RISK MANAGEMENT POLICY FOR THE JUST ENERGY GROUP OF COMPANIES FEBRUARY 2014

Transcription

1 RISK MANAGEMENT POLICY FOR THE JUST ENERGY GROUP OF COMPANIES FEBRUARY 2014

2 TABLE OF CONTENTS ARTICLE 1 RISK POLICY OUTLINE Scope, Objective and Purpose Background and Management Philosophy Management Risk Committee and Risk Management Structure Approved Management and Mitigation Activities Limits Company and Individual Trader Kickback Prohibitions Repercussion of violations and remedial actions Limit Violation Notification Requirements Risk Measurement Controls Reporting Policy Amendment Authority ARTICLE 2 RISK CONTROLS, MEASUREMENTS AND METRICS New Product/Structure/Strategy Approval Counterparty Credit Approval & Scoring Customer Credit Approval and Scoring Measurements and Metrics ARTICLE 3 MAJOR POLICY GUIDELINES Risk Limits Tenors (Duration or length of time of transacted Instruments) Authorities Limits i-

3 ARTICLE 1 RISK POLICY OUTLINE 1.1 Scope, Objective and Purpose This document establishes the risk management policy related to the purchasing, price, volume management and related activities for commodity, foreign exchange and interest rates of the Just Energy Group ( JE ). Procurement and position management activities are primarily comprised of natural gas, electricity, electricity capacity, natural gas pipeline and storage capacity and green energy alternative purchases to meet Retail Sales commitments and activities associated with foreign exchange and interest rate hedging. It is acknowledged that these commodity procurement activities are integrally associated with customer credit risk, particularly commercial customers. This document also establishes the risk management limits associated with the aggregation and monitoring of customers where they are separately identifiable for reporting purposes. It is also acknowledged that these commodity procurement activities are integrally associated with counterparty credit risk with the suppliers of the commodity contracts. JE is exposed to risks associated with the potential losses that may arise from a counterparty s failure to honour its obligations. JE s credit exposure is predominantly a function of the amount of cash required to secure replacement supplies of a commodity in the event of non-performance by a counterparty. It is also acknowledged that these commodity procurement activities, along with competitor pricing and utility prices, directly impact customer pricing. JE establishes targets and thresholds for acceptable margins within the company. Commodity market pricing is a direct feed for establishing appropriate pricing to meet these targets. (Further information on this may be found in the Risk Procedures document.) Senior management is committed to an effective risk management function to ensure appropriate risk management and oversight. Risk management encompasses the acceptance and management of risk as well as the elimination or mitigation of risk. Through effective governance, clear protocols and required reporting provided herein, the senior executives of the Company and the Board of Directors can confirm that: The financial risk taken on by business activities as they relate to commodity, interest rates and foreign exchange is in accordance with their financial expectations as set out in the business plan, forecast or other internal documents as well as the MD&A and AIF. All approved policies and controls with regard to identified risks related to commodity, interest rates and foreign exchange are clear, represent best practices and are complied with. This document also serves to define the role of the Management Risk Committee in commodity hedging (including weather hedges), hedging foreign exchange, hedging interest rates, setting 2

4 hedge position guidelines, establishing strategy and controls around position management and establishing authorization requirements for hedges. This document does not address any areas other than those mentioned above. For clarity, regulatory, legal, collections and other risks are not addressed by this policy. This document, including its appendices, shall be revisited annually, or as material changes occur to the business to ensure that it is current with evolution of the organization as well as methods and approaches in risk management. The provisions of previous versions of this document will remain in effect until an updated version is fully adopted by JE s Board. New provisions in subsequent versions of this document will not be applied retroactively unless this is explicitly stated in the Policy update. The head of the Risk Department is responsible for maintaining the master copy of this document and ensuring that updates are captured in a timely manner. Any public dissemination of these documents is also the responsibility of the head of the Risk Department. 1.2 Background and Management Philosophy It is the intent of JE to transact in the energy market place in a manner that mitigates the risks inherent in supplying energy commodities to retail customers. For clarity, JE recognizes that there are risks inherent in the energy markets and strives to minimize these but recognizes that complete elimination of all such risks is unachievable. Retail customers require variable quantities of energy commodities due to usage patterns that are weather, economic, process, product or schedule dependent. JE s hedge strategy encompasses a portion that is volume driven and a portion that is margin driven. The difference between JE s volume or price of supply and expected retail sale commitments are subject to the limits set forth in Article 3.5 of this policy. The Company also has foreign exchange and interest rate exposures subject to the limits set forth in Article 3.5 of this policy. As a result, the Company may enter into hedges in the following situations: In order to protect customer contract economics from subsequent fluctuations in commodity prices In order to protect customer contract economics from subsequent variability that may alter the expected customer load based on normal weather, To hedge the weather related and other volumetric or margin risks for gas and power risks, books and portfolios. The Supply Department will assess the risk exposure in conjunction with each transaction and buy appropriate instruments to limit this exposure in accordance with the approved structures and strategies. In order to protect the company from variability in foreign exchange, In order to protect the company from variability in interest rates, and 3

