TORONTO, ONTARIO — (Marketwire) — 02/09/12 — Just Energy Group Inc. (NYSE: JE)(TSX: JE) –
Highlights for the three months ended December 31, 2011 included:
Highlights for the nine months ended December 31, 2011 included:
Just Energy Fiscal 2012 Third Quarter Results
Just Energy announced its results for the three months and nine months ended December 31, 2011
Just Energy is a TSX and NYSE listed corporation and it reports in its Management–s Discussion and Analysis, a detailed review of its operating results as measured by gross margin, Adjusted EBITDA and Base EBITDA. Just Energy also reports the profit for the period but management believes that the inclusion of non-cash mark to market on future supply positions makes this measure less valuable in measuring performance as this future supply has been sold at fixed prices.
Third Quarter Operating Performance
The third quarter of fiscal 2012 marks the clearest evidence to date that Just Energy–s diversification efforts over the last two years have been successful in re-energizing the Company–s growth. The continued success of the Commercial division as well as strong residential additions through the Consumer division allowed the Company to add a record 310,000 new customers through marketing (“customer” is defined as a residential customer equivalent). This total exceeded the previous record by 19% and was up 30% from the 238,000 added in the second quarter. Net additions through marketing were 115,000, up 156% from the second quarter. Added to this were 240,000 new customers included with the acquisition of Fulcrum Retail Holdings LLC (“Fulcrum”), which closed on October 3, 2011. Overall, Just Energy–s customer base increased by 10% in the third quarter and now totals 3.758 million Residential Customer Equivalents.
Fulcrum is a Texas marketer who specializes in affinity sales, a channel Just Energy had not previously pursued. This acquisition is not only a strategic fit, but their existing base of customers made the transaction immediately accretive to our shareholders.
In addition, the Momentis network marketing channel is growing very rapidly. Total Momentis agents reached 25,300 in the quarter, up from 11,100 three months earlier. Network marketing does not overlap the Company–s traditional door-to-door sales channel and tends to generate sales to customers who would not otherwise buy from a door-to-door salesperson.
The Hudson acquisition has resulted in an expansion of Just Energy–s presence in the commercial gas and electricity markets. Since acquiring Hudson, the Company has exceeded the prior record level of customer acquisition (137,000) for seven consecutive quarters. Higher customer additions have allowed Just Energy to offset a difficult price environment and resultant weak renewals, maintaining our gross margin and EBITDA.
The Company–s move into green commodity supply through the JustGreen and JustClean programs has been a continued success. Over the past 12-months, green takeup was 33% of new residential customers, who purchased an average of 87% green supply. The overall Green book is now 9% of the Company–s natural gas needs (up from 5% a year ago) and 12% for electricity (up from 10% last year). In order to match customer demand with green supply, Just Energy has participated in more than 25 green projects across our markets.
In addition, Hudson Solar division has made commitments of approximately $62.5 million to date. These projects build relationships with regulators and generate attractive returns on investment. Overall, Just Energy–s commitment to green products and projects strengthens our long-term margins, builds a stronger customer and regulatory relationships and allows our customers and employees to be proud of their contribution to a cleaner environment.
The National Home Services water heater and HVAC rental and sales operation had another strong quarter with installations growing 39% from 110,700 units to 153,700. Our margin from this business was up 65% year over year.
These expansions were seen both in continued marketing success in the third quarter and operating results which exceeded published growth targets for the year.
Management has set targets of 5% per share growth for both gross margin and Adjusted EBITDA for the year.
The 310,000 customers added through marketing in the third quarter was a record for the Company and the net additions of 115,000 effectively equaled the prior record.
To view the Quarterly Customer Additions graph, please visit the following link:
New Commercial customers made up 198,000 of the 310,000 quarterly additions, up 29% from the 154,000 added in the second quarter. These customers have lower annual margins but their aggregation cost and annual customer service costs are commensurately lower as well. Consumer division customer additions were 112,000, up 33% from 84,000 in the second quarter. Overall, as can be seen below, our customer base is up 10% in the quarter. This includes 240,000 customers acquired with the Fulcrum acquisition.
Higher customer numbers and improved operations at both NHS and Terra Grain Fuels led to higher margins for the quarter. Margins were up 12% (9% per share) reaching $147.4 million for the quarter. This was despite warmer winter temperatures that reduced gas consumption in Just Energy–s gas markets. Lost margin of approximately $12 million, the majority of which was recorded in the third quarter but the remaining impact will not be recognized until the fourth quarter which will also see the impact of warmer weather in January. To offset this, the Company had implemented a winter hedging strategy utilizing weather derivative options to mitigate the impact of warm weather. These options return a maximum of $15 million in the case of a warmer than normal winter. During the third quarter, the options returned $9 million against their quarterly cost of $0.8 million.
Operational measures, such as bad debt, remained well under control. Losses were 2.5% on the 43% of sales where Just Energy bears this risk, down from 2.6% a year ago. Attrition rates were in line with management–s expectations and down significantly from those in fiscal 2011. Canadian attrition was 10%, down from 11% a year ago. U.S. natural gas attrition (our market most affected by the housing and employment crisis) was 21%, down from the 25% rate reported a year ago. U.S. electricity attrition was 13%, lower than the 18% reported a year ago. Renewal rates remained soft in a very low price environment with Canadian Consumer division renewals at 60% for gas and 50% for electricity down from 69% and 65% a year ago. U.S. renewal rates were stronger in the Consumer division showing 89% for gas and 71% for electricity from 76% and 74% a year ago. Commercial division renewals are generally a lower percentage and more volatile. They were 47% for Canadian gas and 57% for electricity versus 51% and 62% a year earlier. U.S. Commercial renewals were 61% for gas and 66% for electricity versus 70% and 76% a year ago.
The current stable low commodity price environment is the worst for our core products however we have focused on renewals by giving the customer a range of options including Blend and Extend pricing, our new JustClean products and, most recently, innovative variable price offerings.
