Just Energy Income Fund (TSX:JE.UN) -
Highlights for the three months ended September 30, 2010 included:
-- Gross and net customer additions through marketing of 254,000 and
92,000, respectively, up 81% and 156% year over year.
-- Total customer base reached 3,161,000 customers, up 39% from a year
earlier.
-- Sales (seasonally adjusted) up 33% year over year reaching $748.5
million.
-- Gross margin (seasonally adjusted) of $115.4 million, up 7% (5% per
unit), reflecting improved operating results.
-- General and administrative costs were flat year over year despite a 39%
increase in customers and the inclusion of Hudson Energy Services.
-- Distributable cash after gross margin replacement of $53.4 million, up
2% (0% per unit).
-- Distributable cash of $45.8 million after all marketing expenses up 11%
(8% per unit).
-- Adjusted EBITDA of $39.4 million, up 8% per unit from $36.6 million year
over year.
-- Net loss of $154.4 million ($1.12 per unit), which includes the impact
of the non-cash mark to market loss on future supply positions. Prior
year net income was $110.7 million ($0.82 per unit) due to a favourable
mark to market adjustment.
Just Energy Second Quarter Fiscal 2011 Results
Just Energy Income Fund announced its results for the period ended September 30,
2010. The tables below detail the operating results of the Fund for the three
and six months ended September 30, 2010.
Three months ended September 30, F2011 Per unit F2010 Per unit
($millions, except per unit)
----------------------------------------------------------------------------
Sales(1) $ 748.5 $ 5.44 $ 562.1 $ 4.19
Gross margin(1) 115.4 0.84 107.5 0.80
Distributable cash
After margin replacement 53.4 0.39 52.3 0.39
After marketing expense 45.8 0.33 41.3 0.31
Adjusted EBITDA 39.4 0.29 36.6 0.27
Net income (loss) (154.5) (1.12) 110.7 0.82
Distributions 42.3 0.31 42.8 0.32
Six months ended September 30, F2011 Per unit F2010 Per unit
($millions, except per unit)
----------------------------------------------------------------------------
Sales(1) $1,388.5 $ 10.10 $ 994.7 $ 8.04
Gross margin(1) 204.3 1.49 182.3 1.47
Distributable cash
After margin replacement 87.2 0.63 94.5 0.76
After marketing expense 70.2 0.51 77.4 0.63
Adjusted EBITDA 70.7 0.51 66.8 0.54
Net income 120.8 0.88 213.3 1.72
Distributions 84.6 0.62 77.9 0.63
(1)Seasonally adjusted (non-GAAP) measure.
(2)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
they will be anti-dilutive by fiscal year end. The fiscal 2010 per unit amounts
are calculated on a fully diluted basis.
Just Energy is an Income Fund and it reports in the attached Management's
Discussion and Analysis, a detailed calculation of distributable cash both
before and after marketing expenditures to expand the gross margin from the
Fund's customer base.
The second quarter of fiscal 2011 displayed the continued success of Just
Energy's efforts to diversify its marketing channels, rejuvenate its
door-to-door salesforce as well as the continued impact of its diversification
into new product lines. The purchase of Hudson Energy during the first quarter
added not only an established commercial customer base but also a proven network
of independent brokers for the commercial market. This network has already
contributed to results as reflected in the customer aggregation seen in both the
first and second quarters.
Following a record 261,000 customer additions in the first quarter, Just Energy
achieved gross customer additions through marketing of 254,000 in the second
quarter, up 81% from the previous record of 140,000 additions in the second
quarter of fiscal 2010. Net customer additions for the quarter were 92,000, up
from 36,000 a year ago and higher than the total net additions in both fiscal
2009 and fiscal 2010.
The following table highlights the impact of marketing channel diversification
in the fiscal 2011 compared to the prior two years.
To view a graph of the Quarterly Customer Additions, please visit the following
link: http://media3.marketwire.com/docs/je_1109_quartely_customer_additions.pdf
The first six months of fiscal 2011 have seen marketing generate net additions
equal to 9% of the Fund's April 1, 2010 customer count. With the Hudson Energy
acquisition, the total growth increased to 38% since the beginning of the fiscal
year.
It is important to note that the majority of these new customers will only begin
flowing in the third quarter of fiscal 2011. This customer growth should lead to
both future margin growth and cash flow growth.
Second Quarter Operating Performance
Operating performance in the second quarter improved compared to the
weather-impacted results in the first quarter despite final settlements in the
Ontario and Michigan markets. Gross margins and distributable cash were in line
with our published expectations during the second quarter and, as noted above,
this was without the benefit of new customers signed over the past six months
who will not flow until the third or fourth quarter. While the second quarter
results reflect the adverse effects of final reconciliation costs from the
winter with record warm temperatures on our gas book, gross margins were up 5%
per unit, distributable cash after margin replacement was flat per unit and up
6% per unit after all marketing expense.
Realized margins per customer were weak in the quarter, particularly in the gas
markets which related to the final settlements for the past warm winter. This
resulted in a lag between customer growth and margin growth. Many of the new
customer additions for the fiscal year have been from our Commercial Energy
division which generates margins per customer lower than that of residential
customers. Overall, our new customer margins remained strong which bodes well
for future results. Total embedded margin within our customer book was $1.5
billion despite a 3% decline in the U.S. dollar. Just Energy's future remains
bright.
Management's estimate of the future embedded gross margin is as follows:
Sept 10 Sept 10
vs. June vs. Sept
As of Sept As of June 10 As of June 09
30, 2010 30, 2010 Variance 30, 2010 Variance
-----------------------------------------------------------
Canada (CAD$) $ 708.8 $ 757.5 (6)% $ 816.6 (13)%
United States
(US$) $ 778.8 $ 698.5 11% $ 370.5 102%
Total (CAD$) $ 1,510.9 $ 1,501.1 1% $ 1,213.8 24%
The Fund bears bad debt risk on 35% of its revenue and the expense had peaked at
3.5% in the depths of the recession last year. Since then, along with the slow
recovery in the U.S. economy, losses have steadily declined and totalled 2.5%
for the second quarter, in the middle of the Fund's 2% to 3% target range.
Customer attrition, which had risen above our 30% target in our U.S. gas
markets, has also steadily declined reaching 27% in the trailing 12 months, with
further reductions likely.
The quarter demonstrated clear evidence of improved controls over the general
and administrative costs. Despite a 38% increase in number of customers and the
addition of the Hudson management team to Just Energy's base, overhead costs
were flat at $25.5 million year over year. This was done through the final
realization of synergies from the Universal acquisition completed in fiscal 2010
and tight controls on all other spending.
During the quarter, Just Energy committed to make expenditures toward a number
of new geographic expansions which management believes will contribute to higher
distributable cash in the future. This will result in higher general and
administrative costs in future quarters, but the ratio of these costs to
customers should continue to decline.
The growth of the Commercial Energy division has a number of impacts on
operating results. First, margins per residential customer equivalents ("RCEs")
are lower with these customers but a single customer can equate to hundreds of
RCEs. This means lower customer care costs per RCE and lower initial aggregation
cost. Commercial customers are currently approximately 40% of Just Energy's base
and we expect that percentage to increase over time. Second, commercial
customers are subject to less weather volatility than residential customers
which may mean more predictable results from the natural gas book. Also,
commercial customers do not ordinarily move which could lead to lower overall
attrition, making book balancing less complex.
In regards to the second quarter, CEO Ken Hartwick noted: "We are very pleased
with our operating results in the second quarter. As was the case in the first
quarter, customer aggregation was at a level far higher than any time in Just
Energy's history. This was a result of both our acquisition of Hudson Energy and
the efforts we have made to rebuild our door-to-door salesforce. From a low of
450, we now have more than 1,100 independent contractors working full time."
"Overall, our results for the quarter were in line with our past performance and
our expectations going into the year. Our natural gas margins were dampened by
the final reconciliations for the previous record warm winter. Our electricity
results were solid. Just Energy is well placed heading into its conversion to
corporate status at year end."
Chair Rebecca MacDonald added: "The third quarter will be our last as an Income
Trust. Our entire management team is very proud of the track record we have
built at Just Energy. We remain in position to pay the same $1.24 per share
annually in monthly dividends as we have paid for the last few years in per-unit
distributions. As a significant holder of units, I am also pleased that most
Canadian investors will have increased after-tax returns on conversion."
"Just Energy has never been better positioned. We intend to build on the solid
base we have in place and take our company to new levels as a corporation.
Exceptional opportunities exist for continued growth in the United States and we
are well positioned as a market leader for both residential and commercial
customers. I am confident that our unitholders (soon to be shareholders) will
benefit from this bright future."
The Fund
Just Energy's business involves the sale of natural gas and/or electricity to
residential and commercial customers under long-term fixed-price,
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. The Fund 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 for their
home or business. Management believes that these products will not only add to
profits, but also increase sales receptivity and improve renewal rates.
In addition, through National Home Services, the Fund sells and rents high
efficiency and tankless water heaters, air conditioners and furnaces to Ontario
residents. Through its subsidiary Terra Grain Fuels, the Fund produces and sells
wheat-based ethanol.
Non GAAP Measures
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 our 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 productive capacity in the future.
Management believes the best basis for analyzing both the Fund's results and the
amount available for distribution is to focus on amounts actually received
("seasonally adjusted") because this figure provides the margin earned on all
deliveries to the utilities. Seasonally adjusted sales and gross margin are not
defined performance measures under Canadian GAAP. Seasonally adjusted analysis
applies solely to the gas markets and specifically to Ontario, Quebec, Manitoba
and Michigan.
Forward-Looking Statements
The Fund's press releases may contain forward-looking statements including
statements pertaining to customer revenues and margins, customer additions and
renewals, customer attrition, customer consumption levels, 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 the Fund's
operations, financial results or distribution levels are included in the Fund's
annual information form and other reports on file with Canadian securities
regulatory authorities which can be accessed through the SEDAR website at
www.sedar.com or through the Fund's website at www.justenergy.com.
The Toronto Stock Exchange has neither approved nor disapproved of the contents
of this release.
MANAGEMENT'S DISCUSSION AND ANALYSIS ("MD&A") - November 8, 2010
Overview
The following discussion and analysis is a review of the financial condition and
results of operations of Just Energy Income Fund ("Just Energy", the "Fund" or
"JEIF") for the three and six months ended September 30, 2010, and has been
prepared with all information available up to and including November 8, 2010.
This analysis should be read in conjunction with the unaudited interim
consolidated financial statements for the three and six months ended September
30, 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.justenergy.com. Additional information can be found on SEDAR at
www.sedar.com.
Just Energy is an open-ended, limited-purpose trust established under the laws
of the Province of Ontario to hold securities and to distribute the income of
its directly or indirectly owned operating subsidiaries and affiliates: Just
Energy Ontario L.P. ("JE Ontario"), Just Energy Manitoba L.P. ("JE Manitoba"),
Just Energy Quebec L.P. ("JE Quebec"), Just Energy (B.C.) Limited Partnership
("JE B.C."), Just Energy Alberta L.P. ("JE Alberta"), Alberta Energy Savings
L.P. ("AESLP"), Just Energy Illinois Corp. ("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")
operating under the trade name of National Home Services ("NHS"), Hudson Energy
Services, LLC ("Hudson" or "NES"), 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 fixed price at which
it is able to sell the commodities to its customers and the fixed price at which
it purchases the associated volumes from its suppliers. The Fund also offers
green products through its JustGreen program. The electricity JustGreen product
offers the customer the option of having all or a portion of their electricity
sourced from renewable green sources such as wind, run of the river hydro or
biomass. The gas 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 NHS, the Fund 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.justenergy.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 Long-term debt and financing 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 Long-term debt and financing 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 both the Fund's results and the
amount available for distribution is to focus on amounts actually received
("seasonally adjusted") because this figure provides the margin earned on all
deliveries to the utilities. Seasonally adjusted sales and gross margin are not
defined performance measures under Canadian GAAP. Seasonally adjusted analysis
applies solely to the gas markets and specifically to Ontario, Quebec, Manitoba
and Michigan.
No seasonal adjustment is required for electricity as the supply is balanced
daily. In the other gas markets, payments for supply by the LDCs are aligned
with customer consumption.
Cash Available for Distribution
"Distributable cash after marketing expense" refers to the net Cash Available
for Distribution to Unitholders. Seasonally adjusted gross margin is the
principal contributor to Cash Available for Distribution. Distributable cash is
calculated by the Fund as seasonally adjusted gross margin, adjusted for cash
items including general and administrative expenses, marketing expenses, bad
debt expense, interest expense, corporate taxes, capital taxes and other items.
This non-GAAP measure may not be comparable to other income funds.
"Distributable cash after gross margin replacement" represents the net Cash
Available for Distribution to Unitholders as defined above. However, only the
marketing expenses associated with maintaining the Fund's gross margin at a
stable level, equal to that in place at the beginning of the period, are
deducted. Management believes that this is more representative of the ongoing
operating performance of the Fund because it includes all expenditures necessary
for the retention of existing customers and the addition of new margin to
replace those customers that have not been renewed. This non-GAAP measure may
not be comparable to other income funds.
For reconciliation to cash from operating activities please refer to the "Cash
Available for Distribution and distributions" analysis on page 8.
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 12.
Financial highlights
For the three months ended September 30
(thousands of dollars, except where indicated and per unit amounts)
Fiscal 2011 Fiscal 2010
Per Per unit Per
$ unit(1) Change $ unit(1)
Sales 657,878 $ 4.78 48% 434,659 $ 3.24
Net income (loss)(2) (154,480) $ (1.12) NMF(6) 110,690 $ 0.82
Adjusted EBITDA(3) 39,375 $ 0.29 8% 36,598 $ 0.27
Gross margin
(seasonally
adjusted)(4) 115,356 $ 0.84 5% 107,519 $ 0.80
Distributable cash
- After gross margin
replacement 53,442 $ 0.39 - 52,303 $ 0.39
- After marketing
expense 45,753 $ 0.33 8% 41,345 $ 0.31
Distributions 42,310 $ 0.31 (3)% 42,839 $ 0.32
General and
administrative 25,511 $ 0.19 - 25,634 $ 0.19
Distributable cash
payout ratio(5)
- After gross margin
replacement 79% 82%
- After marketing
expense 92% 104%
For the six months ended September 30
(thousands of dollars, except where indicated and per unit amounts)
Fiscal 2011 Fiscal 2010
Per Per unit Per
$ unit(1) Change $ unit(1)
Sales 1,267,562 $ 9.22 37% 833,669 $ 6.74
Net income(2) 120,829 $ 0.88 (49)% 213,317 $ 1.72
Adjusted EBITDA(3) 70,657 $ 0.51 (6)% 66,780 $ 0.54
Gross margin
(seasonally
adjusted)(4) 204,289 $ 1.49 1% 182,288 $ 1.47
Distributable cash
- After gross margin
replacement 87,225 $ 0.63 (17)% 94,522 $ 0.76
- After marketing
expense 70,155 $ 0.51 (19)% 77,432 $ 0.63
Distributions 84,589 $ 0.62 (2)% 77,853 $ 0.63
General and
administrative 54,783 $ 0.40 21% 41,251 $ 0.33
Distributable cash
payout ratio(5)
- After gross margin
replacement 97% 82%
- After marketing
expense 121% 101%
(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 (loss) includes the impact of unrealized gains (losses)
which represent the mark to market of future commodity supply acquired
to cover future customer demand. The supply has been sold to customers
at fixed prices minimizing any 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. See above for more information.
(4) See discussion of non-GAAP financial measures.
(5) Management targets an annual payout ratio after all marketing expenses,
excluding any Special Distribution, of less than 100%.
(6) Not a meaningful number.
Reconciliation of net income (loss) to Adjusted EBITDA
(thousands of dollars)
For the three For the three For the six For the six
months ended months ended months ended months ended
Sept 30, Sept 30, Sept 30, Sept 30,
fiscal 2011 fiscal 2010 fiscal 2011 fiscal 2010
--------------------------------------------------------
Net income (loss) $ (154,480) $ 110,690 $ 120,829 $ 213,317
Add:
Interest 12,296 4,946 21,776 5,426
Tax expense
(recovery) (46,529) 25,786 (27,169) 36,089
Capital tax 26 48 159 128
Amortization 40,752 24,068 74,200 25,856
--------------------------------------------------------
EBITDA (147,935) 165,538 189,795 280,816
Add:
Change in fair value
of derivative
instruments 181,254 (138,515) (133,122) (226,395)
Marketing expenses
to add gross margin 7,689 10,958 17,070 17,090
Less:
Maintenance capital
expenditures (1,633) (1,383) (3,086) (4,731)
--------------------------------------------------------
Adjusted EBITDA 39,375 36,598 70,657 66,780
--------------------------------------------------------
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:
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. In the three months ended September 30, 2010,
goodwill increased by $2.6 million due to additional transaction costs and a
change in the working capital calculation which impacted the purchase price.
