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Press release from Marketwire

Just Energy Reports First Quarter Results

Thursday, August 12, 2010

Just Energy Reports First Quarter Results09:54 EDT Thursday, August 12, 2010TORONTO, ONTARIO--(Marketwire - Aug. 12, 2010) - Just Energy Income Fund (TSX:JE.UN) - Highlights for the three months ended June 30, 2010 included: -- Gross customer additions through marketing of 261,000 and net additions of 116,000 both the highest in Just Energy history. -- Acquisition effective May 1, 2010 of Hudson Energy Group, a leading energy marketer to the U.S. commercial sector with more than 660,000 customers. -- Just Energy exited the quarter with over 3 million customers, up 70% from a year earlier. -- Sales (seasonally adjusted) up 48% year over year reaching $640.0 million. -- Gross margin (seasonally adjusted) of $88.9 million, up 19% but down 2% per unit, primarily attributable to reduced gas consumption due to record warm weather. -- Significant investments in further expansion - preparation for entry into Massachusetts and two new utility territories in New York, the launch of Momentis network marketing in Ontario and New York, broadening of our newly acquired commercial broker network and the roll- out of National Home Services into Union Gas territory in Ontario. -- Record warm weather reduced Distributable cash after gross margin replacement and Distributable cash by $21.0 million due to margin effects of lower gas consumption. -- Distributable cash after gross margin replacement of $33.8 million, down 32% per unit. -- Distributable cash after all marketing expenses of $24.4 Million, down 44% per unit. -- Adjusted EBITDA of $31.3 million, up from $30.2 million in fiscal 2010. Just Energy First Quarter Fiscal 2011 ResultsJust Energy Income Fund announced its results for the three months ended June 30, 2010. ---------------------------------------------------------------------------- Three months ended June 30, ($ millions except per unit and customers) F2011 Per unit F2010 Per unit ---------------------------------------------------------------------------- Sales (1) $640.0 $432.6 ---------------------------------------------------------------------------- Gross margin (1) 88.9 $0.65 74.8 $0.66 ---------------------------------------------------------------------------- Distributable cash ---------------------------------------------------------------------------- - After margin replacement 33.8 $0.25 42.2 $0.37 ---------------------------------------------------------------------------- - After all marketing expense 24.4 $0.18 36.1 $0.32 ---------------------------------------------------------------------------- Adjusted EBITDA 31.3 $0.23 30.2 $0.27 ---------------------------------------------------------------------------- Net income $275.3 $2.01 $102.6 $0.91 ---------------------------------------------------------------------------- Payout ratio 173% 97% ---------------------------------------------------------------------------- Long Term Customers 3,069,000 1,801,000 ---------------------------------------------------------------------------- (1) Seasonally adjusted (non-GAAP measure) (2) The per unit amounts are calculated using an adjusted fully diluted bases for fiscal 2011 removing the impact of the JEEC and JEIF convertible debentures as they will be anti-dilutive by fiscal year end. The fiscal 2010 per unit amounts are calculated on a fully diluted basis. Just Energy is an Income Fund and it reports in the attached Management's Discussion and Analysis, a detailed calculation of distributable cash both before and after marketing expenditures to expand the gross margin from the Fund's customer base. On May 1, 2010, Just Energy completed the acquisition of Hudson Energy, a U.S. based marketer to largely commercial customers in New York, Illinois, New Jersey and Texas. Hudson specializes in the aggregation of large commercial customers (hospitals, universities, school boards) through independent brokers. Neither Just Energy nor Hudson pursue industrial volumes due to concerns over credit concentration and load volatility.The first quarter of fiscal 2011 displayed the first impacts of Just Energy's efforts to diversify its marketing channels as well as the continued impact of its diversification into new product lines. The purchase of Hudson Energy during the quarter added not only an established commercial customer base but also a proven network of independent brokers to the commercial market.Just Energy had previously only pursued the smaller commercial customers who could be approached door-to-door such as small retail outlets and had not utilized the independent broker network as a source of customers. This new and expanding broker network was a key driver of new customer additions in Q1.Significant investments were made during the quarter to further expand Just Energy's geographic footprint and product offerings.Just Energy achieved record gross customer additions through marketing of 261,000, by far the most ever added in a quarter. This was up 169% from 97,000 a year earlier and 99% from 131,000 in Q4. In addition, Just Energy added 660,000 new customers from the acquisition of Hudson Energy in May. Higher gross customer additions led to record net customer additions through marketing of 116,000, up from 11,000 a year earlier and 13,000 in Q4.The following table highlights the impact of marketing channel diversification in the first quarter compared to the prior two years.To view the Quarterly Customer Addition table, please visit the following link:http://media3.marketwire.com/docs/627040QCA.jpgOverall, the customer base topped 3 million for the first time at quarter end. The table below shows the source of this 70% growth from a year ago. Beginning Acquired Failed Ending Ending April 1, with To June 30, June 30, RCEs 2010 Additions Hudson Attrition Renew 2010 2009 --------------------------------------------------------------------------- Natural Gas Canada 734,000 12,000 - (21,000) (16,000) 709,000 727,000 United States 408,000 108,000 81,000 (32,000) (1,000) 564,000 238,000 --------------------------------------------------------------------------- Total gas 1,142,000 120,000 81,000 (53,000) (17,000) 1,273,000 965,000 --------------------------------------------------------------------------- Elec- tri- city Canada 760,000 26,000 - (18,000) (11,000) 757,000 574,000 United States 391,000 115,000 579,000 (33,000) (13,000) 1,039,000 262,000 --------------------------------------------------------------------------- Total elec- tri- ity 1,151,000 141,000 579,000 (51,000) (24,000) 1,796,000 836,000 --------------------------------------------------------------------------- Com- bined 2,293,000 261,000 660,000 (104,000) (41,000) 3,069,000 1,801,000 --------------------------------------------------------------------------- Customer attrition was slightly above target at 11% and 13% for Canadian gas and electricity versus targets of 10%. U.S. attrition improved to 28% for gas versus a target of 30% and 14% for electricity versus a target of 20%. Improvements in U.S. attrition rates are further evidence of stabilization of the U.S. economy.Customer renewals were 62% for Canadian gas, lower than the target of 70%. Low spot gas prices resulted in very high five year premiums to the Utility price during the quarter leading to "sticker shock" for customers on renewal. Management's expectation is that higher commodity prices should bring renewals in line with targets and past experience. Electricity renewals were on target at 70% in Canada. U.S. renewals were 69% for gas (on a very low number of renewals) and 83% for electricity, both against 75% targets.The 48% increase in sales was due to a 55% increase in average number of customers with normal revenue per customer in electricity but lower than normal gas revenue due to record warm weather conditions resulting in sharply lower gas consumption.Gross margin was up 19% but down both on a per unit and a per customer basis. The increase reflects a higher number of customers and continued strong take-up of JustGreen offerings offset by the warm weather impact on gas consumption. Overall, electricity margins increased in line with the increase in average number of customers. ------------------------------------------------------------------------ % Increase in Seasonally % Increase average Adjusted Q1 2011 Q1 2010 (Decrease) customers ------------------------------------------------------------------------ Natural gas margins $25,851 $42,102 (39)% 24% ------------------------------------------------------------------------ Electricity margins 62,766 32,667 92% 90% ------------------------------------------------------------------------ Total margins $88,617 $74,769 19% 55% ------------------------------------------------------------------------ The table below shows realized margin per RCE for each product: -------------------------------------------------------------------- Realized Margin per RCE Q1 2011 Q1 2010 Change -------------------------------------------------------------------- Canadian gas $137 $195 (30)% -------------------------------------------------------------------- Canadian electricity $142 $141 1% -------------------------------------------------------------------- U.S. gas $82 $274 (70)% -------------------------------------------------------------------- U.S. electricity $144 $176 (18)% -------------------------------------------------------------------- This table and the one that follows highlight the extent of the adverse impact of warm weather reflected in the lower gas consumption in the quarter. While consumption per customer was down more than 30%, the margin impact was greater because not only was margin lost on the related expected sales, but the excess gas resulting from lower consumption was sold at a loss due to very low spot prices. U.S gas and electricity also saw a decrease in realized average margin as a large number of lower margin customers purchased with Hudson Energy in May were included. Because Hudson is only included for two months of the quarter, investors should look to future quarters for the true impact of Hudson on margins and results. ---------------------------------------------------------------------------- Heating Degree Days Heating Degree Days Heating Degree Days - Q1 F2011 - Q1 F2010 - 30 yr avg. ---------------------------------------------------------------------------- Toronto 672 971 (31)% 990 (32)% New York 347 511 (32)% 547 (37)% Chicago 475 701 (32)% 649 (27)% ---------------------------------------------------------------------------- JustGreenContinued strong take-up of the JustGreen energy offering was an offset to otherwise weaker margins in the quarter. 49% of new customers took JustGreen for an average of 89% of their consumption. The result was a continuation of improvement in new residential customer margins to $246 per customer per year up 37% from $179 for Q1 a year earlier and up from $208 per new customer for all of fiscal 2010. Currently, JustGreen customers make up 6% of the electricity portfolio and 3% of the gas portfolio.Hudson Energy Commercial Customer AggregationCommercial customers aggregated largely through a broker network, a market segment not previously pursued by Just Energy, made up 174,000 of the 261,000 customer additions for the quarter. While these customers generate lower margin per RCE ($67/year for Q1 additions), their cost acquisition is also commensurately lower and, combined with lower attrition and lower ongoing servicing cost, the lifetime net value of an RCE is very similar to that of a Just Energy residential customer.During the quarter, investments were made to expand this successful broker network into five provinces and seven states in which Hudson had not previously operated. In Ontario, more than 40 brokers have already enrolled in the network.Energy Marketing Imbedded Gross MarginA measure of the increase in value of the Just Energy gas and electricity customer base is the future gross margin inherent in the matched contracts. Continued growth of this measure as margin is realized quarter after quarter is evidence of the success of marketing efforts.Management's estimate of the future embedded gross margin is as follows: June 30, 2010 June 30, 2009 Increase ------------- ------------- -------- Canada (Cdn$) $ 757.5 million $675.8 million 12 % United States (US$) 698.5 million 284.7 million 145% Total (Cdn$) $1,501.1 million $1,003.2 million 50 % National Home ServicesNHS provides Ontario residential customers long-term water heater rental programs offering conventional tanks, power vented tanks and tankless water heaters in a variety of sizes, in addition to the recently added offering of furnaces and air conditioners. NHS continues to ramp up its operations and, as at June 30, 2010, had a cumulative installed base of 87,400 water heaters, 500 furnaces and 100 air conditioners in Ontario residences. NHS earns revenue from its installed base.As NHS is a high growth, relatively capital intensive business, Just Energy management believes that, in order to maintain stability of distributions, separate non-recourse financing of this capital is appropriate. Accordingly, it entered into a long term financing agreement with Home Trust Capital for the funding of the water heaters. The initial funding received up to June 30, 2010 was $70.9 million.Management's strategy for NHS is to self-fund the business through its growth phase, building value within the customer base. This way, neither NHS will require cash from Just Energy's core operations nor is Just Energy relying on NHS cash flow to fund distributions. General and administrative cost investments were made during the quarter to expand into the Union Gas territory of Ontario, giving NHS reach into the entire province. Management believes that considerable value has already been built inside NHS despite the absence of current cash flow. Longer term, NHS is expected to be a significant and growing revenue and profit source for Just Energy.Ethanol ProductionThe ethanol division has separate non-recourse financing in place such that capital requirements and operating losses will not impact Just Energy's core business ability to pay distributions. Terra Grain Fuels' plant has recently reached levels of production approaching the "name plate" capacity of the facility. Maintenance of that level of production and continued sustainment of improved ethanol prices should lead to positive cash flow from operations from this division in the future.Distributable CashDistributable cash was lower on both a gross and per unit basis in Q1 F2011 versus the comparable quarter in F2010. The major factor in this decline was the loss of natural gas margin due to record warm weather in the quarter.There were a number of other factors which contributed to lower distributable cash: ---------------------------------------------------------------------------- Distributable cash $22.3 million Was $36.1 million in F2010 ---------------------------------------------------------------------------- Operation is non-recourse and must fund its own operations and TGF (not in place in F2010) (3.6) million debt service ---------------------------------------------------------------------------- While still in start-up phase, management believes that substantial long term value has NHS (not in place in F2010) (2.2) million been created within contracts ---------------------------------------------------------------------------- Weather Impact on Gas Margins (21.0) million As described above ---------------------------------------------------------------------------- Reduced reported margin net of US$ decline against Cdn$ (2.3) million savings on US$ denominated costs ---------------------------------------------------------------------------- $(29.1) million General and administrative costs were $29.3 million for the quarter up from $15.6 million a year earlier. Major contributors to this rise were the acquisitions of Universal and Hudson with their general and administrative overhead. As well, the ramp up of NHS and the full operation of Terra Grain Fuels resulted in $5.2 million in new costs. The Energy Marketing portion of the quarterly general and administrative costs was flat versus fiscal 2010 at $8.70 per customer. This included investments necessary for the expansion into Massachusetts, two new utility territories in New York and the launch of Momentis.Bad debt expense was up commensurate with the growth in revenue in those markets where Just Energy bears credit risk. Overall, the expense was 2.8% of revenue, within the target range of 2.0% to 3.0% and equal to that noted in Q4 of fiscal 2010. This was much improved from the 3.5% level seen in the first half of fiscal 2010 and reflects stabilized economic conditions in those markets.Marketing costs were up reflecting much higher customer additions and significantly lower per customer aggregation costs due to the large number of lower cost commercial additions. The marketing success of the commercial division resulted in record gross customer additions of 261,000 up from 97,000 in Q1 of fiscal 2010. This meant that the fixed portion of the quarterly marketing costs was spread across far more additions. Including an estimate for the lifetime commission cost for commercial customers, the average aggregation cost per customer was $148 down 16% from the $178 average in fiscal 2010.Adjusted EBITDA was up slightly at $31.3 from $30.2 million a year prior. Adjusted EBITDA is up while distributable cash is down largely because of heavy marketing expenditure to increase future margins and the elimination of higher taxes year over year in the EBITDA measure.Distributions were $0.31 per unit equal to those of the prior year. Payout ratio was high at 173% in what is seasonally the slowest quarter worsened by the impact of warm weather on gas consumption. In past years, the payout ratio on normal distributions has been below 100% and management's expectation is that it will again be below 100% in fiscal 2011.In regards to the first quarter, CEO Ken Hartwick noted: "Management at Just Energy has been focused on the diversification of both its marketing channels and its product offerings. Our efforts at geographic diversification over the past five years have been a success with our very profitable U.S. business now larger than our longstanding Canadian customer base. We have continued to diversify and the impact of our expanded product offering to large commercial customers through the new channel of independent brokers, has resulted in record customer additions for the quarter.""The quarter also saw significant investments to further expand our business in the future. We prepared ourselves to enter Massachusetts and two new utility territories in New York. We have further diversified our marketing through the launch of our new Momentis network marketing arm as well as continued product diversifications like NHS and JustGreen. These will all be positive contributors to our results in future quarters.""One thing we cannot do is control the weather. The worst scenario for our financial performance is a very warm winter and the first quarter was the end of the warmest winter on record in our markets. As demonstrated in our results, Just Energy is still profitable despite this. With record customer additions at higher margins per customer led by the sale of JustGreen commodity, our future profitability looks very solid. As bad as the winter was, early results indicate that very strong summer electricity loads will offset some of the adverse margin effects in the first quarter. In the future, increasing our commercial volumes (which are less weather sensitive, with lower attrition) and new products like NHS will reduce our relative exposure to weather."Mr. Hartwick added: "The acquisition of Hudson Energy is a key step for our company. The 660,000 customers are largely commercial and, while lower margin than Just Energy residential customers, they have a lifetime return which is very similar per RCE due to lower customer maintenance cost and lower attrition. The broker network which generates these customers is growing and we are currently adding brokers across Canada and in several new states. While the second quarter will see lower aggregation on the commercial side, since key customer decision makers are unavailable in the summer months, we are optimistic that the record customer additions similar to that achieved in our first quarter can be replicated in the future."Chair Rebecca MacDonald added: "We are pleased with these results as we head toward the conversion of Just Energy from a trust to a corporation. The resurgence of our growth led by the building and acquisition of a new commercial customer pipeline is a key step for Just Energy. This will allow us to grow even more quickly as new jurisdictions open to us. With the warm winter behind us, we look forward to more normal weather and the type of growth and profitability Just Energy is known for.""Our growth in the past nine years from 217,000 customers to over 3 million has been both challenging and exciting. Our growth in coming years to 5 million and beyond should be equally so. Your management team is the strongest it has ever been and we are well prepared for this bright future."The FundJust Energy's business involves the sale of natural gas and/or electricity to residential and commercial customers under long-term fixed-price and price-protected contracts. By fixing the price of natural gas or electricity under its fixed-price or price-protected program contracts for a period of up to five years, Just Energy's customers offset their exposure to changes in the price of these essential commodities. Just Energy, which commenced business in 1997, derives its margin or gross profit from the difference between the fixed price at which it is able to sell the commodities to its customers and the fixed price at which it purchases the associated volumes from its suppliers.The Fund also offers "green" products through its JustGreen program. The electricity JustGreen product offers the customer the option of having all or a portion of his or her electricity sourced from renewable green sources such as wind, run of the river hydro or biomass. The gas JustGreen product offers carbon offset credits which will allow the customer to reduce or eliminate the carbon footprint for their home or business. Management believes that these products will not only add to profits, but also increase sales receptivity and improve renewal rates.In addition, through National Home Services, the Fund sells and rents high efficiency and tankless water heaters. NHS began offering the rental of air conditioners and furnaces to Ontario residents in the fourth quarter of fiscal 2010. Through its subsidiary Terra Grain Fuels, the Fund produces and sells wheat-based ethanol.Non GAAP MeasuresAdjusted EBITDA represents earnings before interest, taxes, depreciation and amortization adjusted to exclude the impact of mark-to-market gains (losses) arising from Canadian GAAP requirements for derivative financial instruments on our future supply positions. Just Energy ensures that customer margins are protected by entering into fixed-price supply contracts. In accordance with GAAP, the customer margins are not marked-to-market but there is a requirement to mark-to-market the future supply contracts. This creates unrealized gains (losses) depending upon current supply pricing volatility. Management believes that these short-term mark-to-market non-cash gains (losses) do not impact the long-term financial performance of the Fund. In addition, the Adjusted EBITDA calculation only deducts marketing costs sufficient to maintain existing levels of gross margin and maintenance capital expenditures necessary to sustain existing operations. This highlights the marketing and capital expenditures Just Energy makes to add to its productive capacity in the future.Management believes the best basis for analyzing both the Fund's results and the amount available for distribution is to focus on amounts actually received ("seasonally adjusted") because this figure provides the margin earned on all deliveries to the utilities. Seasonally adjusted sales and gross margin are not defined performance measures under Canadian GAAP. Seasonally adjusted analysis applies solely to the gas markets and specifically to Ontario, Quebec, Manitoba and Michigan.Forward-Looking StatementsThe Fund's press releases may contain forward-looking statements including statements pertaining to customer revenues and margins, customer additions and renewals, customer attrition, customer consumption levels, distributable cash and treatment under governmental regulatory regimes. These statements are based on current expectations that involve a number of risks and uncertainties which could cause actual results to differ from those anticipated. These risks include, but are not limited to, levels of customer natural gas and electricity consumption, rates of customer additions and renewals, rates of customer attrition, fluctuations in natural gas and electricity prices, changes in regulatory regimes and decisions by regulatory authorities, competition and dependence on certain suppliers. Additional information on these and other factors that could affect the Fund's operations, financial results or distribution levels are included in the Fund's annual information form and other reports on file with Canadian securities regulatory authorities which can be accessed through the SEDAR website at www.sedar.com or through the Fund's website at www.justenergy.com.MANAGEMENT'S DISCUSSION AND ANALYSIS ("MD&A") - August 11, 2010OverviewThe following discussion and analysis is a review of the financial condition and results of operations of Just Energy Income Fund ("Just Energy" or the "Fund") for the three months ended June 30, 2010 and has been prepared with all information available up to and including August 11, 2010. This analysis should be read in conjunction with the unaudited interim consolidated financial statements for the three months ended June 30, 2010, as well as the audited consolidated financial statements and related MD&A for the year ended March 31, 2010, contained in the Fund's 2010 Annual Report. The financial information contained herein has been prepared in accordance with Canadian Generally Accepted Accounting Principles ("GAAP"). All dollar amounts are expressed in Canadian dollars. Quarterly reports, the annual report and supplementary information can be found on our corporate website at www.justenergy.com. Additional information can be found on SEDAR at www.sedar.com.Just Energy is an open-ended, limited-purpose trust established under the laws of the Province of Ontario to hold securities and to distribute the income of its directly or indirectly owned operating subsidiaries and affiliates: Just Energy Ontario L.P. ("JE Ontario"), Just Energy Manitoba L.P. ("JE Manitoba"), Just Energy Quebec L.P. ("JE Quebec"), Just Energy (B.C.) Limited Partnership ("JE B.C."), Just Energy Alberta L.P. ("JE Alberta"), Alberta Energy Savings L.P. ("AESLP"), Just Energy Illinois Corp. ("JEIC"), Just Energy New York Corp. ("JENYC"), Just Energy Indiana Corp. ("JE Indiana"), Just Energy Texas L.P. ("JE Texas"), Just Energy Massachusetts Corp. ("JE Mass"), Just Energy Michigan Corp., ("JE Michigan"), Just Energy Exchange Corp. ("JEEC"), Universal Energy Corp. ("UEC"), Universal Gas and Electric Corp. ("UG&E"), Commerce Energy, Inc. ("Commerce" or "CEI"), National Energy Corp. ("NEC") operating under the trade name of National Home Services ("NHS"), Hudson Energy Services LLC ("HES" or "Hudson"), Momentis Canada Corp. and Momentis U.S. Corp. (collectively, "Momentis") and Terra Grain Fuels Inc. ("TGF"), collectively, the "Just Energy Group".Just Energy's primary business involves the sale of natural gas and/or electricity to residential and commercial customers under long-term fixed-price and price-protected contracts. By fixing the price of natural gas or electricity under its fixed-price or price-protected program contracts for a period of up to five years, Just Energy's customers offset their exposure to changes in the price of these essential commodities. Just Energy, which commenced business in 1997, derives its margin or gross profit from the difference between the fixed price at which it is able to sell the commodities to its customers and the fixed price at which it purchases the associated volumes