TORONTO, ONTARIO — (Marketwire) — 05/17/12 — Just Energy Group Inc. (NYSE: JE)(TSX: JE)
Highlights for the year ended March 31, 2012 included:
Highlights for the three months ended March 31, 2012 included:
Just Energy Group converted to a TSX-listed corporation from an income trust on January 1, 2011. It has subsequently listed on the New York Stock Exchange effective January 30, 2012. The Company reports in its Management–s Discussion and Analysis, a detailed calculation of Adjusted EBITDA as its best measure of operating performance.
Customer Aggregation
As a marketing company, the most important driver of Just Energy–s growth is its ability to grow its customer base. Fiscal 2012 saw record customer additions through marketing top one million customers added for the first time. This growth was driven by record additions in both the Consumer and the Commercial divisions.
Overall, the customer base grew 17% year over year reaching almost 3.9 million. The chart below shows the positive trend in customer additions.
To view the Quarterly Customer Additions graph, please visit the following link: .
Each of the steps the Company has taken over the past three years to add additional sales channels have been successful. The core Consumer division residential marketing generated 429,000 new customers, up 1,000 from the previous record 428,000 added in fiscal 2011. This increase is in addition to the significant role the sales force plays in renewing customers.
Commercial additions were 662,000, up 16% from the previous record 571,000 added in fiscal 2011. The growth in Commercial has far exceeded management–s expectations when Hudson Energy was acquired two years ago. The division has grown to 1.9 million customers since its formation following the Hudson purchase. These customers generate, by design, lower per-customer margins than the traditional residential base but their payback is less than 18 months on aggregation cost, just like a residential customer. While this results in slower margin growth than the growth in the customer base, this is a very lucrative business as each customer equivalent brings lower customer aggregation costs and lower ongoing customer care expenses.
Other new marketing channels include initial steps into internet acquisition and telemarketing. A very high growth vehicle is the network marketing unit, Momentis. From a standing start with 3,500 independent representatives at the beginning of the year, Momentis has grown to 47,800 independent representatives at year end. With the rapid ramp-up, Just Energy is only now starting to see the benefit of this unit in new customer contracts and sales of other products.
The year also saw the acquisition of Fulcrum which, along with 240,000 new customers, brought an expertise in affinity marketing which the Company hopes to roll out in other major markets in coming years.
Energy marketing is seeing success in all its channels. With the continued confidence in these sales channels, the Company intends to invest to grow each to its potential.
A second area of growth is National Home Services. The water heater and HVAC rental division saw installed units increase by 39% year over year. Revenue and gross margin are up 58% and 78%, respectively. These products are a natural extension of Just Energy–s focus on the customer–s energy needs and value is being built daily within this division, with steps being taken to move outside of Ontario. Embedded margin within NHS contracts grew by $110 million year over year, up 39%.
Other aspects of the Company–s business also showed improvement. The level of attrition in the customer base again declined to an annual rate of 13% from 15% across the customer book. Improving economic conditions and higher numbers of more stable commercial customers cause management to believe that this trend will continue.
Renewal rates slipped slightly falling to an average of 64% this year from 65% in fiscal 2011. Renewals are challenging in a market where customers are coming off very high cost contracts to new market pricing which is often half what they had been paying. Once these high price contracts roll off, improved renewal rates are expected.
The fiscal 2012 growth in the customer base translated into margin and Adjusted EBITDA growth. The growth was projected to be 5% per share for the year and was well ahead of this pace until extremely warm winter weather resulted in sharply lower natural gas consumption, particularly in the fourth quarter. Despite this, both gross margin and Adjusted EBITDA growth ended the year in line with forecast at 5% and 7% per share, respectively. Management took proactive steps to hedge against warm weather through the purchase of weather index options prior to the winter. These options contributed a net $13 million in margin that would have been otherwise lost to warm temperatures.
