Just Energy Reports Second Quarter Results
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TORONTO, ONTARIO -- (MARKET WIRE) -- 11/06/09 -- Just Energy Income Fund (TSX: JE.UN) -
Highlights for the three months ended September 30, 2009 included:
- Sales (seasonally adjusted) of $562.1 million, up 46% year over year.
- Gross margin (seasonally adjusted) of $107.5 million, up 74% year over year (43% per unit).
- Distributable cash after gross margin replacement of $52.3 million ($0.39 per unit), 50% year over year (26% per unit).
- Distributable cash after all marketing expenses of $41.3 million ($0.31 per unit), up 19% per unit.
- Net income of $110.7 million ($0.82 per unit) which includes the impact of the mark-to-market gain on financial instruments.
- Addition of 430,000 long term customers through the Universal Energy Group acquisition.
- Gross customer additions through marketing of 140,000, the highest quarter in the history of Just Energy.
- Net customer additions of 36,000 up from 9,000 marketed additions in Q2 F2009 and 11,000 in Q1 F2010.
- Continued strong GEO product sales with penetration of 41% of new customers taking an average of 78% GEO supply.
- Expect to declare a Special Distribution of $0.10 to $0.15 on December 31.
Just Energy Second Quarter Fiscal 2010 Results
Just Energy Income Fund announced its results for the three months and six months ended September 30, 2009.
---------------------------------------------------------------- Three Months ended September 30, F2010 Per Unit F2009 Per Unit ($ millions except per Unit) ---------------------------------------------------------------- Sales(1) $562.1 $4.19 $386.2 $3.47 ---------------------------------------------------------------- Gross Margin(1) 107.5 $0.80 61.8 $0.56 ---------------------------------------------------------------- Distributable Cash(1) ---------------------------------------------------------------- - After Margin Replacement 52.3 $0.39 34.8 $0.31 ---------------------------------------------------------------- - After all Marketing Expense 41.3 $0.31 28.4 $0.26 ---------------------------------------------------------------- Net Income (Loss) 110.7 $0.82 (924.0) $(8.31) ---------------------------------------------------------------- Distributions 42.8 $0.32 34.6 $0.31 ---------------------------------------------------------------- (1) Seasonally adjusted ---------------------------------------------------------------- Six Months ended September 30, F2010 Per Unit F2009 Per Unit ($ millions except per Unit) ---------------------------------------------------------------- Sales(1) $994.7 $8.04 $788.0 $7.12 ---------------------------------------------------------------- Gross Margin(1) 182.3 1.47 121.5 $1.10 ---------------------------------------------------------------- Distributable Cash(1) ---------------------------------------------------------------- - After Margin Replacement 94.5 $0.76 65.8 $0.59 ---------------------------------------------------------------- - After all Marketing Expense 77.4 $0.63 58.7 $0.53 ---------------------------------------------------------------- Net Income (Loss) 213.3 $1.72 (889.8) $(8.04) ---------------------------------------------------------------- Distributions 77.9 $0.63 68.3 $0.62 ---------------------------------------------------------------- (1) Seasonally adjusted
Just Energy has completed a strong quarter of growth. A highlight was the smooth merger of our business with that of our most recent acquisition, Universal Energy Group. The second quarter results are the first that consolidate the Universal business and they demonstrate the accretion inherent in that transaction.
Operating measures showed strong results with growth in all key financial measures. There were two reasons for this, accretion from the acquisition of Universal Energy Group ("Universal") and very successful marketing by our team of independent sales contractors.
----------------------------------------------------------------
Operating Measure Q2 F2010 Growth Q2 F2010 Growth
Year over Year per Unit
----------------------------------------------------------------
Sales(1) 46% 21%
----------------------------------------------------------------
Gross Margin(1) 74% 43%
----------------------------------------------------------------
Distributable Cash after
Margin Replacement 50% 26%
----------------------------------------------------------------
Distributable Cash after
Marketing 46% 19%
----------------------------------------------------------------
Customers 29% 19%
----------------------------------------------------------------
(1)Seasonally adjusted
Just Energy acquired Universal and its 430,000 long term customers by issuing 16% of the Fund's total units to Universal shareholders. Accordingly, growth of more than 16% year over year would be accretive. The table above shows Just Energy's growth which for the second quarter, exceeds 16%. The first column shows nominal year over year growth and the second shows growth per unit which better shows actual accretion. Overall, our growth is higher than 16% in every category.
To date, the merger of Universal operations is proceeding smoothly. The consolidation of administrative functions and elimination of overlap is well underway and synergies will be achieved of $10 million in general and administrative cost savings. The combination of our two sales forces is also ahead of expectations with few key sales contractors lost in the transition. Early results from the merged National Home Services water heater division have also been strong.
The tables shown earlier detail the operating results of the Fund for the three and six months ended September 30, 2009. Margin per customer remained strong aided by newly added customer margins of $204 per year, reflecting the very strong take-up of the Green Energy Option product.
The numbers include operating losses at Terra Grain Fuels, the ethanol plant acquired as part of the Universal acquisition, and the start up of National Home Services, our water heater sales and rental business. Both these businesses are expected to be self financing by fiscal year end which should enhance our growth in future periods.
Distributable cash has grown less than gross margin due to the onset of significant cash tax on the Fund's growing US operations and Universal. Just Energy is actively looking for opportunities to minimize this impact.
To view the "Customers Added Through Marketing" graph, please visit the following link: http://media3.marketwire.com/docs/je1106.pdf
The Universal acquisition was not the only driver of growth in the second quarter. Management's efforts to reenergize our salesforce over the past year continue to be successful. Gross customer additions of 140,000 achieved by our sales forces was the strongest quarter in the history of Just Energy.
