted.
Management believes that this is more representative of the ongoing operating
performance of the Fund because it includes all expenditures necessary for the
retention of existing customers and the addition of new margin to replace those
of customers that have not been renewed. This non-GAAP measure may not be
comparable to other income funds.
For reconciliation to cash from operating activities, please refer to the "Cash
Available for Distribution and distributions" analysis on page 7.
Adjusted net income (loss)
"Adjusted net income (loss)" represents the net income (loss) excluding the
impact of mark to market gains (losses) arising from derivative financial
instruments on our future supply. Just Energy ensures that customer margins are
protected by entering into fixed-price supply contracts. In accordance with
GAAP, the associated customer contracts are not marked to market, but there is a
requirement to mark to market the future supply contracts. This creates
unrealized gains (losses) that are not offset by the related customer gains
(losses).
Management believes that these short-term mark to market non-cash gains (losses)
do not impact the long-term financial performance of the Fund. The related
future supply has been sold under long-term customer contracts at fixed prices;
therefore, the annual movement in the theoretical value of this future supply is
not an appropriate measure of current or future operating performance.
Standardized Distributable Cash
Standardized Distributable Cash is a non-GAAP measure developed to provide a
consistent and comparable measurement of distributable cash across entities and
is defined as cash flows from operating activities, as reported in accordance
with GAAP, less an adjustment for total capital expenditures as reported in
accordance with GAAP and restrictions on distributions arising from compliance
with financial covenants restrictive at the date of the calculation of
Standardized Distributable Cash.
For reconciliation to cash from operating activities, please refer to the
"Standardized Distributable Cash and Cash Available for Distribution" analysis
on page 11.
Financial highlights
For the three months ended December 31
(thousands of dollars except where indicated and per unit amounts)
Fiscal 2010 Fiscal 2009
Per Per Unit Per
$ unit(5) Change(5) $ unit(5)
Sales 626,966 $4.68 2% 513,608 $4.57
Net income (loss)(1) 97,390 $0.73 NMF(6) (49,094) $(0.44)
Adjusted net income(2) 44,242 $0.33 (21)% 46,682 $0.42
Gross margin (seasonally
adjusted)(3) 121,722 $0.91 17% 87,554 $0.78
General and administrative 24,767 $0.18 38% 14,753 $0.13
Distributable cash
- After gross margin
replacement 69,455 $0.52 2% 57,475 $0.51
- After marketing expense 61,242 $0.46 7% 48,162 $0.43
Distributions (including
Special Distribution(7)) 68,017 $0.51 6% 53,434 $0.48
Distributions (excluding
Special Distribution) 41,321 $0.31 - 34,860 $0.31
Distributable cash payout
ratio(7) (including
Special Distribution)
- After gross margin
replacement 98% 93%
- After marketing expense 111% 111%
Distributable cash payout
ratio(4) (excluding
Special Distribution)
- After gross margin
replacement 60% 61%
- After marketing expense 67% 72%
For the nine months ended December 31
(thousands of dollars except where indicated and per unit amounts)
Fiscal 2010 Fiscal 2009
Per Per Unit Per
$ unit(5) Change(5) $ unit(5)
Sales 1,460,635 $11.13 5% 1,185,640 $10.65
Net income (loss)(1) 310,707 $2.37 NMF(6) (938,852) $(8.52)
Adjusted net income(2) 59,112 $0.61 (16)% 81,185 $0.73
Gross margin (seasonally
adjusted)(3) 304,010 $2.32 23% 209,050 $1.88
General and administrative 66,018 $0.50 35% 41,436 $0.37
Distributable cash
- After gross margin
replacement 163,977 $1.25 13% 123,276 $1.11
- After marketing expense 138,674 $1.06 10% 106,838 $0.96
Distributions (including
Special Distribution(7)) 145,870 $1.11 2% 121,724 $1.09
Distributions (excluding
Special Distribution) 119,174 $0.91 (2)% 103,150 $0.93
Distributable cash payout
ratio(7) (including
Special Distribution)
- After gross margin
replacement 89% 99%
- After marketing expense 105% 114%
Distributable cash payout
ratio(4) (excluding
Special Distribution)
- After gross margin
replacement 73% 84%
- After marketing expense 86% 97%
(1) Net income (loss) includes the impact of unrealized gains (losses),
which represent the mark to market of future commodity supply acquired
to cover future customer demand. The supply has been sold to customers
at fixed prices minimizing any impact of quarter-end mark to market
gains and losses.
(2) Adjusted net income is a more appropriate measure of the performance of
the Fund since the underlying supply is held to its maturity, and
therefore, mark to market gains and losses do not impact the long-term
financial performance of the Fund.
(3) See discussion of non-GAAP financial measures on page 2.
(4) Management targets an annual payout ratio after all marketing expenses,
excluding any Special Distribution, of less than 100%.
(5) The per unit calculation reflects a fully diluted basis. Year over year
change is calculated on a per unit basis.
(6) Not a meaningful number.
(7) In calendar 2009 and 2008, the Fund under-distributed its taxable income
and the Board of Directors concluded that a Special Distribution would
be paid to ensure that all taxable income would be distributed. Refer to
"Special Distribution" on page 23 for further information.
Reconciliation of For the three For the three For the nine For the nine
net income (loss) months ended months ended months ended months ended
to adjusted net December 31, December 31, December 31, December 31,
income Fiscal 2010 Fiscal 2009 Fiscal 2010 Fiscal 2009
(thousands of ----------- ----------- ----------- -----------
dollars)
Net income (loss) $97,390 $(49,094) $310,707 $(938,852)
Change in fair
value of
derivative
instruments (50,853) 81,345 (277,248) 1,092,859
Tax impact on
change in fair
value of
derivative
instruments (2,295) 14,431 25,653 (72,822)
-------------------------------------------------------
Adjusted net
income $44,242 $46,682 $59,112 $81,185
-------------------------------------------------------
Acquisition of Universal Energy Group
On July 1, 2009, Just Energy completed the acquisition of all of the outstanding
common shares of Universal Energy Group Ltd. ("UEG" or "Universal") pursuant to
a plan of arrangement (the "Arrangement"). Under the Arrangement, UEG
shareholders received 0.58 of an exchangeable share ("Exchangeable Share") of
JEEC, a subsidiary of Just Energy, for each UEG common share held. In aggregate,
21,271,804 Exchangeable Shares were issued pursuant to the Arrangement. Each
Exchangeable Share is exchangeable for a trust unit on a one-for-one basis at
any time at the option of the holder and entitles the holder to a monthly
dividend equal to 66 2/3% of the monthly distribution and /or Special
Distribution paid by Just Energy on a Trust unit. JEEC also assumed all the
covenants and obligations of UEG in respect of the UEG's outstanding 6%
convertible unsecured subordinated debentures (the "Debentures"). On conversion
of the Debentures, holders will be entitled to receive 0.58 of an Exchangeable
Share in lieu of each UEG common share that the holder was previously entitled
to receive on conversion.
The acquisition of UEG was accounted for using the purchase method of
accounting. The Fund allocated the purchase price to the identified assets and
liabilities acquired based on their fair values at the time of acquisition as
follows (thousands of dollars):
Net assets acquired:
Working capital (including cash of $10,319) $ 75,391
Electricity contracts and customer relationships 230,963
Gas contracts and customer relationships 247,189
Water heater contracts and customer relationships 22,700
Other intangible assets 2,721
Goodwill 59,294
Property, plant and equipment 171,918
Future tax liabilities (51,971)
Other liabilities - current (164,148)
Other liabilities - long-term (140,857)
Long-term debt (180,440)
Non-controlling interest (22,697)
-----------
$ 250,063
-----------
-----------
Consideration:
Transaction costs $ 10,117
Exchangeable shares 239,946
-----------
$ 250,063
-----------
-----------
All contracts, customer relationships and intangible assets are amortized over
the average remaining life at the time of acquisition. The gas and electricity
contracts acquired are amortized over periods ranging from eight to 57 months.
The water heater contracts and customer relationships are amortized over 174
months and the intangible assets are amortized over six months. The purchase
price allocation is considered preliminary and as a result may be adjusted
during the year.
Operations
Gas
In each of the markets that Just Energy operates, it is required to deliver gas
to the LDCs for its customers throughout the year. Gas customers are charged a
fixed price for the full term of their contract. Just Energy purchases gas
supply in advance of marketing for residential customers and generally
concurrently with the execution of a contract for commercial customers. The LDC
provides historical customer usage to enable Just Energy to purchase an
approximation of estimated supply. Furthermore, in many markets, Just Energy
mitigates exposure to customer usage by purchasing options that cover potential
differences in customer consumption due to weather variations. The cost of this
strategy is incorporated in the price to the customer. To the extent that
balancing requirements are outside the options purchased, Just Energy bears the
financial responsibility for fluctuations in customer usage. Volume variances
may result in either excess or short supply. Excess supply is sold in the spot
market resulting in either a gain or loss compared to the weighted average cost
of supply. In the case of greater than expected gas consumption, Just Energy
must purchase the short supply at the market price, which may reduce or increase
the customer gross margin typically realized. Under some commercial contract
terms, this balancing may be passed through to the customer.
Ontario, Quebec, British Columbia and Michigan
In Ontario, Quebec, British Columbia and Michigan, the volumes delivered for a
customer typically remain constant throughout the year. Just Energy does not
recognize sales until the customer actually consumes the gas. During the winter
months, gas is consumed at a rate which is greater than delivery, and in the
summer months, deliveries to LDCs exceed customer consumption. Just Energy
receives cash from the LDCs as the gas is delivered, which is even throughout
the year.
Manitoba and Alberta
In Manitoba and Alberta, the volume of gas delivered is based on the estimated
consumption for each month. Therefore, the amount of gas delivered in winter
months is higher than in the spring and summer months. Consequently, cash
received from customers and LDCs will be higher in the winter months.
New York, Illinois, Indiana, Ohio and California
In New York, Illinois, Indiana, Ohio and California, the volume of gas delivered
is based on the estimated consumption and storage requirements for each month.
Therefore the amount of gas delivered in winter months is higher than in the
spring and summer months. Consequently, cash flow received from these states' is
greatest during the third and fourth (winter) quarters, as normally, cash is
received from the LDCs in the same period as customer consumption.
Electricity
Ontario, Alberta, New York, Texas, Pennsylvania, New Jersey, Maryland, Michigan
and California
Just Energy does not bear the risk for variations in residential customer
consumption in any of the electricity markets in which it operates other than
for certain customers in Texas and Alberta and the customers acquired in the
Universal acquisition (customers located in Pennsylvania, New Jersey, Maryland,
Michigan and California). In Ontario and New York, Just Energy provides
customers with price protection for the majority of their electricity
requirements. The customers experience either a small balancing charge or credit
on each bill due to fluctuations in prices applicable to their volume
requirements not covered by a fixed price. To the extent possible given the
competitive nature and market knowledge of customers, future offerings for Texas
customers will be a load balanced product and Just Energy will not bear the risk
for variations in customer consumption.
Cash flow from electricity operations is greatest during the second and fourth
quarters (summer and winter), as electricity consumption is typically highest
during these periods.
Water heaters
NEC began operations in April 2008 and operates under the trade name of National
Home Services ("NHS"). Newten Home Comfort L.P. ("NHCLP") a partnership between
Just Energy and Newten Home Comfort Inc., an arm's length third party holding
20% of the partnership commenced providing Ontario residential customers with a
long term water heater rental program in the summer of 2008, offering high
efficiency conventional and power vented tanks and tankless water heaters. On
July 2, 2009, NEC, a wholly owned home services subsidiary of UEG, acquired
Newten Home Comfort Inc. Accordingly, NHCLP became a wholly owned subsidiary of
Just Energy. On September 30, 2009, NEC acquired substantially all of the assets
of NHCLP, including all of NHCLP's customer water heater rental agreements.
NHCLP and Newten Home Comfort Inc. were subsequently wound up. See page 20 for
additional information on NEC.
Ethanol division
Just Energy also owns a 66.7% interest in TGF, a 150-million-litre capacity
wheat-based ethanol plant located in Belle Plaine, Saskatchewan. The plant
produces ethanol and high protein distillers dried grain ("DDG") from the wheat
supply. See page 21 for additional information on TGF.
Cash Available for Distribution and distributions
For the three months ended December 31
(thousands of dollars except per unit amounts)
Fiscal 2010 Fiscal 2009
----------- -----------
Per unit Per unit
-------- --------
Reconciliation to statements of
cash flow
Cash inflow from operations $4,418 $15,962
Add:
Increase in non-cash working capital 55,938 31,297
Tax impact on distributions to
Class A preference shareholders 886 903
----------- --------
Cash available for distribution $61,242 $48,162
----------- --------
Cash available for distribution
Gross margin per financial statements $111,947 $0.83 $89,826 $0.80
Adjustments required to reflect net
cash receipts from gas sales 9,775 (2,272)
----------- --------
Seasonally adjusted gross margin $121,722 $0.91 $87,554 $0.78
----------- --------
Less:
General and administrative (24,767) (14,753)
Capital tax recovery (expense) (209) (198)
Bad debt expense (5,130) (4,224)
Income tax provision (2,269) (1,896)
Interest expense (5,143) (1,121)
Other items 3,584 1,579
----------- --------
(33,934) (20,613)
----------- --------
Distributable cash before marketing
expenses 87,788 $0.65 66,941 $0.60
Marketing expenses to maintain gross
margin (18,333) (9,466)
----------- --------
Distributable cash after gross margin
replacement 69,455 $0.52 57,475 $0.51
Marketing expenses to add new gross
margin (8,213) (9,313)
----------- --------
Cash available for distribution $61,242 $0.46 $48,162 $0.43
----------- --------
----------- --------
Distributions (includes Special
Distribution)
Unitholder distributions $64,580 $50,426
Class A preference share distributions 2,685 2,500
Unit appreciation rights and deferred
unit grant distributions 752 508
----------- --------
Total distributions $68,017 $0.51 $53,434 $0.48
----------- --------
----------- --------
Distributions (excludes Special
Distribution)
Unitholder distributions $39,233 $32,899
Class A preference share distributions 1,632 1,631
Unit appreciation rights and deferred
unit grant distributions 456 330
----------- --------
Total distributions $41,321 $0.31 $34,860 $0.31
----------- --------
----------- --------
Diluted average number of units
outstanding 134.1m 112.4m
Cash Available for Distribution and distributions
For the nine months ended December 31
(thousands of dollars except per unit amounts)
Fiscal 2010 Fiscal 2009
----------- -----------
Per unit Per unit
-------- --------
Reconciliation to statements of
cash flow
Cash inflow from operations $66,920 $78,967
Add:
Decrease in non-cash working capital 69,791 25,694
Tax impact on distributions to
Class A preference shareholders 1,963 2,177
----------- --------
Cash available for distribution $138,674 $106,838
----------- --------
----------- --------
Cash available for distribution
Gross margin per financial statements $259,518 $1.98 $189,173 $1.70
Adjustments required to reflect net
cash receipts from gas sales 44,492 19,877
----------- --------
Seasonally adjusted gross margin $304,010 $2.32 $209,050 $1.88
----------- --------
Less:
General and administrative (66,018) (41,436)
Capital tax expense (337) (198)
Bad debt expense (12,815) (7,749)
Income tax provision (8,335) (2,654)
Interest expense (10,569) (2,977)
Other items 5,776 2,421
----------- --------
(92,298) (52,593)
----------- --------
Distributable cash before marketing
expenses 211,712 $1.61 156,457 $1.41
Marketing expenses to maintain gross
margin (47,735) (33,181)
----------- --------
Distributable cash after gross margin
replacement 163,977 $1.25 123,276 $1.11
Marketing expenses to add new gross
margin (25,303) (16,438)
----------- --------
Cash available for distribution $138,674 $1.06 $106,838 $0.96
----------- --------
----------- --------
Distributions (includes Special
Distribution)
Unitholder distributions $138,275 $114,526
Class A preference share distributions 5,948 6,028
Unit appreciation rights and deferred
unit grant distributions 1,647 1,170
----------- --------
Total distributions $145,870 $1.11 $121,724 $1.09
----------- --------
----------- --------
Distributions (excludes Special
Distribution)
Unitholder distributions $112,928 $96,999
Class A preference share distributions 4,895 5,159
Unit appreciation rights and deferred
unit grant distributions 1,351 992
----------- --------
Total distributions $119,174 $0.91 $103,150 $0.93
----------- --------
----------- --------
Diluted average number of units
outstanding 131.2m 111.3m
Distributable cash
Distributable cash after gross margin replacement for the current quarter ended
December 31, 2009 was $69.5 million ($0.52 per unit), up 21% from $57.5 million
($0.51 per unit) in fiscal 2009. The growth reflects a 39% increase in
seasonally adjusted gross margin. Factors contributing to margin growth include
a 28% year over year increase in total customers, of which 24% related to the
430,000 acquired customers from Universal. The new Universal customers, higher
margin per customer due to opportunistic pricing and continued strong acceptance
of the Just Green product as well as improved supply management, particularly in
Texas, resulted in increased distributable cash, offsetting a significant
decline in the U.S. dollar. On a per unit basis (reflecting the units issued to
acquire Universal), distributable cash after gross margin replacement was up 2%
and gross margin increased by 17% reflecting higher gross margin per customer,
offset by an anticipated drop off in margin from customers acquired from
Universal that were not expected to renew. The largest factor in the disparity
between distributable cash and gross margin growth was an increase in general
and administrative costs versus the comparable quarter of fiscal 2009.
General and administrative costs were up 68% over the prior year comparable
quarter. This was primarily due to the administrative costs incurred at NHS and
TGF as well as the addition of a portion of Universal's energy marketing
administrative costs. Overall, energy marketing related general and
administrative costs were up 44% in the third quarter of fiscal 2010 versus the
same period last year versus a 28% increase in total customers. Just Energy
currently has general and administrative cost level that does not yet reflect
the full synergies that will be realized in the Universal acquisition.
Management has estimated that these savings would be $10 million per year and
the current expectation is that the savings will be greater than this. The
benefit will be reflected in lower general and administrative cost growth in
future years.
The higher increase in general and administrative costs was largely due to
staffing costs to support future growth, increased collection costs and
professional fee expenditures on the Fund's conversion plan, International
Financial Reporting Standards ("IFRS") and other corporate development
activities. Both NHS and TGF are in the start-up phase and management is
confident that they will offset their start-up costs with distributable cash in
future periods. Bad debt expense increased in the third quarter of fiscal 2010
compared to 2009, primarily due to the increased volumes in those markets where
the Fund bears the credit risk as well as continued weak economic conditions in
the U.S. markets. In order to ensure bad debt is managed during the upcoming
heavy heating season aggressive customer cut offs were done prior to the season
increasing attrition but lessening the impact of bad debt in future quarters.
Just Energy spent $18.3 million in marketing expenses to maintain its current
level of gross margin, which represents 69% of the total marketing expense for
the quarter. A further $8.2 million was spent to increase future gross margin
resulting in the 13,000 net RCE additions and higher margins per new customer
for the quarter. Management's estimate of the future contracted gross margin
decreased to $1,139.4 million from $1,213.8 million at the end of the second
quarter of fiscal 2010 due to a small decline in the Canadian customer base and
a less than proportional growth in future U.S. margins due to a lower U.S.
dollar spot price on which all future U.S. margins are valued. As at December
31, 2009, the Canadian future contracted gross margin is $749.9 million and the
U.S. margin is US$376.9 million.
Distributable cash after all marketing expenses amounted to $61.2 million ($0.46
per unit) for the third quarter of fiscal 2010, an increase of 7% per unit from
$48.2 million ($0.43 per unit) in the prior year comparable quarter. The
increase is due to accretion from the Universal purchase and net customer
additions offset by increased expenditures noted above. Excluding the Special
Distribution, the payout ratio after deduction of all marketing expenses for the
current quarter was 67% versus 72% in fiscal 2009.
Distributable cash after gross margin replacement for the nine months ended
December 31, 2009 was $164.0 million ($1.25 per unit), an increase of 13% per
unit from $123.3 million ($1.11 per unit) in the prior year comparable period.
Distributable cash after marketing expenses was $138.7 million ($1.06 per unit)
for the first nine months of fiscal 2010, an increase of 10% per unit from
$106.8 million ($0.96 per unit) for the same period last year. The payout ratio
after all marketing expenses excluding the Special Distribution for the
nine-month period of fiscal 2010 was 86% versus 97% for the nine months ended
December 31, 2009. As Just Energy has grown, its distribution rate has been
maintained at $1.24 per year in anticipation of the need to convert to a
corporation prior to 2011 (see "Outlook" on page 31). The result has been a
declining payout ratio excluding Special Distributions.
For further information on the changes in the gross margin, please refer to
"Sales and gross margin - Seasonally adjusted" on page 15 and "General and
administrative expenses", "Marketing expenses", "Bad debt expense" and "Interest
expense" are further clarified on pages 21 and 22.
Adjusted net income
Adjusted net income was $44.2 million for the quarter ($0.33 per unit) down from
adjusted net income of $46.7 million ($0.42 per unit) in the third quarter of
fiscal 2009. Positive results from the energy marketing portion of the business
were partially offset by losses from NHS and TGF as both businesses are in
start-up phases. For the nine months ended December 31, 2009, adjusted net
income was $59.1 million ($0.45 per unit) as compared to $81.2 million or $0.73
per unit in the same period last year. Adjusted net income was negatively
impacted by the amortization of the Universal acquired customer contracts and
the increased general and administrative costs incurred for Universal, which
will be reduced as Just Energy works towards consolidating various processes.