Just Energy invested in a number of future expansions which increased administrative costs during the year. Excluding these and the back office which came with the Fulcrum acquisition, these costs grew by far less than the growth in the customer base. Bad debt expense also saw an improvement falling to 2.4% of relevant sales from 2.7% a year ago.
A very important measure of operating success is embedded margin, a calculation of the cash flow which will be generated by existing contracts. At the end of fiscal 2011, our embedded margin stood at $1,726 million. In addition, $484 million in margin was realized during the year. New contracts more than replaced this and the embedded margin ended the year with $1,977 million, up 15% in the year.
Three years ago, growing demand for green energy from our Consumer division customers led to the development of JustGreen and JustClean products. These products have been a tremendous success with now 12% of the current Consumer electricity demand and 10% of the Consumer natural gas demand coming from green sources. While the take-up by new customers on green slowed slightly this year due to pricing pressures in a challenging economy, green remains a focus of the Company.
The Company continues to initiate new products and options for green-oriented customers. The new Hudson Solar business has generated more than $90 million in roof-mount and ground-mount solar array capital projects for corporate and public buildings. It is expected that this business will double in the coming year.
CEO Ken Hartwick said, “Today, we continue to look to the future and see many changes coming in how customers use energy. Time-of-use metering makes control of home consumption an essential goal of homeowners and an opportunity for Just Energy to provide products which assist customers to use energy effectively. Looking further out, we see growth in the sales of electric cars and other vehicles as a major driver of North American power consumption. Again, our executive team is looking for ways to have Just Energy products at the forefront of this growth sector.”
On January 1, 2011, Just Energy implemented a dividend policy where monthly dividends were initially set at $0.10333 per share ($1.24 annually) equal to the former distribution rate as an income trust. This allowed many shareholders to benefit from a more attractive tax treatment on dividends, as opposed to the higher tax rate on the previous distributions.
Executive Chair Rebecca MacDonald stated, “Many of shareholders look to Just Energy as an important source of steady predictable income. This will not change. While the past year saw unfavourable weather conditions for our operating results, we were able to meet our guidance and continued to pay our $1.24 dividend. Our payout ratio on Adjusted EBITDA declined for the third straight year reaching 62%, down from 66% in fiscal 2011 and 78% in fiscal 2010”.
Ms. MacDonald added, “Some in the capital markets look at Just Energy–s overall payout ratio including expenditures to grow the business and think that a rising trend threatens our dividend. Nothing could be further from the truth.”
“Our growth expenditures generally pay back in less than 18 months resulting in the very high returns on invested capital for which Just Energy is known. We do not believe that these sales efforts should be curtailed even if small amounts need to be borrowed to finance them. We have access to financing necessary to fund any realistic level of accelerated growth without impacting our ability to fund dividends. Continued profitable growth and high income will be the result.”
Fourth Quarter Results
The fourth quarter operating results were highlighted by continued strong customer additions but were adversely impacted by extremely warm winter weather which resulted in sharply lower natural gas consumption in Just Energy–s key markets in the Midwest and Northeast.
Customer additions through marketing were 316,000, up 36% from 232,000 in the comparable quarter of fiscal 2010. Net additions were 112,000, up 53% from the prior comparable quarter.
The weather had a substantial but expected effect on both margins and adjusted EBITDA. Heating degree days in the Company–s gas markets, were on average, approximately 15% warmer than normal in the quarter. Margins were up 1% quarter over quarter with lower energy marketing margins being offset by higher margins at NHS and the Terra Grain Fuels ethanol plant.
Adjusted EBITDA was down 5% versus the prior fourth quarter. A number of factors contributed to this decline. The largest was the administrative costs of Fulcrum which are evenly spread throughout the year whereas its electricity based margins are heavily weighted toward the summer months. Other expenditures on new channels, such as Momentis, and new geographic territories, such as the U.K., required upfront expenditures prior to generating revenues.