Net customer additions through marketing for the quarter were 36,000, again the highest total of any recent quarter. While this was up more than 200% versus the comparable quarter of fiscal 2009 and Q1 of fiscal 2010, it was adversely affected by continued high attrition in foreclosure impacted US natural gas markets. There was a small improvement in this attrition for the quarter moving from an annualized 31% to an annualized 28% and management is hopeful that this trend will continue. Attrition in our other markets was in line with company targets.
Sales of Green Energy Option ("GEO") electricity and natural gas products continue to be a major success. Year to date, 41% of our new customers have elected green supply taking, on average, 78% of their consumption through GEO.
In regards to the second quarter, CEO Ken Hartwick noted: "For the second consecutive quarter, Just Energy has delivered substantial growth in the face of a continued deep recession. This is the seventh consecutive year of double digit growth for our company."
Mr. Hartwick added: "Recently acquired Universal Energy has shown its potential as a contributor to our future growth. Merging the two operations has been a tremendous challenge to our team and I want to congratulate them on the success of their efforts to date."
"Our other main success was marketing. We signed more customers in the second quarter than any quarter in the history of the company. Combining this with higher margins on these new customers driven by very strong take up of our GEO product, it is difficult not to be optimistic about the future of Just Energy."
Chair Rebecca MacDonald added: "We have provided guidance that per unit growth in gross margin and distributable cash will be 5% to 10% in fiscal 2010. We are maintaining this forecast at this point in time, despite the fact that the first six months have seen growth of 34% and 29% respectively. The Universal acquisition brought with it 145,000 customers in markets where we will not operate or with short term contracts which we do not expect to renew. These customers generated margin of approximately $9.5 million in the second quarter which will not continue in future periods. Further, there will be more merger realization costs for the remainder of the year. Universal is an accretive transaction but the true accretion will not be seen until fiscal 2011."
"The growth we have noted in the second quarter is another step toward our goal of growing our cash flow by the 2011 trust tax conversion date with the expectation that a converted Just Energy would be able to pay $1.24 in dividends replacing the more heavily taxed $1.24 distribution. This cannot be assured but we continue to be optimistic that it is a realistic expectation. It appears clear that we will need another special distribution to offset undistributed profits for calendar 2009. We expect that this distribution will be in the range of $0.10 to $0.15 per unit and will be paid early next year."
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 Green Energy Option (GEO) program. The electricity GEO 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 GEO product offers carbon offset credits which will allow the customer to reduce or eliminate the carbon footprint for their home or business. Management believes that these products will not only add to profits, but also increase sales receptivity and improve renewal rates.
In addition, through National Home Services, the Fund sells and rents high efficiency and tankless water heaters and produces and sells wheat-based ethanol through its subsidiary Terra Grain Fuels.
Non GAAP Measures
Adjusted net income (loss) represents the net income (loss) excluding the impact of mark-to-market gains (losses) arising from Canadian GAAP requirements for derivative financial instruments on our future supply positions. Just Energy ensures that customer margins are protected by entering into fixed-price supply contracts. In accordance with GAAP, the customer margins are not marked-to-market but there is a requirement to mark-to-market the future supply contracts. This creates unrealized gains (losses) depending upon current supply pricing volatility. Management believes that these short-term mark-to-market non-cash gains (losses) do not impact the long-term financial performance of the Fund.
Management also believes the best basis for analyzing both the Fund's operating results and the amount available for distribution is to focus on amounts actually received ("seasonally adjusted"). Seasonally adjusted analysis applies solely to the Canadian gas market (excluding Alberta and B.C.). Just Energy receives payment from the LDCs upon delivery of the commodity not when the customer actually consumes the gas. Seasonally adjusted analysis eliminates seasonal commodity consumption variances and recognizes amount available for distribution based on cash received from the LDCs.
Forward-Looking Statements
The Fund's press releases may contain forward-looking statements including statements pertaining to customer revenues and margins, customer additions and renewals, customer attrition, customer consumption levels, distributable cash and treatment under governmental regulatory regimes. These statements are based on current expectations that involve a number of risks and uncertainties which could cause actual results to differ from those anticipated. These risks include, but are not limited to, levels of customer natural gas and electricity consumption, rates of customer additions and renewals, rates of customer attrition, fluctuations in natural gas and electricity prices, changes in regulatory regimes and decisions by regulatory authorities, competition and dependence on certain suppliers. Additional information on these and other factors that could affect the Fund's operations, financial results or distribution levels are included in the Fund's annual information form and other reports on file with Canadian securities regulatory authorities which can be accessed through the SEDAR website at www.sedar.com or through the Fund's website at www.justenergy.com.
MANAGEMENT'S DISCUSSION AND ANALYSIS ("MD&A") - November 5, 2009
Overview
The following discussion and analysis is a review of the financial condition and results of operations of Just Energy Income Fund ("Just Energy" or the "Fund") for the three and six months ended September 30, 2009 and has been prepared with all information available up to and including November 5, 2009. This analysis should be read in conjunction with the unaudited interim consolidated financial statements for the three and six months ended September 30, 2009, as well as the audited consolidated financial statements and related MD&A for the year ended March 31, 2009, contained in the Fund's 2009 Annual Report. The financial information contained herein has been prepared in accordance with Canadian Generally Accepted Accounting Principles ("GAAP"). All dollar amounts are expressed in Canadian dollars. Quarterly reports, the annual report and supplementary information can be found under "reports and filings" on our corporate website at www.justenergy.com. Additional information can be found on SEDAR at www.sedar.com.
