Just Energy Income Fund (TSX:JE.UN) -
Highlights for the three months ended June 30, 2010 included:
-- Gross customer additions through marketing of 261,000 and net additions
of 116,000 both the highest in Just Energy history.
-- Acquisition effective May 1, 2010 of Hudson Energy Group, a leading
energy marketer to the U.S. commercial sector with more than 660,000
customers.
-- Just Energy exited the quarter with over 3 million customers, up 70%
from a year earlier.
-- Sales (seasonally adjusted) up 48% year over year reaching $640.0
million.
-- Gross margin (seasonally adjusted) of $88.9 million, up 19% but down 2%
per unit, primarily attributable to reduced gas consumption due to
record warm weather.
-- Significant investments in further expansion - preparation for entry
into Massachusetts and two new utility territories in New York, the
launch of Momentis network marketing in Ontario and New York,
broadening of our newly acquired commercial broker network and the roll-
out of National Home Services into Union Gas territory in Ontario.
-- Record warm weather reduced Distributable cash after gross margin
replacement and Distributable cash by $21.0 million due to margin
effects of lower gas consumption.
-- Distributable cash after gross margin replacement of $33.8
million, down 32% per unit.
-- Distributable cash after all marketing expenses of $24.4
Million, down 44% per unit.
-- Adjusted EBITDA of $31.3 million, up from $30.2 million in fiscal 2010.
Just Energy First Quarter Fiscal 2011 Results
Just Energy Income Fund announced its results for the three months ended June
30, 2010.
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Three months ended
June 30, ($
millions except
per unit and
customers) F2011 Per unit F2010 Per unit
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Sales (1) $640.0 $432.6
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Gross margin (1) 88.9 $0.65 74.8 $0.66
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Distributable cash
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- After margin
replacement 33.8 $0.25 42.2 $0.37
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- After all
marketing expense 24.4 $0.18 36.1 $0.32
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Adjusted EBITDA 31.3 $0.23 30.2 $0.27
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Net income $275.3 $2.01 $102.6 $0.91
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Payout ratio 173% 97%
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Long Term Customers 3,069,000 1,801,000
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(1) Seasonally adjusted (non-GAAP measure)
(2) The per unit amounts are calculated using an adjusted fully
diluted bases 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. On May 1, 2010, Just Energy completed the acquisition of
Hudson Energy, a U.S. based marketer to largely commercial customers in New
York, Illinois, New Jersey and Texas. Hudson specializes in the aggregation of
large commercial customers (hospitals, universities, school boards) through
independent brokers. Neither Just Energy nor Hudson pursue industrial volumes
due to concerns over credit concentration and load volatility.
The first quarter of fiscal 2011 displayed the first impacts of Just Energy's
efforts to diversify its marketing channels as well as the continued impact of
its diversification into new product lines. The purchase of Hudson Energy during
the quarter added not only an established commercial customer base but also a
proven network of independent brokers to the commercial market.
Just Energy had previously only pursued the smaller commercial customers who
could be approached door-to-door such as small retail outlets and had not
utilized the independent broker network as a source of customers. This new and
expanding broker network was a key driver of new customer additions in Q1.
Significant investments were made during the quarter to further expand Just
Energy's geographic footprint and product offerings.
Just Energy achieved record gross customer additions through marketing of
261,000, by far the most ever added in a quarter. This was up 169% from 97,000 a
year earlier and 99% from 131,000 in Q4. In addition, Just Energy added 660,000
new customers from the acquisition of Hudson Energy in May. Higher gross
customer additions led to record net customer additions through marketing of
116,000, up from 11,000 a year earlier and 13,000 in Q4.
The following table highlights the impact of marketing channel diversification
in the first quarter compared to the prior two years.
To view the Quarterly Customer Addition table, please visit the following link:
http://media3.marketwire.com/docs/627040QCA.jpg
Overall, the customer base topped 3 million for the first time at quarter end.
The table below shows the source of this 70% growth from a year ago.
Beginning Acquired Failed Ending Ending
April 1, with To June 30, June 30,
RCEs 2010 Additions Hudson Attrition Renew 2010 2009
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Natural
Gas
Canada 734,000 12,000 - (21,000) (16,000) 709,000 727,000
United
States 408,000 108,000 81,000 (32,000) (1,000) 564,000 238,000
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Total
gas 1,142,000 120,000 81,000 (53,000) (17,000) 1,273,000 965,000
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Elec-
tri-
city
Canada 760,000 26,000 - (18,000) (11,000) 757,000 574,000
United
States 391,000 115,000 579,000 (33,000) (13,000) 1,039,000 262,000
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Total
elec-
tri-
ity 1,151,000 141,000 579,000 (51,000) (24,000) 1,796,000 836,000
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Com-
bined 2,293,000 261,000 660,000 (104,000) (41,000) 3,069,000 1,801,000
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Customer attrition was slightly above target at 11% and 13% for Canadian gas and
electricity versus targets of 10%. U.S. attrition improved to 28% for gas versus
a target of 30% and 14% for electricity versus a target of 20%. Improvements in
U.S. attrition rates are further evidence of stabilization of the U.S. economy.
Customer renewals were 62% for Canadian gas, lower than the target of 70%. Low
spot gas prices resulted in very high five year premiums to the Utility price
during the quarter leading to "sticker shock" for customers on renewal.
Management's expectation is that higher commodity prices should bring renewals
in line with targets and past experience. Electricity renewals were on target at
70% in Canada. U.S. renewals were 69% for gas (on a very low number of renewals)
and 83% for electricity, both against 75% targets.
The 48% increase in sales was due to a 55% increase in average number of
customers with normal revenue per customer in electricity but lower than normal
gas revenue due to record warm weather conditions resulting in sharply lower gas
consumption.
Gross margin was up 19% but down both on a per unit and a per customer basis.
The increase reflects a higher number of customers and continued strong take-up
of JustGreen offerings offset by the warm weather impact on gas consumption.
Overall, electricity margins increased in line with the increase in average
number of customers.
------------------------------------------------------------------------
% Increase
in
Seasonally % Increase average
Adjusted Q1 2011 Q1 2010 (Decrease) customers
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Natural gas margins $25,851 $42,102 (39)% 24%
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Electricity margins 62,766 32,667 92% 90%
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Total margins $88,617 $74,769 19% 55%
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The table below shows realized margin per RCE for each product:
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Realized Margin per RCE Q1 2011 Q1 2010 Change
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Canadian gas $137 $195 (30)%
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Canadian electricity $142 $141 1%
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U.S. gas $82 $274 (70)%
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U.S. electricity $144 $176 (18)%
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This table and the one that follows highlight the extent of the adverse impact
of warm weather reflected in the lower gas consumption in the quarter. While
consumption per customer was down more than 30%, the margin impact was greater
because not only was margin lost on the related expected sales, but the excess
gas resulting from lower consumption was sold at a loss due to very low spot
prices. U.S gas and electricity also saw a decrease in realized average margin
as a large number of lower margin customers purchased with Hudson Energy in May
were included. Because Hudson is only included for two months of the quarter,
investors should look to future quarters for the true impact of Hudson on
margins and results.
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Heating Degree Days Heating Degree Days Heating Degree Days
- Q1 F2011 - Q1 F2010 - 30 yr avg.
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Toronto 672 971 (31)% 990 (32)%
New York 347 511 (32)% 547 (37)%
Chicago 475 701 (32)% 649 (27)%
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JustGreen
Continued strong take-up of the JustGreen energy offering was an offset to
otherwise weaker margins in the quarter. 49% of new customers took JustGreen for
an average of 89% of their consumption. The result was a continuation of
improvement in new residential customer margins to $246 per customer per year up
37% from $179 for Q1 a year earlier and up from $208 per new customer for all of
fiscal 2010. Currently, JustGreen customers make up 6% of the electricity
portfolio and 3% of the gas portfolio.
Hudson Energy Commercial Customer Aggregation
Commercial customers aggregated largely through a broker network, a market
segment not previously pursued by Just Energy, made up 174,000 of the 261,000
customer additions for the quarter. While these customers generate lower margin
per RCE ($67/year for Q1 additions), their cost acquisition is also
commensurately lower and, combined with lower attrition and lower ongoing
servicing cost, the lifetime net value of an RCE is very similar to that of a
Just Energy residential customer.
During the quarter, investments were made to expand this successful broker
network into five provinces and seven states in which Hudson had not previously
operated. In Ontario, more than 40 brokers have already enrolled in the network.
Energy Marketing Imbedded Gross Margin
A measure of the increase in value of the Just Energy gas and electricity
customer base is the future gross margin inherent in the matched contracts.
Continued growth of this measure as margin is realized quarter after quarter is
evidence of the success of marketing efforts.
Management's estimate of the future embedded gross margin is as follows:
June 30, 2010 June 30, 2009 Increase
------------- ------------- --------
Canada (Cdn$) $ 757.5 million $675.8 million 12 %
United States (US$) 698.5 million 284.7 million 145%
Total (Cdn$) $1,501.1 million $1,003.2 million 50 %
National Home Services
NHS provides Ontario residential customers long-term water heater rental
programs offering conventional tanks, power vented tanks and tankless water
heaters in a variety of sizes, in addition to the recently added offering of
furnaces and air conditioners. NHS continues to ramp up its operations and, as
at June 30, 2010, had a cumulative installed base of 87,400 water heaters, 500
furnaces and 100 air conditioners in Ontario residences. NHS earns revenue from
its installed base.
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. Accordingly, it
entered into a long term financing agreement with Home Trust Capital for the
funding of the water heaters. The initial funding received up to June 30, 2010
was $70.9 million.
Management's strategy for NHS is to self-fund the business through its growth
phase, building value within the customer base. This way, neither NHS will
require cash from Just Energy's core operations nor is Just Energy relying on
NHS cash flow to fund distributions. General and administrative cost investments
were made during the quarter to expand into the Union Gas territory of Ontario,
giving NHS reach into the entire province. Management believes that considerable
value has already been built inside NHS despite the absence of current cash
flow. Longer term, NHS is expected to be a significant and growing revenue and
profit source for Just Energy.
Ethanol Production
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 ability to pay distributions. Terra Grain Fuels' plant has recently
reached levels of production approaching the "name plate" capacity of the
facility. Maintenance of that level of production and continued sustainment of
improved ethanol prices should lead to positive cash flow from operations from
this division in the future.
Distributable Cash
Distributable cash was lower on both a gross and per unit basis in Q1 F2011
versus the comparable quarter in F2010. The major factor in this decline was the
loss of natural gas margin due to record warm weather in the quarter.
There were a number of other factors which contributed to lower distributable cash:
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Distributable cash $22.3 million Was $36.1 million in F2010
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Operation is non-recourse and
must fund its own operations and
TGF (not in place in F2010) (3.6) million debt service
----------------------------------------------------------------------------
While still in start-up phase,
management believes that
substantial long term value has
NHS (not in place in F2010) (2.2) million been created within contracts
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Weather Impact on Gas
Margins (21.0) million As described above
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Reduced reported margin net of
US$ decline against Cdn$ (2.3) million savings on US$ denominated costs
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$(29.1) million
General and administrative costs were $29.3 million for the quarter up from
$15.6 million a year earlier. Major contributors to this rise were the
acquisitions of Universal and Hudson with their general and administrative
overhead. As well, the ramp up of NHS and the full operation of Terra Grain
Fuels resulted in $5.2 million in new costs. The Energy Marketing portion of the
quarterly general and administrative costs was flat versus fiscal 2010 at $8.70
per customer. This included investments necessary for the expansion into
Massachusetts, two new utility territories in New York and the launch of
Momentis.
Bad debt expense was up commensurate with the growth in revenue in those markets
where Just Energy bears credit risk. Overall, the expense was 2.8% of revenue,
within the target range of 2.0% to 3.0% and equal to that noted in Q4 of fiscal
2010. This was much improved from the 3.5% level seen in the first half of
fiscal 2010 and reflects stabilized economic conditions in those markets.
Marketing costs were up reflecting much higher customer additions and
significantly lower per customer aggregation costs due to the large number of
lower cost commercial additions. The marketing success of the commercial
division resulted in record gross customer additions of 261,000 up from 97,000
in Q1 of fiscal 2010. This meant that the fixed portion of the quarterly
marketing costs was spread across far more additions. Including an estimate for
the lifetime commission cost for commercial customers, the average aggregation
cost per customer was $148 down 16% from the $178 average in fiscal 2010.
Adjusted EBITDA was up slightly at $31.3 from $30.2 million a year prior.
Adjusted EBITDA is up while distributable cash is down largely because of heavy
marketing expenditure to increase future margins and the elimination of higher
taxes year over year in the EBITDA measure.
Distributions were $0.31 per unit equal to those of the prior year. Payout ratio
was high at 173% in what is seasonally the slowest quarter worsened by the
impact of warm weather on gas consumption. In past years, the payout ratio on
normal distributions has been below 100% and management's expectation is that it
will again be below 100% in fiscal 2011.
In regards to the first quarter, CEO Ken Hartwick noted: "Management at Just
Energy has been focused on the diversification of both its marketing channels
and its product offerings. Our efforts at geographic diversification over the
past five years have been a success with our very profitable U.S. business now
larger than our longstanding Canadian customer base. We have continued to
diversify and the impact of our expanded product offering to large commercial
customers through the new channel of independent brokers, has resulted in record
customer additions for the quarter."
"The quarter also saw significant investments to further expand our business in
the future. We prepared ourselves to enter Massachusetts and two new utility
territories in New York. We have further diversified our marketing through the
launch of our new Momentis network marketing arm as well as continued product
diversifications like NHS and JustGreen. These will all be positive contributors
to our results in future quarters."
"One thing we cannot do is control the weather. The worst scenario for our
financial performance is a very warm winter and the first quarter was the end of
the warmest winter on record in our markets. As demonstrated in our results,
Just Energy is still profitable despite this. With record customer additions at
higher margins per customer led by the sale of JustGreen commodity, our future
profitability looks very solid. As bad as the winter was, early results indicate
that very strong summer electricity loads will offset some of the adverse margin
effects in the first quarter. In the future, increasing our commercial volumes
(which are less weather sensitive, with lower attrition) and new products like
NHS will reduce our relative exposure to weather."
Mr. Hartwick added: "The acquisition of Hudson Energy is a key step for our
company. The 660,000 customers are largely commercial and, while lower margin
than Just Energy residential customers, they have a lifetime return which is
very similar per RCE due to lower customer maintenance cost and lower attrition.
The broker network which generates these customers is growing and we are
currently adding brokers across Canada and in several new states. While the
second quarter will see lower aggregation on the commercial side, since key
customer decision makers are unavailable in the summer months, we are optimistic
that the record customer additions similar to that achieved in our first quarter
can be replicated in the future."
Chair Rebecca MacDonald added: "We are pleased with these results as we head
toward the conversion of Just Energy from a trust to a corporation. The
resurgence of our growth led by the building and acquisition of a new commercial
customer pipeline is a key step for Just Energy. This will allow us to grow even
more quickly as new jurisdictions open to us. With the warm winter behind us, we
look forward to more normal weather and the type of growth and profitability
Just Energy is known for."
"Our growth in the past nine years from 217,000 customers to over 3 million has
been both challenging and exciting. Our growth in coming years to 5 million and
beyond should be equally so. Your management team is the strongest it has ever
been and we are well prepared for 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 and
price-protected contracts. By fixing the price of natural gas or electricity
under its fixed-price or price-protected program contracts for a period of up to
five years, Just Energy's customers offset their exposure to changes in the
price of these essential commodities. Just Energy, which commenced business in
1997, derives its margin or gross profit from the difference between the fixed
price at which it is able to sell the commodities to its customers and the fixed
price at which it purchases the associated volumes from its suppliers.
The Fund also offers "green" products through its 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. NHS began offering the rental of air
conditioners and furnaces to Ontario residents in the fourth quarter of fiscal
2010. Through its subsidiary Terra Grain Fuels, the Fund produces and sells
wheat-based ethanol.