5 In order to protect the company from transaction and liquidity risk, where scarcity in opportunity to purchase may drive decisions on timing and quantity 1.3 Management Risk Committee and Risk Management Structure General Authorization The Management Risk Committee has the general authority to develop appropriate policies and procedures to ensure an appropriate risk control environment. The Management Risk Committee has been delegated this authority from the Board of Directors and the Board Risk Committee. Composition The Management Risk Committee shall, at a minimum, include the SVP, Corporate Risk Officer, the CFO, the COO, and the Commercial Division President. Responsibilities The Management Risk Committee has responsibility for setting the day to day risk management policies including implementation and maintenance of an appropriate risk management organization structure. The Management Risk Committee is responsible for establishing procedures to implement this policy, designating authorized traders and the trade administrator, ensuring an appropriate structure to monitor the status of hedge positions and strategies, ensuring an appropriate control environment and communicating with the Board of Directors through the Board Risk Committee. At a minimum, there will be an independent review of all transactions and reports prescribed by this policy through the Risk Department including ensuring appropriate transaction approvals, market source information and monitoring of positions in relation to approved parameters. The Supply Department is responsible for managing the commodity supply commitments of JE. This includes the forecasting of customer load, purchase of commodity and the hedging of market risk. This also includes managing the foreign exchange requirements as they relate to hedging currency related to US dollar denominated commodity purchases for Canadian expected retail requirements and managing the storage assets that arise through utility scheduling and balancing. It also includes developing a method for transacting and then executing on corporate foreign exchange requirements as communicated by Treasury. Finally, it includes the mitigation and avoidance of risk through adherence to this policy and the guidelines contained herein. Structuring is responsible for calculating and communicating retail prices to regions/divisions for them to establish customer pricing that maintains margin targets. The Treasury group is responsible for managing the foreign exchange requirements as they relate to corporate cash flows together with interest rate commitments of JE and overall management of related credit and collateral requirements. As foreign exchange requirements are identified (inclusive of any commodity related requirements as communicated by Supply), they are approved as to quantum and required timing then communicated to Supply for application of the transaction strategy and execution. The Credit and Collections group and Commercial Structuring group are responsible for establishing and maintaining a corporate customer credit policy, oversight that there are 4

6 appropriate internal measures for the processing of customer credit checks as well as monitoring the creditworthiness of customers on an ongoing basis. For clarity, these areas are responsible for customer risk and separate credit policies exist to manage consumer and commercial customer credit risk; this policy addresses responsibilities and limits associated with commodity counterparties. Reporting The Risk Department reports to the Board of Directors through the Board Risk Committee. The Risk Department also reports directly to the CFO. With respect to transactions for interest and foreign exchange, the Risk Department shall report directly to the COO. 5

7 The Operational and Control Structure is as follows: Board of Directors Board Risk Committee Executive Committee Management Risk Committee EVP Commercial COO Risk Office CFO Commercial Division COO Supply Treasury Credit & Collections Commercial Structuring Consumer Structuring (The dotted line indicates the flow of risk related items. Not all reporting follows these lines.) Roles and responsibilities of these individuals/committees may be found in the Risk Procedures document. Meetings The Management Risk Committee will meet no less than monthly to review at least past, current and proposed commodity price and volume risk, foreign exchange risk and interest rate risk management activities in addition to review of limit excesses, policy breaches, new product/structure proposals and existing product/structure reviews, however discussions at the meetings shall not be limited to these topics. This shall be supplemented by regular reporting that is disseminated to the members of the Management Risk Committee. Outside regularly scheduled meetings, members may recommend hedging instruments and structures for consideration and approval. Prior to implementation, these proposals are subject to the approval conditions of Article 1.5 and Appendix III. 6

