Just Energy Income Fund (TSX:JE.UN) -
Highlights for the year ended March 31, 2010 included:
-- Customer base reached 2,293,000 RCEs, up 28% year over year. Gross
additions through marketing (excluding acquired customers) were 505,000
up 36% from 372,000 in fiscal 2009, and up from 313,000 in fiscal 2008.
-- Net customer additions through marketing were 73,000 for the year, up
from 57,000 last year. The continued weak U.S. economy resulted in U.S.
natural gas attrition of 30%, far higher than the Fund's target 20%.
-- Sales (seasonally adjusted) up 24% to $2.3 billion.
-- Gross margin (seasonally adjusted) of $425.9 million, up 35% year over
year (16% per unit).
-- Distributable cash after gross margin replacement of $230.0 million
($1.78 per unit), up 18% year over year (2% per unit).
-- Distributable cash after all marketing of $197.0 million up 16%.
-- Net earnings per unit of $1.79 in fiscal 2010.
-- Payout ratio on ordinary distributions of 82% unchanged from fiscal
2009.
-- Continued success of Just Green with 39% of new customers taking an
average 81% green supply under the program.
Highlights subsequent to year end:
-- Acquired Hudson Energy, a New York-based natural gas and electricity
marketer to commercial customers with approximately 680,000 customers in
four States. The acquisition was funded through the issuance of $330
million 6% convertible debentures.
Highlights for the three months ended March 31, 2010 included:
-- Customer additions through marketing were 131,000, up 54% from 85,000 in
Q4 of fiscal 2009.
-- Net customer additions were 13,000 in Q4 reflecting continued high
foreclosure and credit related attrition in the U.S.
-- Sales (seasonally adjusted) were $694.8 million, up 18% compared to
fiscal 2009. Gross Margin (seasonally adjusted) of $121.9 million up
15%.
-- Distributable cash after gross margin replacement was $66.0 million,
down from $72.2 million.
-- Distributable cash after all marketing was $58.4 million, down 7%
compared to the prior year comparable quarter.
Just Energy Fiscal 2010 Results
Just Energy Income Fund announced its results for the year ended March 31,
2010.
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Three months ended March 31, Per Per
($ millions except per unit) F2010 unit (2) F2009 unit (2)
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Sales(1) $694.8 $589.9
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Gross Margin(1) 121.9 106.1
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Distributable Cash(1)
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- After Gross Margin Replacement 66.0 $0.49 72.2 $0.65
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- After Marketing Expenses 58.4 $0.43 62.5 $0.56
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Net Loss 79.2 $0.59 168.6 $1.51
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Regular Distributions 41.5 $0.31 34.9 $0.31
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Long Term Customers 2,293,000 1,790,000
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Year ended March 31, Per Per
($ millions except per unit) F2010 unit (2) F2009 unit (2)
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Sales(1) $2,344.2 $1,888.7
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Gross Margin(1) 425.9 315.2
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Distributable Cash(1)
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- After Gross Margin Replacement 230.0 $1.78 195.5 $1.75
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- After Marketing Expenses 197.0 $1.52 169.4 $1.52
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Net Income 231.5 $1.79 (1,107.5) $(10.03)
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Regular Distribution 160.7 $1.24 138.0 $1.24
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Special Distribution 26.7 $0.20 18.6 $0.17
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Ending 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.
Just Energy is an Income Fund and it reports in its Management's Discussion and
Analysis a detailed calculation of distributable cash after gross margin
replacement, and after all marketing expenditures to expand the future gross
margin of the Fund's customer base.
Fiscal 2010 again showed that, despite continued weak economic conditions
particularly in the United States, Just Energy is a resilient engine whose
growth tracks the North American expansion of deregulated utility services. The
Fund's financial results were consistent with market guidance management
provided on April 2, 2010 which called for gross margin growth of greater than
10% per unit and distributable cash after gross margin replacement growth of 2%
per unit. Actual results were gross margin growth of 16% per unit and
distributable cash growth of 2%.
The lower rate of growth in distributable cash is due to a number of factors.
First, with the Universal acquisition, the Fund took on both National Home
Services, our water heater sales and rental business ("NHS"), and Terra Grain
Fuels, an ethanol plant in Saskatchewan ("TGF"). Both NHS and TGF were start-ups
in fiscal 2010 and generated no distributable cash while adding a combined $14.9
million to our general and administrative costs. Both are expected to be cash
flow generators in fiscal 2011. Second, the Fund paid significant income tax
($19.3 million in fiscal 2010 versus $3.9 million in fiscal 2009) due both to
the success of our U.S. operations and taxable activities at Universal. Third,
Just Energy's margin and distributable cash growth were adversely effected by
the record warm winter compared to a colder than normal winter in fiscal 2009.
Finally, with 35% of sales and 42% of margin denominated in U.S. dollars, the
average 4% decline during the fiscal year in the dollar exchange rate was also a
negative impact.
Key to Just Energy's success in the past year was the completion of the
revitalization of our sales force. The charts below highlight the turnaround in
customer aggregation over the past five years and the corresponding growth in
the number of independent sales contractors.
To view the charts of "Customers Added Through Marketing" and "Independent
Contractors at Year End", please visit the following link:
http://media3.marketwire.com/docs/JE0520BARGRAPH.pdf
Record customer additions of 505,000 for fiscal 2010 allowed the Fund to
overcome the continued effects of the U.S. recession on our customer attrition,
particularly in Northern natural gas markets. We see continued high levels of
home foreclosures among our customers and have taken steps to return high credit
risk customers to system supply.
The Fund finished the year with almost 2.3 million customers up 28% year over
year. This includes the impact of both record additions and 430,000 customers
added with the Universal acquisition. The table below shows the positive impact
this has had on the future contracted gross margin from the existing customer
base which is up 18%. This is despite a 25% decline in the U.S. dollar as at
March 31, 2010 compared to March 31, 2009.
March 31, 2010 March 31, 2009 Increase
------------------ ------------------ ----------
Embedded Gross Margin
Canada (Cdn$) $783.1 million $697.1 million 12%
United States (US$) 416.6 million 278.5 million 49%
Total (Cdn$) $1,204.3 million $1,020.3 million 18%
As in recent years, Just Energy's management was able to replace a majority of
lost customers and expiring contracts with new contracts at higher margins. This
resulted in a seasonally adjusted gross margin increase of 35% which was higher
than the 28% increase in customers and the 24% increase in sales for the year.
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Annual
Annual gross margin per customer(1) Fiscal target
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2010
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Customers added in the year
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- Canada - gas $175 $170
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- Canada - electricity $136 $143
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- United States - gas $208 $170
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- United States - electricity $229 $143
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Customers lost in the year
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- Canada - gas $191
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- Canada - electricity $120
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- United States - gas $247
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- United States - electricity $120
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(1) Customer sales price less cost of associated supply and allowance for
bad debt and U.S. working capital.
The above table demonstrates the Fund's ability to grow margin per customer. By
locking in new customers for up to five years at these margins, replacing
customers that had lower margins, Just Energy has also contributed to cash flow
growth in future years. New customer margins were an average $198 per year, up
9% from $181 in fiscal 2009 and up 14% from $173 in fiscal 2008.
Our Just Green products were the largest contributor to these higher margins.
Although Just Green is a premium priced product, 39% of our new customers took
an average of 81% of their supply from green sources. Just Energy makes an
average margin of more than $200 per year on the Just Green customers versus a
target margin of $143 on "brown" electricity customers. As Just Green customers
grow as an overall percentage of the Fund's book, overall margin per customer
should rise in coming years.
Acquisition of Hudson Energy
On April 19th, Just Energy announced the acquisition of Hudson Energy funded by
a $330 million offering of convertible debentures. The transaction closed on May
7th with an effective date of May 1, 2010. Hudson is a privately held energy
marketing company operating in New York, New Jersey, Illinois and Texas,
primarily focused on the small to medium commercial market segment.
The acquisition of Hudson is attractive to Just Energy. Hudson is a leading
marketer of deregulated natural gas and electricity to small and medium sized
commercial customers. Just Energy is a leading marketer to residential customers
in the same markets. Of Hudson's 680,000 customer equivalents, 85% are
commercial. Of Just Energy's 2.3 million customers, 66% are residential.
Hudson markets through 500 independent brokers as well as 40 dedicated inside
sales staff. This sales effort is supported by 60 head office employees. Just
Energy currently does not market through brokers and will benefit from the
immediate broker network with strong relationships built on ease of transacting
with Hudson.
Hudson has grown its customer base by a compound 47% per year from 2004 to 2009
through a combination of proprietary business process and enabling software (the
"Sales Portal") which it believes provides a significant competitive edge. Just
Energy views the addition of Hudson's specialized commercial operations as key
to its future commercial growth in both existing and new markets. The Sales
Portal can be utilized by Just Energy's existing commercial team to increase
sales and better meet the needs of customers in both the United States and
Canada.
While there may be some savings from the overlap of business operations, the
transaction rationale is the addition of Hudson as a proven business unit
successfully growing the commercial markets to complement Just Energy's strength
in the residential markets.
Guidance for Fiscal 2011
In the past, the Fund has provided guidance with respect to expected growth in
gross margin and distributable cash after margin replacement. Based on the
Hudson acquisition and the full year of combined operation with Universal, the
Fund expects distributable cash after gross margin replacement growth to be in
the 5%-10% range for fiscal 2011.
Chief Executive Officer Ken Hartwick stated: "Fiscal 2010 showed that our
rejuvenated sales force gives us the capability to continue to grow even when
faced with weak economic conditions, warm weather and adverse movements in the
U.S. currency. 505,000 new customers are by far the most we have ever added as a
company. With the addition of our Momentis unit and their independent
representatives, we expect to exceed this customer addition level in fiscal
2011. This aggregation strength will see its true value as the U.S. economy and
housing market recovers. Should our attrition fall back to targeted levels, we
should see a return to double digit growth in our customer base."
"The acquisition of Hudson is an exciting step forward. They bring a unique
skill set in marketing to small and medium sized commercial customers, an area
which has not historically been a strength of Just Energy. 85% of their 680,000
customers are commercial. We hope to utilize their technology and business
processes to strengthen our commercial sales capability in all of our markets
including Canada. Their margins are comparable to ours and the price paid
ensures that the transaction will be accretive."
Executive Chair Rebecca MacDonald added: "I would like to point out some of the
other successes we had in fiscal 2010. With the weak U.S. economy, managing our
customer credit exposure was essential. We have always maintained a 2% to 3%
target range for bad debt in those markets where we bear the customer credit
risk. The third quarter saw this measure at 3.3%, above this target range and
steps were taken to tighten credit and reduce losses. While this increased our
attrition as some customers were cut-off from our supply, I am happy to say that
bad debt was back in the target range for Q4 and for the year."
"A second success was our growing water heater business, National Home Services.
Our contracted customers total over 77,000 and we add more each week. We have
entered into an important arrangement with Home Trust Capital wherein they will
supply the capital necessary to grow this business at a very reasonable cost.
NHS will be cash flow positive in fiscal 2011 and is generating tremendous value
for Unitholders."
"Let me finish by commenting on our planned conversion from an Income Trust to a
high dividend paying corporation. I think this will be an essential step in
making the markets truly aware of the value of Just Energy."
"Fiscal 2011 will be our tenth year as a public company. We have grown each and
every year and have delivered a growing yield to our Unitholders. We are
committed to paying an annual dividend of $1.24 following conversion. At this
writing, that equates to a dividend yield of over 9%. It is my view that, in the
long term, growing companies do not have dividend rates of this magnitude. My
wish is that, as a corporation, a broader range of investors will have a chance
to see what you have seen, that Just Energy is a market leader in a growing
industry with a management team and business model which will have us at the
forefront of the market for years to come."
"Fiscal 2011 is going to be an exciting year, one in which Just Energy
demonstrates its market leadership again."
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. NHS began offering the rental of air
conditioners and furnaces to Ontario residents in the fourth quarter of fiscal
2010. Through its subsidiary Terra Grain Fuels, the Fund produces and sells
wheat- based ethanol.
Non GAAP Measures
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 gas markets and specifically to Ontario, Quebec, Manitoba and
Michigan. 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") - May 19, 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 year ended March 31, 2010 and has been prepared with all information
available up to and including May 19, 2010. This analysis should be read in
conjunction with the audited consolidated financial statements for the year
ended March 31, 2010. 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. ("JE Ontario"), Just Energy Manitoba L.P. ("JE Manitoba"),
Just Energy Quebec L.P. ("JE Quebec"), Just Energy (B.C.) Limited Partnership
("JE B.C."), 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. ("UG&E"), Commerce Energy, Inc. ("Commerce" or "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".
Just Energy's business primarily 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. Subsequent to year end, Just Energy acquired Hudson Energy
Services LLC ("Hudson"), a marketer of natural gas and electricity to primarily
commercial customers in New York, New Jersey, Illinois and Texas.
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 customer 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 for their home 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 through the SEDAR website at www.sedar.com.
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 or 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 the sale 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 6.
EBITDA
"EBITDA" represents earnings before interest, taxes, depreciation and
amortization. This is a non-GAAP measure which reflects the pre-tax
profitability of the business.
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.
Embedded gross margin
Embedded gross margin is a rolling five-year measure of management's estimate of
future contracted gross margin. It is the difference between existing customer
contract prices and the cost of supply for the remainder of term, with
appropriate assumptions for customer attrition and renewals. It is assumed that
expiring contracts will be renewed at target margin and renewal rates.
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 9.
Financial Highlights
For the years ended March 31
(thousands of dollars except where indicated and per
unit amounts)
Fiscal 2010 Per unit
$ Per unit(4) change(4)
----------------------------------
Sales 2,299,231 $17.77 4%
Net income (loss)(1) 231,496 $1.79 NMF(5)
Gross margin
(seasonally
adjusted)(2) 425,882 $3.29 16%
Distributable cash
- After gross
margin replacement 230,000 $1.78 2%
- After marketing
expense 197,033 $1.52 0%
Distributions
(including Special
Distribution(6)) 187,418 $1.45 4%
Distributions
(excluding Special
Distribution) 160,722 $1.24 0%
General and
administrative 88,423 $0.68 28%
Distributable cash
payout ratio
(including Special
Distribution)
- After gross
margin replacement 81%
- After marketing
expense 95%
Distributable cash
payout ratio(3)
(excluding Special
Distribution)
After gross margin
replacement 70%
After marketing
expense 82%
Financial Highlights
For the years ended March 31
(thousands of dollars except where indicated and per unit amounts)
Fiscal 2009 Per unit Fiscal 2008
$ Per unit(4) change(4) $ Per unit(4)
--------------------------------------------------------
Sales 1,899,213 $17.03 9% 1,738,690 $16.04
Net income (loss)(1) (1,107,473) $(10.03) NMF(5) 152,761 $1.41
Gross margin
(seasonally
adjusted)(2) 315,193 $2.83 16% 272,180 $2.51
Distributable cash
- After gross
margin replacement 195,520 $1.75 15% 169,997 $1.57
- After marketing
expense 169,353 $1.52 11% 152,834 $1.41
Distributions
(including Special
Distribution(6) 156,604 $1.40 (10)% 173,531 $1.60
Distributions
(excluding Special
Distribution) 138,030 $1.24 7% 128,840 $1.19
General and
administrative 59,586 $0.53 15% 51,638 $0.48
Distributable cash
payout ratio
(including Special
Distribution)
- After gross
margin replacement 80% 102%
- After marketing
expense 92% 114%
Distributable cash
payout ratio(3)
(excluding Special
Distribution)
After gross margin
replacement 71% 76%
After marketing
expense 82% 84%
(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) See discussion of non-GAAP financial measures on page 2.
(3) Management targets an annual payout ratio after all marketing expenses,
excluding any Special Distribution, of less than 100%.
(4) The per unit calculation reflects a fully diluted basis. Year over year
change is calculated on a per unit basis. The diluted weighted average
number of units is 129.4 million for F2010, 111.5 million for F2009 and
108.4 million for F2008 with the exception of net income for F2009 which
was calculated using an anti dilutive unit figure of 110.5 million.
(5) Not a meaningful number.
(6) In calendar 2009, 2008 and 2007 the Fund under-distributed its taxable
income and the Board of Directors concluded that a Special Distribution
be paid to ensure that all taxable income would be distributed. Refer to
"Special Distribution" on page 21 for further information.
Reconciliation of net income (loss)
to adjusted net income Fiscal 2010 Fiscal 2009 Fiscal 2008
Net income (loss) $231,496 $(1,107,473) $152,761
Change in fair value of derivative
instruments 1,282 1,336,976 831
Tax impact on change in fair value
of derivative instruments (47,511) (59,574) 3,130
-----------------------------------------
Adjusted net income $185,267 $169,929 $156,722
-----------------------------------------
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) 74,314
Electricity contracts and customer relationships 229,586
Gas contracts and customer relationships 243,346
Water heater contracts and customer relationships 22,700
Other intangible assets 2,721
Goodwill 66,794
Property, plant and equipment 171,693
Future tax liabilities (50,475)
Other liabilities - current (164,148)
Other liabilities - long-term (140,857)
Long-term debt (183,079)
Non-controlling interest (22,697)
------------
$ 249,898
------------
------------
Consideration:
Transaction costs $ 9,952
Exchangeable shares 239,946
------------
$ 249,898
------------
------------
All contracts, customer relationships and intangible assets are amortized over
the average remaining life at the time of acquisition. The gas and electricity
contracts, including customer relationships, acquired are amortized over periods
ranging from 8 to 57 months. The water heater contracts and customer
relationships are amortized over 174 months and the other intangible assets are
amortized over six months. The non-controlling interest represents 33.3%
ownership of TGF held by Ellis Don Corporation. The purchase price allocation is
considered preliminary and as a result may be adjusted during the twelve-month
period following the acquisition.
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 on 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.
Home services division
NEC began operations in April 2008 and operates under the trade name of National
Home Services. 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. NEC began offering the
rental of air conditioners and furnaces to Ontario residents in the fourth
quarter of fiscal 2010. See page 18 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 wheat-based ethanol and high protein distillers dried grain ("DDG").
See page 19 for additional information on TGF.
Cash Available for Distribution and distributions
For the years ended March 31
(thousands of dollars except per unit amounts)
Fiscal 2010 Fiscal 2009 Fiscal 2008
----------------- --------------- ---------------
Per Per Per
unit unit unit
------ ------ ------
Reconciliation to
statements of cash flow
Cash inflow from operations $158,273 $172,767 $136,007
Add:
Increase (decrease) in non-
cash working capital 35,523 (6,181) 11,879
Tax adjustments 3,237 2,767 4,948
---------- -------- --------
Cash available for
distribution $197,033 $169,353 $152,834
---------- -------- --------
---------- -------- --------
Cash available for
distribution
Gross margin per financial
statements $415,333 $3.21 $322,816 $2.90 $274,800 $2.53
Adjustments required to
reflect net cash receipts
from gas sales 10,549 (7,623) (2,620)
Seasonally adjusted gross
margin $425,882 $3.29 $315,193 $2.83 $272,180 $2.51
---------- -------- --------
Less:
General and administrative (88,423) (59,586) (51,638)
Capital tax expense (522) (220) (827)
Bad debt expense (17,940) (13,887) (6,951)
Income tax recovery
(expense) (18,517) (3,861) 757
Interest expense (16,134) (3,857) (5,346)
Other items 8,447 3,664 780
---------- -------- --------
(133,089) (77,747) (63,225)
---------- -------- --------
Distributable cash before
marketing expenses 292,793 $2.27 237,446 $2.13 208,955 $1.93
Marketing expenses to
maintain gross margin (62,793) (41,926) (38,958)
---------- -------- --------
Distributable cash after
gross margin replacement 230,000 $1.78 195,520 $1.75 169,997 $1.57
Marketing expenses to add
new gross margin (32,967) (26,167) (17,163)
---------- -------- --------
Cash available for
distribution $197,033 $1.52 $169,353 $1.52 $152,834 $1.41
---------- -------- --------
---------- -------- --------
Distributions (includes
Special Distribution)
Unitholder distributions $177,733 $147,399 $158,511
Class A preference share
distributions 7,579 7,660 13,699
Unit appreciation rights
and deferred unit grants
distributions
2,106 1,545 1,321
---------- -------- --------
Total distributions $187,418 $1.45 $156,604 $1.40 $173,531 $1.60
---------- -------- --------
---------- -------- --------
Distributions (excludes
Special Distribution)
Unitholder distributions $152,386 $129,872 $117,720
Class A preference share
distributions 6,526 6,791 10,130
Unit appreciation rights
and deferred unit grants
distributions 1,810 1,367 990
---------- -------- --------
Total distributions $160,722 $1.24 $138,030 $1.24 $128,840 $1.19
---------- -------- --------
---------- -------- --------
Diluted average number of
units outstanding 129.4m 111.5m 108.4m
Distributable cash
Distributable cash after gross margin replacement for the current year ended
March 31, 2010 was $230.0 million ($1.78 per unit), up 18% from $195.5 million
($1.75 per unit) in fiscal 2009. The growth reflects a 35% increase in
seasonally adjusted gross margin. Factors contributing to margin growth include
a 28% year over year increase in total customers, which was a result of 505,000
record new customer additions and 430,000 acquired customers from Universal.
Increased distributable cash was the result of the acquired 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. This growth was offset by a 4% year over year decline in
the U.S. dollar, higher income taxes and interest expenses. On a per unit basis
(reflecting the additional units issued to acquire Universal), distributable
cash after gross margin replacement was up 2% and gross margin increased by 16%
reflecting higher gross margin per customer offset by the anticipated drop in
margin from customers acquired from Universal that were not expected to renew as
well as non-recurring costs of the Universal merger. The largest contributor in
the disparity between distributable cash and gross margin growth was an increase
in general and administrative costs versus fiscal 2009 due to the inclusion of
costs associated with the start up phase at TGF and NHS. These businesses did
not generate distributable cash in fiscal 2010 but added $14.9 million to
general and administrative costs. Both businesses are expected to contribute to
distributable cash in fiscal 2011.
The fiscal 2010 costs reflect general and administrative levels which do not
reflect the full synergies that will be realized in the Universal acquisition.
Management initially estimated that these savings would be $10 million per year
and actual savings will exceed this amount. The benefit will be reflected in
lower general and administrative cost growth in future years.
In addition, higher general and administrative costs reflect increased staffing
expenses to support future growth, increased collection costs and professional
fee expenditures on review of potential acquisitions and the Fund's conversion
plan, International Financial Reporting Standards ("IFRS") and other corporate
development activities. Bad debt expense increased in fiscal 2010 compared to
2009 primarily due to the higher volumes in those markets where the Fund bears
the credit risk as well as continued weak economic conditions in the U.S.
markets. Income taxes expenses were up in fiscal 2010 due to the Universal
entities and tax liabilities in the U.S. In the distributable cash calculation,
a current tax provision of $0.7 million has been deducted as it relates to a
reserve amount which, in management's view, will not likely be paid in the next
year. Interest expense also increased by $12.3 million over the prior year due
to the Universal debentures and TGF credit facilities.
Just Energy spent $62.8 million in marketing expenses to maintain its current
level of gross margin, which represents 66% of the total marketing expense for
the year. A further $33.0 million was spent to generate gross margin growth in
future years, which, combined with expenditures to maintain gross margin,
resulted in a record 505,000 gross RCE additions and 73,000 net RCE additions in
the current year.
Management's estimate of the future embedded gross margin is as follows:
March 31, 2010 March 31, 2009 Increase
----------------------------------------------
Canada (Cdn$) $783.1 million $697.1 million 12%
United States (US$) 414.6 million 278.5 million 49%
Total (Cdn$) $1,204.3 million $1,020.3 million 18%
Excluding the Special Distribution, the payout ratio after deduction of all
marketing expenses for the current year was 82% for the current and prior year.
For further information on the changes in the gross margin, please refer to
"Sales and gross margin - Seasonally adjusted" on page 14 and "General and
administrative expenses", "Marketing expenses", "Bad debt expense" and "Interest
expense" are further clarified on pages 19 to 21.
Discussion of Distributions
For the years ended March 31
(thousands of dollars)
Fiscal Fiscal
2010 Fiscal 2009 2008
--------- ----------- --------
Cash flow from operations(1) (A) $158,273 $172,767 $136,007
Net income (loss) (B) 231,496 (1,107,473) 152,761
Total distributions(2) (C) 187,418 156,604 173,531
Excess (shortfall) of cash flows from
operating activities over distributions
paid (A-C) (29,145) 16,163 (37,524)
Excess (shortfall) of net income over
distributions paid (B-C) 44,078 (1,264,077) (20,770)
(1) Includes non-cash working capital balances
(2) Includes Special Distributions of $26.7 million in fiscal 2010, $18.6
million in fiscal 2009 and $44.7 million in fiscal 2008.
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 2010 fiscal year was a loss of $1.3 million versus a loss of $1.3
billion last year. In fiscal 2009, Just Energy moved away from hedge accounting
during a time of significant commodity market price movement; the combination of
these events resulted in a $1.3 billion loss reported to the Statement of Profit
and Loss. In F2010, there was no change of policy and although there has been
volatility in commodity prices during the year, the year over year change in
these prices was not nearly as significant to the portfolio. In fiscal 2008, the
change in fair value for the year was $76.9 million, of which $0.8 million was
reported in the Statement of Operations. The remaining amount was reported in
the Statement of Comprehensive Income.
