UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

  

FORM 6-K

  

 

 

 

Report of Foreign Private Issuer

Pursuant to Rule 13a-16 or 15d-16 of

the Securities Exchange Act of 1934

 

For the month of November 2018

 

Commission File Number 001-35400

 

 

 

Just Energy Group Inc.

(Translation of registrant's name into English)

 

 

 

6345 Dixie Road, Suite 200, Mississauga, Ontario, Canada, L5T 2E6

(Address of principal executive offices)

 

Indicate by check mark whether the registrant files or will file annual reports under cover of Form 20-F or Form 40F:

 

Form 20-F ☐           Form 40-F ☒

 

Indicate by check mark if the registrant is submitting the Form 6-K in paper as permitted by Regulation S-T Rule 101(b)(1): ☐

 

Note: Regulation S-T Rule 101(b)(1) only permits the submission in paper of a Form 6-K if submitted solely to provide an attached annual report to security holders.

 

Indicate by check mark if the registrant is submitting the Form 6-K in paper as permitted by Regulation S-T Rule 101(b)(7): ☐

 

Note: Regulation S-T Rule 101(b)(7) only permits the submission in paper of a Form 6-K if submitted to furnish a report or other document that the registrant foreign private issuer must furnish and make public under the laws of the jurisdiction in which the registrant is incorporated, domiciled or legally organized (the registrant's "home country"), or under the rules of the home country exchange on which the registrant's securities are traded, as long as the report or other document is not a press release, is not required to be and has not been distributed to the registrant's security holders, and, if discussing a material event, has already been the subject of a Form 6-K submission or other Commission filing on EDGAR.

 

DOCUMENTS INCLUDED AS PART OF THIS REPORT

 

Exhibit  
   
99.1 Financial Statements
   
99.2 Management Discussion and Analysis

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

SIGNATURES

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

 

  JUST ENERGY GROUP INC.  
  (Registrant)  
       
Date: November 8, 2018 By: JONAH T. DAVIDS  
  Name: Jonah T. Davids  
  Title: Senior Vice President, Legal and Regulatory and General Counsel
       
       

 

 

 

 

Exhibit 99.1

 

JUST ENERGY GROUP INC.
INTERIM CONDENSED CONSOLIDATED STATEMENTS OF FINANCIAL POSITION

(in thousands of Canadian dollars)

 

 

   Notes   As at
Sept. 30, 2018
(Unaudited)
   As at
March 31, 2018
(Audited)
 
ASSETS               
Current assets               
Cash and cash equivalents       $17,225   $48,861 
Restricted cash        3,537    3,515 
Trade and other receivables   6    694,479    697,307 
Gas in storage        42,916    11,812 
Fair value of derivative financial assets   8    204,360    218,769 
Income tax recoverable        16,508    5,617 
Other current assets   7    148,777    109,697 
         1,127,802    1,095,578 
Non-current assets               
Investments   8    36,329    36,314 
Property, plant and equipment        19,775    18,893 
Intangible assets        414,006    401,926 
Fair value of derivative financial assets   8    23,427    64,662 
Deferred tax asset        2,971    9,449 
Other non-current assets   7    45,670    19,987 
         542,178    551,231 
TOTAL ASSETS       $1,669,980   $1,646,809 
                
LIABILITIES               
                
Current liabilities               
Trade payables and other       $637,405   $621,148 
Deferred revenue        69,612    41,684 
Income taxes payable        6,616    7,304 
Fair value of derivative financial liabilities   8    40,835    86,288 
Current portion of long-term debt   10    132,898    121,451 
         887,366    877,875 
Non-current liabilities               
Long-term debt   10    528,437    422,053 
Fair value of derivative financial liabilities   8    53,944    51,871 
Deferred tax liability        17,272    6,918 
Other non-current liabilities        46,658    57,349 
         646,311    538,191 
TOTAL LIABILITIES        1,533,677    1,416,066 
SHAREHOLDERS' EQUITY               
Shareholders’ capital   12    1,232,975    1,215,826 
Equity component of convertible debentures        13,029    13,029 
Contributed deficit        (25,186)   (22,693)
Deficit        (1,153,574)   (1,066,931)
Accumulated other comprehensive income        69,458    91,934 
Non-controlling interest        (399)   (422)
TOTAL SHAREHOLDERS' EQUITY        136,303    230,743 
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY       $1,669,980   $1,646,809 

 

Commitments and Guarantees (Note 17)

See accompanying notes to the interim condensed consolidated financial statements

 

1.

 

JUST ENERGY GROUP INC.
INTERIM CONDENSED CONSOLIDATED STATEMENTS OF INCOME (LOSS)
(unaudited in thousands of Canadian dollars, except where indicated and per share amounts)

 

 

   Notes  Three months
ended
Sept. 30,
2018
   Three months
ended
Sept. 30,
2017
   Six months
ended
Sept. 30,
2018
   Six months
ended
Sept. 30,
2017
 
                    
Sales  13  $956,843   $851,927   $1,833,300   $1,699,633 
Cost of sales      783,504    709,264    1,506,429    1,399,407 
GROSS MARGIN      173,339    142,663    326,871    300,226 
EXPENSES                       
Administrative      58,508    46,806    114,190    95,437 
Selling and marketing      56,749    58,577    107,292    116,653 
Other operating expenses  14(a)   31,833    20,795    59,651    55,771 
       147,090    126,178    281,133    267,861 
Operating profit before the following      26,249    16,485    45,738    32,365 
Finance costs  10   (20,123)   (12,521)   (36,463)   (24,511)
Change in fair value of derivative instruments and other  8   (23,932)   (70,923)   (60,488)   39,694 
Other income      2,768    203    2,713    1,802 
Profit (loss) before income taxes      (15,038)   (66,756)   (48,500)   49,350 
Provision for (recovery of) income taxes  11   6,412    (1,833)   14,373    4,964 
PROFIT (LOSS) FOR THE PERIOD     $(21,450)  $(64,923)  $(62,873)  $44,386 
                        
Attributable to:                       
Shareholders of Just Energy     $(21,385)  $(68,864)  $(62,762)  $34,994 
Non-controlling interest      (65)   3,941    (111)   9,392 
PROFIT (LOSS) FOR THE PERIOD     $(21,450)  $(64,923)  $(62,873)  $44,386 
                        
                        
Earnings (loss) per share available to shareholders  15                    
Basic     $(0.16)  $(0.48)  $(0.45)  $0.21 
Diluted     $(0.16)  $(0.48)  $(0.45)  $0.17 

 

See accompanying notes to the interim condensed consolidated financial statements

 

2.

 

JUST ENERGY GROUP INC.
INTERIM CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(unaudited in thousands of Canadian dollars)

 

 

   Three months
ended
Sept. 30,
2018
   Three months
ended
Sept. 30,
2017
   Six months
ended
Sept. 30,
2018
   Six months
ended
Sept. 30,
2017
 
PROFIT (LOSS) FOR THE PERIOD  $(21,450)  $(64,923)  $(62,873)  $44,386 
                     
Other comprehensive loss to be reclassified to profit or loss in subsequent periods: Unrealized loss on translation of foreign operations
   (8,363)   (7,793)   (4,613)   (12,561)
TOTAL COMPREHENSIVE INCOME (LOSS) FOR THE PERIOD, NET OF TAX  $(29,813)  $(72,716)  $(67,486)  $31,825 
                     
Total comprehensive income (loss) attributable to:                    
Shareholders of Just Energy  $(29,748)  $(76,657)  $(67,375)  $22,433 
Non-controlling interest   (65)   3,941    (111)   9,392 
TOTAL COMPREHENSIVE INCOME (LOSS) FOR THE PERIOD, NET OF TAX  $(29,813)  $(72,716)  $(67,486)  $31,825 

 

See accompanying notes to the interim condensed consolidated financial statements

 

3.

 

JUST ENERGY GROUP INC.

INTERIM CONDENSED CONSOLIDATED STATEMENTS OF CHANGES

IN SHAREHOLDERS’ EQUITY (DEFICIENCY)

(unaudited in thousands of Canadian dollars)

 

 

   Notes  Three months
ended
Sept. 30,
2018
   Three months
ended
Sept. 30,
2017
   Six months
ended
Sept. 30,
2018
   Six months
ended
Sept. 30,
2017
 
ATTRIBUTABLE TO THE SHAREHOLDERS                       
Accumulated earnings                       
Accumulated earnings, beginning of period     $748,181   $363,429   $768,847   $259,571 
Adjustment for adoption of IFRS 9 and 15      -    -    20,711    - 
Profit (loss) for the period, attributable to shareholders      (21,385)   (68,864)   (62,762)   34,994 
Accumulated earnings, end of period      726,796    294,565    726,796    294,565 
                        
DIVIDENDS AND DISTRIBUTIONS                       
Dividends and distributions, beginning of period      (1,858,040)   (1,771,254)   (1,835,778)   (1,749,471)
Dividends and distributions declared and paid  16   (22,330)   (21,468)   (44,592)   (43,251)
Dividends and distributions, end of period      (1,880,370)   (1,792,722)   (1,880,370)   (1,792,722)
DEFICIT     $(1,153,574)  $(1,498,157)  $(1,153,574)  $(1,498,157)
                        
ACCUMULATED OTHER COMPREHENSIVE INCOME                       
Accumulated other comprehensive income, beginning of period     $77,821   $65,593   $91,934   $70,361 
Adjustment for adoption of IFRS 9 and 15      -    -    (17,863)   - 
Other comprehensive loss      (8,363)   (7,793)   (4,613)   (12,561)
Accumulated other comprehensive income, end of period     $69,458   $57,800   $69,458   $57,800 
                        
SHAREHOLDERS’ CAPITAL  12                    
Common shares                       
Common shares, beginning of period     $1,084,034   $1,068,778   $1,079,055   $1,070,076 
Share-based units exercised      1,957    529    6,936    10,674 
Repurchase and cancellation of shares      -    (498)   -    (11,941)
Common shares, end of period     $1,085,991   $1,068,809   $1,085,991   $1,068,809 
                        
Preferred shares                       
Preferred shares, beginning of period     $146,983   $132,266   $136,771   $128,363 
Shares issued      -    834    10,447    5,195 
Shares issuance costs      1    (192)   (234)   (650)
Preferred shares, end of period      146,984    132,908    146,984    132,908 
SHAREHOLDERS’ CAPITAL     $1,232,975   $1,201,717   $1,232,975   $1,201,717 
                        
EQUITY COMPONENT OF CONVERTIBLE DEBENTURES                       
Balance, beginning of period     $13,029   $13,508   $13,029   $13,508 
Balance, end of period     $13,029   $13,508   $13,029   $13,508 
                        
CONTRIBUTED SURPLUS (DEFICIT)                       
Balance, beginning of period     $(24,590)  $57,861   $(22,693)  $58,266 
Add: Share-based compensation expense  14(a)   1,494    1,716    3,269    16,963 
Non-cash deferred share grant distributions      17    10    31    22 
Less: Purchase of non-controlling interest      (150)   (102,298)   1,416    (102,298)
Share-based units exercised  12   (1,957)   (529)   (6,936)   (10,674)
Share-based compensation adjustment      -    18    (273)   (5,501)
Balance, end of period     $(25,186)  $(43,222)  $(25,186)  $(43,222)
                        
NON-CONTROLLING INTEREST                       
Balance, beginning of period     $(408)  $-   $(422)  $- 
Distributions to non-controlling shareholders      -    (3,941)   -    (9,392)
Foreign exchange impact on non-controlling interest      74    -    134    - 
Profit (loss) attributable to non-controlling interest      (65)   3,941    (111)   9,392 
Balance, end of period     $(399)  $-   $(399)  $- 
TOTAL SHAREHOLDERS' EQUITY (DEFICIENCY)     $136,303   $(268,354)  $136,303   $(268,354)

 

See accompanying notes to the interim condensed consolidated financial statements

 

4.

 

JUST ENERGY GROUP INC.

INTERIM CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOW

(unaudited in thousands of Canadian dollars)

 

 

 

Net inflow (outflow) of cash related to following activities   
 
 
Notes
    Three months
ended
Sept. 30,
2018
     Three months
ended
Sept. 30,
2017
     Six months
ended
Sept. 30,
2018
     Six months
ended
Sept. 30,
2017
 
OPERATING               
Profit (loss) before income taxes       $(15,038)  $(66,756)  $(48,500)  $49,350 
                          
Items not affecting cash                         
Amortization of intangible assets   14(a)   4,995    4,331    9,340    7,791 
Depreciation of property, plant and equipment   14(a)   960    985    1,858    1,982 
Amortization included in cost of sales        730    769    1,512    1,546 
Share-based compensation   14(a)   1,494    1,716    3,269    16,963 
Financing charges, non-cash portion        5,978    2,585    9,445    5,188 
Other        (29)   (92)   (55)   (184)
Change in fair value of derivative instruments        23,932    70,923    60,488    (39,694)
Adjustment required to reflect net cash receipts from gas sales        5,125    4,881    9,706    7,530 
Net change in working capital balances        (93,698)   (5,442)   (116,722)   (4,886)
Income taxes paid        (1,409)   (4,714)   (9,847)   (15,791)
Cash inflow (outflow) from operating activities        (66,960)   9,186    (79,506)   29,795 
                          
INVESTING                         
Purchase of property, plant and equipment        (630)   (1,768)   (2,559)   (2,959)
Purchase of intangible assets        (10,937)   (5,717)   (18,863)   (12,522)
Acquisition of businesses        -    -    -    (2,546)
Short-term investments        -    (314)   -    (185)
Cash outflow from investing activities        (11,567)   (7,799)   (21,422)   (18,212)
                          
FINANCING                         
Dividends paid        (22,312)   (21,458)   (44,561)   (43,229)
Repayment of long-term debt   10    (59,573)   -    (59,573)   - 
Issuance of long-term debt   10    119,662    -    119,662    - 
Share swap payout   8    (10,000)   -    (10,000)   - 
Debt issuance costs   10    (481)   -    (2,654)   - 
Credit facilities withdrawal   10    26,070    24,612    57,280    49,262 
Issuance of preferred shares        -    834    10,447    5,195 
Preferred shares issuance costs        -    (215)   (334)   (1,676)
Shares repurchase        -    (498)   -    (11,941)
 Distributions to non-controlling interest        -    (4,098)   -    (9,603)
Cash inflow (outflow) from financing activities        53,366    (823)   70,267    (11,992)
                          
Effect of foreign currency translation on cash balances        302    266    (975)   (1,017)
                          
Net cash inflow (outflow)        (24,859)   830    (31,636)   (1,426)
Cash and cash equivalents, beginning of period        42,084    55,120    48,861    57,376 
                          
Cash and cash equivalents, end of period       $17,225   $55,950   $17,225   $55,950 
                          
Supplemental cash flow information:                         
Interest paid       $15,220   $11,575   $26,445   $18,896 
                          
See accompanying notes to the interim condensed consolidated financial statements

 

 

 

5

 

 

JUST ENERGY GROUP INC.


NOTES TO THE INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

For the six months ended September 30, 2018

(unaudited in thousands of Canadian dollars, except where indicated and per share amounts)

 

 

1.

ORGANIZATION

 

Just Energy Group Inc. (“Just Energy”) is a corporation established under the laws of Canada to hold securities and to distribute the income of its directly or indirectly owned operating subsidiaries and affiliates. The registered office of Just Energy is First Canadian Place, 100 King Street West, Toronto, Ontario, Canada. The unaudited interim condensed consolidated financial statements (“Interim Financial Statements”) consist of Just Energy and its subsidiaries and affiliates. The Interim Financial Statements were approved by the Board of Directors on November 7, 2018.

