Just Energy Group Inc. (TSX:JE)
Highlights for the third quarter ended December 31, 2010 included:
-- Operating Results
-- Sales (seasonally adjusted) - Up 10% per unit
-- Gross Margin (seasonally adjusted) - Up 5% per unit
-- Adjusted EBITDA - Up 25% per unit
-- Distributable Cash after Gross Margin Replacement - Down 11% per
unit
-- Distributable Cash after all Marketing Expense - Down 17% per unit
-- Net Income - Up 117% per unit
-- Customer Additions
-- 252,000 gross customers added; 80,000 net customer additions
-- Gross additions up 84% from 137,000 additions in Q3 2010
-- Net additions up 515% from 13,000 in Q3 2010
-- Management Updates Published Financial Guidance for F2011
-- Gross margin growth expected to be at the higher end of 5% to 10%
target range per unit. After nine months, gross margin is up 5% per
unit.
-- Payout ratio on distributions/dividends is expected to be under 100%
for fiscal 2011, consistent with past guidance.
-- Distributable cash after gross margin replacement growth will be
below the 5% to 10% target range per unit. After nine months,
distributable cash after gross margin replacement is down 11% per
unit.
-- Completion of Just Energy Conversion to Corporation
-- Conversion effective January 1, 2011
-- Dividend policy calls for $1.24 annual payment, paid monthly equal
to the previous distribution policy.
Just Energy Third Quarter Results
During the third quarter of fiscal 2011, Just Energy was an Income Fund and it
reports in the attached Management's Discussion and Analysis, a detailed
calculation of distributable cash, both before and after marketing expenditures
to expand Just Energy's customer base. Commencing with fiscal 2012, following
the conversion to a corporation the Management's Discussion and Analysis will
focus on adjusted EBITDA as the main measure of operating performance.
Just Energy announced its results for the three and nine months ended December
31, 2010.
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Three months ended December 31,
($ millions except per Unit) 2010 Per unit 2009 Per unit
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Sales(1) $ 741.8 $ 5.37 $ 654.7 $ 4.88
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Gross margin(1) 132.2 0.96 121.7 0.91
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Distributable cash(1)
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- After gross margin replacement 63.8 0.46 69.5 0.52
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- After marketing expenses 52.5 0.38 61.2 0.46
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Adjusted EBITDA 78.2 0.57 60.6 0.45
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Net income 217.4 1.57 97.4 0.73
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Cash distributions 42.5 0.31 41.2 0.31
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Long term customers 3,241,000 2,280,000
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Nine months ended December 31,
($ millions except per Unit) 2010 Per unit 2009 Per unit
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Sales(1) $ 2,130.3 $ 15.47 $ 1,649.4 $ 12.57
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Gross margin(1) 336.5 2.44 304.0 2.32
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Distributable cash(1)
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- After gross margin replacement 151.0 1.10 164.0 1.25
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- After marketing expenses 122.7 0.89 138.7 1.06
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Adjusted EBITDA 148.9 1.08 127.3 0.97
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Net income 338.2 2.46 310.7 2.37
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Cash distributions 126.8 0.92 117.0 0.89
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(1) Seasonally adjusted (Non GAAP measure)
For the three months ended December 31, 2010, seasonally adjusted sales
increased by 10% per unit, gross margin by 5% per unit, distributable cash after
gross margin replacement declined by 11% per unit and distributable cash after
all marketing expenses decreased by 17% per unit. Adjusted EBITDA (excluding
non-cash mark to market on future supply positions) was $0.57 per unit, up 25%
from $0.45 per unit a year prior. Net income was $1.57 per unit, up 117% from
$0.73 in Q3 2010 including the impact of the mark-to-market gain on future
supply positions.
Beginning Ending Ending
Oct 1, Failed To Dec 31, Dec 31,
RCEs 2010 Additions Attrition Renew 2010 2009
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Natural Gas
Canada 689,000 14,000 (16,000) (17,000) 670,000 759,000
United States 569,000 36,000 (28,000) (6,000) 571,000 393,000
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Total gas 1,258,000 50,000 (44,000) (26,000) 1,241,000 1,152,000
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Electricity
Canada 745,000 36,000 (20,000) (13,000) 748,000 777,000
United States 1,158,000 166,000 (51,000) (21,000) 1,252,000 351,000
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Total
electricity. 1,903,000 202,000 (71,000) (34,000) 2,000,000 1,128,000
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Combined 3,161,000 252,000 (115,000) (57,000) 3,241,000 2,280,000
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The addition of Hudson Energy and its commercial broker channel allowed Just
Energy, along with its residential business, to record its third straight
quarter of strong customer additions on both a gross and net basis. The 252,000
customers added plus the 85,000 renewals resulted in net growth of 80,000 or 3%
for the quarter. Including the customers acquired with Hudson, total customers
were up 42% from a year earlier.
Seasonally adjusted sales were up 10% per unit year over year with gross margin
up 5%. Gross margin was up less than sales primarily due to the large number of
commercial customer additions which generate lower margins. As designed,
commercial customers generate a lower upfront gross margin than residential
customers, however the reduced costs to administer the customers and typically
lower weather-related volatility produce a similar overall customer profit
profile.
Just Energy's growth was entirely in the U.S. during the quarter. Sales and
margin growth were dampened by a 4.1% decline in the U.S. dollar versus the
comparable quarter. During the third quarter, blend and extend offers and other
contract renegotiations resulted in a $3.4 million reduction of what would have
otherwise been collected in gross margin. For the nine months, the total gross
margin reduction has been $6.9 million, however, these retention efforts have
resulted in $20.5 million in increased future gross margin from the extension
period.
Sales of Just Energy's innovative JustGreen products remain strong. During the
quarter, 37% of all customers signed contracted for JustGreen supply, taking on
average 92% of their commodity needs from green sources. While still a small
proportion of the overall customer base (10% of electricity customers and 5% of
gas customers), JustGreen sales more than doubled year over year.
To view a graph of the Quarterly Customer Additions, please visit the following
link: http://media3.marketwire.com/docs/je210_quartely_customer_additions.pdf
Higher customer numbers and higher margins were offset by a 6% increase general
and administrative costs for the quarter which includes expenditures to continue
geographic expansion, obtaining a new commercial license in Pennsylvania and
costs to prepare to enter Pennsylvania for residential sales and Saskatchewan
for the commercial business. Bad debt expense increased by $1.3 million, also
offsetting the higher margins as well as a $9.9 million increase in interest
expense and a $2.2 million increase in income tax expense. The result was a per
unit decline of 11% in distributable cash after gross margin replacement and a
per unit decline of 17% in distributable cash after all marketing expenses.
Adjusted EBITDA was up 25% per unit at $78.2 million versus $60.6 million a year
earlier. Net income (which includes a mark to market of future supply positions)
was $217.4 million ($1.57 per unit), up 117% from $97.4 million ($0.73 per
unit). Distributions were $42.5 million ($0.31 per unit).
The results for nine months reflect both the positive addition of Hudson and the
adverse impact of the record warm winter seen last year. Seasonally adjusted
sales were up 29% reflecting the higher number of customers but gross margin was
only up 11% due to lower margins on commercial customers and the impact of the
past warm winter on natural gas profits. Distributable cash after gross margin
replacement was down 12% per unit with distributable cash after all marketing,
down 16% per unit. Adjusted EBITDA was $148.9 million up 11% per unit with net
income of $336.9 million up 3% per unit. Distributions were $126.8 million
($0.92 per unit).
The Fund had provided guidance that both gross margin and distributable cash
after gross margin replacement would be up 5% to 10% per unit for fiscal 2011.
After nine months, gross margin is up 5% per unit while distributable cash after
margin replacement is down 12% per unit.
As of this writing, the first weeks of the fourth quarter have seen a return to
normal winter weather in Just Energy's key gas markets. The result of continued
normal weather should be substantially higher margin and an increase in
distributable cash, in comparison with Q4 of fiscal 2010. The higher margins
expected lead management to believe that gross margin growth will be toward the
higher end of the 5% to 10% target for fiscal 2011. While distributable cash
growth is also expected to be strong, the adverse effects of the warm winter
seen in reconciliations during Q1 and Q2 cause management to believe that
distributable cash after gross margin replacement will be down year over year,
therefore below the target range. The payout ratio on distributions/dividends is
expected to be under 100%, as had been the case in past years.
The Fund paid its regular monthly distribution of $0.10333 per month ($1.24
annually) during the quarter. Going forward, Just Energy as a corporation will
institute a policy of paying a monthly dividend equal to the past $0.10333
distribution. The first dividend of $0.10333 was paid January 31, 2011.
Just Energy reorganized its income trust structure into a high dividend paying
corporation effective January 1, 2011. In connection with the conversion, JE
amended its credit agreement, increasing the available line for general
corporate purposes to $350 million from $250 million. Toronto-Dominion Bank was
added to the syndicate of lenders that includes Canadian Imperial Bank of
Commerce, Royal Bank of Canada, National Bank of Canada, Societe Generale, The
Bank of Nova Scotia and Alberta Treasury Branches. The increase in the credit
facility will accommodate forecasted working capital requirements for expansion
into new markets, customer growth in existing markets and provide financial
capacity to pursue small acquisitions.
Executive Chair Rebecca MacDonald noted: "This is the last quarter where Just
Energy will report as an Income Trust. Going forward, we will be a high dividend
corporation. We hope to replicate our success as a growth/income vehicle under
our new structure. Management is optimistic that, as a corporation, Just Energy
will appeal to a broader range of potential shareholders improving our liquidity
and market valuation."
CEO Ken Hartwick stated: "This was a quarter which saw strong customer
aggregation on both a gross and net basis. Our attrition rates improved in our
key growth markets in the U.S. and, while renewals in Ontario were challenging
due to an extended period of stable low utility prices and very high premiums
for the five year product, we increased our customer base by 3% during the
quarter. We continue our expansion into new geographic markets. Sales of
JustGreen remain strong with 10% of our electricity book and 5% of our gas book
now on green supply. The higher margins from these products should help offset
the lower per RCE margins from our fast growing commercial customer base."
"While the residual impacts of last year's record warm winter and the decline of
the U.S. dollar have adversely impacted our distributable cash, we are seeing a
return to normal results in the fourth quarter. Our gross margin should be near
the upper end of our target range and Adjusted EBITDA should be up by more than
10% for fiscal 2011. Just Energy is in a very strong position entering into its
first year as a corporation. Management is comfortable that Just Energy can both
fund its continued growth and pay its monthly $0.10333 dividend ($1.24
annually)."
Just Energy Group Inc.
Just Energy's business primarily involves the sale of natural gas and/or
electricity to residential and commercial customers under long-term fixed-price,
price-protected or variable-priced contracts and green energy products. 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. Just Energy also offers
"green" products through its JustGreen program. The electricity JustGreen
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 JustGreen product offers carbon offset credits which
will allow the customer to reduce or eliminate the carbon footprint of their
home or business. Management believes that the JustGreen products will not only
add to profits, but also increase sales receptivity and improve renewal rates.
In addition, through National Home Services, Just Energy sells and rents high
efficiency and tankless water heaters, air conditioners and furnaces to Ontario
residents. Through its subsidiary Terra Grain Fuels, Just Energy produces and
sells wheat-based ethanol.
Forward-Looking Statements
Just Energy'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, general and
administrative expenses, 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 Just
Energy's operations, financial results or distribution levels are included in
Just Energy'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 Just Energy's website at
www.justenergygroup.com.
The Toronto Stock Exchange has neither approved nor disapproved of the contents
of this release.
MANAGEMENT'S DISCUSSION AND ANALYSIS ("MD&A") - February 9, 2011
Overview
The following discussion and analysis is a review of the financial condition and
results of operations of Just Energy Income Fund ("Just Energy", the "Fund" or
"JEIF") for the three and nine months ended December 31, 2010, and has been
prepared with all information available up to and including February 9, 2011.
This analysis should be read in conjunction with the unaudited interim
consolidated financial statements for the three and nine months ended December
31, 2010, as well as the audited consolidated financial statements and related
MD&A for the year ended March 31, 2010, contained in the Fund's 2010 Annual
Report. The financial information contained herein has been prepared in
accordance with Canadian Generally Accepted Accounting Principles ("GAAP"). All
dollar amounts are expressed in Canadian dollars. Quarterly reports, the annual
report and supplementary information can be found on our corporate website at
www.justenergygroup.com. Additional information can be found on SEDAR at
www.sedar.com.
Effective January 1, 2011, Just Energy completed the conversion from an Income
Trust to a Corporation (the "Conversion") and going forward operates under the
name Just Energy Group Inc. ("JEGI" or "Just Energy"). Additional information on
the Conversion can be found in the "Outlook" section on page 35.
Just Energy was 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. ("JE Illinois"), Just Energy New York
Corp. ("JENYC"), Just Energy Indiana Corp. ("JE Indiana"), Just Energy Texas
L.P. ("JE Texas"), Just Energy Massachusetts Corp. ("JE Mass"), Just Energy
Michigan Corp., ("JE Michigan"), Just Energy Exchange Corp. ("JEEC"), Universal
Energy Corporation ("UEC"), Universal Gas and Electric Corporation ("UG&E"),
Commerce Energy Inc. ("Commerce" or "CEI"), National Energy Corp. ("NEC") (which
operates under the trade name of National Home Services ("NHS")), Hudson Energy
Services, LLC ("Hudson" or "HES"), Momentis Canada Corp. and Momentis U.S. Corp.
(collectively, "Momentis") 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,
price-protected or variable-priced contracts and green energy products. 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 price at which it is
able to sell the commodities to its customers and the price at which it
purchases the associated volumes from its suppliers. The Fund also offers green
products through its JustGreen program. The electricity JustGreen product offers
customers the option of having all or a portion of their electricity sourced
from renewable green sources such as wind, run of the river hydro or biomass.
The gas JustGreen product offers carbon offset credits, which will allow
customers to reduce or eliminate the carbon footprint of their homes or
businesses. Management believes that the JustGreen products will not only add to
profits but also increase sales receptivity and improve renewal rates.
In addition, through NHS, Just Energy sells and rents high efficiency and
tankless water heaters and other heating, ventilating and air conditioning
("HVAC") products. TGF, an ethanol producer, operates a wheat-based ethanol
facility in Belle Plaine, Saskatchewan. Just Energy indirectly acquired Hudson,
effective May 1, 2010, a marketer of natural gas and electricity that primarily
sells to commercial customers.
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, extreme weather conditions, rates of customer additions and
renewals, customer attrition, fluctuations in natural gas and electricity
prices, changes in regulatory regimes, decisions by regulatory authorities and
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.justenergygroup.com or
through the SEDAR website at www.sedar.com.
Key terms
"Attrition" means customers whose contracts were terminated early or cancelled
by Just Energy due to delinquent accounts.
"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.
"JEEC convertible debentures" represents the $90 million in convertible
debentures issued by Universal in October 2007. JEEC assumed the obligations of
the debentures as part of the acquisition of Universal Energy Group Ltd. ("UEG")
on July 1, 2009. See the "Long-term debt and financing" on page 29 for further
details.
"JEIF convertible debentures" represents the $330 million in convertible
debentures issued by the Fund to finance the purchase of Hudson, effective May
1, 2010. See the "Long-term debt and financing" on page 29 for further details.
"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
m(3) (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.
"Large commercial customer" means customers representing more than 15 RCEs.
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 Just Energy'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 Just Energy 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 Just Energy because it includes all expenditures
necessary for the retention of existing customers and the addition of new margin
to replace those customers that have not been renewed. This non-GAAP measure may
not be comparable to other income funds or companies.
For reconciliation to cash from operating activities please refer to the "Cash
Available for Distribution and distributions" analysis on page 9.
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 EBITDA
"Adjusted EBITDA" represents EBITDA adjusted to exclude the impact of mark to
market gains (losses) arising from Canadian GAAP requirements for derivative
financial instruments on future supply positions. In addition, the Adjusted
EBITDA calculation deducts marketing costs sufficient to maintain existing
levels of gross margin and maintenance capital expenditures necessary to sustain
existing operations. This adjustment results in the exclusion of the marketing
that Just Energy carried out and the capital expenditures that it had made to
add to its future productive capacity. Management believes this is a useful
measure of operating performance for investors.
Just Energy ensures that customer margins are protected by entering into
fixed-price supply contracts. Under Canadian GAAP, the customer margins are not
marked to market but there is a requirement to mark to market the future supply
contracts. This creates unrealized gains (losses) depending upon current supply
pricing volatility. Management believes that these short-term mark to market
non-cash gains (losses) do not impact the long-term financial performance of the
Fund and have therefore excluded it from the Adjusted EBITDA calculation.
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. It
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 14.
Financial highlights
For the three months ended December 31
(thousands of dollars, except where indicated and per unit amounts)
Fiscal 2011 Fiscal 2010
Per
Per unit Per
$ unit(1) Change $ unit(1)
Sales 744,296 $ 5.39 15% 626,966 $ 4.68
Net income(2) 217,407 $ 1.57 117% 97,390 $ 0.73
Adjusted EBITDA(3) 78,220 $ 0.57 25% 60,563 $ 0.45
Gross margin (seasonally
adjusted)(4) 132,212 $ 0.96 5% 121,722 $ 0.91
Distributable cash
- After gross margin
replacement 63,811 $ 0.46 (11)% 69,455 $ 0.52
- After marketing expense 52,518 $ 0.38 (17)% 61,242 $ 0.46
Cash distributions 42,450 $ 0.31 - 41,248 $ 0.31
General and administrative 26,283 $ 0.19 3% 24,767 $ 0.18
Distributable cash payout
ratio(5)
- After gross margin
replacement 67% 59%
- After marketing expense 81% 67%
For the nine months ended December 31
(thousands of dollars, except where indicated and per unit amounts)
Fiscal 2011 Fiscal 2010
Per
Per unit Per
$ unit(1) Change $ unit(1)
Sales 2,011,858 $14.61 31% 1,460,635 $11.13
Net income(2) 338,236 $ 2.46 4% 310,707 $ 2.37
Adjusted EBITDA(3) 148,876 $ 1.08 11% 127,343 $ 0.97
Gross margin (seasonally
adjusted)(4) 336,501 $ 2.44 5% 304,010 $ 2.32
Distributable cash
- After gross margin
replacement 151,036 $ 1.10 (12)% 163,977 $ 1.25
- After marketing expense 122,673 $ 0.89 (16)% 138,674 $ 1.06
Cash distributions 126,796 $ 0.92 3% 117,044 $ 0.89
General and administrative 81,066 $ 0.59 17% 66,018 $ 0.50
Distributable cash payout
ratio(5)
- After gross margin
replacement 84% 71%
- After marketing expense 103% 84%
(1) The per unit amounts are calculated using an adjusted fully diluted
basis for fiscal 2011, removing the impact of the JEEC and JEIF
convertible debentures as both will be anti-dilutive by fiscal year-end.
The fiscal 2010 per unit amounts are calculated on a fully diluted
basis.
(2) Net income 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 realizable impact of mark to market gains
and losses.
(3) Adjusted EBITDA is a more appropriate measure of the performance of the
Fund since it excludes the unrealized mark to market gains and losses
and deducts only marketing costs and capital spending to sustain
existing operations.
(4) See the discussion of non-GAAP financial measures on page 2.
(5) Management targets an annual payout ratio after all marketing expenses,
excluding any Special Distribution, of less than 100%.
Reconciliation of net income (loss) to Adjusted EBITDA
(thousands of dollars)
For the For the
three three For the For the
months months nine months nine months
ended Dec ended Dec ended Dec ended Dec
31, fiscal 31, fiscal 31, fiscal 31, fiscal
2011 2010 2011 2010
------------------------------------------------
Net income $ 217,407 $ 97,390 $ 338,236 $ 310,707
Add:
Interest 15,081 5,143 36,857 10,569
Tax expense (recovery) 35,901 (17,010) 8,731 19,079
Capital tax 172 209 331 337
Amortization 38,253 23,664 112,453 49,520
------------------------------------------------
EBITDA 306,814 109,396 496,608 390,212
Add:
Change in fair value of
derivative instruments (236,571) (50,853) (369,693) (277,248)
Marketing expenses to add
gross margin 11,293 8,213 28,363 25,303
Less:
Maintenance capital
expenditures (3,316) (6,193) (6,402) (10,924)
------------------------------------------------
Adjusted EBITDA 78,220 60,563 148,876 127,343
------------------------------------------------
Acquisition of Hudson Energy Services, LLC
On May 7, 2010, Just Energy completed the acquisition of all of the equity
interests of Hudson Parent Holdings, LLC, and all of the common shares of Hudson
Energy Corp., thereby indirectly acquiring Hudson Energy Services, LLC, with an
effective date of May 1, 2010.
The acquisition of Hudson 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:
Current assets (including cash of $24,003) $ 88,696
Current liabilities (107,817)
Electricity contracts and customer relationships 200,653
Gas contracts and customer relationships 26,225
Broker network 84,400
Brand 11,200
Information technology system development 17,954
Contract initiation costs 20,288
Other intangible assets 6,545
Goodwill 33,574
Property, plant and equipment 2,559
Unbilled revenue 15,092
Notes receivable - long term 1,312
Security deposits - long term 3,544
Other assets - current 124
Other assets - long term 100
Other liabilities - current (74,683)
Other liabilities - long term (40,719)
-------------
$ 289,047
-------------
-------------
Consideration:
Purchase price $ 287,790
Transaction costs 1,257
-------------
$ 289,047
-------------
-------------
All contracts and intangible assets, excluding brand, are amortized over the
average remaining life at the time of acquisition. The gas and electricity
contracts and customer relationships are amortized over 30 months and 35 months,
respectively. Other intangible assets, excluding brand, are amortized over
periods of three to five years. The brand value is considered to be indefinite
and, therefore, not subject to amortization. The purchase price allocation is
considered preliminary and, as a result, may be adjusted during the 12-month
period following the acquisition.
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 Limited ("Universal") pursuant to a plan
of arrangement (the "Arrangement"). Under the Arrangement, the Universal
shareholders received 0.58 of an exchangeable share ("Exchangeable Share") of
JEEC, a subsidiary of Just Energy, for each Universal common share held. In
aggregate, 21,271,804 Exchangeable Shares were issued pursuant to the
Arrangement. Each Exchangeable Share was exchangeable for a unit of the Fund 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 unit of the Fund. JEEC also
assumed all the covenants and obligations of Universal in respect of Universal's
outstanding JEEC convertible debentures. On conversion of the JEEC convertible
debentures, holders will be entitled to receive 0.58 of an Exchangeable Share in
lieu of each Universal common share that the holder was previously entitled to
receive on conversion.
The acquisition of Universal 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) $ 63,614
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 77,494
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 acquired, including 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 other intangible assets are
amortized over six months. The non-controlling interest represents 33.3%
ownership of TGF held by EllisDon Corporation. The purchase price for this
acquisition is final and no longer subject to change.
Operations
Natural gas
Just Energy offers natural gas customers a variety of products ranging from
month-to-month variable price offerings to five-year fixed-price contracts. For
fixed-price contracts, Just Energy purchases gas supply through physical or
financial transactions with market counterparts in advance of marketing, based
on forecast customer aggregation for residential and small commercial customers.