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. Capital expenses at NEC are
related to the growth of productive capacity of that business in that the
capital cost will be more than offset by the rental contract margins in future
periods. NEC has reached a new agreement with Home Trust Company to separately
finance its water heaters. See page 18 for further discussion on this financing.
In addition, the capital expenditures for TGF are funded through its credit
facility and debt instruments. Management believes that the current $1.24 per
unit annual level of distributions is sustainable in the foreseeable future both
as a trust and, subsequently, as a dividend following conversion to a corporate
structure.
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
For the years ended March 31
(thousands of dollars except per unit amounts)
Fiscal Fiscal Fiscal
2010 2009 2008
--------- -------- --------
Reconciliation to statements of cash flow
Cash inflow from operations $158,273 $172,767 $136,007
Capital expenditures(1) (41,207) (6,345) (7,842)
Standardized Distributable Cash $117,066 $166,422 $128,165
Adjustments to Standardized Distributable Cash
Change in non-cash working capital(2) $35,523 $(6,181) $11,879
Tax adjustments(3) 3,237 2,767 4,948
Capital expenditures(1) 41,207 6,345 7,842
Cash available for distribution $197,033 $169,353 $152,834
Standardized Distributable Cash - per unit
basic 0.91 1.51 1.19
Standardized Distributable Cash - per unit
diluted 0.90 1.49 1.18
Payout Ratio based on Standardized
Distributable Cash (includes Special 160% 94% 135%
Distribution(4))
Payout Ratio based on Standardized
Distributable Cash (excludes Special 137% 83% 100%
Distribution)
(1) Capital expenditures incurred in the year were effectively funded out of
the credit facility. The vast majority of capital expenditures relate to
the purchase of water heaters for subsequent rental. These expenditures
expand the productive capacity of the business. Effective January 2010,
water heater capital purchases are now 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) The amount includes 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.
Also includes a current tax provision amount of $0.7 million related to
a reserve that will not likely be paid in the next fiscal year.
(4) The Special Distribution relating to calendar 2009, 2008 and 2007 has
increased the payout ratios for both comparable periods. Refer to
"Special Distribution" on page 21 for further details.
In accordance with the 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 24. 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 its water
heaters. See page 18 for further discussion on this financing. TGF has a
separate credit facility, debenture and a term loan for their funding
requirements which are detailed on page 24.
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 and
price-protected contracts. 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. As such, the Fund's
productive capacity is determined by the gross margin earned from the contract
price and the related supply cost on energy contracts. Also included would be
the gross margin earned on water heater rentals and ethanol sales after
deducting production related costs.
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. The Fund has entered into an agreement with Momentis
Canada Corporation and Momentis U.S. Corporation under which their independent
representatives will market natural gas and electricity contracts on behalf of
the Just Energy. Management believes that this arrangement will further expand
the productive capacity of the energy business.
Effectively all of the marketing costs related to energy 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.
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 which have as security the water heaters and the contracts. As such,
these capital expenditures increase the productive capacity of the Fund.
Selected Consolidated Financial Data
(thousands of dollars except where indicated and per unit amounts)
The consolidated financial statements of the Fund are prepared in accordance
with Canadian GAAP and are expressed in Canadian dollars. The following table
provides selected financial information for the last three fiscal years.
Statements of Operations Data 2010 2009 2008
----------- ------------ ----------
For the years ended March 31
Sales (seasonally adjusted) $2,344,172 $1,888,733 $1,730,605
Gross margin (seasonally adjusted) $425,882 $315,193 $272,180
Net income (loss) $231,496 $(1,107,473) $152,761
Net income (loss) per unit - basic $1.81 $(10.03) $1.42
Net income (loss) per unit - diluted $1.79 $(10.03) $1.41
Balance Sheet Data 2010 2009 2008
----------- ------------ ----------
As at March 31
Total assets $1,353,095 $535,755 $709,115
Long-term liabilities $824,393 $480,602 $246,248
2010 compared with 2009
Sales increased by 24% in fiscal 2010 due to a 28% net increase in customers as
a result of record new additions and the acquisition of Universal. On July 1,
2009, the Fund completed the acquisition of 430,000 Universal customers in
consideration for JEEC exchangeable shares valued at $239.9 million. For further
information on the acquisition, see page 4. Seasonally adjusted gross margin
increased to $425.9 million or 35% over fiscal 2009 due to higher margin per
customer, continued strong acceptance of the Just Green product as well as
improved supply management.
The change in net income relates primarily to the change in fair value of the
derivative instruments which has improved substantially from the $1.3 billion
loss recorded last year. Also, an increase in the income tax recovery of $42.8
million relates to the Fund's conversion to a taxable Canadian corporation in
late calendar 2010 and the future tax benefits of the mark to market losses
expected to be realized post Conversion. This increase is partially offset by
higher current tax provision related to the Universal entities.
Total assets increased by 153% to $1.4 billion in fiscal 2010. The largest
components of this change relate to the property, plant and equipment,
intangible assets and goodwill recorded as part of the Universal acquisition.
The TGF ethanol plant was acquired totaling over $155.2 million in capital
assets on July 1, 2009. Also, future income tax assets of $122.9 million have
been recorded which relate primarily to the conversion of the Fund expected late
in calendar 2010.
Total long-term liabilities of $824.4 million represent a 72% increase over the
prior fiscal year. 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.
Also, as part of the Universal acquisition, the Fund acquired the debt
obligations of TGF which is comprised of three separate facilities noted on page
24. Long-term liabilities have also increased in fiscal 2010 primarily due to
the change in mark to market valuation of our derivative instruments.
2009 compared with 2008
The increase in sales and gross margin is primarily a result of the increase in
the customer base, mainly in Texas and New York and improved contract prices. In
addition, on August 14, 2008, Just Energy purchased substantially all of the
commercial and residential customer contracts (46,000 RCEs) of CEG Energy
Options Inc. ("CEG") in British Columbia which contributed to Canadian sales and
margin.
The change in net income from a gain of $152.8 million to a loss of $1.1 billion
relates primarily to the $1.3 billion loss representing the change in fair value
of the derivative instruments. These instruments reflect the Fund's requirement
to purchase commodity according to estimated demand and, as such, changes in
value do not impact 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" caption on the Statement
of Operations. In fiscal 2008, Just Energy had elected to use hedge accounting
and thus was able to book the changes in fair value predominantly to Other
Comprehensive Income.
The increase in gross margin is due to an increase in number of customers and
higher gross margin per customer. This was offset by increases in general and
administrative costs, bad debt expenses and marketing expenses. General and
administrative expenses increases were primarily staffing costs in our corporate
office to support our current and future growth, U.S. exchange rates, impact on
U.S. dollar denominated costs, an increase in collection costs, full year rent
for our new Customer Service call center and legal fees with respect to business
operations in the U.S. Bad debt costs increased primarily due to the large
increase in total revenues for the year in the markets where Just Energy assumes
the risk for accounts receivable collections. In addition, the increase in the
U.S. exchange rate and higher default rates noted in the U.S. markets due to the
recessionary conditions led to higher bad debt expense this fiscal year. During
fiscal 2008, improved collection procedures had resulted in a significant excess
reserve for bad debt, which was released in that fiscal year lowering the bad
debt expense. Marketing costs were up due to the impact of the growth in
customer additions, higher U.S. exchange on our U.S. based marketing costs and
increased recruiting and corporate marketing overhead required to build our
commercial sales team.
Total assets decreased by 24% primarily as a result of the change in the other
assets - long term. There had been a significant drop in the forward gas and
power prices related to our derivative instruments noted above. As a result, far
more commodity contracts with counterparties would have resulted in a gain in
the prior year, if sold on the open market. In fiscal 2009, the situation is the
opposite whereby there are far more contracts with counterparties that would
result in a loss if sold on the open market. Therefore, the other asset - long
term amount has decreased and the other liabilities - long-term amount has
increased. Long-term liabilities increased in fiscal 2009 primarily due to the
change in mark to market valuation of our derivative instruments explained
above.
Summary of quarterly results
(thousands of dollars except per unit amounts)
Fiscal 2010 Q1 Q2 Q3 Q4 Total
------------------------- -------- --------- -------- --------- -----------
Sales (seasonally
adjusted) $432,565 $562,133 $654,686 $694,788 $2,344,172
Gross margin (seasonally
adjusted) 74,769 107,519 121,722 121,872 425,882
General and
administrative expense 15,617 25,634 24,767 22,405 88,423
Net income (loss) 102,627 110,690 97,390 (79,211) 231,496
Net income (loss) per
unit
- basic 0.92 0.83 0.73 (0.59) 1.81
Net income (loss) per
unit
- diluted 0.91 0.82 0.73 (0.59) 1.79
Amount available for
distribution
After gross margin
replacement 42,219 52,303 69,455 66,023 230,000
After marketing expense 36,087 41,345 61,242 58,359 197,033
Payout ratio(1)
After gross margin
replacement 83% 82% 98%(1) 63% 81%
After marketing expense 97% 104% 111%(1) 71% 95%
Fiscal 2009 Q1 Q2 Q3 Q4 Total
------------------------- -------- --------- -------- --------- -----------
Sales (seasonally
adjusted) $401,826 $386,158 $510,801 $589,948 $1,888,733
Gross margin (seasonally
adjusted) 59,703 61,793 87,554 106,143 315,193
General and
administrative expense 13,447 13,236 14,753 18,150 59,586
Net income (loss) 34,232 (923,990) (49,094) (168,621) (1,107,473)
Net income (loss) per
unit
- basic 0.31 (8.33) (0.44) (1.57) (10.03)
Net income (loss) per
unit
- diluted 0.31 (8.33) (0.44) (1.57) (10.03)
Amount available for
distribution
After gross margin
replacement 31,046 34,755 57,475 72,244 195,520
After marketing expense 30,282 28,394 48,162 62,515 169,353
Payout ratio(1)
After gross margin
replacement 108% 100% 93%(1) 48% 80%
After marketing expense 111% 122% 111%(1) 56% 92%
(1) Includes a one-time Special Distribution of $26.7 million in fiscal 2010
and $18.6 million in fiscal 2009.
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 fourth quarter
Sales are typically higher in the third and fourth quarters because gas and
electricity consumption are both high during this time period. The overall
customer base is currently 50% gas and 50% electricity. The fourth quarter
increase in seasonally adjusted sales of 18% compared to the prior year
comparable quarter is primarily attributable to record customer additions
through marketing (particularly in the United States) and the acquisition of
Universal. Seasonally adjusted gross margin increased by 15% or $15.7 million in
the fourth quarter of fiscal 2010 as compared to the same period last year.
Total customers were up 54% in the fourth quarter of fiscal 2010 versus the same
period last year. However, the growth of both sales and margin was dampened by a
21% decline in the U.S. dollar quarter over quarter. In the quarter, 42% of the
Just Energy's sales and 51% of margin were from the United States, The
distributable cash after customer gross margin replacement was $66.0 million
down 9% from $72.2 million in the prior comparable quarter. The increase in
gross margin from customers acquired with Universal, net customer additions
through marketing and higher per customer margins were more than offset by the
gas consumption effects of a record warm winter in Just Energy's key gas
markets. The fourth quarter of fiscal 2010 was over 15% warmer in Canada and 5%
warmer in the U.S. than fiscal 2009. Also, the 21% drop in the exchange rate on
the U.S. dollar impacted gross margins negatively during the current quarter. In
addition, the Fund saw higher general and administrative costs due largely to
the inclusion of the costs of TGF and NHS in fiscal 2010, as well as higher tax
provisions and interest expense.
Distributable cash after marketing expenses was $58.4 million, a decrease of 7%
from $62.5 million in the prior comparable quarter. Distributions for the
quarter were $41.5 million, up 19% over the same period last year reflecting a
higher number of units due to the Universal acquisition and the maintenance of
annual $1.24 distributions per unit in both periods. The payout ratio for the
fourth quarter of fiscal 2010 after all marketing expenses was 71%, up from 56%
in the prior year comparable period.
Gas and Electricity Marketing
Financial Statement Analysis
Sales and gross margin - Per financial statements
For the years ended March 31
(thousands of dollars)
Fiscal Fiscal
2010 2009
-------- --------
United United
Sales Canada States Total Canada States Total
--------------
Gas $788,661 $425,975 $1,214,636 $814,275 $343,889 $1,158,164
Electricity 637,580 381,674 1,019,254 518,388 222,661 741,049
-------------- ---------- -------- ---------- ---------- -------- ----------
$1,426,241 $807,649 $2,233,890 $1,332,663 $566,550 $1,899,213
-------------- ---------- -------- ---------- ---------- -------- ----------
Increase 7% 43% 18%
United United
Gross Margin Canada States Total Canada States Total
--------------
Gas $124,105 $81,520 $205,625 $154,171 $64,118 $218,289
Electricity 107,042 91,107 198,149 77,549 26,978 104,527
-------------- ---------- -------- ---------- ---------- -------- ----------
$231,147 $172,627 $403,774 $231,720 $91,096 $322,816
-------------- ---------- -------- ---------- ---------- -------- ----------
Increase - 90% 25%
Canada
Sales amounted to $1.4 billion for the year ended March 31, 2010, up 7% from the
same period in fiscal 2009. Gross margin was $231.1 million for fiscal 2010,
effectively unchanged from $231.7 million in the prior comparable year.
United States
Sales and gross margin in the U.S. were $807.6 million and $172.6 million for
the current year, an increase of 43% and 90%, respectively, from fiscal 2009.
For additional information, see "Sales and gross margin - Seasonally adjusted"
on the following page.
Sales and gross margin - Seasonally adjusted(1)
For the years ended March 31
(thousands of dollars)
Fiscal Fiscal
2010 2009
-------- --------
United United
Sales Canada States Total Canada States Total
--------------
Gas $788,661 $425,975 $1,214,636 $814,275 $343,889 $1,158,164
Adjustments(1) 40,935 4,005 44,940 (10,480) - (10,480)
-------------- ---------- -------- ---------- ---------- -------- ----------
$829,596 $429,980 $1,259,576 $803,795 $343,889 $1,147,684
Electricity 637,580 381,674 1,019,254 518,388 222,661 741,049
-------------- ---------- -------- ---------- ---------- -------- ----------
$1,467,176 $811,654 $2,278,830 $1,322,183 $566,550 $1,888,733
-------------- ---------- -------- ---------- ---------- -------- ----------
Increase 11% 43% 21%
United United
Gross Margin Canada States Total Canada States Total
--------------
Gas $124,105 $81,520 $205,625 $154,171 $64,118 $218,289
Adjustments(1) 10,804 (255) 10,549 (7,623) - (7,623)
-------------- ---------- -------- ---------- ---------- -------- ----------
$134,909 $81,265 $216,174 $146,548 $64,118 $210,666
Electricity 107,042 91,107 198,149 77,549 26,978 104,527
-------------- ---------- -------- ---------- ---------- -------- ----------
$241,951 $172,372 $414,323 $224,097 $91,096 $315,193
-------------- ---------- -------- ---------- ---------- -------- ----------
Increase 8% 89% 31%
(1) For Ontario, Manitoba, Quebec and Michigan gas markets.
On a seasonally adjusted basis, total sales and gross margin increased by 21%
and 31%, respectively, to $2.3 billion and $414.3 million for the year ended
March 31, 2010 over the same period last year. The 21% increase in seasonally
adjusted sales was due to a 28% increase in customers due to record customer
aggregation and the acquisition of Universal offset by a 4% year over year
decline in the U.S. dollar and unfavourable weather-based reduced gas
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.
Canada
Seasonally adjusted sales were $1.5 billion for the year, up 11% from $1.3
billion for the year ended March 31, 2009. Seasonally adjusted gross margins
were $242.0 million for the year of fiscal 2010, an increase of 8% from $224.1
million in fiscal 2009.
Gas
Seasonally adjusted gas sales increased by 3% in fiscal 2010, to $829.6 million
and seasonally adjusted gross margin decreased by 8% to $134.9 million versus
the prior year. The lower margin was due to record warm winter conditions in
Just Energy's key gas markets compared to a colder than average winter in fiscal
2009. The excess gas supply was sold into very weak spot prices reducing margin
from expected levels. In fiscal 2009, the shortfall of supply was purchased at
low spot prices and sold for full margin to customers. After allowance for
balancing, average gross margin per customer ("GM/RCE") for the year ended March
31, 2010 amounted to $191/RCE, down 9% compared to $210/RCE from the prior year
comparable year. The GM/RCE value includes an appropriate allowance for the bad
debt expense in Alberta.
Electricity
Electricity sales were $637.6 million for the current year, an increase of 23%
from fiscal 2009. The increased sales are attributable to a 31% increase in
customers. Gross margin increased by 38% from the prior year to $107.0 million
due to the increase in customers and increased margin per customer resulting
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, after excluding the Just Green product, 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.
Average gross margin per customer after all balancing for the year ended March
31, 2010 in Canada amounted to $149/RCE compared to $131/RCE from the prior
comparable year. The GM/RCE value includes an appropriate allowance for the bad
debt expense in Alberta.
United States
Seasonally adjusted sales for the year ended March 31, 2010 were $811.7 million,
an increase of 43% from $566.6 million in the prior year. Seasonally adjusted
gross margin was $172.4 million, up 89% from $91.1 million in fiscal 2009.
Gas
Seasonally adjusted gas sales in the U.S., increased by 25% from $343.9 million
to $430.0 million for the 2010 fiscal year. The seasonally adjusted sales
increase reflects record customer additions through marketing of 171,000 (up
from 90,000 in fiscal 2009) and the addition of 120,000 customers acquired as
part of the Universal transaction offset by a 4% decline in the U.S. dollar and
lower selling prices. Seasonally adjusted gas margin increased 27% for the
current year to $81.3 million from $64.1 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 4% 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 third and fourth quarters. The
negative impact of this lost margin on the third and fourth quarters was
anticipated at the time of the Universal acquisition and discussed in the MD&A
for the second quarter of fiscal 2010.
Average gross margin after all balancing costs for the year ended March 31, 2010
was $212/RCE, down from $259/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 current year were $381.7 million and
$91.1 million, respectively, versus the comparable period of fiscal 2009 in
which, sales and gross margin amounted to $222.7 million and $27.0 million,
respectively. Electricity customers increased by 67% with a record 216,000
customers added (up from 168,000 in fiscal 2009), driving the 71% sales growth.
Unlike other markets, the Universal acquisition contributed only 2,000 of the
127,000 year over year net additions.
The gross margin increase of 238% reflects the growth in customers and higher
margins per customer. U.S. electricity is where the largest impact of the
growing consumption of Just Green is evident. 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.
Average gross margin per customer for electricity during the current year was
$238/RCE compared to $133/RCE from the prior comparable year. The GM/RCE value
for Texas includes an appropriate allowance for the bad debt expense.
Customer aggregation
Long-term customers
April 1,
2009 Additions Acquired Attrition
----------------------------------------------------------------------------
Natural gas
Canada 743,000 46,000 93,000 (81,000)
United States 235,000 171,000 120,000 (110,000)
----------------------------------------------------------------------------
Total gas 978,000 217,000 213,000 (191,000)
----------------------------------------------------------------------------
Electricity
Canada 578,000 72,000 215,000 (94,000)
United States 234,000 216,000 2,000 (52,000)
----------------------------------------------------------------------------
Total electricity 812,000 288,000 217,000 (146,000)
----------------------------------------------------------------------------
Combined 1,790,000 505,000 430,000 (337,000)
----------------------------------------------------------------------------
Long-term customers
Failed March 31, %Increase
to renew 2010 (Decrease)
------------------------------------------------------------------
Natural gas
Canada (67,000) 734,000 (1)%
United States (8,000) 408,000 74%
------------------------------------------------------------------
Total gas (75,000) 1,142,000 17%
------------------------------------------------------------------
Electricity
Canada (11,000) 760,000 31%
United States (9,000) 391,000 67%
------------------------------------------------------------------
Total electricity (20,000) 1,151,000 42%
------------------------------------------------------------------
Combined (95,000) 2,293,000 28%
------------------------------------------------------------------
Gross customer additions through marketing for the year were 505,000, up 21%
from the 418,000 customers added through marketing during fiscal 2009. Total net
customer additions for the year ended March 31, 2010 were 73,000 down from the
103,000 net customer additions last year due to higher attrition noted on the
larger customer base. Record additions through marketing were offset by the
continuing effects of the weak U.S. economy. The continued high customer loss in
the U.S. market reflects high foreclosure rates and credit cut-offs.
Including the Universal acquisition, there was a 28% net increase in total
customers at March 31, 2010 versus the same period last year. As part of the
Universal acquisition, Just Energy acquired 430,000 customers and also gained a
further 145,000 customers that were unlikely to renew as they were variable in
nature or located in regions that were not in Just Energy's current expansion
plans. As at March 31, 2010, 50,000 of these customers remain under contract.
The fourth quarter also saw a substantial increase in customer additions
compared to the prior year. On an RCE basis, 131,000 gross customers were added
in the quarter, up 54% from the fourth quarter additions of 85,000 in fiscal
2009. Net customer additions in the fourth quarter of fiscal 2010 were 13,000
compared to 15,000 in the same period in fiscal 2009, again reflecting the
impact of the weak US economy on customer attrition.
Just Energy's major marketing challenge remains in 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. The
recent upward movement in energy prices has begun to slow attrition in some
markets. Solid customer additions were seen across the U.S. with Texas and New
York electricity being particularly strong.
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, 2009 through
December 31, 2009 validating the Fund's renewables and carbon offset purchases.
The Fund currently sells Just Green gas in Ontario, British Columbia, Alberta,
Michigan, New York, Ohio and Illinois 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 year, 39% took Just Green for some or all of their energy needs.
On average, these customers elected to purchase 81% of their consumption as
green supply.
Overall, green supply now makes up 2% 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.
Attrition
Natural gas
The trailing 12-month natural gas attrition in Canada was 10% for the year,
consistent with management's target of 10%. In the U.S., gas attrition for the
trailing 12 months was 30%, above management's annual target of 20%. High U.S.
gas attrition is an effect of the continued North American recession leading to
home foreclosures and the necessary aggressive customer cut off or forced return
to default services policies utilized by Just Energy.
Electricity
The trailing 12-month electricity attrition rate in Canada for the year was 13%,
above management's target of 10%. Higher than targeted attrition was a function
of a clean-up of the acquired Universal book of customers which resulted in a
stronger, higher margin book of customers going forward. Electricity attrition
in the United States was 16% over the last year, 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 61%. 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. Of
the total Canadian gas customers renewed in fiscal 2010, 16% were renewed for a
one-year term. Canadian gas was the only market in which renewals lagged the
2010 target of 70%. This was due to the high spread between the Just Energy five
year price and the utility spot price. Management anticipates continued focus in
this area and a return to rising market pricing should result in an improvement
in Canadian gas renewal rates to target levels.
The electricity renewal rate for Canadian customers was 73% 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 67%, above
our target of 50%. The Texas electricity renewal rate was 79%, significantly
better than our target rate of 60%.
In the table below, management outlines the expected annualized attrition and
renewal rates for fiscal 2011. The high U.S. attrition rates reflect an
expectation of continued economic weakness in those markets.
Targets for fiscal 2011:
Attrition F2011 Renewals F2011
Natural gas
Canada 10% 70%
United States 30% 75%
Electricity
Canada 10% 70%
United States 20% 75%
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. -
Fiscal period gas electricity Gas electricity
---------------------------------------------
2011 29% 19% 14% 9%
2012 21% 24% 17% 8%
2013 21% 26% 28% 11%
2014 14% 16% 14% 27%
Beyond 2014 15% 15% 27% 45%
---------------------------------------------
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)
During 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 5% year over year
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 and
renewed in the year. This table reflects the combined margins on both "brown"
energy purchased by customers and Just Green. Sales of the Just Green products
have been very strong with approximately 39% 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 81% of their consumption as green supply.
Annual
Annual gross margin per customer(1) target
Fiscal 2010 fiscal 2010
-------------------------
Customers added in the year
- Canada - gas $175 $170
- Canada - electricity $136 $143
- United States - gas $208 $170
- United States - electricity $229 $143
Customers lost in the year
- Canada - gas $191
- Canada - electricity $120
- United States - gas $247
- United States - electricity $120
(1) Customer sales price less cost of associated supply and allowance for
bad debt and U.S. working capital.
Annual margin on 505,000 new customers added in the year including the impact of
Just Green was $208 and margin earned on 166,000 renewing customers was $168.
Annual margin on customers lost during the year was $179.
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 5 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, in addition to now offering furnaces and
air conditioners. The combined installed water heater base on July 1 was 38,000.
NHS continues to ramp up its operations and, as at March 31, 2010, had a
cumulative installed base of 77,000 water heaters in residential homes. NHS
earns revenue from its installed base.
Because NHS is a high growth, relatively capital intensive business, Just Energy
management believes that, in order to maintain stability of distributions,
separate non-recourse financing of this capital was appropriate. On January 18,
2010 NEC 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 received up to March 31, 2010 was $65.4 million
and total funding is expected to be approximately $90 million over the next
year.