Guidance for Fiscal 2013
In the past, Just Energy provided guidance with respect to expected growth in gross margin and Adjusted EBITDA, a non-GAAP measure used by companies who similarly are required to mark to market long term supply.
Management expects gross margin will grow by between 10% and 12% and Adjusted EBITDA is expected to grow 8% to 10% for the year ended March 31, 2013. It is expected that continued strong customer growth will result in a greater than 10% growth in the customer book more than offsetting the expected lower average margin per customer due to high growth from the Commercial division. In addition, management expects that cash income tax payable for the year will be reduced due to the input tax credits and accelerated depreciation on Hudson Energy Solar projects. Overall cash tax payable is expected to be higher than paid in fiscal 2012 but less than the current tax rate of 25% in Canada and 40% in the United States.
Chief Executive Officer Ken Hartwick stated: “Our more diversified product suite and geographic footprint gives a solid base for continued growth in the future. You will see us begin to use technology to expand our relationship with a customer leading to a deeper customer commitment. We expect continued profitable growth for Just Energy for the foreseeable future.”
Just Energy Group Inc.
Just Energy–s business primarily involves the sale of natural gas and/or electricity to residential and commercial customers under long-term fixed-price, price-protected or variable-priced contracts and green energy products. By fixing the price of natural gas or electricity under its fixed-price or price-protected program contracts for a period of up to five years, Just Energy–s customers offset their exposure to changes in the price of these essential commodities. Just Energy, which commenced business in 1997, derives its margin or gross profit from the difference between the 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, Pennsylvania and Massachusetts.
Forward-Looking Statements
Just Energy–s press releases may contain forward-looking statements including statements pertaining to customer revenues and margins, customer additions and renewals, customer attrition, customer consumption levels, general and administrative expenses, distributable cash, and treatment under governmental regulatory regimes. These statements are based on current expectations that involve a number of risks and uncertainties which could cause actual results to differ from those anticipated. These risks include, but are not limited to, levels of customer natural gas and electricity consumption, rates of customer additions and renewals, rates of customer attrition, fluctuations in natural gas and electricity prices, changes in regulatory regimes and decisions by regulatory authorities, competition and dependence on certain suppliers. Additional information on these and other factors that could affect Just Energy–s operations, financial results or distribution levels are included in Just Energy–s annual information form and other reports on file with Canadian securities regulatory authorities which can be accessed through the SEDAR website at or through Just Energy–s website at .
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 year ended March 31, 2012, and has been prepared with all information available up to and including May 17, 2012. This analysis should be read in conjunction with the audited consolidated financial statements for the year ended March 31, 2012. The financial information contained herein has been prepared in accordance with International Financial Reporting Standards (“IFRS”), as issued by the International Accounting Standards Board (“IASB”). 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 .
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.
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 JE and, like the unitholders of the Fund, the holders of JEEC–s Exchangeable Shares received common shares of JE on a one for one basis. JE also assumed all of the obligations under the $90m convertible debentures and $330m convertible debentures.
On October 3, 2011, Just Energy completed the acquisition of Fulcrum Retail Holdings LLC (“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. Just Energy used the proceeds from the issuance of $100 million of convertible unsecured subordinated debentures issued on September 22, 2012, which bear interest at a rate of 5.75% per annum, to fund the Fulcrum acquisition and for other general corporate purposes.
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. Just Energy markets its gas and electricity contracts in Canada and the U.S. under the following trade names: Just Energy, Hudson Energy, Commerce Energy, Amigo Energy and Tara Energy. 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 will also increase sales receptivity and improve renewal rates.
In addition, Just Energy sells and rents high efficiency and tankless water heaters, air conditioners and furnaces to Ontario residents, through a subsidiary under the trade name, National Home Services (“NHS”). Just Energy also operates a network marketing division under the trade name, Momentis. Through its subsidiary, Terra Grain Fuels, Inc. (“TGF”), Just Energy produces and sells wheat-based ethanol. Just Energy–s subsidiary, Hudson Energy Solar Corp (“HES”), also provides a solar project development platform operating in New Jersey, Pennsylvania and Massachusetts, under the trade name, Hudson Energy Solar.