Synergies from the consolidation are expected to exceed management's
expectations.
Discussion of Distributions
(thousands of dollars)
For the three For the three For the nine For the nine
months ended months ended months ended months ended
December 31, December 31, December 31, December 31,
Fiscal 2010 Fiscal 2009 Fiscal 2010 Fiscal 2009
-------------- -------------- ------------- -------------
Cash flow from
operations(1)(A) $4,418 $15,962 $66,920 $78,967
Net income (loss)(B) $97,390 $(49,094) $310,707 $(938,852)
Total
distributions(2)(C) $68,017 $53,434 $145,870 $121,724
Shortfall of cash
flows from
operating
activities over
distributions paid
(A-C) $(63,599) $(37,472) $(78,950) $(42,757)
Excess (shortfall)
of net income
(loss) over
distributions paid
(B-C) $29,373 $(102,528) $164,837 $(1,060,576)
(1) Includes non-cash working capital balances
(2) Includes a one-time Special Distribution of $26,696 in fiscal 2010 and
$18,574 in fiscal 2009.
Net income (loss) includes non-cash gains and losses associated with the changes
in the current market value of Just Energy's derivative instruments. These
instruments form part of the Fund's requirement to purchase commodity according
to estimated demand and, as such, changes in value do not impact the
distribution policy or the long-term financial performance of the Fund.
Effective July 1, 2008, Just Energy elected to discontinue the practice of hedge
accounting and all gains and losses on derivative instruments have been recorded
in the change in fair value of derivative instruments.
The change in fair value associated with these derivatives included in the net
income for the third quarter of fiscal 2010 was a gain of $50.9 million versus a
loss of $81.3 million for the quarter ended December 31, 2008.
The Fund has, in the past, paid out distributions that were higher than both
financial statement net income and operating cash flow. In the view of
management, the non-GAAP measure, distributable cash, is an appropriate measure
of the Fund's ability to distribute funds, as the cost of carrying incremental
working capital necessary for the growth of the business has been deducted in
the distributable cash calculation. Further, investment in the addition of new
customers intended to increase cash flow is expensed in the financial statements
while the original customer base was capitalized. NEC has reached a new
agreement with Home Trust Company to separately finance their water heaters. See
the "Outlook" section on page 31 for further discussion on this financing. In
addition, the capital expenditures for TGF are funded through their credit
facility and debt instruments. Management believes that the current level of
distributions is sustainable in the foreseeable future.
The timing differences between distributions and cash flow from operations
created by the cost of carrying incremental working capital due to business
seasonality and expansion are funded by the operating credit facility.
Standardized Distributable Cash and Cash Available for Distribution
(thousands of dollars except per unit amounts)
For the three months For the nine months
ended December 31, ended December 31,
Fiscal 2010 Fiscal 2009 Fiscal 2010 Fiscal 2009
----------- ----------- ----------- -----------
Reconciliation to
statements of cash
flow
Cash inflow from
operations $4,418 $15,962 $66,920 $78,967
Capital expenditures(1) (11,034) (1,667) (30,917) (2,993)
---------------------------------------------------
Standardized
Distributable Cash $(6,616) $14,295 $36,003 $75,974
---------------------------------------------------
Adjustments to
Standardized
Distributable Cash
Change in non-cash
working capital(2) $55,938 $31,297 $69,791 $25,694
Tax impact on
distributions to
Class A preference
shareholders(3) 886 903 1,963 2,177
Capital expenditures(1) 11,034 1,667 30,917 2,993
---------------------------------------------------
Cash available for
distribution $61,242 $48,162 $138,674 $106,838
---------------------------------------------------
Standardized
Distributable Cash -
per unit basic (0.05) 0.13 0.28 0.69
Standardized
Distributable Cash -
per unit diluted (0.05) 0.13 0.27 0.68
Payout Ratio based
on Standardized
Distributable Cash
(includes Special
Distribution(4)) NMF(5) 374% 405% 160%
Payout Ratio based on
Standardized
Distributable Cash
(excludes Special
Distribution) NMF(5) 244% 331% 136%
(1) Capital expenditures incurred in the quarter were effectively funded out
of the credit facility. The vast majority of capital expenditures in the
current quarter related to the purchase of water heaters for subsequent
rental. These expenditures expand the productive capacity of the
business. In future periods, water heater capital purchases will be
financed through a separate financing secured by the water heaters and
associated contracts.
(2) Change in non-cash working capital is excluded from the calculation of
Cash Available for Distribution as the Fund has a $250.0 million credit
facility which is available for use to fund working capital
requirements. This eliminates the potential impact of timing distortions
relating to the respective items.
(3) Payments to the holders of Class A preference shares are equivalent to
distributions. The number of Class A preference shares outstanding is
included in the denominator of any per unit calculation.
(4) The Special Distribution relating to calendar 2009 and 2008 has
increased the payout ratios for both comparable periods. Refer to
"Special Distribution" on page 23 for further details.
(5) Not a meaningful number
In accordance with the Canadian Institute of Chartered Accountants ("CICA") July
2007 interpretive release, Standardized Distributable Cash in Income Trusts and
other Flow-Through Entities, the Fund has presented the distributable cash
calculation to conform to this guidance. In summary, for the purposes of the
Fund, Standardized Distributable Cash is defined as the periodic cash flows from
operating activities, including the effects of changes in non-cash working
capital less total capital expenditures as reported in the GAAP financial
statements.
Financing Strategy
The Fund's $250.0 million credit facility will be sufficient to meet the Fund's
short-term working capital and capital expenditure requirements for the gas and
electricity business. As part of the acquisition of Universal, additional credit
facilities and debt were recorded and are explained further on page 27. Working
capital requirements can vary widely due to seasonal fluctuations and planned
U.S.-related growth. In the long-term, the Fund may be required to access the
equity or debt markets in order to fund significant acquisitions. NEC has
reached a new agreement with Home Trust Company to separately finance their
water heaters. See the "Outlook" section on page 31 for further discussion on
this financing.
Productive Capacity
Just Energy's business involves the sale of natural gas and/or electricity to
residential and commercial customers under long-term, fixed-price contracts. As
such, the Fund's productive capacity is determined by the gross margin earned
from the contract price and the related supply cost.
The productive capacity of Just Energy is achieved through the retention of
existing customers and the addition of new customers to replace those that have
not been renewed. The productive capacity is maintained and grows through
independent contractors, call centre renewal efforts, Internet marketing and
various mail campaigns.
Effectively all of the marketing costs related to customer contracts are
expensed immediately but fall into two categories. The first represents
marketing expenses to maintain gross margin at pre-existing levels and by
definition maintain productive capacity. The second category is marketing
expenditures to add new margin, which therefore expands productive capacity. As
noted above, capital expenditures by the Fund are utilized to expand the
productive capacity of the business.
The vast majority of capital expenditures incurred by Just Energy relate to the
purchase of water heaters, which are subsequently rented on a long-term basis
under customer contracts. These capital expenditures are funded by non-recourse
borrowings that have as security the water heaters and contracts. As such, these
capital expenditures increase the productive capacity of the Fund.
Summary of quarterly results
(thousands of dollars except
per unit amounts) F2010 F2010 F2010 F2009
Q3 Q2 Q1 Q4
-- -- -- --
Sales per financial statements $626,966 $434,659 $399,010 $713,573
Gross margin (seasonally adjusted) 121,722 107,519 74,769 106,143
General and administrative expense 24,767 25,634 15,617 18,150
Net income (loss) 97,390 110,690 102,627 (168,621)
Net income (loss) per unit - basic 0.73 0.83 0.92 (1.57)
Net income (loss) per unit - diluted 0.73 0.82 0.91 (1.57)
Adjusted net income (loss) 44,242 (9,682) 24,552 88,744
Adjusted net income per unit - basic 0.33 (0.07) 0.22 0.81
Adjusted net income per unit -
diluted 0.33 (0.07) 0.22 0.79
Amount available for distribution
After gross margin replacement 69,455 52,303 42,219 72,244
After marketing expense 61,242 41,345 36,087 62,515
Payout ratio
After gross margin replacement 98%(1) 82% 83% 48%
After marketing expense 111%(1) 104% 97% 56%
(1) Includes the Special Distribution related to calendar 2009. If the
Special Distribution figure of $26,696 is removed, the payout ratios
would be 60% after gross margin replacement and 67% after marketing
expense.
F2009 F2009 F2009 F2008
Q3 Q2 Q1 Q4
-- -- -- --
Sales per financial statements $513,608 $294,122 $377,910 $652,617
Gross margin (seasonally adjusted) 87,554 61,793 59,703 87,960
General and administrative expense 14,753 13,236 13,447 17,138
Net income (loss) (49,094) (923,990) 34,232 94,025
Net income (loss) per unit - basic (0.44) (8.33) 0.31 0.87
Net income (loss) per unit - diluted (0.44) (8.33) 0.31 0.87
Adjusted net income 46,682 6,872 27,631 87,663
Adjusted net income per unit - basic 0.42 0.06 0.25 0.81
Adjusted net income per unit -
diluted 0.42 0.06 0.25 0.80
Amount available for distribution
After gross margin/customer
replacement 57,475 34,755 31,046 54,334
After marketing expense 48,162 28,394 30,282 53,992
Payout ratio
After gross margin/customer
replacement 93%(1) 100% 108% 61%
After marketing expense 111%(1) 122% 111% 61%
(1) Includes the Special Distribution related to calendar 2008. If the
Special Distribution figure of $18,573 is removed, the payout ratios
would be 61% after gross margin replacement and 72% after marketing
expense.
The Fund's results reflect seasonality as consumption is greatest during the
third and fourth quarters (winter quarters). While year over year quarterly
comparisons are relevant, sequential quarters will vary materially. The main
impact of this will be higher distributable cash with a lower payout ratio in
the third and fourth quarters and lower distributable cash with a higher payout
ratio in the first and second quarters excluding any Special Distribution.
Analysis of the third quarter
Sales are typically higher in the third quarter because gas and electricity
consumption is highest during this period. The overall customer base is
currently 51% gas and 49% electricity. The 22% increase in sales compared to the
prior comparable quarter is primarily attributable to the acquisition of
Universal and strong U.S. growth in our existing markets. The adjusted net
income was $44.2 million for the three months ended December 31, 2009. Increased
adjusted net income was attributable to margin growth offset by amortization
recorded on the acquired Universal contracts in the quarter.
The distributable cash after customer gross margin replacement was $69.5 million
up 21% from $57.5 million in the prior comparable quarter. The increase in gross
margin was due to the margin earned on the acquired customers from Universal,
net customer additions through marketing and higher per customer margins.
Distributable cash after marketing expenses was $61.2 million, an increase of
27% from $48.2 million in the prior comparable quarter. Distributions, including
the Special Distribution, for the quarter were $68.0 million, up 27% over the
same period last year reflecting a 6% per unit increase quarter over quarter.
The payout ratio after all marketing expenses was 111% unchanged from the third
quarter of fiscal 2009.
Gas and Electricity Marketing
Financial Statement Analysis
Sales and gross margin - Per financial statements
For the three months ended December 31
(thousands of dollars)
Fiscal 2010 Fiscal 2009
----------- -----------
United United
Sales Canada States Total Canada States Total
-----
Gas $207,499 $134,251 $341,750 $212,875 $112,563 $325,438
Electricity 171,896 91,263 263,159 130,227 57,943 188,170
---------------------------------------------------------------------
$379,395 $225,514 $604,909 $343,102 $170,506 $513,608
---------------------------------------------------------------------
Increase 11% 32% 18%
United United
Gross Margin Canada States Total Canada States Total
------------
Gas $32,165 $25,478 $57,643 $35,775 $25,190 $60,965
Electricity 29,265 21,090 50,355 20,354 8,507 28,861
---------------------------------------------------------------------
$61,430 $46,568 $107,998 $56,129 $33,697 $89,826
---------------------------------------------------------------------
Increase 9% 38% 20%
For the nine months ended December 31
(thousands of dollars)
Fiscal 2010 Fiscal 2009
----------- -----------
United United
Sales Canada States Total Canada States Total
-----
Gas $448,832 $222,409 $671,241 $459,420 $175,873 $635,293
Electricity 469,844 278,570 748,414 389,246 161,101 550,347
-------------------------------------------------------------------------
$918,676 $500,979 $1,419,655 $848,666 $336,974 $1,185,640
-------------------------------------------------------------------------
Increase 8% 49% 20%
United United
Gross Margin Canada States Total Canada States Total
------------
Gas $61,375 $44,967 $106,342 $80,740 $34,344 $115,084
Electricity 80,645 64,401 145,046 59,574 14,515 74,089
-------------------------------------------------------------------------
$142,020 $109,368 $251,388 $140,314 $48,859 $189,173
-------------------------------------------------------------------------
Increase 1% 124% 33%
Canada
Sales and gross margin for the three months ended December 31, 2009, were $379.4
million and $61.4 million, an increase of 11% and 9%, respectively, from the
prior year comparative period. Total sales and gross margin for the nine month
period of fiscal 2010 were $918.7 million and $142.0 million, respectively.
United States
Sales and gross margin in the U.S. were $225.5 million and $46.6 million for the
third quarter, an increase of 32% and 38%, respectively, from the same period
last year. Total sales and gross margin for the nine months ended December 31,
2009 were $501.0 million and $109.4 million, respectively.
For additional information, see "Sales and gross margin - Seasonally adjusted"
below.
Sales and gross margin - Seasonally adjusted(1)
For the three months ended December 31
(thousands of dollars)
Fiscal 2010 Fiscal 2009
----------- -----------
United United
Sales Canada States Total Canada States Total
-----
Gas $207,499 $134,251 $341,750 $212,875 $112,563 $325,438
Adjustments(1) 23,743 3,977 27,720 (2,807) - (2,807)
------------------------------------------------------------------------
$231,242 $138,228 $369,470 $210,068 $112,563 $322,631
Electricity 171,896 91,263 263,159 130,227 57,943 188,170
------------------------------------------------------------------------
$403,138 $229,491 $632,629 $340,295 $170,506 $510,801
------------------------------------------------------------------------
Increase 18% 35% 24%
United United
Gross Margin Canada States Total Canada States Total
------------
Gas $32,165 $25,478 $57,643 $35,775 $25,190 $60,965
Adjustments(1) 9,350 425 9,775 (2,272) - (2,272)
------------------------------------------------------------------------
$41,515 $25,903 $67,418 $33,503 $25,190 $58,693
Electricity 29,265 21,090 50,355 20,354 8,507 28,861
------------------------------------------------------------------------
$70,780 $ 46,993 $117,773 $53,857 $33,697 $87,554
------------------------------------------------------------------------
Increase 31% 39% 35%
(1) For Ontario, Manitoba, Quebec and Michigan gas markets.
Sales and gross margin - Seasonally adjusted(1)
For the nine months ended December 31
(thousands of dollars)
Fiscal 2010 Fiscal 2009
----------- -----------
United United
Sales Canada States Total Canada States Total
-----
Gas $448,832 $222,409 $671,241 $459,420 $175,873 $635,293
Adjustments(1) 160,985 27,764 188,749 113,145 - 113,145
----------------------------------------------------------------------------
$609,817 $250,173 $859,990 $572,565 $175,873 $748,438
Electricity 469,844 278,570 748,414 389,246 161,101 550,347
----------------------------------------------------------------------------
$1,079,661 $528,743 $1,608,404 $961,811 $336,974 $1,298,785
----------------------------------------------------------------------------
Increase 12% 57% 24%
United United
Gross Margin Canada States Total Canada States Total
------------
Gas $61,375 $44,967 $106,342 $80,740 $34,344 $115,084
Adjustments(1) 41,804 2,688 44,492 19,877 - 19,877
----------------------------------------------------------------------------
$103,179 $47,655 $150,834 $100,617 $ 34,344 $134,961
Electricity 80,645 64,401 145,046 59,574 14,515 74,089
----------------------------------------------------------------------------
$183,824 $112,056 $295,880 $160,191 $48,859 $209,050
----------------------------------------------------------------------------
Increase 15% 129% 42%
(1) For Ontario, Manitoba, Quebec and Michigan gas markets.
On a seasonally adjusted basis, sales and gross margin increased by 24% and 35%,
respectively, to $632.6 million and $117.8 million for the three months ended
December 31, 2009 over the third quarter of fiscal 2009. The 18% increase in
sales was due to a 28% increase in customers (24% of which were acquired with
Universal) offset by a 14% decline in the U.S. dollar and some unfavourable
weather-based consumption in all significant provinces and states. Gross margin
increased at a greater rate than sales due to higher realized margin per
customer, particularly in the U.S.
Total sales and gross margin for the first nine months of fiscal 2010 totalled
$1.6 billion and $295.9 million versus $1.3 billion and $209.1 million for the
same period last year.
Canada
Seasonally adjusted sales were $403.1 million for the quarter, up 18% from
$340.3 million for the comparable quarter in fiscal 2009. Seasonally adjusted
gross margins were $70.8 million in the third quarter of fiscal 2010, an
increase of 31% from $53.9 million in the same quarter last year.
Gas
Gas sales increased by 10% to $231.2 million and gross margin increased by 24%
to $41.5 million, versus the third quarter of fiscal 2009. Customer consumption
increased due to a 4% increase in number of customers (including Universal) and
slightly colder temperatures in Alberta offset by warmer weather in Ontario.
Gross margin growth was greater than that of sales due to higher realized margin
per customer related to steady increases in new customer contract margins in
past periods and improved supply management processes. For the nine months ended
December 31, 2009, sales and gross margins were $609.8 million and $103.2
million, an increase of 7% and 3%, respectively, over the prior year comparable
period.
After allowance for balancing and inclusive of acquisitions, average gross
margin per customer ("GM/RCE") for the three months ended December 31, 2009
amounted to $214/RCE, up 20% compared to $179/RCE from the prior year comparable
period. The GM/RCE value includes an appropriate allowance for the bad debt
expense in Alberta.
Electricity
Electricity sales were $171.9 million for the quarter, an increase of 31% from
the third quarter of fiscal 2009. The increased sales are attributable to a 34%
increase in customers. Gross margin increased by 44% from the prior year
comparable quarter to $29.3 million due to the increase in customers and
increased margin per customer, which resulted from steady increases in new
customer contract margins in past periods and the fact that the electricity
customers acquired from Universal had generally higher margins than those of
Just Energy. As well, new customers under the higher margin Just Green program
are making up a higher proportion of the overall electricity book.
For the nine months ended December 31, 2009, sales and gross margins were $469.8
million and $80.6 million, an increase of 21% and 35%, respectively, over the
same period last year.
Average gross margin per customer after all balancing and including acquisitions
for the quarter ended December 31, 2009 in Canada amounted to $151/RCE compared
to $136/RCE from the prior comparable quarter. The GM/RCE value includes an
appropriate allowance for the bad debt expense in Alberta.
United States
Sales for the third quarter of fiscal 2010 were $229.5 million, an increase of
35% from $170.5 million in the prior year comparable quarter. Seasonally
adjusted gross margin was $47.0 million, up 39% from $34.0 million from the same
quarter last year.
Gas
Gas sales in the U.S. increased by 23% from $112.6 million to $138.2 million for
the third quarter ended December 31, 2009. This increase reflects the addition
of 120,000 customers acquired as part of the Universal transaction and net
customer growth through marketing offset by a 14% decline in the U.S. dollar and
lower selling prices. Gas margin increased 3% for the third quarter of fiscal
2010 to $25.9 million from $25.2 million. U.S. gas margins per customer were
down for three reasons: the customers acquired from Universal were at lower
margins that those of Just Energy; there was a 14% decline in the U.S. dollar
and warmer than normal weather in the northern U.S. which required the sale of
excess supply into a low price spot market. In addition, there were Universal
customers which were not expected to renew (and therefore not included in long
term customer numbers) which expired during the quarter. The expected negative
impact of this lost margin on the third and fourth quarters was disclosed at the
time of the Universal acquisition in the second quarter. Sales and gross margins
for the nine months ended December 31, 2009 totaled $250.2 million and $47.7
million, respectively.
Average gross margin after all balancing costs for the three months ended
December 31, 2009 was $207/RCE, down from $231/RCE noted in the prior year
comparable period. The GM/RCE value includes an appropriate allowance for bad
debt expense in Illinois.
Electricity
Electricity sales and gross margin for the quarter were $91.3 million and $21.1
million, respectively, versus the comparable period of fiscal 2009 in which,
sales and gross margin amounted to $57.9 million and $8.5 million, respectively.
Electricity customers increased by 76%, driving the 58% sales growth. Sales
growth was less than customer growth due to a 14% decline in the U.S. dollar.
Unlike other markets, the Universal acquisition contributed only 2,000 of the
127,000 year over year net additions. Customer additions added through marketing
have been the largest contributor to U.S. electricity growth.
The gross margin increase of 148% reflected the growth in customers and higher
margins per customer. U.S. electricity is where the major impact of the growing
consumption of Just Green is noted. Since the overall book is relatively small,
high take-up of Just Green at higher margins has a greater impact on the overall
margin per customer. In addition, Texas benefitted from high consumption
supplied with low cost commodity while New York profitability rose due to
continued improvements in our supply management.
For the nine months ended December 31, 2009, the sales and gross margins were
$278.6 million and $64.4 million, respectively.
Average gross margin per customer for electricity during the current quarter was
$213/RCE compared to $181/RCE from the prior year comparable period. The GM/RCE
value for Texas includes an appropriate allowance for the bad debt expense.