Higher margins led to significant growth in Adjusted EBITDA. This measure shows cashflow available after the cost of replacement of all margin lost during the quarter. The Company reports future embedded margin within its contracts each quarter. This measure reached $1,930 million, up 4% for the quarter. Adjusted EBITDA was $88.5 million, up 15% (12% per share), the third consecutive quarter with a double digit increase.
On October 3, 2011, Just Energy issued a press release reaffirming its guidance that the 5% targets for gross margin and Adjusted EBITDA growth are expected to be achieved in fiscal 2012. Year to date, gross margin is up 9% per share with Adjusted EBITDA up 18% per share. As can be seen from these results, Just Energy remains well ahead of the pace necessary to realize these goals after nine months. The press release also stated that, based on these operating results and those expected for the remainder of the year, Just Energy will be able to comfortably maintain its current $1.24 annual dividend for the foreseeable future. A third consecutive quarter of significantly lower payout ratio supports that conclusion.
Dividends for the quarter were $0.31 per share, equal to unit distributions paid in the prior comparable quarter. Payout ratio on Adjusted EBITDA was 50%, down from 55% a year ago. The payout ratio for nine months ended December 31, 2011 is 75%, down from 88% a year prior. Traditionally, the fourth quarter has the lowest payout ratio of the year.
As regards to the third quarter, CEO Ken Hartwick noted: “Our record customer additions show clearly that consumers remain responsive to our suite of products despite very low commodity prices.”
“The acquisition of Fulcrum completed at the beginning of the quarter is another example of a strategic move into a new marketing channel, in this case affinity sales. Past expansions such as Hudson and National Home Services have added substantial value to Just Energy. Like these acquisitions, Fulcrum–s existing customer base makes the acquisition accretive day one.”
“With our customer base up 10% in the quarter, we were able to withstand warm winter weather and generate above target growth in both margin and Adjusted EBITDA with the assistance of a weather derivative hedging program we put in place in November.”
Chair Rebecca MacDonald added: “Our third quarter results were very strong making it clear that our business model and dividend policy are sound. Our continued growth in customers and cashflow in the United States made the listing of our shares on the NYSE a logical step. It is our intention to bring the Just Energy story to U.S. investors and to build greater liquidity for our shares.”
“Our growth year to date is well ahead of the 5% per share targeted for gross margin and Adjusted EBITDA. Our payout ratio in each of the first three quarters was below that of the prior year, a year in which we comfortably paid $1.24 to our shareholders. Just Energy has shown its ability to adjust to market conditions and continue to generate the operating returns we have realized throughout our history. With a stronger, more diversified business, Just Energy is poised to be a leading player in retail energy for years to come.”
Just Energy
Just Energy–s business primarily involves the sale of natural gas and/or electricity to residential and commercial customers under long-term fixed-price, price-protected or variable-priced contracts and green energy products. By fixing the price of natural gas or electricity under its fixed-price or price-protected program contracts for a period of up to five years, Just Energy–s customers offset their exposure to changes in the price of these essential commodities. Just Energy, which commenced business in 1997, derives its margin or gross profit from the difference between the price at which it is able to sell the commodities to its customers and the matched term price at which it purchases the associated volumes from its suppliers. Just Energy also offers “green” products through its JustGreen and JustClean programs. The electricity JustGreen product offers the customer the option of having all or a portion of his or her electricity sourced from renewable green sources such as wind, run of the river hydro or biomass. The gas JustGreen product offers carbon offset credits which will allow the customer to reduce or eliminate the carbon footprint of their home or business.
JustClean products are essentially carbon offsets from carbon capture and reduction projects as well as green power renewable energy certificates from green generators. This product can be offered in all states and provinces and is not dependent on energy deregulation. Management believes that the green products will not only add to profits, but also increase sales receptivity and improve renewal rates.
In addition, through National Home Services, Just Energy sells and rents high efficiency and tankless water heaters, air conditioners and furnaces to Ontario residents. Through its subsidiary Terra Grain Fuels, Just Energy produces and sells wheat-based ethanol. Just Energy has also launched, Hudson Solar, a solar project development platform in New Jersey.
Forward-Looking Statements
Just Energy–s press releases may contain forward-looking statements including statements pertaining to customer revenues and margins, customer additions and renewals, customer attrition, customer consumption levels, administrative expenses, Base EBITDA, adjusted EBITDA and treatment under governmental regulatory regimes. These statements are based on current expectations that involve a number of risks and uncertainties which could cause actual results to differ from those anticipated. These risks include, but are not limited to, levels of customer natural gas and electricity consumption, rates of customer additions and renewals, rates of customer attrition, fluctuations in natural gas and electricity prices, changes in regulatory regimes and decisions by regulatory authorities, competition and dependence on certain suppliers. Additional information on these and other factors that could affect Just Energy–s operations, financial results or dividends are included in Just Energy–s annual information form and other reports on file with Canadian securities regulatory authorities which can be accessed through the SEDAR website at or through Just Energy–s website at .
MANAGEMENT–S DISCUSSION AND ANALYSIS (“MD&A”) – February 8, 2012
OVERVIEW
The following discussion and analysis is a review of the financial condition and results of operations of Just Energy Group Inc.(“JE” or “Just Energy” or the “Company”) (formerly Just Energy Income Fund (the “Fund”)) for the three and nine months ended December 31, 2011, and has been prepared with all information available up to and including February 8, 2012. This analysis should be read in conjunction with the unaudited consolidated financial statements for the three and nine months ended December 31, 2011. The financial information contained herein has been prepared in accordance with International Financial Reporting Standards (“IFRS”), as issued by the International Accounting Standards Board (“ISAB”). Just Energy–s date of transition to IFRS was April 1, 2010. All dollar amounts are expressed in Canadian dollars. Quarterly reports, the annual report and supplementary information can be found on Just Energy–s corporate website at . Additional information can be found on SEDAR at or EDGAR at .
Effective January 1, 2011, Just Energy completed the conversion from the Fund to Just Energy (the “Conversion”). As part of the Conversion, Just Energy Exchange Corp. (“JEEC”) was amalgamated with JEGI and, like the unitholders of the Fund, the holders of JEEC–s Exchangeable Shares received common shares of JEGI on a one for one basis. JEGI also assumed all of the obligations under the $90m convertible debentures and $330m convertible debentures.