Just Energy is an open-ended, limited-purpose trust established under the laws of the Province of Ontario to hold securities and to distribute the income of its directly or indirectly owned operating subsidiaries and affiliates: Just Energy Ontario L.P., Just Energy Manitoba L.P., Just Energy Quebec L.P., Just Energy (B.C.) Limited Partnership, Just Energy Alberta L.P. ("JE Alberta"), Alberta Energy Savings L.P. ("AESLP"), Just Energy Illinois Corp. ("JEIC"), Just Energy New York Corp. ("JENYC"), Just Energy Indiana Corp., Just Energy Texas L.P., Just Energy Exchange Corp. ("JEEC"), Universal Energy Corp., Universal Gas and Electric Corp., Commerce Energy, Inc. ("Commerce"), National Energy Corp. ("NEC") operating under the trade name of National Home Services ("NHS"), Newten Home Comfort L.P. ("NHCLP"), and Terra Grain Fuels Inc. ("TGF"), collectively, the "Just Energy Group".
Just Energy's business involves the sale of natural gas and/or electricity to residential and commercial customers under long-term fixed-price and price-protected contracts. By fixing the price of natural gas or electricity under its fixed-price or price-protected program contracts for a period of up to five years, Just Energy's customers offset their exposure to changes in the price of these essential commodities. Just Energy, which commenced business in 1997, derives its margin or gross profit from the difference between the fixed price at which it is able to sell the commodities to its customers and the fixed price at which it purchases the associated volumes from its suppliers. In addition, through NEC and NHCLP, the Fund sells and rents high efficiency and tankless water heaters. TGF, an ethanol producer, operates an ethanol facility in Belle Plaine, Saskatchewan.
The Fund also offers "green" products through its Green Energy Option ("GEO") program. The electricity GEO 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 GEO 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 statements pertaining to customer additions and renewals, customer consumption levels, distributable cash and treatment under governmental regulatory regimes. These statements are based on current expectations that involve a number of risks and uncertainties which could cause actual results to differ from those anticipated. These risks include, but are not limited to, levels of customer natural gas and electricity consumption, rates of customer additions and renewals, fluctuations in natural gas and electricity prices, changes in regulatory regimes and decisions by regulatory authorities, competition and dependence on certain suppliers. Additional information on these and other factors that could affect the Fund's operations, financial results or distribution levels are included in the Fund's annual information form and other reports on file with Canadian security regulatory authorities which can be accessed on our corporate website at www.justenergy.com or through the SEDAR website at www.sedar.com.
Policy Change
Effective July 1, 2008, the Fund changed its practice from treating future supply hedging positions as hedges for accounting purposes. Accordingly, all mark to market adjustments for supply contracts are reflected in the consolidated statements of operations. In the view of management, the previous practice offered no greater clarity for the financial statement user and was very labour intensive and costly to produce. The new accounting practice consolidates all the unrealized, non-cash changes in value of future supply into a single line on the consolidated statements of operations. The Fund's MD&A reports the adjusted net income excluding all non-cash mark to market adjustments for all supply-related derivative instruments and the related tax effect. The expected future net margin is set based on the derivative instruments and is effectively unchanged with commodity market movements. Given commodity volatility and the size of the Fund, the annual swings in mark to market on these positions can be in the hundreds of millions of dollars.
Just Energy believes that the result of this practice change and the associated MD&A disclosure is that actual period operating results will be more transparent for investors.
Key terms
"Attrition" means customers whose contracts were terminated primarily due to relocation or death, or cancelled by Just Energy due to delinquent accounts.
"Delivered volume" represents the actual volume of gas and electricity provided on behalf of customers to the LDCs for the period.
"Failed to renew" means customers who did not renew expiring contracts at the end of their term.
"Gross margin per RCE" represents the gross margin realized on Just Energy's customer base, including both low margin customers acquired through various acquisitions and gains/losses from sales of excess commodity supply.
"LDC" means a local distribution company, the natural gas or electricity distributor for a regulatory or governmentally defined geographic area.
"RCE" means residential customer equivalent or the "customer", which is a unit of measurement equivalent to a customer using, as regards natural gas, 2,815 m3 (or 106 GJs or 1,000 Therms or 1,025 CCFs) of natural gas on an annual basis and, as regards electricity, 10 MWh (or 10,000 kWh) of electricity on an annual basis, which represents the approximate amount of gas and electricity, respectively, used by a typical household in Ontario.
Non-GAAP financial measures
All non-GAAP financial measures do not have standardized meanings prescribed by GAAP and are therefore unlikely to be comparable to similar measures presented by other issuers.
Seasonally adjusted sales and seasonally adjusted gross margin
Management believes the best basis for analyzing both the Fund's results and the amount available for distribution is to focus on amounts actually received ("seasonally adjusted") because this figure provides the margin earned on actual customer consumption. Seasonally adjusted sales and gross margin are not defined performance measures under Canadian GAAP. Seasonally adjusted analysis applies solely to the Canadian gas market and specifically to Ontario, Quebec and Manitoba.
No seasonal adjustment is required for electricity as the supply is balanced daily. In the other gas markets, payments for supply by the LDCs are aligned with customer consumption.
Cash Available for Distribution
"Distributable cash after marketing expense" refers to the net cash available for distribution to Unitholders. Seasonally adjusted gross margin is the principal contributor to cash available for distribution. Distributable cash is calculated by the Fund as seasonally adjusted gross margin, adjusted for cash items including general and administrative expenses, marketing expenses, bad debt expense, interest expense, corporate taxes, capital taxes and other items. This non-GAAP measure may not be comparable to other income funds.