Just Energy also holds a 50% ownership in Just Ventures LLC and Just Ventures L.P. (collectively “Just Ventures”), a jointly controlled entity, which is involved in the marketing of Just Energy–s gas and electricity contracts.
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 1, 2012 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
“$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 26 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 27 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 27 for further details.
“customer” does not refer to an individual customer but instead an RCE.
“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.
“Large commercial customer” means customers representing more than 15 RCEs.
“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.
Non-GAAP financial measures
Just Energy–s consolidated 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 that 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 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 consolidated 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.
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 acquisition 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.
ACQUISITION OF HUDSON ENERGY SERVICES, LLC
In May 2010, Just Energy completed the acquisition of all of the equity interests of Hudson Parent Holdings, LLC, and all of the common shares of Hudson Energy Services, LLC (Hudson”), with an effective date of May 1, 2010. The acquisition was funded by an issuance of $330 million in convertible debentures.
The acquisition of Hudson was accounted for using the purchase method of accounting. The Company allocated the purchase price to the identified assets and liabilities acquired based on their fair values at the time of acquisition, as follows:
All contracts and intangible assets, excluding brand, are amortized over the average remaining life at the time of acquisition. The gas and electricity contracts and customer relationships are amortized over 30 months and 35 months, respectively. Other intangible assets, excluding brand, are amortized over periods of three to five years. The brand value is considered to be indefinite and, therefore, not subject to amortization. The purchase price allocation is considered final and, as a result, no further adjustments will be made.
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 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 was $15 million, with the total cost of these options being $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 may 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 1,000 independent contractors, the Momentis network marketing operation and Internet-based and telephone marketing efforts. Approximately 51% of Just Energy–s customer base resides within the Consumer Energy division, which is currently focused on longer-term price-protected and variable rate 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 49% 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 190 independent contractors in Ontario.
Ethanol division
Just Energy owns and operates Terra Grain Fuels, 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.
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. As of March 31, 2012, there were approximately 47,800 independent representatives.
Solar division
Hudson Energy 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. HES 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. HES 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 March 31, 2012, the division has made commitments of approximately $90.7 million with the status of the associated projects ranging from contracted to completed.
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 the value of customer contracts is protected by entering into fixed-price supply contracts. Under IFRS, the value of the customer contracts is 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.
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 $283.1 million ($2.00 per share) for fiscal 2012, an increase of 9% (7% per share) from $259.0 million ($1.88 per share) in the prior year. The increase is attributable to the increase in gross margin, offset by higher operating expenses. Gross margin increased 7% (5% per share) overall with energy marketing gross margin increasing by 1% and margin contributions from NHS and TGF increasing 78% and 31%, respectively, versus the prior fiscal year.
Administrative expenses increased by 12% from $109.4 million to $122.4 million year over year. The increase over the prior comparable year was due to the inclusion of the administrative expenses relating to Fulcrum of $5.9 million and investments in growth for solar and network marketing expansion. Excluding the Fulcrum-related expenses, administrative expenses amounted to $116.5 million, a 6% increase over prior year in order to support the 10% organic growth in the customer base. A portion of the 6% non-Fulcrum growth is attributable to the Company–s expansion into new markets where investments have been made but the customer growth is not yet reflected in the results.
Selling and marketing expenses for the year ended March 31, 2012, were $177.3 million, a 33% increase from $133.6 million reported in the prior comparative year. This increase is attributable to the 9% increase in customer additions as well as the increased investments related to the build-out of the independent representative network by Momentis. Excluding the $37.3 million of costs associated with the building of Momentis, sales and marketing expenses increased by 5% to $140.0 million.
