Energy Savings Income Fund
TSX : SIF.UN

Energy Savings Income Fund

May 14, 2009 09:44 ET

Energy Savings Reports Fourth Quarter and Fiscal 2009 Results

Record Operating Results for both Fourth Quarter and Year Distributable Cash after Margin Replacement up 33% for Q4 Q4 Customer Additions up 57% Fiscal 2009 Distributable Cash after Margin Replacement up 15%, Fiscal 2009 Adjusted Earnings per Unit up 8% Despite Heavy Foreclosure Rates, Customer Base up 6% at Year End Energy Savings Rebrands to Just Energy Income Fund

TORONTO, ONTARIO--(Marketwire - May 14, 2009) - Energy Savings Income Fund (TSX:SIF.UN) -

Highlights for the three months ended March 31, 2009 included:

- Gross customer additions were 85,000, up 57% compared to Q4 of fiscal 2008. Sales were $713.6 million, up 9% compared to fiscal 2008.

- Adjusted earnings per unit of $0.79, down from $0.80 in Q4 of fiscal 2008.

- Distributable cash after gross margin replacement was $72.2 million, up 33% year over year.

- Distributable cash after all marketing was $62.5 million, up 16% year over year.

- Customer additions were 85,000 up 57% from 54,000 in Q4 of fiscal 2008.

- Net customer additions were 15,000 in Q4 despite continued high foreclosure related attrition in the U.S. There was a net customer loss of 21,000 customers in Q4 2008.

- Payout ratio of 56% versus 61% for the comparable quarter.

Highlights for the year ended March 31, 2009 included:

- Customer base reached 1,790,000 RCEs, up 6% year over year. Gross additions were 418,000 up 22% from 342,000 in fiscal 2008. Excluding the CEG acquisition, customer additions were 372,000.

- Net customer additions were 103,000 for the year, up from 28,000 last year. Excluding the CEG acquisition, net customer additions were 57,000 for fiscal 2009.

- Sales (seasonally adjusted) up 9% to $1.9 billion.

- Gross margin (seasonally adjusted) of $315.2 million, up 16% year over year.

- Distributable cash after gross margin replacement of $195.5 million ($1.75 per unit), up 15% year over year.

- Distributable cash after all marketing of $169.4 million up 11%.

- Adjusted net income of $169.9 million up from $156.7 million.

- Earnings per unit of $1.52 in 2009 from $1.44.

- Payout ratio on ordinary distributions of 82%, down from 84% in fiscal 2008.

Highlights subsequent to year end:

- Announced agreement to acquire Universal Energy Group, a Toronto-based natural gas and electricity marketer with over 580,000 customers in two Provinces and six States.

- The Fund announces it is rebranding from Energy Savings Income Fund to Just Energy Income Fund effective June, 2009.

Energy Savings Fiscal 2009 Results

Energy Savings Income Fund announced its results for the year ended March 31, 2009.



----------------------------------------------------------------------------
Year ended March 31, F2009 Per Unit F2008 Per Unit
($ millions except per unit)
----------------------------------------------------------------------------
Sales(1) $1,899.2 $1,730.6
----------------------------------------------------------------------------
Gross Margin(1) 315.2 $2.83 272.2 $2.51
----------------------------------------------------------------------------
Adjusted Net Income(2) 169.9 $1.52 156.7 $1.44
----------------------------------------------------------------------------
Distributable Cash(1)
----------------------------------------------------------------------------
- After Gross Margin Replacement 195.5 $1.75 170.0 $1.57
----------------------------------------------------------------------------
- After Marketing 169.4 $1.52 152.8 $1.41
----------------------------------------------------------------------------
Distributions - Ordinary 138.0 $1.24 128.8 $1.19
----------------------------------------------------------------------------
Distributions - Special 18.6 $0.17 44.7 $0.41
----------------------------------------------------------------------------
Long Term Customers 1,790,000 1,687,000
----------------------------------------------------------------------------



----------------------------------------------------------------------------
Three Months ended March 31, F2009 Per Unit F2008 Per Unit
($ millions except per unit)
----------------------------------------------------------------------------
Sales(1) $600.4 $515.1
----------------------------------------------------------------------------
Gross Margin(1) 106.1 $0.95 88.0 $0.80
----------------------------------------------------------------------------
Adjusted Net Income(2) 88.7 0.81 87.7 0.80
----------------------------------------------------------------------------
Distributable Cash(1)
----------------------------------------------------------------------------
- After Gross Margin Replacement 72.2 $0.64 54.3 $0.50
----------------------------------------------------------------------------
- After Marketing 62.5 $0.56 54.0 $0.49
----------------------------------------------------------------------------
(1) Seasonally adjusted

(2) Adjusted net income (loss) represents net income (loss) removing the
impact of mark to market gains (losses) arising from derivative
financial instruments on our future supply.


Energy Savings is an Income Fund and it reports in its Management's Discussion and Analysis a detailed calculation of distributable cash after gross margin replacement, and after all marketing expenditures to expand the future gross margin of the Fund's customer base.

Despite a deep economic recession looming over the last six months of fiscal 2009, Energy Savings moved against general business trends with record operating results for both the fourth quarter and fiscal 2009 as a whole. Leading the way was a continuation of the return to strong marketing. As with the prior two quarters, positive year over year comparisons continued with Q4 gross customer additions of 85,000, up 57% from the comparable quarter in fiscal 2008. Net customer additions for Q4 were 15,000, up from a loss of 21,000 customers in Q4 2008. These net additions reflect excellent performance given continued high U.S. attrition due to high foreclosure rates and customer loss due to non-payment. The year saw gross additions of 418,000 up 22% from fiscal 2008. The customer base grew 6% to a total of 1,790,000 at year end.

Gross margin and distributable cash outperformed management expectations in a very weak North American economy. The Fund's published guidance had been for 10% growth in both gross margin and distributable cash after margin replacement. This guidance was tempered to 5% to 10% after Q2 because of the projections of a severe recession in the coming months.

The recession came but the weaker performance did not. Customer additions for both Q3 and Q4 were very strong, more than offsetting higher attrition and bad debt losses. A cold winter combined with very low commodity prices also added to our results. In our U.S. business, a strong U.S. dollar resulted in both higher margins and U.S. denominated costs with the net impact also positive. The Fund increased its guidance to in excess of 10% in late March and continuation of strong performance resulted in 16% gross margin growth and 15% distributable cash after gross margin replacement growth for the year, both well above previous guidance.

As in recent years, Energy Savings' management was able to replace a majority of lost customers and expiring contracts with new contracts at higher margins. This resulted in a margin increase which was far higher than the 6% increase in customers and the 9% increase in sales for the year.



----------------------------------------------------------------------------
Annual gross margin per customer(1) Fiscal Annual target
----------------------------------------------------------------------------
2009 F2009
----------------------------------------------------------------------------
Customers added in the year
----------------------------------------------------------------------------
- Canada - gas $166 $170
----------------------------------------------------------------------------
- Canada - electricity $147 $143
----------------------------------------------------------------------------
- United States - gas $208 $170
----------------------------------------------------------------------------
- United States - electricity $206 $143
----------------------------------------------------------------------------
Customers lost in the year
----------------------------------------------------------------------------
- Canada - gas $184
----------------------------------------------------------------------------
- Canada - electricity $105
----------------------------------------------------------------------------
- United States - gas $175
----------------------------------------------------------------------------
- United States - electricity $102
----------------------------------------------------------------------------
(1) Customer sales price less cost of associated supply and allowance for
bad debt and U.S. working capital.


The table details the Fund's ability to grow margin per customer. By locking in new customers for up to five years at these margins, replacing customers that had lower margins, Energy Savings has also contributed to cash flow growth in future years.

Our annual total gross margin per RCE for fiscal 2009 was $181, an increase of 15% over last year ($157 per RCE). Energy Savings has been able to steadily grow margin over past years while our competition has fallen away.

Unitholders received two forms of distributions in fiscal 2009. The ordinary annual distribution rate rose from $1.21 to $1.24 per unit. In addition to these ordinary distributions, the Fund paid a special distribution of $0.165 per unit to ensure that the Fund was not liable to pay income taxes which would have otherwise resulted from under-distribution in calendar 2008.

Fiscal 2009 saw Energy Savings begin the provision of supply to certain larger volume commercial and industrial customers. Early results of this campaign show that these customers have lower attrition and lower customer care requirements such that, on an all-in cost basis, they achieve lifetime customer value consistent with our expectations despite lower per RCE margins.

Green Energy Option products ("GEO"). The GEO electricity product offers the customer the option of having all or a portion of his or her electricity sourced from renewable green sources such as wind, run of the river hydro or biomass. The gas GEO product offers carbon offset credits which will allow the customer to reduce or eliminate the carbon footprint for their home or business. Management believes that these products will not only add to profits, but also increase sales receptivity and improve renewal rates. Sales of GEO products in fiscal 2009 were 710,000 GJs of Green Energy Option ("GEO") gas and 161,000 MWh of GEO electricity. F2008 saw total GEO sales of 19,000 MWh.

Strong sales of the GEO product continue to support and reaffirm the great demand for the GEO product in all markets.

Proposed Acquisition of UEG

On April 22, 2009, Energy Savings and Universal Energy Group Ltd. ("UEG") jointly announced that they had entered into a definitive agreement to have Energy Savings acquire all of the outstanding common shares of UEG.

UEG supplies over 580,000 residential customer equivalents in Ontario, British Columbia, Michigan, California, Ohio, Pennsylvania, Maryland and New Jersey. In addition, UEG owns a 66.7% ownership interest in Terra Grain Fuels, a Saskatchewan ethanol plant and has a successful water heater-based home services division.

The proposed transaction will be effected by way of a plan of arrangement under the Canada Business Corporations Act. The plan of arrangement will provide for a share exchange through which each outstanding share of UEG will be exchanged for 0.58 of a share (the "Exchangeable Shares") of a subsidiary of ESIF.

Closing of the transaction is subject to certain conditions including approval of UEG shareholders, compliance with the Competition Act, approval of Energy Saving's lenders, and satisfaction of other customary approvals including regulatory, stock exchange and Court approvals. The transaction is expected to close in late June following a UEG special shareholders' meeting to be called to consider the transaction.

In addition to the amalgamation of the two sales forces, the merger of the two businesses should result in a reduction of general and administrative costs per customer. Management anticipates that the completion of the acquisition will be accretive to Unitholders both immediately and after realization of savings through operating synergies.

Guidance for Fiscal 2009

In the past, the Fund has provided guidance with respect to expected growth in gross margin and distributable cash after margin replacement. Based on the UEG acquisition closing in June, the Fund expects gross margin and distributable cash after margin replacement growth in the 5%-10% range for fiscal 2010. This estimate is predicated on limited realization of operating synergy on the UEG acquisition and conservative assumptions on Terra Grain Fuels operating performance. The Fund expects to provide guidance on expected RCE growth for fiscal 2010 once the final number of RCEs acquired with UEG (currently 580,000) is established at closing.

Chief Executive Officer Ken Hartwick stated: "Fiscal 2009 was a very strong year for Energy Savings. We rebuilt our sales and marketing organization at the end of the last fiscal year and the results have been three consecutive quarters of growth in customer additions. Our additions for the year were 418,000 including the CEG acquisition earlier last summer. Overall, our gross additions were up 22% year over year resulting in a 6% growth in RCEs. While most of the cash flow benefit from new customers is not recognized until one to two quarters down the road, our strong additions in Q2 and Q3 contributed to our record Q4 distributable cash which grew of 33% year over year."

"From an administrative point of view, a fast growing business must be watched very carefully. We are in the midst of a major recession. This has a number of impacts on our customers and, accordingly, our business. Foreclosure rates in the U.S. remain high and non-payment of utility bills due to unemployment or other reasons is also rising. This means more customers exiting our services resulting in continued higher than target attrition. We have been very focused on our credit department and I am proud to say that bad debt was held at 2.6% of revenue (in those markets where we bear credit risk). This is the midpoint of our target range and we are very pleased with this level under the current challenging conditions."

"We have also been careful to ensure our U.S. position was matched as attrition exceeded our expectations. The results are demonstrated in our margins (which were high) and our loss on sale of excess supply (which was low) for the period. The net result was a growth of gross margin of 16% for the year, well above our targeted growth of 10%. Many positive factors contributed to this, but it is clear that our commodity management is being soundly run. Margin, after our general and administrative costs and the costs of replacing margin lost in the year (distributable cash after margin replacement,) was up 15%, again well ahead of our 10% target. Our distributable cash after all marketing was up 11% which is a reflection of our strong marketing effort for the year and the increase in our future gross margins on our book. These grew to $1,020.3 million, up from $915.3 million at the end of Q3. One thing we are very proud of is the continued growth of our U.S. business. Of the future gross margins, $697 million are in Canada with $323 million (US$279 million) having been built up through our U.S. expansion since 2004. It is often said that Canadian companies cannot succeed south of the border. Energy Savings is a clear exception to any such rule."

"Not only did Energy Savings have an excellent fiscal 2009 but the base for the future looks very solid as well."

Executive Chair Rebecca MacDonald added: "I like to think of Energy Savings as The Fund for All Seasons. Since our IPO eight years ago, we have seen good weather and bad weather, skyrocketing commodity prices and collapsing commodity prices, good economic times and the worst recession since the 1930's. I would like to think that Energy Savings has been an investment rock throughout the entire period, providing predictable, reliable and growing cash flow to our investors every year, just as I promised at the time of the IPO."

"Our fourth quarter of fiscal 2009 is, all things considered, the strongest quarter in the history of the company. We said we could grow our customer base regardless of whether prices were rising or falling. We generated 85,000 new customers, up 57% from last year at a time when commodity prices were declining. We said that we could hold our margins per customer even if underlying prices were falling. For the year, our average margin per customer was up 15%, once again, well ahead of our targets. We said that we could hold bad debt to between 2% and 3% in those markets where we bear this risk. In the heart of this recession, we stand at 2.6%."

"Most importantly, we said that we could provide stability both to our customers and our investors regardless of conditions. Energy Savings has never failed to deliver commodity to its customers and has never reduced its distribution in the Fund's history. In fact, we have raised distributions 29 times and have topped up with a special distribution each of the last two years. Finally, we promised we would grow. At a time when effectively all public company market guidance projects lower results and negative year over year growth, Energy Savings had an outstanding fourth quarter and exceeded our original 10% guidance for margin and distributable cash growth by 50%. I believe that 15% growth in this environment is something to be truly proud of. I want to thank Ken and his team for a great year."

"As we have in past years, we include within this release our guidance for operating performance in the coming year. It will be very difficult to top our performance from fiscal 2009. Favourable weather, exchange rates and commodity prices allowed us to grow 15% when operating measures within our control would have been closer to 10%. Accordingly, we bring a high base into fiscal 2010. Based on a June closing for the UEG acquisition, we would expect Energy Savings to generate growth in gross margin and distributable cash after margin replacement in the range of 5% to 10%. The actual result will depend on the closing date, the time required to realize operating synergies and the ongoing status of the accompanying Terra Grain Fuels ethanol plant. Accordingly, actual results will vary from this estimation. I will say that our view is that the acquisition will be accretive to distributable cash in fiscal 2010 and that it should be significantly accretive in future years once the operations are fully amalgamated. Similarly, the growth in our customer base will depend upon the eventual date of the merger of our two sales forces but clearly the more than 580,000 RCEs that UEG brings will mean significant growth to our customer base in the coming year."

"Let me finish by commenting on our planned June rebranding of Energy Savings to Just Energy. While the Energy Savings name has served us well, our company has grown far beyond the prospect of savings during times of commodity price volatility. We now offer our Green Energy Option products which are not aimed at any potential for savings but rather the protection of our environment and to encourage conservation. With the UEG acquisition, we will substantially add to our growing base of tankless and high efficiency water heaters, another Green product. While we have never sold our product based on savings, as we enter new markets, we want to ensure that customers see both our focus and the full spectrum of our offerings. We believe Just Energy does just that."

The Fund

Energy Savings' business involves the sale of natural gas and electricity to residential, small to mid-size commercial and small industrial customers under long-term, irrevocable fixed price contracts (price protected for electricity). Energy Savings offers natural gas in Manitoba, Quebec, British Columbia, Illinois and Indiana and both gas and electricity in Ontario, Alberta and New York as well as electricity only in Texas. By securing the price for natural gas or electricity under such contracts for a period of up to five years, Energy Savings' customers reduce or eliminate their exposure to changes in the price of these essential commodities. Energy Savings also has environmentally friendly offerings of natural gas and electricity through its Green Energy Option program.

Non GAAP Measures

Management believes the best basis for analyzing both the Fund's operating results and the amount available for distribution is to focus on amounts actually received ("seasonally adjusted"). Seasonally adjusted analysis applies solely to the Canadian gas market (excluding Alberta). In Canada (excluding Alberta), Energy Savings receives payment from the LDCs upon delivery of the commodity not when the customer actually consumes the gas. Seasonally adjusted analysis eliminates seasonal commodity consumption variances and recognizes the amount available for distribution based on cash received from the LDCs.

Management believes that the short-term mark to market non-cash gains (losses) do not impact the long-term financial performance of the Fund and therefore report "adjusted net income". Adjusted net income represents the net income (loss) removing the impact of mark to market gains (losses) and the related tax impact from the reported net income (loss) figure.

Forward-Looking Statements

The Fund's press releases may contain forward-looking statements including statements pertaining to customer revenues and margins, 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 securities regulatory authorities which can be accessed through the SEDAR website at www.sedar.com or through the Fund's website at www.esif.ca.



MANAGEMENT'S DISCUSSION AND ANALYSIS ("MD&A") - May 14, 2009
----------------------------------------------------------------------------


Overview

The following discussion and analysis is a review of the financial condition and results of operations of Energy Savings Income Fund ("Energy Savings" or the "Fund") for the year ended March 31, 2009 and has been prepared with all information available up to and including May 14, 2009. This analysis should be read in conjunction with the audited consolidated financial statements for the year ended March 31, 2009. 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 www.esif.ca. Additional information can be found on SEDAR at www.sedar.com.

Energy Savings 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: Ontario Energy Savings L.P. ("OESLP"), Energy Savings (Manitoba) L.P. ("ESMLP"), Energy Savings (Quebec) L.P. ("ESLP"), ES (B.C.) Limited Partnership ("ESBC"), Alberta Energy Savings L.P. ("AESLP"), Illinois Energy Savings Corp. ("IESC"), New York Energy Savings Corp. ("NYESC"), Indiana Energy Savings Corp. ("INESC"), Energy Savings Texas Corp. ("ESTC") and Newten Home Comfort L.P. ("NHCLP").

Energy Savings' 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, Energy Savings' customers offset their exposure to changes in the price of these essential commodities. Energy Savings, 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. A new partnership was entered into on July 18, 2008 which involves the marketing, leasing, sale and installation of tankless and high efficiency water heaters.

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, customer attrition, fluctuations in natural gas and electricity prices, changes in regulatory regimes, decisions by regulatory authorities and competition and dependence on certain suppliers. Additional information on these and other factors that could affect the Fund's operations, financial results or distribution levels are included in the Fund's annual information form and other reports on file with Canadian security regulatory authorities which can be accessed on our corporate website at www.esif.ca or through the SEDAR website at www.sedar.com.

Practice change

Effective July 1, 2008, the Fund changed its practice from treating future supply hedging positions as hedges for accounting purposes: all mark to market adjustments are now 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 derivative instruments and the related tax effect. The expected future net margin from the supply and customer contracts is set based on the derivative instruments and is effectively unchanged with commodity market movements. Given commodity price 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.

Energy Savings believes that the result of this accounting change and the associated MD&A disclosure is that actual period operating results will be more transparent for investors.

Key terms

"LDC" means a local distribution company, the natural gas or electricity distributor for a regulatory or governmentally defined geographic area.

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

"Attrition" means customers whose contracts were terminated primarily due to relocation or death, or cancelled by Energy Savings due to delinquent accounts.

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

"Delivered volume" represents the actual volume of gas and electricity provided on behalf of customers to the LDCs for the period.

"Annualized volume/Customers" represents the utility projection of the total volume of gas and/or electricity to be delivered for each 12-month period for customers in place at a point in time. The period growth in annualized volume equates to the growth in Energy Savings' customers for the same period.

"Gross margin per RCE" represents the gross margin realized on Energy Savings' customer base, including both low margin customers acquired through various acquisitions and gains/losses from sales of excess commodity supply.

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. In those markets, Energy Savings is paid based on deliveries made to the LDCs evenly throughout the year. The seasonal adjustment is made to more closely align the gross margin to reflect cash received during the period.

No seasonal adjustment is required for electricity as the supply is balanced daily. In the other gas markets, payments for supply by the LDCs are aligned with customer consumption.

Cash Available for Distribution

"Distributable cash after marketing expense" refers to the net cash available for distribution to Unitholders. Seasonally adjusted gross margin is the principal contributor to cash available for distribution. Distributable cash is calculated by the Fund as seasonally adjusted gross margin, adjusted for cash items including general and administrative expenses, marketing expenses, capital tax, bad debt expense, interest expense, corporate taxes and other adjustments. 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 year 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.

Adjusted net income

"Adjusted net income" represents the net income (loss) removing the impact of mark to market gains (losses) arising from derivative financial instruments on our future supply. Energy Savings 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) depending upon current supply pricing volatility.

Management believes that these short-term mark to market non-cash gains (losses) do not impact the long-term financial performance of the Fund. 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.



Financial highlights
For the years ended March 31
(thousands of dollars except where indicated and per unit amounts)

Fiscal 2009 Fiscal 2008 Fiscal 2007
Per Per Per
$ unit Change $ unit Change $ unit

Sales 1,899,213 $17.03 9% 1,738,690 $16.04 13% 1,532,317 $14.28
Net
income
(loss)
(1) (1,107,473)$(9.93) 152,761 $1.41 93,912 $0.88
Adjusted
net
income
(2) 169,929 $1.52 8% 156,722 $1.44 54% 101,882 $0.95
Gross
margin
(season-
ally
adjusted)315,193 $2.83 16% 272,180 $2.51 18% 230,368 $2.15
Distrib-
utable
cash
- After
gross
margin
replace-
ment 195,520 $1.75 15% 169,997 $1.57 11% 152,788 $1.42
- After
market-
ing
ex-
pense 169,353 $1.52 11% 152,834 $1.41 18% 129,984 $1.21
Distrib-
utions
(includ-
ing
Special
Distrib-
ution
(3)) 156,604 $1.40 (10)% 173,531 $1.60 60% 108,652 $1.01
Distrib-
utions
(exclud-
ing
Special
Distrib-
ution) 138,030 $1.24 7% 128,840 $1.19 19% 108,652 $1.01
General
and
adminis-
trative 59,586 $0.53 15% 51,638 $0.48 23% 41,892 $0.39
Distrib-
utable
cash
payout
ratio(3)
(includ-
ing
Special
Distrib-
ution)
- After
gross
margin
replace-
ment 80% 102% 71%
- After
market-
ing
expense 92% 114% 84%
Distributable
cash payout
ratio(4)
(excluding
Special
Distribution)
- After
gross
margin
replace-
ment 71% 76% 71%
- After
marketing
expense 82% 84% 84%

(1) Net income (loss) includes the impact of unrealized gains (losses)
which represent the mark to market of future commodity supply acquired
to cover future customer demand. The supply has been sold to customers
at fixed prices greatly diminishing the realization of year end mark
to market gains and losses.
(2) Adjusted net income 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) In calendar 2008 and 2007 the Fund under-distributed its taxable income
and the Board of Directors of OESC concluded that a Special
Distribution would be paid to ensure that all taxable income would be
distributed. Refer to "Special Distribution" for further information.
(4) Management targets an annual payout ratio after all marketing expenses,
excluding the Special Distribution, of less than 100%.


Reconciliation of net
income (loss) to Adjusted net income Fiscal 2009 Fiscal 2008 Fiscal 2007

Net income (loss) $(1,107,473) $152,761 $93,912
Change in fair value of derivative
instruments 1,336,976 831 7,619
Tax impact on change in fair value
of derivative instruments (59,574) 3,130 351
--------------------------------------
Adjusted net income $169,929 $156,722 $101,882
--------------------------------------


Operations

Gas

In each of the markets that Energy Savings 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. Energy Savings purchases gas supply in advance of marketing. The LDC provides historical customer usage to enable Energy Savings to purchase an approximation of matched supply. Furthermore, in many markets, Energy Savings 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, Energy Savings bears the financial responsibility for fluctuations in customer usage. Volume variances may result in either excess or short supply. Excess supply is sold in the spot market resulting in either a gain or loss compared to the weighted average cost of supply. In the case of greater than expected gas consumption, Energy Savings must purchase the short supply at the market price, which may reduce or increase the customer gross margin typically realized.

Ontario, Quebec and British Columbia

In Ontario, Quebec and British Columbia, the volumes delivered for a customer typically remain constant throughout the year. Energy Savings 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. Energy Savings 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, Energy Savings is required to invoice and receive payments directly from customers. Energy Savings 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 2008. 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 the late summer of 2009, Energy Savings intends to begin billing and collection services directly for all new customers signed and renewed customers.

New York, Illinois and Indiana

In New York, Illinois and Indiana, 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 from the New York, Illinois and Indiana operations 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 and Texas

Energy Savings does not bear the risk for variations in customer consumption in any of the electricity markets in which it operates other than the commercial customers acquired in Texas. In Ontario and New York, Energy Savings 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, Energy Savings offers a load-following product for which it has acquired load-following supply and therefore does not have exposure to variances in customer consumption. Effectively all future offerings for Texas customers will be a load balanced product and Energy Savings 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 ("Newten") 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. Newten continues to ramp up its operations and as at March 31, 2009, had installed over 1,700 water heaters in residential homes and has commenced earning revenue from its installed base of customers.