Selected financial information
(thousands of dollars)
Date of acquisition (July 1, 2009)
----------------------------------
to March 31, 2010
-----------------
Sales per financial statements $8,886
Cost of sales 1,837
-----
Gross margin 7,049
Selling expense 2,824
General and administrative expense 5,789
Interest Expense 818
Capital expenditures 24,544
Amortization 1,975
Total number of water heaters
installed 77,000
Results of operations
Just Energy has owned NHS since July 1, 2009 and therefore, results reflect only
the nine months of operations ending March 31, 2010. For the nine months ended
March 31, 2010 NHS had sales of $8.9 million and gross margin of $7.1 million.
The cost of sales for the year was $1.8 million and represents the amortization
of the installed water heaters for the customer contracts signed to date.
Selling expenses for fiscal 2010 were $2.8 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 administrative staff
compensation and warehouse expenses, amounted to $5.8 million for the year ended
March 31, 2010. Capital expenditures, including installation costs, amounted to
$24.5 million. Amortization costs were $2.0 million for the current year and
include not only the depreciation on capital assets noted above but also the
amortization of the water heater contracts and customer relationships acquired
in the purchases of Universal and Newten Home Comfort Inc.
The growth of National Home Services has been rapid and, combined with the Home
Trust financing, is expected to be self-sustaining on a cash flow basis. A
number of independent sales contractors, previously marketing gas and
electricity, have been redeployed to water heaters resulting in lower Ontario
customer additions in energy marketing. Overall, management believes this is the
best utilization of the sales force in the Ontario market given the existing gas
and electricity market conditions.
Ethanol Division (TGF)
TGF continues to improve plant production and runtime of the Belle Plaine
wheat-based ethanol facility. For the year ended March 31, 2010, the plant had
achieved an average production capacity of 62% 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 operating losses will not impact distributable cash
from Just Energy's core business.
Selected financial information
(thousands of dollars)
Date of acquisition (July 1, 2009)
----------------------------------
to March 31, 2010
-----------------
Sales per financial statements $56,455
Cost of sales
51,945
-------
Gross margin 4,510
General and administrative expense 9,089
Interest expense 5,107
Capital expenditures 4,599
Amortization 1,079
Results of operations
Just Energy has owned 66.7% of TGF since July 1, 2009 and therefore results
reflect only the nine months of operations to March 31, 2010. During fiscal
2010, TGF had sales of $56.5 million and realized gross margin of $4.5 million.
During the current year, the plant produced 69.4 million litres of ethanol and
66,487 metric tonnes of DDG. For the nine months ended March 31, 2010, TGF
incurred $9.1 million in general and administrative expenses and $5.1 million in
interest charges. Production levels were below the 150 million litre annual
plant design capacity as a result of production bottlenecks primarily in grain
milling until late in the fourth quarter. The first phase of the installation of
the new grain milling equipment was completed on March 1, 2010 to address this
bottleneck and enable production to achieve the design capacity. For the month
of March and April, 2010, production capacity has increased to 73%. Capital
expenditures, including installation costs, for the year amounted to $4.6
million and include the assets related to the grain milling project.
TGF receives a federal subsidy related to an agreement signed on February 17,
2009, based on the volume of ethanol produced. During the nine months ended
March 31, 2010, the subsidy was 10 cents per litre on ethanol produced.
Through fiscal 2011, this subsidy will be 9 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 $88.4 million for the year ended March 31,
2010, representing a 48% increase from $59.6 million in fiscal 2009. This was
primarily due to the inclusion of administrative costs for NHS and TGF as well
as the addition of a portion of Universal's energy marketing administrative
costs.
Fiscal 2010 Fiscal 2009 Variance
-------------------------------------
Energy marketing $73,545 $59,586 $13,959
NHS 5,789 - 5,789
TGF 9,089 - 9,089
-------------------------------------
Total general and administrative
expenses $88,423 $59,586 $28,837
Overall, energy marketing general and administrative costs were up 23% in fiscal
2010 versus last year to support the 28% increase in total customers. The
increased costs include additional collection costs, staff and professional fee
expenditures on review of potential acquisitions and the Fund's conversion plan,
IFRS and other corporate development activities. Total corporate headcount
increased by 28% to a total of 900 full-time employees. Both NHS and TGF are in
the start-up phase and management is confident that they both will offset their
start-up costs with distributable cash in future periods. Overall, after
integrating Universal, management expected to reduce combined JE and Universal
general and administrative costs by $10 million per year on an ongoing basis.
This target has been exceeded on a current run rate basis and the rate of growth
in general and administrative costs should slow in fiscal 2011 through achieved
synergies.
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 $95.8 million, an
increase of 41% from $68.1 million in fiscal 2009.
This reflects increased customer additions of 28% versus the same period last
year and increased recruiting costs resulting in 52% 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 year. Marketing expenses to maintain gross
margin increased by 50% to $62.8 million in fiscal 2010, as compared to $41.9
million last year. The increase resulted from higher customer attrition driven
by a continued weak U.S. economy and a greater number of renewals and associated
costs versus last year.
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 year.
Marketing expenses to add new gross margin in fiscal 2010 totaled $33.0 million,
an increase of 26% from $26.2 million in the prior year.
The actual aggregation costs per customer added were as follows:
Fiscal 2010 Fiscal 2009
Natural gas
Canada $215/RCE
United States $174/RCE
Total gas $182/RCE $194/RCE
Electricity
Canada $188/RCE
United States $161/RCE
Total electricity $168/RCE $156/RCE
Actual total aggregation costs for gas and electricity customers for fiscal 2010
were $182 per customer for gas and $168 per customer for electricity. The main
contributor to lower costs in the U.S. was the 4% decline in the U.S. 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 its 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 amounted
to $4.8 million, an increase of 16% from the $4.1 million paid in fiscal 2009.
The increased expense is a result of the increase in the number of fully paid
unit appreciation rights awarded to employees in fiscal 2010.
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 fiscal 2010 was $17.9 million, up 29% from $13.9 million
expensed last year. The bad debt expense increase was mainly due to the 19%
increase in total revenues where Just Energy assumes the risk for accounts
receivable collections and higher percentage losses in Texas. For the year ended
March 31, 2010, the bad debt expense of $17.9 million represents approximately
2.8% of $649.3 million in revenues. In fiscal 2009, the total bad debt expense
was $13.9 million or 2.6% of $543.5 million in revenue.
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.
Overall, bad debt expense is expected to remain near 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 disconnecting
delinquent customers to ensure that bad debt expense is managed through the
heavy heating season. Bad debt as a percentage of revenue has declined from 3.3%
in the third quarter to 2.8% in the fourth quarter of fiscal 2010.
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 year ended March 31, 2010 amounted to $16.1
million, up from $3.9 million in fiscal 2009. The large increase noted in the
year primarily relates to the $5.0 million in interest expense relating to the
Universal convertible debenture and interest payments of $5.1 million made on
debt associated with TGF.
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 year, a foreign exchange unrealized gain of $26.6 million was reported in
Other Comprehensive Income (Loss) versus a $1.9 million unrealized loss reported
in the prior year. In the first quarter of fiscal 2010, a total of $23.0 million
in U.S. funds was repatriated to back to Canada.
The Fund retains sufficient funds in the U.S. to support ongoing growth and
surplus cash is repatriated to Canada. U.S. cross border cash flow is forecasted
annually and hedges for cross border cash flow are entered into when it is
determined that any surplus U.S. cash is not required for new acquisition
opportunities. 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.
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 year ended March 31,
2010 including tax and the Special Distribution amounted to $7.6 million versus
$7.7 million paid in fiscal 2009. 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 was $26.7 million ($0.20 per unit) and
was paid as 100% cash to the holders of units, UARs, DUGs, Class A preference
shares and JEEC exchangeable shares. The amount was funded by operating cash
flow and the Fund's credit facility and was 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.
Recovery of income tax
For the years ended March 31
(thousands of dollars)
Fiscal 2010 Fiscal 2009
-------------------------
Current income tax expense $19,253 $3,861
Amount credited to Unitholders' equity 2,501 2,767
Future tax recovery (122,014) (64,088)
-------------------------
Recovery of income tax $(100,260) $(57,460)
-------------------------
The Fund recorded a current income tax expense of $19.3 million for the year
versus $3.9 million of expense in fiscal 2009. The change is due to income tax
expense incurred by the Universal entities.
Also included in the income tax provision is an amount relating to the tax
impact of the distributions paid to the Class A preference shareholder 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
year ended March 31, 2010, the tax impact of these distributions, based on a tax
rate of 33%, amounted to $2.5 million as compared to $2.8 million in fiscal
2009. During the current and past year, the Fund had significant temporary
differences attributed to mark to market losses from financial derivatives,
among which a substantial portion is expected to be realized subsequent to 2010.
As the Fund will convert to a taxable Canadian corporation after 2010
(hereinafter defined as the "Conversion"), as per its announcement in January
2010, it is now recording the future tax benefits of these mark to market losses
which are expected to be realized post Conversion. As a result, a future tax
recovery of $122.0 million has been recorded in fiscal 2010.
After the Conversion during the fourth quarter of calendar 2010, the Fund will
be taxed as a taxable Canadian corporation from that date onwards. Therefore,
the future tax asset or liability associated with Canadian liabilities and
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. During
the year, the U.S. subsidiaries (other than the newly acquired UG&E and Commerce
had fully utilized their combined operating losses for tax purposes carried over
from prior years, and after taking these tax losses into effect, recorded a $0.9
million current U.S. federal income tax for the year. These U.S. entities had
also recorded a combined U.S. state income tax of $2.0 million for the year.
Both UG&E and Commerce had no operating losses carried forward and generated
taxable income during the year and as a result, income tax expense of $1.4
million and $2.8 million were recorded for these entities respectively during
the year, which have 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
more likely than not 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
Summary of cash flows
For the years ended March 31
(thousands of dollars)
Fiscal 2010 Fiscal 2009
Operating activities $158,273 $172,767
Investing activities (37,466) (8,187)
Financing activities, excluding distributions 46,666 2,330
Gain (loss) on foreign exchange translation (3,861) 2,691
-------------------------
Increase in cash before distributions 163,612 169,601
Distributions (cash payments) (162,574) (137,817)
-------------------------
Increase (Decrease) in cash 1,038 31,784
Cash - beginning of year 59,094 27,310
-------------------------
Cash - end of year $60,132 $59,094
-------------------------
Operating activities
Cash flow from operating activities for the year ended March 31, 2010 was $158.8
million, a decrease from $172.8 million in the prior comparable year. The
decrease is primarily attributable to an increase in gross margin during fiscal
2010 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 year.
Investing activities
The Fund purchased capital and recorded intangible assets totaling $37.5 million
during the year, an increase from $8.2 million in the prior year. Capital asset
purchases and intangibles amounted to $47.6 million for fiscal 2010, compared
with $6.3 million last year. During the year, a total of $24.5 million was spent
on water heater purchases for NEC. During the second quarter of fiscal 2010, 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 as well as borrowing
requirements for TGF. See page 24 for 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
program ("DRIP") in 2007, a portion of dividends declared are not paid in cash.
Under the program, 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 year, the Fund made cash distributions to its Unitholders in the
amount of $162.6 million, compared to $137.8 million in the prior year, an
increase of 18%. The increase in distributions is a result of the JEEC
exchangeable shares that were converted into units during the last three
quarters of the fiscal year as well as the dividends paid on the exchangeable
shares.
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 year, 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 March 31, 2010 compared to March 31, 2009
Cash increased from $59.1 million as at March 31, 2009 to $60.1 million at March
31, 2010. Long-term debt excluding the current portion has increased to $231.8
million from $76.5 million as a result of the Universal acquisition and is
detailed on page 24. The Just Energy original credit facility decreased to $57.5
million and relates to the normal injection of gas into storage 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 $18.7 million from $7.6 million as at March 31, 2009 due to
additional cash collateral postings related to supply procurement and credit
support for the Universal, Commerce and TGF entities.
The increase in accounts receivable from $249.5 million to $348.9 million is
primarily attributable to the increase in sales during the period as a result of
the Universal acquisition and customer growth. Accounts payable and accrued
liabilities has also increased from $173.8 million to $227.0 million relating to
added consumption as a result of the 430,000 Universal customers acquired on
July 1, 2009 and current year net customer additions of 73,000.
Gas in storage has decreased from $6.7 million to $4.1 million for the year
ended March 31, 2010. This balance reflects injections into storage for the
Illinois, New York and Indiana customer base, which occur from April to
November.
At the end of the year, customers in Ontario, Manitoba and Quebec had consumed
more gas than was supplied to the LDCs for their use. Since Just Energy is paid
for this gas when delivered yet recognizes revenue when the gas is consumed by
the customer, the result on the balance sheet is the unbilled revenue amount of
$20.8 million and accrued gas accounts payable of $15.1 million. As at March 31,
2009, Just Energy had 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 $20.0 million for the
current year. The increased balance relates to tax, rent and various prepayments
from the Commerce, Universal, TGF and NEC entities.
Future income tax assets of $114.3 million were recorded in fiscal 2010
primarily related to the conversion of Just Energy to a taxable Canadian
corporation late in calendar 2010.
Property, plant and equipment increased to $218.6 million from $20.0 million
last year primarily due the acquisition of Universal and inclusion of the plant
assets from TGF and water heater purchases made in fiscal 2010. Intangible
assets and goodwill increases in the current year again relate to the
acquisition of Universal on July 1, 2009.
Long term debt and financing
As at March 31
-------------------------------
(thousands of dollars)
-------------------------------
Fiscal 2010 Fiscal 2009
----------- -----------
Original Credit facility $57,500 $76,500
TGF Credit facility 41,313 -
TGF Debentures 37,001 -
TGF Term Loan 10,000 -
JEEC Convertible debentures 83,417 -
NEC HTC financing 65,435 -
Original Credit Facility
On July 1, 2009, in connection with the acquisition of UEG, Just Energy
increased its credit facility from $170 million to $250 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 March 31, 2010
and 2009, 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. The
lenders have deferred compliance with the financial covenants until April 1,
2011. The facility was further revised on March 31, 2010 postponing the
principal payments due for April 1 to June 1, 2010 and to amortize them over the
six month period commencing October 1, 2010 and ending March 31, 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. The lender has deferred
compliance with the financial covenants until April 1, 2011. On March 31, 2010,
TGF entered into an agreement with the holders of the debentures to defer
scheduled principal payments owing under the Debenture 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 $7.0 million bearing
interest at a prime plus 1% of which $3.2 million was drawn via overdraft is
included in bank indebtedness and $1.6 million of letters of credit have also
been issued.
JEEC Convertible debentures
In conjunction with the acquisition of UEG on July 1, 2009, JEEC also assumed
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.
NEC HTC Financing
On January 18, 2010, NEC announced that it had entered into a long term
financing agreement for the funding of new and existing rental water heater
contracts for NHS. Pursuant to the agreement, NHS will receive financing equal
to the net present value of the first five years of monthly rental income,
discounted at the agreed upon financing rate of 7.99% and as settlement, is
required to remit all proceeds received from customers on the water heater
contracts for the first five years. The financing agreement is subject to a
holdback provision, whereby 3% of the outstanding balance of the funded amount
is deducted and deposited to a reserve account in the event of default. Once all
of the obligations of NHS are satisfied or expired, the remaining funds in the
reserve account will immediately be released to NHS. NEC is required to meet a
number of covenants under the agreement and as at March 31, 2010, all of these
covenants have been met.
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-cancelable.
After
Payments due by period Less than 1 - 3 4 - 5 5
(thousands of dollars) Total 1 year years years years
----------------------------------------------------------------------------
Accounts payable and accrued
Liabilities and Unit
Distribution payable $240,132 $240,132 - - -
Bank indebtedness 8,236 8,236 - - -
Long-term debt
Interest payments 54,312 16,040 24,466 12,260 1,546
Property and equipment 301,249 62,829 120,475 117,945 -
lease agreements 28,785 8,084 10,543 5,330 4,828
EPCOR billing, collections
and supply Commitments 20,220 12,132 8,088 - -
Grain production contracts 57,893 36,059 21,438 396 -
Gas and electricity supply
purchase commitments 3,533,371 1,494,003 1,621,623 415,680 2,065
----------------------------------------------------------------------------
$4,244,198 $1,877,515 $1,806,633 $551,611 $8,439
----------------------------------------------------------------------------
----------------------------------------------------------------------------
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. Significant areas requiring the use of management estimates include
the allowance for doubtful accounts, estimate of the useful life and estimated
fair value of property, plant and equipment and impairment thereon, valuation of
goodwill and intangibles and the impairment thereon, valuation allowances for
future tax assets, the determination of the fair values of financial instruments
as the aggregate fair value amounts represent point in time estimates only and
should not be interpreted as being realizable in an immediate settlement of the
supply contracts and the determination of unit based compensation. 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's 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 2010 and
as a result of the review, it was determined that no impairment of goodwill
existed at March 31, 2010.
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 the Just Green energy 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 estimated 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, electricity, renewable energy certificates and
carbon offsets 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 and renewables 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 require 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 outweighed 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 May 19, 2010, there were 5,263,728 Class A preference shares of JEC
outstanding and 124,857,456 units of the Fund outstanding.
JEEC Exchangeable Shares
A total of 21,271,804 exchangeable shares of JEEC were issued on July 1, 2009
for the purchase of Universal. JEEC shareholders have voting rights equivalent
to the Fund's Unitholders and their shares are exchangeable on a 1:1 basis. As
at May 19, 2010, 16,966,547 shares had been converted and there were 4,305,257
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 that was issued
by the 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.
In June 2009, the CICA amended Handbook Section 3862, Financial Instruments -
Disclosures, to adopt the amendments recently made by the International
Accounting Standards Board 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, therefore the Fund has included these
additional disclosures for the year ended March 31, 2010. As this standard only
addresses disclosure requirements, there is no impact on the financial position
of the Fund.
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.
International Financial Reporting Standards
In February 2008, CICA announced that GAAP for publicly accountable enterprises
will be replaced by IFRS for fiscal years beginning on or after January 1, 2011.
IFRS uses a conceptual framework similar to GAAP but there are significant
differences on recognition, measurement and disclosures.
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, an internal project team was assembled and a
conversion plan was developed in March 2009 to manage the transition to IFRS.
Project status reporting is provided to senior executive management and to the
Audit Committee on a regular basis. We have also engaged an external advisor.
Our project consists of three phases: IFRS diagnostic assessment; solution
development; and implementation. The diagnostic phase, which was completed in
2009, involved a high level review and the identification of major accounting
differences between current Canadian GAAP and IFRS applicable to Just Energy.
The Fund has recently completed phase 2, the solution development phase,
including substantial completion of all policy papers which have been discussed
with the external auditors. The IFRS project team is currently engaged in the
implementation phase, which is the final phase of the project. This phase
involves approval of the accounting policy choices, completing the collection of
data required to prepare the financial statements, implementing changes to
systems and business processes relating to financial reporting, key personnel
training and the monitoring of standards currently being amended by the
International Accounting Standard Board (IASB). 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.
The initial assessment phase determined that the areas with the highest
potential to significantly impact the fund include, but are not limited to,
property, plant and equipment, impairment of assets, accounting for income
taxes, financial instruments, employee benefits as well as the first time
adoption of IFRS ("IFRS 1").
The Fund has selected IFRS 1 elective exemptions which are practical and provide
the most relevant presentation on conversion to IFRS. The primary result of the
exemptions selected is to apply certain IFRS differences prospectively,
minimizing adjustments to the IFRS opening balance sheet.
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 which
cannot be reasonably determined at this time.
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.
Risk Factors
Described below are the principal risks and uncertainties that Just Energy can
foresee. It is not an exhaustive list, some future risks may be as yet unknown
and other risks, currently regarded as immaterial, could turn out to be
material.
Credit, commodity and other market related risks
Availability of supply
The risk of supply default is mitigated through credit and supply diversity
arrangements. The Just Energy business model is based on contracting for supply
to lock in margin. There is a risk that counterparties could not deliver due to
business failure, supply shortage or be otherwise unable to perform their
obligations under their agreements with Just Energy, or that Just Energy could
not identify alternatives to existing counterparties. Just Energy continues to
investigate opportunities to identify or secure additional gas suppliers and
electricity suppliers. Just Energy's commodity contracts are predominantly with
Shell, BP, Bruce Power, Constellation, Societe Generale, Sempra and CP Energy
Marketing (formerly and also known as EPCOR, Merchant and Capital). Other
suppliers represent less than 1% of our gas and 2% of our electricity supply.
Volatility of commodity prices - enforcement
A key risk to the Just Energy's business model is a sudden and significant drop
in the market price of gas or electricity resulting in some customers renouncing
their contracts. Just Energy may encounter difficulty or political resistance
for enforcement of liquidated damages and/or enactment of force majeure
provisions in such a situation and be exposed to spot prices with a material
adverse impact to cash flow. Continual monitoring of margin and exposure allows
management of Just Energy time to adjust strategies, pricing and communications
to mitigate this risk.
Availability of credit
In several of the markets in which Just Energy operates, payment is provided by
LDCs only when the customer has paid for the consumed commodity (rather than
when the commodity is delivered). Also, in some markets, Just Energy must inject
gas inventory into storage in advance of payment. These factors, along with the
seasonality of customer consumption, create working capital requirements
necessitating the use of Just Energy's available credit. In addition, some of
Just Energy's subsidiaries and affiliates are required to provide credit
assurance, by means of providing guarantees or posting collateral, in connection
with commodity supply contracts, license obligations and obligations owed to
certain LDCs. Cash flow and distributions could be impacted by the ability of
Just Energy to fund such requirements or to provide other satisfactory credit
assurance for such obligations. To mitigate credit availability risk and its
potential impact to cash flows, Just Energy has security arrangements in place
pursuant to which commodity suppliers and the lenders under the Credit Facility
hold security over substantially all of the assets of Just Energy (other than
AESLP, NEC and TGF). AESLP, in turn, has similar arrangements in place solely
with EPCOR. Other commodity suppliers' security requirements are met through
cash margining, guarantees and letters of credit. The most significant assets of
Just Energy consist of its contracts with customers, which may not be suitable
as security for some creditors and commodity suppliers. To date, the Credit
Facility and related security agreements have met the collateral posting and
operational requirements of the business. Just Energy continues to monitor its
credit and security requirements. Just Energy's business may be adversely
affected if it is unable to meet cash obligations for operational requirements
or its collateral posting requirements.
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. Although Just
Energy manages its estimated customer requirements, net of contracted commodity
to zero, it is exposed to market risks associated with commodity prices and
market volatility where estimated customer requirements do not match actual
customer requirements or where it has not been able to exactly purchase the
estimated customer requirements. Just Energy is also exposed to interest rates
associated with its credit facility and foreign currency exchange rates
associated with the repatriation of U.S.-denominated funds for
Canadian-denominated distributions. 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,
and the absolute and relative levels of interest rates and foreign currency
exchange rates. Just Energy enters into derivative instruments in order to
manage exposures to changes in commodity prices and foreign currency rates;
current exposure to interest rates does not economically warrant the use of
derivative instruments. The derivative instruments that are used are designed to
fix the price of supply for estimated customer commodity demand 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.
Market risk governance
Just Energy has adopted a corporate-wide Risk Management Policy governing its
market risk management and any derivative trading activities. An internal Risk
Committee, consisting of senior officers of Just Energy monitors company- wide
energy risk management activities as well as foreign exchange and interest rate
activities. There is also a Risk Committee of the Board that oversees
management. The Risk Office and the internal Risk Committee monitor the results
and ensure compliance with the Risk Management Policy. The Risk Office is
responsible for ensuring that Just Energy manages the market, credit and
operational risks within limitations imposed by the Board of Directors in
accordance with its Risk Management Policy. Market risks are monitored by the
Risk Office and internal Risk Committee utilizing industry accepted
mark-to-market techniques and analytical methodologies in addition to company
specific measures. The Risk Office operates and reports independently of the
traders. The failure or inability of Just Energy to comply with and monitor its
Risk Management Policy could have an adverse effect on the operations and cash
flow of Just Energy.
Energy trading inherent risks
Energy trading subjects Just Energy to some inherent risks associated with
future contractual commitments, including market and operational risks,
counterparty credit risk, product location differences, market liquidity and
volatility. There is continuous monitoring and reporting of the valuation of
identified risks to the internal Risk Committee, Executive Committee and the
Risk Committee of the Board of Directors. The failure or inability of Just
Energy to monitor and address the energy trading inherent risks could have a
material adverse effect on its operations and cash flow.
Customer credit risk
In Alberta, Pennsylvania, Maryland, California, Texas and Illinois, credit
review processes have been implemented to manage customer default as Just Energy
has credit risk in these markets. The processes are also applied to commercial
customers in other jurisdictions. In addition, there is a Credit Policy that has
been established to govern these processes. If a significant number of
residential customers or a collection of larger commercial customers for which
Just Energy has the credit risk were to default on their payments, it could have
a material adverse affect on the operations and cash flow of Just Energy.
Management factors default from credit risk in its margin expectations for all
customers in Illinois, Pennsylvania, and Alberta and commercial customers where
Just Energy has the credit risk.
For the remaining customers, 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 internal Risk Committee monitor
current and potential credit exposure to individual counterparties and also
monitor overall aggregate counterparty exposure. The failure of a counterparty
to meet its contractual obligations could have a material adverse effect on the
operations and cash flow of Just Energy.