8 At all meetings of the Management Risk Committee, a majority of its members is necessary to constitute a quorum for the transaction of business. Any action of the Management Risk Committee must be authorized by a majority of the members present. Between scheduled meetings, the Management Risk Committee is authorized to take action by written consent of a majority of its members. Minutes of meetings will be kept by the SVP, Corporate Risk Officer to document decisions of the committee and made available within a week of each meeting. 1.4 Approved Management and Mitigation Activities JE may enter into Spot Purchases, Forwards, Simple Financial Puts and Calls, Fixed for Floating Financial derivatives (Swaps) and other instruments as noted in Appendices I and II as appropriate for meeting forecast retail obligations and within limits as established in Article 3.5. Transactions are only permitted if in compliance with approved structures and strategies. At least once per year, management will look to the upcoming winter and, if warranted, develop a strategy to address risks in the natural gas portfolio for approval by the Board Risk Committee in advance of implementation. The same shall be done for power for the upcoming summer. 1.5 Limits Company and Individual Trader Individual limits may be established and revised by the Management Risk Committee on the basis of permitted risk tolerance. Risk tolerances of the Company are established by this policy. Any change to established risk tolerances and associated limits as described by this policy require prior approval of the Board Risk Committee which shall report any change to the Board of Directors at its next meeting. For clarity, under no circumstances may the limits established by this policy be overridden without prior approval of the Board Risk Committee. The Management Risk Committee is responsible for ensuring the Company is within risk tolerances established by this policy. The Management Risk Committee may establish lower limits to manage risk within Board established limits. The Management Risk Committee can, at any time, establish additional reporting requirements to ensure Company limit compliance. Term transactions that are directly related to a specific customer may be transacted without advance approval, however the associated customer load forecast must be uploaded to EMS by the end of the next business day to support the back to back purchase. Should the transaction be to cover several customers, documentation of customers names and contract numbers shall be uploaded. Transaction approval for the customer load associated with updates that do not include assumption changes will be implicit with the approval of the load update. All other term trades shall be approved by the SVP, Corporate Risk Officer and the SVP, Supply unless the SVP Supply is trading in which case it will be approved by the COO. A standing approval may be granted to accommodate other customer aggregation. Under no circumstances may these limits be overridden. For clarity, should an individual trader wish to transact beyond his/her established limits or constraints for a balancing transaction, additional approvals must be obtained in advance of the trade. The aggregate level of trader limits shall at no time exceed the Company limit. The Board Risk Committee will be informed of individual trader limits; however approval of these limits is implicit in the delegation of operational controls to the 7

9 Management Risk Committee. Appendix III details the levels of authority required for an individual to transact on behalf of the Company. 1.6 Kickback Prohibitions All staff regardless of division are prohibited from receiving compensation including cash, gifts, favourable bid/ask spreads or other profit-sharing arrangements from counterparties as part of the corporate Code of Business Conduct and Ethics Policy. During the course of business, there will be various supplier events. For clarity, these events would be considered a kickback if they were the cause for granting additional business to one counterparty over another where the result is detrimental to the JE Group of companies. For example, if commodity price quotes between two counterparties are significantly different, the trader should be awarding the contract to the counterparty with the best price, all other factors being equal. Where two trades are similar, consideration shall be made as to the overall counterparty risk of the book and grant the trade to alleviate counterparty concentration risk. If there is ever a question as to whether a supplier event could pose a conflict under this article, the Legal Department or Risk Management Department must be consulted. 1.7 Repercussion of violations and remedial actions Limit violations can fall into one of two categories; a compliance violation or a marketsourced/changed situation violation. Compliance Violations Compliance violations are the result of intentional or unintentional violation of the limits established by this policy such as trading without appropriate authorization. All compliance violations must be reported within three business days of discovery to the Chair of the Board Risk Committee together, if appropriate, with a recommendation for remedial action. Any suspected cases of non-compliance by a member of the Management Risk Committee or executive management shall be reported to Internal Audit or the Chair of the Board Risk Committee directly within three business days of discovery. Any instance of non-compliance may also be reported through the Whistleblower website Failure to report a compliance violation is in itself considered a compliance violation. The Board Risk Committee has final authority as to the remedial action. Such remedial action may include consequences up to and including termination of the individual responsible. Market sourced/changed situation violations Market sourced/changed situation violations are usually the result of factors beyond the control of the Supply and Risk Departments such as forward curve movement and the realization of estimated forecast marketing run rates. The change in these factors may occur after a valid trade has been appropriately approved and transacted. In addition, these types of violations can arise from improvement of modeling; particularly forecast modeling. Market sourced/changed situation violations require reporting to the Board Risk Committee at its regularly scheduled meetings together with a review of the factors resulting in the violation. If the review indicates a fundamental change in market factors impacting the Company on an on-going basis, recommendations for policy revision may be developed and recommended. 8