For larger commercial customers, gas supply is generally purchased concurrently
with the execution of a contract. The LDC provides historical customer usage
which, when normalized to average weather, enables Just Energy to purchase to
expected normal customer load. Furthermore, Just Energy mitigates exposure to
weather variations through active management of the gas portfolio which involves
but is not limited to the purchase of options including weather derivatives. Our
ability to mitigate weather effects is limited by the severity of weather from
normal. To the extent that balancing requirements are outside the forecast
purchase, Just Energy bears the financial responsibility for fluctuations in
customer usage. Volume variances may result in either excess or short supply. In
case of under consumption by the customer, excess supply is sold in the spot
market resulting in either a gain or loss compared to the weighted average cost
of supply. Further, customer margin is lowered proportionately to the decrease
in consumption. In case of greater than expected gas consumption, Just Energy
must purchase the short supply in the spot market resulting in either a gain or
loss compared to the weighted average cost of supply. Consequently, customer
margin increases proportionately to the increase in consumption. To the extent
that supply balancing is not fully covered through active management or the
options employed, Just Energy's customer gross margin may be reduced or
increased depending upon market conditions at the time of balancing. Under some
commercial contract terms, this balancing may be passed onto 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 that 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 cash is normally
received from the LDCs in the same period as customer consumption
Electricity
In Ontario, Alberta, New York, Texas, Illinois, Pennsylvania, New Jersey,
Maryland, Michigan, California and Massachusetts, Just Energy offers a variety
of solutions to its electricity customers, including fixed-price and
variable-price products on both short-term and longer-term electricity
contracts. Some of these products provide customers with price-protection
programs for the majority of their electricity requirements. The customers
experience either a small balancing charge or credit (pass-through) on each bill
due to fluctuations in prices applicable to their volume requirements not
covered by a fixed price. Just Energy uses historical usage data for all
enrolled customers to predict future customer consumption and to help with
long-term supply procurement decisions.
Just Energy purchases power supply through physical or financial transaction
with market counterparts in advance of marketing for residential and small
commercial customers based on forecast customer aggregation. Power supply is
generally purchased concurrently with the execution of a contract for larger
commercial customers. The LDC provides historical customer usage which, when
normalized to average weather, enables Just Energy to purchase to expected
normal customer load. Furthermore, Just Energy mitigates exposure to weather
variations through active management of the power portfolio. The expected cost
of this strategy is incorporated into the price to the customer. Our ability to
mitigate weather effects is limited by the severity of weather from normal. To
the extent that balancing requirements are outside the forecast purchase, Just
Energy bears the financial responsibility for excess or short supply caused by
fluctuations in customer usage. In case of under consumption by the customer,
excess supply is sold in the spot market resulting in either a gain or loss in
relation to the original cost of supply. Further, customer margin is lowered
proportionately to the decrease in consumption. In case of greater than expected
power consumption, Just Energy must purchase the short supply in the spot market
resulting in either a gain or loss in relation to the fixed cost of supply.
Customer margin increases proportionately to the increase in consumption. To the
extent that supply balancing is not fully covered through customer
pass-throughs, active management or the options employed, Just Energy's customer
gross margin may be impacted depending upon market conditions at the time of
balancing.
JustGreen
Customers have the ability to choose an appropriate JustGreen program to
supplement their electricity and natural gas contracts, providing an effective
method to offset their carbon footprint associated with the respective commodity
consumption.
JustGreen programs for electricity customers involve the purchase of power from
green generators via power purchase agreements of renewable energy certificates.
JustGreen programs for gas customers involve the purchase of carbon offsets from
green sources such as methane capture.
JustClean
In addition to its traditional commodity marketing business, Just Energy allows
customers to effectively manage their carbon footprint without buying energy
commodity products by signing a JustClean contract. The JustClean products are
essentially employ carbon offsets from Just Energy's carbon capture and
reduction projects as well as green power renewable energy certificates from
green generators.
Blend and Extend program
As part of Just Energy's retention efforts, electricity and natural gas
customers may be contacted for early renewal of their contracts under a blend
and extend offer. These customers are offered a lower rate, compared to their
current contracted rate, but the term of their contract is extended up to five
more years. Consequently, Just Energy may experience a reduction in margins in
the short term but will gain additional future margins.
Consumer (Residential) Energy division
The sale of gas and electricity to customers of 15 RCEs and less is undertaken
by the Consumer Energy division. The marketing of this division is primarily
done door-to-door through our independent contractors and the recently formed
Momentis network marketing operation. Just Energy had a total of 900 independent
contractors selling in the quarter, down from the 1,100 independent contractors
reported last quarter, a normal seasonal event around the holiday season.
Approximately 60% of Just Energy's customers and energy revenues are generated
by the Consumer Energy division, which is currently focused on longer term
price-protected offerings of both JustGreen and commodity products. To the
extent that certain markets are better served by shorter term or enhanced
variable rate products, the Consumer Energy independent contractors also offer
these products.
Commercial Energy division
Customers with annual consumption over 15 RCEs are served by the Commercial
Energy division. These sales are made through two main channels, inside
commercial sales representatives, established by Just Energy in its recent
expansion into this channel, and sales through the broker channel, using the
commercial platform acquired with the Hudson purchase. Commercial customers make
up about 40% of Just Energy's customer base and energy sales. Products offered
to commercial customers can range from standard fixed offerings to "one off"
offerings, which are tailored to meet the customer's specific needs. These can
be either fixed or floating rate or a blend of the two, and normally have terms
of less than five years. Margin per RCE for this division is lower than
residential margins and customer aggregation cost but ongoing customer care
costs are lower as well on a per RCE basis. Commercial customers tend to have
combined attrition and failed to renew rates which are lower than those of
residential customers.
Home Services division
NEC began operations in April 2008 and operates under the trade name of National
Home Services. NHS 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. In
the fourth quarter of fiscal 2010, NHS began offering the rental of air
conditioners and furnaces to Ontario residents. NHS markets through
approximately 200 independent contractors in Ontario. See page 23 for additional
information.
Ethanol division
As of December 31, 2010, Just Energy owned a 66.7% interest in TGF, a
150-million-litre capacity wheat-based ethanol plant located in Belle Plaine,
Saskatchewan. As of January 4, 2011, Just Energy was required to acquire the
remaining 33.3% interest in TGF through a put option and now owns 100% of TGF.
The plant produces wheat-based ethanol and high protein distillers dried grain
("DDG"). See page 24 for additional information on TGF.
Cash Available for Distribution and distributions
For the three months ended December 31
(thousands of dollars, except per unit amounts)
Fiscal 2011 Fiscal 2010
----------------------------------------
Per unit Per unit
----------- ---------
Reconciliation to statements of
cash flow
Cash inflow from operations $ 11,196 $ 4,418
Add:
Increase in non-cash working
capital 42,055 55,938
Other (1,059) -
Tax impact on distributions to
Class A preference shareholders 326 886
---------- ----------
Cash Available for Distribution $ 52,518 $ 61,242
---------- ----------
---------- ----------
Cash Available for Distribution
Gross margin per financial
statements $ 132,278 $ 0.96 $ 111,947 $ 0.83
Adjustments required to reflect
net cash receipts from gas sales (66) 9,775
---------- ----------
Seasonally adjusted gross margin $ 132,212 $ 0.96 $ 121,722 $ 0.91
---------- ----------
Less:
General and administrative (26,283) (24,767)
Capital tax expense (172) (209)
Bad debt expense (6,458) (5,130)
Income tax expense (4,469) (2,269)
Interest expense (15,081) (5,143)
Other items 3,182 3,584
---------- ----------
(49,281) (33,934)
---------- ----------
Distributable cash before marketing
expenses 82,931 $ 0.60 87,788 $ 0.65
Marketing expenses to maintain
gross margin (19,120) (18,333)
---------- ----------
Distributable cash after gross
margin replacement 63,811 $ 0.46 69,455 $ 0.52
Marketing expenses to add new gross
margin (11,293) (8,213)
---------- ----------
Cash Available for Distribution $ 52,518 $ 0.38 $ 61,242 $ 0.46
---------- ----------
---------- ----------
Cash distributions
Distributions and dividends $ 39,925 $ 39,165
Class A preference share
distributions 1,632 1,632
Unit appreciation rights and
deferred unit grants distributions 893 451
---------- ----------
Total cash distributions $ 42,450 $ 0.31 $ 41,248 $ 0.31
---------- ----------
---------- ----------
Adjusted fully diluted average
number of units outstanding(1) 138.2m 134.1m
(1) The per unit amounts are calculated on an adjusted fully diluted basis
for fiscal 2011, removing the impact of the JEEC and JEIF convertible
debentures as both will be anti-dilutive by fiscal year-end. The fiscal
2010 per unit amounts are calculated on a fully diluted basis.
Cash Available for Distribution and distributions
For the nine months ended December 31
(thousands of dollars, except per unit amounts)
Fiscal 2011 Fiscal 2010
----------------------------------------
Per unit Per unit
----------- ---------
Reconciliation to statements of
cash flow
Cash inflow from operations $ 50,744 $ 66,920
Add:
Increase in non-cash working
capital 70,270 69,791
Other 354 -
Tax impact on distributions to
Class A preference shareholders 1,305 1,963
---------- ----------
Cash Available for Distribution $ 122,673 $ 138,674
---------- ----------
---------- ----------
Cash Available for Distribution
Gross margin per financial
statements $ 309,604 $ 2.25 $ 259,518 $ 1.98
Adjustments required to reflect
net cash receipts from gas sales 26,897 44,492
---------- ----------
Seasonally adjusted gross margin $ 336,501 $ 2.44 $ 304,010 $ 2.32
---------- ----------
Less:
General and administrative (81,066) (66,018)
Capital tax expense (331) (337)
Bad debt expense (18,901) (12,815)
Income tax expense (292) (8,335)
Interest expense (36,857) (10,569)
Other items 14,469 5,776
---------- ----------
(122,978) (92,298)
---------- ----------
Distributable cash before marketing
expenses 213,523 $ 1.55 211,712 $ 1.61
Marketing expenses to maintain
gross margin (62,487) (47,735)
---------- ----------
Distributable cash after gross
margin replacement 151,036 $ 1.10 163,977 $ 1.25
Marketing expenses to add new gross
margin (28,363) (25,303)
---------- ----------
Cash Available for Distribution $ 122,673 $ 0.89 $ 138,674 $ 1.06
---------- ----------
---------- ----------
Cash distributions
Distributions and dividends $ 119,273 $ 110,798
Class A preference share
distributions 4,896 4,896
Unit appreciation rights and
deferred unit grants distributions 2,627 1,350
---------- ----------
Total cash distributions $ 126,796 $ 0.92 $ 117,044 $ 0.89
---------- ----------
---------- ----------
Adjusted fully diluted average
number of units outstanding(1) 137.7m 131.2m
(1) The per unit amounts are calculated on an adjusted fully diluted basis
for fiscal 2011, removing the impact of the JEEC and JEIF convertible
debentures as both will be anti-dilutive by fiscal year-end. The fiscal
2010 per unit amounts are calculated on a fully diluted basis.
Distributable cash
The third quarter of fiscal 2011 showed a continuation of the expansion of the
Just Energy customer base. Much of this expansion took place through i) the
acquisition of Hudson in the first quarter, which diversified Just Energy's
product line to include specialized offerings for large commercial customers and
the subsequent expansion of the commercial broker network to seven states and
two new provinces; ii) the launch of the Momentis network marketing division in
Ontario, New York, Illinois, Indiana, Ohio and California; iii) new residential
launches in Massachusetts (May),two new utility territories in New York
(September)and Pennsylvania (March). In addition, NHS committed expenditures to
facilitate its expansion into the Union Gas territory in Ontario and its rollout
of furnace and air conditioner offerings.
The third quarter showed a continued positive impact from the commercial
expansion, along with the Consumer Energy business. Customer additions were
252,000, the third highest quarterly total in Just Energy's history, up 84% from
the 137,000 added in the third quarter of fiscal 2010. Net additions were
80,000, up from 13,000 a year earlier. The result of this growth and the
acquisition of Hudson was a 42% increase in customer additions, year over year.
Sales increased 15% and seasonally adjusted gross margins were up 5% during the
third quarter of fiscal 2011.
Distributable cash after gross margin replacement for the current quarter ended
December 31, 2010, was $63.8 million ($0.46 per unit), down from $69.5 million
($0.52 per unit) in fiscal 2010. The higher gross margin was offset by increased
interest charges, tax provisions and higher bad debt expense. Interest costs
relate primarily to the JEEC and JEIF convertible debentures related to the
Hudson and Universal acquisitions, funding for water heater purchases, and the
debt associated with TGF. Bad debt expense increased by 26% in the third quarter
of fiscal 2011 compared to 2010, due to the 48% increase in sales in those
markets where the Fund bears the credit risk. Overall, bad debt percentage of
relevant sales was 2.5% for the third quarter, within the target range of 2% to
3%.
Just Energy spent $19.1 million in marketing expenses for the quarter to
maintain its current level of gross margin, which represents 55% of the total
marketing expense, excluding the amortization of contract initiation costs. A
further $11.3 million was spent to increase future gross margin for the 80,000
customer additions in the third quarter. General and administrative costs
increased by 3% year over year reflecting continued geographic expansion and the
larger customer base.
Management's estimate of the future embedded gross margin is as follows:
Dec 10 vs. Dec 10 vs.
(millions of As at Dec As at Sept Sept 10 As at Dec Dec 09
dollars) 31, 2010 30, 2010 Variance 31, 2009 Variance
---------------------------------------------------------
Canada (CAD$) $ 678.9 $ 708.8 (4)% $ 749.9 (9)%
United States (US$) $ 822.4 $ 778.8 6% $ 376.9 118%
Total (CAD$) $1,496.9 $1,510.9 (1)% $1,139.4 31%
Management's estimate of the future contracted gross margin decreased slightly
to $1,496.9 million from $1,510.9 million at the end of the second quarter of
fiscal 2011. There was a net increase in margins from the increased customer
base, but this was offset by the 3.4% decline in U.S. exchange rates during the
quarter. The margin on commercial customers signed during the quarter was lower
than that for the new residential customers signed and the customers lost to
attrition or failure to renew. As designed, commercial customers generate a
lower upfront gross margin than residential customers, however, the reduced
costs to administer the customers and typically less weather-related volatility
produce a similar overall customer profit profile.
Distributable cash after all marketing expenses was $52.5 million ($0.38 per
unit) for the third quarter of fiscal 2011, a per unit decrease of 17% from
$61.2 million ($0.46 per unit) in the prior comparable quarter. The 5% increase
in gross margin was offset by the higher interest, tax and bad debt expenses
noted above as well as higher marketing costs to add new gross margin. Although
the number of net customers added was 80,000, versus 13,000 a year earlier, the
blend of large commercial versus consumer margins resulted in a smaller increase
in gross margin for the quarter. The payout ratio after deduction of all
marketing expenses for the current quarter was 81% versus 67% in fiscal 2010.
Distributable cash after gross margin replacement for the nine months ended
December 31, 2010, was $151.0 million ($1.10 per unit), a decrease of 12% per
unit from $164.0 million ($1.25 per unit) in the prior comparable period.
Distributable cash after marketing expenses was $122.7 million ($0.89 per unit)
for the first nine months of fiscal 2011, a decrease of 16% per unit from $138.7
million ($1.06 per unit) for the same period last year. The main factor in the
lower distributable cash was the adverse impact of the past record warm winter
temperatures on gas consumption, necessary utility gas account reconciliations
and lower associated profit recognized in the first and second quarters as well
as higher interest, taxes and bad debt expense. The payout ratio after all
marketing expenses for the nine-month period of fiscal 2011 was 103% versus 84%
for the nine months ended December 31, 2009. Management anticipates that the
payout ratio for fiscal 2011 will be less than 100% as it has been in past
years.
For further information on the changes in the gross margin, please refer to
"Sales and gross margin - Seasonally adjusted" on page 18 and "General and
administrative expenses", "Marketing expenses", "Bad debt expense" and "Interest
expense", which are further clarified on pages 24 to 26.
Discussion of distributions
(thousands of dollars)
For the For the
three months three months For the nine For the nine
ended Dec ended Dec months ended months ended
31, fiscal 31, fiscal Dec 31, Dec 31,
2011 2010 fiscal 2011 fiscal 2010
-------------------------------------------------------
Cash flow from
operations(1) (A) $ 11,196 $ 4,418 $ 50,744 $ 66,920
Net income (B) 217,407 97,390 338,236 310,707
Total cash distributions
(C) 42,450 41,248 126,796 117,044
Shortfall of cash
flows from operating
activities over
distributions paid
(A-C) (31,254) (36,830) (76,052) (50,124)
Excess of net income
over distributions
paid (B-C) 174,957 56,142 211,440 193,663
(1) Includes non-cash working capital balances
Net income 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. The change in fair value
associated with these derivatives, included in the net income for the three and
nine months ended December 31, 2010, was a gain of $236.6 million and $369.7
million, respectively.
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. Furthermore, 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. Management believes
that the current level of distributions/dividends is sustainable in the
foreseeable future.
The timing differences between distributions and cash flow from operations
created by the cost of carrying incremental working capital due to business
seasonality and expansion are funded by the operating credit facility.
Standardized Distributable Cash and Cash Available for Distribution
(thousands of dollars, except per unit amounts)
For the For the
three months three months For the nine For the nine
ended Dec ended Dec months ended months ended
31, fiscal 31, fiscal Dec 31, Dec 31,
2011 2010 fiscal 2011 fiscal 2010
-------------------------------------------------------
Reconciliation to
statements of cash
flow
Cash inflow from
operations $ 11,196 $ 4,418 $ 50,744 $ 66,920
Capital
expenditures(1) (16,375) (12,556) (44,934) (34,850)
-------------------------------------------------------
Standardized
Distributable Cash (5,179) (8,138) 5,810 32,070
-------------------------------------------------------
Adjustments to
Standardized
Distributable Cash
Change in non-cash
working capital (2) 42,055 55,938 70,270 69,791
Tax impact on
distributions to
Class A preference
shareholders(3) 326 886 1,305 1,963
Other (1,059) - 354 -
Capital
expenditures(1) 16,375 12,556 44,934 34,850
-------------------------------------------------------
Cash Available for
Distribution $ 52,518 $ 61,242 $ 122,673 $ 138,674
-------------------------------------------------------
Standardized
Distributable Cash -
per unit basic (0.04) (0.05) 0.04 0.25
Standardized
Distributable Cash -
per unit diluted (0.04) (0.05) 0.04 0.21
Payout ratio based on
Standardized
Distributable Cash NMF(4) NMF(4) 2,182% 365%
(1) The vast majority of capital expenditures in the first six months of
fiscal 2011 and 2010 related 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
being funded through separate financing secured by the water heaters and
associated contracts. All other capital expenditures were funded by the
credit facility.
(2) Change in non-cash working capital is excluded from the calculation of
Cash Available for Distribution as the Fund had a $250 million credit
facility, available for use to fund working capital requirements.
Effective January 1, 2011, Just Energy amended and restated its credit
agreement to increase the available line to $350 million.
(3) This amount includes payments to the holder of Class A preference shares
and is equivalent to distributions. The number of Class A preference
shares outstanding is included in the denominator of any per unit
calculation.
(4) Not a meaningful number.
In accordance with the Canadian Institute of Chartered Accountants ("CICA") July
2007 interpretive release, Standardized Distributable Cash in Income Trusts and
other Flow-Through Entities, the Fund has presented the distributable cash
calculation to conform to this guidance. In summary, for the purposes of the
Fund, Standardized Distributable Cash is defined as the periodic cash flows from
operating activities, including the effects of changes in non-cash working
capital less total capital expenditures as reported in the GAAP financial
statements.
Financing strategy
Effective January 1, 2011, Just Energy increased its credit facility from $250
million to $350 million. The $350 million credit facility will be sufficient to
meet the Fund's short-term working capital and capital expenditure requirements.
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
increase the level of the working capital facility to support growth or to
access the equity or debt markets in order to fund significant acquisitions. NEC
entered into agreements in January 2010 and July 2010 with the Home Trust
Company ("HTC") to separately finance its water heaters. See page 29 for further
discussion on this financing. TGF has a separate credit facility, debenture and
a term loan for its funding requirements, which are detailed on page 29.
Productive capacity
Just Energy's primary business involves the sale of natural gas and/or
electricity to residential and commercial customers under long-term,
fixed-price, price-protected, variable rate and green energy contracts. In
addition, through NHS, the Fund sells and rents high efficiency and tankless
water heaters and HVAC products. TGF, an ethanol producer, operates an ethanol
facility in Belle Plaine, Saskatchewan. The Fund's productive capacity is
primarily determined by the gross margin earned from the contract price and the
related supply cost on energy contracts. Also included is the gross margin
earned on water heater rentals and ethanol sales after deducting
production-related costs.
The maintenance of 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 and Hudson broker channels, call centre
renewal efforts, internet marketing and various mail campaigns. Just Energy
entered into agreements with its wholly owned subsidiary, Momentis, a network
marketing entity, under which its independent representatives will market
natural gas and electricity contracts on behalf of Just Energy. Management
believes that this arrangement will further expand the productive capacity of
the energy business.
Effectively, all of the residential 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. Commercial marketing expenses are paid in one of two ways: The
commission is either paid throughout the contract period as residuals to the
broker who signed the customer for as long as the contract flows, or
alternatively, it is completely or partially paid upfront and the remaining
balance is paid through residuals.
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 the water heaters and the rental contracts as security. As
such, these capital expenditures increase the productive capacity of the Fund.
Summary of quarterly results
(thousands of dollars, except per unit amounts)
Fiscal 2011 Fiscal 2011 Fiscal 2011 Fiscal 2010
Q3 Q2 Q1 Q4
---------------------------------------------------
Sales (seasonally
adjusted) $ 741,817 $ 748,480 $ 639,997 $ 694,788
Gross margin (seasonally
adjusted) 132,212 115,356 88,933 121,872
General and
administrative expense 26,283 25,511 29,272 22,405
Net income (loss) 217,407 (154,480) 275,309 (79,211)
Net income (loss) per
unit - basic 1.61 (1.15) 2.05 (0.59)
Net income (loss) per
unit - diluted 1.39 (1.15) 1.85 (0.59)
Adjusted EBITDA 78,220 39,375 31,282 108,961
Amount available for
distribution
After gross margin
replacement 63,811 53,442 33,783 66,023
After marketing expense 52,518 45,753 24,402 58,359
Payout ratio(1)
After gross margin
replacement 67% 79% 125% 103%(2)
After marketing expense 81% 92% 172% 117%(2)
Fiscal 2010 Fiscal 2010 Fiscal 2010 Fiscal 2009
Q3 Q2 Q1 Q4
---------------------------------------------------
Sales (seasonally
adjusted) $ 654,686 $ 562,133 $ 432,565 $ 589,948
Gross margin (seasonally
adjusted) 121,722 107,519 74,769 106,143
General and
administrative expense 24,767 25,634 15,617 18,150
Net income (loss) 97,390 110,690 102,627 (168,621)
Net income (loss) per
unit - basic 0.73 0.83 0.92 (1.57)
Net income (loss) per
unit - diluted 0.73 0.82 0.91 (1.57)
Adjusted EBITDA 60,563 36,598 30,182 104,614
Amount available for
distribution
After gross margin
replacement 69,455 52,303 42,219 72,244
After marketing expense 61,242 41,345 36,087 62,515
Payout ratio(1)
After gross margin
replacement 59% 78% 83% 74%(2)
After marketing expense 67% 99% 97% 85%(2)
(1) The payout ratios have been calculated using cash distributions paid
during the quarter.