from its suppliers. In addition, through NHS, the Fund sells and rents high efficiency and tankless water heaters and other HVAC products. TGF, an ethanol producer, operates a wheat-based ethanol facility in Belle Plaine, Saskatchewan. Just Energy also indirectly acquired Hudson, effective May 1, 2010 a marketer of natural gas and electricity primarily to commercial customers in New York, New Jersey, Illinois and Texas and results are included for two months of its operations.The Fund also offers green products through its JustGreen program, formerly known as the Green Energy Option or "GEO". The electricity JustGreen product offers the customer the option of having all or a portion of their electricity sourced from renewable green sources such as wind, run of the river hydro or biomass. The gas JustGreen product offers carbon offset credits, which will allow the customer to reduce or eliminate the carbon footprint for their home or business. Management believes that these new products will not only add to profits, but also increase sales receptivity and improve renewal rates.Forward-looking informationThis MD&A contains certain forward-looking information pertaining to customer additions and renewals, customer consumption levels, distributable cash and treatment under governmental regulatory regimes. These statements are based on current expectations that involve a number of risks and uncertainties which could cause actual results to differ from those anticipated. These risks include, but are not limited to, levels of customer natural gas and electricity consumption, extreme weather conditions, rates of customer additions and renewals, customer attrition, fluctuations in natural gas and electricity prices, changes in regulatory regimes, decisions by regulatory authorities and competition and dependence on certain suppliers. Additional information on these and other factors that could affect the Fund's operations, financial results or distribution levels are included in the Fund's annual information form and other reports on file with Canadian security regulatory authorities which can be accessed on our corporate website at www.justenergy.com or through the SEDAR website at www.sedar.com.Key terms"Attrition" means customers whose contracts were terminated early, or cancelled by Just Energy due to delinquent accounts."Delivered volume" represents the actual volume of gas or electricity provided on behalf of customers to the LDCs for the period."Failed to renew" means customers who did not renew expiring contracts at the end of their term."Gross margin per RCE" represents the gross margin realized on Just Energy's customer base, including both low margin customers acquired through various acquisitions and gains/losses from the sale of excess commodity supply."LDC" means a local distribution company, the natural gas or electricity distributor for a regulatory or governmentally defined geographic area."RCE" means residential customer equivalent or the "customer", which is a unit of measurement equivalent to a customer using, as regards natural gas, 2,815 m3 (or 106 GJs or 1,000 Therms or 1,025 CCFs) of natural gas on an annual basis and, as regards electricity, 10 MWh (or 10,000 kWh) of electricity on an annual basis, which represents the approximate amount of gas and electricity, respectively, used by a typical household in Ontario."JEEC convertible debentures" represents the $90 million in convertible debentures issued by Universal in October 2007. JEEC assumed the obligations of the debentures as part of the acquisition of UEG on July 1, 2009. See Long term-debt and financing on page 22 for further details."JEIF convertible debentures" represents the $330 million in convertible debentures issued by the Fund to finance the purchase of Hudson effective May 1, 2010. See Long-term debt and financing on page 25 for further details.Non-GAAP financial measuresAll non-GAAP financial measures do not have standardized meanings prescribed by GAAP and are therefore unlikely to be comparable to similar measures presented by other issuers.Seasonally adjusted sales and seasonally adjusted gross marginManagement believes the best basis for analyzing both the Fund's results and the amount available for distribution is to focus on amounts actually received ("seasonally adjusted") because this figure provides the margin earned on all deliveries to the utilities. Seasonally adjusted sales and gross margin are not defined performance measures under Canadian GAAP. Seasonally adjusted analysis applies solely to the gas markets and specifically to Ontario, Quebec, Manitoba and Michigan.No seasonal adjustment is required for electricity as the supply is balanced daily. In the other gas markets, payments for supply by the LDCs are aligned with customer consumption.Cash Available for Distribution"Distributable cash after marketing expense" refers to the net cash available for distribution to Unitholders. Seasonally adjusted gross margin is the principal contributor to cash available for distribution. Distributable cash is calculated by the Fund as seasonally adjusted gross margin, adjusted for cash items including general and administrative expenses, marketing expenses, bad debt expense, interest expense, corporate taxes, capital taxes and other items. This non-GAAP measure may not be comparable to other income funds."Distributable cash after gross margin replacement" represents the net cash available for distribution to Unitholders as defined above. However, only the marketing expenses associated with maintaining the Fund's gross margin at a stable level equal to that in place at the beginning of the period are deducted. Management believes that this is more representative of the ongoing operating performance of the Fund because it includes all expenditures necessary for the retention of existing customers and the addition of new margin to replace those customers that have not been renewed. This non-GAAP measure may not be comparable to other income funds.For reconciliation to cash from operating activities please refer to the "Cash Available for Distribution and distributions" analysis on page 7.EBITDA"EBITDA" represents earnings before interest, taxes, depreciation and amortization. This is a non-GAAP measure which reflects the pre-tax profitability of the business.Adjusted EBITDA"Adjusted EBITDA" represents EBITDA adjusted to exclude the impact of mark-to-market gains (losses) arising from Canadian GAAP requirements for derivative financial instruments on future supply positions. In addition, the Adjusted EBITDA calculation deducts marketing costs sufficient to maintain existing levels of gross margin and maintenance capital expenditures necessary to sustain existing operations. This highlights the marketing and capital expenditures Just Energy had made to add to its productive capacity in the future. Management believes this is a useful measure of operating performance for investors.Just Energy ensures that customer margins are protected by entering into fixed-price supply contracts. However, under Canadian GAAP, the customer margins are not marked-to-market but there is a requirement to mark-to-market the future supply contracts. This creates unrealized gains (losses) depending upon current supply pricing volatility. Management believes that these short-term mark-to-market non-cash gains (losses) do not impact the long-term financial performance of the Fund and therefore has excluded it from the Adjusted EBITDA calculation.Embedded gross marginEmbedded gross margin is a rolling five-year measure of management's estimate of future contracted gross margin. It is the difference between existing customer contract prices and the cost of supply for the remainder of term, with appropriate assumptions for customer attrition and renewals. It is assumed that expiring contracts will be renewed at target margin and renewal rates.Standardized Distributable CashStandardized Distributable Cash is a non-GAAP measure developed to provide a consistent and comparable measurement of distributable cash across entities."Standardized Distributable Cash" is defined as cash flows from operating activities, as reported in accordance with GAAP, less an adjustment for total capital expenditures as reported in accordance with GAAP and restrictions on distributions arising from compliance with financial covenants restrictive at the date of the calculation of Standardized Distributable Cash.For reconciliation to cash from operating activities please refer to the "Standardized Distributable Cash and Cash Available for Distribution" analysis on page 10. Financial highlights For the three months ended June 30 (thousands of dollars except where indicated and per unit amounts) Fiscal 2011 Fiscal 2010 Per Per unit Per $ unit(5) Change $ unit(5) Sales 609,684 $4.44 26% 399,010 $3.53 Net income(1) 275,309 $2.01 121% 102,627 $0.91 Adjusted EBITDA 2 31,282 $0.23 (15)% 30,182 $0.27 Gross margin (seasonally adjusted) (3) 88,933 $0.65 (2)% 74,769 $0.66 Distributable cash - After gross margin replacement 33,783 $0.25 (32)% 42,219 $0.37 - After marketing expense 24,402 $0.18 (44)% 36,087 $0.32 Distributions 42,277 $0.31 - 35,014 $0.31 General and administrative 29,272 $0.21 50% 15,617 $0.14 Distributable cash payout ratio(4) - After gross margin replacement 125% 83% - After marketing expense 173% 97% (1) Net income includes the impact of unrealized gains (losses) which represent the mark to market of future commodity supply acquired to cover future customer demand. The supply has been sold to customers at fixed prices minimizing any impact of quarter end mark to market gains and losses. (2) Adjusted EBITDA is a more appropriate measure of the performance of the Fund since it excludes the unrealized mark to market gains and losses and deducts only marketing costs and capital spending to sustain existing operations. See Adjusted EBITDA on page 2 for more information. (3) See discussion of non-GAAP financial measures on page 2. (4) Management targets an annual payout ratio after all marketing expenses, excluding any Special Distribution, of less than 100%. (5) The per unit amounts are calculated using an adjusted fully diluted basis for fiscal 2011 removing the impact of the JEEC and JEIF convertible debentures as both will be anti-dilutive by fiscal year end. The fiscal 2010 per unit amounts are calculated on a fully diluted basis. Reconciliation of Net Income to Adjusted EBITDA For the three months ended June 30 (thousands of dollars) Fiscal 2011 Fiscal 2010 ----------- ----------- Net income $275,309 $102,627 Add: Interest 9,480 480 Tax expense (recovery) 19,360 10,303 Capital tax 133 80 Amortization 33,448 1,788 ----------- ------------ EBITDA 337,730 115,278 Add: Change in fair value of derivative instruments (314,376) (87,880) Marketing expenses to add gross margin 9,381 6,132 Less: Maintenance capital expenditures (1,453) (3,348) ----------- ------------ Adjusted EBITDA 31,282 30,182 ----------- ------------ Acquisition of Hudson Energy ServicesOn May 7, 2010, Just Energy completed the acquisition of all of the equity interests of Hudson Parent Holdings, LLC and all of the common shares of Hudson Energy Corp., thereby indirectly acquiring Hudson Energy Services, LLC with an effective date of May 1, 2010. It is important to note that this quarter reflects only two months of operating results from Hudson and that the full effect will not be seen until future quarters.The acquisition of Hudson was accounted for using the purchase method of accounting. The Fund allocated the purchase price to the identified assets and liabilities acquired based on their fair values at the time of acquisition as follows (thousands of dollars): Net assets acquired: Current assets (including cash of $24,003) $ 88,696 Current liabilities (107,817) Electricity contracts and customer relationships 200,653 Gas contracts and customer relationships 26,225 Contract initiation costs 20,288 Broker network 84,400 Brand 11,200 Information technology system development 17,954 Other intangible assets 6,545 Goodwill 30,946 Property, plant and equipment 2,559 Unbilled revenue 15,092 Notes receivable - long-term 1,312 Security deposits - long-term 3,544 Other assets - current 124 Other assets - long-term 100 Other liabilities - current (74,683) Other liabilities - long-term (40,719) ------------ $ 286,419 ------------ ------------ Consideration: Purchase price $ 285,343 Transaction costs 1,076 ------------ $ 286,419 ------------ ------------ All contracts and intangible assets, excluding Brand, are amortized over the average remaining life at the time of acquisition. The gas and electricity contracts and customer relationships are amortized over 30 and 35 months, respectively. Other intangible assets, excluding Brand, are amortized over periods of three to five years. The Brand value is considered to be indefinite and therefore, not subject to amortization. The purchase price allocation is considered preliminary and as a result may be adjusted during the 12-month period following the acquisition.Acquisition of Universal Energy Group Ltd.On July 1, 2009, Just Energy completed the acquisition of all of the outstanding common shares of Universal Energy Group Ltd. ("Universal") pursuant to a plan of arrangement (the "Arrangement"). Under the Arrangement, the Universal shareholders received 0.58 of an exchangeable share ("Exchangeable Share") of JEEC, a subsidiary of Just Energy, for each Universal common share held. In aggregate, 21,271,804 Exchangeable Shares were issued pursuant to the Arrangement. Each Exchangeable Share is exchangeable for a unit of the Fund on a one-for-one basis at any time at the option of the holder and entitles the holder to a monthly dividend equal to 66 2/3% of the monthly distribution and/or Special Distribution paid by Just Energy on a unit of the Fund. JEEC also assumed all the covenants and obligations of Universal in respect of Universal's outstanding JEEC convertible debentures. On conversion of the Debentures, holders will be entitled to receive 0.58 of an Exchangeable Share in lieu of each Universal common share that the holder was previously entitled to receive on conversion.The acquisition of Universal was accounted for using the purchase method of accounting. The Fund allocated the purchase price to the identified assets and liabilities acquired based on their fair values at the time of acquisition as follows (thousands of dollars): Net assets acquired: Working capital (including cash of $10,319) $ 63,614 Electricity contracts and customer relationships 229,586 Gas contracts and customer relationships 243,346 Water heater contracts and customer relationships 22,700 Other intangible assets 2,721 Goodwill 77,494 Property, plant and equipment 171,693 Future tax liabilities (50,475) Other liabilities - current (164,148) Other liabilities - long-term (140,857) Long-term debt (183,079) Non-controlling interest (22,697) ------------ $ 249,898 ------------ ------------ Consideration: Transaction costs $ 9,952 Exchangeable shares 239,946 ------------ $ 249,898 ------------ ------------ All contracts, customer relationships and intangible assets are amortized over the average remaining life at the time of acquisition. The gas and electricity contracts, including customer relationships, acquired are amortized over periods ranging from 8 to 57 months. The water heater contracts and customer relationships are amortized over 174 months and the other intangible assets are amortized over six months. The non-controlling interest represents 33.3% ownership of TGF held by EllisDon Corporation. An adjustment in the amount of $10,700 was made to increase goodwill and decrease working capital during the three months ended June 30, 2010. The purchase price for this acquisition is final and no longer subject to change.OperationsGasIn each of the markets that Just Energy operates, it is required to deliver gas to the LDCs for its customers throughout the year. Gas customers are charged a fixed price for the full term of their contract. Just Energy purchases gas supply in advance of marketing for residential customers and generally concurrently with the execution of a contract for larger commercial customers. The LDC provides historical customer usage to enable Just Energy to purchase an approximation of estimated supply. Furthermore, in many markets, Just Energy mitigates exposure to customer usage by purchasing options that cover potential differences in customer consumption due to weather variations. The cost of this strategy is incorporated in the price to the customer. Our ability to mitigate weather effects is limited by utility requirements to deliver fixed amounts for gas regardless of the weather. To the extent that balancing requirements are outside the options purchased, Just Energy bears the financial responsibility for fluctuations in customer usage. Volume variances may result in either excess or short supply. Excess supply is sold in the spot market resulting in either a gain or loss compared to the weighted average cost of supply. In the case of greater than expected gas consumption, Just Energy must purchase the short supply at the market price, which may reduce or increase the customer gross margin typically realized. Under some commercial contract terms, this balancing may be passed on to the customer.Ontario, Quebec, British Columbia and MichiganIn Ontario, Quebec, British Columbia and Michigan, the volumes delivered for a customer typically remain constant throughout the year. Just Energy does not recognize sales until the customer actually consumes the gas. During the winter months, gas is consumed at a rate which is greater than delivery and in the summer months, deliveries to LDCs exceed customer consumption. Just Energy receives cash from the LDCs as the gas is delivered, which is even throughout the year.Manitoba and AlbertaIn Manitoba and Alberta, the volume of gas delivered is based on the estimated consumption for each month. Therefore, the amount of gas delivered in winter months is higher than in the spring and summer months. Consequently, cash received from customers and LDCs will be higher in the winter months.New York, Illinois, Indiana, Ohio and CaliforniaIn New York, Illinois, Indiana, Ohio and California, the volume of gas delivered is based on the estimated consumption and storage requirements for each month. Therefore, the amount of gas delivered in winter months is higher than in the spring and summer months. Consequently, cash flow received from these states is greatest during the third and fourth (winter) quarters, as normally, cash is received from the LDCs in the same period as customer consumption.ElectricityOntario, Alberta, New York, Texas, Illinois, Pennsylvania, New Jersey, Maryland, Michigan, California and MassachusettsJust Energy offers a variety of price protection products to its electricity customers. The product offerings include both fixed price and variable price long term and short term electricity contracts. Customers have the ability to choose an appropriate JustGreen program to supplement their electricity contracts, providing an effective method to offset their carbon footprint. In Ontario, New York and Texas, Just Energy provides customers with price protection program for the majority of their electricity requirements. The customers experience either a small balancing charge or credit on each bill due to fluctuations in prices applicable to their volume requirements not covered by a fixed price. Just Energy uses historical usage data for all enrolled customers to accurately predict future customer consumption and to help with long term supply procurement decisions.Cash flow from electricity operations is greatest during the second and fourth quarters (summer and winter), as electricity consumption is typically highest during these periods.Home Services divisionNEC began operations in April 2008 and operates under the trade name of National Home Services. Newten Home Comfort L.P. ("NHCLP") a partnership between Just Energy and Newten Home Comfort Inc.,( an arm's length third party holding 20% of the partnership), commenced providing Ontario residential customers with a long term water heater rental program in the summer of 2008, offering high efficiency conventional and power vented tanks and tankless water heaters. On July 2, 2009, NEC, a wholly owned home services subsidiary of UEG, acquired Newten Home Comfort Inc. Accordingly, NHCLP became a wholly owned subsidiary of Just Energy. On September 30, 2009, NEC acquired substantially all of the assets of NHCLP, including all of NHCLP's customer water heater rental agreements. NHCLP and Newten Home Comfort Inc. were subsequently wound up. NEC began offering the rental of air conditioners and furnaces to Ontario residents in the fourth quarter of fiscal 2010. See page 18 for additional information on NEC.Ethanol divisionJust Energy also owns a 66.7% interest in TGF, a 150-million-litre capacity wheat-based ethanol plant located in Belle Plaine, Saskatchewan. The plant produces wheat-based ethanol and high protein distillers dried grain ("DDG"). See page 19 for additional information on TGF. Cash Available for Distribution and distributions For the three months ended June 30 (thousands of dollars except per unit amounts) Fiscal 2011 Fiscal 2010 ----------- ----------- Per unit Per unit -------- -------- Reconciliation to statements of cash flow Cash inflow from operations $25,727 $37,795 Add: Decrease in non-cash working capital (3,648) (2,246) Other 1,785 - Tax impact on distributions to Class A preference shareholders 538 538 ---------- ---------- Cash available for distribution $24,402 $36,087 ---------- ---------- ---------- ---------- Cash available for distribution Gross margin per financial statements $80,497 $0.59 $66,075 $0.59 Adjustments required to reflect net cash receipts from gas sales 8,436 8,694 ---------- ---------- Seasonally adjusted gross margin $88,933 $0.65 $74,769 $0.66 ---------- ---------- Less: General and administrative (29,272) (15,617) Capital tax expense (133) (80) Bad debt expense (5,749) (3,829) Income tax recovery 1,002 40 Interest expense (9,480) (480) Other items 6,771 669 ---------- ---------- (36,861) (19,297) ---------- ---------- Distributable cash before marketing expenses 52,072 $0.38 55,472 $0.49 Marketing expenses to maintain gross margin (18,289) (13,253) ---------- ---------- Distributable cash after gross margin replacement 33,783 $0.25 42,219 $0.37 Marketing expenses to add new gross margin (9,381) (6,132) ---------- ---------- Cash available for distribution $24,402 $0.18 $36,087 $0.32 ---------- ---------- ---------- ---------- Distributions Unitholder distributions $39,644 $32,935 Class A preference share distributions 1,631 1,631 Unit appreciation rights and deferred unit grants distributions 1,002 448 ---------- ---------- Total distributions $42,277 $0.31 $35,014 $0.31 ---------- ---------- ---------- ---------- Adjusted fully diluted average number of units outstanding(1) 137.2m 112.9m (1) The per unit amounts are calculated on an adjusted fully diluted basis for fiscal 2011 removing the JEEC and JEIF convertible debentures impact as both will be anti-dilutive by fiscal year end. The fiscal 2010 per unit amounts are calculated on a fully diluted basis. Distributable cashThe first quarter of fiscal 2011 was a period of rapid expansion for Just Energy. This expansion took place through the acquisition of Hudson, which diversified Just Energy's product line to include specialized offerings for large commercial customers, the expansion of Hudson's proven broker network to seven new states and five new provinces, the launch of the Momentis network marketing division in Ontario and New York as well as spending in anticipation of entry into Massachusetts and two new utility territories in New York. In addition, National Home Services committed expenditures to facilitate its expansion into Union Gas territory in Ontario and its roll-out of furnace and air conditioner offerings.This expansion had two impacts on the quarter. First, general and administrative costs increased to absorb the costs of this expansion. Secondly, quarterly customer additions reached the highest levels seen in the history of Just Energy. The majority of these additions were large commercial customers, a market segment not previously pursued. As with past expansions, management believes that the acquisition of Hudson and these expenditures will build a more diversified and profitable base for Just Energy's future.Distributable cash after gross margin replacement for the current quarter ended June 30, 2010 was $33.8 million ($0.25 per unit), down 20% from $42.2 million ($0.37 per unit) in fiscal 2010. While margin was up 19% it was down on a per unit basis. Margin from the natural gas business was significantly reduced due to lower per customer consumption due to record warm temperatures across Just Energy's key markets.The higher gross margins in the year were offset by increased general and administrative costs largely due to the expansions noted above, interest charges and higher bad debt expenses. Increased general and administrative costs of 87%, over the prior year comparable quarter, were noted, of which $8.3 million (61%) related to incremental Universal, Hudson and Momentis costs not incurred last year. The remaining increase was to accommodate the numerous areas of expansion noted above. Interest costs relate primarily to the JEEC and JEIF convertible debentures which relate to the Hudson and Universal acquisitions, funding for water heater purchases and debt associated with TGF. Bad debt expense increased in the first quarter of fiscal 2011 compared to 2010, due to the increased sales in those markets where the Fund bears the credit risk and the continued weak economic conditions in the U.S. markets. Overall, bad debt percentage of relevant sales was flat within the target range at 2.8% equal to that of the prior quarter.Just Energy spent $18.3 million in marketing expenses for the quarter to maintain its current level of gross margin, which represents 66% of the total marketing expense, excluding the amortization of contract initiation costs. A further $9.4 million was spent to increase future gross margin reflecting the 116,000 net RCE additions through marketing to date for fiscal 2011. Management's estimate of the future contracted gross margin increased to $1,501.1 million from $1,204.3 million at March 31, 2010 and $1,003.2 million a year earlier.Management's estimate of the future embedded gross margin is as follows: June 30, 2010 June 30, 2009 Increase -------------------------------------------------------------------- Canada (Cdn$) $757.5 million $675.8 million 12% United States (US$) 698.5 million 284.7 million 145% Total (Cdn$) $1,501.1 million $1,003.2 million 50% Distributable cash after all marketing expenses amounted to $24.4 million ($0.18 per unit) for the first quarter of fiscal 2011, a decline of 32% from $36.1 million ($0.32 per unit) in the prior year comparable quarter. The decrease is due to the higher gross margin being more than offset by increased expenditures noted above. There were higher marketing costs associated with the significant increase in net customer additions quarter over quarter. The payout ratio after deduction of all marketing expenses for the current quarter was 173%, versus 97% in fiscal 2010. Management anticipates that the payout ratio for fiscal 2011 will be less than 100% (excluding any Special Distributions for tax purposes) as it has been in past years.For further information on the changes in the gross margin, please refer to "Sales and gross margin - Seasonally adjusted" on page 13 and "General and administrative expenses", "Marketing expenses", "Bad debt expense" and "Interest expense" are further clarified on page 19 and 20. Discussion of Distributions For the three months ended June 30 (in thousands of dollars) Fiscal 2011 Fiscal 2010 ------------ ------------- Cash flow from operations(1) (A) $25,727 $37,795 Net income (B) 275,309 102,627 Total distributions (C) 42,277 35,014 Excess (shortfall) of cash flows from operating (16,550) 2,781 activities over distributions paid (A-C) Excess of net income over distributions paid (B-C) 233,032 67,613 (1)Includes non-cash working capital balances Net income includes non-cash gains and losses associated with the changes in the current market value of Just Energy's derivative instruments. These instruments form part of the Fund's requirement to purchase commodity according to estimated demand and, as such, changes in value do not impact the distribution policy or the long-term financial performance of the Fund. The change in fair value associated with these derivatives included in the net income for the first quarter of fiscal 2011 was a gain of $314.4 million versus $87.9 million for the same period last year.The Fund has, in the past, paid out distributions that were higher than both financial statement net income and operating cash flow. In the view of management, the non-GAAP measure, distributable cash, is an appropriate measure of the Fund's ability to distribute funds, as the cost of carrying incremental working capital necessary for the growth of the business has been deducted in the distributable cash calculation. Further, investment in the addition of new customers intended to increase cash flow is expensed in the financial statements while the original customer base was capitalized. Management believes that the current level of distributions is sustainable in the foreseeable future.The timing differences between distributions and cash flow from operations created by the cost of carrying incremental working capital due to business seasonality and expansion are funded by the operating credit facility. Standardized Distributable Cash and Cash Available for Distribution For the three months ended June 30 (thousands of dollars except per unit amounts) Fiscal 2011 Fiscal 2010 ------------ ------------ Reconciliation to statements of cash flow Cash inflow from operations $25,727 $37,795 Capital expenditures(1) (9,607) (7,406) ------------------------- Standardized Distributable Cash 16,120 30,389 ------------------------- Adjustments to Standardized Distributable Cash Change in non-cash working capital (2) (3,648) (2,246) Tax impact on distributions to Class A preference shareholders(3) 538 538 Other 1,785 - Capital expenditures(1) 9,607 7,406 ------------------------- Cash available for distribution $24,402 $36,087 ------------------------- Standardized Distributable Cash - per unit basic 0.12 0.27 Standardized Distributable Cash - per unit diluted 0.11 0.27 Payout Ratio based on Standardized Distributable Cash 262% 115% (1) The vast majority of capital expenditures in the first quarter of fiscal 2010 related to the purchase of water heaters for subsequent rental. These expenditures expand the productive capacity of the business. Effective January 2010, water heater capital purchases are financed through separate financing secured by the water heaters and associated contracts. All other capital expenditures were funded by the credit facility. (2) Change in non-cash working capital is excluded from the calculation of Cash Available for Distribution as the Fund has a $250.0 million credit facility which is available for use to fund working capital requirements. This eliminates the potential impact of timing distortions relating to the respective items. (3) This amount includes payments to the holders of Class A preference shares and is equivalent to distributions. The number of Class A preference shares outstanding is included in the denominator of any per unit calculation. In accordance with the CICA July 2007 interpretive release "Standardized Distributable Cash in Income Trusts and other Flow-Through Entities", the Fund has presented the distributable cash calculation to conform to this guidance. In summary, for the purposes of the Fund, Standardized Distributable Cash is defined as the periodic cash flows from operating activities, including the effects of changes in non-cash working capital less total capital expenditures as reported in the GAAP financial statements.Financing StrategyThe Fund's $250.0 million credit facility will be sufficient to meet the Fund's short-term working capital and capital expenditure requirements. Working capital requirements can vary widely due to seasonal fluctuations and planned U.S.