The sales and marketing expenses representing the costs associated with maintaining gross margin, which are deducted in Adjusted EBITDA, were $83.3 million for the year ended March 31, 2012, 2% lower than $84.8 million in the prior fiscal year. Customers lost through attrition and failed to renew were 775,000 for the year up from 638,000 for the year prior reflecting a 17% higher customer base. Margin growth from NHS and the TGF contributed to the offset of lost margin at a relatively low sales and marketing cost.
Bad debt expense was $28.5 million for the year ended March 31, 2012, a 3% increase from $27.7 million recorded for the prior comparable year. This increase is a result of the 15% increase in revenue for markets which Just Energy bears the bad debt risk year over year. For the year end March 31, 2012, the bad debt expense of $28.5 million represents approximately 2.4% of revenue in the jurisdictions where the Company bears the credit risk.
Dividends and distributions paid for the year ended March 31, 2012 were $175.4 million, an increase of 3% from the prior comparative year as a result of a higher number of shares outstanding. The payout ratio on Base EBITDA was 84% for the year ended March 31, 2012, versus 73% in fiscal 2011. For the year ended March 31, 2012, the payout ratio on Adjusted EBITDA was 62%, versus 66% in the prior year.
For further information on the changes in the gross margin, please refer to “Gas and electricity marketing” on page 15 and “Administrative expenses”, “Selling and marketing expenses”, “Bad debt expense” and “Finance costs”, which are further clarified on pages 21 through 23.
For the year ended March 31, 2010, gross margin was $415.3 million for the year, reflecting lower gas consumption from the winter months being warmer than expected. Administrative, sales and marketing and bad debt expenses amounted to $88.4 million, $95.8 million and $17.9 million, respectively. For fiscal 2010, adjusted EBITDA amounted to $236.3 million ($1.83 per unit) and the payout ratio on Adjusted EBITDA was 78% for the year, reflecting higher distributions of $1.43 per unit due to a Special Distribution of $0.20 per unit being paid.
Management–s estimate of the future embedded gross margin amounted to $1,976.8 million at as March 31, 2012, from $1,725.5 million, an increase of 15% from fiscal 2011. This is over and above the $484.4 million in margin realized by the energy marketing and home services divisions in fiscal 2012. The future embedded gross margin for Canada was up 8% with 39% higher embedded margin from the Home Services division more than offsetting 6% lower margins from energy marketing. The decline in Canadian energy marketing embedded margin was primarily due to a net customer loss of 10% during the year. NHS embedded margins were up 39% in the year reflecting a 39% increase in installed customers over the year. The embedded margin for NHS represents the margin associated with the remaining average life of the customer contracts.
U.S. future embedded gross margin grew 19% over the year from US$835.6 million to US$994.1 million. The growth in energy marketing embedded margins for the year includes US$76 million of future margin associated with customers acquired from Fulcrum. Excluding this growth from the Fulcrum acquisition, the growth in energy marketing embedded gross margin was lower than the 10% organic growth in customer base as the commercial customers, which make up a growing percentage of new additions, by design have lower margins and shorter base contract terms than residential customers. However, the addition of commercial customers also results in lower customer aggregation costs and lower annual customer servicing costs, neither of which is captured in embedded margin.
The U.S. dollar strengthened 3% against the Canadian dollar over fiscal 2012, resulting in an increase of $27.7 million in future embedded gross margin when stated in Canadian dollars.
Funds from operations represents the cash available for distribution to the shareholders of Just Energy. For the year ended March 31, 2012, funds from operations were $175.5 million ($1.24 per share), an 11% decrease from $197.7 million ($1.43 per share) in the prior year. 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, for which the benefit will not be recognized until future periods. The payout ratio on funds from operations was 100% for the year ended March 31, 2012, versus 86% in the prior year, reflecting investments made for future growth during the year.
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 year. These expenditures totaled $85.9 million and, with the acquisition of Fulcrum, resulted in an increase in embedded future margin of $251.3 million. For the year ended March 31, 2012, adjusted funds from operations was $249.6 million ($1.77 per share), an increase of 11% over $225.3 million ($1.63 per share) in the prior year. Payout ratios were 70% for the year ended March 31, 2012, and 75% in the prior fiscal year.
