SECOND QUARTER REPORT 2010

Transcription

1 SECOND QUARTER REPORT 2010 Q2 FORMERLY ENERGY SAVINGS INCOME FUND

2 HIGHLIGHTS FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2009, INCLUDED: Sales (seasonally adjusted) of million, up 46% year over year. _ Gross margin (seasonally adjusted) of million, up 74% year over year (43% per unit). _ Distributable cash after gross margin replacement of 52.3 million (0.39 per unit), 50% year over year (26% per unit). _ Distributable cash after all marketing expenses of 41.3 million (0.31 per unit), up 19% per unit. _ Net income of million (0.82 per unit), which includes the impact of the mark to market of financial instruments. _ Addition of 430,000 long-term customers through the Universal Energy Group acquisition. _ Gross customer additions through marketing of 140,000, the highest quarter in the history of Just Energy. _ Net customer additions of 36,000, up from 9,000 marketed additions in the second quarter of fiscal 2009 and 11,000 in the first quarter of fiscal _ Continued strong Green Energy Option ( GEO ) product sales, with 41% of new customers consuming an average of 78% GEO supply. _ Expect to declare a Special Distribution of 0.10 to 0.15 on December 31, JUST ENERGY INCOME FUND SECOND QUARTER REPORT

3 MESSAGE FROM THE CHIEF EXECUTIVE OFFICER MESSAGE FROM THE CHIEF EXECUTIVE OFFICER Fellow Unitholders, I would like to take this opportunity to describe to you the exceptional quarter Just Energy has just completed. Our staff has worked very hard to ensure the smooth merger of our business with that of our most recent acquisition, Universal Energy Group ( Universal or UEG ). Last quarter, I advised you that we expected that this would be an accretive acquisition over time and the signs of that accretion are evident in our results. The second quarter of fiscal 2010 continues to bear out the guidance that Rebecca MacDonald and I have been providing to the markets over the past years that Just Energy is a predictable, reliable, growth and income vehicle for investors. Businesses across all industry sectors have been greatly impacted by the recession in the last two quarters. However, the recession did not adversely effect our distributions. Just Energy has never missed or cut a distribution in its eightyear history. We comfortably maintained our distributions during these six months. In fact, our payout ratios for the first and second quarters were the lowest in the history of the company. Unlike hundreds of companies faced with the recession, we have not cut back our workforce. In the past year, we have almost doubled our salesforce. With respect to growth, our operating measures showed outstanding results. All our key financial measures grew substantially. There were two reasons for this: accretion from the acquisition of UEG and very successful marketing by our team of independent sales contractors. Q2 fiscal Q2 fiscal 2010 growth 2010 growth year over year per unit Sales 1 46% 21% Gross margin 1 74% 43% Distributable cash after margin replacement 50% 26% Distributable cash after marketing expenses 46% 19% Customers 29% 19% 1 Seasonally adjusted. We acquired Universal and its 430,000 long-term customers by issuing 16% of our units to their shareholders. Accordingly, if we are able to grow more than 16% year over year with no additional major changes, the transaction will be accretive. The table above shows our growth, which for the second quarter, the first quarter following the Universal acquisition, exceeds 16%. The first column shows nominal year over year growth and the second highlights growth per unit, which equates to actual accretion. Overall, our growth is far higher than 16% in every category. To date, the merger of Universal operations is proceeding smoothly. The consolidation of our administrative functions and elimination of overlap is well underway, and we will realize our target of 10 million in general and administrative cost savings by the end of the fiscal year. The combination of our two salesforces is also ahead of expectations as few key sales contractors were lost in the transition. Early results from our merged National Home Services ( NHS ) water heater division have also been positive. Customers added through marketing (thousands of dollars) The Universal acquisition was not the only driver of our exceptional growth in the second quarter. Our efforts to re-energize our salesforce continue to bear fruit. Gross 140 customer additions were 140,000, the highest total through marketing in the history of Just Energy. I want to congratulate our sales and marketing team on this important milestone. Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Fiscal 2007 Fiscal 2008 Fiscal 2009 Fiscal JUST ENERGY INCOME FUND SECOND QUARTER REPORT 2010

4 MESSAGE FROM THE CHIEF EXECUTIVE OFFICER Our net customer additions through marketing for the quarter were 36,000, again the highest total of any recent quarter. While this was up more than 200%, versus the comparable quarter of fiscal 2009 and the first quarter of fiscal 2010, it was adversely affected by continued high attrition in our foreclosure impacted U.S. natural gas markets. We saw a small improvement in this attrition for the quarter, moving from an annualized 31% to an annualized 28% and we are hopeful that this trend will continue. Attrition in our other markets was in line with our targets. Second quarter operating performance The tables below detail the operating results of the Just Energy Income Fund (the Fund ) for the three and six months ended September 30, Each of our measures sales, gross margin and distributable cash were at record levels. Our margin per customer remained strong aided by newly added customer margins of 204 per year, reflecting the very strong take-up of our Green Energy Option ( GEO ) product. As in the past, Just Energy has shown the ability to grow profitably regardless of economic conditions. The numbers below include operating losses at Terra Grain Fuels ( TGF ), our ethanol plant, and the start-up of NHS, our water heater sales and rental business. Both these businesses are expected to be self-financing by fiscal year-end, which should enhance our growth in future periods. Three months ended September 30 (millions of dollars, except per unit) Fiscal 2010 Per unit Fiscal 2009 Per unit Sales Gross margin Distributable cash 1 After margin replacement After all marketing expenses Net income (loss) (924.0) (8.33) Distributions Six months ended September 30 (millions of dollars, except per unit) Fiscal 2010 Per unit Fiscal 2009 Per unit Sales Gross margin Distributable cash 1 After margin replacement After all marketing expenses Net income (loss) (889.8) (8.12) Distributions Seasonally adjusted. Distributable cash has grown less than gross margin due to the onset of significant cash tax on the Fund s growing U.S. operations and Universal. Just Energy is actively looking for opportunities to minimize this impact. JUST ENERGY INCOME FUND SECOND QUARTER REPORT