Cash Available for Distribution and distributions
For the years ended March 31
(thousands of dollars except per unit amounts)

Fiscal 2009 Fiscal 2008 Fiscal 2007
----------- ----------- -----------
Per unit Per unit Per unit
-------- -------- --------

Reconciliation
to statements
of cash flow
Cash inflow from
operations $172,767 $136,007 $98,354
Add:
Increase
(decrease) in
non-cash working
capital (6,181) 11,879 28,311
Tax impact on
distributions
to Class A
preference
shareholders 2,767 4,948 3,319
-------- -------- --------
Cash available
for
distribution $169,353 $152,834 $129,984
-------- -------- --------
-------- -------- --------

Cash available
for distribution
Gross margin per
financial
statements $322,816 $2.90 $274,800 $2.53 $229,444 $2.14
Adjustments
required to
reflect net
cash receipts
from gas sales (7,623) (2,620) 924
-------- -------- --------
Seasonally
adjusted gross
margin $315,193 $2.83 $272,180 $2.51 $230,368 $2.15
-------- -------- --------
Less:
General and
administrative (59,586) (51,638) (41,892)
Capital tax
expense (220) (827) (850)
Bad debt expense (13,887) (6,951) (10,882)
Income tax
recovery (expense) (3,861) 757 (539)
Interest expense (3,857) (5,346) (3,942)
Other items 3,664 780 690
-------- -------- --------
(77,747) (63,225) (57,415)
-------- -------- --------
Distributable cash
before marketing
expenses 237,446 $2.13 208,955 $1.93 172,953 $1.61

Marketing expenses
to maintain gross
margin (41,926) (38,958) (20,165)
-------- -------- --------
Distributable cash
after gross
margin
replacement 195,520 $1.75 169,997 $1.57 152,788 $1.42

Marketing expenses
to add new gross
margin (26,167) (17,163) (22,804)
-------- -------- --------

Cash available for
distribution $169,353 $1.52 $152,834 $1.41 $129,984 $1.21
-------- -------- --------
-------- -------- --------

Distributions
(includes Special
Distribution)
Unitholder
distributions $147,399 $158,511 $99,036

Class A preference
share
distributions 7,660 13,699 9,188
Unit appreciation
rights and
deferred unit
grants
distributions 1,545 1,321 428
-------- -------- --------
Total
distributions $156,604 $1.40 $173,531 $1.60 $108,652 $1.01
-------- -------- --------
-------- -------- --------

Distributions
(excludes Special
Distribution)
Unitholder
distributions $129,872 $117,720 $99,036

Class A preference
share
distributions 6,791 10,130 9,188
Unit appreciation
rights and
deferred unit
grants
distributions 1,367 990 428
-------- -------- --------
Total
distributions $138,030 $1.24 $128,840 $1.19 $108,652 $1.01
-------- -------- --------
-------- -------- --------
Diluted average
number of units
outstanding 111.5m 108.4m 107.3m


Distributable cash

Distributable cash after gross margin replacement for the current year was $195.5 million ($1.75 per unit), up 15% from $170.0 million ($1.57 per unit) in fiscal 2008. The growth reflects a 16% increase in seasonally adjusted gross margin. Factors which aided margin growth included net customer additions, increased consumption due to the cold winter weather with lower supply costs to meet this demand and favourable U.S. exchange rates.

The higher gross margins in the year were offset by increased general and administration costs and bad debt expenses. Increased general and administrative costs of 15%, over the prior year, were primarily staffing costs in our corporate office to support our current and future growth, U.S. exchange rate impact on U.S. dollar denominated costs, an increase in collection costs, full year rent for our new Customer Service call centre and legal fees with respect to business operations in the U.S. Bad debt expense increased in fiscal 2009 compared to 2008, due to the increased revenue in those markets where the Fund bears the credit risk and the weak economic conditions in the U.S. markets. In addition, during fiscal 2008, the Fund released excess bad debt reserve, reducing the comparable bad debt expense for the year.

Energy Savings spent $41.9 million in marketing expenses to maintain its current level of gross margin, which represents 62% of the total marketing expense for the year. A further $26.2 million was spent to increase future gross margin reflecting the 103,000 net RCE additions for fiscal 2009. Management's estimate of the future contracted gross margin grew to $1,020.3 million, up from $915.3 million in the third quarter of fiscal 2009.

Distributable cash after all marketing expenses amounted to $169.4 million ($1.52 per unit) for fiscal 2009, an increase of 11% from $152.8 million ($1.41 per unit) in the prior comparable year. The increase is due to the higher gross margin 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 year over year. Excluding Special Distributions, the payout ratio after deduction of all marketing expenses for the current year was 82%, versus 84% in fiscal 2008.

For further information on the changes in the gross margin, please refer to "Sales and gross margin - Seasonally adjusted" and "General and administrative expenses", "Marketing expenses", "Bad debt expense" and "Interest expense" are further clarified in their respective sections below.



Discussion of Distributions
For the years ended March 31
(in thousands of dollars)

Fiscal 2009 Fiscal 2008 Fiscal 2007
----------- ----------- -----------

Cash flow from operations(1)(A) $172,767 $136,007 $98,354

Net income (loss)(B) $(1,107,473) $152,761 $93,912

Total distributions(2)(C) $156,604 $173,531 $108,652

Excess (shortfall) of cash flows
from operating activities over
distributions paid (A-C) $16,163 $(37,524) $(10,298)

Shortfall of net income (loss)
over distributions paid (B-C) $(1,264,077) $(20,770) $(14,740)

(1) Includes non-cash working capital balances
(2) Includes a one-time Special Distribution of $18.6 million in fiscal 2009
and $44.7 million in fiscal 2008.


Net income (loss) includes non-cash gains and losses associated with the changes in the current market value of Energy Savings' 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, Energy Savings 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 loss was $1.3 billion for the twelve months ended March 31, 2009. In fiscal 2008, Energy Savings had elected to use hedge accounting and thus was able to book the changes in fair value predominantly to Other Comprehensive Income. The change in fair value for the year in fiscal 2008 was $76.9 million.

As can be seen in the table above, the Fund has, in the past, paid out distributions that were higher than both financial statement net income (loss) and operating cash flow. In the view of management, the non-GAAP measure, distributable cash, is an appropriate measure of the Fund's ability to distribute funds, as the cost of carrying incremental working capital necessary for the growth of the business has been deducted in the distributable cash calculation. Further, investment in the addition of new customers intended to increase cash flow is expensed in the financial statements while the original customer base was capitalized. Management believes that the current level of distributions is sustainable in the foreseeable future.

The timing differences between distributions and cash flow from operations created by the cost of carrying incremental working capital due to business seasonality and expansion are funded by the operating credit facility.



Standardized Distributable Cash and Cash Available for Distribution
For the years ended March 31
(thousands of dollars except per unit amounts)

Fiscal 2009 Fiscal 2008 Fiscal 2007
----------- ----------- -----------

Reconciliation to statements of
cash flow
Cash inflow from operations $172,767 $136,007 $98,354
Capital expenditures(1) (6,345) (7,842) (3,726)
-----------------------------------------
Standardized Distributable Cash $166,422 $128,165 $94,628
-----------------------------------------

Adjustments to Standardized
Distributable Cash

Change in non-cash working
capital(2) $(6,181) $11,879 $28,311
Tax impact on distributions to
Class A preference
shareholders(3) 2,767 4,948 3,319
Capital expenditures(1) 6,345 7,842 3,726
-----------------------------------------
Cash available for distribution $169,353 $152,834 $129,984
-----------------------------------------

Standardized Distributable Cash
- per unit basic 1.51 1.19 0.89

Standardized Distributable Cash
- per unit diluted 1.49 1.18 0.88

Payout Ratio based on
Standardized Distributable
Cash(4) (includes Special
Distribution) 94% 135% 115%

Payout Ratio based on
Standardized Distributable
Cash (excludes Special Distribution) 83% 100% 115%

(1) Capital expenditures are funded out of the credit facility.
(2) Change in non-cash working capital is excluded from the calculation of
Cash Available for Distribution as the Fund currently has a $170.0
million credit facility which is available for use to fund working
capital requirements. This eliminates the potential impact of timing
distortions relating to the respective items.
(3) 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.
(4) The Special Distribution relating to 2008 and 2007 has increased the
payout ratios for both comparable periods. Refer to "Special
Distribution" for further details.


In accordance with the CICA July 2007 interpretive release "Standardized Distributable Cash in Income Trusts and other Flow-Through Entities", the Fund has presented the distributable cash calculation to conform to this guidance. In summary, for the purposes of the Fund, Standardized Distributable Cash is defined as the periodic cash flows from operating activities, including the effects of changes in non-cash working capital less total capital expenditures as reported in the GAAP financial statements.

Financing Strategy

The Bank of Nova Scotia joined the lending syndicate on October 17, 2008 with funding totaling $20.0 million increasing the Fund's credit facility to $170.0 million. The credit facility will be sufficient to meet the Fund's short-term working capital and capital expenditure requirements. Working capital requirements can vary widely due to seasonal fluctuations and planned U.S.-related growth. In the long-term, the Fund may be required to access the equity or debt markets in order to fund significant acquisitions.

Productive Capacity

Energy Savings' 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.

The productive capacity of Energy Savings 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 also is maintained through independent contractors, call centre renewal efforts and various mail campaigns to achieve customer growth.

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 therefore maintain productive capacity. The second category is marketing expenditures to add new margin which therefore expands productive capacity.



Financial Statement Analysis

Sales and gross margin - per financial statements
For the years ended March 31
(thousands of dollars)

Fiscal 2009 Fiscal 2008
----------- -----------

United United
Sales Canada States Total Canada States Total
-----

Gas $814,275 $343,889 $1,158,164 $785,788 $247,463 $1,033,251
Electricity 518,388 222,661 741,049 544,278 161,161 705,439
----------------------------------------------------------------------------
$1,332,663 $566,550 $1,899,213 $1,330,066 $408,624 $1,738,690
----------------------------------------------------------------------------
Increase 0% 39% 9%


Gross United United
Margin Canada States Total Canada States Total
------

Gas $154,171 $64,118 $218,289 $140,443 $38,149 $178,592
Electricity 77,549 26,978 104,527 79,804 16,404 96,208
----------------------------------------------------------------------------
$231,720 $91,096 $322,816 $220,247 $54,553 $274,800
----------------------------------------------------------------------------
Increase 5% 67% 17%


Canada

Sales amounted to $1.3 billion for the year, effectively unchanged from the same period in fiscal 2008. Gross margin was $231.7 million for fiscal 2009, up 5% from $220.2 million in the prior comparable year.

United States

Sales and gross margin in the U.S. were $566.6 million and $91.1 million for the fiscal year ended March 31, 2009, an increase of 39% and 67%, respectively, from the same period last year.

For additional information, see "Sales and gross margin - Seasonally adjusted".



Seasonally Adjusted Analysis

Sales and gross margin - Seasonally adjusted(1)
For the year ended March 31
(thousands of dollars)


Fiscal 2009 Fiscal 2008
----------- -----------

United United
Sales Canada States Total Canada States Total
-----

Gas $814,275 $343,889 $1,158,164 $785,788 $247,463 $1,033,251
Adjustments
(1) (10,480) - (10,480) (8,085) - (8,085)
----------------------------------------------------------------------------
$803,795 $343,889 $1,147,684 $777,703 $247,463 $1,025,166
Electricity 518,388 222,661 741,049 544,278 161,161 705,439
----------------------------------------------------------------------------
$1,322,183 $566,550 $1,888,733 $1,321,981 $408,624 $1,730,605
----------------------------------------------------------------------------
Increase 0% 39% 9%



Gross United United
Margin Canada States Total Canada States Total
------

Gas $154,171 $64,118 $218,289 $140,443 $38,149 $178,592
Adjustments
(1) (7,623) - (7,623) (2,620) - (2,620)
----------------------------------------------------------------------------
$146,548 $64,118 $210,666 $137,823 $38,149 $175,972
Electricity 77,549 26,978 104,527 79,804 16,404 96,208
----------------------------------------------------------------------------
$224,097 $91,096 $315,193 $217,627 $54,553 $272,180
----------------------------------------------------------------------------
Increase 3% 67% 16%

(1) For Ontario, Manitoba and Quebec gas markets.



Gross margin analysis
For the years ended March 31
(thousands of dollars)

Fiscal 2009 Fiscal 2008
----------- -----------

United United
Canada States Total Canada States Total

Gas
Customer
margin $146,798 $70,881 $217,679 $143,649 $40,179 $183,828
Loss from
dispositions
of excess
supply and
financial
reconcil-
iations(1) (250) (6,763) (7,013) (5,826) (2,030) (7,856)
----------------------------------------------------------------------------
Gas margin $146,548 $64,118 $210,666 $137,823 $38,149 $175,972
----------------------------------------------------------------------------
Electricity
Customer
margin $78,417 $26,981 $105,398 $84,087 $16,607 $100,694
Loss from
dispositions
of excess
supply(2) (868) (3) (871) (4,283) (203) (4,486)
----------------------------------------------------------------------------
Electricity
margin 77,549 26,978 104,527 $79,804 $16,404 $96,208
----------------------------------------------------------------------------
Total $224,097 $91,096 $315,193 $217,627 $54,553 $272,180
Increase 3% 67% 16%

(1) Results from variances in customer demand and associated gas
reconciliations.
(2) Results from excess supply purchased in advance of customer usage or
fluctuations in customer usage attributable to remaining customers on
load-following contracts.


On a seasonally adjusted basis, sales increased by 9% to $1.9 billion as compared to $1.7 billion in fiscal 2008. Gross margins were $315.2 million in fiscal 2009, up 16% from the comparable prior year.

Canada

Seasonally adjusted sales were $1.3 billion for the year, effectively unchanged from fiscal 2008. Seasonally adjusted gross margins were $224.1 million in fiscal 2009, an increase of 3% from $217.6 million in the prior fiscal year.

Gas

Canadian gas sales increased by 3% to $803.8 million, from $777.7 million in the prior comparable year. In fiscal 2009, total customer delivered volumes were down 3% due to a 2% decline in the customer base. However, despite the drop in the customer base, customer revenue grew by 3% due to an increase in the contract price for new customers signed compared to those customers lost through attrition. Gross margin totaled $146.5 million, up 6% from fiscal 2008 due to significant increases in the margin per customer and lower losses on sale of excess gas to third parties. Excess volumes sold during the year created a loss of $0.3 million in fiscal 2009 versus a loss of $5.8 million in the twelve months of fiscal 2008.

After allowance for balancing and inclusive of acquisitions, average gross margin per customer ("GM/RCE") for the twelve months ended March 31, 2009 amounted to $210/RCE, compared to $193/RCE from the prior comparable year. The GM/RCE value includes an appropriate allowance for the bad debt expense in Alberta.

Electricity

Electricity sales were $518.4 million for the year, a decrease of 5% from fiscal 2008. The reduced sales are attributable to a 9% decrease in total consumption partially attributable to a 5% decline in the number of customers, year over year. Gross margin decreased by only 3% from the prior year to $77.5 million as improved supply management processes and increased Green Energy Option ("GEO") customers offset the decline in customer numbers and lower consumption.

During the year, a small amount of excess volume was sold due to improved commodity management. The balancing losses for the year totaled $0.9 million, greatly reduced from a $4.3 million loss in the prior comparable year.

Average gross margin per customer after all balancing and including acquisitions for the year ended March 31, 2009 in Canada amounted to $131/RCE, up 6% compared to $124/RCE from the prior comparable year. The GM/RCE value includes an appropriate allowance for the bad debt expense in Alberta.

United States

Sales for the twelve months of fiscal 2009 were $566.6 million, an increase of 39% from $408.6 million in the prior year. Seasonally adjusted gross margin was $91.1 million, up 67% from $54.6 million in fiscal 2008.

Gas

Gas sales and gross margin in the U.S. for fiscal 2009 totaled $343.9 million and $64.1 million, respectively, versus $247.5 million and $38.1 million last year. The sales increase of 39% relates primarily to higher average prices, a 13% increase in customer consumption reflecting a 10% increase in customers and the impact of colder weather. Sales and margins also benefited from an increase in the U.S. dollar exchange rate. The U.S. gas gross margin increased by 68% during the twelve months ended March 31, 2009. The increase in gross margin for the year resulted from increased customers, higher weather related consumption offset by the sale of a regional long position resulting in the third party losses of $6.8 million.

Average gross margin after all balancing costs for the twelve months ended March 31, 2009 was $259/RCE, an increase of 48% over the prior year comparable period of $175/RCE. Strong customer consumption on an increased customer base as well as favourable exchange rates contributed to the increase. The GM/RCE value includes an appropriate allowance for bad debt expense in Illinois.

Electricity

Electricity sales and gross margin for the year were $222.7 million and $27.0 million, respectively, versus the prior comparable year of fiscal 2008 in which sales and gross margin amounted to $161.2 million and $16.4 million. Sales and gross margin increased by 38% and 64%, respectively, due to an increase in customers and contract prices, favourable exchange rates and higher per customer consumption due to colder weather in New York.

Average gross margin per customer for electricity during the current quarter increased by 30%, to $133/RCE compared to $102/RCE in the prior year comparable period. U.S. electricity margins benefitted from improved supply management and the strong U.S. dollar. The GM/RCE value for Texas includes an appropriate allowance for the bad debt expense.



Selected Consolidated Financial Data
(thousands of dollars except where indicated and per unit amounts)

The consolidated financial statements of the Fund are prepared in accordance
with Canadian GAAP and are expressed in Canadian dollars. The following
table provides selected financial information for the last three fiscal
years.

Statements of Operations Data
For the years ended March 31 2009 2008 2007
----------- ----------- -----------
Sales per financial statements $1,899,213 $1,738,690 $1,532,317
Gross margin (seasonally adjusted) $315,193 $272,180 $230,368
Net income (loss) $(1,107,473) $152,761 $93,912
Adjusted net income 169,929 156,722 101,882
Net income per unit - basic $(10.03) $1.42 $0.88
Net income per unit - diluted $(9.93) $1.41 $0.88
Adjusted net income per unit - basic $1.54 $1.46 $0.95
Adjusted net income per unit - diluted $1.52 $1.45 $0.95

Balance Sheet Data
As at March 31 2009 2008 2007
----------- ----------- -----------
Total assets $535,755 $709,115 $357,227
Long-term liabilities $480,602 $246,248 $19,509


2009 compared with 2008

The increase in sales and gross margin is primarily a result of the increase in the customer base, mainly in Texas and New York and improved contract prices. In addition, on August 14, 2008 Energy Savings purchased substantially all of the commercial and residential customer contracts (46,000 RCEs) of CEG Energy Options inc. ("CEG") in British Columbia which contributed to Canadian sales and margin.

The change in net income from a gain of $152.8 million to a loss of $1.1 billion relates primarily to the $1.3 billion loss representing the change in fair value of the derivative instruments. These instruments reflect the Fund's requirement to purchase commodity according to estimated demand and, as such, changes in value do not impact the long-term financial performance of the Fund. Effective July 1, 2008, Energy Savings elected to discontinue the practice of hedge accounting and all gains and losses on derivative instruments have been recorded in the "Change in fair value of derivative instruments" caption on the Statement of Operations. In fiscal 2008, Energy Savings had elected to use hedge accounting and thus was able to book the changes in fair value predominantly to Other Comprehensive Income.

Adjusted net income increased to $169.9 million in fiscal 2009 from $156.7 million last year. The increase is a result of improved gross margin figures, offset by increases in general and administrative costs, bad debt expenses and marketing expenses. General and administrative expenses increases were primarily staffing costs in our corporate office to support our current and future growth, U.S. exchange rates, impact on U.S. dollar denominated costs, an increase in collection costs, full year rent for our new Customer Service call centre and legal fees with respect to business operations in the U.S. Bad debt costs increased primarily due to the large increase in total revenues for the year in the markets where Energy Savings assumes the risk for accounts receivable collections. In addition, the increase in the U.S. exchange rate and higher default rates noted in the U.S. markets due to the recessionary conditions led to higher bad debt expense this fiscal year. During fiscal 2008, improved collection procedures had resulted in a significant excess reserve for bad debt, which was released in that fiscal year lowering the bad debt expense. Marketing costs were up due to the impact of the growth in customer additions, higher U.S. exchange on our U.S. based marketing costs and increased recruiting and corporate marketing overhead required to build our commercial sales team.

Total assets decreased by 24% primarily as a result of the change in the Other Assets - Long Term. There has been a significant drop in the forward gas and power prices related to our derivative instruments noted above. As a result, far more commodity contracts with counterparties would have resulted in a gain in the prior year, if sold on the open market. In fiscal 2009, the situation is the opposite whereby there are far more contracts with counterparties that would result in a loss if sold on the open market. Therefore, the Other Asset - Long Term amount has decreased and the Other Liabilities - Long Term amount has increased. Long-term liabilities increased in fiscal 2009 primarily due to the change in mark to market valuation of our derivative instruments explained above.

2008 compared with 2007

The increase in sales and gross margin is primarily a result of the increase in the average sales price and customer base. Energy Savings acquired Just Energy in Texas on May 24, 2007, which contributed to the sales increase. The Fund also had a full 12 months of results from National Fuel Gas ("NFG") in New York and Northern Indiana Public Service Company ("NIPSCO") in Indiana which were two new jurisdictions entered in 2007.

The increase in net income from $93.9 million to $152.8 million and in net income per unit is a result of an increase in gross margin per customer as well as a decrease in bad debt expense, offset by increases in general and administrative costs, marketing expenses and other expenses relating primarily to the change in market value of derivative financial instruments. Effective credit and collection processes implemented during fiscal 2008 reduced the bad debt expense. In addition, collections from the winter billings of fiscal 2007 were higher than anticipated which resulted in a reduction in the associated reserve. General and administrative expenses increased primarily as a result of the additional number of employees and infrastructure necessary to support the Fund's expansion into Texas. The increase in marketing expenses is due to higher overhead costs associated with opening additional offices and additional recruiting expenses.

Adjusted net income increased by 54% from $101.9 million in fiscal 2007 to $156.7 million in fiscal 2008. In fiscal 2008 and 2007, Energy Savings had elected to use hedge accounting and thus was able to book the changes in fair value of the Fund's derivative instruments predominantly to Other Comprehensive Income. Therefore, the differences between adjusted net income and net income are not large since most of the unrealized and realized gains and losses were not flowing through the Consolidated Statement of Operations.

Total assets increased by 99% primarily as a result of the implementation of a new accounting standard for derivative financial instruments. Energy Savings was required to record other assets and liabilities representing the estimated fair value on a mark to market basis of all derivative instruments effective fiscal 2008. In fiscal 2007, only certain derivative instruments were required to be fair valued and recorded in the consolidated financial statements.

Long-term liabilities increased in fiscal 2008 primarily due to the increase in other liabilities - long-term as a result of the implementation of a new accounting standard for derivative financial instruments. In addition, there was a reclassification of the debt from current to long-term on the change of the credit facility renewal period to three years from a previous annual renewal term.



Summary of quarterly results
(thousands of dollars except per unit amounts)

Fiscal 2009 Q1 Q2 Q3 Q4 Total
----------- -------- -------- -------- -------- ----------
Sales per financial
statements $377,910 $294,122 $513,608 $713,573 $1,899,213
Gross margin
(seasonally adjusted) 59,703 61,793 87,554 106,143 315,193
General and
administrative
expense 13,447 13,236 14,753 18,150 59,586
Net income (loss) 34,232 (923,990) (49,094) (168,621) (1,107,473)
Net income (loss)
per unit - basic 0.31 (8.33) (0.44) (1.57) (10.03)
Net income (loss)
per unit - diluted 0.31 (8.31) (0.44) (1.49) (9.93)
Adjusted net income 27,631 6,872 46,682 88,744 169,929
Adjusted net income
per unit - basic 0.25 0.06 0.42 0.81 1.54
Adjusted net income
per unit - diluted 0.25 0.06 0.42 0.79 1.52
Amount available
for distribution
After gross margin/
customer replacement 31,046 34,755 57,475 72,244 195,520
After marketing
expense 30,282 28,394 48,162 62,515 169,353
Payout ratio(1)
After gross margin/
customer replacement 108% 100% 93% 48% 80%
After marketing
expense 111% 122% 111% 56% 92%



Fiscal 2008 Q1 Q2 Q3 Q4 Total
----------- -------- -------- -------- -------- ----------
Sales per financial
statements $352,869 $283,531 $449,673 $652,617 $1,738,690
Gross margin
(seasonally adjusted) 55,309 57,664 71,247 87,960 272,180
General and
administrative
expense 10,942 11,142 12,416 17,138 51,638
Net income 25,918 4,754 28,064 94,025 152,761
Net income per unit
- basic 0.24 0.05 0.26 0.87 1.42
Net income per unit
- diluted 0.24 0.04 0.26 0.87 1.41
Adjusted net income 25,777 8,393 34,890 87,663 156,722
Adjusted net income
per unit - basic 0.24 0.08 0.32 0.81 1.46
Adjusted net income
per unit - diluted 0.24 0.08 0.32 0.80 1.45
Amount available
for distribution
After gross margin
replacement 30,832 37,589 47,242 54,334 169,997
After marketing
expense 26,690 29,690 42,462 53,992 152,834
Payout ratio(1)
After gross margin
replacement 99% 86% 164% 61% 102%
After marketing
expense 114% 109% 183% 61% 114%

(1) Includes a one-time Special Distribution of $18.6 million in fiscal
2009 and $44.7 million in fiscal 2008.


The Fund's results reflect seasonality as consumption is greatest during the third and fourth quarters (winter quarters). While year over year quarterly comparisons are relevant, sequential quarters will vary materially. The main impact of this will be higher distributable cash with a lower payout ratio in the third and fourth quarters and lower distributable cash with a higher payout ratio in the first and second quarters excluding any special distribution.

Analysis of the fourth quarter

Sales are typically higher in the third and fourth quarters because gas consumption is highest during the winter months and approximately 55% of the current customer base is comprised of gas customers. The 9% increase in sales compared to the prior comparable quarter is attributable to an increased customer base for the U.S., related consumption increases and favourable U.S. exchange rates during this time period. Adjusted net income which excludes the impact of the change in fair value of the Fund's derivative instruments increased by 1% to $88.7 million for the three months ended March 31, 2009.

Gross margin increased by 21% in the fourth quarter of fiscal 2009 to $106.1 million from $88.0 million in the same period last year. Increased customer additions, change in the U.S. exchange rate and higher per customer consumption accounted for this increase. General and administration costs were $18.2 million for the quarter, an increase of 6% over $17.1 million last year.

The distributable cash after customer gross margin replacement was $72.2 million, up 33% from $54.3 million in the prior comparable quarter. The increase in gross margin was due to an increased number of customers, favourable exchange rates and improved per unit margins quarter over quarter.

After the deduction of all marketing expenses, distributable cash totaled $62.5 million, up 16% from $54.0 million in the fourth quarter of fiscal 2008. Distributions for the quarter were $34.9 million, an increase of 5% over the same period last year. The payout ratio for the fourth quarter of fiscal 2009 was 56% versus 61% for the same period last year.

Customer volumes

The expansion of the business outside Ontario makes, in the view of management, the continued sole use of RCEs as a customer measurement inappropriate. With continued focus on commercial, small industrial customers and new markets where customer usage is materially different from Ontario, the Fund believes showing straight volumetric measurement of the customer base (annual GJ for natural gas and annual MWh for electricity) will provide meaningful information for analysis. The Fund therefore reported volumetric measures for gas and electricity in Canada and the United States effective this fiscal year. Based on requests by external analysts and Unitholders, the Fund will continue to report RCE data going forward as well.

