Energy Savings Income Fund
TSX : SIF.UN

Energy Savings Income Fund

November 07, 2005 07:30 ET

Energy Savings Reports Second Quarter Results

TORONTO, ONTARIO--(CCNMatthews - Nov. 7, 2005) - Energy Savings Income Fund (TSX:SIF.UN) -

Record New Customer Aggregation

Management Confirms Published Guidance For Year

Highlights for the second quarter ended September 30, 2005 included:

- Record levels of new customer additions. Gross customer additions were 102,000, up 10% from the prior record of 93,000 realized in Q1. Year over year, additions were up 29%.

- Gross margin (seasonally adjusted) of $39.3 million down 1% year over year.

- Premarketing distributable cash of $31.5 million ($0.29 per unit) down 4% year over year.

- Distributions of $0.22 up 9% year over year.

- Net income of $9.4 million ($0.09 per unit) up from a loss of $2.8 million (loss of $0.03 per unit). For the six months, net income was $20.5 million ($0.19 per unit) up from $2.9 million ($0.02 per unit). Net income in F2006 was aided by a tax recovery.

- Completion of successful test marketing allowing entry into the New York natural gas and electricity markets.

- Based on marketing success year to date, management maintains its published guidance of 15% to 20% margin growth for fiscal 2006 but revises guidance to slightly above this range for premarketing and post-marketing distributable cash.

Energy Savings' Second Quarter Results

Energy Savings is an Income Fund and it reports in the attached Management's Discussion and Analysis a detailed calculation of distributable cash both before and after marketing expenditures to expand the Fund's customer base.

Energy Savings Income Fund announced its results for the three and six months ended September 30, 2005.



---------------------------------------------------------------------
Three months ended September 30, F2006 Per Unit F2005 Per Unit
($ millions except per Unit)
---------------------------------------------------------------------
Sales(1) $270.9 $203.6
---------------------------------------------------------------------
Gross Margin(1) 39.3 $0.37 39.3 $0.37
---------------------------------------------------------------------
Distributable Cash(1)
---------------------------------------------------------------------
- Premarketing 31.5 $0.29 32.8 $0.31
---------------------------------------------------------------------
- Post Marketing 20.8 $0.19 22.1 $0.21
---------------------------------------------------------------------
Distributions 24.0 $0.22 22.1 $0.21
---------------------------------------------------------------------
Six months ended September 30, F2006 Per Unit F2005 Per Unit
($ millions except per Unit)
---------------------------------------------------------------------
Sales(1) $533.9 $407.0
---------------------------------------------------------------------
Gross Margin(1) 82.0 $0.77 75.5 $0.71
---------------------------------------------------------------------
Distributable Cash(1)
---------------------------------------------------------------------
- Premarketing 63.8 $0.60 60.6 $0.57
---------------------------------------------------------------------
- Post Marketing 42.3 $0.40 41.0 $0.39
---------------------------------------------------------------------
Distributions 47.5 $0.44 43.5 $0.41
---------------------------------------------------------------------
Long Term Customers 1,327,000 1,096,000
---------------------------------------------------------------------

(1) Seasonally adjusted


The second quarter of fiscal 2006 continued to build on the base built for new markets in fiscal 2005. The Energy Savings' marketing team again set a new benchmark for customer additions. A total of 102,000 new customers were signed by our agents, 29% more than the comparable period in fiscal 2005 and 10% more than the record set in Q1.

Marketing success was led by the continued strength of the Ontario commercial electricity market. A total of 45,000 new electricity customers were signed despite the fact that Ontario residential test marketing will only begin in Q3.



---------------------------------------------------------------------
Published F2006 Q2 F2006 YTD % of F2005 Q2
Market Target Additions Additions Target Additions
---------------------------------------------------------------------
Ontario - Gas 80,000 15,000 32,000 40% 21,000
---------------------------------------------------------------------
Other provinces - Gas 70,000 22,000 43,000 61% 29,000
---------------------------------------------------------------------
United States 100,000 20,000 35,000 35% 16,000
---------------------------------------------------------------------
Electricity 100,000 45,000 85,000 85% 13,000
---------------------------------------------------------------------
Total 350,000 102,000 195,000 56% 79,000
---------------------------------------------------------------------


Our US operations generated 20,000 customers in the quarter up from 15,000 in Q1. Our entry into two new Illinois utility territories during the later half of the second quarter and New York beginning in Q3 should allow continued acceleration of our US additions. With agent ramp-up continuing, management is confident that the 100,000 target for the fiscal year will be achieved.

Overall, additions are ahead of pace with 195,000 customers added in six months versus an annual target of 350,000. This target was 35% higher than the fiscal 2005 target and 21% higher than the record 290,000 new customers realized in that year. Management continues to believe that the fiscal 2006 annual target will be realized.

From a financial point of view, the quarter reflected the greater seasonality expected as more and more customers are added in Alberta and Illinois. Margins were flat year over year with premarketing distributable cash down slightly. These results lagged our customer growth due to two primary factors, bad debt expense in Illinois and electricity balancing costs for two acquired books of business, First Source and EPCOR. Bad debts are a material factor in Illinois' profitability. While these costs have been factored into our $140 annual target margin, the very careful customer screening necessary results in lower contract acceptance rates than in other markets. The electricity balancing costs relate to the nature of the contracts acquired and are detailed in Management's Discussion and Analysis appended to this release.