Just Energy is a corporation established under the laws of Canada and holds securities and distributes 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., Alberta Energy Savings L.P. (“AESLP”), Just Energy Illinois Corp., Just Energy New York Corp., Just Energy Indiana Corp., Just Energy Texas L.P., Just Energy Massachusetts Corp., Just Energy Michigan Corp., Just Energy Pennsylvania Corp., Universal Energy Corporation, Commerce Energy, Inc. (“Commerce” or “CEI”), National Energy Corp. (which operates under the trade name of National Home Services (“NHS”)), Hudson Energy Services, LLC and Hudson Energy Canada Corp. (collectively “Hudson” or “HES”), Momentis Canada Corp. and Momentis U.S. Corp. (collectively, “Momentis”), Terra Grain Fuels, Inc. (“TGF”), Hudson Energy Solar Corp. (“Hudson Solar”), Just Energy Limited (“JEL”) and Fulcrum Retail Holdings LLC and its subsidiaries (operating under the trade names Tara Energy and Amigo Energy) (“Fulcrum”).
Just Energy–s business primarily involves the sale of natural gas and/or electricity to residential and commercial customers under long-term fixed-price, price-protected or variable-priced contracts. 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. Variable rate products allow customers to maintain competitive rates while retaining the ability to lock into a fixed price at their discretion. Just Energy derives its margin or gross profit from the difference between the price at which it is able to sell the commodities to its customers and the related price at which it purchases the associated volumes from its suppliers.
Just Energy also offers green products through its JustGreen and JustClean programs. The electricity JustGreen product offers customers the option of having all or a portion of their electricity sourced from renewable green sources such as wind, run of the river hydro or biomass. The gas JustGreen product offers carbon offset credits that allow customers to reduce or eliminate the carbon footprint of their homes or businesses. JustClean products allow customers in certain jurisdictions to offset their carbon footprint without purchasing commodity from Just Energy. JustClean can be offered in all states and provinces and is not dependent on energy deregulation. Management believes that the JustGreen and JustClean products will not only add to profits, but also increase sales receptivity and improve renewal rates.
In addition, through National Home Services, Just Energy sells and rents high efficiency and tankless water heaters, air conditioners and furnaces to Ontario residents. Through its subsidiary Terra Grain Fuels, Just Energy produces and sells wheat-based ethanol. Just Energy–s subsidiary, Hudson Solar, also provides a solar project development platform operating in New Jersey, Pennsylvania and Massachusetts.
On October 3, 2011, Just Energy completed the acquisition of Fulcrum with an effective date of October 1, 2011. Fulcrum is a retail electricity provider operating in Texas and focuses on residential and small to mid-size commercial customers. Fulcrum markets primarily online and through targeted affinity marketing channels under the brands, Tara Energy, Amigo Energy and Smart Prepaid Electric. Just Energy used the proceeds from the issuance of $100 million of convertible unsecured subordinated debentures, which bear interest at a rate of 5.75% per annum, to fund the Fulcrum acquisition and for other general corporate purposes.
FORWARD-LOOKING INFORMATION
This management–s discussion and analysis (“MD&A”) contains certain forward-looking information pertaining to customer additions and renewals, customer consumption levels, EBITDA, Base EBITDA, Adjusted EBITDA 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 Just Energy–s operations, financial results or distribution levels are included in the June 20, 2011 Annual Information Form and other reports on file with Canadian security regulatory authorities, which can be accessed on our corporate website at or through the SEDAR website at or EDGAR at .
KEY TERMS
“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.
“$90m convertible debentures” represents the $90 million in convertible debentures issued by Universal Energy Group Ltd. (“Universal”) in October 2007. Just Energy Exchange Corp. assumed the obligations of the debentures as part of the Universal acquisition on July 1, 2009 and Just Energy assumed the obligations of the debentures as part of the Conversion. See “Long-term debt and financing” on page 28 for further details.
“$100m convertible debentures” represents the $100 million of convertible debentures issued by the Company to finance the purchase of Fulcrum, effective October 1, 2011. See “Long-term debt and financing” on page 28 for further details.
“$330m convertible debentures” represents the $330 million in convertible debentures issued by the Fund to finance the purchase of Hudson, effective May 1, 2010. Just Energy assumed the obligations of the debentures as part of the Conversion. See “Long-term debt and financing” on page 28 for further details.
“LDC” means a local distribution company; the natural gas or electricity distributor for a regulatory or governmentally defined geographic area.
“RCE” means residential customer equivalent 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.
“customer” does not refer to an individual customer but instead a RCE.
“Large commercial customer” means customers representing more than 15 RCEs.
Non-GAAP financial measures
Just Energy–s financial statements are prepared in compliance with IFRS. All non-GAAP financial measures do not have standardized meanings prescribed by IFRS and are therefore unlikely to be comparable to similar measures presented by other issuers.
Just Energy converted from an income trust to a corporation on January 1, 2011. Under the corporate structure, management believes that Adjusted EBITDA is the best basis for analyzing the financial results of Just Energy.
EBITDA
“EBITDA” represents earnings before finance costs, taxes, depreciation and amortization. This is a non-GAAP measure which reflects the pre-tax profitability of the business.
Base EBITDA
“Base EBITDA” represents EBITDA adjusted to exclude the impact of mark to market gains (losses) arising from IFRS requirements for derivative financial instruments on future supply positions. This measure reflects operating profitability as mark to market gains (losses) are associated with supply already sold at future fixed prices.
Just Energy ensures that customer margins are protected by entering into fixed-price supply contracts. Under IFRS, 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 Just Energy and have therefore excluded it from the Base EBITDA calculation.
Adjusted EBITDA
“Adjusted EBITDA” represents Base EBITDA adjusted to deduct selling and marketing costs sufficient to maintain existing levels of gross margin and maintenance capital expenditures necessary to sustain existing operations. This adjustment results in the exclusion of the marketing that Just Energy carried out and the capital expenditures that it had made to add to its future productive capacity. Management believes this is a useful measure of operating performance for investors.