(2) Includes a one-time Special Distribution of $26.7 million paid in the
fourth quarter of fiscal 2010 and $18.6 million paid in the fourth
quarter of fiscal 2009.
Just Energy'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 Distributions.
Analysis of the third quarter
The 13% increase in seasonally adjusted sales compared to the prior comparable
quarter is attributable to the Hudson customers, acquired on May 7, 2010, with a
May 1, 2010 effective date and new customer additions over the past three
quarters. The customer base has increased by 42% from December 31, 2009. The
increase in sales was less than the increase in customers due to the lower
average customer contract prices for recently added customers and the decline in
the U.S. dollar exchange rate. Improved sales and gross margin from TGF and NHS
are also factors in the growth.
Seasonally adjusted gross margin increased by 9% in the third quarter of fiscal
2011 to $132.2 million, up from $121.7 million in the same period last year. The
margin increase was less than the increase in sales due to the lower relative
margins on commercial customers who make up the majority of the incremental
customers year over year. As designed, commercial customers generate lower
upfront gross margin than residential customers; however, the reduced costs to
administer the customers and typically less weather related volatility produce a
similar overall customer profit profile. General and administrative costs were
$26.3 million, an increase of 6% for the quarter, from the same period last
year. The 6% increase has allowed Just Energy to support a 42% increase in
customers as well as funding one-time costs for the conversion to a corporate
structure.
The distributable cash after customer gross margin replacement was $63.8
million, down 8% from $69.5 million in the prior comparable quarter. The
increased gross margin was offset by increased administrative and interest
charges, tax provision increases and higher bad debt expenses versus the prior
year comparable quarter.
After the deduction of all marketing expenses, distributable cash totalled $52.5
million, a decrease of 14% from $61.2 million in the third quarter of fiscal
2010. Distributions for the quarter were $42.5 million, reflecting the same
annual rate of $1.24, unchanged from a year ago. The payout ratio after payment
of all marketing costs for the third quarter of fiscal 2011 was 81% versus 67%
for the same period last year. Management anticipates that the payout ratio for
fiscal 2011 will be less than 100%, as it has been in past years.
Gas and electricity marketing
Sales and gross margin - Per financial statements
For the three months ended December 31
(thousands of dollars)
Fiscal 2011 Fiscal 2010
United United
Sales Canada States Total Canada States Total
------------
Gas $171,495 $ 156,525 $ 328,020 $ 207,499 $134,251 $ 341,750
Electricity 146,469 236,728 383,197 171,896 91,263 263,159
----------------------------------------------------------------------------
$317,964 $ 393,253 $ 711,217 $ 379,395 $225,514 $ 604,909
----------------------------------------------------------------------------
Increase
(decrease) (16)% 74% 18%
United United
Gross margin Canada States Total Canada States Total
------------
Gas $ 29,283 $ 25,530 $ 54,813 $ 32,165 $ 25,478 $ 57,643
Electricity 19,459 47,573 67,032 29,265 21,090 50,355
----------------------------------------------------------------------------
$ 48,742 $ 73,103 $ 121,845 $ 61,430 $ 46,568 $ 107,998
----------------------------------------------------------------------------
Increase
(decrease) (21)% 57% 13%
For the nine months ended December 31
(thousands of dollars)
Fiscal 2011 Fiscal 2010
United United
Sales Canada States Total Canada States Total
------------
Gas $378,824 $ 285,500 $ 664,324 $ 448,832 $222,409 $ 671,241
Electricity 472,677 783,717 1,256,394 469,844 278,570 748,414
----------------------------------------------------------------------------
$851,501 $1,069,217 $1,920,718 $ 918,676 $500,979 $1,419,655
----------------------------------------------------------------------------
Increase
(decrease) (7)% 113% 35%
United United
Gross margin Canada States Total Canada States Total
------------
Gas $ 44,350 $ 30,353 $ 74,703 $ 61,375 $ 44,967 $ 106,342
Electricity 73,258 142,244 215,502 80,645 64,401 145,046
----------------------------------------------------------------------------
$117,608 $ 172,597 $ 290,205 $ 142,020 $109,368 $ 251,388
----------------------------------------------------------------------------
Increase
(decrease) (17)% 58% 15%
Canada
Sales and gross margin for the three months ended December 31, 2010, were $318.0
million and $48.7 million, respectively, a decrease of 16% and 21%,
respectively, from the prior comparable period. Total sales and gross margin for
the nine-month period of fiscal 2011 were $851.5 million and $117.6 million,
respectively.
United States
Sales and gross margin in the U.S. were $393.3 million and $73.1 million,
respectively, for the third quarter of 2011, an increase of 74% and 57%,
respectively, from the same period last year. Total sales and gross margin for
the nine months ended December 31, 2010, were $1.1 billion and $172.6 million,
respectively.
Sales and gross margin - Seasonally adjusted(1)
For the three months ended December 31
(thousands of dollars)
Fiscal 2011 Fiscal 2010
United United
Sales Canada States Total Canada States Total
------------
Gas $171,495 $ 156,525 $ 328,020 $ 207,499 $134,251 $ 341,750
Adjustments
(1) (2,637) 158 (2,479) 23,743 3,977 27,720
----------------------------------------------------------------------------
$168,858 $ 156,683 $ 325,541 $ 231,242 $138,228 $ 369,470
Electricity 146,469 236,728 383,197 171,896 91,263 263,159
----------------------------------------------------------------------------
$315,327 $ 393,411 $ 708,738 $ 403,138 $229,491 $ 632,629
----------------------------------------------------------------------------
Increase
(decrease) (22)% 71% 12%
United United
Gross margin Canada States Total Canada States Total
------------
Gas $ 29,283 $ 25,530 $ 54,813 $ 32,165 $ 25,478 $ 57,643
Adjustments
(1) (2,268) 2,202 (66) 9,350 425 9,775
----------------------------------------------------------------------------
$ 27,015 $ 27,732 $ 54,747 $ 41,515 $ 25,903 $ 67,418
Electricity 19,459 47,573 67,032 29,265 21,090 50,355
----------------------------------------------------------------------------
$ 46,474 $ 75,305 $ 121,779 $ 70,780 $ 46,993 $ 117,773
----------------------------------------------------------------------------
Increase
(decrease) (34)% 60% 3%
For the nine months ended December 31
(thousands of dollars)
Fiscal 2011 Fiscal 2010
United United
Sales Canada States Total Canada States Total
------------
Gas $378,824 $ 285,500 $ 664,324 $ 448,832 $222,409 $ 671,241
Adjustments
(1) 99,956 18,480 118,436 160,985 27,764 188,749
----------------------------------------------------------------------------
$478,780 $ 303,980 $ 782,760 $ 609,817 $250,173 $ 859,990
Electricity 472,677 783,717 1,256,394 469,844 278,570 748,414
----------------------------------------------------------------------------
$951,457 $1,087,697 $2,039,154 $1,079,661 $528,743 $1,608,404
----------------------------------------------------------------------------
Increase
(decrease) (12)% 106% 27%
United United
Gross margin Canada States Total Canada States Total
------------
Gas $ 44,350 $ 30,353 $ 74,703 $ 61,375 $ 44,967 $ 106,342
Adjustments
(1) 21,272 5,625 26,897 41,804 2,688 44,492
----------------------------------------------------------------------------
$ 65,622 $ 35,978 $ 101,600 $ 103,179 $ 47,655 $ 150,834
Electricity 73,258 142,244 215,502 80,645 64,401 145,046
----------------------------------------------------------------------------
$138,880 $ 178,222 $ 317,102 $ 183,824 $112,056 $ 295,880
----------------------------------------------------------------------------
Increase
(decrease) (24)% 59% 7%
(1) For Ontario, Manitoba, Quebec and Michigan gas markets.
On a seasonally adjusted basis, sales increased by 12% in the third quarter of
fiscal 2011 to $708.7 million as compared to $632.6 million in fiscal 2010.
Gross margins were $121.8 million for the three months ended December 31, 2010,
up 3% from the prior comparable quarter. The lower increase in margin versus
sales is a result of lower margins on commercial customers, which generated the
majority of the increase in sales over the period as well as an active "blend
and extend" marketing program which reduces short-term gross margins to increase
gross margin in the long term. During the third quarter, "blend and extend"
offers and other customer contract renegotations resulted in a $3.4 million
reduction on what would have otherwise been collected as gross margin. For the
nine months, the total margin reduction has been $6.9 million, however, to date
these retention efforts have resulted in $20.5 million in increased future gross
margin for the extension period.
Total sales and gross margin for the first nine months of fiscal 2011 were $2.0
billion and $317.1 million, respectively, versus $1.6 billion and $295.9 million
for the same period last year.
Canada
Seasonally adjusted sales were $315.3 million for the quarter, down 22% from
$403.1 million in fiscal 2010. Seasonally adjusted gross margins were $46.5
million in the third quarter of fiscal 2011, a decrease of 34% from $70.8
million in the same period last year. For the nine months ended December 31,
2010, seasonally adjusted sales and gross margin were $951.5 million and $138.9
million, respectively, down 12% and 24%, respectively, from the prior comparable
period.
Gas
Canadian gas sales were $168.9 million, a decrease of 27% from $231.2 million in
the third quarter of fiscal 2010. In the third quarter of fiscal 2011, total
customer delivered volume was down 17% from the prior comparable quarter due to
a 12% decrease in flowing customers. Gross margin totalled $27.0 million, down
35% from the third quarter of fiscal 2010, reflecting lower consumption and
lower realized margin per customer due to the "blend and extend" contracts
signed by customers among other factors. This will result in higher margins in
the fourth quarter more in line with higher winter customer consumption.
For the nine months ended December 31, 2010, sales and gross margins were $478.8
million and $65.6 million, respectively, a decrease of 21% and 36%,
respectively, over the same period last year.
After allowance for balancing and inclusive of acquisitions, realized average
gross margin per customer ("GM/RCE") for the three months ended December 31,
2010, amounted to $166/RCE compared to $214/RCE for the prior comparable
quarter. The GM/RCE value includes an appropriate allowance for the bad debt
expense in Alberta.
Electricity
Electricity sales were $146.5 million for the quarter, a decrease of 15% from
the third quarter of fiscal 2010 due to a 4% decline in flowing customers. Gross
margin decreased by 34% for the current quarter to $19.5 million versus $29.3
million for the prior comparable period. This decrease is a result of the 4%
decline in customers and total reduced consumption of 8%. The Blend and extend
program added to the gross margin decrease for the quarter. Also, expiring
higher margin customers are being replaced with new lower margin customers due
to competitive pressures from low utility prices in Ontario.
For the nine months ended December 31, 2010, sales and gross margins were $472.7
million and $73.3 million, respectively, an increase of 1% and decrease of 9%,
respectively, over the same period last year.
Realized average gross margin per customer after all balancing and including
acquisitions for the quarter ended December 31, 2010, in Canada amounted to
$108/RCE, a decrease from $151/RCE in the prior year comparable quarter due to
the cumulative effect of new lower margin contracts necessary to compete against
the very low utility price in the Ontario market. Again, the success of "blend
and extend" reduced margins in the short term in exchange for higher margins in
the future. The GM/RCE value includes an appropriate allowance for the bad debt
expense in Alberta.
United States
Sales for the third quarter of fiscal 2011 were $393.4 million, an increase of
71% from $229.5 million in the prior comparable quarter. Seasonally adjusted
gross margin was $75.3 million, up 60% from $47.0 million from the same quarter
last year.
Gas
For the third quarter of fiscal 2011, gas sales and gross margin in the U.S.
totalled $156.7 million and $27.7 million, respectively, versus $138.2 million
and $25.9 million in fiscal 2010. The sales increase of 13% was due to a 45%
increase in customers largely through successful marketing but also through the
acquisition of Hudson. Sales growth was less than customer growth due to a lower
U.S. dollar exchange rate and lower selling prices.
Gross margin increased quarter over quarter by 7% as opposed to the 13% increase
in sales primarily as a result of the 11% decline in customer consumption in
Michigan and the Midwest due to relatively warmer weather conditions and utility
settlements.
Sales and gross margin for the nine months ended December 31, 2010, totalled
$304.0 million and $36.0 million, respectively.
Average realized gross margin after all balancing costs for the three months
ended December 31, 2010, was $161/RCE, a decrease of 22% over the prior year
comparable period of $207/RCE. This is due to lower per customer consumption,
utility reconciliations, losses on sale of excess gas and the inclusion of lower
margin commercial customers acquired with Hudson. The GM/RCE value includes an
appropriate allowance for bad debt expense in Illinois and California.
Electricity
U.S. electricity seasonally adjusted sales and gross margin for the quarter were
$236.7 million and $47.6 million, respectively, versus $91.3 million and $21.1
million, respectively, in the prior comparable quarter of fiscal 2010. Sales
were up 159% due to an increase in flowing customers year over year attributable
to the Hudson acquisition and strong marketing growth. Sales were up more than
gross margin due to higher customer contract prices, offsetting the decline in
the U.S. dollar exchange rate. Total customer demand increased by 214%, which is
consistent with the growth in the customer base. Margins were up 126% year over
year. The majority of customers added over the period were commercial customers
with lower per customer margins than the largely residential book in place a
year prior.
For the nine months ended December 31, 2010, the sales and gross margins were
$783.7 million and $142.2 million, respectively.
Average gross margin per customer for electricity during the current quarter
decreased to $160/RCE, compared to $213/RCE in the prior year comparable period,
as a result of a lower U.S. dollar exchange rate and lower margins per RCE for
commercial customers added. The GM/RCE value for Texas, Pennsylvania and
California includes an appropriate allowance for the bad debt expense.
Customer aggregation
Long-term customers
Oct 1, Failed to Dec 31, % increase
2010 Additions Attrition renew 2010 (decrease)
----------------------------------------------------------------------------
Natural gas
Canada 689,000 14,000 (16,000) (17,000) 670,000 (3)%
United
States 569,000 36,000 (28,000) (6,000) 571,000 -
----------------------------------------------------------------------------
Total gas 1,258,000 50,000 (44,000) (23,000) 1,241,000 (1)%
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Electricity
Canada 745,000 36,000 (20,000) (13,000) 748,000 -
United
States 1,158,000 166,000 (51,000) (21,000) 1,252,000 8%
----------------------------------------------------------------------------
Total
electricity 1,903,000 202,000 (71,000) (34,000) 2,000,000 5%
----------------------------------------------------------------------------
Combined 3,161,000 252,000 (115,000) (57,000) 3,241,000 3%
----------------------------------------------------------------------------
Gross customer additions for the quarter were 252,000, the third largest
quarterly total in Just Energy's history. This was due to very strong additions
in both the Consumer Energy division and the Commercial Energy division. Of the
total, 136,000 were commercial customers, showing the continued positive impact
of both the newly established broker channel and Just Energy's internal efforts
to expand its share of the commercial market. Commercial customers now represent
approximately 40% of the total customer base. Net customer additions through
marketing for the quarter were 80,000. For the same quarter last year, there
were 13,000 net customer additions through marketing. Overall, there has been a
3% increase in total customers from the second quarter and a 42% increase over
the past 12 months.
For the three-month period ended December 31, 2010, total gas customers
decreased by 1%, reflecting a difficult Canadian price environment with a large
disparity between utility spot prices and the five-year prices. The extended
period of low, stable gas prices has reduced the customer appetite for the
stability of higher priced long-term fixed contracts. This continues to impact
new customer additions and renewals.
Total electricity customers were up 5% in the third quarter of fiscal 2011, with
strong growth in our U.S. markets and a slight increase in total customers in
our Canadian markets.
As at December 31, 2010, there are an additional 41,000 RCEs categorized as
variable and short term in nature and, accordingly, have not been included in
the long-term customer aggregation reported above. The majority of these
short-term customers were acquired as part of the Hudson acquisition earlier in
the year.
JustGreen
Sales of the JustGreen products remain strong despite premium pricing in a
low-price environment. The JustGreen 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 match of
the Fund's renewable energy and carbon offset purchases against customer
contracts. An audit for the calendar year of 2010 will be conducted in the
spring of 2011. Just Energy is a participant in a number of renewable energy
projects across North America and is actively pursuing new projects to meet
customer demand for green commodity.
The Fund currently sells JustGreen gas in the eligible markets of Ontario,
British Columbia, Alberta, Michigan, New York, Ohio and Illinois and JustGreen
electricity in Ontario, Alberta, New York and Texas. JustGreen sales will expand
into the remaining markets over the coming quarters. Of all consumer customers
who contracted with Just Energy in the quarter, 37% took JustGreen for some or
all of their energy needs. On average, these customers elected to purchase 92%
of their consumption as green supply, which compared to 38% take-up, for an
average of 91% of consumption in the second quarter.
As at December 31, 2010, green supply made up 5% of the overall gas portfolio,
up from 3% in the third quarter last year. JustGreen supply makes up 10% of the
electricity portfolio, up from 5% from the same date last year.
Attrition
Natural gas
The trailing 12-month natural gas attrition in Canada was 11%, slightly above
management's target of 10%. Attrition is higher than targeted levels due to a
higher than normal customer default move back to the utility. In the U.S., gas
attrition for the trailing 12 months was 25%, below management's annual target
of 30%. This reflects a small continued improvement in the U.S. due to new
product offerings and greater economic stability within the U.S. customer base.
Electricity
The trailing 12-month electricity attrition rate in Canada for the quarter was
12%, above management's target of 10%. The electricity attrition has been
reflecting a similar trend to that of the Canadian gas market. Electricity
attrition in the U.S. was 18% for the trailing 12 months, below management's
target of 20%.
Trailing 12-month Targeted
attrition attrition
fiscal 2011 fiscal 2011
Natural gas
Canada 11% 10%
United States 25% 30%
Electricity
Canada 12% 10%
United States 18% 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 renew their contract prior to the end of
their existing contract term. Efforts begin up to 15 months in advance, allowing
a customer to renew for an additional four or five years.
The trailing 12-month renewal rate for all Canadian gas customers was 65%, below
management's target of 70%. 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 customer renewals
during the past twelve months, 30% were renewed for a one-year term. Canadian
gas markets lagged the 2011 target of 70%, largely due to the current high
spread between the Just Energy five-year price and the utility spot price. The
long period of stable low gas prices has reduced customer interest in renewing
at higher fixed prices. Management will continue to focus on increasing
renewals, 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 64% for the trailing 12
months, which is below the targeted level. There continues to be solid demand
for JustGreen products, supporting renewals in Canadian electricity customers
but due to the disparity between the spot and five-year prices and low
volatility in the spot prices, customers have been reluctant to again lock into
fixed-priced products. Just Energy has introduced some enhanced variable-price
offerings to improve renewal rates.
In the U.S. markets, Just Energy had primarily Illinois and a small number of
Indiana and New York gas customers up for renewal. Gas renewals for the U.S.
were 76%, slightly above our target of 75%.
During the quarter, Just Energy had both Texas and New York electricity
customers up for renewal. The electricity renewal rate was 75%, consistent with
the target rate of 75%.
In each of these markets, our green product is in the process of being offered
to renewing customers, which should further strengthen the profitability of
these customers.
Trailing 12-month renewals Targeted renewals
fiscal 2011 fiscal 2011
Natural gas
Canada 65% 70%
United States 76% 75%
Electricity
Canada 64% 70%
United States 75% 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. -
gas electricity gas electricity
------------------------------------------------------------
Remainder of
2011 6% 6% 3% 6%
2012 26% 21% 22% 27%
2013 22% 24% 25% 19%
2014 16% 17% 12% 21%
2015 14% 12% 16% 14%
Beyond 2015 16% 20% 22% 13%
------------------------------------------------------------
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. To the extent there is continued customer
take-up on "blend and extend" offers, some renewals scheduled for 2012 and 2013
will move back to 2015 and beyond.
Gross margin earned through new marketing efforts
Annual gross margin per customer for new and renewed customers
The table below depicts the annual margins on contracts of residential customers
signed in the quarter. This table reflects all margin earned on new additions
and renewals including both the brown commodity and JustGreen. Customers added
through marketing were at or above the margins of customers lost through
attrition or failure to renew. Renewing customers were at lower margins largely
due to lesser take-up of JustGreen on renewal. However, JustGreen is beginning
to be aggressively marketed for renewals, with the expectation that rates
similar to those for new customers can be achieved. Sales of the JustGreen
products remained very strong with approximately 37% of all residential
customers added in the past quarter taking some or all green energy supply.
Customers that have purchased the JustGreen product elected, on average, to take
92% of their consumption in green supply. For large commercial customers, the
average gross margin for new customers added was $97/RCE, unchanged from the
second quarter of fiscal 2011. The aggregation cost of these customers is
commensurately lower per RCE than a residential customer.
Number of
Annual gross margin per customer(1) Q3 fiscal 2011 customers
-----------------------------
Residential and small commercial customers
added in the quarter
- Canada - gas $235 6,000
- Canada - electricity $179 18,000
- United States - gas $209 32,000
- United States - electricity $183 60,000
Average annual margin $192
Residential and small commercial customers
renewed in the quarter
- Canada - gas $186 33,000
- Canada - electricity $134 30,000
- United States - gas $208 14,000
- United States - electricity $205 8,000
Average annual margin $173
Large commercial customers added in the quarter $ 97 136,000
Large commercial customers lost in the quarter $122 58,000
Residential and small commercial customers lost
in the quarter
- Canada - gas $195 32,000
- Canada - electricity $150 33,000
- United States - gas $208 27,000
- United States - electricity $222 22,000
Average annual margin $191
(1) Customer sales price less cost of associated supply and allowance for
bad debt and U.S. working capital.
Home Services division (NHS)
NHS provides Ontario residential customers with long-term water heater rental
programs that offer conventional tanks, power vented tanks and tankless water
heaters in a variety of sizes, in addition to now offering furnaces and air
conditioners. NHS continues to ramp up its operations and, as at December 31,
2010, had a cumulative installed base of 108,300 water heaters, 1,900 furnaces,
and 500 air conditioners in residential homes. The water heater installed base
has increased by 60% in the past year. Management is confident that NHS will
contribute to the long-term profitability of Just Energy and continue to help
diversify away from weather-related volatility. NHS currently markets through
approximately 200 independent contractors.
As NHS is a high growth, relatively capital-intensive business, Just Energy's
management believes that, in order to maintain stability of distributions,
separate non-recourse financing of this capital is appropriate. In January,
2010, NHS announced that it had entered into a long-term financing agreement
with Home Trust Company ("HTC") for the funding of the water heaters for NHS in
the Enbridge gas distribution territory. During July, 2010, NHS expanded this
financing arrangement to cover the Union Gas territory. Under the agreements,
NHS receives funds equal to the amount of the five-year cash flow of the water
heater contract discounted at an agreed upon rate. HTC is then paid an amount
which is equal to the customer rental payments on the water heaters for the next
five years. The funding received from HTC up to December 31, 2010 was $89.8
million.