Overall, the financial impact of the record customer additions will begin to be seen in Q3 and Q4 of this year. This combined with normal seasonality should, in management's estimation, result in growth rates consistent with the Fund's published guidance. The Fund's payout ratios which were 76% premarketing and 116% post marketing for the quarter, are also expected to return to target levels of 65%-70% and under 100% respectively, on an annual basis.

Executive Chair Rebecca MacDonald noted: "Once more, our marketing team has beaten the previous record for customer additions. For the first time, we have signed over 100,000 customers in one quarter. To place this in perspective, Energy Savings took four years to sign its first 200,000 customers. We equaled half that total in the last three months. Congratulations to Brennan and his marketing team."

CEO Brennan Mulcahy stated: "In our Annual Report and again in our First Quarter Report, I provided guidance indicating that management expects our margin to grow between 15% and 20% this year and that our premarketing distributable cash should grow by a comparable amount. Given the uncertainty in the Trust sector following the September 19, 2005 statement by the Minister of Finance and the fact that fiscal 2006 is the first year in which our results show significant seasonality, we thought it would be useful to clearly reaffirm management guidance for the remainder of this year."

"Because of the matched nature of our supply and demand plus the lead time required to flow customers signed during the remainder of the year to flow, we have a clear picture of our gross margin for Q3 and Q4. As our marketing and general and administrative costs are reasonably predictable, management has a similarly clear view of cashflow through to March 31, 2006. The cashflow is based on normal weather and there inevitably will be some balancing adjustments (up or down) to reach the final number."

"The analysts following Energy Savings have estimates in the following ranges:



Measure Analyst Estimate Range F2005 Actual
F2006 Gross Margin: $196 to $206 million $163.7 million
F2006 Premarketing
Distributable Cash $150 to $169 million $124.0 million
F2006 Post-Marketing
Distributable Cash $105 to $129 million $ 84.0 million

Management is comfortable with estimates for the year as follows:

Bottom of Range
Measure Management Expectation Growth vs. F2005
F2006 Gross Margin: Slightly below bottom of range 20%
F2006 Premarketing
Distributable Cash At or above bottom of range 21%
F2006 Post-Marketing
Distributable Cash At or above bottom of range 25%


As can be seen from the above, we remain confident that our margin growth will be in the 15% to 20% which is our previous published guidance. We currently believe that both our premarketing and post-marketing distributable cash will be slightly higher than the 15% to 20% range of our published guidance."

Ms. MacDonald added: "Energy Savings is a unique growth Trust. Our very high return on invested capital allows us to grow both our business and our distributions. While the current uncertainty surrounding Trust taxation makes an increase in distribution rate imprudent, as Brennan has pointed out, we remain confident about our cashflow growth as well as customer growth. Historically, as our customer base and cashflows have grown, our distribution rate has increased. I do not anticipate that changing in the future."

The Fund

Energy Savings' business, which is conducted in Ontario, Manitoba, Alberta, Quebec, British Columbia, Illinois and New York, involves the sale of natural gas to residential, small to mid-size commercial and small industrial customers under long term, irrevocable fixed price contracts. Energy Savings also supplies electricity to Ontario, Alberta and New York customers. By fixing the price of natural gas or electricity under its fixed price 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 July of 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 matching volumes from its suppliers.

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 amount available for distribution based on cash received from the LDCs.

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") - October 31, 2005

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 six months ended September 30, 2005. This analysis should be read in conjunction with the unaudited interim consolidated financial statements for the six months ended September 30, 2005 as well as the audited consolidated financial statements and related MD&A contained in the 2005 Annual Report. The financial information contained herein has been prepared in accordance with Canadian Generally Accepted Accounting Principles ("GAAP"). Unless indicated otherwise, 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 web site 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 Ontario to hold securities and to distribute the income of its directly or indirectly wholly owned subsidiaries and affiliates: Ontario Energy Savings Corp. ("OESC"), Ontario Energy Savings L.P. ("OESLP"), Energy Savings L.P. ("ESLP"), ESIF Commercial Trust 1 ("Commercial Trust"), Energy Savings (Manitoba) Corp. ("ESMC"), Energy Savings (Quebec) L.P. ("ESPQ"), ES (B.C.) Limited Partnership ("ESBC"), Alberta Energy Savings L.P. ("AESLP"), Ontario Energy Commodities Inc. ("Commodities") and U.S. Energy Savings Corp. ("USESC"). Through its subsidiaries, Energy Savings markets natural gas to residential customers and small to mid-sized commercial businesses in Ontario, Manitoba, Alberta, Illinois and New York as well as solely to commercial customers in Quebec and British Columbia. Energy Savings also markets electricity to residential and small to mid-sized commercial customers in Ontario, Alberta and New York. On August 1, 2005, Energy Savings began marketing under OESLP in the Province of Ontario.

The Fund meets the estimated energy requirements of its customers by purchasing matching volumes of gas and electricity. Customers eliminate their exposure to price escalations and the Fund locks in its margins by entering into long-term, fixed price contracts for gas and electricity supply.

All share and unit amounts relating to Preference shares, common shares and units reflect each of the 2:1 subdivisions effective July 29, 2002 and January 30, 2004.

Forward-Looking Information

This MD&A contains certain forward-looking information statements pertaining to customer additions and renewals, customer consumption levels, distributable cash and treatment under governmental regulatory regimes. These statements are based on current expectations that involve a number of risks and uncertainties which could cause actual results to differ from those anticipated. These risks include, but are not limited to, levels of customer natural gas and electricity consumption, rates of customer additions and renewals, fluctuations in natural gas and electricity prices, changes in regulatory regimes and decisions by regulatory authorities, competition and dependence on certain suppliers. Additional information on these and other factors that could affect the Fund's operations, financial results or distribution levels are included in the Fund's annual information form and other reports on file with Canadian security regulatory authorities which can be accessed on our corporate website at www.esif.ca or through the SEDAR website at www.sedar.com.