"Distributable cash after gross margin replacement" represents the net cash available for distribution to Unitholders as defined above. However, only the marketing expenses associated with maintaining the Fund's gross margin at a stable level equal to that in place at the beginning of the period are deducted. Management believes that this is more representative of the ongoing operating performance of the Fund because it includes all expenditures necessary for the retention of existing customers and the addition of new margin to replace those of customers that have not been renewed. This non-GAAP measure may not be comparable to other income funds.
For reconciliation to cash from operating activities please refer to the "Cash Available for Distribution and distributions" analysis on page 6.
Adjusted net income
"Adjusted net income" represents the net income (loss) excluding the impact of mark to market gains (losses) arising from derivative financial instruments on our future supply. Just Energy ensures that customer margins are protected by entering into fixed-price supply contracts. In accordance with GAAP, the associated customer contracts are not marked to market, but there is a requirement to mark to market the future supply contracts. This creates unrealized gains (losses) that are not offset by the related customer gains (losses).
Management believes that these short-term mark to market non-cash gains (losses) do not impact the long-term financial performance of the Fund. The related future supply has been sold under long-term customer contracts at fixed prices; therefore the annual movement in the theoretical value of this future supply is not an appropriate measure of current or future operating performance.
Standardized Distributable Cash
Standardized Distributable Cash is a non-GAAP measure developed to provide a consistent and comparable measurement of distributable cash across entities.
"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 September 30
(thousands of dollars except where indicated and per unit amounts)
Fiscal 2010 Per Fiscal 2009
$ Per Unit $ Per
unit(5) Change unit(5)
(5)
Sales 434,659 $3.24 23% 294,122 $2.64
Net income (loss)(1) 110,690 $0.82 NMF(6) (923,990) $(8.31)
Adjusted net income (loss)(2) (9,682) $(0.07) (217)% 6,872 $0.06
Gross margin (seasonally
adjusted)(3) 107,519 $0.80 43% 61,793 $0.56
General and administrative 25,634 $0.19 58% 13,236 $0.12
Distributable cash
- After gross margin replacement 52,303 $0.39 26% 34,755 $0.31
- After marketing expense 41,345 $0.31 19% 28,394 $0.26
Distributions 42,839 $0.32 3% 34,609 $0.31
Distributable cash payout
ratio(4)
- After gross margin replacement 82% 100%
- After marketing expense 104% 122%
For the six months ended September 30
(thousands of dollars except where indicated and per unit amounts)
Fiscal 2010 Per Fiscal 2009
$ Per Unit $ Per
unit(5) Change unit(5)
(5)
Sales 833,669 $6.74 11% 672,032 $6.07
Net income (loss)(1) 213,317 $1.72 NMF (889,758) $(8.04)
Adjusted net income (loss)(2) 14,870 $0.12 (61)% 34,503 $0.31
Gross margin (seasonally
adjusted)(3) 182,288 $1.47 34% 121,496 $1.10
General and administrative 41,251 $0.33 38% 26,683 $0.24
Distributable cash
- After gross margin replacement 94,522 $0.76 29% 65,801 $0.59
- After marketing expense 77,432 $0.63 19% 58,676 $0.53
Distributions 77,853 $0.63 2% 68,290 $0.62
Distributable cash payout ratio(4)
- After gross margin replacement 82% 104%
- After marketing expense 101% 116%
(1)Net income (loss) includes the impact of unrealized gains (losses) which
represent the mark to market of future commodity supply acquired to cover
future customer demand. The supply has been sold to customers at fixed
prices minimizing any impact of quarter end mark to market gains and
losses.
(2)Adjusted net income (loss) is a more appropriate measure of the
performance of the Fund since the underlying supply is held to its
maturity, and therefore, mark to market gains and losses do not impact
the long-term financial performance of the Fund.
(3)See discussion of non-GAAP measures on page 2.
(4)Management targets an annual payout ratio after all marketing expenses,
excluding any Special Distribution, of less than 100%.
(5)The per unit calculation is done on a fully diluted basis. Year over year
change is calculated on a per unit basis.
(6)Not a meaningful number.
Reconciliation For the three For the three For the six For the six
of net income months ended months ended months ended months ended
to adjusted net September 30, September 30, September 30, September 30,
income 2009 2008 2009 2008
---- ---- ---- ----
Net income (loss) $110,690 $(923,990) $213,317 $(889,758)
Change in fair
value of
derivative
instruments (138,515) 1,022,628 (226,395) 1,011,514
Tax impact on
change in fair
value of
derivative
instruments 18,143 (91,766) 27,948 (87,252)
-----------------------------------------------------------
Adjusted net
Income (loss) $(9,682) $6,872 $14,870 $34,504
-----------------------------------------------------------
Acquisition of Universal Energy Group
On July 1, 2009, Just Energy completed the acquisition of all of the outstanding common shares of Universal Energy Group Ltd. ("UEG") pursuant to a plan of arrangement (the "Arrangement"). Under the Arrangement, UEG shareholders received 0.58 of an exchangeable share ("Exchangeable Share") of JEEC, a subsidiary of Just Energy, for each UEG common share held. In aggregate, 21,271,804 Exchangeable Shares were issued pursuant to the Arrangement. Each Exchangeable Share is exchangeable for a Trust Unit on a one-for-one basis at any time at the option of the holder and entitles the holder to a monthly dividend equal to 66 2/3% of the monthly distribution paid by Just Energy on a Trust Unit. JEEC also assumed all the covenants and obligations of UEG in respect of the UEG's outstanding 6% convertible unsecured subordinated debentures (the "Debentures"). On conversion of the Debentures, holders will be entitled to receive 0.58 of an Exchangeable Share in lieu of each UEG common share that the holder was previously entitled to receive on conversion.