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 ("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 is 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:
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, including customer relationships, acquired are amortized over periods
ranging from 8 to 57 months. The water heater contracts and customer
relationships are amortized over 174 months and the other intangible assets are
amortized over six months. The non-controlling interest represents 33.3%
ownership of TGF held by EllisDon Corporation. The purchase price for this
acquisition is final and no longer subject to change.
Operations
Gas
In each of the markets that Just Energy operates, it is required to deliver gas
to the LDCs for its customers throughout the year. Gas customers are charged a
fixed price for the full term of their contract. Just Energy purchases gas
supply in advance of marketing for residential customers and is generally
concurrent with the execution of a contract for larger commercial customers. The
LDC provides historical customer usage to enable Just Energy to purchase an
approximation of estimated supply. Furthermore, in many markets, Just Energy
mitigates exposure to customer usage by purchasing options that cover potential
differences in customer consumption due to weather variations. The cost of this
strategy is incorporated in the price to the customer. Our ability to mitigate
weather effects is limited by utilities' requirements to deliver fixed amounts
of gas regardless of the weather. To the extent that balancing requirements are
outside the options purchased, Just Energy bears the financial responsibility
for fluctuations in customer usage. Volume variances may result in either excess
or short supply. Excess supply is sold in the spot market resulting in either a
gain or loss compared to the weighted average cost of supply. In the case of
greater than expected gas consumption, Just Energy must purchase the short
supply at the market price, which may reduce or increase the customer gross
margin typically realized. Under some commercial contract terms, this balancing
may be passed 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
Ontario, Alberta, New York, Texas, Illinois, Pennsylvania, New Jersey, Maryland,
Michigan, California and Massachusetts
Just Energy offers a variety of price protection products to its electricity
customers. The product offerings include both fixed-price and variable-price
long-term and short-term electricity contracts. Customers have the ability to
choose an appropriate JustGreen program to supplement their electricity
contracts, providing an effective method to offset their carbon footprint. In
Ontario, New York and Texas, Just Energy provides customers with price
protection programs for the majority of their electricity requirements. The
customers experience either a small balancing charge or credit on each bill due
to fluctuations in prices applicable to their volume requirements not covered by
a fixed price. Just Energy uses historical usage data for all enrolled customers
to accurately predict future customer consumption and to help with long term
supply procurement decisions.
Cash flow from electricity operations is greatest during the second and fourth
quarters (summer and winter), as electricity consumption is typically highest
during these periods.
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 more than 1,100 independent contractors and the
recently formed Momentis network marketing operation. Approximately two thirds
of Just Energy's customers and energy revenues are generated by the Consumer
Energy division which is focused on five year fixed-price or price-protected
offerings of both JustGreen and regular 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 Hudson purchase. Commercial customers make up
about one third 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 but customer aggregation cost and 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"). 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.
Ethanol division
Just Energy also owns a 66.7% interest in TGF, a 150-million-litre capacity
wheat-based ethanol plant located in Belle Plaine, Saskatchewan. The plant
produces wheat-based ethanol and high protein distillers dried grain ("DDG").
Cash Available for Distribution and distributions
For the three months ended September 30
(thousands of dollars, except per unit amounts)
Fiscal 2011 Fiscal 2010
------------------- -------------------
Per Per
unit unit
--------- ---------
Reconciliation to statements of cash
flow
Cash inflow from operations $ 13,821 $ 24,708
Add:
Increase in non-cash working capital 31,863 16,098
Other (372) -
Tax impact on distributions to Class
A preference shareholders 441 539
---------- ----------
Cash Available for Distribution $ 45,753 $ 41,345
---------- ----------
---------- ----------
Cash Available for Distribution
Gross margin per financial
statements $ 96,829 $ 0.70 $ 81,496 $ 0.61
Adjustments required to reflect
net cash receipts from gas sales 18,527 26,023
---------- ----------
Seasonally adjusted gross margin $115,356 $ 0.84 $107,519 $ 0.80
---------- ----------
Less:
General and administrative (25,511) (25,634)
Capital tax expense (26) (48)
Bad debt expense (6,694) (3,856)
Income tax recovery (expense) 3,175 (6,106)
Interest expense (12,296) (4,946)
Other items 4,516 1,523
---------- ----------
(36,836) (39,067)
---------- ----------
Distributable cash before marketing
expenses 78,520 $ 0.57 68,452 $ 0.51
Marketing expenses to maintain gross
margin (25,078) (16,149)
---------- ----------
Distributable cash after gross
margin replacement 53,442 $ 0.39 52,303 $ 0.39
Marketing expenses to add new gross
margin (7,689) (10,958)
---------- ----------
Cash Available for Distribution $ 45,753 $ 0.33 $ 41,345 $ 0.31
---------- ----------
---------- ----------
Distributions
Unitholder distributions $ 39,807 $ 40,760
Class A preference share
distributions 1,632 1,632
Unit appreciation rights and
deferred unit grants distributions 873 447
---------- ----------
Total distributions $ 42,312 $ 0.31 $ 42,839 $ 0.32
---------- ----------
---------- ----------
Adjusted fully diluted average
number of units outstanding(1) 137.7m 134.3m
(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 six months ended September 30
(thousands of dollars, except per unit amounts)
Fiscal 2011 Fiscal 2010
------------------- -------------------
Per Per
unit unit
--------- ---------
Reconciliation to statements of cash
flow
Cash inflow from operations $ 39,548 $ 62,503
Add:
Increase in non-cash working capital 28,215 13,852
Other 1,413 -
Tax impact on distributions to Class
A preference shareholders 979 1,077
---------- ----------
Cash Available for Distribution $ 70,155 $ 77,432
---------- ----------
---------- ----------
Cash Available for Distribution
Gross margin per financial
statements $177,326 $ 1.29 $147,571 $ 1.19
Adjustments required to reflect
net cash receipts from gas sales 26,963 34,717
---------- ----------
Seasonally adjusted gross margin $204,289 $ 1.49 $182,288 $ 1.47
---------- ----------
Less:
General and administrative (54,783) (41,251)
Capital tax expense (159) (128)
Bad debt expense (12,443) (7,685)
Income tax recovery (expense) 4,177 (6,066)
Interest expense (21,776) (5,426)
Other items 11,287 2,192
---------- ----------
(73,697) (58,364)
---------- ----------
Distributable cash before marketing
expenses 130,592 $ 0.95 123,924 $ 1.00
Marketing expenses to maintain gross
margin (43,367) (29,402)
---------- ----------
Distributable cash after gross
margin replacement 87,225 $ 0.63 94,522 $ 0.76
Marketing expenses to add new gross
margin (17,070) (17,090)
---------- ----------
Cash Available for Distribution $ 70,155 $ 0.51 $ 77,432 $ 0.63
---------- ----------
---------- ----------
Distributions
Unitholder distributions $ 79,451 $ 73,695
Class A preference share
distributions 3,263 3,263
Unit appreciation rights and
deferred unit grants distributions 1,875 895
---------- ----------
Total distributions $ 84,589 $ 0.62 $ 77,853 $ 0.63
---------- ----------
---------- ----------
Adjusted fully diluted average
number of units outstanding(1) 137.5m 123.7m
(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 second quarter of fiscal 2011 showed a continuation of the rapid expansion
for Just Energy that was also seen in the first quarter. This expansion took
place through 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; the launch of the Momentis network marketing
division in Ontario, New York and Illinois; new residential launches in
Massachusetts (May) and two new utility territories in New York (September). 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 second quarter showed a continued positive impact from the commercial
expansion. Customer additions were 254,000, the second highest quarterly total
in the Fund's history, up 81% from the 140,000 added in the second quarter of
fiscal 2010. Net additions were 92,000, up from 36,000 a year earlier. The
result of this growth and the acquisition of Hudson was a 39% increase in
customers, year over year. Sales increased 33% but the increase in margin was 7%
reflecting final balancing costs of the recent warm winter, a lower U.S. dollar
exchange rate and relatively lower margins on commercial customers added, which
were combined with the variable timing of new customers added in the last two
quarters.
Distributable cash after gross margin replacement for the current quarter ended
September 30, 2010, was $53.4 million ($0.39 per unit), up from $52.3 million
($0.39 per unit) in fiscal 2010. The higher gross margin and current tax
recovery in the current period were offset by increased interest charges and
higher bad debt expense. Interest costs relate primarily to the JEEC and JEIF
convertible debentures from the Hudson and Universal acquisitions, funding for
water heater purchases and debt associated with TGF. Bad debt expense increased
by 74% in the second quarter of fiscal 2011 compared to 2010, due to the 151%
increase in sales in those markets where the Fund bears the credit risk and the
continued weak economic conditions in the U.S. markets. Overall, bad debt
percentage of relevant sales was 2.5%, within the target range of 2% to 3% for
the second quarter (down from 2.8% in the prior quarter).
Just Energy spent $25.1 million in marketing expenses for the quarter to
maintain its current level of gross margin, which represents 77% of the total
marketing expense, excluding the amortization of contract initiation costs. A
further $7.7 million was spent to increase future gross margin resulting in
92,000 net RCE additions for the quarter. General and administrative costs were
flat year over year with realization of merger synergies offsetting the higher
costs associated with the larger customer base.
Management's estimate of the future embedded gross margin is as follows
(millions of dollars):
Sept 10 Sept 10
vs. June vs. Sept
As at Sept As at June 10 As at Sept 09
30, 2010 30, 2010 Variance 30, 2009 Variance
-----------------------------------------------------------
Canada (CAD$) $ 708.8 $ 757.5 (6)% $ 816.6 (13)%
United States
(US$) $ 778.8 $ 698.5 11% $ 370.5 110%
Total (CAD$) $1,510.9 $1,501.1 1% $1,213.8 24%
Management's estimate of the future contracted gross margin increased slightly
to $1,510.9 million from $1,501.1 million at the end of the first quarter of
fiscal 2011. There was a net increase in margins from the increased customer
base but this was offset by the 3.3% decline in U.S. exchange rates during the
quarter. The margin on commercial customers signed during the quarter was lower
than that on new residential customers signed and on customers lost to attrition
and failure to renew. However, these customers offer the added benefit of being
subject to less weather-related volatility and lower ongoing service costs due
to the higher average size of the customer.
Distributable cash after all marketing expenses was $45.8 million ($0.33 per
unit) for the second quarter of fiscal 2011, an increase of 11% from $41.3
million ($0.31 per unit) in the prior comparable quarter. The increase is due to
the 7% increase in gross margin and lower marketing costs to add new gross
margin. Although the number of net customers added was 92,000, versus 36,000 a
year earlier, the blend of commercial versus consumer margins resulted in a
smaller increase in embedded gross margin for the quarter. The payout ratio
after deduction of all marketing expenses for the current quarter was 92% versus
104% in fiscal 2010.
Distributable cash after gross margin replacement for the six months ended
September 30, 2010, was $87.2 million ($0.63 per unit), a decrease of 17% per
unit from $94.5 million ($0.76 per unit) in the prior comparable period.
Distributable cash after marketing expenses was $70.2 million ($0.51 per unit),
for the first six months of fiscal 2011, a decrease of 9% from $77.4 million
($0.63 per unit), for the same period last year. The main factor in the lower
distributable cash was the adverse impact of the record warm winter temperatures
on gas consumption and lower associated profit recognized largely in the first
quarter. The payout ratio after all marketing expenses for the six-month period
of fiscal 2011 was 121% versus 101% for the six months ended September 30, 2009.
Management anticipates that the payout ratio for fiscal 2011 will be less than
100% (excluding any Special Distributions for tax purposes), 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 15 and "General and
administrative expenses", "Marketing expenses", "Bad debt expense" and "Interest
expense" which are further clarified on pages 21 to 23.
Discussion of distributions
(in thousands of dollars)
For the
For the three For the six For the six
three months months months months
ended Sept ended Sept ended Sept ended Sept
30, fiscal 30, fiscal 30, fiscal 30, fiscal
2011 2010 2011 2010
----------------------------------------------------
Cash flow from
operations(1) (A) $ 13,821 $ 24,708 $ 39,548 $ 62,503
Net income (loss) (B) (154,480) 110,690 120,829 213,317
Total distributions (C) 42,312 42,839 84,589 77,853
Shortfall of cash flows
from operating
activities over
distributions paid (A-
C) (28,491) (18,131) (46,041) (15,350)
Excess (deficiency) of
net income (loss) over
distributions paid (B-
C) (196,792) 67,851 36,240 135,464
(1) Includes non-cash working capital balances
Net income (loss) includes non-cash gains and losses associated with the changes
in the current market value of Just Energy's derivative instruments. These
instruments form part of the Fund's requirement to purchase commodity according
to estimated demand and, as such, changes in value do not impact the
distribution policy or the long-term financial performance of the Fund. The
change in fair value associated with these derivatives, included in the net
income (loss) for the three and six months ended September 30, 2010, was a loss
of $181.3 million and a gain of $133.1 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. Further, investment in the addition of new
customers intended to increase cash flow is expensed in the financial statements
while the original customer base was capitalized. Management believes that the
current level of distributions is sustainable in the foreseeable future.
The timing differences between distributions and cash flow from operations
created by the cost of carrying incremental working capital due to business
seasonality and expansion are funded by the operating credit facility.
Standardized Distributable Cash and Cash Available for Distribution
(thousands of dollars, except per unit amounts)
For the For the
three three For the six For the six
months months months months
ended Sept ended Sept ended Sept ended Sept
30, fiscal 30, fiscal 30, fiscal 30, fiscal
2011 2010 2011 2010
---------------------------------------------------
Reconciliation to
statements of cash flow
Cash inflow from
operations $ 13,821 $ 24,708 $ 39,548 $ 62,503
Capital expenditures(1) (10,785) (12,477) (20,392) (19,883)
---------------------------------------------------
Standardized
Distributable Cash 3,036 12,231 19,156 42,620
---------------------------------------------------
Adjustments to
Standardized
Distributable Cash
Change in non-cash
working capital (2) 31,863 16,098 29,215 13,852
Tax impact on
distributions to Class
A preference
shareholders(3) 441 539 979 1,077
Other (372) - 1,413 -
Capital expenditures(1) 10,785 12,477 20,392 19,883
---------------------------------------------------
Cash Available for
Distribution $ 45,753 $ 41,345 $ 70,155 $ 77,432
---------------------------------------------------
Standardized
Distributable Cash -
per unit basic 0.01 0.09 0.13 0.35
Standardized
Distributable Cash -
per unit diluted 0.01 0.09 0.12 0.35
Payout ratio based on
Standardized
Distributable Cash NMF(4) 350% 469% 183%
(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 has a $250.0 million credit
facility which is available for use to fund working capital
requirements. This eliminates the potential impact of timing
distortions relating to the respective items.
(3) 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
The Fund's $250.0 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 experienced growth or to access
the equity or debt markets in order to fund significant acquisitions. NEC
entered into an agreement in January 2010 with Home Trust Company to separately
finance its water heaters. See the Ethanol division section for further
discussion on this financing. TGF has a separate credit facility, debenture and
a term loan for its funding requirements, which are detailed in the long term
debt and financing section.
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. The Fund entered
into an agreement 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 all paid upfront. The portion of the commercial marketing
expenses which are paid upfront to brokers are capitalized and amortized over
the remaining life of the customer contract.