Non GAAP Measures
Adjusted EBITDA represents earnings before interest, taxes, depreciation and
amortization 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. Just Energy ensures that customer margins are
protected by entering into fixed-price supply contracts. In accordance with
GAAP, the customer margins are not marked-to-market but there is a requirement
to mark-to-market the future supply contracts. This creates unrealized gains
(losses) depending upon current supply pricing volatility. Management believes
that these short-term mark-to-market non-cash gains (losses) do not impact the
long-term financial performance of the Fund. In addition, the Adjusted EBITDA
calculation only deducts marketing costs sufficient to maintain existing levels
of gross margin and maintenance capital expenditures necessary to sustain
existing operations. This highlights the marketing and capital expenditures Just
Energy makes 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, distributable cash
and treatment under governmental regulatory regimes. These statements are based
on current expectations that involve a number of risks and uncertainties which
could cause actual results to differ from those anticipated. These risks
include, but are not limited to, levels of customer natural gas and electricity
consumption, rates of customer additions and renewals, rates of customer
attrition, fluctuations in natural gas and electricity prices, changes in
regulatory regimes and decisions by regulatory authorities, competition and
dependence on certain suppliers. Additional information on these and other
factors that could affect the Fund's operations, financial results or
distribution levels are included in the Fund's annual information form and other
reports on file with Canadian securities regulatory authorities which can be
accessed through the SEDAR website at www.sedar.com or through the Fund's
website at www.justenergy.com.
MANAGEMENT'S DISCUSSION AND ANALYSIS ("MD&A") - August 11, 2010
Overview
The following discussion and analysis is a review of the financial condition and
results of operations of Just Energy Income Fund ("Just Energy" or the "Fund")
for the three months ended June 30, 2010 and has been prepared with all
information available up to and including August 11, 2010. This analysis should
be read in conjunction with the unaudited interim consolidated financial
statements for the three months ended June 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. ("JEIC"), 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
Corp. ("UEC"), Universal Gas and Electric Corp. ("UG&E"), Commerce Energy, Inc.
("Commerce" or "CEI"), National Energy Corp. ("NEC") operating under the trade
name of National Home Services ("NHS"), Hudson Energy Services LLC ("HES" or
"Hudson"), Momentis Canada Corp. and Momentis U.S. Corp. (collectively,
"Momentis") and Terra Grain Fuels Inc. ("TGF"), collectively, the "Just Energy
Group".
Just Energy's primary business involves the sale of natural gas and/or
electricity to residential and commercial customers under long-term fixed-price
and price-protected contracts. By fixing the price of natural gas or electricity
under its fixed-price or price-protected program contracts for a period of up to
five years, Just Energy's customers offset their exposure to changes in the
price of these essential commodities. Just Energy, which commenced business in
1997, derives its margin or gross profit from the difference between the fixed
price at which it is able to sell the commodities to its customers and the fixed
price at which it purchases the associated volumes from its suppliers. In
addition, through NHS, the Fund sells and rents high efficiency and tankless
water heaters and other HVAC products. TGF, an ethanol producer, operates a
wheat-based ethanol facility in Belle Plaine, Saskatchewan. Just Energy also
indirectly acquired Hudson, effective May 1, 2010 a marketer of natural gas and
electricity primarily to commercial customers in New York, New Jersey, Illinois
and Texas and results are included for two months of its operations.
The Fund also offers green products through its JustGreen program, formerly
known as the Green Energy Option or "GEO". 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 for their home or
business. Management believes that these new products will not only add to
profits, but also increase sales receptivity and improve renewal rates.
Forward-looking information
This MD&A contains certain forward-looking information pertaining to customer
additions and renewals, customer consumption levels, distributable cash and
treatment under governmental regulatory regimes. These statements are based on
current expectations that involve a number of risks and uncertainties which
could cause actual results to differ from those anticipated. These risks
include, but are not limited to, levels of customer natural gas and electricity
consumption, 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.
"Delivered volume" represents the actual volume of gas or electricity provided
on behalf of customers to the LDCs for the period.
"Failed to renew" means customers who did not renew expiring contracts at the
end of their term.
"Gross margin per RCE" represents the gross margin realized on Just Energy's
customer base, including both low margin customers acquired through various
acquisitions and gains/losses from the sale of excess commodity supply.
"LDC" means a local distribution company, the natural gas or electricity
distributor for a regulatory or governmentally defined geographic area.
"RCE" means residential customer equivalent or the "customer", which is a unit
of measurement equivalent to a customer using, as regards natural gas, 2,815 m3
(or 106 GJs or 1,000 Therms or 1,025 CCFs) of natural gas on an annual basis
and, as regards electricity, 10 MWh (or 10,000 kWh) of electricity on an annual
basis, which represents the approximate amount of gas and electricity,
respectively, used by a typical household in Ontario.
"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 UEG on July 1, 2009. See Long
term-debt and financing on page 22 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 on page 25 for further details.
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 7.
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 highlights the marketing and capital
expenditures Just Energy had made to add to its productive capacity in the
future. 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. However, 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 therefore has 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.
"Standardized Distributable Cash" 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 10.
Financial highlights
For the three months ended June 30
(thousands of dollars except where indicated and per unit amounts)
Fiscal 2011 Fiscal 2010
Per Per unit Per
$ unit(5) Change $ unit(5)
Sales 609,684 $4.44 26% 399,010 $3.53
Net income(1) 275,309 $2.01 121% 102,627 $0.91
Adjusted EBITDA 2 31,282 $0.23 (15)% 30,182 $0.27
Gross margin (seasonally
adjusted) (3) 88,933 $0.65 (2)% 74,769 $0.66
Distributable cash
- After gross margin
replacement 33,783 $0.25 (32)% 42,219 $0.37
- After marketing expense 24,402 $0.18 (44)% 36,087 $0.32
Distributions 42,277 $0.31 - 35,014 $0.31
General and administrative 29,272 $0.21 50% 15,617 $0.14
Distributable cash payout
ratio(4)
- After gross margin
replacement 125% 83%
- After marketing expense 173% 97%
(1) Net income includes the impact of unrealized gains (losses) which
represent the mark to market of future commodity supply acquired to
cover future customer demand. The supply has been sold to customers
at fixed prices minimizing any impact of quarter end mark to market
gains and losses.
(2) 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 Adjusted EBITDA on page 2 for more information.
(3) See discussion of non-GAAP financial measures on page 2.
(4) Management targets an annual payout ratio after all marketing
expenses, excluding any Special Distribution, of less than 100%.
(5) The per unit 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.
Reconciliation of Net Income to Adjusted EBITDA
For the three months ended June 30
(thousands of dollars)
Fiscal 2011 Fiscal 2010
----------- -----------
Net income $275,309 $102,627
Add:
Interest 9,480 480
Tax expense (recovery) 19,360 10,303
Capital tax 133 80
Amortization 33,448 1,788
----------- ------------
EBITDA 337,730 115,278
Add:
Change in fair value of
derivative instruments (314,376) (87,880)
Marketing expenses to add gross margin 9,381 6,132
Less:
Maintenance capital expenditures (1,453) (3,348)
----------- ------------
Adjusted EBITDA 31,282 30,182
----------- ------------
Acquisition of Hudson Energy Services
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. It is important to note that this quarter
reflects only two months of operating results from Hudson and that the full
effect will not be seen until future quarters.
The acquisition of Hudson was accounted for using the purchase method of
accounting. The Fund allocated the purchase price to the identified assets and
liabilities acquired based on their fair values at the time of acquisition as
follows (thousands of dollars):
Net assets acquired:
Current assets (including cash of $24,003) $ 88,696
Current liabilities (107,817)
Electricity contracts and customer relationships 200,653
Gas contracts and customer relationships 26,225
Contract initiation costs 20,288
Broker network 84,400
Brand 11,200
Information technology system development 17,954
Other intangible assets 6,545
Goodwill 30,946
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)
------------
$ 286,419
------------
------------
Consideration:
Purchase price $ 285,343
Transaction costs 1,076
------------
$ 286,419
------------
------------
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 and 35 months,
respectively. Other intangible assets, excluding Brand, are amortized over
periods of three to five years. The Brand value is considered to be indefinite
and therefore, not subject to amortization. The purchase price allocation is
considered preliminary and as a result may be adjusted during the 12-month
period following the acquisition.
Acquisition of Universal Energy Group Ltd.
On July 1, 2009, Just Energy completed the acquisition of all of the outstanding
common shares of Universal Energy Group Ltd. ("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 Debentures,
holders will be entitled to receive 0.58 of an Exchangeable Share in lieu of
each Universal common share that the holder was previously entitled to receive
on conversion.
The acquisition of Universal was accounted for using the purchase method of
accounting. The Fund allocated the purchase price to the identified assets and
liabilities acquired based on their fair values at the time of acquisition as
follows (thousands of dollars):
Net assets acquired:
Working capital (including cash of $10,319) $ 63,614
Electricity contracts and customer relationships 229,586
Gas contracts and customer relationships 243,346
Water heater contracts and customer
relationships 22,700
Other intangible assets 2,721
Goodwill 77,494
Property, plant and equipment 171,693
Future tax liabilities (50,475)
Other liabilities - current (164,148)
Other liabilities - long-term (140,857)
Long-term debt (183,079)
Non-controlling interest (22,697)
------------
$ 249,898
------------
------------
Consideration:
Transaction costs $ 9,952
Exchangeable shares 239,946
------------
$ 249,898
------------
------------
All contracts, customer relationships and intangible assets are amortized over
the average remaining life at the time of acquisition. The gas and electricity
contracts, 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. 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.
Operations
Gas
In each of the markets that Just Energy operates, it is required to deliver gas
to the LDCs for its customers throughout the year. Gas customers are charged a
fixed price for the full term of their contract. Just Energy purchases gas
supply in advance of marketing for residential customers and generally
concurrently with the execution of a contract for 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 utility requirements to deliver fixed amounts for
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 on to the customer.
Ontario, Quebec, British Columbia and Michigan
In Ontario, Quebec, British Columbia and Michigan, the volumes delivered for a
customer typically remain constant throughout the year. Just Energy does not
recognize sales until the customer actually consumes the gas. During the winter
months, gas is consumed at a rate which is greater than delivery and in the
summer months, deliveries to LDCs exceed customer consumption. Just Energy
receives cash from the LDCs as the gas is delivered, which is even throughout
the year.
Manitoba and Alberta
In Manitoba and Alberta, the volume of gas delivered is based on the estimated
consumption for each month. Therefore, the amount of gas delivered in winter
months is higher than in the spring and summer months. Consequently, cash
received from customers and LDCs will be higher in the winter months.
New York, Illinois, Indiana, Ohio and California
In New York, Illinois, Indiana, Ohio and California, the volume of gas delivered
is based on the estimated consumption and storage requirements for each month.
Therefore, the amount of gas delivered in winter months is higher than in the
spring and summer months. Consequently, cash flow received from these states is
greatest during the third and fourth (winter) quarters, as normally, cash is
received from the LDCs in the same period as customer consumption.
Electricity
Ontario, Alberta, New York, Texas, 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 program 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.
Home Services division
NEC began operations in April 2008 and operates under the trade name of National
Home Services. Newten Home Comfort L.P. ("NHCLP") a partnership between Just
Energy and Newten Home Comfort Inc.,( an arm's length third party holding 20% of
the partnership), commenced providing Ontario residential customers with a long
term water heater rental program in the summer of 2008, offering high efficiency
conventional and power vented tanks and tankless water heaters. On July 2, 2009,
NEC, a wholly owned home services subsidiary of UEG, acquired Newten Home
Comfort Inc. Accordingly, NHCLP became a wholly owned subsidiary of Just Energy.
On September 30, 2009, NEC acquired substantially all of the assets of NHCLP,
including all of NHCLP's customer water heater rental agreements. NHCLP and
Newten Home Comfort Inc. were subsequently wound up. NEC began offering the
rental of air conditioners and furnaces to Ontario residents in the fourth
quarter of fiscal 2010. See page 18 for additional information on NEC.
Ethanol division
Just Energy also owns a 66.7% interest in TGF, a 150-million-litre capacity
wheat-based ethanol plant located in Belle Plaine, Saskatchewan. The plant
produces wheat-based ethanol and high protein distillers dried grain ("DDG").
See page 19 for additional information on TGF.
Cash Available for Distribution and distributions
For the three months ended June 30
(thousands of dollars except per unit amounts)
Fiscal 2011 Fiscal 2010
----------- -----------
Per unit Per unit
-------- --------
Reconciliation to statements of
cash flow
Cash inflow from operations $25,727 $37,795
Add:
Decrease in non-cash working
capital (3,648) (2,246)
Other 1,785 -
Tax impact on distributions to
Class A preference shareholders 538 538
---------- ----------
Cash available for distribution $24,402 $36,087
---------- ----------
---------- ----------
Cash available for distribution
Gross margin per financial
statements $80,497 $0.59 $66,075 $0.59
Adjustments required to
reflect net cash receipts
from gas sales 8,436 8,694
---------- ----------
Seasonally adjusted gross margin $88,933 $0.65 $74,769 $0.66
---------- ----------
Less:
General and administrative (29,272) (15,617)
Capital tax expense (133) (80)
Bad debt expense (5,749) (3,829)
Income tax recovery 1,002 40
Interest expense (9,480) (480)
Other items 6,771 669
---------- ----------
(36,861) (19,297)
---------- ----------
Distributable cash before
marketing expenses 52,072 $0.38 55,472 $0.49
Marketing expenses to maintain
gross margin (18,289) (13,253)
---------- ----------
Distributable cash after gross
margin replacement 33,783 $0.25 42,219 $0.37
Marketing expenses to add new
gross margin (9,381) (6,132)
---------- ----------
Cash available for distribution $24,402 $0.18 $36,087 $0.32
---------- ----------
---------- ----------
Distributions
Unitholder distributions $39,644 $32,935
Class A preference share
distributions 1,631 1,631
Unit appreciation rights and
deferred unit grants
distributions 1,002 448
---------- ----------
Total distributions $42,277 $0.31 $35,014 $0.31
---------- ----------
---------- ----------
Adjusted fully diluted average
number of units outstanding(1) 137.2m 112.9m
(1) The per unit amounts are calculated on an adjusted fully diluted
basis for fiscal 2011 removing the JEEC and JEIF convertible
debentures impact 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 first quarter of fiscal 2011 was a period of rapid expansion for Just
Energy. This expansion took place through the acquisition of Hudson, which
diversified Just Energy's product line to include specialized offerings for
large commercial customers, the expansion of Hudson's proven broker network to
seven new states and five new provinces, the launch of the Momentis network
marketing division in Ontario and New York as well as spending in anticipation
of entry into Massachusetts and two new utility territories in New York. In
addition, National Home Services committed expenditures to facilitate its
expansion into Union Gas territory in Ontario and its roll-out of furnace and
air conditioner offerings.
This expansion had two impacts on the quarter. First, general and administrative
costs increased to absorb the costs of this expansion. Secondly, quarterly
customer additions reached the highest levels seen in the history of Just
Energy. The majority of these additions were large commercial customers, a
market segment not previously pursued. As with past expansions, management
believes that the acquisition of Hudson and these expenditures will build a more
diversified and profitable base for Just Energy's future.
Distributable cash after gross margin replacement for the current quarter ended
June 30, 2010 was $33.8 million ($0.25 per unit), down 20% from $42.2 million
($0.37 per unit) in fiscal 2010. While margin was up 19% it was down on a per
unit basis. Margin from the natural gas business was significantly reduced due
to lower per customer consumption due to record warm temperatures across Just
Energy's key markets.
The higher gross margins in the year were offset by increased general and
administrative costs largely due to the expansions noted above, interest charges
and higher bad debt expenses. Increased general and administrative costs of 87%,
over the prior year comparable quarter, were noted, of which $8.3 million (61%)
related to incremental Universal, Hudson and Momentis costs not incurred last
year. The remaining increase was to accommodate the numerous areas of expansion
noted above. Interest costs relate primarily to the JEEC and JEIF convertible
debentures which relate to the Hudson and Universal acquisitions, funding for
water heater purchases and debt associated with TGF. Bad debt expense increased
in the first quarter of fiscal 2011 compared to 2010, due to the increased 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 flat within the target range at 2.8% equal to that of the
prior quarter.
Just Energy spent $18.3 million in marketing expenses for the quarter to
maintain its current level of gross margin, which represents 66% of the total
marketing expense, excluding the amortization of contract initiation costs. A
further $9.4 million was spent to increase future gross margin reflecting the
116,000 net RCE additions through marketing to date for fiscal 2011.
Management's estimate of the future contracted gross margin increased to
$1,501.1 million from $1,204.3 million at March 31, 2010 and $1,003.2 million a
year earlier.