The acquisition of UEG was accounted for using the purchase method of accounting. The Fund allocated the purchase price to the identified assets and liabilities acquired based on their fair values at the time of acquisition as follows:
CAD$
Net assets acquired:
Working capital (including cash of $10,319) $ 75,391
Electricity contracts and customer relationships 230,963
Gas contracts and customer relationships 247,189
Water heater contracts and customer relationships 22,700
Other intangible assets 2,721
Goodwill 59,294
Property, plant and equipment 171,918
Future tax liabilities (51,971)
Other liabilities - current (164,148)
Other liabilities - long-term (140,857)
Long-term debt (180,440)
Non-controlling interest (22,697)
--------
$ 250,063
----------
----------
Consideration:
Transaction costs $ 10,117
Exchangeable shares 239,946
---------
$ 250,063
----------
----------
All contract and intangible assets are amortized over the average remaining life at the time of acquisition. The gas and electricity contracts acquired are amortized over periods ranging from 8 to 57 months. The water heater contracts are amortized over 174 months and the intangible assets are amortized over 6 months. The purchase price allocation is considered preliminary and as a result, it may be adjusted during the year.
Operations
Gas
In each of the markets that Just Energy operates, it is required to deliver gas to the LDCs for its customers throughout the year. Gas customers are charged a fixed price for the full term of their contract. For our residential customers, Just Energy purchases gas supply in advance of marketing. The LDC provides historical customer usage to enable Just Energy to purchase an approximation of matched supply. Furthermore, in many markets, Just Energy mitigates exposure to customer usage by purchasing options that cover potential differences in customer consumption due to weather variations. The cost of this strategy is incorporated in the price to the customer. To the extent that balancing requirements are outside the options purchased, Just Energy bears the financial responsibility for fluctuations in customer usage. Volume variances may result in either excess or short supply. Excess supply is sold in the spot market resulting in either a gain or loss compared to the weighted average cost of supply. In the case of greater than expected gas consumption, Just Energy must purchase the short supply at the market price, which may reduce or increase the customer gross margin typically realized. For our commercial customers, Just Energy purchases gas supply that matches the forecasted new customer volume required.
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.
Alberta's regulatory environment is different from the other Canadian provincial markets. In Alberta, Just Energy is required to invoice and receive payments directly from customers. AESLP entered into an agreement with EPCOR Utilities Inc. ("EPCOR") for the provision of billing and collection services in Alberta which was amended and extended in December 2008. Pursuant to the amended agreement, EPCOR will continue to provide billing and collection services for AESLP until November 30, 2011 with respect to AESLP's existing customers. In September 2009, Just Energy, through JE Alberta, began billing and collection services directly for all new customers signed as well as renewing customers.
New York, Illinois, Indiana, Ohio and California
In New York, Illinois, Indiana, Ohio and California, the volume of gas delivered is based on the estimated consumption and storage requirements for each month. Therefore the amount of gas delivered in winter months is higher than in the spring and summer months. Consequently, cash flow received from these States' is greatest during the third and fourth (winter) quarters, as normally, cash is received from the LDCs in the same period as customer consumption.
Electricity
Ontario, Alberta, New York, Texas, Pennsylvania, New Jersey, Maryland, Michigan and California
Just Energy does not bear the risk for variations in customer consumption in any of the electricity markets in which it operates other than for certain customers in Texas and the customers acquired in the Universal acquisition (customers located in Pennsylvania, New Jersey, Maryland, Michigan and California). In Ontario and New York, Just Energy provides customers with price protection for the majority of their electricity requirements. The customers experience either a small balancing charge or credit on each bill due to fluctuations in prices applicable to their volume requirements not covered by a fixed price. In Alberta, Just Energy offers a load-following product for which it has acquired load-following supply and therefore does not have exposure to variances in customer consumption. To the extent possible given the competitive nature and market knowledge of customers, future offerings for Texas customers will be a load balanced product and Just Energy will not bear the risk for variations in customer consumption.
Cash flow from electricity operations is greatest during the second and fourth quarters (summer and winter), as electricity consumption is typically highest during these periods.
Water heaters
NHCLP commenced providing Ontario residential customers with a long term water heater rental program in the summer of 2008, offering tankless water heaters, high efficiency conventional and power vented tanks. On July 2, 2009, NEC, a wholly owned home services subsidiary of UEG, acquired Newten Home Comfort Inc., an arm's length third party that held a 20% interest of NHCLP. Accordingly, NHCLP became a wholly owned subsidiary of Just Energy. NEC, which began operations in April 2008, operates under the trade name of National Home Services ("NHS"). On September 30, 2009, NEC acquired substantially all of the assets of NHCLP, including all of NHCLP's customer water heater rental agreements. See page 18 for additional information on NEC.
Ethanol division
Just Energy, through JEEC also owns a 66.7% interest in TGF, a 150-million-litre capacity wheat-based ethanol plant located in Belle Plaine, Saskatchewan. The plant produces ethanol and high protein distillers dried grain ("DDG") from the wheat supply. See page 19 for additional information on TGF.