Funds from operations
“Funds from operations” refers to the net cash available for distribution to shareholders. Base funds from operations is calculated by Just Energy as gross margin adjusted for cash items including administrative expenses, selling and marketing expenses, bad debt expenses, finance costs, corporate taxes, capital taxes and other items. The gross margin used includes a seasonal adjustment for the gas markets in Ontario, Quebec, Manitoba and Michigan in order to include cash received.
Adjusted funds from operations
“Adjusted funds from operations” refers to the funds from operations adjusted to deduct the selling and marketing costs sufficient to maintain existing levels of gross margin and maintenance capital expenditures necessary to sustain existing operations. This adjustment results in the exclusion of the marketing carried out and the capital expenditures that it made by Just Energy to add to its future productive capacity.
Embedded gross margin
“Embedded gross margin” is a rolling five-year measure of management–s estimate of future contracted energy gross margin as well as the margin associated with the average remaining life of National Home Services– customer contracts. The energy marketing embedded margin 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.
International Financial Reporting Standards
Just Energy has adopted IFRS as the basis for reporting its financial results commencing with the interim financial statements of fiscal 2012 and using April 1, 2010 as the transition date. The comparative figures for fiscal 2011 have been restated in accordance with the Company–s IFRS accounting policies. The interim financial statements and MD&A for the three months ended June 30, 2011, include additional disclosure relating to the transition to IFRS, and therefore, should be read in conjunction with the MD&A and financial statements for the three and nine months ended December 31, 2011.
ACQUISITION OF FULCRUM RETAIL HOLDINGS LLC
On October 3, 2011, Just Energy completed the acquisition of Fulcrum with an effective date of October 1, 2011. The acquisition was funded by an issuance of $100 million in convertible debentures.
The consideration for the acquisition was US$79.4 million paid at the time of closing and subject to customary working capital adjustments. Just Energy will also pay up to US$11.0 million in cash and issue up to 867,025 common shares (collectively the “Earn-Out” amount) to the seller 18 months following the closing date, provided that certain EBITDA and billed volume targets are satisfied by Fulcrum during the Earn-Out period.
In addition, the Company will pay, as part of the contingent consideration, an additional 4.006% on the cash portion of the contingent consideration and $1.86 for each of the common shares that are issued at the end of the Earn-Out period.
The acquisition of Fulcrum was accounted for using the purchase method of accounting. Just Energy allocated the purchase price to the identified assets and liabilities acquired based on their fair values at the time of acquisition as follows:
The electricity customer contracts and affinity relationships are amortized over the average remaining life at the time of acquisition. The electricity contracts and customer relationships are amortized over 3.5 years. The affinity relationships are amortized over eight years.
OPERATIONS
Natural gas
Just Energy offers natural gas customers a variety of products ranging from month-to-month variable-price offerings to five-year fixed-price contracts. For fixed-price contracts, Just Energy purchases gas supply through physical or financial transactions with market counterparts in advance of marketing, based on forecast customer aggregation for residential and small commercial customers. For larger commercial customers, gas supply is generally purchased concurrently with the execution of a contract.
The LDC provides historical customer usage which, when normalized to average weather, enables Just Energy to purchase the expected normal customer load. Furthermore, Just Energy mitigates exposure to weather variations through active management of the gas portfolio, which involves, but is not limited to, the purchase of options including weather derivatives. Just Energy–s ability to mitigate weather effects is limited by the severity of weather from normal. To the extent that balancing requirements are outside the forecast purchase, Just Energy bears the financial responsibility for fluctuations in customer usage. Volume variances may result in either excess or short supply. In the case of under consumption by the customer, excess supply is sold in the spot market resulting in either a gain or loss compared to the weighted average cost of supply. Further, customer margin is lowered proportionately to the decrease in consumption. In the case of greater than expected gas consumption, Just Energy must purchase the short supply in the spot market resulting in either a gain or loss compared to the weighted average cost of supply. Consequently, customer margin increases proportionately to the increase in consumption. To the extent that supply balancing is not fully covered through active management or the options employed, Just Energy–s customer gross margin may be reduced or increased depending upon market conditions at the time of balancing. Under some commercial contract terms, this balancing may be passed onto the customer.
Just Energy has entered into weather index derivatives for the third and fourth quarters of fiscal 2012 with the intention of reducing gross margin fluctuations from extreme weather. The maximum payout associated with the weather derivatives for fiscal 2012 will be $15 million. As at December 31, 2011, the warmer than normal temperatures across Just Energy–s gas markets has resulted in the potential payout of approximately $9 million of the $15 million payout. The total cost of these options was $2 million.
Ontario, Quebec, British Columbia and Michigan
In Ontario, Quebec, British Columbia and Michigan, the volumes delivered for a customer typically remain constant throughout the year. Just Energy does not recognize sales until the customer actually consumes the gas. During the winter months, gas is consumed at a rate that is greater than delivery and, in the summer months, deliveries to LDCs exceed customer consumption. Just Energy receives cash from the LDCs as the gas is delivered, which is even throughout the year.
Manitoba, Alberta and Saskatchewan
In Manitoba, Alberta and Saskatchewan, 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, California, Georgia, New Jersey and Pennsylvania
In New York, Illinois, Indiana, Ohio, California, Georgia, New Jersey and Pennsylvania, the volume of gas delivered is based on the estimated consumption and storage requirements for each month. Therefore, the amount of gas delivered in winter months is higher than in the spring and summer months. Consequently, cash flow received from these states is greatest during the third and fourth (winter) quarters, as cash is normally received from the LDCs in the same period as customer consumption.
Electricity
In Ontario, Alberta, New York, Texas, Illinois, Pennsylvania, New Jersey, Maryland, Michigan, California and Massachusetts, Just Energy offers a variety of solutions to its electricity customers, including fixed-price and variable-price products on both short-term and longer-term electricity contracts. Some of these products provide customers with price-protection programs for the majority of their electricity requirements. The customers experience either a small balancing charge or credit (pass-through) on each bill due to fluctuations in prices applicable to their volume requirements not covered by a fixed price. Just Energy uses historical usage data for all enrolled customers to predict future customer consumption and to help with long-term supply procurement decisions.