Electricity supply - balancing risk
It is Just Energy's policy to procure the estimated electricity requirements of
its customers with offsetting electricity swaps in advance of obtaining
customers. Depending on several factors, including weather, Just Energy's
customers may use more or less electricity than the volume purchased by Just
Energy for delivery to them. Just Energy is able to invoice some of its existing
electricity customers for balancing charges or credits when the amount of energy
used is greater than or less than the amount of energy that Just Energy has
estimated. For certain Texas and commercial customers, Just Energy bears the
risk of fluctuation in customer consumption. Just Energy monitors consumption
and has a balancing and pricing strategy to accommodate the estimated associated
costs. In certain circumstances, there can be balancing issues for which Just
Energy is responsible when customer aggregation forecasts are not realized.
Natural gas supply - balancing risk
It is Just Energy's policy to procure the estimated gas requirements of its
customers with offsetting gas physical forwards in advance of obtaining
customers. Depending on several factors including weather, Just Energy's
customers may use more or less gas than the volume purchased by Just Energy for
delivery to them. Just Energy does not invoice its natural gas customers for
balancing and, accordingly, bears the risk of fluctuation in customer
consumption. Just Energy monitors gas consumption and has an options strategy
that covers forecast differences in customer consumption due to weather
variations as well as forecast LDC balancing requirements. The cost of this
strategy is incorporated in the price to the customer. To the extent that
forecast balancing requirements are outside the options purchased, Just Energy
will bear financing responsibility, be exposed to market risk and, furthermore,
may also be exposed to penalties by the LDCs. The inability or failure of Just
Energy to manage and monitor these balancing risks could have a material adverse
effect on its operations and cash flow. In addition, for certain commercial
customers, Just Energy bears the risk of fluctuation in customer consumption.
Just Energy monitors consumption and has a balancing and pricing strategy to
accommodate for the estimated associated costs.
Operational risks
Information technology systems
Just Energy operates in a high-volume business with an extensive array of data
interchanges and market requirements. Just Energy is dependent on its management
information systems to track, monitor and correct or otherwise verify a high
volume of data to ensure the reported financial results are accurate. Management
also relies on its management information systems to provide its independent
contractors with compensation information and to electronically record each
customer telephone interaction. Just Energy's information systems also help
management forecast new customer enrolments and their energy requirements, which
help ensure that the Fund is able to supply its new customers' estimated average
energy requirements without exposing the Fund to the spot market beyond the risk
tolerances established by the Risk Management Policy. The failure of Just Energy
to install and maintain these systems could have a material adverse effect on
the operations and cash flow of Just Energy.
Reliance on third party service providers
In all jurisdictions in which Just Energy operates, the LDCs currently perform
billing and collection services except as follows: in the province of Alberta
and state of Texas, where Just Energy is required to invoice and receive
payments directly from its customers; in Illinois, where Just Energy is
responsible for collection of defaulted amounts; in British Columbia and
California where Just Energy is required to invoice and receive payments from
certain commercial customers and in Ontario, where Just Energy would be
responsible for collection of defaulted amounts in respect of certain large
volume users in one utility territory. To date, no defaults have been
experienced in this last category. In 2005, Just Energy entered into a five-year
agreement with EPCOR for the provision of billing and collection services for
all of Just Energy's customers in Alberta which was amended and extended in
December 2008. Pursuant to the amended agreement, EPCOR will continue to provide
billing and collection services for AESLP until November 30, 2011 with respect
to AESLP's existing customers. In the late summer of 2009, Just Energy began
billing and collection services directly for all new customers signed and
renewed customers. If the LDCs cease to perform these services, Just Energy
would have to seek a third party billing provider or develop internal systems to
perform these functions. There is no assurance that the LDCs will continue to
provide these services in the future.
Outsourcing and offshoring arrangements
Just Energy has outsource arrangements, predominantly to support the call
centre's requirements for business continuity plans and independence for
regulatory purposes. Contract data input is also outsourced as is some business
continuity and disaster recovery. Some of the outsourcing contracts are
offshore. As with any contractual relationship, there are inherent risks to be
mitigated and these are actively managed, predominantly through quality control
measures and regular reporting.
Competition
A number of companies (including Direct Energy, Superior Energy and MX Energy)
and incumbent utility subsidiaries compete with Just Energy in the residential,
commercial and small industrial market. It is possible that new entrants may
enter the market as marketers and compete directly for the customer base that
Just Energy targets, slowing or reducing its market share. If the LDCs are
permitted by changes in the current regulatory framework to sell natural gas at
prices other than cost, their existing customer bases could provide them with a
significant competitive advantage. This may limit the number of customers
available for marketers including Just Energy.
Dependence on independent sales contractors
Just Energy must retain qualified independent sales contractors despite
competition among Just Energy's competitors. If Just Energy is unable to attract
a sufficient number of independent sales contractors, Just Energy's customer
additions and renewals may decrease and the Fund may not be able to execute its
business strategy. The continued growth of Just Energy is reliant on
distribution channels, including the services of its independent sales
contractors. There can be no assurance that competitive conditions will allow
these independent contractors, who are not employees of Just Energy or its
affiliates, to achieve these customer additions. Lack of success in these
marketing programs would limit future growth of the cash flow of Just Energy.
Just Energy has consistently taken the position that its independent sales
contractors act independently pursuant to their contracts for service, which
provide that Just Energy does not control how, where or when they provide their
services. On occasion, an independent contractor may make a claim that they are
entitled to a benefit pursuant to legislation even though they have entered into
a contract with Just Energy that provides that they are not entitled to benefits
normally available to employees and Just Energy must respond to these claims.
Just Energy's position has been confirmed by regulatory bodies in many
instances, but Just Energy is currently appealing the findings of two regulatory
bodies (one in Canada and one in the U.S.). Should Just Energy be unsuccessful
in its appeals, Just Energy would be required to remit unpaid tax amounts plus
interest and might be assessed a penalty. It could also mean that Just Energy
would have to reassess its position in respect of other regulatory matters
affecting its independent sales contractors such as income tax treatment. Such a
decision could have a material adverse effect on the operations and cash flow of
Just Energy.
Electricity and gas contract renewals and attrition rates
As at March 31, 2010, Just Energy held long-term electricity and gas contracts
reflecting approximately 2,293,000 long-term RCEs and the renewal schedule for
the contracts is noted on page 17. Just Energy has experienced contract
attrition rates of approximately 13% in Canada and 16% in the U.S. for
electricity with rates of 10% and 30% being realized for Canada and the U.S.,
respectively, for gas. Management forecasts using a combination of experienced
and expected attrition per year, however there can be no assurance that these
rates of annual attrition will not increase in the future or that Just Energy
will be able to renew its existing electricity and gas contracts at the expiry
of their terms. Changes in customer behaviour, government regulation or
increased competition may affect (potentially adversely) attrition and renewal
rates in the future, and these changes could adversely impact the future cash
flow of Just Energy. See page 16 for further discussion on "Failed to renew".
Just Energy's experience is that approximately 73% and 79% of its Canadian and
U.S. electricity customers, respectively, and 61% and 67% of its Canadian and
U.S. gas customers, respectively, have renewed at the expiry of the term of
their contract.
Cash distributions are not guaranteed and will fluctuate with the performance of
Just Energy
Although Just Energy intends to distribute the interest and other income it
earns less expenses and amounts, if any, paid by Just Energy in connection with
the redemption of units, there can be no assurance regarding the amounts of
income to be generated by the Fund's affiliates and paid, directly or indirectly
to the Fund. The ability to distribute and the actual amount distributed in
respect of the units will depend upon numerous factors, including profitability,
fluctuations in working capital, debt service requirements (including compliance
with Credit Facility obligations), the sustainability of margins, the ability of
Just Energy to procure, at favourable prices, its estimated commitment to supply
natural gas and electricity to its customers, the ability of Just Energy to
secure additional gas and electricity contracts and other factors beyond the
control of Just Energy. Management of Just Energy cannot make any assurances
that the Fund's affiliates will be able to pass any additional costs arising
from legislative changes (or any amendments) on to customers. Cash distributions
are not guaranteed and will fluctuate with the performance of the Fund's
affiliates and other factors.
Earnings volatility
Just Energy business is seasonal in nature. In addition to regular seasonal
fluctuations in its earnings, there is significant volatility in its earnings
associated with the requirement to mark its commodity contracts to market. The
earnings volatility associated with seasonality and mark to market accounting
may be misconstrued as instability, thereby impacting access to capital.
Management ensures there is adequate disclosure for both the mark to market and
seasonality to mitigate this risk.
Model risk
The approach to calculation of market value and customer forecasts requires data
intensive modeling used in conjunction with certain assumptions when
independently verifiable information is not available. Although Just Energy uses
industry standard approaches and validates its internally developed models,
results could change significantly should underlying assumptions prove incorrect
or an embedded modeling error go undetected in the vetting process.
Commodity alternatives
To the extent that natural gas and electricity enjoy a price advantage over
other forms of energy, such price advantage may be transitory and consumers may
switch to the use of another form of energy. The inherent volatility of natural
gas and electricity prices could result in these other sources of energy
providing more significant competition to Just Energy.
Capital asset and replacement risk
The retail business does not invest in a significant capital asset program
however the water heater business and the ethanol plant are more capital
intensive businesses. The risk associated with water heater replacement is
considered minimal as there are several suppliers of high efficiency tanks to
source replacements and individually, the units are not material. The risk
associated with the capital assets of the ethanol plant are more significant as
parts are not standard, components have a significant value associated and
capital asset replacements could significantly impact operations during periods
of upgrade or repair. Management monitors this risk in the ethanol business to
ensure continuity of operations as demonstrated through the recent hammer mill
project that replaced the roller mill technology.
Credit facilities and other debt arrangements
The credit facility maintained by Just Energy L.P. and JEUSC is in the amount of
$250 million. The lenders under such credit facility together with certain of
the suppliers of Just Energy and its affiliates are parties to an intercreditor
agreement and related security agreements which provide for a joint security
interest over all customer contracts (except for those owned by AESLP). There
are various covenants pursuant to the credit facility that govern the activities
of the Fund and its subsidiaries and affiliates. The borrowers are required to
submit monthly reports addressing, among other things, mark-to-market exposure,
their borrowing base and a supply/demand projection. To date, the Fund's
subsidiaries have met the requirements of the credit facility; however, should
those subsidiaries default under the credit facility and it become unavailable,
it could have a significant material adverse effect on the business of those
subsidiaries and on the results of operations and financial performance of the
Fund if it is not able to obtain other financing on satisfactory terms.
TGF also has a credit facility of up to $50 million and a debenture purchase
agreement providing for the issuance of up to $40 million associated with the
Belle Plaine facility. Security for these facilities includes a first priority
security interest on all assets and undertaking of TGF. These facilities include
certain financial covenants of which certain requirements have not been met
within the last year and have been waived by the lenders for fiscal 2011. The
lenders have also agreed to defer certain principal payments during fiscal 2011.
In addition, there is a term loan for $10 million and a working capital
operating line of $7 million. The term loan is secured by liquid investments on
deposit with the lender. There is a risk that these credit facilities, including
the debenture purchase agreement, may not continue to be available on the same
terms or at all given the compliance issues that TGF experienced under the
facilities in 2009, which could result in the Belle Plaine facility ceasing to
operate and a loss of the security pledged by TGF as security for advances under
such credit facilities.
The Fund has guaranteed JEEC's obligations under the JEEC Debentures in
connection with the Universal acquisition. Risks associated with these
debentures include dilution to Unitholders in the event they are converted into
JEEC Exchangeable Shares or JEEC Exchangeable Shares are issued to satisfy
JEEC's obligations upon maturity or redemption, and such JEEC Exchangeable
Shares are subsequently exchanged for Units.
NHS has also entered into a long-term financing agreement with respect to the
installation of water heaters (see page 25 for more information.) In the event
this financing became unavailable, it could have a material adverse affect on
the Fund's home services business.
Disruptions to infrastructure
Customers are reliant upon the LDCs to deliver their contracted commodity. LDCs
are reliant upon the continuing availability of the distribution infrastructure.
Any disruptions in this infrastructure would result in counterparties and
thereafter Just Energy enacting the force majeure clauses of their contracts.
Under such severe circumstances there would be no revenue or associated cost of
sales to report for the affected areas.
Expansion strategy and future acquisitions
The Fund plans to grow its business by expansion into additional deregulated
markets through organic growth and acquisitions. The expansion into additional
markets is subject to a number of risks, any of which could prevent the Fund
from realizing its business strategy.
Acquisitions involve numerous risks, any one of which could harm the Fund's
business, including difficulties in integrating the operations, technologies,
products, existing contracts, accounting processes and personnel of the target
and realizing the anticipated synergies of the combined businesses; difficulties
in supporting and transitioning customers, if any, or assets of the target
company may exceed the value the Fund realizes, or the value it could have
realized if it had allocated the purchase price or other resources to another
opportunity; risks of entering new markets or areas in which Just Energy has
limited or no experience or are outside its core competencies; potential loss of
key employees, customers and strategic alliances from either Just Energy's
current business or the business of the target; assumption of unanticipated
problems or latent liabilities, such as problems with the quality of the
products of the target; and inability to generate sufficient revenue to offset
acquisition costs.
Future acquisitions or expansion could result in the incurrence of additional
debt and related interest expense, as well as unforeseen liabilities, all of
which could have a material adverse effect on the Fund's business, results of
operations and financial condition. The failure to successfully evaluate and
execute acquisitions or otherwise adequately address the risks associated with
acquisitions could have a material adverse effect on Just Energy's business,
results of operations and financial condition. Just Energy may require
additional financing should an appropriate acquisition be identified and it may
not have access to the funding required for the expansion of its business or
such funding may not be available to Just Energy on acceptable terms. There is
no assurance that Just Energy will determine to pursue any acquisition or that
such an opportunity, if pursued, will be successful.
Legal, regulatory and securities risks
Legislative and regulatory environment
Just Energy operates in the highly regulated natural gas and electricity retail
sales industry in the provinces of Ontario, Manitoba, Quebec, British Columbia
and Alberta and in the states of Illinois, Indiana, New York, Michigan, Ohio,
California, Pennsylvania, New Jersey, Maryland and Texas. It must comply with
the legislation and regulations in these jurisdictions in order to maintain its
licensed status and to continue its operations. There is potential for change to
this legislation and these regulatory measures that may, favourably or
unfavourably, impact Just Energy's business model. As part of doing business as
a door-to-door marketing company, Just Energy receives complaints from consumers
which may involve sanctions from regulatory and legal authorities including
those which issue marketing licences. Similarly, changes to consumer protection
legislation in those provinces and states where Just Energy markets to
non-commercial customers may, favourably or unfavourably, impact Just Energy's
business model. Just Energy has a dedicated team of in-house regulatory advisors
to ensure adequate knowledge of the legislation and regulations in order that
operations may be advised of regulations pursuant to which procedures are
required to be implemented and monitored to maintain license status. When new
markets are entered, the team assesses the market and determines if additional
expertise (internal or external) is required. There is also a team that monitors
and addresses complaints with a view to mitigating underlying causes of
complaints.
In addition to the complaints and class actions referenced herein and litigation
in the ordinary course of business, Just Energy may in the future be subject to
class actions, other litigation and other actions arising in relation to its
consumer contracts and marketing practices. See the "Legal proceedings" section
on page 38 of this report. This litigation is, and any such additional
litigation could be, time consuming and expensive and could distract our
executive team from the conduct of Just Energy' daily business. The adverse
resolution of any specific lawsuit could have a material adverse effect on our
ability to favourably resolve other lawsuits and on the Fund's financial
condition and liquidity.
Investment eligibility
Just Energy will endeavor to ensure that the units continue to be qualified
investments for registered retirement savings plans, deferred profit sharing
plans, registered retirement income funds and registered education savings
plans. The Tax Act imposes penalties for the acquisition or holding of
non-qualified or ineligible investments and there is no assurance that the
conditions prescribed for such qualified or eligible investments will be adhered
to at any particular time.
Nature of units, convertible debentures and exchangeable shares
Securities such as the units, convertible debentures and exchangeable shares are
hybrids in that they share certain attributes common to both equity securities
and debt instruments. The units, convertible debentures and exchangeable shares
do not represent a direct investment in the natural gas or electricity wholesale
business and should not be viewed by investors as shares or securities in any of
the Fund's affiliates. As holders of units, subject to the Trust Beneficiaries'
Liability Act, 2004, Unitholders do not have the statutory rights normally
associated with ownership of shares of a company including, for example, the
right to bring "oppressive" or "derivative" actions. The units represent a
fractional interest in the Fund. The Fund's primary assets are its direct and
indirect interests in the securities of its affiliates. The price per unit is,
among other things, a function of anticipated distributable income.
Redemption right
It is anticipated that the redemption right will not be the primary mechanism
for Unitholders to liquidate their investments. JEC Notes, Notes of OESC
Exchangeco II Inc. ("Exchangeco II"), a wholly owned subsidiary of the Fund, and
the Fund Notes (of which none are outstanding), which may be distributed in
specie to Unitholders in connection with a redemption will not be listed on any
stock exchange and no established market is expected to develop for such JEC
Notes, Exchangeco II Notes and the Fund Notes. Cash redemptions are subject to
limitations.
Unitholder limited liability
The Declaration of Trust provides that no Unitholder will be subject to any
liability in connection with the Fund or its assets or obligations, and in the
event that a court determines that Unitholders are subject to any such
liabilities, the liabilities will be enforceable only against, and will be
satisfied only out of, the Unitholder's share of the Fund's assets.
The Declaration of Trust further provides that the trustee and the Fund shall
make all reasonable efforts to include as a specific term of any obligations or
liabilities being incurred by the Fund or the Trustee on behalf of the Fund a
contractual provision to the effect that neither the Unitholders nor the trustee
have any personal liability or obligations in respect thereof. The
Administration Agreement contains such provisions. Personal liability may also
arise in respect of claims against the Fund that do not arise under contracts,
including claims in tort, claims for taxes and possibly certain other statutory
liabilities. As the Fund's activities are generally limited to investing in
securities issued by its affiliates, the possibility of any personal liability
of this nature arising is considered remote.
On December 16, 2004, the Government of Ontario passed the Trust Beneficiaries'
Liability Act, 2004, which limits the liability of holders of trust units, in a
manner similar to that afforded to holders of shares of Ontario incorporated
limited liability corporations. The legislation provides that the beneficiaries
of a trust are not as beneficiaries, liable for any act, default, obligation or
liability of the trust or any of its trustees that arises after the act became
law if, when the act or default occurs or the obligation or liability arises:
(a) the trust is a reporting issuer under the Securities Act (Ontario); and (b)
the trust is governed by the laws of Ontario. The Fund is a reporting issuer
under the Securities Act (Ontario) and is governed by the laws of Ontario.
However, the courts have not yet had an opportunity to consider this
legislation.
The operations of the Fund will be conducted, upon the advice of counsel, in
such a way and in such jurisdictions as to avoid as far as possible any material
risk of liability on the Unitholders for claims against the Fund.
Distribution of common shares and notes on termination of the Fund
Upon termination of the Fund, the trustee may distribute the common shares,
Exchangeco common shares, JEC Notes, Exchangeco II Notes and the Fund Notes
directly to the Unitholders, subject to obtaining all required regulatory
approvals. There is currently no market for the common shares, Exchangeco common
shares, Exchangeco II Notes, OESC Notes, or the Fund Notes. In addition, the
common shares, Exchangeco common shares, Exchangeco II Notes, OESC Notes and the
Fund Notes are not freely tradable and are not currently listed on any stock
exchange.
The Fund may issue additional units diluting existing Unitholders' interests
The Declaration of Trust authorizes the OESC as administrator to cause the Fund
to issue an unlimited number of units for such consideration and on such terms
and conditions as shall be established by the Administrator without the approval
of any Unitholders. Additional units have been and will be issued by the Fund on
the exercise of the Exchangeco II Exchange Rights relating to the Class A
preference shares.
Restrictions on potential growth
The payout by the Fund's affiliates of the vast majority of all of their
operating cash flow will make additional capital and operating expenditures
dependent on increased cash flow or additional financing in the future. Lack of
such funds could limit the future growth of Just Energy and its cash flow.
Changes in securities legislation
There can be no assurance that the treatment of mutual fund trusts will not be
changed in a manner which adversely affects Unitholders. If the Fund ceases to
qualify as a "mutual fund trust" under the Tax Act, the units will cease to be
qualified investments for registered retirement savings plans, deferred profit
sharing plans, registered retirement income funds and registered education
savings plans.
Risks relating to certain of the Fund's subsidiaries
The following risk factors relate to the respective businesses conducted by TGF
and NHS, subsidiaries of the Fund acquired pursuant to the Universal
Acquisition, and are in addition to the risk factors set forth above and in the
AIF. The Fund's subsidiaries are immaterial to the total results of the
business. TGF and NHS had a net loss of $9.7 million versus the total net income
of $231.5 million realized by the Fund for the year ended March 31, 2010. In
addition, TGF and NHS generated 2.8% of the gross margin for the year ended
March 31, 2010 and held 19% of the total assets.
Leverage and restrictive covenants
TGF's use of debt financing makes it more difficult for it to operate because it
must make principal and interest payments on the indebtedness and abide by
covenants contained in its debt financing agreements. The level of TGF's debt
may have implications on TGF's operations, including, among other things: (i)
limiting TGF's ability to obtain additional debt financing; (ii) making TGF
vulnerable to increases in prevailing interest rates; (iii) requiring TGF to
dedicate a substantial portion of its cash flow from operations to interest and
principal payments in respect of its indebtedness, thereby reducing the
availability of cash flow for working capital, capital expenditures and other
general corporate expenditures; (iv) placing TGF at a competitive disadvantage
because it may be substantially more leveraged than some of its competitors; (v)
subjecting all or substantially all of TGF's assets to liens, which means that
there may be no assets left for the Fund in the event of a liquidation; (vi)
limiting TGF's ability to adjust to changing market conditions, which could make
it more vulnerable to a downturn in the general economic conditions of its
business; and (vii) limiting TGF's ability to make business and operational
decisions, including, without limitation, limiting TGF's ability to pay
dividends, make capital improvements, sell or purchase assets or engage in
transactions TGF deems to be appropriate and in its best interest.
TGF's ability to make payments on and refinance its indebtedness will depend on
its ability to generate cash from its future operations. TGF's ability to
generate cash from future operations is subject, in large part, to general
economic, competitive, legislative and regulatory factors and other factors that
are beyond TGF's control. If TGF is unable to comply with applicable restrictive
covenants or service its debt, TGF may lose control of its business and be
forced to reduce or delay planned capital expenditures, sell assets, restructure
its indebtedness or submit to foreclosure proceedings, all of which could result
in a material adverse effect upon TGF's business, results of operations and
financial condition. TGF's future debt arrangements may also include
subordinated debt, which may contain even more restrictions and be on less
favourable terms than TGF's existing senior debt and subordinated debt.
Reliance on proprietary technology; risk of claims for infringement
The ability of TGF to operate its Belle Plaine facility and for it to be
economically viable depends on intellectual property and proprietary technology
(collectively, "proprietary technology") licensed from third parties. No
assurance can be given that the proprietary technology may not be circumvented,
misappropriated, disclosed, infringed or required to be licensed to others.
TGF's rights are non-exclusive and accordingly others may use the proprietary
technology to conduct a competitive ethanol production business. Third parties
may claim that the use of the proprietary technology has infringed their rights
or may directly or indirectly challenge TGF's right to the proprietary
technology. It is possible that litigation by TGF or others may be required to
protect the proprietary technology or TGF's right to use it, or to determine the
validity or scope of the rights of others. Such litigation can be time consuming
and expensive, cause delays in TGF's operations or require TGF to enter into
licensing arrangements that may require the payment of license fees or royalties
to others. Such royalty or licensing arrangements, if required, may not be
available on terms acceptable to TGF.
Dependence on commodity prices
TGF's results of operations, financial position and business outlook are
substantially dependent on commodity prices, especially prices for wheat,
natural gas, ethanol and distillers grains. Prices for these commodities are
generally subject to significant volatility and uncertainty. As a result, TGF's
results may fluctuate substantially, and TGF may experience periods of declining
prices for TGF's products and increasing costs for TGF's raw materials, which
could result in operating losses. TGF may attempt to offset a portion of the
effects of such fluctuations by entering into forward contracts to supply
ethanol or to purchase wheat, natural gas or other items or by engaging in other
hedging transactions, however, the amount and duration of these hedging and
other risk mitigation activities may vary substantially over time. In addition,
these activities involve substantial costs and substantial risks and may be
ineffective to mitigate these fluctuations.
Sensitivity to gasoline prices and demand
Ethanol is marketed both as a fuel additive to reduce vehicle emissions from
gasoline and as an octane enhancer to improve the octane rating of gasoline with
which it is blended. As a result, ethanol prices are influenced by the supply
and demand for gasoline (which is itself influenced by the supply and demand for
crude oil).