The vast majority of capital expenditures incurred by Just Energy relate to the
purchase of water heaters which are subsequently rented on a long-term basis
under customer contracts. These capital expenditures are funded by non-recourse
borrowings which have as security the water heaters and the rental contracts. 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 2010 Fiscal 2010
Q2 Q1 Q4 Q3
---------------------------------------------------
Sales (seasonally
adjusted) $ 748,480 $ 639,997 $ 694,788 $ 654,686
Gross margin (seasonally
adjusted) 115,356 88,933 121,872 121,722
General and
administrative expense 25,511 29,272 22,405 24,767
Net income (loss) (154,480) 275,309 (79,211) 97,390
Net income (loss) per
unit - basic (1.15) 2.05 (0.59) 0.73
Net income (loss) per
unit - diluted (1.15) 1.85 (0.59) 0.73
Adjusted EBITDA 39,375 31,282 108,961 60,563
Amount available for
distribution
After gross margin
replacement 53,442 33,783 66,023 69,455
After marketing expense 45,753 24,402 58,359 61,242
Payout ratio
After gross margin
replacement 79% 125% 63% 98%(1)%
After marketing expense 92% 173% 71% 111%(1)%
Fiscal Fiscal Fiscal Fiscal
2010 Q2 2010 Q1 2009 Q4 2009 Q3
---------------------------------------------------
Sales (seasonally
adjusted) $ 562,133 $ 432,565 $ 589,948 $ 510,801
Gross margin (seasonally
adjusted) 107,519 74,769 106,143 87,554
General and
administrative expense 25,634 15,617 18,150 14,753
Net income (loss) 110,690 102,627 (168,621) (49,094)
Net income (loss) per
unit - basic 0.83 0.92 (1.57) (0.44)
Net income (loss) per
unit - diluted 0.82 0.91 (1.57) (0.44)
Adjusted EBITDA 36,598 30,182 104,614 60,822
Amount available for
distribution
After gross margin
replacement 52,303 42,219 72,244 57,475
After marketing expense 41,345 36,087 62,515 48,162
Payout ratio
After gross margin
replacement 82% 83% 48% 93%(1)%
After marketing expense 104% 97% 56% 111%(1)%
(1) Includes a one-time Special Distribution of $26.7 million in the third
quarter of fiscal 2010 and $18.6 million in the third quarter of fiscal
2009.
The Fund's results reflect seasonality, as consumption is greatest during the
third and fourth quarters (winter quarters). While year over year quarterly
comparisons are relevant, sequential quarters will vary materially. The main
impact of this will be higher distributable cash with a lower payout ratio in
the third and fourth quarters, and lower distributable cash with a higher payout
ratio in the first and second quarters, excluding any Special Distribution.
Analysis of the second quarter
The 33% increase in seasonally adjusted sales compared to the prior comparable
quarter is mainly attributable to the sales generated by Hudson customers which
were acquired on May 1, 2010. Strong net growth in customers added in the fourth
quarter of fiscal 2010 and first quarter of fiscal 2011 through marketing,
primarily in the U.S., has also increased sales. The sales impact of the net
customer additions in the second quarter will be reflected in future periods as
these customers begin to flow with Just Energy. The customer base has increased
by 39% from September 30, 2009.
Seasonally adjusted gross margin increased by 7% in the second quarter of fiscal
2011 to $115.4 million, up from $107.5 million in the same period last year. The
margin increase was less than the increase in sales due to final reconciliations
for the recent warm winter, a lower U.S. dollar exchange rate and lower relative
margins on commercial customers who make up the majority of the incremental
customers year over year. General and administrative costs were $25.5 million
for the quarter, unchanged from the same period last year.
The distributable cash after customer gross margin replacement was $53.4
million, up 2% from $52.3 million in the prior comparable quarter. The increased
gross margin was offset by increased interest charges and bad debt expenses
versus the prior year comparable quarter.
After the deduction of all marketing expenses, distributable cash totalled $45.8
million, an increase of 11% from $41.3 million in the second quarter of fiscal
2010. Distributions for the quarter were $42.3 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 second quarter of fiscal 2011 was 92% versus 104%
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 September 30
(thousands of dollars)
Fiscal 2011 Fiscal 2010
--------------------------------- ---------------------------
United United
Sales Canada States Total Canada States Total
---------------
Gas $ 77,614 $ 55,927 $ 133,541 $ 91,636 $ 37,724 $129,360
Electricity 165,578 322,075 487,653 174,457 111,919 286,376
----------------------------------------------------------------------------
$243,192 $378,002 $ 621,194 $266,093 $149,643 $415,736
----------------------------------------------------------------------------
Increase
(decrease) (9)% 153% 49%
United United
Gross Margin Canada States Total Canada States Total
---------------
Gas $ 2,936 $ (461) $ 2,475 $ 6,496 $ 8,795 $ 15,291
Electricity 27,805 57,901 85,706 31,741 30,283 62,024
----------------------------------------------------------------------------
$ 30,741 $ 57,440 $ 88,181 $ 38,237 $ 39,078 $ 77,315
----------------------------------------------------------------------------
Increase
(decrease) (20)% 47% 14%
For the six months ended September 30
(thousands of dollars)
Fiscal 2011 Fiscal 2010
--------------------------------- ---------------------------
United United
Sales Canada States Total Canada States Total
---------------
Gas $207,329 $128,975 $ 336,304 $241,333 $ 88,158 $329,491
Electricity 326,208 546,989 873,197 297,948 187,307 485,255
----------------------------------------------------------------------------
$533,537 $675,964 $1,209,501 $539,281 $275,465 $814,746
----------------------------------------------------------------------------
Increase
(decrease) (1)% 145% 48%
United United
Gross Margin Canada States Total Canada States Total
---------------
Gas $ 15,067 $ 4,823 $ 19,890 $ 29,210 $ 19,489 $ 48,699
Electricity 53,801 94,671 148,472 51,380 43,311 94,691
----------------------------------------------------------------------------
$ 68,868 $ 99,494 $ 168,362 $ 80,590 $ 62,800 $143,390
----------------------------------------------------------------------------
Increase
(decrease) (15)% 58% 17%
Canada
Sales and gross margin for the three months ended September 30, 2010, were
$243.2 million and $30.7 million respectively, a decrease of 9% and 20%,
respectively, from the prior comparable period. Total sales and gross margin for
the six-month period of fiscal 2011 were $533.5 million and $68.9 million,
respectively.
United States
Sales and gross margin in the U.S. were $378.0 million and $57.4 million
respectively for the second quarter of 2011, an increase of 153% and 47%,
respectively, from the same period last year. Total sales and gross margin for
the six months ended September 30, 2010, were $676.0 million and $99.5 million,
respectively.
Sales and gross margin - Seasonally adjusted(1)
For the three months ended September 30
(thousands of dollars)
Fiscal 2011 Fiscal 2010
--------------------------------- ---------------------------
United United
Sales Canada States Total Canada States Total
---------------
Gas $ 77,614 $ 55,927 $ 133,541 $ 91,636 $ 37,724 $129,360
Adjustments(1) 71,889 18,713 90,602 103,686 23,788 127,474
----------------------------------------------------------------------------
$149,503 $ 74,640 $ 224,143 $195,322 $ 61,512 $256,834
Electricity 165,578 322,075 487,653 174,457 111,919 286,376
----------------------------------------------------------------------------
$315,081 $396,715 $ 711,796 $369,779 $173,431 $543,210
----------------------------------------------------------------------------
Increase
(decrease) (15)% 129% 31%
United United
Gross margin Canada States Total Canada States Total
---------------
Gas $ 2,936 $ (461) $ 2,475 $ 6,496 $ 8,795 $ 15,291
Adjustments(1) 15,456 3,071 18,527 23,760 2,263 26,023
----------------------------------------------------------------------------
$ 18,392 $ 2,610 $ 21,002 $ 30,256 $ 11,058 $ 41,314
Electricity 27,805 57,901 85,706 31,741 30,283 62,024
----------------------------------------------------------------------------
$ 46,197 $ 60,511 $ 106,708 $ 61,997 $ 41,341 $103,338
----------------------------------------------------------------------------
Increase
(decrease) (25)% 46% 3%
For the six months ended September 30
(thousands of dollars)
Fiscal 2011 Fiscal 2010
--------------------------------- ---------------------------
United United
Sales Canada States Total Canada States Total
---------------
Gas $207,329 $128,975 $ 336,304 $241,333 $ 88,158 $329,491
Adjustments(1) 102,593 18,322 120,915 137,241 23,788 161,029
----------------------------------------------------------------------------
$309,922 $147,297 $ 457,219 $378,574 $111,946 $490,520
Electricity 326,208 546,989 873,197 297,948 187,307 485,255
----------------------------------------------------------------------------
$636,130 $694,286 $1,330,416 $676,522 $299,253 $975,775
----------------------------------------------------------------------------
Increase
(decrease) (6)% 132% 36%
United United
Gross margin Canada States Total Canada States Total
---------------
Gas $ 15,067 $ 4,823 $ 19,890 $ 29,210 $ 19,489 $ 48,699
Adjustments(1) 23,540 3,423 26,963 32,454 2,263 34,717
----------------------------------------------------------------------------
$ 38,607 $ 8,246 $ 46,853 $ 61,664 $ 21,752 $ 83,416
Electricity 53,801 94,671 148,472 51,380 43,311 94,691
----------------------------------------------------------------------------
$ 92,408 $102,917 $ 195,325 $113,044 $ 65,063 $178,107
----------------------------------------------------------------------------
Increase
(decrease) (18)% 58% 10%
(1) For Ontario, Manitoba, Quebec and Michigan gas markets.
On a seasonally adjusted basis, sales increased by 31% in the second quarter of
fiscal 2011 to $711.8 million as compared to $543.2 million in fiscal 2010.
Gross margins were $106.7 million for the three months ended September 30, 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.
Total sales and gross margin for the first six months of fiscal 2011 were
$1,330.4 million and $195.3 million, respectively, versus $975.8 million and
$178.1 million for the same period last year.
Canada
Seasonally adjusted sales were $315.1 million for the quarter, down 15% from
$369.8 million in fiscal 2010. Seasonally adjusted gross margins were $46.2
million in the second quarter of fiscal 2011, a decrease of 25% from $62.0
million in the same period last year. For the six months ended September 30,
2010, seasonally adjusted sales and gross margin were $636.1 million and $92.4
million respectively, down 6% and 18%, respectively from the prior comparable
period.
Gas
Canadian gas sales were $149.5 million, a decrease of 23% from $195.3 million in
the second quarter of fiscal 2010. In the second quarter of fiscal 2011, total
customer delivered volumes were down 20% from the prior comparable quarter due
to warm temperatures across all key gas markets and a 13% decrease in flowing
customers. Gross margin totalled $18.4 million, down 39% from the second quarter
of fiscal 2010, reflecting lower consumption and $10.7 million in losses on the
sale of excess gas resulting from milder temperatures last winter at much lower
spot prices than had been originally contracted.
For the six months ended September 30, 2010, sales and gross margins were $309.9
million and $38.6 million respectively, a decrease of 18% and 37%, 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 September 30,
2010, amounted to $128/RCE, compared to $175/RCE for the prior comparable
quarter. This was due to the lower consumption and losses on the sale of excess
gas. The GM/RCE value includes an appropriate allowance for the bad debt expense
in Alberta.
Electricity
Electricity sales were $165.6 million for the quarter, a decrease of 5% from the
second quarter of fiscal 2010 due to a 5% decline in flowing customers. Gross
margin decreased by 12% for the current quarter to $27.8 million versus $31.7
million for the prior comparable period. This decrease is a result of the 5%
decline in customers and total reduced consumption of 11% in Alberta (where
customers and supply are load following) due to a much warmer air conditioning
season in fiscal 2010 versus fiscal 2011.
During the quarter, there were a number of Ontario electricity customers that
were contacted for early renewal of their contract under a "blend and extend"
offer. These customers were offered a lower rate versus their current price but
the term of their contract was extended out to five more years. By doing so,
approximately $1.8 million was lost in margin for the current quarter but
approximately $9.5 million was locked in as future margins.
For the six months ended September 30, 2010, sales and gross margins were $326.2
million and $53.8 million respectively, an increase of 9% and 5%, respectively,
over the same period last year.
Realized average gross margin per customer after all balancing and including
acquisitions for the quarter ended September 30, 2010 in Canada amounted to
$143/RCE, a decrease from $164/RCE in the prior year comparable quarter due to
the lower per customer consumption in Alberta. The GM/RCE value includes an
appropriate allowance for the bad debt expense in Alberta.
United States
Sales for the second quarter of fiscal 2011 were $396.7 million, an increase of
129% from $173.4 million in the prior comparable quarter. Seasonally adjusted
gross margin was $60.5 million, up 46% from $41.3 million from the same quarter
last year.
Gas
For the second quarter of fiscal 2011, gas sales and gross margin in the U.S.
totalled $74.6 million and $2.6 million, respectively, versus $61.5 million and
$11.1 million in fiscal 2010. The sales increase of 21% was due to a 48%
increase in customers largely through successful marketing but also through the
acquisition of Hudson. Sales growth was less than customer growth due to warmer
weather, a lower U.S. dollar exchange rate and lower selling prices.
Gross margin declined quarter over quarter by 76% as opposed to the 21% increase
in sales primarily due to final reconciliations against the prior warm winter.
In Michigan, one time reconciliations with the utility and associated sales of
surplus gas (which must be completed in the summer) resulted in a loss of $7.4
million in margin.
Sales and gross margin for the six months ended September 30, 2010, totalled
$147.3 million and $8.2 million, respectively. Average realized gross margin
after all balancing costs for the three months ended September 30, 2010, was
$33/RCE, a decrease of 88% over the prior year comparable period of $267/RCE.
This is due to sharply 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
$322.1 million and $57.9 million, respectively, versus $111.9 million and $30.3
million respectively in the prior comparable quarter of fiscal 2010. Sales were
up 192% 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 selling prices offsetting the decline in the U.S.
dollar exchange rate. Total customer demand increased by 252%, which is
consistent with the growth in the customer base. Margins were up 91% 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 six months ended September 30, 2010, the sales and gross margins were
$547.0 million and $94.7 million, respectively.
Average gross margin per customer for electricity during the current quarter
decreased to $156/RCE, compared to $282/RCE in the prior year comparable period,
as a direct 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
July 1, Failed September % Increase
2010 Additions Attrition to renew 30, 2010 (Decrease)
----------------------------------------------------------------------------
Natural gas
Canada 709,000 15,000 (22,000) (13,000) 689,000 (3)%
United
States 564,000 40,000 (31,000) (4,000) 569,000 1%
----------------------------------------------------------------------------
Total gas 1,273,000 55,000 (53,000) (17,000) 1,258,000 (1)%
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Electricity
Canada 757,000 25,000 (22,000) (15,000) 745,000 (2)%
United
States 1,039,000 174,000 (49,000) (6,000) 1,158,000 11%
----------------------------------------------------------------------------
Total
electricity 1,796,000 199,000 (71,000) (21,000) 1,903,000 6%
----------------------------------------------------------------------------
Combined 3,069,000 254,000 (124,000) (38,000) 3,161,000 3%
----------------------------------------------------------------------------
Gross customer additions for the quarter were 254,000, the second largest 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,
133,000 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. Net customer additions through
marketing for the quarter were 92,000. For the same quarter last year, there
were 36,000 net customer additions through marketing. Overall, there has been a
3% increase in total customers since the first quarter and 39% increase over the
past 12 months.
For the three month period ended September 30, 2010, total gas customer numbers
decreased by 1%, reflecting a difficult Canadian price environment with a large
disparity between utility spot prices and the five-year prices. This continues
to impact new customer additions and renewals.
Total electricity customers were up 6% in the three months ended September 30,
2010 with strong growth in our U.S. markets slightly offset by a small decline
in total customers in our Canadian markets.
As at September 30, 2010, there are an additional 68,000 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 in the
previous quarter.
JustGreen
Sales of the JustGreen products remain strong but were tempered somewhat by
their relatively high cost during a period of economic slowdown. 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.
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, 38% took JustGreen for some or
all of their energy needs. On average, these customers elected to purchase 91%
of their consumption as green supply which compared to 48% take-up for an
average of 89% of consumption in the first quarter.
As of the quarter ended September 30, 2010, green supply now makes up 3% of our
overall gas portfolio, up from 1% in the second quarter last year. JustGreen
supply makes up 11% of our electricity portfolio, up from 4% from the same
period last year.
Attrition
Natural gas
The trailing 12-month natural gas attrition in Canada was 12%, above
management's target of 10%. Attrition is higher than targeted levels due to weak
economic conditions causing a higher than normal customer default move back to
the utility. In the U.S., gas attrition for the trailing 12 months was 27%,
below management's annual target of 30%. This reflects a small continued
improvement in the U.S. due to new product offerings and some strengthening in
the U.S. economy.