10 The Supply Department, Treasury, Credit and Collections groups as well as individuals from the commercial division have the responsibility for complying with the terms of the Risk Policy. The Risk Department has the responsibility of identifying and reporting breaches that occur. The Management Risk Committee shall determine whether recommendations for remedial action are appropriate. The Board Risk Committee shall make the final decision as to the recommended remedial action. 1.8 Limit Violation Notification Requirements The following limit violations must be brought to the attention of the Board of Directors through the Board Risk Committee together with a proposed/enacted resolution to the violation (see Article 2.4 and Appendix IV for definitions): Open positions (long or short) in excess of defined limits (Volumetric Risk) Expected unrealized customer margin less than defined limits (Margin Risk, Earnings Risk) Market value of open basis position in excess of defined limits (Basis Risk) VaR in excess of defined limits (Volume, Price and Volatility Exposure Risk) Expected margin less MTM of open position in excess of defined limits (Margin Risk) Counterparty exposure in excess of defined limits (Credit Risk) Contracting of instruments that have not been approved by the Management Risk Committee (Structure Risk) Contracting with counterparties that have not been approved by the Management Risk Committee (Credit and Operational Risk) Proposed resolutions may include, but are not limited to: Eliminating the position through entering an offsetting purchase or sale Holding the position for a certain period of time, with the approval of the Management Risk Committee Remedial actions to be pursued with the trader as recommended and approved by the Management Risk Committee 1.9 Risk Measurement JE measures its volume risk based on open positions relative to normal weather until 15 days before delivery (at which time the actual weather forecast is used) and forecast retail load. JE measures its margin risk based on customer margin relative to the internally marked price curves. Reporting will focus on the quantification of the open positions volumetrically, using Market value and VaR. Margin risks will also be reported. These measurements will be performed at a 9

11 portfolio level for purposes of this policy however the Management Risk Committee, Supply Department and Risk Management may choose to prepare measurements at a more granular level for day to day monitoring purposes. Reports will be generated at a minimum weekly with daily preparation preferred. Reports shall accommodate at least the required measurements of this policy. The Supply Department will continually evaluate the effectiveness of its risk mitigation efforts overall and, as necessary, review on a more granular level and recalibrate models or approach as necessary. Should this effort result in a proposed change to strategy, it shall be approved in accordance with the requirements of this policy Controls No leveraged contracts JE may not enter into any contracts that effectively increase the contract quantity or the contract price through use of linear or non-linear factors that effectively increase the quantity of the position at the time of the transaction or are triggered by a future event. Master Agreements required for Over-the-Counter Wholesale Contracts All over-the-counter wholesale contracts that JE enters into are subject to contract provisions with counterparties contained within master agreements (or long form contracts that set out terms and conditions usually found in master agreements) unless otherwise approved by the Management Risk Committee. Wholesale market contracts only for which a fair value can reliably be obtained The use of any transaction for which a fair market quotation cannot be obtained or which cannot be valued reliably is prohibited. For clarity, in illiquid markets such as those associated with Just Green, as long as a third party price quotation can be provided, the requirement of this control will be met. Acceptable models for valuation should identify and quantify risks associated with the transaction and demonstrate that the transaction is financially sound. Limited Basis Risk Trades are limited to supply or generation points and JE sales areas that are connected. Contracts Only by Authorized traders Only persons who have been specifically authorized by the Management Risk Committee to execute contracts may do so. Daily Reporting of Contracts: Traders must record all new contracts and related transactions and all modifications to existing contracts in the EMS system by the end of the business day on which the contract or modification was executed. Independent reviews: On an ongoing basis and in conjunction with internal audit there will be independent testing of compliance with the procedures and controls implemented to comply with this policy. 10

12 Contract review: On an ongoing basis, the Legal Department will review new standard contracts. Any nonstandard contract or contracts, including confirmations, prepared by counterparties should be approved by the Legal Department prior to execution. Confirmation of all contracts Risk Department will confirm all transactions. All unresolved disputed transactions will be reported to the Management Risk Committee. Recording of execution of contracts: All transactions must be executed either on an online exchange platform or via written agreements, via a recorded telephone or via instant messaging. The recording of telephone lines or instant messaging is not intended to replace the confirmation process; rather it will serve as an additional back-up in case of disputes that are not resolved via the normal confirmation procedure. Additional controls and reporting possible: The Management Risk Committee may establish any additional controls and reporting requirements that it believes are appropriate. Additional limitations possible The Management Risk Committee may establish any additional limitations that it believes are appropriate Reporting Board of Directors The Board of Directors, through the Board Risk Committee, will receive reports on the Company s measured risk exposure at each regularly convened meeting. These reports shall, at a minimum, exhibit the risk exposure to the end of each commodity portfolio measured in accordance with the Major Policy Guidelines of Article 3 and the related Appendices. The measured risk exposure for each of foreign exchange and interest rates will also be reported. The following items shall be measured in accordance with Article 3.5 and require specific reference at the regularly scheduled meetings of the Board Risk Committee; (i) status at the time of the current report, and (ii) any violations experienced since the last report, and (iii) remediation taken of: Open positions (long or short) on volume basis VaR of the portfolio A calculation showing the net expected Margin compared to minimum requirements 11