Key terms:

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

"Long-term Customers" represents customers that meet management's required margin thresholds and therefore expect to have the opportunity to renew at the end of their contract. "Customers not expected renew" are generally large volume and/or low margin customers who are not part of Energy Savings' target market.

"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) of natural gas on an annual basis and, as regards electricity, 10,000 kWh of electricity on an annual basis, which represents the approximate amount of gas and electricity used by a typical Ontario household.



Financial Highlights
For the three months ended September 30
(Thousands of dollars except where indicated and per unit amounts)

2005 2004
$ Per Unit $ Per Unit Change
Amount available for
distribution(1)
- Premarketing 31,491 $0.29 32,769 $0.31 (4)%
- Post marketing 20,760 $0.19 22,094 $0.21 (6)%

Distributions 24,043 $0.22 22,136 $0.21 9%
Payout Ratio
- Premarketing 76% 68%
- Post marketing 116% 100%

(1) See "Distributable cash and cash distributions"

For the six months ended September 30
(Thousands of dollars except where indicated and per unit amounts)

2005 2004
$ Per Unit $ Per Unit Change

Amount available for
distribution(1)
- Premarketing 63,755 $0.60 60,594 $0.57 5%
- Post marketing 42,325 $0.40 40,956 $0.39 3%

Distributions 47,506 $0.44 43,455 $0.41 9%
Payout Ratio
- Premarketing 75% 72%
- Post marketing 112% 106%

(1) See "Distributable cash and cash distributions"


Non GAAP Financial Measures

Seasonally Adjusted Gross Margin

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 gross margin is not a defined performance measure under Canadian GAAP. 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 gas, not when the customer actually consumes the gas. Seasonally adjusted analysis eliminates seasonal commodity consumption variances and recognizes amount available for distribution based on cash received from the LDCs.

In Alberta, Illinois and New York, Energy Savings receives cash from the LDC only when the customer has paid the LDC for the consumed gas. Cash flows are greatest in the Fund's third and fourth quarters (the winter quarters) as natural gas cashflow is typically received from the LDC in the month following the month of customer consumption. It is important to note that, as Energy Savings' business grows in Alberta and in the U.S., the Fund's results will reflect greater seasonality. While year over year quarterly comparisons will remain appropriate, sequential quarters will vary materially. The main impact of this will be higher distributable cash with a lower payout ratio in Q3 and Q4 and lower distributable cash with a higher payout ratio in Q1 and Q2.

No seasonal adjustment is required for electricity as accounts are automatically balanced daily. In real time, any excess/shortfall is immediately settled in the open market. Electricity customers' consumption will be greatest during the summer (Q2) and winter quarters (Q4).

Distributable cash

Distributable cash is not a defined term under Canadian GAAP. It refers to the net cash received by the Fund that is available for distributions 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 debts, other income/expense and corporate taxes. Management believes that distributable cash is the most useful measure of performance as it provides investors with an indication of the amount of cash available for distribution to Unitholders. This Non GAAP measure may not be comparable to other income funds.



Distributable Cash and Cash Distributions
For the three months ended September 30
(Thousands of dollars except per unit amounts)

2005 2004
---- ----
Per Unit Per Unit
-------- --------
Cash Available for Distribution
Gross margin per financial statements $23,124 $21,905
Adjustments required to reflect net
cash receipts from gas sales 16,217 17,365
-------- --------
Seasonally adjusted gross margin $39,341 $0.37 $39,270 $0.37
-------- --------
General and administrative (8,500) (6,382)
Capital tax (207) (250)
Bad debts (1,644) (20)
Corporate tax recovery(1) 2,517 4
Other (expense) income(2) (16) 147
-------- --------
(7,850) (6,501)
-------- --------

Cash available for distribution
before marketing expenses $31,491 $0.29 $32,769 $0.31
Marketing expenses (10,731) (10,675)
-------- --------
Cash available for distribution $20,760 $0.19 $22,094 $0.21
-------- --------
-------- --------

Reconciliation to Statements
of Cash Flow
Cash inflow from operations $26,046 $17,701
Add:
Increase (decrease) in non-cash
working capital (6,117) 3,555
Tax effect on distributions paid
to the holders of Class A
preference shares 831 838
-------- --------
$20,760 $22,094
-------- --------
-------- --------

Distributions
Unitholder distributions $21,675 $19,804
Preference A share distributions 2,301 2,319
Unit appreciation rights
distributions 64 13
-------- --------
24,040 22,136
Non-cash distributions -
deferred unit grants 3 -
-------- --------
Total distributions $24,043 $0.22 $22,136 $0.21
-------- --------
-------- --------
Diluted average number of
units outstanding 106.9m 106.2m


For the six months ended September 30
(Thousands of dollars except per unit amounts)

2005 2004
---- ----
Per Unit Per Unit
-------- --------
Cash Available for Distribution
Gross margin per financial statements $60,226 $53,663
Adjustments required to reflect net
cash receipts from gas sales 21,781 21,859
-------- --------
Seasonally adjusted gross margin $82,007 $0.77 $75,522 $0.71
-------- --------
General and administrative (16,801) (14,513)
Capital tax (414) (500)
Bad debts (2,178) (22)
Corporate tax recovery
(provision)(1) 1,170 (166)
Other (expense) income(2) (29) 273
-------- --------
(18,252) (14,928)
-------- --------