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 compared to the Canadian gas market. Electricity
attrition in the United States was 15% for the trailing 12 months, below
management's target of 20%.
Trailing 12-Month
Attrition fiscal Targeted Attrition
2011 fiscal 2011
Natural gas
Canada 12% 10%
United States 27% 30%
Electricity
Canada 12% 10%
United States 15% 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 63%, 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 customers renewed in the
first quarter of fiscal 2011, 32% 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. 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 65% 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 are 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 78%, 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 89%, well above 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 Targeted Renewals
Renewals fiscal 2011 fiscal 2011
Natural gas
Canada 63% 70%
United States 78% 75%
Electricity
Canada 65% 70%
United States 89% 75%
Gas and electricity contract renewals
This table shows the percentage of customers up for renewal in each of the
following years:
Canada - U.S. -
Canada - gas electricity U.S. - gas electricity
-------------------------------------------------------
Remainder of 2011 15% 11% 8% 14%
2012 24% 22% 20% 23%
2013 22% 26% 26% 17%
2014 15% 17% 12% 21%
2015 14% 12% 18% 16%
Beyond 2015 10% 12% 16% 9%
-------------------------------------------------------
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 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, the take-up rate is beginning to be
aggressively marketed for renewals, with the expectation that rates similar to
those for new customers being achieved. Sales of the JustGreen products remained
very strong with approximately 38% of all residential customers added in the
past quarter taking some or all green energy supply. Customers that purchased
the JustGreen product elected, on average, to take 91% of their consumption in
green supply. A 100% JustGreen electricity customer in Ontario generates annual
margins of approximately $193/RCE, much higher than the "brown" margins
realized. For large commercial customers, the average gross margin for new
customers added was $100/RCE, an increase from $67/RCE reported in the first
quarter of fiscal 2011. The aggregation cost of these customers is
commensurately lower per RCE than a consumer customer.
Number of
Annual gross margin per customer(1) Q2 fiscal 2011 Customers
-------------------------------
Residential and small commercial customers
added in the quarter
- Canada - gas $198 8,000
- Canada - electricity $133 17,000
- United States - gas $220 32,000
- United States - electricity $172 64,000
Average annual margin $181
Customers renewed in the quarter
- Canada - gas $168 28,000
- Canada - electricity $106 27,000
- United States - gas $199 8,000
- United States - electricity $150 10,000
Average annual margin $146
Large commercial customers added in the
quarter $100 133,000
Customers lost in the quarter
- Canada - gas $195 35,000
- Canada - electricity $150 37,000
- United States - gas $180 29,000
- United States - electricity $178 28,000
Average annual margin $176
(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 September 30,
2010, had a cumulative installed base of 99,700 water heaters, 1,000 furnaces,
and 300 air conditioners in residential homes. The water heater installed base
has increased by 80% in the past year. Management is confident that NHS will
contribute to the long-term profitability of the Fund and continue to help
diversify away from weather-related volatility.
As NHS is a high growth, relatively capital-intensive business, Just Energy
management believes that, in order to maintain stability of distributions,
separate non-recourse financing of this capital is appropriate. On January 18,
2010, NHS announced that it had entered into a long-term financing agreement
with HTC for the funding of the water heaters for NHS in the Enbridge gas
distribution territory. On July 16, 2010, NHS expanded this financing
arrangement to cover the Union Gas territory. Under the agreement, 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 September 30, 2010, was $80.7
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 excellent cash returns following repayment of the HTC
financing.
The first six 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.
Home Services division
Selected financial information
(thousands of dollars, except where indicated)
Three months Three months
ended Sept 30, ended Sept 30,
2010 2009
Sales per financial statements $ 5,172 $ 2,474
Cost of sales 1,386 159
----------------------------------
Gross margin 3,786 2,315
Marketing expenses 850 1,112
General and administrative expense 2,996 2,154
Interest expense 1,490 -
Capital expenditures 9,152 11,094
Amortization 468 1,025
Ending total number of water heaters
installed 99,700 55,500
Results of operations
For the quarter ended September 30, 2010, NHS had sales of $5.2 million and
gross margin of $3.8 million, an increase of 110% and 64%, respectively, from
the prior comparable quarter. The cost of sales for the quarter was $1.4 million
and represents the non-cash amortization of the installed water heaters for the
customer contracts signed to date. Marketing expenses for the second quarter of
fiscal 2011 were $0.9 million and include the amortization of commission costs
paid to the independent agents, automobile fleet costs, advertising and
promotion and telecom and office supplies expenses. General and administrative
costs, which relate primarily to administrative staff compensation and warehouse
expenses, amounted to $3.0 million for the three months ended September 30,
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 $9.2 million for
the three months ended September 30, 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 six months ended September 30, 2010, sales and gross margin for NHS were
$9.6 million and $6.6 million, respectively. Marketing and general and
administrative expenses were $1.7 million and $5.9 million, respectively, for
the first half of fiscal 2011. Interest expense amounted to $2.8 million as a
result of the financing arrangement with HTC. To date in fiscal 2011, capital
expenditures by NHS amounted to $17.3 million. Comparative figures include
results for only three months 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 plant production and runtime of the
Belle Plaine, Saskatchewan, wheat-based ethanol facility. For the quarter ended
September 30, 2010, the plant achieved an average production capacity of 81%
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. The plant was forced to close for eight days in the quarter
as a result of the inability to have wheat delivered due to flooding in the
Belle Plaine area. This was a marked improvement over the 19 days of shutdown
experienced in the first quarter of fiscal 2011. Ethanol prices continue to be
depressed and were, on average, $0.57 per litre for the quarter, flat with the
prior quarter. Wheat prices averaged $170 per metric tonne for the quarter, up
slightly from $168 in the first 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.
Ethanol division
Selected financial information
(thousands of dollars)
Three months Three months
ended Sept 30, ended Sept 30,
2010 2010
Sales per financial statements $31,191 $16,449
Cost of sales 26,618 14,583
----------------------------------
Gross margin 4,573 1,866
General and administrative expense 3,162 3,819
Interest expense 1,902 1,843
Capital expenditures 65 100
Amortization 297 621
Results of operations
During the second quarter of fiscal 2011, TGF had sales of $31.2 million, an
increase of 90% from $16.4 million in the prior comparable quarter. Gross margin
amounted to $4.6 million, up 145% from $1.9 million in the second quarter of
fiscal 2010. During the quarter, the plant produced 30.6 million litres of
ethanol and 28,386 metric tonnes of DDG. For the three months ended September
30, 2010, TGF incurred $3.2 million in general and administrative expenses and
$1.9 million in interest charges. Capital expenditures for the quarter,
including installation costs, amounted to $0.1 million.
For the six months ended September 30, 2010, sales and gross margin for TGF were
$48.0 million and $1.9 million, respectively. General and administrative costs
and interest expenses were $5.5 million and $3.6 million, respectively, for the
first half of fiscal 2011. Comparative figures include results for only three
months as TGF was acquired as part of the Universal acquisition effective July
1, 2009.
TGF receives a federal subsidy related to an 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
General and administrative expenses
General and administrative costs were $25.5 million for the three months ended
September 30, 2010, consistent with that which was reported in the second
quarter of fiscal 2010. The expenses for the current quarter include $2.1
million in costs related to Hudson, which was not owned by the Fund during the
prior comparable quarter. These higher costs were offset by the realization of
synergies from the Universal acquisition completed in fiscal 2010. The current
quarter expenses also reflect a one-time reduction in expenses attributable to
litigation settlements costs for the quarter being lower than what had been
previously accrued. It is expected that general and administrative costs will
increase in the third and fourth quarters as the costs of further geographic
expansions are incurred and as the Fund converts to a corporation.
Expenditures for general and administrative costs for the six months ended
September 30, 2010, were $54.8 million, an increase of 33% from $41.3 million in
the prior comparable period. The increase is a result of the prior period not
including the expenses relating to Hudson, increased costs to accommodate
numerous areas of expansion undertaken by the Fund which should result in higher
margin and distributable cash in future periods, and only three months of
expenses from Universal, which was acquired effective July 1, 2009.
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 $37.0 million, an increase of 37% from $27.1
million in the second quarter of fiscal 2010. New customers signed by our
marketing sales force were 254,000 in the second quarter of fiscal 2011, up 81%
compared to 140,000 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.
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 $25.1 million for the second quarter of fiscal 2011, an increase of
56% from $16.1 million from the prior comparable quarter as a result of higher
attrition from a larger customer base and an increase in the number of customers
up for renewal in the current period.
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 second quarter totalled $7.7
million, a decrease from $11.0 million in the prior comparable period. Although
there was a greater increase in the net customer additions of 92,000 for the
second quarter, up from 36,000 in fiscal 2010, the blend of commercial and
residential customers added resulted in a lower increase in margin than in the
previous year. In addition, some of the cost of commercial customer additions
was capitalized and will be expensed over the life of the contract.
Marketing expenses included in distributable cash exclude amortization related
to the contract initiation costs for Hudson and NHS. For the three and six
months ended September 30, 2010, the amortization amounted to $4.2 million and
$6.3 million, respectively.
For the six months ended September 30, 2010, total marketing expenses were $66.7
million, an increase of 43% from the $46.5 million reported in the same period
last year.
The actual aggregation costs for the six months ended September 30, 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 $ 247/RCE $ 174/RCE $ 32/RCE
United States $ 199/RCE $ 120/RCE $ 24/RCE
Electricity
Canada $ 208/RCE $ 141/RCE $ 30/RCE
United States $ 183/RCE $ 71/RCE $ 37/RCE
Total aggregation costs $ 197/RCE $ 92/RCE $ 34/RCE
The actual aggregation cost per customer added for all energy marketing for the
six months ended September 30, 2010, was $110, up from $95 in the first quarter.
This is due to the higher relative number of residential customers aggregated
and their associated higher costs. The $34 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 $34 per year for each additional
year that the customer flows. Assuming an average life of 2.8 years, this would
add approximately $61 (1.8 X $34) to the fiscal 2011 $34 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 $1.5 million for the second quarter of fiscal 2011, an increase from the $1.0
million paid in first quarter of fiscal 2010. Total costs for the six months
ended September 30, 2010, totalled $2.6 million, versus $1.6 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 and California, 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,
the Fund is responsible for the bad debt risk. Credit review processes have been
established to manage the customer default rate. Management factors default from
credit risk into its margin expectations for all of the above-noted markets.
During the quarter, Just Energy was exposed to bad debt on 35% of its sales.
Bad debt expense for three months ended September 30, 2010, increased by 74% to
$6.7 million versus $3.9 million expensed in the prior comparable quarter. The
bad debt expense increase was entirely related to the 151% increase in total
revenues for the quarter to $262.6 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 six months ended September 30, 2010, the bad debt expense was $12.4
million, representing approximately 2.6% of the $469.6 million in sales in
markets where it assumes credit risk (34% of total sales), within the Fund's 2%
to 3% target range. This was slightly improved from the 2.8% reported for the
first quarter and down from the 3.5% 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 second 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 September 30, 2010 amounted to
$12.3 million, an increase from $4.9 million in the second 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 six-month period of fiscal 2011, the total interest cost was $21.8
million versus $5.4 million paid in fiscal 2010. This increase is a result of
not only the JEIF convertible dentures and NEC financing, but also the inclusion
of only three 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 second
quarter, a foreign exchange unrealized loss of $5.7 million was reported in
other comprehensive income (loss) versus an unrealized gain of $6.8 million
reported in the same period last year. For the six months ended September 30,
2010, the foreign exchange unrealized gain was $9.2 million versus $25.0 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. The Fund
retains sufficient funds in the U.S. to support ongoing growth and surplus cash
is repatriated to Canada. U.S. cross border cash flow is forecasted annually and
hedges for cross border cash flow are entered into when it is determined that
any surplus U.S. cash is not required for new acquisition opportunities.
Class A preference share distributions
The remaining holder of the Just Energy Corp. ("JEC") Class A preference shares
(which are exchangeable into units on a 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 six months ended September 30, 2010, including tax amounted to $1.6 million
and $3.3 million, respectively, both of which are unchanged from the comparable
periods in fiscal 2010. 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 months three months For the six For the six
ended Sept ended Sept months ended months ended
30, fiscal 30, fiscal Sept 30, Sept 30,
2011 2010 fiscal 2011 fiscal 2010
------------------------------------------------------
Current income tax
provision (recovery) $ (3,175) $ 6,106 $ (4,177) $ 6,066
Amount credited to
Unitholders' equity 441 539 979 1,077
Future tax expense
(recovery) (43,796) 19,141 (23,972) 28,946
------------------------------------------------------
(Recovery of)
Provision for income
tax $ (46,530) $ 25,786 $ (27,170) $ 36,089
------------------------------------------------------
------------------------------------------------------
The Fund recorded a current income tax recovery of $3.2 million for the second
quarter of fiscal 2011 versus $6.1 million of provision in the same period last
year. A tax recovery of $4.2 million has been recorded for the six month period
of fiscal 2011 versus a provision of $6.1 million for the same period last year.
The change is mainly attributable to U.S. income tax recovery generated by
operating losses incurred by the U.S. entities during the first two 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 six months ended September 30, 2010, the tax impact of
these distributions, based on a tax rate of 30% and 28%, respectively, amounted
to $0.4 million and $1.0 million respectively, versus an amount of $0.5 million
and $1.1 million, respectively based on 30% last year. The decrease of this tax
impact in the second quarter of fiscal 2011 is due to a decline in corporate tax
rate in Canada.
As noted in the Fund's 2010 Annual Report, the Fund will convert to a taxable
Canadian corporation after calendar 2010 (the "Conversion"), 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 two quarters of this fiscal year, these mark to market losses
increased due to a further decline in fair value of the derivative instruments,
and as a result, a future tax recovery of $24.0 million has been recorded for
this period.
After the Conversion at the commencement of the first quarter of calendar 2011,
the Fund will be taxed as a taxable Canadian corporation from that date onwards.
Therefore, the future tax asset or liability associated with Canadian
liabilities and assets recorded on the 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 the Fund 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 six For the six
ended Sept ended Sept months ended months ended
30, fiscal 30, fiscal Sept 30, Sept 30,
2011 2010 fiscal 2011 fiscal 2010
-------------------------------------------------------
-------------------------------------------------------
Operating activities $ 13,821 $ 24,708 $ 39,548 $ 62,503
Investing activities (19,787) (5,089) (283,373) (12,495)
Financing activities,
excluding
distributions 9,352 5,609 313,021 (5,587)
Effect of foreign
currency translation 2,413 (5,829) 6,960 (6,928)
-------------------------------------------------------
Increase in cash
before distributions 5,799 19,399 76,156 37,493
Distributions (cash
payments) (36,380) (34,930) (72,441) (66,907)
-------------------------------------------------------
Increase (decrease)
in cash (30,581) (15,531) 3,715 (29,414)
Cash - beginning of
period 94,428 45,211 60,132 59,094
-------------------------------------------------------
Cash - end of period $ 63,847 $ 29,680 $ 63,847 $ 29,680
-------------------------------------------------------
-------------------------------------------------------
Operating activities
Cash flow from operating activities for the three months ended September 30,
2010, was $12.7 million, a decrease from $24.7 million in the prior comparable
quarter. For the six months ended September 30, 2010, cash flow from operations
was $38.4 million, a decrease from $62.5 million in the prior comparable period.
This change is a result of a $16.9 million greater change in non-cash working
capital which is required to support the increased size of the Fund. Higher
customer numbers but lower margin relating to the recent warm winter, a lower
U.S. dollar exchange rate and relatively lower margins on commercial customers
added also had an impact.
Investing activities
The Fund purchased capital assets totalling $10.8 million and $20.4 million
during the three- and six-month periods ended September 30, 2010, respectively,
a decrease from $12.5 million and slight increase from $19.9 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 second 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 September 30, 2010, Just Energy had drawn a total of $8.0 million against
the credit facility versus $16.3 million drawn in the second quarter of fiscal
2010. Financing activities, excluding distributions, for the six month period of
fiscal 2011 relate primarily to 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.
On July 1, 2009, in connection with the acquisition of Universal, Just Energy
increased its credit facility from $170.0 million to $250.0 million. As part of
the increase in the credit facility, Societe Generale and Alberta Treasury
Branches joined Canadian Imperial Bank of Commerce, Royal Bank of Canada,
National Bank of Canada and Bank of Nova Scotia as the syndicate of lenders
thereunder. As Just Energy continues to expand in the U.S. markets, the need to
fund working capital and security 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 upfront annually
once the customer begins to flow.