5 MESSAGE FROM THE CHIEF EXECUTIVE OFFICER Expectations for the remainder of fiscal 2010 Just Energy has provided guidance that per unit growth in gross margin and distributable cash after gross margin replacement will be 5% to 10% in fiscal We are maintaining this forecast at this point in time, despite the fact that the first six months have seen growth of 34% and 29%, respectively. The Universal acquisition brought with it 145,000 customers in markets where we will not operate or with short-term contracts which we do not expect to renew. These customers generated a margin of approximately 9.5 million in the second quarter, which will not continue in future periods. In addition, there will be further merger realization costs for the remainder of the year. Universal is an accretive transaction, but the true accretion will not be seen until fiscal We continue to review other acquisition possibilities, largely in the United States where the credit market has forced many smaller players either out of the market or into forced sale. Our intent remains to only pursue acquisitions that are immediately accretive. Our GEO electricity and natural gas products continue to be a major success. Year to date, 41% of our new customers have elected an average of 78% of their consumption through GEO. This percentage has been steadily growing and the result has been the 204 margin on new customers signed in the period. Based on operations to date, it appears clear that the Fund will again have to make a Special Distribution for calendar The amount of the distribution is currently expected to be approximately 0.10 to 0.15 per unit. The final amount will be declared on December 31, 2009, and paid through a single distribution in early The final amount of the distribution may vary based on financial performance in the third quarter. This quarter has been among the strongest in Just Energy s history. I want to thank our team for their efforts and thank my fellow Unitholders for their continued support. Yours sincerely, Ken Hartwick Chief Executive Officer 4 JUST ENERGY INCOME FUND SECOND QUARTER REPORT 2010

6 MANAGEMENT S DISCUSSION AND ANALYSIS MANAGEMENT S DISCUSSION AND ANALYSIS ( MD&A ) November 5, 2009 Overview The following discussion and analysis is a review of the financial condition and results of operations of Just Energy Income Fund ( Just Energy or the Fund ) for the three and six months ended September 30, 2009, and has been prepared with information available up to and including November 5, This analysis should be read in conjunction with the unaudited interim consolidated financial statements for the three and six months ended September 30, 2009, as well as the audited consolidated financial statements and related MD&A for the year ended March 31, 2009, contained in the Fund s 2009 Annual Report. The financial information contained herein has been prepared in accordance with Canadian Generally Accepted Accounting Principles ( GAAP ). All dollar amounts are expressed in Canadian dollars. Quarterly reports, the annual report and supplementary information can be found under reports and filings on our corporate website at Additional information can be found on SEDAR at Just Energy is an open-ended, limited-purpose trust established under the laws of the Province of Ontario to hold securities and to distribute the income of its directly or indirectly owned operating subsidiaries and affiliates: Just Energy Ontario L.P. ( JE Ontario ), Just Energy Manitoba L.P. ( JE Manitoba ), Just Energy Quebec L.P. ( JE Quebec ), Just Energy (B.C.) Limited Partnership ( JE BC ), Just Energy Alberta L.P. ( JE Alberta ), Alberta Energy Savings L.P. ( AESLP ), Just Energy Illinois Corp. ( JEIC ), Just Energy New York Corp. ( JENYC ), Just Energy Indiana Corp. ( JEINC ), Just Energy Texas L.P. ( JETLP ), Just Energy Exchange Corp. ( JEEC ), Universal Energy Corp. ( UEC ), Universal Gas and Electric Corp. ( UGEC ), Commerce Energy, Inc. ( Commerce ), National Energy Corp. ( NEC ) operating under the trade name of National Home Services ( NHS ), Newten Home Comfort L.P. ( NHCLP ), and Terra Grain Fuels Inc. ( TGF ), collectively, the Just Energy Group. Just Energy s business involves the sale of natural gas and/or electricity to residential and commercial customers under long-term fixed-price and price-protected contracts. By fixing the price of natural gas or electricity under its fixed-price or price-protected program contracts for a period of up to five years, Just Energy s customers offset their exposure to changes in the price of these essential commodities. Just Energy, which commenced business in 1997, derives its margin or gross profit from the difference between the fixed price at which it is able to sell the commodities to its customers and the fixed price at which it purchases the associated volumes from its suppliers. In addition, through NEC and NHCLP, the Fund sells and rents high efficiency and tankless water heaters. TGF, an ethanol producer, operates an ethanol facility in Belle Plaine, Saskatchewan. The Fund also offers green products through its Green Energy Option ( GEO ) program. The electricity GEO product offers the customer the option of having all or a portion of their electricity sourced from renewable green sources such as wind, run of the river hydro or biomass. The gas GEO product offers carbon offset credits which will allow the customer to reduce or eliminate the carbon footprint of their home or business. Management believes that these new products will not only add to profits but also increase sales receptivity and improve renewal rates. Forward-looking information This MD&A contains certain forward-looking information pertaining to customer additions and renewals, customer consumption levels, distributable cash and treatment under governmental regulatory regimes. These statements are based on current expectations that involve a number of risks and uncertainties which could cause actual results to differ from those anticipated. These risks include, but are not limited to, levels of customer natural gas and electricity consumption, rates of customer additions and renewals, fluctuations in natural gas and electricity prices, changes in regulatory regimes and decisions by regulatory authorities, competition and dependence on certain suppliers. Additional information on these and other factors that could affect the Fund s operations, financial results or distribution levels are included in the Fund s annual information form and other reports on file with Canadian security regulatory authorities, which can be accessed on our corporate website at or through the SEDAR website at JUST ENERGY INCOME FUND SECOND QUARTER REPORT