Just Energy purchases power supply through physical or financial transactions with market counterparties in advance of marketing for residential and small commercial customers based on forecast customer aggregation. Power supply is generally purchased concurrently with the execution of a contract for larger commercial customers. The LDC provides historical customer usage which, when normalized to average weather, enables Just Energy to purchase to expected normal customer load. Furthermore, Just Energy mitigates exposure to weather variations through active management of the power portfolio. The expected cost of this strategy is incorporated into the price to the customer. Our ability to mitigate weather effects is limited by the severity of weather from normal. In certain markets, to the extent that balancing requirements are outside the forecast purchase, Just Energy bears the financial responsibility for excess or short supply caused by fluctuations in customer usage. In the case of under consumption by the customer, excess supply is sold in the spot market resulting in either a gain or loss in relation to the original cost of supply. Further, customer margin is lowered proportionately to the decrease in consumption. In the case of greater than expected power consumption, Just Energy must purchase the short supply in the spot market resulting in either a gain or loss in relation to the fixed cost of supply. Customer margin generally increases proportionately to the increase in consumption. To the extent that supply balancing is not fully covered through customer pass-throughs or active management or the options employed, Just Energy–s customer gross margin may be impacted depending upon market conditions at the time of balancing.
JustGreen
Customers have the ability to choose an appropriate JustGreen program to supplement their electricity and natural gas contracts, providing an effective method to offset their carbon footprint associated with the respective commodity consumption.
JustGreen programs for electricity customers involve the purchase of power from green generators (such as wind, solar, run of the river hydro or biomass) via power purchase agreements and renewable energy certificates. JustGreen programs for gas customers involve the purchase of carbon offsets from carbon capture and reduction projects.
JustClean
In addition to its traditional commodity marketing business, Just Energy allows customers to effectively manage their carbon footprint without buying energy commodity products by signing a JustClean contract. The JustClean products are essentially carbon offsets from carbon capture and reduction projects as well as green power renewable energy certificates from green generators. This product can be offered in all states and provinces and is not dependent on energy deregulation.
Blend and Extend program
As part of Just Energy–s retention efforts, electricity and natural gas customers may be contacted for early renewal of their contracts under a Blend and Extend offer. These customers are offered a lower rate, compared to their current contracted rate, but the term of their contract is extended up to five more years. Consequently, Just Energy may experience a reduction in margins in the short term but will gain additional future margins.
Consumer (Residential) Energy division
The sale of gas and electricity to customers of 15 RCEs and less is undertaken by the Consumer Energy division. The marketing of energy products of this division is primarily done door-to-door through 870 independent contractors, the Momentis network marketing operation and Internet-based and telephone marketing efforts. Approximately 52% of Just Energy–s customer base resides within the Consumer Energy division, which is currently focused on longer-term price-protected offerings of commodity products, JustGreen and JustClean. To the extent that certain markets are better served by shorter-term or enhanced variable rate products, the Consumer Energy independent contractors also offer these products.
Commercial Energy division
Customers with annual consumption over 15 RCEs are served by the Commercial Energy division. These sales are made through three main channels: door-to-door commercial independent contractors; inside commercial sales representatives; and sales through the broker channel using the commercial platform acquired with the Hudson purchase. Commercial customers make up about 48% of Just Energy–s customer base. Products offered to commercial customers can range from standard fixed price offerings to “one off” offerings, which are tailored to meet the customer–s specific needs. These products can be either fixed or floating rate or a blend of the two, and normally have terms of less than five years. Margin per RCE for this division is lower than consumer margins but customer aggregation costs and ongoing customer care costs are lower as well on a per RCE basis. Commercial customers tend to have combined attrition and failed-to-renew rates that are lower than those of consumer customers.
Home Services division
NHS began operations in April 2008 and provides Ontario residential customers with a long-term water heater, furnace and air conditioning rental, offering high efficiency conventional and power vented tanks and tankless water heaters and high efficiency furnaces and air conditioners. NHS markets through approximately 240 independent contractors in Ontario. See page 21 for additional information.
Ethanol division
Just Energy owns and operates 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”). On January 4, 2011, Just Energy acquired the 33.3% interest in TGF that was previously owned by EllisDon Design Build Inc. (“EllisDon”) pursuant to a put option exercised by EllisDon. See page 22 for additional information on TGF.
Network Marketing division
Just Energy owns and operates Momentis, a network marketing company operating within Canada and the U.S. Independent representatives educate consumers about the benefits of energy deregulation and sell them products offered by Just Energy as well as a number of other products. Independent representatives are rewarded through commissions earned based on new customers added. For the three months ended December 31, 2011, there were 14,200 independent representatives added, bringing the total number to 25,300 as of December 31, 2011.
Solar division
Hudson Solar, a solar project development platform operating in New Jersey, Pennsylvania and Massachusetts, brings renewable energy directly to the consumer, enabling them to reduce their environmental impact and energy costs. Hudson Solar installs solar systems on residential or commercial sites, maintaining ownership of the system and providing maintenance and monitoring of the system for a period of up to 20 years. Hudson Solar sells the energy generated by the solar panels back to the customer. This division will contribute to operating metrics through commodity sales, renewable energy credit offset sales and tax incentives. As of December 31, 2011, the division has made commitments of approximately $62.5 million with the status of the associated projects ranging from contracted to completed.
(1)The per share/unit amounts are calculated on an adjusted fully diluted basis, removing the impact of the $330m, $100m and $90m convertible debentures as all will be anti-dilutive in future periods.
Base EBITDA differs from EBITDA in that the impact of the mark to market gains (losses) from the financial instruments is removed. This measure reflects operating profitability as mark to market gains (losses) are associated with supply already sold at future fixed prices. Just Energy ensures that customer margins are protected by entering into fixed-price 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 Just Energy.
For Adjusted EBITDA, selling and marketing expenses used for increasing gross margin are also removed along with maintenance capital expenditures being deducted. As a corporation, management believes that Adjusted EBITDA is the best measure of operating performance.