Customer aggregation
Long-term customers
September Failed December
30, to 31, %Increase
2009 Additions Attrition renew 2009 (Decrease)
----------------------------------------------------------------------------
Natural gas
Canada 791,000 14,000 (21,000) (25,000) 759,000 (4)%
United
States 385,000 44,000 (35,000) (1,000) 393,000 2%
----------------------------------------------------------------------------
Total gas 1,176,000 58,000 (56,000) (26,000) 1,152,000 (2)%
----------------------------------------------------------------------------
Electricity
Canada 785,000 18,000 (24,000) (2,000) 777,000 (1)%
United
States 306,000 61,000 (16,000) - 351,000 15%
----------------------------------------------------------------------------
Total
electricity 1,091,000 79,000 (40,000) (2,000) 1,128,000 3%
----------------------------------------------------------------------------
Combined 2,267,000 137,000 (96,000) (28,000) 2,280,000 1%
----------------------------------------------------------------------------
Gross customer additions through marketing for the third quarter were 137,000,
up 46% from the 94,000 customers added in the third quarter of fiscal 2009.
Total net customer additions for the quarter were 13,000 down from the 23,000
net customer additions in the same period last year due to higher attrition
noted on the larger customer base. Overall, there was a 28% increase in total
customers at December 31, 2009 versus December 31, 2008. As part of the
Universal acquisition, Just Energy also gained a further 145,000 customers that
were unlikely to renew as they were variable in nature or located in regions
that are not in Just Energy's current expansion plans. As at December 31, 2009,
70,000 of these customers remain.
In addition the sales organization in Ontario added 12,000 water heater units in
the third quarter which have a residential customer equivalent of 8,000.
Just Energy's major marketing challenge remains the Canadian markets where the
disparity between spot prices and the five year prices continues to impact
sales. This has hurt both new customer additions and renewals. Under these
conditions, Just Energy's marketing force has concentrated on the sale of Just
Green and related products. Acceptance of these products was strong but
combining their premium price with a continued generally weak economy, sales
were insufficient to offset attrition in Canadian gas and electricity. Customer
additions in the United States remained ahead of target resulting in total
additions for all markets of 137,000, the second highest quarterly total in Just
Energy history. Solid customer additions were seen across the U.S. with Texas
and New York electricity being particularly strong.
Take-up of Just Green remains strong in those markets where it is offered.
Overall, green supply now makes up 3% of our overall gas portfolio, up from 1% a
year ago. Just Green supply makes up 5% of our electricity portfolio, up from 2%
from the same period last year. For this reason, the margins on new customer
additions continued to exceed target levels despite certain focused price
discounts to stimulate sales in markets with very low utility prices resulting
in high five year premiums.
Delivered volumes in the quarter
Delivered volumes details the change in the actual growth of volumes delivered
to customers. This measure tracks our actual financial results and reflects
weather and other volume variances in markets where the utility does not
establish flat delivery requirements.
The following table shows the actual delivered volumes for the third quarter of
fiscal 2010 and the prior year comparable quarter:
For the three months
ended December 31 Fiscal 2010 Fiscal 2009 % Increase
----------- ----------- ----------
Natural gas (GJ)
Canada 20,394,404 19,520,757 4%
United States 12,498,352 7,631,322 64%
----------------------------------------------------------
Total gas(1) 32,892,756 27,152,079 21%
----------------------------------------------------------
Electricity (MWh)
Canada 1,920,850 1,454,369 32%
United States 856,390 418,940 104%
----------------------------------------------------------
Total electricity(2) 2,777,240 1,873,309 48%
----------------------------------------------------------
(1) Includes 834,000 GJs of Just Green gas in fiscal 2010 versus 137,000 GJs
in the third quarter of last year.
(2) A total of 149,000 MWh of Just Green electricity was delivered in the
third quarter of fiscal 2010 versus 45,000 MWh of electricity delivered
for the same period last year.
Gas deliveries increased by 21% in the three months ended December 31, 2009 over
the same period last year due to a 16% increase in customers mainly as a result
of the Universal acquisition. Electricity volumes increased by 48% over the
prior year comparable quarter due to strong customer additions in Texas and New
York and acquired Universal customers, resulting in 44% growth of the customer
base.
Just Green
Sales of the Just Green products continue to support and reaffirm the strong
demand for the green energy products in all markets. The Just Green program
allows customers to choose to purchase units of green energy in the form of
renewable energy or carbon offsets, in an effort to reduce greenhouse gas
emissions. When a customer purchases a unit of green energy, it creates a
contractual obligation for Just Energy to purchase a supply of green energy at
least equal to the demand created by the customer's purchase. A review was
conducted by Grant Thornton LLP of Just Energy's Renewable Energy and Carbon
Offsets Sales and Purchases report for the period from January 1, 2007 through
December 31, 2008 validating the Fund's renewables and carbon offset purchases.
An audit for the 2009 calendar period is scheduled for the fourth quarter.
The Fund sells Just Green gas in Ontario, British Columbia, New York and
Illinois currently and Just Green electricity in Ontario, Alberta, New York and
Texas. Just Green sales are expanding into the remaining markets over the coming
quarters. Of all customers who contracted with Just Energy in the last quarter,
43% took Just Green for some or all of their energy needs. On average, these
customers elected to purchase 86% of their consumption as green supply.
Accordingly, 37% of all new customer volumes choose Just Green supply.
Attrition
Natural gas
The trailing 12-month natural gas attrition in Canada was 9% for the quarter,
below management's target of 10%. In the U.S., gas attrition for the trailing 12
months was 31%, above management's annual target of 20%. High U.S. gas attrition
is a residual effect of the North American recession and the aggressive customer
cut off or forced return to default services policies utilized by the company.
Electricity
The trailing 12-month electricity attrition rate in Canada for the year was 11%,
slightly above management's target of 10%. Electricity attrition in the United
States was 17% over the last twelve months, below management's target of 20%.
Failed to renew
The Just Energy renewal process is a multi-faceted program and aims to maximize
the number of customers who choose to sign a new contract prior to the end of
their existing contract term. Efforts begin up to 15 months in advance allowing
a customer to re-contract for an additional four or five years.
The trailing 12-month renewal rate for all Canadian gas customers was 60%. In
the Ontario gas market, customers who do not positively elect to renew or
terminate their contract receive a one-year fixed price for the ensuing year. A
total of 75,000 gas customers were renewed in the last twelve months and, of
these, 24,800 were renewed for a one-year term. Canadian gas was the only market
in which renewals lagged the 2010 target. This was due to the spread between the
Just Energy five year price and the utility spot price. Management has increased
focus on improving renewal techniques which should result in an improvement in
renewal rates to target levels.
The electricity renewal rate for Canadian customers was 71% for the trailing 12
months. In the Ontario electricity market, there is no opportunity to renew a
residential or small volume customer for a one-year term should the customer
fail to positively renew or terminate his or her contract. There has been solid
take-up of Just Green products within Canadian electricity renewals leading to
higher than target renewal rates. Management targets a renewal rate for
electricity customers of 65%.
In the U.S. markets, Just Energy currently only has Illinois gas and Texas
electricity customers up for renewal. Gas renewals for the U.S. were 56%, above
our target of 50% on a very small number of renewals. The Texas electricity
renewal rate was 79%, significantly better than our target rate of 60% based on
over 44,600 customers.
The table below shows actual renewal rates for the last twelve months versus target:
F2010 Target F2010
----- ------------
Natural gas
Canada 60% 70%
United States 56% 50%
Electricity
Canada 71% 65%
United States 79% 60%
Gas and electricity contract renewals
This table shows the percentage of customers up for renewal in each of the
following years:
Canada - Canada - U.S. - U.S. -
gas electricity Gas electricity
------------------------------------------------
Remainder of 2010 6% 1% 3% 2%
2011 27% 19% 13% 9%
2012 20% 25% 18% 9%
2013 20% 28% 29% 13%
2014 15% 17% 15% 28%
Beyond 2014 12% 10% 22% 39%
------------------------------------------------
Total 100% 100% 100% 100%
Just Energy continuously monitors its customer renewal rates and continues to
modify its offering to existing customers in order to maximize the number of
customers who renew their contracts.
Gross margin earned through new marketing efforts
Annual gross margin per customer for new and renewed customers (includes Just
Green impact)
In the third quarter of fiscal 2010, the Fund continued to see the positive
impact of continued efforts to maintain strong margin per customer during
challenging marketing periods. Overall, average gross margin per RCE increased
by 11% quarter over quarter primarily due to the compound impact of higher per
customer margins on new contracts in past quarters offset by a lower U.S. dollar
reducing the margin on existing U.S. contracts. These higher margins on past
contracts have been a function of strong Just Green sales, opportunistic pricing
in a falling market and improved supply management.
The table below depicts the annual margins on contracts of customers signed in
the quarter. This table reflects only the margins on "brown" energy purchased by
customers. To the extent that customers elected green electricity, margins per
customer are significantly higher. Sales of the Just Green products have been
very strong with approximately 43% of all customers added in the past year
taking some or all green energy supply. Those who purchased the green products
elect on average to purchase 86% of their consumption as green supply.
Annual
Annual gross margin per customer(1) Target
Fiscal 2010 Fiscal 2010
------------------------
Customers added in the quarter
- Canada - gas $174 $170
- Canada - electricity $148 $143
- United States - gas $200 $170
- United States - electricity $230 $143
Customers lost in the quarter
- Canada - gas $190
- Canada - electricity $119
- United States - gas $247
- United States - electricity $125
(1) Customer sales price less cost of associated supply and allowance for
bad debt and U.S. working capital.
Annual margin on new customers added in the quarter including the impact of Just
Green was $211 and margin earned on renewing customers was $159.
National Home Services Division
NHS was acquired on July 1, 2009 as part of the Universal acquisition. On July
2, 2009, NHS acquired Newten Home Comfort Inc. and on September 30, 2009,
acquired substantially all of the assets of NHCLP (see Page 6 for additional
information). NHS provides Ontario residential customers long-term water heater
rental programs offering conventional tanks, power vented tanks and tankless
water heaters in a variety of sizes, furnaces and air conditioners. The combined
installed water heater base on July 1, 2009 was 37,687. NHS continues to ramp up
its operations and, as at December 31, 2009, had a cumulative installed base of
67,461 water heaters in residential homes. NHS has commenced earning revenue
from its installed base.
Because NHS is a high growth, relatively capital intensive business, Just
Energy's management has been examining opportunities to separately finance water
heater installations and a new agreement has been reached with Home Trust
Company. (See the "Outlook" section on page 31 for additional information.)
Accordingly, capital required for this business will not impact distributable
cash generated by the core natural gas and electricity business.
Selected financial information
(thousands of dollars)
Three months ended Nine months ended
December 31, 2009 December 31, 2009
----------------- -----------------
Sales per financial statements $2,597 $5,071
Cost of Sales 379 538
------------------------------------
Gross Margin 2,218 4,533
Selling expenses 375 1,487
General and administrative expense 1,045 3,199
Capital expenditures 4,841 19,993
Amortization 450 1,475
Total water heaters installed 11,997 29,774
Results of Operations
For the three months ended December 31, 2009 NHS had sales of $2.6 million,
gross margin of $2.2 million and net income of $0.7 million. The cost of sales
for the quarter was $0.4 million and represents the amortization of the
installed water heaters for the customer contracts signed to date. Selling
expenses for the quarter were $0.4 million and include the amortization of
commission costs paid to the independent agents, automobile fleet costs,
advertising and promotion and telecom and office supplies expenses. General and
administrative costs, which relate primarily to staff compensation and warehouse
expenses, amounted to $1.0 million for the quarter ended December 31, 2009.
Capital expenditures, including installation costs, amounted to $4.8 million.
Amortization costs were $0.5 million for the quarter and include the
depreciation on fixed assets and the amortization of the water heaters contracts
acquired in the purchase from Universal and Newten Home Comfort Inc.
Just Energy has owned NHS since July 1, 2009 and therefore results reflect only
the six months of operations to December 31, 2009. Sales totaled $5.1 million
and NHS earned gross margins of $4.5 million during this period. A total of
$20.0 million has been spent to date on capital items for NHS operations.
The growth of National Home Services has been substantial and, combined with the
Home Trust Company financing, will be self sustaining on a cash flow basis. A
large number of independent sales contractors previously marketing gas and
electricity have been redeployed to water heaters resulting in lower customer
additions in energy marketing. Overall, management believes this is the best
utilization of the sales force.
Ethanol Division (TGF)
TGF continues to improve plant production and run time of the Belle Plaine,
Saskatchewan, wheat based ethanol facility. For the quarter ended December 31,
2009, the plant had achieved an average production capacity of 63% with capacity
expected to rise upon completion of the grain milling upgrade discussed below.
The ethanol division has separate non-recourse financing in place such that
capital requirements and possible operating losses will not impact distributable
cash from Just Energy's core business.
Selected financial information
(thousands of dollars)
Three months ended Nine months ended
December 31, 2009 December 31, 2009
----------------- -----------------
Sales per financial statements $19,460 $35,909
Cost of sales 17,729 32,312
Gross margin 1,731 3,597
General and administrative expense 2,440 6,259
Interest expense 1,671 3,514
Capital Expenditures 1,263 1,363
Amortization 222 843
Results of Operations
For the three months ended December 31, 2009 TGF had sales of $19.5 million,
realized gross margin of $1.7 million and a net loss of $1.4 million. During the
quarter the plant produced 23.5 million litres of ethanol and 23,690 metric
tonnes of Distillers dried grain. For the three months ended December 31, 2009
TGF incurred $2.4 million in general and administrative expenses and $1.7
million in interest charges. Production levels continue to be below the 150.0
million litres annual plant design capacity as a result of production challenges
in grain milling. New grain milling equipment is being installed by year end to
address this production bottleneck and enable production to achieve the design
capacity. Capital expenditures, including installation costs, for the quarter
amounted to $1.2 million and include the assets related to the grain milling
project noted above. This project is on schedule and on budget. TGF is expected
to realize net income once the milling equipment installation is complete.
Year to date, TGF has gross margin of $3.6 million on sales of $35.9 million.
Overall, the plant has realized a loss before interest, taxes and amortization
of $2.7 million for the six month period.
TGF receives a federal subsidy related to an agreement signed on February 17,
2009, based on the volume of ethanol produced. During the nine month ended
December 31, 2009 and through fiscal 2011, this subsidy is 10 cents per litre on
ethanol produced. This amount declines through time to 5 cents per litre of
ethanol produced in fiscal 2015, the last year of the agreement.
Overall Consolidated Results
General and administrative expenses
General and administrative costs were $24.8 million for the three months ended
December 31, 2009, representing a 68% increase from $14.8 million in the third
quarter of fiscal 2009. This was primarily due to the administrative costs for
NHS and TGF as well as the addition of a portion of Universal's energy marketing
administrative costs.
General and administrative expenses Fiscal 2010 Fiscal 2009 Variance
----------- ----------- --------
Energy marketing $21,282 $14,753 $6,529
NHS 1,045 - 1,045
TGF 2,440 - 2,440
----------- ----------- --------
Total 24,767 14,753 10,014
Overall, energy marketing general and administrative costs were up 44% in the
third quarter of fiscal 2010 versus the same period last year versus a 28%
increase in total customers. The higher increase is largely due to staffing
costs to support future growth, increased collection costs and professional fee
expenditures on the Fund's conversion plan, IFRS and other corporate development
activities. While operating headcount increased significantly due to the
Universal acquisition, management expects that after continued future
administrative consolidation, total corporate headcount will have increased by
20% to a total of 874 full-time employees. Both NHS and TGF are in the start-up
phase and management is confident that they will offset their start-up costs
with distributable cash in future periods. Overall, management expected to
reduce combined general and administrative costs by $10 million per year on an
ongoing basis. This target has been exceeded and the rate of growth in general
and administrative costs will slow significantly in fiscal 2011.
Expenditures for general and administrative costs for the nine months ended
December 31, 2009 were $66.0 million, an increase of 59% from $41.4 million in
the prior comparable period as a result of the additional costs noted above.
Marketing expenses
Marketing expenses, which consist of commissions paid to independent sales
contractors for signing new customers, expenses to operate the regional sales
offices and an allocation of corporate marketing costs, were $26.5 million, an
increase of 41% from $18.8 million in the third quarter of fiscal 2009. Total
gross customer additions were up by 46% in the current quarter versus the same
period last year.
For the nine months ended December 31, 2009, marketing expenses were $73.0
million, an increase of 47% from the $49.6 million reported in the same period
last year. This reflects increased customer additions versus the same period
last year and increased recruiting costs resulting in 50% more active
independent sales contractors. In addition, higher sales office expenses
resulting from expansion and further development of the commercial product
offerings increased the costs in fiscal 2010.
Marketing expenses to maintain gross margin are allocated based on the ratio of
gross margin lost from attrition as compared to the gross margin signed from new
and renewed customers during the period. Marketing expenses to maintain gross
margin increased by 94% to $18.3 million, as compared to $9.5 million in the
third quarter of fiscal 2009. The increase resulted from higher customer
attrition and a greater number of renewals and associated costs versus the
comparable quarter.
Marketing expenses to add new gross margin are allocated based on the ratio of
net new gross margin earned on the customers signed, less attrition, as compared
to the gross margin signed from new and renewed customers during the period.
Marketing expenses to add new gross margin in the third quarter totaled $8.2
million, a decrease of 12% from $9.3 million in the prior year comparable
quarter. The decrease is consistent with the drop in the net customer additions
of 13,000 in the third quarter of fiscal 2010 versus 23,000 net customers during
fiscal 2009. The actual aggregation costs per customer added were as follows:
Nine months ended Nine months ended
December 31, December 31,
Fiscal 2010 Fiscal 2009
Natural gas
Canada $220/RCE
United States $183/RCE
Total gas $192/RCE $176/RCE
Electricity
Canada $182/RCE
United States $165/RCE
Total electricity $170/RCE $150/RCE
Actual total aggregation costs for gas and electricity customers to date for
fiscal 2010 were $192 per customer for gas and $170 per customer for
electricity. For the nine months ended December 31, 2008, the gas and
electricity aggregation costs were $176 and $150 per customer, respectively. The
main contributor to higher costs in the US was the 14% decline in the US dollar
versus the Canadian dollar year over year. The increase in per customer
aggregation cost in Canada is due to two reasons, a Just Green customer
generates a higher commission commensurate with a higher margin, and secondly,
increased commission rates to stimulate sales in heavily penetrated Canadian
markets.
Unit based compensation
Compensation in the form of units (non-cash) granted by the Fund to the
directors, officers, full-time employees and service providers of its
subsidiaries and affiliates pursuant to the 2001 unit option plan, the 2004 unit
appreciation rights plan and the directors' deferred compensation plan for the
third quarter amounted to $1.0 million, effectively unchanged from the $1.1
million paid in the prior comparable quarter. Total costs for the nine months
ended December 31, 2009 totaled $2.6 million, compared to $2.9 million for the
same period last year.
Bad debt expense
In Illinois, Alberta, Texas, Pennsylvania, Maryland and California, Just Energy
assumes the credit risk associated with the collection of all customer accounts.
In addition, for large direct billed accounts in B.C. and Ontario, the Fund is
responsible for the bad debt risk. Credit review processes have been established
to manage the customer default rate. Management factors default from credit risk
into its margin expectations for all of the above noted markets.
Bad debt expense for the third quarter of fiscal 2010 was $5.1 million up from
$4.2 million expensed in the same quarter of last year, an increase of 21%. The
bad debt expense increase was mainly due to the 16% increase in total revenues
from $338.2 million to $393.2 million for the quarter in the markets where Just
Energy assumes the risk for accounts receivable collections and higher
percentage losses in the Texas market. Management integrates its default rate
for bad debts within its margin targets and continuously reviews and monitors
the credit approval process to mitigate customer delinquency.
For the nine months ended December 31, 2009, the bad debt expense was $12.8
million, representing approximately 3.3% of $393.6 million in revenues. In
fiscal 2009, the total bad debt expense was $7.7 million or 2.3% of $338.2
million in revenue for the nine-month period. Following billing for the high
electricity consumption period in Texas, bad debt losses have exceeded 4% in
that market reflecting the effects of recessionary economic conditions not
previously seen. With continued weakness in other markets, overall bad debt
losses are slightly above the target range of 2% - 3%. This level is expected to
continue for the fourth quarter.
Overall, bad debt expense is expected to remain at or be slightly above the
upper end of the 2% to 3% target until there is a sustained residential real
estate recovery in the U.S. As discussed earlier management has taken an
aggressive position with regards to returning customers to utility default
services or disconnects to ensure that bad debt expense is managed through the
heavy heating season.
For each of Just Energy's other markets, the LDCs provide collection services
and assume the risk of any bad debt owing from Just Energy's customers for a
fee.
Interest expense
Total interest expense for the three months ended December 31, 2009 amounted to
$5.1 million up from $1.1 million in the prior year comparable period. The large
increase noted in the third quarter primarily relates to the $1.8 million in
interest expense on the Universal convertible debenture and interest payments of
$1.7 million made on debt held by TGF. For the nine-month period of fiscal 2010,
the total interest cost was $10.6 million versus $3.0 million paid in fiscal
2009.