There are two measures of volume which are being reported - "Annualized volumes/Customers" and "Delivered volumes" in the following two tables. The first measure, "Annualized volumes/Customers" represents the utility projection of the total volume of gas or electricity to be delivered for each 12-month period for customers in place at a point in time. This is the best measure of the relative success of customer aggregation efforts and the long term expectations for profitability of the customers. The second measure is "Delivered volumes in the year", which details the change in the actual growth of volumes delivered to customers for fiscal 2009 as compared to fiscal 2008. This measure tracks our actual financial results and reflects weather and other volume variances.

Energy Savings' published targets for fiscal 2009 were to increase natural gas volumes by 5% and electricity volumes by 15%.

Annualized volumes/Customers

The following table identifies how the annualized volumes have changed from April 1, 2008 to March 31, 2009:



%
Annualized Incr-
Annualized Annualized Annualized Annualized volume as ease
volume as at volume volume volumes not at March (Dec-
April 1, 2008 increase attrition renewed 31, 2009 rease)
----------------------------------------------------------------------------

Natural
gas (GJ)
Canada 80,666,000 10,070,000 (8,162,000) (3,816,000) 78,758,000 (2)%
United
States 22,578,000 9,540,000 (7,208,000) - 24,910,000 10%
----------------------------------------------------------------------------
Total
gas 103,244,000 19,610,000 (15,370,000) (3,816,000) 103,668,000 0%
----------------------------------------------------------------------------

Electricity
(MWh)
Canada 6,090,000 650,000 (680,000) (280,000) 5,780,000 (5)%
United
States 1,040,000 1,680,000 (300,000) (80,000) 2,340,000 125%
----------------------------------------------------------------------------
Total
elect-
ricity 7,130,000 2,330,000 (980,000) (360,000) 8,120,000 14%
----------------------------------------------------------------------------


For the twelve month period ended March 31, 2009, total gas customer numbers are flat as compared to last year which reflects customer additions above targeted levels in the U.S. offset by higher than expected attrition in Canada. U.S. gas annualized volume additions increased by 10% due to strong growth in New York and Indiana.

Total electricity annualized volumes were up 14% for the fiscal year. All customer growth was in the United States with Canada lagging due to high relative five-year prices in Ontario. All electricity contracts entered into by the Province of Ontario since deregulation have been at prices far higher than the current regulated rate and management believes that, over time, regulated prices should move toward that of our five year offering. U.S. electricity volumes were up 125% with strong growth in both New York and Texas.

RCE comparison

In past periods, Energy Savings has reported its customer volumes as RCEs. To allow continuity of comparison, the table below shows the growth of RCEs for the fiscal year ended March 31, 2009.



Customer aggregation

Long-term customers

April 1, 2008 Additions Attrition Failed to renew March 31, 2009
----------------------------------------------------------------------------
Natural
gas
Canada 761,000 95,000 (77,000) (36,000) 743,000
United
States 213,000 90,000 (68,000) - 235,000
----------------------------------------------------------------------------
Total gas 974,000 185,000 (145,000) (36,000) 978,000
----------------------------------------------------------------------------

Electricity
Canada 609,000 65,000 (68,000) (28,000) 578,000
United
States 104,000 168,000 (30,000) (8,000) 234,000
----------------------------------------------------------------------------
Total
electricity 713,000 233,000 (98,000) (36,000) 812,000
----------------------------------------------------------------------------
Combined 1,687,000 418,000 (243,000) (72,000) 1,790,000
----------------------------------------------------------------------------


Gross customer additions for the year, excluding the CEG acquisition were 372,000, up 9% from 342,000 in fiscal 2008. This was due to the opening of additional sales offices in fiscal 2009 and improved recruiting success. Total net customer additions for the year excluding acquisitions were 57,000 in fiscal 2009. In fiscal 2008 the net customer additions were 28,000.

The fourth quarter saw a substantial increase in customer additions compared to the prior year. On an RCE basis, 85,000 gross customers were added in the quarter, up 57% from the fourth quarter additions of 54,000 in fiscal 2008. Net customer additions in the fourth quarter of fiscal 2009 were 15,000 compared to the same period in fiscal 2008 in which the Fund reported negative customer growth.

Delivered volumes in the year

The following table shows the actual delivered volumes for the current and prior comparable year:



% Increase
For the year ended March 31 Fiscal 2009 Fiscal 2008 (Decrease)

Natural gas (GJ)
Canada 73,133,170 75,039,726 (3)%
United States 23,433,805 20,707,436 13%
----------------------------------------------------------------------------
Total gas(1) 96,566,975 95,747,162 1%
----------------------------------------------------------------------------

Electricity (MWh)
Canada 5,802,096 6,366,741 (9)%
United States 1,729,086 667,540 159%
----------------------------------------------------------------------------
Total electricity(1) 7,531,182 7,034,281 7%
----------------------------------------------------------------------------

(1) Includes 709,736 GJs of Green Energy Option ("GEO") gas and 160,953
MWh of GEO electricity delivered in fiscal 2009.


Gas deliveries increased by 1% in the twelve months ended March 31, 2009 primarily due to colder weather conditions and increased U.S. customer base noted during the year. Electricity volumes increased by 7% over the prior comparable year due to strong customer additions in Texas and New York.

Green Energy Option ("GEO")

Sales of the GEO product continue to support and reaffirm the great demand for the GEO product in all markets. The GEO program allows customers to choose to purchase units of green energy in the form of renewable energy or carbon offsets, in an effort to reduce greenhouse gas emissions. When a customer purchases a unit of green energy, it creates a contractual obligation for Energy Savings to purchase a supply of green energy at least equal to the demand created by the customer's purchase. A review was conducted by Grant Thornton LLP of Energy Savings' Renewable Energy and Carbon Offsets Sales and Purchases report for the period from January 1, 2007 through December 31, 2008 validating the Fund's purchases of renewable energy and carbon offsets.

Attrition

Natural gas

Natural gas attrition in Canada was 10% for the year, in line with management's target of 10%. In the U.S., gas attrition for the trailing 12 months was 30%, above management's annual target of 20% but decreased from the 33% and 31% noted in the second and third quarters of fiscal 2009, respectively. Annualized attrition for the fourth quarter was 7% for Canada but increased to 34% for the United States.

Electricity

Electricity attrition in Canada for the year was 11%, slightly above management's target of 10%. However, annualized attrition for the fourth quarter was 9%, below our internal target. Electricity attrition in the United States was 17% over the last 12 months, below management's target of 20%. Annualized U.S. electricity attrition for the fourth quarter was 22%, slightly above target.

Failed to renew

The Energy Savings renewal process is a multi-faceted program and aims to maximize the number of customers who choose to sign a new contract prior to the end of their existing contract term. Efforts begin up to 15 months in advance of contract expiry, allowing a customer to re-contract for an additional four or five years. Presently, the only contracts under which the terms are completed, and therefore are eligible for renewal, are the Ontario, British Columbia and Manitoba gas and Ontario electricity customers.

During the year, renewals for Canadian gas customers in Ontario, British Columbia and Manitoba were 73%. In the Ontario gas market, customers who do not positively elect to renew or terminate their contract receive a one-year fixed price for the ensuing year. This renewal rate is a blend of one-year and five-year contracts and 45% of the 75% of Ontario customers renewed were for a one-year term.

In the Ontario electricity market, there is no opportunity to renew a residential or small volume customer for a one-year term should the customer fail to positively renew or terminate his or her contract. Management targets a renewal rate for electricity customers of 60%. For the fiscal year ended March 31, 2009, 67% of all expiring electricity customer volumes were successfully renewed.

In fiscal 2010, management expects to have the following annualized attrition and renewal rates:



Attrition F2010 Renewals F2010

Natural gas
Canada 10% 70%
United States 20% 50%

Electricity
Canada 10% 65%
United States 20% 60%



Gas and electricity contract renewals

This table shows the percentage of customers up for renewal in each of the
following years:


Canada - Canada - U.S. - U.S. -
Fiscal period gas electricity gas electricity
----------------------------------------------------
2010 25% 7% 11% 14%
2011 25% 22% 15% 8%
2012 21% 22% 13% 12%
2013 15% 30% 30% 15%
Beyond 2013 14% 19% 31% 51%
----------------------------------------------------
Total 100% 100% 100% 100%


Energy Savings continuously monitors its customer renewal rates and continues to modify its offering to existing customers in order to maximize the number of customers who renew their contracts.

Gross margin earned through new marketing efforts

Annual gross margin per customer for new and renewed customers

During fiscal 2009, the Fund continued to see the positive impact of continued efforts to maintain strong margin per customer during challenging marketing periods. The table below depicts the higher margins realized on customers signed in the year:



Annual
Annual gross margin per customer(1) target
Fiscal 2009 Fiscal 2009
-----------------------------

Customers added in the year
- Canada - gas $166 $170
- Canada - electricity $147 $143
- United States - gas $208 $170
- United States - electricity $206 $143
Customers lost in the year
- Canada - gas $184
- Canada - electricity $105
- United States - gas $175
- United States - electricity $102

(1) Customer sales price less cost of associated supply and allowance for
bad debt and U.S. working capital.


General and administrative expenses

General and administrative costs were $59.6 million for the year, representing a 15% increase from $51.6 million in fiscal 2008. The increased expenses in fiscal 2009 were primarily staffing costs in our corporate office to support our current and future growth, U.S. exchange rate impact on U.S. dollar denominated costs, an increase in collection costs, full year rent for our new Customer Service call centre and legal fees with respect to business operations in the U.S. Corporate headcount increased by 25 to a total of 700 fulltime employees primarily to enable Operations to prepare for the new Alberta customers to be billed internally, for sales support for our commercial expansion, and for Customer Service and IT to service our expanding customer base. Collection costs were up in fiscal 2009 reflecting outsourced costs related to the Texas residential market expansion to address increased collection activities. In addition, the call centre was operational for only five months of fiscal 2008 versus a full year this year.

Marketing expenses

Marketing expenses, which consist of commissions paid to independent sales contractors for signing new customers as well as an allocation of corporate costs, were $68.1 million, an increase of 21% from $56.1 million for the twelve month period of fiscal 2008. The largest single component of the increase was the impact of the higher U.S. dollar on our U.S. based marketing costs. The increase also reflects the growth in customer additions, offset by higher costs related to commissions, recruiting and corporate marketing overhead required to build our commercial sales team. During the current fiscal year, management undertook a sales and marketing reorganization to accelerate the customer additions. We are seeing the impact of this reorganization. Customers signed by our marketing sales force increased in fiscal 2009 to 372,000 compared to 342,000 additions in fiscal 2008, an increase of 9%.

Marketing expenses to maintain gross margin are allocated based on the ratio of gross margin lost from attrition as compared to the gross margin signed from new and renewed customers during the fiscal year. Marketing expenses to maintain gross margin were $41.9 million, an increase of 8% from $39.0 million from fiscal 2008.

Marketing expenses to add new gross margin are allocated based on the ratio of net new gross margin earned on the customers signed, less attrition, as compared to the gross margin signed from new and renewed customers during the period. Marketing expenses to add new gross margin totaled $26.2 million, an increase of 52% from $17.2 million in the prior year comparable period. The large increase is consistent with the net customer additions of 57,000 in fiscal 2009 (excluding acquired customers) versus 28,000 net additions fiscal 2008. All marketing costs related to the GEO product offerings are allocated against new margin and there has been a significant increase in our GEO products in the current year.

The actual aggregation costs per customer added compared to the fiscal 2009 target were as follows:



Target
Fiscal 2009 Fiscal 2009
Natural gas
Canada $185/RCE
United States $199/RCE
Total gas $194/RCE $170/RCE
Electricity
Canada $181/RCE
United States $146/RCE
Total electricity $156/RCE $143/RCE


Actual total aggregation costs for gas and electricity customers to date for fiscal 2009 were $194 per customer for gas and $156 per customer for electricity.

In Canada, gas and electricity aggregation costs were $185 and $181 per customer, respectively. Gas and electricity costs were above target due lower than expected Canadian customer additions for the current year and therefore, higher corporate, marketing and customer service costs were allocated to each unit of volume. Approximately 40% of the total marketing expense relates to the costs associated with corporate, marketing and customer service overhead.

In the U.S., gas aggregation costs and electricity aggregation costs were $199 and $146 per customer which is above target for the year. U.S. customer additions were above expectations but the cost per RCE was higher than our target reflecting the higher exchange rate noted during fiscal 2009. U.S. customers (the Fund's highest growth market) were signed with a less than one year margin payback period.

Unit based compensation

Compensation in the form of units (non-cash) granted by the Fund to the directors, officers, full-time employees and service providers of its subsidiaries and affiliates pursuant to the 2001 unit option plan, the 2004 unit appreciation rights plan and the directors' deferred compensation plan amounted to $4.1 million, an increase of 33% from the $3.1 million paid in fiscal 2008. The increased expense in fiscal 2009 is a result of the increase in the number of fully paid unit appreciation rights awarded to employees in fiscal 2009.

Bad debt expense

In Illinois, Alberta and Texas, Energy Savings assumes the credit risk associated with the collection of all customer accounts. In addition, for large direct-billed accounts in B.C. and Ontario, the Fund is responsible for the bad debt risk. Credit review processes have been established to manage the customer default rate. Management factors default from credit risk into its margin expectations for all of the above noted markets.

Bad debt expense for fiscal 2009 was $13.9 million versus $7.0 million expensed in the prior comparable year. The bad debt expense increase of 100% was partially due to the 20% increase in total revenues for the year in the markets where Energy Savings assumes the risk for accounts receivable collections. The increase in the U.S. exchange rate and increased default rates noted in the U.S. markets are due to the recessionary conditions. Also, during fiscal 2008, improved collection procedures had resulted in a significant excess reserve for bad debt, which was released lowering the 2008 bad debt expense. Management integrates its default rate for bad debts within its margin targets and continuously reviews and monitors the credit approval process to mitigate customer delinquency.

For the twelve months ended March 31, 2009, the bad debt expense represents 2.6% of $543.5 million in revenues, near the midpoint of the Fund's 2-3% target range. Higher credit losses should be expected with the current North American recession. Management continues to target bad debt expense of approximately 2-3% during fiscal 2010 and believes that the upper end of the range will be adequate even during a severe and extended recession.

For each of Energy Savings' other markets, the LDCs provide collection services and assume the risk of any bad debt owing from Energy Savings' customers for a regulated fee.

Interest expense

Total interest expense for the twelve months ended March 31, 2009 amounted to $3.9 million, a decrease from $5.3 million in fiscal 2008. The decrease is due to reduced U.S. direct borrowing costs under the credit facility agreement. The U.S. line was completely repaid at the end of fiscal 2009. Energy Savings is required to meet a number of financial covenants under the credit facility agreement and as at March 31, 2009, all of these covenants were met.

Foreign exchange

Energy Savings has an exposure to U.S. dollar exchange rates as a result of its U.S. operations and any changes in the applicable exchange rate may result in a decrease or increase in Other Comprehensive Income (Loss). For the year, a foreign exchange unrealized loss of $1.9 million was reported in Other Comprehensive Income (Loss) versus an unrealized gain of $4.0 million reported in the same period last year. In fiscal 2009, all monies earned in the U.S. were redeployed in the U.S. to fund continued growth. Overall, the high U.S. dollar increases sales and gross margin but this is partially offset by higher operating costs denominated in U.S. dollars.

Class A Preference share distributions

The remaining holder of the Ontario Energy Savings Corp. ("OESC") Class A Preference shares (which are exchangeable into units on a 1:1 basis) is entitled to receive, on a quarterly basis, a payment equal to the amount paid or payable to a Unitholder on an equal number of units. The total amount paid for the twelve months ended March 31, 2009 including tax and the Special Distribution amounted to $7.7 million versus $13.7 million paid in fiscal 2008. The decrease in the preference share distributions resulted from the exchange of 1,442,484 shares into units over the past year and a lower Special Distribution paid in fiscal 2009. These distributions on the Class A Preference shares are reflected in the Statement of Unitholders' Equity of the Fund's consolidated financial statements, net of tax.

Special Distribution

The Fund under-distributed its taxable income in calendar 2008 and would have been subject to tax at 46% for any undistributed taxable income. In order to ensure all of the taxable income is distributed to its Unitholders, the Board of Directors of OESC, as attorney and administrator of the Fund, concluded that it would be preferable to pay out a Special Distribution to effectively allocate all of the taxable income to the Unitholders. The Special Distribution of $18.6 million ($0.165 per unit) was funded by operating cash flow and the Fund's credit facility and was paid in cash on January 30, 2009. In fiscal 2008, a Special Distribution of $44.7 million ($0.41 per unit) was declared in the third quarter and included a combination of 50% cash and 50% units.

Normal course issuer bid

During the third quarter of fiscal 2009, the Fund obtained approval from its Board of Directors to make a normal course issuer bid to purchase up to 9,000,000 units, for the 12-month period commencing November 21, 2008 and ending November 20, 2009 with a maximum of 44,754 units that can be purchased during any trading day. In fiscal 2009, the Fund purchased and cancelled 909,700 units for cash consideration of $6.6 million (an average price of $7.26 per unit).



Recovery of income tax
For the years ended March 31
----------------------------
(thousands of dollars)
----------------------

Fiscal 2009 Fiscal 2008
---------------------------------
Current income tax expense (recovery) $ 3,861 $ (757)
Amount credited to Unitholders' equity 2,767 4,948
Future tax recovery (64,088) (18,692)
---------------------------------
Recovery of income tax $(57,460) $(14,501)
---------------------------------
---------------------------------


The Fund recorded a current income tax expense of $3.9 million for the year versus a recovery of $0.8 million in the same period last year. The change is mainly attributable to state income taxes that our U.S. entities paid, Canadian income tax expense and a small portion of U.S. withholding tax remitted. Also included in the income tax provision, is an amount relating to the tax impact of the distributions paid to the Class A preference shareholder of OESC. In accordance with EIC 151, "Exchangeable Securities Issued by Subsidiaries of Income Trusts", all Class A preference shares are included as part of Unitholders' equity and the distributions paid to the shareholder are included as distributions on the Statement of Unitholders' equity, net of tax. For the year ended March 31, 2009, the tax impact of these distributions, based on an estimated tax rate of 33%, amounted to $2.8 million as compared to $4.9 million in fiscal 2008. During the year, the Fund had significant temporary differences attributed to the mark to market losses from the financial derivatives. As a result, all of the future tax liability recorded during the year was offset by a portion of the mark to market losses. A future tax recovery of $64.1 million has been recorded for fiscal 2009.

Effective January 1, 2011, the Fund will be taxed as a specified investment flow-through trust ("SIFT") Canadian income that has not been subject to a Canadian corporate income tax in the Canadian operating entities. Therefore, the future tax asset or liability associated with Canadian assets recorded on the balance sheet as at that date will be realized over time as the temporary differences between the carrying value of assets in the consolidated financial statements and their respective tax bases are realized. Current Canadian income taxes will be accrued at that time to the extent that there is taxable income in the Fund or its underlying operating entities.

The U.S. based corporate subsidiaries are subject to U.S. income taxes on their taxable income determined under U.S. income tax rules and regulations. As the U.S. subsidiaries had combined operating losses for tax purposes at March 31, 2009, no provision for current U.S. income tax has been made by those U.S. entities.

The Fund follows the liability method of accounting for income taxes. Under this method, income tax liabilities and assets are recognized for the estimated tax consequences attributable to the temporary differences between the carrying value of the assets and liabilities on the consolidated financial statements and their respective tax bases, using substantively enacted income tax rates. A valuation allowance is recorded against a future income tax asset if it is not anticipated that the asset will be realized in the foreseeable future. The effect of a change in the income tax rates used in calculating future income tax liabilities and assets is recognized in income during the period that the change occurs.



Liquidity and capital resources
Summary of cash flows
---------------------
For the years ended March 31
----------------------------
(thousands of dollars)
----------------------

Fiscal 2009 Fiscal 2008

Operating activities $172,767 $136,007
Investing activities (8,187) (41,242)
Financing activities, excluding distributions 2,330 58,033
Gain on foreign exchange 2,691 707
----------------------------------------------------------------------------
Increase in cash before distributions 169,601 153,505
Distributions (cash payments) (137,817) (142,981)
----------------------------------------------------------------------------
Increase in cash 31,784 10,524
Cash - beginning of year 27,310 16,786
----------------------------------------------------------------------------
Cash - end of year $ 59,094 $ 27,310
----------------------------------------------------------------------------
----------------------------------------------------------------------------


Operating activities

Cash flow from operating activities for the twelve months ended March 31, 2009 was $172.8 million, an increase from $136.0 million in the prior comparable year. The increase is primarily attributable to an increase in gross margin during fiscal 2009.

Investing activities

The Fund purchased capital assets totaling $6.3 million during the year, a decrease from $7.8 million in the prior year. In fiscal 2009, Energy Savings' capital spending related to the water heater business and purchases of office equipment and IT software. Last year, purchases were primarily for information technology systems associated with customer service operations supporting the Fund's expanding customer base. During the second quarter, Energy Savings purchased substantially all of the commercial and residential customer contracts of CEG in British Columbia for $1.8 million. CEG was a Western Canadian marketer of natural gas wholly owned by SemCanada Energy Company, both of which filed for creditor protection under the Companies' Creditors Arrangement Act on July 30, 2008. The customer contracts had annualized volumes of approximately 4.9 million GJs or 46,000 RCEs. The remaining term of the contracts at the time of acquisition was estimated to be 20 months. In fiscal 2008, Energy Savings completed the acquisition of Just Energy, including all of its electricity contracts for a total, net of cash, of $33.4 million, of which $18.1 million involved the issuance of units of the Fund.

Financing activities

Financing activities excluding distributions relate primarily to an increase of the operating line for working capital requirements. During the current year, Energy Savings had drawn a total of $87.7 million against the credit facility versus $97.3 million drawn last year. As Energy Savings continues to expand in the United States markets, the need to fund working capital and security requirements will increase driven primarily by the number of customers aggregated and to a lesser extent by the number of new markets. Based on the markets in which Energy Savings currently operates and others that management expects to enter, funding requirements will be supported through the credit facility.

The Fund's liquidity requirements are driven by the delay from the time that a customer contract is signed until cash flow is generated. Approximately 50% of an independent sales contractor's commission payment is made following reaffirmation or verbal verification of the customer contract with most of the remaining 50% being paid after the energy commodity begins flowing to the customer.

The elapsed period between the times when a customer is signed to when the first payment is received from the customer varies with each market. The time delays per market are approximately two to nine months. These periods reflect the time required by the various LDCs to enroll, flow the commodity, bill the customer and remit the first payment to Energy Savings. In Alberta and Texas, Energy Savings receives payment directly from the customer.

Distributions (cash payments)

Investors should note that due to the institution of a distribution reinvestment program ("DRIP") on December 20, 2007, a portion of distributions declared are not paid in cash. This program was suspended on December 1, 2008 with the commencement of the normal course issuer bid and was re-instituted on March 31, 2009. Under the program, Unitholders can elect to receive their distributions in units at a 2% (formally 5%) discount to the prevailing market price rather than the cash equivalent. During the year, the Fund made cash distributions to its Unitholders and Class A preference shareholder in the amount of $137.8 million, compared to $143.0 million in fiscal 2008.

Energy Savings will continue to utilize its cash resources for expansion into new markets, growth in its existing customer base, acquisitions like the CEG customers as well as distributions to its Unitholders.

At the end of the year, the annual rate for distributions per unit was $1.24. The Fund intends to make distributions to its Unitholders, based upon cash receipts of the Fund, excluding proceeds from the issuance of additional Fund units, adjusted for costs and expenses of the Fund. The Fund's intention is for Unitholders of record on the 15th day of each month to receive distributions at the end of the month.

In both fiscal 2009 and 2008, a Special distribution was made to ensure that the Fund distributed all of its taxable income. See "Special Distribution" for additional information.

Balance Sheet as at March 31, 2009 compared to March 31, 2008

Cash increased from $27.3 million as at March 31, 2008 to $59.1 million. The utilization of the credit facility increased from $67.6 million to $76.5 million as a result of normal injection of gas into storage and various other working capital requirements. Working capital requirements in the U.S. and Alberta result from the timing difference between customer consumption and cash receipts. For electricity, working capital is required to fund the lag between settlements with the suppliers and settlement with the LDCs. Under the terms of the credit facility, Energy Savings is able to make use of Bankers' Acceptances and LIBOR advances at stamping fees of 1.5%, prime rate advances at Canadian and U.S. prime plus 0.5% and letters of credit at 1.5%.

The increase in accounts receivable from $207.8 million to $249.5 million is primarily attributable to the improved margin and increased customers for both gas and electricity. Accounts payable and accrued liabilities has also increased from $128.7 million to $165.4 million relating to increased customer consumption associated with the normal seasonality of the Fund.

Gas in storage has increased from $4.3 million to $6.7 million for the year ended March 31, 2009. The increased balance reflects injections into storage for the expanding U.S. customer base.

At the end of the year, customers in Ontario, Manitoba and Quebec had consumed more gas than was supplied to the LDCs for their use. Since Energy Savings is paid for this gas when delivered yet recognizes revenue when the gas is consumed by the customer, the result on the balance sheet is the unbilled revenue amount of $57.8 million and accrued gas accounts payable of $41.4 million. At March 31, 2008, Energy Savings had unbilled revenues amounting to $47.3 million and accrued gas accounts payable of $38.5 million.

Effective July 1, 2008, Energy Savings elected to discontinue the practice of hedge accounting. Previously, the Fund had elected to use hedge accounting and thus was able to book the changes in fair value predominantly to Other Comprehensive Income. The mark to market gains and losses can result in significant changes in net income and accordingly Unitholders' equity from quarter to quarter due to commodity price volatility. Given that the Fund has purchased this supply to cover future customer usage at fixed prices, management believes that these non-cash quarterly changes are not meaningful.

Contractual Obligations

In the normal course of business, the Fund is obligated to make future payments for contracts and other commitments that are known and non-cancelable.



Payments due by period Total Less than 1 1 - 3 4 - 5 After 5
(thousands of dollars) year years years years
----------------------------------------------------------------------------

Property and equipment
lease agreements $25,498 $5,499 $9,150 $5,034 $5,815
EPCOR billing and
collections 31,205 10,111 21,094 - -
Gas and electricity
supply purchase
commitments 3,549,055 1,343,509 1,661,520 531,174 12,852
----------------------------------------------------------------------------

$3,605,758 $1,359,119 $1,691,764 $ 536,208 $ 18,667
----------------------------------------------------------------------------
----------------------------------------------------------------------------


Other obligations

In the opinion of management, the Fund has no material pending actions, claims or proceedings that have not been either included in its accrued liabilities or in the financial statements. In the normal course of business the Fund could be subject to certain contingent obligations that become payable only if certain events were to occur. The inherent uncertainty surrounding the timing and financial impact of any events prevents any meaningful measurement, which is necessary to assess any material impact on future liquidity. Such obligations include potential judgments, settlements, fines and other penalties resulting from actions, claims or proceedings.