Cash Available for Distribution and distributions
For the three months ended September
(thousands of dollars except per unit amounts)
Fiscal 2010 Fiscal 2009
---------- -----------
Per unit Per unit
-------- --------
Reconciliation to statements of cash
flow
Cash inflow from operations $24,708 $17,743
Add:
Increase in non-cash working capital 16,098 10,062
Tax impact on distributions to Class A
preference shareholders 539 589
--------- ---------
Cash available for distribution $41,345 $28,394
--------- ---------
--------- ---------
Cash available for distribution
Gross margin per financial statements $81,496 $0.61 $44,126 $0.40
Adjustments required to reflect net
cash receipts from gas sales 26,023 17,667
--------- ---------
Seasonally adjusted gross margin $107,519 $0.80 $61,793 $0.56
--------- ---------
Less:
General and administrative (25,634) (13,236)
Capital tax recovery (expense) (48) 66
Bad debt expense (3,856) (2,462)
Income tax provision (6,106) (615)
Interest expense (4,946) (965)
Other items 1,523 1,065
--------- ---------
(39,067) (16,147)
--------- ---------
Distributable cash before marketing
expenses 68,452 $0.51 45,646 $0.41
Marketing expenses to maintain gross
margin (16,149) (10,891)
--------- ---------
Distributable cash after gross margin
replacement 52,303 $0.39 34,755 $0.31
Marketing expenses to add new gross
margin (10,958) (6,361)
--------- ---------
Cash available for distribution $41,345 $0.31 $28,394 $0.26
--------- ---------
--------- ---------
Distributions
Unitholder distributions $40,760 $32,639
Class A preference share distributions 1,632 1,632
Unit appreciation rights and deferred
unit grants
distributions 447 338
--------- ---------
Total distributions $42,839 $0.32 $34,609 $0.31
--------- ---------
--------- ---------
Diluted average number of units
outstanding 134.3m 111.2m
Cash Available for Distribution and distributions
For the six months ended September 30
(thousands of dollars except per unit amounts)
Fiscal 2010 Fiscal 2009
----------- -----------
Per unit Per unit
-------- --------
Reconciliation to statements of cash
flow
Cash inflow from operations $62,503 $63,005
Add:
Decrease in non-cash working capital 13,852 (5,603)
Tax impact on distributions to Class A
preference shareholders 1,077 1,274
--------- ---------
Cash available for distribution $77,432 $58,676
--------- ---------
--------- ---------
Cash available for distribution
Gross margin per financial statements $147,571 $1.19 $99,347 $0.90
Adjustments required to reflect net
cash receipts from gas sales 34,717 22,149
--------- ---------
Seasonally adjusted gross margin $182,288 $1.47 $121,496 $1.10
--------- ---------
Less:
General and administrative (41,251) (26,683)
Capital tax expense (128) -
Bad debt expense (7,685) (3,525)
Income tax provision (6,066) (758)
Interest expense (5,426) (1,856)
Other items 2,192 842
--------- ---------
(58,364) (31,980)
--------- ---------
Distributable cash before marketing
expenses 123,924 $1.00 89,516 $0.81
Marketing expenses to maintain gross
margin (29,402) (23,715)
--------- ---------
Distributable cash after gross margin
replacement 94,522 $0.76 65,801 $0.59
Marketing expenses to add new gross
margin (17,090) (7,125)
--------- ---------
Cash available for distribution $77,432 $0.63 $58,676 $0.53
--------- ---------
--------- ---------
Distributions
Unitholder distributions $73,695 $64,100
Class A preference share distributions 3,263 3,528
Unit appreciation rights and deferred
unit grants distributions 895 662
--------- ---------
Total distributions $77,853 $0.63 $68,290 $0.62
--------- ---------
--------- ---------
Diluted average number of units
outstanding 123.7m 110.7m
Distributable cash
Distributable cash after gross margin replacement for the current quarter ended September 30, 2009 was $52.3 million ($0.39 per unit), up 50% from $34.8 million ($0.31 per unit) in fiscal 2009. The growth reflects a 74% increase in seasonally adjusted gross margin. Factors contributing to margin growth include a 29% year over year increase in total customers, of which 24% related to the 430,000 acquired customers from Universal. The new Universal customers, higher margin per customer due to opportunistic pricing and continued strong acceptance of the GEO product as well as improved supply management, particularly in Texas, resulted in increased distributable cash. On a per unit basis (reflecting the units issued to acquire Universal), distributable cash after gross margin replacement and gross margin were up 26% and 43% respectively reflecting solid operating performance and per unit accretion due to the price paid for Universal.
The higher gross margins in the quarter were offset to a degree by increased general and administrative costs and bad debt expenses. Increased general and administrative costs of 93% over the prior year comparable quarter were primarily due to the Universal acquisition, staffing costs in our corporate office to support our current and future growth, and an increase in telecom and collection costs. As administrative overlap efficiencies continue to be realized in future quarters, growth in general and administrative costs should track margin growth. Bad debt expense increased in the second quarter of fiscal 2010 compared to 2009 primarily due to the increased volumes in those markets where the Fund bears the credit risk as well as the weak economic conditions in the U.S. markets.
Just Energy spent $16.1 million in marketing expenses to maintain its current level of gross margin, which represents 60% of the total marketing expense for the quarter. A further $11.0 million was spent to increase future gross margin resulting in the 36,000 net RCE additions for the quarter. Management's estimate of the future contracted gross margin increased to $1,213.8 million from $1,003.2 million at the end of the first quarter of fiscal 2010.