 

2.

OPERATIONS

 

Just Energy is a leading consumer company specializing in electricity and natural gas commodities, energy efficiency solutions and renewable energy options. With offices located across the United States (“U.S.”), Canada, the United Kingdom (“U.K.”), Germany, Ireland and Japan, Just Energy serves residential and commercial customers, providing homes and businesses with a broad range of energy solutions that deliver comfort, convenience and control. Just Energy is the parent company of Amigo Energy, EdgePower Inc., Green Star Energy, Hudson Energy, Interactive Energy Group, Just Energy Advanced Solutions, Tara Energy and terrapass.

 

By fixing the price of natural gas or electricity under its fixed-price or price-protected program contracts for a period of up to five years, Just Energy’s customers offset their exposure to changes in the price of these essential commodities. Variable rate products allow customers to maintain competitive rates while retaining the ability to lock into a fixed price at their discretion. Flat-bill products allow customers to pay a flat rate each month regardless of usage. Just Energy derives its margin or gross profit from the difference between the price at which it is able to sell the commodities to its customers and the related price at which it purchases the associated volumes from its suppliers.

 

In addition, Just Energy markets smart thermostats, offering the thermostats as a stand alone unit or bundled with certain commodity products. The smart thermostats are manufactured and distributed by ecobee Inc. (“ecobee”), a company in which Just Energy holds a 7.8% fully diluted equity interest. Just Energy also offers green products through its JustGreen program. The JustGreen electricity product offers customers the option of having all or a portion of their electricity sourced from renewable green sources such as wind, solar, hydropower or biomass. The JustGreen gas product offers carbon offset credits that allow customers to reduce or eliminate the carbon footprint of their homes or businesses. Additional green products allow customers to offset their carbon footprint without buying energy commodity products and can be offered in all states and provinces without being dependent on energy deregulation. Just Energy also provides energy management solutions to both Consumer and Commercial customers in the form of value added products and services which include, but is not limited to, smart irrigation controllers, LED retro fits lighting and HVAC controls, as well as enterprise monitoring.

 

3.

FINANCIAL STATEMENT PREPARATION

 

(a)

Statement of compliance with IFRS

  

These Interim Financial Statements have been prepared in accordance with International Accounting Standard (“IAS”) 34, Interim Financial Reporting, as issued by the International Accounting Standards Board (“IASB”), utilizing the accounting policies Just Energy outlined in its March 31, 2018 annual audited consolidated financial statements. Accordingly, certain information and footnote disclosures normally included in the annual audited consolidated financial statements prepared in accordance with International Financial Reporting Standards (“IFRS”), as issued by the IASB, have been omitted or condensed.

 

6

 

JUST ENERGY GROUP INC.
NOTES TO THE INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

For the six months ended September 30, 2018

(unaudited in thousands of Canadian dollars, except where indicated and per share amounts)

 

 

(b)Basis of presentation and interim reporting

 

These Interim Financial Statements should be read in conjunction with and follow the same accounting policies and methods of application as those used in the annual audited consolidated financial statements for the years ended March 31, 2018 and 2017.

 

The Interim Financial Statements are presented in Canadian dollars, the functional currency of Just Energy, and all values are rounded to the nearest thousand, except where otherwise indicated. The Interim Financial Statements are prepared on a going concern basis under the historical cost convention, except for certain financial assets and liabilities which are stated at fair value.

 

The interim operating results are not necessarily indicative of the results that may be expected for the full year ending March 31, 2019, due to seasonal variations resulting in fluctuations in quarterly results. 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.

 

(c)Principles of consolidation

 

The Interim Financial Statements include the accounts of Just Energy and its directly or indirectly owned subsidiaries and affiliates as at September 30, 2018. Subsidiaries and affiliates are consolidated from the date of acquisition and control, and continue to be consolidated until the date that such control ceases. The financial statements of the subsidiaries and affiliates are prepared for the same reporting period as Just Energy, using consistent accounting policies. All intercompany balances, sales, expenses and unrealized gains and losses resulting from intercompany transactions are eliminated on consolidation.

 

4.

ACCOUNTING STANDARDS ISSUED BUT NOT YET EFFECTIVE

 

IFRS 16, Leases (“IFRS 16”), was issued by the IASB in January 2016. This guidance brings most leases onto the balance sheet for lessees under a single model, eliminating the distinction between operating and finance leases. Lessor accounting remains largely unchanged and the distinction between operating and finance leases is retained. Furthermore, per the standard, a lessee recognizes a right-of-use asset and a lease liability. The right-of-use asset is treated similarly to other non-financial assets and depreciated accordingly, and the liability accrues interest. The lease liability is initially measured at the present value of the lease payments payable over the lease term, discounted at the rate implicit in the lease. Lessees are permitted to make an accounting policy election, by class of underlying asset, to apply a method like IAS 17’s operating lease accounting and not recognize lease assets and lease liabilities for leases with a lease term of 12 months or less, and on a lease-by-lease basis. IFRS 16 supersedes IAS 17, Leases, and its related interpretations, and is effective for periods beginning on or after January 1, 2019, with earlier adoption permitted if IFRS 15, Revenue from Contracts with Customers (“IFRS 15”), has also been applied. Just Energy has not yet assessed the impact of this standard. Just Energy will adopt IFRS 16 beginning April 1, 2019.

 

IFRIC 23, Uncertainty over Income Tax Treatments, was issued by the IASB in June 2017. This interpretation provides guidance to be applied in the determination of taxable profit or loss, tax bases, unused tax losses, unused tax credits and tax rates, when there is uncertainty over income tax treatments under IAS 12. The interpretation is effective for annual periods beginning on or after January 1, 2019. Just Energy has not yet assessed the impact of this standard.

 

7

 

JUST ENERGY GROUP INC.
NOTES TO THE INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

For the six months ended September 30, 2018

(unaudited in thousands of Canadian dollars, except where indicated and per share amounts)

 

 

5.

ACCOUNTING POLICIES AND NEW STANDARDS ADOPTED

 

IFRS 15 – Revenue from Contracts with Customers

 

Just Energy has adopted IFRS 15, as issued by the IASB in July 2014, effective January 1, 2018. The new accounting policies have been applied from April 1, 2018 and, in accordance with the transitional provisions in IFRS 15, comparative figures have not been restated. Just Energy adopted IFRS 15 using the modified retrospective method, applying the practical expedient in paragraph C5(c) under which the aggregate effect of all modifications on the date of initial application is reflected. Accordingly, transition adjustments have been recognized through equity as at April 1, 2018.

 

IFRS 15 replaces the provisions of IAS 18, Revenue, that relates to all revenue from contracts from customers, unless those contracts are in the scope of other standards. The new standard establishes a five-step model to account for revenue arising from contracts with customers. Under IFRS 15, revenue is recognized at an amount that reflects the consideration to which an entity expects to be entitled in exchange for transferring goods or services to a customer.

 

Accounting policies

 

The following accounting policies are applicable to the accounting for all revenue arising from contracts with customers, unless those contracts are in the scope of other standards in the quarter ended April 1, 2018 and onwards. Please refer to the accounting policies outlined in the March 31, 2018 annual audited consolidated financial statements for details on accounting policies applicable to comparative amounts.

 

Gas and electricity

 

Sales

 

Just Energy historically recognized revenue based on consumption of the commodity by the customer. Often times, the billing cycles for customers do not coincide with the accounting periods used for financial reporting purposes. Gas and electricity that have been consumed by a customer, but not yet billed to that customer, are estimated on an accrual basis and included in revenue during the period in which they were consumed. These accrual amounts result in contract assets and are presented as unbilled revenues under IFRS 15. Unbilled revenues are assessed for impairment in accordance with IFRS 9.

 

Upon the adoption of IFRS 15, there is no change in the revenue recognition for gas and electricity sales. Just Energy has identified that the material performance obligation is the provision of gas and electricity to customers, which is satisfied over time throughout the contract term. Just Energy utilizes the output method to recognize revenue based on the units of gas and electricity delivered and billed to the customer each month. Just Energy has elected to adopt the practical expedient to recognize revenue in the amount to which the entity has a right to invoice, as the entity has a right to consideration from a customer in an amount that corresponds directly with the value to the customer of the entity’s performance to date.

 

Expenses

 

Historically, North American residential sales commissions and incentives paid to brokers, employees or third parties for acquiring new contracts with customers were recognized as selling expenses as they were incurred.

 

8

 

JUST ENERGY GROUP INC.
NOTES TO THE INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

For the six months ended September 30, 2018

(unaudited in thousands of Canadian dollars, except where indicated and per share amounts)

 

 

Upon the adoption of IFRS 15, incremental costs to obtain a contract with a customer are capitalized if expected to be recovered. As such, Just Energy commenced capitalizing all upfront sales commissions, incentives and third party verification costs that met the criteria for capitalization. These expenses are deferred and amortized over the average customer relationship period, which is estimated to be between two and five years, based on historical blended attrition rates, including expected renewal periods by region. Just Energy has elected under the practical expedient to recognize incremental costs of obtaining a contract as an expense when incurred if the contract length is one year or less.

 

Impact on financial statements

 

The cumulative effect of changes made to the April 1, 2018 interim condensed consolidated statement of financial position for the adoption of IFRS 15 was as follows, and had a deferred tax liability effect of $7,493:

 

    Original IAS 18   Carrying amount
New IFRS 15
Current assets        
Customer acquisition costs  $31,852  $43,152
Non-current financial assets        
Customer acquisition costs   $17,101  $34,162

 

The following table shows the effect of IFRS 15 adoption on the interim condensed consolidated statement of financial position as at September 30, 2018:

 

   As at
Sept. 30,
2018 (reported)
  Balances
without
adoption of
IFRS 15
  Effect of
change
higher
(lower)
Current assets            
Customer acquisition costs  $60,501  $36,765  $23,736
Non-current financial assets            
Customer acquisition costs  $41,117  $17,293  $23,824

 

 

9

 

JUST ENERGY GROUP INC.
NOTES TO THE INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

For the six months ended September 30, 2018

(unaudited in thousands of Canadian dollars, except where indicated and per share amounts)

 

 

The following table shows the effect of the adoption of IFRS 15 on the interim condensed consolidated statements of comprehensive income (loss) for the three and six months ended September 30, 2018:

 

 
 
 
 
 
 
 
 
For the three
months ended
Sept. 30, 2018
(reported)
 
 
 
 
 
 
 
 
Balances
without
adoption
of IFRS 15
 
 
 
 
 
 
 
 
Effect of
change
higher
(lower)
 
 
 
 
 
 
 
 
For the six
months ended
Sept. 30, 2018
(reported)
 
 
 
 
 
 
 
 
Balances
without
adoption
of IFRS 15
 
 
 
 
 
 
 
 
Effect of
change
higher
(lower)
 
 
 
 
Sales  $956,843   $956,843   $-   $1,833,300   $1,833,300   $- 
Cost of sales   783,504    783,504    -    1,506,429    1,506,429    - 
Gross margin   173,339    173,339    -    326,871    326,871    - 
Expenses                              
Administrative   58,508    58,508    -    114,190    114,190    - 
Selling and marketing   56,749    66,861    (10,112)   107,292    126,667    (19,375)
Other operating expenses   31,833    31,833    -    59,651    59,651    - 
    147,090    157,202    (10,112)   281,133    300,508    (19,375)
Operating profit before the following   26,249    16,137    10,112    45,738    26,363    19,375 
Finance costs   (20,123)   (20,123)   -    (36,463)   (36,463)   - 
Change in fair value of derivative instruments and other   (23,932)   (23,932)   -    (60,488)   (60,488)   - 
Other income   2,768    2,768    -    2,713    2,713    - 
Loss before income taxes   (15,038)   (25,150)   10,112    (48,500)   (67,875)   19,375 
Provision for income taxes   6,412    6,412    -    14,373    14,373    - 
Loss for the period  $(21,450)  $(31,562)  $10,112   $(62,873)  $(82,248)  $19,375 
Attributable to:                              
Shareholders of Just Energy  $(21,385)  $(31,497)  $10,112   $(62,762)  $(82,137)  $19,375 
Non-controlling interest   (65)   (65)   -    (111)   (111)   - 
Loss for the period  $(21,450)  $(31,562)  $10,112   $(62,873)  $(82,248)   19,375 
Loss per share available to shareholders                              
Basic  $(0.16)  $(0.23)  $0.07   $(0.45)  $(0.58)  $0.13 
Diluted  $(0.16)  $(0.23)  $0.07   $(0.45)  $(0.58)  $0.13 

 

IFRS 15 did not impact any revenue amounts related to historical or current revenue recognition. The key factors driving revenue segmentation are related to differentiation between the business divisions, which are disclosed in Note 13.

 

The majority of Just Energy’s customer contracts meet IFRS 15’s B16 practical expedient where Just Energy has the right to consideration from a customer in an amount that corresponds directly with the value to the customer of the performance completed to date. While there is no change in revenue recognition upon the adoption of IFRS 15 for flat-bill customer contracts, they do not meet the B16 practical expedient and therefore require the following disclosure for the contracts that have a duration of one year or more:

 

 

10

 

JUST ENERGY GROUP INC.
NOTES TO THE INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

For the six months ended September 30, 2018

(unaudited in thousands of Canadian dollars, except where indicated and per share amounts)

 

 

The aggregate of contractual amounts allocated to performance obligations related to flat-bill contracts that are unsatisfied as at September 30, 2018 is $90,844.

 

Just Energy expects to recognize revenue on these flat-bill contracts in the amounts of:

 

   October 1,
2018 to March
31, 2019
   April 1,
2019 to
March 31,
2020
   April 1,
2020 to
March 31,
2021
   April 1, 2021
to March 31,
2022
   Years
thereafter
   Total 
Gas and electricity flat- bill contracts  $15,565   $29,425   $21,614   $13,051   $11,189   $90,844 

 

IFRS 9 – Financial Instruments

 

Just Energy has adopted IFRS 9, Financial Instruments (“IFRS 9”) as issued by the IASB in July 2014, effective April 1, 2018. The new accounting policies have been applied from April 1, 2018 and, in accordance with the transitional provisions in IFRS 9, comparative figures have not been restated. Just Energy has adopted IFRS 9 retrospectively, and accordingly, transition adjustments have been recognized through equity as at April 1, 2018.

 

IFRS 9 replaces the provisions of IAS 39, Financial Instruments Recognition and Measurement, that relate to the recognition, classification and measurement of financial assets and financial liabilities; derecognition of financial instruments; impairment of financial assets and hedge accounting. IFRS 9 also significantly amends other standards dealing with financial instruments such as IFRS 7, Financial Instruments: Disclosures.

 

(a)Accounting policy for financial instruments under IFRS 9

 

The following accounting policy is applicable to the accounting for financial instruments in the quarter ended April 1, 2018 and onwards. Please refer to the accounting policies Just Energy outlined in its March 31, 2018 annual audited consolidated financial statements for details on the financial instruments accounting policies applicable to comparative amounts.

 

Financial assets

 

(i)Recognition and derecognition

 

Regular purchases and sales of financial assets are recognized on the trade-date, being the date on which Just Energy commits to purchase or sell the asset. Financial assets are derecognized when the rights to receive cash flows from the financial assets have expired or have been transferred and Just Energy has transferred substantially all the risks and rewards of ownership.