7 MANAGEMENT S DISCUSSION AND ANALYSIS Policy change Effective July 1, 2008, the Fund changed its practice from treating future supply hedging positions as hedges for accounting purposes. Accordingly, all mark to market adjustments for supply contracts are reflected in the consolidated statements of operations. In the view of management, the previous practice offered no greater clarity for the financial statement user and was very labour intensive and costly to produce. The new accounting practice consolidates all the unrealized, non-cash changes in value of future supply into a single line on the consolidated statements of operations. The Fund s MD&A reports the adjusted net income excluding all non-cash mark to market adjustments for all supply-related derivative instruments and the related tax effect. The expected future net margin is set based on the derivative instruments and is effectively unchanged with commodity market movements. Given commodity volatility and the size of the Fund, the annual swings in mark to market on these positions can be in the hundreds of millions of dollars. Just Energy believes that the result of this practice change and the associated MD&A disclosure is that actual period operating results will be more transparent for investors. Key terms Attrition means customers whose contracts were terminated primarily due to relocation or death, or cancelled by Just Energy due to delinquent accounts. Delivered volume represents the actual volume of gas and electricity provided on behalf of customers to the local distribution companies ( LDCs ) for the period. Failed to renew means customers who did not renew expiring contracts at the end of their term. Gross margin per RCE represents the gross margin realized on Just Energy s customer base, including both low margin customers acquired through various acquisitions and gains/losses from sales of excess commodity supply. LDC means a local distribution company, the natural gas or electricity distributor for a regulatory or governmentally defined geographic area. RCE means residential customer equivalent or the customer, which is a unit of measurement equivalent to a customer using, as regards natural gas, 2,815 m 3 (or 106 GJs or 1,000 Therms or 1,025 CCFs) of natural gas on an annual basis and, as regards electricity, 10 MWh (or 10,000 kwh) of electricity on an annual basis, which represents the approximate amount of gas and electricity, respectively, used by a typical household in Ontario. Non-GAAP financial measures All non-gaap financial measures do not have standardized meanings prescribed by GAAP and are therefore unlikely to be comparable to similar measures presented by other issuers. Seasonally adjusted sales and seasonally adjusted gross margin Management believes the best basis for analyzing both the Fund s results and the amount available for distribution is to focus on amounts actually received ( seasonally adjusted ) because this figure provides the margin earned on actual customer consumption. Seasonally adjusted sales and gross margin are not defined performance measures under Canadian GAAP. Seasonally adjusted analysis applies solely to the Canadian gas market and specifically to Ontario, Quebec and Manitoba. No seasonal adjustment is required for electricity as the supply is balanced daily. In the other gas markets, payments for supply by the LDCs are aligned with customer consumption. 6 JUST ENERGY INCOME FUND SECOND QUARTER REPORT 2010

8 MANAGEMENT S DISCUSSION AND ANALYSIS Cash Available for Distribution Distributable cash after marketing expense refers to the net cash available for distribution to Unitholders. Seasonally adjusted gross margin is the principal contributor to Cash Available for Distribution. Distributable cash is calculated by the Fund as seasonally adjusted gross margin, adjusted for cash items including general and administrative expenses, marketing expenses, bad debt expense, interest expense, corporate taxes, capital taxes and other items. This non-gaap measure may not be comparable to other income funds. Distributable cash after gross margin replacement represents the net cash available for distribution to Unitholders as defined above. However, only the marketing expenses associated with maintaining the Fund s gross margin at a stable level equal to that in place at the beginning of the period are deducted. Management believes that this is more representative of the ongoing operating performance of the Fund because it includes all expenditures necessary for the retention of existing customers and the addition of new margin to replace those of customers that have not been renewed. This non-gaap measure may not be comparable to other income funds. For reconciliation to cash from operating activities, please refer to the Cash Available for Distribution and distributions analysis on page 11. Adjusted net income Adjusted net income represents the net income (loss) excluding the impact of mark to market gains (losses) arising from derivative financial instruments on our future supply. Just Energy ensures that customer margins are protected by entering into fixed-price supply contracts. In accordance with GAAP, the associated customer contracts are not marked to market, but there is a requirement to mark to market the future supply contracts. This creates unrealized gains (losses) that are not offset by the related customer gains (losses). Management believes that these short-term mark to market non-cash gains (losses) do not impact the long-term financial performance of the Fund. The related future supply has been sold under long-term customer contracts at fixed prices; therefore the annual movement in the theoretical value of this future supply is not an appropriate measure of current or future operating performance. Standardized Distributable Cash Standardized Distributable Cash is a non-gaap measure developed to provide a consistent and comparable measurement of distributable cash across entities. Standardized Distributable Cash is defined as cash flows from operating activities, as reported in accordance with GAAP, less an adjustment for total capital expenditures as reported in accordance with GAAP and restrictions on distributions arising from compliance with financial covenants restrictive at the date of the calculation of Standardized Distributable Cash. For reconciliation to cash from operating activities, please refer to the Standardized Distributable Cash and Cash Available for Distribution analysis on page 14. JUST ENERGY INCOME FUND SECOND QUARTER REPORT