-related growth. In the long-term, the Fund may be required to access the equity or debt markets in order to fund significant acquisitions. NEC entered into an agreement with Home Trust Company to separately finance its water heaters. See page 18 for further discussion on this financing. TGF has a separate credit facility, debenture and a term loan for their funding requirements which are detailed on page 23.Productive CapacityJust Energy's primary business involves the sale of natural gas and/or electricity to residential and commercial customers under long-term, fixed-price and price protected contracts. In addition, through NHS, the Fund sells and rents high efficiency and tankless water heaters and HVAC products. TGF, an ethanol producer, operates an ethanol facility in Belle Plaine, Saskatchewan. The Fund's productive capacity is primarily determined by the gross margin earned from the contract price and the related supply cost on energy contracts. Also included would be the gross margin earned on water heater rentals and ethanol sales after deducting production related costs.The maintenance of productive capacity of Just Energy is achieved through the retention of existing customers and the addition of new customers to replace those that have not been renewed. The productive capacity is maintained and grows through independent contractors and Hudson broker channels, call centre renewal efforts, internet marketing and various mail campaigns. The Fund has entered into an agreement with Momentis under which their independent representatives will market natural gas and electricity contracts on behalf of Just Energy. Momentis is a multi level marketing entity. Management believes that this arrangement will further expand the productive capacity of the energy business.Effectively all of the residential marketing costs related to energy customer contracts are expensed immediately but fall into two categories. The first represents marketing expenses to maintain gross margin at pre-existing levels and by definition to maintain productive capacity. The second category is marketing expenditures to add new margin which therefore expands productive capacity. The Hudson commercial marketing expenses are primarily capitalized and amortized over the remaining life of the customer contract.The vast majority of capital expenditures incurred by Just Energy relate to the purchase of water heaters which are subsequently rented on a long term basis under customer contracts. These capital expenditures are funded by non-recourse borrowings which have as security the water heaters and the rental contracts. As such, these capital expenditures increase the productive capacity of the Fund. Summary of quarterly results (thousands of dollars except per unit amounts) Fiscal Fiscal Fiscal Fiscal 2011 Q1 2010 Q4 2010 Q3 2010 Q2 --------- ------------------- ------------- -------- Sales (seasonally adjusted) $639,997 $694,788 $654,686 $562,133 Gross margin (seasonally adjusted) 88,933 121,872 121,722 107,519 General and administrative expense 29,272 22,405 24,767 25,634 Net income (loss) 275,309 (79,211) 97,390 110,690 Net income (loss) per unit - basic 2.05 (0.59) 0.73 0.83 Net income (loss) per unit - diluted 1.85 (0.59) 0.73 0.82 Adjusted EBITDA 31,282 108,961 60,563 36,598 Amount available for distribution After gross margin replacement 33,783 66,023 69,455 52,303 After marketing expense 24,402 58,359 61,242 41,345 Payout ratio After gross margin replacement 125% 63% 98%(1) 82% After marketing expense 173% 71% 111%(1) 104% Fiscal Fiscal Fiscal Fiscal 2010 Q1 2009 Q4 2009 Q3 2009 Q2 --------- ------------------ ----------- ------- Sales (seasonally adjusted) $432,565 $589,948 $510,801 $386,158 Gross margin (seasonally adjusted) 74,769 106,143 87,554 61,793 General and administrative expense 15,617 18,150 14,753 13,236 Net income 102,627 (168,621) (49,094) (923,990) Net income per unit - basic 0.92 (1.57) (0.44) (8.33) Net income per unit - diluted 0.91 (1.57) (0.44) (8.33) Adjusted EBITDA 30,182 104,614 60,822 17,024 Amount available for distribution After gross margin replacement 42,219 72,244 57,475 34,755 After marketing expense 36,087 62,515 48,162 28,394 Payout ratio After gross margin replacement 83% 48% 93%(1) 100% After marketing expense 97% 56% 111%(1) 122% (1) Includes a one-time Special Distribution of $26.7 million in Q3, fiscal 2010 and $18.6 million in Q3, fiscal 2009. The Fund's results reflect seasonality as consumption is greatest during the third and fourth quarters (winter quarters). While year over year quarterly comparisons are relevant, sequential quarters will vary materially. The main impact of this will be higher distributable cash with a lower payout ratio in the third and fourth quarters and lower distributable cash with a higher payout ratio in the first and second quarters excluding any special distribution.Analysis of the first quarterThe 48% increase in seasonally adjusted sales compared to the prior year comparable quarter is mainly attributable to the sales generated by both Universal and Hudson customers which were acquired, respectively, on July 1, 2009 and May 1, 2010. Strong net growth in customers added through marketing, primarily in the U.S., has also increased sales. The customer base has increased by 34% since the 2010 fiscal year end and 70% from June 30, 2009. Just Energy now has over three million RCEs.Gross margin increased by 19% in the first quarter of fiscal 2011 to $88.9 million from $74.8 million in the same period last year. In fiscal 2011, the customer additions include both Universal and Hudson (two months only) which were not acquired at this time last year. The increased customer additions and higher margin per new customer were partially offset by a 12% stronger Canadian dollar and sharply lower per customer gas consumption due to unusually warm weather. General and administration costs were $29.3 million for the quarter, an increase of 87% over $15.6 million reported for the same period last year due to inclusion costs for Universal and Hudson as well as significant expenditures targeted at further expansion of Just Energy's business footprint and product offerings.The distributable cash after customer gross margin replacement was $33.8 million, down 20% from $42.2 million in the prior comparable quarter. The increased gross margin was offset by increased general and administration, interest charges and bad debt expenses versus the prior year comparable quarter.After the deduction of all marketing expenses, distributable cash totaled $24.4 million, a decrease of 32% from $36.1 million in the first quarter of fiscal 2010. Distributions for the quarter were $42.3 million, an increase of 21% over the same period last year. The payout ratio after payment of all marketing costs for the first quarter of fiscal 2011 was 173% versus 97% for the same period last year. Management anticipates that payout ratio for fiscal 2011 will be less than 100% (excluding any tax driven Special Distributions) as it has been in past years. Sales and gross margin - per financial statements For the three months ended June 30 (thousands of dollars) Fiscal 2011 Fiscal 2010 ----------- ----------- United United Sales Canada States Total Canada States Total ----- Gas $129,715 $73,048 $202,763 $149,697 $50,434 $200,131 Electricity 160,629 224,914 385,543 123,491 75,388 198,879 ---------------------------------------------------------------------------- $290,344 $297,962 $588,306 $273,188 $125,822 $399,010 ---------------------------------------------------------------------------- Increase 6% 137% 47% Gross United United Margin Canada States Total Canada States Total ------ Gas $12,131 $5,284 $17,415 $22,714 $10,694 $33,408 Electricity 25,996 36,770 62,766 19,639 13,028 32,667 ---------------------------------------------------------------------------- $38,127 $42,054 $80,181 $42,353 $23,722 $66,075 ---------------------------------------------------------------------------- Increase (decrease) (10)% 77% 21% CanadaSales were $290.3 million for the three months ended June 30, 2010, an increase of 6% from the prior comparable period. Gross margin was $38.1 million for the first quarter, down 10% from the first quarter of fiscal 2010United StatesSales and gross margin in the U.S. were $298.0 million and $42.1 million for the first quarter, an increase of 137% and 77%, respectively, from the same period last year.Seasonally Adjusted AnalysisSales and gross margin - Seasonally adjusted(1) For the three months ended June 30 (thousands of dollars) Fiscal 2011 Fiscal 2010 ----------- ----------- United United Sales Canada States Total Canada States Total ----- Gas $129,715 $73,048 $202,763 $149,697 $50,434 $200,131 Adjust- ments(1) 30,704 (391) 30,313 33,555 - 33,555 --------------------------------------------------------------------------- $160,419 $72,657 $233,076 $183,252 $50,434 $233,686 Electri- city 160,629 224,914 385,543 123,491 75,388 198,879 --------------------------------------------------------------------------- $321,048 $297,571 $618,619 $306,743 $125,822 $432,565 --------------------------------------------------------------------------- Increase 5% 137% 43% Gross United United Margin Canada States Total Canada States Total ------ Gas $12,131 $5,284 $17,415 $22,714 $10,694 $33,408 Adjust- ments(1) 8,084 352 8,436 8,694 - 8,694 --------------------------------------------------------------------------- $20,215 $5,636 $25,851 $31,408 $10,694 $42,102 Electri- city 25,996 36,770 $62,766 19,639 13,028 32,667 --------------------------------------------------------------------------- $46,211 $42,406 $88,617 $51,047 $23,722 $74,769 --------------------------------------------------------------------------- Increase (decrease) (9)% 79% 19% (1) For Ontario, Manitoba, Quebec and Michigan gas markets. On a seasonally adjusted basis, sales increased by 43% in the first quarter of fiscal 2011 to $618.6 million as compared to $432.6 million in fiscal 2010. Gross margins were $88.6 million for the three months ended June 30, 2010, up 19% from the prior year comparable quarter.CanadaSeasonally adjusted sales were $321.0 million for the quarter, up 5% from $306.7 million in fiscal 2010. Seasonally adjusted gross margins were $46.2 million in the first quarter of fiscal 2011, a decrease of 9% from $51.0 million in the same period last year.GasCanadian gas sales were $160.4 million, a decrease of 12% from $183.3 million in the first quarter of fiscal 2010. In the first quarter of fiscal 2011, total customer delivered volumes were down 37% from the prior comparable quarter due to extremely warm temperatures across all key gas markets and a 2% decrease in flowing customers. Gross margin totaled $20.2 million, down 36% from the first quarter of fiscal 2010 reflecting lower consumption and losses on the sale of excess gas at much lower spot prices than had been contracted originally.The table that follows highlights the extent of the adverse impact of warm weather on gas consumption in the quarter. -------------------------------------------------------------------------- Heating Degree Days Heating Degree Days Heating Degree Days - Q1 F2011 - Q1 F2010 - 30 yr avg. -------------------------------------------------------------------------- Toronto 672 971 (31)% 990 (32)% New York 347 511 (32)% 547 (37)% Chicago 475 701 (32)% 649 (27)% -------------------------------------------------------------------------- After allowance for balancing and inclusive of acquisitions, realized average gross margin per customer ("GM/RCE") for the three months ended June 30, 2010 amounted to $137/RCE, compared to $195/RCE for the prior comparable quarter. This was due to the lower consumption and balancing losses. The GM/RCE value includes an appropriate allowance for the bad debt expense in Alberta.ElectricityElectricity sales were $160.6 million for the quarter, an increase of 30% from the first quarter of fiscal 2010. The sales growth is attributable to a 33% increase in total consumption largely due to the Universal acquired customers. Gross margin increased by 32% for the current quarter to $26.0 million versus $19.6 million for the prior year comparable period. Gross margin growth is consistent with the consumption increases and continued higher margin per customer due to the growth of the JustGreen program.Average gross margin per customer after all balancing and including acquisitions for the quarter ended June 30, 2010 in Canada amounted to $142/RCE, slightly increased from $141/RCE in the prior year comparable quarter. The GM/RCE value includes an appropriate allowance for the bad debt expense in Alberta.United StatesSales for the first three months of fiscal 2011 were $297.6 million, an increase of 137% from $125.8 million in the prior year comparable quarter. Seasonally adjusted gross margin was $42.4 million, up 79% from $23.7 million from the same quarter last year.GasGas sales and gross margin in the U.S. for the first quarter of fiscal 2011 totaled $72.7 million and $5.6 million, respectively, versus $50.4 million and $10.7 million in fiscal 2010. Despite an increased number of customers due to successful marketing and the Hudson acquisition, gross margin declined by 47% due to a sharp decline in per customer consumption based on record warm weather noted above and third party losses on the sale of the resultant excess gas as well as a 12% strengthening of the Canadian dollar exchange rate. Just Energy's ability to mitigate weather effects is limited by utility requirements to deliver fixed amounts of gas regardless of weather, particularly in Michigan. Average realized gross margin after all balancing costs for the three months ended June 30, 2010 was $82/RCE, a decrease of 70% over the prior year comparable period of $274/RCE. This is due to sharply lower per customer consumption, losses on sale of excess gas and the inclusion of lower margin Hudson customers for two months. The GM/RCE value includes an appropriate allowance for bad debt expense in Illinois.ElectricityU.S. electricity seasonally adjusted sales and gross margin for the quarter were $224.9 million and $36.8 million, respectively, versus the prior comparable quarter of fiscal 2010 in which sales and gross margin amounted to $75.4 million and $13.0 million. Sales and margins increased due to a 297% increase in customers year over year due to the Hudson acquisition and strong marketing growth. The two months of the Hudson purchase added $111.5 million in sales and $13.7 million of gross margin to the U.S. electricity results. Total customer demand increased by 261% which is consistent with the growth in the customer base.Average gross margin per customer for electricity during the current quarter decreased to $144/RCE compared to $176/RCE in the prior year comparable period as a direct result of unfavourable movements in exchange rates and lower margins per RCE for the Hudson commercial customers. The GM/RCE value for Texas includes an appropriate allowance for the bad debt expense. Customer aggregation Long-term customers June % April 1, Addi- Attri- Failed 30, Increase 2010 tions Acquired tion to renew 2010 (Decrease) --------------------------------------------------------------------------- Natural gas Canada 734,000 12,000 - (21,000) (16,000) 709,000 (3)% United States 408,000 108,000 81,000 (32,000) (1,000) 564,000 38% --------------------------------------------------------------------------- Total gas 1,142,000 120,000 81,000 (53,000) (17,000) 1,273,000 11% --------------------------------------------------------------------------- Electri- city Canada 760,000 26,000 - (18,000) (11,000) 757,000 -% United States 391,000 115,000 579,000 (33,000) (13,000) 1,039,000 166% --------------------------------------------------------------------------- Total electri- city 1,151,000 141,000 579,000 (51,000) (24,000) 1,796,000 56% --------------------------------------------------------------------------- Combined 2,293,000 261,000 660,000 (104,000) (41,000) 3,069,000 34% --------------------------------------------------------------------------- As part of the Hudson acquisition Just Energy acquired 660,000 customers with similar profiles to our existing book of customers. Another 48,000 RCEs acquired with Hudson are variable and short term in nature and have not been included in the long-term customer aggregation reported above.Gross customer additions for the quarter were 921,000 comprised of 660,000 customers acquired with Hudson and 261,000 added through marketing. Of the customers added through marketing, 174,000 were large commercial customers showing the immediate positive impact of both Hudson's broker channel and Just Energy's internal efforts to expand its share of the commercial market. Net customer additions through marketing for the quarter were 116,000 (excluding the 660,000 customers acquired with Hudson). For the same quarter last year there were 11,000 net customer additions through marketing. Overall, there has been a 34% increase in total customers during the quarter and 70% increase over the past twelve months.For the three month period ended June 30, 2010, total gas customer numbers increased by 11% from the fourth quarter of last year reflecting solid growth in the U.S. and the Hudson acquisition.Total electricity customers were up 56% as at June 30, 2010 from the fiscal 2010 year end. The Hudson acquisition was responsible for the vast majority of this growth but solid additions from marketing were made, particularly in Texas.JustGreenSales of the JustGreen products continue to support and reaffirm the strong demand for the green energy products in all markets. The JustGreen program allows customers to choose to purchase units of green energy in the form of renewable energy or carbon offsets, in an effort to reduce greenhouse gas emissions. When a customer purchases a unit of green energy, it creates a contractual obligation for Just Energy to purchase a supply of green energy at least equal to the demand created by the customer's purchase. A review was conducted by Grant Thornton LLP of Just Energy's Renewable Energy and Carbon Offsets Sales and Purchases report for the period from January 1, 2009 through December 31, 2009 validating the match of the Fund's renewable energy and carbon offset purchases against customer contracts.The Fund currently sells JustGreen gas in the eligible markets of Ontario, British Columbia, Alberta, Michigan, New York, Ohio and Illinois and JustGreen electricity in Ontario, Alberta, New York and Texas. JustGreen sales are expanding into the remaining markets over the coming quarters. Of all customers who contracted with Just Energy in the quarter, 49% took JustGreen for some or all of their energy needs. On average, these customers elected to purchase 89% of their consumption as green supply.For the first quarter ended June 30, 2010 green supply now makes up 3% of our overall gas portfolio, up from 1% in the first quarter last year. JustGreen supply makes up 6% of our electricity portfolio, up from 4% from the same period last year.AttritionNatural gasThe trailing 12-month natural gas attrition in Canada was 11%, slightly above management's target of 10%. In the U.S., gas attrition for the trailing 12 months was 28%, below management's annual target of 30%. This reflects a small improvement in the US and management is optimistic that further improvements will be seen as the US economy strengthens and should commodity prices continue to rise.ElectricityThe trailing 12-month electricity attrition rate in Canada for the quarter was 13%, above management's target of 10%. Electricity attrition in the United States was 14% for the trailing 12 months, below management's target of 20%. Trailing Twelve-Month Targeted Attrition F2011 Attrition F2011 Natural gas Canada 11% 10% United States 28% 30% Electricity Canada 13% 10% United States 14% 20% Failed to renewThe Just Energy renewal process is a multi-faceted program and aims to maximize the number of customers who choose to renew their contract prior to the end of their existing contract term. Efforts begin up to 15 months in advance allowing a customer to renew for an additional four or five years.The trailing 12-month renewal rate for all Canadian gas customers was 62%, below management's target of 70%. In the Ontario gas market, customers who do not positively elect to renew or terminate their contract receive a one-year fixed price for the ensuing year. Of the total Canadian gas customers renewed in the first quarter of fiscal 2011, 34% were renewed for a one-year term. Canadian gas markets lagged the 2011 target of 70% largely due to the current high spread between the Just Energy five year price and the utility spot price. Management will continue to focus on increasing renewals and a return to rising market pricing should result in an improvement in Canadian gas renewal rates to target levels.The electricity renewal rate for Canadian customers was 70% for the trailing 12 months which is at the targeted level. There has been solid demand for JustGreen products by renewing Canadian electricity customers.In the U.S. markets, Just Energy currently has only Illinois, Indiana and New York gas customers up for renewal. Gas renewals for the U.S. were 69%, below our target of 75% on a very limited number of renewals. Again, the high spread between the Just Energy 5 year price and utility floating rate prices has impacted renewals.During the quarter Just Energy had both Texas and New York electricity customers up for renewal. The electricity renewal rate was 83%, better than our target rate of 75%. Trailing 12-month Targeted Renewals F2011 Renewals F2011 Natural gas Canada 62% 70% United States 69% 75% Electricity Canada 70% 70% United States 83% 75% Gas and electricity contract renewalsThis table shows the percentage of customers up for renewal in each of the following years: Canada - U.S. - Fiscal period Canada - gas electricity U.S. - gas electricity ------------------------------------------------------- Remainder of 2011 22% 16% 12% 6% 2012 23% 23% 17% 9% 2013 21% 26% 27% 10% 2014 15% 16% 13% 25% 2015 14% 12% 22% 38% Beyond 2015 5% 7% 9% 12% ------------------------------------------------------- Total 100% 100% 100% 100% Just Energy continuously monitors its customer renewal rates and continues to modify its offering to existing customers in order to maximize the number of customers who renew their contracts.Gross margin earned through new marketing effortsAnnual gross margin per customer for new and renewed customersThe table below depicts the annual margins on contracts of residential customers signed in the quarter. This table reflects all margin earned on new additions and renewals including brown commodity and JustGreen. Customers added through marketing were at or above the margins of customers lost through attrition or failure to renew. Renewing customers were at lower margins largely due to lesser take-up of JustGreen on renewal. Sales of the JustGreen products remained very strong with approximately 49% of all customers added in the past quarter taking some or all green energy supply. Those who purchased the JustGreen product elect to take on average 89% of their consumption. A 100% JustGreen electricity customer in Ontario generates annual margins of approximately $182, much higher than the "brown" margins realized. For large commercial customers, the average gross margin for new customers added was $67 per RCE. These customers equal, by definition, more than 15 RCEs. The aggregation cost of these customers is commensurately lower per RCE than a residential customer. Annual gross margin per customer(1) Fiscal 2011 ----------- Residential and small commercial customers added in the quarter - Canada - gas $199 - Canada - electricity $169 - United States - gas $272 - United States - electricity $256 Cusomers renewed in the quarter - Canada - gas $131 - Canada - electricity $108 - United States - gas $203 - United States - electricity $200 Large commercial customers added in the quarter $67 Customers lost in the quarter - Canada - gas $195 - Canada - electricity $150 - United States - gas $208 - United States - electricity $222 (1) Customer sales price less cost of associated supply and allowance for bad debt and U.S. working capital. Home Services division (NHS)NHS was acquired on July 1, 2009 as part of the Universal acquisition. On July 2, 2009, NHS acquired Newten Home Comfort Inc. and on September 30, 2009, acquired substantially all of the assets of NHCLP (see page 5 for additional information). NHS provides Ontario residential customers long-term water heater rental programs offering conventional tanks, power vented tanks