 

(ii)Classification

 

From April 1, 2018, Just Energy classified its financial assets in the following measurement categories:

·Those to be measured subsequently at fair value (either through other comprehensive income (loss) (“OCI”) or through profit or loss); and
·Those to be measured at amortized cost.

 

11

 

JUST ENERGY GROUP INC.
NOTES TO THE INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

For the six months ended September 30, 2018

(unaudited in thousands of Canadian dollars, except where indicated and per share amounts)

 

 

The measurement category classification of financial assets depends on Just Energy’s business objectives for managing the financial assets and whether contractual terms of the cash flow are considered solely payments of principal and interest. For assets measured at fair value, gains and losses will either be recorded in profit or loss or in other comprehensive income depending upon the business objective.

 

Just Energy reclassifies debt instruments when and only when its business objective for managing those assets changes.

 

(iii)Measurement

 

At initial recognition, Just Energy measures a financial asset at its fair value. In the case of a financial asset not categorized as fair value through profit or loss (“FVTPL”), transaction costs that are directly attributable to the acquisition of the financial asset are included in measurement at initial recognition. Transaction costs of financial assets carried at FVTPL are expensed in profit or loss.

 

Subsequent measurement of debt instruments depends on Just Energy’s business objective for managing the asset and the cash flow characteristics of the asset. There are three measurement categories into which Just Energy classifies its debt instruments:

 

Amortized cost: Assets held for collection of contractual cash flows that represent solely payments of principal and interest are measured at amortized cost. A gain or loss on a debt instrument is recognized in profit or loss when the asset is derecognized or impaired. Interest income from these financial assets is included in “finance income” using the effective interest rate method. Cash and cash equivalents, restricted cash, trade and other receivables are included in this category.

 

Fair value through other comprehensive income (“FVOCI”): Assets held to achieve a particular business objective, by collecting contractual cash flows and selling financial assets, where the contractual terms of the financial asset give rise on specified dates to cash flows that are solely payments of principal and interest on the principal outstanding are measured at FVOCI. Movements in the carrying amount are taken through OCI, except for the recognition of impairment gains or losses, interest revenue and foreign exchange gains and losses, which are recognized in profit or loss. When the financial asset is derecognized, the cumulative gain or loss previously recognized in OCI is reclassified from equity to profit or loss. Interest income from these financial assets is included in “finance income” using the effective interest rate method. Just Energy has not classified any investments in this category.

 

Fair value through profit or loss (“FVTPL”): Assets that do not meet the criteria for amortized cost or FVOCI are measured at FVTPL. A gain or loss on a debt investment that is subsequently measured at FVTPL and is not part of a hedging relationship is recognized in profit or loss. Just Energy classifies its derivatives and its investments in equity securities at FVTPL due to the fact that they do not meet the criteria for classification at amortized cost as the contractual cash flows are not solely payments of principal and interest.

 

Just Energy’s equity instruments are carried at FVTPL, and gains and losses are recorded in profit or loss.

 

12

 

JUST ENERGY GROUP INC.
NOTES TO THE INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

For the six months ended September 30, 2018

(unaudited in thousands of Canadian dollars, except where indicated and per share amounts)

 

 

(iv)Impairment

 

Just Energy assesses on a forward-looking basis the expected credit losses (“ECL”) associated with its assets carried at amortized cost, including other receivables. For trade and other receivables only, Just Energy applies the simplified approach permitted by IFRS 9, which requires expected lifetime losses to be recognized from initial recognition of the receivables.

 

Trade receivables are reviewed qualitatively on a case-by-case basis to determine if they need to be written off.

 

ECL are measured as the difference in the present value of the contractual cash flows that are due to Just Energy under the contract, and the cash flows that Just Energy expects to receive. Just Energy assesses all information available, including past due status, credit ratings, the existence of third party insurance and forward-looking macroeconomic factors in the measurement of the ECL associated with its assets carried at amortized cost. Just Energy measures ECL by considering the risk of default over the contract period and incorporates forward-looking information into its measurement.

 

(b)New classification categories of financial instruments on adoption of IFRS 9

 

As at April 1, 2018, the date of initial application, Just Energy’s financial instruments and new classification categories under IFRS 9 were as follows:

 

   Classification category
   Original IAS 39  New IFRS 9
Current financial assets      
Cash and cash equivalents  Loans and receivables  Amortized cost
Restricted cash  Loans and receivables  Amortized cost
Trade and other receivables  Loans and receivables  Amortized cost
Derivative assets  FVTPL  FVTPL
Non-current financial assets      
Investments  FVOCI and FVTPL  FVTPL
Derivative assets  FVTPL  FVTPL
Current financial liabilities      
Trade and other payables  Other financial liabilities  Amortized cost
Derivative liabilities  FVTPL  FVTPL
Current portion of long-term debt  Other financial liabilities  Amortized cost
Non-current financial liabilities      
Long-term debt  Other financial liabilities  Amortized cost
Derivative liabilities  FVTPL  FVTPL

 

Upon adoption of IFRS 9, the investment in ecobee is classified as FVTPL instead of available-for-sale, resulting in a movement of $17,863 relating to the unrealized gain on revaluation of investments, net of tax from OCI to accumulated earnings on April 1, 2018.

 

(c)Reconciliation of lifetime expected credit loss balance from IAS 39 to IFRS 9

 

The following table reconciles the closing lifetime expected credit loss for financial assets and contract assets in accordance with IAS 39 as at March 31, 2018 to the opening allowance for credit losses as at April 1, 2018.

 

13

 

JUST ENERGY GROUP INC.
NOTES TO THE INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

For the six months ended September 30, 2018

(unaudited in thousands of Canadian dollars, except where indicated and per share amounts)

 

 

   Impairment allowance
under IAS 39 as at
March 31, 2018
  Remeasurement  Lifetime expected
credit loss under
IFRS 9 as at
April 1, 2018
Trade and other receivables  $60,121  $11,237  $71,358
Unbilled revenues  $-  $12,399  $12,399

 

(d)Impairment of financial assets

 

Just Energy has two types of financial asset subject to IFRS 9’s new ECL model: (i) trade and other receivables and (ii) unbilled revenues. Just Energy was required to revise its impairment methodology under IFRS 9 for each of these classes of assets. For trade and other receivables, Just Energy applies the simplified approach to providing for ECL prescribed by IFRS 9, which requires the use of the lifetime expected loss provision for all trade receivables and unbilled revenues. Measurement of ECL resulted in an increase to the provision for trade receivables and unbilled revenues of $23,636, which was recorded as at April 1, 2018. This was before the tax impact of $5,616, which reduced the deferred tax liability, as at April 1, 2018.

 

(e)Derivatives and hedging activities

 

Just Energy did not apply hedge accounting under IAS 39, nor under IFRS 9.

 

6.

TRADE AND OTHER RECEIVABLES

 

     
 
As at
Sept. 30, 2018
 
 
As at
March 31, 2018
Trade account receivables, net  $376,697  $332,083
Accrued gas receivables   1,318   15,893
Unbilled revenues   250,536   301,577
Other   65,928   47,754
   $694,479  $697,307

 

7.

OTHER CURRENT AND NON-CURRENT ASSETS

 

(a) Other current assets    As at
Sept. 30, 2018
   As at
March 31, 2018
  Prepaid expenses and deposits  $40,694  $32,900
  Customer acquisition costs   60,501   31,852
  Green certificates   37,234   42,230
  Gas delivered in excess of consumption   10,348   2,715
     $148,777  $109,697
           
(b) Other non-current assets       As at
Sept. 30, 2018
      As at
March 31, 2018
  Customer acquisition costs  $41,117  $17,101
  Other long-term assets   4,553   2,886
     $45,670  $19,987

 

14

 

JUST ENERGY GROUP INC.
NOTES TO THE INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

For the six months ended September 30, 2018

(unaudited in thousands of Canadian dollars, except where indicated and per share amounts)

 

 

8.FINANCIAL INSTRUMENTS

 

(a)Fair value of derivative financial instruments and other

 

The fair value of financial instruments is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date (i.e., an exit price). Management has estimated the value of financial swaps, physical forwards and option contracts for electricity, natural gas, carbon and renewable energy certificates, and generation and transmission capacity 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 immediate 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 options. Management periodically uses non-exchange traded swap agreements based on cooling degree days (CDDs) and heating degree days (HDDs) measured in its utility service territories to reduce the impact of weather volatility on Just Energy’s electricity volumes commonly referred to as “weather derivatives”. The fair value of these swaps on a given measurement station indicated in the derivative contract are determined by calculating the difference between the agreed strike and expected variable observed at the same station.

 

The following table illustrates gains (losses) related to Just Energy’s derivative financial instruments classified as FVTPL and recorded on the interim condensed consolidated statements of financial position as fair value of derivative financial assets and fair value of derivative financial liabilities, with their offsetting values recorded in change in fair value of derivative instruments and other on the interim condensed consolidated statements of income (loss).

 

   Three months
ended
Sept. 30,
2018
     Three months
ended
Sept. 30,
2017
     Six months
ended
Sept. 30,
2018
     Six months
ended
Sept. 30,
2017
 
Change in fair value of derivative instruments and other                    
                     
Physical forward contracts and options (i)  $41,108   $(71,671)  $(57,203)  $16,347 
Financial swap contracts and options (ii)   (30,758)   12,330    38,046    16,024 
Foreign exchange forward contracts   (1,437)   (9,004)   867    (2,065)
Share swap   (2,298)   300    (5,561)   (1,807)
Unrealized foreign exchange on 6.5% convertible bond and 8.75% loan   3,784    7,313    (213)   12,097 
6.5% convertible bond conversion feature   14    (728)   246    4,900 
Weather derivatives   (30,181)   -    (30,181)   - 
Other derivative options   (4,164)   (9,463)   (6,489)   (5,802)
Change in fair value of derivative instruments and other  $(23,932)  $(70,923)  $(60,488)  $39,694 

 

15

 

JUST ENERGY GROUP INC.
NOTES TO THE INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

For the six months ended September 30, 2018

(unaudited in thousands of Canadian dollars, except where indicated and per share amounts)

 

 

The following table summarizes certain aspects of the fair value of derivative financial assets and liabilities recorded in the interim condensed consolidated statement of financial position as at September 30, 2018:

 

   Financial
assets (current)
  Financial
assets (non-current)
  Financial
liabilities (current)
  Financial liabilities
(non-current)
             
Physical forward contracts and options (i)  $162,194   $22,698   $20,037   $26,949 
Financial swap contracts and options (ii)   22,900    646    6,570    25,342 
Foreign exchange forward contracts   -    -    251    455 
Share swap   -    -    13,961    - 
Weather derivative   10,356    -    -    - 
Other derivative options   8,910    83    16    1,198 
As at September 30, 2018  $204,360   $23,427   $40,835   $53,944 

 

The following table summarizes certain aspects of the fair value of derivative financial assets and liabilities recorded in the interim condensed consolidated statement of financial position as at March 31, 2018:

 

   Financial
assets (current)
  Financial
assets (non-current)
  Financial
liabilities (current)
  Financial liabilities
(non-current)
             
Physical forward contracts and options  $198,891   $60,550   $32,451   $29,003 
Financial swap contracts and options   8,133    1,342    34,369    22,117 
Foreign exchange forward contracts   -    -    1,068    505 
Share swap   -    -    18,400    - 
6.5% convertible bond conversion feature   -    -    -    246 
Other derivative options   11,745    2,770    -    - 
As at March 31, 2018  $218,769   $64,662   $86,288   $51,871 

 

Below is a summary of the financial instruments classified through profit or loss as at September 30, 2018, to which Just Energy has committed:

 

(i) Physical forward contracts and options consist of:

 

·Electricity contracts with a total remaining volume of 35,362,864 MWh, a weighted average price of $47.90/MWh and expiry dates up to September 30, 2028.

 

·Natural gas contracts with a total remaining volume of 102,417,945 GJs, a weighted average price of $3.80/GJ and expiry dates up to December 31, 2024.

 

·Renewable energy certificates (“RECs”) and emission-reduction credit contracts with a total remaining volume of 3,971,389 MWh and 441,750 tonnes, respectively, a weighted average price of $27.01/REC and $2.75/tonne, respectively, and expiry dates up to December 31, 2028 and December 31, 2021.

 

·Electricity generation capacity contracts with a total remaining volume of 3,798 MWCap, a weighted average price of $6,612.89/MWCap and expiry dates up to October 31, 2022.

 

 

16

 

JUST ENERGY GROUP INC.
NOTES TO THE INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

For the six months ended September 30, 2018

(unaudited in thousands of Canadian dollars, except where indicated and per share amounts)

 

 

·Ancillary contracts with a total remaining volume of 1,376,191 MWh, a weighted average price of $16.24/MWh and expiry dates up to December 31, 2020.

 

(ii) Financial swap contracts and options consist of:

 

·Electricity contracts with a total remaining volume of 11,930,819 MWh, an average price of $37.43/MWh and expiry dates up to November 30, 2024.

 

·Natural gas contracts with a total remaining volume of 134,838,027 GJs, an average price of $3.53/GJ and expiry dates up to December 31, 2024.

 

·Electricity generation capacity contracts with a total remaining volume of 141 MWCap, a weighted average price of $70,972.67/MWCap and expiry dates up to October 31, 2020.

 

·Ancillary contracts with a total remaining volume of 1,242,514 MWh, a weighted average price of $18.33/MWh and expiry dates up to December 31, 2020.

 

(iii) Weather derivatives consist of:

 

·Weather swaps for cooling degree days with temperature strike values of 79.30–89.10 Fahrenheit and power strike prices of $24.00–$32.00/MWh and an expiry date of October 31, 2018.

 

·Weather swaps for heating degree days with temperature strike values of 25.00–30.00 Fahrenheit and power strike prices of $100.00/MWh and an expiry date of February 28, 2019.

 

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 fulfil its obligations under the contracts, Just Energy may not be able to realize the financial assets’ balance recognized in the consolidated financial statements.

 

Share swap agreement

 

Just Energy has entered into a share swap agreement to manage the interim condensed consolidated statements of income (loss) volatility associated with the Company’s restricted share grant and deferred share grant plans. The value, on inception, of the 2,500,000 shares under this share swap agreement was approximately $33,803. On August 22, 2018, Just Energy reduced the notional value of the share swap to $23,803 through a payment of $10,000 and renewed the share swap agreement for an additional year. Net monthly settlements received under the share swap agreement are recorded in other income. Just Energy records the fair value of the share swap agreement in the non-current derivative financial liabilities on the interim condensed consolidated statements of financial position. Changes in the fair value of the share swap agreement are recorded through the interim condensed consolidated statements of income (loss) as a change in fair value of derivative instruments and other.

 

17

 

JUST ENERGY GROUP INC.
NOTES TO THE INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

For the six months ended September 30, 2018

(unaudited in thousands of Canadian dollars, except where indicated and per share amounts)

 

 

Fair value (“FV”) hierarchy derivatives

 

Level 1

 

The fair value measurements are classified as Level 1 in the FV hierarchy if the fair value is determined using quoted unadjusted market prices.

 

Level 2

 

Fair value measurements that require observable 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, significant inputs must be directly or indirectly observable in the market. Just Energy values its New York Mercantile Exchange (“NYMEX”) financial gas fixed-for-floating swaps under Level 2.

 

Level 3

 

Fair value measurements that 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 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 FV hierarchy. For the natural gas supply contracts, Just Energy uses three different market observable curves: (i) Commodity (predominately NYMEX), (ii) Basis and (iii) Foreign exchange. NYMEX curves extend for over five years (thereby covering the length of Just Energy’s contracts); however, most basis curves extend only 12 to 15 months into the future. In order to calculate basis curves for the remaining years, Just Energy uses extrapolation, which leads natural gas supply contracts to be classified under Level 3.