The elapsed period between the times when a customer is signed to when the first
payment is received from the customer varies with each market. The time delays
per market are approximately two to nine months. These periods reflect the time
required by the various LDCs to enroll, flow the commodity, bill the customer
and remit the first payment to Just Energy. In Alberta and Texas, Just Energy
receives payment directly from the customer.
Distributions (cash payments)
Investors should note that due to the 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 six months ended September 30, 2010, the Fund made cash distributions to its
Unitholders and the Class A preference shareholder in the amount of $36.4
million and $72.4 million, respectively, compared to $34.9 million and $66.9
million 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.
The Fund intends to make distributions to its Unitholders, based upon cash
receipts of the Fund, excluding proceeds from the issuance of additional Fund
units, adjusted for costs and expenses of the Fund. The Fund's intention is for
Unitholders of record on the 15th day of each month to receive distributions at
the end of the month.
Balance Sheet as at September 30, 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 $15.2 million on September 30, 2010, from $18.7 million. The
utilization of the credit facility decreased from $57.5 million to $44.5 million
as a result of higher cash receipts due to the Universal and Hudson acquisitions
and strong customer additions in the past fiscal year. 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 $366.0 million as at September 30, 2010. Accounts payable and accrued
liabilities have also increased from $227.0 million to $326.8 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.
Gas in storage has increased from $4.1 million to $48.2 million during the six
months ended September 30, 2010. The increased balance reflects injections into
storage for the expanding U.S. customer base, which occurs from April to
November.
At the end of the second quarter in Ontario, Manitoba, Quebec and Michigan, the
Fund 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 $114.3 million and gas
delivered in excess of consumption of $91.8 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 $27.2 million from $5.6 million at the end of the last
fiscal year mainly due to the Hudson acquisition since 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 the Fund 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 $560.7 million and $223.3 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 $512.4 million in
the six months ended September 30, 2010, from $231.8 million and is detailed
below.
Long-term debt and financing
(thousands of dollars)
As at September As at March 31,
30, 2010 2010
================== ------------------
Original credit facility $ 44,500 $ 57,500
TGF credit facility 40,154 41,313
TGF debentures 37,001 37,001
TGF term loan 10,000 10,000
JEEC convertible debentures 84,049 83,417
NEC financing 80,734 65,435
JEIF convertible debentures 283,797 -
Original credit facility
Just Energy holds a $250.0 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. Under the terms of the 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 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 September 30, 2010 and 2009, all of these covenants have been met.
TGF credit facility
A credit facility of up to $50.0 million was established with a syndicate of
Canadian lenders led by Conexus Credit Union 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
2%, with principal repayments commencing on March 1, 2010. The credit facility
is secured by a demand debenture agreement, a first priority security interest
on all assets and undertakings of TGF, and a general security interest on all
other current and acquired assets of TGF. The credit facility includes certain
financial covenants, the more significant of which relate to current ratio, debt
to equity ratio, debt service coverage and minimum shareholder's equity. The
lenders have deferred compliance with the financial covenants until April 1,
2011. The facility was further revised on March 31, 2010, postponing the
principal payments due for April 1, 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 $40.0 million aggregate principal amount of debentures was
entered into in 2006. The interest rate is 10.5% per annum, compounded annually
and payable quarterly. Interest is to be paid quarterly with quarterly principal
payments commencing October 1, 2009 in the amount of $1.0 million per quarter.
The agreement includes certain financial covenants the more significant of which
relate to current ratio, debt to capitalization ratio, debt service coverage,
debt to EBITDA and minimum shareholder's equity. The lender has deferred
compliance with the financial covenants until April 1, 2011. On March 31, 2010,
TGF entered into an agreement with the holders of the debentures to defer
scheduled principal payments owing under the Debenture until April 1, 2011.
TGF term/operating facilities
TGF also maintains a working capital facility for $10.0 million with a third
party lender bearing interest at prime plus 1% due in full on December 31, 2010.
This facility is secured by liquid investments on deposit with the lender. In
addition, TGF has a working capital operating line of $7.0 million bearing
interest at a prime plus 1%, of which $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 29.8
units of the Fund representing a conversion price of $33.56 per Exchangeable
Share as at September 30, 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 September 30, 2010, all of these
covenants have been met.
JEIF convertible debentures
On May 7, 2010, Just Energy completed the acquisition of all of 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
Total 1 year years years 5 years
---------------------------------------------------------------------------
Accounts
payable,
accrued
liabilities and
unit
distribution
payable $ 340,070 $ 340,070 $ - $ - $ -
Bank
indebtedness 863 863 - - -
Long-term debt 632,389 67,850 114,904 119,635 330,000
Interest
payments 192,570 39,981 63,156 48,655 35,828
Property and
equipment lease
agreements 32,617 4,664 13,727 7,577 6,649
EPCOR billing,
collections and
supply
commitments 12,096 5,184 6,912 - -
Grain production
contracts 48,682 26,952 21,334 396 -
Gas and
electricity
supply purchase
commitments 3,666,406 942,984 2,147,261 557,146 19,015
---------------------------------------------------------------------------
$4,925,693 $1,428,548 $2,367,294 $ 733,409 $ 391,492
---------------------------------------------------------------------------
---------------------------------------------------------------------------
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
The Fund does not have any material transactions with any individuals or
companies that are not considered independent to the Fund or any of its
subsidiaries and/or affiliates.
Critical accounting estimates
The consolidated financial statements of the Fund have been prepared in
accordance with Canadian GAAP. Certain accounting policies require management to
make estimates and judgments that affect the reported amounts of assets,
liabilities, revenues, cost of sales, marketing and general and administrative
expenses. Estimates are based on historical experience, current information and
various other assumptions that are believed to be reasonable under the
circumstances. The emergence of new information and changed circumstances may
result in actual results or changes to estimated amounts that differ materially
from current estimates.
The following assessment of critical accounting estimates is not meant to be
exhaustive. The Fund might realize different results from the application of new
accounting standards promulgated, from time to time, by various rule-making
bodies.
Unbilled revenues/Accrued gas accounts payable
Unbilled revenues result when customers consume more gas than has been delivered
by Just Energy to the LDCs. These estimates are stated at net realizable value.
Accrued gas accounts payable represents Just Energy's obligation to the LDC with
respect to gas consumed by customers in excess of that delivered 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 and California. In addition,
for large direct-billed accounts in B.C. and Ontario, the Fund is responsible
for the bad debt risk. Management estimates the allowance for doubtful accounts
in these markets based on the financial conditions of each jurisdiction, the
aging of the receivables, customer and industry concentrations, the current
business environment and historical experience.
Goodwill
In assessing the value of goodwill for potential impairment, assumptions are
made regarding Just Energy's future cash flow. If the estimates change in the
future, the Fund may be required to record impairment charges related to
goodwill. An impairment review of goodwill was performed 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
The Fund 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.
The Fund'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 the Fund's price exposure
and serves to fix acquisition costs of gas and electricity to be delivered under
the fixed price or price protected customer contracts. Just Energy'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 trust units
As at November 8, 2010, there were 5,263,728 Class A preference shares of JEC
outstanding and 126,086,266 units of the Fund outstanding.
JEEC Exchangeable Shares
A total of 21,271,804 Exchangeable Shares of JEEC were issued on July 1, 2009,
for the purchase of Universal. JEEC shareholders have voting rights equivalent
to the Fund's Unitholders and their shares are exchangeable on a one for one
basis. As at November 8, 2010, 17,307,502 shares had been converted and there
were 3,964,302 Exchangeable Shares outstanding.
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.justenergy.com. Management estimates that the distributions for calendar
2010 to be allocated in a similar manner to that of 2009.
Recently issued accounting standards
The following are new standards, not yet in effect, which are required to be
adopted by the Fund on the effective date:
Business combinations
In October 2008, the CICA issued Handbook Section 1582, Business Combinations
("CICA 1582"), concurrently with CICA Handbook Section 1601, Consolidated
Financial Statements ("CICA 1601"), and CICA Handbook Section 1602,
Non-controlling Interest ("CICA 1602"). CICA 1582, which replaces CICA Handbook
Section 1581, Business Combinations, establishes standards for the measurement
of a business combination and the recognition and measurement of assets acquired
and liabilities assumed. CICA 1601, which replaces CICA Handbook Section 1600,
carries forward the existing Canadian guidance on aspects of the preparation of
consolidated financial statements subsequent to acquisition other than
non-controlling interests. CICA 1602 establishes guidance for the treatment of
non-controlling interests subsequent to acquisition through a business
combination. These new standards are effective for fiscal years beginning on or
after January 1, 2011. The Fund has not yet determined the impact of these
standards on its consolidated financial statements.
International Financial Reporting Standards
In February 2008, CICA announced that GAAP for publicly accountable enterprises
will be replaced by IFRS for fiscal years beginning on or after January 1, 2011.
IFRS uses a conceptual framework similar to GAAP but there are significant
differences in recognition, measurement and disclosures.
Just Energy will transition to IFRS effective April 1, 2011, and intends to
issue its first interim financial statements under IFRS for the three-month
period ending June 30, 2011, and a complete set of financial statements under
IFRS for the year ending March 31, 2012.
Based on the initial assessment of the differences between Canadian GAAP and
IFRS relevant to the Fund, an internal project team was assembled and a
conversion plan was developed in March 2009 to manage the transition to IFRS.
Project status reporting is provided to senior executive management and to the
Audit Committee on a regular basis.
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 engaged
in the implementation phase, which is the final phase of the project. This phase
involves approving of the accounting policy choices, completing the collection
of data required to prepare the financial statements, implementing changes to
systems and business processes relating to financial reporting, administering
key personnel training and monitoring standards currently being amended by the
International Accounting Standard Board ("IASB"). 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.
The initial assessment phase determined that 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 that each
part of property, plant and equipment that has a cost which is significant in
relation to the overall cost of the item should 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 still in process but is
not expected to be material.
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/gas and 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 re-measured 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 market 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 $3.5 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, however, the impact on the first quarter of fiscal
2011 is approximately $1 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.
The expected transitional adjustments, changes in accounting policies and
subsequent accounting may result in other business impacts, such as impacts on
the debt covenants and capital requirements disclosure. Based on the work
completed to date, the transition is expected to have minimal impact on
information technology and internal controls over financial reporting of the
Fund however, the Fund will continue to access these areas as the project
progresses.
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 five
months ended September 30, 2010, is as follows:
Total
-------------------
Sales(1) $ 308,044
Net loss(1) (26,872)
Current assets 130,755
Non-current assets 370,297
Current liabilities 194,582
Non-current liabilities 40,285
(1)Results from May 1, 2010 to September 30, 2010
Corporate governance
Just Energy is committed to transparency in our operations and our approach to
governance meets all recommended standards. Full disclosure of our compliance
with existing corporate governance rules is available on our website at
www.justenergy.com and is included in the Fund's May 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
The major change for the outlook of Just Energy during the quarter was a
continuation of the renewed growth of customer additions since the acquisition
of Hudson and its broker channel. Total customers additions of 254,000 in the
second quarter and 261,000 in the first quarter are far higher than the record
140,000 added in the second quarter of fiscal 2010. Net additions of 92,000 and
116,000, respectively, also far outstrip the 36,000 net additions recorded in
the second quarter of fiscal 2010.
During the past three fiscal years, Just Energy relied on increased margin per
customer in order to meet its growth targets as customer growth in U.S. markets
was offset by customer declines in the more saturated Canadian market. The first
six months of fiscal 2011 have seen marketing generate net additions of 9% to
the Fund's April 1, 2010 customer count with the Hudson acquisition raising the
total growth to 38% since then.
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 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 book less
complex.
Overall customer growth is concentrated in the U.S. Management believes that any
future growth in Canada will be concentrated in JustGreen sales and water
heaters. The U.S. share of the customer book reached 52% for the first time in
the first quarter and is currently at 55%. The U.S. share of sales and margins
in the second quarter were 56% and 57% respectively. These ratios will continue
to increase as the vast majority of current growth potential lies within the
U.S. One impact of this will be increased financial statement exposure to
movements in the U.S. dollar exchange rate. 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 when it is determined that
any surplus U.S. cash is not required for new acquisition growth.
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
were flat between the second quarter of fiscal 2011 versus the same period last
year. These increases should more than offset future margins from the growth
generated.
On June 29, 2010, the Fund received approval by its Unitholders for the plan to
reorganize the income trust structure into a high dividend paying corporation,
and subsequently received approval of the Court of Queen's Bench of Alberta on
June 30, 2010. Upon completion of the reorganization, currently scheduled for
January 1, 2011, the Board intends to implement a dividend policy where monthly
dividends will be initially set at $0.1033 per share ($1.24 annually) equal to
the current distributions paid to Just Energy's Unitholders.
The federal government's announcement on October 31, 2006 of the pending
imposition of a tax on income trusts effective January 1, 2011, caused Just
Energy to analyze options which would maximize Unitholder value for the long
term. The conclusion of the analysis was that conversion to a high-dividend
yield corporation was the optimal option available to the Fund. The proposed
reorganization offers a number of benefits:
-- The unique nature of Just Energy as a growth company with high return on
invested capital allows it to pay both a substantial yield and continue
to grow. This remains true regardless of whether Just Energy is an
income fund or a corporation.
-- The receipt of $1.24 per year in dividends will result in a
substantially higher after-tax cash yield to shareholders than that of
$1.24 in distributions for most taxable Canadian Unitholders.
-- It is anticipated that as a corporation, Just Energy will have greater
access to capital markets to the extent that issuance of equity should
be required for growth through acquisition.
-- Limitations under the proposed tax on undue expansion of trusts and
foreign ownership limitations on trusts will no longer apply to Just
Energy.
-- The high-dividend yield as a corporation combined with Just Energy's
growth prospects is expected to focus market attention on the value of
Just Energy shares.
-- It is anticipated that the reorganized structure of the Fund as a
dividend-paying corporation will attract new investors, including non-
resident investors, and provide, in the aggregate, a more active and
attractive market for the Just Energy shares than currently exists for
the units.
-- As a corporation, Just Energy will be managed by the same experienced
team of professionals.
In anticipation of the need for conversion, the Fund has not increased its rate
of distribution since early 2008 despite substantial growth in its business.
Distributions have been maintained by Just Energy at $0.1033 per month ($1.24
annually) supplemented by annual Special Distributions ($0.20 payable January
31, 2010, being the most recent). The decision not to continue distribution
increases and the continued growth of Just Energy have given the Fund the
flexibility to continue to pay a dividend equal to the current monthly
distributions following the reorganization. This ability makes full allowance
for the payment of tax by Just Energy and does not rely on a merger with tax
loss-bearing companies.