Foreign exchange
Just Energy has an exposure to U.S. dollar exchange rates as a result of its
U.S. operations and any changes in the applicable exchange rate may result in a
decrease or increase in other comprehensive income (Loss) for fiscal 2010. For
the quarter, a foreign exchange unrealized loss of $0.2 million was reported in
Other Comprehensive Income (Loss) versus a $2.3 million unrealized loss reported
in the prior year comparable period. For the nine months ended December 31,
2009, the foreign exchange unrealized gain was $24.8 million versus a gain of
$5.8 million for the same period in fiscal 2009. In fiscal 2010 to date, a total
of $23.0 million in U.S. funds was repatriated back to Canada. It is expected
that future monies earned in the U.S. will be redeployed in the U.S. to fund
continued growth, therefore the Fund is not hedging our U.S. currency at this
time.
Overall, a weak U.S. dollar decreases sales and gross margin but this is
partially offset by lower operating costs denominated in U.S. dollars. While
there can be quarterly fluctuations because of relative inflows and outflows,
the overall annual impact on adjusted net income should not be material, given
the high growth of the U.S. markets.
Class A preference share distributions
The remaining holder of the Just Energy Corp. ("JEC") Class A preference shares
(which are exchangeable into units on a 1:1 basis) is entitled to receive, on a
quarterly basis, a payment equal to the amount paid or payable to a Unitholder
on an equal number of units. The total amount paid for the three and nine months
ended December 31, 2009 including tax and the Special Distribution amounted to
$2.6 million and $5.9 million, respectively. In fiscal 2009, the distribution
paid for the three and nine month periods were $2.5 million and $6.0 million,
respectively. These distributions on the Class A preference shares are reflected
in the Statement of Unitholders' Equity of the Fund's consolidated financial
statements, net of tax.
Special Distribution
The Fund under-distributed its taxable income in calendar 2009 and 2008 and
would have been subject to tax at 46% for any undistributed taxable income. In
order to ensure that all of the taxable income is distributed to its
Unitholders, the Board of Directors concluded that it would be preferable to pay
out a Special Distribution to effectively allocate all of the taxable income to
the Unitholders. The Special Distribution is $26.7 million ($0.20 per unit) and
will be paid as 100% cash to the holders of units, Unit Appreciation Rights
("UARs"), Deferred Unit Grants ("DUGs"), Class A preference shares and JEEC
Exchangeable Shares. The amount will be funded by operating cash flow and the
Fund's credit facility and will be paid on January 30, 2010. In fiscal 2009, a
Special Distribution of $18.6 million ($0.165 per unit) was declared in the
third quarter.
Provision for (recovery of) income tax
(thousands of dollars)
For the three months For the nine months
ended December 31, ended December 31,
Fiscal 2010 Fiscal 2009 Fiscal 2010 Fiscal 2009
Current income tax
expense $ 2,269 $ 1,896 $8,335 $2,654
Amount credited to
Unitholders' equity 886 903 1,963 2,177
Future tax provision
(recovery) (20,165) 14,431 8,781 (77,335)
------ ------ ----- ------
Provision for (recovery
of) income tax $(17,010) $17,230 $19,079 $(72,504)
The Fund recorded a current income tax expense of $2.3 million versus a tax
expense of $1.9 million in the same period last year. A tax provision of $8.3
million has been recorded for the nine month period of fiscal 2010 versus a
provision of $2.7 million for the same period last year. The change is mainly
due to additional income tax expense incurred by the newly acquired Universal
entities and state income taxes that our U.S. entities paid. Also included in
the income tax provision is an amount relating to the tax impact of the
distributions paid to the Class A preference shareholders of JEC. In accordance
with EIC 151, Exchangeable Securities Issued by Subsidiaries of Income Trusts,
all Class A preference shares are included as part of Unitholders' equity and
the distributions paid to the shareholders are included as distributions on the
Statement of Unitholders' equity, net of tax. For the three and nine months
ended December 31, 2009, the tax impact of these distributions, based on a tax
rate of 32.25%, amounted to $0.9 million and $2.0 million, respectively. In
addition, future tax recovery of $20.2 million and future tax expense of $8.8
million were recorded for the three and nine months ended December 31, 2009
respectively. These future tax provisions primarily resulted from the change in
fair value of derivative instruments.
Effective January 1, 2011, the Fund will be taxed as a Specified Investment
Flow-Through ("SIFT") trust on Canadian income that has not been subject to a
Canadian corporate income tax in the Canadian operating entities. Therefore, the
future tax asset or liability associated with Canadian assets recorded on the
balance sheet as at that date will be realized over time as the temporary
differences between the carrying value of assets in the consolidated financial
statements and their respective tax bases are realized. Current Canadian income
taxes will be accrued at that time to the extent that there is taxable income in
the Fund or its underlying operating entities.
The U.S. based corporate subsidiaries are subject to U.S. income taxes on their
taxable income determined under U.S. income tax rules and regulations. The U.S.
subsidiaries (other than the newly acquired Commerce) had combined operating
losses for tax purposes at December 31, 2009, no provision for current U.S.
federal income tax has been made by those U.S. entities. On the other hand,
Commerce had no operating losses carried forward and generated taxable income
during the period and as a result, an income tax expense of $2.6 million was
recorded during the period, which has been included in the current income tax
expense amounts as noted above.
The Fund follows the liability method of accounting for income taxes. Under this
method, income tax liabilities and assets are recognized for the estimated tax
consequences attributable to the temporary differences between the carrying
value of the assets and liabilities on the consolidated financial statements and
their respective tax bases, using substantively enacted income tax rates. A
valuation allowance is recorded against a future income tax asset if it is not
anticipated that the asset will be realized in the foreseeable future. The
effect of a change in the income tax rates used in calculating future income tax
liabilities and assets is recognized in income during the period that the change
occurs.
Liquidity and Capital Resources
(thousands of dollars)
For the three months For the nine months
ended December 31, ended December 31,
----------------------------------------------------------------------------
Fiscal 2010 Fiscal 2009 Fiscal 2010 Fiscal 2009
Operating activities $4,418 $15,962 $66,920 $78,967
Investing activities (12,556) (1,667) (25,051) (5,335)
Financing activities,
excluding distributions 47,456 19,050 41,869 34,624
Gain (loss) on foreign
exchange 5,519 (1,473) (1,408) (1,003)
----------------------------------------------------------------------------
Increase in cash before
distributions 44,837 31,872 82,330 107,253
Distributions (cash
payments) (34,670) (29,326) (101,577) (82,851)
----------------------------------------------------------------------------
Increase (Decrease) in cash 10,167 2,546 (19,247) 24,402
Cash - beginning of
period 29,680 49,166 59,094 27,310
----------------------------------------------------------------------------
Cash - end of period $39,847 $51,712 $39,847 $51,712
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Operating activities
Cash flow from operating activities for the three and nine months ended December
31, 2009 was $4.4 million and $66.9 million, respectively, as compared to $16.0
million and $79.0 million, respectively, for the same periods last year. The
decrease for the current quarter resulted from increased net income that was
partially offset by higher amortization on the acquired customer contracts from
Universal and unrealized income related to the financial instruments recorded in
the quarter.
Investing activities
The Fund purchased capital and recorded intangible assets totaling $12.6 million
during the quarter, an increase from $1.7 million in the prior year comparable
quarter. Capital asset purchases and intangibles amounted to $34.8 million for
the nine months ended December 31, 2009, compared with $3.0 million in the same
period last year. During the quarter a total of $4.8 million was spent on water
heater purchases for NEC. For the period ended September 30, 2009, the Fund
completed the acquisition of Universal in consideration for JEEC exchangeable
shares valued at $239.9 million. For further information on the acquisition see
page 4. On July 2, 2009, NEC acquired Newten Home Comfort Inc., an arm's length
third party that held a 20% interest of NHCLP. Accordingly, NHCLP became a
wholly owned subsidiary of Just Energy. NEC, which began operations in April
2008, operates under the trade name of National Home Services. In the second
quarter of fiscal 2009, Just Energy purchased substantially all of the
commercial and residential customer contracts of CEG in British Columbia for
$1.8 million. CEG was a western Canadian marketer of natural gas wholly owned by
SemCanada Energy Company, both of which filed for creditor protection under the
Companies' Creditors Arrangement Act on July 30, 2008. As well, in fiscal 2009
the Fund entered into a limited partnership to form NHCLP for an investment of
$0.5 million.
Financing activities
Financing activities excluding distributions relate primarily to the drawdown of
the operating line for working capital requirements. During the three months
ended December 31, 2009, Just Energy had net borrowings of $36.0 million against
long-term debt versus $23.8 million drawn in the third quarter of fiscal 2009.
See page 26 for an additional discussion on Long term debt and financing.
The Fund's liquidity requirements are driven by the delay from the time that a
customer contract is signed until cash flow is generated. Approximately 50% of
an independent sales contractor's commission payment is made following
reaffirmation or verbal verification of the customer contract with most of the
remaining 50% being paid after the energy commodity begins flowing to the
customer.
The elapsed period between the times when a customer is signed to when the first
payment is received from the customer varies with each market. The time delays
per market are approximately two to nine months. These periods reflect the time
required by the various LDCs to enroll, flow the commodity, bill the customer
and remit the first payment to Just Energy. In Alberta and Texas, Just Energy
receives payment directly from the customer.
Distributions (cash payments)
Investors should note that due to the institution of a distribution reinvestment
plan ("DRIP") on December 20, 2007, a portion of dividends declared are not paid
in cash. Under the plan, Unitholders can elect to receive their distributions in
units at a 2% discount to the prevailing market price rather than the cash
equivalent.
During the quarter, the Fund made cash distributions to its Unitholders in the
amount of $34.7 million, compared to $29.3 million in the prior year comparable
period, an increase of 18%. The increase in distributions is a result of the
JEEC exchangeable shares that were converted into units during the last two
quarters. For the nine months ended December 31, 2009, cash distributions
totaled $101.6 million compared to $82.9 million in the same period during
fiscal 2009.
Just Energy will continue to utilize its cash resources for expansion into new
markets, growth in its existing customer base as well as distributions to its
Unitholders.
At the end of the quarter, the annual rate for distributions per unit was $1.24.
The Fund intends to make distributions to its Unitholders, based upon cash
receipts of the Fund, excluding proceeds from the issuance of additional Fund
units, adjusted for costs and expenses of the Fund. The Fund's intention is for
Unitholders of record on the 15th day of each month to receive distributions at
the end of the month.
Balance Sheet as at December 31, 2009 compared to March 31, 2009
Cash decreased from $59.1 million as at March 31, 2009 to $39.8 million at
December 31, 2009. Long term debt has increased to $231.7 million from $76.5
million as a result of the Universal acquisition and is detailed on page 27. The
Just Energy original credit facility increased to $117.0 million as a result of
normal injection of gas into storage, water heater funding and various other
working capital requirements. Working capital requirements in the U.S. and
Alberta result from the timing difference between customer consumption and cash
receipts. For electricity, working capital is required to fund the lag between
settlements with the suppliers and settlement with the LDCs. Restricted cash has
increased to $20.1 million from $7.6 million as at March 31, 2009 due to
additional cash collateral postings related to supply procurement for the
Universal, Commerce and TGF entities.
The increase in accounts receivable from $249.5 million to $330.4 million is
primarily attributable to the increase in sales during the period as a result of
the Universal acquisition. Accounts payable and accrued liabilities has also
increased from $165.4 million to $213.5 million relating to added consumption as
a result of the 430,000 Universal customers acquired on July 1, 2009.
Gas in storage has increased from $6.7 million to $36.3 million for the third
quarter of fiscal 2010. The increased balance reflects injections into storage
for the expanding Illinois, New York and Indiana customer base, which occurs
from April to November.
At the end of the quarter, Just Energy had delivered more gas to the LDCs in
Ontario and Quebec than customers had consumed. Since Just Energy is paid for
this gas when delivered yet recognizes revenue when the gas is consumed by the
customer, the balance sheet includes deferred revenue of $130.6 million and gas
delivered in excess of consumption of $102.5 million. At March 31, 2009,
customers had consumed more than had been delivered to the LDCs, thereby
resulting in unbilled revenues amounting to $57.8 million and accrued gas
accounts payable of $41.4 million.
Prepaid expenses have increased from $2.0 million to $28.7 million for the third
quarter of fiscal 2010. The increased balance relates to tax, rent and various
prepayments from the Commerce, Universal, TGF and NEC entities.
Long term debt and financing
As at December 31
-----------------
(thousands of dollars)
--------------------
Fiscal 2010 Fiscal 2009
----------- -----------
Original Credit facility 117,045 76,500
TGF Credit facility 41,699 -
TGF Debentures 38,000 -
TGF Term Loan 10,000 -
JEEC convertible debentures 80,686 -
Original Credit Facility
On July 1, 2009, in connection with the acquisition of UEG, Just Energy
increased its credit facility from $170.0 million to $250.0 million. As part of
the increase in the credit facility, Societe Generale and Alberta Treasury
Branches joined Canadian Imperial Bank of Commerce, Royal Bank of Canada,
National Bank of Canada and Bank of Nova Scotia as the syndicate of the lenders
thereunder. Under the new terms of the credit facility, effective July 1, 2009,
Just Energy is able to make use of Bankers' Acceptances and LIBOR advances at
stamping fees of 4.0%, prime rate advances at Canadian and U.S. prime plus 3.0%
and letters of credit at 4.0%. Just Energy's obligations under the credit
facility are supported by guarantees of certain subsidiaries and affiliates and
secured by a pledge of the assets of Just Energy and the majority of its
operating subsidiaries and affiliates. Just Energy is required to meet a number
of financial covenants under the credit facility agreement. As at December 31,
2009 and 2008, all of these covenants have been met.
TGF Credit facility
A credit facility of up to $50.0 million was established with a syndicate of
Canadian lenders led by Conexus Credit Union was arranged to finance the
construction of the ethanol plant in 2007. The facility was further revised on
March 18, 2009, and was converted to a fixed repayment term of 10 years
commencing March 1, 2009 which includes interest costs at a rate of prime plus
2%, with principal repayments commencing on March 1, 2010. The credit facility
is secured by a demand debenture agreement, a first priority security interest
on all assets and undertakings of TGF and a general security interest on all
other current and acquired assets of TGF. The credit facility includes certain
financial covenants the more significant of which relate to current ratio, debt
to equity ratio, debt service coverage and minimum shareholder's equity. For the
period ended December 31, 2009, TGF was in compliance with all of the covenants
other than the current ratio and the debt service coverage covenant which were
subsequently waived on January 25, 2010. The lenders also deferred compliance
with the financial covenants until April 1, 2011.
TGF Debentures
A debenture purchase agreement with a number of private parties providing for
the issuance of up to $40.0 million aggregate principal amount of debentures was
entered into in 2006. The interest rate is 10.5% per annum, compounded annually
and payable quarterly. Interest is to be paid quarterly with quarterly principal
payments commencing October 1, 2009 in the amount of $1.0 million per quarter.
The agreement includes certain financial covenants the more significant of which
relate to current ratio, debt to capitalization ratio, debt service coverage,
debt to EBITDA and minimum shareholder's equity. For the period ended December
31, 2009, TGF was in compliance with all of the covenants other than the current
ratio, the debt service coverage and debt to EBITDA covenant which were
subsequently waived on January 25, 2010. The lender also deferred compliance
with the financial covenants until April 1, 2011.
TGF Term/Operating Facilities
TGF also maintains a working capital facility for $10.0 million with a third
party lender bearing interest at prime plus 1% due in full on December 31, 2010.
This facility is secured by liquid investments on deposit with the lender. In
addition, TGF has a working capital operating line of $7,000 bearing interest at
a prime plus 1% of which $3,903 was drawn via overdraft and $1,600 of letters of
credit and is included in bank indebtedness.
JEEC Convertible debentures
In conjunction with the acquisition of UEG on July 1, 2009, JEEC also acquired
the obligations of the convertible unsecured subordinated debentures issued by
Universal in October 2007 which have a face value of $90 million. The debentures
mature on September 30, 2014 unless converted prior to that date and bear
interest at an annual rate of 6% payable semi-annually on March 31 and September
30 of each year. Each $1,000 principal amount of the debentures is convertible
at any time prior to maturity or on the date fixed for redemption, at the option
of the holder, into approximately 27.3 units of the Fund representing a
conversion price of $36.63 per exchangeable share.
The debentures are not redeemable prior to October 1, 2010. On and after October
1, 2010, but prior to September 30, 2012, the debentures are redeemable, in
whole or in part, at a price equal to the principal amount thereof, plus accrued
and unpaid interest, at the Fund's sole option on not more than 60 days and not
less than 30 days prior notice, provided that the current market price on the
date on which notice of redemption is given is not less than 125% of the
conversion price. On and after September 30, 2012, but prior to the maturity
date, the debentures are redeemable, in whole or in part, at a price equal to
the principal amount thereof, plus accrued and unpaid interest, at the Fund's
sole option on not more than 60 days and not less than 30 days prior notice.
Contractual Obligations
In the normal course of business, the Fund is obligated to make future payments
for contracts and other commitments that are known and non-cancellable.
Payments due by
period
(thousands of Less than 1 - 3 4 - 5 After 5
dollars) Total 1 year years years years
----------------------------------------------------------------------------
Property and
equipment lease
agreements $27,425 $2,228 $13,228 $6,214 $5,755
EPCOR billing,
collections and
supply Commitments 24,204 3,157 21,047 - -
Grain production
contracts 19,521 7,941 10,379 1,183 -
Gas and electricity
supply purchase
commitments 3,836,206 458,742 2,435,322 878,019 64,123
----------------------------------------------------------------------------
$3,907,356 $ 472,068 $2,479,976 $885,416 $69,878
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Other obligations
The Fund is also subject to certain contingent obligations that become payable
only if certain events or rulings were to occur. The inherent uncertainty
surrounding the timing and financial impact of these events or rulings prevents
any meaningful measurement, which is necessary to assess any material impact on
future liquidity. Such obligations include potential judgments, settlements,
fines and other penalties resulting from actions, claims or proceedings. In the
opinion of management, the Fund has no material pending actions, claims or
proceedings that have not been either included in its accrued liabilities or in
the financial statements.
Transactions with Related Parties
The Fund does not have any material transactions with any individuals or
companies that are not considered independent to the Fund or any of its
subsidiaries and/or affiliates.
Critical Accounting Estimates
The consolidated financial statements of the Fund have been prepared in
accordance with Canadian GAAP. Certain accounting policies require management to
make estimates and judgments that affect the reported amounts of assets,
liabilities, revenues, cost of sales, marketing and general and administrative
expenses. Estimates are based on historical experience, current information and
various other assumptions that are believed to be reasonable under the
circumstances. The emergence of new information and changed circumstances may
result in actual results or changes to estimated amounts that differ materially
from current estimates.
The following assessment of critical accounting estimates is not meant to be
exhaustive. The Fund might realize different results from the application of new
accounting standards promulgated, from time to time, by various rule-making
bodies.
Unbilled revenues/Accrued gas accounts payable
Unbilled revenues result when customers consume more gas than has been delivered
by Just Energy to the LDCs. These estimates are stated at net realizable value.
Accrued gas accounts payable represents Just Energy's obligation to the LDC with
respect to gas consumed by customers in excess of that delivered. This
obligation is also valued at net realizable value. This estimate is required for
the gas business unit only, since electricity is consumed at the same time as
delivery. Management uses the current average customer contract price and the
current average supply cost as a basis for the valuation.
Gas delivered in excess of consumption/Deferred revenues
Gas delivered to LDCs in excess of consumption by customers is valued at the
lower of cost and net realizable value. Collections from LDCs in advance of
their consumption results in deferred revenues which are valued at net
realizable value. This estimate is required for the gas business unit only since
electricity is consumed at the same time as delivery. Management uses the
current average customer contract price and the current average supply cost as a
basis for the valuation.
Allowance for doubtful accounts
Just Energy assumes the credit risk associated with the collection of customers'
accounts in Alberta, Illinois, Texas, Pennsylvania, Maryland and California. In
addition, for large direct billed accounts in B.C. and Ontario the Fund is
responsible for the bad debt risk. Management estimates the allowance for
doubtful accounts in these markets based on the financial conditions of each
jurisdiction, the aging of the receivables, customer and industry
concentrations, the current business environment and historical experience.
Goodwill
In assessing the value of goodwill for potential impairment, assumptions are
made regarding Just Energy' future cash flow. If the estimates change in the
future, the Fund may be required to record impairment charges related to
goodwill. An impairment review of goodwill was performed during fiscal 2009 and
as a result of the review, it was determined that no impairment of goodwill
existed at March 31, 2009. There were no events during the quarter which
triggered the requirement of an impairment test to be performed as at December
31, 2009.
Fair Value of Derivative Financial Instruments and Risk Management
The Fund has entered into a variety of derivative financial instruments
effectively all related to future supply contracts as part of the business of
purchasing and selling gas, electricity and Just Green option. Just Energy
enters into contracts with customers to provide electricity and gas at fixed
prices and provide comfort to certain customers that a specified amount of
energy will be derived from green generation. These customer contracts expose
Just Energy to changes in market prices to supply these commodities. To reduce
the exposure to the commodity market price changes, Just Energy uses derivative
financial and physical contracts to secure fixed price commodity supply matching
its delivery or green commitment obligations.
The Fund's business model objective is to minimize commodity risk other than
consumption changes, usually attributable to weather. Accordingly, it is Just
Energy' policy to hedge the estimated requirements of its customers with
offsetting hedges of natural gas and electricity at fixed prices for terms equal
to those of the customer contracts. The cash flow from these supply contracts is
expected to be effective in offsetting the Fund's price exposure and serves to
fix acquisition costs of gas and electricity to be delivered under the fixed
price or price protected customer contracts. Just Energy' policy is not to use
derivative instruments for speculative purposes.