13 The overall mark to market of the supply contracts by counterparty together with any violation of counterparty limits, including permitted counterparties, whether intentional or unintentional. The market value of the open basis positions Any unintentional violations of contracting limits, including permitted instruments and tenors The following requires immediate reporting: Any intentional unapproved violations of contracting limits, including permitted instruments Limit violations wherein management recommends leaving the violation uncorrected for a period of time. These specific items shall be prepared for at least each commodity portfolio and also for foreign exchange and interest rates as applicable. The Board Risk Committee Chair is granted the authority to approve exception transactions together with management recommendations between Board Risk Committee meetings. Should the Board Risk Committee Chair determine that full Board Risk Committee approval is required; a special meeting of the Board Risk Committee will be held to process such approval. Executive Committee The Executive Committee will receive reports on commodity, volume and margin risk, foreign exchange risk and interest rate risk management activities including volumes hedged and the market value of hedges in such form and at such times as the Executive Committee shall determine. The Risk Department and Supply Department shall independently prepare their reports for dissemination as requested. At a minimum, the hedge position over the entire portfolio shall be reviewed monthly. In addition, the Executive Committee shall receive all internal audit findings relating to commodity price risk, foreign exchange risk and interest rate risk management issues at such time as they are prepared. Any breach of the existing Major Policy Guidelines of Article 3.5 shall be reported to the Executive Committee and the Board Risk Committee. Disclosure Committee The Management Risk Committee is obliged to report any material matter which could impact public disclosure to the Disclosure Committee for consideration. Management Risk Committee The Management Risk Committee shall receive regular reporting at least at the level required for the Board of Directors but may determine more detailed reporting is appropriate. In addition, the Management Risk Committee shall receive the results of other analyses such as stress testing, back testing, risk adjusted performance, Cash Flow at Risk or Value at Risk that may be prepared 12

14 by either the Supply or Risk Departments. The Risk Department will endeavour to provide reporting at least weekly or more frequently. All limit violations are reported immediately to members of the Management Risk Committee through the dissemination of the regular report Policy Amendment Authority Amendments to this document will be required from time to time. Any changes to this document must be approved by JE s Board Risk Committee through delegation. All approved changes to this document will require: Communication of changes to affected employees Review of those changes and giving individuals time to ask questions in regards to changes made Acknowledgement in writing by each employee covered under the risk management policy that he or she has o Received communication of the changes o Confirmed understanding of requirements of the associated changes to the risk management policy o Agreed to fully comply with the updated risk management policy This last point shall be evidenced through an annual acknowledgement form. 13

15 ARTICLE 2 RISK CONTROLS, MEASUREMENTS AND METRICS 2.1 New Product/Structure/Strategy Approval For purposes of this document: Instrument: a new type of financial or physical derivative not previously considered by this policy. Structure: utilizes approved instruments in a new configuration to reduce risk in either the supply portfolio or in proposing products for commercial customers. (For example, the Illinois hedging structure when it was first implemented used physical and financial derivatives together in a way not previously applied by the Company but both the physical and financial derivatives were previously approved instruments for transaction.) Strategy an approach to the risks of the business wherein the key underlying goals of risk mitigation are changed. (For example, the goal of locking in the margin on contracts is changed to only locking in a portion, individual market hedging is changed to a portfolio approach or the goal of locking in foreign exchange over a single year is changed to locking in the rate over a longer tenor.) All new instruments, structures and strategies must be approved by the Management Risk Committee. The Board Risk Committee shall be informed of all new hedging strategies and any materially new instruments or structures. The Board Risk Committee shall be provided a presentation annually assessing the upcoming winter together with a proposed strategy as to how best mitigate risk within the gas portfolio. At the first meeting following the end of the winter season, an evaluation of the past winter strategy to the outcomes will also be presented. Likewise the Board Risk Committee shall be provided a presentation annually assessing the upcoming summer together with a proposed strategy as to how best mitigate risk within the power portfolio. At the first meeting following the end of the summer season, an evaluation of the past summer strategy to the outcomes will also be presented. 2.2 Counterparty Credit Approval & Scoring The retail organization is predominantly a purchaser of energy. It contracts for commodities to meet its retail sales requirements and closely aligns its supply purchases with these sales. The company also considers margin risk within its portfolios. Sales to counterparties are generally made to balance portfolio open positions and are short-term in nature. As a result, the Company has minimal receivables from counterparties at any given time and the majority of the commodity counterparty exposure is in the risk of future non-performance by a counterparty in a transaction where all or a portion of the price has been fixed. Total company exposure, 14