9 MANAGEMENT S DISCUSSION AND ANALYSIS Financial highlights For the three months ended September 30 (thousands of dollars, except where indicated and per unit amounts) Fiscal 2010 Fiscal 2009 Per Per unit 5 Change 5 unit 5 Sales 434, % 294, Net income (loss) 1 110, NMF 6 (923,990) (8.33) Adjusted net income (loss) 2 (9,682) (0.07) (217)% 6, Gross margin (seasonally adjusted) 3 107, % 61, General and administrative 25, % 13, Distributable cash After gross margin replacement 52, % 34, After marketing expenses 41, % 28, Distributions 42, % 34, Distributable cash payout ratio 4 After gross margin replacement 82% 100% After marketing expenses 104% 122% For the six months ended September 30 (thousands of dollars, except where indicated and per unit amounts) Fiscal 2010 Fiscal 2009 Per Per unit 5 Change 5 unit 5 Sales 833, % 672, Net income (loss) 1 213, NMF 6 (889,758) (8.12) Adjusted net income 2 14, (61)% 34, Gross margin (seasonally adjusted) 3 182, % 121, General and administrative 41, % 26, Distributable cash After gross margin replacement 94, % 65, After marketing expenses 77, % 58, Distributions 77, % 68, Distributable cash payout ratio 4 After gross margin replacement 82% 104% After marketing expenses 101% 116% 1 Net income (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 impact of quarter-end mark to market gains and losses. 2 Adjusted net income (loss) is a more appropriate measure of the performance of the Fund since the underlying supply is held to its maturity, and therefore, mark to market gains and losses do not impact the long-term financial performance of the Fund. 3 See discussion of non-gaap measures on page 6. 4 Management targets an annual payout ratio after all marketing expenses, excluding any Special Distribution, of less than 100%. 5 The per unit calculation is done on a fully diluted basis. Year over year change is calculated on a per unit basis. 6 Not a meaningful number. 8 JUST ENERGY INCOME FUND SECOND QUARTER REPORT 2010

10 MANAGEMENT S DISCUSSION AND ANALYSIS Reconciliation of net income (loss) to adjusted net income (loss) (thousands of dollars) For the three months ended Sept. 30, fiscal 2010 For the three months ended Sept. 30, fiscal 2009 For the six months ended Sept. 30, fiscal 2010 For the six months ended Sept. 30, fiscal 2009 Net income (loss) 110,690 (923,990) 213,317 (889,758) Change in fair value of derivative instruments (138,515) 1,022,629 (226,395) 1,011,514 Tax impact on change in fair value of derivative instruments 18,143 (91,767) 27,948 (87,253) Adjusted net income (loss) (9,682) 6,872 14,870 34,503 Acquisition of Universal Energy Group On July 1, 2009, Just Energy completed the acquisition of all of the outstanding common shares of Universal Energy Group Ltd. ( Universal or UEG ) pursuant to a plan of arrangement (the Arrangement ). Under the Arrangement, UEG shareholders received 0.58 of an exchangeable share ( Exchangeable Share ) of JEEC, a subsidiary of Just Energy, for each UEG common share held. In aggregate, 21,271,804 Exchangeable Shares were issued pursuant to the Arrangement. Each Exchangeable Share is exchangeable for a trust unit on a one-for-one basis at any time at the option of the holder and entitles the holder to a monthly dividend equal to % of the monthly distribution paid by Just Energy on a trust unit. JEEC also assumed all the covenants and obligations of UEG in respect of UEG s outstanding 6% convertible unsecured subordinated debentures (the Debentures ). On conversion of the Debentures, holders will be entitled to receive 0.58 of an Exchangeable Share in lieu of each UEG common share that the holder was previously entitled to receive on conversion. The acquisition of UEG was accounted for using the purchase method of accounting. The Fund allocated the purchase price to the identified assets and liabilities acquired based on their fair values at the time of acquisition as follows (thousands of dollars): CAD Net assets acquired Working capital (including cash of 10,319) 75,391 Electricity contracts and customer relationships 230,963 Gas contracts and customer relationships 247,189 Water heater contracts and customer relationships 22,700 Other intangible assets 2,721 Goodwill 59,294 Property, plant and equipment 171,918 Future tax liabilities (51,971) Other liabilities current (164,148) Other liabilities long term (140,857) Long-term debt (180,440) Non-controlling interest (22,697) 250,063 Consideration Transaction costs 10,117 Exchangeable Shares 239, ,063 All contract and intangible assets are amortized over the average remaining life at the time of acquisition. The gas and electricity contracts acquired are amortized over periods ranging from eight to 57 months. The water heater contracts are amortized over 174 months and the intangible assets are amortized over six months. The purchase price allocation is considered preliminary and as a result may be adjusted during the year. JUST ENERGY INCOME FUND SECOND QUARTER REPORT