The financial statements are in compliance with Section 3855 of the CICA
Handbook, which requires a determination of fair value for all derivative
financial instruments. Up to June 30, 2008, the financial statements also
applied Section 3865 of the CICA Handbook, which permitted a further calculation
for qualified and designated accounting hedges to determine the effective and
ineffective portion of the hedge. This calculation permitted the change in fair
value to be predominantly accounted for in the Statement of other comprehensive
income. As of July 1, 2008, management decided that the increasing complexity
and costs of maintaining this treatment outweigh the benefits. This fair value
(and when it was applicable, the ineffectiveness) is determined using market
information at the end of each quarter. Management believes the Fund remains
economically hedged operationally across all jurisdictions.
Preference shares of JEC and Trust units
As at February 10, 2010, there were 5,263,728 Class A preference shares of JEC
outstanding and 123,431,022 units of the Fund outstanding.
JEEC Exchangeable Shares
A total of 21,271,804 exchangeable shares of JEEC were issued on July 1 for the
purchase of Universal. JEEC shareholders have voting rights equivalent to fund
Unitholders and their shares are exchangeable on a 1:1 basis. As at February 10,
2010, 15,982,284 shares had been converted and there were 5,289,520 exchangeable
shares outstanding.
Taxability of distributions
Cash and unit distributions received in calendar 2009 were allocated as 100%
other income. Additional information can be found on our website at
www.justenergy.com. Management estimates the distributions for calendar 2010 to
be allocated in a similar manner to that of 2009.
Adoption of new accounting policies
As of April 1, 2009, the Fund adopted a new accounting standard, CICA Handbook
Section 3064, Goodwill and Intangible Assets, which establishes revised
standards for recognition, measurement, presentation and disclosure of goodwill
and intangible assets. Just Energy adopted this standard retroactively as
required by the standards.
Recently issued accounting standards
The following are new standards, not yet in effect, which are required to be
adopted by the Fund on the effective date.
Business combinations
In October 2008, the CICA issued Handbook Section 1582, Business Combinations
("CICA 1582"), concurrently with CICA Handbook Section 1601, Consolidated
Financial Statements ("CICA 1601"), and CICA Handbook Section 1602,
Non-controlling Interest ("CICA 1602"). CICA 1582, which replaces CICA Handbook
Section 1581, Business Combinations, establishes standards for the measurement
of a business combination and the recognition and measurement of assets acquired
and liabilities assumed. CICA 1601, which replaces CICA Handbook Section 1600,
carries forward the existing Canadian guidance on aspects of the preparation of
consolidated financial statements subsequent to acquisition other than
non-controlling interests. CICA 1602 establishes guidance for the treatment of
non-controlling interests subsequent to acquisition through a business
combination. These new standards are effective for fiscal years beginning on or
after January 1, 2011. The Fund has not yet determined the impact of these
standards on its consolidated financial statements.
Financial Instruments Disclosure
In June 2009, the CICA amended Handbook Section 3862, Financial Instruments -
Disclosures, to adopt the amendments recently made by the International
Accounting Standards Board ("IASB") to IFRS 7, Financial Instruments -
Disclosures. The amendments require enhanced disclosure requirements about the
fair value measurement, including the relative reliability of the inputs used in
those measurements, and about the liquidity risk of financial instruments. The
amendments are effective for annual financial statements relating to fiscal
years ending after September 30, 2009. Just Energy will reflect the additional
disclosures in its 2010 annual audited financial statements.
International Financial Reporting Standards
In February 2008, CICA announced that GAAP for publicly accountable enterprises
will be replaced by International Financial Reporting Standards ("IFRS") for
fiscal years beginning on or after January 1, 2011.
Just Energy will transition to IFRS effective April 1, 2011, and intends to
issue its first interim financial statements under IFRS for the three-month
period ending June 30, 2011, and a complete set of financial statements under
IFRS for the year ending March 31, 2012.
Based on the initial assessment of the differences between Canadian GAAP and
IFRS relevant to the Fund, a project team was assembled and a conversion plan
was developed in March 2009 to manage the transition to IFRS. Key personnel
received professional training on IFRS and training will continue to be provided
to staff throughout and beyond the transition process. We have also engaged an
external advisor.
Our project consists of three phases: IFRS diagnostic assessment, solution
development, and implementation. Having completed the diagnostic phase, we
assessed that property, plant and equipment, impairment of assets, accounting
for income taxes, financial instruments as well as the first time adoption of
IFRS ("IFRS 1") are likely to have a significant impact on the Fund. The Fund is
in the process of finalizing phase 2, the solution development phase. The IFRS
project team is focusing on documenting issues, generating options and making
recommendations, resolving first-time application issues and carrying on ongoing
discussions with our external auditors. Just Energy has also commenced analysis
of IFRS financial statement presentation and disclosure requirements. These
assessments will need to be further analyzed and evaluated throughout the
implementation phase of the Fund's project.
It is expected that several transitional adjustments and changes in accounting
policies will be made on the transition to IFRS. The transitional adjustments
and subsequent accounting may result in other business impacts such as impacts
on the debt covenants and capital requirements disclosure. The Fund is currently
determining the direction of changes and quantifying the adjustments.
Based on the work completed to date, the transition is expected to have minimal
impact on information technology and internal controls over financial reporting
of the Fund.
Management will continue to monitor changes planned by the IASB to ensure that
any impact is appropriately reflected in our transition plan.
Legal Proceedings
On March 3, 2008, the Citizen's Utility Board, AARP and Citizen Action/Illinois
filed a complaint before the Illinois Commerce Commission ("ICC") alleging that
independent sales agents used deceptive practices in the sale of Just Energy
contracts to Illinois customers. On October 14, 2009, the complaint proceeded to
a hearing by the ICC. A final decision is expected during the fourth quarter.
The State of California has filed a number of complaints to the Federal
Regulatory Energy Commission ("FREC") against many suppliers of electricity,
including Commerce, a subsidiary of the Fund, with respect to events stemming
from the 2001 energy crises in California. Pursuant to the complaints, the State
of California is challenging the FREC's enforcement of its market-based rate
system. Although Commerce did not own generation, the State of California is
claiming that Commerce was unjustly enriched by the run-up caused by the alleged
market manipulation by other market participants. The proceedings are currently
ongoing.
Just Energy will resolve or vigorously contest the claims in these matters and
in any other non-material litigation matters. Management believes that the
pending legal actions against JEIC and Commerce are not expected to have a
material impact on the financial condition of the Fund at this time.
Controls and Procedures
Except for the limitations on scope of design as noted below, during the most
recent interim period, there have been no changes in the Fund's policies and
procedures that comprise its internal control over financial reporting that have
materially affected, or are reasonably likely to materially affect, the Fund's
internal control over financial reporting.
Limitation on Scope of Design
Section 3.3(1) of National Instrument 52-109, Certification of Disclosure in
Issuer's Annual and Interim Filings, states that the Fund may limit its design
of disclosure controls and procedures and internal controls over financial
reporting for a business that it acquired not more than 365 days before the end
of the financial period to which the certificate relates. Under this section,
the Fund's CEO and CFO have limited the scope of the design, and subsequent
evaluation, of disclosure controls and procedures and internal controls over
financial reporting to exclude controls, policies and procedures of the
subsidiaries TGF and NHS acquired on July 1, 2009 as part of the UEG
acquisition.
Summary financial information pertaining to the UEG acquisition that was
included in the consolidated financial statements of the Fund as at December 31,
2009 is as follows:
(thousands of dollars)
TGF NHS Total
------- ------ -------
Revenue(i) $35,909 $5,071 $40,980
Net loss(i) (4,318) (823) (5,141)
Current assets(ii) 11,649 6,407 11,102
Non-current assets(ii) 149,886 72,387 222,273
Current liabilities(ii) 64,493 856 65,349
Non-current liabilities(ii) 34,410 3,236 37,646
(i) Results from July 2, 2009 to December 31, 2009
(ii) Balance Sheet as at December 31, 2009
Corporate governance
Just Energy is committed to transparency in our operations and our approach to
governance meets all recommended standards. Full disclosure of our compliance
with existing corporate governance rules is available on our website at
www.justenergy.com and is included in the Fund's May 15, 2009 management proxy
circular. Just Energy actively monitors the corporate governance and disclosure
environment to ensure timely compliance with current and future requirements.
Outlook
Just Energy Income Fund has announced that it plans to reorganize its income
trust structure into a high dividend paying corporation. Unitholders will be
asked to approve, by way of a plan of arrangement (the "Arrangement"), the
reorganization at the Fund's annual and special meeting of Unitholders scheduled
for June 29, 2010.
Upon completion of the reorganization, the Board intends to implement a dividend
policy where monthly dividends will be initially set at $0.1033 per share ($1.24
annually), equal to the current distributions paid to Just Energy Unitholders.
The federal government's announcement on October 31, 2006 of the pending
imposition of a tax on income trusts effective January 1, 2011 caused Just
Energy to analyze options which would maximize Unitholder value for the long
term. The conclusion of the analysis was that conversion to a high dividend
corporation was the optimal option available to the Fund. The proposed
reorganization offers a number of benefits:
- The conversion to a corporation will result in a lower overall tax burden
versus payment of the trust tax after January 1, 2011.
- The unique nature of Just Energy as a growth company with high return on
invested capital allows it to pay both a substantial yield and continue to grow.
This remains true regardless of whether Just Energy is an income fund or a
corporation.
- The receipt of $1.24 per year in dividends will result in a substantially
higher after tax cash yield to shareholders than that of $1.24 in distributions
for most taxable Canadian Unitholders.
- As a corporation, Just Energy will have greater access to capital markets to
the extent that issuance of equity should be required for growth through
acquisition.
- Limitations under the proposed tax on undue expansion of trusts and foreign
ownership limitations on trusts will no longer apply to Just Energy.
- The high dividend yield as a corporation combined with Just Energy's growth
prospects will focus market attention on the value of Just Energy shares.
In anticipation of the need for conversion, the Fund has not increased its rate
of distribution since early 2008 despite substantial growth in its business.
Distributions have been maintained by Just Energy at $0.1033 per month ($1.24
annually) supplemented by an annual Special Distributions ($0.20 payable January
31, 2010 being the most recent.) The decision not to continue distribution
increases and the continued growth of Just Energy have given the Fund the
flexibility to continue to pay a dividend equal to the current monthly
distributions following the reorganization. This ability makes full allowance
for the payment of tax by Just Energy and does not rely on a merger with tax
loss bearing companies.
The other major near-term activity of management is the continued consolidation
of the Universal operations into Just Energy. To date, the transition has
proceeded smoothly with significant accretion seen to the consolidated financial
results on a per unit basis. Management continues to rationalize overlap and has
identified certain Universal customers who will either not be renewed or who are
unlikely to elect renewal. Further, there are remaining non-recurring merger
costs which are expected to occur in the fourth quarter of fiscal 2010.
Accordingly, the rate of growth per unit for gross margin and distributable cash
will not be sustained during the fourth quarter.
Management has provided guidance that gross margin and distributable cash after
gross margin replacement per unit are expected to grow by approximately 5% to
10% on a per unit basis in fiscal 2010. After three quarters, gross margin has
increased by 31% per unit and distributable cash by 18% per unit. The fourth
quarter should see a slowing of margin growth for several reasons. The US dollar
is expected to be down substantially year over year against the Canadian dollar
reducing margins in the U.S. markets. The majority of customers purchased with
Universal, which were not expected to renew (see "Customer aggregation" on page
17), will have ceased receiving their commodity from Just Energy in the fourth
quarter. These customers generated approximately $9.5 million per quarter of
margin. Finally, fiscal 2009 benefitted from extremely cold weather in the
fourth quarter, it is unlikely that margins from excess gas consumption will be
replicated this year. Management's current expectation is that per unit margin
growth for the year will be higher than the 5% to 10% previously guided but less
than 20% for the year. Distributable cash growth is expected to be negative in
the fourth quarter as it was in this quarter. This is due to higher growth in
general and administrative costs than growth in margin as well as higher
interest expense and taxes associated with the acquired Universal operations.
The current expectation is that distributable cash after margin replacement will
increase at the lower end of the 5% to 10% per unit range indicated in previous
guidance.
The financial positions of the Fund's commodity suppliers remain sound based on
analysis by management as are those of the banks participating in the credit
facility. Management does not believe that weakness in the global credit markets
will have any near term impact on either existing business or the Fund's ability
to grow in the future.
Sales of the Just Green products have been very strong with approximately 43% of
all customers added in the last quarter using 86% of the green energy supply.
Continued sales of Just Green products at these levels will alter the economics
of Just Energy as green customers generate much higher per customer margins than
the past five year fixed rate customers. As these new green customers become a
higher and higher percentage of the overall Just Energy customer base, the
results should be higher margins per customer and improved renewal rates.
The economies of Just Energy's markets remain in a continued recession. The very
weak North American economic conditions and the turmoil in the credit and
financial markets have not affected Just Energy's growth rates or its ability to
realize high margin per customer. The major impact of the recession has been
higher customer attrition in the United States due to high levels of utility
shutoff following the increased volume billing periods. Following billing for
the high electricity consumption period in Texas, bad debt losses have exceeded
4% in that market reflecting the effects of recessionary economic conditions not
previously seen. With continued weakness in other markets, overall bad debt
losses are slightly above the target range of 2% - 3%. This level is expected to
continue for the fourth quarter. The Fund does not bear bad debt risk in
Ontario, Quebec, Manitoba, British Columbia (excluding large volume customers),
New York, Indiana, Michigan, Ohio and New Jersey. These markets contain
approximately 76% of Just Energy's customers.
The Fund intends to continue its geographic expansion into new markets in the
United States both through organic growth and focused acquisitions. The Fund
intends to enter Massachusetts in the first quarter of fiscal 2011 and
Pennsylvania in third quarter of next year. The Fund is actively reviewing a
number of further possible acquisitions. Just Energy continues to monitor the
progress of the deregulated markets in various jurisdictions. In addition, Just
Energy is pursuing the development of alternative sales channels to enhance its
continued growth in customer additions.
Changes made to the Income Tax Act require certain income trusts, including Just
Energy, to pay taxes after 2010, similar to those paid by taxable Canadian
corporations. The payment of such taxes will, in the future, reduce the cash
flow of the Fund, thereby reducing the amount available for distributions to
Unitholders. Just Energy is analyzing potential restructuring options in
preparation for conversion from a trust to a corporation on or before 2011.
On January 18, 2010 Just Energy entered into a long term financing agreement
with Home Trust Company for the funding of the water heaters for National Home
Services. Under the agreement NHS will receive an amount equal to the five year
cash flow of the water heater contract discounted at an agreed upon rate. Home
Trust Company will then in return receive the customer payments on the water
heaters for the next five years. The initial funding will be for approximately
$45.0 million and total funding is expected to be approximately $90.0 million
over the next year.
JUST ENERGY INCOME FUND
CONSOLIDATED BALANCE SHEETS
(Unaudited - thousands of dollars)
----------------------------------------------------------------------------
----------------------------------------------------------------------------
DECEMBER 31, 2009 MARCH 31, 2009
ASSETS
CURRENT
Cash $ 39,847 $ 59,094
Restricted cash 20,111 7,609
Accounts receivable 330,437 249,480
Gas delivered in excess of consumption 102,544 -
Gas in storage 36,332 6,690
Inventory 8,672 257
Unbilled revenues 112 57,779
Prepaid expenses and deposits 28,728 2,020
Corporate taxes recoverable 2,323 -
Current portion of future tax 20,611 -
Other assets - current (Note 9a) 2,786 5,544
----------------------------------------------------------------------------
592,503 388,473
INTANGIBLE ASSETS (Note 6) 398,485 5,097
FUTURE INCOME TAX ASSETS 7,194 -
GOODWILL 171,376 117,061
PROPERTY PLANT AND EQUIPMENT (less
accumulated amortization - $25,022; March
31, 2009 - $19,790) 212,558 19,971
OTHER ASSETS - LONG TERM (Note 9a) 4,939 5,153
----------------------------------------------------------------------------
$ 1,387,055 $ 535,755
----------------------------------------------------------------------------
----------------------------------------------------------------------------
LIABILITIES
CURRENT
Bank indebtedness $ 6,954 $ -
Accounts payable and accrued liabilities 213,450 165,431
Customer rebates payable 6,993 7,309
Management incentive program payable 1,423 1,093
Unit distribution payable 38,443 10,977
Corporate taxes payable 4,269 1,906
Deferred revenue 130,618 -
Accrued gas accounts payable 87 41,379
Current portion of long-term debt (Note 7) 55,697 -
Other liabilities - current (Note 9a) 521,531 519,352
----------------------------------------------------------------------------
----------------------------------------------------------------------------
979,465 747,447
LONG TERM DEBT (Note 7) 231,733 76,500
DEFERRED LEASE INDUCEMENTS 2,079 2,382
FUTURE INCOME TAX LIABILITIES 61,510 -
OTHER LIABILITIES - LONG TERM (Note 9a) 468,797 401,720
----------------------------------------------------------------------------
----------------------------------------------------------------------------
1,743,584 1,228,049
----------------------------------------------------------------------------
NON CONTROLLING INTEREST 21,339 292
----------------------------------------------------------------------------
UNITHOLDERS' EQUITY (DEFICIENCY)
Deficit $ (1,303,477) $ (1,470,277)
Accumulated other comprehensive income 256,399 364,566
----------------------------------------------------------------------------
(1,047,078) (1,105,711)
Unitholders' capital 652,423 398,454
Contributed surplus 16,787 14,671
----------------------------------------------------------------------------
Unitholders' deficit (377,868) (692,586)
----------------------------------------------------------------------------
----------------------------------------------------------------------------
$ 1,387,055 $ 535,755
----------------------------------------------------------------------------
----------------------------------------------------------------------------
See accompanying notes to consolidated financial statements
Commitments (Note 12)
JUST ENERGY INCOME FUND
CONSOLIDATED STATEMENTS OF UNITHOLDERS' EQUITY (DEFICIT)
FOR THE NINE MONTHS ENDED DECEMBER 31
(Unaudited - thousands of dollars)
----------------------------------------------------------------------------
----------------------------------------------------------------------------
2009 2008
ACCUMULATED EARNINGS (DEFICIT)
Accumulated earnings (deficit), beginning of
period $ (712,427) $ 392,082
Net income (loss) 310,707 (938,852)
----------------------------------------------------------------------------
Accumulated earnings (deficit), end of period (401,720) (546,770)
----------------------------------------------------------------------------
DISTRIBUTIONS
Distributions, beginning of period (757,850) (604,013)
Distributions and dividends (139,922) (115,695)
Class A preference share distributions - net of
income taxes of $1,963 (2008 - $2,177) (3,985) (3,851)
----------------------------------------------------------------------------
Distributions, end of period (901,757) (723,559)
----------------------------------------------------------------------------
DEFICIT (1,303,477) (1,270,329)
----------------------------------------------------------------------------
ACCUMULATED OTHER COMPREHENSIVE INCOME
Accumulated other comprehensive income, beginning
of period 364,566 40,789
Other comprehensive income (loss) (108,167) 392,855
----------------------------------------------------------------------------
Accumulated other comprehensive income, end of
period 256,399 433,644
----------------------------------------------------------------------------
UNITHOLDERS' CAPITAL (Note 8)
Unitholders' capital, beginning of period 398,454 358,103
Trust units exchanged 179,385 3,606
Trust units issued on exercise/exchange of unit
compensation (Note 8b) 574 4,981
Trust units issued 13,449 40,204
Exchangeable shares issued 239,946 -
Exchangeable shares exchanged (179,385) -
Repurchase and cancellation of units - (4,639)
Class A preference shares exchanged - (3,606)
----------------------------------------------------------------------------
Unitholders' capital, end of period 652,423 398,649
----------------------------------------------------------------------------
CONTRIBUTED SURPLUS (Note 8b) 16,787 14,226
----------------------------------------------------------------------------
Unitholders' deficit, end of period $ (377,868) $ (423,810)
----------------------------------------------------------------------------
----------------------------------------------------------------------------
See accompanying notes to the consolidated financial statements
JUST ENERGY INCOME FUND
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited - thousands of dollars except per unit amount)
----------------------------------------------------------------------------
----------------------------------------------------------------------------
THREE MONTHS ENDED NINE MONTHS ENDED