Cash available for distribution
before marketing expenses $63,755 $0.60 $60,594 $0.57
Marketing expenses (21,430) (19,638)
-------- --------
Cash available for distribution $42,325 $0.40 $40,956 $0.39
-------- --------
-------- --------

Reconciliation to Statements
of Cash Flow
Cash inflow from operations $36,702 $30,009
Add:
Increase in non-cash
working capital 3,980 9,257
Tax effect on distributions paid
to the holders of Class A
preference shares 1,643 1,690
-------- --------
$42,325 $40,956
-------- --------
-------- --------

Distributions
Unitholder distributions $42,833 $38,756
Preference A share distributions 4,549 4,678
Unit appreciation rights
distributions 119 21
-------- --------
47,501 43,455
Non-cash distributions -
deferred unit grants 5 -
-------- --------
Total distributions $47,506 $0.44 $43,455 $0.41
-------- --------
-------- --------
Diluted average number of
units outstanding 106.9m 106.1m


(1) The prior comparative quarter utilized the deduction of acquisition costs to reduce taxable income. As a result, the corporate tax amounts of prior quarters relate solely to large corporation tax ("LCT"). The recovery of tax losses in the current year relate to the tax loss realized in Canada which can be carried back to recover part of the income taxes paid in the prior year.

(2) Other income relates to interest earned on investments. Other expense relates to interest and other bank service charges.



Sales and Gross Margin Analysis

Sales and Gross Margin - Per Financial Statements
For the three months ended September 30
(thousands of dollars)

2005 2004
---- ----
United United
Sales Canada States Total Canada States Total
-----
Gas $71,786 $6,031 $77,817 $51,689 $965 $52,654
Electricity 102,194 38 102,232 61,636 - 61,636
---------------------------------------------------------------------
$173,980 $6,069 $180,049 $113,325 $965 $114,290
---------------------------------------------------------------------
Increase 54% NMF(1) 58%


United United
Gross Margin Canada States Total Canada States Total
------------
Gas $13,594 $766 $14,360 $12,341 $186 $12,527
Electricity 8,747 17 8,764 9,378 - 9,378
---------------------------------------------------------------------
$22,341 $783 $23,124 $21,719 $186 $21,905
---------------------------------------------------------------------
Increase 3% NMF(1) 6%

(1) Not Meaningful Figure



Sales and Gross Margin - Per Financial Statements
For the six months ended September 30
(thousands of dollars)

2005 2004
---- ----
United United
Sales Canada States Total Canada States Total
-----
Gas $208,807 $12,643 $221,450 $177,241 $1,344 $178,585
Electricity 192,966 38 193,004 121,778 - 121,778
---------------------------------------------------------------------
$401,773 $12,681 $414,454 $299,019 $1,344 $300,363
---------------------------------------------------------------------
Increase 34% NMF(1) 38%


United United
Gross Margin Canada States Total Canada States Total
------------
Gas $39,330 $1,707 $41,037 $35,301 $261 $35,562
Electricity 19,172 17 19,189 18,101 - 18,101
---------------------------------------------------------------------
$58,502 $1,724 $60,226 $53,402 $261 $53,663
---------------------------------------------------------------------
Increase 10% NMF(1) 12%

(1) Not Meaningful Figure


As noted above, total sales and margin for the three months ended September 30, 2005 were $180.0 million and $23.1 million, an increase of 58% and 6%, respectively, over the second quarter of fiscal 2005.

Total sales and margin for the six months ended September 30, 2005 were $414.5 million and $60.2 million for the quarter, up 38% and 12%, respectively, over the prior comparable period. The increase in sales and margin is primarily attributable to the increase in long-term customers through acquisition and aggregation efforts as well as an increase in the average contract sales price from the prior comparative quarter. See "Customer Aggregation" for further details.

Canada

Sales were $174.0 million for the quarter, up 54% from $113.3 million in fiscal 2005. Margins were $22.3 million for the quarter, an increase of 3% from the same quarter in the previous year. Refer to "Sales and Gross Margin - Seasonally Adjusted" for further details.

The decrease in electricity margin over the same comparable period is a result of increased supply costs associated with the customer contracts acquired from both EPCOR and First Source. Refer to "Sales and Gross Margin - Seasonally Adjusted" for further details.

Sales for the six months ended September 30, 2005 were $401.8 million, an increase of 34% from $299.0 million in the prior comparative period.

United States

Sales and margins were $6.1 million and $0.8 million for the quarter, respectively. Sales and margins for the six months were $12.7 million and $1.7 million, respectively. The increase in sales and margin reflects the growth in customer base over the past year. For additional information, see "Sales and Gross Margin - Seasonally Adjusted".