For the year ended March 31, 2010, funds from operations amounted to $197.0 million ($1.52 per unit), resulting in a payout ratio of 94%, including the Special Distribution. Adjusted funds from operations was $213.3 million ($1.65 per unit) for fiscal 2010, resulting in a distribution payout ratio of 87%.
Just Energy has adopted IFRS as the basis for reporting financial results for fiscal 2012. The comparative figures for fiscal 2011 have been restated in accordance with the Company–s IFRS accounting policies but fiscal 2010 results are prepared in accordance with Canadian GAAP. The following table provides selected financial information for the last three fiscal years.
2012 compared with 2011
Sales decreased by 6% from $3.0 billion in fiscal 2011 to $2.8 billion in fiscal 2012. 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 primarily as a result of the decrease in commodity market prices.
For the year ended March 31, 2012, gross margin increased by 7% to $517.5 million from $481.6 million reported in fiscal 2011. Gross margin related to energy marketing increased 1% year over year despite a 17% increase in customer base as a result of the warm winter temperatures impacting gas consumption across all markets and the increasing percentage of lower margin commercial customers within the overall book. Gross margin from TGF and NHS increased by 31% and 78%, respectively for the year ended March 31, 2012.
Net loss for fiscal 2012 amounted to $126.6 million, compared with net income of $352.9 million in fiscal 2011. The change in net income (loss) is due to the change in fair value of the derivative instruments, which showed a loss of $96.3 million in fiscal 2012, versus a gain in fiscal 2011 of $506.0 million. Under IFRS, the customer margins are not marked to market but there is a requirement to mark to market the future supply contracts, creating unrealized gains or losses depending on the supply pricing.
Total assets slightly decreased to $1.5 billion in fiscal 2012 as a result of the amortization of the intangible assets acquired through the Hudson acquisition.
Total long-term liabilities as of March 31, 2012 were $999.6 million representing a 12% increase over the fiscal 2011. Just Energy funded the Fulcrum acquisition effective October 1, 2011 by issuing $100 million in convertible debentures, which as at March 31, 2012, were valued at $85.9 million in long-term debt. Offsetting this increase other long-term liabilities have decreased in fiscal 2012 primarily due to the movement from long term liabilities to short term liabilities.
2011 compared with 2010
Just Energy adopted IFRS effective April 1, 2010. As a result, fiscal 2011 results were prepared in accordance with IFRS. For the year ended March 31, 2010, the financial results from reported using Canadian GAAP. This 2011 to 2010 comparison considers the changes between the fiscal 2011 results reported under IFRS and the fiscal 2010 results reported under Canadian GAAP.
Sales increased by 28% in fiscal 2011 due to a 45% net increase in customers as a result of 999,000 new additions and the acquisition of Hudson. Effective May 1, 2010, Just Energy completed the acquisition of 660,000 largely commercial Hudson customers and issued $330 million of convertible debentures in order to finance the acquisition. For further information on the acquisition, see page 5. As at March 31, 2011, commercial customers made up 40% of the Just Energy customer base, and while there are lower margins associated with these customers, the associated expenses to acquire and maintain are lower on a per RCE basis. Gross margin increased to $481.6 million or 16% over fiscal 2010.
Net income increased by 52% from $231.5 million ($1.79 per unit) in fiscal 2010 to $352.9 million ($2.56 per share) in fiscal 2011. The change in net income relates primarily to the change in fair value of the derivative instruments, which showed a gain in fiscal 2011 of $506.0 million versus a loss of $1.3 million in fiscal 2010 as well as strong operating results for the year. Offsetting this increase is the income tax provision of $173.4 million for fiscal 2011, versus an income tax recovery of $100.3 million in fiscal 2010.