Management's strategy for NHS is to self-fund the business through its growth
phase, building value within the customer base. This way, NHS will not require
significant cash from Just Energy's core operations nor will Just Energy rely on
NHS's cash flow to fund distributions. The result should be a valuable asset,
which will generate strong cash returns following repayment of the HTC
financing.
The first nine months of 2011 saw significant geographic and product expansions
for NHS. The division has begun marketing its products in Union Gas territory in
Ontario, expanding its reach to the entire province. It also rolled out an
offering of furnace and air conditioner rentals and sales. These expansions were
funded by increased general and administrative costs but are expected to
substantially increase the growth and profitability of NHS in the future.
Selected financial information
(thousands of dollars, except where indicated)
Three months Three months
ended Dec 31, ended Dec 31,
2010 2009
Sales per financial statements $ 5,976 $ 2,597
Cost of sales 1,611 379
-----------------------------
Gross margin 4,365 2,218
Marketing expenses 756 375
General and administrative expense 2,896 1,045
Interest expense 1,733 -
Capital expenditures 7,044 4,841
Amortization 484 450
Ending total number of water heaters installed 108,300 67,500
Results of operations
For the quarter ended December 31, 2010, NHS had sales of $6.0 million and gross
margin of $4.4 million, an increase of 130% and 97%, respectively, from the
prior comparable quarter. The cost of sales for the quarter was $1.6 million, of
which 1.2 million represents the non-cash amortization of the installed water
heaters for the customer contracts signed to date. Marketing expenses for the
third quarter of fiscal 2011 were $0.8 million and include the amortization of
commission costs paid to the independent agents, automotive 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 $2.9 million for the three
months ended December 31, 2010. The high level of general and administrative
costs relative to past quarters was largely due to the expansion into Union Gas
territory and the rollout of furnace and air conditioner offerings.
Capital expenditures, including installation costs, amounted to $7.0 million for
the three months ended December 31, 2010. Amortization costs were $0.5 million
for the current quarter and include not only the depreciation on
non-tank-related capital assets noted above but also the amortization of the
purchased water heater contracts.
For the nine months ended December 31, 2010, sales and gross margin for NHS were
$15.6 million and $11.0 million, respectively. Marketing, general and
administrative and other expenses were $2.4 million and $8.8 million,
respectively, for the first nine months of fiscal 2011. Interest expense
amounted to $4.6 million as a result of the financing arrangement with HTC. To
date in fiscal 2011, capital expenditures by NHS amounted to $24.4 million.
Comparative figures are not included as NHS was acquired as part of the
Universal acquisition effective July 1, 2009.
The growth of NHS has been rapid and, combined with the HTC financing, is
expected to be self-sustaining on a cash flow basis.
Ethanol division (TGF)
TGF continues to remain focused on improving the plant production and run time
of the Belle Plaine, Saskatchewan, wheat-based ethanol facility. For the quarter
ended December 31, 2010, the plant achieved an average production capacity of
84%, which is the best quarter in its history. The Phase 1 grain-milling upgrade
has allowed the plant to achieve daily milling rates exceeding nameplate
capacity from time to time. Ethanol prices improved and were, on average, $0.60
per litre for the quarter, an increase of 5% from the $0.57 per litre price
noted in the second quarter. Wheat prices averaged $160 per metric tonne for the
quarter, down from $170 last quarter.
The ethanol division has separate non-recourse financing in place such that
capital requirements and operating losses will not impact Just Energy's core
business and its ability to pay distributions.
Selected financial information
(thousands of dollars)
Three months Three months
ended Dec 31, ended Dec 31,
2010 2009
Sales per financial statements $ 26,879 $ 19,460
Cost of sales 20,887 17,729
-----------------------------
Gross margin 5,992 1,731
General and administrative expense 3,110 2,440
Interest expense 1,789 1,671
Capital expenditures 37 1,263
Amortization 299 222
Results of operations
During the third quarter of fiscal 2011, TGF had sales of $26.9 million, an
increase of 38% from $19.5 million in the prior comparable quarter. Gross margin
amounted to $6.0 million, up 246% from $1.7 million in the third quarter of
fiscal 2010. During the quarter, the plant produced 31.6 million litres of
ethanol and 31,683 metric tonnes of DDG. For the three months ended December 31,
2010, TGF incurred $3.1 million in general and administrative expenses and $1.8
million in interest charges.
For the nine months ended December 31, 2010, sales and gross margin for TGF were
$74.9 million and $7.9 million, respectively. General and administrative costs
and interest expenses were $8.4 million and $5.4 million, respectively, for the
first nine months of fiscal 2011. Comparative figures were not included as TGF
was acquired as part of the Universal acquisition, effective July 1, 2009.
TGF receives a federal subsidy related to the ecoEnergy for Biofuels Agreement
signed on February 17, 2009, based on the volume of ethanol produced. From July
1, 2009 to March 31, 2010, the subsidy was ten cents per litre, and throughout
fiscal 2011, this subsidy will be nine cents per litre. This amount declines
through time to five cents per litre of ethanol produced in fiscal 2015, the
last year of the agreement.
Overall consolidated results - Just Energy
General and administrative expenses
General and administrative costs were $26.3 million for the three months ended
December 31, 2010, an increase of 6% from $24.8 million, which was reported in
the third quarter of fiscal 2010. The 6% increase has allowed Just Energy to
support a 42% increase in customers as well as funding one-time costs for the
conversion to a corporate structure. In addition, Just Energy obtained a new
commercial license in Pennsylvania and incurred costs to prepare to enter
Pennsylvania for residential sales and Saskatchewan for the commercial business.
Just Energy expects continued general and administrative spending to support
geographic market expansion but management believes that costs per customer will
continue to decline over the long term.
Expenditures for general and administrative costs for the nine months ended
December 31, 2010, were $81.1 million, an increase of 23% from $66.0 million in
the prior comparable period. The increase versus the prior period is a result of
the inclusion of Hudson administrative costs, increased costs to accommodate
numerous areas of expansion (which should result in higher margin and
distributable cash in future periods) and Universal administrative costs (only
six months were included in the comparable period).
Marketing expenses
Marketing expenses, which consist of commissions paid to independent sales
contractors, brokers and independent representatives for signing new customers,
as well as corporate costs, were $34.5 million, an increase of 30% from $26.5
million in the third quarter of fiscal 2010. New customers signed by our
marketing sales force were 252,000 in the third quarter of fiscal 2011, up 84%
compared to 137,000 customers added through our sales offices in the same period
last year. The increase in the current quarter expense reflects the cost of
strong growth in customer additions, offset by the lower aggregation cost per
customer and a lower U.S. dollar exchange rate.
Marketing expenses to maintain gross margin are allocated based on the ratio of
gross margin lost from attrition as compared to the gross margin signed from new
and renewed customers during the period. Marketing expenses to maintain gross
margin were $19.1 million for the third quarter of fiscal 2011, an increase of
4% from $18.3 million from the prior comparable quarter.
Marketing expenses to add new gross margin are allocated based on the ratio of
net new gross margin earned on the customers signed, less attrition, as compared
to the gross margin signed from new and renewed customers during the period.
Marketing expenses to add new gross margin in the third quarter totalled $11.3
million, a 38% increase from $8.2 million in the prior comparable period.
Although there was a greater increase in the net customer additions of 80,000
for the third quarter, up from 13,000 in fiscal 2010, the blend of commercial
and residential customers added resulted in a lower increase in margin than in
the previous year.
Commissions related to obtaining and renewing Hudson commercial contracts are
paid in one of the following ways: all or partially upfront or as a residual
payment over the life of the contract. If the commission is paid all or
partially upfront, it is capitalized and amortized in marketing expenses over
the term for which the associated revenue is earned. If the commission is paid
as a residual payment, the amount is expensed as earned. Of the current total
commercial customer base, approximately 65% are commercial broker customers and
40% of these commercial brokers are being paid recurring residual payments.
Marketing expenses included in distributable cash exclude amortization related
to the contract initiation costs for Hudson and NHS. For the three and nine
months ended December 31, 2010, the amortization amounted to $4.1 million and
$10.3 million, respectively.
For the nine months ended December 31, 2010, total marketing expenses were
$101.2 million, an increase of 39% from the $73.0 million reported in the same
period last year.
The actual aggregation costs for the nine months ended December 31, 2010, per
customer for residential and commercial customers signed by independent
representatives and commercial customers signed by brokers were as follows:
Residential Commercial Commercial broker
customers customers customers
Natural gas
Canada $269/RCE $161/RCE $ 31/RCE
United States $181/RCE $155/RCE $ 21/RCE
Electricity
Canada $203/RCE $138/RCE $ 32/RCE
United States $147/RCE $ 76/RCE $ 41/RCE
Total aggregation costs $172/RCE $108/RCE $ 35/RCE
The actual aggregation cost per customer added for all energy marketing for the
nine months ended December 31, 2010, was $104, down from $110 in the second
quarter. This is due to the higher relative number of commercial customers
aggregated and their associated lower costs. The $35 average aggregation cost
for the commercial broker customers is based on the expected average annual cost
for the respective customer contracts. It should be noted that commercial broker
contracts pay further commissions averaging $35 per year for each additional
year that the customer flows. Assuming an average life of 2.8 years, this would
add approximately $63 (1.8 X $35) to the fiscal 2011 $35 average aggregation
cost for commercial broker customers reported above.
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 $1.3 million for the third quarter of fiscal 2011, an increase from the $1.0
million paid in third quarter of fiscal 2010. Total costs for the nine months
ended December 31, 2010, totalled $3.9 million, versus $2.6 million for the same
period last year. The increase relates primarily to additional fully paid unit
appreciation rights awarded to the senior management of the Fund.
Bad debt expense
In Illinois, Alberta, Texas, Pennsylvania, California and Massachusetts, Just
Energy assumes the credit risk associated with the collection of customer
accounts. In addition, for commercial direct-billed accounts in B.C., New York
and Ontario, Just Energy is responsible for the bad debt risk. NHS has also
assumed credit risk for customer account collection for territories within
Ontario that were previously serviced by our competitor Reliance. 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. During the quarter, Just Energy was exposed to the risk of
bad debt on 36% of its sales.
Bad debt expense for three months ended December 31, 2010, increased by 26% to
$6.5 million (2.5% of credit risk sales) versus $5.1 million expensed in the
prior comparable quarter. The bad debt expense increase was entirely related to
the 48% increase in total revenues for the quarter to $261.8 million, in the
markets where Just Energy assumes the risk for accounts receivable collections,
which also now includes incremental commercial customers. Management integrates
its default rate for bad debts within its margin targets and continuously
reviews and monitors the credit approval process to mitigate customer
delinquency.
For the nine months ended December 31, 2010, the bad debt expense was $18.9
million, representing approximately 2.6% of the $731.4 million in sales in
markets where it assumes credit risk (36% of total sales), within the Fund's 2%
to 3% target range. This was unchanged from the 2.6% reported for the second
quarter and down from the 3.3% reported a year earlier. Credit losses in Texas
as a percentage of total revenues have declined due to aggressive collection
efforts and quicker disconnection for delinquent customers. Continued
improvements in the Illinois collection efforts and lower default rates for
acquired Hudson commercial customers have also contributed to the improvement in
the bad debt rate versus the third quarter of fiscal 2010. Management expects
that bad debt expense will be in the range of 2% to 3% for the remainder of the
fiscal year assuming that the housing market in the U.S. continues to show signs
of improvement.
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
regulated fee.
Interest expense
Total interest expense for the three months ended December 31, 2010, amounted to
$15.1 million, an increase from $5.1 million in the third quarter of fiscal
2010. The large increase in costs primarily relates to the interest expense for
the JEIF convertible debentures associated with the Hudson acquisition as well
as interest costs associated with the NEC financing.
For the nine-month period of fiscal 2011, the total interest cost was $36.9
million versus $10.6 million paid in fiscal 2010. This increase is a result of
not only the JEIF convertible debentures and NEC financing but also the
inclusion of only six months of interest relating to the JEEC convertible
debentures and TGF financing in the prior comparable period.
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 the third
quarter, a foreign exchange unrealized loss of $4.1 million was reported in
other comprehensive income (loss) versus $0.2 million reported in the same
period last year. For the nine months ended December 31, 2010, the foreign
exchange unrealized gain was $5.2 million versus $24.8 million for the same
period in fiscal 2010.
Overall, a weaker U.S. dollar decreases sales and gross margin but this is
partially offset by lower operating costs denominated in U.S. dollars. Just
Energy 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. Just Energy
hedges between 25% and 90% of the next 12 months cross border cash flows
depending on its level of certainty.
Class A preference share cash distributions
The remaining holder of the Just Energy Corp. ("JEC") Class A preference shares
(which are exchangeable into units on a one for one basis) is entitled to
receive, on a quarterly basis, a payment equal to the amount paid or payable to
a Unitholder on an equal number of units. The total amount paid for the three
and nine months ended December 31, 2010, including tax, amounted to $1.6 million
and $4.9 million, respectively, unchanged from the prior year. The distributions
on the Class A preference shares are reflected in the consolidated statement of
Unitholders' deficiency of the Fund's consolidated financial statements, net of
tax.
(Recovery of) Provision for income tax
(thousands of dollars)
For the
For the three three months For the nine For the nine
months ended ended Dec months ended months ended
Dec 31, 31, Dec 31, Dec 31,
fiscal 2011 fiscal 2010 fiscal 2011 fiscal 2010
---------------------------------------------------------
Current income tax
provision
(recovery) $ 4,469 $ 2,269 $ 292 $ 8,335
Amount credited to
Unitholders'
equity 326 886 1,305 1,963
Future tax expense
(recovery) 31,106 (20,165) 7,134 8,781
---------------------------------------------------------
(Recovery of)
Provision for
income tax $ 35,901 $(17,010) $ 8,731 $ 19,079
---------------------------------------------------------
---------------------------------------------------------
The Fund recorded a current income tax provision of $4.5 million for the third
quarter of fiscal 2011 versus $2.3 million of provision in the same period last
year. A tax provision of $0.3 million has been recorded for the nine-month
period of fiscal 2011 versus a provision of $8.3 million for the same period
last year. The change is mainly attributable to lower Canadian income taxes as a
result of the integration of the Universal entities into the income fund
structure during the first three quarters of this fiscal year.
Also included in the income tax provision is an amount relating to the tax
impact of the distributions paid to the Class A preference shareholders of JEC.
In accordance with EIC 151, Exchangeable Securities Issued by Subsidiaries of
Income Trusts, all Class A preference shares are included as part of
Unitholders' equity and the distributions paid to the shareholders are included
as distributions on the consolidated statement of Unitholders' deficiency, net
of tax. For the three and nine months ended December 31, 2010, the tax impact of
these distributions, based on a tax rate of 30%, amounted to $0.3 million and
$1.3 million, respectively, versus an amount of $0.9 million and $2.0 million,
respectively, based on 32.3% last year. The decrease of this tax impact in the
third quarter of fiscal 2011 is due to a decline in the corporate tax rate in
Canada.
As noted in the Fund's 2010 Annual Report, the Fund converted to a taxable
Canadian corporation effective January 1, 2011 and a future tax recovery of
$122.0 million was recorded in fiscal 2010 to recognize the significant
temporary differences attributed to mark to market losses from financial
derivatives, which is expected to be realized subsequent to 2010. During the
first nine months of this fiscal year, these mark to market losses declined as a
result of a change in fair value of the derivative instruments, and as a result,
a future tax expense of $7.1 million has been recorded for this period.
After the Conversion at the commencement of the first quarter of calendar 2011,
Just Energy will be taxed as a taxable Canadian corporation. Therefore, the
future tax asset or liability associated with Canadian liabilities and assets
recorded on the consolidated balance sheets 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. Canadian entities under Just Energy will be subject to a tax rate of
approximately 28% after the Conversion.
The Fund follows the liability method of accounting for income taxes. Under this
method, income tax liabilities and assets are recognized for the estimated tax
consequences attributable to the temporary differences between the carrying
value of the assets and liabilities on the consolidated financial statements and
their respective tax bases, using substantively enacted income tax rates. A
valuation allowance is recorded against a future income tax asset if it is not
anticipated that the asset will be realized in the foreseeable future. The
effect of a change in the income tax rates used in calculating future income tax
liabilities and assets is recognized in income during the period that the change
occurs.
Liquidity and capital resources
Summary of cash flows
(thousands of dollars)
For the For the
three months three months For the nine For the nine
ended Dec ended Dec months ended months ended
31, fiscal 31, fiscal Dec 31, Dec 31,
2011 2010 fiscal 2011 fiscal 2010
---------------------------------------------------------
Operating
activities $ 11,196 $ 4,418 $ 50,744 $ 66,920
Investing
activities (19,132) (12,556) (302,505) (25,051)
Financing
activities,
excluding
distributions 41,976 47,456 354,997 41,869
Effect of foreign
currency
translation 764 5,519 7,724 (1,408)
---------------------------------------------------------
Increase in cash
before
distributions 34,804 44,837 110,960 82,330
Distributions (cash
payments) (34,883) (34,670) (107,324) (101,577)
---------------------------------------------------------
Increase (decrease)
in cash (79) 10,167 3,636 (19,247)
Cash - beginning of
period 63,847 29,680 60,132 59,094
---------------------------------------------------------
Cash - end of
period $ 63,768 $ 39,847 $ 63,768 $ 39,847
---------------------------------------------------------
---------------------------------------------------------
Operating activities
Cash flow from operating activities for the three months ended December 31,
2010, was $11.2 million, an increase from $4.4 million in the prior comparable
quarter. For the nine months ended December 31, 2010, cash flow from operations
was $50.7 million, a decrease from $66.9 million in the prior comparable period.
This change is a result of increased net income in fiscal 2011 to date which was
offset by increased amortization costs and a lower seasonal adjustment due to
warmer weather conditions.
Investing activities
The Fund purchased capital assets totalling $8.7 million and $29.1 million
during the three- and nine-month periods ended December 31, 2010, respectively a
decrease from $11.0 million and $30.9 million in the same periods last year. In
fiscal 2011 to date, Just Energy's capital spending related primarily to the
water heater business and costs related to purchases of office equipment and IT
software.
Financing activities
Financing activities in the third quarter related primarily to the drawdown of
the operating line for working capital requirements as well as additional HTC
financing for purchase of additional water heaters. During the three months
ended December 31, 2010, Just Energy had drawn a total of $29.9 million against
the credit facility versus $38.4 million drawn in the third quarter of fiscal
2010. Financing activities, excluding distributions, for the nine-month period
of fiscal 2011 relate primarily to convertible debentures issued to fund the
Hudson acquisition. During the first quarter of fiscal 2011, Just Energy entered
into an agreement with a syndicate of underwriters for $330 million of
convertible debentures to fund the Hudson acquisition.
As of December 31, 2010, Just Energy had a credit facility of $250 million. In
connection with the Conversion on January 1, 2011, Just Energy increased its
credit facility to $350 million and repayment of the facility is due on December
31, 2013. The syndicate of lenders now includes the Canadian Imperial Bank of
Commerce, Royal Bank of Canada, National Bank of Canada, Societe Generale, Bank
of Nova Scotia, Toronto-Dominion Bank and Alberta Treasury Branches.
As Just Energy continues to expand in the U.S. markets, the need to fund working
capital and collateral posting requirements will increase, driven primarily by
the number of customers aggregated, and to a lesser extent, by the number of new
markets. Based on the markets in which Just Energy currently operates and others
that management expects the Fund to enter, funding requirements will be
supported through the credit facility.
The Fund's liquidity requirements are driven by the delay from the time that a
customer contract is signed until cash flow is generated. For residential
customers, approximately 60% of an independent sales contractor's commission
payment is made following reaffirmation or verbal verification of the customer
contract, with most of the remaining 40% being paid after the energy commodity
begins flowing to the customer. For commercial customers, commissions are paid
either as the energy commodity flows throughout the contract or partially
upfront once the customer begins to flow.
The elapsed period between the time 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 distribution reinvestment plan ("DRIP"), a
portion of distributions 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 three
and nine months ended December 31, 2010, the Fund made cash distributions to its
Unitholders and the Class A preference shareholder in the amount of $34.9
million and $107.3 million, respectively, compared to $34.7 million and $101.6
million, respectively, in the prior comparable periods.
Just Energy will continue to utilize its cash resources for expansion into new
markets, growth in its existing energy marketing customer base, JustGreen
products and Home Services division, and also to make accretive acquisitions of
customers as well as distributions to its Unitholders.
At the end of the quarter, the annual rate for distributions per unit was $1.24.
Effective January 1, 2011 Just Energy intends to make dividends to its
shareholders, based upon cash receipts of Just Energy, excluding proceeds from
the issuance of additional units, adjusted for costs and expenses of the
company. Just Energy's intention is for shareholders of record on the 15th day
of each month to receive dividends at the end of the month.
Balance sheet as at December 31, 2010, compared to March 31, 2010
Cash increased from $60.1 million as at March 31, 2010, to $63.8 million.
Restricted cash, which includes cash collateral posting related to supply
procurement and credit support for Universal, Commerce and the TGF entities, has
decreased to $0.7 million on December 31, 2010, from $18.7 million. The
utilization of the credit facility increased from $57.5 million to $72.4 million
as a result of normal injection of gas into storage and various other working
capital requirements. Working capital requirements in the U.S. and Alberta are a
result of 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.
There was an increase in accounts receivable from $348.9 million at March 31,
2010 to $429.4 million as at December 31, 2010. Accounts payable and accrued
liabilities have also increased from $227.0 million to $314.5 million for the
same period. Both increases in accounts receivable and payable are related to
added consumption as a result of the Hudson customers acquired and strong net
additions from fiscal 2010 and the first two quarters of fiscal 2011.
Gas in storage has increased from $4.1 million to $34.2 million during the nine
months ended December 31, 2010. The increased balance reflects injections into
storage from April to November for the expanding U.S. customer base.
At the end of the third quarter in Ontario, Manitoba, Quebec and Michigan, Just
Energy had delivered more gas to LDCs than was supplied to customers 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 consolidated
balance sheets is the deferred revenue amount of $111.9 million and gas
delivered in excess of consumption of $89.5 million. At March 31, 2010, Just
Energy had unbilled revenues amounting to $20.8 million and accrued gas accounts
payable of $15.1 million.
Contract initiation costs relate to the commissions paid by both Hudson and NHS
for contracts sold and will be amortized over the life of the contract. The
balance increased to $29.2 million from $5.6 million at the end of the last
fiscal year mainly due to the Hudson acquisition. The March 31, 2010 balance
related to contract initiation costs for NHS only.
Other assets and other liabilities relate entirely to the fair value of the
financial derivatives. The mark to market gains and losses can result in
significant changes in net income and, accordingly, Unitholders' equity from
quarter to quarter due to commodity price volatility. Given that Just Energy has
purchased this supply to cover future customer usage at fixed prices, management
believes that these non-cash quarterly changes are not meaningful.
Intangible assets include the acquired customer contracts as well as other
intangibles such as brand, broker network and information technology systems,
primarily related to the Hudson and Universal purchases. The total intangible
asset and goodwill balances increased to $482.9 million and $222.4 million,
respectively, from $340.6 million and $177.9 million, respectively, as at March
31, 2010.
Long-term debt excluding the current portion has increased to $547.9 million in
the nine months ended December 31, 2010, from $231.8 million and is detailed
below.