DECEMBER 31 DECEMBER 31
2009 2008 2009 2008
SALES $ 626,966 $ 513,608 $ 1,460,635 $ 1,185,640
COST OF SALES 515,019 423,782 1,201,117 996,467
----------------------------------------------------------------------------
GROSS MARGIN 111,947 89,826 259,518 189,173
----------------------------------------------------------------------------
EXPENSES
General and
administrative expenses 24,767 14,753 66,018 41,436
Capital tax expense 209 198 337 198
Marketing expenses 26,546 18,779 73,038 49,619
Unit based compensation 993 1,119 2,626 2,873
Bad debt expense 5,130 4,224 12,815 7,749
Amortization of
intangible assets and
related supply contracts 20,309 599 41,390 2,967
Amortization of property,
plant and equipment 1,935 1,245 5,656 3,586
----------------------------------------------------------------------------
79,889 40,917 201,880 108,428
----------------------------------------------------------------------------
INCOME BEFORE THE
UNDERNOTED 32,058 48,909 57,638 80,745
INTEREST EXPENSE 5,143 1,121 10,569 2,977
CHANGE IN FAIR VALUE OF
DERIVATIVE
INSTRUMENTS (Note 9a) (50,853) 81,345 (277,248) 1,092,859
OTHER INCOME (1,441) (1,665) (2,755) (3,707)
----------------------------------------------------------------------------
INCOME (LOSS) BEFORE
INCOME TAX 79,209 (31,892) 327,072 (1,011,384)
PROVISION FOR (RECOVERY
OF) INCOME TAX (17,010) 17,230 19,079 (72,504)
NON-CONTROLLING INTEREST (1,171) (28) (2,714) (28)
----------------------------------------------------------------------------
NET INCOME (LOSS) $ 97,390 $ (49,094) $ 310,707 $ (938,852)
----------------------------------------------------------------------------
----------------------------------------------------------------------------
See accompanying notes to consolidated financial statements
Income (loss) per unit
(Note 10)
Basic $ 0.73 $ (0.44) $ 2.39 $ (8.52)
Diluted $ 0.73 $ (0.44) $ 2.37 $ (8.52)
JUST ENERGY INCOME FUND
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(Unaudited - thousands of dollars)
----------------------------------------------------------------------------
----------------------------------------------------------------------------
THREE MONTHS ENDED NINE MONTHS ENDED
DECEMBER 31 DECEMBER 31
2009 2008 2009 2008
NET INCOME (LOSS) $ 97,390 $ (49,094) $ 310,707 (938,852)
----------------------------------------------------------------------------
Unrealized gain (loss) on
translation of self sustaining
operations (176) (2,252) 24,845 5,846
Unrealized and realized gain on
derivative instruments
designated as cash flow hedges
prior to July 1, 2008 net
of income taxes of $89,256
(Note 9a) - - - 498,654
Amortization of deferred
unrealized gain of discontinued
hedges net of income taxes of
$7,787 (2008 -$14,431)
and $25,511 (2008 - $25,558) for
the three and nine
months respectively (Note 9a) (43,386) (64,145) (133,012) (111,645)
----------------------------------------------------------------------------
OTHER COMPREHENSIVE INCOME (LOSS) (43,562) (66,397) (108,167) 392,855
----------------------------------------------------------------------------
COMPREHENSIVE INCOME (LOSS) $ 53,828 $ (115,491) $ 202,540 (545,997)
----------------------------------------------------------------------------
----------------------------------------------------------------------------
See accompanying notes to consolidated financial statements
JUST ENERGY INCOME FUND
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited - thousands of dollars)
----------------------------------------------------------------------------
----------------------------------------------------------------------------
THREE MONTHS ENDED NINE MONTHS ENDED
DECEMBER 31 DECEMBER 31
Net inflow (outflow) of
cash related to the
following activities 2009 2008 2009 2008
OPERATING
Net income (loss) $ 97,390 $ (49,094) $ 310,707 $ (938,852)
----------------------------------------------------------------------------
Items not affecting cash
Amortization of
intangible assets and
related supply contracts 20,309 599 41,390 2,967
Amortization of property,
plant and equipment 1,935 1,245 5,656 3,586
Unit based compensation 993 1,119 2,626 2,873
Non controlling interest (1,171) (28) (2,714) (28)
Future income taxes (20,165) 14,431 8,781 (77,335)
Financing charges,
non-cash portion 414 - 810 -
Other 1,729 (86) 2,211 (1,286)
Change in fair value of
derivative instruments (50,853) 81,345 (277,248) 1,092,859
----------------------------------------------------------------------------
(46,809) 98,625 (218,488) 1,023,636
----------------------------------------------------------------------------
Adjustments required to
reflect net cash receipts
from gas sales 9,775 (2,272) 44,492 19,877
----------------------------------------------------------------------------
Changes in non-cash
working capital (55,938) (31,297) (69,791) (25,694)
----------------------------------------------------------------------------
Cash inflow from
operations 4,418 15,962 66,920 78,967
----------------------------------------------------------------------------
FINANCING
Exercise of trust unit
options (Note 8a) - - - 4,293
Distributions and
dividends paid to
Unitholders and
holders of Exchangeable
shares (33,924) (28,597) (98,645) (79,068)
Distributions to Class A
preference shareholders (1,632) (1,632) (4,895) (5,960)
Tax impact on
distributions to Class A
preference shareholders 886 903 1,963 2,177
Units purchased for
cancellation - (4,639) - (4,639)
Increase in bank
Indebtedness 6,954 - 6,954 -
Issuance of long-term
Debt 120,118 39,628 140,362 63,226
Repayment of long-term
debt and bank
indebtedness (84,085) (15,841) (109,085) (28,149)
Funding from minority
Interest holder of TGF 1,302 - 1,302 -
Restricted cash 3,167 (98) 2,336 (107)
----------------------------------------------------------------------------
12,786 (10,276) (59,708) (48,227)
----------------------------------------------------------------------------
INVESTING
Purchase of capital
assets (11,034) (1,667) (30,917) (2,993)
Water heater customer
acquisition costs and
other intangible assets (1,522) - (3,933) -
Acquisitions (Note 5) - - 9,799 (2,342)
----------------------------------------------------------------------------
(12,556) (1,667) (25,051) (5,335)
----------------------------------------------------------------------------
Effect of foreign
currency translation on
cash balances 5,519 (1,473) (1,408) (1,003)
----------------------------------------------------------------------------
NET CASH INFLOW (OUTFLOW) 10,167 2,546 (19,247) 24,402
CASH, BEGINNING OF PERIOD 29,680 49,166 59,094 27,310
----------------------------------------------------------------------------
CASH, END OF PERIOD $ 39,847 $ 51,712 $ 39,847 $ 51,712
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Supplemental information
Interest paid $ 4,691 $ 1,134 $ 8,900 $ 3,049
Income taxes paid $ 13,300 $ 22 $ 20,536 $ 154
----------------------------------------------------------------------------
----------------------------------------------------------------------------
See accompanying notes to consolidated financial statements
JUST ENERGY INCOME FUND
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE NINE MONTHS ENDED DECEMBER 31, 2009
(thousands of dollars except where indicated and per unit amounts)
----------------------------------------------------------------------------
----------------------------------------------------------------------------
1. INTERIM FINANCIAL STATEMENTS
The unaudited interim consolidated financial statements do not conform in all
respects to the requirements of Canadian Generally Accepted Accounting
Principles ("GAAP") for annual financial statements and should therefore be read
in conjunction with the audited consolidated financial statements and notes
thereto included in the Fund's annual report for fiscal 2009. The unaudited
interim consolidated financial statements have been prepared by management in
accordance with Canadian GAAP applicable to interim consolidated financial
statements and follow the same accounting policies and methods in their
applications as the most recent annual financial statements, except as described
in Note 3.
2. ORGANIZATION
Just Energy Income Fund ("Just Energy" or the "Fund"), formerly known as Energy
Savings Income Fund, changed its name effective June 1, 2009.
Just Energy is an open-ended, limited-purpose trust established under the laws
of the Province of Ontario to hold securities and to distribute the income of
its directly or indirectly owned operating subsidiaries and affiliates: Just
Energy Ontario L.P. ("JE Ontario"), Just Energy Manitoba L.P. ("JE Manitoba"),
Just Energy Quebec L.P. ("JE Quebec"), Just Energy (B.C.) Limited Partnership
("JE BC"), Alberta Energy Savings L.P. ("AESLP"), Just Energy Alberta L.P. ("JE
Alberta"), Just Energy Illinois Corp. ("JEIC"), Just Energy New York Corp.
("JENYC"), Just Energy Indiana Corp. ("JEINC"), Just Energy Texas L.P.
("JETLP"), Just Energy Exchange Corp. ("JEEC"), Universal Energy Corporation
("UEC"), Universal Gas and Electric Corp. ("UGEC"), Commerce Energy Inc.
("CEI"), National Energy Corp. ("NEC") (operating under the trade name of
National Home Services ("NHS")) and Terra Grain Fuels Inc. ("TGF") (collectively
the "Just Energy Group").
3. CHANGES IN SIGNIFICANT ACCOUNTING POLICIES
(A) ADOPTION OF NEW ACCOUNTING STANDARDS
On April 1, 2009, the Fund adopted a new accounting standard that was issued by
the Canadian Institute of Chartered Accountants ("CICA") Handbook Section 3064,
Goodwill and Intangible Assets, which establishes revised standards for
recognition, measurement, presentation and disclosure of goodwill and intangible
assets. Just Energy adopted this standard retroactively as required by the
standards with no impact on the financial statements.
(B) RECENTLY ISSUED ACCOUNTING STANDARDS
The following are the new standards, not yet in effect, which are required to be
adopted by the Fund on the effective date:
Business combinations
In October 2008, the CICA issued Handbook Section 1582, Business Combinations
("CICA 1582"), concurrently with CICA Handbook Section 1601, Consolidated
Financial Statements ("CICA 1601"), and CICA Handbook Section 1602,
Non-controlling Interest ("CICA 1602"). CICA 1582, which replaces CICA Handbook
Section 1581, Business Combinations, establishes standards for the measurement
of a business combination and the recognition and measurement of assets acquired
and liabilities assumed. CICA 1601, which replaces CICA Handbook Section 1600,
carries forward the existing Canadian guidance on aspects of the preparation of
consolidated financial statements subsequent to acquisition other than
non-controlling interests. CICA 1602 establishes guidance for the treatment of
non-controlling interests subsequent to acquisition through a business
combination. These new standards are effective for fiscal years beginning on or
after January 1, 2011. The Fund has not yet determined the impact of these
standards on its consolidated financial statements.
International Financial Reporting Standards
In February 2008, CICA announced that GAAP for publicly accountable enterprises
will be replaced by International Financial Reporting Standards ("IFRS") for
fiscal years beginning on or after January 1, 2011.
Just Energy will transition to IFRS effective April 1, 2011, and intends to
issue its first interim consolidated financial statement under IFRS for the
three-month period ending June 30, 2011, and a complete set of consolidated
financial statements under IFRS for the year ending March 31, 2012.
Just Energy has identified differences between Canadian GAAP and IFRS relevant
to the Fund and an initial assessment has been made of the impact of the
required changes to accounting systems, business processes and requirements for
personnel training and development. A conversion plan was developed in March
2009 to manage the transition to IFRS.
As part of the conversion plan, the Fund is in the process of analyzing the
detailed impacts of these identified differences and developing solutions to
bridge these differences. Just Energy is currently on target with its conversion
plan.
(C) ACCOUNTING POLICIES ADOPTED UPON ACQUISITION OF UNIVERSAL ENERGY GROUP LTD.
(Note 5)
(i) Inventory
Ethanol, ethanol in process and grain inventory are valued at the lower of cost
and net realizable value with cost being determined on a weighted average basis.
(ii) Property, plant and equipment
Property, plant and equipment are recorded at cost less accumulated
amortization. Amortization for property, plant and equipment related to the
Fund's ethanol plant is provided over estimated useful lives of 15 to 25 years
using the straight line method.
(iii) Water heater contracts
Water heater contracts represent the fair value of rental contracts on the
acquisition of various water heater contracts. These contracts are amortized
over their average estimated remaining life. The Fund regularly evaluates these
water heater contracts including the estimates of useful lives.
4. SEASONALITY OF OPERATIONS
Just Energy's operations are seasonal. Gas consumption by customers is typically
highest in October through March and lowest in April through September.
Electricity consumption is typically highest in January through March and July
through September. Electricity consumption is lowest in October through December
and April through June.
5. ACQUISITIONS
(a) Acquisition of Universal Energy Group Ltd.
On July 1, 2009, Just Energy completed the acquisition of all of the outstanding
common shares of Universal Energy Group Ltd. ("UEG") pursuant to a plan of
arrangement (the "Arrangement"). Under the Arrangement, UEG shareholders
received 0.58 of an exchangeable share ("Exchangeable Share") of JEEC, a
subsidiary of Just Energy, for each UEG common share held. In aggregate,
21,271,804 Exchangeable Shares were issued pursuant to the Arrangement. Each
Exchangeable Share is exchangeable for a Trust Unit on a one-for-one basis at
any time at the option of the holder and entitles the holder to a monthly
dividend equal to 66 2/3% of the monthly distribution paid by Just Energy on a
trust unit. JEEC also assumed all the covenants and obligations of UEG in
respect of UEG's outstanding 6% convertible unsecured subordinated debentures
(the "Debentures"). On conversion of the Debentures, holders will be entitled to
receive 0.58 of an Exchangeable Share in lieu of each UEG common share that the
holder was previously entitled to receive on conversion.
The acquisition of UEG was accounted for using the purchase method of
accounting. The Fund allocated the purchase price to the identified assets and
liabilities acquired based on their fair values at the time of acquisition as
follows:
CAD$
Net assets acquired:
Working capital (including cash of $10,319) $ 75,391
Electricity contracts and customer relationships 230,963
Gas contracts and customer relationships 247,189
Water heater contracts and customer relationships 22,700
Other intangible assets 2,721
Goodwill 59,294
Property, plant and equipment 171,918
Future tax liabilities (51,971)
Other liabilities - current (164,148)
Other liabilities - long-term (140,857)
Long-term debt (180,440)
Non-controlling interest (22,697)
-----------
$ 250,063
-----------
-----------
Consideration:
Transaction costs $ 10,117
Exchangeable shares 239,946
-----------
$ 250,063
-----------
-----------
All contracts and intangible assets are amortized over the average remaining
life at the time of acquisition. The gas and electricity contracts and customer
relationships are amortized over periods ranging from 8 to 57 months. The water
heater contracts and customer relationships are amortized over 174 months and
the intangible assets are amortized over six months. The purchase price
allocation is considered preliminary and as a result it may be adjusted during
the year.
(b) Newten Home Comfort Inc.
On July 2, 2009, NEC, a wholly owned subsidiary of the Fund, acquired Newten
Home Comfort Inc., an arm's length third party that held a 20% interest in
Newten Home Comfort L.P. for $3.2 million, of which $520 was paid in cash and
determined to be the purchase price consideration. The purchase price
consideration excludes contingent payments to the 20% interest holders that will
become payable in July 2012 based on completed water heater installations. Any
contingent payments made will result in an increase to the balance of goodwill
generated by the acquisition.
(c) Acquisition of CEG's natural gas customers
During the prior fiscal year, Just Energy purchased substantially all of the
commercial and residential customer contracts of CEG Energy Options Inc. ("CEG")
in British Columbia. CEG was a Western Canada marketer of natural gas wholly
owned by SemCanada Energy Company, both of which filed for creditor protection
under the Companies' Creditors Arrangement Act on July 30, 2008. The customer
contracts had annualized volumes of approximately 4.9 million GJs.
The purchase price was allocated as follows:
The purchase price was allocated as follows:
Net assets acquired:
Gas contracts $ 1,842
-------
-------
Consideration:
Cash $ 1,842
-------
-------
The gas contracts are being amortized over the average remaining life of the
contracts, which at the time of the acquisition was 20 months.
6. INTANGIBLE ASSETS
Accumulated Net Book
As at December 31, 2009 Cost Amortization Value
----------------------------------------------------------------------------
Gas contracts and customer relationships $ 236,801 $ 44,121 $ 192,680
Electricity contracts and customer
relationships 247,607 67,913 179,694
Water heater contracts and customer
relationships 23,081 821 22,260
Other intangible assets 6,392 2,541 3,851
----------------------------------------------------------------------------
$ 513,881 $ 115,396 $ 398,485
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Accumulated Net Book
As at March 31, 2009 Cost Amortization Value
----------------------------------------------------------------------------
Gas contracts and customer relationships $ 2,223 $ 710 $ 1,513
Electricity contracts and customer
relationships 14,379 10,795 3,584
----------------------------------------------------------------------------
$ 16,602 $ 11,505 $ 5,097
----------------------------------------------------------------------------
----------------------------------------------------------------------------
7. LONG TERM DEBT AND FINANCING
December 31, March 31,
2009 2009
Credit facility (a) $117,045 $76,500
TGF Credit facility (b)(i) 41,699 -
TGF Debentures (b)(ii) 38,000 -
TGF Operating facilities (b)(iii) 10,000 -
JEEC Convertible debentures (c) 80,686 -
----------------------------------------------------------
287,430 76,500
Less: current portion (55,697) -
----------------------------------------------------------
$231,733 $76,500
----------------------------------------------------------
----------------------------------------------------------
The following table details the interest expense for the three and nine months
ended December 31, 2009. Interest is expensed at the effective interest rate.
For the three For the three For the nine For the nine
months ended months ended months ended months ended
December 31, December 31, December 31, December 31,
2009 2008 2009 2008
----------------------------------------------------------------------------
Credit facility (a) $ 1,708 $ 1,121 $ 3,545 $ 2,977
TGF Credit
facility (b)(i) 447 - 1,065 -
TGF Debentures
(b)(ii) 1,005 - 2,133 -
TGF Wheat
production
financing - - 10 -
TGF Operating
facilities
(b)(iii) 219 - 306 -
JEEC Convertible
debentures (c) 1,764 - 3,510 -
----------------------------------------------------------------------------
$ 5,143 $ 1,121 $ 10,569 $ 2,977
----------------------------------------------------------------------------
----------------------------------------------------------------------------
(a) On July 1, 2009, in connection with the acquisition of UEG, Just Energy
increased its credit facility from $170 million to $250 million. The credit
facility is available to Just Energy to meet working capital requirements. As
part of the increase in the credit facility, Societe Generale and Alberta
Treasury Branches joined Canadian Imperial Bank of Commerce, Royal Bank of
Canada, National Bank of Canada and Bank of Nova Scotia as the syndicate of
lenders thereunder. The repayment of the facility is due on October 29, 2011.
Interest is payable on outstanding loans at rates that vary with Bankers'
Acceptance, LIBOR, Canadian bank prime rate or U.S. prime rate. Under the terms
of the operating credit facility, Just Energy is able to make use of Bankers'
Acceptances and LIBOR advances at stamping fees of 4.0%, prime rate advances at
bank prime plus 3.0%, and letters of credit at 4.0%. As at December 31, 2009,
the Canadian prime rate was 2.25% and the U.S. prime rate was 3.25%. As at
December 31, 2009, Just Energy had drawn $117,045 (March 31, 2009 - $76,500)
against the facility and total letters of credit outstanding amounted to $34,428
(March 31, 2009 - $8,459). Just Energy has $98,527 of the facility remaining for
future working capital and security requirements. Just Energy's obligations
under the credit facility are supported by guarantees of certain subsidiaries
and affiliates and secured by a pledge of the assets of Just Energy and the
majority of its operating subsidiaries and affiliates. Just Energy is required
to meet a number of financial covenants under the credit facility agreement. As
at December 31, 2009 and 2008, all of these covenants have been met.
(b) In connection with the acquisition of UEG on July 1, 2009, the Fund acquired
the debt obligations of TGF, which consists currently of three separate
facilities, outlined below.
(i) TGF Credit Facility
A credit facility of up to $50,000 was established with a syndicate of Canadian
lenders led by Conexus Credit Union was arranged to finance the construction of
the ethanol plant in 2007. The facility was further revised on March 18, 2009,
and was converted to a fixed repayment term of ten years commencing March 1,
2009 which includes interest costs at a rate of prime plus 2%, with principal
repayments commencing on March 1, 2010. As at December 31, 2009, $5,000 of
principal has been repaid. The credit facility is secured by a demand debenture
agreement, a first priority security interest on all assets and undertakings of
TGF, and a general security interest on all other current and acquired assets of
TGF. The credit facility includes certain financial covenants the more
significant of which relate to current ratio, debt to equity ratio, debt service
coverage and minimum shareholders' equity. For the period ended December 31,
2009, TGF was in compliance with all of the covenants other than the current
ratio and the debt service coverage covenant which were subsequently waived on
January 25, 2010. The lenders also deferred compliance with the financial
covenants until April 1, 2011. As at December 31, 2009 the amount owing under
this facility amounted to $41,699.
(ii) TGF Debentures
A debenture purchase agreement with a number of private parties providing for
the issuance of up to $40,000 aggregate principal amount of debentures was
entered into in 2006. The interest rate is 10.5% per annum, compounded annually
and payable quarterly. Interest is to be paid quarterly with quarterly principal
payments commencing October 1, 2009 in the amount of $1,000 per quarter. The
agreement includes certain financial covenants the more significant of which
relate to current ratio, debt to capitalization ratio, debt service coverage,
debt to EBITDA and minimum shareholders' equity. On January 1, 2009, TGF entered
into an agreement with the holders of the debenture to defer the compliance with
the financial covenants and the scheduled principal payments owing under the
Debenture until October 1, 2009. For the period ended December 31, 2009, TGF was
in compliance with all of the covenants other than the current ratio, the debt
service coverage, and debt to EBITDA covenant which were subsequently waived on
January 25, 2010. The lender also deferred compliance with the financial
covenants until April 1, 2011. As a result, the debentures are classified as a
long-term obligation. As at December 31, 2009, the amount owing under this
debenture agreement amounted to $38,000.
(iii) TGF Operating Facilities
TGF also maintains a term loan for $10,000 with a third party lender bearing
interest at prime plus 1% due in full on December 31, 2010. This facility is
secured by liquid investments on deposit with the lender. In addition, TGF has a
working capital operating line of $7,000 bearing interest at prime plus 1% of
which $3,900 was drawn via overdraft and $1,600 of letters of credit.