Management's estimate of the future embedded gross margin is as follows:
June 30, 2010 June 30, 2009 Increase
--------------------------------------------------------------------
Canada (Cdn$) $757.5 million $675.8 million 12%
United States (US$) 698.5 million 284.7 million 145%
Total (Cdn$) $1,501.1 million $1,003.2 million 50%
Distributable cash after all marketing expenses amounted to $24.4 million ($0.18
per unit) for the first quarter of fiscal 2011, a decline of 32% from $36.1
million ($0.32 per unit) in the prior year comparable quarter. The decrease is
due to the higher gross margin being more than offset by increased expenditures
noted above. There were higher marketing costs associated with the significant
increase in net customer additions quarter over quarter. The payout ratio after
deduction of all marketing expenses for the current quarter was 173%, versus 97%
in fiscal 2010. 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 13 and "General and
administrative expenses", "Marketing expenses", "Bad debt expense" and "Interest
expense" are further clarified on page 19 and 20.
Discussion of Distributions
For the three months ended June 30
(in thousands of dollars)
Fiscal 2011 Fiscal 2010
------------ -------------
Cash flow from operations(1) (A) $25,727 $37,795
Net income (B) 275,309 102,627
Total distributions (C) 42,277 35,014
Excess (shortfall) of cash flows from operating (16,550) 2,781
activities over distributions paid (A-C)
Excess of net income over distributions paid (B-C) 233,032 67,613
(1)Includes non-cash working capital balances
Net income includes non-cash gains and losses associated with the changes in the
current market value of Just Energy's derivative instruments. These instruments
form part of the Fund's requirement to purchase commodity according to estimated
demand and, as such, changes in value do not impact the distribution policy or
the long-term financial performance of the Fund. The change in fair value
associated with these derivatives included in the net income for the first
quarter of fiscal 2011 was a gain of $314.4 million versus $87.9 million for the
same period last year.
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
For the three months ended June 30
(thousands of dollars except per unit amounts)
Fiscal 2011 Fiscal 2010
------------ ------------
Reconciliation to statements of cash flow
Cash inflow from operations $25,727 $37,795
Capital expenditures(1) (9,607) (7,406)
-------------------------
Standardized Distributable Cash 16,120 30,389
-------------------------
Adjustments to Standardized Distributable Cash
Change in non-cash working capital (2) (3,648) (2,246)
Tax impact on distributions to Class A preference
shareholders(3) 538 538
Other 1,785 -
Capital expenditures(1) 9,607 7,406
-------------------------
Cash available for distribution $24,402 $36,087
-------------------------
Standardized Distributable Cash - per unit basic 0.12 0.27
Standardized Distributable Cash - per unit
diluted 0.11 0.27
Payout Ratio based on Standardized Distributable
Cash 262% 115%
(1) The vast majority of capital expenditures in the first quarter
of fiscal 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 financed 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 holders 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.
In accordance with the CICA July 2007 interpretive release "Standardized
Distributable Cash in Income Trusts and other Flow-Through Entities", the Fund
has presented the distributable cash calculation to conform to this guidance. In
summary, for the purposes of the Fund, Standardized Distributable Cash is
defined as the periodic cash flows from operating activities, including the
effects of changes in non-cash working capital less total capital expenditures
as reported in the GAAP financial statements.
Financing Strategy
The Fund's $250.0 million credit facility will be sufficient to meet the Fund's
short-term working capital and capital expenditure requirements. Working capital
requirements can vary widely due to seasonal fluctuations and planned
U.S.-related growth. In the long-term, the Fund may be required to access the
equity or debt markets in order to fund significant acquisitions. NEC entered
into an agreement with Home Trust Company to separately finance its water
heaters. See page 18 for further discussion on this financing. TGF has a
separate credit facility, debenture and a term loan for their funding
requirements which are detailed on page 23.
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
and price protected 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 would be 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 has
entered into an agreement with Momentis under which their independent
representatives will market natural gas and electricity contracts on behalf of
Just Energy. Momentis is a multi level marketing entity. 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 to maintain productive capacity. The second category is
marketing expenditures to add new margin which therefore expands productive
capacity. The Hudson commercial marketing expenses are primarily 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 Fiscal Fiscal Fiscal
2011 Q1 2010 Q4 2010 Q3 2010 Q2
--------- ------------------- ------------- --------
Sales (seasonally
adjusted) $639,997 $694,788 $654,686 $562,133
Gross margin
(seasonally
adjusted) 88,933 121,872 121,722 107,519
General and
administrative
expense 29,272 22,405 24,767 25,634
Net income (loss) 275,309 (79,211) 97,390 110,690
Net income (loss) per
unit - basic 2.05 (0.59) 0.73 0.83
Net income (loss) per
unit - diluted 1.85 (0.59) 0.73 0.82
Adjusted EBITDA 31,282 108,961 60,563 36,598
Amount available for
distribution
After gross
margin
replacement 33,783 66,023 69,455 52,303
After marketing
expense 24,402 58,359 61,242 41,345
Payout ratio
After gross
margin
replacement 125% 63% 98%(1) 82%
After marketing
expense 173% 71% 111%(1) 104%
Fiscal Fiscal Fiscal Fiscal
2010 Q1 2009 Q4 2009 Q3 2009 Q2
--------- ------------------ ----------- -------
Sales (seasonally
adjusted) $432,565 $589,948 $510,801 $386,158
Gross margin
(seasonally
adjusted) 74,769 106,143 87,554 61,793
General and
administrative
expense 15,617 18,150 14,753 13,236
Net income 102,627 (168,621) (49,094) (923,990)
Net income per unit -
basic 0.92 (1.57) (0.44) (8.33)
Net income per unit -
diluted 0.91 (1.57) (0.44) (8.33)
Adjusted EBITDA 30,182 104,614 60,822 17,024
Amount available for
distribution
After gross
margin
replacement 42,219 72,244 57,475 34,755
After marketing
expense 36,087 62,515 48,162 28,394
Payout ratio
After gross
margin
replacement 83% 48% 93%(1) 100%
After marketing
expense 97% 56% 111%(1) 122%
(1) Includes a one-time Special Distribution of $26.7 million in Q3,
fiscal 2010 and $18.6 million in Q3, 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 first quarter
The 48% increase in seasonally adjusted sales compared to the prior year
comparable quarter is mainly attributable to the sales generated by both
Universal and Hudson customers which were acquired, respectively, on July 1,
2009 and May 1, 2010. Strong net growth in customers added through marketing,
primarily in the U.S., has also increased sales. The customer base has increased
by 34% since the 2010 fiscal year end and 70% from June 30, 2009. Just Energy
now has over three million RCEs.
Gross margin increased by 19% in the first quarter of fiscal 2011 to $88.9
million from $74.8 million in the same period last year. In fiscal 2011, the
customer additions include both Universal and Hudson (two months only) which
were not acquired at this time last year. The increased customer additions and
higher margin per new customer were partially offset by a 12% stronger Canadian
dollar and sharply lower per customer gas consumption due to unusually warm
weather. General and administration costs were $29.3 million for the quarter, an
increase of 87% over $15.6 million reported for the same period last year due to
inclusion costs for Universal and Hudson as well as significant expenditures
targeted at further expansion of Just Energy's business footprint and product
offerings.
The distributable cash after customer gross margin replacement was $33.8
million, down 20% from $42.2 million in the prior comparable quarter. The
increased gross margin was offset by increased general and administration,
interest charges and bad debt expenses versus the prior year comparable quarter.
After the deduction of all marketing expenses, distributable cash totaled $24.4
million, a decrease of 32% from $36.1 million in the first quarter of fiscal
2010. Distributions for the quarter were $42.3 million, an increase of 21% over
the same period last year. The payout ratio after payment of all marketing costs
for the first quarter of fiscal 2011 was 173% versus 97% for the same period
last year. Management anticipates that payout ratio for fiscal 2011 will be less
than 100% (excluding any tax driven Special Distributions) as it has been in
past years.
Sales and gross margin - per financial statements
For the three months ended June 30
(thousands of dollars)
Fiscal 2011 Fiscal 2010
----------- -----------
United United
Sales Canada States Total Canada States Total
-----
Gas $129,715 $73,048 $202,763 $149,697 $50,434 $200,131
Electricity 160,629 224,914 385,543 123,491 75,388 198,879
----------------------------------------------------------------------------
$290,344 $297,962 $588,306 $273,188 $125,822 $399,010
----------------------------------------------------------------------------
Increase 6% 137% 47%
Gross United United
Margin Canada States Total Canada States Total
------
Gas $12,131 $5,284 $17,415 $22,714 $10,694 $33,408
Electricity 25,996 36,770 62,766 19,639 13,028 32,667
----------------------------------------------------------------------------
$38,127 $42,054 $80,181 $42,353 $23,722 $66,075
----------------------------------------------------------------------------
Increase
(decrease) (10)% 77% 21%
Canada
Sales were $290.3 million for the three months ended June 30, 2010, an increase
of 6% from the prior comparable period. Gross margin was $38.1 million for the
first quarter, down 10% from the first quarter of fiscal 2010
United States
Sales and gross margin in the U.S. were $298.0 million and $42.1 million for the
first quarter, an increase of 137% and 77%, respectively, from the same period
last year.
Seasonally Adjusted Analysis
Sales and gross margin - Seasonally adjusted(1)
For the three months ended June 30
(thousands of dollars)
Fiscal 2011 Fiscal 2010
----------- -----------
United United
Sales Canada States Total Canada States Total
-----
Gas $129,715 $73,048 $202,763 $149,697 $50,434 $200,131
Adjust-
ments(1) 30,704 (391) 30,313 33,555 - 33,555
---------------------------------------------------------------------------
$160,419 $72,657 $233,076 $183,252 $50,434 $233,686
Electri-
city 160,629 224,914 385,543 123,491 75,388 198,879
---------------------------------------------------------------------------
$321,048 $297,571 $618,619 $306,743 $125,822 $432,565
---------------------------------------------------------------------------
Increase 5% 137% 43%
Gross United United
Margin Canada States Total Canada States Total
------
Gas $12,131 $5,284 $17,415 $22,714 $10,694 $33,408
Adjust-
ments(1) 8,084 352 8,436 8,694 - 8,694
---------------------------------------------------------------------------
$20,215 $5,636 $25,851 $31,408 $10,694 $42,102
Electri-
city 25,996 36,770 $62,766 19,639 13,028 32,667
---------------------------------------------------------------------------
$46,211 $42,406 $88,617 $51,047 $23,722 $74,769
---------------------------------------------------------------------------
Increase
(decrease) (9)% 79% 19%
(1) For Ontario, Manitoba, Quebec and Michigan gas markets.
On a seasonally adjusted basis, sales increased by 43% in the first quarter of
fiscal 2011 to $618.6 million as compared to $432.6 million in fiscal 2010.
Gross margins were $88.6 million for the three months ended June 30, 2010, up
19% from the prior year comparable quarter.
Canada
Seasonally adjusted sales were $321.0 million for the quarter, up 5% from $306.7
million in fiscal 2010. Seasonally adjusted gross margins were $46.2 million in
the first quarter of fiscal 2011, a decrease of 9% from $51.0 million in the
same period last year.
Gas
Canadian gas sales were $160.4 million, a decrease of 12% from $183.3 million in
the first quarter of fiscal 2010. In the first quarter of fiscal 2011, total
customer delivered volumes were down 37% from the prior comparable quarter due
to extremely warm temperatures across all key gas markets and a 2% decrease in
flowing customers. Gross margin totaled $20.2 million, down 36% from the first
quarter of fiscal 2010 reflecting lower consumption and losses on the sale of
excess gas at much lower spot prices than had been contracted originally.
The table that follows highlights the extent of the adverse impact of warm
weather on gas consumption in the quarter.
--------------------------------------------------------------------------
Heating Degree Days Heating Degree Days Heating Degree Days
- Q1 F2011 - Q1 F2010 - 30 yr avg.
--------------------------------------------------------------------------
Toronto 672 971 (31)% 990 (32)%
New York 347 511 (32)% 547 (37)%
Chicago 475 701 (32)% 649 (27)%
--------------------------------------------------------------------------
After allowance for balancing and inclusive of acquisitions, realized average
gross margin per customer ("GM/RCE") for the three months ended June 30, 2010
amounted to $137/RCE, compared to $195/RCE for the prior comparable quarter.
This was due to the lower consumption and balancing losses. The GM/RCE value
includes an appropriate allowance for the bad debt expense in Alberta.
Electricity
Electricity sales were $160.6 million for the quarter, an increase of 30% from
the first quarter of fiscal 2010. The sales growth is attributable to a 33%
increase in total consumption largely due to the Universal acquired customers.
Gross margin increased by 32% for the current quarter to $26.0 million versus
$19.6 million for the prior year comparable period. Gross margin growth is
consistent with the consumption increases and continued higher margin per
customer due to the growth of the JustGreen program.
Average gross margin per customer after all balancing and including acquisitions
for the quarter ended June 30, 2010 in Canada amounted to $142/RCE, slightly
increased from $141/RCE in the prior year comparable quarter. The GM/RCE value
includes an appropriate allowance for the bad debt expense in Alberta.
United States
Sales for the first three months of fiscal 2011 were $297.6 million, an increase
of 137% from $125.8 million in the prior year comparable quarter. Seasonally
adjusted gross margin was $42.4 million, up 79% from $23.7 million from the same
quarter last year.
Gas
Gas sales and gross margin in the U.S. for the first quarter of fiscal 2011
totaled $72.7 million and $5.6 million, respectively, versus $50.4 million and
$10.7 million in fiscal 2010. Despite an increased number of customers due to
successful marketing and the Hudson acquisition, gross margin declined by 47%
due to a sharp decline in per customer consumption based on record warm weather
noted above and third party losses on the sale of the resultant excess gas as
well as a 12% strengthening of the Canadian dollar exchange rate. Just Energy's
ability to mitigate weather effects is limited by utility requirements to
deliver fixed amounts of gas regardless of weather, particularly in Michigan.
Average realized gross margin after all balancing costs for the three months
ended June 30, 2010 was $82/RCE, a decrease of 70% over the prior year
comparable period of $274/RCE. This is due to sharply lower per customer
consumption, losses on sale of excess gas and the inclusion of lower margin
Hudson customers for two months. The GM/RCE value includes an appropriate
allowance for bad debt expense in Illinois.
Electricity
U.S. electricity seasonally adjusted sales and gross margin for the quarter were
$224.9 million and $36.8 million, respectively, versus the prior comparable
quarter of fiscal 2010 in which sales and gross margin amounted to $75.4 million
and $13.0 million. Sales and margins increased due to a 297% increase in
customers year over year due to the Hudson acquisition and strong marketing
growth. The two months of the Hudson purchase added $111.5 million in sales and
$13.7 million of gross margin to the U.S. electricity results. Total customer
demand increased by 261% which is consistent with the growth in the customer
base.
Average gross margin per customer for electricity during the current quarter
decreased to $144/RCE compared to $176/RCE in the prior year comparable period
as a direct result of unfavourable movements in exchange rates and lower margins
per RCE for the Hudson commercial customers. The GM/RCE value for Texas includes
an appropriate allowance for the bad debt expense.
Customer aggregation
Long-term customers
June %
April 1, Addi- Attri- Failed 30, Increase
2010 tions Acquired tion to renew 2010 (Decrease)
---------------------------------------------------------------------------
Natural
gas
Canada 734,000 12,000 - (21,000) (16,000) 709,000 (3)%
United
States 408,000 108,000 81,000 (32,000) (1,000) 564,000 38%
---------------------------------------------------------------------------
Total
gas 1,142,000 120,000 81,000 (53,000) (17,000) 1,273,000 11%
---------------------------------------------------------------------------
Electri-
city
Canada 760,000 26,000 - (18,000) (11,000) 757,000 -%
United
States 391,000 115,000 579,000 (33,000) (13,000) 1,039,000 166%
---------------------------------------------------------------------------
Total
electri-
city 1,151,000 141,000 579,000 (51,000) (24,000) 1,796,000 56%
---------------------------------------------------------------------------
Combined 2,293,000 261,000 660,000 (104,000) (41,000) 3,069,000 34%
---------------------------------------------------------------------------
As part of the Hudson acquisition Just Energy acquired 660,000 customers with
similar profiles to our existing book of customers. Another 48,000 RCEs acquired
with Hudson are variable and short term in nature and have not been included in
the long-term customer aggregation reported above.
Gross customer additions for the quarter were 921,000 comprised of 660,000
customers acquired with Hudson and 261,000 added through marketing. Of the
customers added through marketing, 174,000 were large commercial customers
showing the immediate positive impact of both Hudson's 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 116,000 (excluding the
660,000 customers acquired with Hudson). For the same quarter last year there
were 11,000 net customer additions through marketing. Overall, there has been a
34% increase in total customers during the quarter and 70% increase over the
past twelve months.