Adjusted EBITDA amounted to $88.5 million ($0.62 per share) in the third quarter of fiscal 2012, an increase of 15% (12% per share/unit) from $76.8 million ($0.56 per unit) in the prior comparable quarter. The increase is attributable to the increase in gross margin, offset by higher operating expenses. Gross margin increased 12% (9% per share/unit) overall with energy marketing gross margin increasing by 5% and margin contributions from NHS and TGF increasing 65% and 12%, respectively, versus the comparable quarter.
Administrative expenses increased by 19% from $26.2 million to $31.3 million quarter over quarter. The increase over the prior comparable quarter was due to the inclusion of the administrative expenses relating to Fulcrum of $2.6 million and investments in growth for solar and network marketing expansion. Excluding the Fulcrum-related expenses, administrative expenses amounted to $28.7 million, consistent with the administrative expenses recorded in the prior three quarters.
Selling and marketing expenses for the three months ended December 31, 2011, were $48.9 million, a 42% increase from $34.5 million reported in the prior comparative quarter. This increase is attributable to the 23% increase in customer additions as well as the increased investments related to the build-out of the independent representative network by Momentis. The sales and marketing expenses representing the costs associated with maintaining gross margin, which are deducted in Adjusted EBITDA, were $19.2 million for the three months ended December 31, 2011, relatively unchanged from $19.1 million in the prior comparable quarter.
Bad debt expense was $8.3 million for the three months ended December 31, 2011, a 28% increase from $6.5 million recorded for the prior comparable quarter. This increase is a result of the 20% increase in revenue for markets which Just Energy bears the bad debt risk quarter over quarter. In addition, during the quarter, there were higher customer defaults in Texas after the peak billing during the seasonally warmer summer months. For the three months ended December 31, 2011, the bad debt expense of $8.3 million represents approximately 2.6% of revenue.
Dividends and distributions paid for the three months ended December 31, 2011 were $43.9 million, an increase of 3% from the prior comparative quarter as a result of the dividends paid to JEEC shareholders being only 66.67% of that which was paid to JE shareholders and a higher number of shares versus units outstanding. The payout ratio on Base EBITDA was 69% for the three months ended December 31, 2011, versus 62% in the prior comparative quarter. For the three months ended December 31, 2011, the payout ratio on Adjusted EBITDA was 50%, versus 55% in the prior comparative quarter.
For the nine months ended December 31, 2011, Adjusted EBITDA amounted to $173.8 million ($1.23 per share), an increase of 21% (18% per share/unit) from $144.0 million ($1.05 per unit) in the prior comparable period. For the current nine months, gross margin increased by 11% (9% per share/unit). Dividends and distributions for the nine months ended December 31, 2011, were $131.2 million ($0.93 per share), an increase of 3% from the prior comparative period. The payout ratio on Base EBITDA was 99% for the nine months ended December 31, 2011, versus 104% in the prior comparative period. For the nine months ended December 31, 2011, the payout ratio on Adjusted EBITDA was 75% versus 88% in the prior comparative period.
For further information on the changes in the gross margin, please refer to “Gas and electricity marketing” on page 14 and “Administrative expenses”, “Selling and marketing expenses”, “Bad debt expense” and “Finance costs”, which are further clarified on pages 21 through 25.
Management–s estimate of the future embedded gross margin amounted to $1,929.7 million at as December 31, 2011, an increase of 4% during the quarter. The future embedded gross margin for Canada was unchanged with higher embedded margin from National Home Services offsetting lower margins from energy marketing. The decline in embedded Canadian energy marketing margin was entirely due to a net customer loss of 3% during the quarter. NHS embedded margins were up 5% in the quarter reflecting a 7% increase in installed customers over the quarter. The embedded margin associated with National Home Services represents the margin associated with the remaining average life of the customer contracts.
U.S. future embedded gross margin grew 12% over the quarter from US$866.7 million to US$973.4 million. The growth in energy marketing embedded margins for the quarter includes US$76 million of future margin associated with customers acquired from Fulcrum. The growth in energy marketing embedded gross margin remains lower than the 16% growth in customer base as the commercial customers, which make up a growing percentage of new additions, have lower margins and shorter base contract terms than residential customers. However, the commercial customer base also results in lower customer aggregations costs and lower annual customer servicing costs, which are not captured in embedded margin.
The U.S. dollar weakened 3% against the Canadian dollar during the quarter, resulting in a lowering of $30.4 million in total future embedded gross margin when stated in Canadian dollars. Excluding the impact from foreign exchange and Fulcrum, the embedded margin from energy marketing increased by approximately $15 million.
Future embedded margin associated with TGF or Hudson Solar is currently immaterial and is therefore excluded from the embedded margin outlined above. As of December 31, 2011, Hudson Solar has made commitments of approximately $62.5 million, with the status of the associated projects ranging from contracted to completed. Completed projects make up a very small percentage of the commitments, therefore embedded margin from these projects is not yet material.
Funds from operations
Funds from operations represent the cash available for distribution to the shareholders of Just Energy. For the three months ended December 31, 2011, funds from operations was $51.6 million ($0.36 per share), a 9% decrease from $56.5 million ($0.41 per unit) in the prior comparable quarter. This decrease is a result of the additional spending associated with the expansion of the solar and network marketing divisions in the current fiscal year. The payout ratio on funds from operations was 85% for the three months ended December 31, 2011, versus 75% in the prior comparable quarter. For the nine months ended December 31, 2011, funds from operations was $119.7 million ($0.85 per share), resulting in a payout ratio of 110%. In the prior comparable period, funds from operations was $122.8 million ($0.89 per unit), resulting in a payout ratio of 103%.
Adjusted funds from operations is adjusted to deduct only the sales and marketing expenses associated with maintaining gross margin as well as the maintenance capital expenditures for the quarter. For the three months ended December 31, 2011, adjusted funds from operations was $76.6 million ($0.54 per share), an increase of 19% over $64.5 million ($0.47 per unit) in the prior comparable period. For the nine months ended December 31, 2011, adjusted funds from operations was $161.5 million ($1.15 per share), an increase of 12% over the prior comparable period. Payout ratios were 57% and 81% for the three and nine months ended December 31, 2011, respectively, opposed to 66% and 58% in the prior comparable period.