(c) In conjunction with the acquisition of UEG on July 1, 2009, JEEC also
acquired the obligations of the convertible unsecured subordinated debentures
issued by UEG in October 2007. These instruments have a face value of $90,000
and mature on September 30, 2014 unless converted prior to that date and bear
interest at an annual rate of 6% payable semi-annually on March 31 and September
30 of each year. Each $1,000 principal amount of the debentures is convertible
at any time prior to maturity or on the date fixed for redemption, at the option
of the holder, into approximately 27.3 Exchangeable Shares of Just Energy
Exchange Corp. representing a conversion price of $36.63 per Exchangeable Share.
During the three and six months ended December 31, 2009, interest expense
amounted to $1,764 and $3,510, respectively.
The debentures are not redeemable prior to October 1, 2010. On and after October
1, 2010, but prior to September 30, 2012, the debentures are redeemable, in
whole or in part, at a price equal to the principal amount thereof, plus accrued
and unpaid interest, at the Fund's sole option on not more than 60 days and not
less than 30 days prior notice, provided that the current market price on the
date on which notice of redemption is given is not less than 125% of the
conversion price. On and after September 30, 2012, but prior to the maturity
date, the debentures are redeemable, in whole or in part, at a price equal to
the principal amount thereof, plus accrued and unpaid interest, at the Fund's
sole option on not more than 60 days and not less than 30 days prior notice.
8. UNITHOLDERS' CAPITAL
(a) Trust units of the Fund
An unlimited number of units may be issued. Each unit is transferable, voting
and represents an equal undivided beneficial interest in any distributions from
the Fund whether of net income, net realized capital gains or other amounts, and
in the net assets of the Fund in the event of termination or winding-up of the
Fund.
The Fund intends to make distributions to its Unitholders based on the cash
receipts of the Fund, excluding proceeds from the issuance of additional Fund
units, adjusted for costs and expense of the Fund, the amount which may be paid
by the Fund in connection with any cash redemptions or repurchases of units and
any other amount that the Board of Directors considers necessary to provide for
the payment of any costs which have been or will be incurred in the activities
and operations of the Fund. The Fund's intention is for Unitholders of record on
the 15th day of each month to receive distributions at the end of the month,
excluding any special distributions.
Class A preference shares of Just Energy Corp.
The terms of the unlimited Class A preference shares of JEC are non-voting,
non-cumulative and exchangeable into trust units in accordance with the JEC
shareholders' agreement as restated and amended, with no priority on
dissolution. Pursuant to the amended and restated Declaration of Trust which
governs the Fund, the holders of Class A preference shares are entitled to vote
in all votes of Unitholders as if they were the holders of the number of units
that they would receive if they exercised their shareholder exchange rights.
Class A preference shareholders have equal entitlement to distributions from the
Fund as Unitholders.
Exchangeable shares of JEEC
On July 1, 2009, Just Energy completed the acquisition of all of the outstanding
common shares of Universal Energy Group Ltd. ("UEG") pursuant to a plan of
arrangement (the "Arrangement"). Under the Arrangement, UEG shareholders
received 0.58 of an exchangeable share ("Exchangeable Share") of Just Energy
Exchange Corp. ("JEEC"), a subsidiary of Just Energy, for each UEG common share
held. In aggregate, 21,271,804 Exchangeable Shares were issued pursuant to the
Arrangement. Each Exchangeable Share is exchangeable for a Trust Unit on a
one-for-one basis at any time at the option of the holder and entitles the
holder to a monthly dividend equal to 66 2/3% of the monthly distribution paid
by Just Energy on a Trust Unit.
2009 2008
Issued and Outstanding Units/Shares Units/Shares
Trust units
-----------
Balance, beginning of
period 106,138,523 $ 385,294 102,152,194 $ 341,337
Options exercised - - 355,000 4,840
Unit appreciation rights
exchanged 39,482 555 9,788 141
Deferred unit grants
exchanged 1,712 19 - -
Distribution
reinvestment plan 1,073,105 13,449 1,604,484 17,891
Units issued - - 1,336,115 22,313
Units cancelled - - (677,700) (4,639)
Exchanged from
Exchangeable shares 15,902,969 179,385 - -
Exchanged from Class A
preference shares - - 1,442,484 3,606
--------------------------------------------------
Balance, end of period 123,155,791 578,702 106,222,365 385,489
--------------------------------------------------
Class A preference
shares
------------------
Balance, beginning of
period 5,263,728 13,160 6,706,212 16,766
Exchanged into units - - (1,442,484) (3,606)
--------------------------------------------------
Balance, end of period 5,263,728 13,160 5,263,728 13,160
--------------------------------------------------
Exchangeable shares
-------------------
Balance, beginning of
period - - - -
Exchangeable shares
issued 21,271,804 239,946 - -
Exchanged into units (15,902,969) (179,385) - -
--------------------------------------------------
Balance, end of period 5,368,835 60,561 - -
--------------------------------------------------
Unitholders' capital,
end of period 133,788,354 $ 652,423 111,486,093 $ 398,649
--------------------------------------------------
--------------------------------------------------
Distribution reinvestment plan
Under the Fund's distribution reinvestment plan ("DRIP"), Unitholders holding a
minimum of 100 units can elect to receive their distributions (both regular and
special) in units rather than cash at a 2% discount to the simple average
closing price of the units for five trading days preceding the applicable
distribution payment date, providing the units are issued from treasury and not
purchased on the open market.
Units cancelled
During the prior fiscal year, the Fund obtained approval from its Board of
Directors to make a normal course issuer bid to purchase up to 9,000,000 units
for the 12-month period commencing November 21, 2008 and ending November 20,
2009. A maximum of 44,754 units can be purchased during any trading day. No
units were purchased and cancelled during the period.
Units issued
During the nine months ended December 31, 2009, the Fund issued 15,902,969 units
relating to the exchange of exchangeable shares. The exchangeable shares were
issued pursuant to Just Energy's acquisition of Universal Energy Group Ltd.
During the prior comparable period, the Fund issued 1,336,115 units relating to
a portion of the special distribution declared on December 31, 2007, payable in
units.
(b) Contributed surplus
Amounts credited to contributed surplus include unit based compensation awards,
unit appreciation rights ("UARs") and deferred unit grants ("DUGs"). Amounts
charged to contributed surplus are awards exercised during the period.
Contributed Surplus 2009 2008
----- -----
Balance, beginning of period $ 14,671 $ 12,004
Add: unit based compensation awards 2,626 2,873
non-cash deferred unit grants distributions 64 38
Less: unit based awards exercised (574) (689)
--------- ---------
Balance, end of period $ 16,787 $ 14,226
--------- ---------
--------- ---------
Total amounts credited to Unitholders' capital in respect of unit options and
deferred unit grants exercised or exchanged during the three and nine months
ended December 31, 2009 amounted to $38 (2008 - nil) and $574 (2008 - $4,981).
Cash received from options exercised for the three and nine months ended
December 31, 2009 amounted to $nil (2008 - nil) and $nil (2008 - $4,293).
9. FINANCIAL INSTRUMENTS
(a) Fair value
The Fund has a variety of gas and electricity supply contracts that are captured
under CICA Handbook section 3855, Financial Instruments - Measurement and
Recognition. Fair value is the estimated amount that Just Energy would pay or
receive to dispose of these supply contracts in an arm's length transaction
between knowledgeable, willing parties who are under no compulsion to act.
Management has estimated the value of electricity, renewable and gas swap and
forward contracts using a discounted cash flow method which employs market
forward curves that are either directly sourced from third parties or are
developed internally based on third party market data. These curves can be
volatile thus leading to volatility in the mark to market with no impact to cash
flows. Gas options have been valued using the Black option value model using the
applicable market forward curves and the implied volatility from other market
traded gas options.
Effective July 1, 2008, the Fund ceased the utilization of hedge accounting.
Accordingly, all the mark to market changes on the Fund's derivative instruments
are recorded on a single line on the consolidated statements of operations. Due
to the commodity volatility and size of the Fund, the quarterly swings in mark
to market on these positions will increase the volatility in the Fund's
earnings.
The following tables illustrate (gains)/losses related to the Fund's derivative
financial instruments classified as held-for-trading recorded against other
assets and other liabilities with their offsetting values recorded in change in
fair value derivative instruments for the three and nine months ended December
31, 2009.
Change In Fair Value of Derivative Instruments
For the three For the three For the three For the three
months ended months ended months ended months ended
December 31, December 31, December 31, December 31,
2009 2009 (USD) 2008 2008 (USD)
Canada
Fixed-for-
floating
electricity
swaps (i) $ (55,615) n/a $ (31,802) n/a
Renewable energy
certificates
(ii) 1,362 n/a (272) n/a
Verified
emission-
reduction
credits (iii) (9) n/a - n/a
Options (iv) (634) n/a (1,650) n/a
Physical gas
forward
contracts (v) (214) n/a 51,386 n/a
Transportation
forward
contracts (vi) 13,191 n/a (11,121) n/a
United States
Fixed-for-
floating
electricity
swaps (vii) 185 176 26,614 21,559
Physical
electricity
forwards (viii) 4,061 3,852 30,098 24,381
Unforced
capacity forward
contracts (ix) 733 695 2,237 1,812
Unforced
capacity
physical
contracts (x) (327) (311) - -
Renewable energy
certificates
(xi) (655) (621) (323) (262)
Verified
emission-reduc-
tion credits (xii) 189 179 122 100
Options (xiii) 388 368 (871) (706)
Physical gas
forward
contracts (xiv) (120) (114) 90,191 73,059
Transportation
forward
contracts (xv) 929 881 4,202 3,404
Heat rate swaps
(xvi) (2,344) (2,223) 315 255
Fixed financial
swaps (xvii) 8,732 8,282 - -
Foreign exchange
forward
contracts
(xviii) 824 n/a 795 n/a
Other
Amortization of
deferred
unrealized gains
of discontinued
hedges (51,174) n/a (78,576) n/a
Amortization of
derivative
financial
instruments
related to
Universal
acquisition 29,645 n/a - n/a
----------------------------------------------------------------------------
Change In Fair
Value of
Derivative
Instruments $ (50,853) $ 81,345
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Change In Fair Value of Derivative Instruments
For the nine For the nine For the nine For the nine
months ended months ended months ended months ended
December 31, December 31, December 31, December 31,
2009 2009 (USD) 2008 2008 (USD)
Canada
Fixed-for-
floating
electricity
swaps (i) $ (41,462) n/a $ 122,073 n/a
Renewable energy
certificates
(ii) (477) n/a $ 448 n/a
Verified
emission-
reduction
credits (iii) (9) n/a - n/a
Options (iv) 326 n/a $ (1,259) n/a
Physical gas
forward
contracts (v) (54,327) n/a $ 621,147 n/a
Transportation
forward
contracts (vi) 20,680 n/a $ (7,086) n/a
United States
Fixed-for-
floating
electricity
swaps (vii) (10,987) (10,021) 79,520 71,445
Physical
electricity
forwards (viii) (29,093) (25,983) 108,037 98,027
Unforced
capacity forward
contracts (ix) (458) (309) 5,725 5,106
Unforced
capacity
physical
contracts (x) (26) (32) - -
Renewable energy
certificates
(xi) 731 645 (206) (149)
Verified
emission-
reduction
credits (xii) 405 371 63 43
Options (xiii) 2,653 2,414 4,307 3,851
Physical gas
forward
contracts (xiv) (70,434) (64,148) 294,024 265,663
Transportation
forward
contracts (xv) 223 231 3,370 2,617
Heat rate
swaps (xvi) (3,882) (3,591) 87 39
Fixed financial
swaps (xvii) 5,393 5,209 - -
Foreign exchange
forward
contracts
(xviii) 2,494 n/a 121 n/a
Other
Amortization of
deferred
unrealized gains
of discontinued
hedges (158,523) n/a (137,203) n/a
Amortization of
derivative
financial
instruments
related to
Universal
acquisition $ 59,525 n/a - n/a
----------------------------------------------------------------------------
Change In Fair
Value of
Derivative
Instruments $ (277,248) $ 1,093,168
----------------------------------------------------------------------------
----------------------------------------------------------------------------
The following table illustrates (gains)/losses representing the ineffective
portion of the Fund's designated hedges prior to July 1, 2008, recorded against
other assets and other liabilities with their offsetting values recorded in
change in fair value of derivative instruments.
Change In Fair Value of Derivative Instruments
For the nine For the nine For the nine For the nine
months ended months ended months ended months ended
December 31, December 31, December 31, December 31,
2009 2009 (USD) 2008 2008 (USD)
Canada
Fixed-for-
floating
electricity
swaps (i) $ - n/a $ (476) n/a
United States
Fixed-for-
floating
electricity
swaps (vii) - - 167 164
----------------------------------------------------------------------------
Change In Fair
Value of
Derivative
Instruments $ - - $ (309) -
----------------------------------------------------------------------------
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Total Change In
Fair value of
Derivative
Instruments $ (277,248) $ 1,092,859
----------------------------------------------------------------------------
----------------------------------------------------------------------------
The following table illustrates (gains)/losses to the Fund's designated hedges
prior to July 1, 2008, recorded against other assets and other liabilities with
their offsetting values recorded in other comprehensive income.
Other Comprehensive Income
For the nine For the nine
months ended months ended
December 31, December 31,
2008 2008 (USD)
Canada
Fixed-for-floating electricity swaps (i) $ (75,354) n/a
Renewable energy certificates (ii) - n/a
Verified emission-reduction credits (iii) - n/a
Options (iv) - n/a
Physical gas forward contracts (v) (313,071) n/a
Transportation forward contracts (vi) (5,958) n/a
United States
Fixed-for-floating electricity swaps (vii) (40,473) (39,808)
Physical electricity forwards (viii) (30,573) (30,071)
Unforced capacity forward contracts (ix) (4,743) (4,665)
Renewable energy certificates (xi) - -
Verified emission-reduction credits (xii) - -
Options (xiii) - -
Physical gas forward contracts (xiv) (124,760) (122,711)
Transportation forward contracts (xv) 7,022 6,907
Heat rate swaps (xvi) - -
Fixed financial swaps (xvii) - -
Foreign exchange forward contracts (xviii) - -
Amortization of deferred unrealized gains of
discontinued hedges (4,550) -
--------------------------------------------------------------------------
Other Comprehensive Income $ (592,460)
--------------------------------------------------------------------------
--------------------------------------------------------------------------
The following table summarizes certain aspects of the financial assets and
liabilities recorded in the financial statements as at December 31, 2009.
Other Other
Other assets Other assets liabilities liabilities
(current) (long term) (current) (long term)
Canada
Fixed-for-floating
electricity
swaps (i) $ - $ - $ 220,401 $ 190,578
Renewable energy
certificates (ii) 349 618 30 137
Verified
emission-reduction
credits (iii) 2 7 - -
Options (iv) - - 263 482
Physical gas
forward
contracts (v) - - 162,155 153,184
Transportation
forward
contracts (vi) - - 10,373 8,453
United States
Fixed-for-floating
electricity
swaps (vii) - - 22,372 18,630
Physical
electricity
forwards (viii) 95 389 21,305 26,614
Unforced capacity
forward
contracts (ix) 186 146 120 -
Unforced capacity
physical
contracts (x) 34 - - -
Renewable energy
certificates (xi) 81 95 162 542
Verified
emission-reduction
credits (xii) - - 92 298
Options (xiii) - - 1,960 1,543
Physical gas
forward
contracts (xiv) - - 73,412 63,855
Transportation
forward
contracts (xv) 84 - 1,233 1,390
Heat rate
swaps (xvi) 784 3,665 434 -
Fixed financial
swaps (xvii) 67 19 7,219 3,091
Foreign exchange
forward
contracts (xviii) 1,104 - - -
----------------------------------------------------------------------------
As at December 31,
2009 $ 2,786 $ 4,939 $ 521,531 $ 468,797
----------------------------------------------------------------------------
----------------------------------------------------------------------------
The following table summarizes certain aspects of the financial assets and
liabilities recorded in the financial statements as at March 31, 2009.
Other Other
Other assets Other assets liabilities liabilities
(current) (long term) (current) (long term)
Canada
Fixed-for-floating
electricity
swaps (i) $ - $ - $ 149,476 $ 158,289
Renewable energy
certificates (ii) 94 251 - 23
Verified
emission-reduction
credits (iii) - - - -
Options (iv) 792 23 237 997
Physical gas
forward
contracts (v) - - 198,329 103,734
Transportation
forward
contracts (vi) 787 2,160 927 163
United States
Fixed-for-floating
electricity
swaps (vii) - - 34,997 24,577
Physical
electricity
forwards (viii) - - 48,242 41,456
Unforced capacity
forward
contracts (ix) 19 213 366 -
Unforced capacity
physical
contracts (x) - - - -
Renewable energy
certificates (xi) 57 191 19 48
Verified
emission-reduction
credits (xii) - - - -
Options (xiii) 395 - 204 1,349
Physical gas
forward
contracts (xiv) - - 84,010 69,627
Transportation
forward
contracts (xv) 4 - 961 1,457
Heat rate
swaps (xvi) 72 1,171 956 -
Fixed financial
swaps (xvii) - 869 628 -
Foreign exchange
forward
contracts (xviii) 3,324 275 - -
----------------------------------------------------------------------------
As at March 31,
2009 $ 5,544 $ 5,153 $ 519,352 $ 401,720
----------------------------------------------------------------------------
----------------------------------------------------------------------------
The following table summarizes financial instruments classified as held for
trading as at December 31, 2009 to which the Fund has committed.
Total
Contract Type Notional Remaining Maturity Date
Volume Volume
Canada
----------------------------------------------------------------------------
(i) Fixed-for-floating 0.0001-50 14,414,619 January 31, 2010 -
electricity swaps MWh MWh August 18, 2016
(i)
----------------------------------------------------------------------------
(ii) Renewable energy 10-90,000 1,210,017 January 31, 2010 -
certificates MWh MWh December 31, 2014
----------------------------------------------------------------------------
(iii) Verified emission 2,000-55,000 505,000 January 31, 2010 -
reduction credits Tonnes Tonnes December 31, 2014
----------------------------------------------------------------------------
(iv) Options 46-40,500 6,664,483 January 31, 2010 -
GJ/month GJ February 28, 2014
----------------------------------------------------------------------------
(v) Physical gas forward 5-14,705 161,580,980 January 31, 2010 -
contracts GJ/day GJ June 30, 2015
----------------------------------------------------------------------------
(vi) Transportation 45-39,914 67,886,718 January 31, 2010 -
forward contracts GJ/day GJ October 31, 2013
----------------------------------------------------------------------------
United States
----------------------------------------------------------------------------
(vii) Fixed-for-floating 0.10-28 2,364,640 January 31, 2010 -
electricity swaps MW/h MWh December 31, 2014
(i)
----------------------------------------------------------------------------
(viii) Physical electricity 1-42 4,557,149 January 2, 2010 -
forwards MW/h MWh September 30, 2014
----------------------------------------------------------------------------
(ix) Unforced capacity 5-35 1,485 January 31, 2010 -
forward contracts MWCap MWCap November 30, 2012
----------------------------------------------------------------------------
(x) Unforced capacity 3-18 156 January 31, 2010 -
physical contracts MWCap MWCap September 30, 2010
----------------------------------------------------------------------------
(xi) Renewable energy 2,200-110,000 1,515,265 January 31, 2010 -
certificates MWh MWh December 31, 2014
----------------------------------------------------------------------------
(xii) Verified emission 10,000-50,000 390,000 January 31, 2010 -
reduction credits Tonnes Tonnes December 31, 2014
----------------------------------------------------------------------------
(xiii) Options 5-170,000 8,119,980 January 31, 2010 -
mmBTU/month mmBTU December 31, 2014
----------------------------------------------------------------------------
(xiv) Physical gas forward 5-5,500 61,243,695 January 4, 2010 -
contracts mmBTU/day mmBTU July 31, 2014
----------------------------------------------------------------------------
(xv) Transportation 35-90,000 36,144,020 January 4, 2010 -
forward mmBTU/day mmBTU January 31, 2013
contracts
----------------------------------------------------------------------------
(xvi) Heat rate swaps 1-30 2,707,119 January 31, 2010 -
MWh MWh November 30, 2014
----------------------------------------------------------------------------
(xvii) Fixed financial swap 100-238,700 29,517,406 January 31, 2010 -
mmBTU/month mmBTU November 30, 2014
----------------------------------------------------------------------------
(xviii) Foreign exchange $1,981-$2,258 N/A January 8, 2010 -
forward (US $2,000) April 7, 2010
contracts (ii)
----------------------------------------------------------------------------
Fair Value Notional
Contract Type Fixed Price Favourable/ Value
(Unfavourable)
Canada
----------------------------------------------------------------------------
(i) Fixed-for-floating $36.55-$128.13 ($410,979) $1,052,008
electricity swaps
(i)
----------------------------------------------------------------------------
(ii) Renewable energy $3.00-$26.00 $800 $7,604
certificates
----------------------------------------------------------------------------
(iii) Verified emission $9.34-$11.50 $9 $5,236
reduction credits
----------------------------------------------------------------------------
(iv) Options $6.35-$12.40 ($745) $12,088
----------------------------------------------------------------------------
(v) Physical gas forward $4.99-$10.00 ($315,339) $1,264,729
contracts
----------------------------------------------------------------------------
(vi) Transportation $0.01-$1.85 ($18,826) $54,910
forward
contracts
----------------------------------------------------------------------------
United States
----------------------------------------------------------------------------
(vii) Fixed-for-floating $39.15-$143.72 ($41,002) $202,700
electricity swaps (US$37.25-$136.75) (US($39,012)) (US$192,864)
(i)
----------------------------------------------------------------------------
(viii) Physical electricity $41.88-$115.87 ($47,435) $297,741
forwards (US$39.85-$110.25) (US($45,133)) (US$283,293)
----------------------------------------------------------------------------
(ix) Unforced capacity $3,153-$8,408 $212 $8,256
forward contracts (US$3,000-$8,000) (US$202) (US$7,855)
----------------------------------------------------------------------------
(x) Unforced capacity $998-$1,839 $34 $230
physical contracts (US$950-$1,750) (US$32) (US$219)
----------------------------------------------------------------------------
(xi) Renewable energy $1.68-$23.65 ($528) $11,989
certificates (US$1.60-$22.50) (US($502)) (US$11,407)
----------------------------------------------------------------------------
(xii) Verified emission $7.78-$8.93 ($390) $3,309
reduction credits (US$7.40-$8.50) (US$(371)) (US$3,148)
----------------------------------------------------------------------------
(xiii) Options $6.73-$14.50 ($3,503) $13,294
(US$6.40-$13.80) (US($3,333)) (US$12,649)
----------------------------------------------------------------------------
(xiv) Physical gas forward $4.97-$12.49 ($137,267) $547,897
contracts (US$4.73-$11.88) (US($130,606)) (US$521,310)
----------------------------------------------------------------------------
(xv) Transportation $0.01-$0.63 ($2,539) ($10,663)
forward (US$0.01-$0.60) (US($2,416)) (US$10,146)
contracts
----------------------------------------------------------------------------
(xvi) Heat rate swaps $39.72-$88.32 $4,015 $146,233
(US$37.79-$84.03) (US$3,820) (US$139,137)
----------------------------------------------------------------------------
(xvii) Fixed financial swap $5.49-$8.73 ($10,224) $206,505
(US$5.22-$8.31) (US($9,728)) (US$196,484)
----------------------------------------------------------------------------
(xviii) Foreign exchange $0.9905-$1.1289 $1,104 $16,816
forward (US$16,000)
contracts (ii)
----------------------------------------------------------------------------
(i) The electricity fixed-for-floating contracts related to the Province of
Alberta are predominantly load-following as well as some contracts in Ontario,
wherein the quantity of electricity contained in the supply contract "follows"
the usage of customers designated by the supply contract. Notional volumes
associated with these contracts are estimates and subject to change with
customer usage requirements. There are also load shaped fixed-for-floating
contracts in Ontario, New York and Texas, wherein the quantity of electricity is
established but varies throughout the term of the contracts.