Distributable cash after all marketing expenses amounted to $41.3 million ($0.31 per unit) for the second quarter of fiscal 2010, an increase of 19% per unit from $28.4 million ($0.26 per unit) in the prior year comparable quarter. The increase is due to accretion from the Universal purchase and net customer additions offset by increased expenditures noted above. The lower rate of increase for distributable cash was due to the higher marketing costs associated with the significant increase in net customer additions (excluding acquired customers) quarter over quarter. The payout ratio after deduction of all marketing expenses for the current quarter was 104% versus 122% in fiscal 2009.
Distributable cash after gross margin replacement for the six months ended September 30, 2009 was $94.5 million ($0.76 per unit), an increase of 29% per unit from $65.8 million ($0.59 per unit) in the prior year comparable period. Distributable cash after marketing expenses was $77.4 million ($0.63 per unit) for the first six months of fiscal 2010, an increase of 19% per unit from $58.7 million ($0.53 per unit) for the same period last year. The payout ratio after all marketing expenses for the six month period of fiscal 2010 was 101% versus 116% for the six months ended September 30, 2009.
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 pages 19 and 20.
Adjusted net income
Adjusted net loss was $(9.7) million for the quarter ($(0.07) per unit) down from net income of $6.9 million ($0.06 per unit) in the second quarter of fiscal 2009. Adjusted net income was negatively impacted by the amortization of the Universal acquired customer contracts and the increased general and administrative costs incurred for Universal as Just Energy works towards consolidating various processes. Also contributing to the change are losses from NHS and TGF as both businesses are in start-up phases. For the six months ended September 30, 2009, adjusted net income was $14.9 million ($0.12 per unit) as compared to $36.9 million or $0.33 per unit in the same period last year.
Discussion of Distributions
(thousands of dollars)
For the three For the three For the six For the six
months ended months ended months ended months ended
September 30, September 30, September 30, September 30,
2009 2008 2009 2008
---- ---- ---- ----
Cash flow from
operations(1)(A) $24,708 $17,743 $62,503 $63,005
Net income
(loss)(B) $110,690 $(923,990) $213,317 $(889,758)
Total
distributions© $42,839 $34,609 $77,853 $68,290
Shortfall of
cash flows from
operating
activities over
distributions
paid (A-C) $(18,131) $(16,866) $(15,350) $(5,285)
Excess
(shortfall) of
net income
(loss) over
distributions
paid (B-C) $67,851 $(958,599) $135,464 $(958,048)
(1)Includes non-cash working capital balances
Net income (loss) includes non-cash gains and losses associated with the changes in the current market value of Just Energy's derivative instruments. These instruments form part of the Fund's requirement to purchase commodity according to estimated demand and, as such, changes in value do not impact the distribution policy or the long-term financial performance of the Fund. Effective July 1, 2008, Just Energy elected to discontinue the practice of hedge accounting and all gains and losses on derivative instruments have been recorded in Change in fair value of derivative instruments.
The change in fair value associated with these derivatives included in the net income for the second quarter of fiscal 2010 was a gain of $138.5 million versus a loss of $1,022.6 million for the quarter ended September 30, 2008.
The Fund has, in the past, paid out distributions that were higher than both financial statement net income and operating cash flow. In the view of management, the non-GAAP measure, distributable cash, is an appropriate measure of the Fund's ability to distribute funds, as the cost of carrying incremental working capital necessary for the growth of the business has been deducted in the distributable cash calculation. Further, investment in the addition of new customers intended to increase cash flow is expensed in the financial statements while the original customer base was capitalized. In addition, the capital expenditures for NHS and TGF are funded through the credit facility and debt instruments. Management believes that the current level of distributions is sustainable in the foreseeable future.
The timing differences between distributions and cash flow from operations created by the cost of carrying incremental working capital due to business seasonality and expansion are funded by the operating credit facility.
Standardized Distributable Cash and Cash Available for Distribution
(thousands of dollars except per unit amounts)
For the three months For the six months
ended September 30, ended September 30,
Fiscal 2010 Fiscal 2009 Fiscal 2010 Fiscal 2009
----------- ----------- ----------- -----------
Reconciliation to
statements of cash flow
Cash inflow from
operations $24,708 $17,743 $62,503 $63,005
Capital expenditures(1) (12,477) (1,118) (19,883) (1,326)
---------------------------------------------------
Standardized
Distributable Cash $12,231 $16,625 $42,620 $61,679
---------------------------------------------------
Adjustments to
Standardized
Distributable
Cash
Change in non-cash
working capital(2) $16,098 $10,062 $13,852 $(5,603)
Tax impact on
distributions to Class A
preference shareholders(3) 539 589 1,077 1,274
Capital expenditures(1) 12,477 1,118 19,883 1,326
---------------------------------------------------
Cash available for
distribution $41,345 $28,394 $77,432 $58,676
---------------------------------------------------
Standardized
Distributable Cash - per
unit basic 0.09 0.15 0.32 0.56
Standardized
Distributable Cash - per
unit diluted 0.10 0.15 0.34 0.56
Payout Ratio based on
Standardized
Distributable Cash 350% 208% 183% 111%
(1)Capital expenditures incurred in the quarter are effectively funded out
of the credit facility. The majority of capital expenditures in the
current quarter related to the purchase of water heaters for subsequent
rental. These expenditures expand the productive capacity of the
business.
(2)Change in non-cash working capital is excluded from the calculation of
Cash Available for Distribution as the Fund has a $250.0 million credit
facility which is available for use to fund working capital requirements.
This eliminates the potential impact of timing distortions relating to
the respective items.
(3)Payments to the holders of Class A preference shares are equivalent to
distributions. The number of Class A preference shares outstanding is
included in the denominator of any per unit calculation.