Sales and Gross Margin - Seasonally Adjusted(1)
For the three months ended September 30
(thousands of dollars)

2005 2004
---- ----
United United
Sales Canada States Total Canada States Total
-----
Gas $71,786 $6,031 $77,817 $51,689 $965 $52,654
Adjustments 90,837 - 90,837 89,259 - 89,259
---------------------------------------------------------------------
162,623 6,031 168,654 140,948 $965 $141,913
Electricity 102,194 38 102,232 61,636 - 61,636
---------------------------------------------------------------------
$264,817 $6,069 $270,886 $202,584 $965 $203,549
---------------------------------------------------------------------
Increase 31% NMF(2) 33%


United United
Gross Margin Canada States Total Canada States Total
------------
Gas $13,594 $766 $14,360 $12,341 $186 $12,527
Adjustments 16,217 - 16,217 17,365 - 17,365
---------------------------------------------------------------------
29,811 766 30,577 29,706 186 29,892
Electricity 8,747 17 8,764 9,378 - 9,378
---------------------------------------------------------------------
$38,558 $783 $39,341 $39,084 $186 $39,270
---------------------------------------------------------------------
Decrease (1)% NMF(2) 0%



Sales and Gross Margin - Seasonally Adjusted(1)
For the six months ended September 30
(thousands of dollars)

2005 2004
---- ----
United United
Sales Canada States Total Canada States Total
-----
Gas $208,807 $12,643 $221,450 $177,241 $1,344 $178,585
Adjustments 119,480 - 119,480 106,676 - 106,676
---------------------------------------------------------------------
328,287 12,643 340,930 283,917 $1,344 $285,261
Electricity 192,966 38 193,004 121,778 - 121,778
---------------------------------------------------------------------
$521,253 $12,681 $533,934 $405,695 $1,344 $407,039
---------------------------------------------------------------------
Increase 28% NMF(2) 31%


United United
Gross Margin Canada States Total Canada States Total
------------
Gas $39,330 $1,707 $41,037 $35,301 $261 $35,562
Adjustments 21,781 - 21,781 21,859 - 21,859
---------------------------------------------------------------------
61,111 1,707 62,818 57,160 261 57,421
Electricity 19,172 17 19,189 18,101 - 18,101
---------------------------------------------------------------------
$80,283 $1,724 $82,007 $75,261 $261 $75,522
---------------------------------------------------------------------
Increase 7% NMF(2) 9%


(1) for Canadian gas excluding Alberta

(2) Not Meaningful Figure

On a seasonally adjusted basis, sales were $270.9 million for the quarter, up 33% from $203.5 million in fiscal 2005. Margins were $39.3 million for the quarter, no change from the second quarter of fiscal 2005. The increase in sales for both gas and electricity is directly attributable to the increase in customer base and an increase in the average customer sales price from the prior comparable period. Gas margins remained at the same level as the prior comparable period due to margin per RCE approaching target levels of $170/RCE, down from $182/RCE in fiscal 2005.

Canada

Sales were $264.8 million for the quarter, up 31% from $202.6 million in fiscal 2005. Margins were $38.6 million for the quarter, a decrease of 1% from the same quarter in the previous year. Gas margins increased at a slower rate than sales, consistent with previous management guidance. As higher margin contracts roll off the Energy Savings book and are renewed with margins closer to our $170/RCE annual target, our overall gas book is trending towards our target margin, whereas in fiscal 2005, gas margins (excluding acquisitions) were $182/RCE. In addition to this, the cost related to fuel requirements on the TransCanada Pipe Line increased by approximately $1.2 million over the prior comparative quarter, resulting in a higher landed supply cost. Furthermore, prices for gas balancing purchases fluctuate over time resulting in higher prices in certain periods and lower prices in others, causing the margins to fluctuate during the term of the contract but overall, result in an average annual margin at or above $170/RCE over the term of the contract.

In the electricity market, even though long term customers increased by 27%, gross margin decreased by 7% quarter over quarter. The decrease in margin is directly related to the customer contracts acquired in Ontario from First Source Energy Corp. ("First Source") and EPCOR Utilities Inc. ("EPCOR") in May 2003 and May 2005, respectively. All of the EPCOR acquired contracts, as well as approximately 80% of the First Source acquired contracts, are load following, which results in Energy Savings bearing the risk and benefits of fluctuations in consumption from the standard customer usage profile. In contrast, Energy Savings' customer contracts provide for the customers within the pool to share the risk and benefit of any variance in consumption from their historical usage, therefore, the Fund bears no risk for balancing losses. As a result of the summer (high consumption quarter) being warmer than expected, consumption was higher than the historical usage, and therefore, additional supply was purchased in the open market. During the quarter, spot market prices were at the highest level since the opening of the market in May of 2002. As at the end of the quarter, approximately 13% of our long term electricity customer base is load following.

The impact of fluctuation in consumption through the summer period for the First Source and EPCOR customer contracts was a decrease in margin of $1.3 million. The balance of the First Source and EPCOR contracts have an average remaining life of approximately two years. A portion of the balancing costs was factored into the purchase price for the customers, which remains accretive to Energy Savings.

Sales for the six months ended September 30, 2005 were $521.3 million, an increase of 28% from $405.7 million in the prior comparative period.

United States

Sales and margins were $6.1 million and $0.8 million for the quarter. Sales and margins for the six months were $12.7 million and $1.7 million, respectively. The increase in sales and margin reflects the growth in customer base over the past year. The first and second quarters are the lowest usage period in Illinois reflective of the seasonality of customer usage of gas. The lower margin percentage compared to Canadian gas sales is consistent with the lower target margin expected from these customers.

During August, Energy Savings commenced test marketing in its second U.S. market, New York. In this State, Energy Savings is marketing dual fuel contracts, covering both gas and electricity needs. Expected customer additions should result in meaningful gross margin beginning in the fourth quarter.

Seasonally adjusted margins for the three and six months ended September 30, 2005 were $0.8 million and $1.7 million, respectively, the same as on a financial statement basis.

Customers aggregated during the period will generate margins at or above Energy Savings' target margins of $140/RCE for gas and $100/RCE for electricity.