Total assets increased by 21% to $1.6 billion in fiscal 2011. The largest components of this change relate to the property, plant and equipment, intangible assets, goodwill and contract initiation costs recorded as part of the Hudson acquisition.
Total long-term liabilities of $890.7 million represent an 8% increase over fiscal 2010. Just Energy funded the Hudson acquisition by issuing $330 million in convertible debentures, which as at March 31, 2011, were valued at $286.4 million and recorded in long-term debt. Other long-term liabilities also decreased in fiscal 2011 primarily due to the change in mark to market valuation of future supply positions.
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 fourth quarter
Sales decreased by 13% quarter over quarter to $820.4 million from $941.3 million. Sales from gas and electricity marketing decreased by 14% quarter over quarter primarily as a result of lower commodity prices as well as lower gas consumption due to the extremely warm winter temperatures across Just Energy–s gas markets versus relatively cold weather the prior year. This decrease was partially offset by higher sales for NHS and TGF. Gross margin was flat quarter over quarter due to the increase in gross margin contribution from NHS and TGF offsetting the 4% lower gross margin from energy marketing. The decline in energy marketing gross margin was attributable to the extremely warm winter weather in Just Energy markets and the impact on natural gas consumption. Heating degree days in Just Energy–s primary gas markets were 10% to 15% warmer than normal in January and February, with March being 38% warmer than normal. Gross margin percentage increased to 21% for fiscal 2012 versus 18% for fiscal 2011 due to improved margin per customer in energy marketing and improved results at NHS and TGF.
The change in fair value of derivative instruments resulted in a loss of $90.2 million for the current quarter, in comparison with a gain of $139.7 million in the fourth quarter of the prior fiscal year. Net loss for the three months ended March 31, 2012 was $76.9 million, representing a loss per share of $0.55. For the prior comparative quarter, net income was $37.1 million, representing income of $0.27 and $0.23 on a basic and diluted per share basis, respectively. 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 impact of mark to market gains and losses.
Adjusted EBITDA decreased by 5% to $109.3 million for the three months ended March 31, 2012. This decrease is attributable to the weather impacts on energy marketing and higher administrative, bad debt and selling and marketing expenses to maintain gross margin, Base EBITDA (after all selling and marketing costs) decreased by 30% to $76.9 million for the three months ended March 31, 2012, down from $109.3 million in the prior comparable quarter primarily as a result of higher investment in the solar and network marketing divisions as well as investments to open new geographic territories for energy marketing. These expenditures will support future growth for the Company. For the three months ended March 31, 2012, the provision for income tax expense amounted to $15.8 million versus the prior comparative period expense of $162.0 million, which was a result of a change in the deferred tax rate to the Conversion.
Dividends/distributions paid were $44.2 million, a 2% increase from $43.2 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. Payout ratio on Adjusted EBITDA was 40% for the three months ended March 31, 2012, compared with 38% in the prior comparable quarter.
Sales for the year ended March 31, 2012 were $2.6 billion, a decrease of 8% from $2.8 billion in the prior year. The sales decline reflects the impact of the decrease in commodity prices within contracts signed in recent periods and the impact on gas consumption of the extremely warm temperatures during the third and fourth quarters. Because of the lower commodity prices, Just Energy has experienced 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.
Gross margins were $456.4 million for the year, an increase of 1% from the $451.4 million earned during the year ended March 31, 2011. The increase in gross margin is primarily a result of the record number of customers added through marketing and the Fulcrum acquisition, offset by the impact from the warm winter partially mitigated through weather derivative options.
Gas
Sales were $883.1 million for the year ended March 31, 2012, down 26% from $1,185.8 million in the prior year. Gross margins were $140.1 million for fiscal 2012, a decrease of 19% from $172.8 million in the prior year. The number of gas customers has decreased by 10% during the fiscal year.