In accordance with the CICA July 2007 interpretive release "Standardized Distributable Cash in Income Trusts and other Flow-Through Entities" the Fund has presented the distributable cash calculation to conform to this guidance. In summary, for the purposes of the Fund, Standardized Distributable Cash is defined as the periodic cash flows from operating activities, including the effects of changes in non-cash working capital less total capital expenditures as reported in the GAAP financial statements.
Financing Strategy
The Fund's $250.0 million credit facility will be sufficient to meet the Fund's short-term working capital and capital expenditure requirements for the gas and electricity business. As part of the acquisition of Universal additional credit facilities and debt were recorded and are explained further on page 23. 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.
Productive Capacity
Just Energy's business involves the sale of natural gas and/or electricity to residential and commercial customers under long-term, fixed-price contracts. As such, the Fund's productive capacity is determined by the gross margin earned from the contract price and the related supply cost.
The productive capacity of Just Energy is achieved through the retention of existing customers and the addition of new customers to replace those that have not been renewed. The productive capacity is maintained and grows through independent contractors, call centre renewal efforts and various mail campaigns.
Effectively all of the marketing costs related to customer contracts are expensed immediately but fall into two categories. The first represents marketing expenses to maintain gross margin at pre-existing levels and by definition maintain productive capacity. The second category is marketing expenditures to add new margin which therefore expands productive capacity. As noted above, capital expenditures by the Fund are utilized to expand the productive capacity of the business.
Summary of quarterly results
(thousands of dollars except per unit amounts)
F2010 F2010 F2009 F2009
Q2 Q1 Q4 Q3
-- -- -- --
Sales per financial statements $434,659 $399,010 $713,573 $513,608
Gross margin (seasonally
adjusted) 107,519 74,769 106,143 87,554
General and administrative
expense 25,634 15,617 18,150 14,753
Net income (loss) 110.690 102,627 (168,621) (49,094)
Net income (loss) per unit -
basic $0.83 0.92 (1.57) (0.44)
Net income (loss) per unit -
diluted 0.82 0.91 (1.57) (0.44)
Adjusted net income (loss) (9,682) 24,552 88,744 46,682
Adjusted net income per unit -
basic (0.07) 0.22 0.81 0.42
Adjusted net income per unit -
diluted (0.07) 0.22 0.79 0.42
Amount available for distribution
After gross margin replacement $52,303 42,219 72,244 57,475
After marketing expense 41,345 36,087 62,515 48,162
Payout ratio
After gross margin replacement 81% 83% 48% 93%(1)
After marketing expense 104% 97% 56% 111%(1)
F2009 F2009 F2008 F2008
Q2 Q1 Q4 Q3
-- -- -- --
Sales per financial statements $294,122 $377,910 $652,617 $449,673
Gross margin (seasonally
adjusted) 61,793 59,703 87,960 71,247
General and administrative
expense 13,236 13,447 17,138 12,416
Net income (loss) (923,990) 34,232 94,025 28,064
Net income per unit - basic $(8.33) $0.31 $0.87 $0.26
Net income per unit - diluted (8.31) 0.31 0.87 0.26
Adjusted net income 6,872 27,631 87,663 34,890
Adjusted net income per unit -
basic 0.06 0.25 0.81 0.32
Adjusted net income per unit -
diluted 0.06 0.25 0.80 0.32
Amount available for distribution
After gross margin/customer
replacement $34,755 $31,046 $54,334 $47,242
After marketing expense 28,394 30,282 53,992 42,462
Payout ratio
After gross margin/customer
replacement 100% 108% 61% 164%(1)
After marketing expense 122% 111% 61% 183%(1)
(1)Includes a one-time Special Distribution of $18.6 million in Q3, fiscal
2009 and $44.7 million in Q3, fiscal 2008.
The Fund's results reflect seasonality as consumption is greatest during the third and fourth quarters (winter quarters). While year over year quarterly comparisons are relevant, sequential quarters will vary materially. The main impact of this will be higher distributable cash with a lower payout ratio in the third and fourth quarters and lower distributable cash with a higher payout ratio in the first and second quarters excluding any special distribution.
Analysis of the second quarter
Sales are typically lower in the first and second quarters because gas consumption is highest during the winter months and approximately 52% of the current customer base is gas customers. The 48% increase in sales compared to the prior comparable quarter is primarily attributable to the acquisition of Universal and strong U.S. growth in our existing markets. The adjusted net loss was $(9.7) million for the three months ended September 30, 2009. Lower adjusted net income was attributable to margin growth due to the amortization recorded on the acquired Universal contracts and customer relationships in the quarter.
The distributable cash after customer gross margin replacement was $52.3 million up 50% from $34.8 million in the prior comparable quarter. The increase in gross margin was due to the margin earned on the acquired customers from Universal, net customer additions through marketing and higher per customer margins.
Distributable cash after marketing expenses was $41.3 million, an increase of 46% from $28.4 million in the prior comparable quarter. Distributions for the quarter were $42.8 million, up 24% over the same period last year reflecting a 3% per unit increase quarter over quarter. The payout ratio in a seasonally slow quarter was 104% versus 122% in the second quarter of fiscal 2009.
Gas and Electricity Marketing
Financial Statement Analysis
Sales and gross margin - Per financial statements
For the three months ended September 30
(thousands of dollars)
Fiscal 2010 Fiscal 2009
----------- -----------
United United
Sales Canada States Total Canada States Total
-----
Gas $91,636 $37,724 $129,360 $8
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