Long-term debt and financing
(thousands of dollars)
As at December 31, 2010 As at March 31, 2010
---------------------------------------------
Original credit facility $ 72,446 $ 57,500
TGF credit facility 38,417 41,313
TGF debentures 37,001 37,001
TGF term loan - 10,000
JEEC convertible debentures 84,376 83,417
NEC financing 89,802 65,435
JEIF convertible debentures 285,130 -
Original credit facility
Just Energy holds a $350 million credit facility which was increased on January
1, 2011 from $250 million to meet working capital requirements. The syndicate of
lenders now includes Canadian Imperial Bank of Commerce, Royal Bank of Canada,
National Bank of Canada, Societe Generale, Bank of Nova Scotia, Toronto Dominion
Bank and Alberta Treasury Branches. Under the terms of the credit facility, Just
Energy was able to make use of Bankers' Acceptances and LIBOR advances at
stamping fees of 4.0%, prime rate advances at Canadian prime and U.S. prime plus
3.0% and letters of credit at 4.0%. Just Energy's obligations under the credit
facility are supported by guarantees of certain subsidiaries and affiliates and
secured by a pledge of the assets of Just Energy and the majority of its
operating subsidiaries and affiliates. Just Energy is required to meet a number
of financial covenants under the credit facility agreement. As at December 31,
2010 and 2009, all of these covenants have been met.
TGF credit facility
A credit facility of up to $50 million 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 further revised on
March 18, 2009, and was converted to a fixed repayment term of ten years
commencing March 1, 2009, which includes interest costs at a rate of prime plus
3%, 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 shareholders' 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, 2010 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 million aggregate principal amount of debentures was
entered into in 2006. The interest rate is 10.5% per annum, compounded annually.
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 shareholders' 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 had a term loan for $10,000 with a third party lender bearing interest at
prime plus 1% which was due in full on December 31, 2010. As at December 31,
2010 the $10,000 amount was repaid. In addition, TGF has a working capital
operating line bearing interest at prime plus 2% of which $0.3 million of
letters of credit have also been issued.
JEEC convertible debentures
In conjunction with the acquisition of Universal 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
JEEC convertible 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
JEEC convertible debentures is convertible at any time prior to maturity or on
the date fixed for redemption, at the option of the holder, into approximately
30.22 units of the Fund, representing a conversion price of $33.09 per
Exchangeable Share as at December 31, 2010. Pursuant to the JEEC convertible
debentures, if JEEC fixes a record date for the making of a dividend on the JEEC
Exchangeable Shares, the conversion price shall be adjusted in accordance
therewith.
The JEEC convertible debentures are not redeemable prior to October 1, 2010. On
and after October 1, 2010, but prior to September 30, 2012, the JEEC convertible
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 JEEC convertible 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 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 in the Enbridge gas distribution territory. On July 16, 2010,
the financing arrangement was expanded to the Union Gas territory. Pursuant to
the agreement, NHS will receive financing of an amount 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 an amount
equivalent to the rental stream from customers on the water heater contracts for
the first five years. The financing agreement is subject to a holdback
provision, whereby 3% in the Enbridge territory and 5% in the Union Gas
territory 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 December 31, 2010, all of these
covenants have been met.
JEIF convertible debentures
On May 7, 2010, Just Energy completed the acquisition of all the equity
interests of Hudson Parent Holdings, LLC, and Hudson Energy Corp. (collectively,
"Hudson") with an effective date of May 1, 2010. Just Energy entered into an
agreement with a syndicate of underwriters for $330 million of convertible
extendible unsecured subordinated debentures. The JEIF convertible debentures
bear an interest rate of 6.0% per annum payable semi-annually in arrears on June
30 and December 31 of each year, with maturity on June 30, 2017. Each $1,000 of
principal amount of the JEIF convertible debentures is convertible at any time
prior to maturity or on the date fixed for redemption, at the option of the
holder, into approximately 55.6 units of the Fund, representing a conversion
price of $18 per unit.
The JEIF convertible debentures are not redeemable prior to June 30, 2013,
except under certain conditions after a change of control has occurred. On or
after June 30, 2013, but prior to June 30, 2015, the debentures may be redeemed
by the Fund, in whole or in part, on not more than 60 days' and not less than 30
days' prior notice, at a redemption price equal to the principal amount thereof,
plus accrued and unpaid interest, 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 or after June 30, 2015, and prior to the maturity date, the
debentures may be redeemed by the Fund, in whole or in part, at a redemption
price equal to the principal amount thereof, plus accrued and unpaid interest.
Contractual obligations
In the normal course of business, the Fund is obligated to make future payments
for contracts and other commitments that are known and non-cancellable.
Payments due by period
(thousands of dollars)
Less than 1 - 3 4 - 5 After 5
Total 1 year years years years
----------------------------------------------------------------------------
Accounts payable,
accrued liabilities
and unit distribution
payable $ 314,457 $314,457 $ - $ - $ -
Bank indebtedness 2,690 2,690 - - -
Long-term debt
(contractual cash
flow) 657,667 131,734 74,318 119,345 332,270
Interest payments 182,603 37,765 63,909 49,405 31,524
Property and equipment
lease agreements 30,600 2,376 13,773 7,594 6,857
EPCOR billing,
collections and supply
commitments 8,432 2,300 6,132 - -
Grain production
contracts 35,206 13,476 21,334 396 -
Gas and electricity
supply purchase
commitments 3,422,563 485,517 2,274,757 624,974 37,315
----------------------------------------------------------------------------
$4,654,218 $990,315 $2,454,223 $801,714 $407,966
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Other obligations
In the opinion of management, the Fund has no material pending actions, claims
or proceedings that have not been included in either its accrued liabilities or
in the financial statements. In the normal course of business, the Fund could be
subject to certain contingent obligations that become payable only if certain
events were to occur. The inherent uncertainty surrounding the timing and
financial impact of any events 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.
Transactions with related parties
Just Energy does not have any material transactions with any individuals or
companies that are not considered independent to Just Energy or any of its
subsidiaries and/or affiliates.
Critical accounting estimates
The consolidated financial statements of the Fund have been prepared in
accordance with Canadian GAAP. Certain accounting policies require management to
make estimates and judgments that affect the reported amounts of assets,
liabilities, revenues, cost of sales, marketing, and general and administrative
expenses. Estimates are based on historical experience, current information and
various other assumptions that are believed to be reasonable under the
circumstances. The emergence of new information and changed circumstances may
result in actual results or changes to estimated amounts that differ materially
from current estimates.
The following assessment of critical accounting estimates is not meant to be
exhaustive. The Fund might realize different results from the application of new
accounting standards promulgated, from time to time, by various rule-making
bodies.
Unbilled revenues/Accrued gas accounts payable
Unbilled revenues result when customers consume more gas than has been delivered
by Just Energy to the LDCs. These estimates are stated at net realizable value.
Accrued gas accounts payable represents Just Energy's obligation to the LDC with
respect to gas consumed by customers in excess of that delivered and 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, California and
Massachusetts. In addition, for large direct-billed accounts in B.C., New York
and Ontario, Just Energy is responsible for the bad debt risk. NHS has also
assumed credit risk for customer accounts within several territories within
Ontario that were previously serviced by our competitor Reliance. 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 either at as March 31,
2010, or June 30, 2010, and as a result of the review, it was determined that no
impairment of goodwill existed.
Fair value of derivative financial instruments and risk management
Just Energy has entered into a variety of derivative financial instruments as
part of the business of purchasing and selling gas, electricity and JustGreen
supply. 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 to cover its estimated fixed-price delivery or green commitment
obligations.
Just Energy's business model's objective is to minimize commodity risk, other
than consumption changes, usually attributable to weather. Accordingly, it is
Just Energy's policy to hedge the estimated fixed-price requirements of its
customers with offsetting hedges of natural gas and electricity at fixed prices
for terms equal to those of the customer contracts. The cash flow from these
supply contracts is expected to be effective in offsetting Just Energy's price
exposure and serves to fix acquisition costs of gas and electricity to be
delivered under the fixed-price or price-protected customer contracts. Just
Energy's policy is not to use derivative instruments for speculative purposes.
Just Energy's expansion in the U.S. has introduced foreign-exchange-related
risks. Just Energy enters into foreign exchange forwards in order to hedge the
exposure to fluctuations in cross border cash flows.
The financial statements are in compliance with Section 3855 of the CICA
Handbook, which requires a determination of fair value for all derivative
financial instruments. Up to June 30, 2008, the financial statements also
applied Section 3865 of the CICA Handbook, which permitted a further calculation
for qualified and designated accounting hedges to determine the effective and
ineffective portions of the hedge. This calculation permitted the change in fair
value to be accounted for predominately in the consolidated statements of
comprehensive income. As of July 1, 2008, management decided that the increasing
complexity and costs of maintaining this accounting 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 JEGI common shares
As at February 9, 2011, there were no Class A preference shares of JEC
outstanding and 136,471,987 common shares of Just Energy Group Inc. ("JEGI")
outstanding. As of January 1, the Fund converted to a corporation and all Class
A preference shares of JEC were converted on a one for one basis for JEGI common
shares.
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 had voting rights equivalent to
the Fund's Unitholders and their shares are exchangeable on a one for one basis.
On January 1, 2011 all of the remaining Exchangeable Shares had been converted
to JEGI common shares.
Taxability of distributions
Cash and unit distributions received in calendar 2009 were allocated 100% to
other income. Additional information can be found on our website at
www.justenergygroup.com. Management estimates that the distributions for
calendar 2010 will be allocated as 85% other income, 8% non-eligible dividend
and 7% return of capital.
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 will not adopt the new standards prior to
adopting IFRS as described below.
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 in recognition, measurement and disclosures. The conversion to IFRS
will impact the way we present our financial results, however, we do not expect
IFRS to impact the overall revenue and underlying profitability trends of our
operating performance.
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. The first financial statements prepared
under IFRS will include numerous notes disclosing extensive transitional
information and full disclosure of all new IFRS accounting policies.
Based on the initial assessment of the differences between Canadian GAAP and
IFRS relevant to Just Energy, 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.
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 also completed Phase 2, the solution development phase, which
includes the substantial completion of all policy papers which have been
discussed with the external auditors. The IFRS project team is currently
completing the implementation phase, which is the final phase of the project.
This phase involves approving 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,
administering key personnel training and monitoring standards currently being
amended by the International Accounting Standard Board ("IASB"). This phase is
expected to be completed by the end of fiscal 2011. Just Energy has also
analyzed the IFRS financial statement presentation and disclosure requirements.
These assessments will continue to be analyzed and evaluated throughout the
implementation phase of the Fund's project.
Since all changes to IFRS which will be effective as at April 1, 2011 are not
known, any conclusions drawn at this point in time are considered preliminary.
The areas with the highest potential to impact the Fund include, but are not
limited to, the following:
IAS 16: Property, plant and equipment
IAS 16 reinforces the requirement under Canadian GAAP that requires each part of
property, plant and equipment that has a cost, which is significant in relation
to the overall cost of the item, be depreciated separately. The Fund will adopt
this revised accounting policy with respect to the componentization of the
ethanol plant on transition to IFRS. The carrying value of the ethanol plant and
corresponding depreciation expense will differ upon transition to IFRS. The
quantification of the impact is expected to be $0.6 million.
IAS 36: Impairment of assets
IAS 36 uses a one-step approach to both testing and measuring impairment, with
asset carrying values compared directly to the higher of fair value less costs
to sell and value in use (which uses discounted future cash flows). Canadian
GAAP, however, uses a two-step approach to impairment testing, first comparing
asset carrying values with undiscounted future cash flows to determine whether
impairment exists, and then measuring any impairment by comparing asset carrying
values with fair values. The Fund does not expect any material impairment upon
transition to IFRS.
IAS 12: Income taxes
Other than recording the tax effect of the various other transitional
adjustments and the reclassification of certain tax balances, the Fund does not
expect to record any significant tax-related adjustments on the transition to
IFRS.
IAS 39: Financial instruments: Recognition and measurement
The Fund enters into fixed-term contracts with customers to provide electricity
and gas at fixed prices. These customer contracts expose the Fund to changes in
market prices of electricity and gas consumption. To reduce the exposure to
movements in commodity prices arising from the acquisition of electricity and
gas at floating rates, the Fund routinely enters into derivative contracts.
Under Canadian GAAP, all supply contracts are remeasured at fair value at each
reporting date. The requirements for normal purchase and normal sale exemption
(own-use exemption) are similar under Canadian GAAP and IFRS; however, several
small differences exist. There is no specific guidance either in Canadian GAAP
or IFRS with respect to eligibility of the own-use exemption of energy supply
contracts entered into by energy retailers. The Fund has concluded that the
own-use exemption does not apply and the amounts will continue to be marked to
market as is the current practice.
IAS 39 also requires that transaction costs incurred upon initial acquisition of
a financial instrument be deferred and amortized into profit and loss over the
life of the instrument. Initial application of IAS 39 will result in an opening
balance sheet adjustment to reduce long-term debt on the date of transition.
This adjustment of approximately $2.4 million will be offset through opening
retained earnings.
IFRS 2: Share-based payments
Under IFRS, when stock option awards vest gradually, each tranche is to be
considered as a separate award; whereas under Canadian GAAP, the gradually
vested tranches are considered as a single award. This will result in expenses
relating to share-based payments being recognized over the expected term of each
vested tranche. IFRS also requires the Fund to estimate forfeitures up front in
the valuation of stock options; whereas, under Canadian GAAP, they can be
recorded upfront or recorded as they occur. Currently, the Fund accounts for
forfeitures as they occur. On transition the adjustment to opening retained
earnings is not significant and the impact is approximately $0.5 million.
The Fund has analyzed the optional exemptions available under IFRS 1, First-time
Adoption of International Financial Reporting. IFRS generally requires an entity
to apply standards on a retrospective basis; however, IFRS 1 provides both
mandatory exceptions and optional exemptions from this general requirement.
First-time adoption exemptions relevant to the Fund are discussed below.
Business Combinations
Under this exemption, the Fund may elect not to retrospectively apply IFRS 3 to
past business combinations. The standard may be prospectively applied from the
date of the opening IFRS balance sheet. The Fund intends to use this exemption.
Share-based payment transactions
The Fund may not elect to apply IFRS 2 to equity instruments that were granted
on or before November 7, 2002, or which are vested before the company's date of
transition to IFRS. The Fund may also not elect to apply IFRS 2 to liabilities
arising from share-based payment transactions, which settled before the date of
transition to IFRS. The Fund intends to apply these exemptions.
Cumulative translation adjustment
The exemption permits the Fund to reset the cumulative translation adjustments
to zero by recognizing the full amount in the retained earnings of the opening
IFRS balance sheet. The Fund is currently not expected to elect this exemption.
Borrowing costs
The exemption allows the Fund to adopt IAS 23, which requires the capitalization
of borrowing costs on all qualifying assets, prospectively from the date of the
opening IFRS balance sheet. The Fund intends to use this exemption.
Until the Fund has prepared a full set of annual financial statements under
IFRS, we will not be able to determine or precisely quantify all of the impacts
that will result from converting to IFRS.
We are still evaluating the impact of conversion on our accounting systems.
However, based on the differences identified to date, we believe our systems can
accommodate the required changes. We believe our internal and disclosure control
processes will not need significant modifications as a result of our transition
to IFRS. We have assessed the impacts of adoption on our debt covenants and
other contractual arrangements, and have not identified any material compliance
issues.
Just Energy continues to evaluate the impacts of current and prospective IFRS on
all of our business activities, including those of our subsidiaries and the
impact on our entity-wide information system.
Legal proceedings
Just Energy's subsidiaries are party to a number of legal proceedings. Just
Energy believes that each proceeding constitutes a routine legal matter
incidental to the business conducted by Just Energy and that the ultimate
disposition of the proceedings will not have a material adverse effect on its
consolidated earnings, cash flows or financial position.
In addition to the routine legal proceedings of Just Energy, the State of
California has filed a number of complaints to the Federal Energy Regulatory
Commission ("FERC") against many suppliers of electricity, including Commerce
Energy Inc. ("CEI") with respect to events stemming from the 2001 energy crisis
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 facilities, the State of California is claiming that CEI
was unjustly enriched by the run-up in charges caused by the alleged market
manipulation of other market participants. On March 18, 2010, the Administrative
Law Judge in the matter granted a motion to strike the claim 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. CEI continues to vigorously contest this matter and it is not expected
to have a material impact on the financial condition of the Fund.
Controls and procedures
During the most recent interim period, there have been no changes in the Fund's
policies and procedures that comprise its internal control over financial
reporting, that have materially affected, or are reasonably likely to materially
affect, the Fund's internal control over financial reporting
Limitation on scope of design
Section 3.3(1) of National Instrument 52-109, Certification of Disclosure in
Issuer's Annual and Interim Filings, states that the Fund may limit its design
of disclosure controls and procedures and internal controls over financial
reporting for a business that it acquired not more than 365 days before the end
of the financial period to which the certificate relates. Under this section,
the Fund's CEO and CFO have limited the scope of the design, and subsequent
evaluation, of disclosure controls and procedures and internal controls over
financial reporting to exclude controls, policies and procedures of the Hudson
subsidiaries acquired on May 1, 2010.
Summary financial information pertaining to the Hudson acquisition that was
included in the consolidated financial statements of the Fund for the eight
months ended December 31, 2010, is as follows:
(thousands of dollars) Total
----------------
Sales(1) $ 476,507
Net loss(1) (703)
Current assets 118,810
Non-current assets 335,376
Current liabilities 144,095
Non-current liabilities 27,090
(1) Results from May 1, 2010 to December 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.justenergygroup.com and is included in the Fund's May 27, 2010 management
proxy circular. Just Energy actively monitors the corporate governance and
disclosure environment to ensure timely compliance with current and future
requirements.
Outlook
Just Energy's third quarter saw a continuation of the strong customer
aggregation by both the Consumer Energy division and the Commercial Energy
division noted since the acquisition of Hudson Energy and its broker channel.
The third quarter total customer additions of 252,000 were 84% greater than the
137,000 added in the third quarter of fiscal 2010. Net additions were 80,000
compared to the 13,000 net additions recorded in the third quarter of fiscal
2010.
The result of three strong quarters of growth has been a double-digit increase
in the customer base by marketing with the Hudson acquisition raising the total
customer growth by 42% over the past 12 months. The growth of the Commercial
Energy division has a number of impacts on operating results. First, margins per
RCE are lower with commercial customers but a single customer can equate to
hundreds of RCEs. This means lower customer care costs per RCE and lower initial
aggregation costs. Commercial customers are currently approximately 40% of Just
Energy's base, and management expects that to increase to 50% over time. Second,
commercial customers are typically subject to less weather volatility than
residential customers. This may translate into more predictable results from the
natural gas book. Also, commercial customers do not ordinarily move, reducing
overall attrition, and making balancing of the supply book less complex.
Customer growth is expected to continue from the U.S. Growth in Canada's more
saturated markets is hampered by stable low gas prices. These prices make a
fixed price alternative less attractive. Electricity sales in Ontario are also
challenging, as government mandated prices are below the cost of alternative
supply. Sales in Canada are predominantly JustGreen or water heaters. That said,
Just Energy continues to show overall customer growth driven by U.S. marketing.
The U.S. share of seasonally adjusted sales and margins in the third quarter
were 56% and 57%, respectively. One impact of this will be increased financial
statement exposure to movements in the U.S. dollar exchange rate as was seen in
the quarter. The 3.4% decline in the U.S. dollar seen in the quarter reduced
reported gross margin by $3.3 million (2.5%) and distributable cash by $2.3
million (4.4%). It is expected that sales, margins and distributable cash will
be subject to more volatility during times of currency fluctuations. U.S. cross
border cash flow is forecasted annually, and hedges for cross border cash flow
are entered into. Just Energy hedges between 25% and 90% of the next 12 months
cross border cash flows depending on its level of certainty.
In addition to Commercial Energy division growth, Just Energy has committed
expenditures toward a number of other geographic expansions, which management
believes will contribute to higher distributable cash in the future. The
near-term impact will be increases in general and administrative costs, which
increased by 6% in the third quarter versus a year prior. This increase should
be more than offset by future margins from the growth generated.
Effective January 1, 2011, Just Energy completed the Conversion from an Income
Trust to a corporation and going forward operates under the name Just Energy
Group Inc. ("JEGI"). As part of the Conversion, Just Energy Exchange Corp. was
amalgamated with JEGI and, like the unitholders of the Fund, the holders of Just
Energy Exchange Corp.'s exchangeable shares received common shares of JEGI on a
one-for-one basis. The Board has implemented a dividend policy where monthly
dividends have been initially set at $0.10333 per share ($1.24 annually), equal
to the current distributions paid to Just Energy's Unitholders. On January 1,
2011, JEGI also assumed all of the obligations under the JEEC convertible
debentures and the JEIF convertible debentures.
In anticipation of the need for conversion, the Fund did not increase its rate
of distribution since early 2008 despite substantial growth in its business.
Distributions have been maintained by Just Energy at $0.10333 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.
In connection with the Conversion, Just Energy amended and restated its credit
agreement with a syndicate of lenders that includes Canadian Imperial Bank of
Commerce, Royal Bank of Canada, National Bank of Canada, Societe Generale, The
Bank of Nova Scotia, Toronto-Dominion Bank and Alberta Treasury Branches to
increase the available line for general corporate purposes to $350 million from
$250 million. The increase in the credit facility will accommodate forecasted
working capital requirements for expansion into new markets and customer growth
in existing markets and will provide financial capacity to pursue small
acquisitions. The repayment of the facility is due on December 31, 2013.
On November 17, 2010, the minority shareholder of TGF, EllisDon Design Build
Inc., exercised its right to put its one-third equity interest in TGF to JEEC
for $10 million of Exchangeable Shares. The transaction closed on January 4,
2011 and as a result, JEGI issued 689,940 common shares to the minority
shareholder on January 4, 2011. TGF is now a wholly-owned subsidiary of JEGI.
The Fund has partnered on a power-purchase-agreement basis with a number of
green energy projects and plans to enter into more such partnerships
concentrated in jurisdictions where Just Energy has an established customer
base. Just Energy continues to monitor the progress of the deregulated markets
in various jurisdictions, which may create the opportunity for further
geographic expansion.
JUST ENERGY GROUP INC.