Transactions with Related Parties

The Fund does not have any material transactions with any individuals or companies that are not considered independent to the Fund or any of its subsidiaries and/or affiliates.

Critical Accounting Estimates

The consolidated financial statements of the Fund have been prepared in accordance with Canadian GAAP. Certain accounting policies require management to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues, cost of sales, marketing and general and administrative expenses. Estimates are based on historical experience, current information and various other assumptions that are believed to be reasonable under the circumstances. The emergence of new information and changed circumstances may result in actual results or changes to estimated amounts that differ materially from current estimates.

The following assessment of critical accounting estimates is not meant to be exhaustive. The Fund might realize different results from the application of new accounting standards promulgated, from time to time, by various rule-making bodies.

Unbilled revenues/Accrued gas accounts payable

Unbilled revenues result when customers consume more gas than has been delivered by Energy Savings to the LDCs. These estimates are stated at net realizable value. Accrued gas accounts payable represents Energy Savings' obligation to the LDC with respect to gas consumed by customers in excess of that delivered. This obligation is also valued at net realizable value. This estimate is required for the gas business unit only, since electricity is consumed at the same time as delivery. Management uses the current average customer contract price and the current average supply cost as a basis for the valuation.

Gas delivered in excess of consumption/Deferred revenues

Gas delivered to LDCs in excess of consumption by customers is valued at the lower of cost and net realizable value. Collections from LDCs in advance of their consumption results in deferred revenues which are valued at net realizable value. This estimate is required for the gas business unit only since electricity is consumed at the same time as delivery. Management uses the current average customer contract price and the current average supply cost as a basis for the valuation.

Allowance for doubtful accounts

Energy Savings assumes the credit risk associated with the collection of customers' accounts in Alberta, Illinois and Texas. In addition, for large direct billed accounts in B.C. and Ontario the Fund is responsible for the bad debt risk. Management estimates the allowance for doubtful accounts in these markets based on the financial conditions of each jurisdiction, the aging of the receivables, customer and industry concentrations, the current business environment and historical experience.

Goodwill

In assessing the value of goodwill for potential impairment, assumptions are made regarding Energy Savings' future cash flow. If the estimates change in the future, the Fund may be required to record impairment charges related to goodwill. An impairment review of goodwill was performed during fiscal 2009 and as a result of the review, it was determined that no impairment of goodwill existed at March 31, 2009.

Fair Value of Derivative Financial Instruments and Risk Management

The Fund has entered into a variety of derivative financial instruments as part of the business of purchasing and selling gas, electricity and the green energy option. Energy Savings enters into contracts with customers to provide electricity and gas at fixed prices and provide comfort to certain customers that a specified amount of energy will be derived from green generation. These customer contracts expose Energy Savings to changes in market prices to supply these commodities. To reduce the exposure to the commodity market price changes, Energy Savings uses derivative financial and physical contracts to secure fixed price commodity supply to cover its estimated delivery or green commitment obligations.

The Fund's business model objective is to minimize commodity risk other than consumption changes, usually attributable to weather. Accordingly, it is Energy Savings' policy to hedge the estimated requirements of its customers with offsetting hedges of natural gas and electricity at fixed prices for terms equal to those of the customer contracts. The cash flow from these supply contracts is expected to be effective in offsetting Funds' price exposure and serves to fix acquisition costs of gas and electricity to be delivered under the fixed price or price protected customer contracts. Energy Savings' policy is not to use derivative instruments for speculative purposes.

Energy Savings' expansion in the U.S. has introduced foreign exchange related risks. Energy Savings has entered into foreign exchange forwards in order to hedge the exposure to fluctuations in cross border cash flows.

The financial statements are in compliance with Section 3855 of the CICA Handbook, which require a determination of fair value for all derivative financial instruments. Up to June 30, 2008, the financial statements also applied Section 3865 of the CICA Handbook which permitted a further calculation for qualified and designated accounting hedges to determine the effective and ineffective portion of the hedge. This calculation permitted the majority of the change in fair value to be accounted for in the Statement of Other Comprehensive Income. As of July 1, 2008, management decided that the increasing complexity and costs of maintaining this accounting treatment outweighed the benefits. This fair value, (and when it was applicable, the ineffectiveness) is determined using market information at the end of each quarter. Management believes the Fund remains economically hedged operationally across all jurisdictions.

Preference shares of OESC and Trust units

As at May 14, 2009 there were 5,263,728 Class A Preference Shares of OESC outstanding and 106,170,109 units of the Fund outstanding.

Taxability of distributions

Cash and unit distributions received in calendar 2008 were allocated 100% to other income. Additional information can be found on our website at www.esif.ca. Management estimates the distributions for calendar 2009 will be allocated in a similar manner to that of 2008.

Adoption of new accounting policies

On April 1, 2008, the Fund adopted three new accounting standards that were issued by the Canadian Institute of Chartered Accountants ("CICA"); Handbook Section 1535, Capital Disclosures; Handbook Section 3862, Financial Instruments - Disclosures; Handbook Section 3863, Financial Instruments - Presentation. Energy Savings adopted these standards prospectively as required by the standards.

Capital disclosure

Section 1535 requires disclosure of information related to the objectives, policies and processes for managing capital. In addition, the disclosure includes whether externally imposed capital requirements have been complied with. As this standard only addresses disclosure requirements, there was no impact on the financial position of the Fund.

Financial instruments - Disclosures and Financial instruments - Presentation

Section 3862, Financial Instruments - Disclosures and Section 3863, Financial Instruments - Presentation, replace Section 3861, Financial Instruments - Disclosure and Presentation. The new disclosure standards increase the emphasis on the risks associated with both recognized and unrecognized financial instruments and how those risks are managed. The new presentation standards carry forward the former presentation requirements. As these standards only address presentation and disclosure requirements, there was no impact on the financial position of the Fund.

Credit Risk and the fair value of Financial assets and Financial liabilities

On January 20, 2009, the Emerging Issues Committee of the CICA approved an abstract (EIC 173, Credit Risk and the Fair Value of Financial Assets and Financial Liabilities) which clarifies that own credit risk and the credit risk of the counterparty should be taken into account in determining the fair value of derivative instruments. Energy Savings has adopted this standard retrospectively as required which resulted in a gain of $2,964 being recorded to its accumulated earnings.

Recently issued accounting standards

The following are new standards, not yet in effect, which are required to be adopted by the Fund on the effective date:

Goodwill and Intangible Assets - CICA Section 3064

As of April 1, 2009, the Fund will be required to adopt Section 3064, Goodwill and intangible assets, which establishes revised standards for recognition, measurement, presentation and disclosure of goodwill and intangible assets. The new standard is effective for fiscal years beginning on or after October 1, 2008. The Fund has not yet determined the impact of this standard on its financial statements.

Business combinations

In October 2008, the CICA issued Handbook Section 1582, Business Combinations ("CICA 1582), concurrently with CICA Handbook Section 1601, Consolidated Financial Statements ("CICA 1601"), and CICA Handbook Section 1602, Non-controlling Interest ("CICA 1602"). CICA 1582, which replaces CICA Handbook Section 1581, Business Combinations, establishes standards for the measurement of a business combination and the recognition and measurement of assets acquired and liabilities assumed. CICA 1601, which replaces CICA Handbook Section 1600, carries forward the existing Canadian guidance on aspects of the preparation of consolidated financial statements subsequent to acquisition other than non-controlling interests. CICA 1602 establishes guidance for the treatment of non-controlling interests subsequent to acquisition through a business combination. These new standards are effective for fiscal years beginning on or after January 1, 2011. The Fund has not yet determined the impact of these standards on its consolidated financial statements.

International Financial Reporting Standards

In January 2006, the CICA Accounting Standards Board ("AcSB") adopted a strategic plan for the direction of accounting standards in Canada. As part of that plan, the AcSB confirmed in February 2008 that International Financial Reporting Standards ("IFRS") will replace Canadian GAAP in 2011 for profit-oriented Canadian publicly accountable enterprises.

Energy Savings will transition to IFRS effective April 1, 2011, and intends to issue, its first interim financial statement under IFRS for the three-month period ending June 30, 2011, and a complete set of financial statements under IFRS for the year ending March 31, 2012.

Energy Savings has identified differences between Canadian GAAP and IFRS relevant to the Fund and an initial assessment has been made of the impact of the required changes to accounting systems, business processes, and requirements for personnel training and development. Based on the initial assessment of the differences applicable to the Fund, a project team was assembled and a conversion plan was developed in March 2009 to manage the transition to IFRS. As part of the conversion plan, the Fund is in the process of analyzing the detailed impacts of these identified differences and developing solutions to bridge these differences. Energy Savings is currently on target with its conversion plan.

Pursuant to the requirements of CSA Staff Notice 52-320, the following is the high level summary of the key elements of the IFRS conversion plan:

The Fund is currently analyzing various options available under IFRS including options available under IFRS 1 (First-time Adoption of International Financial Reporting Standards). Areas that may have a significant impact on the Fund's financial statements as a result of adopting IFRS are IFRS 1, financial instruments, impairment of assets, intangible assets, business combinations and income taxes.

Information Technology and data systems will be assessed, documentation updated and system changes implemented as required. It is expected that, at a minimum some changes in systems may need to be enhanced. In addition, system options are under consideration to generate financial information under both Canadian GAAP and IFRS.

As part of the current solution development phase, changes in Internal Control over Financial Reporting ("ICFR") are being identified due to change in the processes and systems. Concurrently with implementation of these changes, the ICFR documentation of internal controls will be updated as required, as will the test plans related to management's ongoing assessment of ICFR.

Disclosure Controls and Procedures ("DC&P"), including investor relations and external communications plans, will be assessed and documentation of DC&P will be updated as required, as will test plans related to management's ongoing assessment of DC&P (which includes investor relations and external communication processes).

Energy Savings recognizes that training at all levels is essential to a successful conversion and integration. To date, finance staff, other relevant employees, including certain members of senior management, have attended initial IFRS training sessions. Additional training and communication programs will be developed for delivery to the Audit Committee, Board of Directors, senior management and other stakeholders, as required. Finance staff and other relevant employees will continue to receive ongoing training, as needed, throughout the conversion process.

While a detailed analysis of the impact of conversion on business activities is progressing, based on the diagnostic review, management does not anticipate any significant changes to the business activities. As part of its review, the Fund will assess the impact of adopting IFRS on various items such as debt covenants and capital requirements.

The above disclosure related to IFRS is based on management's current interpretation of requirements and may change as new information becomes available.

RISK FACTORS

Described below are the principal risks and uncertainties that Energy Savings can forsee. It is not an exhaustive list, some future risks may be as yet unknown and other risks, currently regarded as immaterial, could turn out to be material.

Credit, Commodity and Other Market Related Risks

Availability of Supply and Dependence on Shell Energy

The risk of supply default is mitigated through credit and supply diversity arrangements. The Energy Savings' business model is based on contracting for supply to lock in margin. While Energy Savings has the ability to select alternative commodity suppliers, approximately 49% of its gas and 54% of its electricity supply contracts are currently with the Shell Entities. There is a risk that counterparties could not deliver due to business failure, supply shortage or be otherwise unable to perform their obligations under their agreements with Energy Savings, or that Energy Savings could not identify alternatives to Shell Entities. Energy Savings continues to investigate opportunities to identify or secure additional gas suppliers and electricity suppliers. In addition to the Shell Entities, Energy Savings has contracts with other commodity suppliers including the BP Entities, Bruce Power, Constellation, and EPCOR. Other suppliers represent less than 1% and 2% of our gas and electricity supply, respectively.

Volatility of Commodity Prices - Enforcement

A key risk to the Energy Savings' business model is a sudden and significant drop in the market price of gas or electricity resulting in some customers renouncing their contracts. Energy Savings may encounter difficulty or political resistance for enforcement of liquidated damages and/or enactment of force majeure provisions in such a situation and be exposed to spot prices with a material adverse impact to cash flow. Continual monitoring of margin and exposure allows management of Energy Savings time to adjust strategies, pricing and communications to mitigate this risk.

Availability of Credit

Energy Savings operates in the Illinois, Texas, Indiana and Alberta markets which provide for payment by LDCs only when the customer has paid for the consumed commodity (rather than when the commodity is delivered). Also, in the Illinois and Indiana markets, Energy Savings must inject gas inventory into storage in advance of payment. These factors, along with the seasonality of customer consumption, create working capital requirements necessitating the use of Energy Savings' available credit. In addition, some of Energy Savings' subsidiaries and affiliates are required to provide credit assurance, by means of providing guarantees or posting collateral, in connection with commodity supply contracts, license obligations and obligations owed to certain LDCs. Cash flow and distributions could be impacted by the ability of Energy Savings to fund such requirements or to provide other satisfactory credit assurance for such obligations. To mitigate credit availability risk and its potential impact to cash flows, Energy Savings has security arrangements in place pursuant to which commodity suppliers and the lenders under the Credit Facility hold security over substantially all of the assets of Energy Savings (other than AESLP and Newten). AESLP in turn has similar arrangements in place solely with EPCOR. Other commodity suppliers' security requirements are met through cash margining, guarantees and letters of credit. The most significant assets of Energy Savings consist of its contracts with customers, which may not be suitable as security for some creditors and commodity suppliers. To date, the Credit Facility and related security agreements have met the collateral posting and operational requirements of the business. Energy Savings continues to monitor its credit and security requirements. Energy Savings' business may be adversely affected if it is unable to meet cash obligations for operational requirements or its collateral posting requirements.

Market Risk

Market risk is the potential loss that may be incurred as a result of changes in the market or fair value of a particular instrument or commodity. Although Energy Savings manages its estimated customer requirements net of contracted commodity to zero, it is exposed to market risks associated with commodity prices and market volatility where estimated customer requirements do not match actual customer requirements or where it has not been able to exactly purchase the estimated customer requirements. Energy Savings is also exposed to interest rates associated with its credit facility and foreign currency exchange rates associated with the repatriation of U.S. denominated funds for Canadian denominated distributions. Energy Savings' exposure to market risk is affected by a number of factors, including accuracy of estimation of customer commodity requirements, commodity prices, volatility and liquidity of markets, and the absolute and relative levels of interest rates and foreign currency exchange rates. Energy Savings enters into derivative instruments in order to manage exposures to changes in commodity prices and foreign currency rates; current exposure to interest rates does not economically warrant the use of derivative instruments. The derivative instruments that are used are designed to fix the price of supply for estimated customer commodity demand in Canadian dollars and thereby fix margins such that Unitholder distributions can be appropriately established. Derivative instruments are generally transacted over-the-counter. The inability or failure of Energy Savings to manage and monitor the above market risks could have a material adverse effect on the operations and cash flow of Energy Savings.

Market Risk Governance

Energy Savings has adopted a corporate-wide Risk Management Policy governing its market risk management and any derivative trading activities. An internal Risk Committee, consisting of senior officers of Energy Savings monitors company-wide energy risk management activities as well as foreign exchange and interest rate activities. There is also a Risk Committee of the Board that oversees management. The Risk Office and the internal Risk Committee monitor the results and ensure compliance with the Risk Management Policy. The Risk Office is responsible for ensuring that Energy Savings manages the market, credit and operational risks within limitations imposed by the Board of Directors in accordance with its Risk Management Policy. Market risks are monitored by the Risk Office and internal Risk Committee utilizing industry accepted mark-to-market techniques and analytical methodologies in addition to company specific measures. The Risk Office operates and reports independently of the traders. The failure or inability of Energy Savings to comply with and monitor its Risk Management Policy could have an adverse effect on the operations and cash flow of Energy Savings.

Energy Trading Inherent Risks

Energy trading subjects Energy Savings to some inherent risks associated with future contractual commitments, including market and operational risks, counterparty credit risk, product location differences, market liquidity and volatility. There is continuous monitoring and reporting of the valuation of identified risks to the internal Risk Committee, Executive Committee and the Risk Committee of the Board of Directors. The failure or inability of Energy Savings to monitor and address the energy trading inherent risks could have a material adverse effect on its operations and cash flow.

Customer Credit Risk

In Alberta, Texas and Illinois, credit review processes have been implemented to manage customer default as Energy Savings has credit risk in these markets. The processes are also applied to commercial customers in other jurisdictions. In addition, there is a Credit Policy that has been established to govern these processes. If a significant number of residential customers or a collection of larger commercial customers for which Energy Savings has the credit risk were to default on their payments, it could have a material adverse affect on the operations and cash flow of Energy Savings. Management factors default from credit risk in its margin expectations for all customers in Illinois, Texas and Alberta and commercial customers where Energy Savings has the credit risk.

For the remaining customers, the LDCs provide collection services and assume the risk of any bad debts owing from Energy Savings' customers for a fee. Management believes that the risk of the LDCs failing to deliver payment to Energy Savings is minimal. There is no assurance that the LDCs that provide these services will continue to do so in the future.

Counterparty Credit Risk

Counterparty credit risk represents the loss that Energy Savings would incur if a counterparty fails to perform under its contractual obligations. This risk would manifest itself in Energy Savings replacing contracted supply at prevailing market rates thus impacting the related customer margin or replacing contracted foreign exchange at prevailing market rates impacting the related Canadian dollar denominated distributions. Counterparty limits are established within the Risk Management Policy. Any exception to these limits requires approval from the Board of Directors of OESC. The Risk Office and internal Risk Committee monitor current and potential credit exposure to individual counterparties and also monitor overall aggregate counterparty exposure. The failure of a counterparty to meet its contractual obligations could have a material adverse effect on the operations and cash flow of Energy Savings.

Electricity Supply - Balancing Risk

It is Energy Savings' policy to procure the estimated electricity requirements of its customers with offsetting electricity swaps in advance of obtaining customers. Depending on several factors, including weather, Energy Savings' customers may use more or less electricity than the volume purchased by Energy Savings for delivery to them. Energy Savings is able to invoice some of its existing electricity customers for balancing charges or credits when the amount of energy used is greater than or less than the amount of energy that Energy Savings has estimated. For certain Texas and commercial customers, Energy Savings bears the risk of fluctuation in customer consumption. Energy Savings monitors consumption and has a balancing and pricing strategy to accommodate the estimated associated costs. In certain circumstances, there can be balancing issues for which Energy Savings is responsible when customer aggregation forecasts are not realized.

Natural Gas Supply - Balancing Risk

It is Energy Savings' policy to procure the estimated gas requirements of its customers with offsetting gas physical forwards in advance of obtaining customers. Depending on several factors, including weather, Energy Savings' customers may use more or less gas than the volume purchased by Energy Savings for delivery to them. Energy Savings does not invoice its natural gas customers for balancing and, accordingly, bears the risk of fluctuation in customer consumption. Energy Savings monitors gas consumption and has an options strategy that covers forecast differences in customer consumption due to weather variations as well as forecast LDC balancing requirements. The cost of this strategy is incorporated in the price to the customer. To the extent that forecast balancing requirements are outside the options purchased, Energy Savings will bear financing responsibility, be exposed to market risk and, furthermore, may also be exposed to penalties by the LDCs. The inability or failure of Energy Savings to manage and monitor these balancing risks could have a material adverse effect on its operations and cash flow. In addition, for certain commercial customers, Energy Savings bears the risk of fluctuation in customer consumption. Energy Savings monitors consumption and has a balancing and pricing strategy to accommodate for the estimated associated costs.

Operational Risks

Information Technology Systems

Energy Savings operates in a high-volume business with an extensive array of data interchanges and market requirements. Energy Savings is dependent on its management information systems to track, monitor and correct or otherwise verify a high volume of data to ensure the reported financial results are accurate. Management also relies on its management information systems to provide its independent contractors with compensation information and to electronically record each customer telephone interaction. Energy Savings' information systems also help management forecast new customer enrolments and their energy requirements, which help ensure that the Fund is able to supply its new customers' estimated average energy requirements without exposing the Fund to the spot market beyond the risk tolerances established by the Risk Management Policy. The failure of Energy Savings to install and maintain these systems could have a material adverse effect on the operations and cash flow of Energy Savings.

Reliance on Third Party Service Providers

In all jurisdictions in which Energy Savings operates, the LDCs currently perform billing and collection services except as follows: in the province of Alberta and state of Texas, where Energy Savings is required to invoice and receive payments directly from its customers; in Illinois, where Energy Savings is responsible for collection of defaulted amounts; in British Columbia where Energy Savings is required to invoice and receive payments from certain commercial customers and in Ontario, where Energy Savings would be responsible for collection of defaulted amounts in respect of certain large volume users in one utility territory. To date, no defaults have been experienced in this last category. In 2005, Energy Savings entered into a five-year agreement with EPCOR for the provision of billing and collection services for all of Energy Savings' customers in Alberta which was amended and extended in December 2008. 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 the late summer of 2009, Energy Savings intends to begin billing and collection services directly for all new customers signed and renewed customers. If the LDCs cease to perform these services, Energy Savings would have to seek a third party billing provider or develop internal systems to perform these functions. There is no assurance that the LDCs will continue to provide these services in the future.

Outsourcing and Offshoring Arrangements

Energy Savings has outsource arrangements, predominantly to support the call centre's requirements for business continuity plans and independence for regulatory purposes. Contract data input is also outsourced. Some of the outsourcing contracts are offshore. As with any contractual relationship, there are inherent risks to be mitigated and these are actively managed, predominantly through quality control measures and regular reporting.

Competition

A number of companies (Direct Energy, Superior Energy and MX Energy) and incumbent utility subsidiaries compete with Energy Savings in the residential, commercial and small industrial market. It is possible that new entrants may enter the market as marketers and compete directly for the customer base that Energy Savings targets, slowing or reducing its market share. If the LDCs are permitted by changes in the current regulatory framework to sell natural gas at prices other than cost, their existing customer bases could provide them with a significant competitive advantage. This may limit the number of customers available for marketers including Energy Savings.

Dependence on Independent Sales Contractors

Energy Savings must retain qualified Independent Sales Contractors despite competition among Energy Savings' competitors. If Energy Savings is unable to attract a sufficient number of Independent Sales Contractors, Energy Savings' customer additions and renewals may decrease and the Fund may not be able to execute its business strategy. The continued growth of Energy Savings is reliant on distribution channels, including the services of its Independent Sales Contractors. There can be no assurance that competitive conditions will allow these Independent Contractors, who are not employees of Energy Savings or its affiliates, to achieve these customer additions. Lack of success in these marketing programs would limit future growth of the cash flow of Energy Savings.

Energy Savings has consistently taken the position that its Independent Sales Contractors act independently pursuant to their contracts for service, which provide that Energy Savings does not control how, where or when they provide their services. On occasion, an independent contractor may make a claim that they are entitled to a benefit pursuant to legislation even though they have entered into a contract with Energy Savings that provides that they are not entitled to benefits normally available to employees and Energy Savings must respond to these claims. Energy Savings' position has been confirmed by regulatory bodies in many instances, but Energy Savings is currently appealing the findings of two regulatory bodies (one in Canada and one in the U.S.). Should Energy Savings be unsuccessful in its appeals, Energy Savings would be required to remit unpaid tax amounts plus interest and might be assessed a penalty. It could also mean that Energy Savings would have to reassess its position in respect of other regulatory matters affecting its Independent Sales Contractors such as income tax treatment. Such a decision could have a material adverse effect on the operations and cash flow of Energy Savings.

Electricity Contract Renewals and Attrition Rates

As at March 31, 2009, Energy Savings held long-term electricity contracts reflecting approximately 812,000 long-term electricity RCEs, of which 8% renew in 2010, 18% renew in 2011, 19% in 2012, 25% in 2013 and 30% beyond 2013. Although Energy Savings has experienced electricity contract attrition rates of approximately 13% per year, there can be no assurance that this rate of annual attrition will not increase in the future or that Energy Savings will be able to renew its existing electricity contracts at the expiry of their terms. Changes in customer behaviour, government regulation or increased competition may affect (potentially adversely) attrition and renewal rates in the future, and these changes could adversely impact the future cash flow of Energy Savings. See discussion under "Failed to renew". Energy Savings' experience is that approximately 67% of its electricity customers have renewed at the expiry of the term of their contract.

Gas Contract Renewals and Attrition Rates

As at March 31, 2009, Energy Savings had long-term gas contracts reflecting approximately 978,000 long-term gas RCEs, of which 21% renew in 2010, 22% renew in 2011, 18% in 2012, 19% in 2013 and 20% renew beyond 2013. The experience of Energy Savings is that approximately 73% of gas customers renew at the expiry of the term of their contract. Although Energy Savings has experienced gas contract attrition rates of approximately 15% per year, there can be no assurance that this rate of annual attrition will not increase in the future or that Energy Savings will be able to renew its existing gas contracts at the expiration of their terms. Changes in customer behaviour, government regulation or increased competition may affect (potentially adversely) attrition and renewal rates in the future and these changes could adversely impact the future cash flow of Energy Savings. See discussion under "Volumes not renewed".

Cash Distributions Are Not Guaranteed and Will Fluctuate with the Performance of Energy Savings

Although Energy Savings intends to distribute the interest and other income it earns less expenses and amounts, if any, paid by Energy Savings in connection with the redemption of units, there can be no assurance regarding the amounts of income to be generated by the Fund's affiliates and paid, directly or indirectly to the Fund. The ability to distribute and the actual amount distributed in respect of the units will depend upon numerous factors, including profitability, fluctuations in working capital, debt service requirements (including compliance with Credit Facility obligations), the sustainability of margins, the ability of Energy Savings to procure, at favourable prices, its estimated commitment to supply natural gas and electricity to its customers, the ability of Energy Savings to secure additional gas and electricity contracts and other factors beyond the control of Energy Savings. Management of Energy Savings cannot make any assurances that the Fund's affiliates will be able to pass any additional costs arising from legislative changes (or any amendments) on to customers. Cash distributions are not guaranteed and will fluctuate with the performance of the Fund's affiliates and other factors.

Earnings Volatility

Energy Savings business is seasonal in nature. In addition to regular seasonal fluctuations in its earnings, there is significant volatility in its earnings associated with the requirement to mark its commodity contracts to market. The earnings volatility associated with seasonality and mark to market accounting may be misconstrued as instability, thereby impacting access to capital. Management ensures there is adequate disclosure for both the mark to market and seasonality to mitigate this risk.

Model Risk

The approach to calculation of market value and customer forecasts requires data intensive modeling used in conjunction with certain assumptions when independently verifiable information is not available. Although Energy Savings uses industry standard approaches and validates its internally developed models, results could change significantly should underlying assumptions prove incorrect or an embedded modeling error go undetected in the vetting process.