Just Energy entered into weather index derivatives for the period from November 1, 2011 through to March 31, 2012 with the intention of reducing gross margin fluctuations from extreme weather. The maximum payout cap on the options was $15 million. The weather during the third quarter was approximately 10% to 15% warmer than normal and accounted for approximately $9 million of the total option payout. For the fourth quarter, weather remained approximately 10% to 15% warmer for January and February, absorbing the remainder of the payout cap, but then the weather was approximately 38% warmer than normal in the month of March. The impact from the record warm winter was lost gross margin of approximately $28 million, offset by the $15 million payout from the weather index derivative.
Canada
Canadian gas sales were $476.0 million, a decrease of 28% from $660.0 million recorded for the year ended March 31, 2011. Gross margin totalled $85.2 million, down 10% from the prior comparative year. The decrease in sales is a result of the decline in commodity prices reflected in recent contract offerings, the 15% smaller customer base and lower consumption due to the extremely warm winter. Gross margin was 10% lower in fiscal 2012 than the prior year due to the smaller customer base and lower consumption of gas offset, by higher realized margin per customer.
After allowance for balancing and inclusive of acquisitions, realized average gross margin per customer (“GM/RCE”) for the year ended March 31, 2012, amounted to $178/RCE compared to $160/RCE for the prior year. The GM/RCE value includes an appropriate allowance for the bad debt expense in Alberta.
United States
For the year ended March 31, 2012, gas sales totalled $407.0 million, a decrease of 23% from $525.7 million in the prior year. Gross margin for the gas markets in the U.S. was $54.9 million, a 30% decrease versus $78.6 million reported in the prior year. Total gas customers in the U.S decreased by 4% during fiscal 2012. The lower sales and gross margin were the result of a lower consumption due to warmer than usual winter weather and the overall decrease in customer base. The lower commodity price environment and its impact on recently signed contracts also contributed to the decline in gas sales in the U.S. year over year.
Average realized gross margin after all balancing costs for the year ended March 31, 2012, was $113/RCE, a decrease from $141/RCE. In addition to the impact from weather, a higher proportion of commercial customers were added which have lower margins per RCE by design. The GM/RCE value includes an appropriate allowance for bad debt expense in Illinois, Georgia and California.
Electricity
Sales for fiscal 2012 were $1,719.9 million, an increase of 5% from $1,635.3 million for the year ended March 31, 2011. Gross margin was $316.2 million, up 13% from $278.7 million in the prior year. The number of electricity customers has increased by 32% during the past year.
Canada
Electricity sales were $489.0 million for the year ended March 31, 2012, a decrease of 21% from the prior comparable year due to a 5% decline in RCEs as well as new variable rate products offered at lower sales prices. Gross margin decreased by 2% year over year to $93.2 million versus $94.7 million in the prior year. The substantially lower decline in margin versus customers was largely due to higher margins associated with the JustGreen product offerings as well as some attractive variable rate products.
Realized average gross margin per customer in Canada after all balancing and including acquisitions for the year ended March 31, 2012, amounted to $141/RCE, an increase from $127/RCE in the prior year. The GM/RCE value includes an appropriate allowance for the bad debt expense in Alberta.
United States
Electricity sales in the U.S. were $1,230.8 million for the year ended March 31, 2012, an increase of 21% from $1,015.3 million in the prior year. Gross margin for electricity in the U.S was $223.1 million, a 21% increase from $183.9 million recorded in fiscal 2011. Driving sales growth was the 53% increase in customer base during the year, as a result of strong additions through marketing and 240,000 RCEs added through the Fulcrum acquisition, effective October 1, 2011. These Fulcrum customers had a limited impact on sales and margins as they will generate the majority of their annual revenue and margin in the first and second quarters (summer months).
Average gross margin per customer for electricity during the year decreased to $132/RCE, compared to $149/RCE in the prior year, as a result of a higher proportion of commercial customers added which have lower margins per RCE by design. The GM/RCE value for Texas, Pennsylvania, Massachusetts and California includes an appropriate all