(Formerly JUST ENERGY INCOME FUND)
INTERIM CONSOLIDATED BALANCE SHEETS
As at
(Unaudited, thousands of Canadian dollars)
----------------------------------------------------------------------------
----------------------------------------------------------------------------
December 31, 2010 March 31, 2010
ASSETS
CURRENT
Cash $ 63,768 $ 60,132
Restricted cash 708 18,650
Accounts receivable 429,406 348,892
Gas delivered in excess of consumption 89,508 7,410
Gas in storage 34,203 4,058
Inventory 7,275 6,323
Unbilled revenues 1,083 20,793
Prepaid expenses and deposits 5,780 20,038
Current portion of future income tax
assets 85,040 29,139
Corporate tax recoverable 10,878 -
Other assets - current (Note 11a) 3,323 2,703
----------------------------------------------------------------------------
730,972 518,138
FUTURE INCOME TAX ASSETS 51,625 85,197
PROPERTY, PLANT AND EQUIPMENT 236,994 218,616
CONTRACT INITIATION COSTS 29,231 5,587
INTANGIBLE ASSETS (Note 6) 482,871 340,629
GOODWILL 221,247 177,887
LONG-TERM RECEIVABLE 3,952 2,014
OTHER ASSETS - LONG TERM (Note 11a) 4,043 5,027
----------------------------------------------------------------------------
$ 1,760,935 $ 1,353,095
----------------------------------------------------------------------------
----------------------------------------------------------------------------
LIABILITIES
CURRENT
Bank indebtedness $ 2,690 $ 8,236
Accounts payable and accrued
liabilities 314,457 226,950
Unit distribution payable - 13,182
Corporate taxes payable 4,046 6,410
Current portion of future income tax
liabilities 17,526 6,776
Deferred revenue 111,910 7,202
Accrued gas accounts payable 918 15,093
Current portion of long-term debt (Note
7) 59,288 62,829
Other liabilities - current (Note 11a) 559,520 685,200
----------------------------------------------------------------------------
1,070,355 1,031,878
LONG-TERM DEBT (Note 7) 547,884 231,837
FUTURE INCOME TAXES 2,812 -
DEFERRED LEASE INDUCEMENTS 1,708 1,984
OTHER LIABILITIES - LONG TERM (Note 11a) 432,871 590,572
----------------------------------------------------------------------------
----------------------------------------------------------------------------
2,055,630 1,856,271
----------------------------------------------------------------------------
NON-CONTROLLING INTEREST 18,616 20,603
----------------------------------------------------------------------------
UNITHOLDERS' DEFICIENCY
Deficit $(1,197,082) $(1,423,698)
Accumulated other comprehensive income
(Note 9) 149,960 221,969
----------------------------------------------------------------------------
(1,047,122) (1,201,729)
Unitholders' capital 677,515 659,118
Equity component of convertible
debenture (Note 7e) 33,914 -
Contributed surplus 22,382 18,832
----------------------------------------------------------------------------
Unitholders' deficiency (313,311) (523,779)
----------------------------------------------------------------------------
$ 1,760,935 $1, 353,095
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Commitments (Note 14) Contingencies (Note 15) Subsequent events (Note 17)
See accompanying notes to the interim consolidated financial statements
JUST ENERGY GROUP INC.
(Formerly JUST ENERGY INCOME FUND)
INTERIM CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited, thousands of Canadian dollars, except per unit amounts)
----------------------------------------------------------------------------
----------------------------------------------------------------------------
THREE MONTHS ENDED NINE MONTHS ENDED
DECEMBER 31 DECEMBER 31
2010 2009 2010 2009
SALES $ 744,296 $ 626,966 $ 2,011,858 $ 1,460,635
COST OF SALES 612,018 515,019 1,702,254 1,201,117
----------------------------------------------------------------------------
GROSS MARGIN 132,278 111,947 309,604 259,518
----------------------------------------------------------------------------
EXPENSES
General and administrative
expenses 26,283 24,767 81,066 66,018
Marketing expenses 34,469 26,546 101,177 73,038
Bad debt expense 6,458 5,130 18,901 12,815
Amortization of intangible
assets and related supply
contracts 29,654 20,309 89,081 41,390
Amortization of property,
plant and equipment 1,997 1,935 5,809 5,656
Unit based compensation 1,302 993 3,925 2,626
Capital tax expense 172 209 331 337
----------------------------------------------------------------------------
100,335 79,889 300,290 201,880
----------------------------------------------------------------------------
INCOME BEFORE THE UNDERNOTED 31,943 32,058 9,314 57,638
INTEREST EXPENSE (Note 7) 15,081 5,143 36,857 10,569
CHANGE IN FAIR VALUE OF
DERIVATIVE INSTRUMENTS (Note
11a) (236,571) (50,853) (369,693) (277,248)
OTHER INCOME (127) (1,441) (2,830) (2,755)
----------------------------------------------------------------------------
INCOME BEFORE INCOME TAXES 253,560 79,209 344,980 327,072
PROVISION FOR (RECOVERY OF)
INCOME TAXES 35,901 (17,010) 8,731 19,079
NON-CONTROLLING INTEREST 252 (1,171) (1,987) (2,714)
----------------------------------------------------------------------------
NET INCOME $ 217,407 $ 97,390 $ 338,236 $ 310,707
----------------------------------------------------------------------------
----------------------------------------------------------------------------
See accompanying notes to the interim consolidated financial statements
Net income per unit (Note 12)
Basic $ 1.61 $ 0.73 $ 2.51 $ 2.39
Diluted $ 1.39 $ 0.73 $ 2.30 $ 2.37
JUST ENERGY GROUP INC.
(Formerly JUST ENERGY INCOME FUND)
INTERIM CONSOLIDATED STATEMENTS OF UNITHOLDERS' DEFICIENCY
FOR THE NINE MONTHS ENDED DECEMBER 31
(Unaudited, thousands of Canadian dollars)
----------------------------------------------------------------------------
----------------------------------------------------------------------------
2010 2009
ACCUMULATED DEFICIT
Accumulated deficit, beginning of period $ (480,931) $ (712,427)
Net income 338,236 310,707
----------------------------------------------------------------------------
Accumulated deficit, end of period (142,695) (401,720)
----------------------------------------------------------------------------
DISTRIBUTIONS AND DIVIDENDS
Distributions, beginning of period (942,767) (757,850)
Distributions and dividends on
Exchangeable Shares (108,574) (139,922)
Class A preference share distributions -
net of income taxes of $1,305 (2009 -
$1,963) (3,046) (3,985)
----------------------------------------------------------------------------
Distributions and dividends, end of
period (1,054,387) (901,757)
----------------------------------------------------------------------------
DEFICIT (1,197,082) (1,303,477)
----------------------------------------------------------------------------
ACCUMULATED OTHER COMPREHENSIVE INCOME
(Note 9)
Accumulated other comprehensive income,
beginning of period 221,969 364,566
Other comprehensive loss (72,009) (108,167)
----------------------------------------------------------------------------
Accumulated other comprehensive income,
end of period 149,960 256,399
----------------------------------------------------------------------------
UNITHOLDERS' CAPITAL (Note 10)
Unitholders' capital, beginning of
period 659,118 398,454
Trust units exchanged 10,085 179,385
Trust units issued on exercise/exchange
of unit compensation 462 574
Trust units issued - 13,449
Distribution reinvestment plan 17,935 -
Exchangeable Shares issued - 239,946
Exchangeable Shares exchanged (10,085) (179,385)
----------------------------------------------------------------------------
Unitholders' capital, end of period 677,515 652,423
----------------------------------------------------------------------------
EQUITY COMPONENT OF CONVERTIBLE
DEBENTURE (Note 7e) 33,914 -
CONTRIBUTED SURPLUS (Note 10b) 22,382 16,787
----------------------------------------------------------------------------
Unitholders' deficiency, end of period $ (313,311) $ (377,868)
----------------------------------------------------------------------------
----------------------------------------------------------------------------
See accompanying notes to the interim consolidated financial statements
JUST ENERGY GROUP INC.
(Formerly JUST ENERGY INCOME FUND)
INTERIM CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited, thousands of Canadian dollars)
----------------------------------------------------------------------------
----------------------------------------------------------------------------
THREE MONTHS ENDED NINE MONTHS ENDED
DECEMBER 31 DECEMBER 31
2010 2009 2010 2009
NET INCOME $ 217,407 $ 97,390 $ 338,236 $ 310,707
----------------------------------------------------------------------------
Unrealized gain (loss) on
translation of self-sustaining
operations (4,090) (176) 5,136 24,845
Amortization of deferred
unrealized gain of
discontinued hedges net of
income taxes of $5,421 (2009
-$7,787) and $15,860 (2009 -
$25,511) for the three and
nine months ended December 31,
respectively (Note 11a) (25,227) (43,386) (77,145) (133,012)
----------------------------------------------------------------------------
OTHER COMPREHENSIVE LOSS (29,317) (43,562) (72,009) (108,167)
----------------------------------------------------------------------------
COMPREHENSIVE INCOME $ 188,090 $ 53,828 $ 266,227 $ 202,540
----------------------------------------------------------------------------
----------------------------------------------------------------------------
See accompanying notes to the
interim consolidated financial
statements
JUST ENERGY GROUP INC.
(Formerly JUST ENERGY INCOME FUND)
INTERIM CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited, thousands of Canadian dollars)
----------------------------------------------------------------------------
----------------------------------------------------------------------------
THREE MONTHS ENDED NINE MONTHS ENDED
DECEMBER 31 DECEMBER 31
Net inflow (outflow) of cash
related to the following
activities 2010 2009 2010 2009
OPERATING
Net income $ 217,407 $ 97,390 $ 338,236 $ 310,707
----------------------------------------------------------------------------
Items not affecting cash
Amortization of intangible
assets and related supply
contracts 29,572 20,309 88,999 41,390
Amortization of property,
plant and equipment 2,079 1,935 5,891 5,656
Amortization of contract
initiation costs 4,056 - 10,327 -
Unit based compensation 1,302 993 3,925 2,626
Non-controlling interest 252 (1,171) (1,987) (2,714)
Future income taxes 31,106 (20,165) 7,134 8,781
Financing charges, non-cash
portion 1,660 414 4,319 810
Other 2,454 1,729 6,966 2,211
Change in fair value of
derivative instruments (236,571) (50,853) (369,693) (277,248)
----------------------------------------------------------------------------
(164,090) (46,809) (244,119) (218,488)
----------------------------------------------------------------------------
Adjustments required to
reflect net cash receipts
from gas sales (66) 9,775 26,897 44,492
----------------------------------------------------------------------------
Net change in non-cash working
capital (42,055) (55,938) (70,270) (69,791)
----------------------------------------------------------------------------
Cash inflow from operating
activities 11,196 4,418 50,744 66,920
----------------------------------------------------------------------------
FINANCING
Distributions and dividends
paid to Unitholders and
holders of Exchangeable
Shares (33,577) (33,924) (103,734) (98,645)
Distributions to Class A
preference shareholder (1,632) (1,632) (4,895) (4,895)
Tax impact on distributions to
Class A preference
shareholder 326 886 1,305 1,963
Increase/(decrease) in bank
indebtedness 1,827 6,954 (5,546) 6,954
Issuance of long-term debt 47,789 120,118 414,771 140,362
Repayment of long-term debt (22,094) (84,085) (72,252) (109,085)
Funding from minority interest
holder of TGF - 1,302 - 1,302
Restricted cash 14,454 3,167 18,024 2,336
----------------------------------------------------------------------------
Cash inflow from financing
activities 7,093 12,786 247,673 (59,708)
----------------------------------------------------------------------------
INVESTING
Purchase of property, plant
and equipment (8,688) (11,034) (29,080) (30,917)
Purchase of other intangible
assets (919) (1,522) (1,814) (3,933)
Acquisitions (Note 5) (2,425) - (260,472) 9,799
Proceeds from long-term
receivable (332) - 2,901 -
Contract initiation costs (6,768) - (14,040) -
----------------------------------------------------------------------------
Cash outflow from investing
activities (19,132) (12,556) (302,505) (25,051)
----------------------------------------------------------------------------
Effect of foreign currency
translation on cash balances 764 5,519 7,724 (1,408)
----------------------------------------------------------------------------
NET CASH INFLOW (OUTFLOW) (79) 10,167 3,636 (19,247)
CASH, BEGINNING OF PERIOD 63,847 29,680 60,132 59,094
----------------------------------------------------------------------------
CASH, END OF PERIOD $ 63,768 $ 39,847 $ 63,768 $ 39,847
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Supplemental cash flow
information
Interest paid $ 18,905 $ 4,691 $ 29,595 $ 8,900
Income taxes paid $ 326 $ 13,300 $ 8,312 $ 20,536
----------------------------------------------------------------------------
----------------------------------------------------------------------------
See accompanying notes to the
interim consolidated financial
statements
JUST ENERGY GROUP INC.
(Formerly JUST ENERGY INCOME FUND)
NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS
FOR THE NINE MONTHS ENDED DECEMBER 31, 2010
(thousands of Canadian dollars except where indicated and per unit amounts)
----------------------------------------------------------------------------
----------------------------------------------------------------------------
1. INTERIM FINANCIAL STATEMENTS
The unaudited interim consolidated financial statements do not conform in all
respects to the requirements of Canadian Generally Accepted Accounting
Principles ("GAAP") for annual financial statements and should therefore be read
in conjunction with the audited consolidated financial statements and notes
thereto included in Just Energy Income Fund's ("Just Energy", the "Fund", or
"JEIF") annual report for fiscal 2010. The unaudited interim consolidated
financial statements have been prepared by management in accordance with
Canadian GAAP applicable to interim consolidated financial statements and follow
the same accounting policies and methods of application as the most recent
annual financial statements, except as described in Note 3.
2. ORGANIZATION
Effective January 1, 2011, Just Energy completed the conversion from an Income
Trust to a Corporation (the "Conversion") and going forward operates under the
name Just Energy Group Inc. ("JEGI").
JEIF was 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. ("JE Illinois"), Just Energy New York
Corp. ("JENYC"), Just Energy Indiana Corp. ("JE Indiana"), Just Energy Texas
L.P. ("JE Texas"), Just Energy Exchange Corp. ("JEEC"), Universal Energy
Corporation ("UEC"), Universal Gas and Electric Corporation ("UG&E"), Commerce
Energy, Inc. ("Commerce" or "CEI"), National Energy Corporation ("NEC")
(operating under the trade name of National Home Services ("NHS")), Momentis
Canada Corp. and Momentis U.S. Corp. (collectively, "Momentis"), Just Energy
Massachusetts Corp. ("JE Mass"), Just Energy Michigan Corp. ("JE Michigan"),
Hudson Energy Services, LLC ("Hudson" or "HES") and Terra Grain Fuels, Inc.
("TGF"), collectively, the "Just Energy Group".
3. CHANGES IN SIGNIFICANT ACCOUNTING POLICIES
(a) Significant accounting policies adopted from acquisitions
(i) Contract initiation costs
Commissions related to obtaining and renewing Hudson customer contracts are paid
in one of the following ways: all or partially upfront or as a residual payment
over the life of the contract. If the commission is paid all or partially
upfront, it is recorded as contract initiation costs and amortized in marketing
expenses over the term for which the associated revenue is earned. If the
commission is paid as a residual payment, the amount is expensed as earned.
In addition, commissions related to obtaining customer contracts signed under
NEC are recorded as contract initiation costs and amortized in marketing
expenses over the remaining life of the contract.
(b) 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:
(i) Business Combinations
In October 2008, the Canadian Institute of Chartered Accountants ("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 will not adopt
the new standards prior to adopting IFRS as described below.
(ii) 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 statements 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 diagnostic
assessment, solution development and implementation phases. The Fund has
completed the initial assessment and solution development phases. These 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. The IFRS
team is currently engaged in the implementation phase, which is the final phase
of the project.
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;
share-based payments and 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 full 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 expects a significant increase in financial
statement disclosure requirements resulting from the adoption of IFRS. Just
Energy is currently on target with its conversion plan.
4. SEASONALITY OF OPERATIONS
Just Energy's operations are seasonal. Gas consumption by customers is typically
highest in October through March and lowest in April through September.
Electricity consumption is typically highest in January through March and July
through September. Electricity consumption is lowest in October through December
and April through June.
5. ACQUISITIONS
(a) Acquisition of Hudson Energy Services, LLC
On May 7, 2010, Just Energy completed the acquisition of all of the equity
interests of Hudson Parent Holdings, LLC, and all the common shares of Hudson
Energy Corp., thereby indirectly acquiring Hudson Energy Services, LLC, with an
effective date of May 1, 2010. The acquisition was funded by an issuance of $330
million in convertible debentures issued on May 5, 2010 (see Note 7e).
The acquisition of Hudson 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:
Net assets acquired
Current assets (including cash of $24,003) $ 88,696
Current liabilities (107,817)
Electricity contracts and customer relationships 200,653
Gas contracts and customer relationships 26,225
Broker network 84,400
Brand 11,200
Information technology system development 17,954
Contract initiation costs 20,288
Other intangible assets 6,545
Goodwill 33,574
Property, plant and equipment 2,559
Unbilled revenue 15,092
Notes receivable - long term 1,312
Security deposits - long term 3,544
Other assets - current 124
Other assets - long term 100
Other liabilities - current (74,683)
Other liabilities - long term (40,719)
-------------
$ 289,047
-------------
-------------
Consideration
Purchase price $ 287,790
Transaction costs 1,257
------------
$ 289,047
-------------
-------------
All contracts and intangible assets, excluding brand, are amortized over the
average remaining life at the time of acquisition. The gas and electricity
contracts and customer relationships are amortized over 30 months and 35 months,
respectively. Other intangible assets, excluding brand, are amortized over
periods of three to five years. The brand value is considered to be indefinite
and, therefore, not subject to amortization. The purchase price allocation is
considered preliminary and, as a result, it may be adjusted during the 12-month
period following the acquisition.
(b) 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" 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 was exchangeable for a trust unit on a one for one basis at
any time at the option of the holder, and entitled the holder to a monthly
dividend equal to 66 2/3% of the monthly distribution paid by Just Energy on a
trust unit. JEEC also assumed all the covenants and obligations of UEG in
respect of UEG's outstanding 6% convertible unsecured subordinated debentures.
The 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:
Net assets acquired
Working capital (including cash of $10,319) $ 63,614
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 77,494
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 a 33.3% ownership of TGF held by EllisDon
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 eight to 57 months. The
water heater contracts and customer relationships are amortized over 174 months,
and the intangible assets were amortized over six months. An adjustment in the
amount of $10,700 was made to increase goodwill and decrease working capital
during the three months ended June 30, 2010. The purchase price for this
acquisition is final and no longer subject to change.
(c) 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.
6. INTANGIBLE ASSETS
Accumulated
As at December 31, 2010 Cost amortization Net book value
----------------------------------------------------------------------------
Gas contracts and customer
relationships $ 252,196 $ 127,091 $ 125,105
Electricity contracts and
customer relationships 441,713 209,691 232,022
Water heater contracts and
customer relationships 23,164 2,412 20,752
Broker network 82,638 11,018 71,620
Brand 10,966 - 10,966
Information technology system
development 19,465 2,562 16,903
Other intangible assets 9,270 3,767 5,503
----------------------------------------------------------------------------
$ 839,412 $ 356,541 $ 482,871
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Accumulated
As at March 31, 2010 Cost amortization Net book 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 2,982 2,397 585
----------------------------------------------------------------------------
$ 500,507 $ 159,878 $ 340,629
----------------------------------------------------------------------------
----------------------------------------------------------------------------
7. LONG-TERM DEBT AND FINANCING
December 31, 2010 March 31, 2010
Credit facility (a) $ 72,446 $ 57,500
TGF credit facility (b)(i) 38,417 41,313
TGF debentures (b)(ii) 37,001 37,001
TGF term/Operating facilities (b)(iii) - 10,000
JEEC convertible debentures (c) 84,376 83,417
NEC financing (d) 89,802 65,435
JEIF convertible debentures (e) 285,130 -
----------------------------------------------------------------------------
607,172 294,666
Less: current portion (59,288) (62,829)
----------------------------------------------------------------------------
$ 547,884 $ 231,837
----------------------------------------------------------------------------
----------------------------------------------------------------------------
The following table details the interest expense for the three and nine months
ended December 31, 2010, and December 31, 2009. Interest is expensed at the
effective interest rate.
For the For the For the For the
three three nine nine
months months months months
ended ended ended ended
December December December December
31, 2010 31, 2009 31, 2010 31, 2009
----------------------------------------------------------------------------
Credit facility (a) $ 3,614 $ 1,708 $ 5,549 $ 3,545
TGF credit facility (b)(i) 657 447 1,528 1,065
TGF debentures (b)(ii) 1,075 1,005 3,257 2,133
TGF term/operating facilities
(b)(iii) 15 219 571 306
TGF wheat production financing - - - 10
JEEC Convertible debentures (c) 1,677 1,764 5,009 3,510
NEC financing (d) 1,733 - 4,564 -
JEIF convertible debentures (e) 6,310 - 16,379 -
----------------------------------------------------------------------------
$ 15,081 $ 5,143 $ 36,857 $ 10,569
----------------------------------------------------------------------------
----------------------------------------------------------------------------
(a) As of December 31, 2010, Just Energy held a $250 million credit facility to
meet working capital requirements. The syndicate of lenders includes Canadian
Imperial Bank of Commerce, Royal Bank of Canada, National Bank of Canada, Bank
of Nova Scotia, Societe Generale and Alberta Treasury Branches. Effective
January 1, 2011, Just Energy amended and restated its credit agreement to
increase the available line to $350 million. The repayment of the facility is
due on December 31, 2013. The Toronto-Dominion Bank became a member of the
Syndicate on January 1, 2011.
Interest is payable on outstanding loans at rates that vary with Bankers'
Acceptances, LIBOR, Canadian bank prime rate or U.S. prime rate. Under the terms
of the operating credit facility, Just Energy is able to make use of Bankers'
Acceptances and LIBOR advances at stamping fees of 4.0%, prime rate advances at
bank prime plus 3.0%, and letters of credit at 4.0%. As at December 31, 2010,
the Canadian prime rate was 3.0% and the U.S. prime rate was 3.25%. As at
December 31, 2010, Just Energy had drawn $72,446 (March 31, 2010 - $57,500)
against the facility and total letters of credit outstanding amounted to $73,120
(March 31, 2010 - $49,444). As at December 31, 2010, Just Energy has $104,434 of
the facility remaining for future working capital and security requirements.
Just Energy's obligations under the credit facility are supported by guarantees
of certain subsidiaries and affiliates and secured by a pledge of the assets of
Just Energy and the majority of its operating subsidiaries and affiliates. Just
Energy is required to meet a number of financial covenants under the credit
facility agreement. As at December 31, 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 currently comprise the following separate
facilities:
(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 3% 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 most significant of which relate to current ratio, debt
to equity ratio, debt service coverage and minimum shareholders' equity. The
lenders have deferred compliance with the financial covenants until April 1,
2011. The facility was further revised on April 5, 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
December 31, 2010, the amount owing under this facility amounted to $38,417.
(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.
Quarterly principal payments commenced October 1, 2009, in the amount of $1,000
per quarter. The agreement includes certain financial covenants, the more
significant of which relate to current ratio, debt to capitalization ratio, debt
service coverage, debt to EBITDA and minimum shareholders' equity. The lender
has deferred compliance with the financial covenants until April 1, 2011. On
April 5, 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 at December 31, 2010, the amount owing under this debenture agreement
amounted to $37,001.
(iii) TGF term/operating facilities
TGF's term loan for $10,000 with a third party lender bearing interest at prime
plus 1% was due in full on December 31, 2010. This facility was secured by
liquid investments on deposit with the lender. As at December 31, 2010, the
amount owing under the facility for $10,000 was repaid.
(iv) TGF has a working capital operating line of $7,000 bearing interest at a
rate of prime plus 2%. In addition, total letters of credit issued amounted to
$250.