Sensitivity to wheat prices and supply
Wheat is the principal raw material TGF will use to produce ethanol and
distillers grains. As a result, changes in the price of wheat can significantly
affect TGF's business. At certain levels, wheat prices would make ethanol
uneconomical to use in fuel markets. The price of wheat is influenced by local
and international weather conditions (including droughts) and other factors
affecting crop yields, farmer planting decisions and general economic, market
and regulatory factors, including government policies and subsidies with respect
to agriculture and international trade, and global and local supply and demand.
The significance and relative affect of these factors on the price of wheat is
difficult to predict. Any event that tends to negatively affect the supply of
wheat, such as adverse weather or crop disease, could increase wheat prices and
potentially harm TGF's business. The price of wheat has fluctuated significantly
in the past and may fluctuate significantly in the future.
TGF may also have difficulty from time to time in purchasing wheat on economic
terms due to supply shortages. Any supply shortage could require TGF to suspend
operations until wheat became available on economic terms.
Sensitivity to natural gas prices and supply
TGF relies upon third-parties for TGF's supply of natural gas, which is consumed
in the manufacture of ethanol. The prices for and availability of natural gas
are subject to volatile market conditions. These market conditions are affected
by factors beyond TGF's control such as weather conditions (including
hurricanes), overall economic conditions and foreign and domestic governmental
regulation and relations. Significant disruptions in the supply of natural gas
could impair TGF's ability to manufacture ethanol for TGF's customers.
Sensitivity of distillers grain prices to the price of other commodity products
Distillers grains compete with other protein-based animal feed products. The
price of distillers grains may decrease when the price of competing feed
products decrease. The prices of competing animal feed products are based in
part on the prices of the commodities from which they are derived. Downward
pressure on commodity prices, such as soybeans, will generally cause the price
of competing animal feed products to decline, resulting in downward pressure on
the price of distillers grains. Because the price of distillers grains is not
tied to production costs, decreases in the price of distillers grains will
result in TGF generating less revenue and lower profit margins.
Dependence on federal and provincial legislation and regulation
Various laws, regulations and programs of the United States federal government
and certain provincial and state governments are intended to lead to increased
use of ethanol in gasoline. For example, certain existing and proposed laws,
regulations and programs provide (or if implemented will provide) economic
incentives to ethanol producers and users, however, existing and proposed laws
may be influenced by those who believe that the use of ethanol does not create
the benefits suggested by proponents of increased ethanol usage. These existing
and proposed laws, regulations and programs are constantly changing. In both the
U.S. and Canada legislators and environmental regulators could adopt or modify
existing or proposed laws, regulations or programs that could adversely affect
the use of ethanol. There can be no assurance that existing laws, regulations or
programs will continue in the future, or that proposed laws, regulations or
programs will be adopted or implemented as currently anticipated or at all. In
addition, certain jurisdictional governments may oppose the use of ethanol
because those jurisdictions might have to acquire ethanol from other
jurisdictions, which could increase gasoline prices in those jurisdictions.
Environmental, health and safety laws, regulations and liabilities
TGF owns the land on which it has built the Belle Plaine facility. TGF is
subject to various federal, provincial and local environmental laws and
regulations, including those relating to the discharge of materials into the
air, water and ground, the generation, storage, handling, use, transportation
and disposal of hazardous materials, and the health and safety of TGF's
employees. These laws and regulations require TGF to maintain and comply with
numerous environmental permits to operate its Belle Plaine facility. These laws,
regulations and permits can often require expensive pollution control equipment
or operational changes to limit actual or potential impacts on the environment.
A violation of these laws, regulations or permit conditions can result in
substantial fines, natural resource damages, criminal sanctions, permit
revocations and/or facility shutdowns.
Environmental issues, such as contamination and compliance with applicable
environmental standards could arise at any time during the operation of the
Belle Plaine facility. If this occurs, it could require TGF to spend significant
resources to remedy the issues and may have a material adverse impact on the
operation of the Belle Plaine facility.
There is a risk of liability for the investigation and cleanup of environmental
contamination at each of the properties that TGF owns or operates. If hazardous
substances have been or are disposed of or released at sites that undergo
investigation and/or remediation by regulatory agencies, TGF may be responsible
under environmental laws for all or part of the costs of investigation and/or
remediation, and for damages to natural resources. TGF may also be subject to
related claims by private parties, including TGF's employees and property owners
or residents near the Belle Plaine facility, alleging property damage and
personal injury due to exposure to hazardous or other materials at or from its
Belle Plaine facility. Additionally, employees, property owners or residents
near the Belle Plaine facility could object to the air emissions or water
discharges from the Belle Plaine facility. Ethanol production has been known to
produce an unpleasant odour. Environmental and public nuisance claims or toxic
tort claims could be brought against TGF as a result of this odour or TGF's
other releases to the air or water. Some of these matters may require TGF to
expend significant resources for investigation, cleanup, installation of control
technologies or other compliance-related items, or other costs.
In addition, new laws, new interpretations of existing laws, increased
governmental enforcement of environmental laws or other developments could
require TGF to make additional significant expenditures. Continued government
and public emphasis on environmental issues may result in increased future
investments for environmental controls at the Belle Plaine Facility. For
example, federal and state environmental authorities have recently been
investigating alleged excess volatile organic compounds and other air emissions
from certain U.S. ethanol plants, which could also occur in Canada.
Present and future environmental laws and regulations (and interpretations
thereof) applicable to TGF's operations, more vigorous enforcement policies and
discovery of currently unknown conditions may require substantial capital and
other expenditures.
The hazards and risks associated with producing and transporting TGF's products
(such as fires, natural disasters, explosions, and abnormal pressures and
blowouts) may also result in personal injury claims by employees, third-parties
or damage to property owned by TGF or by third parties. As protection against
operating hazards, TGF maintains insurance coverage against some, but not all,
potential losses. However, TGF could sustain losses for uninsurable or uninsured
events, or in amounts in excess of existing insurance coverage.
Disruptions to infrastructure, or in the supply of fuel or natural gas
TGF's business depends on the continuing availability of rail, road, storage and
distribution infrastructure. Any disruption in this infrastructure network,
whether caused by rail car shortages, earthquakes, storms, other natural
disasters or human error or malfeasance, could have a material adverse effect on
TGF's business. TGF relies upon third-parties to maintain the rail lines from
the Belle Plaine facility to the national rail network, and any failure on their
part to provide rail cars or maintain the lines could impede TGF's delivery of
productions, impose additional costs on TGF and could have a material adverse
effect on TGF's business, results of operations and financial condition.
TGF's business also depends on the continuing availability of raw materials,
including fuel and natural gas. The production of ethanol, from the planting of
wheat to the distribution of ethanol to refiners, is highly energy intensive.
Significant amounts of fuel and natural gas are required for the growing,
fertilizing and harvesting of wheat, as well as for the fermentation,
distillation and transportation of ethanol and the drying of distillers grains.
A serious disruption in supplies of fuel or natural gas, or significant
increases in the prices of fuel or natural gas, could significantly reduce the
availability of raw materials at the Belle Plaine facility and increase TGF's
production costs.
Technological advances
TGF expects that technological advances in the processes and procedures for
processing ethanol will continue to occur. It is possible that those advances
could make the processes and procedures that TGF intends to utilize at the Belle
Plaine facility less efficient or obsolete, or cause the ethanol TGF intends to
produce to be of a lesser quality. These advances could also allow TGF's
competitors to produce ethanol at a lower cost than TGF. If TGF is unable to
adopt or incorporate technological advances, TGF's ethanol production methods
and processes could be less efficient than those of its competitors, which could
cause the Belle Plaine facility to become less competitive.
Ethanol production methods are also constantly advancing. A current trend in
ethanol production research is to develop an efficient method of producing
ethanol from cellulose-based biomass such as agricultural waste, forest residue
and municipal solid waste. Another trend in ethanol production research is to
produce ethanol through a chemical process rather than a fermentation process,
thereby significantly increasing the ethanol yield per pound of feedstock.
Although current technology does not allow these production methods to be
competitive, new technologies may develop that would allow these methods to
become viable means of ethanol production in the future. If TGF is unable to
adopt or incorporate these advances into its operations, TGF's cost of producing
ethanol could be significantly higher than those of its competitors, which could
make the Belle Plaine facility less competitive.
In addition, alternative fuels, additives and oxygenates are continually under
development. Alternative fuel additives that can replace ethanol may be
developed, which may decrease the demand for ethanol. It is also possible that
technological advances in engine and exhaust system design and performance could
reduce the use of oxygenates, which would lower the demand for ethanol, in which
case TGF's business, results of operations and financial condition may be
materially adverse affected.
Buy-outs and returns of water heaters
Just Energy's customers are permitted to purchase their rented water heaters at
a price determined with reference to the price of the water heater at the time
of installation or may terminate their rental agreement with NHS at any time. If
customers choose to buy their installed water heaters or terminate their rental
agreement, the number of installed water heaters and the composition of the
portfolio of installed water heaters could change.
Social or technological changes affecting the water heater market
Within Canada, the Ontario marketplace is unique in that the vast majority of
homeowners rent their water heaters; however, there can be no assurance that NHS
customers will continue to rent their water heaters. It is also possible that
more economical or efficient water heating technology than that which is
currently used by customers will be developed or that the economic conditions in
which the current technology is applied will change resulting in a reduction in
the number of installed water heaters.
Concentration of water heater suppliers and product faults
Although there are a number of manufacturers of water heaters, NHS relies
principally on GSW Inc. ("GSW") for its supply of water heaters. Should this
supplier fail to deliver in a timely manner, delays or disruptions in the supply
and installation of water heaters could result.
In addition, different water heater manufacturers may, from time to time, source
components from the same manufacturers for use in their water heaters. As a
result, a parts defect relating to a commonly sourced component could affect
water heaters produced by more than one manufacturer. Although NHS maintains
what it believes to be suitable product liability insurance, there can be no
assurance that NHS will be able to maintain such insurance on acceptable terms
or that any such insurance will provide adequate protection against potential
liabilities, including with respect to product recalls.
Geographic concentration of the Canadian water heater market
The Canadian water heater rental market is primarily limited to the province of
Ontario. A prolonged downturn in the Ontario economy and a corresponding
slowdown in new home construction could have an adverse effect on the demand for
additional water heaters in Ontario.
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. On April 14, 2010, the ICC released its order finding that
Just Energy had committed ten violations and imposing a penalty of $0.1 million.
Pursuant to the order, Just Energy is required to undertake an independent audit
to confirm its compliance with the regulations and to change certain sales and
marketing processes.
The State of California has filed a number of complaints to the Federal
Regulatory Energy Commission ("FERC") 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 FERC's enforcement of its market-based rate
system. Although CEI did not own generation, the State of California is claiming
that CEI was unjustly enriched by the run-up caused by the alleged market
manipulation by other market participants. The proceedings are currently
ongoing. On March 18, 2010, the Administrative Law Judge granted the motion to
strike for all parties in one of the complaints holding that California did not
prove that the reporting errors masked the accumulation of market power.
California has appealed the decision.
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
Disclosure controls and procedures
Except for the limitation on scope of design of disclosure controls and
procedures as noted below, Just Energy maintains appropriate information
systems, procedures and controls to ensure that information disclosed externally
is complete, reliable and timely. Just Energy's Chief Executive Officer and
Chief Financial Officer evaluated, or caused an evaluation under their direct
supervision of, the design and operating effectiveness of the Fund's disclosure
controls and procedures (as defined in National Instrument 52-109, Certification
of Disclosure in Issuer's Annual and Interim Filings) as at March 31, 2010, and
have concluded that such disclosure controls and procedures were appropriately
designed and were operating effectively.
Internal control over financial reporting
Except for the limitation on scope of the internal controls over financial
reporting as noted below, Just Energy has established adequate internal controls
over financial reporting to provide reasonable assurance regarding the
reliability of the Fund's financial reporting and the preparation of the
financial statements for external purposes in accordance with GAAP. Just
Energy's Chief Executive Officer and Chief Financial Officer assessed, or caused
an assessment under their direct supervision of the design and operating
effectiveness of the Fund's internal controls over financial reporting (as
defined in National Instrument 52-109, Certification of Disclosure in Issuer's
Annual and Interim Filings) as at March 31, 2010 using the Internal Control over
Financial Reporting - Guidance for Smaller Public Companies published by The
Committee of Sponsoring Organizations of the Treadway Commission (COSO). Based
on the assessment concluded that Just Energy's internal controls over financial
reporting were appropriately designed and were operating effectively.
It should be noted that a control system, no matter how well conceived and
operated, can provide only reasonable, not absolute, assurance that the
objectives of the control system are met. Because of the inherent limitations in
all control systems, no evaluation of controls can provide absolute assurance
that all control issues, including instances of fraud, if any, have been
detected. These inherent limitations include, among other items: (i) that
management's assumptions and judgments could ultimately prove to be incorrect
under varying conditions and circumstances; (ii) the impact of any undetected
errors; and (iii) controls may be circumvented by the unauthorized acts of
individuals, by collusion of two or more people, or by management override.
The design of any system of controls is also based in part upon certain
assumptions about the likelihood of future events, and there can be no assurance
that any design will succeed in achieving its stated goals under all potential
future conditions.
Changes in internal control over financial reporting
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 during the year ended March 31, 2010.
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 March, 2010
is as follows (thousands of dollars):
TGF NHS Total
--------- --------- ---------
Revenue(1) $56,455 $8,886 $65,341
Net loss(1) (6,861) (2,887) (9,748)
Current assets(2) 10,792 6,579 17,371
Non-current assets(2) 150,236 84,913 235,149
Current liabilities(2) 67,351 12,574 79,925
Non-current liabilities(2) 37,358 53,920 91,278
(1) Results from July 2, 2009 to March 31, 2010
(2) Balance Sheet as at March 31, 2010
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 23, 2010 management proxy
circular. Just Energy actively monitors the corporate governance and disclosure
environment to ensure timely compliance with current and future requirements.
Outlook
On April 19, 2010, Just Energy announced the intent to purchase all of the
shares of Hudson Energy Corporation, a privately held commercial energy
marketing company operating in New York, New Jersey, Illinois and Texas. The
funding for the acquisition totaling $330 million was completed through the sale
of 6% convertible debentures to a syndicate of underwriters. The transaction
closed on May 7, 2010.
Just Energy believes that Hudson is a strong strategic fit and will
significantly accelerate Just Energy's development as a leading North American
energy marketing business. Hudson will add significant depth and focus to Just
Energy's growing commercial marketing business. 85% of Hudson's customers are
commercial while 65% of Just Energy customers are residential. Hudson generates
its sales through its independent broker and contractor marketing channels. Just
Energy has not meaningfully utilized the broker channel as an aggregation tool.
With its Sales Portal technology, Hudson also has technology that enables more
efficient selling of Hudson's products to commercial customers through the
broker channel and through direct sales. Just Energy management believes that
this technology can be used in all of the jurisdictions in North America where
Just Energy currently operates.
The Hudson acquisition, on a proforma basis, was materially accretive to the
combined company's EBITDA for the year ended March 31, 2010. Management
anticipates that this accretion will continue under combined operations. There
will be some one-time transition costs in the second and third quarters of
fiscal 2011 but the transaction is expected to be accretive in fiscal 2011 after
these expenses.
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 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 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.
Management believes that Just Energy will again grow its key operating measures
during fiscal 2011. Overall, management believes that a return to targeted
attrition rates as the U.S. economy recovers is a key factor in the level of
Just Energy's growth going forward. Customer additions are at record levels but
the benefit of this is absorbed by high attrition rates in the United States.
Company growth expectations are predicated on some recovery in the U.S. but not
full recovery to prerecession levels. The addition of Hudson will be accretive
to the Fund's growth on a fully diluted per unit basis although this growth will
be offset to a degree by one-time transition costs.
Management's best expectation is that distributable cash after gross margin
replacement will grow by approximately 5-10%, including the acquisition from
Hudson. Total RCEs are expected to grow after all attrition and failure to renew
over and above the customers brought with Hudson. However, management is not in
a position to provide guidance on the level of customer growth pending
acquisition of the Hudson sales force and its integration into Just Energy.
Investors will be updated in future quarters on the customer growth
expectations.
Sales of the Just Green products have been very strong with approximately 39% of
all customers added in the current year taking 81% of green energy supply.
Although currently a small component of the overall customer book (2% of gas
customers and 5% of electricity customers), continued sales of Just Green
products at these levels will alter the economics of Just Energy as green
customers generate 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 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 and Pennsylvania in third
quarter of fiscal 2011. 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.
JUST ENERGY INCOME FUND
CONSOLIDATED BALANCE SHEETS
AS AT MARCH 31
(thousands of dollars)
----------------------------------------------------------------------------
----------------------------------------------------------------------------
2010 2009
ASSETS
CURRENT
Cash $ 60,132 $ 59,094
Restricted cash (Note 4) 18,650 7,609
Accounts receivable 348,892 249,480
Gas delivered in excess of consumption 7,410 -
Gas in storage 4,058 6,690
Inventory 6,323 257
Unbilled revenues 20,793 57,779
Prepaid expenses and deposits 20,038 2,020
Current portion of future income
tax assets (Note 9) 29,139 -
Other assets - current (Note 13a) 2,703 5,544
----------------------------------------------------------------------------
518,138 388,473
FUTURE INCOME TAX ASSETS (Note 9) 85,197 -
PROPERTY PLANT AND EQUIPMENT (Note 6) 218,616 19,971
INTANGIBLE ASSETS (Note 7) 346,216 5,097
GOODWILL 177,887 117,061
LONG TERM RECEIVABLE 2,014 -
OTHER ASSETS - LONG TERM (Note 13a) 5,027 5,153
----------------------------------------------------------------------------
$ 1,353,095 $ 535,755
----------------------------------------------------------------------------
----------------------------------------------------------------------------
LIABILITIES
CURRENT
Bank indebtedness (Note 8b iv) $ 8,236 $ -
Accounts payable and accrued liabilities 226,950 173,833
Unit distribution payable 13,182 10,977
Corporate taxes payable 6,410 1,906
Current portion of future income tax
liabilities (Note 9) 6,776 -
Deferred revenue 7,202 -
Accrued gas accounts payable 15,093 41,379
Current portion of long-term debt (Note 8) 62,829 -
Other liabilities - current (Note 13a) 685,200 519,352
----------------------------------------------------------------------------
1,031,878 747,447
LONG TERM DEBT (Note 8) 231,837 76,500
DEFERRED LEASE INDUCEMENTS 1,984 2,382
OTHER LIABILITIES -LONG TERM(Note 13a) 590,572 401,720
----------------------------------------------------------------------------
1,856,271 1,228,049
----------------------------------------------------------------------------
NON CONTROLLING INTEREST 20,603 292
----------------------------------------------------------------------------
UNITHOLDERS' EQUITY (DEFICIENCY)
Deficit $ (1,423,698) $ (1,470,277)
Accumulated other comprehensive income (Note
10) 221,969 364,566
----------------------------------------------------------------------------
(1,201,729) (1,105,711)
Unitholders' capital 659,118 398,454
Contributed surplus 18,832 14,671
----------------------------------------------------------------------------
Unitholders' deficit (523,779) (692,586)
----------------------------------------------------------------------------
$ 1,353,095 $ 535,755
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Guarantees (Note 17) Commitments (Note 18) Contingencies (Note 19)
Subsequent event (Note 23)
See accompanying notes to consolidated financial statements
Approved on behalf of Just Energy Income Fund by Just Energy Corp., as
administrator.
Rebecca MacDonald Michael Kirby
Executive Chair Corporate Director
JUST ENERGY INCOME FUND
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED MARCH 31
(thousands of dollars except per unit amount)
----------------------------------------------------------------------------
----------------------------------------------------------------------------
2010 2009
SALES $ 2,299,231 $ 1,899,213
COST OF SALES 1,883,898 1,576,397
----------------------------------------------------------------------------
GROSS MARGIN 415,333 322,816
----------------------------------------------------------------------------
EXPENSES
General and administrative expenses 88,423 59,586
Marketing expenses 95,760 68,093
Bad debt expense 17,940 13,887
Amortization of intangible assets and related
supply contracts 58,548 3,594
Amortization of property, plant and equipment 7,897 5,100
Unit based compensation 4,754 4,098
Capital tax expense 522 220
----------------------------------------------------------------------------
273,844 154,578
----------------------------------------------------------------------------
INCOME BEFORE THE UNDERNOTED 141,489 168,238
INTEREST EXPENSE (Note 8) 16,134 3,857
CHANGE IN FAIR VALUE OF DERIVATIVEINSTRUMENTS
(Note 13a) 1,282 1,336,976
OTHER INCOME (3,515) (7,604)
----------------------------------------------------------------------------
INCOME (LOSS) BEFORE INCOME TAX 127,588 (1,164,991)
RECOVERY OF INCOME TAX (Note 9) (100,260) (57,460)
NON-CONTROLLING INTEREST (3,648) (58)
----------------------------------------------------------------------------
NET INCOME (LOSS) $ 231,496 $ (1,107,473)
----------------------------------------------------------------------------
----------------------------------------------------------------------------
See accompanying notes to consolidated financial statements
Income (loss) per unit (Note 15)
Basic $ 1.81 $ (10.03)
Diluted $ 1.79 $ (10.03)
JUST ENERGY INCOME FUND
CONSOLIDATED STATEMENTS OF UNITHOLDERS' EQUITY (DEFICIT)
FOR THE YEARS ENDED MARCH 31
(thousands of dollars)
----------------------------------------------------------------------------
----------------------------------------------------------------------------
2010 2009
ACCUMULATED EARNINGS (DEFICIT)
Accumulated earnings (deficit), beginning of
year $ (712,427) $ 392,082
Adjustment for change in accounting policy - 2,964
Net income (loss) 231,496 (1,107,473)
----------------------------------------------------------------------------
Accumulated deficit, end of year (480,931) (712,427)
----------------------------------------------------------------------------
DISTRIBUTIONS
Distributions, beginning of year (757,850) (604,013)
Distributions and dividends on exchangeable
shares (179,839) (148,944)
Class A preference share distributions - net of
income taxes of $2,501 (2009 - $2,767) (5,078) (4,893)
----------------------------------------------------------------------------
Distributions, end of year (942,767) (757,850)
----------------------------------------------------------------------------
DEFICIT (1,423,698) (1,470,277)
----------------------------------------------------------------------------
ACCUMULATED OTHER COMPREHENSIVE INCOME (Note 10)
Accumulated other comprehensive income,
beginning of year 364,566 40,789
Other comprehensive income (loss) (142,597) 323,777
----------------------------------------------------------------------------
Accumulated other comprehensive income, end of
year 221,969 364,566
----------------------------------------------------------------------------
UNITHOLDERS' CAPITAL (Note 11)
Unitholders' capital, beginning of year 398,454 358,103
Trust units exchanged 187,063 3,606
Trust units issued on exercise/exchange of unit
compensation (Note 12d) 682 5,778
Trust units issued 20,036 41,176
Exchangeable shares issued 239,946 -
Exchangeable shares exchanged (187,063) -
Repurchase and cancellation of units - (6,603)
Class A preference shares exchanged - (3,606)
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Unitholders' capital, end of year 659,118 398,454
----------------------------------------------------------------------------
CONTRIBUTED SURPLUS (Note 12d) 18,832 14,671
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Unitholders' deficit, end of year $ (523,779) $(692,586)
----------------------------------------------------------------------------
----------------------------------------------------------------------------
See accompanying notes to the consolidated financial statements
JUST ENERGY INCOME FUND
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
FOR THE YEARS ENDED MARCH 31
(thousands of dollars)
----------------------------------------------------------------------------
----------------------------------------------------------------------------
2010 2009
----------------------------------------------------------------------------
NET INCOME (LOSS) $ 231,496 (1,107,473)
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Unrealized gain (loss) on translation of self
sustaining operations 26,626 (1,906)
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
13a) - 498,654
Amortization of deferred unrealized gain of
discontinued hedges, net of income taxes of $34,339
(2009 -$38,805) (Note 13a) (169,223) (172,971)
----------------------------------------------------------------------------
OTHER COMPREHENSIVE INCOME (LOSS) (142,597) 323,777
----------------------------------------------------------------------------
COMPREHENSIVE INCOME (LOSS) $ 88,899 (783,696)
----------------------------------------------------------------------------
----------------------------------------------------------------------------
See accompanying notes to consolidated financial statements
JUST ENERGY INCOME FUND
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED MARCH 31
(thousands of dollars)
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Net inflow (outflow) of cash related to the
following activities 2010 2009
OPERATING
Net income (loss) $ 231,496 $ (1,107,473)
----------------------------------------------------------------------------
Items not affecting cash
Amortization of intangible assets and related
supply contracts 58,548 3,594
Amortization of property, plant and equipment 7,897 5,100
Unit based compensation 4,754 4,098
Non controlling interest (3,648) (58)
Future income taxes (122,014) (64,088)
Financing charges, non-cash portion 902 -
Other 4,030 (3,940)
Change in fair value of derivative instruments 1,282 1,336,976
----------------------------------------------------------------------------
(48,249) 1,281,682
----------------------------------------------------------------------------
Adjustments required to reflect net cash receipts
from gas sales (note 20) 10,549 (7,623)
----------------------------------------------------------------------------
Changes in non-cash working capital (Note 21) (35,523) 6,181
----------------------------------------------------------------------------
Cash inflow from operations 158,273 172,767
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FINANCING
Exercise of trust unit options (Note 12a) - 4,293
Distributions and dividends paid to Unitholders
and holders of Exchangeable shares (157,495) (129,357)
Distributions to Class A preference shareholders (7,580) (8,460)
Tax impact on distributions to Class A preference
shareholders 2,501 2,767
Units purchased for cancellation - (6,603)
Increase in bank indebtedness 8,236 -
Issuance of long-term debt 243,797 87,726
Repayment of long-term debt (207,493) (85,731)
Funding from minority interest holder of TGF 1,500 -
Restricted cash 626 (122)
----------------------------------------------------------------------------
(115,908) (135,487)
----------------------------------------------------------------------------
INVESTING
Purchase of capital assets (41,207) (6,345)
Water heater customer acquisition costs and other
intangible assets (6,348) -
Acquisitions (Note 5) 9,799 (1,842)
Proceeds from sale of customer contracts 290 -
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(37,466) (8,187)
----------------------------------------------------------------------------
Effect of foreign currency translation on cash
balances (3,861) 2,691
----------------------------------------------------------------------------
NET CASH INFLOW (1,038) 31,784
CASH, BEGINNING OF YEAR 59,904 27,310
----------------------------------------------------------------------------
CASH, END OF YEAR $ 60,132 $ 59,094
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Supplemental information
Interest paid $ 14,621 $ 4,009
Income taxes paid $ 27,886 $ 1,153
----------------------------------------------------------------------------
----------------------------------------------------------------------------
See accompanying notes to consolidated financial statements
JUST ENERGY INCOME FUND
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEAR ENDED MARCH 31, 2010
(thousands of dollars except where indicated and per unit amounts)
----------------------------------------------------------------------------
1. 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"), 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. ("JEINC"), Just Energy Texas L.P.