For the three month period ended June 30, 2010, total gas customer numbers
increased by 11% from the fourth quarter of last year reflecting solid growth in
the U.S. and the Hudson acquisition.
Total electricity customers were up 56% as at June 30, 2010 from the fiscal 2010
year end. The Hudson acquisition was responsible for the vast majority of this
growth but solid additions from marketing were made, particularly in Texas.
JustGreen
Sales of the JustGreen products continue to support and reaffirm the strong
demand for the green energy products in all markets. 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 are
expanding into the remaining markets over the coming quarters. Of all customers
who contracted with Just Energy in the quarter, 49% took JustGreen for some or
all of their energy needs. On average, these customers elected to purchase 89%
of their consumption as green supply.
For the first quarter ended June 30, 2010 green supply now makes up 3% of our
overall gas portfolio, up from 1% in the first quarter last year. JustGreen
supply makes up 6% 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 11%, slightly above
management's target of 10%. In the U.S., gas attrition for the trailing 12
months was 28%, below management's annual target of 30%. This reflects a small
improvement in the US and management is optimistic that further improvements
will be seen as the US economy strengthens and should commodity prices continue
to rise.
Electricity
The trailing 12-month electricity attrition rate in Canada for the quarter was
13%, above management's target of 10%. Electricity attrition in the United
States was 14% for the trailing 12 months, below management's target of 20%.
Trailing Twelve-Month Targeted
Attrition F2011 Attrition F2011
Natural gas
Canada 11% 10%
United States 28% 30%
Electricity
Canada 13% 10%
United States 14% 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 62%, 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, 34% 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 70% for the trailing 12
months which is at the targeted level. There has been solid demand for JustGreen
products by renewing Canadian electricity customers.
In the U.S. markets, Just Energy currently has only Illinois, Indiana and New
York gas customers up for renewal. Gas renewals for the U.S. were 69%, below our
target of 75% on a very limited number of renewals. Again, the high spread
between the Just Energy 5 year price and utility floating rate prices has
impacted renewals.
During the quarter Just Energy had both Texas and New York electricity customers
up for renewal. The electricity renewal rate was 83%, better than our target
rate of 75%.
Trailing 12-month Targeted
Renewals F2011 Renewals F2011
Natural gas
Canada 62% 70%
United States 69% 75%
Electricity
Canada 70% 70%
United States 83% 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. -
Fiscal period Canada - gas electricity U.S. - gas electricity
-------------------------------------------------------
Remainder of 2011 22% 16% 12% 6%
2012 23% 23% 17% 9%
2013 21% 26% 27% 10%
2014 15% 16% 13% 25%
2015 14% 12% 22% 38%
Beyond 2015 5% 7% 9% 12%
-------------------------------------------------------
Total 100% 100% 100% 100%
Just Energy continuously monitors its customer renewal rates and continues to
modify its offering to existing customers in order to maximize the number of
customers who renew their contracts.
Gross margin earned through new marketing efforts
Annual gross margin per customer for new and renewed customers
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. Sales of the JustGreen products remained very
strong with approximately 49% of all customers added in the past quarter taking
some or all green energy supply. Those who purchased the JustGreen product elect
to take on average 89% of their consumption. A 100% JustGreen electricity
customer in Ontario generates annual margins of approximately $182, much higher
than the "brown" margins realized. For large commercial customers, the average
gross margin for new customers added was $67 per RCE. These customers equal, by
definition, more than 15 RCEs. The aggregation cost of these customers is
commensurately lower per RCE than a residential customer.
Annual gross margin per customer(1)
Fiscal 2011
-----------
Residential and small commercial customers added in the quarter
- Canada - gas $199
- Canada - electricity $169
- United States - gas $272
- United States - electricity $256
Cusomers renewed in the quarter
- Canada - gas $131
- Canada - electricity $108
- United States - gas $203
- United States - electricity $200
Large commercial customers added in the quarter $67
Customers lost in the quarter
- Canada - gas $195
- Canada - electricity $150
- United States - gas $208
- United States - electricity $222
(1) Customer sales price less cost of associated supply and allowance for
bad debt and U.S. working capital.
Home Services division (NHS)
NHS was acquired on July 1, 2009 as part of the Universal acquisition. On July
2, 2009, NHS acquired Newten Home Comfort Inc. and on September 30, 2009,
acquired substantially all of the assets of NHCLP (see page 5 for additional
information). NHS provides Ontario residential customers long-term water heater
rental programs offering conventional tanks, power vented tanks and tankless
water heaters in a variety of sizes, in addition to now offering furnaces and
air conditioners. NHS continues to ramp up its operations and, as at June 30,
2010, had a cumulative installed base of 87,400 water heaters, 500 furnaces and
100 air conditioners in residential homes. NHS earns revenue from its installed
base.
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
cash from Just Energy's core operations nor is Just Energy relying on NHS cash
flow to fund distributions. The result should be a very valuable asset which
will generate excellent cash returns upon repayment of the Home Trust Company
("HTC") financing.
The first quarter 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 rental 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.
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 NEC announced that it had entered into a long term financing agreement with
HTC for the funding of the water heaters for National Home Services. 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 initial funding received up to June 30, 2010 was $70.9
million.
Home Services division
Selected financial information
(thousands of dollars)
Three months ended
June 30, 2010
-------------
Sales per financial statements $4,441
Cost of sales 1,609
-----
Gross margin 2,832
Selling expense 814
General and administrative expense 2,885
Interest expense 1,341
Capital expenditures 8,154
Amortization 467
Total number of water heaters installed 10,400
Results of operations
Just Energy has owned NHS since July 1, 2009 and therefore has no comparative
results for the same period last year. For the first quarter ended June 30, 2010
NHS had sales of $4.4 million and gross margin of $2.8 million. The cost of
sales for the quarter was $1.6 million and represents the amortization of the
installed water heaters for the customer contracts signed to date. Selling
expenses for the first quarter of fiscal 2011 were $0.8 million and include the
amortization of commission costs paid to the independent agents, automobile
fleet costs, advertising and promotion and telecom and office supplies expenses.
General and administrative costs, which relate primarily to administrative staff
compensation and warehouse expenses, amounted to $2.9 million for the three
months ended June 30, 2010. The high level of general and administrative costs
relative to past quarters were largely due to the expansion into Union Gas
territory and the roll-out of furnace and air conditioner offerings.
Capital expenditures, including installation costs, amounted to $8.2 million.
Amortization costs were $0.5 million for the current year and include not only
the depreciation on capital assets noted above but also the amortization of the
water heater contracts and customer relationships acquired in the purchases of
Universal and Newten Home Comfort Inc.
The growth of National Home Services has been rapid and, combined with the 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 wheat-based ethanol facility. For the quarter ended June 30, 2010,
the plant achieved an average production capacity of 62%. The Phase 1 grain
milling upgrade has allowed the plant to achieve daily milling rates exceeding
nameplate capacity from time to time, however extreme rain limited the ability
for the plant to source grain supply and the plant was forced to reduce
production levels or shut down for 19 days. Plant capacity was close to 80% on
days when the plant was in production mode. Ethanol prices continue to be
depressed and were on average $0.57 per litre for the quarter and are expected
to increase slightly during the fiscal year. Wheat prices are projected to
increase from the average this quarter of $168 per metric tonne in the near
term.
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 ability to pay distributions.
Ethanol division
Selected financial information
(thousands of dollars)
Three months ended
June 30, 2010
-------------
Sales per financial statements $16,806
Cost of sales 19,452
-------
Gross margin (2,646)
General and administrative expense 2,334
Interest expense 1,707
Capital expenditures 114
Amortization 296
Results of operations
Just Energy has owned 66.7% of TGF since July 1, 2009 and therefore has no
comparable results for the same period last year. During the first quarter of
fiscal 2011, TGF had sales of $16.8 million and realized gross margin of $(2.6)
million. The negative gross margin was a function of high production costs due
to plant inefficiency and low ethanol and DDG prices. During the quarter, the
plant produced 23.2 million litres of ethanol and 23,060 metric tonnes of DDG.
For the three months ended June 30, 2010, TGF incurred $2.3 million in general
and administrative expenses and $1.7 million in interest charges. Capital
expenditures, including installation costs, for the quarter amounted to $0.1
million.
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 10 cents per litre on ethanol produced. Through fiscal
2011, this subsidy will be 9 cents per litre on ethanol produced. This amount
declines through time to 5 cents per litre of ethanol produced in fiscal 2015,
the last year of the agreement.
TGF has seen improved results since quarter end due to the grain milling upgrade
and improved ethanol and DDG prices.
Overall consolidated results
General and administrative expenses
General and administrative costs were $29.3 million for the three months ended
June 30, 2010, representing a 87% increase from $15.6 million in the first
quarter of fiscal 2010. The current year expense includes both Universal and two
months of Hudson each of which were acquired after the comparable quarter of
last year. 57% of the increase in expense was due to these acquisitions. The
remaining increase was to accommodate the numerous areas of expansion undertaken
by the Fund during the quarter which should result in higher margin and
distributable cash in future periods. Other factors include the U. S. exchange
rate impact on U.S. dollar denominated costs and an increase in collection
costs.
Marketing expenses
Marketing expenses, which consist of commissions paid to independent sales
contractors, brokers and independent representatives for signing new customers
as well as an allocation of corporate costs, were $29.8 million, an increase of
54% from $19.4 million in the first quarter of fiscal 2010. New customers signed
by our marketing sales force were 261,000 in the first quarter of fiscal 2010,
up 169% compared to 97,000 customers added through our sales offices in Q1 of
fiscal 2010. The increase in the current quarter expense reflects the growth in
customer additions and the impact of the higher U.S. dollar on our U.S. based
marketing costs and 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 fiscal year. Marketing expenses to maintain
gross margin were $18.3 million, an increase of 38% from $13.3 million from the
prior year comparable quarter.
Marketing expenses to add new gross margin are allocated based on the ratio of
net new gross margin earned on the customers signed, less attrition, as compared
to the gross margin signed from new and renewed customers during the period.
Marketing expenses to add new gross margin in the first quarter totaled $9.4
million, an increase from $6.1 million in the prior year comparable period. The
increase is the result of the increase in the net customer additions of 116,000
in fiscal 2011 versus 11,000 net customers added through our sales offices
during the first quarter of fiscal 2010.
Marketing expenses included in distributable cash exclude amortization related
to the contract initiation costs for Hudson and NHS. For the three months ended
June 30, 2010, the amortization amounted to $2.1 million.
The quarterly actual aggregation costs per customer including Hudson were as
follows:
Fiscal 2011 Fiscal 2010
Natural gas
Canada $158/RCE $209/RCE
United States $75/RCE $199/RCE
Total gas $84/RCE $202/RCE
Electricity
Canada $124/RCE $162/RCE
United States $118/RCE $161/RCE
Total electricity $119/RCE $161/RCE
All Customers $95/RCE $176/RCE
Renewals $43/RCE $37/RCE
The aggregation costs above are those included within the quarterly results.
Commercial contracts (174,000 out of 261,000 aggregated) pay further commission
averaging $30 per year for each additional year that the customer flows.
Assuming an average life of 3 years, this would add approximately $45 to the
F2011 average of All Customers above.
Aggregation costs per customer were down significantly during the quarter. The
marketing success of the commercial division resulted in record gross customer
additions of 261,000 up from 97,000 in Q1 of fiscal 2010. Due to the large gross
addition increase, the fixed portion of the marketing costs were spread across
far more additions. Including an estimate for the lifetime commission cost for
commercial customers, the average cost per customer of $140 was down 21% from
the average of $178 in fiscal 2010.
The aggregation costs above are those included within the quarterly results.
Commercial contracts pay further commission averaging $30 per year for each
additional year that the customer flows. Assuming an average life of 3 years,
this would add approximately $60 to the fiscal 2011 average of all commercial
costs 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 $1.1 million for the first quarter of fiscal 2011, an increase from the $0.7
million paid in Q1 of fiscal 2010. 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, Maryland and California, Just Energy
assumes the credit risk associated with the collection of all 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.
Bad debt expense for three months ended June 30, 2010 increased by 50% to $5.7
million versus $3.8 million expensed in the prior year comparable quarter. The
bad debt expense increase was entirely related to the 84% increase in total
revenues for the quarter in the markets where Just Energy assumes the risk for
accounts receivable collections which also now includes incremental Hudson
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 first quarter, the bad debt expense represents 2.8% of $207.0 million in
revenues, within the Fund's 2-3% target range. This was equal to the level
reported in Q4 and down from the 3.4% reported a year earlier. Higher credit
losses have been experienced in Texas which has been offset by improvements in
Illinois and Alberta and lower default rates for acquired Hudson commercial
customers. Management has taken an aggressive position with regards to returning
customers to utility default services or disconnecting delinquent customers to
ensure that bad debt expense is managed through the high consumption electricity
and gas periods.
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 June 30, 2010 amounted to $9.5
million, an increase from $0.5 million in the first quarter of fiscal 2010. The
large increase in costs for the quarter primarily relates to the interest
expense for the JEEC and JEIF convertible debentures associated with the
Universal and Hudson acquisitions, as well as, interest costs associated with
the TGF debt.
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 quarter, a
foreign exchange unrealized gain of $14.9 million was reported in other
comprehensive income (loss) versus an unrealized gain of $18.2 million reported
in the same period last year.
Overall, a stronger U.S. dollar increases sales and gross margin but this is
partially offset by higher 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 1:1 basis) is entitled to receive, on a
quarterly basis, a payment equal to the amount paid or payable to a Unitholder
on an equal number of units. The total amount paid for the three months ended
June 30, 2010 including tax amounted to $1.6 million unchanged from the same
comparable period in fiscal 2010. The distributions on the Class A preference
shares are reflected in the Statement of Unitholders' Equity of the Fund's
consolidated financial statements, net of tax.
Provision for income tax
For the three months ended June 30
(thousands of dollars)
Fiscal 2011 Fiscal 2010
---------------------------------------------
Current income tax recovery $ (1,002) $ (40)
Amount credited to
Unitholders' equity 538 538
Future tax expense 19,824 9,805
---------------------------------------------
Provision for income tax $19,360 $10,303
---------------------------------------------
---------------------------------------------
The Fund recorded a current income tax recovery of $1.0 million for the first
quarter of fiscal 2011 versus $0.04 million of recovery in the same period last
year. The change is mainly attributable to a U.S. income tax recovery generated
by operating losses incurred by the U.S. entities in this quarter.
Also included in the income tax provision is an amount relating to the tax
impact of the distributions paid to the Class A preference shareholders of JEC.
In accordance with EIC 151, "Exchangeable Securities Issued by Subsidiaries of
Income Trusts", all Class A preference shares are included as part of
Unitholders' equity and the distributions paid to the shareholders are included
as distributions on the Statement of Unitholders' equity, net of tax. For the
three months ended June 30, 2010, the tax impact of these distributions, based
on a tax rate of 33%, amounted to $0.5 million which is unchanged from the
amount in fiscal 2010.
As noted in the Fund's Fiscal 2010 annual report, the Fund will convert to a
taxable Canadian corporation after 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 this quarter these mark to market losses declined as a result of a change
in fair value of the derivative instruments, and as a result, a future tax
expense of $19.8 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 balance sheet as at that date will be
realized over time as the temporary differences between the carrying value of
assets in the consolidated financial statements and their respective tax bases
are realized. Current Canadian income taxes will be accrued at that time to the
extent that there is taxable income in the Fund or its underlying operating
entities.
The 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
For the three months ended June 30
(thousands of dollars)
Fiscal 2011 Fiscal 2010
Operating activities $ 25,727 $ 37,795
Investing activities (263,586) (7,406)
Financing activities, excluding distributions 303,669 (11,196)
Effect of foreign currency translation 4,547 (1,099)
----------------------------------------------------------------------------
Increase in cash before distributions 70,357 18,094
Distributions (cash payments) (36,061) (31,977)
----------------------------------------------------------------------------
Increase (decrease) in cash 34,296 (13,883)
Cash - beginning of period 60,132 59,094
----------------------------------------------------------------------------
Cash - end of period $ 94,428 $ 45,211
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Operating activities
Cash flow from operating activities for the three months ended June 30, 2010 was
$25.7 million, a decrease from $37.8 million in the prior year comparable
quarter. The decrease relates to strong net income growth offset by increased
amortization, taxes and unrealized income related to the financial instruments
recorded in the quarter.