The 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 INCOME FUND
INTERIM CONSOLIDATED BALANCE SHEETS
As at
(Unaudited - thousands of Canadian dollars)
---------------------------------------------------------------------------
---------------------------------------------------------------------------
September 30, March 31,
2010 2010
ASSETS CURRENT
Cash $ 63,847 $ 60,132
Restricted cash 15,154 18,650
Accounts receivable 365,984 348,892
Gas delivered in excess of consumption 91,796 7,410
Gas in storage 48,204 4,058
Inventory 5,031 6,323
Unbilled revenues - 20,793
Prepaid expenses and deposits 23,334 20,038
Current portion of future income tax assets 19,665 29,139
Corporate tax recoverable 13,712 -
Other assets - current (Note 11a) 3,034 2,703
---------------------------------------------------------------------------
649,761 518,138
FUTURE INCOME TAX ASSETS 134,670 85,197
PROPERTY, PLANT AND EQUIPMENT 233,113 218,616
CONTRACT INITIATION COSTS 27,193 5,587
INTANGIBLE ASSETS (Note 6) 560,655 340,629
GOODWILL 223,346 177,887
LONG-TERM RECEIVABLE 3,702 2,014
OTHER ASSETS - LONG TERM (Note 11a) 1,610 5,027
---------------------------------------------------------------------------
$ 1,834,050 $1, 353,095
---------------------------------------------------------------------------
---------------------------------------------------------------------------
LIABILITIES
CURRENT
Bank indebtedness $ 863 $ 8,236
Accounts payable and accrued liabilities 326,785 226,950
Unit distribution payable 13,285 13,182
Corporate taxes payable - 6,410
Current portion of future income tax
liabilities 12,246 6,776
Deferred revenue 114,301 7,202
Accrued gas accounts payable - 15,093
Current portion of long-term debt (Note 7) 67,850 62,829
Other liabilities - current (Note 11a) 692,474 685,200
----------------------------------------------------------------------------
1,227,804 1,031,878
LONG-TERM DEBT (Note 7) 512,385 231,837
DEFERRED LEASE INDUCEMENTS 1,803 1,984
OTHER LIABILITIES - LONG TERM (Note 11a) 555,343 590,572
----------------------------------------------------------------------------
2,297,335 1,856,271
----------------------------------------------------------------------------
NON-CONTROLLING INTEREST 18,364 20,603
----------------------------------------------------------------------------
UNITHOLDERS' DEFICIENCY
Deficit $(1,386,479) $(1,423,698)
Accumulated other comprehensive income (Note
9) 179,277 221,969
----------------------------------------------------------------------------
(1,207,202) (1,201,729)
Unitholders' capital 670,591 659,118
Equity component of convertible debenture
(Note 7e) 33,914 -
Contributed surplus 21,048 18,832
----------------------------------------------------------------------------
Unitholders' deficiency (481,649) (523,779)
----------------------------------------------------------------------------
$ 1,834,050 $1, 353,095
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Commitments (Note 14) Contingencies (Note 15)
See accompanying notes to the interim consolidated financial statements
INTERIM CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited - thousands of Canadian dollars except per unit amounts)
----------------------------------------------------------------------------
----------------------------------------------------------------------------
THREE MONTHS ENDED SIX MONTHS ENDED
SEPTEMBER 30 SEPTEMBER 30
2010 2009 2010 2009
SALES $ 657,878 $ 434,659 $ 1,267,562 $ 833,669
COST OF SALES 561,049 353,163 1,090,236 686,098
----------------------------------------------------------------------------
GROSS MARGIN 96,829 81,496 177,326 147,571
----------------------------------------------------------------------------
EXPENSES
General and
administrative
expenses 25,511 25,634 54,783 41,251
Marketing expenses 36,950 27,107 66,708 46,492
Bad debt expense 6,694 3,856 12,443 7,685
Amortization of
intangible assets and
related supply
contracts 32,255 20,487 59,427 21,081
Amortization of
property, plant and
equipment 1,892 2,527 3,812 3,721
Unit based
compensation 1,548 976 2,623 1,633
Capital tax expense 26 48 159 128
----------------------------------------------------------------------------
104,876 80,635 199,955 121,991
----------------------------------------------------------------------------
INCOME (LOSS) BEFORE THE
UNDERNOTED (8,047) 861 (22,629) 25,580
INTEREST EXPENSE (Note
7) 12,296 4,946 21,776 5,426
CHANGE IN FAIR VALUE OF
DERIVATIVE INSTRUMENTS
(Note 11a) 181,254 (138,515) (133,122) (226,395)
OTHER INCOME (921) (558) (2,703) (1,314)
----------------------------------------------------------------------------
INCOME (LOSS) BEFORE
INCOME TAX (200,676) 134,988 91,420 247,863
PROVISION FOR (RECOVERY
OF) INCOME TAX (46,530) 25,786 (27,170) 36,089
NON-CONTROLLING INTEREST 334 (1,488) (2,239) (1,543)
----------------------------------------------------------------------------
NET INCOME (LOSS) $ (154,480) $ 110,690 $ 120,829 $ 213,317
----------------------------------------------------------------------------
----------------------------------------------------------------------------
See accompanying notes
to the interim
consolidated financial
statements
Net income (loss) per
unit (Note 12)
Basic $ (1.15) $ 0.83 $ 0.90 $ 1.75
Diluted $ (1.15) $ 0.82 $ 0.84 $ 1.72
INTERIM CONSOLIDATED STATEMENTS OF UNITHOLDERS' DEFICIENCY
FOR THE SIX MONTHS ENDED SEPTEMBER 30
(Unaudited - thousands of Canadian dollars)
----------------------------------------------------------------------------
----------------------------------------------------------------------------
2010 2009
ACCUMULATED DEFICIT
Accumulated deficit, beginning of period $ (480,931) $ (712,427)
Net income 120,829 213,317
----------------------------------------------------------------------------
Accumulated deficit, end of period (360,102) (499,110)
----------------------------------------------------------------------------
DISTRIBUTIONS
Distributions, beginning of period (942,767) (757,850)
Distributions and dividends on Exchangeable
Shares (81,326) (74,590)
Class A preference share distributions - net
of income taxes of $979 (2009 - $1,077) (2,284) (2,186)
----------------------------------------------------------------------------
Distributions, end of period (1,026,377) (834,626)
----------------------------------------------------------------------------
DEFICIT (1,386,479) (1,333,736)
----------------------------------------------------------------------------
ACCUMULATED OTHER COMPREHENSIVE INCOME (Note
9)
Accumulated other comprehensive income,
beginning of period 221,969 364,566
Other comprehensive loss (42,692) (64,605)
----------------------------------------------------------------------------
Accumulated other comprehensive income, end of
period 179,277 299,961
----------------------------------------------------------------------------
UNITHOLDERS' CAPITAL (Note 10)
Unitholders' capital, beginning of period 659,118 398,454
Trust units exchanged 7,224 172,027
Trust units issued on exercise/exchange of
unit compensation 461 536
Distribution reinvestment plan 11,012 7,775
Exchangeable Shares issued - 239,946
Exchangeable Shares exchanged (7,224) (172,027)
----------------------------------------------------------------------------
Unitholders' capital, end of period 670,591 646,711
----------------------------------------------------------------------------
EQUITY COMPONENT OF CONVERTIBLE DEBENTURE
(Note 7e) 33,914 -
CONTRIBUTED SURPLUS (Note 10b) 21,048 15,805
----------------------------------------------------------------------------
Unitholders' deficiency, end of period $ (481,649) $ (371,259)
----------------------------------------------------------------------------
----------------------------------------------------------------------------
See accompanying notes to the interim consolidated financial statements
INTERIM CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited - thousands of Canadian dollars)
----------------------------------------------------------------------------
----------------------------------------------------------------------------
THREE MONTHS ENDED SIX MONTHS ENDED
SEPTEMBER 30 SEPTEMBER 30
2010 2009 2010 2009
NET INCOME (LOSS) $(154,480) $ 110,690 $ 120,829 $ 213,317
----------------------------------------------------------------------------
Unrealized gain (loss) on
translation of self-
sustaining operations (5,650) 6,775 9,226 25,021
Amortization of deferred
unrealized gain of
discontinued hedges net of
income taxes of $4,589
(2009 -$7,918) and $10,439
(2009 - $17,724) for the
three and six months ended
September 30, respectively
(Note 11a) (23,195) (40,296) (51,918) (89,626)
----------------------------------------------------------------------------
OTHER COMPREHENSIVE LOSS (28,845) (33,521) (42,692) (64,605)
----------------------------------------------------------------------------
COMPREHENSIVE INCOME (LOSS) $(183,325) $ 77,169 $ 78,137 $ 148,712
----------------------------------------------------------------------------
----------------------------------------------------------------------------
See accompanying notes to the interim consolidated financial statements
INTERIM CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited - thousands of Canadian dollars)
----------------------------------------------------------------------------
----------------------------------------------------------------------------
THREE MONTHS ENDED SIX MONTHS ENDED
SEPTEMBER 30 SEPTEMBER 30
Net inflow (outflow) of cash
related to the following
activities 2010 2009 2010 2009
OPERATING
Net income (loss) $ (154,480) $ 110,690 $ 120,829 $ 213,317
----------------------------------------------------------------------------
Items not affecting cash
Amortization of intangible
assets and related supply
contracts 32,255 20,487 59,427 21,081
Amortization of property,
plant and equipment 1,892 2,527 3,812 3,721
Amortization of contract
initiation costs 4,183 - 6,271 -
Unit-based compensation 1,548 976 2,623 1,633
Non-controlling interest 334 (1,488) (2,239) (1,543)
Future income taxes (43,796) 19,141 (23,972) 28,946
Financing charges, non-cash
portion 1,635 396 2,659 396
Other 2,332 569 4,512 482
Change in fair value of
derivative instruments 181,254 (138,515) (133,122) (226,395)
----------------------------------------------------------------------------
181,637 (95,907) (80,029) (171,679)
----------------------------------------------------------------------------
Adjustments required to
reflect net cash receipts
from gas sales 18,527 26,023 26,963 34,717
----------------------------------------------------------------------------
Net change in non-cash
working capital (31,863) (16,098) (28,215) (13,852)
----------------------------------------------------------------------------
Cash inflow from operations 13,821 24,708 39,518 62,503
----------------------------------------------------------------------------
FINANCING
Distributions and dividends
paid to Unitholders and
holders of Exchangeable
Shares (35,189) (33,837) (70,157) (64,721)
Distributions to Class A
preference shareholder (1,632) (1,632) (3,263) (3,263)
Tax impact on distributions
to Class A preference
shareholder 441 539 979 1,077
Decrease in bank
indebtedness (6,990) - (7,373) -
Issuance of long-term debt 17,785 12,718 366,982 20,244
Repayment of long-term debt (772) (6,000) (50,158) (25,000)
Restricted cash (671) (1,109) 3,570 (831)
----------------------------------------------------------------------------
(27,028) (29,321) 240,580 (72,494)
----------------------------------------------------------------------------
INVESTING
Purchase of property, plant
and equipment (10,785) (12,477) (20,392) (19,883)
Purchase of other
intangible assets (533) (2,411) (895) (2,411)
Acquisitions (Note 5) (4,976) 9,799 (258,047) 9,799
Proceeds from long-term
receivable 105 - 3,233 -
Contract initiation costs (3,598) - (7,272) -
----------------------------------------------------------------------------
(19,787) (5,089) (283,373) (12,495)
----------------------------------------------------------------------------
Effect of foreign currency
translation on cash
balances 2,413 (5,829) 6,960 (6,928)
----------------------------------------------------------------------------
NET CASH INFLOW (OUTFLOW) (30,581) (15,531) 3,715 (29,414)
CASH, BEGINNING OF PERIOD 94,428 45,211 60,132 59,094
----------------------------------------------------------------------------
CASH, END OF PERIOD $ 63,847 $ 29,680 $ 63,847 $ 29,680
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Supplemental cash flow
information
Interest paid $ 7,018 $ 3,770 $ 10,690 $ 4,209
Income taxes paid $ 5,530 $ 5,502 $ 7,986 $ 6,479
----------------------------------------------------------------------------
----------------------------------------------------------------------------
See accompanying notes to the interim consolidated financial statements
JUST ENERGY INCOME FUND
NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS
FOR THE SIX MONTHS ENDED SEPTEMBER 30, 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
Just Energy is an open-ended, limited-purpose trust established under the laws
of the Province of Ontario to hold securities and to distribute the income of
its directly or indirectly owned operating subsidiaries and affiliates: Just
Energy Ontario L.P. ("JE Ontario"), Just Energy Manitoba L.P. ("JE Manitoba"),
Just Energy Quebec L.P. ("JE Quebec"), Just Energy (B.C.) Limited Partnership
("JE B.C."), Just Energy Alberta L.P. ("JE Alberta"), Alberta Energy Savings
L.P. ("AESLP"), Just Energy Illinois Corp. ("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 commercial customer contracts are
paid in one of two ways: upfront or as a residual payment over the life of the
contract. If the commission is paid upfront, it is recorded as contract
initiation costs and amortized in marketing expenses over the remaining life of
the contract. 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
(a) Recently issued accounting standards (cont'd)
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, the 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, which will be completed
by April 1, 2011.
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. In the three months ended September 30, 2010,
goodwill increased by $2.6 due to additional transaction costs and a change in
the working capital calculation which impacted the purchase price.
(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 is exchangeable for a trust unit on a one-for-one basis at
any time at the option of the holder, and entitles the holder to a monthly
dividend equal to 66 2/3% of the monthly distribution paid by Just Energy on a
Trust Unit. JEEC also assumed all the covenants and obligations of UEG in
respect of UEG's outstanding 6% convertible unsecured subordinated debentures.
The 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 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 8 to 57 months. The water
heater contracts and customer relationships are amortized over 174 months and
the intangible assets are amortized over six months. 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 Net Book
As at September 30, 2010 Cost Amortization Value
----------------------------------------------------------------------------
Gas contracts and customer
relationships $ 256,831 $ 109,635 $ 147,196
Electricity contracts and customer
relationships 449,107 170,265 278,842
Water heater contracts and customer
relationships 23,081 2,014 21,067
Broker network 85,497 7,125 78,372
Brand 11,346 - 11,346
Information technology system
development 19,613 1,647 17,966
Other intangible assets 9,194 3,328 5,866
----------------------------------------------------------------------------
$ 854,669 $ 294,014 $ 560,655
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Accumulated Net Book
As at March 31, 2010 Cost Amortization Value
----------------------------------------------------------------------------
Gas contracts and customer
relationships $ 228,827 $ 63,484 $ 165,343
Electricity contracts and customer
relationships 245,617 92,779 152,838
Water heater contracts and customer
relationships 23,081 1,218 21,863
Other intangible assets 2,982 2,397 585
----------------------------------------------------------------------------
$ 500,507 $ 159,878 $ 340,629
----------------------------------------------------------------------------
----------------------------------------------------------------------------
7. LONG-TERM DEBT AND FINANCING
September March 31,
30, 2010 2010
Credit facility (a) $ 44,500 $ 57,500
TGF Credit facility (b)(i) 40,154 41,313
TGF Debentures (b)(ii) 37,001 37,001
TGF Term/Operating facilities (b)(iii) 10,000 10,000
JEEC Convertible debentures (c) 84,049 83,417
NEC Financing (d) 80,734 65,435
JEIF Convertible debentures (e) 283,797 -
----------------------------------------------------------------------------
580,235 294,666
Less: current portion (67,850) (62,829)
----------------------------------------------------------------------------
$ 512,385 $ 231,837
----------------------------------------------------------------------------
----------------------------------------------------------------------------
The following table details the interest expense for the three and six
months ended September 30, 2010. Interest is expensed at the effective
interest rate.
For the For the For the For the
three three six six
months months months months
ended ended ended ended
September September September September
30, 30, 30, 30,
2010 2009 2010 2009
----------------------------------------------------------------------------
Credit facility (a) $ 968 $ 1,357 $ 1,935 $ 1,837
TGF Credit facility (b)(i) 424 618 871 618
TGF Debentures (b)(ii) 1,232 1,128 2,182 1,128
TGF Term/operating facilities
(b)(iii) 245 87 556 87
TGF Wheat production financing - 10 - 10
JEEC Convertible debentures (c) 1,668 1,746 3,332 1,746
NEC Financing (d) 1,490 - 2,831 -
JEIF Convertible debentures (e) 6,269 - 10,069 -
----------------------------------------------------------------------------
$ 12,296 $ 4,946 $ 21,776 $ 5,426
----------------------------------------------------------------------------
----------------------------------------------------------------------------
(a) Just Energy holds 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. The repayment of the facility is
due on October 29, 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 September 30, 2010,
the Canadian prime rate was 3.0% and the U.S. prime rate was 3.25%. As at
September 30, 2010, Just Energy had drawn $44,500 (March 31, 2010 - $57,500)
against the facility and total letters of credit outstanding amounted to $66,895
(March 31, 2010 - $49,444). As at September 30, 2010, Just Energy has $138,605
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 September 30, 2010 and 2009, all of these covenants
have been met.
(b) In connection with the acquisition of UEG on July 1, 2009, the Fund acquired
the debt obligations of TGF, which is currently comprised of 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 2% with principal
repayments scheduled to commence on March 1, 2010. The credit facility is
secured by a demand debenture agreement, a first priority security interest on
all assets and undertakings of TGF and a general security interest on all other
current and acquired assets of TGF. As a result, the facility is fully
classified as a current obligation. The credit facility includes certain
financial covenants, the more significant of which relate to current ratio, debt
to equity ratio, debt service coverage and minimum 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
September 30, 2010, the amount owing under this facility amounted to $40,154.
(ii) TGF debentures
A debenture purchase agreement with a number of private parties providing for
the issuance of up to $40,000 aggregate principal amount of debentures was
entered into in 2006. The interest rate is 10.5% per annum, compounded annually
and payable quarterly. 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
shareholder's 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 September 30, 2010, the amount
owing under this debenture agreement amounted to $37,001.