Commodity Alternatives

To the extent that natural gas and electricity enjoy a price advantage over other forms of energy, such price advantage may be transitory and consumers may switch to the use of another form of energy. The inherent volatility of natural gas and electricity prices could result in these other sources of energy providing more significant competition to Energy Savings.

Capital Asset and Replacement Risk

The Fund does not invest in a significant capital asset program and the vast majority of capital asset expenditures are with respect to information technology including telephony. The capital asset expenditure cash flow in fiscal 2009 represents 4% of operating cash flow and has been funded through operations. Replacement of capital assets is not considered significant.

Material Debt Arrangements

The Fund's Credit Facility is in the amount of $170.0 million. There are various covenants pursuant to the Credit Facility that govern most of the Fund's subsidiaries and affiliates. In addition, the Fund is required to submit monthly reporting covering, among other things, mark to market exposure, borrowing base certificate and a supply/demand projection. To date, the Fund has met the requirements of the Credit Facility. Should the Credit Facility be unavailable, there would be a significant material adverse effect as the likely result would be either, a replacement facility with increased costs, or an inability to operate.

Disruptions to Infrastructure

Customers are reliant upon the LDCs to deliver their contracted commodity. LDCs are reliant upon the continuing availability of the distribution infrastructure. Any disruptions in this infrastructure would result in counterparties and thereafter Energy Savings enacting the force majeure clauses of their contracts. Under such severe circumstances there would be no revenue or associated cost of sales to report for the affected areas.

Expansion Strategy and Future Acquisitions

The Fund plans to grow its business by expansion into additional deregulated markets through organic growth and acquisitions. The expansion into additional markets is subject to a number of risks, any of which could prevent the Fund from realizing its business strategy.

Acquisitions involve numerous risks, any one of which could harm the Fund's business, including difficulties in integrating the operations, technologies, products, existing contracts, accounting processes and personnel of the target and realizing the anticipated synergies of the combined businesses; difficulties in supporting and transitioning customers, if any, or assets of the target company may exceed the value the Fund realizes, or the value it could have realized if it had allocated the purchase price or other resources to another opportunity; risks of entering new markets or areas in which Energy Savings has limited or no experience or are outside its core competencies; potential loss of key employees, customers and strategic alliances from either Energy Savings' current business or the business of the target; assumption of unanticipated problems or latent liabilities, such as problems with the quality of the products of the target; and inability to generate sufficient revenue to offset acquisition costs.

Future acquisitions or expansion could result in the incurrence of additional debt and related interest expense, as well as unforeseen liabilities, all of which could have a material adverse effect on the Fund's business, results of operations and financial condition. The failure to successfully evaluate and execute acquisitions or otherwise adequately address the risks associated with acquisitions could have a material adverse effect on Energy Savings' business, results of operations and financial condition. Energy Savings may require additional financing should an appropriate acquisition be identified and it may not have access to the funding required for the expansion of its business or such funding may not be available to Energy Savings on acceptable terms. There is no assurance that Energy Savings will determine to pursue any acquisition or that such an opportunity, if pursued, will be successful.

Legal, Regulatory and Securities Risks

Legislative and Regulatory Environment

Energy Savings operates in the highly regulated natural gas and electricity retail sales industry in the provinces of Ontario, Manitoba, Quebec, British Columbia and Alberta and in the states of Illinois, Indiana, New York and Texas. It must comply with the legislation and regulations in these jurisdictions in order to maintain its licensed status and to continue its operations. There is potential for change to this legislation and these regulatory measures that may, favourably or unfavourably, impact Energy Savings' business model. As part of doing business as a door-to-door marketing company, Energy Savings receives complaints from consumers which may involve sanctions from regulatory and legal authorities including those which issue marketing licences. Similarly, changes to consumer protection legislation in those provinces and states where Energy Savings markets to non-commercial customers may, favourably or unfavourably, impact Energy Savings' business model. Energy Savings has a dedicated team of in-house regulatory advisors to ensure adequate knowledge of the legislation and regulations in order that operations may be advised of regulations pursuant to which procedures are required to be implemented and monitored to maintain license status. When new markets are entered, the team assesses the market and determines if additional expertise (internal or external) is required. There is also a team that monitors and addresses complaints with a view to mitigating underlying causes of complaints.

In addition to the complaints and class actions referenced herein and litigation in the ordinary course of business, Energy Savings may in the future be subject to class actions, other litigation and other actions arising in relation to its consumer contracts and marketing practices. See the "Legal proceedings" section of this report. This litigation is, and any such additional litigation could be, time consuming and expensive and could distract our executive team from the conduct of Energy Savings' daily business. The adverse resolution of any specific lawsuit could have a material adverse effect on our ability to favourably resolve other lawsuits and on the Fund's financial condition and liquidity.

Investment Eligibility

Energy Savings will endeavor to ensure that the units continue to be qualified investments for registered retirement savings plans, deferred profit sharing plans, registered retirement income funds and registered education savings plans. The Tax Act imposes penalties for the acquisition or holding of non-qualified or ineligible investments and there is no assurance that the conditions prescribed for such qualified or eligible investments will be adhered to at any particular time.

Nature of Units

Securities such as the units are hybrids in that they share certain attributes common to both equity securities and debt instruments. The units do not represent a direct investment in the natural gas or electricity wholesale business and should not be viewed by investors as shares or securities in any of the Fund's affiliates. As holders of units, subject to the Trust Beneficiaries' Liability Act, 2004, Unitholders do not have the statutory rights normally associated with ownership of shares of a company including, for example, the right to bring "oppressive" or "derivative" actions. The units represent a fractional interest in the Fund. The Fund's primary assets are its direct and indirect interests in the securities of its affiliates. The price per unit is, among other things, a function of anticipated distributable income.

Redemption Right

It is anticipated that the redemption right will not be the primary mechanism for Unitholders to liquidate their investments. OESC Notes, Notes of OESC Exchangeco II Inc. ("Exchangeco II"), a wholly owned subsidiary of the Fund, and the Fund Notes (of which none are outstanding), which may be distributed in specie to Unitholders in connection with a redemption will not be listed on any stock exchange and no established market is expected to develop for such OESC Notes, Exchangeco II Notes and the Fund Notes. Cash redemptions are subject to limitations.

Unitholder Limited Liability

The Declaration of Trust provides that no Unitholder will be subject to any liability in connection with the Fund or its assets or obligations, and in the event that a court determines that Unitholders are subject to any such liabilities, the liabilities will be enforceable only against, and will be satisfied only out of, the Unitholder's share of the Fund's assets.

The Declaration of Trust further provides that the trustee and the Fund shall make all reasonable efforts to include as a specific term of any obligations or liabilities being incurred by the Fund or the Trustee on behalf of the Fund a contractual provision to the effect that neither the Unitholders nor the trustee have any personal liability or obligations in respect thereof. The Administration Agreement contains such provisions. Personal liability may also arise in respect of claims against the Fund that do not arise under contracts, including claims in tort, claims for taxes and possibly certain other statutory liabilities. As the Fund's activities are generally limited to investing in securities issued by its affiliates, the possibility of any personal liability of this nature arising is considered remote.

On December 16, 2004, the Government of Ontario passed the Trust Beneficiaries' Liability Act, 2004, which limits the liability of holders of trust units, in a manner similar to that afforded to holders of shares of Ontario incorporated limited liability corporations. The legislation provides that the beneficiaries of a trust are not as beneficiaries, liable for any act, default, obligation or liability of the trust or any of its trustees that arises after the act became law if, when the act or default occurs or the obligation or liability arises: (a) the trust is a reporting issuer under the Securities Act (Ontario); and (b) the trust is governed by the laws of Ontario. The Fund is a reporting issuer under the Securities Act (Ontario) and is governed by the laws of Ontario. However, the courts have not yet had an opportunity to consider this legislation.

The operations of the Fund will be conducted, upon the advice of counsel, in such a way and in such jurisdictions as to avoid as far as possible any material risk of liability on the Unitholders for claims against the Fund.

Distribution of Common Shares and Notes on Termination of the Fund

Upon termination of the Fund, the trustee may distribute the common shares, Exchangeco common shares, OESC Notes, Exchangeco II Notes and the Fund Notes directly to the Unitholders, subject to obtaining all required regulatory approvals. There is currently no market for the common shares, Exchangeco common shares, Exchangeco II Notes, OESC Notes, or the Fund Notes. In addition, the common shares, Exchangeco common shares, Exchangeco II Notes, OESC Notes and the Fund Notes are not freely tradable and are not currently listed on any stock exchange.

The Fund May Issue Additional Units Diluting Existing Unitholders' Interests

The Declaration of Trust authorizes the OESC as administrator to cause the Fund to issue an unlimited number of units for such consideration and on such terms and conditions as shall be established by the Administrator without the approval of any Unitholders. Additional units have been and will be issued by the Fund on the exercise of the Exchangeco II Exchange Rights relating to the Class A preference shares.

Restrictions on Potential Growth

The payout by the Fund's affiliates of the vast majority of all of their operating cash flow will make additional capital and operating expenditures dependent on increased cash flow or additional financing in the future. Lack of such funds could limit the future growth of Energy Savings and its cash flow.

Changes in Securities Legislation

There can be no assurance that the treatment of mutual fund trusts will not be changed in a manner which adversely affects Unitholders. If the Fund ceases to qualify as a "mutual fund trust" under the Tax Act, the units will cease to be qualified investments for registered retirement savings plans, deferred profit sharing plans, registered retirement income funds and registered education savings plans.

Legal Proceedings


On March 3, 2008, the Citizen's Utility Board, ("CUB") AARP and Citizen Action/Illinois filed a complaint before the Illinois Commerce Commission alleging claims very similar to those in the Illinois AG Complaint. Energy Savings has commenced discussion with the CUB to address and defend the allegations and intends to seek a constructive resolution to the matter.

On March 20, 2008, an Indiana resident filed a proposed consumer class action against IESC in Illinois also based on allegations similar to those made by the Illinois Attorney General. The court dismissed the action and ordered the plaintiff to refile with proper jurisdiction cited (citizenship and quantum). The action has been restricted to Indiana plaintiffs on a limited basis. The plaintiff will now have to seek certification.

On April 4, 2008, NYESC was served with a complaint initiated by a commercial customer in New York that proposes a class action against NYESC, the Fund and the LDC (Consolidated Edison) on behalf of residents of New York City. On December 16, 2008, the court dismissed the complaint against the fund and the complaint against NYESC was referred to arbitration. The plaintiff's representative filed an appeal but has yet, under state court rules, perfected it, which it has until July 15, 2009 to do so.

Energy Savings will resolve or vigorously contest the claims in these matters. Management believes that the pending legal actions against IESC and, NYESC or the Fund are not expected to have a material impact on the financial condition and liquidity of the Fund at this time.

Controls and Procedures

Energy Savings maintains appropriate information systems, procedures and controls to ensure that information disclosed externally is complete, reliable and timely. Energy Savings' Chief Executive Officer and Chief Financial Officer evaluated, or caused an evaluation under their direct supervision of, the design and operating effectiveness of the Fund's disclosure controls and procedures (as defined in National Instrument 52-109, Certification of Disclosure in Issuer's Annual and Interim Filings) as at March 31, 2009 and have concluded that such disclosure controls and procedures were appropriately designed and were operating effectively.

Energy Savings has also established adequate internal controls over financial reporting to provide reasonable assurance regarding the reliability of the Fund's financial reporting and the preparation of the financial statements for external purposes in accordance with GAAP. Energy Savings' Chief Executive Officer and Chief Financial Officer assessed, or caused an assessment under their direct supervision of, the design and operating effectiveness of the Fund's internal controls over financial reporting (as defined in National Instrument 52-109, Certification of Disclosure in Issuer's Annual and Interim Filings) as at March 31, 2009 using the Committee of Sponsoring Organizations Internal Control - Integrated Framework. Based on that assessment, it was determined that Energy Savings' internal controls over financial reporting were appropriately designed and were operating effectively.

Energy Savings did not make any changes to the design of its internal controls over financial reporting during the year ended March 31, 2009 that would have materially affected or would reasonably likely to materially affect the Fund's internal controls over financial reporting.

It should be noted that a control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues, including instances of fraud, if any, have been detected. These inherent limitations include, among other items: (i) that management's assumptions and judgments could ultimately prove to be incorrect under varying conditions and circumstances; (ii) the impact of any undetected errors; and (iii) controls may be circumvented by the unauthorized acts of individuals, by collusion of two or more people, or by management override.

The design of any system of controls is also based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions.

Corporate governance

Energy Savings is committed to transparency in our operations and our approach to governance meets all recommended standards. Full disclosure of our compliance with existing corporate governance rules is available on our website at www.esif.ca and will be included in the Fund's May 29, 2009 management proxy circular. Energy Savings actively monitors the corporate governance and disclosure environment to ensure timely compliance with current and future requirements.

Outlook

A key initiative for the coming year is the rebranding of Energy Savings; including the both the Income Fund and our main operating units across Canada and the United States. The purpose of this initiative is to support the presentation of a single, consistent and distinctive corporate identity to all stakeholders in all markets. As an organization, one of our main competitive advantages is our relative size, strength and stability. By moving to a single brand identity for all markets, we will be better positioned to more effectively communicate the full extent of this advantage. In addition, this initiative will also allow us to clarify the specific nature of our value proposition and to facilitate the repositioning of our corporate identity to reflect our increased focus on green energy and other related environmental friendly products and services. Further details regarding this initiative will be provided in our forthcoming annual report.

On April 22, 2009 Energy Savings announced that it entered into a definitive agreement to acquire by way of plan of arrangement (the "Arrangement") all of the outstanding common shares of the Universal Energy Group Ltd. ("UEG"), a TSX listed marketer of deregulated natural gas and electricity. The Arrangement will provide for a share exchange through which each outstanding share of UEG will be exchanged for 0.58 of a share (the "Exchangeable Shares") of a subsidiary of the Fund. Each Exchangeable Share will be exchangeable into one Energy Savings trust unit at any time at the option of the holder for no additional consideration. The transaction is expected to close in late June and is subject to certain conditions including approval of UEG shareholders, compliance with the Competition Act, approval of Energy Savings' lenders and satisfaction of other customary approvals. The transaction would require the issuance of approximately 21.1 million Exchangeable Shares increasing the diluted units of the Fund to 132.6 million.

The Fund has entered into support agreements (the "Support Agreements") with holders of 51% of the outstanding shares of UEG. These Support Agreements require these holders to, among other things, (i) vote or cause to be voted, the holder's UEG securities in favour of the proposed Arrangement at the UEG meeting; (ii) not to exercise any dissent rights or other rights available to delay, upset or challenge the Arrangement; (iii) not to sell or otherwise dispose of the holder's UEG securities; (iv) not to solicit or otherwise knowingly encourage any other acquisition proposal of UEG; (v) to refrain from taking or causing to be taken any actions that would reduce the likelihood of the Arrangement being successfully completed; and, with respect to certain holders (vi) to enter into an escrow agreement at closing under which 60% of the holder's Exchangeable Shares shall be escrowed as of closing and released as to 50% on the first anniversary of the closing date and as to 50% on the second anniversary of the closing date.

Management believes that the acquisition of UEG will be immediately accretive to both gross margin and distributable cash per unit despite the transition costs of merging the operations. The full benefit of the acquisition will not be seen until fiscal 2011 when the savings from elimination of administrative overlap will be fully realized.

The UEG acquisition brings a total of 14 U.S. state marketing licenses which will provide an option for accelerated entry into attractive American markets. UEG currently supplies over 580,000 RCEs in Ontario, British Columbia, Michigan, California, Ohio, Pennsylvania, Maryland and New Jersey.

UEG operates a very successful home services business renting and selling water heaters and related products. This business will be merged with the Newten water heater business and management believes the growth of this business will accelerate significantly. UEG also owns a 66.7% interest in Terra Grain Fuels, a 150 million litre capacity ethanol plant located in Belle Plaine, Saskatchewan. The plant is currently making repairs to its facility to move to full capacity production. Management does not currently expect that ethanol will form a long term segment of Energy Savings' business.

On February 7, 2008, the Attorney General for Illinois filed a complaint against IESC (the "Illinois AG Complaint"). The Illinois AG Complaint alleged that independent sales agents used deceptive practices in their sale of Energy Savings' contracts to Illinois customers. On May 12, 2009, a settlement of the action was reached subject to court approval. Under this settlement, IESC will comply with several consumer safeguards, many of which IESC has practiced for more than a year. In addition, $1.0 million will be made to a limited number of customers in settlement of claims.


The financial positions of the Fund's commodity suppliers remain sound based on analysis by management as are those of the banks participating in the Credit Facility. Management does not believe that weakness in the global credit markets will have any near term impact on either existing business or the Fund's ability to grow in the future.

Management's best estimation is that Energy Savings will again grow its key operating measures during fiscal 2010. Gross margin and distributable cash after gross margin replacement per unit are expected to grow by approximately 5 to 10%, including the acquisition from UEG. Distributable cash after marketing expenses is expected to grow at a slightly lower rate due to increased marketing expenses associated with the forecasted volume additions and GEO product growth. Total RCEs are expected to grow after all attrition and failure to renew. However, management is not in a position to provide guidance on the level of customer growth pending acquisition of the UEG sales force and its integration into Energy Savings. Investors will be updated in future quarters on the customer growth expectations.

The economies of Energy Savings' markets are currently in the midst of a significant recession. These very weak North American economic conditions and the turmoil in the credit and financial markets have had a limited effect on Energy Savings. In general, utility bills are among the last to go unpaid in times of financial hardship. Impact on the Fund to date has been limited to higher than expected attrition in the United States due to record foreclosures and utility shutoffs. Bad debt losses increased in the third and fourth quarter but remain comfortably in the mid range of the Fund's 2-3% long-term target range. There can be no assurance that bad debt losses will not increase further during an extended recession. The Fund does not bear bad debt risk in Ontario, Quebec, Manitoba, British Columbia (excluding large volume customers), New York and Indiana. These markets contain approximately 74% of Energy Savings' customers.

In the past, times of financial stress have increased the importance of accurate budgeting for homeowners and small businesses. This has, to date been positive for Energy Savings and its insurance type contracts and strong marketing results for the past three quarters bear this out. Finally, tight credit and a weak economy should increase the number of competitors that fail or are forced to sell out. This will be favourable for a well capitalized company like Energy Savings.

The Fund intends to continue its geographic expansion into new markets in the United States both through organic growth and focused acquisitions. The Fund is actively reviewing a number of further possible acquisitions. Energy Savings continues to actively monitor the progress of the deregulated markets in various jurisdictions.

Changes made to the Income Tax Act require certain income trusts, including Energy Savings, to pay taxes after 2010, similar to those paid by taxable Canadian corporations. The payment of such taxes will, in the future, reduce the cash flow of the Fund, thereby reducing the amount available for distributions to unitholders. Energy Savings is actively analyzing potential restructuring options in preparation for conversion from a trust to a corporation on or before 2011.




ENERGY SAVINGS INCOME FUND
CONSOLIDATED BALANCE SHEETS
AS AT MARCH 31
(thousands of dollars)
----------------------------------------------------------------------------
----------------------------------------------------------------------------

2009 2008
ASSETS

CURRENT
Cash and cash equivalents $ 59,094 $ 27,310
Restricted cash (Note 5) 7,609 4,749
Accounts receivable 249,480 207,793
Gas in storage 6,690 4,268
Inventory 257 -
Unbilled revenues 57,779 47,299
Prepaid expenses 2,020 2,343
Corporate taxes recoverable - 2,665
Other assets - current (Note 12a) 5,544 193,398
----------------------------------------------------------------------------

388,473 489,825

GAS CONTRACTS (less accumulated amortization
- $710; 2008 - $nil) 1,513 -

ELECTRICITY CONTRACTS (less accumulated
amortization - $37,216; 2008 - $32,401) 3,584 1,527
GOODWILL 117,061 116,146
CAPITAL ASSETS (Note 7) 19,971 16,637
OTHER ASSETS - LONG TERM (Note 12a) 5,153 75,560
FUTURE INCOME TAX ASSETS (Note 9) - 9,420
----------------------------------------------------------------------------

$ 535,755 $ 709,115
----------------------------------------------------------------------------
----------------------------------------------------------------------------

LIABILITIES

CURRENT
Accounts payable and accrued liabilities $ 165,431 128,682
Customer rebates payable (Note 5) 7,309 4,617
Management incentive program payable 1,093 2,235
Unit distribution payable 10,977 30,696
Corporate taxes payable 1,906 -
Accrued gas accounts payable 41,379 38,522
Other liabilities - current (Note 12a) 519,352 59,150
----------------------------------------------------------------------------
747,447 263,902
LONG TERM DEBT (Note 8) 76,500 67,583
DEFERRED LEASE INDUCEMENTS 2,382 2,817
OTHER LIABILITIES - LONG TERM (Note 12a) 401,720 156,390
FUTURE INCOME TAX LIABILITIES (Note 9) - 19,458
----------------------------------------------------------------------------

1,228,049 510,150
----------------------------------------------------------------------------

NON-CONTROLLING INTEREST (Note 6b) 292 -
----------------------------------------------------------------------------

EQUITY (DEFICIT)
Deficit $ (1,470,277) $ (211,931)
Accumulated other comprehensive income 364,566 40,789
----------------------------------------------------------------------------
(1,105,711) (171,142)
Unitholders' capital 398,454 358,103
Contributed surplus 14,671 12,004
----------------------------------------------------------------------------
Unitholders' equity (deficit) (692,586) 198,965
----------------------------------------------------------------------------

$ 535,755 $ 709,115
----------------------------------------------------------------------------
----------------------------------------------------------------------------

Guarantees (Note 16)
Commitments (Note 17)
Contingencies (Note 18)

See accompanying notes to consolidated financial statements
Approved on behalf of Energy Savings Income Fund by Ontario Energy
Savings Corp., as administrator.
Rebecca MacDonald Michael Kirby
Executive Chair Corporate Director



ENERGY SAVINGS INCOME FUND
CONSOLIDATED STATEMENTS OF UNITHOLDERS' EQUITY
FOR THE YEARS ENDED MARCH 31
(thousands of dollars)
----------------------------------------------------------------------------
----------------------------------------------------------------------------

2009 2008

ACCUMULATED EARNINGS (DEFICIT)
Accumulated earnings, beginning of year $ 392,082 $ 237,802
Adjustment for change in accounting policy
(2008- net of income taxes of $49) (Note 3 (II)) 2,964 1,519
Net income (loss) (1,107,473) 152,761
----------------------------------------------------------------------------
Accumulated earnings (deficit), end of year (712,427) 392,082
----------------------------------------------------------------------------

DISTRIBUTIONS
Distributions, beginning of year (604,013) (435,430)
Distributions (148,944) (159,832)
Class A preference share distributions
- net of income taxes of $2,767 (2008 - $4,948) (4,893) (8,751)
----------------------------------------------------------------------------
Distributions, end of year (757,850) (604,013)
----------------------------------------------------------------------------

DEFICIT (1,470,277) (211,931)
----------------------------------------------------------------------------

ACCUMULATED OTHER COMPREHENSIVE INCOME
Accumulated other comprehensive income,
beginning of year 40,789 -
Transitional adjustment upon implementation
- derivative instruments designated as cash
flow hedges and derivative gains previously
deferred (2008 - net of income taxes of $1,536) - 113,865
Adjustment upon conversion - unrealized losses
on translation of self-sustaining foreign
operations - (87)
Other comprehensive income (loss) 323,777 (72,989)
----------------------------------------------------------------------------
Accumulated other comprehensive income,
end of year 364,566 40,789
----------------------------------------------------------------------------

UNITHOLDERS' CAPITAL (Note 10)
Unitholders' capital, beginning of year 358,103 328,153
Trust units exchanged 3,606 5,000
Trust units issued on exercise/exchange of
unit compensation (Note 11d) 5,778 4,793
Trust units issued 41,176 25,157
Repurchase and cancellation of units (6,603) -
Class A preference shares exchanged (3,606) (5,000)
----------------------------------------------------------------------------
Unitholders' capital, end of year 398,454 358,103
----------------------------------------------------------------------------

CONTRIBUTED SURPLUS (Note 11d) 14,671 12,004
----------------------------------------------------------------------------

Unitholders' equity (deficit), end of year $(692,586) $ 198,965
----------------------------------------------------------------------------
----------------------------------------------------------------------------

See accompanying notes to the consolidated financial statements



ENERGY SAVINGS INCOME FUND
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED MARCH 31
(thousands of dollars except per unit amounts)
----------------------------------------------------------------------------
----------------------------------------------------------------------------

2009 2008

SALES $ 1,899,213 $ 1,738,690

COST OF SALES 1,576,397 1,463,890
----------------------------------------------------------------------------

GROSS MARGIN 322,816 274,800
----------------------------------------------------------------------------

EXPENSES
General and administrative expenses 59,586 51,638
Capital tax 220 827
Marketing expenses 68,093 56,121
Unit based compensation (Note 11d) 4,098 3,076
Bad debt expense 13,887 6,951
Amortization of gas contracts 710 177
Amortization of electricity contracts 2,884 7,384
Amortization of capital assets 5,100 5,110
----------------------------------------------------------------------------

154,578 131,284
----------------------------------------------------------------------------
INCOME BEFORE THE UNDERNOTED 168,238 143,516
INTEREST EXPENSE (Note 8) 3,857 5,346
CHANGE IN FAIR VALUE OF DERIVATIVE INSTRUMENTS
(Note 12a) 1,336,976 831
OTHER INCOME (7,604) (921)
----------------------------------------------------------------------------
INCOME (LOSS) BEFORE INCOME TAX (1,164,991) 138,260
RECOVERY OF INCOME TAX (Note 9) (57,460) (14,501)
NON-CONTROLLING INTEREST (Note 6b) (58) -
----------------------------------------------------------------------------

NET INCOME (LOSS) $ (1,107,473) $ 152,761
----------------------------------------------------------------------------
----------------------------------------------------------------------------
See accompanying notes to consolidated financial statements

Income per unit (Note 14)
Basic $ (10.03) $ 1.42
Diluted $ (9.93) $ 1.41



ENERGY SAVINGS INCOME FUND
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
FOR THE YEARS ENDED MARCH 31
(thousands of dollars except per unit amount)
----------------------------------------------------------------------------
----------------------------------------------------------------------------