Investing activities
The Fund purchased capital assets totaling $9.6 million during the quarter, an
increase from $7.4 million in the same period last year. In fiscal 2011, Just
Energy's capital spending related to the water heater business, costs related to
a new call center in Texas and purchases of office equipment and IT software.
Financing activities
Financing activities excluding distributions relate primarily to debentures
issued to fund the Hudson acquisition and a decrease of the operating line for
working capital requirements. During the three months ended June 30, 2010, Just
Energy entered into an agreement with a syndicate of underwriters for $330
million of convertible debentures to fund the Hudson acquisition. The Fund also
repaid a total of $49.0 million against the credit facility versus $19.0 million
repaid in the first quarter of fiscal 2009. On July 1, 2009, in connection with
the acquisition of UEG, Just Energy increased its credit facility from $170
million to $250 million. As part of the increase in the credit facility, Societe
Generale and Alberta Treasury Branches joined Canadian Imperial Bank of
Commerce, Royal Bank of Canada, National Bank of Canada and Bank of Nova Scotia
as the syndicate of lenders thereunder. As Just Energy continues to expand in
the United States 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 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 institution of a distribution reinvestment
program ("DRIP") on December 20, 2007, a portion of distributions declared are
not paid in cash. This program was suspended on December 1, 2008 with the
commencement of the normal course issuer bid and was re-instituted on March 31,
2009. 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 first quarter, the Fund made cash distributions to its
Unitholders and the Class A preference shareholder in the amount of $36.1
million, compared to $32.0 million in fiscal 2010.
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 June 30, 2010 compared to March 31, 2010
Cash increased from $60.1 million as at March 31, 2010 to $94.4 million.
Restricted cash which includes cash collateral posting related to supply
procurement and credit support for Universal, Commerce and TGF entities has
decreased to $14.5 million on June 30, 2010 from $18.7 million. The utilization
of the credit facility decreased from $57.5 million to $36.5 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 result from the timing difference between customer consumption
and cash receipts. For electricity, working capital is required to fund the lag
between settlements with the suppliers and settlement with the LDCs.
The decrease in accounts receivable from $348.9 million to $325.9 million is
primarily attributable to the decrease in revenue associated with the period of
lower gas consumption in the first quarter in comparison to the fourth quarter.
Accounts payable and accrued liabilities has increased from $227.0 million to
$308.4 million related to added consumption as a result of the Universal and
Hudson customers acquired and strong net additions from fiscal 2010.
Gas in storage has increased from $4.1 million to $38.4 million for the first
quarter of fiscal 2011. 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 first quarter, customers in Ontario, Manitoba, Quebec and
Michigan had consumed more gas than was supplied to the LDCs for their use.
Since Just Energy is paid for this gas when delivered yet recognizes revenue
when the gas is consumed by the customer, the result on the balance sheet is the
unbilled revenue amount of $21.0 million and accrued gas accounts payable of
$1.4 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 $28.3 million from $5.6 million at the end of last fiscal
year due mainly to the Hudson acquisition since the March 31, 2010 balance
relates to contract initiation costs for NHS only.
The 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, Information technology systems
primarily related to the Hudson and Universal purchases. The total intangible
asset and goodwill balances increased to $644.6 million and $222.8 million,
respectively, from $340.6 million and $177.9 million as at March 31, 2010.
Long-term debt excluding the current portion has increased to $496.5 million in
the first quarter from $231.8 million and is detailed below.
Long-term debt and financing
As at June 30
(thousands of dollars)
----------------------------
Fiscal 2011 Fiscal 2010
------------------------------------
Original credit facility $36,500 $57,500
TGF credit facility 40,927 41,313
TGF debentures 37,001 37,001
TGF term Loan 10,000 10,000
JEEC convertible debentures 83,731 83,417
NEC HTC financing 70,949 65,435
JEIF convertible debentures 282,478 -
Original credit Facility
On July 1, 2009, in connection with the acquisition of UEG, Just Energy
increased its credit facility from $170 million to $250 million. As part of the
increase in the credit facility, Societe Generale and Alberta Treasury Branches
joined Canadian Imperial Bank of Commerce, Royal Bank of Canada, National Bank
of Canada and Bank of Nova Scotia as the syndicate of the lenders thereunder.
Under the new terms of the credit facility, effective July 1, 2009, Just Energy
is able to make use of Bankers' Acceptances and LIBOR advances at stamping fees
of 4.0%, prime rate advances at Canadian and U.S. prime plus 3.0% and letters of
credit at 4.0%. Just Energy's obligations under the credit facility are
supported by guarantees of certain subsidiaries and affiliates and secured by a
pledge of the assets of Just Energy and the majority of its operating
subsidiaries and affiliates. Just Energy is required to meet a number of
financial covenants under the credit facility agreement. As at June 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 was arranged to finance the
construction of the ethanol plant in 2007. The facility was further revised on
March 18, 2009, and was converted to a fixed repayment term of 10 years
commencing March 1, 2009 which includes interest costs at a rate of prime plus
2%, with principal repayments commencing on March 1, 2010. The credit facility
is secured by a demand debenture agreement, a first priority security interest
on all assets and undertakings of TGF and a general security interest on all
other current and acquired assets of TGF. The credit facility includes certain
financial covenants the more significant of which relate to current ratio, debt
to equity ratio, debt service coverage and minimum shareholder's equity. The
lenders have deferred compliance with the financial covenants until April 1,
2011. The facility was further revised on March 31, 2010 postponing the
principal payments due for April 1 to June 1, 2010 and to amortize them over the
six month period commencing October 1, 2010 and ending March 31, 2011.
TGF debentures
A debenture purchase agreement with a number of private parties providing for
the issuance of up to $40.0 million aggregate principal amount of debentures was
entered into in 2006. The interest rate is 10.5% per annum, compounded annually
and payable quarterly. Interest is to be paid quarterly with quarterly principal
payments commencing October 1, 2009 in the amount of $1.0 million per quarter.
The agreement includes certain financial covenants the more significant of which
relate to current ratio, debt to capitalization ratio, debt service coverage,
debt to EBITDA and minimum shareholder's equity. The lender has deferred
compliance with the financial covenants until April 1, 2011. On March 31, 2010,
TGF entered into an agreement with the holders of the debentures to defer
scheduled principal payments owing under the Debenture until April 1, 2011.
TGF term/operating facilities
TGF also maintains a working capital facility for $10.0 million with a third
party lender bearing interest at prime plus 1% due in full on December 31, 2010.
This facility is secured by liquid investments on deposit with the lender. In
addition, TGF has a working capital operating line of $7.0 million bearing
interest at a prime plus 1% of which $3.2 million was drawn via overdraft is
included in bank indebtedness and $3.4 million of letters of credit have also
been issued.
JEEC convertible debentures
In conjunction with the acquisition of UEG on July 1, 2009, JEEC also assumed
the obligations of the convertible unsecured subordinated debentures issued by
Universal in October 2007 which have a face value of $90 million. The debentures
mature on September 30, 2014 unless converted prior to that date and bear
interest at an annual rate of 6% payable semi-annually on March 31 and September
30 of each year. Each $1,000 principal amount of the debentures is convertible
at any time prior to maturity or on the date fixed for redemption, at the option
of the holder, into approximately 29.3 units of the Fund representing a
conversion price of $34.09 per exchangeable share.
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 debentures are
redeemable, in whole or in part, at a price equal to the principal amount
thereof, plus accrued and unpaid interest, at the Fund's sole option on not more
than 60 days and not less than 30 days prior notice, provided that the current
market price on the date on which notice of redemption is given is not less than
125% of the conversion price. On and after September 30, 2012, but prior to the
maturity date, the debentures are redeemable, in whole or in part, at a price
equal to the principal amount thereof, plus accrued and unpaid interest, at the
Fund's sole option on not more than 60 days and not less than 30 days prior
notice.
NEC HTC financing
On January 18, 2010, NEC announced that it had entered into a long term
financing agreement for the funding of new and existing rental water heater
contracts for NHS. Pursuant to the agreement, NHS will receive financing 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% 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 June 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 "debentures"). The debentures
bear an interest rate of 6.0% per annum payable semi-annually in arrears on June
30 and December 31 with maturity on June 30, 2017. Each $1,000 of principal
amount of the debentures is convertible at any time prior to maturity or on the
date fixed for redemption, at the option of the holder, into approximately 55.6
units of Just Energy Income Fund representing a conversion price of $18 per
unit.
The 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 and
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 exceeds 125% of the conversion price. On or after June 30,
2014, 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-cancelable.
Payments due by
period
(thousands of Less than 1 - 3 4 - 5 After 5
dollars) Total 1 year years years years
---------------------------------------------------------------------------
Accounts
payable,
accrued
liabilities
and
Unit
distribution
payable $321,647 $321,647 $- $- $-
Bank
indebtedness 7,853 7,853 - - -
Long-term debt 615,377 65,109 102,235 118,033 330,000
Interest
payments 194,074 29,592 63,451 50,175 50,856
Property and
equipment
lease
agreements 31,156 6,495 12,535 6,616 5,510
EPCOR billing,
collections
and supply
commitments 16,345 8,653 7,692 - -
Grain
production
contracts 52,466 30,736 21,334 396 -
Gas and
electricity
supply
purchase
commitments 3,936,299 1,397,493 2,017,737 510,211 10,858
---------------------------------------------------------------------------
$5,175,217 $ 1,867,578 $2,224,984 $685,431 $397,224
---------------------------------------------------------------------------
---------------------------------------------------------------------------
Other obligations
In the opinion of management, the Fund has no material pending actions, claims
or proceedings that have not been either included in its accrued liabilities or
in the financial statements. 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. This
obligation is also valued at net realizable value. This estimate is required for
the gas business unit only, since electricity is consumed at the same time as
delivery. Management uses the current average customer contract price and the
current average supply cost as a basis for the valuation.
Gas delivered in excess of consumption/Deferred revenues
Gas delivered to LDCs in excess of consumption by customers is valued at the
lower of cost and net realizable value. Collections from LDCs in advance of
their consumption results in deferred revenues which are valued at net
realizable value. This estimate is required for the gas business unit only since
electricity is consumed at the same time as delivery. Management uses the
current average customer contract price and the current average supply cost as a
basis for the valuation.
Allowance for doubtful accounts
Just Energy assumes the credit risk associated with the collection of customers'
accounts in Alberta, Illinois, Texas, Pennsylvania, Maryland and California. In
addition, for large direct billed accounts in B.C. and Ontario, the Fund is
responsible for the bad debt risk. Management estimates the allowance for
doubtful accounts in these markets based on the financial conditions of each
jurisdiction, the aging of the receivables, customer and industry
concentrations, the current business environment and historical experience.
Goodwill
In assessing the value of goodwill for potential impairment, assumptions are
made regarding Just Energy's future cash flow. If the estimates change in the
future, the Fund may be required to record impairment charges related to
goodwill. An impairment review of goodwill was performed during 2010 and as a
result of the review, it was determined that no impairment of goodwill existed
at June 30, 2010.
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 the green energy
option. Just Energy enters into contracts with customers to provide electricity
and gas at fixed prices and provide comfort to certain customers that a
specified amount of energy will be derived from green generation. These customer
contracts expose Just Energy to changes in market prices to supply these
commodities. To reduce the exposure to the commodity market price changes, Just
Energy uses derivative financial and physical contracts to secure fixed price
commodity supply to cover its estimated fixed price delivery or green commitment
obligations.
The Fund's business model objective is to minimize commodity risk other than
consumption changes, usually attributable to weather. Accordingly, it is Just
Energy'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 Funds' 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 will enter 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 require a determination of fair value for all derivative
financial instruments. Up to June 30, 2008, the financial statements also
applied Section 3865 of the CICA Handbook which permitted a further calculation
for qualified and designated accounting hedges to determine the effective and
ineffective portion of the hedge. This calculation permitted the change in fair
value to be accounted for predominately in the Statement of Other 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 August 11, 2010 there were 5,263,728 Class A Preference Shares of JEC
outstanding and 125,265,818 units of the Fund outstanding.
JEEC Exchangeable Shares
A total of 21,271,804 exchangeable shares of JEEC were issued on July 1, 2009
for the purchase of Universal. JEEC shareholders have voting rights equivalent
to the Fund's Unitholders and their shares are exchangeable on a 1:1 basis. As
at August 11, 2010, 17,046,104 shares had been converted and there were
4,225,700 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 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 on recognition, measurement and disclosures.
Just Energy will transition to IFRS effective April 1, 2011, and intends to
issue its first interim financial statements under IFRS for the three-month
period ending June 30, 2011, and a complete set of financial statements under
IFRS for the year ending March 31, 2012.
Based on the initial assessment of the differences between Canadian GAAP and
IFRS relevant to the Fund, an internal project team was assembled and a
conversion plan was developed in March 2009 to manage the transition to IFRS.
Project status reporting is provided to senior executive management and to the
Audit Committee on a regular basis. 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 approval of the accounting
policy choices, completing the collection of data required to prepare the
financial statements, implementing changes to systems and business processes
relating to financial reporting, key personnel training and the monitoring of
standards currently being amended by the International Accounting Standard Board
("IASB"). Just Energy has also 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 significantly impact the fund includes but is 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 that 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 componentization
of the ethanol plant on transition to IFRS. The carrying value of the ethanol
plant and corresponding depreciation expense will be different under IFRS, but
the impact is not expected to be material.
IAS 36: Impairment of assets
IAS 36 uses a one step approach for both testing for and measurement of
impairment, with asset carrying values compared directly with 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
IAS 12 is largely similar to the Canadian standard. Any impact to the Fund will
depend primarily on other adjustments made upon transition to IFRS which will
likely have a corresponding effect on income tax balances.
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 to fair value at each
reporting date. The requirement for normal purchase and normal sales contract
(own use exemption) is similar under Canadian GAAP and IFRS, however several
small differences exist. There is no specific guidance either in Canadian GAAP
of IFRS with respect to eligibility of the own-use exemption of energy supply
contracts entered into by energy retailers. The Fund currently is in the process
of determining which type of supply contracts and which specific markets of the
Fund meet the requirement for the own-use exemption under IFRS.
IFRS 2: Share-based payments
Under IFRS, when stock option awards vest gradually, each tranche is to be
considered as a separate award whereas 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 upfront 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. The Fund is the processes of determining the impact of such
adjustment on the opening balance sheet as at the transition date.
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 exemptions 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 apply IFRS 3 retrospectively to
past business combinations. The standard may be applied prospectively from the
date of the opening IFRS balance sheet. The Fund intends to use this exemption.
Share-based payment transactions
The Fund may elect to not apply IFRS 2 to equity instruments that were granted
on or before November 7, 2002 or which vested before the company's date of
transition to IFRS. The Fund may also elect to not 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 differences
The exemption permits the Fund to reset the cumulative translation differences
to zero by recognizing the full amount in the retained earnings of the opening
IFRS balance sheet. The Fund is currently assessing whether it will 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. Business impacts, IT systems and the control environment will continue to
be assessed as the project progresses.
Legal Proceedings
Just Energy's subsidiaries are party to a number of legal proceedings. Just
Energy believes that each such 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 Regulatory Energy
Commission ("FERC") against many suppliers of electricity, including CEI with
respect to events stemming from the 2001 energy crises in California. Pursuant
to the complaints, the State of California is challenging the FERC's enforcement
of its market-based rate system. Although CEI did not own generation, the State
of California is claiming that CEI was unjustly enriched by the run-up 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 as at June 30,
2010 is as follows (thousands of dollars):
Total
-----
Sales(1) $117,477
Net income(1) 5,092
Current assets 141,299
Non-current assets 381,738
Current liabilities 178,382
Non-current liabilities 39,271
(1) Results from May 1, 2010 to June 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 past five years have seen a significant geographic diversification of Just
Energy's customer base. For the first time, this quarter ended with more
customers in the United States than in Canada. This diversification protects the
Fund against overexposure to any one regulatory jurisdiction and, to a degree,
weather variance. Past quarters have seen a further diversification effort, in
this case marketing channels.
The acquisition of Hudson is a major step in broadening Just Energy's access to
the large commercial market. While the Fund does not want to be exposed to
industrial volumes due to their inherent volatility and credit exposure, large
commercial customers such as hospitals, universities and school boards are both
underserved by deregulated suppliers and potentially profitable. While the
margin per RCE of these customers is lower than a residential customer, so too
is the customer acquisition cost. The result is the same quick payback and high
return on investment that Just Energy has been known for.