 

Weather derivatives are non-exchange traded financial instruments used as part of a risk management strategy to mitigate the impact adverse weather conditions have on gross margin. The fair values of the derivatives are determined using an internally developed model that relies upon both observable inputs and significant unobservable inputs. Accordingly, the fair values of these derivatives are classified as Level 3. Observable market and contractual inputs to these models vary by contract type and would typically include notional amounts, reference weather stations, strike prices, temperature strike values, terms to expiration and historical weather data. Significant unobservable inputs would include expected weather curves and scenario probabilities. These are the most significant assumptions contributing to the determination of fair value estimates and changes in these inputs can result in a significantly higher or lower fair value measurement.

 

For the share swap, Just Energy uses a forward interest rate curve along with a volume weighted average share price.

 

Just Energy’s accounting policy is to recognize transfers between levels of the fair value hierarchy on the date of the event or change in circumstances that caused the transfer. There were no transfers into or out of Level 1, Level 2 or Level 3 during the three and six months ended September 30, 2018 or the year ended March 31, 2018.

 

18

 

JUST ENERGY GROUP INC.
NOTES TO THE INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

For the six months ended September 30, 2018

(unaudited in thousands of Canadian dollars, except where indicated and per share amounts)

 

 

Fair value measurement input sensitivity

 

The main cause of changes in the fair value of derivative instruments is changes in the forward curve prices used for the fair value calculations. Just Energy provides a sensitivity analysis of these forward curves under the “Market risk” section of this note. Other inputs, including volatility and correlations, are driven off historical settlements.

 

The following table illustrates the classification of derivative financial assets (liabilities) in the FV hierarchy as at September 30, 2018:

 

   Level 1  Level 2  Level 3  Total
Derivative financial assets  $-   $-   $227,787   $227,787 
Derivative financial liabilities   -    (13,731)   (81,048)   (94,779)
Total net derivative assets (liabilities)  $-   $(13,731)  $146,739   $133,008 

 

The following table illustrates the classification of derivative financial assets (liabilities) in the FV hierarchy as at March 31, 2018:

 

   Level 1  Level 2  Level 3  Total
Derivative financial assets  $-   $-   $283,431   $283,431 
Derivative financial liabilities   -    (21,092)   (117,067)   (138,159)
Total net derivative assets (liabilities)  $-   $(21,092)  $166,364   $145,272 

 

A key assumption used when determining the significant unobservable inputs included in Level 3 of the FV hierarchy consists of up to 5% price extrapolation to calculate monthly prices that extend beyond the market observable 12- to 15-month forward curve.

 

The following table illustrates the changes in net fair value of financial assets (liabilities) classified as Level 3 in the FV hierarchy for the following periods:

 

     Six months ended
September 30, 2018
     Year ended
March 31, 2018
 
Balance, beginning of period  $166,364   $(315,110)
Total gains   103,200    105,709 
Purchases   145,704    207,531 
Sales   (63,524)   (64,464)
Settlements   (205,005)   232,698 
Balance, end of period  $146,739   $166,364 

 

(b)Classification of non-derivative financial assets and liabilities

 

As at September 30, 2018 and March 31, 2018, the carrying value of cash and cash equivalents, restricted cash, current trade and other receivables, and trade and other payables approximates their fair value due to their short-term nature.

 

Long-term debt recorded at amortized cost has a fair value as at September 30, 2018 of $740.8 million (March 31, 2018 - $570.1 million) and the interest payable on outstanding amounts is at rates that vary with Bankers’ Acceptances, LIBOR, Canadian bank prime rate or U.S. prime rate, with the exceptions of 8.75% loan, 6.75% $100M convertible debentures, 6.75% $160M convertible debentures, 6.5% convertible bonds and 5.75% convertible debentures, which are fair valued based on market value. The 6.75% $100M convertible debentures, 6.75% $160M convertible debentures, 6.5% convertible bonds and 5.75% convertible debentures are classified as Level 1 in the FV hierarchy.

 

19

 

JUST ENERGY GROUP INC.
NOTES TO THE INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

For the six months ended September 30, 2018

(unaudited in thousands of Canadian dollars, except where indicated and per share amounts)

 

 

Investments in equity instruments have a fair value as at September 30, 2018 of $36.3 million (March 31, 2018 - $36.3 million) and are measured based on Level 2 of the fair value hierarchy. Level 2 inputs for non-derivative financial assets include quoted prices for similar assets in active markets, and quoted prices for identical or similar assets that are not active.

 

No adjustments were made in the quarter in valuing the investment in ecobee or Energy Earth. Movements are related to foreign exchange revaluations.

 

The following table illustrates the classification of investments in the FV hierarchy as at September 30, 2018:

 

   Level 1  Level 2  Level 3  Total
Investment in ecobee  $-   $32,445   $-   $32,445 
Investment in Energy Earth   -    3,884    -    3,884 
Total investments  $-   $36,329   $-   $36,329 

 

The risks associated with Just Energy’s financial instruments are as follows:

 

(i)Market risk

 

Market risk is the potential loss that may be incurred as a result of changes in the market or fair value of a particular instrument or commodity. Components of market risk to which Just Energy is exposed are discussed below.

 

Foreign currency risk

 

Foreign currency risk is created by fluctuations in the fair value or cash flows of financial instruments due to changes in foreign exchange rates and exposure as a result of investments in U.S. and international operations.

 

The performance of the Canadian dollar relative to the U.S. dollar could positively or negatively affect Just Energy’s income, as a portion of Just Energy’s income is generated in U.S. dollars and is subject to currency fluctuations upon translation to Canadian dollars. Due to its growing operations in the U.S. and Europe, Just Energy expects to have a greater exposure to foreign currency fluctuations in the future than in prior years. Just Energy has economically hedged between 50% and 90% of forecasted cross-border cash flows that are expected to occur within the next 12 months and between 0% and 50% of certain forecasted cross-border cash flows that are expected to occur within the next 13 to 24 months. The level of economic hedging is dependent on the source of the cash flow and the time remaining until the cash repatriation occurs.

 

Just Energy may, from time to time, experience losses resulting from fluctuations in the values of its foreign currency transactions, which could adversely affect its operating results. Translation risk is not hedged.

 

20

 

JUST ENERGY GROUP INC.
NOTES TO THE INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

For the six months ended September 30, 2018

(unaudited in thousands of Canadian dollars, except where indicated and per share amounts)

 

 

With respect to translation exposure, if the Canadian dollar had been 5% stronger or weaker against the U.S. dollar for the period ended September 30, 2018, assuming that all the other variables had remained constant, loss for the period would have been $3.7 million lower/higher and OCI would have been $10.8 million lower/higher.

 

Interest rate risk

 

Just Energy is only 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. Just Energy’s exposure to interest rate risk is relatively immaterial and temporary in nature. Just Energy does not currently believe that its long-term debt exposes the Company to material interest rate 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) of approximately $434 in profit before income taxes for the three months ended September 30, 2018 (2017 - $300).

 

Commodity price risk

 

Just Energy is exposed to market risks associated with commodity prices and market volatility where estimated customer requirements do not match actual customer requirements. Management actively monitors these positions on a daily basis in accordance with its Risk Management Policy. This policy sets out a variety of limits, most importantly thresholds for open positions in the gas and electricity portfolios which also feed a Value at Risk limit. 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 and thereby fix margins such that shareholder dividends 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 flows of Just Energy. Just Energy mitigates the exposure to variances in customer requirements that are driven by changes in expected weather conditions through active management of the underlying portfolio, which involves, but is not limited to, the purchase of options including weather derivatives. Just Energy’s ability to mitigate weather effects is limited by the degree to which weather conditions deviate from normal.

 

Commodity price sensitivity – all derivative financial instruments

 

If all the energy prices associated with derivative financial instruments including natural gas, electricity, verified emission-reduction credits and renewable energy certificates had risen (fallen) by 10%, assuming that all of the other variables had remained constant, profit before income taxes for the three months ended September 30, 2018 would have increased (decreased) by $214,025 ($212,185), primarily as a result of the change in fair value of Just Energy’s derivative financial instruments.

 

Commodity price sensitivity – Level 3 derivative financial instruments

 

If the energy prices associated with only Level 3 derivative financial instruments including natural gas, electricity, verified emission-reduction credits and renewable energy certificates had risen (fallen) by 10%, assuming that all of the other variables had remained constant, profit before income taxes for the three months ended September 30, 2018 would have increased (decreased) by $216,798 ($214,958), primarily as a result of the change in fair value of Just Energy’s derivative financial instruments.

 

21

 

JUST ENERGY GROUP INC.
NOTES TO THE INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

For the six months ended September 30, 2018

(unaudited in thousands of Canadian dollars, except where indicated and per share amounts)

 

 

(ii) Credit risk

 

Credit risk is the risk that one party to a financial instrument fails to discharge an obligation and causes financial loss to another party. Just Energy is exposed to credit risk in two specific areas: customer credit risk and counterparty credit risk.

 

Customer credit risk

 

In Alberta, Texas, Illinois, British Columbia, California, Michigan, Delaware, Ohio, Georgia and the U.K., 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.

 

The aging of the accounts receivable from the above markets was as follows:

 

     Sept. 30, 2018      March 31, 2018  
       
Current  $125,123   $113,786 
1 – 30 days   42,050    44,374 
31–60 days   17,818    21,241 
61–90 days   13,372    12,686 
Over 90 days   60,413    69,207 
   $258,776   $261,294 

 

Changes in the expected lifetime credit loss were as follows:

 

     Sept. 30, 2018      March 31, 2018  
       
Balance, beginning of period  $60,121   $49,431 
Provision for doubtful accounts   45,184    56,300 
Bad debts written off   (38,902)   (41,802)
Adjustment from IFRS 9 adoption   23,636    - 
Foreign exchange   (3,744)   (3,808)
Balance, end of period  $86,295   $60,121 

 

In 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 providing these services will continue to do so in the future.

 

Counterparty credit risk

 

Counterparty credit risk represents the loss that Just Energy would incur if a counterparty fails to perform under its contractual obligations. This risk would manifest itself in Just Energy replacing contracted supply at prevailing market rates, thus impacting the related customer margin. Counterparty limits are established within the Risk Management Policy. Any exceptions to these limits require approval from the Board of Directors of Just Energy. The Risk Department 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.

 

22

 

JUST ENERGY GROUP INC.
NOTES TO THE INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

For the six months ended September 30, 2018

(unaudited in thousands of Canadian dollars, except where indicated and per share amounts)

 

 

As at September 30, 2018, the estimated counterparty credit risk exposure amounted to $227,787 (2017 - $24,228), representing the risk relating to Just Energy’s exposure to derivatives that are in an asset position.

 

(iii) Liquidity risk

 

Liquidity risk is the potential inability to meet financial obligations as they fall due. Just Energy 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 Just Energy’s financial liabilities:

 

As at September 30, 2018:

 

   Carrying
amount
  Contractual
cash flows
  Less than
1 year
   
1–3 years
   
4–5 years
  More than
5 years
Trade and other payables  $636,767   $636,767   $636,767   $-   $-   $- 
Long-term debt1   661,335    706,386    135,146    179,395    391,845    - 
Gas, electricity and non-commodity contracts   94,779    3,200,110    1,026,658    1,747,709    326,348    99,395 
   $1,392,881   $4,543,263   $1,798,571   $1,927,104   $718,193   $99,395 
                               
As at March 31, 2018:                              
                               
    Carrying
amount
   Contractual
cash flows
   Less than
1 year
    
1–3 years
    
4–5 years
   More than
5 years
Trade and other payables  $616,434   $616,434   $616,434   $-   $-   $- 
Long-term debt1   543,504    575,525    122,115    193,410    260,000    - 
Gas, electricity and non-commodity contracts   138,159    3,171,037    1,867,389    1,202,949    69,658    31,041 
   $1,298,097   $4,362,996   $2,605,938   $1,396,359   $329,658   $31,041 

 

1 Included in long-term debt are the 6.75% $100M convertible debentures, 6.75% $160M convertible debentures, 6.5% convertible bonds and 5.75% convertible debentures, which may be settled through the issuance of shares at the option of the holder or Just Energy upon maturity.

 

In addition to the amounts noted above, as at September 30, 2018, the contractual net interest payments over the term of the long-term debt with scheduled repayment terms are as follows:

 

     Less than 1 year      1–3 years      4–5 years      More than 5 years  
Interest payments  $29,437   $68,061   $37,547   $- 

 

23

 

JUST ENERGY GROUP INC.
NOTES TO THE INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

For the six months ended September 30, 2018

(unaudited in thousands of Canadian dollars, except where indicated and per share amounts)

 

 

(iv)Supplier risk

 

Just Energy purchases the majority of the gas and electricity delivered to its customers through long-term contracts entered into with various suppliers. Just Energy has an exposure to supplier risk as the ability to continue to deliver gas and electricity to its customers is reliant upon the ongoing operations of these suppliers and their ability to fulfil their contractual obligations. As at September 30, 2018, Just Energy has applied an adjustment factor to determine the fair value of its financial assets in the amount of $6,626 (2017 - $5,562) to accommodate for its counterparties’ risk of default.

 

9.

ACQUISITION OF BUSINESSES

 

(a)Acquisition of EdgePower, Inc.

 

On February 28, 2018, Just Energy completed the acquisition of the issued and outstanding shares of EdgePower, Inc. (“EdgePower”), a privately held energy monitoring and management company operating out of Aspen, Colorado. EdgePower provides lighting and HVAC controls, as well as enterprise monitoring, in hundreds of commercial buildings in North America. Just Energy acquired 100% of the equity interests of EdgePower for the purposes of integrating their lighting and HVAC controls with the commercial business. The fair value of the total consideration transferred is US$14.9 million, of which US$7.5 million was paid in cash and US$7.4 million was settled through the issuance of 1,415,285 Just Energy common shares. The goodwill that was acquired as part of this acquisition relates primarily to the EdgePower workforce and synergies between Just Energy and EdgePower.

 

In addition, the former shareholders of EdgePower are entitled to a payment of up to a maximum of US$6.0 million, payable in cash, subject to continuing employment and the achievement of certain annual and cumulative performance thresholds of the EdgePower business. The payment is calculated as 20% of EBITDA for the EdgePower business for the years of 2019–2021 with minimum thresholds that must be met. As at the acquisition date, the amount recognized for management remuneration was $nil.

 

The following is the preliminary purchase price allocation for EdgePower:

 

NET ASSETS ACQUIRED     
      
Working capital  $993 
Intangible assets   14,198 
Goodwill   7,673 
Deferred tax liabilities   (3,820)
Total consideration  $19,044 
      
Cash paid, net of working capital adjustment  $9,534 
Common shares issued   9,510 
Total consideration  $19,044 

 

24

 

JUST ENERGY GROUP INC.
NOTES TO THE INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

For the six months ended September 30, 2018

(unaudited in thousands of Canadian dollars, except where indicated and per share amounts)

 

 

(b)Acquisition of Filter Group Inc. (“Filter Group”)

 

On October 1, 2018, Just Energy announced the closing of the acquisition of Filter Group, a leading provider of subscription based, home water filtration systems to residential customers in Canada and the United States. Headquartered in Toronto, Ontario, Filter Group currently provides under counter and whole home water filtration solutions to residential markets in the provinces of Ontario and Manitoba and the states of Nevada, California, Arizona, Michigan and Illinois, with over 30,000 home water filtration systems installed to date.