16 particularly where receivables are included, shall be contemplated in the limits assigned in these circumstances. JE s decision to enter into transactions with counterparties must include consideration of credit risk. JE generally limits its commodity transactions to entities with a high degree of financial viability which generally hold significant physical or contractual assets and are therefore able to enter the Intercreditor facility. JE seeks to conduct the majority of its commodity transactions with these suppliers while limiting transactions with smaller suppliers. JE must balance the need to acquire economically beneficial supplies while being assured of physical and financial performance by a counterparty. Subject to the exception of Article 3.5(iv), the Company may not transact with any counterparties below a Baa2 rating by Moody s, BBB by S&P, BBB by DBRS or the equivalent rating of other agencies without advance Board Risk Committee approval. Such approval must consider the associated limitations of the Credit Facility. Each counterparty must have an ISDA Master Swap Agreement or other approved master contract in place with the JE entity with which it is doing business. Any other agreement, such as a long form confirmation, requires Legal approval. Management Risk Committee approval is required for all collateral posting requirements associated with hedges to the extent that they are unique in nature. If collateral posting is according to formula within a master agreement or other regular and independently verifiable means such as is required by wire service operators, explicit Management Risk Committee approval is not required. 2.3 Customer Credit Approval and Scoring Customer credit policies are addressed by the Credit Policies that are monitored and maintained by Credit and Collections and the Commercial Structuring groups. The Risk Group obtains information for customers 1000RCEs or greater including: individual and overall aging remaining term and annual usage 2.4 Measurements and Metrics The limits of this policy are associated with a variety of measurements that require definition to ensure consistency and accuracy. All limits contemplate the overall position of JE regardless of how it is recorded internally (i.e. through a wholesale book, retail book, storage book or any other form of separation). The Company s commodity risk is generally segregated to its power portfolio and its gas portfolio. Where there are heat rate conversions, the supply and the associated contractual requirements shall be associated with the appropriate portfolio for measurement purposes. i.e. customer demand and heat rate will be contained within the power portfolio and the associated gas requirement together with any associated gas supply contracts in the gas portfolio. All supply and demand associated with carbon offsets and green generated power will be segregated 15

17 into separate JustGreen/JustClean gas and JustGreen/JustClean power portfolios respectively for measurement purposes. There are two key components of demand applicable to the gas, power and green portfolios. These are, customer flowing load and the variability imbedded within customer contracts (such as load following). In addition, the gas book has storage and other assets which also impact demand requirements. Variable load customers shall only be included into the fixed load position when a hedge is put in place (typically monthly but can be longer term). The load position shall also include relevant volumes associated with fixed price exposures of index customers. Pricing must reflect the month-ahead hedge along with market prices. Storage for index price customers shall be included in the positions according to the storage reporting and strategies regularly reviewed and agreed by the Management Risk Committee. Storage for variable price load shall be included in the position when a hedge is put in place. Total Expected Customer Requirements: This is the overall consumption that is forecast for a portfolio. It is comprised of: i. expected weather normalized consumption for customers under a fixed price contract with Just Energy inclusive of approved assumptions such as attrition, plus ii. iii. iv. expected weather normalized consumption for customers under a variable price contract for which fixed price supply has been procured and/or for which the price has been set, plus the forecast weather normalized consumption of customers for which Just Energy is purchasing supply to implement a sales, retention, re-contracting or renewal campaign, plus fuel requirements to ship expected weather normalized consumption of customers captured under (i), (ii), (iii) in addition to index customers, plus v. Basis requirement associated with index customers, plus vi. vii. Expected weather normalized consumption associated with customer options for which Just Energy has entered into a mitigating trade. Fixed price requirements from customer contracts that have revenue component linked to a commodity index i.e. Fixed Heat Rate customers, Index Rate Customers Total Expected Natural Gas Storage Requirements: This is the overall future natural gas storage injection (withdrawal) that is forecast for the portfolio. Each gas market has storage associated with it, however the method by which each utility allocates this storage is different. Regardless of how storage is allocated by the utility, it shall be separated from total customer requirements as defined above and tracked according to the requirements laid out 16

18 in this section and as such where this section refers to injection, it means both explicit and implied storage requirements communicated by the utility. Expected natural gas storage requirements are comprised of: i. expected injections for customers under fixed price contracts with Just Energy ii. iii. iv. the forecast injections for customers for which Just Energy is purchasing supply to implement sales, retention, or re-contracting campaigns, plus Anticipated injections for fixed price customers renewing a service agreement contract with Just Energy, plus Anticipated injections for index customers, plus v. Expected injections for variable price customers once a storage hedge is placed. Contracted Customer requirements: Weather normalized customer consumption for customers under contract with Just Energy net of any storage assets accumulated (which are tracked separately). Key variables in this forecast include actual consumption data, customer type, delivery pool, attrition and historical weather data. New Campaign Customer requirements: Forecast weather normalized consumption for anticipated additional customers for new sales campaigns for which supply has been or will shortly be purchased. The key variables in this forecast include those for contracted customer forecasts as well as marketing run rates. Open Position: An open position is calculated as a sum of customer weather normalized consumption, storage requirement and related contracted supply. Note that by default these calculations include the open basis position. The overall company open position shall be calculated using contracted customer requirements as well as forecast and contracted customer requirements inclusive of any options. Limits shall be applied to the position for which the underlying supply, including assets, has been purchased or allocated. Value at Risk VaR The maximum loss that will not be exceeded with a given probability (defined as the confidence level), over a given period of time. For purposes of this policy, the VaR results from taking the open position for the relevant measurement and calculating the dollar loss that is probable of occurring within a 99% confidence interval using current market volatilities and an assumption that the position will only be held for one day. For example, a value at risk of $10,000 under this method of calculation means that for one day in 100 (1% of the time), holding the open position for one day could result in a gain or loss of $10,000 or more using 17