2009 2008

NET INCOME (LOSS) $ (1,107,473) $ 152,761
----------------------------------------------------------------------------

Unrealized gain (loss) on translation of
self sustaining operations (1,906) 3,951
Unrealized and realized gain (loss) on
derivative instruments designated as cash
flow hedges prior to July 1, 2008 net of
income taxes of $89,256 (2008 - ($15,266))
(Note 12a) 498,654 (76,940)
Amortization of deferred unrealized gain on
discontinued hedges after July 1, 2008, net
of income taxes of $38,805(Note 12a) (172,971) -
----------------------------------------------------------------------------
OTHER COMPREHENSIVE INCOME (LOSS) 323,777 (72,989)
----------------------------------------------------------------------------
COMPREHENSIVE INCOME (LOSS) $ (783,696) $ 79,772
----------------------------------------------------------------------------
----------------------------------------------------------------------------
See accompanying notes to consolidated financial statements



ENERGY SAVINGS INCOME FUND
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED MARCH 31
(thousands of dollars)
----------------------------------------------------------------------------
----------------------------------------------------------------------------

Net inflow (outflow) of cash related to 2009 2008
the following activities

OPERATING
Net income (loss) $ (1,107,473) $ 152,761
----------------------------------------------------------------------------
Items not affecting cash
Amortization of gas contracts 710 177
Amortization of electricity contracts 2,884 7,384
Amortization of capital assets 5,100 5,110
Unit based compensation 4,098 3,076
Non controlling interest (58) -
Future income taxes (Note 9) (64,088) (18,692)
Other (3,940) (141)
Change in fair value of derivative instruments 1,336,976 831
----------------------------------------------------------------------------

1,281,682 (2,255)
----------------------------------------------------------------------------

Adjustments required to reflect net cash
receipts from gas sales (Note 19) (7,623) (2,620)
----------------------------------------------------------------------------

Changes in non-cash working capital (Note 20) 6,181 (11,879)
----------------------------------------------------------------------------
Cash inflow from operations 172,767 136,007
----------------------------------------------------------------------------

FINANCING
Exercise of trust unit options (Note 11d) 4,293 4,053
Issue of trust units - 18,079
Distributions paid to Unitholders (129,357) (131,132)
Distributions on Class A preference shares (8,460) (11,849)
Tax impact on distributions to Class A
preference shareholders 2,767 4,948
Units purchased for cancellation (6,603) -
Issuance of long-term debt and increase in
bank indebtedness 87,726 97,294
Repayment of long-term debt and bank
indebtedness (85,731) (68,303)
Restricted cash (122) 1,962
----------------------------------------------------------------------------

(135,487) (84,948)
----------------------------------------------------------------------------

INVESTING
Purchase of capital assets (6,345) (7,842)
Acquisitions (Note 6) (1,842) (33,400)
----------------------------------------------------------------------------

(8,187) (41,242)
----------------------------------------------------------------------------
Effect of foreign currency translation on
cash balances 2,691 707
----------------------------------------------------------------------------
NET CASH INFLOW 31,784 10,524
CASH, BEGINNING OF YEAR 27,310 16,786
----------------------------------------------------------------------------
CASH, END OF YEAR $ 59,094 $ 27,310
----------------------------------------------------------------------------
----------------------------------------------------------------------------

Supplemental Information

Interest paid $ 4,009 $ 5,545
Income taxes paid $ 1,153 $ 1,251

Supplemental disclosure relating to
non-cash financing and investing activities

Acquisition of capital assets through lease
inducements $ - $ 2,817
----------------------------------------------------------------------------
----------------------------------------------------------------------------
See accompanying notes to consolidated financial statements



ENERGY SAVINGS INCOME FUND
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEAR ENDED MARCH 31, 2009
(thousands of dollars except where indicated and per unit amounts)
----------------------------------------------------------------------------
----------------------------------------------------------------------------


1. ORGANIZATION

Energy Savings Income Fund ("Energy Savings" or the "Fund")

Energy Savings 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: Ontario Energy Savings L.P. ("OESLP"), Energy Savings (Manitoba) L.P. ("ESMLP"), Energy Savings (Quebec) L.P. ("ESPQ"), ES (B.C.) Limited Partnership ("ESBC"), Alberta Energy Savings L.P. ("AESLP"), Illinois Energy Savings Corp. ("IESC"), New York Energy Savings Corp. ("NYESC"), Indiana Energy Savings Corp. ("INESC"), Energy Savings Texas Corp. ("ESTC") and Newten Home Comfort L.P. ("NHCLP") (collectively the "Energy Savings Group").

2. OPERATIONS

The Energy Savings Group

Energy Savings' 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, Energy Savings' customers offset their exposure to changes in the price of these essential commodities. Energy Savings, 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. Energy Savings also has environmentally friendly offerings of natural gas and electricity through its Green Energy Option program.

3. (I) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

(a) Principles of consolidation

The consolidated financial statements have been prepared in accordance with Canadian Generally Accepted Accounting Principles ("GAAP"), and include the accounts of Energy Savings Income Fund and its directly or indirectly owned subsidiaries and affiliates.

(b) Cash and cash equivalents

All highly liquid temporary cash investments with an original maturity of three months or less when purchased are considered to be cash equivalents.

(c) Unbilled revenues/accrued gas accounts payable or gas delivered in excess of consumption/deferred revenues

Unbilled revenues are stated at estimated realizable value and result when customers consume more gas than has been delivered by Energy Savings to local distribution companies ("LDCs"). Accrued gas accounts payable represents the obligation to the LDCs with respect to gas consumed by customers in excess of that delivered to the LDCs.

Gas delivered to LDCs in excess of consumption by customers is stated at the lower of cost and net realizable value. Collections from customers in advance of their consumption of gas result in deferred revenues.

Due to the seasonality of our operations, during the winter months, customers will have consumed more than what was delivered resulting in the recognition of unbilled revenues/accrued gas accounts payable; however, in the summer months, customers will have consumed less than what was delivered, resulting in the recognition of gas delivered in excess of consumption/deferred revenues.

These adjustments are applicable solely to the Ontario, Manitoba and Quebec gas markets.

(d) Gas in storage

Gas in storage primarily represents the gas delivered to the LDCs in the States of Illinois, Indiana and New York. The balance will fluctuate as gas is injected or withdrawn from storage. Injections typically occur from April through November and withdrawals occur from December through March.

In addition, a portion of the gas in storage relates to operations in the Province of Alberta. In Alberta, there is a month to month carryover, which represents the difference between the gas delivered to the LDC within a month and customer consumption. The delivery volumes in the following month are adjusted accordingly.

Gas in storage is stated at the lower of cost and net realizable value.

(e) Inventory

Inventory, comprising of water heaters, are stated at the lower of cost and net realizable value.

(f) Capital assets

Capital assets are recorded at cost. Amortization is provided over the estimated useful lives of the assets, with the half year rule applied to acquisitions, as follows:



----------------------------------------------------------------------------
Asset Basis Rate
----------------------------------------------------------------------------
Furniture and fixtures Declining balance 20%
Office equipment Declining balance 20%
Computer equipment Declining balance 30%
Computer software Declining balance 100%
Commodity billing and settlement systems Straight line 5 years
Water heaters Straight line 15 years
Leasehold improvements Straight line Term of lease
----------------------------------------------------------------------------


Capital assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to the estimated undiscounted future cash flows expected to be generated by the asset. If the carrying amount of an asset exceeds its estimated future cash flows, an impairment charge is recognized for the amount by which the carrying amount of the asset exceeds the fair value of the asset.

(g) Asset retirement obligations

Asset retirement obligations, including any restoration costs required in connection with leased assets or properties, are recognized at fair value in the period in which the obligations are incurred and a reasonable estimate of fair value can be made. Energy Savings did not have any such obligations outstanding for the years ended March 31, 2009 and 2008.

(h) Goodwill

Goodwill, reflecting the excess of the acquisition and incremental costs over the fair value of assets purchased by the Fund, is not amortized. The carrying amount of goodwill is tested for impairment annually, or more frequently if events or changes in circumstances indicate that the asset might be impaired. The impairment test is carried out in two steps, in the first step the carrying amount of the reporting unit including goodwill is compared with its fair value. When the fair value of a reporting unit including goodwill exceeds its carrying amount, goodwill of the reporting unit is not considered impaired and the second step of the impairment test is unnecessary. The second step is carried out when the carrying of a reporting unit exceeds its fair value, in which case the implied fair value of the reporting unit's goodwill is compared with its carrying amount to measure the amount of the impairment loss, if any. The implied fair value of goodwill is determined in the same manner as the value of goodwill is determined in a business combination.

(i) Gas contracts

Gas contracts represent the original fair value of existing sales and supply contracts acquired by Energy Savings on the acquisition of various gas contracts. These contracts are amortized over their average estimated remaining life. The Fund regularly evaluates existing gas contracts including the estimates of useful lives.

(j) Electricity contracts

Electricity contracts represent the original fair value of existing sales and supply contracts acquired by Energy Savings on the acquisition of various electricity contracts. These contracts are amortized over their average estimated remaining life. The Fund regularly evaluates existing electricity contracts including the estimates of useful lives.

(k) Other assets (liabilities) - current/longterm, change in fair value of derivative instruments and other comprehensive income (loss)

Energy Savings' various derivative instruments have been accounted for using Canadian Institute of Chartered Accountants ("CICA") Section 3855, Financial Instruments - Recognition and Measurement. Effective July 1, 2008, the Fund ceased the utilization of hedge accounting. In accordance with CICA Handbook Section 3865, Hedges, the Fund is amortizing the accumulated gains and losses to June 30, 2008 from other comprehensive income in the same period in which the original hedged item affects the Statement of Operations. No retrospective restatement is required for this change. The derivatives are measured at fair value and booked to the Consolidated Balance Sheets. Effective July 1, 2008, all changes in fair value between periods are booked to Change In Fair Value of Derivative Instruments on the Consolidated Statements of Operations.

Prior to July 1, 2008, Financial instruments that met hedging requirements were accounted for under CICA Handbook Section 3865, Hedges. For derivative instruments accounted for under CICA Handbook Section 3865, Energy Savings formally documented the relationship between hedging instruments and the hedged items, as well as its risk management objective and strategy for undertaking various hedge transactions. This process included linking all derivative financial instruments to anticipated transactions. Energy Savings also formally assessed, both at the hedge's inception and on an ongoing basis, whether the derivative financial instruments that were used in hedging transactions were highly effective in offsetting changes in cash flows of the hedged items. The derivatives were measured at fair value and booked to the Consolidated Balance Sheets. Changes in fair value between periods were booked to Other Comprehensive Income for the effective portion of the hedge with the remaining change being booked to Change In Fair Value of Derivative Instruments.

Energy Savings enters into hedges of its cost of sales relating to its fixed price electricity sales by entering into fixed-for-floating electricity swap contracts and physical forward contracts, heat rate swap contracts and financial and physical forward gas contracts (to fulfill obligations under the heat rate swaps) with electricity and natural gas suppliers. These swaps and forwards are accounted for in accordance with CICA Handbook Section 3855. Prior to July 1, 2008, they were accounted for in accordance with CICA Handbook Section 3865 and, in some limited circumstances, CICA Handbook Section 3855.

Energy Savings enters into hedges of its cost of sales relating to its fixed price gas contracts by entering into a combination of physical gas forwards, financial gas forwards, physical transportation forwards and option contracts. Physical gas forwards and transportation forwards are accounted for in accordance with CICA Handbook Section 3855. Prior to July 1, 2008, they were accounted for in accordance with CICA Handbook Section 3865. Option contracts and financial gas forwards are accounted for in accordance with CICA Handbook Section 3855. The premiums and settlements for these derivative instruments recognized in cost of sales, when incurred.

Energy Savings enters into hedges for its foreign exchange risk relating to its anticipated repatriation of U.S. denominated currency by entering into foreign exchange forward contracts with its lender. Since April 1, 2007, Energy Savings has accounted for these forward contracts in accordance with CICA Handbook Section 3855 by recording them on the Consolidated Balance Sheet as either other assets or other liabilities measured at fair value, with changes in fair value booked to Change In Fair Value of Derivative Instruments.

(l) Derivative instruments

Electricity:

Energy Savings has entered into contracts with customers to provide electricity at fixed prices ("customer electricity contracts"). Customer electricity contracts include requirements contracts and contracts with fixed or variable volumes at fixed prices. The customer electricity contracts expose Energy Savings to changes in market prices of electricity and consumption. To reduce its exposure to movements in commodity prices arising from the acquisition of electricity at floating rates, Energy Savings uses electricity derivative contracts ("electricity derivative contracts"). These electricity derivative contracts are fixed-for-floating swaps, physical electricity forward contracts or a combination of heat rate swaps and physical or financial forward gas contracts.

Energy Savings agrees to exchange the difference between the variable or indexed price and the fixed price on a notional quantity of electricity for a specified time frame in the fixed-for-floating contract arrangement. Energy Savings takes title to electricity at a fixed price for scheduling into the power grid under the forward contracts. Energy Savings agrees to pay for certain quantities of power based on the floating price of natural gas under heat rate swaps. In order to cover the floating price of gas under these arrangements, prices for gas are fixed through either physical or financial forward gas contract. These contracts are expected to be effective as economic hedges of the electricity price exposure. Energy Savings continues to monitor its effective hedging relationship between retail consumption and its supply contracts and prior to July 1, 2008, after which the Fund ceased the utilization of hedge accounting, evaluated the effectiveness of this relationship on a quarterly basis to meet the criteria for hedge accounting.

The fair value of the electricity derivative contracts are recorded in the Consolidated Balance Sheet with changes in the fair value being recorded in Change In Fair Value of Derivative Instruments on the Consolidated Statements of Operations. Prior to July 1, 2008, the changes in the fair value were recorded in Other Comprehensive Income to the extent that the hedge measurement was effective with the remainder recorded in Change In Fair Value of Derivative Instruments. Any electricity derivative contracts that did not qualify for hedge accounting or were de-designated as a hedge were recorded at fair market value with the changes in fair value recorded in current period income as a component of Change In Fair Value of Derivative Instruments.

Any gains or losses accumulated up to the date that the electricity derivative contract was terminated or de-designated as a hedge were deferred in accumulated other comprehensive income ("AOCI") then recorded in cost of sales when the hedged customer electricity contract affected income.

Gas:

Energy Savings has entered into contracts with customers to provide gas at fixed prices ("customer gas contracts"). The customer gas contracts expose Energy Savings to changes in market prices of gas and consumption. To reduce its exposure to movements in commodity prices and usage, Energy Savings uses gas physical and financial contracts ("gas supply contracts"). These gas supply contracts are expected to be effective as economic hedges of the gas price exposure.

Energy Savings continues to monitor its effective hedging relationship between retail consumption and its supply contracts and prior to July 1, 2008 after which the Fund ceased the utilization of hedge accounting, evaluated the effectiveness of this relationship on a quarterly basis to meet the criteria for hedge accounting.

Energy Savings uses physical forwards, transportation forwards (together "physical gas supply contracts") and other gas financial instruments to fix the price of its gas supply. Under the physical gas supply contracts, Energy Savings agrees to pay a specified price per volume of gas or transportation. Other financial instruments are comprised of financial puts and calls that fix the price of gas in jurisdictions where Energy Savings has scheduling responsibilities and therefore is exposed to commodity price risk on volumes above or below its base supply.

The fair value of physical gas contracts is recorded in the Consolidated Balance Sheet with changes in the fair value being recorded in Change In Fair Value of Derivative Instruments on the Consolidated Statements of Operations. Prior to July 1, 2008, the changes were recorded in Other Comprehensive Income to the extent that the hedge measurement was effective with the remainder recorded in Change In Fair Value of Derivative Instruments. Any physical gas contract that did not qualify for hedge accounting or was de-designated as an accounting hedge together with the gas financial instruments were valued at fair market value with the changes in fair value recorded in current period income as a component of Change In Fair Value of Derivative Instruments. Any gains or losses accumulated up to the date that the physical gas supply contract was terminated or de-designated as a hedge were deferred in AOCI then recorded in cost of sales when the hedged customer gas contract affected income.

Foreign exchange:

To reduce its exposure to movements in foreign exchange rates, Energy Savings uses foreign exchange forwards ("foreign exchange contracts"). These foreign exchange contracts were expected to be effective as hedges of the anticipated cross border cash flow but were found to not be effective under GAAP accounting requirements during fiscal 2007.

Up until September 30, 2006, unrealized gains on foreign exchange contracts up to the date of de-designation of the hedging relationship were deferred to be recognized over the term of the contract based on the timing of the underlying hedged transactions. As of December 31, 2006, these derivative financial instruments have been recorded on the balance sheet as either other assets or other liabilities measured at fair value, with changes in fair value recognized in income as other income (expense). The deferred gain was reclassified to AOCI as of April 1, 2007.

(m) Revenue recognition

Energy Savings delivers gas and/or electricity to end-use customers who have entered into long term fixed price contracts. Revenue is recognized when the commodity is consumed by the end-use customer or sold to third parties. The Fund assumes credit risk in only three jurisdictions - Alberta, Illinois and Texas, where credit review processes are in place prior to commodity flowing to the customer.

Energy Savings recognizes revenue from the monthly rental and sale of water heaters.

(n) Marketing expenses

Commissions and various other costs related to obtaining and renewing customer contracts are charged to income in the period incurred.

(o) Foreign currency translation

The operations of the Fund's U.S. based subsidiaries are self sustaining operations. Accordingly, the assets and liabilities of foreign subsidiaries are translated into Canadian dollars at the rate of exchange at the balance sheet date. Revenues and expenses are translated at the average rate of exchange for the period. The resulting gains and losses are accumulated as a component of Unitholders' equity within AOCI.

(p) Per unit amounts

The computation of income per unit is based on the weighted average number of units outstanding during the year. Diluted earnings per unit is computed in a similar way to basic earnings per unit except that the weighted average units outstanding are increased to include additional units assuming the exercise of unit options, unit appreciation rights and deferred unit grants, if dilutive.

(q) Unit based compensation plans

The Fund accounts for all of its unit based compensation awards using the fair value based method.

Awards are valued at grant date and are not subsequently adjusted for changes in the prices of the underlying unit and other measurement assumptions. Compensation for awards without performance conditions is recognized as an expense and a credit to contributed surplus over the related vesting period of the awards. Compensation for awards with performance conditions is recognized based on management's best estimate of whether the performance condition will be achieved.

When options and other unit-based compensation awards are exercised or exchanged, the amounts previously credited to contributed surplus are reversed and credited to Unitholders' equity. The amount of cash, if any, received from participants is also credited to Unitholders' equity.

(r) Employee future benefits

Energy Savings established a long term incentive plan (the "Plan") for all permanent full time and part time Canadian employees (working more than 20 hours per week) of its affiliates and subsidiaries. The Plan consists of two components, a Deferred Profit Sharing Plan ("DPSP") and an Employee Profit Sharing Plan ("EPSP"). For participants of the DPSP, Energy Savings contributes an amount equal to a maximum of 2% per annum of an employee's base earnings. For the EPSP, Energy Savings contributes an amount up to a maximum of 2% per annum of an employee's base earnings towards the purchase of trust units of the Fund, on a matching one for one basis.

Participation in either plan is voluntary. The Plan has a two year vesting period beginning from the later of the Plan's effective date and the employee's starting date. During the year, Energy Savings contributed $739 (2008 - $647) to both plans, which was paid in full during the year.

(s) Exchangeable Securities

Energy Savings follows the recommendations of the Emerging Issues Committee relating to the presentation of exchangeable securities issued by subsidiaries of income funds. The recommendations require that the exchangeable securities issued by a subsidiary of an income fund be presented on the consolidated balance sheet of the income fund as a part of Unitholders' equity if the following criteria have been met:

- the holders of the exchangeable securities are entitled to receive distributions of earnings economically equivalent to distributions received on units of the income fund; and

- the exchangeable securities ultimately are required to be exchanged for units of the income fund as a result of the passage of fixed periods of time or the non-transferability to third parties of the exchangeable securities without first exchanging them for units of the income fund.

The Class A Preference shares meet these criteria and have been classified as Unitholders' equity. In addition, all distributions paid to the Class A preference shareholders must be recorded in Unitholders' equity, net of tax. The management incentive program, which is a bonus equal to the distribution amount received by a Unitholder, is additional compensation to senior management of Ontario Energy Savings Corp. ("OESC"), a wholly owned subsidiary of the Fund.

(t) Use of estimates

The preparation of the financial statements, in conformity with Canadian Generally Accepted Accounting Principles, requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates. In particular, valuation techniques such as those used in the preparation of fair values are significantly affected by the assumptions used and the amount and timing of estimates. The aggregate fair value amounts represent point in time estimates only and should not be interpreted as being realizable in an immediate settlement of the supply contracts.

(u) Income Taxes

The Fund is a taxable entity under the Income Tax Act (Canada) and is taxable on income that is not distributed or distributable to the Fund's Unitholders. Payments made between the Canadian operating entities and the Fund ultimately transfers both current and future income tax liabilities to the Unitholders. The future income tax liability associated with Canadian assets recorded on the balance sheet is recovered over time through these payments.

Effective January 1, 2011, the Fund will be subject to a SIFT (specified investment flow-through entities) tax on distributions of Canadian taxable income that has not been subject to a Canadian corporate income tax in the Canadian operating entities. Therefore, the future tax asset or liability associated with Canadian assets recorded on the balance sheet as at that date will be realized over time as the temporary differences between the carrying value of assets in the consolidated financial statements and their respective tax bases are realized. Current Canadian income taxes will be accrued for at that time to the extent that there is taxable income in the Fund or its underlying operating entities.

The U.S. based corporate subsidiaries are subject to U.S. income taxes on its taxable income determined under U.S. income tax rules and regulations. As the U.S. subsidiaries had combined operating losses for tax purposes at March 31, 2009, no provision for current U.S. income tax has been made by those U.S. entities.

The Fund follows the liability method of accounting for income taxes. Under this method, income tax liabilities and assets are recognized for the estimated tax consequences attributable to the temporary differences between the carrying value of the assets and liabilities on the consolidated financial statements and their respective tax bases, using substantively enacted income tax rates. A valuation allowance is recorded against a future income tax asset if it is not anticipated that the asset will be realized in the foreseeable future. The effect of a change in the income tax rates used in calculating future income tax liabilities and assets is recognized in income during the period that the change occurs.

(II) ADOPTION OF NEW ACCOUNTING STANDARDS

On April 1, 2008, the Fund adopted three new accounting standards that were issued by the CICA; Handbook Section 1535, Capital Disclosures; Handbook Section 3862, Financial Instruments - Disclosures; and Handbook Section 3863, Financial Instruments - Presentation. Energy Savings adopted these standards prospectively as required by the standards.

Capital Disclosure

Section 1535 requires disclosure of information related to the objectives, policies and processes for managing capital. In addition, disclosures include whether externally imposed capital requirements have been complied with. As this standard only addresses disclosure requirements, there is no impact on the financial position of the Fund (Note 13).

Financial Instruments - Disclosures and Financial Instruments - Presentation

Section 3862, Financial Instruments - Disclosures and Section 3863, Financial Instruments - Presentation, which replace Section 3861, Financial Instruments - Disclosure and Presentation, increases the emphasis on the risks associated with both recognized and unrecognized financial instruments and how those risks are managed. The new presentation standards carry forward the former presentation requirements. As this standard only addresses presentation and disclosure requirements, there is no impact on the financial position of the Fund (Note 12).

Credit risk and the fair value of financial assets and financial liabilities

On January 20, 2009, the Emerging Issues Committee ("EIC") of the CICA approved an abstract (EIC 173, Credit Risk and the Fair Value of Financial Assets and Financial Liabilities) which clarifies that the company's own credit risk and the credit risk of the counterparty should be taken into account in determining the fair value of derivative instruments. EIC 173 is to be applied retrospectively without restatement of prior periods to all financial assets and liabilities measured at fair value in interim and annual financial statements for periods ending on or after the date of issuance of this Abstract. The Fund incorporated the provisions of EIC 173 in the current year on a restrospective basis without restatement of prior periods and recorded an adjustment to increase opening accumulated earnings of $2,964.

(III) RECENTLY ISSUED ACCOUNTING STANDARDS

The following are the new standards, not yet in effect, which are required to be adopted by the Fund on the effective date:

Goodwill and Intangible assets

As of April 1, 2009, the Fund will be required to adopt CICA Handbook Section 3064, Goodwill and Intangible assets, which establishes revised standards for recognition, measurement, presentation and disclosure of goodwill and intangible assets. The Fund has not yet determined the impact of this standard on its consolidated financial statements.

Business combinations

In October 2008, the CICA issued Handbook Section 1582, Business Combinations ("CICA 1582), concurrently with CICA Handbook Section 1601, Consolidated Financial Statements ("CICA 1601"), and CICA Handbook Section 1602, Non-controlling Interest ("CICA 1602"). CICA 1582, which replaces CICA Handbook Section 1581, Business Combinations, establishes standards for the measurement of a business combination and the recognition and measurement of assets acquired and liabilities assumed. CICA 1601, which replaces CICA Handbook Section 1600, carries forward the existing Canadian guidance on aspects of the preparation of consolidated financial statements subsequent to acquisition other than non-controlling interests. CICA 1602 establishes guidance for the treatment of non-controlling interests subsequent to acquisition through a business combination. These new standards are effective for fiscal years beginning on or after January 1, 2011. The Fund has not yet determined the impact of these standards on its consolidated financial statements.

International Financial Reporting Standards

In February 2008, CICA announced that GAAP for publicly accountable enterprises will be replaced by International Financial Reporting Standards ("IFRS") for fiscal years beginning on or after January 1, 2011.

Energy Savings will transition to IFRS effective April 1, 2011, and intends to issue its first interim financial statement under IFRS for the three-month period ending June 30, 2011, and a complete set of financial statements under IFRS for the year ending March 31, 2012.

Energy Savings has identified differences between Canadian GAAP and IFRS relevant to the Fund and an initial assessment has been made of the impact of the required changes to accounting systems, business processes, and requirements for personnel training and development. Based on the initial assessment of the differences applicable to the Fund, a project team was assembled and a conversion plan was developed in March 2009 to manage the transition to IFRS.

As part of the conversion plan, the Fund is in the process of analyzing the detailed impacts of these identified differences and developing solutions to bridge these differences. Energy Savings is currently on target with its conversion plan.

4. SEASONALITY OF OPERATIONS

Energy Savings' operations are seasonal. Gas consumption by customers is typically highest in October through March and lowest in April through September. Electricity consumption is typically highest in January through March and July through September. Electricity consumption is lowest in October through December and April through June.

5. RESTRICTED CASH/CUSTOMER REBATES PAYABLE

Restricted cash and customer rebates payable represent; (i) funds held as security for payment of certain monthly charges in Texas, and (ii) rebate monies received from LDCs in Ontario as provided by the Independent Electricity System Operator ("IESO").

(i) ESTC is required to post collateral to wire owners to secure payment of future expected charges under the Texas Electric Choice as required by the Public Utility Commission of Texas.