(iii) TGF term/operating facilities
TGF maintains a term loan for $10,000 with a third party lender bearing interest
at prime plus 1% due in full on December 31, 2010. This facility is secured by
liquid investments on deposit with the lender. As at September 30, 2010, the
amount owing under the facility amounted to $10,000.
(iv) TGF has a working capital operating line of $7,000 bearing interest at a
rate of prime plus 1%. 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 29.8
Exchangeable Shares of JEEC, representing a conversion price of $33.56 per
Exchangeable Share as at September 30, 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 six months ended September 30, 2010, interest expense
amounted to $3,332.
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.
(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 $80,734 owing under this agreement, including $2,753 relating to the
holdback provision as at September 30, 2010. The company is required to meet a
number of covenants under the agreement. As at September 30, 2010, all of these
covenants have been met.
(e) In order to fund the acquisition of Hudson effective 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"). 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 six months ended September 30, 2010, interest expense amounted to $10,069.
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 of $283,797 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.
8. INCOME TAXES
The Fund recorded a current income tax recovery of $3.2 million for the second
quarter of fiscal 2011 versus $6.1 million of provision in the same period in
fiscal 2010. A tax recovery of $4.2 million has been recorded for the six-month
period of fiscal 2011 versus a provision of $6.1 million for the same period in
fiscal 2010.
For the For the
three three For the six For the six
months months months months
ended Sept ended Sept ended Sept ended Sept
30, fiscal 30, fiscal 30, fiscal 30, fiscal
2011 2010 2011 2010
-------------------------------------------------
Current income tax
recovery $ (3,175) $ 6,106 $ (4,177) $ 6,066
Amount credited to
Unitholders' deficiency 441 539 979 1,077
Future tax expense
(recovery) (43,796) 19,141 (23,972) 28,946
-------------------------------------------------
Provision for (recovery
of) income tax $ (46,530) $ 25,786 $ (27,170) $ 36,089
-------------------------------------------------
-------------------------------------------------
9. ACCUMULATED OTHER COMPREHENSIVE INCOME
For the six months ended September
30, 2010
Foreign
currency
translation Cash flow
adjustment hedges Total
Balance, beginning of period $ 28,584 $ 193,385 $ 221,969
Unrealized foreign currency
translation adjustment 9,226 - 9,226
Amortization of deferred unrealized
gain on discontinued hedges after
July 1, 2008, net of income taxes of
$10,439 - (51,918) (51,918)
----------------------------------------
$ 37,810 $ 141,467 $ 179,277
----------------------------------------
----------------------------------------
For the six months ended September
30, 2009
Foreign
currency
translation Cash flow
adjustment hedges Total
Balance, beginning of period $ 1,958 $ 362,608 $ 364,566
Unrealized foreign currency
translation adjustment 25,021 - 25,021
Amortization of deferred unrealized
gain on discontinued hedges after
July 1, 2008, net of income taxes of
$17,724 - (89,626) (89,626)
----------------------------------------
$ 26,979 $ 272,982 $ 299,961
----------------------------------------
----------------------------------------
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.
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 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
from the Fund as Unitholders.
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 is exchangeable for
a trust unit on a one-for-one basis at any time at the option of the holder, and
entitles the holder to a monthly dividend equal to 66 2/3% of the monthly
distribution paid by Just Energy on a trust unit.
JEEC owns 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"). A portion of 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 January 3, 2011; and (ii) the volume weighted
average trading price of the JEEC Exchangeable Shares on the TSX for the month
of December 2010.
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 38,989 461 37,979 536
Distribution
reinvestment plan 849,244 11,012 641,806 7,775
Exchanged from
Exchangeable Shares 640,389 7,224 15,250,593 172,027
----------------------------------------------------
Balance, end of period 125,853,929 611,772 122,068,901 565,632
----------------------------------------------------
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 (640,389) (7,224) (15,250,593) (172,027)
----------------------------------------------------
Balance, end of period 4,047,783 45,659 6,021,211 67,919
----------------------------------------------------
Unitholders' capital,
end of period 135,165,440 $ 670,591 133,353,840 $ 646,711
----------------------------------------------------
----------------------------------------------------
Distribution reinvestment plan
Under the Fund's distribution reinvestment program ("DRIP"), Unitholders holding
a minimum of 100 units can elect to receive their distributions (both regular
and special) in units rather than cash at a 2% discount to the simple average
closing price of the units for five trading days preceding the applicable
distribution payment date, providing the units are issued from treasury and not
purchased on the open market.
Units issued
During the six months ended September 30, 2010, the Fund issued 640,389 units
relating to the exchange of Exchangeable Shares of JEEC. During the prior
comparable period, the Fund issued 15,250,593 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 2,623 1,633
non-cash deferred unit grant distributions 54 37
Less: unit-based awards exercised (461) (536)
------------ ------------
Balance, end of period $ 21,048 $ 15,805
------------ ------------
------------ ------------
Total amounts credited to Unitholders' capital in respect of unit options and
deferred unit grants exercised or exchanged during the six months ended
September 30, 2010 amounted to $461 (2009 - $536).
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, renewable and
gas swaps 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 and recorded as other
assets and other liabilities with their offsetting values recorded in income as
the change in fair value of derivative instruments for the three months ended
September 30, 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 September ended September
September 30, 2010 September 30, 2009
30, 2010 (USD) 30, 2009 (USD)
Canada
Fixed-for-floating
electricity swaps (i) $ 4,605 n/a $ (16,995) n/a
Renewable energy certificates
(ii) 3 n/a (1,585) n/a
Verified emission-reduction
credits (iii) 1,189 n/a - n/a
Options (iv) (1,692) n/a 168 n/a
Physical gas forward
contracts (v) 61,473 n/a (44,301) n/a
Transportation forward
contracts (vi) 1,433 n/a 4,232 n/a
United States
Fixed-for-floating
electricity swaps (vii) 24,172 23,263 (7,571) (7,000)
Physical electricity forwards
(viii) 28,881 27,795 (10,975) (10,146)
Unforced capacity forward
contracts (ix) 209 201 1,449 1,340
Unforced capacity physical
contracts (x) 255 246 301 279
Renewable energy certificates
(xi) 1,159 1,116 974 900
Verified emission-reduction
credits (xii) 331 318 7 7
Options (xiii) (749) (721) 962 889
Physical gas forward
contracts (xiv) 11,315 10,890 (44,026) (40,701)
Transportation forward
contracts (xv) 365 351 (623) (576)
Heat rate swaps (xvi) 4,464 4,296 (74) (68)
Fixed financial swaps (xvii) 33,107 31,862 (2,940) (2,718)
Foreign exchange forward
contracts (xviii) (524) n/a 816 n/a
Amortization of deferred
unrealized gains on
discontinued hedges (27,784) n/a (48,214) n/a
Amortization of derivative
financial instruments
related to acquisitions 39,042 n/a 29,880 n/a
----------------------------------------------------------------------------
Change in Fair Value of
Derivative
Instruments $ 181,254 $(138,515)
----------------------------------------------------------------------------
----------------------------------------------------------------------------
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 six months ended September 30, 2010:
Change In Fair Value of Derivative
Instruments
For the For the
For the six six
six months For the months
months ended six months ended
ended September ended September
September 30, 2010 September 30, 2009
30, 2010 (USD) 30, 2009 (USD)
Canada
Fixed-for-floating
electricity swaps (i) $(134,236) n/a $ 14,152 n/a
Renewable energy certificates
(ii) 146 n/a (1,839) n/a
Verified emission-reduction
credits (iii) 1,189 n/a - n/a
Options (iv) (855) n/a 960 n/a
Physical gas forward
contracts (v) (22,155) n/a (54,114) n/a
Transportation forward
contracts (vi) (11,917) n/a 7,488 n/a
United States
Fixed-for-floating
electricity swaps (vii) (72) (255) (11,173) (10,196)
Physical electricity forwards
(viii) 6,199 5,833 (33,155) (29,834)
Unforced capacity forward
contracts (ix) 369 357 (1,191) (1,004)
Unforced capacity physical
contracts (x) 899 872 301 279
Renewable energy certificates
(xi) 1,839 1,777 1,386 1,266
Verified emission-reduction
credits (xii) 333 321 216 192
Options (xiii) (929) (896) 2,265 2,046
Physical gas forward
contracts (xiv) (19,319) (18,921) (70,312) (64,034)
Transportation forward
contracts (xv) 208 199 (706) (649)
Heat rate swaps (xvi) 7,522 7,271 (1,537) (1,368)
Fixed financial swaps (xvii) 25,741 24,701 (3,339) (3,073)
Foreign exchange forward
contracts (xviii) (247) n/a 1,671 n/a
Amortization of deferred
unrealized gains of
discontinued hedges (62,357) n/a (107,348) n/a
Amortization of derivative
financial instruments
related to acquisitions 74,520 n/a 29,880 n/a
----------------------------------------------------------------------------
Change In Fair Value of
Derivative
Instruments $(133,122) $(226,395)
----------------------------------------------------------------------------
----------------------------------------------------------------------------
The following table summarizes certain aspects of the financial assets and
liabilities recorded in the financial statements as at September 30, 2010:
Other Other Other Other
assets assets liabilities liabilities
(current) (long term) (current) (long term)
Canada
Fixed-for-floating
electricity swaps (i) $ - $ - $ 187,526 $ 135,721
Renewable energy
certificates (ii) 301 538 41 142
Verified emission-
reduction credits (iii) - - 306 875
Options (iv) 1,170 858 - -
Physical gas forward
contracts (v) - - 225,119 192,959
Transportation forward
contracts (vi) - - 3,624 3,958
United States
Fixed-for-floating
electricity swaps (vii) - - 57,344 46,529
Physical electricity
forwards (viii) - - 82,969 69,256
Unforced capacity forward
contracts (ix) 477 45 588 128
Unforced capacity physical
contracts (x) 241 - 1,210 488
Renewable energy
certificates (xi) 175 96 1,326 2,423
Verified emission-
reduction credits (xii) - - 255 697
Options (xiii) 45 3 474 502
Physical gas forward
contracts (xiv) 14 - 90,535 64,325
Transportation forward
contracts (xv) - - 1,469 2,309
Heat rate swaps (xvi) 87 70 2,370 727
Fixed financial swaps
(xvii) - - 37,318 34,304
Foreign exchange forward
contracts (xviii) 524 - - -
----------------------------------------------------------------------------
As at September 30, 2010 $ 3,034 $ 1,610 $ 692,474 $ 555,343
----------------------------------------------------------------------------
----------------------------------------------------------------------------
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
United States
Fixed-for-floating
electricity swaps (vii) - - 31,291 30,464
Physical electricity
forwards (viii) - - 38,015 39,035
Unforced capacity forward
contracts (ix) 523 102 445 9
Unforced capacity physical
contracts (x) 33 146 731 -
Renewable energy
certificates (xi) 107 130 918 945
Verified emission-
reduction credits (xii) - - 167 447
Options (xiii) - - 912 915
Physical gas forward
contracts (xiv) - - 96,938 75,142
Transportation forward
contracts (xv) - - 1,265 2,262
Heat rate swaps (xvi) 654 3,605 - -
Fixed financial swaps
(xvii) - - 21,720 16,767
Foreign exchange forward
contracts (xviii) 277 - - -
----------------------------------------------------------------------------
As at March 31, 2010 $ 2,703 $ 5,027 $ 685,200 $ 590,572
----------------------------------------------------------------------------
----------------------------------------------------------------------------
The following table summarizes financial instruments classified as held for
trading as at September 30, 2010 to which the Fund has committed.
Total remaining
Contract type Notional volume volume Maturity date
Canada
----------------------------------------------------------------------------
(i) Fixed-for-
floating October 31, 2010
electricity - January 31,
swaps (i) 0.0001-85 MWh 10,707,887 MWh 2017
----------------------------------------------------------------------------
(ii) Renewable December 31,
energy 2010 - December
certificates 10-90,000 MWh 1,285,368 MWh 31, 2014
----------------------------------------------------------------------------
(iii) Verified
emission December 31,
reduction 2,000-100,000 2010 - December
credits Tonnes 605,000 Tonnes 31, 2014
----------------------------------------------------------------------------
(iv) Options October 31, 2010
46-40,500 - February 28,
GJ/month 4,555,629 GJ 2014
----------------------------------------------------------------------------
(v) Physical gas October 31, 2010
forward - January 31,
contracts 5-12,951 GJ/day 132,612,805 GJ 2016
----------------------------------------------------------------------------
(vi) Transportation
forward October 31, 2010
contracts 50-35,000 GJ/day 63,082,570 GJ - May 31, 2015
----------------------------------------------------------------------------
United States
----------------------------------------------------------------------------
(vii) Fixed-for-
floating
electricity October 31, 2010
swaps (i) 0.10-79 MWh 7,023,943 MWh - June 30, 2015
----------------------------------------------------------------------------
(viii) Physical October 31, 2010
electricity - August 31,
forwards 1-33 MWh 7,441,062 MWh 2015
----------------------------------------------------------------------------
(ix) Unforced
capacity October 31, 2010
forward - November 30,
contracts 5-35 MWCap 880 MWCap 2012
----------------------------------------------------------------------------
(x) Unforced
capacity
physical October 31, 2010
contracts 1-50 MWCap 2,704 MWCap - May 31, 2014
----------------------------------------------------------------------------
(xi) Renewable December 31,
energy 2,000-160,000 2010 - December
certificates MWh 2,852,724 MWh 31, 2015
----------------------------------------------------------------------------
(xii) Verified
emission- December 31,
reduction 10,000-50,000 2010 - December
credits Tonnes 615,000 Tonnes 31, 2014
----------------------------------------------------------------------------
(xiii) Options October 31, 2010
5-120,000 - December 31,
mmBTU/month 5,310,945 mmBTU 2014
----------------------------------------------------------------------------
(xiv) Physical gas
forward 5-5,000 October 31, 2010
contracts mmBTU/day 43,281,431 mmBTU - May 31, 2015
----------------------------------------------------------------------------
(xv) Transportation
forward 3-19,735 October 31, 2010
contracts mmBTU/day 40,348,793 mmBTU - March 31, 2015
----------------------------------------------------------------------------
(xvi) Heat rate swaps October 31, 2010
1-30 MWh 4,193,514 MWh - July 31, 2015
----------------------------------------------------------------------------
(xvii) Fixed financial 50-657,600 October 31, 2010
swaps mmBTU/month 51,551,493 mmBTU - July 31, 2015
----------------------------------------------------------------------------
(xviii) Foreign
exchange
forward ($768-$6,366) October 01, 2010
contract (US$742-$6,100) n/a - July 05, 2011
----------------------------------------------------------------------------
Fair value
favourable/
Contract type Fixed price (unfavourable) Notional value
Canada
----------------------------------------------------------------------------
(i) Fixed-for-
floating
electricity
swaps (i) $28.75-$128.13 ($323,247) $748,741
----------------------------------------------------------------------------
(ii) Renewable
energy
certificates $3.00-$26.00 $656 $8,141
----------------------------------------------------------------------------
(iii) Verified
emission
reduction
credits $6.00-$11.50 ($1,181) $5,836
----------------------------------------------------------------------------
(iv) Options $6.35-$12.40 $2,028 $8,551
----------------------------------------------------------------------------
(v) Physical gas
forward
contracts $3.16-$10.00 ($418,078) $988,415
----------------------------------------------------------------------------
(vi) Transportation
forward
contracts $0.01-$1.57 ($7,582) $46,693
----------------------------------------------------------------------------
United States
----------------------------------------------------------------------------
(vii) Fixed-for-
floating $25.00-$140.72
electricity (US$24.30- ($103,873) $431,411
swaps (i) $136.75) (US($100,946)) (US$419,253)
----------------------------------------------------------------------------
(viii) Physical $23.92-$120.39
electricity (US$23.25- ($152,225) $453,220
forwards $117.00) (US($147,935)) (US$440,447)
----------------------------------------------------------------------------
(ix) Unforced
capacity $3,087-$8,232
forward (US$3,000- ($194) $4,723
contracts $8,000) ((US$189)) (US$4,590)
----------------------------------------------------------------------------
(x) Unforced
capacity
physical $978-$9,004 ($1,457) $13,866
contracts (US$950-$8,750) ((US$1,416)) (US$13,475)
----------------------------------------------------------------------------
(xi) Renewable
energy $1.65-$32.93 ($3,478) $17,324
certificates (US$1.60-$32.00) (US($3,380)) (US$16,836)
----------------------------------------------------------------------------
(xii) Verified
emission-
reduction $6.53-$9.00 ($952) $4,832
credits (US$6.35-$8.75) (US$(925)) (US$4,696)
----------------------------------------------------------------------------
(xiii) Options $7.97-$14.20 ($928) $8,369
(US$7.75-$13.80) (US($902)) (US$8,133)
----------------------------------------------------------------------------
(xiv) Physical gas
forward $3.70-$12.22 ($154,846) $371,317
contracts (US$3.60-$11.88) (US($150,482)) (US$360,852)
----------------------------------------------------------------------------
(xv) Transportation $0.0026-$1.0290
forward (US$0.0025- ($3,778) ($49,973)
contracts $1.0000) (US($3,671)) (US$48,565)
----------------------------------------------------------------------------
(xvi) Heat rate swaps $19.23-$76.86
(US$18.69- ($2,940) $176,616
$74.69) (US($2,857)) (US$171,638)
----------------------------------------------------------------------------
(xvii) Fixed financial $3.85-$8.85 ($71,622) $328,368
swaps (US$3.74-$8.60) (US($69,603)) (US$319,114)
----------------------------------------------------------------------------
(xviii) Foreign
exchange
forward $41,189
contract $1.0350-$1.0657 $524 (US$39,342)
----------------------------------------------------------------------------
(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.