(ii) Hedge accounting was applied to most of these forwards up to September 30,
2006. However, the hedge was de-designated and a loss of $195 for the year ended
March 31, 2007 was recorded in other liabilities. As the required hedge
accounting effectiveness was achieved for certain quarters of fiscal 2007, a
$1,933 gain was deferred and recorded in accumulated other comprehensive income
and is being recognized in the Statement of Operations over the remaining term
of each hedging relationship.
The following table summarizes the nature of financial assets and liabilities
recorded in the financial statements for the nine months ended December 31,
2009.
December 31, 2009 December 31, 2008
Loss on cash Loss on cash
flow hedges flow hedges
transferred Unrealized transferred Unrealized
from Other gain from Other gain
Comprehensive recorded in Comprehensive recorded in
Income to the Other Income to the Other
Statement of Comprehensive Statement of Comprehensive
Operations Income Operations Income
Canada
Fixed-for-
floating
electricity
swaps (i) $ - $ - $ (19,208) $ 94,562
Physical gas
forward
contracts and
transportation
forward
contracts (v) - - (135,808) 454,838
United States
Fixed-for-
floating
electricity
swaps (vii) - - (13,826) 54,299
Physical
electricity
contracts
(viii) - - (30,659) 61,232
Unforced
capacity
forward
contracts (ix) - - - 4,743
Physical gas
forward
contracts and
transportation
forward
contracts
(xiii) - - (26,184) 143,922
Amortization
of deferred
unrealized
gains of
discontinued
hedges (158,522) - (137,203) -
----------------------------------------------------------------------------
Total realized
and unrealized
gains/(losses) $ (158,522) $ - $ (362,888) $ 813,596
----------------------------------------------------------------------------
----------------------------------------------------------------------------
The estimated amortization of deferred gains and losses reported in accumulated
other comprehensive income that is expected to be amortized to net income within
the next 12 months is a gain of $139,727.
These derivative financial instruments create a credit risk for Just Energy
since they have been transacted with a limited number of counterparties. Should
any counterparty be unable to fulfill its obligations under the contracts, Just
Energy may not be able to realize the other asset balance recognized in the
financial statements.
In Illinois, Texas and Alberta, Just Energy assumes the credit risk associated
with cash collection from its customers. Credit review processes have been put
in place for these markets where Just Energy has credit risk to manage the
customer default rate. If a significant number of customers were to default on
their payments, it could have a material adverse effect on Just Energy's
operations and cash flow. Management factors default from credit risk in its
margin expectations for Illinois, Texas and Alberta.
(b) Classification of Financial Assets and Liabilities
The following table represents the fair values and carrying amounts of financial
assets and liabilities measured at fair value or amortized cost.
As at December 31, 2009 Carrying amount Fair value
Cash and cash equivalents and restricted cash $ 59,958 $ 59,958
Accounts receivable $ 330,437 $ 330,437
Bank indebtedness, accounts payable and accrued liabilities,
customer rebates payable, management incentive
program payable and unit distribution payable $ 267,263 $ 267,263
Long-term debt $ 287,430 $ 296,744
For the three For the three
months ended months ended
December 31, 2009 December 31, 2008
Interest expense on financial
liabilities not held for trading $ 5,143 $ 1,109
For the nine For the nine
months ended months ended
December 31, 2009 December 31, 2008
Interest expense on financial
liabilities not held for trading $ 10,569 $ 2,953
The carrying value of cash, restricted cash, accounts receivable, accounts
payable and accrued liabilities, management incentive program payable and unit
distribution payable approximates their fair value due to their short term
liquidity.
The carrying value of the long-term debt approximates its fair value as the
interest payable on outstanding amounts at rates that vary with Bankers'
Acceptances, LIBOR, Canadian bank prime rate or U.S. prime rate.
(c) Management of risks arising from financial instruments
The risks associated with the Fund's financial instruments are as follows:
(i) Market risk
Market risk is the potential loss that may be incurred as a result of changes in
the market or fair value of a particular instrument or commodity. Components of
market risk to which the Fund is exposed are discussed below:
Foreign currency risk
Foreign currency risk is created by fluctuations in the fair value or cash flows
of financial instruments due to changes in foreign exchange rates and exposure
as a result of investment in U.S. operations.
A portion of Just Energy's earnings is generated in U.S. dollars and is subject
to currency fluctuations. The performance of the Canadian dollar relative to the
U.S. dollar could positively or negatively affect Just Energy's earnings. Due to
its growing operations in the U.S. and recent acquisition of UEG, Just Energy
expects to have a greater exposure in the future to U.S. fluctuations than in
prior years.
The Fund may, from time to time, experience losses resulting from fluctuations
in the values of its foreign currency, which could adversely affect operating
results.
With respect to translation exposure, as at December 31, 2009, if the Canadian
dollar had been 5% stronger or weaker against the U.S. dollar, assuming that all
the other variables had remained constant, net income for the three months ended
December 31, 2009 would have been $2,112 lower/higher and other comprehensive
income would have been $1,814 lower/higher.
Interest rate risk
Just Energy is also exposed to interest rate fluctuations associated with its
floating rate credit facility. Just Energy's current exposure to interest rates
does not economically warrant the use of derivative instruments. The Fund's
exposure to interest rate risk is relatively immaterial and temporary in nature.
As such, the Fund does not believe that this long-term debt exposes it to
material financial risks and has determined that there is no need to set out
parameters to actively manage this risk.
A 1% increase (decrease) in interest rates would have resulted in a decrease
(increase) in income before taxes for the three and nine months ended December
31, 2009 of approximately $416 (2008 - $249) and $774 (2008 - $601),
respectively.
Commodity price risk
Just Energy is exposed to market risks associated with commodity prices and
market volatility where estimated customer requirements do not match actual
customer requirements. Just Energy's exposure to market risk is affected by a
number of factors, including accuracy of estimation of customer commodity
requirements, commodity prices, volatility and liquidity of markets. Just Energy
enters into derivative instruments in order to manage exposures to changes in
commodity prices. The derivative instruments that are used are designed to fix
the price of supply for estimated customer commodity demand in Canadian dollars
and thereby fix margins such that Unitholder distributions can be appropriately
established. Derivative instruments are generally transacted over-the-counter.
The inability or failure of Just Energy to manage and monitor the above market
risks could have a material adverse effect on the operations and cash flow of
Just Energy.
As at December 31, 2009, if the energy prices including natural gas,
electricity, carbon offset gas credits and renewable energy certificates, had
risen (fallen) by 10%, assuming that all the other variables had remained
constant, income before taxes for the three month period ended December 31, 2009
would have increased (decreased) by $248,627 ($247,786) primarily as a result of
the change in the fair value of the Fund's derivative instruments.
Changes in energy prices will not significantly impact the Fund's gross margin.
(ii) Credit risk
Credit risk is the risk that one party to a financial instrument fails to
discharge an obligation and causes financial loss to another party. Just Energy
is exposed to credit risk in two specific areas: Customer Credit Risk and
Counterparty Credit Risk.
Customer Credit Risk
In Alberta, Texas, Illinois, Pennsylvania, California and Maryland, Just Energy
has customer credit risk and therefore, credit review processes have been
implemented to perform credit evaluations of customers and manage customer
default. If a significant number of customers were to default on their payments,
it could have a material adverse effect on the operations and cash flow of Just
Energy. Management factors default from credit risk in its margin expectations
for all the above markets.
As at December 31, 2009, accounts receivables from the above markets with a
carrying value of $16,186 (March 31, 2009 - $17,022) were past due but not
doubtful. As at December 31, 2009 the aging of the accounts receivables from the
above markets was as follows:
Current $ 38,387
1 - 30 days 8,770
31 - 60 days 2,324
61 - 90 days 1,571
Over 90 days 22,447
--------
$ 73,499
--------
For the nine months ended December 31, 2009, changes in the allowance for
doubtful accounts were as follows:
Balance, beginning of period $ 28,457
Provision for doubtful accounts 12,815
Bad debts written off (10,792)
Others (3,473)
----------
Balance, end of period $ 27,007
----------
For the remaining markets, the LDCs provide collection services and assume the
risk of any bad debts owing from Just Energy's customers for a fee. Management
believes that the risk of the LDCs failing to deliver payment to Just Energy is
minimal. There is no assurance that the LDCs that provide these services will
continue to do so in the future.
Counterparty Credit Risk
Counterparty credit risk represents the loss that Just Energy would incur if a
counterparty fails to perform under its contractual obligations. This risk would
manifest itself in Just Energy replacing contracted supply at prevailing market
rates thus impacting the related customer margin or replacing contracted foreign
exchange at prevailing market rates impacting the related Canadian dollar
denominated distributions. Counterparty limits are established within the Risk
Management Policy. Any exception to these limits requires approval from the
Board of Directors of JEC. The Risk Office and Risk Committee monitor current
and potential credit exposure to individual counterparties and also monitor
overall aggregate counterparty exposure. However, the failure of a counterparty
to meet its contractual obligations could have a material adverse effect on the
operations and cash flows of Just Energy.
As at December 31, 2009, the maximum credit risk exposure amounted to
$3,909,704, representing the notional value of its derivative financial
instruments and accounts receivable.
(iii) Liquidity risk
Liquidity risk is the potential inability to meet financial obligations as they
fall due. The Fund manages this risk by monitoring detailed weekly cash flow
forecasts covering a rolling six-week period, monthly cash forecasts for the
next 12 months, and quarterly forecasts for the following two-year period to
ensure adequate and efficient use of cash resources and credit facilities.
(iv) Supplier risk
Just Energy purchases the majority of the gas and electricity delivered to its
customers through long term contracts entered into with various suppliers. Just
Energy has an exposure to supplier risk as the ability to continue to deliver
gas and electricity to its customers is reliant upon the ongoing operations of
these suppliers and their ability to fulfill their contractual obligations. Just
Energy has discounted the fair value of its financial assets by $684 to
accommodate for its counterparties' risk of default.
10. INCOME (LOSS) PER UNIT
Three months ended Nine months ended
December 31 December 31
2009 2008 2009 2008
Basic income (loss) per unit
----------------------------
Net income (loss) available to
Unitholders $ 97,390 $ (49,094) $ 310,707 $ (938,852)
-------- ---------- --------- -----------
Weighted average number of units
outstanding 122,562 106,049 115,735 104,439
Weighted average number of Class A
preference shares 5,264 5,264 5,264 5,741
Weighted average number of
Exchangeable shares 5,679 - 8,779 -
-------- ---------- --------- -----------
Basic units and shares outstanding 133,505 111,313 129,778 110,180
-------- ---------- --------- -----------
Basic income (loss) per unit $ 0.73 $ (0.44) $ 2.39 $ (8.52)
-------- ---------- --------- -----------
-------- ---------- --------- -----------
Diluted income (loss) per unit
------------------------------
Net income (loss) available to
Unitholders $ 97,390 $ (49,094) $ 310,707 $ (938,852)
-------- ---------- --------- -----------
Basic units and shares outstanding 133,505 111,313 129,778 110,180
Dilutive effect of:
Unit options - - - -
Unit appreciation rights 543 - 1,385 -
Deferred unit grants 74 - 69 -
-------- ---------- --------- -----------
Units outstanding on a diluted
basis 134,122 111,313 131,232 110,180
-------- ---------- --------- -----------
Diluted income (loss) per unit $ 0.73 $ (0.44) $ 2.37 $ (8.52)
-------- ---------- --------- -----------
-------- ---------- --------- -----------
11. REPORTABLE BUSINESS SEGMENTS
Just Energy operates in two reportable geographic segments, Canada and the
United States. Reporting by geographic region is in line with Just Energy's
performance measurement parameters. Both the Canadian and the U.S. operations
have gas and electricity business segments.
Just Energy evaluates segment performance based on gross margin.
The following tables present Just Energy's results by geographic segment and
operating segments.
Three months ended December 31, 2009
Gas and Electricity Marketing TGF NHS
----------------------------- ------- --------
Canada United States Canada Canada Consolidated
Sales gas $ 207,499 $ 134,251 $ - $ - $ 341,750
Sales
electricity 171,896 91,263 - - 263,159
Ethanol - - 19,460 - 19,460
Home Service - - - 2,597 2,597
----------------------------------------------------------------------------
Sales $ 379,395 $ 225,514 $ 19,460 $ 2,597 $ 626,966
----------------------------------------------------------------------------
Gross margin $ 61,430 $ 46,568 $ 1,731 $ 2,218 $ 111,947
Amortization of
property, plant
and equipment (1,608) (53) (222) (52) (1,935)
Amortization of
intangible
assets (11,914) (7,997) - (398) (20,309)
Other operating
expenses (13,120) (40,605) (2,440) (1,480) (57,645)
----------------------------------------------------------------------------
Income (loss)
before the
undernoted 34,788 (2,087) (931) 288 32,058
Interest expense (3,193) (279) (1,671) - (5,143)
Change in fair
value of
derivative
instruments 50,926 (73) - - 50,853
Other income (7,248) 8,616 73 - 1,441
Non-controlling
interest - - 1,171 - 1,171
Recovery of
income tax 13,485 3,155 - 370 17,010
----------------------------------------------------------------------------
Net income (loss)$ 88,758 $ 9,332 $ (1,358) $ 658 $ 97,390
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Additions to
capital assets $ 4,882 $ 48 $ 1,263 $ 4,841 $ 11,034
----------------------------------------------------------------------------
Three months ended December 31, 2008
Gas and Electricity Marketing
-----------------------------
Canada United States Consolidated
------ ------------- -------------
Sales gas $ 212,875 $ 112,563 $ 325,438
Sales electricity 130,227 57,943 188,170
----------------------------------------------------------------------------
Sales $ 343,102 $ 170,506 $ 513,608
----------------------------------------------------------------------------
Gross margin $ 56,129 $ 33,697 $ 89,826
Amortization of electricity
contracts - (323) (323)
Amortization of gas contracts (276) - (276)
Amortization of capital assets (1,150) (95) (1,245)
Other operating expenses (21,569) (17,504) (39,073)
----------------------------------------------------------------------------
Income before the undernoted 33,134 15,775 48,909
Interest expense (634) (487) (1,121)
Change in fair value of derivative
instruments 34,337 (115,682) (81,345)
Other income 1,926 (261) 1,665
Non-controlling interest 28 - 28
Provision for income tax (2,752) (14,478) (17,230)
----------------------------------------------------------------------------
Net income (loss) $ 66,039 $ (115,133) $ (49,094)
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Additions to capital assets $ 1,602 $ 65 $ 1,667
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Nine months ended December 31, 2009
Gas and Electricity Marketing TGF NHS
----------------------------- ------- --------
Canada United States Canada Canada Consolidated
Sales gas $ 448,832 $ 222,409 $ - $ - $ 671,241
Sales
electricity 469,844 278,570 - - 748,414
Ethanol - - 35,909 - 35,909
Home Service - - - 5,071 5,071
---------------------------------------------------------------------------
Sales $ 918,676 $ 500,979 $ 35,909 $ 5,071 $ 1,460,635
---------------------------------------------------------------------------
Gross margin $ 142,020 $ 109,368 $ 3,597 $ 4,533 $ 259,518
Amortization of
property, plant
and equipment (3,966) (174) (843) (673) (5,656)
Amortization of
intangible
assets (24,089) (16,499) - (802) (41,390)
Other operating
expenses (77,448) (66,364) (6,259) (4,763) (154,834)
---------------------------------------------------------------------------
Income (loss)
before the
undernoted 36,517 26,331 (3,505) (1,705) 57,638
Interest
expense (6,298) (757) (3,514) - (10,569)
Change in fair
value of
derivative
instruments 126,953 150,295 - - 277,248
Other income 2,688 25 42 - 2,755
Non-controlling
interest - - 2,659 55 2,714
Recovery of
(provision)
for income tax 4,264 (24,170) - 827 (19,079)
---------------------------------------------------------------------------
Net income $ 164,124 $ 151,724 $ (4,318) $ (823) $ 310,707
---------------------------------------------------------------------------
---------------------------------------------------------------------------
Additions to
capital assets $ 9,380 $ 181 $ 1,363 $ 19,993 $ 30,917
---------------------------------------------------------------------------
---------------------------------------------------------------------------
Total goodwill $ 135,461 $ 32,935 $ - $ 2,980 $ 171,376
---------------------------------------------------------------------------
---------------------------------------------------------------------------
Total assets $ 762,920 $ 383,806 $ 161,535 $ 78,794 $ 1,387,055
---------------------------------------------------------------------------
Nine months ended December 31, 2008
Gas and Electricity Marketing
-----------------------------
Canada United States Consolidated
------ ------------- ------------
Sales gas $ 459,420 $ 175,873 $ 635,293
Sales electricity 389,246 161,101 550,347
----------------------------------------------------------------------------
Sales $ 848,666 $ 336,974 $ 1,185,640
----------------------------------------------------------------------------
Gross margin $ 140,314 $ 48,859 $ 189,173
Amortization of electricity
contracts (178) (2,375) (2,553)
Amortization of gas contracts (414) - (414)
Amortization of capital assets (3,252) (334) (3,586)
Other operating expenses (54,715) (47,160) (101,875)
----------------------------------------------------------------------------
Income (loss) before the
undernoted 81,755 (1,010) 80,745
Interest expense (1,908) (1,069) (2,977)
Change in fair value of derivative
instruments (662,467) (430,392) (1,092,859)
Other income (expense) 3,973 (266) 3,707
Non-controlling interest 28 - 28
Recovery of income tax 2,543 69,961 72,504
----------------------------------------------------------------------------
Net loss $ (576,076) $ (362,776) $ (938,852)
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Additions to capital assets $ 2,839 $ 154 $ 2,993
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Total goodwill $ 94,957 $ 21,713 $ 116,670
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Total assets $ 371,600 $ 180,224 $ 551,824
----------------------------------------------------------------------------
----------------------------------------------------------------------------
12. COMMITMENTS
Commitments for each of the next five years and thereafter are as follows:
Premises and Grain Master Services Long-term gas and
equipment production agreement with electricity contracts
leasing contracts EPCOR with various suppliers
2010 $ 2,228 $ 7,941 $ 3,157 $ 458,742
2011 7,393 8,578 12,628 1,464,412
2012 5,835 1,819 8,419 970,910
2013 3,946 1,183 - 592,292
2014 2,268 - - 285,727
Thereafter 5,755 - - 64,122
------------ ------------ --------------- ----------------------
$ 27,425 $ 19,521 $ 24,204 $ 3,836,205
------------ ------------ --------------- ----------------------
------------ ------------ --------------- ----------------------
Just Energy is also committed under long-term contracts with customers to supply
gas and electricity. These contracts have various expiry dates and renewal
options.
13. COMPARATIVE CONSOLIDATED FINANCIAL STATEMENTS
Certain figures from the comparative financial statements have been reclassified
from statements previously presented to conform to the presentation of the
current year's consolidated financial statements.
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