11 MANAGEMENT S DISCUSSION AND ANALYSIS Operations Gas In each of the markets that Just Energy operates, it is required to deliver gas to the LDCs for its customers throughout the year. Gas customers are charged a fixed price for the full term of their contract. For our residential customers, Just Energy purchases gas supply in advance of marketing. The LDC provides historical customer usage to enable Just Energy to purchase an approximation of matched supply. Furthermore, in many markets, Just Energy mitigates exposure to customer usage by purchasing options that cover potential differences in customer consumption due to weather variations. The cost of this strategy is incorporated in the price to the customer. To the extent that balancing requirements are outside the options purchased, Just Energy bears the financial responsibility for fluctuations in customer usage. Volume variances may result in either excess or short supply. Excess supply is sold into the spot market resulting in either a gain or loss compared to the weighted average cost of supply. In the case of greater than expected gas consumption, Just Energy must purchase the short supply at the market price, which may reduce or increase the customer gross margin typically realized. For our commercial customers, Just Energy purchases gas supply that matches the forecasted new customer volume required. Ontario, Quebec, British Columbia and Michigan In Ontario, Quebec, British Columbia and Michigan, the volumes delivered for a customer typically remain constant throughout the year. Just Energy does not recognize sales until the customer actually consumes the gas. During the winter months, gas is consumed at a rate which is greater than delivery, and in the summer months, deliveries to LDCs exceed customer consumption. Just Energy receives cash from the LDCs as the gas is delivered, which is even throughout the year. Manitoba and Alberta In Manitoba and Alberta, the volume of gas delivered is based on the estimated consumption for each month. Therefore, the amount of gas delivered in winter months is higher than in the spring and summer months. Consequently, cash received from customers and LDCs will be higher in the winter months. Alberta s regulatory environment is different from the other Canadian provincial markets. In Alberta, Just Energy is required to invoice and receive payments directly from customers. AESLP entered into an agreement with EPCOR Utilities Inc. ( EPCOR ) for the provision of billing and collection services in Alberta which was amended and extended in December Pursuant to the amended agreement, EPCOR will continue to provide billing and collection services for AESLP until November 30, 2011, with respect to AESLP s existing customers. In September 2009, Just Energy, through JE Alberta, began billing and collection services directly for all new customers signed as well as renewing customers. New York, Illinois, Indiana, Ohio and California In New York, Illinois, Indiana, Ohio and California, the volume of gas delivered is based on the estimated consumption and storage requirements for each month; therefore, the amount of gas delivered in winter months is higher than in the spring and summer months. Consequently, cash flow received from these states is greatest during the third and fourth (winter) quarters, as normally, cash is received from the LDCs in the same period as customer consumption. Electricity Ontario, Alberta, New York, Texas, Pennsylvania, New Jersey, Maryland, Michigan and California Just Energy does not bear the risk for variations in customer consumption in any of the electricity markets in which it operates other than for certain customers in Texas and the customers acquired in the Universal acquisition (customers located in Pennsylvania, New Jersey, Maryland, Michigan and California). In Ontario and New York, Just Energy provides customers with price protection for the majority of their electricity requirements. The customers experience either a small balancing charge or credit on each bill due to fluctuations in prices applicable to their volume requirements not covered by a fixed price. In Alberta, Just Energy offers a loadfollowing product for which it has acquired load-following supply and therefore does not have exposure to variances in customer consumption. To the extent possible, given the competitive nature and market knowledge of customers, future offerings for Texas customers will be a load balanced product and Just Energy will not bear the risk for variations in customer consumption. Cash flow from electricity operations is greatest during the second and fourth quarters (summer and winter), as electricity consumption is typically highest during these periods. Water heaters NHCLP commenced providing Ontario residential customers with a long-term water heater rental program in the summer of 2008, offering tankless water heaters, high efficiency conventional and power vented tanks. On July 2, 2009, NEC, a wholly owned home services subsidiary of UEG, acquired Newten Home Comfort Inc., an arm s length third party that held a 20% interest in NHCLP. Accordingly, NHCLP became a wholly owned subsidiary of Just Energy. NEC began operations in April 2008 and operates under the trade name of National Home Services ( NHS ). On September 30, 2009, NEC acquired substantially all the assets of NHCLP, including all of NHCLP s customer water heater rental agreements. See page 22 for additional information on NHS. 10 JUST ENERGY INCOME FUND SECOND QUARTER REPORT 2010

12 MANAGEMENT S DISCUSSION AND ANALYSIS Terra Grain Fuels (ethanol division) Just Energy, through JEEC, also owns a 66.7% interest in TGF, a 150-million-litre capacity wheat-based ethanol plant located in Belle Plaine, Saskatchewan. The plant produces ethanol and high protein distillers dried grain ( DDG ) from the wheat supply. See page 23 for additional information on TGF. Cash Available for Distribution and distributions For the three months ended September 30 (thousands of dollars, except per unit amounts) Fiscal 2010 Fiscal 2009 Per unit Per unit Reconciliation to statements of cash flow Cash inflow from operations 24,708 17,743 Add: Increase in non-cash working capital 16,098 10,062 Tax impact on distributions to Class A preference shareholders Cash Available for Distribution 41,345 28,394 Cash Available for Distribution Gross margin per financial statements 81, , Adjustments required to reflect net cash receipts from gas sales 26,023 17,667 Seasonally adjusted gross margin 107, , Less: General and administrative (25,634) (13,236) Capital tax recovery (expense) (48) 66 Bad debt expense (3,856) (2,462) Income tax provision (6,106) (615) Interest expense (4,946) (965) Other items 1,523 1,065 (39,067) (16,147) Distributable cash before marketing expenses 68, , Marketing expenses to maintain gross margin (16,149) (10,891) Distributable cash after gross margin replacement 52, , Marketing expenses to add new gross margin (10,958) (6,361) Cash Available for Distribution 41, , Distributions Unitholder distributions 40,760 32,639 Class A preference share distributions 1,632 1,632 Unit appreciation rights and deferred unit grants distributions Total distributions 42, , Diluted average number of units outstanding 134.3m 111.2m JUST ENERGY INCOME FUND SECOND QUARTER REPORT