Just Energy–s results reflect seasonality, as consumption is greatest during the third and fourth quarters (winter quarters). While year over year quarterly comparisons are relevant, sequential quarters will vary materially. The main impact of this will be higher Base EBITDA and Adjusted EBITDA and lower payout ratios in the third and fourth quarters, and lower Base EBITDA and Adjusted EBITDA and higher payout ratios in the first and second quarters.
Analysis of the third quarter
Sales decreased by 1% quarter over quarter to $738.6 million from $744.3 million. Sales from gas and electricity marketing decreased by 3% quarter over quarter primarily as a result of lower commodity prices as well as lower gas consumption due to the seasonally warmer temperatures in the current quarter. However, this decrease was offset by higher sales for NHS and TGF. Gross margin increased by 12% quarter over quarter due to a 5% increase in energy margin contribution as well as increased margin from NHS and TGF.
Net loss for the three months ended December 31, 2011 was $97.4 million, representing a loss per share of $0.70, on a basic and diluted basis. For the prior comparative quarter, net income was $178.5 million, representing income of $1.41 and $1.16, both on a basic and diluted per unit basis, respectively. The change in fair value of derivative instruments resulted in a loss of $110.7 million for the current quarter, in comparison with a gain of $234.9 million in the third quarter of the prior fiscal year. The fair value of derivative instruments represents the mark to market of future commodity supply acquired to cover future customer demand. The supply has been sold to customers at future fixed prices, minimizing any realizable impact of mark to market gains and losses.
Adjusted EBITDA increased by 15% to $88.5 million for the three months ended December 31, 2011. This increase is attributable to the increase in gross margin less the higher administrative, bad debt and selling and marketing expenses to maintain gross margin. Base EBITDA (after all selling and marketing costs) decreased by 8% (10% per share/unit) to $63.6 million for the three months ended December 31, 2011, down from $68.8 million in the prior comparable quarter primarily as a result of higher investment in the solar and network marketing divisions to support future growth.
Dividends/distributions paid were $43.9 million, a 3% increase from $42.5 million paid in the prior comparative quarter. The increase is due to the higher number of outstanding shares as the annual dividend/distribution rate was unchanged at $1.24 per year. In the prior year, JEEC Exchangeable Shares were paid dividends equal to 66.67% of the Fund–s distributions. These shares have now been exchanged for JE common shares and receive the $1.24 annual dividends. Payout ratio on Adjusted EBITDA was 50% for the three months ended December 31, 2011, compared with 55% in the prior comparable quarter.
Sales for the three months ended December 31, 2011 were $686.3 million, a decrease of 3% from $711.2 million in the prior comparable quarter. The sales decline was the result of a gradual reduction in average price within the customer base as new customers signed and customer renewals are at lower prices than that of customers expiring or lost through attrition because of the decrease in commodity market prices. Gross margins were $128.5 million for the quarter, an increase of 5% from the $121.8 million earned during the three months ended December 31, 2010. The increase in gross margin is primarily a result of the inclusion of the margin associated with the record number of customers added through marketing and the 240,000 customers acquired with Fulcrum.
In past years, the warm weather experienced in third quarter (10% to 15% warmer than normal in Just Energy–s gas markets) would have resulted in substantial losses compared to the contracted margins of the customers. Following the losses seen in the record winter of 2009/2010, management developed a program of purchasing weather derivative options that are intended to offset margin lost due to warmer winter weather. Management estimates that the margin lost in the third quarter would have totalled approximately $12 million including reconciliations expected to be quantified in the fourth quarter, as a result of the lower consumption. Payout to the Company on the weather options has totalled $9 million in the quarter largely offsetting the losses. There is a payout cap on the options of $15 million.
For the nine months ended December 31, 2011, sales were $1,827.6 million, a decrease of 5% from $1,920.7 million reported in the prior comparable period. Gross margin was $301.7 million for the nine months ended December 31, 2011, an increase of 4% from $290.2 million earned in the first nine months of fiscal 2011.
Canada
Sales were $251.1 million for the three months ended December 31, 2011, down 21% from $318.0 million in the prior comparable quarter. Gross margins were $47.2 million in the third quarter, a decrease of 3% from $48.7 million in the prior comparable period. For the nine months ended December 31, 2011, sales and gross margin were $674.5 million and $109.3 million, respectively, representing a decrease of 21% in sales and 7% in gross margin over the comparative period of fiscal 2011. The number of customers in Canada has decreased by 12% during the past year.
Gas
Canadian gas sales were $131.8 million, a decrease of 23% from $171.5 million recorded for the three months ended December 31, 2010. The decrease is a result of the Canadian gas customer base falling by 15% year over year lower consumption of gas due to the warmer than usual winter weather and the decline in commodity prices reflected in recent contract offerings. Gross margin totalled $24.6 million, down 16% from the prior comparative quarter. During the quarter, Just Energy entered into weather derivative options up to March 31, 2012 with the intention of reducing gross margin fluctuations from extreme weather. The weather index derivative mitigated any further loss that would have otherwise been experienced in the quarter.
For the nine months ended December 31, 2011, sales amounted to $309.5 million, a decrease of 18% from $378.8 million recorded in the prior comparable quarter due to a declining customer base, lower gas consumption due to warmer weather as well as lower contract prices. Gross margin increased by 10% from $44.4 million, to $48.8 million as a result of the impact of weather index derivatives recapturing lost margin.
After allowance for balancing and inclusive of acquisitions, realized average gross margin per customer (“GM/RCE”) for the rolling 12 months ended December 31, 2011, amounted to $171/RCE compared to $179/RCE for the prior comparable quarter. The GM/RCE value includes an appropriate allowance for the bad debt expense in Alberta.
Electricity
Electricity sales were $119.3 million for the three months ended December 31, 2011, a decrease of 19% from the prior comparable quarter due to a 9% decline in RCEs as well as variable rate product offerings being at lower prices. Gross margin increased by 16% quarter over quarter to $22.6 million versus $19.5 million in the comparable three-month period. This increase in margin was a result of the higher margin associated with the JustGreen product offerings as well as some attractive variable rate products.