 

Just Energy acquired all of the issued and outstanding shares of Filter Group and the shareholder loan owing by Filter Group. In addition to the assumption of approximately $22 million of third party Filter Group debt, the aggregate consideration payable by Just Energy under the Purchase Agreement is comprised of: (i) $15 million in cash, fully payable within 180 days of closing; and (ii) earn-out payments of up to 9.5 million Just Energy common shares (with up to an additional 2.4 million Just Energy common shares being issuable to satisfy dividends that otherwise would have been paid in cash on the Just Energy shares issuable pursuant to the earn-out payments (the “DRIP Shares”)), subject to customary closing adjustments. The earn-out payments are contingent on the achievement by Filter Group of certain performance-based milestones specified in the Purchase Agreement in each of the first three years following the closing of the acquisition. In addition, the earn-out payments may be paid 50% in cash and the DRIP Shares 100% in cash, at the option of Just Energy.

 

Daniel MacDonald, the CEO of Filter Group, is the son of the Executive Chair of Just Energy. The transaction was reviewed by Strategic Initiatives Committee and it received a fairness opinion on the transaction.

 

10.

LONG-TERM DEBT AND FINANCING

 

    
 
 
Maturity
 
 
  Sept. 30
2018
   
 
  March 31,
2018
 
Credit facility (a)  September 1, 2020  $179,395   $122,115 
Less: Debt issue costs (a)      (2,372)   (664)
8.75% loan (b)  September 12, 2023   115,623    - 
6.75% $100M convertible debentures (c)  March 31, 2023   86,276    85,760 
6.75% $160M convertible debentures (d)  December 31, 2021   149,515    148,146 
6.5% convertible bonds (e)  July 29, 2019   132,898    188,147 
       661,335    543,504 
Less: Current portion      (132,898)   (121,451)
      $528,437   $422,053 

 

25

 

JUST ENERGY GROUP INC.
NOTES TO THE INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

For the six months ended September 30, 2018

(unaudited in thousands of Canadian dollars, except where indicated and per share amounts)

 

 

Future annual minimum repayments are as follows:

 

  

 

Less than

1 year

 

    1–3 years      4–5 years   

 

More than

5 years

 

    Total  
                                    
Credit facility (a)  $-   $179,395   $-   $-   $179,395 
8.75% loan (b)   -    -    131,845    -    131,845 
6.75% $100M convertible debentures (c)   -         100,000         100,000 
6.75% $160M convertible debentures (d)   -    -    160,000    -    160,000 
6.5% convertible bonds (e)   135,146    -    -    -    135,146 
   $135,146   $179,395   $391,845   $-   $706,386 

 

The details for long-term debt are as follows:

 

     As at
April 1,
2018
     Cash
inflows/
(outflows)
     Foreign
Exchange
     Non-
cash
changes
     As at
Sept. 30,
2018
 
                                    
Credit facility (a)  $121,451   $54,909   $-   $663   $177,023 
8.75% loan (b)   -    119,380    (393)   (3,364)   115,623 
6.75% $100M convertible debentures (c)   85,760    -    -    516    86,276 
6.75% $160M convertible debentures (d)   148,146    -    -    1,369    149,515 
6.5% convertible bonds (e)   188,147    (59,574)   606    3,719    132,898 
   $543,504   $114,715   $213   $2,903   $661,335 
Less: Current portion  $(121,451)  $-   $-   $-   $(132,898)
   $422,053   $114,715   $213   $2,903   $528,437 

 

     As at
April 1,
2017
     Cash
inflows/
(outflows)
     Foreign
Exchange
     Non-
cash
changes
     As at
March 31,
2018
 
                
Credit facility (a)  $66,001   $53,857   $-   $1,593   $121,451 
6.75% $100M convertible debentures (c)   -    95,869    -    (10,109)   85,760 
6.75% $160M convertible debentures (d)   145,579    -    -    2,567    148,146 
6.5% convertible bonds (e)   190,486    -    (6,101)   3,761    188,147 
5.75% convertible debentures (f)   96,022    (100,000)   -    3,978    - 
   $498,088   $49,726   $(6,101)  $1,790   $543,504 
Less: Current portion  $-   $-   $-   $-   $(121,451)
   $498,088   $49,726   $(6,101)  $1,790   $422,053 

 

26

 

JUST ENERGY GROUP INC.
NOTES TO THE INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

For the six months ended September 30, 2018

(unaudited in thousands of Canadian dollars, except where indicated and per share amounts)

 

 

 Interest is expensed based on the effective interest rate. The following table details the finance costs for the indicated periods:

 

     Three months
ended
Sept. 30,
2018
     Three months
ended
Sept. 30,
2017
     Six months
ended
Sept. 30,
2018
     Six months
ended
Sept. 30,
2017
 
Credit facility (a)  $4,620   $2,932   $9,054   $5,570 
6.75% $100M convertible debentures (c)   2,293    -    4,585    - 
6.75% $160M convertible debentures (d)   3,399    3,342    6,769    6,062 
6.5% convertible debentures (e)   5,629    3,687    9,776    7,741 
5.75% convertible debentures (f)   -    2,072    -    4,145 
Collateral cost and other   4,182    488    6,279    993 
   $20,123   $12,521   $36,463   $24,511 

 

(a)As of April 18, 2018, the Company has renegotiated an agreement with a syndicate of lenders that includes Canadian Imperial Bank of Commerce (“CIBC”), National Bank of Canada (“National”), HSBC Bank Canada, JPMorgan Chase Bank N.A., Alberta Treasury Branches, Canadian Western Bank and Morgan Stanley Senior Funding, Inc., a subsidiary of Morgan Stanley Bank N.A. The agreement extends Just Energy’s credit facility for an additional two years to September 1, 2020. The facility size was increased to $352.5 million from $342.5 million, with an accordion for Just Energy to draw up to $370 million. Certain principal amount outstanding under the letters of credit facility is guaranteed by Export Development Canada under its Account Performance Security Guarantee Program.

 

Interest is payable on outstanding loans at rates that vary with Bankers’ Acceptance rates, 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 3.400%. Prime rate advances are at a rate of bank prime (Canadian bank prime rate or U.S. prime rate) plus 2.400% and letters of credit are at a rate of 3.40%. Interest rates are adjusted quarterly based on certain financial performance indicators.

 

As at September 30, 2018, the Canadian prime rate was 3.7% and the U.S. prime rate was 5.25%. As at September 30, 2018, $179.40 million has been drawn against the facility and total letters of credit outstanding as of September 30, 2018, amounted to $89.38 million (June 30, 2018 - $103.85 million). As at September 30, 2018, Just Energy has $83.7 million of the facility remaining for future working capital and/or security requirements. Just Energy’s obligations under the credit facility are supported by guarantees of certain subsidiaries and affiliates and secured by a general security agreement and a pledge of the assets and securities of Just Energy and the majority of its operating subsidiaries and affiliates excluding, primarily, the U.K., Barbados, Ireland, Japan and Germany operations. Just Energy is required to meet a number of financial covenants under the credit facility agreement. As at September 30, 2018, the Company was compliant with all of these covenants.

 

(b)On September 12, 2018, Just Energy entered into a US$250 million non-revolving multi-draw senior unsecured term loan facility (the “8.75% loan”) with Sagard Credit Partners, LP and certain funds managed by a leading U.S. based global fixed income asset manager. The 8.75% loan bears interest at 8.75% per annum payable semi-annually in arrears on June 30 and December 31 in each year, and will mature on September 12, 2023. Warrants totalling 7.5 million were issued to the counterparties at a strike price of $8.56 each, convertible to one Just Energy common stock. The value of these warrants has been assessed as nominal. As at September 30, 2018, US$97.0 million were drawn from the 8.75% loan. The 8.75% loan has three tranches. The first tranche is earmarked for general corporate purposes, including to pay down Just Energy's credit facility. The second tranche is earmarked towards the settlement of Just Energy's 6.5% convertible bonds. The third tranche is earmarked for investments and future acquisitions.

 

27

 

 

JUST ENERGY GROUP INC.
NOTES TO THE INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

For the six months ended September 30, 2018

(unaudited in thousands of Canadian dollars, except where indicated and per share amounts)

 

 

(c)On February 22, 2018, Just Energy issued $100 million of convertible unsecured senior subordinated debentures (the “6.75% $100 million convertible debentures”). The 6.75% $100 million convertible debentures bear interest at an annual rate of 6.75%, payable semi-annually in arrears on March 31 and September 30 in each year, and have a maturity date of March 31, 2023.

 

(d)On October 5, 2016, Just Energy issued $160 million of convertible unsecured senior subordinated debentures (the “6.75% $160 million convertible debentures”). The 6.75% $160 million convertible debentures bear interest at an annual rate of 6.75%, payable semi-annually in arrears on June 30 and December 31 in each year, and have a maturity date of December 31, 2021.

 

(e)On January 29, 2014, Just Energy issued US$150 million of European-focused senior unsecured convertible bonds (the “6.5% convertible bonds”). The 6.5% convertible bonds bear interest at an annual rate of 6.5%, payable semi-annually in arrears in equal installments on January 29 and July 29 in each year, and have a maturity date of July 29, 2019. The Company incurred transaction costs of $5,215 and has shown these costs net of the 6.5% convertible bonds. As at September 30, 2018, US$45.6 million were tendered and extinguished, resulting in a loss on redemption of $1.5 million.

 

(f)In September 2011, Just Energy issued $100 million of convertible unsecured subordinated debentures (the “5.75% convertible debentures”), which was used to fund an acquisition. The 5.75% convertible debentures bear interest at an annual rate of 5.75%, payable semi-annually on March 31 and September 30 in each year, and have a maturity date of September 30, 2018. The 5.75% convertible debentures were fully redeemed on March 27, 2018.

 

11.INCOME TAXES

 

     Three months
ended
Sept. 30, 2018
     Three months
ended
Sept. 30, 2017
     Six months
ended
Sept. 30, 2018
     Six months
ended
Sept. 30, 2017
 
Current income tax expense (recovery)  $(520)  $3,893   $(3,032)  $4,484 
Deferred tax expense (recovery)   6,932    (5,726)   17,405    480 
Provision for (recovery of) income taxes  $6,412   $(1,833)  $14,373   $4,964 

 

28

 

JUST ENERGY GROUP INC.
NOTES TO THE INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

For the six months ended September 30, 2018

(unaudited in thousands of Canadian dollars, except where indicated and per share amounts)

 

 

12.SHAREHOLDERS’ CAPITAL

 

Just Energy is authorized to issue an unlimited number of common shares and 50,000,000 preference shares issuable in series, both with no par value. Shares outstanding have no preferences, rights or restrictions attached to them.

 

Just Energy has the ability to make a normal course issuer bid (“NCIB”) to purchase for cancellation a portion of the outstanding 6.75% convertible debentures expiring December 31, 2021, as well as the renewal of Just Energy common shares, respectively. Under each NCIB, Just Energy could have purchased debentures and common shares representing 10% of the outstanding public float at close of business February 28, 2018 up to daily and total limits. These shares may be purchased during the year starting March 19, 2018 and ending March 15, 2019. For the three months ended September 30, 2018, Just Energy had purchased $nil of common shares through the NCIB program, compared to $nil purchased in the prior year.

 

Details of issued and outstanding shareholders’ capital are as follows:

 

         Six months ended
Sept. 30, 2018
           Year ended
March 31, 2018
 
   Shares  Amount  Shares  Amount
Common shares:            
             
Issued and outstanding                    
Balance, beginning of period   148,394,152   $1,079,055    147,013,538   $1,070,076 
Share-based awards exercised   901,943    6,936    1,643,156    11,954 
Acquisition of subsidiary   -    -    1,415,285    8,966 
Repurchase and cancellation of shares   -    -    (1,677,827)   (11,941)
Balance, end of period   149,296,095   $1,085,991    148,394,152   $1,079,055 
                     
Preferred shares:                    
                     
Issued and outstanding                    
Balance, beginning of period   4,323,300   $136,771    4,040,000   $128,363 
Shares issued for cash   338,865    10,447    283,300    9,260 
Preferred shares issuance cost   -    (234)   -    (852)
Balance, end of period   4,662,165   $146,984    4,323,300   $136,771 
                     
Shareholders' capital   153,958,260   $1,232,975    152,717,452   $1,215,826 

 

13.REPORTABLE BUSINESS SEGMENTS

 

Just Energy’s reportable segments include the following: Consumer Energy and Commercial Energy. Just Energy has aggregated the operating segments into these reportable segments on the basis that the operating segments share economic characteristics. These characteristics include the nature of the product and services sold, the distribution methods, and the type of customer class and regulatory environment.

 

Transactions between operating segments are in the normal course of operations and are recorded at the exchange amount. Allocations made between segments for shared assets or allocated expenses are based on the number of residential customer equivalents in the respective segments.

 

29

 

JUST ENERGY GROUP INC.
NOTES TO THE INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

For the six months ended September 30, 2018

(unaudited in thousands of Canadian dollars, except where indicated and per share amounts)

 

 

Management monitors the operating results of its business units separately for the purpose of making decisions about resource allocation and performance assessment. Segment performance is evaluated based on operating profit or loss and is measured consistently with operating profit or loss in the consolidated financial statements. Just Energy is not considered to have any key customers.

 

Corporate and shared services report the costs related to management oversight of the business units, public reporting and filings, corporate governance and other shared services functions.