and tankless water heaters in a variety of sizes, in addition to now offering furnaces and air conditioners. NHS continues to ramp up its operations and, as at June 30, 2010, had a cumulative installed base of 87,400 water heaters, 500 furnaces and 100 air conditioners in residential homes. NHS earns revenue from its installed base.Management's strategy for NHS is to self-fund the business through its growth phase, building value within the customer base. This way, NHS will not require cash from Just Energy's core operations nor is Just Energy relying on NHS cash flow to fund distributions. The result should be a very valuable asset which will generate excellent cash returns upon repayment of the Home Trust Company ("HTC") financing.The first quarter saw significant geographic and product expansions for NHS. The division has begun marketing its products in Union Gas territory in Ontario expanding its reach to the entire province. It also rolled out an offering of furnace and air conditioner rental and sales. These expansions were funded by increased general and administrative costs but are expected to substantially increase the growth and profitability of NHS in the future.As NHS is a high growth, relatively capital intensive business, Just Energy management believes that, in order to maintain stability of distributions, separate non-recourse financing of this capital is appropriate. On January 18, 2010 NEC announced that it had entered into a long term financing agreement with HTC for the funding of the water heaters for National Home Services. Under the agreement, NHS receives funds equal to the amount of the five year cash flow of the water heater contract discounted at an agreed upon rate. HTC is then paid an amount which is equal to the customer rental payments on the water heaters for the next five years. The initial funding received up to June 30, 2010 was $70.9 million. Home Services division Selected financial information (thousands of dollars) Three months ended June 30, 2010 ------------- Sales per financial statements $4,441 Cost of sales 1,609 ----- Gross margin 2,832 Selling expense 814 General and administrative expense 2,885 Interest expense 1,341 Capital expenditures 8,154 Amortization 467 Total number of water heaters installed 10,400 Results of operationsJust Energy has owned NHS since July 1, 2009 and therefore has no comparative results for the same period last year. For the first quarter ended June 30, 2010 NHS had sales of $4.4 million and gross margin of $2.8 million. The cost of sales for the quarter was $1.6 million and represents the amortization of the installed water heaters for the customer contracts signed to date. Selling expenses for the first quarter of fiscal 2011 were $0.8 million and include the amortization of commission costs paid to the independent agents, automobile fleet costs, advertising and promotion and telecom and office supplies expenses. General and administrative costs, which relate primarily to administrative staff compensation and warehouse expenses, amounted to $2.9 million for the three months ended June 30, 2010. The high level of general and administrative costs relative to past quarters were largely due to the expansion into Union Gas territory and the roll-out of furnace and air conditioner offerings.Capital expenditures, including installation costs, amounted to $8.2 million. Amortization costs were $0.5 million for the current year and include not only the depreciation on capital assets noted above but also the amortization of the water heater contracts and customer relationships acquired in the purchases of Universal and Newten Home Comfort Inc.The growth of National Home Services has been rapid and, combined with the HTC financing, is expected to be self-sustaining on a cash flow basis.Ethanol division (TGF)TGF continues to remain focused on improving plant production and runtime of the Belle Plaine wheat-based ethanol facility. For the quarter ended June 30, 2010, the plant achieved an average production capacity of 62%. The Phase 1 grain milling upgrade has allowed the plant to achieve daily milling rates exceeding nameplate capacity from time to time, however extreme rain limited the ability for the plant to source grain supply and the plant was forced to reduce production levels or shut down for 19 days. Plant capacity was close to 80% on days when the plant was in production mode. Ethanol prices continue to be depressed and were on average $0.57 per litre for the quarter and are expected to increase slightly during the fiscal year. Wheat prices are projected to increase from the average this quarter of $168 per metric tonne in the near term.The ethanol division has separate non-recourse financing in place such that capital requirements and operating losses will not impact Just Energy's core business ability to pay distributions. Ethanol division Selected financial information (thousands of dollars) Three months ended June 30, 2010 ------------- Sales per financial statements $16,806 Cost of sales 19,452 ------- Gross margin (2,646) General and administrative expense 2,334 Interest expense 1,707 Capital expenditures 114 Amortization 296 Results of operationsJust Energy has owned 66.7% of TGF since July 1, 2009 and therefore has no comparable results for the same period last year. During the first quarter of fiscal 2011, TGF had sales of $16.8 million and realized gross margin of $(2.6) million. The negative gross margin was a function of high production costs due to plant inefficiency and low ethanol and DDG prices. During the quarter, the plant produced 23.2 million litres of ethanol and 23,060 metric tonnes of DDG. For the three months ended June 30, 2010, TGF incurred $2.3 million in general and administrative expenses and $1.7 million in interest charges. Capital expenditures, including installation costs, for the quarter amounted to $0.1 million.TGF receives a federal subsidy related to an agreement signed on February 17, 2009, based on the volume of ethanol produced. From July 1, 2009 to March 31, 2010, the subsidy was 10 cents per litre on ethanol produced. Through fiscal 2011, this subsidy will be 9 cents per litre on ethanol produced. This amount declines through time to 5 cents per litre of ethanol produced in fiscal 2015, the last year of the agreement.TGF has seen improved results since quarter end due to the grain milling upgrade and improved ethanol and DDG prices.Overall consolidated resultsGeneral and administrative expensesGeneral and administrative costs were $29.3 million for the three months ended June 30, 2010, representing a 87% increase from $15.6 million in the first quarter of fiscal 2010. The current year expense includes both Universal and two months of Hudson each of which were acquired after the comparable quarter of last year. 57% of the increase in expense was due to these acquisitions. The remaining increase was to accommodate the numerous areas of expansion undertaken by the Fund during the quarter which should result in higher margin and distributable cash in future periods. Other factors include the U. S. exchange rate impact on U.S. dollar denominated costs and an increase in collection costs.Marketing expensesMarketing expenses, which consist of commissions paid to independent sales contractors, brokers and independent representatives for signing new customers as well as an allocation of corporate costs, were $29.8 million, an increase of 54% from $19.4 million in the first quarter of fiscal 2010. New customers signed by our marketing sales force were 261,000 in the first quarter of fiscal 2010, up 169% compared to 97,000 customers added through our sales offices in Q1 of fiscal 2010. The increase in the current quarter expense reflects the growth in customer additions and the impact of the higher U.S. dollar on our U.S. based marketing costs and lower aggregation cost per customer.Marketing expenses to maintain gross margin are allocated based on the ratio of gross margin lost from attrition as compared to the gross margin signed from new and renewed customers during the fiscal year. Marketing expenses to maintain gross margin were $18.3 million, an increase of 38% from $13.3 million from the prior year comparable quarter.Marketing expenses to add new gross margin are allocated based on the ratio of net new gross margin earned on the customers signed, less attrition, as compared to the gross margin signed from new and renewed customers during the period. Marketing expenses to add new gross margin in the first quarter totaled $9.4 million, an increase from $6.1 million in the prior year comparable period. The increase is the result of the increase in the net customer additions of 116,000 in fiscal 2011 versus 11,000 net customers added through our sales offices during the first quarter of fiscal 2010.Marketing expenses included in distributable cash exclude amortization related to the contract initiation costs for Hudson and NHS. For the three months ended June 30, 2010, the amortization amounted to $2.1 million.The quarterly actual aggregation costs per customer including Hudson were as follows: Fiscal 2011 Fiscal 2010 Natural gas Canada $158/RCE $209/RCE United States $75/RCE $199/RCE Total gas $84/RCE $202/RCE Electricity Canada $124/RCE $162/RCE United States $118/RCE $161/RCE Total electricity $119/RCE $161/RCE All Customers $95/RCE $176/RCE Renewals $43/RCE $37/RCE The aggregation costs above are those included within the quarterly results. Commercial contracts (174,000 out of 261,000 aggregated) pay further commission averaging $30 per year for each additional year that the customer flows. Assuming an average life of 3 years, this would add approximately $45 to the F2011 average of All Customers above.Aggregation costs per customer were down significantly during the quarter. The marketing success of the commercial division resulted in record gross customer additions of 261,000 up from 97,000 in Q1 of fiscal 2010. Due to the large gross addition increase, the fixed portion of the marketing costs were spread across far more additions. Including an estimate for the lifetime commission cost for commercial customers, the average cost per customer of $140 was down 21% from the average of $178 in fiscal 2010.The aggregation costs above are those included within the quarterly results. Commercial contracts pay further commission averaging $30 per year for each additional year that the customer flows. Assuming an average life of 3 years, this would add approximately $60 to the fiscal 2011 average of all commercial costs above.Unit-based compensationCompensation in the form of units (non-cash) granted by the Fund to the directors, officers, full-time employees and service providers of its subsidiaries and affiliates pursuant to the 2001 unit option plan, the 2004 unit appreciation rights plan and the directors' deferred compensation plan amounted to $1.1 million for the first quarter of fiscal 2011, an increase from the $0.7 million paid in Q1 of fiscal 2010. The increase relates primarily to additional fully paid unit appreciation rights awarded to the senior management of the Fund.Bad debt expenseIn Illinois, Alberta, Texas, Pennsylvania, Maryland and California, Just Energy assumes the credit risk associated with the collection of all customer accounts. In addition, for commercial direct-billed accounts in B.C., New York and Ontario, the Fund is responsible for the bad debt risk. Credit review processes have been established to manage the customer default rate. Management factors default from credit risk into its margin expectations for all of the above noted markets.Bad debt expense for three months ended June 30, 2010 increased by 50% to $5.7 million versus $3.8 million expensed in the prior year comparable quarter. The bad debt expense increase was entirely related to the 84% increase in total revenues for the quarter in the markets where Just Energy assumes the risk for accounts receivable collections which also now includes incremental Hudson customers. Management integrates its default rate for bad debts within its margin targets and continuously reviews and monitors the credit approval process to mitigate customer delinquency.For the first quarter, the bad debt expense represents 2.8% of $207.0 million in revenues, within the Fund's 2-3% target range. This was equal to the level reported in Q4 and down from the 3.4% reported a year earlier. Higher credit losses have been experienced in Texas which has been offset by improvements in Illinois and Alberta and lower default rates for acquired Hudson commercial customers. Management has taken an aggressive position with regards to returning customers to utility default services or disconnecting delinquent customers to ensure that bad debt expense is managed through the high consumption electricity and gas periods.For each of Just Energy's other markets, the LDCs provide collection services and assume the risk of any bad debt owing from Just Energy's customers for a regulated fee.Interest expenseTotal interest expense for the three months ended June 30, 2010 amounted to $9.5 million, an increase from $0.5 million in the first quarter of fiscal 2010. The large increase in costs for the quarter primarily relates to the interest expense for the JEEC and JEIF convertible debentures associated with the Universal and Hudson acquisitions, as well as, interest costs associated with the TGF debt.Foreign exchangeJust Energy has an exposure to U.S. dollar exchange rates as a result of its U.S. operations and any changes in the applicable exchange rate may result in a decrease or increase in other comprehensive income (loss). For the quarter, a foreign exchange unrealized gain of $14.9 million was reported in other comprehensive income (loss) versus an unrealized gain of $18.2 million reported in the same period last year.Overall, a stronger U.S. dollar increases sales and gross margin but this is partially offset by higher operating costs denominated in U.S. dollars. The Fund retains sufficient funds in the U.S. to support ongoing growth and surplus cash is repatriated to Canada. U.S. cross border cash flow is forecasted annually and hedges for cross border cash flow are entered into when it is determined that any surplus U.S. cash is not required for new acquisition opportunities.Class A preference share distributionsThe remaining holder of the Just Energy Corp. ("JEC") Class A preference shares (which are exchangeable into units on a 1:1 basis) is entitled to receive, on a quarterly basis, a payment equal to the amount paid or payable to a Unitholder on an equal number of units. The total amount paid for the three months ended June 30, 2010 including tax amounted to $1.6 million unchanged from the same comparable period in fiscal 2010. The distributions on the Class A preference shares are reflected in the Statement of Unitholders' Equity of the Fund's consolidated financial statements, net of tax. Provision for income tax For the three months ended June 30 (thousands of dollars) Fiscal 2011 Fiscal 2010 --------------------------------------------- Current income tax recovery $ (1,002) $ (40) Amount credited to Unitholders' equity 538 538 Future tax expense 19,824 9,805 --------------------------------------------- Provision for income tax $19,360 $10,303 --------------------------------------------- --------------------------------------------- The Fund recorded a current income tax recovery of $1.0 million for the first quarter of fiscal 2011 versus $0.04 million of recovery in the same period last year. The change is mainly attributable to a U.S. income tax recovery generated by operating losses incurred by the U.S. entities in this quarter.Also included in the income tax provision is an amount relating to the tax impact of the distributions paid to the Class A preference shareholders of JEC. In accordance with EIC 151, "Exchangeable Securities Issued by Subsidiaries of Income Trusts", all Class A preference shares are included as part of Unitholders' equity and the distributions paid to the shareholders are included as distributions on the Statement of Unitholders' equity, net of tax. For the three months ended June 30, 2010, the tax impact of these distributions, based on a tax rate of 33%, amounted to $0.5 million which is unchanged from the amount in fiscal 2010.As noted in the Fund's Fiscal 2010 annual report, the Fund will convert to a taxable Canadian corporation after 2010 ("the Conversion"), and a future tax recovery of $122.0 million was recorded in fiscal 2010 to recognize the significant temporary differences attributed to mark to market losses from financial derivatives which is expected to be realized subsequent to 2010. During this quarter these mark to market losses declined as a result of a change in fair value of the derivative instruments, and as a result, a future tax expense of $19.8 million has been recorded for this period.After the Conversion at the commencement of the first quarter of calendar 2011, the Fund will be taxed as a taxable Canadian corporation from that date onwards. Therefore, the future tax asset or liability associated with Canadian liabilities and assets recorded on the balance sheet as at that date will be realized over time as the temporary differences between the carrying value of assets in the consolidated financial statements and their respective tax bases are realized. Current Canadian income taxes will be accrued at that time to the extent that there is taxable income in the Fund or its underlying operating entities.The Fund follows the liability method of accounting for income taxes. Under this method, income tax liabilities and assets are recognized for the estimated tax consequences attributable to the temporary differences between the carrying value of the assets and liabilities on the consolidated financial statements and their respective tax bases, using substantively enacted income tax rates. A valuation allowance is recorded against a future income tax asset if it is not anticipated that the asset will be realized in the foreseeable future. The effect of a change in the income tax rates used in calculating future income tax liabilities and assets is recognized in income during the period that the change occurs. Liquidity and capital resources Summary of cash flows For the three months ended June 30 (thousands of dollars) Fiscal 2011 Fiscal 2010 Operating activities $ 25,727 $ 37,795 Investing activities (263,586) (7,406) Financing activities, excluding distributions 303,669 (11,196) Effect of foreign currency translation 4,547 (1,099) ---------------------------------------------------------------------------- Increase in cash before distributions 70,357 18,094 Distributions (cash payments) (36,061) (31,977) ---------------------------------------------------------------------------- Increase (decrease) in cash 34,296 (13,883) Cash - beginning of period 60,132 59,094 ---------------------------------------------------------------------------- Cash - end of period $ 94,428 $ 45,211 ---------------------------------------------------------------------------- ---------------------------------------------------------------------------- Operating activitiesCash flow from operating activities for the three months ended June 30, 2010 was $25.7 million, a decrease from $37.8 million in the prior year comparable quarter. The decrease relates to strong net income growth offset by increased amortization, taxes and unrealized income related to the financial instruments recorded in the quarter.Investing activitiesThe Fund purchased capital assets totaling $9.6 million during the quarter, an increase from $7.4 million in the same period last year. In fiscal 2011, Just Energy's capital spending related to the water heater business, costs related to a new call center in Texas and purchases of office equipment and IT software.Financing activitiesFinancing activities excluding distributions relate primarily to debentures issued to fund the Hudson acquisition and a decrease of the operating line for working capital requirements. During the three months ended June 30, 2010, Just Energy entered into an agreement with a syndicate of underwriters for $330 million of convertible debentures to fund the Hudson acquisition. The Fund also repaid a total of $49.0 million against the credit facility versus $19.0 million repaid in the first quarter of fiscal 2009. On July 1, 2009, in connection with the acquisition of UEG, Just Energy increased its credit facility from $170 million to $250 million. As part of the increase in the credit facility, Societe Generale and Alberta Treasury Branches joined Canadian Imperial Bank of Commerce, Royal Bank of Canada, National Bank of Canada and Bank of Nova Scotia as the syndicate of lenders thereunder. As Just Energy continues to expand in the United States markets, the need to fund working capital and security requirements will increase, driven primarily by the number of customers aggregated, and to a lesser extent by the number of new markets. Based on the markets in which Just Energy currently operates and others that management expects to enter, funding requirements will be supported through the credit facility.The Fund's liquidity requirements are driven by the delay from the time that a customer contract is signed until cash flow is generated. For residential customers, approximately 60% of an independent sales contractor's commission payment is made following reaffirmation or verbal verification of the customer contract with most of the remaining 40% being paid after the energy commodity begins flowing to the customer. For commercial customers commissions are paid either as the energy commodity flows throughout the contract or upfront annually once the customer begins to flow.The elapsed period between the times when a customer is signed to when the first payment is received from the customer varies with each market. The time delays per market are approximately two to nine months. These periods reflect the time required by the various LDCs to enroll, flow the commodity, bill the customer and remit the first payment to Just Energy. In Alberta and Texas, Just Energy receives payment directly from the customer.Distributions (cash payments)Investors should note that due to the institution of a distribution reinvestment program ("DRIP") on December 20, 2007, a portion of distributions declared are not paid in cash. This program was suspended on December 1, 2008 with the commencement of the normal course issuer bid and was re-instituted on March 31, 2009. Under the program, Unitholders can elect to receive their distributions in units at a 2% discount to the prevailing market price rather than the cash equivalent. During the first quarter, the Fund made cash distributions to its Unitholders and the Class A preference shareholder in the amount of $36.1 million, compared to $32.0 million in fiscal 2010.Just Energy will continue to utilize its cash resources for expansion into new markets, growth in its existing energy marketing customer base, JustGreen products and Home Services division and also to make accretive acquisitions of customers as well as distributions to its Unitholders.At the end of the quarter, the annual rate for distributions per unit was $1.24. The Fund intends to make distributions to its Unitholders, based upon cash receipts of the Fund, excluding proceeds from the issuance of additional Fund units, adjusted for costs and expenses of the Fund. The Fund's intention is for Unitholders of record on the 15th day of each month to receive distributions at the end of the month.Balance Sheet as at June 30, 2010 compared to March 31, 2010Cash increased from $60.1 million as at March 31, 2010 to $94.4 million. Restricted cash which includes cash collateral posting related to supply procurement and credit support for Universal, Commerce and TGF entities has decreased to $14.5 million on June 30, 2010 from $18.7 million. The utilization of the credit facility decreased from $57.5 million to $36.5 million as a result of higher cash receipts due to the Universal and Hudson acquisitions and strong customer additions in the past fiscal year. Working capital requirements in the U.S. and Alberta result from the timing difference between customer consumption and cash receipts. For electricity, working capital is required to fund the lag between settlements with the suppliers and settlement with the LDCs.The decrease in accounts receivable from $348.9 million to $325.9 million is primarily attributable to the decrease in revenue associated with the period of lower gas consumption in the first quarter in comparison to the fourth quarter. Accounts payable and accrued liabilities has increased from $227.0 million to $308.4 million related to added consumption as a result of the Universal and Hudson customers acquired and strong net additions from fiscal 2010.Gas in storage has increased from $4.1 million to $38.4 million for the first quarter of fiscal 2011. The increased balance reflects injections into storage for the expanding U.S. customer base, which occurs from April to November.At the end of the first quarter, customers in Ontario, Manitoba, Quebec and Michigan had consumed more gas than was supplied to the LDCs for their use. Since Just Energy is paid for this gas when delivered yet recognizes revenue when the gas is consumed by the customer, the result on the balance sheet is the unbilled revenue amount of $21.0 million and accrued gas accounts payable of $1.4 million. At March 31, 2010, Just Energy had unbilled revenues amounting to $20.8 million and accrued gas accounts payable of $15.1 million.Contract initiation costs relate to the commissions paid by both Hudson and NHS for contracts sold and will be amortized over the life of the contract. The balance increased to $28.3 million from $5.6 million at the end of last fiscal year due mainly to the Hudson acquisition since the March 31, 2010 balance relates to contract initiation costs for NHS only.The other assets and other liabilities relate entirely to the fair value of the financial derivatives. The mark to market gains and losses can result in significant changes in net income and accordingly Unitholders' equity from quarter to quarter due to commodity price volatility. Given that the Fund has purchased this supply to cover future customer usage at fixed prices, management believes that these non-cash quarterly changes are not meaningful.Intangible assets include the acquired customer contracts as well as other intangibles such as Brand, Broker network, Information technology systems primarily related to the Hudson and Universal purchases. The total intangible asset and goodwill balances increased to $644.6 million and $222.8 million, respectively, from $340.6 million and $177.9 million as at March 31, 2010.Long-term debt excluding the current portion has increased to $496.5 million in the first quarter from $231.8 million and is detailed below. Long-term debt and financing As at June 30 (thousands of dollars) ---------------------------- Fiscal 2011 Fiscal 2010 ------------------------------------ Original credit facility $36,500 $57,500 TGF credit facility 40,927 41,313 TGF debentures 37,001 37,001 TGF term Loan 10,000 10,000 JEEC convertible debentures 83,731 83,417 NEC HTC financing 70,949 65,435 JEIF convertible debentures 282,478 - Original credit FacilityOn July 1, 2009, in connection with the acquisition of UEG, Just Energy increased its credit facility from $170 million to $250 million. As part of the increase in the credit facility, Societe Generale and Alberta Treasury Branches joined Canadian Imperial Bank of Commerce, Royal Bank of Canada, National Bank of Canada and Bank of Nova Scotia as the syndicate of the lenders thereunder. Under the new terms of the credit facility, effective July 1, 2009, Just Energy is able to make use of Bankers' Acceptances and LIBOR advances at stamping fees of 4.0%, prime rate advances at Canadian and U.S. prime plus 3.0% and letters of credit at 4.0%. Just Energy's obligations under the credit facility are supported by guarantees of certain subsidiaries and affiliates and secured by a pledge of the assets of Just Energy and the majority of its operating subsidiaries and affiliates. Just Energy is required to meet a number of financial covenants under the credit facility agreement. As at June 30, 2010 and 2009, all of these covenants have been met.TGF credit facilityA credit facility of up to $50.0 million was established with a syndicate of Canadian lenders led by Conexus Credit Union was arranged to finance