("JETLP"), Just Energy Exchange Corp. ("JEEC"), Universal Energy Corp. ("UEC"),
Universal Gas & Electric Corporation ("UGEC"), 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".
2. OPERATIONS
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, furnaces and air conditioners and
produces and sells wheat-based ethanol through Terra Grain Fuels Inc.
3. (I) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) Principles of consolidation
The consolidated financial statements have been prepared in accordance with
Canadian Generally Accepted Accounting Principles ("GAAP"), and include the
accounts of Just Energy Income Fund and its directly or indirectly owned
subsidiaries and affiliates.
(b) Cash and cash equivalents
All highly liquid temporary cash investments with an original maturity of three
months or less when purchased are considered to be cash equivalents.
(c) Unbilled revenues/accrued gas accounts payable or gas delivered in excess of
consumption/deferred revenues
Unbilled revenues are stated at estimated realizable value and result when
customers consume more gas than has been delivered by Just Energy to local
distribution companies ("LDCs"). Accrued gas accounts payable represents the
obligation to the LDCs with respect to gas consumed by customers in excess of
that delivered to the LDCs.
Gas delivered to LDCs in excess of consumption by customers is stated at the
lower of cost and net realizable value. Collections from customers in advance of
their consumption of gas result in deferred revenues.
Due to the seasonality of our operations, during the winter months, customers
will have consumed more than what was delivered resulting in the recognition of
unbilled revenues/accrued gas accounts payable; however, in the summer months,
customers will have consumed less than what was delivered, resulting in the
recognition of gas delivered in excess of consumption/deferred revenues.
These adjustments are applicable solely to the Ontario, Manitoba, Quebec and
Michigan gas markets.
(d) Gas in storage
Gas in storage primarily represents the gas delivered to the LDCs in the States
of Illinois, Indiana and New York. The balance will fluctuate as gas is injected
or withdrawn from storage. Injections typically occur from April through
November and withdrawals occur from December through March.
In addition, a portion of the gas in storage relates to operations in the
Province of Alberta. In Alberta, there is a month to month carryover, which
represents the difference between the gas delivered to the LDC within a month
and customer consumption. The delivery volumes in the following month are
adjusted accordingly.
Gas in storage is stated at the lower of cost and net realizable value.
(e) Inventory
Inventory consists of water heaters as well as ethanol, ethanol in process and
grain inventory. Water heaters are stated at the lower of cost and net
realizable value with cost being determined on a weighted average basis.
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.
(f) Property, plant and equipment
Property, plant and equipment are recorded at cost less accumulated
amortization. Cost for water heaters, furnaces and air conditioners includes the
cost of installation. Amortization is provided over the estimated useful lives
of the assets, with the half year rule applied to additions, as follows:
----------------------------------------------------------------------------
Asset Basis Rate
----------------------------------------------------------------------------
Furniture and fixtures Declining balance 20%
Office equipment Declining balance 20%
Computer equipment Declining balance 30%
Computer software Declining balance 100%
Ethanol plant and equipment Straight line 25 years
Commodity billing and settlement
systems Straight line 5 years
Water heaters Straight line 15 years
Furnaces and air conditioners Straight line 15 years
Leasehold improvements Straight line Term of lease
Vehicles Straight line 5 years
----------------------------------------------------------------------------
(g) Goodwill
Goodwill is the residual amount that results when the purchase price of an
acquired business exceeds the sum of the amounts allocated to the tangible and
intangible assets acquired, less liability assumed, based on their fair values.
Goodwill is allocated as of the date of the business combination to the Fund's
reporting units that are expected to benefit from the synergies of the business
combination.
Goodwill is not amortized and tested for impairment annually or more frequently
if events or changes in circumstances indicate that the asset might be impaired.
The impairment test is carried out in two steps, in the first step, the carrying
amount of the reporting unit including goodwill is compared with its fair value.
When the fair value of a reporting unit including goodwill exceeds its carrying
amount, goodwill of the reporting unit is not considered to be impaired and the
second step of the impairment test is unnecessary. The second step is carried
out when the carrying amount of a reporting unit exceeds its fair value, in
which case the implied fair value of the reporting unit's goodwill is compared
with its carrying amount to measure the amount of the impairment loss, if any.
The implied fair value of goodwill is determined in the same manner as the value
of goodwill is determined in a business combination.
Effective April 1, 2009, the Fund adopted Canadian Institute of Chartered
Accountants ("CICA") Handbook Section 3064, Goodwill and Intangible Assets, as
described in note 3(II).
(h) Gas contracts and customer relationships
Gas contracts represent the original fair value of existing sales and supply
contracts acquired by Just Energy on the acquisition of various gas contracts
and expected renewals. These contracts are amortized over their average
estimated remaining life of up to five years on a straight line basis which
approximates the life of the assets.
(i) Electricity contracts and customer relationships
Electricity contracts represent the original fair value of existing sales and
supply contracts acquired by Just Energy on the acquisition of various
electricity contracts and expected renewals. These contracts are amortized over
their average estimated remaining life of up to six years on a straight line
basis which approximates the life of the assets.
(j) Water heater contracts and customer relationships
Water heater contracts represent the fair value of rental contracts on the
acquisition of various water heater contracts and expected renewals. These
contracts are operating leases and are amortized over their average estimated
remaining life of up to fifteen years on a straight line basis which
approximates the life of the assets.
(k) Impairment of long-lived assets
Just Energy reviews long-lived assets, which include property, plant and
equipment and intangible assets with finite lives, whenever events or changes in
circumstances indicate that the carrying amount of the asset may not be
recoverable. Recoverability of assets to be held and used is measured by a
comparison of the carrying amount of an asset to the estimated undiscounted
future cash flows expected to be generated by the asset, through use and
eventual disposition. If the carrying amount of an asset exceeds its estimated
future cash flows, an impairment charge is recognized for the amount by which
the carrying amount of the asset exceeds the fair value of the asset.
(l) Other assets (liabilities) - current/long term, change in fair value of
derivative instruments and other comprehensive income (loss)
Just Energy's various derivative instruments have been accounted for using CICA
Handbook Section 3855, Financial Instruments - Recognition and Measurement.
Effective July 1, 2008, the Fund ceased the utilization of hedge accounting. In
accordance with CICA Handbook Section 3865, Hedges, the Fund is amortizing the
accumulated gains and losses to June 30, 2008 from other comprehensive income in
the same period in which the original hedged item affects the Statement of
Operations. No retrospective restatement is required for this change. The
derivatives are measured at fair value and booked to the consolidated balance
sheets. Effective July 1, 2008, all changes in fair value between periods are
booked to change in fair value of derivative Instruments on the consolidated
statements of operations.
Prior to July 1, 2008, financial instruments that met hedging requirements were
accounted for under CICA Handbook Section 3865, Hedges. For derivative
instruments accounted for under CICA Handbook Section 3865, Just Energy formally
documented the relationship between hedging instruments and the hedged items, as
well as its risk management objective and strategy for undertaking various hedge
transactions. This process included linking all derivative financial instruments
to anticipated transactions. Just Energy also formally assessed, both at the
hedge's inception and on an ongoing basis, whether the derivative financial
instruments that were used in hedging transactions were highly effective in
offsetting changes in cash flows of the hedged items. The derivatives were
measured at fair value and booked to the consolidated balance sheets. Changes in
fair value between periods were booked to other comprehensive income for the
effective portion of the hedge with the remaining change being booked to change
in fair value of derivative instruments on the consolidated statements of
operations.
Just Energy enters into hedges of its cost of sales relating to its fixed price
electricity and Just Green electricity sales by entering into fixed for floating
electricity swap contracts and physical forward contracts, unforeced capacity
contracts, heat rate swap contracts, heat rate options, renewable energy
certificates and financial and physical forward gas contracts (to fulfill
obligations under the heat rate swaps) with electricity and natural gas
suppliers. These swaps and forwards are accounted for in accordance with CICA
Handbook Section 3855. Prior to July 1, 2008, they were accounted for in
accordance with CICA Handbook Section 3865 and, in some limited circumstances,
CICA Handbook Section 3855.
Just Energy enters into hedges of its cost of sales relating to its fixed-price
gas and Just Green gas contracts by entering into a combination of physical gas
forwards, financial gas forwards, physical transportation forwards, carbon
offset contracts and option contracts. Physical gas forwards and transportation
forwards are accounted for in accordance with CICA Handbook Section 3855. Prior
to July 1, 2008, they were accounted for in accordance with CICA Handbook
Section 3865. Option contracts and financial gas forwards are accounted for in
accordance with CICA Handbook Section 3855.
Just Energy enters into hedges for its foreign exchange risk relating to its
anticipated repatriation of U.S. denominated currency by entering into foreign
exchange forward contracts with its lender. Since April 1, 2007, Just Energy has
accounted for these forward contracts in accordance with CICA Handbook Section
3855 by recording them on the consolidated balance sheet as either other assets
or other liabilities measured at fair value, with changes in fair value booked
to change in fair value of derivative instruments.
(m) Financial instruments
Financial instruments are classified into a defined category, namely,
held-for-trading financial assets or financial liabilities, held-to-maturity
investments, loans and receivables, available-for-sale financial assets, or
other financial liabilities. Financial instruments are included on the Fund's
balance sheet and measured at fair value, except for loans and receivables,
held-to-maturity financial assets and other financial liabilities which are
measured at cost or amortized cost. Financial assets and financial liabilities
have been initially remeasured as at April 1, 2009 to take into account the
appropriate credit risk and counterparty credit risk (see note 13c). Gains and
losses on held-for-trading financial assets and financial liabilities are
recognized in net earnings in the period in which they arise. Unrealized gains
and losses, including those related to changes in foreign exchange rates on
available-for-sale financial assets, are recognized in accumulated other
comprehensive loss until the financial asset is derecognized or determined to be
impaired, at which time any unrealized gains or losses are recorded in net
earnings. Transaction costs other than those related to financial instruments
classified as held-for-trading, which are expensed as incurred, are amortized
using the effective interest method. The following classifications have been
applied:
-- cash and restricted cash as held-for-trading, which is measured at fair
value
-- accounts receivable are classified as loans and receivables, which are
measured at amortized cost
-- long-term debt, accounts payable and accrued liabilities, unit
distribution payable and bank indebtedness are classified as other
financial liabilities, which are measured at amortized cost.
Electricity:
Just Energy has entered into contracts with customers to provide electricity and
renewable energy at fixed prices ("customer electricity contracts"). Customer
electricity contracts include requirements contracts and contracts with fixed or
variable volumes at fixed prices. The customer electricity contracts expose Just
Energy to changes in market prices of electricity, renewable energy certificates
and consumption. To reduce its exposure to movements in commodity prices arising
from the acquisition of electricity and renewable energy certificates at
floating rates, Just Energy uses electricity derivative contracts ("electricity
derivative contracts"). These electricity derivative contracts are fixed for
floating swaps, physical electricity forward contracts, unforced capacity
contracts, renewable energy certificates or a combination of heat rate swaps,
heat rate options and physical or financial forward gas contracts.
Just Energy agrees to exchange the difference between the variable or indexed
price and the fixed price on a notional quantity of electricity for a specified
time frame in the fixed for floating contract arrangements. Just Energy takes
title to the renewable energy certificate volumes to satisfy customer contracts.
Just Energy takes title to electricity and unforced capacity at a fixed price
for scheduling into the power grid under the forward contracts. Just Energy
agrees to pay for certain quantities of power based on the floating price of
natural gas under heat rate swaps. In order to cover the floating price of gas
under these arrangements, prices for gas are fixed through either physical or
financial forward gas contracts with a protection against weather variation
achieved through the purchase of heat rate options. These contracts are expected
to be effective as economic hedges of the electricity price exposure.
The premiums and settlements for these derivative instruments are recognized in
cost of sales, when incurred.
The fair value of the electricity derivative contracts are recorded in the
consolidated balance sheet with changes in the fair value being recorded in
change in fair value of derivative instruments on the consolidated statements of
operations. Prior to July 1, 2008, Just Energy monitored its effective hedging
relationship between retail consumption and its supply contracts and evaluated
the effectiveness of these relationships on a quarterly basis to meet the
criteria for hedge accounting. The changes in the fair value were recorded in
other comprehensive income to the extent that the hedge measurement was
effective with the remainder recorded in change in fair value of derivative
instruments. Any electricity derivative contracts that did not qualify for hedge
accounting or were de-designated as a hedge were recorded at fair market value
with the changes in fair value recorded in current period income as a component
of change in fair value of derivative instruments. After July 1, 2008, the Fund
ceased the utilization of hedge accounting.
Any gains or losses accumulated up to the date that the electricity derivative
contract was terminated or de-designated as a hedge were deferred in accumulated
other comprehensive income ("AOCI") then recorded in cost of sales when the
hedged customer electricity contract affected income.
Gas:
Just Energy has entered into contracts with customers to provide gas and carbon
offsets at fixed prices ("customer gas contracts"). Customer gas contracts
include requirements contracts and contracts with fixed or variable volumes at
fixed prices. The customer gas contracts expose Just Energy to changes in market
prices of gas and consumption. To reduce its exposure to movements in commodity
prices and usage, Just Energy uses carbon offset, options and gas physical and
financial contracts ("gas supply contracts"). These gas supply contracts are
expected to be effective as economic hedges of the gas price exposure.
Just Energy uses physical forwards, carbon offset transportation forwards
(together "physical gas supply contracts") and other gas financial instruments
to fix the price of its gas supply. Under the physical gas supply contracts,
Just Energy agrees to pay a specified price per volume of gas or transportation.
Other financial instruments are comprised of financial puts and calls that fix
the price of gas in jurisdictions where Just Energy has scheduling
responsibilities and therefore is exposed to commodity price risk on volumes
above or below its base supply.
The fair value of physical gas contracts is recorded in the consolidated balance
sheet with changes in the fair value being recorded in change in fair value of
derivative instruments on the consolidated statements of operations. Prior to
July 1, 2008, Just Energy monitored its effective hedging relationship between
retail consumption and its supply contracts and evaluated the effectiveness of
these relationships on a quarterly basis to meet the criteria of hedge
accounting. The changes were recorded in other comprehensive income to the
extent that the hedge measurement was effective with the remainder recorded in
change in fair value of derivative instruments. Any physical gas contract that
did not qualify for hedge accounting or was de-designated as an accounting hedge
together with the gas financial instruments were valued at fair market value
with the changes in fair value recorded in current period income as a component
of change in fair value of derivative instruments. Any gains or losses
accumulated up to the date that the physical gas supply contract was terminated
or de-designated as a hedge were deferred in AOCI then recorded in cost of sales
when the hedged customer gas contract affected income. After July 1, 2008, the
Fund ceased the utilization of hedge accounting.
Foreign exchange:
To reduce its exposure to movements in foreign exchange rates, Just Energy uses
foreign exchange forwards ("foreign exchange contracts"). These foreign exchange
contracts were expected to be effective as hedges of the anticipated cross
border cash flow but were found to be not effective under GAAP accounting
requirements during fiscal 2007.
Up until September 30, 2006, unrealized gains on foreign exchange contracts up
to the date of de-designation of the hedging relationship were deferred to be
recognized over the term of the contract based on the timing of the underlying
hedged transactions. As of October 1, 2006, these derivative financial
instruments have been recorded on the balance sheet as either other assets or
other liabilities measured at fair value, with changes in fair value recognized
in income as other income (expense). The deferred gain was reclassified to AOCI
as of April 1, 2007.
(n) Revenue recognition
Just Energy delivers gas and/or electricity to end-use customers who have
entered into long-term fixed-price contracts. Revenue is recognized when the
commodity is consumed by the end-use customer or sold to third parties. The Fund
assumes credit risk in Illinois, Alberta, Texas, Pennsylvania, Maryland and
California, and for large volume customers in British Columbia and Ontario. In
these markets, the Fund ensures that credit review processes are in place prior
to commodity flowing to the customer.
Just Energy recognizes revenue upon delivery to customers at terminals or other
locations for ethanol and dried distillers grain.
Just Energy recognizes water heater revenue from the monthly rental or sale
commencing from the installation of the water heater.
(o) Marketing expenses
Commissions and various other costs related to obtaining and renewing customer
contracts are charged to income in the period incurred.
(p) Foreign currency translation
The operations of the Fund's U.S-based subsidiaries are self-sustaining
operations. Accordingly, the assets and liabilities of foreign subsidiaries are
translated into Canadian dollars at the rate of exchange at the balance sheet
date. Revenues and expenses are translated at the average rate of exchange for
the period. The resulting gains and losses are accumulated as a component of
Unitholders' equity within AOCI.
(q) Per unit amounts
The computation of income per unit is based on the weighted average number of
units outstanding during the year. Diluted earnings per unit is computed in a
similar way to basic earnings per unit except that the weighted average units
outstanding are increased to include additional units assuming the exercise of
unit options, unit appreciation rights and deferred unit grants, exchangeable
shares and conversion of convertible debentures, if dilutive.
(r) Unit based compensation plans
The Fund accounts for all of its unit based compensation awards using the fair
value based method.
Awards are valued at grant date and are not subsequently adjusted for changes in
the prices of the underlying unit and other measurement assumptions.
Compensation for awards without performance conditions is recognized as an
expense and a credit to contributed surplus over the related vesting period of
the awards. Compensation for awards with performance conditions is recognized
based on management's best estimate of whether the performance condition will be
achieved.
When options, unit appreciation rights ("UARs") and deferred unit grants
("DUGs") are exercised or exchanged, the amounts previously credited to
contributed surplus are reversed and credited to Unitholders' equity. The amount
of cash, if any, received from participants is also credited to Unitholders'
equity.
(s) Employee future benefits
Just Energy established a long term incentive plan (the "Plan") for permanent
full time and part time employees (working more than 20 hours per week) of Just
Energy Corp. ("JEC"), JE BC, JE Alberta, JE Manitoba and JE Quebec. The Plan
consists of two components, a Deferred Profit Sharing Plan ("DPSP") and an
Employee Profit Sharing Plan ("EPSP").
For participants of the DPSP, Just Energy contributes an amount equal to a
maximum of 2% per annum of an employee's base earnings. For the EPSP, Just
Energy contributes an amount up to a maximum of 2% per annum of an employee's
base earnings towards the purchase of trust units of the Fund, on a matching one
for one basis.
For the U.S. employees, Just Energy has established a 401(k) plan to provide
employees the potential for future financial security for retirement. Employees
may participate in the 401(k) plan subject to all the terms and conditions of
the plan. They may join the plan on the first of any month, once they have
completed six months of employment. The 401(k) savings plan is an employer
matching plan. Just Energy will match an amount up to 4% of their base earnings.
Employees may contribute from 1% up to 25% of their total salary with JE on a
beforehand basis with a 2010 calendar year maximum of $17.
Participation in either plan in Canada or the U.S. is voluntary. The Plan has a
two year vesting period beginning from the later of the Plan's effective date
and the employee's starting date. During the year, Just Energy contributed
$1,096 (2009 - $739) to both plans, which was paid in full during the year and
recognized as an expense in the consolidated statement of operations.
(t) Exchangeable Securities
Just Energy follows the recommendations of the Emerging Issues Committee
relating to the presentation of exchangeable securities, which includes the
class A preference shares, issued by subsidiaries of income funds. The
recommendations require that the exchangeable securities issued by a subsidiary
of an income fund be presented on the consolidated balance sheet of the income
fund as a part of Unitholders' equity if the following criteria have been met:
-- the holders of the exchangeable securities are entitled to receive
distributions of earnings economically equivalent to distributions
received on units of the income fund; and
-- the exchangeable securities ultimately are required to be exchanged for
units of the income fund as a result of the passage of fixed periods of
time or the non-transferability to third parties of the exchangeable
securities without first exchanging them for units of the income fund.
The exchangeable shares and Class A preference shares meet these criteria and
have been classified as Unitholders' equity. All distributions paid to JEEC
shareholders are included in Unitholders' Equity. All distributions paid to the
Class A preference shareholder must be recorded in Unitholders' equity, net of
tax. The management incentive program, which is a bonus equal to the
distribution amount received by a Unitholder, is additional compensation to
senior management of JEC, a wholly owned subsidiary of the Fund.
(u) Use of estimates
The preparation of the financial statements, in conformity with Canadian GAAP,
requires management to make estimates and assumptions that affect the amounts
reported in the financial statements and accompanying notes. Actual results
could differ from those estimates and assumptions. Significant areas requiring
the use of management estimates include allowance for doubtful accounts,
estimate of the useful life and estimated fair value of property, plant and
equipment and impairments thereon, valuation of goodwill and intangibles and the
impairment thereon, valuation allowances for future tax assets, the
determination of the fair values of financial instruments, as the aggregate fair
value amounts represent point in time estimates only and should not be
interpreted as being realizable in an immediate settlement of the supply
contracts, and the determination of unit based compensation.
(v) Income taxes
The Fund is a taxable entity under the Income Tax Act (Canada) and is taxable on
income that is not distributed or distributable to the Fund's Unitholders.
Payments made between the Canadian operating entities and the Fund ultimately
transfers both current and future income tax liabilities to the Unitholders. The
future income tax liability associated with Canadian assets recorded on the
balance sheet is recovered over time through these payments.
Effective January 1, 2011, the Fund will be subject to a SIFT (specified
investment flow-through entities) tax on distributions of Canadian taxable
income that has not been subject to a Canadian corporate income tax in the
Canadian operating entities. Therefore, the Fund has computed future income
based on temporary differences expected to reverse after December 31, 2010 at
the substantively enacted tax rates and laws expected to apply for such periods.
Current Canadian income taxes will be accrued for only after December 31, 2010
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 its
taxable income determined under U.S. income tax rules and regulations.
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
expected to apply when the asset is realized or the liability settled. A
valuation allowance is recorded against a future income tax asset if it is
determined that it is more likely than not that the future tax assets will not
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.
(II) ADOPTION OF NEW ACCOUNTING STANDARDS
In June 2009, the CICA amended Section 3862, Financial Instruments - Disclosures
to include additional disclosure relating to the measurement of fair value for
financial instruments and liquidity risk. The amendment establishes a three
level hierarchy that reflects the significance of the inputs used in fair value
measurements on financial instruments. The amendment is effective for annual
financial statements relating to fiscal years ending after September 30, 2009,
therefore the Fund has included these additional disclosures (see Note 13) for
year end March 31, 2010. As this standard only addresses disclosure
requirements, there is no impact on the financial position of the Fund.
On April 1, 2009, the Fund adopted a new accounting standard that was issued by
the 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 consolidated
financial statements.
(III) 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.
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 developed a changeover plan which includes a diagnostic
assessment, solution development and implementation phase. The Fund has
completed the initial assessment and solution development phases. This included
certain training initiatives, researching and documenting the significant
differences between Canadian GAAP and IFRS, assessing the impact on the Fund and
a preliminary assessment of the information technology systems.
Significant differences exist which may impact the Fund's financial reporting.
Those areas include, but are not limited to, property, plant and equipment,
impairment of assets, accounting for income taxes, financial instruments,
employee benefits as well as the first time adoption of IFRS ("IFRS 1").
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. Although the impact of the adoption of IFRS on the
Fund's financial position and results of operations is not yet reasonably
determinable or estimable, the Fund does expect a significant increase in
financial statement disclosure requirements resulting from the adoption of IFRS.
Just Energy is currently on target with its conversion plan. For additional
information, please refer to the 2010 Management's Discussion and Analysis.