 

For the three months ended September 30, 2018:

 

   Consumer
division
   Commercial
division
   Corporate
and shared
services
division
   Consolidated 
Sales  $593,608   $363,235   $-   $956,843 
Gross margin   125,246    48,093    -    173,339 
Administrative expenses   23,254    11,659    23,595    58,508 
Selling and marketing expenses   36,516    20,233    -    56,749 
Depreciation of property, plant and equipment   904    56    -    960 
Amortization of intangible assets   4,624    371    -    4,995 
Other operating expenses   22,955    2,923    -    25,878 
Operating profit (loss) for the period  $36,993   $12,851   $(23,595)  $26,249 
Finance costs                  (20,123)
Change in fair value of derivative instruments and other                  (23,932)
Other income                  2,768 
Provision for income taxes                  (6,412)
Loss for the period                 $(21,450)
Capital expenditures  $10,381   $1,187   $-   $11,568 

 

30

 

JUST ENERGY GROUP INC.
NOTES TO THE INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

For the six months ended September 30, 2018

(unaudited in thousands of Canadian dollars, except where indicated and per share amounts)

 

 

For the three months ended September 30, 2017:

 

     Consumer
division
     Commercial
division
      Corporate
and shared
services
division
     Consolidated  
             
Sales  $504,705   $347,222   $-   $851,927 
Gross margin   107,387    35,276    -    142,663 
Administrative expenses   18,073    10,446    18,287    46,806 
Selling and marketing expenses   40,643    17,934    -    58,577 
Depreciation of property, plant and equipment   909    76    -    985 
Amortization of intangible assets   3,852    479    -    4,331 
Other operating expenses (recovery)   16,033    (554)   -    15,479 
Operating profit (loss) for the period  $27,877   $6,895   $(18,287)  $16,485 
Finance costs                  (12,521)
Change in fair value of derivative instruments and other                  (70,923)
Other income                  203 
Recovery of income taxes                  1,833 
Loss for the period                 $(64,923)
Capital expenditures  $5,015   $2,470   $-   $7,485 

 

 

 

 

 

 

 

31

 

JUST ENERGY GROUP INC.
NOTES TO THE INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

For the six months ended September 30, 2018

(unaudited in thousands of Canadian dollars, except where indicated and per share amounts)

 

 

For the six months ended September 30, 2018:

 

 
 
 
 
  Consumer
division
   
 
  Commercial
division
   
 
  Corporate
and shared
services
division
   
 
  Consolidated  
             
Sales  $1,135,786   $697,514   $-   $1,833,300 
Gross margin   244,011    82,860    -    326,871 
Depreciation of property, plant and equipment   1,757    101    -    1,858 
Amortization of intangible assets   8,627    713    -    9,340 
Administrative expenses   43,400    21,171    49,619    114,190 
Selling and marketing expenses   70,204    37,088    -    107,292 
Other operating expenses   43,365    5,088    -    48,453 
Operating profit (loss) for the period  $76,658   $18,699   $(49,619)  $45,738 
Finance costs                  (36,463)
Change in fair value of derivative instruments and other                  (60,488)
Other income                  2,713 
Provision for income taxes                  (14,373)
Loss for the period                 $(62,873)
Capital expenditures  $19,563   $1,859   $-   $21,422 
                     
As at September 30, 2018                    
Total goodwill  $148,462   $154,522   $-   $302,984 
Total assets  $1,261,372   $408,608   $-   $1,669,980 
Total liabilities  $1,250,519   $283,158   $-   $1,533,677 

 

 

 

 

 

 

 

 

 

32

 

JUST ENERGY GROUP INC.
NOTES TO THE INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

For the six months ended September 30, 2018

(unaudited in thousands of Canadian dollars, except where indicated and per share amounts)

 

 

For the six months ended September 30, 2017:

 

 
 
 
 
  Consumer
division
   
 
  Commercial
division
   
 
  Corporate
and shared
services
division
   
 
  Consolidated  
             
Sales  $991,471   $708,162   $-   $1,699,633 
Gross margin   222,892    77,334    -    300,226 
Depreciation of property, plant and equipment   1,823    159    -    1,982 
Amortization of intangible assets   6,808    983    -    7,791 
Administrative expenses   33,316    18,411    43,710    95,437 
Selling and marketing expenses   79,632    37,021    -    116,653 
Other operating expenses   43,896    2,102    -    45,998 
Operating profit (loss) for the period  $57,417   $18,658   $(43,710)  $32,365 
Finance costs                  (24,511)
Change in fair value of derivative instruments and other                  39,694 
Other income                  1,802 
Provision for income taxes                  (4,964)
Profit for the period                 $44,386 
Capital expenditures  $10,372   $5,109   $-   $15,481 
                     
As at September 30, 2017                    
Total goodwill  $143,184   $148,441   $-   $291,625 
Total assets  $848,423   $428,386   $-   $1,276,809 
Total liabilities  $1,336,073   $209,090   $-   $1,545,163 

 

Sales from external customers

 

The revenue is based on the location of the customer.

 

 
 
 
 
 
 
  Three months
ended
Sept. 30, 2018
   
 
 
  Three months
ended
Sept. 30, 2017
   
 
 
  Six months
ended
Sept. 30, 2018
      Six months
ended
Sept. 30, 2017
 
Canada  $83,440   $77,312   $172,668   $160,691 
United States   720,868    637,793    1,334,157    1,272,305 
International   152,535    136,822    326,475    266,637 
Total  $956,843   $851,927   $1,833,300   $1,699,633 

 

 

 

 

33

 

JUST ENERGY GROUP INC.
NOTES TO THE INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

For the six months ended September 30, 2018

(unaudited in thousands of Canadian dollars, except where indicated and per share amounts)

 

 

Non-current assets

 

Non-current assets by geographic segment consist of property, plant and equipment and intangible assets and are summarized as follows:

 

     As at Sept. 30, 2018      As at March 31, 2018  
Canada  $207,706   $201,985 
United States   212,237    207,147 
International   13,838    11,687 
Total  $433,781   $420,819 

 

14.OTHER EXPENSES

 

(a)Other operating expenses

 

     Three months
ended
Sept. 30, 2018
     Three months
ended
Sept. 30, 2017
     Six months
ended
Sept. 30, 2018
     Six months
ended
Sept. 30, 2017
 
Amortization of other intangible assets  $4,995   $4,331   $9,340   $7,791 
Depreciation of property, plant and equipment   960    985    1,858    1,982 
Bad debt expense   24,384    13,763    45,184    29,035 
Share-based compensation   1,494    1,716    3,269    16,963 
   $31,833   $20,795   $59,651   $55,771 

 

(b)Employee benefits expense

 

 
 
 
 
 
 
  Three months
ended
Sept. 30, 2018
   
 
 
  Three months
ended
Sept. 30, 2017
   
 
 
  Six months
ended
Sept. 30, 2018
   
 
 
  Six months
ended
Sept. 30, 2017
 
Wages, salaries and commissions  $67,996   $56,447   $128,527   $112,618 
Benefits   11,692    6,193    16,573    12,503 
   $79,688   $62,640   $145,100   $125,121 

 

34

 

JUST ENERGY GROUP INC.
NOTES TO THE INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

For the six months ended September 30, 2018

(unaudited in thousands of Canadian dollars, except where indicated and per share amounts)

 

 

15.EARNINGS (LOSS) PER SHARE

 

 
 
 
 
 
 
  Three months
ended
Sept. 30, 2018
   
 
 
  Three months
ended
Sept. 30, 2017
   
 
 
  Six months
ended
Sept. 30, 2018
   
 
 
  Six months
ended
Sept. 30, 2017
 
BASIC EARNINGS (LOSS) PER SHARE                    
Profit (loss) as per consolidated statement of income  $(21,385)  $(68,864)  $(62,762)  $34,994 
Dividend to preferred shareholders - net of tax   2,374    2,062    4,717    4,275 
Earnings (loss) available to shareholders   (23,759)   (70,926)   (67,479)   30,719 
Basic weighted average shares outstanding   149,247,715    146,821,112    148,862,333    146,941,860 
Basic earnings (loss) per share available to shareholders  $(0.16)  $(0.48)  $(0.45)  $0.21 
                     
DILUTED EARNINGS (LOSS) PER SHARE                    
Earnings (loss) available to shareholders  $(23,759)  $(70,926)  $(67,479)  $30,719 
Adjustment for dilutive impact of convertible debentures   -    -    -    2,088 
Adjusted earnings (loss) available to shareholders  $(23,759)  $(70,926)  $(67,479)  $32,807 
Basic weighted average shares outstanding   149,247,715    146,821,112    148,862,333    146,941,860 
Dilutive effect of:                    
Restricted share grants   2,377,279    2,884,809    2,704,346    2,866,591 
Deferred share grants   136,508    101,294    125,905    97,465 
Convertible debentures   39,574,831    38,804,494    39,574,831    38,804,494 
Shares outstanding on a diluted basis   191,336,333    188,611,709    191,267,415    188,710,410 
Diluted earnings (loss) per share available to shareholders  $(0.16)  $(0.48)  $(0.45)  $0.17 

 

16.DIVIDENDS AND DISTRIBUTION

 

For the three months ended September 30, 2018, a dividend of $0.125 (2017 - $0.125) per common share was declared by Just Energy. This dividend amounted to $18,657 (2017 - $18,349), which was approved by the Board of Directors and paid out during the period. For the six months ended September 30, 2018, dividends of $0.25 (2017 - $0.25) per common share were declared and paid by Just Energy. This amounted to $37,206 (2017 - $36,725), which was approved by the Board of Directors and paid out during the period.

 

For the three months ended September 30, 2018, a distribution of $0.125 (2017 - $0.125) per common share for share grants was declared by Just Energy. This distribution amounted to $443 (2017 - $313), which was approved by the Board of Directors and distributed during the period. For the six months ended September 30, 2018, distributions of $0.25 (2017 - $0.25) per common share for share grants were declared and paid by Just Energy. This amounted to $968 (2017 - $711), which was approved by the Board of Directors and distributed during the period.

 

35

 

JUST ENERGY GROUP INC.
NOTES TO THE INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

For the six months ended September 30, 2018

(unaudited in thousands of Canadian dollars, except where indicated and per share amounts)

 

 

For the three months ended September 30, 2018, a dividend of US$0.53125 (2017 - US$0.53125) per preferred share was declared by Just Energy. This dividend amounted to $3,230 (2017 - $2,806), which was approved by the Board of Directors and paid out during the period. For the six months ended September 30, 2018, dividends of US$1.0625 (2017 - US$1.0625) per preferred share were declared and paid by Just Energy. This amounted to $6,418 (2017 - $5,815), which was approved by the Board of Directors and paid out during the period.

 

17.COMMITMENTS AND GUARANTEES

 

Commitments for each of the next five years and thereafter are as follows:

 

As at September 30, 2018

 

  

 

Less than 1

year

 

    1–3 years      4–5 years      More than 5 years      Total  
Premises and equipment leasing  $2,618   $7,773   $7,775   $7,700   $25,866 
Gas, electricity and non-commodity contracts   1,026,658    1,747,709    326,348    99,395    3,200,110 
   $1,029,276   $1,755,482   $334,123   $107,095   $3,225,976 

 

Just Energy has entered into leasing contracts for office buildings and administrative equipment. These leases have a leasing period of between one and eight years. No purchase options are included in any major leasing contracts. 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.

 

On October 9, 2018, Just Energy announced that it has entered into a Multi-Year Contingent Business Interruption Insurance Agreement (the “Insurance”).

 

The Insurance primarily complements Just Energy’s robust risk management program and is intended to mitigate the impacts to the Company due to, among other things, natural disasters, such as Hurricane Harvey and the January 2018 winter freeze in Texas.

 

The Insurance provides up to US$25 million of insured limit per event, US$50 million per year and US$225 million of limit over an 80-month term, covering risks such as loss of income due to natural perils, sabotage, terrorism including cyber-attack, increased cost of supply from damage to supply and distribution infrastructure, interruption due to damage to customer property, losses in excess of Just Energy’s weather derivative program recoveries, and any unforeseen or unplanned weather related loss.

 

 

36

 

JUST ENERGY GROUP INC.
NOTES TO THE INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

For the six months ended September 30, 2018

(unaudited in thousands of Canadian dollars, except where indicated and per share amounts)

 

 

Guarantees

 

Pursuant to separate arrangements with Westchester Fire Insurance Company, Travelers Casualty and Surety Company of America, Berkley Insurance Company and Charter Brokerage LLC, Just Energy has issued surety bonds to various counterparties including states, regulatory bodies, utilities and various other surety bond holders in return for a fee and/or meeting certain collateral posting requirements. Such surety bond postings are required in order to operate in certain states or markets. Total surety bonds issued as at September 30, 2018 amounted to $57.9 million.  

 

As at September 30, 2018, Just Energy had total letters of credit outstanding in the amount of $89.4 million (Note 10(a)).

 

18.COMPARATIVE INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

Certain figures in the comparative interim condensed consolidated financial statements have been reclassified from statements previously presented to conform to the presentation of the current year’s interim condensed consolidated financial statements.

 

37.

 

 

Exhibit 99.2

 

Management’s discussion and analysis

– November 7, 2018

 

The following Management’s Discussion and Analysis (“MD&A”) is a review of the financial condition and operating results of Just Energy Group Inc. (“Just Energy” or the “Company”) for the three and six months ended September 30, 2018. This MD&A has been prepared with all information available up to and including November 7, 2018. This MD&A should be read in conjunction with Just Energy’s unaudited interim condensed consolidated financial statements (“Interim Financial Statements”) for the three and six months ended September 30, 2018. The financial information contained herein has been prepared in accordance with International Financial Reporting Standards (“IFRS”), as issued by the International Accounting Standards Board. All dollar amounts are expressed in Canadian dollars unless otherwise noted. Quarterly reports, the annual report and supplementary information can be found on Just Energy’s corporate website at www.justenergygroup.com. Additional information can be found on SEDAR at www.sedar.com or on the U.S. Securities and Exchange Commission’s website at www.sec.gov.

 

Company overview

 

Founded in Canada in 1997, Just Energy is a leading consumer company focused on essential needs, including electricity and natural gas commodities; on health and well-being, through products such as water quality and filtration devices; and on utility conservation, bringing energy efficient solutions and renewable energy options to consumers. Currently operating in the United States, Canada, the United Kingdom, Germany, Ireland and Japan, Just Energy serves residential and commercial customers. Just Energy is the parent company of Amigo Energy, EdgePower Inc., Filter Group Inc., Green Star Energy, Hudson Energy, Interactive Energy Group, Just Energy Advanced Solutions, Tara Energy, and terrapass.

 

 

For a more detailed description of Just Energy’s business operations, refer to the “Operations overview” section on page 6 of this MD&A.

 

Forward-looking information

 

This MD&A may contain forward-looking statements and information, including guidance for Base EBITDA for the fiscal year ending March 31, 2019. 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, general economic, business and market conditions, the ability of management to execute its business plan, levels of customer natural gas and electricity consumption, extreme weather conditions, rates of customer additions and renewals, rates of customer attrition, fluctuations in natural gas and electricity prices, interest and exchange rates, actions taken by governmental authorities including energy marketing regulation, increases in taxes and changes in government regulations and incentive programs, changes in regulatory regimes, results of litigation and decisions by regulatory authorities, competition, the performance of acquired companies and dependence on certain suppliers. Additional information on these and other factors that could affect Just Energy’s operations, financial results or dividend levels is included in Just Energy’s Annual Information Form and other reports on file with Canadian securities regulatory authorities which can be accessed through the SEDAR website at www.sedar.com or by visiting EDGAR on the SEC’s website at www.sec.gov.

 

1.

Key terms

 

“5.75% convertible debentures” refers to the $100 million in convertible debentures issued by Just Energy to finance the purchase of Fulcrum Retail Holdings, LLC, issued in September 2011. The convertible debentures were fully redeemed on March 27, 2018. See “Debt and financing for operations” on page 29 for further details.

 

“6.5% convertible bonds” refers to the US$150 million in convertible bonds issued in January 2014, which mature on July 29, 2019. Net proceeds were used to redeem Just Energy’s outstanding $90 million convertible debentures and pay down Just Energy’s line of credit. See “Debt and financing for operations” on page 29 for further details.

 

“6.75% $160M convertible debentures” refers to the $160 million in convertible debentures issued in October 2016, which have a maturity date of December 31, 2021. Net proceeds were used to redeem Just Energy’s outstanding senior unsecured notes on October 5, 2016 and $225 million of its 6.0% convertible debentures on November 7, 2016. See “Debt and financing for operations” on page 29 for further details.

 

“6.75% $100M convertible debentures” refers to the $100 million in convertible debentures issued in February 2018, which have a maturity date of March 31, 2023. Net proceeds were used to redeem the 5.75% convertible debentures on March 27, 2018. See “Debt and financing for operations” on page 29 for further details.

 

“8.75% loan” refers to the US$250 million non-revolving multi-draw senior unsecured term loan facility entered into on September 12, 2018, which has a maturity date of September 12, 2023. US$97 million was drawn. Net proceeds were used to fund a tender offer for Just Energy’s outstanding 6.5% convertible bonds due July 2019, and for general corporate purposes, including to pay down the Company’s credit facility. See “Debt and financing for operations” on page 29 for further details.

 

“Attrition” means customers whose contracts were terminated prior to the end of the term either at the option of the customer or by Just Energy.

 

“Customer count” refers to an individual customer rather than to an RCE (see key term below).

 

“Failed to renew” means customers who did not renew expiring contracts at the end of their term.