(c) In conjunction with the acquisition of Universal on July 1, 2009, JEEC also
acquired the obligations of the convertible unsecured subordinated debentures
(the "JEEC convertible debentures") issued by Universal in October 2007. The
fair value of the convertible debenture was estimated by discounting the
remaining contractual payments at the time of acquisition. This discount will be
accreted using an effective interest rate of 8%. 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 JEEC
convertible debentures is convertible at any time prior to maturity or on the
date fixed for redemption, at the option of the holder, into approximately 30.22
Exchangeable Shares of JEEC, representing a conversion price of $33.09 per
Exchangeable Share as at December 31, 2010. Pursuant to the JEEC convertible
debentures, if JEEC fixes a record date for the making of a dividend on the JEEC
Exchangeable Shares, the conversion price shall be adjusted in accordance
therewith. During the nine months ended December 31, 2010, interest expense
amounted to $5,009.
On and after October 1, 2010, but prior to September 30, 2012, the JEEC
convertible 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 JEEC convertible 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. On January 1, 2011, as
part of the Conversion, JEEC amalgamated with and continued as JEGI. JEGI
assumed all of the obligations under the JEEC convertible debentures.
(d) On January 18, 2010, NEC entered into a long-term financing agreement for
the funding of new and existing rental water heater contracts in the Enbridge
gas distribution territory. On July 16, 2010, NEC expanded this facility to
cover the Union Gas territory. Pursuant to the agreement, NEC receives financing
of an amount 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, it is required to remit an amount equivalent to the rental stream
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% in the
Enbridge territory and 5% in the Union Gas territory of the outstanding balance
of the funded amount is deducted and deposited into 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 NEC.
NEC has $89,802 owing under this agreement, including $3,192 relating to the
holdback provision as at December 31, 2010. NEC is required to meet a number of
covenants under the agreement. As at December 31, 2010, all of these covenants
have been met.
(e) In order to fund the acquisition of Hudson, on May 5, 2010, Just Energy
entered into an agreement with a syndicate of underwriters for $330 million of
convertible extendible unsecured subordinated debentures (the "JEIF convertible
debentures"). The JEIF convertible debentures bear interest at a rate of 6.0%
per annum payable semi-annually in arrears on June 30 and December 31, with a
maturity date of June 30, 2017. Each $1,000 principal amount of the JEIF
convertible debentures is convertible at any time prior to maturity or on the
date fixed for redemption, at the option of the holder, into approximately 55.6
units of the Fund, representing a conversion price of $18 per unit. During the
nine months ended December 31, 2010, interest expense amounted to $16,379.
The JEIF convertible debentures are not redeemable prior to June 30, 2013,
except under certain conditions after a change of control has occurred. On or
after June 30, 2013, but prior to June 30, 2015, the JEIF convertible debentures
may be redeemed by the Fund, in whole or in part, on not more than 60 days' and
not less than 30 days' prior notice, at a redemption price equal to the
principal amount thereof, plus accrued and unpaid interest, provided that the
current market price (as defined herein) on the date on which notice of
redemption is given is not less than 125% of the conversion price. On and after
June 30, 2015, and prior to maturity, the JEIF convertible debentures may be
redeemed by the Fund, in whole or in part, at a redemption price equal to the
principal amount thereof, plus accrued and unpaid interest.
The Fund may, at its own option, on not more than 60 days' and not less than 40
days' prior notice, subject to applicable regulatory approval and provided that
no event of default has occurred and is continuing, elect to satisfy its
obligation to repay all or any portion of the principal amount of the JEIF
convertible debentures that are to be redeemed or that are to mature, by issuing
and delivering to the holders thereof that number of freely tradable units
determined by dividing the principal amount of the JEIF convertible debentures
being repaid by 95% of the current market price on the date of redemption or
maturity, as applicable.
The conversion feature of the JEIF convertible debentures has been accounted for
as a separate component of Unitholders' deficiency in the amount of $33,914. The
remainder of the net proceeds of the JEIF convertible debentures has been
recorded as long-term debt, which will be accreted up to the face value of
$330,000 over the term of the JEIF convertible debentures using an effective
interest rate of 8.8%. If the JEIF convertible debentures are converted into
common shares, the value of the conversion will be reclassified to share capital
along with the principal amount converted. On January 1, 2011, as part of the
Conversion, JEGI assumed all of the obligations under the JEIF convertible
debentures.
8. INCOME TAXES
The Fund recorded a current income tax provision of $4.5 million for the third
quarter of fiscal 2011 versus $2.3 million of a tax provision in the same period
last year. A tax provision of $0.3 million has been recorded for the nine-month
period of fiscal 2011 versus a provision of $8.3 million for the same period in
fiscal 2010.
For the For the For the For the
three three nine nine
months months months months
ended ended ended ended
December December December December
31, fiscal 31, fiscal 31, fiscal 31, fiscal
2011 2010 2011 2010
--------------------------------------------
Current income tax provision $ 4,469 $ 2,269 $ 292 $ 8,335
Amount credited to Unitholders'
equity 326 886 1,305 1,963
Future tax expense (recovery) 31,106 (20,165) 7,134 8,781
--------------------------------------------
(Recovery of) provision for
income taxes $ 35,901 $(17,010) $ 8,731 $ 19,079
--------------------------------------------
--------------------------------------------
9. ACCUMULATED OTHER COMPREHENSIVE INCOME
For the nine months ended December 31, 2010
Foreign
currency
translation Cash flow
adjustment hedges Total
Balance, beginning of period $ 28,584 $ 193,385 $ 221,969
Unrealized foreign currency
translation adjustment 5,136 - 5,136
Amortization of deferred unrealized
gain on discontinued hedges after
July 1, 2008, net of income taxes of
$15,860 - (77,145) (77,145)
---------------------------------------
$ 33,720 $ 116,240 $ 149,960
---------------------------------------
---------------------------------------
For the nine months ended December
31, 2009
Foreign
currency
translation Cash flow
adjustment hedges Total
Balance, beginning of period $ 1,958 $ 362,608 $ 364,566
Unrealized foreign currency
translation adjustment 24,845 - 24,845
Amortization of deferred unrealized
gain on discontinued hedges after
July 1, 2008, net of income taxes of
$25,511 - (133,012) (133,012)
---------------------------------------
$ 26,803 $ 229,596 $ 256,399
---------------------------------------
---------------------------------------
10. UNITHOLDERS' CAPITAL
(a) Trust units of the Fund
An unlimited number of units may be issued. Each unit is transferable, voting
and represents an equal undivided beneficial interest in any distributions from
the Fund whether of net income, net realized capital gains or other amounts, and
in the net assets of the Fund in the event of termination or winding-up of the
Fund.
The Fund intends to make distributions to its Unitholders based on the cash
receipts of the Fund, excluding proceeds from the issuance of additional Fund
units, adjusted for costs and expenses of the Fund, amounts 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.
Effective January 1, 2011, the trust units of the Fund were exchanged on a
one-for-one basis for common shares of JEGI.
Class A preference shares of Just Energy Corp.
The terms of the unlimited Class A preference shares of Just Energy Corp.
("JEC") are non-voting, non-cumulative and exchangeable into trust units/shares
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 holder of Class A preference shares is
entitled to vote in all votes of Unitholders as if she was the holder of the
number of units that she would receive if she exercised her shareholder exchange
rights. Class A preference shareholders have equal entitlement to
distributions/dividends from the Fund as Unitholders.
Effective January 1, 2011, the Class A preference shares were exchanged on a
one-for-one basis for shares of JEGI.
Exchangeable Shares of JEEC
On July 1, 2009, Just Energy completed the acquisition of all the outstanding
common shares of Universal pursuant to the Arrangement. Under the Arrangement,
Universal shareholders received 0.58 of an Exchangeable Share of JEEC for each
Universal common share held. In aggregate, 21,271,804 Exchangeable Shares were
issued pursuant to the Arrangement. Each Exchangeable Share was exchangeable for
a trust unit on a one-for-one basis at any time at the option of the holder, and
entitled the holder to a monthly dividend equal to 66 2/3% of the monthly
distribution paid by Just Energy on a trust unit.
As of December 31, 2010, JEEC owned 66 2/3% of the issued and outstanding shares
in the capital of TGF (Canada). Pursuant to the terms of a unanimous
shareholders' agreement in respect of TGF, if all of the assets and the
undertaking of TGF in connection with its Belle Plaine facility are not sold by
November 30, 2010, the other shareholder of TGF may elect on such date to
require JEEC to purchase such shareholder's TGF shares (the "Put Shares"). The
purchase price for the Put Shares shall be paid by the issuance of that number
of Exchangeable Shares equal to the quotient of (i) $10 million, less the
cumulative amount of all dividends and other distributions paid in cash to the
shareholder on the Put Shares from April 15, 2009 to the closing date of such
sale; and (ii) the volume weighted average trading price of the JEEC
Exchangeable Shares on the TSX for the month of December 2010.
The minority shareholder exercised its right on the Put Shares on November 17,
2010 and JEGI issued 689,940 common shares on January 4, 2011 in exchange for
the remaining 1/3 ownership of TGF.
2010 2009
Issued and outstanding Units/Shares Units/Shares
Trust units
-------------------------
Balance, beginning of
period 124,325,307 $ 593,075 106,138,523 $ 385,294
Unit based awards
exercised/exchanged 38,989 462 39,482 555
Deferred unit grants
exchanged - - 1,712 19
Distribution
reinvestment plan 1,324,834 17,935 1,073,105 13,449
Exchanged from
Exchangeable Shares 894,018 10,085 15,902,969 179,385
---------------------------------------------------
Balance, end of period 126,583,148 621,557 123,155,791 578,702
---------------------------------------------------
Class A preference
shares
-------------------------
Balance, unchanged
during period 5,263,728 13,160 5,263,728 13,160
---------------------------------------------------
Exchangeable Shares
-------------------------
Balance, beginning of
period 4,688,172 52,883 - -
Exchangeable Shares
issued - - 21,271,804 239,946
Exchanged into units (894,018) (10,085) (15,902,969) (179,385)
---------------------------------------------------
Balance, end of period 3,794,154 42,798 5,368,835 60,561
---------------------------------------------------
Unitholders' capital,
end of period 135,641,030 $ 677,515 133,788,354 $ 652,423
---------------------------------------------------
---------------------------------------------------
Distribution reinvestment plan
Under the Fund's distribution reinvestment plan ("DRIP"), Unitholders holding a
minimum of 100 units can elect to receive their distributions 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 issued
During the nine months ended December 31, 2010, the Fund issued 894,018 units
relating to the exchange of Exchangeable Shares of JEEC. During the prior
comparable period, the Fund issued 15,902,969 units relating to the exchange of
Exchangeable Shares. The Exchangeable Shares were issued pursuant to Just
Energy's acquisition of UEG.
(b) Contributed surplus
Amounts credited to contributed surplus include unit based compensation awards,
unit appreciation rights and deferred unit grants. Amounts charged to
contributed surplus are awards exercised during the period.
Contributed Surplus 2010 2009
--------- ---------
Balance, beginning of period $ 18,832 $ 14,671
Add: unit based compensation awards 3,925 2,626
non-cash deferred unit grant distributions 87 64
Less: unit based awards exercised (462) (574)
--------- ---------
Balance, end of period $ 22,382 $ 16,787
--------- ---------
--------- ---------
Total amounts credited to Unitholders' capital in respect of unit options and
deferred unit grants exercised or exchanged during the nine months ended
December 31, 2010, amounted to $462 (2009 - $574).
11. 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 three months ended December 31, 2010:
Change in Fair Value of Derivative
Instruments
For the For the
For the three For the three
three months three months
months ended months ended
ended December ended December
December 31, 2010 December 31, 2009
31, 2010 (USD) 31, 2009 (USD)
Canada
Fixed-for-floating
electricity swaps(i) $ (51,906) n/a $ (55,615) n/a
Renewable energy
certificates(ii) 843 n/a 1,362 n/a
Verified emission-reduction
credits(iii) (300) n/a (9) n/a
Options(iv) 309 n/a (634) n/a
Physical gas forward
contracts(v) (64,420) n/a (214) n/a
Transportation forward
contracts(vi) (4,830) n/a 13,191 n/a
Fixed financial swaps(vii) 2,141 n/a - n/a
United States
Fixed-for-floating
electricity swaps(viii) (34,041) (33,606) 185 176
Physical electricity
forwards(ix) (43,417) (42,868) 4,061 3,852
Unforced capacity forward
contracts(x) 624 616 733 695
Unforced capacity physical
contracts(xi) 1,306 1,289 (327) (311)
Renewable energy
certificates(xii) (1,054) (1,041) (655) (621)
Verified emission-reduction
credits(xiii) (408) (402) 189 179
Options(xiv) 433 427 388 368
Physical gas forward
contracts(xv) (83,841) (82,781) (120) (114)
Transportation forward
contracts(xvi) (403) (398) 929 881
Heat rate swaps(xvii) (5,031) (4,968) (2,344) (2,223)
Fixed financial swaps(xviii) 40,947 40,430 8,732 8,282
Foreign exchange forward
contracts(xix) (756) n/a 824 n/a
Weather index derivatives - - - -
Amortization of deferred
unrealized gains on
discontinued hedges (30,648) n/a (51,174) n/a
Amortization of derivative
financial instruments related
to acquisitions 37,881 n/a 29,645 n/a
----------------------------------------------------------------------------
Change in Fair Value of
Derivative Instruments $(236,571) $ (50,853)
----------------------------------------------------------------------------
----------------------------------------------------------------------------
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 nine months ended December 31, 2010:
Change In Fair Value of Derivative
Instruments
For the For the
nine nine
For the months For the months
nine months ended nine months ended
ended December ended December
December 31, 2010 December 31, 2009
31, 2010 (USD) 31, 2009 (USD)
Canada
Fixed-for-floating
electricity swaps(i) $(186,142) n/a $ (41,462) n/a
Renewable energy
certificates(ii) 989 n/a (477) n/a
Verified emission-reduction
credits(iii) 889 n/a (9) n/a
Options(iv) (545) n/a 326 n/a
Physical gas forward
contracts(v) (86,575) n/a (54,327) n/a
Transportation forward
contracts(vi) (16,747) n/a 20,680 n/a
Fixed financial swaps(vii) 2,141 n/a - n/a
United States
Fixed-for-floating
electricity swaps(viii) (34,113) (33,861) (10,987) (10,021)
Physical electricity
forwards(ix) (37,218) (37,035) (29,093) (25,983)
Unforced capacity forward
contracts(x) 993 973 (458) (309)
Unforced capacity physical
contracts(xi) 2,204 2,161 (26) (32)
Renewable energy
certificates(xii) 785 736 731 645
Verified emission-reduction
credits(xiii) (74) (82) 405 371
Options(xiv) (496) (468) 2,653 2,414
Physical gas forward
contracts(xv) (103,160) (101,702) (70,434) (64,148)
Transportation forward
contracts(xvi) (195) (199) 223 231
Heat rate swaps(xvii) 2,490 2,303 (3,882) (3,591)
Fixed financial swaps(xviii) 66,688 65,131 5,393 5,209
Foreign exchange forward
contracts(xix) (1,003) n/a 2,494 n/a
Weather index derivatives - - - -
Amortization of deferred
unrealized gains on
discontinued hedges (93,005) n/a (158,523) n/a
Amortization of derivative
financial instruments related
to acquisitions 112,401 n/a 59,525 n/a
----------------------------------------------------------------------------
Change In Fair Value of
Derivative Instruments $(369,693) $(277,248)
----------------------------------------------------------------------------
----------------------------------------------------------------------------
The following table summarizes certain aspects of the financial assets and
liabilities recorded in the financial statements as at December 31, 2010:
Other Other Other Other
assets assets liabilities liabilities
(current) (long term) (current) (long term)
Canada
Fixed-for-floating
electricity swaps(i) $ - $ - $ 161,582 $ 109,758
Renewable energy
certificates(ii) 193 195 156 418
Verified emission-
reduction credits(iii) - - 295 584
Options(iv) 1,000 718 - -
Physical gas forward
contracts(v) - - 190,365 163,293
Transportation forward
contracts(vi) - 917 934 2,735
Fixed financial
swaps(vii) - 66 2,207 -
United States
Fixed-for-floating
electricity
swaps(viii) 97 111 34,231 32,952
Physical electricity
forwards(ix) - 336 62,510 42,326
Unforced capacity
forward contracts(x) 1 18 688 132
Unforced capacity
physical contracts(xi) 5 - 1,541 1,154
Renewable energy
certificates(xii) 45 50 1,054 1,366
Verified emission-
reduction
credits(xiii) 121 - 243 399
Options(xiv) - - 792 530
Physical gas forward
contracts(xv) - - 40,627 27,963
Transportation forward
contracts(xvi) - - 1,500 1,756
Heat rate swaps(xvii) 524 1,587 13 -
Fixed financial
swaps(xviii) 57 45 60,782 47,505
Foreign exchange forward
contracts(xix) 1,280 - - -
Weather index
derivatives - - - -
----------------------------------------------------------------------------
As at December 31, 2010 $ 3,323 $ 4,043 $ 559,520 $ 432,871
----------------------------------------------------------------------------
----------------------------------------------------------------------------
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 Other
assets 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
Fixed financial
swaps(vii) - - - -
United States
Fixed-for-floating
electricity
swaps(viii) - - 31,291 30,464
Physical electricity
forwards(ix) - - 38,015 39,035
Unforced capacity
forward contracts(x) 523 102 445 9
Unforced capacity
physical contracts(xi) 33 146 731 -
Renewable energy
certificates(xii) 107 130 918 945
Verified emission-
reduction
credits(xiii) - - 167 447
Options(xiv) - - 912 915
Physical gas forward
contracts(xv) - - 96,938 75,142
Transportation forward
contracts(xvi) - - 1,265 2,262
Heat rate swaps(xvii) 654 3,605 - -
Fixed financial
swaps(xviii) - - 21,720 16,767
Foreign exchange forward
contracts(xix) 277 - - -
Weather index
derivatives - - - -
----------------------------------------------------------------------------
As at March 31, 2010 $ 2,703 $ 5,027 $ 685,200 $ 590,572
----------------------------------------------------------------------------
----------------------------------------------------------------------------
The following table summarizes financial instruments classified as
held-for-trading as at December 31, 2010 to which the Fund has committed.
Total remaining
Contract type Notional volume volume Maturity date
Canada
----------------------------------------------------------------------------
(i) Fixed-for-
floating
electricity January 01, 2011
swaps (i) 0.0001-85 MWh 10,526,032 MWh - March 01, 2017
----------------------------------------------------------------------------
(ii) Renewable December 31,
energy 2011 - December
certificates 10-90,000 MWh 1,106,558 MWh 31, 2015
----------------------------------------------------------------------------
(iii) Verified
emission December 31,
reduction 2011 - December
credits 2,000-55,000 Tonnes 511,000 Tonnes 31, 2014
----------------------------------------------------------------------------
(iv) Options January 31, 2011
- February 28,
46-40,500 GJ/month 3,949,492 GJ 2014
----------------------------------------------------------------------------
(v) Physical gas
forward January 31, 2011
contracts 5-14,337 GJ/day 121,040,730 GJ - March 31, 2016
----------------------------------------------------------------------------
(vi) Transportation
forward January 31, 2011
contracts 74-27,274 GJ/day 59,062,616 GJ - May 31, 2015
----------------------------------------------------------------------------
(vii) Fixed January 31, 2011
financial - October 31,
swaps 500 GJ/day 300,000 GJ 2015
----------------------------------------------------------------------------
United States
----------------------------------------------------------------------------
(viii) Fixed-for-
floating January 01, 2011
electricity - November 30,
swaps (i) 0.10-74 MWh 7,769,132 MWh 2015
----------------------------------------------------------------------------
(ix) Physical
electricity January 31, 2011
forwards 1-35 MWh 8,179,817 MWh - May 31, 2016
----------------------------------------------------------------------------
(x) Unforced
capacity January 31, 2011
forward - November 30,
contracts 5-30 MWCap 721 MWCap 2012
----------------------------------------------------------------------------
(xi) Unforced
capacity
physical January 31, 2011
contracts 2-50 MWCap 2,656 MWCap - May 31, 2014
----------------------------------------------------------------------------
(xii) Renewable December 31,
energy 2011 - December
certificates 5,000-160,000 MWh 2,089,400 MWh 31, 2015
----------------------------------------------------------------------------
(xiii) Verified
emission- December 31,
reduction 10,000-50,000 2011 - December
credits Tonnes 540,000 Tonnes 31, 2016
----------------------------------------------------------------------------
(xiv) Options January 31, 2011
5-120,000 - December 31,
mmBTU/month 4,175,350 mmBTU 2014
----------------------------------------------------------------------------
(xv) Physical gas
forward January 03, 2011
contracts 5-4,300 mmBTU/day 20,750,374 mmBTU - July 31, 2014
----------------------------------------------------------------------------
(xvi) Transportation January 01, 2011
forward - August 31,
contracts 1-22,039 mmBTU/day 35,789,525 mmBTU 2015
----------------------------------------------------------------------------
(xvii) Heat rate January 31, 2011
swaps - September 30,
1-30 MWh 3,977,782 MWh 2015
----------------------------------------------------------------------------
(xviii) Fixed
financial 930-320,000 January 31, 2011
swaps mmBTU/month 68,468,889 mmBTU - May 31, 2017
----------------------------------------------------------------------------
(xix) Foreign
exchange January 04, 2011
forward ($348-$6,501) - October 03,
contracts (US$342-$6,100) n/a 2011
----------------------------------------------------------------------------
Fair value
favourable/
Contract type Fixed price (unfavourable) Notional value
Canada
----------------------------------------------------------------------------
(i) Fixed-for-
floating
electricity
swaps (i) $28.75-$128.13 ($271,340) $696,184
----------------------------------------------------------------------------
(ii) Renewable
energy
certificates $3.00-$26.00 ($186) $7,149
----------------------------------------------------------------------------
(iii) Verified
emission
reduction
credits $6.00-$11.50 ($879) $4,796
----------------------------------------------------------------------------
(iv) Options $6.35-$12.40 $1,718 $7,376
----------------------------------------------------------------------------
(v) Physical gas
forward
contracts $3.35-$10.00 ($353,658) $879,576
----------------------------------------------------------------------------
(vi) Transportation
forward
contracts $0.01-$1.57 ($2,752) $39,741
----------------------------------------------------------------------------
(vii) Fixed
financial
swaps $4.51-$8.79 ($2,141) $9,845
----------------------------------------------------------------------------
United States
----------------------------------------------------------------------------
(viii) Fixed-for-
floating
electricity $24.17-$136.01 ($66,975) $433,076
swaps (i) (US$24.30-$136.75) (US($67,339)) (US$435,427)
----------------------------------------------------------------------------
(ix) Physical
electricity $23.12-$109.65 ($104,500) $449,197
forwards (US$23.25-$110.25) (US($105,067)) (US$451,636)
----------------------------------------------------------------------------
(x) Unforced
capacity
forward $945-$7,957 ($801) $3,591
contracts (US$950-$8,000) ((US$805)) (US$3,610)
----------------------------------------------------------------------------
(xi) Unforced
capacity
physical $398-$8,703 ($2,690) $12,732
contracts (US$400-$8,750) ((US$2,705)) (US$12,801)
----------------------------------------------------------------------------
(xii) Renewable
energy $2.69-$22.38 ($2,325) $12,413
certificates (US$2.70-$22.50) (US($2,338)) (US$12,480)
----------------------------------------------------------------------------
(xiii) Verified
emission-
reduction $4.48-$8.70 ($521) $3,901
credits (US$4.50-$8.75) (US$(524)) (US$3,922)
----------------------------------------------------------------------------
(xiv) Options $7.71-$13.73 ($1,322) $4,961
(US$7.75-$13.80) (US($1,329)) (US$4,988)
----------------------------------------------------------------------------
(xv) Physical gas
forward $3.73-$11.82 ($68,590) $172,484
contracts (US$3.75-$11.88) (US($68,962)) (US$173,420)
----------------------------------------------------------------------------
(xvi) Transportation
forward $0.0025-$4.73 ($3,256) ($75,191)
contracts (US$0.0025-$4.7600) (US($3,274)) (US$75,599)
----------------------------------------------------------------------------
(xvii) Heat rate $19.39-$75.32 $2,098 $167,307
swaps (US$19.50-$75.73) (US$2,109) (US$168,215)
----------------------------------------------------------------------------
(xviii) Fixed
financial $3.90-$9.35 ($108,185) $443,052
swaps (US$3.92-$9.40) (US($108,772)) (US$445,457)
----------------------------------------------------------------------------
(xix) Foreign
exchange
forward $29,866
contracts $1.0161-$1.0657 $1,280 (US$28,642)
----------------------------------------------------------------------------
(i) The electricity fixed-for-floating contracts related to the Province of
Alberta are predominantly load-following and some contracts in Ontario are also
load-following, 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 these and the rest of Just Energy's electricity
markets wherein the quantity of electricity is established but varies throughout
the term of the contracts.