13 MANAGEMENT S DISCUSSION AND ANALYSIS Cash Available for Distribution and distributions For the six months ended September 30 (thousands of dollars, except per unit amounts) Fiscal 2010 Fiscal 2009 Per unit Per unit Reconciliation to statements of cash flow Cash inflow from operations 62,503 63,005 Add: Increase (decrease) in non-cash working capital 13,852 (5,603) Tax impact on distributions to Class A preference shareholders 1,077 1,274 Cash Available for Distribution 77,432 58,676 Cash Available for Distribution Gross margin per financial statements 147, , Adjustments required to reflect net cash receipts from gas sales 34,717 22,149 Seasonally adjusted gross margin 182, , Less: General and administrative (41,251) (26,683) Capital tax expense (128) Bad debt expense (7,685) (3,525) Income tax provision (6,066) (758) Interest expense (5,426) (1,856) Other items 2, (58,364) (31,980) Distributable cash before marketing expenses 123, , Marketing expenses to maintain gross margin (29,402) (23,715) Distributable cash after gross margin replacement 94, , Marketing expenses to add new gross margin (17,090) (7,125) Cash Available for Distribution 77, , Distributions Unitholder distributions 73,695 64,100 Class A preference share distributions 3,263 3,528 Unit appreciation rights and deferred unit grants distributions Total distributions 77, , Diluted average number of units outstanding 123.7m 110.7m Distributable cash Distributable cash after gross margin replacement for the current quarter ended September 30, 2009, was 52.3 million (0.39 per unit), up 50% from 34.8 million (0.31 per unit) in fiscal The growth reflects a 74% increase in seasonally adjusted gross margin. Factors contributing to margin growth include a 29% year over year increase in total customers, of which 24% related to the 430,000 acquired customers from Universal. The new Universal customers, higher margin per customer due to opportunistic pricing and continued strong acceptance of the GEO product as well as improved supply management, particularly in Texas, resulted in increased distributable cash. On a per unit basis (reflecting the units issued to acquire Universal), distributable cash after gross margin replacement and gross margin were up 26% and 43%, respectively, reflecting solid operating performance and per unit accretion due to the price paid for Universal. The higher gross margins in the quarter were offset to a degree by increased general and administrative costs and bad debt expenses. Increased general and administrative costs of 94% over the prior year comparable quarter were primarily due to the Universal acquisition, staffing costs in our corporate office to support our current and future growth, and an increase in telecom and collection costs. As administrative overlap efficiencies continue to be realized in future quarters, growth in general and administrative costs should track margin growth. Bad debt expense increased in the second quarter of fiscal 2010 compared to 2009 primarily due to the increased volumes in those markets where the Fund bears the credit risk as well as the weak economic conditions in the U.S. markets. 12 JUST ENERGY INCOME FUND SECOND QUARTER REPORT 2010

14 MANAGEMENT S DISCUSSION AND ANALYSIS Just Energy spent 16.1 million in marketing expenses to maintain its current level of gross margin, which represents 60% of the total marketing expense for the quarter. A further 11.0 million was spent to increase future gross margin resulting in the 36,000 net RCE additions for the quarter. Management s estimate of the future contracted gross margin increased to 1,213.8 million from 1,003.2 million at the end of the first quarter of fiscal Distributable cash after all marketing expenses amounted to 41.3 million (0.31 per unit) for the second quarter of fiscal 2010, an increase of 19% per unit from 28.4 million (0.26 per unit) in the prior year comparable quarter. The increase is due to accretion from the Universal purchase and net customer additions offset by increased expenditures noted above. The lower rate of increase for distributable cash was due to the higher marketing costs associated with the significant increase in net customer additions (excluding acquired customers) quarter over quarter. The payout ratio after deduction of all marketing expenses for the current quarter was 104% versus 122% in fiscal Distributable cash after gross margin replacement for the six months ended September 30, 2009, was 94.5 million (0.76 per unit), an increase of 29% per unit from 65.8 million (0.59 per unit) in the prior year comparable period. Distributable cash after marketing expenses was 77.4 million (0.63 per unit) for the first six months of fiscal 2010, an increase of 19% per unit from 58.7 million (0.53 per unit) for the same period last year. The payout ratio after all marketing expenses for the six-month period of fiscal 2010 was 101% versus 116% for the six months ended September 30, For further information on the changes in the gross margin, please refer to Sales and gross margin Seasonally adjusted on page 17 and General and administrative expenses, Marketing expenses, Bad debt expense and Interest expense are further clarified on pages 23, 24 and 25. Adjusted net income (loss) Adjusted net loss was 9.7 million for the quarter (0.07 per unit), down from net income of 6.9 million (0.06 per unit) in the second quarter of fiscal Adjusted net income was negatively impacted by the amortization of the Universal acquired customer contracts and the increased general and administrative costs incurred for Universal as Just Energy works towards consolidating various processes. Also contributing to the change are losses from NHS and TGF as both businesses are in start-up phases. For the six months ended September 30, 2009, adjusted net income was 14.9 million (0.12 per unit) as compared to 34.5 million or 0.31 per unit in the same period last year. Discussion of distributions (thousands of dollars) For the For the For the For the three months three months six months six months ended ended ended ended Sept. 30, Sept. 30, Sept. 30, Sept. 30, fiscal 2010 fiscal 2009 fiscal 2010 fiscal 2009 Cash flow from operations 1 (A) 24,708 17,743 62,503 63,005 Net income (loss) (B) 110,690 (923,990) 213,317 (889,758) Total distributions (C) 42,839 34,609 77,853 68,290 Shortfall of cash flows from operating activities (18,131) (16,866) (15,350) (5,285) over distributions paid (A C) Excess (shortfall) of net income (loss) over distributions paid (B C) 67,851 (958,599) 135,464 (958,048) 1 Includes non-cash working capital balances. Net income (loss) includes non-cash gains and losses associated with the changes in the current market value of Just Energy s derivative instruments. These instruments form part of the Fund s requirement to purchase commodity according to estimated demand and, as such, changes in value do not impact the distribution policy or the long-term financial performance of the Fund. Effective July 1, 2008, Just Energy elected to discontinue the practice of hedge accounting, and all gains and losses on derivative instruments have been recorded in change in fair value of derivative instruments. The change in fair value associated with these derivatives included in the net income for the second quarter of fiscal 2010 was a gain of million versus a loss of 1,022.6 million for the quarter ended September 30, JUST ENERGY INCOME FUND SECOND QUARTER REPORT