Hudson utilized a well established broker network to access the commercial
market. Just Energy had not previously utilized brokers. The results in the
first quarter were record customer additions supported by 174,000 large
commercial RCE additions. Management anticipates that this trend will continue
and commercial customers will be a growing portion of Just Energy's customer
base. In addition to this broker channel, Just Energy is building an inside
commercial sales team which is seeing solid early results.
Just Energy has committed expenditures toward a number of other expansions which
management believes will contribute to higher distributable cash in the future.
During the quarter, the Hudson broker network was expanded to five provinces and
seven states in which they did not previously operate. In Ontario, more than 40
brokers have already been enrolled in the network. Just Energy also invested to
prepare for its entry into Massachusetts and two new utility territories in New
York.
Further expansion has been undertaken through NHS. During the quarter NHS
expanded into Ontario's Union Gas territory and rolled-out an offering of
furnaces and air conditioners. This fast growing water heater and HVAC rental
and sales operation has created substantial long term value for the Fund and,
with these expansions, management believes that its rapid growth will continue.
Similarly, the JustGreen products represent a new product which broadens our
prospective market. Many purchasers of JustGreen would not otherwise purchase
gas or electricity from a door-to-door sales presentation.
The quarter saw the first results of the launch of the Fund's Momentis network
marketing operation. Momentis independent representatives will market natural
gas and electricity contracts on behalf of Just Energy. This is the first time
the Fund has utilized the network marketing channel.
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 Queens Bench, Alberta on June
30, 2010. Upon completion of the reorganization, the board intends to implement
a dividend policy where monthly dividends will be initially set at $0.1033 per
share ($1.24 annually) equal to the current distributions paid to Just Energy'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 are 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 new 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 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.
Sales of the JustGreen products have been very strong with approximately 49% of
all customers added in the current quarter taking 89% of green energy supply.
Although currently a small component of the overall customer book (3% of gas
customers and 6% of electricity customers), continued sales of JustGreen
products at these levels will alter the economics of Just Energy as green
customers generate higher per customer margins than the past five-year
fixed-rate customers. As these new green customers become a higher and higher
percentage of the overall Just Energy customer base, the results should be
higher margins per customer and improved renewal rates.
The Fund intends to continue its geographic expansion into new markets in the
United States both through organic growth and focused acquisitions. Just Energy
intends to begin marketing in Pennsylvania in the third quarter of fiscal 2011.
The Fund is actively reviewing a number of further possible acquisitions. Just
Energy continues to monitor the progress of the deregulated markets in various
jurisdictions.
JUST ENERGY INCOME FUND
CONSOLIDATED BALANCE SHEETS
(Unaudited - thousands of dollars)
----------------------------------------------------------------------------
----------------------------------------------------------------------------
June 30, 2010 March 31, 2010
ASSETS
CURRENT
Cash $ 94,428 $ 60,132
Restricted cash 14,530 18,650
Accounts receivable 325,875 348,892
Gas delivered in excess of consumption 21,325 7,410
Gas in storage 38,386 4,058
Inventory 4,636 6,323
Unbilled revenues 20,978 20,793
Prepaid expenses and deposits 24,543 20,038
Current portion of future income tax assets 14,940 29,139
Other assets - current (Note 11a) 1,637 2,703
----------------------------------------------------------------------------
561,278 518,138
FUTURE INCOME TAX ASSETS 88,484 85,197
PROPERTY, PLANT AND EQUIPMENT 226,593 218,616
CONTRACT INITIATION COSTS 28,330 5,587
INTANGIBLE ASSETS (Note 6) 644,562 340,629
GOODWILL 222,765 177,887
LONG-TERM RECEIVABLE 3,898 2,014
OTHER ASSETS - LONG TERM (Note 11a) 4,674 5,027
----------------------------------------------------------------------------
$ 1,780,584 $ 1, 353,095
----------------------------------------------------------------------------
----------------------------------------------------------------------------
LIABILITIES
CURRENT
Bank indebtedness $ 7,853 $ 8,236
Accounts payable and accrued liabilities 308,412 226,950
Unit distribution payable 13,235 13,182
Corporate taxes payable 2,838 6,410
Current portion of future income tax
liabilities 9,513 6,776
Deferred revenue 25,202 7,202
Accrued gas accounts payable 1,414 15,093
Current portion of long-term debt (Note 7) 65,108 62,829
Other liabilities - current (Note 11a) 597,753 685,200
----------------------------------------------------------------------------
1,031,328 1,031,878
LONG-TERM DEBT (Note 7) 496,478 231,837
DEFERRED LEASE INDUCEMENTS 1,898 1,984
OTHER LIABILITIES - LONG TERM (Note 11a) 496,292 590,572
----------------------------------------------------------------------------
2,025,996 1,856,271
----------------------------------------------------------------------------
NON-CONTROLLING INTEREST 18,030 20,603
----------------------------------------------------------------------------
UNITHOLDERS' DEFICIENCY
Deficit $ (1,190,128) $ (1,423,698)
Accumulated other comprehensive income (Note
9) 208,122 221,969
----------------------------------------------------------------------------
(982,006) (1,201,729)
Unitholders' capital 664,717 659,118
Equity component of convertible debenture
(Note 7e) 33,914 -
Contributed surplus 19,933 18,832
----------------------------------------------------------------------------
Unitholders' deficiency (263,442) (523,779)
----------------------------------------------------------------------------
$ 1,780,584 $ 1, 353,095
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Commitments (Note 14) Contingencies (Note 15)
See accompanying notes to consolidated financial statements
JUST ENERGY INCOME FUND
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED JUNE 30
(Unaudited - thousands of dollars except per unit amounts)
----------------------------------------------------------------------------
----------------------------------------------------------------------------
2010 2009
SALES $609,684 $ 399,010
COST OF SALES 529,187 332,935
----------------------------------------------------------------------------
GROSS MARGIN 80,497 66,075
----------------------------------------------------------------------------
EXPENSES
General and administrative expenses 29,272 15,617
Marketing expenses 29,758 19,385
Bad debt expense 5,749 3,829
Amortization of intangible assets and related supply
contracts 27,172 594
Amortization of property, plant and equipment 1,920 1,194
Unit-based compensation 1,075 657
Capital tax expense 133 80
---------------------------------------------------------------------------
95,079 41,356
----------------------------------------------------------------------------
INCOME (LOSS) BEFORE THE UNDERNOTED (14,582) 24,719
INTEREST EXPENSE (Note 7) 9,480 480
CHANGE IN FAIR VALUE OF DERIVATIVE INSTRUMENTS (Note
11a) (314,376) (87,880)
OTHER INCOME (1,782) (756)
----------------------------------------------------------------------------
INCOME BEFORE INCOME TAXES 292,096 112,875
PROVISION FOR INCOME TAXES (Note 8) 19,360 10,303
NON-CONTROLLING INTEREST (2,573) (55)
----------------------------------------------------------------------------
NET INCOME $275,309 $ 102,627
----------------------------------------------------------------------------
----------------------------------------------------------------------------
See accompanying notes to consolidated financial
statements
Income per unit (Note 12)
Basic $ 2.05 $ 0.92
Diluted $ 1.85 $ 0.91
JUST ENERGY INCOME FUND
CONSOLIDATED STATEMENTS OF UNITHOLDERS' DEFICIENCY
FOR THE THREE MONTHS ENDED JUNE 30
(Unaudited - thousands of dollars)
----------------------------------------------------------------------------
----------------------------------------------------------------------------
2010 2009
ACCUMULATED DEFICIT
Accumulated deficit, beginning of period $ (480,931) $ (712,427)
Net income 275,309 102,627
----------------------------------------------------------------------------
Accumulated deficit, end of period (205,622) (609,800)
----------------------------------------------------------------------------
DISTRIBUTIONS
Distributions, beginning of period (942,767) (757,850)
Distributions and dividends on Exchangeable
Shares (40,646) (33,383)
Class A preference share distributions - net of
income taxes of $538 (2009 - $538) (1,093) (1,093)
----------------------------------------------------------------------------
Distributions, end of period (984,506) (792,326)
----------------------------------------------------------------------------
DEFICIT (1,190,128) (1,402,126)
----------------------------------------------------------------------------
ACCUMULATED OTHER COMPREHENSIVE INCOME (Note 9)
Accumulated other comprehensive income,
beginning of period 221,969 364,566
Other comprehensive loss (13,847) (31,084)
----------------------------------------------------------------------------
Accumulated other comprehensive income, end of
period 208,122 333,482
----------------------------------------------------------------------------
UNITHOLDERS' CAPITAL (Note 10)
Unitholders' capital, beginning of period 659,118 398,454
Trust units exchanged 4,768 -
Trust units issued on exercise/exchange of unit
compensation - 197
Distribution reinvestment plan 5,599 2,464
Exchangeable shares exchanged (4,768) -
----------------------------------------------------------------------------
Unitholders' capital, end of period 664,717 401,115
EQUITY COMPONENT OF CONVERTIBLE DEBENTURE (Note
7e) 33,914 -
CONTRIBUTED SURPLUS (Note 10b) 19,933 15,151
----------------------------------------------------------------------------
Unitholders' deficiency, end of period $ (263,442) $ (652,378)
----------------------------------------------------------------------------
----------------------------------------------------------------------------
See accompanying notes to consolidated financial statements
JUST ENERGY INCOME FUND
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
FOR THE THREE MONTHS ENDED JUNE 30
(Unaudited - thousands of dollars)
----------------------------------------------------------------------------
----------------------------------------------------------------------------
2010 2009
-------------------------------------------------------------------------
NET INCOME $ 275,309 $ 102,627
-------------------------------------------------------------------------
Unrealized gain on translation of self sustaining
operations 14,876 18,246
Amortization of deferred unrealized gain on
discontinued hedges, net of income taxes of $6,259
(2009 -$9,805) (Note 11a) (28,723) (49,330)
-------------------------------------------------------------------------
OTHER COMPREHENSIVE LOSS (13,847) (31,084)
-------------------------------------------------------------------------
COMPREHENSIVE INCOME $ 261,462 $ 71,543
-------------------------------------------------------------------------
-------------------------------------------------------------------------
See accompanying notes to consolidated financial statements
JUST ENERGY INCOME FUND
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED JUNE 30
(Unaudited - thousands of dollars)
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Net inflow (outflow) of cash related to the following
activities 2010 2009
OPERATING
Net income $ 275,309 $102,627
----------------------------------------------------------------------------
Items not affecting cash
Amortization of intangible assets and related supply
contracts 27,172 594
Amortization of property, plant and equipment 1,920 1,194
Amortization of contract initiation costs 2,088 -
Unit-based compensation 1,075 657
Non-controlling interest (2,573) (55)
Future income taxes 19,824 9,805
Financing charges, non-cash portion 1,024 -
Other 2,180 (87)
Change in fair value of derivative instruments (314,376) (87,880)
----------------------------------------------------------------------------
(261,666) (75,772)
----------------------------------------------------------------------------
Adjustments required to reflect net cash receipts from
gas sales 8,436 8,694
----------------------------------------------------------------------------
Changes in non-cash working capital 3,648 2,246
----------------------------------------------------------------------------
Cash inflow from operations 25,727 37,795
----------------------------------------------------------------------------
FINANCING
Distributions and dividends paid to Unitholders and
holders of Exchangeable shares (34,968) (30,884)
Distributions to Class A preference shareholders (1,631) (1,631)
Tax impact on distributions to Class A preference
shareholders 538 538
Decrease in bank indebtedness (383) -
Issuance of long-term debt 349,197 7,526
Repayment of long-term debt (49,386) (19,000)
Restricted cash 4,241 278
----------------------------------------------------------------------------
267,608 (43,173)
----------------------------------------------------------------------------
INVESTING
Purchase of property, plant and equipment (9,607) (7,406)
Purchase of other intangible assets (362) -
Acquisitions (Note 5) (253,071) -
Proceeds of long-term receivable 3,128 -
Contract initiation costs (3,674) -
----------------------------------------------------------------------------
(263,586) (7,406)
----------------------------------------------------------------------------
Effect of foreign currency translation on cash
balances 4,547 (1,099)
----------------------------------------------------------------------------
NET CASH INFLOW (OUTFLOW) 34,296 (13,883)
CASH, BEGINNING OF PERIOD 60,132 59,094
----------------------------------------------------------------------------
CASH, END OF PERIOD $ 94,428 $ 45,211
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Supplemental information
Interest paid $ 3,672 $ 439
Income taxes paid $ 2,456 $ 977
----------------------------------------------------------------------------
----------------------------------------------------------------------------
See accompanying notes to consolidated financial statements
JUST ENERGY INCOME FUND
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED JUNE 30, 2010
(thousands of dollars except where indicated and per unit amounts)
1. INTERIM FINANCIAL STATEMENTS
The unaudited interim consolidated financial statements do not conform in all
respects to the requirements of Canadian generally accepted accounting
principles ("GAAP") for annual financial statements and should therefore be read
in conjunction with the audited consolidated financial statements and notes
thereto included in the Fund's annual report for fiscal 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 in their
application as the most recent annual financial statements, except as described
in Note 3.
2. ORGANIZATION
Just Energy Income Fund ("Just Energy", the "Fund", or "JEIF"), formerly known
as Energy Savings Income Fund, changed its name effective June 1, 2009.
Just Energy is an open-ended, limited-purpose trust established under the laws
of the Province of Ontario to hold securities and to distribute the income of
its directly or indirectly owned operating subsidiaries and affiliates: Just
Energy Ontario L.P. ("JE Ontario"), Just Energy Manitoba L.P. ("JE Manitoba"),
Just Energy Quebec L.P. ("JE Quebec"), Just Energy (B.C.) Limited Partnership
("JE B.C."), Just Energy Alberta L.P. ("JE Alberta"), Alberta Energy Savings
L.P. ("AESLP"), Just Energy Illinois Corp. ("JE Illinios"), 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 Corp.
("UEC"), Universal Gas & Electric Corporation ("UG&E"), Commerce Energy Inc.
("Commerce" or "CEI"), National Energy Corp. ("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 policies adopted from acquisitions
(i) Contract initiation costs
Commissions related to obtaining and renewing commercial customer contracts
through brokers and independent contractors signed under Hudson are recorded as
contract initiation costs and amortized in marketing expenses over the remaining
life of the contract.
In addition, commissions related to obtaining customer contracts signed under
NEC are recorded as contract initiation costs and amortized in marketing
expenses over the remaining life of the contract.
(b) Recently issued accounting standards
The following are new standards, not yet in effect, which are required to be
adopted by the Fund on the effective date:
(i) Business combinations
In October 2008, the Canadian Institute of Chartered Accountants ("CICA") issued
Handbook Section 1582, Business Combinations ("CICA 1582"), concurrently with
CICA Handbook Section 1601, Consolidated Financial Statements ("CICA 1601"), and
CICA Handbook Section 1602, Non-controlling Interest ("CICA 1602"). CICA 1582,
which replaces CICA Handbook Section 1581, Business Combinations, establishes
standards for the measurement of a business combination and the recognition and
measurement of assets acquired and liabilities assumed. CICA 1601, which
replaces CICA Handbook Section 1600, carries forward the existing Canadian
guidance on aspects of the preparation of consolidated financial statements
subsequent to acquisition other than non-controlling interests. CICA 1602
establishes guidance for the treatment of non-controlling interests subsequent
to acquisition through a business combination. These new standards are effective
for fiscal years beginning on or after January 1, 2011. The Fund has not yet
determined the impact of these standards on its consolidated financial
statements.
(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 a 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,
employee benefits 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 impact of the adoption of IFRS on the
Fund's financial position and results of operations is not yet reasonably
determinable or estimable, the Fund does expect a significant increase in
financial statement disclosure requirements resulting from the adoption of IFRS.
Just Energy is currently on target with its conversion plan 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 30,946
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)
-----------
$ 286,419
-----------
-----------
Consideration:
Purchase price $ 285,343
Transaction costs 1,076
-----------
$ 286,419
-----------
-----------
Goodwill associated with the Hudson acquisition is part of the U.S. gas and
electricity marketing segment.
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 periods of 30 months and
35 months, respectively. Other intangible assets, excluding brand, are amortized
over periods ranging from three to five years. The brand value is considered to
be indefinite and therefore, not subject to amortization. The purchase price
allocation is considered preliminary and as a result it may be adjusted during
the 12-month period following the acquisition.
(b) Acquisition of Universal Energy Group Ltd.