the construction of the ethanol plant in 2007. The facility was further revised on March 18, 2009, and was converted to a fixed repayment term of 10 years commencing March 1, 2009 which includes interest costs at a rate of prime plus 2%, with principal repayments commencing on March 1, 2010. The credit facility is secured by a demand debenture agreement, a first priority security interest on all assets and undertakings of TGF and a general security interest on all other current and acquired assets of TGF. The credit facility includes certain financial covenants the more significant of which relate to current ratio, debt to equity ratio, debt service coverage and minimum shareholder's equity. The lenders have deferred compliance with the financial covenants until April 1, 2011. The facility was further revised on March 31, 2010 postponing the principal payments due for April 1 to June 1, 2010 and to amortize them over the six month period commencing October 1, 2010 and ending March 31, 2011.TGF debenturesA debenture purchase agreement with a number of private parties providing for the issuance of up to $40.0 million aggregate principal amount of debentures was entered into in 2006. The interest rate is 10.5% per annum, compounded annually and payable quarterly. Interest is to be paid quarterly with quarterly principal payments commencing October 1, 2009 in the amount of $1.0 million per quarter. The agreement includes certain financial covenants the more significant of which relate to current ratio, debt to capitalization ratio, debt service coverage, debt to EBITDA and minimum shareholder's equity. The lender has deferred compliance with the financial covenants until April 1, 2011. On March 31, 2010, TGF entered into an agreement with the holders of the debentures to defer scheduled principal payments owing under the Debenture until April 1, 2011.TGF term/operating facilitiesTGF also maintains a working capital facility for $10.0 million with a third party lender bearing interest at prime plus 1% due in full on December 31, 2010. This facility is secured by liquid investments on deposit with the lender. In addition, TGF has a working capital operating line of $7.0 million bearing interest at a prime plus 1% of which $3.2 million was drawn via overdraft is included in bank indebtedness and $3.4 million of letters of credit have also been issued.JEEC convertible debenturesIn conjunction with the acquisition of UEG on July 1, 2009, JEEC also assumed the obligations of the convertible unsecured subordinated debentures issued by Universal in October 2007 which have a face value of $90 million. The debentures mature on September 30, 2014 unless converted prior to that date and bear interest at an annual rate of 6% payable semi-annually on March 31 and September 30 of each year. Each $1,000 principal amount of the debentures is convertible at any time prior to maturity or on the date fixed for redemption, at the option of the holder, into approximately 29.3 units of the Fund representing a conversion price of $34.09 per exchangeable share.The JEEC convertible debentures are not redeemable prior to October 1, 2010. On and after October 1, 2010, but prior to September 30, 2012, the debentures are redeemable, in whole or in part, at a price equal to the principal amount thereof, plus accrued and unpaid interest, at the Fund's sole option on not more than 60 days and not less than 30 days prior notice, provided that the current market price on the date on which notice of redemption is given is not less than 125% of the conversion price. On and after September 30, 2012, but prior to the maturity date, the debentures are redeemable, in whole or in part, at a price equal to the principal amount thereof, plus accrued and unpaid interest, at the Fund's sole option on not more than 60 days and not less than 30 days prior notice.NEC HTC financingOn January 18, 2010, NEC announced that it had entered into a long term financing agreement for the funding of new and existing rental water heater contracts for NHS. Pursuant to the agreement, NHS will receive financing of an amount equal to the net present value of the first five years of monthly rental income, discounted at the agreed upon financing rate of 7.99% and as settlement, is required to remit an amount equivalent to the rental stream from customers on the water heater contracts for the first five years. The financing agreement is subject to a holdback provision, whereby 3% of the outstanding balance of the funded amount is deducted and deposited to a reserve account in the event of default. Once all of the obligations of NHS are satisfied or expired, the remaining funds in the reserve account will immediately be released to NHS. NEC is required to meet a number of covenants under the agreement and as at June 30, 2010, all of these covenants have been met.JEIF convertible debenturesOn May 7, 2010, Just Energy completed the acquisition of all of the equity interests of Hudson Parent Holdings, LLC and Hudson Energy Corp. (collectively, "Hudson") with an effective date of May 1, 2010. Just Energy entered into an agreement with a syndicate of underwriters for $330 million of convertible extendible unsecured subordinated debentures (the "debentures"). The debentures bear an interest rate of 6.0% per annum payable semi-annually in arrears on June 30 and December 31 with maturity on June 30, 2017. Each $1,000 of principal amount of the debentures is convertible at any time prior to maturity or on the date fixed for redemption, at the option of the holder, into approximately 55.6 units of Just Energy Income Fund representing a conversion price of $18 per unit.The debentures are not redeemable prior to June 30, 2013 except under certain conditions after a change of control has occurred. On or after June 30, 2013 and prior to June 30, 2015, the debentures may be redeemed by the Fund, in whole or in part, on not more than 60 days and not less than 30 days prior notice, at a redemption price equal to the principal amount thereof plus accrued and unpaid interest, provided that the current market price on the date on which notice of redemption is given exceeds 125% of the conversion price. On or after June 30, 2014, and prior to the maturity date, the debentures may be redeemed by the Fund, in whole or in part, at a redemption price equal to the principal amount thereof plus accrued and unpaid interest.Contractual ObligationsIn the normal course of business, the Fund is obligated to make future payments for contracts and other commitments that are known and non-cancelable. Payments due by period (thousands of Less than 1 - 3 4 - 5 After 5 dollars) Total 1 year years years years --------------------------------------------------------------------------- Accounts payable, accrued liabilities and Unit distribution payable $321,647 $321,647 $- $- $- Bank indebtedness 7,853 7,853 - - - Long-term debt 615,377 65,109 102,235 118,033 330,000 Interest payments 194,074 29,592 63,451 50,175 50,856 Property and equipment lease agreements 31,156 6,495 12,535 6,616 5,510 EPCOR billing, collections and supply commitments 16,345 8,653 7,692 - - Grain production contracts 52,466 30,736 21,334 396 - Gas and electricity supply purchase commitments 3,936,299 1,397,493 2,017,737 510,211 10,858 --------------------------------------------------------------------------- $5,175,217 $ 1,867,578 $2,224,984 $685,431 $397,224 --------------------------------------------------------------------------- --------------------------------------------------------------------------- Other obligationsIn the opinion of management, the Fund has no material pending actions, claims or proceedings that have not been either included in its accrued liabilities or in the financial statements. In the normal course of business the Fund could be subject to certain contingent obligations that become payable only if certain events were to occur. The inherent uncertainty surrounding the timing and financial impact of any events prevents any meaningful measurement, which is necessary to assess any material impact on future liquidity. Such obligations include potential judgments, settlements, fines and other penalties resulting from actions, claims or proceedings.Transactions with Related PartiesThe Fund does not have any material transactions with any individuals or companies that are not considered independent to the Fund or any of its subsidiaries and/or affiliates.Critical Accounting EstimatesThe consolidated financial statements of the Fund have been prepared in accordance with Canadian GAAP. Certain accounting policies require management to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues, cost of sales, marketing and general and administrative expenses. Estimates are based on historical experience, current information and various other assumptions that are believed to be reasonable under the circumstances. The emergence of new information and changed circumstances may result in actual results or changes to estimated amounts that differ materially from current estimates.The following assessment of critical accounting estimates is not meant to be exhaustive. The Fund might realize different results from the application of new accounting standards promulgated, from time to time, by various rule-making bodies.Unbilled revenues/Accrued gas accounts payableUnbilled revenues result when customers consume more gas than has been delivered by Just Energy to the LDCs. These estimates are stated at net realizable value. Accrued gas accounts payable represents Just Energy's obligation to the LDC with respect to gas consumed by customers in excess of that delivered. This obligation is also valued at net realizable value. This estimate is required for the gas business unit only, since electricity is consumed at the same time as delivery. Management uses the current average customer contract price and the current average supply cost as a basis for the valuation.Gas delivered in excess of consumption/Deferred revenuesGas delivered to LDCs in excess of consumption by customers is valued at the lower of cost and net realizable value. Collections from LDCs in advance of their consumption results in deferred revenues which are valued at net realizable value. This estimate is required for the gas business unit only since electricity is consumed at the same time as delivery. Management uses the current average customer contract price and the current average supply cost as a basis for the valuation.Allowance for doubtful accountsJust Energy assumes the credit risk associated with the collection of customers' accounts in Alberta, Illinois, Texas, Pennsylvania, Maryland and California. In addition, for large direct billed accounts in B.C. and Ontario, the Fund is responsible for the bad debt risk. Management estimates the allowance for doubtful accounts in these markets based on the financial conditions of each jurisdiction, the aging of the receivables, customer and industry concentrations, the current business environment and historical experience.GoodwillIn assessing the value of goodwill for potential impairment, assumptions are made regarding Just Energy's future cash flow. If the estimates change in the future, the Fund may be required to record impairment charges related to goodwill. An impairment review of goodwill was performed during 2010 and as a result of the review, it was determined that no impairment of goodwill existed at June 30, 2010.Fair Value of Derivative Financial Instruments and Risk ManagementThe Fund has entered into a variety of derivative financial instruments as part of the business of purchasing and selling gas, electricity and the green energy option. Just Energy enters into contracts with customers to provide electricity and gas at fixed prices and provide comfort to certain customers that a specified amount of energy will be derived from green generation. These customer contracts expose Just Energy to changes in market prices to supply these commodities. To reduce the exposure to the commodity market price changes, Just Energy uses derivative financial and physical contracts to secure fixed price commodity supply to cover its estimated fixed price delivery or green commitment obligations.The Fund's business model objective is to minimize commodity risk other than consumption changes, usually attributable to weather. Accordingly, it is Just Energy's policy to hedge the estimated fixed price requirements of its customers with offsetting hedges of natural gas and electricity at fixed prices for terms equal to those of the customer contracts. The cash flow from these supply contracts is expected to be effective in offsetting the Funds' price exposure and serves to fix acquisition costs of gas and electricity to be delivered under the fixed price or price protected customer contracts. Just Energy's policy is not to use derivative instruments for speculative purposes.Just Energy's expansion in the U.S. has introduced foreign exchange related risks. Just Energy will enter into foreign exchange forwards in order to hedge the exposure to fluctuations in cross border cash flows.The financial statements are in compliance with Section 3855 of the CICA Handbook, which require a determination of fair value for all derivative financial instruments. Up to June 30, 2008, the financial statements also applied Section 3865 of the CICA Handbook which permitted a further calculation for qualified and designated accounting hedges to determine the effective and ineffective portion of the hedge. This calculation permitted the change in fair value to be accounted for predominately in the Statement of Other Comprehensive Income. As of July 1, 2008, management decided that the increasing complexity and costs of maintaining this accounting treatment outweighed the benefits. This fair value, (and when it was applicable, the ineffectiveness) is determined using market information at the end of each quarter. Management believes the Fund remains economically hedged operationally across all jurisdictions.Preference shares of JEC and Trust unitsAs at August 11, 2010 there were 5,263,728 Class A Preference Shares of JEC outstanding and 125,265,818 units of the Fund outstanding.JEEC Exchangeable SharesA total of 21,271,804 exchangeable shares of JEEC were issued on July 1, 2009 for the purchase of Universal. JEEC shareholders have voting rights equivalent to the Fund's Unitholders and their shares are exchangeable on a 1:1 basis. As at August 11, 2010, 17,046,104 shares had been converted and there were 4,225,700 exchangeable shares outstanding.Taxability of distributionsCash and unit distributions received in calendar 2009 were allocated 100% to other income. Additional information can be found on our website at www.justenergy.com. Management estimates the distributions for calendar 2010 to be allocated in a similar manner to that of 2009.Recently issued accounting standardsThe following are new standards, not yet in effect, which are required to be adopted by the Fund on the effective date:Business combinationsIn October 2008, the CICA issued Handbook Section 1582, Business combinations ("CICA 1582"), concurrently with CICA Handbook Section 1601, Consolidated Financial Statements ("CICA 1601"), and CICA Handbook Section 1602, Non-controlling Interest ("CICA 1602"). CICA 1582, which replaces CICA Handbook Section 1581, Business combinations, establishes standards for the measurement of a Business combination and the recognition and measurement of assets acquired and liabilities assumed. CICA 1601, which replaces CICA Handbook Section 1600, carries forward the existing Canadian guidance on aspects of the preparation of consolidated financial statements subsequent to acquisition other than non-controlling interests. CICA 1602 establishes guidance for the treatment of non-controlling interests subsequent to acquisition through a Business combination. These new standards are effective for fiscal years beginning on or after January 1, 2011. The Fund has not yet determined the impact of these standards on its consolidated financial statements.International Financial Reporting StandardsIn February 2008, CICA announced that GAAP for publicly accountable enterprises will be replaced by IFRS for fiscal years beginning on or after January 1, 2011. IFRS uses a conceptual framework similar to GAAP but there are significant differences on recognition, measurement and disclosures.Just Energy will transition to IFRS effective April 1, 2011, and intends to issue its first interim financial statements under IFRS for the three-month period ending June 30, 2011, and a complete set of financial statements under IFRS for the year ending March 31, 2012.Based on the initial assessment of the differences between Canadian GAAP and IFRS relevant to the Fund, an internal project team was assembled and a conversion plan was developed in March 2009 to manage the transition to IFRS. Project status reporting is provided to senior executive management and to the Audit Committee on a regular basis. Our project consists of three phases: IFRS diagnostic assessment; solution development; and implementation. The diagnostic phase, which was completed in 2009, involved a high level review and the identification of major accounting differences between current Canadian GAAP and IFRS applicable to Just Energy. The Fund has also completed phase 2, the solution development phase, which includes the substantial completion of all policy papers which have been discussed with the external auditors. The IFRS project team is currently engaged in the implementation phase, which is the final phase of the project. This phase involves approval of the accounting policy choices, completing the collection of data required to prepare the financial statements, implementing changes to systems and business processes relating to financial reporting, key personnel training and the monitoring of standards currently being amended by the International Accounting Standard Board ("IASB"). Just Energy has also analyzed the IFRS financial statement presentation and disclosure requirements. These assessments will continue to be analyzed and evaluated throughout the implementation phase of the Fund's project.The initial assessment phase determined that the areas with the highest potential to significantly impact the fund includes but is not limited to the following:IAS 16: Property, plant and equipment:IAS 16 reinforces the requirement under Canadian GAAP that requires that each part of property, plant and equipment that has a cost that is significant in relation to the overall cost of the item should be depreciated separately. The Fund will adopt this revised accounting policy with respect to componentization of the ethanol plant on transition to IFRS. The carrying value of the ethanol plant and corresponding depreciation expense will be different under IFRS, but the impact is not expected to be material.IAS 36: Impairment of assetsIAS 36 uses a one step approach for both testing for and measurement of impairment, with asset carrying values compared directly with the higher of fair value less costs to sell and value in use (which uses discounted future cash flows). Canadian GAAP however, uses a two-step approach to impairment testing: first comparing asset carrying values with undiscounted future cash flows to determine whether impairment exists; and then measuring any impairment by comparing asset carrying values with fair values. The Fund does not expect any material impairment upon transition to IFRS.IAS 12: Income taxesIAS 12 is largely similar to the Canadian standard. Any impact to the Fund will depend primarily on other adjustments made upon transition to IFRS which will likely have a corresponding effect on income tax balances.IAS 39: Financial instruments: Recognition and measurementThe Fund enters into fixed term contracts with customers to provide electricity and gas at fixed prices. These customer contracts expose the Fund to changes in market prices of electricity / gas and consumption. To reduce the exposure to movements in commodity prices arising from the acquisition of electricity and gas at floating rates, the Fund routinely enters into derivative contracts. Under Canadian GAAP all supply contracts are re-measured to fair value at each reporting date. The requirement for normal purchase and normal sales contract (own use exemption) is similar under Canadian GAAP and IFRS, however several small differences exist. There is no specific guidance either in Canadian GAAP of IFRS with respect to eligibility of the own-use exemption of energy supply contracts entered into by energy retailers. The Fund currently is in the process of determining which type of supply contracts and which specific markets of the Fund meet the requirement for the own-use exemption under IFRS.IFRS 2: Share-based paymentsUnder IFRS, when stock option awards vest gradually, each tranche is to be considered as a separate award whereas Canadian GAAP the gradually vested tranches are considered as a single award. This will result in expenses relating to share-based payments being recognized over the expected term of each vested tranche. IFRS also requires the Fund to estimate forfeitures upfront in the valuation of stock options, whereas under Canadian GAAP, they can be recorded upfront or recorded as they occur. Currently, the Fund accounts for forfeitures as they occur. The Fund is the processes of determining the impact of such adjustment on the opening balance sheet as at the transition date.The Fund has analyzed the optional exemptions available under IFRS 1 First-time Adoption of International Financial Reporting. IFRS generally requires an entity to apply standards on a retrospective basis, however, IFRS 1 provides both mandatory exemptions and optional exemptions from this general requirement. First time adoption exemptions relevant to the Fund are discussed below:Business combinationsUnder this exemption, the Fund may elect not to apply IFRS 3 retrospectively to past business combinations. The standard may be applied prospectively from the date of the opening IFRS balance sheet. The Fund intends to use this exemption.Share-based payment transactionsThe Fund may elect to not apply IFRS 2 to equity instruments that were granted on or before November 7, 2002 or which vested before the company's date of transition to IFRS. The Fund may also elect to not apply IFRS 2 to liabilities arising from share-based payment transactions which settled before the date of transition to IFRS. The Fund intends to apply these exemptions.Cumulative translation differencesThe exemption permits the Fund to reset the cumulative translation differences to zero by recognizing the full amount in the retained earnings of the opening IFRS balance sheet. The Fund is currently assessing whether it will elect this exemption.Borrowing costsThe exemption allows the Fund to adopt IAS 23, which requires the capitalization of borrowing costs on all qualifying assets, prospectively from the date of the opening IFRS balance sheet. The Fund intends to use this exemption.Until the Fund has prepared a full set of annual financial statements under IFRS, we will not be able to determine or precisely quantify all of the impacts that will result from converting to IFRS.The expected transitional adjustments, changes in accounting policies and subsequent accounting may result in other business impacts such as impacts on the debt covenants and capital requirements disclosure. Based on the work completed to date, the transition is expected to have minimal impact on information technology and internal controls over financial reporting of the Fund. Business impacts, IT systems and the control environment will continue to be assessed as the project progresses.Legal ProceedingsJust Energy's subsidiaries are party to a number of legal proceedings. Just Energy believes that each such proceeding constitutes a routine legal matter incidental to the business conducted by Just Energy and that the ultimate disposition of the proceedings will not have a material adverse effect on its consolidated earnings, cash flows, or financial position.In addition to the routine legal proceedings of Just Energy, the State of California has filed a number of complaints to the Federal Regulatory Energy Commission ("FERC") against many suppliers of electricity, including CEI with respect to events stemming from the 2001 energy crises in California. Pursuant to the complaints, the State of California is challenging the FERC's enforcement of its market-based rate system. Although CEI did not own generation, the State of California is claiming that CEI was unjustly enriched by the run-up in charges caused by the alleged market manipulation of other market participants. On March 18, 2010, the Administrative Law Judge in the matter granted a motion to strike the claim for all parties in one of the complaints, holding that California did not prove that the reporting errors masked the accumulation of market power. California has appealed the decision. CEI continues to vigorously contest this matter and it is not expected to have a material impact on the financial condition of the Fund.Controls and ProceduresDuring the most recent interim period, there have been no changes in the Fund's policies and procedures that comprise its internal control over financial reporting, that have materially affected, or are reasonably likely to materially affect, the Fund's internal control over financial reportingLimitation on Scope of DesignSection 3.3(1) of National Instrument 52-109, "Certification of Disclosure in Issuer's Annual and Interim Filings", states that the Fund may limit its design of disclosure controls and procedures and internal controls over financial reporting for a business that it acquired not more than 365 days before the end of the financial period to which the certificate relates. Under this section, the Fund's CEO and CFO have limited the scope of the design, and subsequent evaluation, of disclosure controls and procedures and internal controls over financial reporting to exclude controls, policies and procedures of the Hudson subsidiaries acquired on May 1, 2010.Summary financial information pertaining to the Hudson acquisition that was included in the consolidated financial statements of the Fund as at June 30, 2010 is as follows (thousands of dollars): Total ----- Sales(1) $117,477 Net income(1) 5,092 Current assets 141,299 Non-current assets 381,738 Current liabilities 178,382 Non-current liabilities 39,271 (1) Results from May 1, 2010 to June 30, 2010 Corporate governanceJust Energy is committed to transparency in our operations and our approach to governance meets all recommended standards. Full disclosure of our compliance with existing corporate governance rules is available on our website at www.justenergy.com and is included in the Fund's May 27, 2010 management proxy circular. Just Energy actively monitors the corporate governance and disclosure environment to ensure timely compliance with current and future requirements.OutlookThe past five years have seen a significant geographic diversification of Just Energy's customer base. For the first time, this quarter ended with more customers in the United States than in Canada. This diversification protects the Fund against overexposure to any one regulatory jurisdiction and, to a degree, weather variance. Past quarters have seen a further diversification effort, in this case marketing channels.The acquisition of Hudson is a major step in broadening Just Energy's access to the large commercial market. While the Fund does not want to be exposed to industrial volumes due to their inherent volatility and credit exposure, large commercial customers such as hospitals, universities and school boards are both underserved by deregulated suppliers and potentially profitable. While the margin per RCE of these customers is lower than a residential customer, so too is the customer acquisition cost. The result is the same quick payback and high return on investment that Just Energy has been known for.Hudson utilized a well established broker network to access the commercial market. Just Energy had not previously utilized brokers. The results in the first quarter were record customer additions supported by 174,000 large commercial RCE additions. Management anticipates that this trend will continue and commercial customers will be a growing portion of Just Energy's customer base. In addition to this broker channel, Just Energy is building an inside commercial sales team which is