Distributable Cash

Premarketing distributable cash for the quarter was $31.5 million ($0.29 per unit), a decrease of 4% from $32.8 million ($0.31 per unit) in the second quarter of fiscal 2005. The decrease in premarketing distributable cash is primarily related to general and administrative expenditures required to enter new markets and an increase in bad debts in the Illinois and Alberta markets compared to the prior year's quarter. At the end of the second quarter of fiscal 2005, Energy Savings had negligible accounts receivable in Illinois and had not yet entered the Alberta market. Therefore, bad debts expense was minimal. Premarketing distributable cash for the six months ended September 30, 2005 was $63.8 million ($0.60 per unit), an increase of 5% from $60.6 million for the prior comparable period.

Distributable cash after marketing expenses was $20.8 million for the quarter, a decrease of 6% from $22.1 million in the prior comparable quarter. The decrease is directly attributable to the increase in general and administrative expenses and bad debts as outlined above. Marketing expenses remained relatively constant even though aggregated customers increased by 29% over the prior comparative period. During the quarter, 44% of the customers aggregated were electricity versus 16% in the same quarter last year. The aggregation costs for electricity customers are substantially lower than aggregation costs for gas customers. Cash flow from these new customers is realized three to six months after signing, depending on the market. Distributable cash after marketing expenses for the six months ended September 30, 2005 was $42.3 million, an increase of 3% from $41.0 million in the prior comparable period.

The payout ratio before marketing expense was 76% for the quarter versus 68% for the prior comparative quarter. After marketing expenses, the payout ratio was 116% for the quarter versus 100% for the comparable quarter. The payout ratios before marketing expenses for the six months ended September 30, 2005 was 75% versus 72% for the prior comparable quarter while payout ratios after marketing expenses were 112%, versus 106% for the prior comparable quarter.

Management is comfortable that the payout ratios on an annual basis will be within the target ranges of 65 - 70% (premarketing) and less than 100% (post marketing) respectively. As Energy Savings continues to expand its business in Alberta as well as the U.S. markets, seasonality will have a greater impact on the quarterly payout ratios. In these markets impacted by seasonality, it is anticipated that 65% -70% of its margin will be recognized in the second half of the fiscal year, based on expected consumption patterns. At September 30, 2005, approximately 13% of our customers are in these markets, versus only 2% one year ago. It is anticipated that this percentage will continue to increase as both Alberta and the U.S. will increasingly be growth markets for Energy Savings.

Customers added during the period will generate cashflow in future periods, also contributing to bringing payout ratios back to our target range. Management is comfortable with the Fund's liquidity and believes it has adequate capital resources to fund both its growth and distributions going forward.



Net income (loss)

Reconciliation to Three months ending Six months ending
Statement of Operations September 30 September 30
2005 2004 2005 2004
---------------------------------------
Cash available for distribution $20,760 $22,094 $42,325 $40,956
Adjustments required to
reflect net cash
receipts from sales (16,217) (17,365) (21,781) (21,859)
Items not affecting cash 5,684 (6,645) 1,620 (14,513)
Tax effect on distributions
paid to holders of Class A
preference shares (831) (838) (1,643) (1,690)
---------------------------------------

Net income (loss) $9,396 $(2,754) $20,521 $2,894
---------------------------------------
---------------------------------------


Energy Savings had net income for the three and six months ended September 30, 2005 of $9.4 million (2004 - $(2.8) million) and $20.5 million (2004 - $2.9 million), respectively. Net income has increased over the prior comparative quarter as a result of other income and the recovery of income taxes. Other income has increased to $14.4 million (2004 - $(0.5) million) and $16.8 million (2004 - $0.1 million) primarily due to the gain in market value on the hedging instruments. Recovery of income taxes is a combination of a reduction in the future income tax liability as well as an anticipated small recovery of income taxes paid in the prior year. The decrease in the future tax liability is attributable to the reduction in the difference between the tax and accounting cost basis for the acquired gas and electricity contracts.



Summary of Quarterly Results
(thousands of dollars except per unit amounts)

F2006 F2005
--------------------------------------
Q2 Q1 Q4 Q3
-- -- -- --
Sales per financial statements $180,049 $234,405 $406,901 $213,649
Net income 9,396 11,125 27,268 7,042
Net income per unit - Basic $0.09 $0.11 $0.26 $0.07
Net income per unit - Diluted 0.09 0.10 0.26 0.07
Amount available for
distribution
- Premarketing 31,491 $32,264 $28,483 $34,930
- Post marketing 20,760 21,565 19,454 23,603
Payout ratio
- Premarketing 76% 73% 81% 65%
- Post marketing 116% 109% 118% 96%


F2005 F2004
--------------------------------------
Q2 Q1 Q4 Q3
-- -- -- --
Sales per financial statements $114,290 $186,073 $312,905 $181,803
Net income (loss)(1) (2,754) 5,648 22,724 5,309
Net income (loss) per unit
- Basic $(0.03) $0.05 $0.22 $0.05
Net income (loss) per unit
- Diluted (0.03) 0.05 0.21 0.05
Amount available for
distribution
- Premarketing $32,769 $27,825 $28,878 $30,792
- Post marketing 22,094 18,862 22,505 22,385
Payout ratio
- Premarketing 68% 77% 70% 64%
- Post marketing 100% 113% 90% 88%


Energy Savings' operations are seasonal. Gas consumption is typically highest in the third and fourth quarters while electricity consumption is highest in second and fourth quarters. As a result, quarter over quarter comparisons are a more reliable basis for analysis than sequential quarter comparisons, as results from quarter to quarter may vary materially due to seasonality.