(ii) OESLP is obligated to disperse the monies to eligible end-use customers in accordance with the Ontario Power Generation Rebate as part of OESLP's Retailer License conditions.

6. ACQUISITIONS

(a) Acquisition of CEG Energy Options Inc.'s ("CEG") natural gas customers

On August 14, 2008, Energy Savings purchased substantially all of the commercial and residential customer contracts of CEG in British Columbia. CEG was a Western Canada marketer of natural gas wholly owned by SemCanada Energy Company, both of which filed for creditor protection under the Companies' Creditors Arrangement Act on July 30, 2008. The customer contracts had annualized volumes of approximately 4.9 million GJs.

The purchase price has been allocated as follows:



Net assets acquired:
Gas contracts $ 1,842

Consideration:
Cash $ 1,842


The gas contracts will be amortized over the average remaining life of the contracts, which at the time of the acquisition was 20 months.

(b) Partnership with Newten Home Comfort Inc.

On July 18, 2008, the Fund, through its affiliates, entered into a limited partnership to form Newten Home Comfort L.P., a business involving the marketing, leasing, sale, and installation of tankless and high efficiency water heaters. The Fund will hold approximately an 80% equity interest and will invest up to $1,400 as equity and up to $1,850 as convertible debt financing in Newten Home Comfort L.P. As at March 31, 2009, the Fund had invested $1,000 as equity.

(c) Acquisition of Just Energy Texas L.P.

During the prior fiscal year, Energy Savings completed the acquisition of Just Energy Texas L.P. ("Just Energy"), including all of its electricity contracts. The aggregate cost of this transaction, including transaction costs, was US$34,165 including cash acquired in the amount of US$3,373. Pursuant to the agreement, Energy Savings acquired approximately 1.3 million megawatt hours (MWh) of contracted customer usage. The acquisition was funded through a credit facility drawdown, of which $18,079 (US$18,362) including interest of $356 (US$362) was returned to the Fund on October 9, 2007 in exchange for 1,169,399 units of the Fund issued from treasury. The units are subject to the terms of an escrow agreement for the benefit of the Just Energy vendors and are being released to the vendors over a three-year period.

The purchase price was allocated as follows:



US$ CAD$
Net assets acquired:
Working capital (including cash of US$3,373, CAD$3,659) $ 7,236 $ 7,849
Electricity contracts 11,400 12,365
Goodwill 17,826 19,336
Capital assets 18 20
Long-term liabilities (2,315) (2,511)
--------- ---------

$ 34,165 $ 37,059
--------- ---------
--------- ---------

Consideration:

Cash $ 34,165 $ 37,059
--------- ---------
--------- ---------


The acquisition of Just Energy was accounted for using the purchase method of accounting. Energy Savings allocated the purchase price to the identified assets and liabilities acquired based on their fair values at the time of acquisition.

The electricity contracts acquired are amortized over the average estimated remaining life of the contracts. During the first quarter of fiscal 2009, upon finalization of the purchase price allocation, there was an increase of $3,457 (US$3,187) in intangible assets relating to electricity contracts and a corresponding reduction in goodwill.



7. CAPITAL ASSETS

Accumulated
2009 Cost Amortization Net Book Value
----------------------------------------------------------------------------

Furniture and fixtures $ 3,770 $ 1,889 $ 1,881
Office equipment 11,119 3,959 7,160
Computer equipment 5,387 2,543 2,844
Computer software 2,565 1,750 815
Commodity billing and
settlement system 6,993 6,654 339
Water heaters 2,324 77 2,247
Leasehold improvements 7,603 2,918 4,685
----------------------------------------------------------------------------

$ 39,761 $ 19,790 $ 19,971
----------------------------------------------------------------------------
----------------------------------------------------------------------------



Accumulated
2008 Cost Amortization Net Book Value
----------------------------------------------------------------------------

Furniture and fixtures $ 3,345 $ 1,444 $ 1,901
Office equipment 9,051 2,433 6,618
Computer equipment 3,145 2,160 985
Computer software 1,196 603 593
Commodity billing and
settlement system 6,563 5,477 1,086
Leasehold improvements 7,451 1,997 5,454
----------------------------------------------------------------------------

$ 30,751 $ 14,114 $ 16,637
----------------------------------------------------------------------------
----------------------------------------------------------------------------


8. LONG TERM DEBT

A credit facility in the amount of $170,000 is available to Energy Savings to meet working capital requirements. Interest is payable on outstanding loans at rates that vary with Bankers' Acceptance, LIBOR, Canadian bank prime rate or U.S. prime rate. Under the terms of the operating credit facility, Energy Savings is able to make use of Bankers' Acceptances and LIBOR advances at stamping fees of 1.5%, prime rate advances at bank prime plus 0.5%, and letters of credit at 1.5%. As at March 31, 2009, the Canadian prime rate was 2.5% and the U.S. prime rate was 3.25%. As at March 31, 2009, Energy Savings had drawn $76,500 (2008 - $67,583) against the facility and total letters of credit outstanding amounted to $8,459 (2008 - $8,149). Energy Savings has $85,041 of the facility remaining for future working capital and security requirements. Energy Savings' obligations under the credit facility are supported by guarantees of certain subsidiaries and affiliates and secured by a pledge of the assets of Energy Savings and the majority of its operating subsidiaries and affiliates. Energy Savings is required to meet a number of financial covenants under the credit facility agreement. As at March 31, 2009 and 2008, all of these covenants have been met. Interest expense for the year ended March 31, 2009 was $3,833 (2008 - $5,346). Interest is expensed at the effective interest rate.

9. INCOME TAXES

The Fund is a mutual fund trust for income tax purposes and will be taxed as a specified investment flow-through trust ("SIFT") for years commencing after 2010. As such, prior to January 1, 2011 the Fund is only subject to current income taxes on any taxable income not distributed to Unitholders. Subsequent to December 31, 2010, the Fund will be subject to current income taxes on any taxable income not distributed to Unitholders and on all taxable income earned from Canadian corporate and flow-through subsidiaries, other than dividends from Canadian corporate subsidiaries distributed to Unitholders. If the Fund's equity capital grows beyond certain dollar limits prior to January 1, 2011, the Fund would become a SIFT and would commence in that year being subject to tax on income distributed. The Fund expects that its income distributed will not be subject to tax prior to 2011 and intends to distribute all its taxable income earned prior to then. Accordingly, the Fund has not provided for future income taxes on its temporary differences and those of its flow-through subsidiary trust and partnerships expected to reverse prior to 2011 as it is considered tax exempt for accounting purposes.

A valuation allowance has been provided against future tax assets of certain Canadian and foreign subsidiaries where the Fund has determined that it is more likely than not that those future tax assets will not be realized in the foreseeable future. The valuation allowance may be reduced in future periods if the Fund determines that it is more likely than not that all or a portion of those future tax assets will be realized.

Canadian based corporate subsidiaries are subject to tax on their taxable income at a rate of 33% (2008 - 36%).

The following table reconciles the difference between the income taxes that would result solely by applying statutory tax rates to the pre-tax income for Energy Savings and the income tax provision in the financial statements.



2009 2008

Income before income tax $ (1,164,991) $ 138,260
------------- ----------
------------- ----------

Income tax expense at the combined basic rate
of 33% (2008 -36%) (384,448) 49,774
Taxes on income attributable to Unitholders (49,294) (49,883)
Unrecognized tax benefit on mark to market
losses on derivative instruments 385,070 -
Tax impact of corporate re-organization (3,729) (7,021)
Benefit of U.S. tax losses and other tax
assets not previously recognized (5,199) (7,371)
Non-deductible expenses 140 -
------------- ----------

Recovery of income tax $ (57,460) $ (14,501)
------------- ----------
------------- ----------

Components of Energy Savings' income tax 2009 2008
recovery are as follows:
Income tax provision (recovery) $ 3,861 $ (757)
Amount credited to Unitholders' equity 2,767 4,948
------------- ----------
Current income tax provision 6,628 4,191
Future tax recovery (64,088) (18,692)
------------- ----------

Recovery of income tax $ (57,460) $ (14,501)
------------- ----------
------------- ----------



Components of the Fund's net future income tax
liability are as follows: 2009 2008

Partnership income deferred for tax purposes
and book carrying amount of investments in
partnerships in excess of tax cost $ 598 $ 4,055
Excess of tax basis over book basis for U.S.
operations (13,037) (8,767)
Mark to market gains (losses) on derivative
instruments (140,047) 14,750
----------------------------
(152,486) 10,038
Less: valuation allowance 152,486 -
------------- ----------

Future income tax liabilities (net) $ - $ 10,038
------------- ----------
------------- ----------


U.S. based corporate subsidiaries are subject to tax on their taxable income at a rate of 40% (2008 - 40%).

At March 31, 2009, the U.S. subsidiaries of Energy Savings had $3,147 (US $2,495) in combined operating losses for tax purposes, all of which will expire by 2026. The tax benefit of these losses has been recognized in earnings, reducing the future taxes related to OCI of the U.S. subsidiaries in these financial statements.

10. UNITHOLDERS' CAPITAL

Trust units of the Fund

An unlimited number of units may be issued. Each unit is transferable, voting and represents an equal undivided beneficial interest in any distributions from the Fund whether of net income, net realized capital gains or other amounts, and in the net assets of the Fund in the event of termination or winding-up of the Fund.

The Fund intends to make distributions to its Unitholders based on the cash receipts of the Fund, excluding proceeds from the issuance of additional Fund units, adjusted for costs and expense of the Fund, amount which may be paid by the Fund in connection with any cash redemptions or repurchases of units and any other amount that the Board of Directors considers necessary to provide for the payment of any costs which have been or will be incurred in the activities and operations of the Fund. The Fund's intention is for Unitholders of record on the 15th day of each month to receive distributions at the end of the month, excluding any special distributions.

Class A preference shares of OESC

The terms of the unlimited Class A preference shares of OESC are non-voting, non-cumulative and exchangeable into trust units in accordance with the OESC shareholders' agreement as restated and amended, with no priority on dissolution. Pursuant to the amended and restated Declaration of Trust which governs the Fund, the holders of Class A preference shares are entitled to vote in all votes of Unitholders as if they were the holders of the number of units that they would receive if they exercised their shareholder exchange rights. Class A preference shareholders have equal entitlement to distributions from the Fund as Unitholders.



2009 2008

Issued and Outstanding Units/Shares Units/Shares

Trust units
-----------
Balance, beginning of year 102,152,194 $ 341,337 98,082,535 $ 306,387
Options exercised 355,000 4,840 345,833 4,556
Unit appreciation rights
exchanged 65,036 938 17,868 237
Distribution reinvestment
plan 1,697,394 18,863 536,559 7,078
Units issued 1,336,115 22,313 1,169,399 18,079
Units cancelled (909,700) (6,603) - -
Exchanged from Class A
preference shares 1,442,484 3,606 2,000,000 5,000
------------------------------------------------
Balance, end of year 106,138,523 385,294 102,152,194 341,337
------------------------------------------------
Class A preference shares
-------------------------
Balance, beginning of year 6,706,212 16,766 8,706,212 21,766
Exchanged into units (1,442,484) (3,606) (2,000,000) (5,000)
------------------------------------------------
Balance, end of year 5,263,728 13,160 6,706,212 16,766
------------------------------------------------
Unitholders' capital, end
of year 111,402,251 $ 398,454 108,858,406 $ 358,103
------------------------------------------------
------------------------------------------------


Distribution reinvestment plan

Under the Fund's distribution reinvestment program ("DRIP"), Unitholders holding a minimum of 100 units can elect to receive their distributions (both regular and special) in units rather than cash at a 2% discount to the simple average closing price of the units for five trading days preceding the applicable distribution payment date, providing the units are issued from treasury and not purchased on the open market.

Units cancelled

During the year, the Fund obtained approval from its Board of Directors to make a normal course issuer bid to purchase up to 9,000,000 units, for the 12-month period commencing November 21, 2008 and ending November 20, 2009. A maximum of 44,754 units can be purchased during any trading day.

During the year, the Fund purchased and cancelled 909,700 units for a cash consideration of $6,603.

Units issued

During the year, the Fund issued 1,336,115 units for the 50% portion of the special distribution declared, to be paid in units, in the prior fiscal year.

11. UNIT BASED COMPENSATION PLANS

(a) Unit option plan

The Fund grants awards under its 2001 unit option plan to directors, officers, full-time employees and service providers (non-employees) of Energy Savings. In accordance with the unit option plan, the Fund may grant options to a maximum of 11,300,000 units. As at March 31, 2009, there were 758,666 options still available for grant under the plan. Of the options issued, 555,500 options remain outstanding at year end. The exercise price of the unit options equals the closing market price of the Fund's units on the last business day preceding the grant date. The unit options will vest over periods ranging from three to five years from the grant date and expire after five or ten years from the grant date.

A summary of the changes in the Fund's option plan during the year and status at March 31, 2009 is outlined below.



Weighted
average
Outstanding Range of Weighted average grant date
options exercise prices exercise price(1) fair value(2)

Balance,
beginning
of year 970,500 $11.25 - $18.70 $14.64
Granted 50,000 $12.70 $12.70 $0.91
Forfeited/
cancelled (110,000) $15.11 - $17.15 $15.77
Exercised (355,000) $11.25 - $12.17 $12.09
------------
Balance,
end of year 555,500 $11.25 - $18.70 $15.88
------------
------------

(1) The weighted average exercise price is calculated by dividing the
exercise price of options granted by the number of options granted.
(2) The weighted average grant date fair value is calculated by dividing
the fair value of options granted by the number of options granted.



2009 Options Outstanding Options Exercisable
----------------------------------------------------------------------------
Weighted
Average Weighted Weighted
Range of Remaining Average Average
Exercise Number Contractual Exercise Number Exercise
Prices Outstanding Life Price Exercisable Price

$12.69 - $15.63 330,500 1.95 $15.05 158,700 $15.55
$15.90 - $18.70 225,000 1.76 $17.10 154,000 $17.08
----------- -----------
Balance, end of year 555,500 1.88 $15.88 312,700 $16.30
----------- -----------
----------- -----------



2008 Options Outstanding Options Exercisable
----------------------------------------------------------------------------
Weighted
Average Weighted Weighted
Range of Remaining Average Average
Exercise Number Contractual Exercise Number Exercise
Prices Outstanding Life Price Exercisable Price

$11.25 - $12.69 360,000 0.53 $12.10 356,000 $12.09
$15.09 - $15.63 335,500 2.72 $15.46 112,600 $15.61
$15.90 - $18.70 275,000 2.76 $16.99 84,000 $17.10
--------- ---------
Balance, end of year 970,500 1.92 $14.64 552,600 $13.57
--------- ---------
--------- ---------



Options available for grant 2009 2008

Balance, beginning of year 698,666 812,666
Add: canceled/forfeited during the year 110,000 44,000
Less: granted during the year (50,000) (158,000)
--------- ---------
Balance, end of year 758,666 698,666
--------- ---------
--------- ---------


The Fund uses a binomial option pricing model to estimate the fair values. The binomial model was chosen because of the yield associated with the units. Fair values of employee unit options are estimated at grant date. Fair values of non-employee unit options are estimated and revalued each reporting period until a measurement date is achieved. The following weighted average assumptions have been used in the valuation for fiscal 2009:



Risk free rate 3.13%
Expected volatility 27.31%
Expected life 5 years
Expected distributions $1.24 per year


(b) Unit appreciation rights

The Fund grants awards under its 2004 unit appreciation rights ("UARs") plan to senior officers, employees and service providers of its subsidiaries and affiliates in the form of fully paid UARs. In accordance with the unit appreciation rights plan, the Fund may grant UARs to a maximum of 2,000,000. As at March 31, 2009 there were 374,668 UARs still available for grant under the plan. Of the UARs issued, 1,388,896 UARs remain outstanding at March 31, 2009. Except as otherwise provided, (i) the UARs vest from one to five years from the grant date providing, in most cases, on the applicable vesting date the UAR grantee continues as a senior officer, employee or service provider of the Fund or any affiliate thereof; (ii) the UARs expire no later than ten years from the grant date; (iii) a holder of UARs is entitled to distributions as if a UAR were a unit; and (iv) when vested, the holder of a UAR may exchange one UAR for one unit.



UARs Available for Grant 2009 2008
--------- ---------
Balance, beginning of year 804,170 78,277
Less: granted during the year (455,215) (284,704)
Add: increase in UARs available for grant - 1,000,000
Add: canceled/forfeited during the year 25,713 10,597
--------- ---------

Balance, end of year 374,668 804,170
--------- ---------
--------- ---------


(c) Deferred unit grants

The Fund grants awards under its 2004 Directors' deferred compensation plan to all independent directors on the basis each director is required to receive annually $15 of his compensation entitlement in deferred unit grants ("DUGs") and may elect to receive all or any portion of the balance of his annual compensation in DUGs. In accordance with the deferred compensation plan, the Fund may grant DUGs to a maximum of 100,000. The DUGs vest on the earlier of the date of the Director's resignation or three years following the date of grant and expire ten years following the date of grant. As of March 31, 2009, there were 31,568 DUGs available for grant under the plan. Of the DUGs issued, 62,530 DUGs remain outstanding at March 31, 2009.



DUGs Available for Grant 2009 2008
--------- ---------

Balance, beginning of year 56,537 71,143
Less: granted during the year (24,969) (14,606)
--------- ---------

Balance, end of year 31,568 56,537
--------- ---------
--------- ---------



(d) Contributed surplus

Amounts credited to contributed surplus include unit based compensation
awards, UARs and DUGs. Amounts charged to contributed surplus are awards
exercised during the year.


Contributed Surplus 2009 2008
--------- ---------

Balance, beginning of year $ 12,004 $ 9,633
Add: unit based compensation awards 4,098 3,076
non-cash deferred unit grants distributions 55 35
Less: unit based awards exercised (1,486) (740)
--------- ---------

Balance, end of year $ 14,671 $ 12,004
--------- ---------
--------- ---------


Total amounts credited to Unitholders' capital in respect of unit options and deferred unit grants exercised or exchanged during the year ended March 31, 2009 amounted to $5,778 (2008 - $4,793).

Cash received from options exercised for the year ended March 31, 2009 amounted to $4,293 (2008 - $4,053).

12. FINANCIAL INSTRUMENTS

(a) Fair value

The Fund has a variety of gas and electricity supply contracts that are captured under CICA Handbook Section 3855, Financial Instruments - Measurement and Recognition. Fair value is the estimated amount that Energy Savings would pay or receive to dispose of these supply contracts in an arm's length transaction between knowledgeable, willing parties who are under no compulsion to act. Management has estimated the value of electricity and gas swap and forward contracts using a discounted cash flow method which employs market forward curves that are either directly sourced from third parties or are developed internally based on third party market data. These curves can be volatile thus leading to volatility in the mark to market values, but results in no impact to cash flows. Gas options have been valued using the Black option value model using the applicable market forward curves and the implied volatility from other market traded gas options.

Effective July 1, 2008, the Fund ceased the utilization of hedge accounting. Accordingly, all the mark to market changes on the Fund's derivative instruments are recorded on a single line on the consolidated statements of operations. Due to the commodity price volatility and size of the Fund, the quarterly swings in mark to market on these positions will increase the volatility in the Fund's earnings.

The following table illustrates the (gains)/losses related to the Fund's derivative financial instruments classified as held-for-trading, recorded against other assets and other liabilities with their offsetting values recorded in Change In Fair Value of Derivative Instruments:



Change in Fair Value of Derivative Instruments

For the year For the year For the year
ended March 31, ended March 31, For the year ended ended March 31,
2009 2009 (USD) March 31, 2008 2008 (USD)

Canada
Fixed-for
-floating
electricity
swaps(i) $ 223,191 N/A $ 5,535 N/A
Renewable
energy
certificates
(ii) $ 527 N/A $ (854) N/A
Options(iii) $ (4,847) N/A $ 530 N/A
Physical gas
forward
contracts(iv)$ 771,300 N/A $ - N/A
Transportation
foward
contracts(v) $ (5,059) N/A $ - N/A
United States
Fixed-for
-floating
electricity
swaps(vi) $ 96,031 $ 84,666 $ - $ -
Physical
electricity
forwards(vii)$ 130,911 $ 116,116 $ - $ -
Unforced
capacity
foward
contracts
(viii) $ 5,249 $ 4,730 $ 39 $ 42
Renewable
energy
certificates
(ix) $ (104) $ (68) $ (75) $ (75)
Verified
emission
reduction
certificates
(x) $ 8 $ - $ - $ -
Options(xi) $ 790 $ 1,068 $ (139) $(264)
Physical gas
forward
contracts
(xii) $ 336,831 $ 299,516 $ - $ -
Transportation
forward
contracts
(xiii) $ (6,252) $ (4,992) $ - $ -
Fixed
financial
swaps(xiv) $ (242) $ (191) $ - $ -
Heat rate
swaps(xv) $ (251) $ (228) $ - $ -
Foreign
exchange
forward
contracts(xvi)$ 978 N/A $(4,772) N/A
Amortization
of deferred
unrealized
gains of
discontinued
hedges $(211,776) $ 3,244
----------------------------------------------------------------------------
Change In Fair
Value of
Derivatives
Instruments $ 1,337,285 $ 3,508
----------------------------------------------------------------------------
----------------------------------------------------------------------------


The following table illustrates the (gains)/losses representing the ineffective portion of the Fund's designated hedges prior to July 1, 2008, recorded against other assets and other liabilities with their offsetting values recorded in Change In Fair Value of Derivative Instruments:



Change in Fair Value of Derivative Instruments

For the year For the year For the year
ended March 31, ended March 31, For the year ended ended March 31,
2009 2009 (USD) March 31, 2008 2008 (USD)

Canada
Fixed-for
-floating
electricity
swaps(i) $ (476) N/A $ (3,116) N/A

United
States
Fixed-for
-floating
electricity
swaps(vi) $ 167 $ 164 $ 439 $ 423

----------------------------------------------------------------------------
Change In Fair
Value of
Derivatives
Instruments $ (309) $ (2,677)
----------------------------------------------------------------------------
----------------------------------------------------------------------------

----------------------------------------------------------------------------
Total Change in
Fair Value of
Derivatives
Instruments $ 1,336,976 $ 831
----------------------------------------------------------------------------



The following table illustrates the (gains)/losses related to the Fund's designated hedges prior to July 1, 2008, recorded against other assets and other liabilities with their offsetting values recorded in other comprehensive income:



Other Comprehensive Income
Fiscal 2009 Fiscal 2008

OCI - For the OCI - For the OCI - For the OCI - For the
year ended year ended March year ended year ended March
March 31, 2009 31, 2009 (USD) March 31, 2008 31, 2008 (USD)

Canada
Fixed-for
-floating
electricity
swaps(i) $ (75,354) N/A $ 103,531 N/A
Renewable
energy
certificates
(ii) $ - N/A $ - N/A
Options(iii) $ - N/A $ - N/A
Physical
gas forward
contracts
(iv) $(313,071) N/A $ 40,317 N/A
Transportation
foward
contracts
(v) $ (5,958) N/A $ (3,164) N/A

United States
Fixed-for
-floating
electricity
swaps(vi) $ (40,473) $ (39,808) $ (18,822) $ (18,745)
Physical
electricity
forwards
(vii) $ (30,573) $ (30,071) $ (13,811) $ (14,344)
Unforced
capacity
foward
contracts
(viii) $ (4,743) $ (4,665) $ - $ -
Renewable
energy
certificates
(ix) $ - $ - $ - $ -
Verified
emission
reduction
certificates
(x) $ - $ - $ - $ -
Options(xi) $ - $ - $ - $ -
Physical
gas forward
contracts
(xii) $(124,760) $(122,711) $ (43,133) $ (44,576)
Transportation
forward
contracts
(xiii) $ 7,022 $ 6,907 $ - $ -
Fixed
financial
swap(xiv) $ - $ - $ - $ -
Heat rate
swaps(xv) $ - $ - $ - $ -
Foreign
exchange
forward
contracts
(xvi) $ - N/A $ - N/A
Amortization
of deferred
unrealized
gains of
discounted
hedges $ (4,550) $ (3,244)
----------------------------------------------------------------------------
Other
Comprehensive
Income $(592,460) $ 61,674
----------------------------------------------------------------------------
----------------------------------------------------------------------------


The following table summarizes the nature of the financial assets and liabilities recorded in the financial statements as at March 31, 2009:



Other Assets Other Assets Other Liabilities Other Liabilities
(Current) (Long-term) (Current) (Long-term)
Canada
Fixed-for
-floating
electricity
swaps(i) $ - $ - $ 149,476 $ 158,289
Renewable
energy
certificates
(ii) $ 94 $ 251 $ - $ 23
Options(iii) $ 792 $ 23 $ 237 $ 997
Physical gas
forward
contracts
(iv) $ - $ - $ 198,329 $ 103,734
Transportation
foward
contracts(v) $ 787 $ 2,160 $ 927 $ 163
United States
Fixed-for
-floating
electricity
swaps(vi) $ - $ - $ 34,997 $ 24,577
Physical
electricity
forwards
(vii) $ - $ - $ 48,242 $ 41,456
Unforced
capacity
foward
contracts
(viii) $ 19 $ 213 $ 366 $ -
Renewable
energy
certificates
(ix) $ 57 $ 191 $ 19 $ 48
Verified
emission
reduction
certificates
(x) $ - $ - $ - $ -
Options(xi) $ 395 $ - $ 204 $ 1,349
Physical gas
forward
contracts
(xii) $ - $ - $ 84,010 $ 69,627
Transportation
forward
contracts
(xiii) $ 4 $ - $ 961 $ 1,457
Fixed
financial
swaps(xiv) $ - $ 869 $ 628 $ -
Heat rate
swaps(xv) $ 72 $ 1,171 $ 956 $ -
Foreign
exchange
forward
contracts
(xvi) $ 3,324 $ 275 $ - $ -
----------------------------------------------------------------------------
As at March
31, 2009 $ 5,544 $ 5,153 $ 519,352 $ 401,720
----------------------------------------------------------------------------
----------------------------------------------------------------------------


The following tables summarize the nature of the financial assets and liabilities recorded in the financial statements as at March 31, 2008:



Other Assets Other Assets Other Liabilities Other Liabilities
(Current) (Long-term) (Current) (Long-term)
Canada
Fixed-for
-floating
electricity
swaps(i) $ 13,344 $ 12,517 $ 49,965 $ 139,695
Renewable
energy
certificates
(ii) $ 222 $ 632 $ - $ -
Options(iii) $ - $ - $ 1,937 $ 3,442
Physical gas
forward
contracts
(iv) $125,669 $ 36,270 $ - $ 5,228
Transportation
foward
contracts
(v) $ 520 $ - $ 6,915 $ 2,903
United States
Fixed-for
-floating
electricity
swaps(vi) $ 1,117 $ 232 $ - $ 3,939
Physical
electricity
forwards
(vii) $ 12,637 $ 2,715 $ - $ -
Unforced
capacity
foward
contracts
(viii) $ - $ - $ 43 $ -
Renewable
energy
certificates
(ix) $ 10 $ 67 $ - $ -
Verified
emission
reduction
certificates
(x) $ - $ - $ - $ -
Options(xi) $ 1,610 $ - $ 290 $ 1,183
Physical
gas forward
contracts
(xii) $ 35,832 $ 20,875 $ - $ -
Transportation
forward
contracts
(xiii) $ - $ - $ - $ -
Fixed
financial
swaps(xiv) $ - $ - $ - $ -
Heat rate
swaps(xv) $ - $ - $ - $ -
Foreign
exchange
forward
contracts
(xvi) $ 2,325 $ 2,252 $ - $ -
----------------------------------------------------------------------------
As at March
31, 2008 $193,286 $ 75,560 $ 59,150 $ 156,390
----------------------------------------------------------------------------
----------------------------------------------------------------------------


The following table summarizes financial instruments classified as held for trading as at March 31, 2009 to which the Fund is committed:



Total
Notional Remaining
Contract Type Volume Volume Maturity Date

Canada
----------------------------------------------------------------------------
(i) Fixed-for-floating 0.0001-35 13,464,104 April 1, 2009 -
electricity swaps(a) MW/h MWh August 1, 2015
----------------------------------------------------------------------------
(ii) Renewable energy 10-26,100 499,322 MWh December 31, 2009 -
certificates MWh December 31, 2014
----------------------------------------------------------------------------
(iii) Options 46-40,500 8,711,942 April 30, 2009 -
GJ/month GJ February 28, 2014
----------------------------------------------------------------------------
(iv) Physical gas forward 0.14-4,809 155,443,652 April 30, 2009 -
contracts GJ/day GJ April 30, 2015
----------------------------------------------------------------------------
(v) Transportation forward 33-15,500 85,858,757 April 1, 2009 -
contracts GJ/day GJ October 31, 2013
----------------------------------------------------------------------------
United States
----------------------------------------------------------------------------
(vi) Fixed-for-floating 0.10-14.70 1,868,707 April 30, 2009 -
electricity swaps MW/h MWh March 31, 2014
----------------------------------------------------------------------------
(vii) Physical electricity 1.0-25.0 3,437,488 April 1, 2009 -
forwards MW/h MWh May 31, 2014
----------------------------------------------------------------------------
(viii) Unforced capacity 1.1-112.4 214 April 30, 2009 -
fixed physical MWCap MWCap April 30, 2009
contract
----------------------------------------------------------------------------
(viii) Unforced capacity 5-40 2,180 April 30, 2009 -
forward contracts MWCap MWCap November 30, 2012
----------------------------------------------------------------------------
(ix) Renewable energy 2,000-40,000 474,400 December 31, 2009 -
certificates MWh MWh December 31, 2013
----------------------------------------------------------------------------
(x) Verified emission 10,000 60,000 December 31, 2009 -
reduction certificates Tonnes Tonnes December 31, 2012
----------------------------------------------------------------------------
(xi) Options 5-73,000 7,598,033 April 30, 2009 -
mmBTU/month mmBTU May 31, 2013
----------------------------------------------------------------------------
(xii) Physical gas forward 5-4,207 47,425,538 April 30, 2009 -
contracts mmBTU/day mmBTU April 30, 2014
----------------------------------------------------------------------------
(xiii)Transportation forward 380-10,500 33,370,625 April 1, 2009 -
contracts mmBTU/day mmBTU January 31, 2013
----------------------------------------------------------------------------
(xiv) Fixed financial swap 100-4,500 4,116,400 November 30, 2009-
mmBTU/day mmBTU May 31, 2014
----------------------------------------------------------------------------
(xv) Heat rate swaps 1-15 1,414,213 July 31, 2009 -
MWh MWh May 31, 2014
----------------------------------------------------------------------------
(xvi) Foreign exchange $1,982-$2,276 N/A April 7, 2009 -
forward contracts(b) (US $2,000) April 7, 2010
----------------------------------------------------------------------------



Fair Value
Favourable/ Notional
Contract Type Fixed Price (Unfavourable) Value

Canada
----------------------------------------------------------------------------
(i) Fixed-for-floating $55.24-$128.13 ($307,765) $1,012,783
electricity swaps(a)
----------------------------------------------------------------------------
(ii) Renewable energy $3.00-$9.00 $322 $2,284
certificates
----------------------------------------------------------------------------
(iii) Options $5.50-$13.20 ($419) $15,145
----------------------------------------------------------------------------
(iv) Physical gas forward $3.56-$10.00 ($302,063) $1,240,440
contracts
----------------------------------------------------------------------------
(v) Transportation forward $0.01-$1.68 $1,857 $79,189
contracts
----------------------------------------------------------------------------
United States
----------------------------------------------------------------------------
(vi) Fixed-for-floating $54.24-$172.48 ($59,574) $219,344
electricity swaps (US$43.00-$136.75) (US($47,232)) (US$173,903)
----------------------------------------------------------------------------
(vii) Physical electricity $28.25-$139.06 ($89,698) $300,023
forwards (US$22.40-$110.25) (US($71,116)) (US$237,868)
----------------------------------------------------------------------------
(viii)Unforced capacity $378.39-$945.98 ($11) $165
fixed physical (US$300-$750) (US$(9)) (US$131)
contract
----------------------------------------------------------------------------
(viii)Unforced capacity $3,784-$10,091 ($123) $14,650
forward contracts (US$3,000-$8,000) (US($97)) (US$11,165)
----------------------------------------------------------------------------
(ix) Renewable energy $5.80-$28.38 $181 $4,626
certificates (US$4.60-$22.50) (US$143) (US$3,668)
----------------------------------------------------------------------------
(x) Verified emission $10.41 $ - $624
reduction certificates (US$8.25) (US$-) (US$495)
----------------------------------------------------------------------------
(xi) Options $6.94-$17.41 ($1,158) $16,812
(US$5.50-$13.80) (US($919)) (US$13,329)
----------------------------------------------------------------------------
(xii) Physical gas forward $4.10-$14.98 ($153,637) $509,151
contracts (US$3.25-$11.88) (US($121,808)) (US$403,672)
----------------------------------------------------------------------------
(xiii)Transportation forward $0.01-$0.76 ($2,414) $6,997
contracts (US$0.01-$0.60) (US($1,914)) (US$5,547)
----------------------------------------------------------------------------
(xiv) Fixed financial swap $7.62-$9.13 ($241) $33,871
(US$6.04-$7.24) (US$191) (US$26,854)
----------------------------------------------------------------------------
(xv) Heat rate swaps $30.63-$82.22 $287 $90,149
(US$30.63-$65.19) (US$228) (US$71,292)
----------------------------------------------------------------------------
(xvi) Foreign exchange $0.99-$1.1381 $3,599 $55,126
forward contracts (b) (US$52,000)
----------------------------------------------------------------------------

(a) The electricity fixed-for-floating contracts related to the Province of
Alberta are predominantly load-following, wherein the quantity of
electricity contained in the supply contract "follows" the usage of
customers designated by the supply contract. Notional volumes
associated with these contracts are estimates and subject to change
with customer usage requirements. There are also load shaped
fixed-for-floating contracts in Ontario wherein the quantity of
electricity is established but varies throughout the term of the
contracts.

(b) Hedge accounting was applied to most of these forwards up to September
30, 2006. However, the hedge was de-designated and a loss of $195 for
the year ended March 31, 2007 was recorded in other liabilities. As
the required hedge accounting effectiveness was achieved for certain
quarters of fiscal 2007, a $1,933 gain was deferred and recorded in
AOCI and is being recognized in the Statement of Operations over the
remaining term of each hedging relationship.


The following table summarizes the nature of financial assets and liabilities recorded in the financial statements:



Fiscal 2009 Fiscal 2008

Loss on cash flow Loss on cash flow
hedges transferred hedges transferred
from Other Unrealized gain from Other Unrealized gain
Comprehensive recorded in Comprehensive recorded in
Income to the Other Income to the Other
Statement of Comprehensive Statement of Comprehensive
Operations Income Operations Income
Canada
Fixed-for
-floating
electricity
swaps(i) $ (19,208) $ 94,562 $ (93,999) $ (9,490)
Physical
gas forward
contracts
and
transportation
forward
contracts
(iv) $ (135,808) $ 454,837 $ (523,116) $ 485,965
United States
Fixed-for
-floating
electricity
swaps(vi) $ (13,826) $ 54,299 $ (53,562) $ 72,339
Physical
electricity
forwards
(vii) $ (30,659) $ 61,232 $ (87,416) $ 101,215
Unforced
capacity
foward
contracts
(viii) $ - $ 4,743 $ - $ -
Physical
gas forward
contracts
and
transportation
forward
contracts
(xi) $ (26,184) $ 143,922 $ (165,012) $ 208,158
Amortization
of deferred
unrealized
gains of
discontinued
hedges $ (211,776) $ - $ 3,244 $ -
----------------------------------------------------------------------------
Total realized
and
unrealized
gains/
(losses) $ (437,461) $ 813,595 $ (919,861) $ 858,187
----------------------------------------------------------------------------
----------------------------------------------------------------------------


The estimated amortization of deferred gains and losses reported in AOCI that is expected to be amortized to net income within the next 12 months is a gain of $218,052.

(b) Classification of Financial Assets and Liabilities

The following table represents the fair values and carrying amounts of financial assets and liabilities measured at fair value or amortized cost:



As at March 31, 2009 Carrying amount Fair value

Cash and cash equivalents and restricted cash $ 66,703 $ 66,703
Accounts receivable $ 249,480 $ 249,480
Accounts payable and accrued liabilities,
customer rebates payable, management incentive
program payable and unit distribution payable $ 184,809 $ 184,809
Long-term debt $ 76,500 $ 76,500



For the year For the year
ended March ended March
31, 2009 31, 2008

Interest expense on financial liabilities not
held for trading $ 3,833 $ 5,346


The carrying value of cash, restricted cash, accounts receivable, accounts payable and accrued liabilities, management incentive program payable and unit distribution payable approximates their fair value due to their short term liquidity.

The carrying value of the long-term debt approximates its fair value as the interest payable on outstanding amounts at rates that vary with Bankers' Acceptance, LIBOR, Canadian bank prime rate or U.S. prime rate.

(c) Management of risks arising from financial instruments

The risks associated with the Fund's financial instruments are as follows:

(i) Market risk

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

Foreign currency risk

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

A portion of Energy Savings' earnings is generated in U.S. dollars and is subject to currency fluctuations. The performance of the Canadian dollar relative to the U.S. dollar could positively or negatively affect Energy Savings' earnings. Due to its growing operations in the U.S., Energy Savings expects to have a greater exposure in the future to U.S. fluctuations than in prior years.

The Fund may, from time to time, experience losses resulting from fluctuations in the values of these foreign currencies, which could adversely affect operating results.

With respect to translation exposure, as at March 31, 2009, if the Canadian dollar had been 5% stronger or weaker against the U.S. dollar, assuming that all the other variables had remained constant, net income for the year ended March 31, 2009 would have been $20,295 higher/lower and other comprehensive income would have been $4,289 lower/higher.

Interest rate risk

Energy Savings is also exposed to interest rate fluctuations associated with its floating rate credit facility. Energy Savings' current exposure to interest rates does not economically warrant the use of derivative instruments.

The Fund's exposure to interest rate risk is relatively immaterial and temporary in nature. As such, the Fund does not believe that this long-term debt exposes it to material financial risks and has determined that there is no need to set out parameters to actively manage this risk.

A 1% increase (decrease) in interest rates would have resulted in a decrease (increase) in income before taxes for the year ended March 31, 2009 of approximately $270.

Commodity price risk

Energy Savings is exposed to market risks associated with commodity prices and market volatility where estimated customer requirements do not match actual customer requirements. Energy Savings' exposure to market risk is affected by a number of factors, including accuracy of the estimation of customer commodity requirements, commodity prices, volatility and liquidity of markets. Energy Savings enters into derivative instruments in order to manage exposures to changes in commodity prices. The derivative instruments that are used are designed to fix the price of supply for estimated customer commodity demand in Canadian dollars and thereby fix margins such that Unitholder distributions can be appropriately established. Derivative instruments are generally transacted over-the-counter. These derivative financial instruments create a credit risk for Energy Savings since they have been transacted with a limited number of counterparties. Should any counterparty be unable to fulfill its obligations under the contracts, Energy Savings may not be able to realize the other asset balance recognized in the financial statements. The inability or failure of Energy Savings to manage and monitor the above market risks could have a material adverse effect on the operations and cash flows of Energy Savings.

Other assets and Other liabilities on the Consolidated Balance Sheets represent the fair value of the derivative instruments. As a result of commodity volatility and the size of the Fund, annual swings in the mark to market on the Fund's positions could have a significant impact on these balances.

As at March 31, 2009, if the electricity prices had risen (fallen) by 10%, assuming that all the other variables had remained constant, income before taxes for the year ended March 31, 2009 would have increased (decreased) by $90,661 ($90,366) primarily as a result of the change in the fair value of the Fund's derivative instruments.

As at March 31, 2009, if the natural gas prices had risen (fallen) by 10%, assuming that all the other variables had remained constant, income before taxes for the year ended March 31, 2009 would have increased (decreased) by $121,149 ($120,219) primarily as a result of the change in the fair value of the Fund's derivative instruments.

Changes in gas and electricity prices will not significantly impact the Fund's gross margin percentage due to its fixed-price contracts with its customers.

(ii) Credit risk

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

Customer Credit Risk

In Alberta, Texas and Illinois, Energy Savings has customer credit risk and therefore, credit review processes have been implemented to perform credit evaluations of customers and manage customer default. If a significant number of customers were to default on their payments, it could have a material adverse effect on the operations and cash flow of Energy Savings. Management factors default from credit risk in its margin expectations for Illinois, Texas and Alberta.

As at March 31, 2009, accounts receivables from Alberta, Texas and Illinois with a carrying value of $17,022 (March 31, 2008 - $14,285) were past due but not doubtful. As at March 31, 2009 the aging of the accounts receivables from Alberta, Texas and Illinois was as follows:



Current $ 44,745
1 - 30 days 13,590
31 - 60 days 6,591
61 - 90 days 2,276
Over 90 days 1,221
-----------
$ 68,423
-----------

For the year ended March 31, 2009, changes in the allowance for doubtful
accounts were as follows:

Balance, beginning of period $ 9,162
Provision for doubtful accounts 13,887
Bad debts written off (15,075)
Others 683
-----------
Balance, end of period $ 8,657
-----------


For the remaining markets, the LDCs provide collection services and assume the risk of any bad debts owing from Energy Savings' customers for a fee. Management believes that the risk of the LDCs failing to deliver payment to Energy Savings is minimal. There is no assurance that the LDCs that provide these services will continue to do so in the future.

Counterparty Credit Risk

Counterparty credit risk represents the loss that Energy Savings would incur if a counterparty fails to perform under its contractual obligations. This risk would manifest itself in Energy Savings replacing contracted supply at prevailing market rates thus impacting the related customer margin or replacing contracted foreign exchange at prevailing market rates impacting the related Canadian dollar denominated distributions. Counterparty limits are established within the Risk Management Policy. Any exception to these limits requires approval from the Board of Directors of OESC. The Risk Office and Risk Committee monitor current and potential credit exposure to individual counterparties and also monitor overall aggregate counterparty exposure. However, the failure of a counterparty to meet its contractual obligations could have a material adverse effect on the operations and cash flows of Energy Savings.

As at March 31, 2009, the maximum credit risk exposure amounted to $3,617,478, representing the notional value of its derivative financial instruments and accounts receivable.

(iii) Liquidity risk

Liquidity risk is the potential inability to meet financial obligations as they fall due. The Fund manages this risk by monitoring detailed weekly cash flow forecasts covering a rolling six-week period, monthly cash forecasts for the next 12 months, and quarterly forecasts for the following two-year period to ensure adequate and efficient use of cash resources and credit facilities.

(iv) Supplier risk

Energy Savings purchases the majority of the gas and electricity delivered to its customers through long term contracts entered into with various suppliers. Energy Savings has an exposure to supplier risk as the ability to continue to deliver gas and electricity to its customers is reliant upon the ongoing operations of these suppliers and their ability to fulfill their contractual obligations. Energy Savings has discounted the fair value of its financial assets by $2,065 to accommodate for its counterparties' risk of default. A significant portion of these gas and electricity purchases is from Shell Energy North America and its affiliates.

13. CAPITAL DISCLOSURE

Energy Savings' defines capital as Unitholders' equity (excluding accumulated other comprehensive income) and long-term debt. The Fund's objectives when managing capital are to maintain flexibility between:

a) enabling it to operate efficiently;

b) providing liquidity and access to capital for growth opportunities; and

c) providing returns and generating predictable cash flow for distribution to Unitholders

The Fund manages the capital structure and makes adjustments to it in light of changes in economic conditions and the risk characteristics of the underlying assets. The Board of Directors does not establish quantitative return on capital criteria for management; but rather promotes year over year sustainable profitable growth. The Fund's capital management objectives have remained unchanged from the prior year. The Fund is not subject to any externally imposed capital requirements other than financial covenants in its credit facility and as at March 31, 2009 all of these covenants have been met.



14. INCOME (LOSS) PER UNIT

2009 2008
Basic income (loss) per unit
----------------------------

Net income (loss) available to Unitholders $ (1,107,473) $ 152,761
-------------- -------------
Weighted average number of units outstanding 104,841,000 98,830,000
Weighted average number of Class A preference
shares 5,623,000 8,701,000
-------------- -------------
Basic units and shares outstanding 110,464,000 107,531,000
-------------- -------------
Basic income (loss) per unit $ (10.03) $ 1.42
-------------- -------------
-------------- -------------

Diluted income (loss) per unit
------------------------------

Net income (loss) available to Unitholders $ (1,107,473) $ 152,761
Basic units and shares outstanding 110,464,000 107,531,000
Dilutive effect of:
Unit options 16,000 115,000
Unit appreciation rights 1,021,000 766,000
Deferred unit grants 45,000 28,000
-------------- -------------
Units outstanding on a diluted basis 111,546,000 108,440,000
-------------- -------------
Diluted income (loss) per unit $ (9.93) $ 1.41
-------------- -------------
-------------- -------------


15. REPORTABLE BUSINESS SEGMENTS

Energy Savings operates in two reportable geographic segments, Canada and the United States. Reporting by geographic region is in line with Energy Savings' performance measurement parameters. Both the Canadian and the U.S. operations have gas and electricity business segments.

Energy Savings evaluates segment performance based on gross margin.

The following tables present Energy Savings' results by geographic segment:



2009 Canada United States Consolidated
----------- -------------- -------------

Sales gas $ 814,275 $ 343,889 $ 1,158,164
Sales electricity 518,388 222,661 741,049
----------------------------------------------------------------------------
Sales $ 1,332,663 $ 566,550 $ 1,899,213
----------------------------------------------------------------------------

Gross margin $ 231,720 $ 91,096 $ 322,816
Amortization of gas
contracts 710 - 710
Amortization of electricity
contracts 178 2,706 2,884
Amortization of capital
assets 4,660 440 5,100
Other operating expenses 89,889 55,995 145,884
----------------------------------------------------------------------------
Income before the undernoted 136,283 31,955 168,238
Interest expense 2,479 1,378 3,857
Change in fair value of
derivative instruments 872,402 464,574 1,336,976
Other income (7,574) (30) (7,604)
Non-controlling interest (58) - (58)
Recovery of income tax (1,971) (55,489) (57,460)
----------------------------------------------------------------------------
Net loss $ (728,995) $ (378,478) $ (1,107,473)
----------------------------------------------------------------------------
----------------------------------------------------------------------------

Additions to capital assets $ 6,169 $ 176 $ 6,345
----------------------------------------------------------------------------
----------------------------------------------------------------------------

Total goodwill $ 94,576 $ 22,485 $ 117,061
----------------------------------------------------------------------------
----------------------------------------------------------------------------

Total assets $ 368,873 $ 166,882 $ 535,755
----------------------------------------------------------------------------
----------------------------------------------------------------------------



2008 Canada United States Consolidated
----------- -------------- -------------

Sales gas $ 785,788 $ 247,463 $ 1,033,251
Sales electricity 544,278 161,161 705,439
----------------------------------------------------------------------------
Sales $ 1,330,066 $ 408,624 $ 1,738,690
----------------------------------------------------------------------------

Gross margin $ 220,247 $ 54,553 $ 274,800
Amortization of gas
contracts 177 - 177
Amortization of electricity
contracts 1,284 6,100 7,384
Amortization of capital
assets 3,647 1,463 5,110
Other operating expenses 66,438 52,175 118,613
----------------------------------------------------------------------------
Income (loss) before the
undernoted 148,701 (5,185) 143,516
Interest expense 2,174 3,172 5,346
Change in fair value of
derivative instruments (566) 1,397 831
Other income (680) (241) (921)
Recovery of income tax (3,353) (11,148) (14,501)
----------------------------------------------------------------------------
Net income $ 151,126 $ 1,635 $ 152,761
----------------------------------------------------------------------------
----------------------------------------------------------------------------

Additions to capital
assets $ 7,143 $ 699 $ 7,842
----------------------------------------------------------------------------
----------------------------------------------------------------------------

Total goodwill $ 94,576 $ 21,570 $ 116,146
----------------------------------------------------------------------------
----------------------------------------------------------------------------

Total assets $ 520,384 $ 188,731 $ 709,115
----------------------------------------------------------------------------
----------------------------------------------------------------------------


16. GUARANTEES

(a) Officers and Directors

Corporate indemnities have been provided by the Fund to all directors and certain officers of its subsidiaries and affiliates for various items including, but not limited to, all costs to settle suits or actions due to their association with the Fund and its subsidiaries and/or affiliates, subject to certain restrictions. The Fund has purchased directors' and officers' liability insurance to mitigate the cost of any potential future suits or actions. Each indemnity, subject to certain exceptions, applies for so long as the indemnified person is a director or officer of one of the Fund's subsidiaries and/or affiliates. The maximum amount of any potential future payment cannot be reasonably estimated.

(b) Operations

In the normal course of business, the Fund and/or the Fund's subsidiaries and affiliates have entered into agreements that include guarantees in favour of third parties, such as purchase and sale agreements, leasing agreements and transportation agreements. These guarantees may require the Fund and/or its subsidiaries to compensate counterparties for losses incurred by the counterparties as a result of breaches in representation and regulations or as a result of litigation claims or statutory sanctions that may be suffered by the counterparty as a consequence of the transaction. The maximum payable under these guarantees is estimated to be $77,000.

17. COMMITMENTS

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



Premises and Master Services Long-term gas
equipment agreement with and electricity
leasing EPCOR contracts with
various suppliers

2010 $ 5,499 $ 10,111 $ 1,343,509
2011 4,877 13,233 1,014,596
2012 4,273 7,861 646,924
2013 2,937 - 376,666
2014 2,097 - 154,508
Thereafter 5,815 - 12,852
-------- -------- -----------
$ 25,498 $ 31,205 $ 3,549,055
-------- -------- -----------
-------- -------- -----------


Energy Savings is also committed under long-term contracts with customers to supply gas and electricity. These contracts have various expiry dates and renewal options.

18. CONTINGENCIES

During the prior year, the Citizen's Utility Board, AARP and Citizen Action/Illinois filed a complaint before the Illinois Commerce Commission alleging claims that independent sales agents used deceptive practices in their sale of Energy Savings' contracts to Illinois customers. Energy Savings has commenced discussions with the various parties to address and defend the allegations and intends to seek a constructive resolution to the matter.

At this time, the likelihood of damages or recoveries and the ultimate amounts, if any, with respect to this litigation is not determinable, however, an estimated amount has been recorded in these consolidated financial statements as at March 31, 2009.

19. ADJUSTMENTS REQUIRED TO REFLECT NET CASH RECEIPTS FROM GAS SALES



Changes in: 2009 2008

Accrued gas accounts payable $ 2,857 $ 5,465
Unbilled revenues (10,480) (8,085)
----------- ----------
$ (7,623) $ (2,620)
----------- ----------
----------- ----------



20. CHANGES IN NON-CASH WORKING CAPITAL

2009 2008

Accounts receivable $ (17,251) $ (14,887)
Gas in storage (1,288) 1,609
Prepaid expenses 381 (134)
Corporate taxes recoverable 4,447 1,661
Accounts payable and accrued liabilities 20,131 (694)
Management incentive program payable (1,142) 981
Inventory (229) -
Other 1,132 (415)
----------- ----------

$ 6,181 $ (11,879)
----------- ----------
----------- ----------


21. COMPARATIVE CONSOLIDATED FINANCIAL STATEMENTS

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

22. SUBSEQUENT EVENT

On April 22, 2009, Energy Savings and Universal Energy Group Ltd. ("UEG") jointly announced that they have entered into a definitive agreement pursuant to which Energy Savings will propose to acquire all of the outstanding common shares of UEG. The plan of arrangement provides for a share exchange through which each outstanding share of UEG will be exchanged for 0.58 of a share of a subsidiary of Energy Savings, which will be exchangeable into one Energy Savings' trust unit at any time at the option of the holder, for no additional consideration. The transaction will result in a corresponding adjustment to the conversion feature of UEG's outstanding 6% convertible unsecured subordinated debentures (TSX:UEG.DB) in accordance with their terms.

The transaction is expected to close in late June and is subject to certain conditions including approval of UEG shareholders, compliance with the Competition Act, approval of Energy Savings' lenders, and satisfaction of other customary approvals including regulatory, stock exchange, and Court approvals.

During the prior year, the Attorney General for Illinois filed a complaint against IESC (the "Illinois AG Complaint"). The Illinois AG Complaint alleged that independent sales agents used deceptive practices in their sale of Energy Savings' contracts to Illinois customers. On May 12, 2009, a settlement of the action was reached subject to court approval. Under this settlement, IESC will comply with several consumer safeguards, many of which IESC has practiced for more than a year. In addition, $1,000 will be made available to a limited number of customers in settlement of claims.

The Toronto Stock Exchange has neither approved nor disapproved of the contents of this release.

Contact Information

  • Energy Savings Income Fund
    Ms. Rebecca MacDonald
    Executive Chair
    (416) 367-2872
    or
    Energy Savings Income Fund
    Mr. Ken Hartwick, C.A.
    Chief Executive Officer
    (905) 795-3557
    or
    Energy Savings Income Fund
    Ms. Beth Summers, C.A.
    Chief Financial Officer
    (905) 795-4206
    www.esif.ca