seeing solid early results.Just Energy has committed expenditures toward a number of other expansions which management believes will contribute to higher distributable cash in the future.During the quarter, the Hudson broker network was expanded to five provinces and seven states in which they did not previously operate. In Ontario, more than 40 brokers have already been enrolled in the network. Just Energy also invested to prepare for its entry into Massachusetts and two new utility territories in New York.Further expansion has been undertaken through NHS. During the quarter NHS expanded into Ontario's Union Gas territory and rolled-out an offering of furnaces and air conditioners. This fast growing water heater and HVAC rental and sales operation has created substantial long term value for the Fund and, with these expansions, management believes that its rapid growth will continue.Similarly, the JustGreen products represent a new product which broadens our prospective market. Many purchasers of JustGreen would not otherwise purchase gas or electricity from a door-to-door sales presentation.The quarter saw the first results of the launch of the Fund's Momentis network marketing operation. Momentis independent representatives will market natural gas and electricity contracts on behalf of Just Energy. This is the first time the Fund has utilized the network marketing channel.On June 29, 2010, the Fund received approval by its Unitholders for the plan to reorganize the income trust structure into a high dividend paying corporation and subsequently received approval of the Court of Queens Bench, Alberta on June 30, 2010. Upon completion of the reorganization, the board intends to implement a dividend policy where monthly dividends will be initially set at $0.1033 per share ($1.24 annually) equal to the current distributions paid to Just Energy's Unitholders.The Federal Government's announcement on October 31, 2006 of the pending imposition of a tax on income trusts effective January 1, 2011 caused Just Energy to analyze options which would maximize Unitholder value for the long term. The conclusion of the analysis was that conversion to a high dividend yield corporation was the optimal option available to the Fund. The proposed reorganization offers a number of benefits: -- The unique nature of Just Energy as a growth company with high return on invested capital allows it to pay both a substantial yield and continue to grow. This remains true regardless of whether Just Energy is an income fund or a corporation. -- The receipt of $1.24 per year in dividends will result in a substantially higher after tax cash yield to shareholders than that of $1.24 in distributions for most taxable Canadian Unitholders. -- It is anticipated that as a corporation, Just Energy will have greater access to capital markets to the extent that issuance of equity should be required for growth through acquisition. -- Limitations under the proposed tax on undue expansion of trusts and foreign ownership limitations on trusts will no longer apply to Just Energy. -- The high dividend yield as a corporation combined with Just Energy's growth prospects are expected to focus market attention on the value of Just Energy shares. -- It is anticipated that the reorganized structure of the Fund as a dividend paying corporation will attract new investors, including non- resident investors, and provide, in the aggregate, a more active and attractive market for the new Just Energy shares than currently exists for the units. -- As a corporation, Just Energy will be managed by the same experienced team of professionals. In anticipation of need for conversion, the Fund has not increased its rate of distribution since early 2008 despite substantial growth in its business. Distributions have been maintained by Just Energy at $0.1033 per month ($1.24 annually) supplemented by annual Special Distributions ($0.20 payable January 31, 2010 being the most recent). The decision not to continue distribution increases and the continued growth of Just Energy have given the Fund the flexibility to continue to pay a dividend equal to the current monthly distributions following the reorganization. This ability makes full allowance for the payment of tax by Just Energy and does not rely on a merger with tax loss bearing companies.Sales of the JustGreen products have been very strong with approximately 49% of all customers added in the current quarter taking 89% of green energy supply. Although currently a small component of the overall customer book (3% of gas customers and 6% of electricity customers), continued sales of JustGreen products at these levels will alter the economics of Just Energy as green customers generate higher per customer margins than the past five-year fixed-rate customers. As these new green customers become a higher and higher percentage of the overall Just Energy customer base, the results should be higher margins per customer and improved renewal rates.The Fund intends to continue its geographic expansion into new markets in the United States both through organic growth and focused acquisitions. Just Energy intends to begin marketing in Pennsylvania in the third quarter of fiscal 2011. The Fund is actively reviewing a number of further possible acquisitions. Just Energy continues to monitor the progress of the deregulated markets in various jurisdictions. JUST ENERGY INCOME FUND CONSOLIDATED BALANCE SHEETS (Unaudited - thousands of dollars) ---------------------------------------------------------------------------- ---------------------------------------------------------------------------- June 30, 2010 March 31, 2010 ASSETS CURRENT Cash $ 94,428 $ 60,132 Restricted cash 14,530 18,650 Accounts receivable 325,875 348,892 Gas delivered in excess of consumption 21,325 7,410 Gas in storage 38,386 4,058 Inventory 4,636 6,323 Unbilled revenues 20,978 20,793 Prepaid expenses and deposits 24,543 20,038 Current portion of future income tax assets 14,940 29,139 Other assets - current (Note 11a) 1,637 2,703 ---------------------------------------------------------------------------- 561,278 518,138 FUTURE INCOME TAX ASSETS 88,484 85,197 PROPERTY, PLANT AND EQUIPMENT 226,593 218,616 CONTRACT INITIATION COSTS 28,330 5,587 INTANGIBLE ASSETS (Note 6) 644,562 340,629 GOODWILL 222,765 177,887 LONG-TERM RECEIVABLE 3,898 2,014 OTHER ASSETS - LONG TERM (Note 11a) 4,674 5,027 ---------------------------------------------------------------------------- $ 1,780,584 $ 1, 353,095 ---------------------------------------------------------------------------- ---------------------------------------------------------------------------- LIABILITIES CURRENT Bank indebtedness $ 7,853 $ 8,236 Accounts payable and accrued liabilities 308,412 226,950 Unit distribution payable 13,235 13,182 Corporate taxes payable 2,838 6,410 Current portion of future income tax liabilities 9,513 6,776 Deferred revenue 25,202 7,202 Accrued gas accounts payable 1,414 15,093 Current portion of long-term debt (Note 7) 65,108 62,829 Other liabilities - current (Note 11a) 597,753 685,200 ---------------------------------------------------------------------------- 1,031,328 1,031,878 LONG-TERM DEBT (Note 7) 496,478 231,837 DEFERRED LEASE INDUCEMENTS 1,898 1,984 OTHER LIABILITIES - LONG TERM (Note 11a) 496,292 590,572 ---------------------------------------------------------------------------- 2,025,996 1,856,271 ---------------------------------------------------------------------------- NON-CONTROLLING INTEREST 18,030 20,603 ---------------------------------------------------------------------------- UNITHOLDERS' DEFICIENCY Deficit $ (1,190,128) $ (1,423,698) Accumulated other comprehensive income (Note 9) 208,122 221,969 ---------------------------------------------------------------------------- (982,006) (1,201,729) Unitholders' capital 664,717 659,118 Equity component of convertible debenture (Note 7e) 33,914 - Contributed surplus 19,933 18,832 ---------------------------------------------------------------------------- Unitholders' deficiency (263,442) (523,779) ---------------------------------------------------------------------------- $ 1,780,584 $ 1, 353,095 ---------------------------------------------------------------------------- ---------------------------------------------------------------------------- Commitments (Note 14) Contingencies (Note 15) See accompanying notes to consolidated financial statements JUST ENERGY INCOME FUND CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE THREE MONTHS ENDED JUNE 30 (Unaudited - thousands of dollars except per unit amounts) ---------------------------------------------------------------------------- ---------------------------------------------------------------------------- 2010 2009 SALES $609,684 $ 399,010 COST OF SALES 529,187 332,935 ---------------------------------------------------------------------------- GROSS MARGIN 80,497 66,075 ---------------------------------------------------------------------------- EXPENSES General and administrative expenses 29,272 15,617 Marketing expenses 29,758 19,385 Bad debt expense 5,749 3,829 Amortization of intangible assets and related supply contracts 27,172 594 Amortization of property, plant and equipment 1,920 1,194 Unit-based compensation 1,075 657 Capital tax expense 133 80 --------------------------------------------------------------------------- 95,079 41,356 ---------------------------------------------------------------------------- INCOME (LOSS) BEFORE THE UNDERNOTED (14,582) 24,719 INTEREST EXPENSE (Note 7) 9,480 480 CHANGE IN FAIR VALUE OF DERIVATIVE INSTRUMENTS (Note 11a) (314,376) (87,880) OTHER INCOME (1,782) (756) ---------------------------------------------------------------------------- INCOME BEFORE INCOME TAXES 292,096 112,875 PROVISION FOR INCOME TAXES (Note 8) 19,360 10,303 NON-CONTROLLING INTEREST (2,573) (55) ---------------------------------------------------------------------------- NET INCOME $275,309 $ 102,627 ---------------------------------------------------------------------------- ---------------------------------------------------------------------------- See accompanying notes to consolidated financial statements Income per unit (Note 12) Basic $ 2.05 $ 0.92 Diluted $ 1.85 $ 0.91 JUST ENERGY INCOME FUND CONSOLIDATED STATEMENTS OF UNITHOLDERS' DEFICIENCY FOR THE THREE MONTHS ENDED JUNE 30 (Unaudited - thousands of dollars) ---------------------------------------------------------------------------- ---------------------------------------------------------------------------- 2010 2009 ACCUMULATED DEFICIT Accumulated deficit, beginning of period $ (480,931) $ (712,427) Net income 275,309 102,627 ---------------------------------------------------------------------------- Accumulated deficit, end of period (205,622) (609,800) ---------------------------------------------------------------------------- DISTRIBUTIONS Distributions, beginning of period (942,767) (757,850) Distributions and dividends on Exchangeable Shares (40,646) (33,383) Class A preference share distributions - net of income taxes of $538 (2009 - $538) (1,093) (1,093) ---------------------------------------------------------------------------- Distributions, end of period (984,506) (792,326) ---------------------------------------------------------------------------- DEFICIT (1,190,128) (1,402,126) ---------------------------------------------------------------------------- ACCUMULATED OTHER COMPREHENSIVE INCOME (Note 9) Accumulated other comprehensive income, beginning of period 221,969 364,566 Other comprehensive loss (13,847) (31,084) ---------------------------------------------------------------------------- Accumulated other comprehensive income, end of period 208,122 333,482 ---------------------------------------------------------------------------- UNITHOLDERS' CAPITAL (Note 10) Unitholders' capital, beginning of period 659,118 398,454 Trust units exchanged 4,768 - Trust units issued on exercise/exchange of unit compensation - 197 Distribution reinvestment plan 5,599 2,464 Exchangeable shares exchanged (4,768) - ---------------------------------------------------------------------------- Unitholders' capital, end of period 664,717 401,115 EQUITY COMPONENT OF CONVERTIBLE DEBENTURE (Note 7e) 33,914 - CONTRIBUTED SURPLUS (Note 10b) 19,933 15,151 ---------------------------------------------------------------------------- Unitholders' deficiency, end of period $ (263,442) $ (652,378) ---------------------------------------------------------------------------- ---------------------------------------------------------------------------- See accompanying notes to consolidated financial statements JUST ENERGY INCOME FUND CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME FOR THE THREE MONTHS ENDED JUNE 30 (Unaudited - thousands of dollars) ---------------------------------------------------------------------------- ---------------------------------------------------------------------------- 2010 2009 ------------------------------------------------------------------------- NET INCOME $ 275,309 $ 102,627 ------------------------------------------------------------------------- Unrealized gain on translation of self sustaining operations 14,876 18,246 Amortization of deferred unrealized gain on discontinued hedges, net of income taxes of $6,259 (2009 -$9,805) (Note 11a) (28,723) (49,330) ------------------------------------------------------------------------- OTHER COMPREHENSIVE LOSS (13,847) (31,084) ------------------------------------------------------------------------- COMPREHENSIVE INCOME $ 261,462 $ 71,543 ------------------------------------------------------------------------- ------------------------------------------------------------------------- See accompanying notes to consolidated financial statements JUST ENERGY INCOME FUND CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE THREE MONTHS ENDED JUNE 30 (Unaudited - thousands of dollars) ---------------------------------------------------------------------------- ---------------------------------------------------------------------------- Net inflow (outflow) of cash related to the following activities 2010 2009 OPERATING Net income $ 275,309 $102,627 ---------------------------------------------------------------------------- Items not affecting cash Amortization of intangible assets and related supply contracts 27,172 594 Amortization of property, plant and equipment 1,920 1,194 Amortization of contract initiation costs 2,088 - Unit-based compensation 1,075 657 Non-controlling interest (2,573) (55) Future income taxes 19,824 9,805 Financing charges, non-cash portion 1,024 - Other 2,180 (87) Change in fair value of derivative instruments (314,376) (87,880) ---------------------------------------------------------------------------- (261,666) (75,772) ---------------------------------------------------------------------------- Adjustments required to reflect net cash receipts from gas sales 8,436 8,694 ---------------------------------------------------------------------------- Changes in non-cash working capital 3,648 2,246 ---------------------------------------------------------------------------- Cash inflow from operations 25,727 37,795 ---------------------------------------------------------------------------- FINANCING Distributions and dividends paid to Unitholders and holders of Exchangeable shares (34,968) (30,884) Distributions to Class A preference shareholders (1,631) (1,631) Tax impact on distributions to Class A preference shareholders 538 538 Decrease in bank indebtedness (383) - Issuance of long-term debt 349,197 7,526 Repayment of long-term debt (49,386) (19,000) Restricted cash 4,241 278 ---------------------------------------------------------------------------- 267,608 (43,173) ---------------------------------------------------------------------------- INVESTING Purchase of property, plant and equipment (9,607) (7,406) Purchase of other intangible assets (362) - Acquisitions (Note 5) (253,071) - Proceeds of long-term receivable 3,128 - Contract initiation costs (3,674) - ---------------------------------------------------------------------------- (263,586) (7,406) ---------------------------------------------------------------------------- Effect of foreign currency translation on cash balances 4,547 (1,099) ---------------------------------------------------------------------------- NET CASH INFLOW (OUTFLOW) 34,296 (13,883) CASH, BEGINNING OF PERIOD 60,132 59,094 ---------------------------------------------------------------------------- CASH, END OF PERIOD $ 94,428 $ 45,211 ---------------------------------------------------------------------------- ---------------------------------------------------------------------------- Supplemental information Interest paid $ 3,672 $ 439 Income taxes paid $ 2,456 $ 977 ---------------------------------------------------------------------------- ---------------------------------------------------------------------------- See accompanying notes to consolidated financial statements JUST ENERGY INCOME FUNDNOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSFOR THE THREE MONTHS ENDED JUNE 30, 2010(thousands of dollars except where indicated and per unit amounts)1. INTERIM FINANCIAL STATEMENTSThe unaudited interim consolidated financial statements do not conform in all respects to the requirements of Canadian generally accepted accounting principles ("GAAP") for annual financial statements and should therefore be read in conjunction with the audited consolidated financial statements and notes thereto included in the Fund's annual report for fiscal 2010. The unaudited interim consolidated financial statements have been prepared by management in accordance with Canadian GAAP applicable to interim consolidated financial statements and follow the same accounting policies and methods in their application as the most recent annual financial statements, except as described in Note 3.2. ORGANIZATIONJust Energy Income Fund ("Just Energy", the "Fund", or "JEIF"), formerly known as Energy Savings Income Fund, changed its name effective June 1, 2009.Just Energy is an open-ended, limited-purpose trust established under the laws of the Province of Ontario to hold securities and to distribute the income of its directly or indirectly owned operating subsidiaries and affiliates: Just Energy Ontario L.P. ("JE Ontario"), Just Energy Manitoba L.P. ("JE Manitoba"), Just Energy Quebec L.P. ("JE Quebec"), Just Energy (B.C.) Limited Partnership ("JE B.C."), Just Energy Alberta L.P. ("JE Alberta"), Alberta Energy Savings L.P. ("AESLP"), Just Energy Illinois Corp. ("JE Illinios"), Just Energy New York Corp. ("JENYC"), Just Energy Indiana Corp. ("JE Indiana"), Just Energy Texas L.P. ("JE Texas"), Just Energy Exchange Corp. ("JEEC"), Universal Energy Corp. ("UEC"), Universal Gas & Electric Corporation ("UG&E"), Commerce Energy Inc. ("Commerce" or "CEI"), National Energy Corp. ("NEC") operating under the trade name of National Home Services ("NHS"), Momentis Canada Corp. and Momentis U.S. Corp. (collectively, "Momentis"), Just Energy Massachusetts Corp. ("JE Mass"), Just Energy Michigan Corp.("JE Michigan"), Hudson Energy Services LLC ("Hudson" or "HES") and Terra Grain Fuels Inc. ("TGF"), collectively, the "Just Energy Group".3. CHANGES IN SIGNIFICANT ACCOUNTING POLICIES(a) Significant policies adopted from acquisitions(i) Contract initiation costsCommissions related to obtaining and renewing commercial customer contracts through brokers and independent contractors signed under Hudson are recorded as contract initiation costs and amortized in marketing expenses over the remaining life of the contract.In addition, commissions related to obtaining customer contracts signed under NEC are recorded as contract initiation costs and amortized in marketing expenses over the remaining life of the contract.(b) Recently issued accounting standardsThe following are new standards, not yet in effect, which are required to be adopted by the Fund on the effective date:(i) Business combinationsIn October 2008, the Canadian Institute of Chartered Accountants ("CICA") issued Handbook Section 1582, Business Combinations ("CICA 1582"), concurrently with CICA Handbook Section 1601, Consolidated Financial Statements ("CICA 1601"), and CICA Handbook Section 1602, Non-controlling Interest ("CICA 1602"). CICA 1582, which replaces CICA Handbook Section 1581, Business Combinations, establishes standards for the measurement of a business combination and the recognition and measurement of assets acquired and liabilities assumed. CICA 1601, which replaces CICA Handbook Section 1600, carries forward the existing Canadian guidance on aspects of the preparation of consolidated financial statements subsequent to acquisition other than non-controlling interests. CICA 1602 establishes guidance for the treatment of non-controlling interests subsequent to acquisition through a business combination. These new standards are effective for fiscal years beginning on or after January 1, 2011. The Fund has not yet determined the impact of these standards on its consolidated financial statements.(ii) International Financial Reporting StandardsIn February 2008, the CICA announced that GAAP for publicly accountable enterprises will be replaced by International Financial Reporting Standards ("IFRS") for fiscal years beginning on or after January 1, 2011.Just Energy will transition to IFRS effective April 1, 2011, and intends to issue its first interim consolidated financial statements under IFRS for the three-month period ending June 30, 2011, and a complete set of consolidated financial statements under IFRS for the year ending March 31, 2012.Just Energy has developed a changeover plan which includes a diagnostic assessment, solution development and implementation phases. The Fund has completed the initial assessment and solution development phases. These included certain training initiatives, researching and documenting the significant differences between Canadian GAAP and IFRS, assessing the impact on the Fund and a preliminary assessment of the information technology systems. The IFRS team is currently engaged in the implementation phase, which is the final phase of the project.Significant differences exist which may impact the Fund's financial reporting. Those areas include, but are not limited to, property, plant and equipment, impairment of assets, accounting for income taxes, financial instruments, employee benefits and the first time adoption of IFRS ("IFRS 1").As part of the conversion plan, the Fund is in the process of analyzing the detailed impacts of these identified differences and developing solutions to bridge these differences. Although the impact of the adoption of IFRS on the Fund's financial position and results of operations is not yet reasonably determinable or estimable, the Fund does expect a significant increase in financial statement disclosure requirements resulting from the adoption of IFRS. Just Energy is currently on target with its conversion plan which will be completed by April 1, 2011.4. SEASONALITY OF OPERATIONSJust Energy's operations are seasonal. Gas consumption by customers is typically highest in October through March and lowest in April through September. Electricity consumption is typically highest in January through March and July through September. Electricity consumption is lowest in October through December and April through June.5. ACQUISITIONS(a) Acquisition of Hudson Energy Services LLCOn May 7, 2010, Just Energy completed the acquisition of all of the equity interests of Hudson Parent Holdings, LLC and all the common shares of Hudson Energy Corp., thereby indirectly acquiring Hudson Energy Services LLC with an effective date of May 1, 2010. The acquisition was funded by an issuance of $330 million in convertible debentures issued on May 5, 2010 (see note 7e).The acquisition of Hudson was accounted for using the purchase method of accounting. The Fund allocated the purchase price to the identified assets and liabilities acquired based on their fair values at the time of acquisition as follows: Net assets acquired: Current assets (including cash of $24,003) $ 88,696 Current liabilities (107,817) Electricity contracts and customer relationships 200,653 Gas contracts and customer relationships 26,225 Broker network 84,400 Brand 11,200 Information technology system development 17,954 Contract initiation costs 20,288 Other intangible assets 6,545 Goodwill 30,946 Property, plant and equipment 2,559 Unbilled revenue 15,092 Notes receivable - long term 1,312 Security deposits - long term 3,544 Other assets - current 124 Other assets - long term 100 Other liabilities - current (74,683) Other liabilities - long term (40,719) ----------- $ 286,419 ----------- ----------- Consideration: Purchase price $ 285,343 Transaction costs 1,076 ----------- $ 286,419 ----------- ----------- Goodwill associated with the Hudson acquisition is part of the U.S. gas and electricity marketing segment. All contracts and intangible assets, excluding brand, are amortized over the average remaining life at the time of acquisition. The gas and electricity contracts and customer relationships are amortized over periods of 30 months and 35 months, respectively. Other intangible assets, excluding brand, are amortized over periods ranging from three to five years. The brand value is considered to be indefinite and therefore, not subject to amortization. The purchase price allocation is considered preliminary and as a result it may be adjusted during the 12-month period following the acquisition.(b) Acquisition of Universal Energy Group Ltd.On July 1, 2009, Just Energy completed the acquisition of all of the outstanding common shares of Universal Energy Group Ltd. ("UEG" or "Universal") pursuant to a plan of arrangement (the "Arrangement"). Under the Arrangement, UEG shareholders received 0.58 of an exchangeable share ("Exchangeable Share") of JEEC, a subsidiary of Just Energy, for each UEG common share held. In aggregate, 21,271,804 Exchangeable Shares were issued pursuant to the Arrangement. Each Exchangeable Share is exchangeable for a trust unit on a one-for-one basis at any time at the option of the holder and entitles the holder to a monthly dividend equal to 66 2/3% of the monthly distribution paid by Just Energy on a Trust Unit. JEEC also assumed all the covenants and obligations of UEG in respect of UEG's outstanding 6% convertible unsecured subordinated debentures.The acquisition of UEG was accounted for using the purchase method of accounting. The Fund allocated the purchase price to the identified assets and liabilities acquired based on their fair values at the time of acquisition as follows: Net assets acquired: Working capital (including cash of $10,319) $ 63,614 Electricity contracts and customer relationships 229,586 Gas contracts and customer relationships 243,346 Water heater contracts and customer relationships 22,700 Other intangible assets 2,721 Goodwill 77,494 Property, plant and equipment 171,693 Future tax liabilities (50,475) Other liabilities - current (164,148) Other liabilities - long-term (140,857) Long-term debt (183,079) Non-controlling interest (22,697) ------------ $ 249,898 ------------ ------------ Consideration: Transaction costs $ 9,952 Exchangeable shares 239,946 ------------ $ 249,898 ------------ ------------ Non-controlling interest represents 33.3% ownership of TGF held by Ellis Don Corporation.All contracts and intangible assets are amortized over the average remaining life at the time of acquisition. The gas and electricity contracts and customer relationships are amortized over periods ranging from 8 to 57 months. The water heater contracts and customer relationships are amortized over 174 months and the intangible assets are amortized over six months. An adjustment in the amount of $10,700 was made to increase goodwill and decrease working capital during the three months ended June 30, 2010. The purchase price for this acquisition is final and no longer subject to change.(c) Newten Home Comfort Inc.On July 2, 2009, NEC, a wholly owned subsidiary of the Fund, acquired Newten Home Comfort Inc., an arm's length third party that held a 20% interest in Newten Home Comfort L.P. for $3.2 million, of which $520 was paid in cash and determined to be the purchase price consideration. The purchase price consideration excludes contingent payments to the 20% interest holders that will become payable in July 2012 based on the number of completed water heater installations. Any contingent payments made will result in an increase to the balance of goodwill generated by the acquisition. 