4. RESTRICTED CASH
Restricted cash and customer rebates payable represent; (i) funds held as
security for payment of certain monthly charges, (ii) rebate monies received
from local distribution companies in Ontario as provided by the Independent
Electricity System Operator ("IESO"), and (iii) funds held as security for a TGF
credit facility.
(1) Certain subsidiaries are required to post collateral to counterparties
including pipelines, wire owners and local distribution companies to
secure payment of future expected charges. Commerce has provided cash
collateral with one supplier, and this security was in place prior to
the acquisition of Universal Energy Group Ltd ("UEG") by Just Energy.
(ii) JE Ontario is obligated to disperse the monies to eligible end-use
customers in accordance with the Ontario Power Generation Rebate as
part of Just Energy Ontario L.P.'s Retailer License conditions.
(iii) UEG provided cash collateral as security for a $10,000 term facility
provided to TGF. This facility and liquid security was in place prior
to the acquisition of UEG by Just Energy.
5. ACQUISITIONS
(a) Acquisition of Universal Energy Group Ltd.
On July 1, 2009, Just Energy completed the acquisition of all of the outstanding
common shares of Universal Energy Group Ltd. ("UEG") pursuant to a plan of
arrangement (the "Arrangement"). Under the Arrangement, UEG shareholders
received 0.58 of an exchangeable share ("Exchangeable Share") of JEEC, a
subsidiary of Just Energy, for each UEG common share held. In aggregate,
21,271,804 Exchangeable Shares were issued pursuant to the Arrangement. Each
Exchangeable Share is exchangeable for a Trust Unit on a one-for-one basis at
any time at the option of the holder and entitles the holder to a monthly
dividend equal to 66 2/3% of the monthly distribution paid by Just Energy on a
Trust Unit. JEEC also assumed all the covenants and obligations of UEG in
respect of the UEG's outstanding 6% convertible unsecured subordinated
debentures (the "Debentures"). On conversion of the Debentures, holders will be
entitled to receive 0.58 of an Exchangeable Share in lieu of each UEG common
share that the holder was previously entitled to receive on conversion.
The acquisition of UEG was accounted for using the purchase method of
accounting. The Fund allocated the purchase price to the identified assets and
liabilities acquired based on their fair values at the time of acquisition as
follows:
CAD$
Net assets acquired:
Working capital (including cash of $10,319) $ 74,314
Electricity contracts and customer relationships 229,586
Gas contracts and customer relationships 243,346
Water heater contracts and customer relationships 22,700
Other intangible assets 2,721
Goodwill 66,794
Property, plant and equipment 171,693
Future tax liabilities (50,475)
Other liabilities - current (164,148)
Other liabilities - long-term (140,857)
Long-term debt (183,079)
Non-controlling interest (22,697)
------------
$ 249,898
------------
------------
Consideration:
Transaction costs $ 9,952
Exchangeable shares 239,946
------------
$ 249,898
------------
------------
Non-controlling interest represents 33.3% ownership of TGF held by Ellis Don
Corporation.
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 6 months. The purchase price allocation
is considered preliminary and as a result it may be adjusted prior to July 1,
2010.
(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 the number of 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:
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. PROPERTY PLANT AND EQUIPMENT
Accumulated Net Book
2010 Cost Amortization Value
---------------------------------------------------------------------
Furniture and fixtures $ 5,581 $ 2,972 $ 2,609
Office equipment 14,810 5,930 8,880
Computer equipment 6,417 3,763 2,654
Computer software 5,562 4,198 1,364
Commodity billing and settlement
system 6,544 6,515 29
Water heaters 51,059 2,481 48,578
Furnaces and air conditioners 317 4 313
Leasehold improvements 8,409 4,116 4,293
Vehicle 197 46 151
Ethanol plant and equipment 159,500 10,054 149,446
Land 299 - 299
---------------------------------------------------------------------
$ 258,695 $ 40,079 $ 218,616
---------------------------------------------------------------------
---------------------------------------------------------------------
Accumulated Net Book
2009 Cost Amortization Value
---------------------------------------------------------------------
Furniture and fixtures $ 3,770 $ 1,889 $ 1,881
Office equipment 11,119 3,959 7,160
Computer equipment 5,387 2,543 2,844
Computer software 2,565 1,750 815
Commodity billing and settlement
system 6,993 6,654 339
Water heaters 2,324 77 2,247
Leasehold improvements 7,603 2,918 4,685
---------------------------------------------------------------------
$ 39,761 $ 19,790 $ 19,971
---------------------------------------------------------------------
---------------------------------------------------------------------
7. INTANGIBLE ASSETS
Accumulated Net Book
2010 Cost Amortization Value
---------------------------------------------------------------- --------
Gas contracts and customer
relationships $ 228,827 $ 63,484 $ 165,343
Electricity contracts and customer
relationships 245,617 92,779 152,838
Water heater contracts and customer
relationships 23,081 1,218 21,863
Other intangible assets 8,725 2,553 6,172
-------------------------------------------------------------------------
$ 506,250 $ 160,034 $ 346,216
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Accumulated Net Book
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
-------------------------------------------------------------------------
-------------------------------------------------------------------------
8. LONG TERM DEBT AND FINANCING
2010 2009
Credit facility (a) $ 57,500 $ 76,500
TGF Credit facility (b)(i) 41,313 -
TGF Debentures (b)(ii) 37,001 -
TGF Operating facilities (b)(iii) 10,000 -
JEEC Convertible debentures (c) 83,417 -
NEC HTC financing (d) 65,435 -
-------------------------------------------------------------------------
294,666 76,500
Less: current portion (62,829) -
-------------------------------------------------------------------------
$ 231,837 $ 76,500
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Future annual minimum principal repayments are as follows:
2011 2012 2013 2014 2015 Total
Credit Facility (a) $ - $57,500 $ - $ - $ - $57,500
TGF Credit Facility
(b)(i) 41,313 - - - - 41,313
TGF Debentures (b)(ii) - 3,998 33,003 - - 37,001
TGF Operating Facilities
(b)(iii) 10,000 - - - - 10,000
JEEC Convertible
debentures (c) - - - 83,417 - 83,417
NEC HTC financing (d) 11,516 12,470 13,504 14,623 13,322 65,435
-------------------------------------------------------------------------
$62,829 $73,968 $46,507 $98,040 $13,322 $294,666
-------------------------------------------------------------------------
The following table details the interest expense. Interest
is expensed at the effective interest rate.
2010 2009
Credit facility (a) $ 5,258 $ 3,857
TGF Credit facility (b)(i) 1,365 -
TGF Debentures (b)(ii) 3,049 -
TGF wheat production financing 10 -
TGF Operating facilities (b)(iii) 683 -
JEEC Convertible debentures (c) 4,952 -
NEC HTC financing (d) 817 -
-------------------------------------------------------------------------
$ 16,134 $ 3,857
-------------------------------------------------------------------------
-------------------------------------------------------------------------
(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 March 31, 2010, the
Canadian prime rate was 2.25% and the U.S. prime rate was 3.25%. As at March 31,
2010, Just Energy had drawn $57,500 (2009 - $76,500) against the facility and
total letters of credit outstanding amounted to $49,444 (2009 - $8,459). Just
Energy has $143,056 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 March 31, 2010
and 2009, 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 is currently comprised 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 and was arranged to finance the construction
of the ethanol plant in 2007. The facility was 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 scheduled to commence 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. As a result, the facility is fully
classified as a current obligation. 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. The
lenders have deferred compliance with the financial covenants until April 1,
2011. The facility was further revised on March 31, 2010 to postpone the
principal payments due for April 1 to June 1, 2010 and to amortize them over the
six month period commencing October 1, 2010 and ending March 1, 2011. As at
March 31, 2010 the amount owing under this facility amounted to $41,313.
(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 shareholder's equity. The lender has deferred
compliance with the financial covenants until April 1, 2011. On March 31, 2010,
TGF entered into an Agreement with the holders of the debenture to defer
scheduled principal payments owing under the Debenture until April 1, 2011. As a
result, the debentures are fully classified as a long-term obligation. As at
March 31, 2010, the amount owing under this debenture agreement amounted to
$37,001.
(iii) TGF Term/Operating Facilities
TGF 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. As at March 31, 2010, the amount
owing under the facility amounted to $10,000.
(iv) TGF has a working capital operating line of $7,000 bearing interest at rate
of prime plus 1% of which $3,239 was drawn via overdraft. In addition, total
letters of credit issued amounted to $1,600.
(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 year, interest expense amounted to $4,952.
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.
(d) On January 18, 2010, NEC entered into a long term financing agreement for
the funding of new and existing rental water heater contracts. Pursuant to the
agreement, NEC will receive financing equal to the present value of the first
five years of monthly rental income, discounted at the agreed upon financing
rate of 7.99% and as settlement is required to remit all proceeds received from
customers on the water heater contracts for the first five years. As security
for performance of the obligation, NEC has pledged the water heaters subject to
the financed rental agreement as collateral.
The financing agreement is subject to a holdback provision, whereby 3% of the
outstanding balance of the funded amount is deducted and deposited to a reserve
account in the event of default. Once all obligations of NEC are satisfied or
expired, the remaining funds in the reserve account will immediately be released
to National Energy Corporation.
NEC has $65,435 owing under this agreement including $2,014 relating to the
holdback provision as at March 31, 2010. The company is required to meet a
number of covenants under the agreement. As at March 31, 2010, all of these
covenants have been met.
9. INCOME TAXES
The Fund is a mutual fund trust for income tax purposes. Pursuant to its
announcement on February 3, 2010, it plans to reorganize its income trust
structure and convert into a corporation on or before January 1, 2011
("Conversion"). Until Conversion, the Fund is only subject to current income
taxes on any taxable income not distributed to Unitholders. Subsequent to
Conversion on or before January 1, 2011, the Fund will be subject to current
income taxes on all of its taxable income. If the Fund's equity capital grows
beyond certain dollar limits prior to January 1, 2011, the Fund would become a
SIFT and would commence in that year being subject to tax on income distributed.
The Fund expects that its income distributed will not be subject to tax prior to
2011 and intends to distribute all its taxable income earned prior to then.
Accordingly, the Fund has not provided for future income taxes on its temporary
differences and those of its flow-through subsidiary trust and partnerships
expected to reverse prior to 2011 as it is considered tax exempt for accounting
purposes. The tax basis of the assets and liabilities of the Fund related to
such temporary differences expected to reverse before 2011 exceed the financial
statement carrying amounts by approximately $138,410 (2009 - $283,339),
reflecting future tax deductions in excess of future taxable amounts.
The Fund has recognized future income taxes for the temporary differences
between the carrying amount and tax values of assets and liabilities in respect
of the proportion of the Fund's income taxed directly to the Unitholders that
are expected to reverse in or after 2011. A valuation allowance has been
provided against future tax assets of certain subsidiaries where the Fund has
determined that it is more likely than not that those future tax assets will not
be realized in the foreseeable future. The valuation allowance may be reduced in
future periods if the Fund determines that it is more likely than not that all
or a portion of those future tax assets will be realized.
Canadian based corporate subsidiaries are subject to tax on their taxable income
at a rate of 33% (2009 - 33%). U.S. based corporate subsidiaries are subject to
tax on their taxable income at a rate of 40% (2009 - 40%).
At March 31, 2010, the U.S. subsidiaries of Just Energy do not have any
operating losses carryover for tax purposes (2009 - $3,147).
The following table reconciles the difference between the income taxes that
would result solely by applying statutory tax rates to the pre-tax income for
Just Energy and the income tax provision in the financial statements.
2010 2009
Income before income tax $ 127,588 $ (1,164,991)
------------ --------------
------------ --------------
Income tax expense at the combined basic rate of
33% (2009 -33%) 42,104 (384,448)
Taxes on income attributable to Unitholders (42,045) (49,294)
Unrecognized tax benefit on mark to market
losses on derivative instruments - 385,070
Recognized tax benefit on mark to market losses
on derivative instruments - -
Tax impact of corporate re-organization - (3,729)
Benefit of U.S. tax losses and other tax assets
not previously recognized (100,459) (5,199)
Non-deductible expenses 140 140
------------ --------------
Recovery of income tax $ (100,260) $ (57,460)
------------ --------------
------------ --------------
Components of Just Energy's income tax recovery
are as follows: 2010 2009
Income tax provision $ 19,253 $ 3,861
Amount credited to Unitholders' equity 2,501 2,767
------------ --------------
Current income tax provision 21,754 6,628
Future tax recovery (122,014) (64,088)
------------ --------------
Recovery of income tax $ (100,260) $ (57,460)
------------ --------------
------------ --------------
Components of the Fund's net future income tax
asset are as follows: 2010 2009
Partnership income deferred for tax purposes and
book carrying amount of investments in
partnerships in excess of tax cost $ (483) $ (598)
Excess of book basis over tax basis on customer
contracts (84,840) -
Excess of tax basis over book basis for U.S.
operations 28,339 13,037
Mark to market losses on derivative instruments 245,237 140,047
------------ --------------
188,252 152,486
Less: valuation allowance 80,693 152,486
------------ --------------
Future income tax assets (net) $ 107,560 $ -
------------ --------------
------------ --------------
10. ACCUMULATED OTHER COMPREHENSIVE INCOME
Foreign
currency
Translation Cash Flow
Adjustment Hedges Total
2010
Balance, beginning of year $ 1,958 $ 362,608 $ 364,566
Unrealized foreign currency
translation adjustment 26,626 - 26,626
Amortization of deferred unrealized
gain on discontinued hedges after
July 1, 2008, net of income taxes
of $34,339 - (169,223) (169,223)
----------------------------------------
$ 28,584 $ 193,385 $ 221,969
----------------------------------------
----------------------------------------
Foreign
currency
Translation Cash Flow
Adjustment Hedges Total
2009
Balance, beginning of year $ 3,864 $ 36,925 $ 40,789
Unrealized foreign currency
translation adjustment (1,906) - (1,906)
Unrealized gains on
derivative instruments designated
as cash flow hedges prior to July
1, 2008, net of income taxes of
$89,256 - 498,654 498,654
Amortization of deferred unrealized
gain on discontinued hedges after
July 1, 2008, net of income taxes
of $38,805 - (172,971) (172,971)
----------------------------------------
$ 1,958 $ 362,608 $ 364,566
----------------------------------------
----------------------------------------
11. UNITHOLDERS' CAPITAL
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, 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. ("JEC")
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 UEG pursuant to the Arrangement. Under the Arrangement, UEG
shareholders received 0.58 of an exchangeable share of JEEC, 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.
2010 2009
Issued and Outstanding Units/Shares Units/Shares
Trust units
-------------------------
Balance, beginning of
year 106,138,523 $ 385,294 102,152,194 $ 341,337
Options exercised - - 355,000 4,840
Unit based awards
exercised/exchanged 49,078 682 65,036 938
Distribution reinvestment
plan 1,554,074 20,036 1,697,394 18,863
Units issued - - 1,336,115 22,313
Units cancelled - - (909,700) (6,603)
Exchanged from
Exchangeable shares 16,583,632 187,063 - -
Exchanged from Class A
preference shares - - 1,442,484 3,606
---------------------------------------------------
Balance, end of year 124,325,307 593,075 106,138,523 385,294
---------------------------------------------------
Class A preference shares
-------------------------
Balance, beginning of
year 5,263,728 13,160 6,706,212 16,766
Exchanged into units - - (1,442,484) (3,606)
---------------------------------------------------
Balance, end of year 5,263,728 13,160 5,263,728 13,160
---------------------------------------------------
Exchangeable shares
-------------------------
Balance, beginning of
year - - - -
Exchangeable shares
issued 21,271,804 239,946 - -
Exchanged into units (16,583,632) (187,063) - -
---------------------------------------------------
Balance, end of year 4,688,172 52,883 - -
---------------------------------------------------
Unitholders' capital, end
of year 134,277,207 $ 659,118 111,402,251 $ 398,454
---------------------------------------------------
---------------------------------------------------
Distribution reinvestment plan
Under the Fund's distribution reinvestment program ("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 could be purchased during any trading day. No
units were purchased and cancelled during the year.
During the prior fiscal year, the Fund purchased and cancelled 909,700 units for
a cash consideration of $6,603.
Units issued
During the year ended March 31, 2010, the Fund issued 16,583,632 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 year, the Fund issued 1,336,115 units relating to a
portion of the special distribution declared on December 31, 2007, payable in
units.
12. UNIT BASED COMPENSATION PLANS
(a) Unit option plan
The Fund grants awards under its 2001 unit option plan to directors, officers,
full-time employees and service providers (non-employees) of Just Energy. In
accordance with the unit option plan, the Fund may grant options to a maximum of
11,300,000 units. As at March 31, 2010, there were 961,666 options still
available for grant under the plan. Of the options issued, 352,500 options
remain outstanding at year end. The exercise price of the unit options equals
the closing market price of the Fund's units on the last business day preceding
the grant date. The unit options will vest over periods ranging from three to
five years from the grant date and expire after five or ten years from the grant
date.
A summary of the changes in the Fund's option plan during the year and status at
March 31, 2010 is outlined below.
Weighted
Range of average
Outstanding exercise exercise
options prices price(1)
Balance, beginning of year 555,500 $11.25-$18.70 $15.88
Granted - - -
Forfeited/cancelled 203,000 $12.69-$18.70 $15.82
Exercised - - -
--------------------------------------
$15.09 -
Balance, end of year 352,500 $17.47 $15.92
--------------------------------------
--------------------------------------
(1) The weighted average exercise price is calculated by dividing the
exercise price of options granted by the number of options granted.
2010 Options Outstanding Options Exercisable
----------------------------------------------------------------------------
Weighted
Average Weighted Weighted
Remaining Average Average
Range of Number Contractual Exercise Number Exercise
Exercise Prices Outstanding Life Price Exercisable Price
$15.09 - $15.63 267,500 0.49 $15.53 200,000 $15.63
$16.65 - $17.47 85,000 1.20 17.13 51,000 17.13
----------- -----------
Balance, end of year 352,500 0.66 $15.92 251,000 $15.94
----------- -----------
----------- -----------
2009 Options Outstanding Options Exercisable
----------------------------------------------------------------------------
Weighted
Average Weighted Weighted
Remaining Average Average
Range of Number Contractual Exercise Number Exercise
Exercise Prices Outstanding Life Price Exercisable Price
$12.69 - $15.63 330,500 1.95 $15.05 158,700 $15.55
$15.90 - $18.70 225,000 1.76 $17.10 154,000 $17.08
----------- -----------
Balance, end of year 555,500 1.88 $15.88 312,700 $16.30
----------- -----------
----------- -----------
Options available for grant 2010 2009
Balance, beginning of year 758,666 698,666
Add: canceled/forfeited during the year 203,000 110,000
Less: granted during the year - (50,000)
--------------------
Balance, end of year 961,666 758,666
--------------------
--------------------
The Fund uses a binomial option pricing model to estimate the fair values. The
binomial model was chosen because of the yield associated with the units. Fair
values of employee unit options are estimated at grant date. Fair values of
non-employee unit options are estimated and revalued each reporting period until
a measurement date is achieved. The following weighted average assumptions have
been used in the valuation for fiscal 2010:
Risk free rate 3.13%
Expected volatility 27.31%
Expected life 5 years
Expected distributions $1.24 per year
(b) Unit appreciation rights
The Fund grants awards under its 2004 unit appreciation rights ("UARs") plan to
senior officers, employees and service providers of its subsidiaries and
affiliates in the form of fully paid UARs. On June 25, 2009, the Unitholders of
the Fund approved a 1,000,000 increase in the number of UARs available for
grant. After this increase, in accordance with the unit appreciation rights
plan, the Fund may grant UARs to a maximum of 3,000,000. As at March 31, 2010,
there were 74,472 (2009 - 374,668) UARs still available for grant under the
plan. Of the UARs issued, 2,640,723 UARs remain outstanding at March 31, 2010.
Except as otherwise provided, (i) the UARs vest from one to five years from the
grant date providing, in most cases, on the applicable vesting date the UAR
grantee continues as a senior officer, employee or service provider of the Fund
or any affiliate thereof; (ii) the UARs expire no later than ten years from the
grant date; (iii) a holder of UARs is entitled to distributions as if a UAR were
a unit; and (iv) when vested, the holder of a UAR may exchange one UAR for one
unit.
UARs Available for Grant 2010 2009
------- ---------
Balance, beginning of year 374,668 804,170
Less: granted during the year (1,307,192) (455,215)
Add: increase in UARs available for grant 1,000,000 -
Add: cancelled/forfeited during the year 6,996 25,713
------- ---------
Balance, end of year 74,472 374,668
------- ---------
------- ---------
(c) Deferred unit grants
The Fund grants awards under its 2004 Directors' deferred compensation plan to
all independent directors on the basis each director is required to receive
annually $15 of his compensation entitlement in deferred unit grants ("DUGs")
and may elect to receive all or any portion of the balance of his annual
compensation in DUGs. The holders of DUGs are also granted additional DUGs on a
monthly basis equal to the monthly distribution paid to Unitholders of the Fund.
On June 25, 2009, the Unitholders of the Fund approved a 100,000 increase in the
number of DUGs available for grant. After the increase in accordance with the
deferred compensation plan, the Fund may grant DUGs to a maximum of 200,000. The
DUGs vest on the earlier of the date of the Director's resignation or three
years following the date of grant and expire ten years following the date of
grant. As of March 31, 2010, there were 108,248 (2009 - 31,568) DUGs available
for grant under the plan. Of the DUGs issued, 84,138 DUGs remain outstanding at
March 31, 2010.
DUGs Available for Grant 2010 2009
--------- --------
Balance, beginning of year 31,568 56,537
Add: increase in DUGS available for grant 100,000 -
Less: granted during the year (23,320) (24,969)
--------- --------
Balance, end of year 108,248 31,568
--------- --------
--------- --------
(d) Contributed surplus
Amounts credited to contributed surplus include unit based compensation awards,
UARs and DUGs. Amounts charged to contributed surplus are awards exercised
during the year.
Contributed Surplus 2010 2009
--------- --------
Balance, beginning of year $ 14,671 $ 12,004
Add: unit based compensation awards 4,754 4,098
non-cash deferred unit grants distributions 89 55
Less: unit based awards exercised (682) (1,486)
--------- --------
--------- --------
Balance, end of year $ 18,832 $ 14,671
--------- --------
--------- --------
Total amounts credited to Unitholders' capital in respect of unit options and
deferred unit grants exercised or exchanged during the year ended March 31, 2010
amounted to $682 (2009 - $5,778).
Cash received from options exercised for the year ended March 31, 2010 amounted
to $nil (2009 - $4,293).