 

“Gross margin per RCE” refers to the energy gross margin realized on Just Energy’s RCE customer base, including 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.

 

“Maintenance capital expenditures” means the necessary cash expenditures required to maintain existing operations at functional levels.

 

“Preferred shares” refers to the 8.50%, fixed-to-floating rate, cumulative, redeemable, perpetual preferred shares that were initially issued at a price of US$25.00 per preferred share in February 2017. The cumulative feature means that preferred shareholders are entitled to receive dividends at a rate of 8.50% on the initial offer price, as and if declared by our Board of Directors.

 

“RCE” means residential customer equivalent, which is a unit of measurement equivalent to a customer using, as regards natural gas, 2,815 m3 (or 106 GJs or 1,000 Therms or 1,025 CCFs) of natural gas on an annual basis and, as regards electricity, 10 MWh (or 10,000 kWh) of electricity on an annual basis, which represents the approximate amount of gas and electricity, respectively, used by a typical household in Ontario, Canada, including commercial brokerage sales.

 

Non-IFRS financial measures

 

Just Energy’s unaudited interim condensed consolidated financial statements are prepared in accordance with IFRS. The financial measures that are defined below do not have a standardized meaning prescribed by IFRS and may not be comparable to similar measures presented by other companies. These financial measures should not be considered as an alternative to, or more meaningful than, net income (loss), cash flow from operating activities and other measures of financial performance as determined in accordance with IFRS; however, the Company believes that these measures are useful in providing relative operational profitability of the Company’s business.

 

2.

EBITDA

 

“EBITDA” refers to earnings before finance costs, income taxes, depreciation and amortization. EBITDA is a non-IFRS measure that reflects the operational profitability of the business.

 

Base EBITDA

 

“Base EBITDA” refers to EBITDA adjusted to exclude the impact of mark to market gains (losses) arising from IFRS requirements for derivative financial instruments, as well as reflecting an adjustment for share-based compensation and non-controlling interest. This measure reflects operational profitability as the non-cash share-based compensation expense is treated as an equity issuance for the purposes of this calculation, as it will be settled in shares, the mark to market gains (losses) are associated with supply already sold in the future at fixed prices and the mark to market gains (losses) of weather derivatives are not yet realized. Also included in Base EBITDA are gains and losses from the Company’s portfolio of equity investments and acquisitions which are presented in the Company’s unaudited interim condensed consolidated statements of income.

 

Just Energy ensures that customer margins are protected by entering into fixed-price supply contracts. Under current IFRS, the customer contracts are not marked to market; however, there is a requirement to mark to market the future supply contracts. This creates unrealized gains (losses) depending upon current supply pricing. Management believes that these short-term mark to market gains (losses) do not impact the long-term financial performance of Just Energy, and management has therefore excluded them from the Base EBITDA calculation.

 

Funds from operations

 

Funds from Operations (“FFO”) refers to the cash flow generated by current operations. FFO is calculated by Just Energy as gross margin adjusted for cash items including administrative expenses, selling and marketing expenses, bad debt expenses, finance costs, corporate taxes, capital taxes and other cash items. FFO also includes a seasonal adjustment for the gas markets in Ontario, Quebec, Manitoba and Michigan in order to include cash received from LDCs for gas not yet consumed by end customers.

 

base Funds from operations

 

Base Funds from Operations (“Base FFO”) refers to FFO reduced by capital expenditures purchased to maintain productive capacity. Capital expenditures to maintain productive capacity represent the capital spend relating to capital and intangible assets.

 

Base Funds from Operations Payout Ratio

 

The payout ratio for Base FFO means dividends declared and paid as a percentage of Base FFO.

 

Embedded gross margin

 

“Embedded gross margin” is a rolling five-year measure of management’s estimate of future contracted energy and product gross margin. The energy marketing embedded gross margin is the difference between existing energy customer contract prices and the cost of supply for the remainder of the term, with appropriate assumptions for RCE attrition and renewals. The product gross margin is the difference between existing value-added product customer contract prices and the cost of sales. It is assumed that expiring contracts will be renewed at target margin renewal rates.

 

Embedded gross margin indicates the margin expected to be realized from existing customers. It is intended only as a directional measure for future gross margin. It is not discounted to present value nor is it intended to take into account administrative and other costs necessary to realize this margin.

 

3.

Financial highlights

For the three months ended September 30

(thousands of dollars, except where indicated and per share amounts)

 

   Fiscal 2019   % increase
(decrease)
   Fiscal 2018 
Sales  $956,843    12%  $851,927 
Gross margin   173,339    22%   142,663 
Administrative expenses   58,508    25%   46,806 
Selling and marketing expenses   56,749    (3)%   58,577 
Finance costs   20,123    61%   12,521 
Loss1   (21,450)   67%   (64,923)
Loss per share available to shareholders - basic and diluted   (0.16)        (0.48)
Dividends/distributions   22,330    4%   21,468 
Base EBITDA2   37,261    81%   20,548 
Base Funds from Operations2   26,223    241%   7,683 
Payout ratio on Base Funds from Operations2   85%         279% 

1Loss includes the impact of unrealized gains (losses), which represents 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 realizable impact of mark to market gains and losses. 

2 See “Non-IFRS financial measures” on page 2.

 

Just Energy’s gross margin increased 22% to $173.3 million in the quarter ended September 30, 2018 mainly due to improved pricing power in North America and increased international sales activities. Sales revenue increased 12% to $956.8 million during the three months ended September 30, 2018.

  

Base EBITDA was $37.3 million, an increase of 81% as compared to the second quarter of fiscal 2018 due to the significant improvement in gross margin, offset by higher bad debts and an increase in administrative expenses to support the growth initiatives.

  

Administrative expenses increased 25% to support talent acquisition and retention, investment in process improvements and operational efficiencies, and ongoing business acquisition activities. The Company continues its efforts to reduce administrative expenses through greater automation and consolidation of support activities. A recent decision made by the lower court on the Kevin Flood, et al. v. Just Energy Marketing Group, et al. case confirmed that the Company is not legally liable for the claims against it, which resulted in a reversal of $4.0 million in legal expenses for the three months ended September 30, 2018. Selling and marketing expenses decreased 3% compared to the prior comparable quarter due to the capitalization of upfront commission expenses and the reduction of non-commission selling expenses due to the consolidation of regional sales offices and diversification of sales channels.

  

Finance costs increased by 61% in the second quarter, as compared to the prior comparable quarter, primarily driven by the premium and fees associated with the partial redemption of the 6.5% convertible bonds, higher collateral related costs associated with Texas electricity markets and interest expense from the increased utilization of the credit facility and higher interest rates.

 

4.

Financial highlights

For the six months ended September 30

(thousands of dollars, except where indicated and per share amounts)

 

       % increase     
   Fiscal 2019   (decrease)   Fiscal 2018 
Sales  $1,833,300    8%  $1,699,633 
Gross margin   326,871    9%   300,226 
Administrative expenses   114,190    20%   95,437 
Selling and marketing expenses   107,292    (8)%   116,653 
Finance costs   36,463    49%   24,511 
Profit (loss) for the period1   (62,873)   (242)%   44,386 
Profit (loss) per share available to shareholders - basic   (0.45)        0.21 
Profit (loss) per share available to shareholders - diluted   (0.45)        0.17 
Dividends/distributions   44,592    3%   43,251 
Base EBITDA2   64,541    22%   53,057 
Base FFO2   44,337    57%   28,191 
Payout ratio on Base FFO2   101%        153%
Embedded gross margin2   2,336,200    45%   1,615,000 
Customer count   1,633,000    3%   1,580,000 
Total ending RCEs   4,164,000    2%   4,087,000 
Total gross RCE additions   619,000    12%   555,000 
Total net RCE additions (reductions)   1,000    NMF3    (124,000)

1Profit (loss) includes the impact of unrealized gains (losses), which represents 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 realizable impact of mark to market gains and losses. 

2 See “Non-IFRS financial measures” on page 2. 

3 Not a meaningful figure.

 

For the six months ended September 30, 2018, sales were $1.8 billion and gross margin was $326.9 million, 8% and 9% higher, respectively, than the prior comparable period. Base EBITDA amounted to $64.5 million, an increase of 22% from the first six months of fiscal 2018. The growth in Base EBITDA was largely attributable to the significant improvement in gross margin driven by the improved pricing power, offset by higher bad debt provisions and an increase in administrative expenses to support growth initiatives.

  

Administrative expenses increased 20% from the prior comparable period. The Company continues its efforts to reduce administrative expenses through greater automation and consolidation of support activities. A recent decision made by the lower court on the Kevin Flood, et al. v. Just Energy Marketing Group, et al. case confirmed that the Company is not legally liable for the claims against it, which resulted in a reversal of $4.0 million in legal expenses for the three months ended September 30, 2018. Selling and marketing expenses decreased 8% compared to the prior comparable period as a result of the capitalization of upfront commission expenses and the reduction of non-commission selling expenses due to the consolidation of regional sales offices and diversification of sales channels. Finance costs increased 49%, primarily driven by the premium and fees associated with the partial redemption of the 6.5% convertible bonds, higher collateral related costs associated with Texas electricity markets and interest expense from the increased utilization of the credit facility and higher interest rates.

 

Embedded gross margin amounted to $2,336.2 million as of September 30, 2018, an increase of 45% compared to the embedded gross margin as of September 30, 2017, as pricing optimization efforts expanded to a broader customer base. The embedded gross margin includes $45.2 million from Filter Group Inc., which was acquired by Just Energy on October 1, 2018.

 

 

5.

Operations overview

 

CONSUMER DIVISION

 

The sale of gas and electricity to customers with annual consumption equivalent to 15 RCEs or less is undertaken by the Consumer division. Marketing of the energy products of this division is primarily done through retail, online marketing and door-to-door marketing. Consumer customers make up 43% of Just Energy’s RCE base, which is currently focused on longer-term price-protected, flat-bill and variable rate product offerings as well as JustGreen products. To the extent that certain markets are better served by shorter-term or enhanced variable rate products, the Consumer division’s sales channels also offer these products.

 

Developments in connectivity and convergence and changes in customer preferences have created an opportunity for Just Energy to provide value added products and service bundles connected to energy. As a conservation solution, smart thermostats are offered as a value-added product with commodity contracts, but were also sold previously as a stand-alone unit. The smart thermostats are manufactured and distributed by ecobee Inc., a company in which Just Energy holds a 7.8% fully diluted equity interest. In addition, Just Energy has also expanded its product offering in some markets to include air filters, LED light bulbs and residential smart irrigation controllers. On October 1, 2018, Just Energy added home water filtration systems to its line of consumer products and service offerings, through the acquisition of Filter Group Inc.

 

COMMERCIAL DIVISION

 

Customers with annual consumption equivalent to over 15 RCEs are served by the Commercial division. These sales are made through three main channels: brokers; door-to-door commercial independent contractors; and inside commercial sales representatives. Commercial customers make up 57% of Just Energy’s RCE base. Products offered to Commercial customers can range from standard fixed-price offerings to “one off” offerings, which are tailored to meet the customer’s specific needs. These products can be either fixed or floating rate or a blend of the two, and normally have a term of less than five years. Gross margin per RCE for this division is lower than it is for the Consumer division, but customer aggregation costs and ongoing customer care costs per RCE are lower as well. Commercial customers have significantly lower attrition rates than those of Consumer customers.

 

In addition, the Commercial division also provides value added products and services which include LED lighting, smart building controls, monitoring and alerts, bill audits, smart thermostats, tariff analysis, energy insights and energy procurement.

 

ABOUT THE ENERGY MARKETS

 

Natural gas

 

Just Energy offers natural gas customers a variety of products ranging from month-to-month variable-price contracts to five-year fixed-price contracts. Gas supply is purchased from market counterparties based on forecasted Consumer and small Commercial RCEs. For larger Commercial customers, gas supply is generally purchased concurrently with the execution of a contract. Variable rate products allow customers to maintain competitive rates while retaining the ability to lock into a fixed price at their discretion. Flat-bill products offer customers the ability to pay a fixed amount per period regardless of usage or changes in the price of the commodity.

 

The LDCs provide historical customer usage which, when normalized to average weather, enables Just Energy to purchase the expected normal customer load. Furthermore, Just Energy mitigates exposure to weather variations through active management of the gas portfolio, which involves, but is not limited to, the purchase of options including weather derivatives. Just Energy’s ability to successfully mitigate weather effects is limited by the degree to which weather conditions deviate from normal. To the extent that balancing requirements are outside the forecasted purchase, Just Energy bears the financial responsibility for fluctuations in customer usage. To the extent that supply balancing is not fully covered through active management or the options employed, Just Energy’s realized customer gross margin may be reduced or increased depending upon market conditions at the time of balancing.

 

6.

Territory Gas delivery method
Ontario, Quebec, Manitoba and Michigan The volumes delivered for a customer typically remain constant throughout the year. Sales are not recognized until the customer actually consumes the gas. During the winter months, gas is consumed at a rate that is greater than delivery, resulting in accrued gas receivables, and, in the summer months, deliveries to LDCs exceed customer consumption, resulting in gas delivered in excess of consumption. Just Energy receives cash from the LDCs as the gas is delivered, which is even throughout the year.
Alberta, British Columbia, New York, Illinois, Indiana, Ohio, California, Georgia, Maryland, New Jersey, Pennsylvania, Saskatchewan, the United Kingdom, Germany and Ireland The volume of gas delivered is based on the estimated consumption and storage requirements for each month. Therefore, the amount of gas delivered in the winter months is higher than in the spring and summer months. Consequently, cash flow received from most of these markets is greatest during the third and fourth (winter) quarters, as cash is normally received from the LDCs in the same period as customer consumption.

 

 

Electricity

 

Just Energy services various territories in Canada, the U.S., the U.K., Germany, Ireland and Japan with electricity. A variety of electricity solutions are offered, including fixed-price, flat-bill and variable-price products on both short-term and longer-term electricity contracts. Some of these products provide customers with price-protection programs for the majority of their electricity requirements. Just Energy uses historical usage data for all enrolled customers to predict future customer consumption and to help with long-term supply procurement decisions. Flat-bill products offer a consistent price regardless of usage.

 

Just Energy purchases power supply from market counterparties for residential and small Commercial customers based on forecasted customer aggregation. Power supply is generally purchased concurrently with the execution of a contract for larger Commercial customers. Historical customer usage is obtained from LDCs, which, when normalized to average weather, provides Just Energy with expected normal customer consumption. Furthermore, Just Energy mitigates exposure to weather variations through active management of the power portfolio, which involves, but is not limited to, the purchase of options, including weather derivatives.

 

Just Energy’s ability to successfully mitigate weather effects is limited by the degree to which weather conditions deviate from normal. To the extent that balancing power purchases are outside the acceptable forecast, Just Energy bears the financial responsibility for excess or short supply caused by fluctuations in customer usage. Any supply balancing not fully covered through customer pass-throughs, active management or the options employed may impact Just Energy’s gross margin depending upon market conditions at the time of balancing.

 

JustGreen

 

Customers also have the ability to choose an appropriate JustGreen program to supplement their natural gas and electricity contracts, providing an effective method to offset their carbon footprint associated with the respective commodity consumption.

 

JustGreen programs for gas customers involve the purchase of carbon offsets from carbon capture and reduction projects. JustGreen’s electricity product offers customers the option of having all or a portion of their electricity sourced from renewable green sources such as wind, solar, hydropower or biomass, via power purchase agreements and renewable energy certificates. Additional green products allow customers to offset their carbon footprint without buying energy commodity products and can be offered in all states and provinces without being dependent on energy deregulation.