6. INTANGIBLE ASSETS Accumulated Net Book As at June 30, 2010 Cost Amortization Value ---------------------------------------------------------------------------- Gas contracts and customer relationships $ 261,627 $ 88,483 $ 173,144 Electricity contracts and customer relationships 456,760 129,690 327,070 Water heater contracts and customer relationships 23,081 1,626 21,455 Broker network 88,454 2,948 85,506 Brand 11,738 - 11,738 Information technology system development 19,788 698 19,090 Other intangible assets 9,429 2,870 6,559 ---------------------------------------------------------------------------- $ 870,877 $ 226,315 $ 644,562 ---------------------------------------------------------------------------- ---------------------------------------------------------------------------- Accumulated Net Book As at March 31, 2010 Cost Amortization Value ---------------------------------------------------------------------------- Gas contracts and customer relationships $ 228,827 $ 63,484 $ 165,343 Electricity contracts and customer relationships $ 245,617 92,779 152,838 Water heater contracts and customer relationships 23,081 1,218 21,863 Other intangible assets 2,982 2,397 585 ---------------------------------------------------------------------------- $ 500,507 $ 159,878 $ 340,629 ---------------------------------------------------------------------------- ---------------------------------------------------------------------------- 7. LONG-TERM DEBT AND FINANCING June 30, March 31, 2010 2010 Credit facility (a) $ 36,500 $ 57,500 TGF credit facility (b)(i) 40,927 41,313 TGF debentures (b)(ii) 37,001 37,001 TGF term/operating facilities (b)(iii) 10,000 10,000 JEEC convertible debentures (c) 83,731 83,417 NEC financing (d) 70,949 65,435 JEIF convertible debentures (e) 282,478 - ---------------------------------------------------------------------------- 561,586 294,666 Less: current portion (65,108) (62,829) ---------------------------------------------------------------------------- $ 496,478 $ 231,837 ---------------------------------------------------------------------------- ---------------------------------------------------------------------------- The following table details the interest expense. Interest is expensed at the effective interest rate. June 30, June 30, 2010 2009 Credit facility (a) $ 967 $ 480 TGF Credit facility (b)(i) 447 - TGF Debentures (b)(ii) 950 - TGF Term/Operating facilities (b)(iii) 311 - JEEC Convertible debentures (c) 1,664 - NEC financing (d) 1,341 - JEIF Convertible debentures (e) 3,800 - ---------------------------------------------------------------------------- $ 9,480 $ 480 ---------------------------------------------------------------------------- ---------------------------------------------------------------------------- (a) Just Energy holds a $250 million credit facility to meet working capital requirements. The syndicate of lenders includes Canadian Imperial Bank of Commerce, Royal Bank of Canada, National Bank of Canada, Bank of Nova Scotia, Societe Generale and Alberta Treasury Branches. The repayment of the facility is due on October 29, 2011.Interest is payable on outstanding loans at rates that vary with Bankers' Acceptances, LIBOR, Canadian bank prime rate or U.S. prime rate. Under the terms of the operating credit facility, Just Energy is able to make use of Bankers' Acceptances and LIBOR advances at stamping fees of 4.0%, prime rate advances at bank prime plus 3.0%, and letters of credit at 4.0%. As at June 30, 2010, the Canadian prime rate was 2.5% and the U.S. prime rate was 3.25%. As at June 30, 2010, Just Energy had drawn $36,500 (March 31, 2010 - $57,500) against the facility and total letters of credit outstanding amounted to $68,426 (March 31, 2010 - $49,444). As of June 30, 2010, Just Energy has $145,074 of the facility remaining for future working capital and security requirements. Just Energy's obligations under the credit facility are supported by guarantees of certain subsidiaries and affiliates and secured by a pledge of the assets of Just Energy and the majority of its operating subsidiaries and affiliates. Just Energy is required to meet a number of financial covenants under the credit facility agreement. As at June 30, 2010 and 2009, all of these covenants have been met.(b) In connection with the acquisition of UEG on July 1, 2009, the Fund acquired the debt obligations of TGF, which is currently comprised of the following separate facilities:(i) TGF Credit FacilityA credit facility of up to $50,000 was established with a syndicate of Canadian lenders led by Conexus Credit Union and was arranged to finance the construction of the ethanol plant in 2007. The facility was revised on March 18, 2009, and was converted to a fixed repayment term of ten years commencing March 1, 2009 which includes interest costs at a rate of prime plus 2% with principal repayments scheduled to commence on March 1, 2010. The credit facility is secured by a demand debenture agreement, a first priority security interest on all assets and undertakings of TGF and a general security interest on all other current and acquired assets of TGF. As a result, the facility is fully classified as a current obligation. The credit facility includes certain financial covenants, the more significant of which relate to current ratio, debt to equity ratio, debt service coverage and minimum shareholder's equity. The lenders have deferred compliance with the financial covenants until April 1, 2011. The facility was further revised on April 5, 2010 to postpone the principal payments due for April 1 to June 1, 2010 and to amortize them over the six-month period commencing October 1, 2010 and ending March 1, 2011. As at June 30, 2010, the amount owing under this facility amounted to $40,927.(ii) TGF DebenturesA debenture purchase agreement with a number of private parties providing for the issuance of up to $40,000 aggregate principal amount of debentures was entered into in 2006. The interest rate is 10.5% per annum, compounded annually and payable quarterly. Quarterly principal payments commence October 1, 2009 in the amount of $1,000 per quarter. The agreement includes certain financial covenants, the more significant of which relate to current ratio, debt to capitalization ratio, debt service coverage, debt to EBITDA, and minimum shareholder's equity. The lender has deferred compliance with the financial covenants until April 1, 2011. On April 5, 2010, TGF entered into an Agreement with the holders of the debenture to defer scheduled principal payments owing under the debenture until April 1, 2011. As at June 30, 2010, the amount owing under this debenture agreement amounted to $37,001.(iii) TGF Term/Operating FacilitiesTGF maintains a term loan for $10,000 with a third party lender bearing interest at prime plus 1% due in full on December 31, 2010. This facility is secured by liquid investments on deposit with the lender. As at June 30, 2010, the amount owing under the facility amounted to $10,000.(iv) TGF has a working capital operating line of $7,000 bearing interest at a rate of prime plus 1% of which $3,850 was drawn via overdraft. In addition, total letters of credit issued amounted to $250.(c) In conjunction with the acquisition of UEG on July 1, 2009, JEEC also acquired the obligations of the convertible unsecured subordinated debentures (the "JEEC convertible debentures") issued by UEG in October 2007. These instruments have a face value of $90,000 and mature on September 30, 2014, unless converted prior to that date, and bear interest at an annual rate of 6% payable semi-annually on March 31 and September 30 of each year. Each $1,000 principal amount of the JEEC convertible debentures is convertible at any time prior to maturity or on the date fixed for redemption, at the option of the holder, into approximately 29.3 Exchangeable Shares of JEEC representing a conversion price of $34.09 per Exchangeable Share. During the period, interest expense amounted to $1,664.The JEEC convertible debentures are not redeemable prior to October 1, 2010. On and after October 1, 2010, but prior to September 30, 2012, the JEEC convertible debentures are redeemable, in whole or in part, at a price equal to the principal amount thereof, plus accrued and unpaid interest, at the Fund's sole option on not more than 60 days and not less than 30 days prior notice, provided that the current market price on the date on which notice of redemption is given is not less than 125% of the conversion price. On and after September 30, 2012, but prior to the maturity date, the JEEC Debentures are redeemable, in whole or in part, at a price equal to the principal amount thereof, plus accrued and unpaid interest, at the Fund's sole option on not more than 60 days and not less than 30 days prior notice.(d) On January 18, 2010, NEC entered into a long-term financing agreement for the funding of new and existing rental water heater contracts. Pursuant to the agreement, NEC receives financing of an amount equal to the present value of the first five years of monthly rental income, discounted at the agreed upon financing rate of 7.99% and at settlement it is required to remit an amount equivalent to the rental stream from customers on the water heater contracts for the first five years. As security for performance of the obligation, NEC has pledged the water heaters subject to the financed rental agreement as collateral.The financing agreement is subject to a holdback provision, whereby 3% of the outstanding balance of the funded amount is deducted and deposited into a reserve account in the event of default. Once all obligations of NEC are satisfied or expired, the remaining funds in the reserve account will immediately be released to NEC.NEC has $70,949 owing under this agreement including $2,266 relating to the holdback provision as at June 30, 2010. The company is required to meet a number of covenants under the agreement. As at June 30, 2010, all of these covenants have been met.(e) In order to fund the acquisition of Hudson effective May 1, 2010, Just Energy entered into an agreement with a syndicate of underwriters for $330 million of convertible extendible unsecured subordinated debentures (the " JEIF convertible debentures"). The JEIF convertible debentures bear interest at a rate of 6.00% per annum payable semi-annually in arrears on June 30 and December 31 with a maturity date of June 30, 2017. Each $1,000 principal amount of the JEIF convertible debentures is convertible at anytime prior to maturity or on the date fixed for redemption, at the option of the holder, into approximately 55.6 units of the Fund representing a conversion price of $18 per unit. During the period, interest expense amounted to $3,800.The JEIF convertible debentures are not redeemable prior to June 30, 2013 except under certain conditions after a change of control has occurred. On or after June 30, 2013 and prior to June 30, 2015, the JEIF convertible debentures may be redeemed by the Fund, in whole or in part, on not more than 60 days and not less than 30 days prior notice, at a redemption price equal to the principal amount thereof plus accrued and unpaid interest, provided that the current market price (as defined herein) on the date on which notice of redemption is given is not less than 125% of the conversion price. On and after June 30, 2015, and prior to maturity, the JEIF convertible debentures may be redeemed by the Fund, in whole or in part, at a redemption price equal to the principal amount thereof plus accrued and unpaid interest.The Fund may, at its own option, on not more than 60 days and not less than 40 days' prior notice, subject to applicable regulatory approval and provided that no event of default has occurred and is continuing, elect to satisfy its obligation to repay all or any portion of the principal amount of the JEIF convertible debentures that are to be redeemed or that are to mature, by issuing and delivering to the holders thereof that number of freely tradeable units determined by dividing the principal amount of the JEIF convertible debentures being repaid by 95% of the current market price on the date of redemption or maturity, as applicable.The conversion feature of the JEIF convertible debentures has been accounted for as a separate component of unitholders' deficiency in the amount of $33,914. The remainder of the net proceeds of the JEIF convertible debentures of $281,770 has been recorded as long-term debt, which will be accreted up to the face value of $330,000 over the term of the JEIF convertible debentures using an effective interest rate of 8.8%. If the JEIF convertible debentures are converted into common shares, the value of the conversion will be reclassified to share capital along with the principal amount converted.8. INCOME TAXESThe Fund recorded a current income tax recovery of $1.0 million for the first quarter of fiscal 2011 versus a recovery of $0.04 million in the same period last year. The change is mainly attributable to a U.S. income tax recovery generated by operating losses incurred by the U.S. entities in this quarter. Q1 2011 Q1 2010 -------------------------- Current income tax recovery $ (1,002) $ (40) Amount credited to Unitholders' equity 538 538 Future tax expense 19,824 9,805 -------------------------- Provision for income tax $ 19,360 $ 10,303 -------------------------- -------------------------- 9. ACCUMULATED OTHER COMPREHENSIVE INCOME For the three months ended June 30, 2010 Foreign Currency Translation Cash Flow Adjustment Hedges Total Balance, beginning of period $ 28,584 $ 193,385 $ 221,969 Unrealized foreign currency translation adjustment 14,876 - 14,876 Amortization of deferred unrealized gain on discontinued hedges,net of income taxes of $6,259 - (28,723) (28,723) ------------------------------------ $ 43,460 $ 164,662 $ 208,122 ------------------------------------ ------------------------------------ For the three months ended June 30, 2009 Foreign Currency Cash Translation Flow Adjustment Hedges Total Balance, beginning of period $ 1,958 $ 362,608 $ 364,566 Unrealized foreign currency translation adjustment 18,246 - 18,246 Amortization of deferred unrealized gain on discontinued hedges, net of income taxes of $9,805 - (49,330) (49,330) ------------------------------------ $ 20,204 $ 313,278 $ 333,482 ------------------------------------ ------------------------------------ 10. UNITHOLDERS' CAPITAL(a) Trust units of the FundAn unlimited number of units may be issued. Each unit is transferable, voting and represents an equal undivided beneficial interest in any distributions from the Fund whether of net income, net realized capital gains or other amounts, and in the net assets of the Fund in the event of termination or winding-up of the Fund.The Fund intends to make distributions to its Unitholders based on the cash receipts of the Fund, excluding proceeds from the issuance of additional Fund units, adjusted for costs and expense of the Fund, amounts which may be paid by the Fund in connection with any cash redemptions or repurchases of units and any other amount that the Board of Directors considers necessary to provide for the payment of any costs which have been or will be incurred in the activities and operations of the Fund. The Fund's intention is for Unitholders of record on the 15th day of each month to receive distributions at the end of the month, excluding any special distributions.Class A preference shares of Just Energy Corp.The terms of the unlimited Class A preference shares of Just Energy Corp. ("JEC") are non-voting, non-cumulative and exchangeable into trust units in accordance with the JEC shareholders' agreement as restated and amended, with no priority on dissolution. Pursuant to the amended and restated Declaration of Trust which governs the Fund, the holders of Class A preference shares are entitled to vote in all votes of Unitholders as if they were the holders of the number of units that they would receive if they exercised their shareholder exchange rights. Class A preference shareholders have equal entitlement to distributions from the Fund as Unitholders.Exchangeable Shares of JEECOn July 1, 2009, Just Energy completed the acquisition of all the outstanding common shares of UEG pursuant to the Arrangement. Under the arrangement, UEG shareholders received 0.58 of an Exchangeable Shares of JEEC, for each UEG common share held. In aggregate, 21,271,804 Exchangeable Shares were issued pursuant to the Arrangement. Each Exchangeable Share is exchangeable for a Trust Unit on a one-for-one basis at any time at the option of the holder and entitles the holder to a monthly dividend equal to 66 2/3% of the monthly distribution paid by Just Energy on a Trust Unit.JEEC owns 66 2/3% of the issued and outstanding shares ("TGF Shares") in the capital of TGF (Canada). Pursuant to the terms of a unanimous shareholders' agreement in respect of TGF, if all of the assets and undertaking of TGF in connection with its Belle Plaine Facility are not sold by November 30, 2010, the other shareholder of TGF may elect on such date to require JEEC to purchase such shareholder's TGF shares (the "Put Shares"). A portion of the purchase price for the Put Shares shall be paid by the issuance of that number of Exchangeable Shares equal to the quotient of: (i) $10 million, less the cumulative amount of all dividends and other distributions paid in cash to the shareholder on the Put Shares from April 15, 2009 to January 3, 2011; and (ii) the volume weighted average trading price of the JEEC Exchangeable Shares on the TSX for the month of December 2010, delivered annually in three equal installments commencing January 2, 2011. 2010 2009 Issued and outstanding Units/Shares Units/Shares Trust units Balance, beginning of period 124,325,307 $ 593,075 106,138,523 $ 385,294 Unit-based awards exercised/exchanged - - 14,590 197 Distribution reinvestment plan 443,218 5,599 221,775 2,464 Exchanged from Exchangeable shares 422,673 4,768 - - ----------------------------------------------- Balance, end of period 125,191,198 603,442 106,374,888 387,955 ----------------------------------------------- Class A preference shares Balance, unchanged during period 5,263,728 13,160 5,263,728 13,160 ----------------------------------------------- Exchangeable shares Balance, beginning of period 4,688,172 52,883 - - Exchanged into units (422,673) (4,768) - - ----------------------------------------------- Balance, end of period 4,265,499 48,115 - - ----------------------------------------------- Unitholders' capital, end of period 134,720,425 $ 664,717 111,638,616 $ 401,115 ----------------------------------------------- ----------------------------------------------- Distribution reinvestment planUnder the Fund's distribution reinvestment program ("DRIP"), Unitholders holding a minimum of 100 units can elect to receive their distributions (both regular and special) in units rather than cash at a 2% discount to the simple average closing price of the units for five trading days preceding the applicable distribution payment date, providing the units are issued from treasury and not purchased on the open market.Units issuedDuring the three months ended June 30, 2010, the Fund issued 422,673 units relating to the exchange of Exchangeable Shares of JEEC.(b) Contributed surplusAmounts credited to contributed surplus include unit-based compensation awards, unit appreciation rights and deferred unit grants. Amounts charged to contributed surplus are awards exercised during the period. Contributed Surplus 2010 2009 ------------------- Balance, beginning of period $ 18,832 $ 14,671 Add: unit-based compensation awards 1,075 657 non-cash deferred unit grant distributions 26 20 Less: unit-based awards exercised - (197) ------------------- Balance, end of period $ 19,933 $ 15,151 ------------------- ------------------- Total amounts credited to Unitholders' capital in respect of unit options and deferred unit grants exercised or exchanged during the three months ended June 30, 2010 amounted to nil (2009 - $197).11. FINANCIAL INSTRUMENTS(a) Fair valueThe Fund has a variety of gas and electricity supply contracts that are captured under CICA Handbook Section 3855, Financial Instruments - Measurement and Recognition. Fair value is the estimated amount that Just Energy would pay or receive to dispose of these supply contracts in an arm's length transaction between knowledgeable, willing parties who are under no compulsion to act. Management has estimated the value of electricity, unforced capacity, heat rates, heat rate options, renewable and gas swap and forward contracts using a discounted cash flow method which employs market forward curves that are either directly sourced from third parties or are developed internally based on third party market data. These curves can be volatile thus leading to volatility in the mark to market with no impact to cash flows. Gas options have been valued using the Black option value model using the applicable market forward curves and the implied volatility from other market traded gas options.Effective July 1, 2008, the Fund ceased the utilization of hedge accounting. Accordingly, all the mark to market changes on the Fund's derivative instruments are recorded on a single line on the consolidated statements of operations. Due to the commodity volatility and size of the Fund, the quarterly swings in mark to market on these positions will increase the volatility in the Fund's earnings.The following tables illustrate (gains)losses related to the Fund's derivative financial instruments classified as held-for- trading recorded against other assets and other liabilities with their offsetting values recorded in change in fair value of derivative instruments for the three months ended June 30, 2010: Change in Fair Value of Derivative Instruments For the For the For the three For the three three months three months months ended months ended ended June June 30, ended June June 30, 30, 2010 2010 30, 2009 2009 (USD) (USD) Canada Fixed-for-floating electricity swaps (i) $ (138,841) n/a $ 31,147 n/a Renewable energy certificates (ii) 143 n/a (254) n/a Verified emission-reduction credits (iii) - n/a - n/a Options (iv) 837 n/a 792 n/a Physical gas forward contracts (v) (83,628) n/a (9,811) n/a Transportation forward contracts (vi) (13,349) n/a 3,256 n/a United States Fixed-for-floating electricity swaps (vii) (24,244) (23,518) (3,601) (3,197) Physical electricity forwards (viii) (22,682) (21,962) (22,180) (19,689) Unforced capacity forward contracts (ix) 160 155 (2,640) (2,344) Unforced capacity physical contracts (x) 643 626 - - Renewable energy certificates (xi) 680 661 412 366 Verified emission-reduction credits (xii) 2 2 209 186 Options (xiii) (180) (175) 1,303 1,156 Physical gas forward contracts (xiv) (30,634) (29,811) (26,286) (23,333) Transportation forward contracts (xv) (156) (152) (83) (74) Heat rate swaps (xvi) 3,058 2,975 (1,464) (1,299) Fixed financial swaps (xvii) (7,366) (7,161) (399) (355) Foreign exchange forward contracts 277 n/a 854 n/a Other Amortization of deferred unrealized gains on discontinued hedges (34,573) n/a (59,135) n/a Amortization of derivative financial instruments related to acquisitions 35,477 n/a - n/a ---------------------------------------------------------------------------- Change in Fair Value of Derivative Instruments $ (314,376) $ (87,880) ---------------------------------------------------------------------------- ---------------------------------------------------------------------------- The following table summarizes certain aspects of the financial assets and liabilities recorded in the financial statements as at June 30, 2010: Other Other Other assets Other assets liabilities liabilities (current) (long term) (current) (long term) Canada Fixed-for-floating electricity swaps (i) $ 374 $ 335 $ 169,507 $ 149,844 Renewable energy certificates (ii) 300 529 31 138 Verified emission-reduction credits (iii) 2 7 - - Options (iv) 155 182 - - Physical gas forward contracts (v) - - 201,098 155,508 Transportation forward contracts (vi) 14 404 2,303 4,264 United States Fixed-for-floating electricity swaps (vii) - - 45,991 36,642 Physical electricity forwards (viii) 1 - 67,840 60,063 Unforced capacity forward contracts (ix) 428 149 438 126 Unforced capacity physical contracts (x) 156 102 1,034 469 Renewable energy certificates (xi) 64 98 1,280 1,291 Verified emission-reduction credits (xii) - - 176 470 Options (xiii) - - 1,095 633 Physical gas forward contracts (xiv) - - 83,554 65,056 Transportation forward contracts (xv) 32 - 1,377 2,189 Heat rate swaps (xvi) 111 2,868 1,448 - Fixed financial swaps (xvii) - - 20,581 19,599 Foreign exchange forward contracts - - - - ---------------------------------------------------------------------------- As at June 30, 2010 $ 1,637 $ 4,674 $ 597,753 $ 496,292 ---------------------------------------------------------------------------- ---------------------------------------------------------------------------- The following table summarizes certain aspects of the financial assets and liabilities recorded in the financial statements as at March 31, 2010: Other Other Other Assets Other Assets Liabilities Liabilities (current) (long term) (current) (long term) Canada Fixed-for-floating electricity swaps (i) $ - $ - $ 244,563 $ 212,920 Renewable energy certificates (ii) 350 621 30 139 Verified emission-reduction credits (iii) 2 7 - - Options (iv) 757 416 - - Physical gas forward contracts (v) - - 237,145 203,088 Transportation forward contracts (vi) - - 11,060 8,439 United States Fixed-for-floating electricity swaps (vii) - - 31,291 30,464 Physical electricity forwards (viii) - - 38,015 39,035 Unforced capacity forward contracts (ix) 523 102 445 9 Unforced capacity physical contracts (x) 33 146 731 - Renewable energy certificates (xi) 107 130 918 945 Verified emission-reduction credits (xii) - - 167 447 Options (xiii) - - 912 915 Physical gas forward contracts (xiv) - - 96,938 75,142 Transportation forward contracts (xv) - - 1,265 2,262 Heat rate swaps (xvi) 654 3,605 - - Fixed financial swaps (xvii) - - 21,720 16,767 Foreign exchange forward contracts 277 - - - ---------------------------------------------------------------------------- As at March 31, 2010 $ 2,703 $ 5,027 $ 685,200 $ 590,572 ---------------------------------------------------------------------------- ---------------------------------------------------------------------------- The following table summarizes financial instruments classified as held for trading as at June 30, 2010. --------------------------------------------------------------------- Total Notional Remaining Contract Type Volume Volume Maturity Date --------------------------------------------------------------------- Canada --------------------------------------------------------------------- (i) Fixed-for- floating electricity 0.0001- July 31, 2010 - swaps (i) 115 MWh 11,815,179 MWh October 31, 2016 --------------------------------------------------------------------- (ii) Renewable December 31, energy 10-90,000 2010 - December certificates MWh 1,265,368 MWh 31, 2014 --------------------------------------------------------------------- (iii) Verified emission 2,000- December 31, reduction 100,000 2010 - December credits Tonnes 605,000 Tonnes 31, 2014 --------------------------------------------------------------------- (iv) July 31, 2010 - 46-40,500 February 28, Options GJ/month 4,775,620 GJ 2014 --------------------------------------------------------------------- (v) Physical gas July 31, 2010 - forward 3-15,191 November 30, contracts GJ/day 141,353,627 GJ 2015 --------------------------------------------------------------------- (vi) Transportation forward 7-465,000 July 31, 2010 - contracts GJ/day 72,413,923 GJ May 31, 2015 --------------------------------------------------------------------- United States --------------------------------------------------------------------- (vii) Fixed-for- floating electricity 0.10-34 July 31, 2010 - swaps (i) MWh 6,993,028 MWh June 30, 2015 --------------------------------------------------------------------- (viii) Physical electricity July 31, 2010 - forwards 1-40 MWh 7,121,830 MWh January 31, 2015 --------------------------------------------------------------------- (ix) Unforced capacity July 31, 2010 - forward 5-35 November 30, contracts MWCap 1,075 MWCap 2012 --------------------------------------------------------------------- (x) Unforced capacity physical 2-150 July 31, 