15 MANAGEMENT S DISCUSSION AND ANALYSIS The Fund has, in the past, paid out distributions that were higher than both financial statement net income and operating cash flow. In the view of management, the non-gaap measure, distributable cash, is an appropriate measure of the Fund s ability to distribute funds, as the cost of carrying incremental working capital necessary for the growth of the business has been deducted in the distributable cash calculation. Further, investment in the addition of new customers intended to increase cash flow is expensed in the financial statements while the original customer base was capitalized. In addition, the capital expenditures for NHS and TGF are funded through the credit facility and debt instruments. Management believes that the current level of distributions is sustainable in the foreseeable future. The timing differences between distributions and cash flow from operations created by the cost of carrying incremental working capital due to business seasonality and expansion are funded by the operating credit facility. Standardized Distributable Cash and Cash Available for Distribution (thousands of dollars, except per unit amounts) For the For the For the For the three months three months six months six months ended ended ended ended Sept. 30, Sept. 30, Sept. 30, Sept. 30, fiscal 2010 fiscal 2009 fiscal 2010 fiscal 2009 Reconciliation to statements of cash flow Cash inflow from operations 24,708 17,743 62,503 63,005 Capital expenditures 1 (12,477) (1,118) (19,883) (1,326) Standardized Distributable Cash 12,231 16,625 42,620 61,679 Adjustments to Standardized Distributable Cash Change in non-cash working capital 2 16,098 10,062 13,852 (5,603) Tax impact on distributions to Class A preference shareholders ,077 1,274 Capital expenditures 1 12,477 1,118 19,883 1,326 Cash Available for Distribution 41,345 28,394 77,432 58,676 Standardized Distributable Cash per unit basic Standardized Distributable Cash per unit diluted Payout ratio based on Standardized Distributable Cash 350% 208% 183% 111% 1 Capital expenditures incurred in the quarter are effectively funded out of the credit facility. The majority of capital expenditures in the current quarter related to the purchase of water heaters for subsequent rental. These expenditures expand the productive capacity of the business. 2 Change in non-cash working capital is excluded from the calculation of Cash Available for Distribution as the Fund has a million credit facility which is available for use to fund working capital requirements. This eliminates the potential impact of timing distortions relating to the respective items. 3 Payments to the holders of Class A preference shares are equivalent to distributions. The number of Class A preference shares outstanding is included in the denominator of any per unit calculation. In accordance with the Canadian Institute of Chartered Accountants ( CICA ) July 2007 interpretive release, Standardized Distributable Cash in Income Trusts and other Flow-Through Entities, the Fund has presented the distributable cash calculation to conform to this guidance. In summary, for the purposes of the Fund, Standardized Distributable Cash is defined as the periodic cash flows from operating activities, including the effects of changes in non-cash working capital less total capital expenditures as reported in the GAAP financial statements. Financing strategy The Fund s million credit facility will be sufficient to meet the Fund s short-term working capital and capital expenditure requirements for the gas and electricity business. As part of the acquisition of Universal, additional credit facilities and debt were recorded and are explained further on page 28. Working capital requirements can vary widely due to seasonal fluctuations and planned U.S.-related growth. In the long term, the Fund may be required to access the equity or debt markets in order to fund significant acquisitions. Productive capacity Just Energy s business involves the sale of natural gas and/or electricity to residential and commercial customers under long-term, fixed-price contracts. As such, the Fund s productive capacity is determined by the gross margin earned from the contract price and the related supply cost. 14 JUST ENERGY INCOME FUND SECOND QUARTER REPORT 2010