19 market valuation. The VaR for each of the gas and power portfolios shall be consolidated with consideration of correlation to arrive at the overall VaR of the organization. Reporting Period VaR Reporting Period VaR calculates a VaR for each discrete reporting period open position. Reporting Period VaR is defined as Monthly VaR for current and next quarter, Quarterly VaR for remaining quarters in current year and all quarters in the following calendar year and Annual VaR for all remaining calendar years. Short Term VaR Short term VaR calculates a VaR over a limited period of time up to at most the upcoming three months. Mark to Market MTM : The mark to market calculation is a result of taking the relevant open position by month and multiplying it by the difference between the associated forward market price and the cost of the associated contract. For example, the mark to market for a counterparty will be a summation of the net contracted volumes with that counterparty (essentially the open position with that counterparty) at each delivery point multiplied by the difference between the associated market forward curve and the cost of the underlying contracts. Market Value: The market value is calculated by taking the open position and multiplying it the market price at each relevant delivery point. The base calculation for all portfolios shall start with the open position calculated by taking the net of the forecast consumption for contracted customers, forecast storage requirements and contracted supply inclusive of all options and applicable assets. The risk policy limits shall be applied by taking this base position and adding new campaign customer requirements and expected additional customer requirements for weather consumption for which underlying supply has been purchased. Differences to the base position will be measured. The largest factors that influence limits are weather, model risk (including but not limited to accuracy of assumptions), regulatory, market price, sales run rates and attrition. Results of calculations are heavily dependent upon the timing of the calculation and the accuracy of the assumptions around attrition. As a matter of course, Supply and Risk will stress test these factors as specified in the Risk Management Procedures document. ARTICLE 3 MAJOR POLICY GUIDELINES 3.1 Risk Limits The fundamental control over market risks inherent in JE s derivative portfolio is the imposition of risk limits. Risk limits are dollar denominated or volume based values that 18

20 define boundaries of permissible derivative purchase and sales activities as a result of sales requirements, foreign exchange, and interest rates and restrict unauthorized derivative purchase and sales activities. Risk limits are developed based on tolerances of management and the Board of Directors for margin impairment due to uncovered positions with influences from credit agreements and availability of the products. 3.2 Instruments The Company may elect to manage its commodity, foreign exchange and interest rate risks through derivative instruments. The use of derivative instruments is authorized for hedging activities only. Hedges may consist of multiple contracts which, in combination, reduce the Company s risk exposure. Hedges may only be transacted using the instruments outlined in this Article or the related appendices. The Company may not, at any time, write uncovered options to hedge its position without express approval by the Management Risk Committee. (For clarity, the sale of a previously purchased option or combination of options is permitted, at strike prices that may not match those of initial transaction. As well, the writing of an option that is covered by a customer option is permitted. However writing an entirely new option that is not covered is prohibited.) At no time is the sale or writing of an option to be considered a balancing transaction. Board approval is required for proposed new hedging strategies, regardless of whether the strategy employs instruments permitted under this policy. The Management Risk Committee must consider the availability of Treasury lines, cost benefit of each new hedging structure and strategy as it relates to both the risk being hedged and its impact on counterparty collateral requirements in its recommendations to the Board. The Company may elect to manage its commodity volume, and margin risks, foreign exchange risk and interest rate risk through the following instruments (noting that naming conventions may differ by market or counterparty): Future or forward contracts (physical or financial) Renewable Energy Certificates Carbon Emission Offset Credits Storage Assets Transportation and other Assets Swaps (physical, financial, fixed for floating, fixed for fixed, floating for floating) Spreads (spark, crack, etc.) Heat Rate (for index physical power) Options contracts ( any complex option contract must be approved in advance by the Management Risk Committee) Extraction contracts Transmission rights contracts Auction revenue rights Congestion revenue rights Power generation capacity contracts (supply or reserve) Weather derivatives (swaps and options) 19