On July 1, 2009, Just Energy completed the acquisition of all of the outstanding
common shares of Universal Energy Group Ltd. ("UEG" or "Universal") pursuant to
a plan of arrangement (the "Arrangement"). Under the Arrangement, UEG
shareholders received 0.58 of an exchangeable share ("Exchangeable Share") of
JEEC, a subsidiary of Just Energy, for each UEG common share held. In aggregate,
21,271,804 Exchangeable Shares were issued pursuant to the Arrangement. Each
Exchangeable Share 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 Ellis Don
Corporation.
All contracts and intangible assets are amortized over the average remaining
life at the time of acquisition. The gas and electricity contracts and customer
relationships are amortized over periods ranging from 8 to 57 months. The water
heater contracts and customer relationships are amortized over 174 months and
the intangible assets are amortized over 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 June 30, 2010 Cost Amortization Value
----------------------------------------------------------------------------
Gas contracts and customer relationships $ 261,627 $ 88,483 $ 173,144
Electricity contracts and customer
relationships 456,760 129,690 327,070
Water heater contracts and customer
relationships 23,081 1,626 21,455
Broker network 88,454 2,948 85,506
Brand 11,738 - 11,738
Information technology system
development 19,788 698 19,090
Other intangible assets 9,429 2,870 6,559
----------------------------------------------------------------------------
$ 870,877 $ 226,315 $ 644,562
----------------------------------------------------------------------------
----------------------------------------------------------------------------
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
June 30, March 31,
2010 2010
Credit facility (a) $ 36,500 $ 57,500
TGF credit facility (b)(i) 40,927 41,313
TGF debentures (b)(ii) 37,001 37,001
TGF term/operating facilities (b)(iii) 10,000 10,000
JEEC convertible debentures (c) 83,731 83,417
NEC financing (d) 70,949 65,435
JEIF convertible debentures (e) 282,478 -
----------------------------------------------------------------------------
561,586 294,666
Less: current portion (65,108) (62,829)
----------------------------------------------------------------------------
$ 496,478 $ 231,837
----------------------------------------------------------------------------
----------------------------------------------------------------------------
The following table details the interest expense.
Interest is expensed at the effective interest rate.
June 30, June 30,
2010 2009
Credit facility (a) $ 967 $ 480
TGF Credit facility (b)(i) 447 -
TGF Debentures (b)(ii) 950 -
TGF Term/Operating facilities (b)(iii) 311 -
JEEC Convertible debentures (c) 1,664 -
NEC financing (d) 1,341 -
JEIF Convertible debentures (e) 3,800 -
----------------------------------------------------------------------------
$ 9,480 $ 480
----------------------------------------------------------------------------
----------------------------------------------------------------------------
(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 June 30, 2010, the
Canadian prime rate was 2.5% and the U.S. prime rate was 3.25%. As at June 30,
2010, Just Energy had drawn $36,500 (March 31, 2010 - $57,500) against the
facility and total letters of credit outstanding amounted to $68,426 (March 31,
2010 - $49,444). As of June 30, 2010, Just Energy has $145,074 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 June 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 shareholder's 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 June
30, 2010, the amount owing under this facility amounted to $40,927.
(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 commence 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 June 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 June 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% of which $3,850 was drawn via overdraft. In addition,
total letters of credit issued amounted to $250.
(c) In conjunction with the acquisition of UEG on July 1, 2009, JEEC also
acquired the obligations of the convertible unsecured subordinated debentures
(the "JEEC convertible debentures") issued by UEG in October 2007. These
instruments have a face value of $90,000 and mature on September 30, 2014,
unless converted prior to that date, and bear interest at an annual rate of 6%
payable semi-annually on March 31 and September 30 of each year. Each $1,000
principal amount of the 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 29.3 Exchangeable Shares of JEEC representing a
conversion price of $34.09 per Exchangeable Share. During the period, interest
expense amounted to $1,664.
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 Debentures are redeemable, in whole or
in part, at a price equal to the principal amount thereof, plus accrued and
unpaid interest, at the Fund's sole option on not more than 60 days and not less
than 30 days prior notice.
(d) On January 18, 2010, NEC entered into a long-term financing agreement for
the funding of new and existing rental water heater contracts. Pursuant to the
agreement, NEC 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 at 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% 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 $70,949 owing under this agreement including $2,266 relating to the
holdback provision as at June 30, 2010. The company is required to meet a number
of covenants under the agreement. As at June 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 6.00% 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 anytime 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 period, interest expense amounted to $3,800.
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 and 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 tradeable 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 $281,770 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 $1.0 million for the first
quarter of fiscal 2011 versus a recovery of $0.04 million in the same period
last year. The change is mainly attributable to a U.S. income tax recovery
generated by operating losses incurred by the U.S. entities in this quarter.
Q1 2011 Q1 2010
--------------------------
Current income tax recovery $ (1,002) $ (40)
Amount credited to Unitholders' equity 538 538
Future tax expense 19,824 9,805
--------------------------
Provision for income tax $ 19,360 $ 10,303
--------------------------
--------------------------
9. ACCUMULATED OTHER COMPREHENSIVE INCOME
For the three months ended June 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 14,876 - 14,876
Amortization of deferred unrealized
gain on discontinued hedges,net of
income taxes of $6,259 - (28,723) (28,723)
------------------------------------
$ 43,460 $ 164,662 $ 208,122
------------------------------------
------------------------------------
For the three months ended June 30, 2009
Foreign
Currency Cash
Translation Flow
Adjustment Hedges Total
Balance, beginning of period $ 1,958 $ 362,608 $ 364,566
Unrealized foreign currency translation
adjustment 18,246 - 18,246
Amortization of deferred unrealized
gain on discontinued hedges, net of
income taxes of $9,805 - (49,330) (49,330)
------------------------------------
$ 20,204 $ 313,278 $ 333,482
------------------------------------
------------------------------------
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 expense 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 holders of Class A preference shares are
entitled to vote in all votes of Unitholders as if they were the holders of the
number of units that they would receive if they exercised their shareholder
exchange rights. Class A preference shareholders have equal entitlement to
distributions from the Fund as Unitholders.
Exchangeable Shares of JEEC
On July 1, 2009, Just Energy completed the acquisition of all the outstanding
common shares of UEG pursuant to the Arrangement. Under the arrangement, UEG
shareholders received 0.58 of an Exchangeable Shares of JEEC, for each UEG
common share held. In aggregate, 21,271,804 Exchangeable Shares were issued
pursuant to the Arrangement. Each Exchangeable Share is exchangeable for a Trust
Unit on a one-for-one basis at any time at the option of the holder and entitles
the holder to a monthly dividend equal to 66 2/3% of the monthly distribution
paid by Just Energy on a Trust Unit.
JEEC owns 66 2/3% of the issued and outstanding shares ("TGF 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 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, delivered annually in three equal installments commencing
January 2, 2011.
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 - - 14,590 197
Distribution reinvestment
plan 443,218 5,599 221,775 2,464
Exchanged from Exchangeable
shares 422,673 4,768 - -
-----------------------------------------------
Balance, end of period 125,191,198 603,442 106,374,888 387,955
-----------------------------------------------
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 - -
Exchanged into units (422,673) (4,768) - -
-----------------------------------------------
Balance, end of period 4,265,499 48,115 - -
-----------------------------------------------
Unitholders' capital, end of
period 134,720,425 $ 664,717 111,638,616 $ 401,115
-----------------------------------------------
-----------------------------------------------
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 three months ended June 30, 2010, the Fund issued 422,673 units
relating to the exchange of Exchangeable Shares of JEEC.
(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 1,075 657
non-cash deferred unit grant distributions 26 20
Less: unit-based awards exercised - (197)
-------------------
Balance, end of period $ 19,933 $ 15,151
-------------------
-------------------
Total amounts credited to Unitholders' capital in respect of unit options and
deferred unit grants exercised or exchanged during the three months ended June
30, 2010 amounted to nil (2009 - $197).
11. FINANCIAL INSTRUMENTS
(a) Fair value
The Fund has a variety of gas and electricity supply contracts that are captured
under CICA Handbook Section 3855, Financial Instruments - Measurement and
Recognition. Fair value is the estimated amount that Just Energy would pay or
receive to dispose of these supply contracts in an arm's length transaction
between knowledgeable, willing parties who are under no compulsion to act.
Management has estimated the value of electricity, unforced capacity, heat
rates, heat rate options, renewable and gas swap and forward contracts using a
discounted cash flow method which employs market forward curves that are either
directly sourced from third parties or are developed internally based on third
party market data. These curves can be volatile thus leading to volatility in
the mark to market with no impact to cash flows. Gas options have been valued
using the Black option value model using the applicable market forward curves
and the implied volatility from other market traded gas options.
Effective July 1, 2008, the Fund ceased the utilization of hedge accounting.
Accordingly, all the mark to market changes on the Fund's derivative instruments
are recorded on a single line on the consolidated statements of operations. Due
to the commodity volatility and size of the Fund, the quarterly swings in mark
to market on these positions will increase the volatility in the Fund's
earnings.
The following tables illustrate (gains)losses related to the Fund's derivative
financial instruments classified as held-for- trading recorded against other
assets and other liabilities with their offsetting values recorded in change in
fair value of derivative instruments for the three months ended June 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 June June 30, ended June June 30,
30, 2010 2010 30, 2009 2009
(USD) (USD)
Canada
Fixed-for-floating
electricity swaps (i) $ (138,841) n/a $ 31,147 n/a
Renewable energy certificates
(ii) 143 n/a (254) n/a
Verified emission-reduction
credits (iii) - n/a - n/a
Options (iv) 837 n/a 792 n/a
Physical gas forward
contracts (v) (83,628) n/a (9,811) n/a
Transportation forward
contracts (vi) (13,349) n/a 3,256 n/a
United States
Fixed-for-floating
electricity swaps (vii) (24,244) (23,518) (3,601) (3,197)
Physical electricity forwards
(viii) (22,682) (21,962) (22,180) (19,689)
Unforced capacity forward
contracts (ix) 160 155 (2,640) (2,344)
Unforced capacity physical
contracts (x) 643 626 - -
Renewable energy certificates
(xi) 680 661 412 366
Verified emission-reduction
credits (xii) 2 2 209 186
Options (xiii) (180) (175) 1,303 1,156
Physical gas forward
contracts (xiv) (30,634) (29,811) (26,286) (23,333)
Transportation forward
contracts (xv) (156) (152) (83) (74)
Heat rate swaps (xvi) 3,058 2,975 (1,464) (1,299)
Fixed financial swaps (xvii) (7,366) (7,161) (399) (355)
Foreign exchange forward
contracts 277 n/a 854 n/a
Other
Amortization of deferred
unrealized gains on
discontinued hedges (34,573) n/a (59,135) n/a
Amortization of derivative
financial instruments
related to acquisitions 35,477 n/a - n/a
----------------------------------------------------------------------------
Change in Fair Value of
Derivative
Instruments $ (314,376) $ (87,880)
----------------------------------------------------------------------------
----------------------------------------------------------------------------
The following table summarizes certain aspects of the financial assets and
liabilities recorded in the financial statements as at June 30, 2010:
Other Other Other
assets Other assets liabilities liabilities
(current) (long term) (current) (long term)
Canada
Fixed-for-floating
electricity swaps (i) $ 374 $ 335 $ 169,507 $ 149,844
Renewable energy
certificates (ii) 300 529 31 138
Verified emission-reduction
credits (iii) 2 7 - -
Options (iv) 155 182 - -
Physical gas forward
contracts (v) - - 201,098 155,508
Transportation forward
contracts (vi) 14 404 2,303 4,264
United States
Fixed-for-floating
electricity swaps (vii) - - 45,991 36,642
Physical electricity
forwards (viii) 1 - 67,840 60,063
Unforced capacity forward
contracts (ix) 428 149 438 126
Unforced capacity physical
contracts (x) 156 102 1,034 469
Renewable energy
certificates (xi) 64 98 1,280 1,291
Verified emission-reduction
credits (xii) - - 176 470
Options (xiii) - - 1,095 633
Physical gas forward
contracts (xiv) - - 83,554 65,056
Transportation forward
contracts (xv) 32 - 1,377 2,189
Heat rate swaps (xvi) 111 2,868 1,448 -
Fixed financial swaps
(xvii) - - 20,581 19,599
Foreign exchange forward
contracts - - - -
----------------------------------------------------------------------------
As at June 30, 2010 $ 1,637 $ 4,674 $ 597,753 $ 496,292
----------------------------------------------------------------------------
----------------------------------------------------------------------------
The following table summarizes certain aspects of the financial assets and
liabilities recorded in the financial statements as at March 31, 2010:
Other Other Other
Assets Other Assets Liabilities Liabilities
(current) (long term) (current) (long term)
Canada
Fixed-for-floating
electricity swaps (i) $ - $ - $ 244,563 $ 212,920
Renewable energy
certificates (ii) 350 621 30 139
Verified emission-reduction
credits (iii) 2 7 - -
Options (iv) 757 416 - -
Physical gas forward
contracts (v) - - 237,145 203,088
Transportation forward
contracts (vi) - - 11,060 8,439
United States
Fixed-for-floating
electricity swaps (vii) - - 31,291 30,464
Physical electricity
forwards (viii) - - 38,015 39,035
Unforced capacity forward
contracts (ix) 523 102 445 9
Unforced capacity physical
contracts (x) 33 146 731 -
Renewable energy
certificates (xi) 107 130 918 945
Verified emission-reduction
credits (xii) - - 167 447
Options (xiii) - - 912 915
Physical gas forward
contracts (xiv) - - 96,938 75,142
Transportation forward
contracts (xv) - - 1,265 2,262
Heat rate swaps (xvi) 654 3,605 - -
Fixed financial swaps (xvii) - - 21,720 16,767
Foreign exchange forward
contracts 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 June 30, 2010.