Weather index derivatives
Just Energy has entered into Heating Degree Days ("HDD") Collar contracts at
major weather stations closest to Just Energy's customer base to mitigate gross
margin exposure to weather related volume variance. Just Energy reviews the
customer margin relationship to weather in combination with current commodity
price levels and, as required, enters an HDD Collar contract by purchasing an
HDD put option and simultaneously writing an HDD call option. The contract
settlement is expected to offset increases or decreases in margin from
consumption variance as well as gains or losses from balancing excess or short
supply.
The following table summarizes the weather derivative financial instruments
classified as held-for-trading as at December 31, 2010 to which the Fund has
committed.
Notional
Amount (per Call Strike Put Strike Maximum
Weather Index (Weather (Weather Payout
Station Unit) Index Units) Index Units) ('000)
----------------------------------------------------------------------------
New York - LaGuardia ($6,962) ($3,978)
Airport (US$7,000) 2,987 2,687 (US$4,000)
----------------------------------------------------------------------------
($9,946) ($4,973)
Chicago - O'Hare Airport (US$10,000) 3,771 3,471 (US$5,000)
----------------------------------------------------------------------------
Toronto - Pearson ($44,757) ($12,930)
Airport (US$45,000) 2,225 2,065 (US$13,000)
----------------------------------------------------------------------------
The estimated amortization of deferred gains and losses reported in accumulated
other comprehensive income ("AOCI") that is expected to be amortized to net
income within the next 12 months is a gain of $81,694.
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
consolidated financial statements.
Fair value ("FV") 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, and
long-term debt under Level 1.
Level 2
Fair value measurements that 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 values its
New York Mercantile Exchange ("NYMEX") financial gas fixed-for-floating swaps
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 mark to market calculations. The profile is based on historical
settlements with counterparties or with the system operator and is considered an
unobservable input for the purposes of establishing the level in the hierarchy.
For the natural gas supply contracts, Just Energy uses three different market
observable curves: i) Commodity (predominately NYMEX); ii) Basis and iii)
Foreign exchange. NYMEX curves extend for over five years (thereby covering the
length of Just Energy's contracts); however, most basis curves only extend 12 to
15 months into the future. In order to calculate basis curves for the remaining
years, Just Energy uses extrapolation, which leads to natural gas supply
contracts to be classified under Level 3.
Fair value measurement input sensitivity
The main cause of changes in the fair value of derivative instruments is changes
in 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 historical settlements.
The following table illustrates the classification of financial
assets/(liabilities) in the FV hierarchy as at December 31, 2010:
December 31, 2010
Level 1 Level 2 Level 3 Total
Financial assets
Trading assets $ 64,476 $ - $ - $ 64,476
Loans and receivable 433,358 - - 433,358
Derivative financial
assets - 168 7,198 7,366
Financial liabilities
Derivative financial
liabilities - (110,494) (881,897) (992,391)
Other financial
liabilities (924,319) - - (924,319)
----------------------------------------------------------------------------
Total net derivative
liabilities $ (426,485) $ (110,326) $ (874,699) $ (1,411,510)
----------------------------------------------------------------------------
----------------------------------------------------------------------------
The following table illustrates the changes in net fair value of financial
assets/(liabilities) classified as Level 3 in the FV hierarchy for the nine
months ended December 31, 2010:
December 31, 2010
Opening balance, April 01, 2010 $ (1,229,555)
Total gain/(losses) - Net Income 31,381
Purchases (252,640)
Sales 4,356
Settlements 571,759
Transfer out of Level 3 -
----------------------------------------------------------------------------
Closing Balance, December 31, 2010 $ (874,699)
----------------------------------------------------------------------------
----------------------------------------------------------------------------
(b) Classification of financial assets and liabilities
The following table represents the fair values and carrying amounts of financial
assets and liabilities measured at amortized cost.
As at December 31, 2010 Carrying amount Fair value
Cash and restricted cash $ 64,476 $ 64,476
Accounts receivable $ 429,406 $ 429,406
Long-term receivable $ 3,952 $ 3,952
Other assets $ 7,366 $ 7,366
Bank indebtedness, accounts payable and
accrued liabilities, and unit distributions
payable $ 317,147 $ 317,147
Long-term debt $ 607,172 $ 658,566
Other liabilities $ 992,391 $ 992,391
For the three For the three
months ended months ended
December 31, December 31,
2010 2009
Interest expense on financial liabilities
not held-for-trading $ 15,081 $ 5,143
For the nine For the nine
months ended months ended
December 31, December 31,
2010 2009
Interest expense on financial liabilities
not held-for-trading $ 36,857 $ 10,569
The carrying value of cash, restricted cash, accounts receivable, accounts
payable and accrued liabilities, and unit distributions payable approximates
their fair value due to their short-term liquidity.
The carrying value of long-term debt approximates its fair value as the interest
payable on outstanding amounts is at rates that vary with Bankers' Acceptances,
LIBOR, Canadian bank prime rate or U.S. prime rate, with the exception of the
JEIF and JEEC convertible debentures, which are fair valued, based on market
value.
(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 income 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 income. Due to
its growing operations in the U.S. and its recent acquisition of Hudson, Just
Energy expects to have a greater exposure to U.S. fluctuations in the future
than in prior years. Just Energy has hedged between 25% to 90% of certain
forecasted cross border cash flows that are expected to occur within the next
year. The level of hedging is dependent on the source of the cash flow and the
time remaining until the cash repatriation occurs.
The Fund may, from time to time, experience losses resulting from fluctuations
in the values of its foreign currency transactions, which could adversely affect
its operating results.
With respect to translation exposure, as at December 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 nine months ended
December 31, 2010, would have been $943 higher/lower and other comprehensive
income would have been $3,048 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.
The Fund does not currently believe that this long-term debt exposes it to
material financial risks but has set out parameters to actively manage this risk
within its Risk Management Policy.
A 1% increase (decrease) in interest rates would have resulted in a decrease
(increase) in income before income taxes for the three months ended December 31,
2010, of approximately $258.
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. Management actively monitors these positions on a daily
basis in accordance with its Risk Management Policy. This policy sets out a
variety of limits, most importantly thresholds for open positions in the gas and
electricity portfolios, which also feed a Value at Risk limit; should any of the
limits be exceeded, they are closed expeditiously or express approval to
continue to hold is obtained. 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 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 December 31, 2010, if the energy prices including natural gas,
electricity, verified emission-reduction credits, and renewable energy
certificates had risen (fallen) by 10%, assuming that all the other variables
had remained constant, income before taxes for the quarter ended December 31,
2010, would have increased (decreased) by $199,810 ($199,307) 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 December 31, 2010, if the energy prices including natural gas,
electricity, verified emission-reduction credits, and renewable energy
certificates, had risen (fallen) by 10%, assuming that all the other variables
had remained constant, income before taxes for the quarter ended December 31,
2010 would have increased (decreased) by $175,414 ($174,994) primarily as a
result of the change in the fair value of the Fund's derivative instruments.
(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, Maryland, New York and
New Jersey, 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 flows of Just Energy. Management factors default from credit risk in its
margin expectations for all the above markets.
As at December 31, 2010, accounts receivable from the above markets with a
carrying value of $17,982 (March 31, 2010 - $20,239) were past due but not
doubtful. As at December 31, 2010, the aging of the accounts receivable from the
above markets was as follows:
Current $ 64,670
1 - 30 days 11,522
31 - 60 days 3,814
61 - 90 days 2,646
Over 90 days 12,209
-------------
$ 94,861
-------------
For the nine months ended December 31, 2010, changes in the allowance for
doubtful accounts were as follows:
Balance, beginning of period $ 23,110
Provision for doubtful accounts 18,901
Bad debts written off (16,629)
Others (559)
-------------
Balance, end of period $ 24,823
-------------
For the remaining markets, the local distribution companies ("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. Counterparty limits are
established within the Risk Management Policy. Any exceptions to these limits
require approval from the Board of Directors of JEC. The Risk Office and Risk
Committee monitors current and potential credit exposure to individual
counterparties and also monitors overall aggregate counterparty exposure.
However, the failure of a counterparty to meet its contractual obligations could
have a material adverse effect on the operations and cash flows of Just Energy.
As at December 31, 2010, the maximum counterparty credit risk exposure amounted
to $102,227, 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 as at
December 31, 2010.
Less More
Carrying Contractual than 1 1 to 3 4 to 5 than 5
amount cash flows year years years years
Accounts payable
and accrued
liabilities and
unit
distribution
payable $ 314,457 $ 314,457 $314,457 $ - $ - $ -
Bank
indebtedness 2,690 2,690 2,690 - - -
Long-term
debt(i) 607,172 657,667 131,734 74,318 119,345 332,270
Derivative
instruments 992,391 3,422,563 485,517 2,274,757 624,974 37,315
----------------------------------------------------------------------------
$1,916,710 $4,397,377 $934,398 $2,349,075 $744,319 $369,585
----------------------------------------------------------------------------
----------------------------------------------------------------------------
(i) Included in long-term debt is $330,000 and $90,000 relating to
convertible debentures, which may be settled through the issuance of
shares at the option of the holder.
In addition to the amounts noted above, at December 31, 2010, net interest
payments over the life of the long-term debt and bank credit facility are as
follows:
Less More
than 1 1 to 3 4 to 5 than 5
year years years years
----------------------------------------------------------------------------
Interest payments $ 37,765 $ 63,909 $ 49,405 $ 31,524
----------------------------------------------------------------------------
----------------------------------------------------------------------------
(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 $1,506 to
accommodate for its counterparties' risk of default.
12. INCOME PER UNIT
For the three For the three For the nine For the nine
months ended months ended months ended months ended
Dec. 31, 2010 Dec. 31, 2009 Dec. 31, 2010 Dec. 31, 2009
Basic income per
unit
-----------------
Net income
available to
Unitholders $ 217,407 $ 97,390 $ 338,236 $ 310,707
-------------- -------------- -------------- --------------
Weighted average
number of units
outstanding 126,364,236 122,562,398 125,550,897 115,735,191
Weighted average
number of Class
A preference
shares 5,263,728 5,263,728 5,263,728 5,263,728
Weighted average
number of
Exchangeable
Shares 3,697,919 5,678,633 4,070,665 8,779,040
-------------- -------------- -------------- --------------
Basic units and
shares
outstanding 135,325,883 133,504,759 134,885,290 129,777,959
-------------- -------------- -------------- --------------
Basic income per
unit $ 1.61 $ 0.73 $ 2.51 $ 2.39
-------------- -------------- -------------- --------------
-------------- -------------- -------------- --------------
Diluted income
per unit
-----------------
Net income
available to
Unitholders $ 217,407 $ 97,390 $ 338,236 310,707
Adjusted net
income for
dilutive impact
of convertible
debentures 7,182 - 15,313 -
-------------- -------------- -------------- --------------
Adjusted net
income 224,589 97,390 353,549 310,707
-------------- -------------- -------------- --------------
Basic units and
shares
outstanding 135,325,883 133,504,759 134,885,290 129,777,959
Dilutive effect
of:
Unit
appreciation
rights 2,766,925 543,326 2,723,448 1,385,237
Deferred unit
grants 96,628 74,204 90,570 68,691
Convertible
debentures 23,773,043 - 16,066,667 -
-------------- -------------- -------------- --------------
Units outstanding
on a diluted
basis 161,962,479 134,122,289 153,765,975 131,231,887
-------------- -------------- -------------- --------------
Diluted income
per unit $ 1.39 $ 0.73 $ 2.30 $ 2.37
-------------- -------------- -------------- --------------
-------------- -------------- -------------- --------------
13. 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 segments
have operations in both Canada and the 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.
For the three months ended December 31, 2010
Gas and electricity Home
marketing Ethanol services
---------------------------------------------
United
Canada States Canada Canada Consolidated
----------------------------------------------------------
Sales gas $ 171,569 $ 156,675 $ - $ - $ 328,244
Sales electricity 146,469 236,728 - - 383,197
Ethanol - - 26,879 - 26,879
Home services - - - 5,976 5,976
----------------------------------------------------------------------------
Sales $ 318,038 $ 393,403 $ 26,879 $ 5,976 $ 744,296
----------------------------------------------------------------------------
Gross margin $ 48,783 $ 73,138 $ 5,992 $ 4,365 $ 132,278
Amortization of
property, plant
and equipment (1,269) (343) (299) (86) (1,997)
Amortization of
intangible assets (11,447) (17,809) - (398) (29,654)
Other operating
expenses 7,707 (69,037) (3,110) (4,244) (68,684)
----------------------------------------------------------------------------
Income (loss)
before the
undernoted 43,774 (14,051) 2,583 (363) 31,943
Interest expense 10,054 1,505 1,789 1,733 15,081
Change in fair
value of
derivative
instruments (116,103) (120,468) - - (236,571)
Other income (213) (67) - 153 (127)
Non-controlling
interest - - 252 - 252
Provision
(recovery) of
income tax 7,110 29,892 - (1,101) 35,901
----------------------------------------------------------------------------
Net income (loss) $ 142,926 $ 75,087 $ 542 $ (1,148) $ 217,407
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Additions to
property, plant
and equipment $ 1,310 $ 297 $ 37 $ 7,044 $ 8,688
----------------------------------------------------------------------------
For the three months ended December 31, 2009
Gas and electricity Home
marketing Ethanol Services
---------------------------------------------
United
Canada States Canada Canada Consolidated
----------------------------------------------------------
Sales gas $ 207,499 $ 134,251 $ - $ - $ 341,750
Sales electricity 171,896 91,263 - - 263,159
Ethanol - 19,460 - 19,460
Home Services - - 2,597 2,597
----------------------------------------------------------------------------
Sales $ 379,395 $ 225,514 $ 19,460 $ 2,597 $ 626,966
----------------------------------------------------------------------------
Gross margin $ 61,430 $ 46,568 $ 1,731 $ 2,218 $ 111,947
Amortization of
property, plant
and equipment (1,608) (53) (222) (52) (1,935)
Amortization of
intangible assets (11,914) (7,997) - (398) (20,309)
Other operating
expenses (13,120) (40,605) (2,440) (1,480) (57,645)
----------------------------------------------------------------------------
Income (loss)
before the
undernoted 34,788 (2,087) (931) 288 32,058
Interest expense 3,193 279 1,671 - 5,143
Change in fair
value of
derivative
instruments (50,926) 73 - - (50,853)
Other income 7,248 (8,616) (73) - (1,441)
Non-controlling
interest - - (1,171) - (1,171)
Provision
(recovery) of
income tax (13,485) (3,155) - (370) (17,010)
----------------------------------------------------------------------------
Net income (loss) $ 88,758 $ 9,332 $ (1,358) $ 658 $ 97,390
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Additions to
property, plant
and equipment $ 4,882 $ 48 $ 1,263 $ 4,841 $ 11,034
----------------------------------------------------------------------------
For the nine months ended December 31, 2010
Gas and electricity Home
marketing Ethanol services
---------------------------------------------
United
Canada States Canada Canada Consolidated
----------------------------------------------------------
Sales gas $ 379,144 $ 285,855 $ - $ - $ 664,999
Sales electricity 472,677 783,717 - - 1,256,394
Ethanol - - 74,876 - 74,876
Home services - - - 15,589 15,589
----------------------------------------------------------------------------
Sales $ 851,821 $1,069,572 $ 74,876 $ 15,589 $ 2,011,858
----------------------------------------------------------------------------
Gross margin $ 117,879 $ 172,823 $ 7,919 $ 10,983 $ 309,604
Amortization of
property, plant
and equipment (3,822) (869) (892) (226) (5,809)
Amortization of
intangible assets (34,108) (53,780) - (1,193) (89,081)
Other operating
expenses (51,284) (133,242) (8,364) (12,510) (205,400)
----------------------------------------------------------------------------
Income (loss)
before the
undernoted 28,665 (15,068) (1,337) (2,946) 9,314
Interest expense 25,141 1,754 5,398 4,564 36,857
Change in fair
value of
derivative
instruments (280,282) (89,411) - - (369,693)
Other income (3,349) 113 (41) 447 (2,830)
Non-controlling
interest - - (1,987) - (1,987)
Provision
(recovery) of
income tax (20,493) 31,710 - (2,486) 8,731
----------------------------------------------------------------------------
Net income (loss) $ 307,648 $ 40,766 $ (4,707) $ (5,471) $ 338,236
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Additions to
property, plant
and equipment $ 2,567 $ 1,947 $ 216 $ 24,350 $ 29,080
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Total goodwill $ 160,253 $ 60,711 $ - $ 283 $ 221,247
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Total assets $ 699,572 $ 775,231 $ 189,393 $ 96,739 $ 1,760,935
----------------------------------------------------------------------------
For the nine months ended December 31, 2009
Gas and electricity Home
marketing Ethanol Services
---------------------------------------------
United
Canada States Canada Canada Consolidated
----------------------------------------------------------
Sales gas $ 448,832 $ 222,409 $ - $ - $ 671,241
Sales electricity 469,844 278,570 - - 748,414
Ethanol - - 35,909 - 35,909
Home Service - - - 5,071 5,071
----------------------------------------------------------------------------
Sales $ 918,676 $ 500,979 $ 35,909 $ 5,071 $ 1,460,635
----------------------------------------------------------------------------
Gross margin $ 142,020 $ 109,368 $ 3,597 $ 4,533 $ 259,518
Amortization of
property, plant
and equipment (3,966) (174) (843) (673) (5,656)
Amortization of
intangible assets (24,089) (16,499) - (802) (41,390)
Other operating
expenses (77,448) (66,364) (6,259) (4,763) (154,834)
----------------------------------------------------------------------------
Income (loss)
before the
undernoted 36,517 26,331 (3,505) (1,705) 57,638
Interest expense 6,298 757 3,514 - 10,569
Change in fair
value of
derivative
instruments (126,953) (150,295) - - (277,248)
Other income (2,688) (25) (42) - (2,755)
Non-controlling
interest - - (2,659) (55) (2,714)
Provision
(recovery) of
income tax (4,264) 24,170 - (827) 19,079
----------------------------------------------------------------------------
Net income (loss) $ 164,124 $ 151,724 $ (4,318) $ (823) $ 310,707
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Additions to
property, plant
and equipment $ 9,380 $ 181 $ 1,363 $ 19,993 $ 30,917
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Total goodwill $ 135,461 $ 32,935 $ - $ 2,980 $ 171,376
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Total assets $ 762,920 $ 383,806 $ 161,535 $ 78,794 $ 1,387,055
----------------------------------------------------------------------------
14. COMMITMENTS
Commitments for each of the next five years and thereafter are as follows:
Long-term gas
and electricity
Premises and Grain Master Services contracts with
equipment production agreement with various
leasing contracts EPCOR suppliers
2011 $ 2,376 $ 13,476 $ 2,300 $ 485,517
2012 7,988 19,631 6,132 1,409,297
2013 5,785 1,703 - 865,460
2014 4,216 396 - 450,039
2015 3,378 - - 174,935
Thereafter 6,857 - - 37,315
--------------- --------------- --------------- ---------------
$ 30,600 $ 35,206 $ 8,432 $ 3,422,563
--------------- --------------- --------------- ---------------
--------------- --------------- --------------- ---------------
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.
15. CONTINGENCIES
The State of California has filed a number of complaints to the Federal Energy
Regulatory Commission ("FERC") against many suppliers of electricity, including
Commerce, a subsidiary of the Fund, with respect to events stemming from the
2001 energy crisis 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.
16. COMPARATIVE INTERIM CONSOLIDATED FINANCIAL STATEMENTS
Certain figures from the comparative consolidated financial statements have been
reclassified from statements previously presented to conform to the presentation
of the current period's consolidated financial statements.
17. SUBSEQUENT EVENTS
(i) Trust conversion
On January 1, 2011, JEIF completed the conversion from an income trust to a
corporation (the "Conversion"). The Conversion was implemented pursuant to a
plan of arrangement under the Canada Business Corporations Act. Under the plan
of arrangement, all of the JEIF trust units , JEEC Exchangeable Shares and the
Class A preference shares of JEC have been exchanged for common shares of JEGI
on a one-for-one basis. The common shares of JEGI trade on the TSX under the
symbol "JE". JEGI also assumed all of the obligations under the JEEC convertible
debentures and the JEIF convertible debentures.
(ii) Amended credit agreement
In connection with the Conversion, JE amended and restated its credit agreement
with a syndicate of lenders which includes Canadian Imperial Bank of Commerce,
Royal Bank of Canada, National Bank of Canada, Bank of Nova Scotia, Alberta
Treasury Branches, Societe Generale and Toronto-Dominion Bank to increase the
available line for general corporate purposes from $250 million to $350 million.
The increase in the credit facility will accommodate forecasted working capital
requirements for expansion into new markets and customer growth in existing
markets and provide financial capacity to pursue small acquisitions. The
repayment of the facility is due on December 31, 2013.
(iii) Exercise of put
The minority shareholder of TGF, EllisDon Design Build Inc., exercised its right
to put its one-third equity interest in TGF to JEEC on November 17, 2010 for $10
million of Exchangeable Shares based on the volume weighted trading price during
the month of December 2010. As a result, JEGI issued 689,940 common shares to
the minority shareholder on January 4, 2011. TGF is now a wholly owned
subsidiary of JEGI.
(iv) Declared dividends
On January 5, 2011, the Board of Directors of the Corporation declared a
dividend in the amount of $0.10333 per common share ($1.24 annually). The
dividend will be paid on January 31, 2011 to shareholders of record at the close
of business on January 15, 2011.
On February 2, 2011, the Board of Directors of the Corporation declared a
dividend in the amount of $0.10333 per common share ($1.24 annually). The
dividend will be paid on February 28, 2011 to shareholders of record at the
close of business on February 15, 2011.
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