13. FINANCIAL INSTRUMENTS
(a) Fair value
The Fund has a variety of gas and electricity supply contracts that are captured
under 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, unforced capacity, heat rates, heat rate options,
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 year ended March 31, 2010:
Change In Fair Value of Derivative
Instruments
For the For the
year year
For the ended For the ended
year March year March
ended 31, ended 31,
March 31, 2010 March 2009
2010 (USD) 31, 2009 (USD)
Canada
Fixed-for-floating electricity
swaps (i) $ 5,041 n/a $ 223,191 n/a
Renewable energy certificates (ii) (480) n/a 527 n/a
Verified emission-reduction credits
(iii) (9) n/a - n/a
Options (iv) (1,593) n/a (4,847) n/a
Physical gas forward contracts (v) 70,568 n/a 771,300 n/a
Transportation forward contracts
(vi) 21,353 n/a (5,059) n/a
United States
Fixed-for-floating electricity
swaps (vii) 11,295 11,761 96,031 84,666
Physical electricity forwards
(viii) 2,332 4,737 130,911 116,116
Unforced capacity forward contracts
(ix) (423) (274) 5,249 4,730
Unforced capacity physical
contracts (x) 563 544 - -
Renewable energy certificates (xi) 1,856 1,744 (104) (68)
Verified emission-reduction credits
(xii) 644 604 8 -
Options (xiii) 1,082 879 790 1,068
Physical gas forward contracts
(xiv) (30,742) (25,350) 336,831 299,516
Transportation forward contracts
(xv) 1,303 1,287 (6,252) (4,992)
Heat rate swaps (xvi) (4,264) (3,965) (251) (228)
Fixed financial swaps (xvii) 34,201 33,370 (242) (191)
Foreign exchange forward contracts
(xviii) 3,322 n/a 978 n/a
Other
Amortization of deferred unrealized
gains of discontinued hedges (203,562) n/a (211,776) n/a
Amortization of derivative financial
instruments related to Universal
acquisition $ 88,795 n/a - n/a
---------------------------------------------------------------------------
Change In Fair Value of Derivative
Instruments $ 1,282 $1,337,285
---------------------------------------------------------------------------
---------------------------------------------------------------------------
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 For the
year year
For the ended For the ended
year March year March
ended 31, ended 31,
March 31, 2010 March 2009
2010 (USD) 31, 2009 (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 $ 1,282 $1,336,976
---------------------------------------------------------------------------
---------------------------------------------------------------------------
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
year
For the year ended
ended March March 31,
31, 2009 2009 (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 March 31, 2010:
Other Other Other
assets Other assets liabilities liabilities
(current) (long term) (current) (long term)
Canada
Fixed-for-
floating
electricity
swaps (i) $ - $ - $ 244,563 $ 212,920
Renewable energy
certificates
(ii) 350 621 30 139
Verified
emission-
reduction
credits (iii) 2 7 - -
Options (iv) 757 416 - -
Physical gas
forward
contracts (v) - - 237,145 203,088
Transportation
forward
contracts (vi) - - 11,060 8,439
United States
Fixed-for-
floating
electricity
swaps (vii) - - 31,291 30,464
Physical
electricity
forwards (viii) - - 38,015 39,035
Unforced
capacity
forward
contracts (ix) 523 102 445 9
Unforced
capacity
physical
contracts (x) 33 146 731 -
Renewable energy
certificates
(xi) 107 130 918 945
Verified
emission-
reduction
credits (xii) - - 167 447
Options (xiii) - - 912 915
Physical gas
forward
contracts (xiv) - - 96,938 75,142
Transportation
forward
contracts (xv) - - 1,265 2,262
Heat rate swaps
(xvi) 654 3,605 - -
Fixed financial
swaps (xvii) - - 21,720 16,767
Foreign exchange
forward
contracts
(xviii) 277 - - -
----------------------------------------------------------------------------
As at March 31,
2010 $ 2,703 $ 5,027 $ 685,200 $ 590,572
----------------------------------------------------------------------------
----------------------------------------------------------------------------
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 March 31, 2010 to which is fund has committed
Total
Notional Remaining
Contract Type Volume Volume
Canada
----------------------------------------------------------------------------
(i) Fixed-for-floating 0.0001-50 MWh 12,873,605 MWh
electricity swaps (i)
----------------------------------------------------------------------------
(ii) Renewable energy 10-90,000 MWh 1,210,017 MWh
certificates
----------------------------------------------------------------------------
(iii) Verified emission 2,000-55,000 Tonnes 505,000 Tonnes
reduction credits
----------------------------------------------------------------------------
(iv) Options 46-40,500 GJ/month 5,590,040 GJ
----------------------------------------------------------------------------
(v) Physical gas forward 5-16,862 GJ/day 145,443,234 GJ
contracts
----------------------------------------------------------------------------
(vi) Transportation forward 11-465,000 GJ/day 69,017,645 GJ
contracts
----------------------------------------------------------------------------
United States
----------------------------------------------------------------------------
(vii) Fixed-for-floating 0.10-28 MW/h 2,271,140 MWh
electricity swaps (i)
----------------------------------------------------------------------------
(viii) Physical electricity 1-33 MW/h 4,813,387 MWh
forwards
----------------------------------------------------------------------------
(ix) Unforced capacity 5-35 MWCap 1,275 MWCap
forward contracts
----------------------------------------------------------------------------
(x) Unforced capacity 10-60 MWCap 2,065 MWCap
physical contracts
----------------------------------------------------------------------------
(xi) Renewable energy 2,200-110,000 MWh 2,030,265 MWh
certificates
----------------------------------------------------------------------------
(xii) Verified emission 10,000-50,000 Tonnes 615,000 Tonnes
reduction credits
----------------------------------------------------------------------------
(xiii) Options 5-120,000 mmBTU/month 6,236,595 mmBTU
----------------------------------------------------------------------------
(xiv) Physical gas forward 5-22,970 mmBTU/day 53,078,540 mmBTU
contracts
----------------------------------------------------------------------------
(xv) Transportation forward 35-9,300 mmBTU/day 41,137,356 mmBTU
contracts
----------------------------------------------------------------------------
(xvi) Heat rate swaps 1-30 MWh 2,991,002 MWh
----------------------------------------------------------------------------
(xvii) Fixed financial swap 100-7,700 mmBTU/day 36,033,542 mmBTU
----------------------------------------------------------------------------
(xviii) Foreign exchange $1,981-$2,258 (US N/A
forward contracts (ii) $2,000)
----------------------------------------------------------------------------
Fair Value
Favourable/ Notional
Maturity Date Fixed Price (Unfavourable) Value
Canada
----------------------------------------------------------------------------
(i) April 30, 2010 - $23.00-$128.13 ($457,483) $933,845
March 01, 2016
----------------------------------------------------------------------------
(ii) December 31, 2010 $3.00-$26.00 $802 $7,604
- December 31,
2014
----------------------------------------------------------------------------
(iii) December 31, 2010 $9.34-$11.50 $9 $5,236
- December 31,
2014
----------------------------------------------------------------------------
(iv) April 30, 2010 - $6.35-$12.40 $1,173 $10,234
February 28, 2014
----------------------------------------------------------------------------
(v) April 30, 2010 - $3.31-$10.00 ($440,233) $1,133,277
June 30, 2015
----------------------------------------------------------------------------
(vi) April 30, 2010 - $0.01-$1.57 ($19,499) $52,657
May 31, 2015
----------------------------------------------------------------------------
United States
----------------------------------------------------------------------------
(vii) April 30, 2010 - $37.83-$138.91 ($61,755) $184,587
March 31, 2015 (US$37.25- (US($60,794)) (US$181,716)
$136.75)
---------------------------------------------------------------------------
(viii) April 30, 2010 - $30.98-$111.99 ($77,050) $299,561
January 31, 2015 (US$30.50- (US($75,852)) (US$294,902)
$110.25)
----------------------------------------------------------------------------
(ix) April 30, 2010 - $3,047-$8,126 $171 (US$168) $6,806
November 30, 2012 (US$3,000- (US$6,700)
$8,000)
----------------------------------------------------------------------------
(x) April 30, 2010 - $ 1,016-$3,017 ($552) ((US$543)) $6,028
May 31, 2014 (US$1,000- (US$5,934)
$2,970)
----------------------------------------------------------------------------
(xi) December 31, 2010 $1.63-$22.86 ($1,626) $14,147
- December 31, (US$1.60- (US($1,601)) (US$13,927)
2014 $22.50)
----------------------------------------------------------------------------
(xii) December 31, 2010 $6.45-$8.89 ($614) (US$(604)) $4,770
- December 31, (US$6.35- (US$4,696)
2014 $8.75)
----------------------------------------------------------------------------
(xiii) April 30, 2010 - $6.50-$14.02 ($1,827) $9,774
December 31, 2014 (US$6.40- (US($1,799)) (US$9,622)
$13.80)
----------------------------------------------------------------------------
(xiv) April 1, 2010 - $3.76-$12.07 ($172,080) $458,177
July 31, 2014 (US$3.70- (US($169,403)) (US$451,050)
$11.88)
----------------------------------------------------------------------------
(xv) April 1, 2010 - $0.01-$0.61 ($3,527) ($33,738)
March 31, 2015 (US$0.01- (US($3,472)) (US$33,213)
$0.60)
----------------------------------------------------------------------------
(xvi) April 30, 2010 - $26.98-$70.99 $4,259 (US$4,193) $133,444
February 28, 2015 (US$26.56- (US$131,368)
$69.89)
----------------------------------------------------------------------------
(xvii) April 30, 2010 - $4.00-$7.83 ($38,487) $238,550
March 31, 2015 (US$3.94- (US($37,888)) (US$234,840)
$7.71)
----------------------------------------------------------------------------
(xviii) April 7, 2010 - $0.9905- $277 $4,063
April 7, 2010 $1.1289 (US$4,000)
----------------------------------------------------------------------------
(i) The electricity fixed-for-floating contracts related to the Province of
Alberta are predominantly load-following and 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 the
rest of Just Energy's electricity markets 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 AOCI and is being recognized in the
Statement of Operations over the remaining term of each hedging relationship.
The term expires in April 2010.
The following table summarizes the nature of financial assets and liabilities
recorded in the financial statements for the year ended March 31, 2010.
March 31, 2010 March 31, 2009
Loss on cash Loss on cash
flow hedges flow hedges
transferred transferred
from Other Unrealized from Other Unrealized gain
Comprehensive gain recorded Comprehensive recorded in
Income to the in 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 (203,562) - (211,776) -
----------------------------------------------------------------------------
Total realized
and unrealized
gains/(losses) $ (203,562) $ - $ (437,461) $ 813,596
----------------------------------------------------------------------------
----------------------------------------------------------------------------
The estimated amortization of deferred gains and losses reported in AOCI that is
expected to be amortized to net income within the next 12 months is a gain of
$120,204.
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, Pennsylvania, Maryland, California 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 these markets.
Fair Value Hierarchy
Level 1
The fair value measurements are classified as Level 1 in the FV Hierarchy if the
fair value is determined using quoted, unadjusted market prices. Just Energy
values its cash, restricted cash, accounts receivable, bank indebtedness,
accounts payable and accrued liabilities, unit distributions payable, long-term
debt, and NYMEX financial gas fixed for floating swaps under Level 1.
Level 2
Fair value measurements which require inputs other than quoted prices in Level
1, either directly or indirectly are classified as Level 2 in the FV hierarchy.
This could include the use of statistical techniques to derive the FV curve from
observable market prices. However, in order to be classified under Level 2,
inputs must be substantially observable in the market. Just Energy does not
classify any of the financial instruments under Level 2.
Level 3
Fair value measurements which require unobservable market data or use
statistical techniques to derive forward curves from observable market data and
unobservable inputs are classified as Level 3 in the FV hierarchy. For the
electricity supply contracts, Just Energy uses quoted market prices as per
available market forward data and applies a price shaping profile to calculate
the monthly prices from annual strips and hourly prices from block strips for
the purposes of MTM calculations. The profile is based on historical settlements
with counterparties or with the system operator and is considered an
unobservable input. For the natural gas supply contracts, Just Energy uses three
different market observable curves: 1) Commodity (predominately NYMEX), 2) Basis
and 3) Foreign Exchange. NYMEX curves extend for over 5 years (thereby covering
the length of Just Energy's contracts); however, most basis curves only extend
12-15 months into the future. In order to calculate basis curves for remaining
years, Just Energy uses extrapolation which leads to natural gas supply
contracts to be classified under Level 3.
Note on fair value measurement and input sensitivity
The main cause of changes in fair value of derivative instruments is the forward
curve prices used for the fair value calculations. Just Energy provides a
sensitivity analysis of these forward curves under the commodity price risk
section of this note. Other inputs, including volatility and correlations, are
driven off of historical settlements.
The following table illustrates the classification of financial
assets/(liabilities) in the fair value hierarchy as at March 31, 2010:
March 31, 2010
Level 1 Level 2 Level 3 Total
Financial assets
Trading assets $ 78,782 $ - $ - $ 72,782
Loans and receivable $ 348,892 $ - $ - $ 348,892
Derivative financial
assets $ - $ - $ 7,730 $ 7,730
Financial liabilities
Derivative financial
liabilities $ (38,487) $ - $ (1,237,285) $ (1,275,772)
Other financial
liabilities $ (543,034) $ - $ - $ (543,034)
----------------------------------------------------------------------------
Total net derivative
assets/(liabilities) $ (153,847) $ - $ (1,229,555) $ (1,383,402)
----------------------------------------------------------------------------
----------------------------------------------------------------------------
The following table illustrates the changes in net fair value of financial
assets/(liabilities) classified as Level 3 in the fair value hierarchy for the
year ended March 31, 2010:
March 31,
2010
Opening Balance, April 01, 2009 $ (908,100)
Total gain/(losses) - Net Income $ (433,577)
Purchases $ (402,608)
Issues $ 2,653
Settlements $ 512,077
Transfer out of Level 3 $ -
----------------------------------------------------------------------------
Closing Balance, March 31, 2010 $ (1,229,555)
----------------------------------------------------------------------------
----------------------------------------------------------------------------
(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:
Carrying
As at March 31, 2010 amount Fair value
Cash and cash equivalents and restricted cash $ 78,782 $ 78,782
Accounts receivable $ 348,892 $ 348,892
Other assets $ 7,730 $ 7,730
Bank indebtedness, accounts payable and accrued
liabilities and unit distribution payable $ 248,368 $ 248,368
Long-term debt $ 294,666 $ 302,689
Other liabilities $ 1,275,772 $ 1,275,772
For the years ended March 31
2010 2009
Interest expense on financial liabilities not
held for trading $ 16,134 $ 3,857
The carrying value of cash, restricted cash, accounts receivable, accounts
payable and accrued liabilities 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'
Acceptance, LIBOR, Canadian bank prime rate or U.S. prime rate with the
exception for the JEEC convertible debenture which is fair valued based on
market.
(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 transactions, which could adversely affect
operating results.
With respect to translation exposure, as at March 31, 2010, 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 year ended March
31, 2010 would have been $662 lower/higher and other comprehensive income would
have been $8,146 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 year ended March 31, 2010 of
approximately $421.
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.
Commodity price sensitivity - all derivative financial instruments
As at March 31, 2010, if the energy prices including natural gas, electricity,
green natural gas credits, and green electricity certificates, had risen
(fallen) by 10%, assuming that all the other variables had remained constant,
income before taxes for the year ended March 31, 2010 would have increased
(decreased) by $188,537 ($187,592) primarily as a result of the change in the
fair value of the Fund's derivative instruments.
Commodity price sensitivity - Level 3 derivative financial instruments
As at March 31, 2010, if the energy prices including natural gas, electricity,
green natural gas credits and green electricity certificates had risen (fallen)
by 10% assuming that all the other variables had remained constant, income
before taxes for the year ended March 31, 2010 would have increased (decreased)
by $170,287 ($169,495) 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 March 31, 2010, accounts receivables from the above markets with a
carrying value of $20,239 (March 31, 2009 - $17,022) were past due but not
impaired. As at March 31, 2010, the aging of the accounts receivables from the
above markets was as follows:
Current $ 44,531
1 - 30 days 13,873
31 - 60 days 4,598
61 - 90 days 1,768
Over 90 days 3,973
-------------------------------------------------
$ 68,743
-------------------------------------------------
For the year ended March 31, 2010, changes in the allowance for doubtful
accounts were as follows:
Balance, beginning of year $ 8,657
Provision for doubtful accounts 17,939
Bad debts written off (14,880)
Others (1,866)
----------------------------------------------------
Balance, end of year $ 9,850
----------------------------------------------------
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 March 31, 2010, the maximum counterparty credit risk exposure amounted to
$76,473, representing the risk relating to its derivative financial assets 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.
The following are the contractual maturities, excluding interest payments,
reflecting undiscounted disbursements of the Fund's financial liabilities at
March 31, 2010:
Contractual Less than 1
Carrying amount cash flows year
Accounts payable and accrued
liabilities and unit
distribution payable $ 240,132 $ 240,132 $ 240,132
Bank indebtedness 8,236 8,236 8,236
Long-term debt 294,666 301,249 62,829
Derivative instruments:
Cash outflow 1,275,772 3,533,371 1,494,003
----------------------------------------------------------------------------
$ 1,818,806 $ 4,082,988 $ 1,805,200
----------------------------------------------------------------------------
----------------------------------------------------------------------------
More than 5
1 to 3 years 4 to 5 years years
Accounts payable and accrued
liabilities and unit
distribution payable $ - $ - $ -
Bank indebtedness - - -
Long-term debt 120,475 117,945 -
Derivative instruments:
Cash outflow 1,621,623 415,680 2,065
----------------------------------------------------------------------------
$ 1,742,098 $ 533,625 $ 2,065
----------------------------------------------------------------------------
----------------------------------------------------------------------------
In addition to the amounts noted above, at March 31, 2010, net interest payments
over the life of the long-term debt and bank credit facility are:
Less than 1 More than 5
year 1 to 3 years 4 to 5 years years
----------------------------------------------------------------------------
Interest payments $ 16,040 $ 24,466 $ 12,260 $ 1,546
----------------------------------------------------------------------------
----------------------------------------------------------------------------
(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 $672 to
accommodate for its counterparties' risk of default.
14. CAPITAL DISCLOSURE
Just Energy defines capital as Unitholders' equity (excluding accumulated other
comprehensive income) and long-term debt. The Fund's objectives when managing
capital are to maintain flexibility between:
a) enabling it to operate efficiently;
b) providing liquidity and access to capital for growth opportunities; and
c) providing returns and generating predictable cash flow for distribution to
Unitholders
The Fund manages the capital structure and makes adjustments to it in light of
changes in economic conditions and the risk characteristics of the underlying
assets. The Board of Directors does not establish quantitative return on capital
criteria for management; but rather promotes year over year sustainable
profitable growth. The Fund's capital management objectives have remained
unchanged from the prior year. The Fund is not subject to any externally imposed
capital requirements other than financial covenants in its credit facilities and
as at March 31, 2010 and 2009, all of these covenants have been met.
15. INCOME (LOSS) PER UNIT
2010 2009
Basic income (loss) per unit
----------------------------
Net income (loss) available to Unitholders $ 231,496 $ (1,107,473)
--------------- ---------------
Weighted average number of units outstanding 117,674,000 104,841,000
Weighted average number of Class A preference
shares 5,264,000 5,623,000
Weighted average number of Exchangeable
shares 5,028,000 -
--------------- ---------------
Basic units and shares outstanding 127,966,000 110,464,000
--------------- ---------------
Basic income (loss) per unit $ 1.81 $ (10.03)
--------------- ---------------
--------------- ---------------
Diluted income (loss) per unit(1)
Net income (loss) available to Unitholders $ 231,496 $ (1,107,473)
--------------- ---------------
Basic units and shares outstanding 127,966,000 110,464,000
Dilutive effect of:
Unit options - -
Unit appreciation rights 1,392,000 -
Deferred unit grants 71,000 -
Convertible debentures - -
--------------- ---------------
Units outstanding on a diluted basis 129,429,000 110,464,000
--------------- ---------------
Diluted income (loss) per unit $ 1.79 $ (10.03)
--------------- ---------------
--------------- ---------------
(1) Conversion of convertible debentures is anti-dilutive to income per unit
for the year ended March 31, 2010. Conversion of unit options, unit
appreciation rights and deferred unit grants are anti-diluted to income
(loss) for the year ended March 31, 2009.
16. 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. The gas and electricity business segment
have operations in both Canada and United States.
Just Energy evaluates segment performance based on geographic segments and
operating segments.
The following tables present Just Energy's results by geographic segments and
operating segments:
2010
Gas and electricity Home
marketing Ethanol Services
--------------------- ------- --------
United
Canada States Canada Canada Consolidated
Sales gas $ 788,661 $ 425,975 $ - $ - $ 1,214,636
Sales electricity 637,580 381,674 - - 1,019,254
Ethanol - - 56,455 - 56,455
Home Service - - - 8,886 8,886
----------------------------------------------------------------------------
Sales $ 1,426,241 $ 807,649 $ 56,455 $ 8,886 $ 2,299,231
----------------------------------------------------------------------------
Gross margin $ 231,147 $ 172,627 $ 4,510 $ 7,049 $ 415,333
Amortization of
property, plant
and equipment (5,768) (262) (1,079) (788) (7,897)
Amortization of
intangible
assets (34,959) (22,402) - (1,187) (58,548)
Other operating
expenses (68,156) (121,394) (9,089) (8,760) (207,399)
----------------------------------------------------------------------------
Income before the
undernoted 122,264 28,569 (5,658) (3,686) 141,489
Interest expense 9,079 1,130 5,107 818 16,134
Change in fair
value of
derivative
instruments 37,058 (35,776) - - 1,282
Other income (3,122) (82) (311) - (3,515)
Non-controlling
interest - - (3,593) (55) (3,648)
Provision for
income tax (123,112) 24,415 - (1,562) (100,259)
----------------------------------------------------------------------------
Net income $ 202,362 $ 38,882 $ (6,861) $ (2,887) $ 231,496
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Additions to
capital assets $ 11,267 $ 797 $ 4,599 $ 24,544 $ 41,207
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Total goodwill $ 138,905 $ 31,053 $ - $ 7,929 $ 177,887
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Total assets $ 727,395 $ 373,180 $161,028 $ 91,492 $ 1,353,095
----------------------------------------------------------------------------
Gas and electricity
2009 marketing
-------------------
United
Canada States Consolidated
-------------------------------------------
Sales gas $ 814,275 $ 343,889 $ 1,158,164
Sales electricity 518,388 222,661 741,049
----------------------------------------------------------------------------
Sales $ 1,332,663 $ 566,550 $ 1,899,213
----------------------------------------------------------------------------
Gross margin $ 231,720 $ 91,096 $ 322,816
Amortization of gas contracts 710 - 710
Amortization of electricity
contracts 178 2,706 2,884
Amortization of capital assets 4,660 440 5,100
Other operating expenses 89,889 55,995 145,884
----------------------------------------------------------------------------
Income before the undernoted 136,283 31,955 168,238
Interest expense 2,479 1,378 3,857
Change in fair value of
derivative instruments 872,402 464,574 1,336,976
Other income (7,574) (30) (7,604)
Non-controlling interest (58) - (58)
Recovery of income tax (1,971) (55,489) (57,460)
----------------------------------------------------------------------------
Net loss $ (728,995) $ (378,478) $ (1,107,473)
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Additions to capital assets $ 6,169 $ 176 $ 6,345
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Total goodwill $ 94,576 $ 22,485 $ 117,061
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Total assets $ 368,873 $ 166,882 $ 535,755
----------------------------------------------------------------------------
----------------------------------------------------------------------------
17. GUARANTEES
(a) Officers and Directors
Corporate indemnities have been provided by the Fund to all directors and
certain officers of its subsidiaries and affiliates for various items including,
but not limited to, all costs to settle suits or actions due to their
association with the Fund and its subsidiaries and/or affiliates, subject to
certain restrictions. The Fund has purchased directors' and officers' liability
insurance to mitigate the cost of any potential future suits or actions. Each
indemnity, subject to certain exceptions, applies for so long as the indemnified
person is a director or officer of one of the Fund's subsidiaries and/or
affiliates. The maximum amount of any potential future payment cannot be
reasonably estimated.
(b) Operations
In the normal course of business, the Fund and/or the Fund's subsidiaries and
affiliates have entered into agreements that include guarantees in favour of
third parties, such as purchase and sale agreements, leasing agreements and
transportation agreements. These guarantees may require the Fund and/or its
subsidiaries to compensate counterparties for losses incurred by the
counterparties as a result of breaches in representation and regulations or as a
result of litigation claims or statutory sanctions that may be suffered by the
counterparty as a consequence of the transaction. The maximum payable under
these guarantees is estimated to be $69,174.
18. COMMITMENTS
Commitments for each of the next five years and thereafter are as follows:
Long-term gas
Master and
Premises Services electricity
and Grain agreement contracts
equipment production with with various
leasing contracts EPCOR suppliers
2011 8,084 36,059 12,132 1,494,003
2012 6,186 19,720 8,088 1,001,759
2013 4,357 1,718 - 619,864
2014 3,026 396 - 323,362
2015 2,304 92,318
Thereafter 4,828 - - 2,065
----------- ----------- ----------- ---------------
$ 28,785 $ 57,893 $ 20,220 $ 3,533,371
----------- ----------- ----------- ---------------
----------- ----------- ----------- ---------------
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.
19. CONTINGENCIES
The State of California has filed a number of complaints to the Federal
Regulatory Energy Commission ("FERC") 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 FERC'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. On March 18, 2010, the Administrative Law Judge granted the motion to
strike for all parties in one of the complaints holding that California did not
prove that the reporting errors masked the accumulation of market power.
California has appealed the decision.
At this time, the likelihood of damages or recoveries and the ultimate amounts,
if any, with respect to this litigation is not determinable; however, an
estimated amount has been recorded in these consolidated financial statements as
at March 31, 2010.
20. ADJUSTMENTS REQUIRED TO REFLECT NET CASH RECEIPTS FROM GAS SALES
Changes in: 2010 2009
Accrued gas accounts payable $ (26,286) $ 2,857
Unbilled revenues 36,986 (10,480)
Gas delivered in excess of consumption (8,508) -
Deferred revenue 8,357 -
Other - -
------------ ------------
$ 10,549 $ (7,623)
------------ ------------
------------ ------------
21. CHANGES IN NON-CASH WORKING CAPITAL
2010 2009
Accounts receivable $ (60,021) $ (17,251)
Gas in storage 2,430 (1,288)
Inventory (41) (229)
Prepaid expenses 25,869 381
Accounts payable and accrued liabilities 5,931 18,989
Corporate taxes payable (recoverable) (8,303) 4,447
Other (1,388) 1,132
---------------------------
$ (35,523) $ 6,181
---------------------------
---------------------------
22. 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.
23. SUBSEQUENT EVENT
On May 7, 2010, Just Energy completed the acquisition of all of the common
shares of Hudson Parent Holdings, LLC and Hudson Energy Corp. (collectively,
"Hudson") with an effective date of May 1, 2010. Hudson is a privately held
energy marketing company operating in New York, New Jersey, Illinois and Texas,
primarily focused on the small to mid-size commercial customer market.
In order to fund the purchase for the acquisition and related costs, Just Energy
has entered into an agreement to sell to a syndicate of underwriters $330
million aggregate principal amount of 6.00% Convertible Extendible Unsecured
Subordinated Debentures (the "Convertible Debentures"). The Convertible
Debentures will bear interest at a rate of 6.00% per annum payable semi-annually
in arrears on June 30 and December 31.
The consideration for the acquisition will be approximately U.S.$304.2 million,
subject to customary working capital adjustments, payable as to U.S.$295.0
million in cash at closing and a post-closing deferred payment of U.S.$9.2
million, payable in four equal quarterly instalments during the first year
following closing. Just Energy anticipates that associated transaction and
financing costs will bring the total purchase cost to approximately $330
million.
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