The estimated amortization of deferred gains and losses reported in AOCI that is
expected to be amortized to net income within the next 12 months is a gain of
$95,879.
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 which require inputs other than quoted prices in Level
1, either directly or indirectly are classified as Level 2 in the FV hierarchy.
This could include the use of statistical techniques to derive the FV curve from
observable market prices. However, in order to be classified under Level 2,
inputs must be substantially observable in the market. Just Energy values its
New York Mercantile Exchange ("NYMEX") financial gas fixed for floating swaps
under Level 2.
Level 3
Fair value measurements that 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: 1) Commodity (predominately NYMEX), 2) Basis and 3) 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 remaining years, Just Energy
uses extrapolation which leads to natural gas supply contracts to be classified
under Level 3.
Note on fair value measurement input sensitivity
The main cause of changes in the fair value of derivative instruments are
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 September 30, 2010:
September 30, 2010
Level 1 Level 2 Level 3 Total
Financial assets
Trading assets $ 79,001 $ - $ - $ 79,001
Loans and receivable 369,686 - - 369,686
Derivative financial
assets - - 4,644 4,644
Financial liabilities
Derivative financial
liabilities - (71,622) (1,176,195) (1,247,817)
Other financial
liabilities (921,168) - - (921,168)
----------------------------------------------------------------------------
Total net derivative
liabilities $ (472,481) $ (71,622) $ (1,171,551) $ (1,715,654)
----------------------------------------------------------------------------
----------------------------------------------------------------------------
The following table illustrates the changes in net fair value of financial
assets/(liabilities) classified as Level 3 in the FV hierarchy for the six
months ended September 30, 2010:
September 30, 2010
Opening balance, April 01, 2010 $ (1,229,555)
Total gain/(losses) - Net Income (166,889)
Purchases (129,325)
Sales (2,072)
Settlements 356,290
Transfer out of Level 3 -
----------------------------------------------------------------------------
Closing Balance, September 30, 2010 $ (1,171,551)
----------------------------------------------------------------------------
----------------------------------------------------------------------------
(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 September 30, 2010 Carrying amount Fair value
Cash and restricted cash $ 79,001 $ 79,001
Accounts receivable $ 365,984 $ 365,984
Long-term receivable $ 3,702 $ 3,702
Other assets $ 4,644 $ 4,644
Bank indebtedness, accounts payable and
accrued liabilities and unit
distributions payable $ 340,933 $ 340,933
Long-term debt $ 580,235 $ 633,289
Other liabilities $ 1,247,817 $ 1,247,817
For the three months For the three months
ended September ended September
30,2010 30,2009
Interest expense on financial
liabilities not held for trading $ 12,296 $ 4,946
For the six months For the six months
ended September ended September 30,
30,2010 2009
Interest expense on financial
liabilities not held for trading $ 21,776 $ 5,426
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 in the future to U.S. fluctuations
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 September 30, 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 six months ended
September 30, 2010 would have been $3,132 lower/higher and other comprehensive
income would have been $5,652 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 September
30, 2010 of approximately $239.
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; 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 in Canadian dollars and thereby fix margins such that
Unitholder distributions can be appropriately established. Derivative
instruments are generally transacted over-the-counter. The inability or failure
of Just Energy to manage and monitor the above market risks could have a
material adverse effect on the operations and cash flow of Just Energy.
Commodity price sensitivity - all derivative financial instruments
As at September 30, 2010, if the energy prices including all 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 September 30,
2010 would have increased (decreased) by $197,958 ($197,523) 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 September 30, 2010, if the energy prices including level 3 derivative
financial instruments for 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 September 30, 2010 would have increased (decreased) by $173,176
($172,807) 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 September 30, 2010, accounts receivable from the above markets with a
carrying value of $27,999 (March 31, 2010 - $20,239) were past due but not
doubtful. As at September 30, 2010, the aging of the accounts receivable from
the above markets was as follows:
Current $ 64,744
1 - 30 days 19,443
31 - 60 days 5,423
61 - 90 days 3,133
Over 90 days 18,977
-----------------
$111,720
-----------------
For the three months ended September 30, 2010, changes in the allowance for
doubtful accounts were as follows:
Balance, beginning of period $ 23,110
Provision for doubtful accounts 12,443
Bad debts written off (9,079)
Others (526)
------------------
Balance, end of period $ 25,948
------------------
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 exception to these limits
requires 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 September 30, 2010, the maximum counterparty credit risk exposure amounted
to $116,364, 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
September 30, 2010:
Carrying Contractual Less than
amount cash flows 1 year
Accounts payable and
accrued liabilities and
unit distribution payable $ 340,070 $ 340,070 $ 340,070
Bank indebtedness 863 863 863
Long-term debt (i) 580,235 632,389 67,850
Derivative instruments:
Cash outflow 1,247,817 3,666,406 942,984
----------------------------------------------------------------------------
----------------------------------------------------------------------------
$ 2,168,985 $ 4,639,728 $ 1,351,767
----------------------------------------------------------------------------
----------------------------------------------------------------------------
1 to 3 4 to 5 More than
years years 5 years
Accounts payable and
accrued liabilities and
unit distribution payable $ - $ - $ -
Bank indebtedness - - -
Long-term debt (i) 114,904 119,635 330,000
Derivative instruments:
Cash outflow 2,147,261 557,146 19,015
----------------------------------------------------------------------------
----------------------------------------------------------------------------
$ 2,262,165 $ 676,781 $ 349,015
----------------------------------------------------------------------------
----------------------------------------------------------------------------
(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 September 30, 2010, net interest
payments over the life of the long-term debt and bank credit facility are as
follows:
Less than 1 to 3 4 to 5 More than
1 year years years 5 years
----------------------------------------------------------------------------
Interest payments $ 39,981 $ 63,156 $ 48,655 $ 40,778
----------------------------------------------------------------------------
(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 $1,213 to
accommodate for its counterparties' risk of default.
12. INCOME (LOSS) PER UNIT
For the For the For the six For the six
three months three months months ended months ended
ended Sept. ended Sept. Sept. 30, Sept. 30,
30, 2010 30, 2009 2010 2009
Basic income (loss) per
unit
------------------------
Net income (loss)
available to
Unitholders $ (154,480) $ 110,690 $ 120,829 $ 213,317
----------------------------------------------------
Weighted average number
of units outstanding 125,462,358 118,294,042 125,142,006 112,302,933
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 4,176,620 9,267,522 4,258,056 4,659,082
----------------------------------------------------
Basic units and shares
outstanding 134,902,706 132,825,292 134,663,790 122,225,743
----------------------------------------------------
Basic income (loss) per
unit $ (1.15) $ 0.83 $ 0.90 $ 1.75
----------------------------------------------------
----------------------------------------------------
Diluted income (loss)
per unit
------------------------
Net income (loss)
available to
Unitholders $ (154,480) $ 110,690 $ 120,829 213,317
Adjusted net income for
dilutive impact of
convertible debentures - - 8,648 -
----------------------------------------------------
Adjusted net income (154,480) 110,690 129,477 213,317
----------------------------------------------------
Basic units and shares
outstanding 134,902,706 132,825,292 134,663,790 122,225,743
Dilutive effect of:
Unit appreciation
rights 2,697,099 1,386,737 2,701,471 1,384,569
Deferred unit grants 90,803 69,199 87,525 65,919
Convertible debentures 21,015,113 - 17,608,920 -
----------------------------------------------------
Units outstanding on a
diluted basis 158,705,721 134,281,228 155,061,706 123,676,231
----------------------------------------------------
Diluted income (loss)
per unit $ (1.15) $ 0.82 $ 0.84 $ 1.72
----------------------------------------------------
----------------------------------------------------
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 September 30, 2010
Gas and electricity Home
marketing Ethanol services
-------------------------------------------
United
Canada States Canada Canada Consolidated
--------------------------------------------------------
Sales gas $ 77,729 $ 56,132 $ - $ - $ 133,861
Sales electricity 165,579 322,075 - - 487,654
Ethanol - - 31,191 - 31,191
Home services - - - 5,172 5,172
----------------------------------------------------------------------------
Sales 243,308 378,207 31,191 5,172 657,878
----------------------------------------------------------------------------
Gross margin 30,839 57,631 4,573 3,786 96,829
Amortization of
property, plant and
equipment (1,207) (316) (297) (72) (1,892)
Amortization of
intangible assets (11,325) (20,534) - (396) (32,255)
Other operating
expenses (28,333) (35,294) (2,920) (4,182) (70,729)
----------------------------------------------------------------------------
Income (loss) before
the undernoted (10,026) 1,487 1,356 (864) (8,047)
Interest expense 8,771 133 1,902 1,490 12,296
Change in fair value
of derivative
instruments 70,061 111,193 - - 181,254
Other income (501) (679) (35) 294 (921)
Non-controlling
interest - - 334 - 334
Provision (recovery)
for income tax (42,011) (3,134) - (1,385) (46,530)
----------------------------------------------------------------------------
Net income (loss) $ (46,346) $(106,026) $ (845) $ (1,263) $ (154,480)
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Additions to
property, plant and
equipment $ 806 $ 762 $ 65 $ 9,152 $ 10,785
----------------------------------------------------------------------------
For the three months ended September 30, 2009
Gas and electricity Home
marketing Ethanol services
-------------------------------------------
United
Canada States Canada Canada Consolidated
--------------------------------------------------------
Sales gas $ 91,635 $ 37,724 $ - $ - $ 129,359
Sales electricity 174,457 111,920 - - 286,377
Ethanol - 16,449 - 16,449
Home services - - 2,474 2,474
----------------------------------------------------------------------------
Sales 266,092 149,644 16,449 2,474 434,659
----------------------------------------------------------------------------
Gross margin 38,237 39,079 1,866 2,315 81,496
Amortization of
property, plant and
equipment (1,232) (53) (621) (621) (2,527)
Amortization of
intangible assets (11,892) (8,191) - (404) (20,487)
Other operating
expenses (42,283) (8,236) (3,819) (3,283) (57,621)
----------------------------------------------------------------------------
Income (loss) before
the undernoted (17,170) 22,599 (2,574) (1,993) 861
Interest expense 2,689 414 1,843 - 4,946
Change in fair value
of derivative
instruments (67,752) (70,763) - - (138,515)
Other income (9,191) 8,602 31 - (558)
Non-controlling
interest - - (1,488) - (1,488)
Provision for income
tax 8,934 17,309 - (457) 25,786
----------------------------------------------------------------------------
Net income (loss) $ 48,150 $ $67,037 $ (2,960) $ (1,536) $ 110,690
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Additions to
property, plant and
equipment $ 1,249 $ 34 $ 100 $ 11,094 $ 12,477
----------------------------------------------------------------------------
For the six months ended September 30, 2010
Gas and electricity Home
marketing Ethanol services
-------------------------------------------
United
Canada States Canada Canada Consolidated
--------------------------------------------------------
Sales gas $ 207,575 $ 129,180 $ - $ - $ 336,755
Sales electricity 326,208 546,989 - - 873,197
Ethanol - - 47,997 - 47,997
Home services - - - 9,613 9,613
----------------------------------------------------------------------------
Sales 533,783 676,169 47,997 9,613 1,267,562
----------------------------------------------------------------------------
Gross margin 69,096 99,685 1,927 6,618 177,326
Amortization of
property, plant and
equipment (2,553) (526) (593) (140) (3,812)
Amortization of
intangible assets (22,661) (35,971) - (795) (59,427)
Other operating
expenses (58,991) (64,205) (5,254) (8,266) (136,716)
----------------------------------------------------------------------------
Income (loss) before
the undernoted (15,109) (1,017) (3,920) (2,583) (22,629)
Interest expense 15,087 249 3,609 2,831 21,776
Change in fair value
of derivative
instruments (164,179) 31,057 - - (133,122)
Other income (3,136) 180 (41) 294 (2,703)
Non-controlling
interest - - (2,239) - (2,239)
Provision (recovery)
for income tax (27,603) 1,818 - (1,385) (27,170)
----------------------------------------------------------------------------
Net income (loss) $ 164,722 $ (34,321) $ (5,249) $ (4,323) $ 120,829
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Additions to
property, plant and
equipment $ 1,257 $ 1,650 $ 179 $ 17,306 $ 20,392
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Total goodwill $ 160,535 $ 62,811 $ - $ - $ 223,346
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Total assets $ 753,486 $ 807,541 $163,915 $ 109,108 $ 1,834,050
----------------------------------------------------------------------------
For the six months ended September 30, 2009
Gas and electricity Home
marketing Ethanol services
-------------------------------------------
United
Canada States Canada Canada Consolidated
--------------------------------------------------------
Sales gas $ 241,333 $ 88,158 $ - $ - $ 329,491
Sales electricity 297,948 187,307 - - 485,255
Ethanol - - 16,449 - 16,449
Home services - 2,474 2,474
----------------------------------------------------------------------------
Sales 539,281 275,465 16,449 2,474 833,669
----------------------------------------------------------------------------
Gross margin 80,590 62,800 1,866 2,315 147,571
(2,358) (121) (621) (621) (3,721)
Amortization of
intangible assets (12,175) (8,502) - (404) (21,081)
Other operating
expenses (64,328) (25,759) (3,819) (3,283) (97,189)
----------------------------------------------------------------------------
Income before the
undernoted 1,729 28,418 (2,574) (1,993) 25,580
Interest expense 3,105 478 1,843 - 5,426
Change in fair value
of derivative
instruments (76,027) (150,368) - - (226,395)
Other income (9,936) 8,591 31 - (1,314)
Non-controlling
interest - - (1,488) (55) (1,543)
Provision for income
tax 9,221 27,325 - (457) 36,089
----------------------------------------------------------------------------
Net income (loss) $ 75,366 $ 142,392 $ (2,960) $ (1,481) $ 213,317
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Additions to
property, plant and
equipment $ 4,498 $ 133 $ 100 $ 15,152 $ 19,883
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Total goodwill $ 135,745 $ 33,552 $ - $ 2,697 $ 171,994
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Total assets $ 799,323 $ 368,269 $159,790 $ 50,679 $ 1,378,061
----------------------------------------------------------------------------
----------------------------------------------------------------------------
14. COMMITMENTS
Commitments for each of the next five years and thereafter are as follows:
Long-term gas
and
Master electricity
Premises and Grain Services contracts with
equipment production agreement with various
leasing contracts EPCOR suppliers
2011 $ 4,664 $ 26,952 $ 5,184 $ 942,984
2012 7,523 19,631 6,912 1,338,287
2013 6,204 1,703 - 808,974
2014 4,662 396 - 411,118
2015 2,915 - - 146,028
Thereafter 6,649 - - 19,015
-------------- -------------- -------------- --------------
$ 32,617 $ 48,682 $ 12,096 $ 3,666,406
-------------- -------------- -------------- --------------
-------------- -------------- -------------- --------------
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.
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