21 Participating forwards See Appendix I for current permitted commodity hedge instruments and Appendix II for current permitted foreign exchange and interest rate hedge instruments. These instruments may be updated from time to time at the discretion of the Management Risk Committee provided such updated terms are in accordance with this policy. 3.3 Tenors (Duration or length of time of transacted Instruments) The overall term for Hedges in connection with any commodity risk except transportation shall not, without prior approval by the Board of Directors, exceed the term of the hedged item or portfolio. The overall term for Hedges in connection with foreign exchange or interest rate risk shall not, without prior approval by the Board of Directors, exceed the approved budget or outlook scenarios. To the extent that JE enters into Power Purchase Agreements ( PPA s), generation tolling agreements, storage capacity arrangements or ownership of natural gas assets, the hedges associated with these agreements shall be subject to review and approval of the Management Risk Committee. Any strategies associated with these agreements are subject to the requirements of Article Authorities The Management Risk Committee is responsible for coordinating authorization for trade execution within the limits set by the Board of Directors. Such authorization shall only be granted to those familiar with these risk policy guidelines. Increasing levels of authorization are required within the Company and are included in Appendix III together with the procedures required when authorities overlap. The Board Risk Committee Chair is granted the authority to approve exception transactions together with management recommendations between Board Risk Committee meetings. Should the Board Risk Committee Chair determine that full Board Risk Committee approval is required; a special meeting of the Board Risk Committee will be held to process such approval. 3.5 Limits The following are the limits for Just Energy. The Management Risk Committee may choose to measure risk at a more granular level and impose more restrictive limits than those set out below. (i) Commodity Price Risk (A) Ratio of Total Expected Customer Requirements 20

22 At no time shall the ratio of the Total Expected Customer Requirements to the Contracted Customer requirements be greater than 1.1:1. (B) At Risk Limit The company will not enter into open natural gas or power supply commitments that expose Just Energy to a dollar impact in excess of $2,500,000 in VaR as measured using the open position for the next 12 months in accordance with 2.5 of this Policy. (C) Storage Injections Requirements JE will comply with all injection and ratchet requirements of each of the utilities with which it interacts. (D) Storage Limit By October 31 of each year, the upcoming winter storage plan will be summarized for the Management Risk Committee and approval granted prior to its execution. (E) Natural gas Portfolio Position Limit Although the company manages its natural gas portfolio to a net zero supply/demand position based on normal weather, the company may enter into supply contracts which, over time, exceed or fall short of the estimated quantities of commodity required to cover natural gas requirements to its customers during the time period covered by the forecast load, primarily as a result of changed assumptions related to weather. Natural gas term markets get increasingly illiquid with the increase in tenor of the natural gas contract. Just Energy has set its volumetric limits to account for market liquidity and tradable wholesale products. During any single reporting period, the Company s natural gas open volumetric position inclusive of all options may not exceed or fall short of estimated normal weather customer requirements by greater than 9,000GJ/day. Reporting Period Limit for natural gas is defined as Monthly Limit for prompt month and any single month in the current and upcoming gas year and then per season gas strips thereafter (i.e. Nov-Mar and Apr- Oct). Should the Company have a stack and roll structure implemented that, when adjusted, is within this volume, it shall be reported without adjustment and noted as an approved exception. (F) Locational Natural gas Portfolio Basis Limit The company buys natural gas in bulk at liquid delivery points and covers geographical disparity with basis trades. During any single month for the upcoming 12 months, the natural gas open volumetric basis position may 21

23 not exceed or fall short of estimated normal weather customer requirements at each delivery point by greater than 10,000 GJ/Day except for the following delivery points that are considered liquid trading hubs and are allowed to hold open positions based on the following limits for any given month; AECO Nova Inventory Transfer NYMEX Henry Hub Empress NGI Chicago Dawn Station ,000 GJ/Day 100,000 mmbtu/day 25,000 GJ/Day 25,000 mmbtu/day 25,000 GJ/Day 25,000 mmbtu/day For purposes of all winter months in the prompt 12 months, delivery regions shall all be balanced to within 10,000GJ/day or mmbtu/day as applicable. For example, a delivery region of the Midwest is balanced by closing the basis from NYMEX to Nicor but the basis between Nicor and the remaining Midwest delivery points may not be yet closed. For purposes of the prompt month, all delivery points shall be balanced to within 10,000 GJ or mmbtu/day. (G) Financial Natural gas Portfolio Basis Limit At no time shall the absolute market value of the open position calculated using the open position s prices at each relevant delivery point less the absolute market value of the open position calculated using NYMEX of US prices or AECO for Canadian prices exceed $2M in the upcoming year or $5M in any fiscal year thereafter. (H) Natural Gas Expected Margin Limit During any single month, the Company s expected margin for natural gas (as quantified by the budgeting and forecasting group and determined in accordance with the Risk Management Procedures document) less the associated mark to market of the open position for that month shall not result in a loss of more than $350,000 for that month. (I) Customer Margin Limit At no time shall the expected average customer gross margin measured in accordance with the credit facility parameters for either gas or power for the upcoming 24 months be less than $135/RCE for residential customers and $50/RCE for commercial customers. (J) Financial Power Portfolio Basis Limit 22