16 MANAGEMENT S DISCUSSION AND ANALYSIS The productive capacity of Just Energy is achieved through the retention of existing customers and the addition of new customers to replace those that have not been renewed. The productive capacity is maintained and grows through independent contractors, call centre renewal efforts and various mail campaigns. Effectively all of the marketing costs related to customer contracts are expensed immediately but fall into two categories: The first represents marketing expenses to maintain gross margin at pre-existing levels and by definition maintain productive capacity. The second category is marketing expenditures to add new margin which therefore expands productive capacity. As noted above, capital expenditures by the Fund are utilized to expand the productive capacity of the business. Summary of quarterly results (thousands of dollars, except per unit amounts) Q2 fiscal Q1 fiscal Q4 fiscal Q3 fiscal Sales per financial statements 434, , , ,608 Gross margin (seasonally adjusted) 107,519 74, ,143 87,554 General and administrative expense 25,634 15,617 18,150 14,753 Net income (loss) 110, ,627 (168,621) (49,094) Net income (loss) per unit basic (1.57) (0.44) Net income (loss) per unit diluted (1.57) (0.44) Adjusted net income (loss) (9,682) 24,552 88,744 46,682 Adjusted net income (loss) per unit basic (0.07) Adjusted net income (loss) per unit diluted (0.07) Amount available for distribution After gross margin replacement 52,303 42,219 72,244 57,475 After marketing expenses 41,345 36,087 62,515 48,162 Payout ratio After gross margin replacement 82% 83% 48% 93% 1 After marketing expenses 104% 97% 56% 111% 1 Q2 fiscal Q1 fiscal Q4 fiscal Q3 fiscal Sales per financial statements 294, , , ,673 Gross margin (seasonally adjusted) 61,793 59,703 87,960 71,247 General and administrative expense 13,236 13,447 17,138 12,416 Net income (loss) (923,990) 34,232 94,025 28,064 Net income (loss) per unit basic (8.33) Net income (loss) per unit diluted (8.33) Adjusted net income (loss) 6,872 27,631 87,663 34,890 Adjusted net income (loss) per unit basic Adjusted net income (loss) per unit diluted Amount available for distribution After gross margin/customer replacement 34,755 31,046 54,334 47,242 After marketing expenses 28,394 30,282 53,992 42,462 Payout ratio After gross margin/customer replacement 100% 108% 61% 164% 1 After marketing expenses 122% 111% 61% 183% 1 1 Includes a one-time Special Distribution of 18.6 million in the third quarter of fiscal 2009 and 44.7 million in the third quarter of fiscal The Fund s results reflect seasonality as consumption is greatest during the third and fourth quarters (winter quarters). While year over year quarterly comparisons are relevant, sequential quarters will vary materially. The main impact of this will be higher distributable cash with a lower payout ratio in the third and fourth quarters and lower distributable cash with a higher payout ratio in the first and second quarters excluding any Special Distribution. JUST ENERGY INCOME FUND SECOND QUARTER REPORT

17 MANAGEMENT S DISCUSSION AND ANALYSIS Analysis of the second quarter Sales are typically lower in the first and second quarters because gas consumption is highest during the winter months and approximately 52% of the current customer base are gas customers. The 48% increase in sales compared to the prior comparable quarter is primarily attributable to the acquisition of Universal and strong U.S. growth in our existing markets. The adjusted net loss was 9.7 million for the three months ended September 30, Lower adjusted net income was attributable to margin growth due to the amortization recorded on the acquired Universal contracts and customer relationships in the quarter. The distributable cash after customer gross margin replacement was 52.3 million, up 50% from 34.8 million in the prior comparable quarter. The increase in gross margin was due to the margin earned on the acquired customers from Universal, net customer additions through marketing and higher per customer margins. Distributable cash after marketing expenses was 41.3 million, an increase of 46% from 28.4 million in the prior comparable quarter. Distributions for the quarter were 42.8 million, up 24% over the same period last year, reflecting a 3% per unit increase quarter over quarter. The payout ratio in a seasonally slow quarter was 104% versus 122% in the second quarter of fiscal Gas and electricity marketing analysis Sales and gross margin Per financial statements For the three months ended September 30 (thousands of dollars) Fiscal 2010 Fiscal 2009 Sales Canada United States Total Canada United States Total Gas 91,636 37, ,360 87,052 23, ,399 Electricity 174, , , ,197 55, , , , , ,249 78, ,122 Increase 24% 90% 41% Gross margin Canada United States Total Canada United States Total Gas 6,496 8,795 15,291 14,816 3,174 17,990 Electricity 31,741 30,283 62,024 19,646 6,490 26,136 38,237 39,078 77,315 34,462 9,664 44,126 Increase 11% 304% 75% For the six months ended September 30 (thousands of dollars) Fiscal 2010 Fiscal 2009 Sales Canada United States Total Canada United States Total Gas 241,333 88, , ,545 63, ,855 Electricity 297, , , , , , , , , , , ,032 Increase 7% 65% 21% Gross margin Canada United States Total Canada United States Total Gas 29,210 19,489 48,699 44,965 9,154 54,119 Electricity 51,380 43,311 94,691 39,220 6,008 45,228 80,590 62, ,390 84,185 15,162 99,347 Increase (decrease) (4)% 314% 44% Canada Sales and gross margin for the three months ended September 30, 2009, were million and 38.2 million, an increase of 24% and 11%, respectively, from the prior year comparative period. Total sales and gross margin for the six-month period of fiscal 2010 were million and 80.6 million, respectively. 16 JUST ENERGY INCOME FUND SECOND QUARTER REPORT 2010