For the nine months ended December 31, 2011, sales amounted to $365.0 million, a decrease of 23% from $472.7 million recorded in the prior comparable period due to the declining customer base. Gross margin decreased by 17% to $60.5 million for the nine months ended December 31, 2011, over the prior comparable period.
Realized average gross margin per customer in Canada after all balancing and including acquisitions for the rolling 12-months ended December 31, 2011, amounted to $122/RCE, a decrease from $132/RCE in the prior comparative period due to the cumulative effect of new lower margin contracts necessary to compete against the very low utility price in the Ontario market. The GM/RCE value includes an appropriate allowance for the bad debt expense in Alberta.
United States
Sales for the third quarter of fiscal 2012 were $435.2 million, an increase of 11% from $393.3 million for the three months ended December 31, 2010. Gross margin was $81.3 million, up 11% from $73.1 million in the prior comparable period. For the nine months ended December 31, 2011, sales increased by 8% to $1,153.1 million over the prior comparable period. Gross margin for the nine months ended December 31, 2011, was $192.3 million, an increase of 11% from $172.6 million recorded in the prior comparable period.
Gas
For the three months ended December 31, 2011, gas sales and gross margin in the U.S. totalled $122.4 million and $24.4 million, respectively, versus $156.5 million and $25.5 million, respectively, in the prior comparable quarter. Total gas customers remained relatively unchanged year over year. The sales decrease of 22% was the result of a lower consumption due to warmer than usual winter weather and a gradual reduction in average price within the customer base as renewals and new customers signed are at lower prices than those for customers expiring or lost through attrition.
Despite the 22% decrease in sales, the decrease in gross margin year over year was 4%. The negative impact of the warmer weather experienced during the quarter was lessened as a result of the weather derivatives put in place at the beginning of November, 2011.
For the nine months ended December 31, 2011, sales amounted to $238.9 million, a decrease of 16% from $285.5 million recorded in the prior comparable period due to the change in product pricing and lower consumption due to weather. Gross margin increased by 15% from $30.4 million to $34.9 million for the nine months ended December 31, 2011, primarily as a result of weather index derivatives and the prior comparable period experiencing losses on sale of excess gas.
Average realized gross margin after all balancing costs for the rolling 12 months ended December 31, 2011, was $151/RCE, an increase from $142/RCE. This is primarily due to the lower losses on sale of excess gas this year compared to the previous year. The GM/RCE value includes an appropriate allowance for bad debt expense in Illinois and California.
Electricity
U.S. electricity sales and gross margin for the three months ended December 31, 2011 were $312.9 million and $56.9 million, respectively, versus $236.7 million and $47.6 million, in the third quarter of fiscal 2011. Sales increased 32% due to a 55% increase in long-term customers year over year, as a result of strong additions through marketing and 240,000 RCEs added through the Fulcrum acquisition. Sales increased less than the increase in customers due to a higher number of commercial customers and lower commodity pricing. Gross margin increased by 20% due to the higher customer base being offset by lower margins on the large number of commercial customers added.
For the nine months ended December 31, 2011, sales amounted to $914.1 million, an increase of 17% from $783.7 million recorded in the prior comparable period. Gross margin increased 11% from $142.2 million to $157.4 million for the nine months ended December 31, 2011. Customers were up sharply but the majority of the net customer additions are lower margin commercial customers.
Average gross margin per customer for electricity during the current quarter decreased to $127/RCE, compared to $165/RCE in the prior comparable quarter, as a result of lower margins per RCE by design for commercial customers added. The GM/RCE value for Texas, Pennsylvania, Massachusetts and California includes an appropriate allowance for the bad debt expense.
Gross customer additions for the quarter were 310,000, up 23% from the 252,000 customers added through marketing in the third quarter of fiscal 2011 and an increase of 30% from the 238,000 customers added in the second quarter of fiscal 2012. Gross additions for the quarter were at record levels, exceeding Just Energy–s previous record gross additions of 261,000 recorded in the first quarter of fiscal 2011. Net additions were 355,000 for the quarter, resulting in a 10% growth in the customer base for the third quarter, including the additional 240,000 customers acquired with Fulcrum effective October 1, 2011.
Consumer customer additions amounted to 112,000, an increase of 33% from 84,000 customer additions recorded in the second quarter of fiscal 2012. Additions for the second quarter of fiscal 2012 were below management–s expectations with the third quarter–s additions being more in line with expectations. Management continues to diversify its sales platform beyond door-to-door sales to include the Momentis network, telephone and online marketing channels and responded to the current price environment with a change in product offerings to include variable-based products.
Commercial additions were 198,000 for the quarter, a 29% increase from 154,000 additions in the second quarter of fiscal 2012. The broker sales channel continues to expand across Just Energy–s existing markets. Commercial additions, which consists of customers representing 15 RCEs or higher, will fluctuate quarterly depending on the size of the contracts signed.
Total gas customers decreased by 3% during the last three months, reflecting a difficult price environment with a large disparity between utility spot prices and the five-year prices. The extended period of low, stable gas prices has reduced the customer appetite for the stability of higher priced long-term fixed contracts. As a result, Just Energy has moved to a variety of consumer products that provide a different value proposition in the current environment. Profitable new capped variable rate and monthly flat-rate contracts are being sold while spot market prices remain stable.
Total electricity customers were up 17% during the quarter, with a 26% growth in the U.S. market and a 1% decrease in customers in the Canadian markets. The growth in the U.S. is a result of the strong additions and the acquired Fulcrum customers, while the Canadian electricity market, particularly in Ontario, continues to face competitive challenges due to low utility pricing.
JustGreen and JustClean
Sales of the JustGreen products remain strong despite premium pricing in a low-price environment. The JustGreen program allows customers to choose to purchase units of green energy in the form of renewable energy or carbon offsets, in an effort to reduce greenhouse gas emissions. When a customer purchases a unit of green energy, it creates a contractual obligation for Just Energy to purchase a supply of green energy at least