It is important to note that, as Energy Savings' business grows in Alberta and the U.S., Energy Savings' results will reflect greater seasonality.



Long-term Customers
For the three months ended September 30, 2005
---------------------------------------------------------
Failed To
Canada Beginning(4) Additions Attrition(2) Renew(3) Ending
---------------------------------------------------------
Gas
Ontario 635,000 15,000 (23,000) (5,000) 622,000
Other
markets(1) 138,000 22,000 (4,000) - 156,000
---------------------------------------------------------------------
Total -
Gas 773,000 37,000 (27,000) (5,000) 778,000
Electricity 439,000 45,000 (7,000) (2,000) 475,000
---------------------------------------------------------------------
Total
Canada 1,212,000 82,000 (34,000) (7,000) 1,253,000
---------------------------------------------------------------------

United
States 60,000 20,000 (6,000) - 74,000
---------------------------------------------------------------------
Combined 1,272,000 102,000 (40,000) (7,000) 1,327,000
---------------------------------------------------------------------
---------------------------------------------------------------------


(1) Includes Quebec, British Columbia, Manitoba and Alberta.

(2) Attrition - Customers whose contracts were automatically terminated primarily due to relocation or death, or cancelled by Energy Savings due to delinquent accounts

(3) Failed to Renew - Customers who did not renew expiring contracts at the end of their term.

(4) Adjusted to reflect the reclassification of certain customers purchased from First Source to Not Expected to Renew. See "First Source Purchase" below.

The marketing results for this quarter were the highest in the Fund's history. Overall, Energy Savings aggregated 102,000 RCEs during the quarter, an increase of 29% over the second quarter of fiscal 2005. The Ontario electricity marketing campaign continues to be highly successful following the opening of the small commercial market, which occurred in May of 2005. Energy Savings completed its test marketing in New York during the quarter, has opened its first permanent office and will begin marketing both natural gas and electricity in Q3.

First Source Purchase

In May 2003, Energy Savings acquired approximately 141,000 electricity customers (113,000 on the acquisition and a further 28,000 after processing and reaffirmation of pending contracts) from First Source for an aggregate price of $5.3 million (net of adjustments). It was estimated that approximately 88,000 customers would renew at the end of their contracts, therefore these customers were assigned to the Long-term Customer pool. A majority of these contracts are large volume and, given the uncertainty of the electricity market, 75% of the customers that have been up for renewal have opted not to renew upon expiration of their contract. At the end of the second quarter, 42,000 First Source contracts remain, of which management anticipates the renewal of 10,000. The Long-term Customer book has been adjusted to reflect this view.

While this level of renewal will reduce the overall value of the acquisition, to date the First Source customers have generated $5.7 million in cashflow (excluding renewal value and including the costs of load following balancing this summer).

Customers Not Expected to Renew

In addition to the long-term customers, Energy Savings has an additional 167,000 customers (23,000 gas and 144,000 electricity) which were acquired through various acquisitions of customer contracts. Management does not anticipate that these customers will renew upon expiration of their contract. These customers generate substantially less margin than is typically realized on customers aggregated by Energy Savings and on average have approximately two years remaining until the end of their contract. As of September 30, 2005, of the 144,000 electricity customers not expected to renew, the vast majority are under load following contracts.

Attrition

Overall attrition was 11% on an annualized basis, which approximates the customer attrition rate used for internal purposes. Management continues to monitor attrition to ensure its 10% rate remains appropriate for planning purposes.

Attrition levels in the Illinois market have been higher (16%) than that which has historically been experienced in the Canadian markets. This higher attrition is largely due to customer terminations by Energy Savings for delinquent accounts. Management anticipates that the attrition in Illinois will continue at this higher rate for the foreseeable future in order to minimize bad debt expense.

Failed to Renew

A total of 7,000 Long-term customers failed to renew during the quarter. This level of renewals was consistent with Energy Savings' target renewal rate of 80% of its long term customers. These renewals are realized through various marketing efforts and management estimates that the Fund incurs a cost of $40 per contract renewal. For additional information, see "Renewals".

Gross Additions (excluding acquisitions)

Energy Savings' published targets for fiscal 2006 were gross customer additions excluding acquisitions of 350,000. The following table shows the aggregation to date compared with these targets.



Gross Customer Q1 Q2 YTD Published % Realized
Additions F2006 F2006 F2006 Target To Date
---------------------------------------------------------------------

Canada
Gas
Ontario 17,000 15,000 32,000 80,000 40%
Other markets(1) 21,000 22,000 43,000 70,000 61%
---------------------------------------------------------------------
Total - Gas 38,000 37,000 75,000 150,000 50%
Electricity 40,000 45,000 85,000 100,000 85%
---------------------------------------------------------------------
Total Canada 78,000 82,000 160,000 250,000 64%

United States 15,000 20,000 35,000 100,000 35%
---------------------------------------------------------------------
Combined 93,000 102,000 195,000 350,000 56%
---------------------------------------------------------------------
---------------------------------------------------------------------

(1) Includes Quebec, British Columbia, Manitoba and Alberta


Canada

Gas

Total gross gas customer additions in Canada for the second quarter were 37,000, bringing the total additions to 75,000 (50% of the published annual target). Gas additions in Ontario continue to be slightly behind pace as Ontario agents are focusing on generating strong results through marketing electricity to commercial customers. Other markets in Canada exceeded the target pace. The Canadian gas customers added through marketing efforts during the period were matched with supply to generate margins at or above Energy Savings' average annual target margin of $170/RCE over the life of the contract.