---------------------------------------------------------------------
Total
Notional Remaining
Contract Type Volume Volume Maturity Date
---------------------------------------------------------------------
Canada
---------------------------------------------------------------------
(i) Fixed-for-
floating
electricity 0.0001- July 31, 2010 -
swaps (i) 115 MWh 11,815,179 MWh October 31, 2016
---------------------------------------------------------------------
(ii) Renewable December 31,
energy 10-90,000 2010 - December
certificates MWh 1,265,368 MWh 31, 2014
---------------------------------------------------------------------
(iii) Verified
emission 2,000- December 31,
reduction 100,000 2010 - December
credits Tonnes 605,000 Tonnes 31, 2014
---------------------------------------------------------------------
(iv) July 31, 2010 -
46-40,500 February 28,
Options GJ/month 4,775,620 GJ 2014
---------------------------------------------------------------------
(v) Physical gas July 31, 2010 -
forward 3-15,191 November 30,
contracts GJ/day 141,353,627 GJ 2015
---------------------------------------------------------------------
(vi) Transportation
forward 7-465,000 July 31, 2010 -
contracts GJ/day 72,413,923 GJ May 31, 2015
---------------------------------------------------------------------
United States
---------------------------------------------------------------------
(vii) Fixed-for-
floating
electricity 0.10-34 July 31, 2010 -
swaps (i) MWh 6,993,028 MWh June 30, 2015
---------------------------------------------------------------------
(viii) Physical
electricity July 31, 2010 -
forwards 1-40 MWh 7,121,830 MWh January 31, 2015
---------------------------------------------------------------------
(ix) Unforced
capacity July 31, 2010 -
forward 5-35 November 30,
contracts MWCap 1,075 MWCap 2012
---------------------------------------------------------------------
(x) Unforced
capacity
physical 2-150 July 31, 2010 -
contracts MWCap 2,697 MWCap May 31, 2014
---------------------------------------------------------------------
(xi) Renewable 2,000- December 31,
energy 160,000 2010 - December
certificates MWh 2,832,265 MWh 31, 2015
---------------------------------------------------------------------
(xii) Verified
emission 10,000- December 31,
reduction 50,000 2010 - December
credits Tonnes 615,000 Tonnes 31, 2014
---------------------------------------------------------------------
(xiii) July 31, 2010 -
5-37,500 5,378,990 December 31,
Options mmBTU/day mmBTU 2014
---------------------------------------------------------------------
(xiii) July 1, 2010 -
Heat Rate September 30,
Options 1,600 MWh 147,200 MWh 2010
---------------------------------------------------------------------
(xiv) Physical gas
forward 5-11,106 46,193,941 July 1, 2010 -
contracts mmBTU/day mmBTU July 31, 2014
---------------------------------------------------------------------
(xv) Transportation
forward 15-15,000 39,252,865 July 1, 2010 -
contracts mmBTU/day mmBTU March 31, 2015
---------------------------------------------------------------------
(xvi) Heat rate July 31, 2010 -
swaps 1-30 MWh 3,728,117 MWh May 31, 2015
---------------------------------------------------------------------
(xvii) Fixed 100-
financial 21,561 46,239,222 July 31, 2010 -
swaps mmBTU/day mmBTU April 30, 2015
---------------------------------------------------------------------
---------------------------------------------------------
Fair Value
Favourable/ Notional
Fixed Price (unfavourable) Value
---------------------------------------------------------
---------------------------------------------------------
(i) $28.75-$128.13 ($318,642) $844,770
---------------------------------------------------------
(ii) $3.00-$26.00 $660 $8,031
---------------------------------------------------------
(iii) $6.00-$11.50 $9 $5,836
---------------------------------------------------------
(iv) $6.35-$12.40 $337 $9,043
---------------------------------------------------------
(v) $3.51-$10.00 ($356,606) $1,074,275
---------------------------------------------------------
(vi) $0.01-$1.57 ($6,149) $53,206
---------------------------------------------------------
---------------------------------------------------------
(vii) $25.55-$145.58
(US$24.00- ($82,633) $465,338
$136.75) (US($77,619)) (US$437,101)
---------------------------------------------------------
(viii) $22.25-$124.56
(US$20.90- ($127,902) $473,649
$117.00) (US($120,141)) (US$444,908)
---------------------------------------------------------
(ix) $3,194-$8,517
(US$3,000- $13 $5,988
$8,000) (US$12) (US$5,625)
---------------------------------------------------------
(x) $1,490-$14,053
(US$1,400- ($1,245) $18,138
$13,200) ((US$1,169)) (US$17,037)
---------------------------------------------------------
(xi) $1.70-$26.62
(US$1.60- ($2,409) $17,627
$25.00) (US($2,263)) (US$16,557)
---------------------------------------------------------
(xii) $6.76-$9.32 ($646) $4,999
(US$6.35-$8.75) (US$(607)) (US$4,696)
---------------------------------------------------------
(xiii) $8.25-$14.69
(US$7.75- ($1,834) $8,757
$13.80) (US($1,723)) (US$8,226)
---------------------------------------------------------
(xiii) $73.71-$75.33
(US$69.24- $106 $390
$70.76) (US$100) (US$366)
---------------------------------------------------------
(xiv) $4.79-$12.65
(US$4.50- ($148,610) $419,217
$11.88) (US($139,592)) (US$393,779)
---------------------------------------------------------
(xv) $0.0027-$0.6388
(US$0.0025- ($3,534) ($31,034)
$0.6000) (US($3,320)) ((US$29,151))
---------------------------------------------------------
(xvi) $28.74-$89.93
(US$27.00- $1,531 $184,274
$83.53) (US$1,438) (US$173,092)
---------------------------------------------------------
(xvii) $4.39-$9.16 ($40,180) $312,113
(US$4.12-$8.60) (US($37,742)) (US$293,174)
---------------------------------------------------------
(i) The electricity fixed-for-floating contracts related to the Province of
Alberta are predominantly load-following and some contracts in Ontario,
wherein the quantity of electricity contained in the supply contract
"follows" the usage of customers designated by the supply contract. Notional
volumes associated with these contracts are estimates and subject to change
with customer usage requirements. There are also load shaped fixed-for-
floating contracts in the rest of Just Energy's electricity markets wherein
the quantity of electricity is established but varies throughout the term of
the contracts.
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
$106,833.
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.
In Illinois, Texas, Pennsylvania, Maryland, California, New York (small portion
of direct billing customers), New Jersey and Alberta, Just Energy assumes the
credit risk associated with cash collection from its customers. Credit review
processes have been put in place for these markets where Just Energy has credit
risk to manage the customer default rate. If a significant number of customers
were to default on their payments, it could have a material adverse effect on
Just Energy's operations and cash flow. Management factors default from credit
risk in its margin expectations for these markets.
Fair value ("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 which require unobservable market data or use
statistical techniques to derive forward curves from observable market data and
unobservable inputs are classified as Level 3 in the FV hierarchy. For the
electricity supply contracts, Just Energy uses quoted market prices as per
available market forward data and applies a price shaping profile to calculate
the monthly prices from annual strips and hourly prices from block strips for
the purposes of mark to market calculations. The profile is based on historical
settlements with counterparties or with the system operator and is considered an
unobservable input for the purposes of establishing the level in the hierarchy.
For the natural gas supply contracts, Just Energy uses three different market
observable curves: 1) commodity (predominately NYMEX), 2) basis and 3) foreign
exchange. NYMEX curves extend for over 5 years (thereby covering the length of
Just Energy's contracts); however, most basis curves only extend 12-15 months
into the future. In order to calculate basis curves for remaining years, Just
Energy uses extrapolation which leads to natural gas supply contracts to be
classified under Level 3.
Note on fair value measurement input sensitivity
The main cause of changes in 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 of historical settlements.
The following table illustrates the classification of financial
assets/(liabilities) in the FV hierarchy as at June 30, 2010:
June 30, 2010
Level 1 Level 2 Level 3 Total
Financial assets
Trading assets $ 108,958 $ - $ - $ 108,958
Loans and receivable 329,773 - - 329,773
Derivative financial assets - - 6,311 6,311
Financial liabilities
Derivative financial
liabilities - (40,180) (1,053,865) (1,094,045)
Other financial liabilities (891,086) - - (891,086)
----------------------------------------------------------------------------
Total net derivative
liabilities $(452,355) $(40,180) $(1,047,554) $(1,540,089)
----------------------------------------------------------------------------
----------------------------------------------------------------------------
The following table illustrates the changes in net fair value of financial
assets/(liabilities) classified as Level 3 in the FV hierarchy for the three
months ended June 30, 2010:
June 30, 2010
Opening balance, April 01, 2010 $ (1,229,555)
Total gain/(losses) - Net Income 491,469
Purchases (107,906)
Sales (2,721)
Settlements (198,841)
Transfer out of Level 3 -
----------------------------------------------------------------------------
Closing Balance, June 30, 2010 $ (1,047,554)
----------------------------------------------------------------------------
----------------------------------------------------------------------------
(b) Classification of financial assets and liabilities
The following table represents the fair values and carrying amounts of
financial assets and liabilities measured at fair value or amortized cost:
Carrying
As at June 30, 2010 amount Fair value
Cash and restricted cash $ 108,958 $ 108,958
Accounts receivable $ 325,875 $ 325,875
Long-term receivables $ 3,898 $ 3,898
Other assets $ 6,311 $ 6,311
Bank indebtedness, accounts payable and accrued
liabilities and unit distributions payable 329,500 $ 329,500
Long-term debt 561,586 $ 606,302
Other liabilities $1,094,045 $1,094,045
For the three months ended June 30
2010 2009
Interest expense on financial liabilities not held
for trading $ 9,480 $ 480
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 the long-term debt approximates its fair value as the
interest payable on outstanding amounts at rates that vary with Bankers'
Acceptances, LIBOR, Canadian bank prime rate or U.S. prime rate with the
exception for 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 earnings is generated in U.S. dollars and is subject
to currency fluctuations. The performance of the Canadian dollar relative to the
U.S. dollar could positively or negatively affect Just Energy's earnings. Due to
its growing operations in the U.S. and its recent acquisition of Hudson, Just
Energy expects to have a greater exposure in the future to U.S. fluctuations
than in prior years.
The Fund may, from time to time, experience losses resulting from fluctuations
in the values of its foreign currency transactions, which could adversely affect
operating results.
With respect to translation exposure, as at June 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 three months ended
June 30, 2010 would have been $2,756 higher/lower and other comprehensive income
would have been $1,974 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 June 30,
2010 of approximately $248.
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 June 30, 2010, if the energy prices including natural gas, electricity,
green natural gas credits, and green electricity certificates, had risen
(fallen) by 10%, assuming that all the other variables had remained constant,
income before taxes for the year ended June 30, 2010 would have increased
(decreased) by $239,229 ($238,327) 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 June 30, 2010, if the energy prices including natural gas, electricity,
green natural gas credits, and green electricity certificates, had risen
(fallen) by 10%, assuming that all the other variables had remained constant,
income before taxes for the year ended June 30, 2010 would have increased
(decreased) by $214,174 ($213,342) primarily as a result of the change in the
fair value of the Fund's derivative instruments.
Changes in energy prices will not significantly impact the Fund's gross margin.
(ii) Credit risk
Credit risk is the risk that one party to a financial instrument fails to
discharge an obligation and causes financial loss to another party. Just Energy
is exposed to credit risk in two specific areas: Customer Credit Risk and
Counterparty Credit Risk.
Customer credit risk
In Alberta, Texas, Illinois, Pennsylvania, California, 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 June 30, 2010, accounts receivable from the above markets with a
carrying value of $22,124 (March 31, 2010 - $20,239) were past due but not
doubtful. As at June 30, 2010, the aging of the accounts receivable from the
above markets was as follows:
Current $129,516
1 - 30 days 12,977
31 - 60 days 5,654
61 - 90 days 3,493
Over 90 days 19,901
---------
$ 171,541
---------
For the three months ended June 30, 2010, changes in the allowance for
doubtful accounts were as follows:
Balance, beginning of period $17,519
Provision for doubtful accounts 5,743
Bad debts written off (4,647)
Others (212)
--------
Balance, end of period $18,403
--------
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 monitor current and potential credit exposure to individual
counterparties and also monitor overall aggregate counterparty exposure.
However, the failure of a counterparty to meet its contractual obligations could
have a material adverse effect on the operations and cash flows of Just Energy.
As at June 30, 2010, the maximum counterparty credit risk exposure amounted to
$177,852, 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
of June 30, 2010:
More
Carrying Contractual Less Than 1 to 3 4 to 5 Than 5
Amount Cash Flows 1 Year years Years Years
Accounts
payable and
accrued
liabilities
and unit
distribution
payable $321,647 $321,647 $321,647 $- $- $-
Bank
indebtedness 7,853 7,853 7,853 - - -
Long-term
debt 561,586 615,377 65,109 102,235 118,033 330,000
Derivative
instruments:
Cash outflow 1,094,045 3,936,299 1,397,493 2,017,737 510,211 10,858
----------------------------------------------------------------------------
$1,985,131 $4,881,176 $1,792,102 $2,119,972 $628,244 $340,858
----------------------------------------------------------------------------
In addition to the amounts noted above, at June 30, 2010, net interest
payments over the life of the long-term debt and bank credit facility are:
Less than 1 to 3 4 to 5 More than
1 year years years 5 years
----------------------------------------
Interest payments $29,592 $63,451 $50,175 $50,856
----------------------------------------------------------------------------
(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 $2,959 to
accommodate for its counterparties' risk of default.
12. INCOME PER UNIT
2010 2009
Basic income per unit
Net income available to Unitholders $275,309 $102,627
--------------------------
Weighted average number of units outstanding 124,818,132 106,198,000
Weighted average number of Class A preference
shares 5,263,728 5,264,000
Weighted average number of Exchangeable Shares 4,340,387 -
--------------------------
Basic units and shares outstanding 134,422,247 111,462,000
--------------------------
Basic income per unit $2.05 $0 .92
--------------------------
--------------------------
Diluted income per unit
Net income available to Unitholders $275,309 $102,627
Adjusted net income for dilutive impact of
convertible debentures 3,925 -
--------------------------
Adjusted net income 279,234 102,627
--------------------------
Basic units and shares outstanding 134,422,247 111,462,000
Dilutive effect of:
Unit appreciation rights 2,701,377 1,382,000
Deferred unit grants 84,211 63,000
Convertible debentures 13,940,519 -
--------------------------
Units outstanding on a diluted basis 151,148,354 112,907,000
--------------------------
Diluted income per unit $1.85 $0.91
--------------------------
--------------------------
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 United States.
Just Energy evaluates segment performance based on geographic segments and
operating segments. In the prior year comparative period, Ethanol and Home
services divisions are not included as both were acquired on July 1, 2009 under
the UEG acquisition.
The following tables present Just Energy's results by geographic segments
And operating segments:
June 30, 2010
Gas and Electricity Home
Marketing Ethanol Services
-------------------------------------------
United
Canada States Canada Canada Consolidated
Sales gas $ 129,846 $ 73,048 $ - $ - $ 202,894
Sales electricity 160,629 224,914 - - 385,543
Ethanol - - 16,806 - 16,806
Home Service - - - 4,441 4,441
----------------------------------------------------------------------------
Sales $ 290,475 $ 297,962 $ 16,806 $ 4,441 $ 609,684
----------------------------------------------------------------------------
Gross margin $ 38,257 $ 42,054 $ (2,646) $ 2,832 $ 80,497
Amortization of
property, plant
and equipment (1,346) (210) (296) (68) (1,920)
Amortization of
intangible assets (11,336) (15,437) - (399) (27,172)
Other operating
expenses (30,658) (28,911) (2,334) (4,084) (65,987)
----------------------------------------------------------------------------
Income (Loss)
before the
undernoted (5,083) (2,504) (5,276) (1,719) (14,582)
Interest expense 6,316 116 1,707 1,341 9,480
Change in fair
value of
derivative
instruments (234,240) (80,136) - - (314,376)
Other income (2,635) 859 (6) - (1,782)
Non-controlling
interest - - (2,573) - (2,573)
Provision
(recovery) for
income tax 14,408 4,952 - - 19,360
----------------------------------------------------------------------------
Net income (loss) $ 211,068 $ 71,705 $ (4,404) $ (3,060) $ 275,309
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Additions to
property, plant
and equipment $ 451 $ 888 $ 114 $ 8,154 $ 9,607
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Total goodwill $ 160,536 $ 62,229 $ - - $ 222,765
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Total assets $ 677,335 $ 850,548 $ 156,790 $ 95,911 $ 1,780,584
----------------------------------------------------------------------------
----------------------------------------------------------------------------
June 30, 2009
United
Canada States Consolidated
-----------------------------------
Sales gas $ 149,697 $ 50,434 $ 200,131
Sales electricity 123,491 75,388 198,879
----------------------------------------------------------------------------
Sales $ 273,188 $ 125,822 $ 399,010
----------------------------------------------------------------------------
Gross margin $ 42,353 $ 23,722 $ 66,075
Amortization of gas contracts 283 - 283
Amortization of electricity contracts - 311 311
Amortization of property, plant and
equipment 1,126 68 1,194
Other operating expenses 22,045 17,523 39,568
----------------------------------------------------------------------------
Income before the undernoted 18,899 5,820 24,719
Interest expense 416 64 480
Change in fair value of derivative
instruments (8,275) (79,605) (87,880)
Other income (745) (11) (756)
Non-controlling interest (55) - (55)
Provision for income taxes 287 10,016 10,303
----------------------------------------------------------------------------
Net income $ 27,271 $ 75,356 $ 102,627
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Additions to property, plant and
equipment $ 7,307 $ 99 $ 7,406
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Total goodwill $ 94,576 $ 20,732 $ 115,308
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Total assets $ 313,888 $ 143,823 $ 457,711
----------------------------------------------------------------------------
----------------------------------------------------------------------------
14. COMMITMENTS
Commitments for each of the next five years and thereafter are as follows:
Long-term
Gas and
Master Electricity
Premises Services Contracts
and Grain Agreement with
Equipment Production with Various
Leasing Contracts EPCOR Suppliers
2011 $ 6,495 $ 30,736 $ 8,653 $ 1,397,493
2012 7,046 19,631 7,692 1,259,688
2013 5,489 1,703 - 758,049
2014 3,871 396 - 382,702
2015 2,745 - - 127,509
Thereafter 5,510 - - 10,858
---------------------------------------------
$ 31,156 $ 52,466 $ 16,345 $ 3,936,299
---------------------------------------------
---------------------------------------------
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
Regulatory Energy Commission ("FERC") against many suppliers of electricity,
including Commerce, a subsidiary of the Fund, with respect to events stemming
from the 2001 energy crises in California. Pursuant to the complaints, the State
of California is challenging the FERC's enforcement of its market-based rate
system. Although Commerce did not own generation, the State of California is
claiming that Commerce was unjustly enriched by the run-up caused by the alleged
market manipulation by other market participants. The proceedings are currently
ongoing. On March 18, 2010, the Administrative Law Judge granted the motion to
strike for all parties in one of the complaints holding that California did not
prove that the reporting errors masked the accumulation of market power.
California has appealed the decision.
At this time, the likelihood of damages or recoveries and the ultimate amounts,
if any, with respect to this litigation is not determinable; however, an
estimated amount has been recorded in these consolidated financial statements as
at June 30, 2010.
16. COMPARATIVE 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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