2010 - contracts MWCap 2,697 MWCap May 31, 2014 --------------------------------------------------------------------- (xi) Renewable 2,000- December 31, energy 160,000 2010 - December certificates MWh 2,832,265 MWh 31, 2015 --------------------------------------------------------------------- (xii) Verified emission 10,000- December 31, reduction 50,000 2010 - December credits Tonnes 615,000 Tonnes 31, 2014 --------------------------------------------------------------------- (xiii) July 31, 2010 - 5-37,500 5,378,990 December 31, Options mmBTU/day mmBTU 2014 --------------------------------------------------------------------- (xiii) July 1, 2010 - Heat Rate September 30, Options 1,600 MWh 147,200 MWh 2010 --------------------------------------------------------------------- (xiv) Physical gas forward 5-11,106 46,193,941 July 1, 2010 - contracts mmBTU/day mmBTU July 31, 2014 --------------------------------------------------------------------- (xv) Transportation forward 15-15,000 39,252,865 July 1, 2010 - contracts mmBTU/day mmBTU March 31, 2015 --------------------------------------------------------------------- (xvi) Heat rate July 31, 2010 - swaps 1-30 MWh 3,728,117 MWh May 31, 2015 --------------------------------------------------------------------- (xvii) Fixed 100- financial 21,561 46,239,222 July 31, 2010 - swaps mmBTU/day mmBTU April 30, 2015 --------------------------------------------------------------------- --------------------------------------------------------- Fair Value Favourable/ Notional Fixed Price (unfavourable) Value --------------------------------------------------------- --------------------------------------------------------- (i) $28.75-$128.13 ($318,642) $844,770 --------------------------------------------------------- (ii) $3.00-$26.00 $660 $8,031 --------------------------------------------------------- (iii) $6.00-$11.50 $9 $5,836 --------------------------------------------------------- (iv) $6.35-$12.40 $337 $9,043 --------------------------------------------------------- (v) $3.51-$10.00 ($356,606) $1,074,275 --------------------------------------------------------- (vi) $0.01-$1.57 ($6,149) $53,206 --------------------------------------------------------- --------------------------------------------------------- (vii) $25.55-$145.58 (US$24.00- ($82,633) $465,338 $136.75) (US($77,619)) (US$437,101) --------------------------------------------------------- (viii) $22.25-$124.56 (US$20.90- ($127,902) $473,649 $117.00) (US($120,141)) (US$444,908) --------------------------------------------------------- (ix) $3,194-$8,517 (US$3,000- $13 $5,988 $8,000) (US$12) (US$5,625) --------------------------------------------------------- (x) $1,490-$14,053 (US$1,400- ($1,245) $18,138 $13,200) ((US$1,169)) (US$17,037) --------------------------------------------------------- (xi) $1.70-$26.62 (US$1.60- ($2,409) $17,627 $25.00) (US($2,263)) (US$16,557) --------------------------------------------------------- (xii) $6.76-$9.32 ($646) $4,999 (US$6.35-$8.75) (US$(607)) (US$4,696) --------------------------------------------------------- (xiii) $8.25-$14.69 (US$7.75- ($1,834) $8,757 $13.80) (US($1,723)) (US$8,226) --------------------------------------------------------- (xiii) $73.71-$75.33 (US$69.24- $106 $390 $70.76) (US$100) (US$366) --------------------------------------------------------- (xiv) $4.79-$12.65 (US$4.50- ($148,610) $419,217 $11.88) (US($139,592)) (US$393,779) --------------------------------------------------------- (xv) $0.0027-$0.6388 (US$0.0025- ($3,534) ($31,034) $0.6000) (US($3,320)) ((US$29,151)) --------------------------------------------------------- (xvi) $28.74-$89.93 (US$27.00- $1,531 $184,274 $83.53) (US$1,438) (US$173,092) --------------------------------------------------------- (xvii) $4.39-$9.16 ($40,180) $312,113 (US$4.12-$8.60) (US($37,742)) (US$293,174) --------------------------------------------------------- (i) The electricity fixed-for-floating contracts related to the Province of Alberta are predominantly load-following and some contracts in Ontario, wherein the quantity of electricity contained in the supply contract "follows" the usage of customers designated by the supply contract. Notional volumes associated with these contracts are estimates and subject to change with customer usage requirements. There are also load shaped fixed-for- floating contracts in the rest of Just Energy's electricity markets wherein the quantity of electricity is established but varies throughout the term of the contracts. The estimated amortization of deferred gains and losses reported in AOCI that is expected to be amortized to net income within the next 12 months is a gain of $106,833.These derivative financial instruments create a credit risk for Just Energy since they have been transacted with a limited number of counterparties. Should any counterparty be unable to fulfill its obligations under the contracts, Just Energy may not be able to realize the other asset balance recognized in the consolidated financial statements.In Illinois, Texas, Pennsylvania, Maryland, California, New York (small portion of direct billing customers), New Jersey and Alberta, Just Energy assumes the credit risk associated with cash collection from its customers. Credit review processes have been put in place for these markets where Just Energy has credit risk to manage the customer default rate. If a significant number of customers were to default on their payments, it could have a material adverse effect on Just Energy's operations and cash flow. Management factors default from credit risk in its margin expectations for these markets.Fair value ("FV") hierarchyLevel 1The fair value measurements are classified as Level 1 in the FV Hierarchy if the fair value is determined using quoted, unadjusted market prices. Just Energy values its cash, restricted cash, accounts receivable, bank indebtedness, accounts payable and accrued liabilities, unit distributions payable, and long-term debt under Level 1.Level 2Fair value measurements which require inputs other than quoted prices in Level 1, either directly or indirectly are classified as Level 2 in the FV hierarchy. This could include the use of statistical techniques to derive the FV curve from observable market prices. However, in order to be classified under Level 2, inputs must be substantially observable in the market. Just Energy values its New York Mercantile Exchange ("NYMEX") financial gas fixed for floating swaps under Level 2.Level 3Fair value measurements which require unobservable market data or use statistical techniques to derive forward curves from observable market data and unobservable inputs are classified as Level 3 in the FV hierarchy. For the electricity supply contracts, Just Energy uses quoted market prices as per available market forward data and applies a price shaping profile to calculate the monthly prices from annual strips and hourly prices from block strips for the purposes of mark to market calculations. The profile is based on historical settlements with counterparties or with the system operator and is considered an unobservable input for the purposes of establishing the level in the hierarchy. For the natural gas supply contracts, Just Energy uses three different market observable curves: 1) commodity (predominately NYMEX), 2) basis and 3) foreign exchange. NYMEX curves extend for over 5 years (thereby covering the length of Just Energy's contracts); however, most basis curves only extend 12-15 months into the future. In order to calculate basis curves for remaining years, Just Energy uses extrapolation which leads to natural gas supply contracts to be classified under Level 3.Note on fair value measurement input sensitivityThe main cause of changes in fair value of derivative instruments are changes in the forward curve prices used for the fair value calculations. Just Energy provides a sensitivity analysis of these forward curves under the commodity price risk section of this note. Other inputs, including volatility and correlations, are driven off of historical settlements. The following table illustrates the classification of financial assets/(liabilities) in the FV hierarchy as at June 30, 2010: June 30, 2010 Level 1 Level 2 Level 3 Total Financial assets Trading assets $ 108,958 $ - $ - $ 108,958 Loans and receivable 329,773 - - 329,773 Derivative financial assets - - 6,311 6,311 Financial liabilities Derivative financial liabilities - (40,180) (1,053,865) (1,094,045) Other financial liabilities (891,086) - - (891,086) ---------------------------------------------------------------------------- Total net derivative liabilities $(452,355) $(40,180) $(1,047,554) $(1,540,089) ---------------------------------------------------------------------------- ---------------------------------------------------------------------------- The following table illustrates the changes in net fair value of financial assets/(liabilities) classified as Level 3 in the FV hierarchy for the three months ended June 30, 2010: June 30, 2010 Opening balance, April 01, 2010 $ (1,229,555) Total gain/(losses) - Net Income 491,469 Purchases (107,906) Sales (2,721) Settlements (198,841) Transfer out of Level 3 - ---------------------------------------------------------------------------- Closing Balance, June 30, 2010 $ (1,047,554) ---------------------------------------------------------------------------- ---------------------------------------------------------------------------- (b) Classification of financial assets and liabilities The following table represents the fair values and carrying amounts of financial assets and liabilities measured at fair value or amortized cost: Carrying As at June 30, 2010 amount Fair value Cash and restricted cash $ 108,958 $ 108,958 Accounts receivable $ 325,875 $ 325,875 Long-term receivables $ 3,898 $ 3,898 Other assets $ 6,311 $ 6,311 Bank indebtedness, accounts payable and accrued liabilities and unit distributions payable 329,500 $ 329,500 Long-term debt 561,586 $ 606,302 Other liabilities $1,094,045 $1,094,045 For the three months ended June 30 2010 2009 Interest expense on financial liabilities not held for trading $ 9,480 $ 480 The carrying value of cash, restricted cash, accounts receivable, accounts payable and accrued liabilities and unit distributions payable approximates their fair value due to their short-term liquidity.The carrying value of the long-term debt approximates its fair value as the interest payable on outstanding amounts at rates that vary with Bankers' Acceptances, LIBOR, Canadian bank prime rate or U.S. prime rate with the exception for the JEIF and JEEC convertible debentures which are fair valued based on market value.(c) Management of risks arising from financial instrumentsThe risks associated with the Fund's financial instruments are as follows:(i) Market riskMarket risk is the potential loss that may be incurred as a result of changes in the market or fair value of a particular instrument or commodity. Components of market risk to which the Fund is exposed are discussed below:Foreign currency riskForeign currency risk is created by fluctuations in the fair value or cash flows of financial instruments due to changes in foreign exchange rates and exposure as a result of investment in U.S. operations.A portion of Just Energy's earnings is generated in U.S. dollars and is subject to currency fluctuations. The performance of the Canadian dollar relative to the U.S. dollar could positively or negatively affect Just Energy's earnings. Due to its growing operations in the U.S. and its recent acquisition of Hudson, Just Energy expects to have a greater exposure in the future to U.S. fluctuations than in prior years.The Fund may, from time to time, experience losses resulting from fluctuations in the values of its foreign currency transactions, which could adversely affect operating results.With respect to translation exposure, as at June 30, 2010, if the Canadian dollar had been 5% stronger or weaker against the U.S. dollar, assuming that all the other variables had remained constant, net income for the three months ended June 30, 2010 would have been $2,756 higher/lower and other comprehensive income would have been $1,974 lower/higher.Interest rate riskJust Energy is also exposed to interest rate fluctuations associated with its floating rate credit facility. Just Energy's current exposure to interest rates does not economically warrant the use of derivative instruments. The Fund's exposure to interest rate risk is relatively immaterial and temporary in nature. The Fund does not currently believe that this long- term debt exposes it to material financial risks but has set out parameters to actively manage this risk within its Risk Management Policy.A 1% increase (decrease) in interest rates would have resulted in a decrease (increase) in income before income taxes for the three months ended June 30, 2010 of approximately $248.Commodity price riskJust Energy is exposed to market risks associated with commodity prices and market volatility where estimated customer requirements do not match actual customer requirements. Management actively monitors these positions on a daily basis in accordance with its Risk Management Policy. This policy sets out a variety of limits, most importantly thresholds for open positions in the gas and electricity portfolios; should any of the limits be exceeded, they are closed expeditiously or express approval to continue to hold is obtained. Just Energy's exposure to market risk is affected by a number of factors, including accuracy of estimation of customer commodity requirements, commodity prices, volatility and liquidity of markets. Just Energy enters into derivative instruments in order to manage exposures to changes in commodity prices. The derivative instruments that are used are designed to fix the price of supply for estimated customer commodity demand in Canadian dollars and thereby fix margins such that Unitholder distributions can be appropriately established. Derivative instruments are generally transacted over-the-counter. The inability or failure of Just Energy to manage and monitor the above market risks could have a material adverse effect on the operations and cash flow of Just Energy.Commodity price sensitivity - all derivative financial instrumentsAs at June 30, 2010, if the energy prices including natural gas, electricity, green natural gas credits, and green electricity certificates, had risen (fallen) by 10%, assuming that all the other variables had remained constant, income before taxes for the year ended June 30, 2010 would have increased (decreased) by $239,229 ($238,327) primarily as a result of the change in the fair value of the Fund's derivative instruments.Commodity price sensitivity - Level 3 derivative financial instrumentsAs at June 30, 2010, if the energy prices including natural gas, electricity, green natural gas credits, and green electricity certificates, had risen (fallen) by 10%, assuming that all the other variables had remained constant, income before taxes for the year ended June 30, 2010 would have increased (decreased) by $214,174 ($213,342) primarily as a result of the change in the fair value of the Fund's derivative instruments.Changes in energy prices will not significantly impact the Fund's gross margin.(ii) Credit riskCredit risk is the risk that one party to a financial instrument fails to discharge an obligation and causes financial loss to another party. Just Energy is exposed to credit risk in two specific areas: Customer Credit Risk and Counterparty Credit Risk.Customer credit riskIn Alberta, Texas, Illinois, Pennsylvania, California, Maryland, New York and New Jersey, Just Energy has customer credit risk and therefore, credit review processes have been implemented to perform credit evaluations of customers and manage customer default. If a significant number of customers were to default on their payments, it could have a material adverse effect on the operations and cash flows of Just Energy. Management factors default from credit risk in its margin expectations for all the above markets. As at June 30, 2010, accounts receivable from the above markets with a carrying value of $22,124 (March 31, 2010 - $20,239) were past due but not doubtful. As at June 30, 2010, the aging of the accounts receivable from the above markets was as follows: Current $129,516 1 - 30 days 12,977 31 - 60 days 5,654 61 - 90 days 3,493 Over 90 days 19,901 --------- $ 171,541 --------- For the three months ended June 30, 2010, changes in the allowance for doubtful accounts were as follows: Balance, beginning of period $17,519 Provision for doubtful accounts 5,743 Bad debts written off (4,647) Others (212) -------- Balance, end of period $18,403 -------- For the remaining markets, the local distribution companies ("LDCs") provide collection services and assume the risk of any bad debts owing from Just Energy's customers for a fee. Management believes that the risk of the LDCs failing to deliver payment to Just Energy is minimal. There is no assurance that the LDCs that provide these services will continue to do so in the future.Counterparty credit riskCounterparty credit risk represents the loss that Just Energy would incur if a counterparty fails to perform under its contractual obligations. This risk would manifest itself in Just Energy replacing contracted supply at prevailing market rates thus impacting the related customer margin. Counterparty limits are established within the Risk Management Policy. Any exception to these limits requires approval from the Board of Directors of JEC. The Risk Office and Risk Committee monitor current and potential credit exposure to individual counterparties and also monitor overall aggregate counterparty exposure. However, the failure of a counterparty to meet its contractual obligations could have a material adverse effect on the operations and cash flows of Just Energy.As at June 30, 2010, the maximum counterparty credit risk exposure amounted to $177,852, representing the risk relating to its derivative financial assets and accounts receivable.(iii) Liquidity riskLiquidity risk is the potential inability to meet financial obligations as they fall due. The Fund manages this risk by monitoring detailed weekly cash flow forecasts covering a rolling six-week period, monthly cash forecasts for the next 12 months, and quarterly forecasts for the following two-year period to ensure adequate and efficient use of cash resources and credit facilities. The following are the contractual maturities, excluding interest payments, reflecting undiscounted disbursements of the Fund's financial liabilities as of June 30, 2010: More Carrying Contractual Less Than 1 to 3 4 to 5 Than 5 Amount Cash Flows 1 Year years Years Years Accounts payable and accrued liabilities and unit distribution payable $321,647 $321,647 $321,647 $- $- $- Bank indebtedness 7,853 7,853 7,853 - - - Long-term debt 561,586 615,377 65,109 102,235 118,033 330,000 Derivative instruments: Cash outflow 1,094,045 3,936,299 1,397,493 2,017,737 510,211 10,858 ---------------------------------------------------------------------------- $1,985,131 $4,881,176 $1,792,102 $2,119,972 $628,244 $340,858 ---------------------------------------------------------------------------- In addition to the amounts noted above, at June 30, 2010, net interest payments over the life of the long-term debt and bank credit facility are: Less than 1 to 3 4 to 5 More than 1 year years years 5 years ---------------------------------------- Interest payments $29,592 $63,451 $50,175 $50,856 ---------------------------------------------------------------------------- (iv) Supplier riskJust Energy purchases the majority of the gas and electricity delivered to its customers through long term contracts entered into with various suppliers. Just Energy has an exposure to supplier risk as the ability to continue to deliver gas and electricity to its customers is reliant upon the ongoing operations of these suppliers and their ability to fulfill their contractual obligations. Just Energy has discounted the fair value of its financial assets by $2,959 to accommodate for its counterparties' risk of default.12. INCOME PER UNIT 2010 2009 Basic income per unit Net income available to Unitholders $275,309 $102,627 -------------------------- Weighted average number of units outstanding 124,818,132 106,198,000 Weighted average number of Class A preference shares 5,263,728 5,264,000 Weighted average number of Exchangeable Shares 4,340,387 - -------------------------- Basic units and shares outstanding 134,422,247 111,462,000 -------------------------- Basic income per unit $2.05 $0 .92 -------------------------- -------------------------- Diluted income per unit Net income available to Unitholders $275,309 $102,627 Adjusted net income for dilutive impact of convertible debentures 3,925 - -------------------------- Adjusted net income 279,234 102,627 -------------------------- Basic units and shares outstanding 134,422,247 111,462,000 Dilutive effect of: Unit appreciation rights 2,701,377 1,382,000 Deferred unit grants 84,211 63,000 Convertible debentures 13,940,519 - -------------------------- Units outstanding on a diluted basis 151,148,354 112,907,000 -------------------------- Diluted income per unit $1.85 $0.91 -------------------------- -------------------------- 13. REPORTABLE BUSINESS SEGMENTSJust Energy operates in two reportable geographic segments, Canada and the United States. Reporting by geographic region is in line with Just Energy's performance measurement parameters. The gas and electricity business segments have operations in both Canada and United States.Just Energy evaluates segment performance based on geographic segments and operating segments. In the prior year comparative period, Ethanol and Home services divisions are not included as both were acquired on July 1, 2009 under the UEG acquisition. The following tables present Just Energy's results by geographic segments And operating segments: June 30, 2010 Gas and Electricity Home Marketing Ethanol Services ------------------------------------------- United Canada States Canada Canada Consolidated Sales gas $ 129,846 $ 73,048 $ - $ - $ 202,894 Sales electricity 160,629 224,914 - - 385,543 Ethanol - - 16,806 - 16,806 Home Service - - - 4,441 4,441 ---------------------------------------------------------------------------- Sales $ 290,475 $ 297,962 $ 16,806 $ 4,441 $ 609,684 ---------------------------------------------------------------------------- Gross margin $ 38,257 $ 42,054 $ (2,646) $ 2,832 $ 80,497 Amortization of property, plant and equipment (1,346) (210) (296) (68) (1,920) Amortization of intangible assets (11,336) (15,437) - (399) (27,172) Other operating expenses (30,658) (28,911) (2,334) (4,084) (65,987) ---------------------------------------------------------------------------- Income (Loss) before the undernoted (5,083) (2,504) (5,276) (1,719) (14,582) Interest expense 6,316 116 1,707 1,341 9,480 Change in fair value of derivative instruments (234,240) (80,136) - - (314,376) Other income (2,635) 859 (6) - (1,782) Non-controlling interest - - (2,573) - (2,573) Provision (recovery) for income tax 14,408 4,952 - - 19,360 ---------------------------------------------------------------------------- Net income (loss) $ 211,068 $ 71,705 $ (4,404) $ (3,060) $ 275,309 ---------------------------------------------------------------------------- ---------------------------------------------------------------------------- Additions to property, plant and equipment $ 451 $ 888 $ 114 $ 8,154 $ 9,607 ---------------------------------------------------------------------------- ---------------------------------------------------------------------------- Total goodwill $ 160,536 $ 62,229 $ - - $ 222,765 ---------------------------------------------------------------------------- ---------------------------------------------------------------------------- Total assets $ 677,335 $ 850,548 $ 156,790 $ 95,911 $ 1,780,584 ---------------------------------------------------------------------------- ---------------------------------------------------------------------------- June 30, 2009 United Canada States Consolidated ----------------------------------- Sales gas $ 149,697 $ 50,434 $ 200,131 Sales electricity 123,491 75,388 198,879 ---------------------------------------------------------------------------- Sales $ 273,188 $ 125,822 $ 399,010 ---------------------------------------------------------------------------- Gross margin $ 42,353 $ 23,722 $ 66,075 Amortization of gas contracts 283 - 283 Amortization of electricity contracts - 311 311 Amortization of property, plant and equipment 1,126 68 1,194 Other operating expenses 22,045 17,523 39,568 ---------------------------------------------------------------------------- Income before the undernoted 18,899 5,820 24,719 Interest expense 416 64 480 Change in fair value of derivative instruments (8,275) (79,605) (87,880) Other income (745) (11) (756) Non-controlling interest (55) - (55) Provision for income taxes 287 10,016 10,303 ---------------------------------------------------------------------------- Net income $ 27,271 $ 75,356 $ 102,627 ---------------------------------------------------------------------------- ---------------------------------------------------------------------------- Additions to property, plant and equipment $ 7,307 $ 99 $ 7,406 ---------------------------------------------------------------------------- ---------------------------------------------------------------------------- Total goodwill $ 94,576 $ 20,732 $ 115,308 ---------------------------------------------------------------------------- ---------------------------------------------------------------------------- Total assets $ 313,888 $ 143,823 $ 457,711 ---------------------------------------------------------------------------- ---------------------------------------------------------------------------- 14. COMMITMENTS Commitments for each of the next five years and thereafter are as follows: Long-term Gas and Master Electricity Premises Services Contracts and Grain Agreement with Equipment Production with Various Leasing Contracts EPCOR Suppliers 2011 $ 6,495 $ 30,736 $ 8,653 $ 1,397,493 2012 7,046 19,631 7,692 1,259,688 2013 5,489 1,703 - 758,049 2014 3,871 396 - 382,702 2015 2,745 - - 127,509 Thereafter 5,510 - - 10,858 --------------------------------------------- $ 31,156 $ 52,466 $ 16,345 $ 3,936,299 --------------------------------------------- --------------------------------------------- Just Energy is also committed under long-term contracts with customers to supply gas and electricity. These contracts have various expiry dates and renewal options.15. CONTINGENCIESThe State of California has filed a number of complaints to the Federal Regulatory Energy Commission ("FERC") against many suppliers of electricity, including Commerce, a subsidiary of the Fund, with respect to events stemming from the 2001 energy crises in California. Pursuant to the complaints, the State of California is challenging the FERC's enforcement of its market-based rate system. Although Commerce did not own generation, the State of California is claiming that Commerce was unjustly enriched by the run-up caused by the alleged market manipulation by other market participants. The proceedings are currently ongoing. On March 18, 2010, the Administrative Law Judge granted the motion to strike for all parties in one of the complaints holding that California did not prove that the reporting errors masked the accumulation of market power. California has appealed the decision.At this time, the likelihood of damages or recoveries and the ultimate amounts, if any, with respect to this litigation is not determinable; however, an estimated amount has been recorded in these consolidated financial statements as at June 30, 2010.16. COMPARATIVE CONSOLIDATED FINANCIAL STATEMENTSCertain figures from the comparative consolidated financial statements have been reclassified from statements previously presented to conform to the presentation of the current period's consolidated financial statements.FOR FURTHER INFORMATION PLEASE CONTACT: Just Energy Income Fund Ms. Rebecca MacDonald Executive Chair (416) 367-2872 or Just Energy Income Fund Mr. Ken Hartwick, C.A. Chief Executive Officer & President (905) 795-3557 or Just Energy Income Fund Ms. Beth Summers, C.A. Chief Financial Officer (905) 795-4206 www.justenergy.com The Toronto Stock Exchange has neither approved nor disapproved of the contents of this release.