 

7.

Just Energy currently sells JustGreen gas and electricity in eligible markets across North America. Of all Consumer customers who contracted with Just Energy in the trailing 12 months, 38% took JustGreen for some or all of their energy needs. On average, these customers elected to purchase 73% of their consumption as green supply. For comparison, as reported for the trailing 12 months ended September 30, 2017, 30% of Consumer customers who contracted with Just Energy chose to include JustGreen for an average of 75% of their consumption. As of September 30, 2018, JustGreen now makes up 9% of the Consumer gas portfolio, compared to 13% a year ago. JustGreen makes up 13% of the Consumer electricity portfolio, compared to 14% a year ago.

 

Value added products and services

 

In addition to JustGreen, Just Energy also provides energy management solutions to both Consumer and Commercial customers in the form of value-added products and services. These products and services may be sold in a bundle with natural gas or electricity, or on a stand-alone basis.

 

Just Energy’s Commercial energy management solutions include LED lighting as well as monitoring and control solutions for lighting and HVAC systems. The solutions include custom design, procurement, utility rebate management, and management of installation services that may be purchased outright or financed through third parties.

 

Energy management for the Consumer business focuses on energy efficient products. Just Energy has strategic partnerships to facilitate the purchase and support of smart thermostats, air filter replacements, home warranty products, and smart irrigation controllers. Customers may also redeem points earned through Just Energy’s Perks loyalty program for a wide variety of free or discounted energy saving products.

 

As of October 1, 2018, Just Energy announced the closing of the acquisition of Filter Group Inc. As a result, Just Energy will add home water filtration systems to its line of consumer product and service offerings.

 

ADOPTION OF NEW STANDARDS

 

Adoption of IFRS 15, Revenue from Contracts with Customers

 

On April 1, 2018, Just Energy adopted an accounting policy that provides a standardized guideline for entities to account for revenue arising from contracts with customers. Following the terms of the standardization, Just Energy has applied IFRS 15 using the modified retrospective method. As such, transition adjustments have been recognized through equity as at April 1, 2018.

 

Upon the adoption of IFRS 15, incremental costs to obtain a contract with a customer within the Consumer business in North America are capitalized if these costs are expected to be recovered. Similar costs pertaining to other segments have been capitalized in the past. Accordingly, Just Energy has changed its accounting policy to allow for capitalizing all upfront-sales commissions, incentives, and third party verification costs paid based on customer acquisition that met the criteria for capitalization. Just Energy has elected, under the practical expedient, to recognize incremental costs of obtaining a contract as an expense when incurred if the amortization period of the asset is less than one year. These expenses are deferred and amortized over the average customer relationship period (which is estimated to be between two and five years based on historical blended attrition rates, inclusive of expected renewal periods by region).

 

The adjustments to Just Energy’s current year financial statements included an increase of $28.4 million in the opening balance of customer acquisition costs that was capitalized – an increase in deferred income tax liabilities of $7.6 million and an opening retained earnings adjustment of $20.8 million. The year to date fiscal year 2019 impact of the new standard increased net earnings by approximately $19.4 million pre-tax.

 

The new accounting standard has no impact on the economics of our business. That being stated, the implementation of IFRS 15 will result in a change in timing of the recognition of commission expenses but has no effect on the cash flows of Just Energy. Historically, FFO was more aligned to the recognition of operating cash flow. IFRS 15 disconnects these two, with operating cash flow lagging behind FFO, as incremental customer acquisition costs are paid upfront and capitalized.

  

8.

For a further description of the impact of the accounting policy change, refer to the interim condensed consolidated financial statements for the period ended September 30, 2018.

 

Adoption of IFRS 9, Financial Instruments

 

Effective April 1, 2018, Just Energy adopted IFRS 9, Financial Instruments (“IFRS 9”). IFRS 9 introduces a new expected lifetime credit loss impairment model which replaces the existing incurred loss impairment model under IAS 39.

 

Under the previous accounting standard, IAS 39, a collective allowance for losses was recorded on trade receivables when a loss event had occurred as at, or prior to, the balance sheet date. An incurred loss event provides objective evidence to establish an allowance for loss against these receivables. IAS 39 did not allow the recognition of any allowance for losses expected in the future if a loss event had not yet occurred on the balance sheet date.

 

Under IFRS 9, Just Energy is required to apply a lifetime expected credit loss model, where credit losses that are expected to transpire in future years, irrespective of whether a loss event has occurred or not, as at the balance sheet date, are provided for. The expected lifetime credit loss is calculated based on the weighted average expected cash collected shortfall against the carrying value of the receivable and unbilled revenue and considers reasonable and supportable information about past events, current conditions, and forecasts of future events and economic conditions that may impact the credit profile of the receivables.

 

IFRS 9 requires that forward-looking indicators are considered when determining the impact on credit risk and measuring lifetime expected credit losses and are incorporated in the risk parameters as relevant. Based on the analysis performed by Just Energy, it was determined that the following forward-looking indicators could have an impact on the credit performance of the receivables, and they were considered in its calculation of the allowance for losses:

 

-Interest rate;

-Unemployment;

-Commodity prices; and

-Consumer Price Index.

 

IFRS 9 does not require the restatement of comparative period financial statements except in limited circumstances related to aspects of hedge accounting. Just Energy made the decision not to restate comparative period financial information and has recognized any measurement differences between the previous carrying amounts and the new carrying amounts on April 1, 2018, through an adjustment to opening retained earnings, net of deferred tax implications.

  

In Alberta, Texas, Illinois, California, Michigan, Delaware, Ohio, Georgia, the U.K. and Ireland, as well as for Interactive Energy Group and Just Green U.S., Just Energy has customer credit risk, and therefore, credit review processes have been implemented to perform credit evaluations of customers and manage customer default.

  

Just Energy’s bad debt expense as a percentage of revenue for these markets, as determined under IAS 39, for the three months ended September 30, 2017, was 2.2%.

  

Similarly, under IFRS 9, for the period ended September 30, 2018, the same metric was determined to be 2.75%. This increase in the bad debt expense as a percentage of revenue was not indicative of a change in the expected recovery value of the underlying consumer debts receivable but rather a function of extending the allowance for expected lifetime credit losses to provide for expected future losses over a longer future time frame as required under IFRS 9. The standard required that a provision for expected lifetime credit losses be calculated for unbilled revenues, as they meet the definition of a contract asset under IFRS 15, whereas previously, under IAS 39, these receivables would not have a provision under the incurred loss model.

  

9.

In the remaining markets, the 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 LDCs failing to deliver payment to Just Energy is minimal.

  

The following table summarizes the transition adjustment required to adopt IFRS 9 as at April 1, 2018 for the markets above.

  

(in thousands of dollars)  IAS 39 carrying amount as at March 31, 2018   Transition adjustment   IFRS 9 carrying amount as at April 1, 2018 
Trade receivables  $395,730   $(11,237)  $384,493 
Unbilled revenues  $301,577   $(12,399)  $289,178 

  

Due to the transition from an incurred loss model to a future expected lifetime credit loss model as required under IFRS 9, if forecast of events or change of economic condition are expected to give rise to change of the credit loss, the bad debt expenses will be changed prior to the occurrence of the future event. This would theoretically result in a greater bad debt expense and a corresponding decrease in reported net income when compared to net income reported under IAS 39 in situations where the future expected event leads to deterioration of the credit loss.

 

EBITDA

For the three months ended September 30

(thousands of dollars)

 

   Fiscal 2019   Fiscal 2018 
Reconciliation to interim condensed consolidated statements of income          
Loss for the period  $(21,450)  $(64,923)
Add (subtract):          
Finance costs   20,123    12,521 
Provision for (recovery of) income taxes   6,412    (1,833)
Depreciation and amortization   6,685    6,085 
EBITDA  $11,770   $(48,150)
Add (subtract):          
Change in fair value of derivative instruments and other   23,932    70,923 
Share-based compensation   1,494    1,716 
Loss (profit) attributable to non-controlling interest   65    (3,941)
Base EBITDA  $37,261   $20,548 
           
Gross margin per interim condensed consolidated financial statements  $173,339   $142,663 
Add (subtract):          
Administrative expenses   (58,508)   (46,806)
Selling and marketing expenses   (56,749)   (58,577)
Bad debt expense   (24,384)   (13,763)
Amortization included in cost of sales   730    769 
Other income   2,768    203 
Loss (profit) attributable to non-controlling interest   65    (3,941)
Base EBITDA  $37,261   $20,548 

  

10.

EBITDA

For the six months ended September 30

(thousands of dollars)

 

   Fiscal 2019   Fiscal 2018 
Reconciliation to interim condensed consolidated statements of income          
Profit (loss) for the period  $(62,873)  $44,386 
Add:          
Finance costs   36,463    24,511 
Provision for income taxes   14,373    4,964 
Depreciation and amortization   12,710    11,319 
EBITDA  $673   $85,180 
Add (subtract):          
Change in fair value of derivative instruments and other   60,488    (39,694)
Share-based compensation   3,269    16,963 
Loss (profit) attributable to non-controlling interest   111    (9,392)
Base EBITDA  $64,541   $53,057 
           
Gross margin per interim condensed consolidated financial statements  $326,871   $300,226 
Add (subtract):          
Administrative expenses   (114,190)   (95,437)
Selling and marketing expenses   (107,292)   (116,653)
Bad debt expense   (45,184)   (29,035)
Amortization included in cost of sales   1,512    1,546 
Other income   2,713    1,802 
Loss (profit) attributable to non-controlling interest   111    (9,392)
Base EBITDA  $64,541   $53,057 

 

For the three months ended September 30, 2018, Base EBITDA amounted to $37.3 million, an increase of 81% from $20.5 million in the prior comparable quarter due to the significant improvement in gross margin, offset by higher bad debts and an increase in administrative expenses to support the growth initiatives.

 

Sales increased by 12% for the quarter ended September 30, 2018. Gross margin was up 22% to $173.3 million due to improved pricing power in North America and increased international sales activities. Administrative expenses increased by 25% to support talent acquisition and retention, investment in process improvements and operational efficiencies, and ongoing business acquisition activities. The Company continues its efforts to reduce administrative expenses through greater automation and consolidation of support activities. A recent decision made by the lower court on the Kevin Flood, et al. v. Just Energy Marketing Group, et al. case confirmed that the Company is not legally liable for the claims against it, which resulted in a reversal of $4.0 million in legal expenses for the three months ended September 30, 2018. Selling and marketing expenses for the three months ended September 30, 2018 were $56.7 million, down from $58.6 million reported in the prior comparable quarter as a result of the capitalization of upfront commission expenses and the reduction of non-commission selling expenses due to the consolidation of regional sales offices and diversification of sales channels.

 

Finance costs were $20.1 million, an increase of 61% from the prior comparable quarter, primarily driven by the premium and fees associated with the partial redemption of the 6.5% convertible bonds, higher collateral related costs associated with Texas electricity markets and interest expense from the increased utilization of the credit facility and higher interest rates.

 

Bad debt expense was $24.4 million for the three months ended September 30, 2018, an increase of 77% from $13.8 million recorded for the prior comparable quarter. For the six months ended September 30, 2018, the bad debt expense was $45.2 million, an increase of 56% compared with the prior comparable period. The increase for the three and six months ended September 30, 2018 was partially driven by higher revenue. Bad debt expense represents approximately 2.5% of revenue in the jurisdictions where the Company bears the credit risk, up from the 2.2% of revenue reported for the three months ended September 30, 2017.

 

11.

For the six months ended September 30, 2018, sales increased by 8% to $1.8 billion and the gross margin increased by 9% to $326.9 million. Base EBITDA amounted to $64.5 million for the first six months of fiscal 2019, an increase of 22% from $53.1 million in the prior comparable period. The growth in Base EBITDA is largely attributable to the significant improvement in gross margin, offset by higher bad debts and an increase in administrative expenses to support the growth initiatives.

 

Administrative expenses increased by 20% from $95.4 million to $114.2 million, during the six months ended September 30, 2018. The Company continues its effort to reduce its administrative costs through greater automation and consolidation of support activities. A recent decision made by the lower court on the Kevin Flood, et al. v. Just Energy Marketing Group, et al. case confirmed that the Company is not legally liable for the claims against it, which resulted in a reversal of $4.0 million in legal expenses for the three months ended September 30, 2018. For the six months ended September 30, 2018, selling and marketing expenses decreased by 8% from the prior comparable period as a result of the capitalization of upfront commission expenses and the reduction of non-commission selling expenses due to the consolidation of regional sales offices and diversification of sales channels.

 

For more information on the changes in the results from operations, please refer to “Gross margin” on page 21 and “Administrative expenses” and “Selling and marketing expenses”, which are further explained on pages 23 and 24.

 

EMBEDDED GROSS MARGIN

Management's estimate of the future embedded gross margin is as follows:

(millions of dollars)

 

   As at   As at   Sept 30 vs.   As at   2018 vs. 
   Sept. 30,   June 30,   June 30   Sept. 30,   2017 
   2018   2018   variance   2017   variance 
Future embedded gross margin  $2,336.2   $1,963.6    19%  $1,615.0    45%

 

Management’s estimate of the future embedded gross margin within its customer contracts amounted to $2,336.2 million as of September 30, 2018, an increase of 19% compared to the embedded gross margin as of June 30, 2018 resulting from Just Energy’s pricing optimization efforts, offset by a negative foreign exchange impact of $27.6 million from the weakening U.S. dollar on the exchange rate assumptions. The embedded gross margin increased 45% from $1,615.0 million reported as of September 30, 2017, as pricing optimization efforts expanded to a broader customer base.

  

The embedded gross margin includes $45.2 million from Filter Group Inc., which was acquired by Just Energy on October 1, 2018.

  

Embedded gross margin indicates the margin expected to be realized over the next five years from existing customers. It is intended only as a directional measure for future gross margin. It is not discounted to present value nor is it intended to take into account administrative and other costs necessary to realize this margin. As our mix of customers continues to reflect a higher proportion of Commercial volume, the embedded gross margin may, depending on currency rates, grow at a slower pace than customer growth; however, the underlying costs necessary to realize this margin will also decline.

 

12.

Funds from Operations

For the three months ended September 30

(thousands of dollars)

 

   Fiscal 2019   Fiscal 2018 
Cash inflow from operating activities  $(66,960)  $9,186 
Add (subtract):          
Changes in working capital   93,698    5,442 
Loss (profit) attributable to non-controlling interest   65    (3,941)
Tax adjustment   1,930    821 
Funds from Operations  $28,733   $11,508 
Less: Maintenance capital expenditures   (2,510)   (3,825)
Base Funds from Operations  $26,223   $7,683 
           
Gross margin per interim condensed consolidated financial statements  $173,339   $142,663 
Add (subtract):          
Administrative expenses   (58,508)   (46,806)
Selling and marketing expenses   (56,749)   (58,577)
Bad debt expense   (24,384)   (13,763)
Current income tax provision   520    (3,893)
Adjustment required to reflect net cash receipts from gas sales   5,125    4,881 
Amortization included in cost of sales   730    769 
Other income   2,768    203 
Financing charges, non-cash   5,978    2,585 
Finance costs   (20,123)   (12,521)
Other non-cash adjustments   37    (4,033)
Funds from Operations  $28,733   $11,508 
Less: Maintenance capital expenditures   (2,510)   (3,825)
Base Funds from Operations  $26,223   $7,683 
Base Funds from Operations payout ratio   85%   279%