Growth in the Ontario gas market is expected to replace attrition and customers not renewing although, in fiscal 2006, additions are lower than the number of customers lost through attrition and failure to renew in Ontario due to the concentration of efforts on electricity marketing. It is anticipated that the Alberta market will continue to be the primary contributor to net gas customer growth.

Electricity

Total electricity additions were 45,000 for the quarter, bringing the total additions to 85,000 (85% of the published annual target). Energy Savings began offering five-year fixed price contracts to small commercial customers in Ontario in May 2005. The Ontario market has been receptive to the Energy Savings' offering. The electricity customers signed during the quarter were matched with supply to generate margins expected to be at or above Energy Savings' average annual target margin of $100/RCE over the life of the contract.

In October, Energy Savings began test marketing electricity contracts to residential customers within the Province of Ontario.

United States

Energy Savings aggregated 20,000 RCEs in the U.S. markets during the quarter, bringing the total additions to date to 35,000 (35% of published target). During the quarter, Energy Savings completed its test marketing for its second U.S market, New York. Energy Savings has opened its first permanent sales office and will begin marketing both gas and electricity this quarter. In addition, Energy Savings recently began marketing in two new LDC territories in Illinois (Peoples Energy and North Shore). Management anticipates that the marketing efforts in the State of New York will ramp up in the second half of the fiscal year and is therefore comfortable that its annual published target for U.S. customer additions will be met.

The Illinois gas customers signed during the quarter were matched with supply to generate margins at or above the Energy Savings' average annual target margin of $140/RCE over the life of the contract.

Renewals

In fiscal 2005, Energy Savings implemented a marketing program aimed at maximizing the number of customers which renew at the end of their contract term. Efforts begin up to 15 months in advance with contracts proposing renewal of the existing agreements for an additional five years. To the extent customers do not renew under this recontracting program, additional processes such as mail and telemarketing renewals will take place closer to the contract expiry date.

Based on our experience to date and the marketing program, management continues to use an 80% renewal target for planning purposes.

General and administrative expenses

General and administrative costs were $8.5 million (2004 - $6.4 million) and $16.8 million (2004 - $14.5 million) for the three and six months ended September 30, 2005, an increase of 33% and 16%, respectively from the prior comparative period. These costs were up marginally (2%) from Q1 reflecting the established operating platforms in our new markets. Management anticipates stable expenditures for the remainder of the year as most growth in infrastructure costs was put in place in advance of new market openings during past quarters.

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 $0.9 million (2004 - $1.0 million) and $2.0 million (2004 - $1.4 million) for the three and six months ended September 30, 2005.

Marketing expenses

Marketing expenses, which primarily consist of commissions paid to independent sales agents upon signing new customers, were $10.7 million (2004 - $10.7 million) and $21.4 million (2004 - $19.6 million) for the three and six months ended September 30, 2005. The marketing expenses were consistent for the three months while there was an increase of 9% for the six months versus the prior comparative quarter. The increase is primarily attributable to the 32% increase in customers aggregated year to date. The increase in marketing expense was lower than the increase in customers aggregated because electricity accounted for 44% of the customers aggregated to date and commissions for electricity contracts are lower than commissions paid for gas contracts.

Bad debt expense

In Illinois and Alberta, Energy Savings assumes the credit risk associated with the collection of its customers accounts. Credit review processes have been put in place for these markets to manage the customer default rate. Management factors default from credit risk in its margin expectations for both Illinois and Alberta.

Bad debt expense provided for the three and six months ended September 30, 2005 was $1.6 million and $2.2 million, respectively. It is anticipated that the bad debts expense will continue to be approximately 1.5%-2% of annual revenue earned in both Illinois and Alberta. This default rate is consistent with recent utility experience in both of these markets.

For the remaining markets, including New York (where Energy Savings began test marketing during the quarter), the LDCs provide collection services and assume the risk of any bad debt owing from Energy Savings' customers.

Interest expense

As at September 30, 2005, Energy Savings had utilized $9.3 million of its operating line for working capital needs. In addition to utilization of the operating line, a total of $6.2 million in letters of credit have been issued. The operating line bears interest at bank prime plus 0.5% and letters of credit bear interest at 1.5%. Total interest expense amounted to $0.2 million for the six months ended September 30, 2005 (2004 - $0.03 million).

Foreign exchange

Energy Savings has an exposure to foreign currency exchange rates as a result of its investment in U.S. operations. Changes in the applicable exchange rate may result in a decrease or increase in income. A non cash loss of $0.4 million (2004 - $0.1 million) and $0.3 million (2004 - $0.1 million) was recognized during the three and six months ended September 30, 2005.

Income taxes recovery

Recovery of income taxes for the three and six months ended September 30, 2005 amounted to $3.9 million and $5.7 million, respectively. The balance is a culmination of a reduction in the future income tax liability as well as a recovery of $1.2 million in corporate taxes. The decrease in the future tax liability is attributable to the decrease in the difference between the tax and accounting cost basis for the acquired gas and electricity contracts. The majority of these assets are deducted for tax at a rate greater than that for accounting. The recovery of the corporate taxes is due to tax loss realized in Canada during the quarter which can be carried back to recover part of the income taxes paid in the prior year.

Liquidity



Summary of Cash Flows Three months ending Six months ending
(thousands of dollars) September 30 September 30
2005 2004 2005 2004
--------------------------------------
Operating activities $26,046 $17,701 $36,702 $30,009
Investing activities (1,107) (744) (8,586) (2,343)
Financial activities,
excluding distributions (541) 163 10,743 5,262
Loss on foreign exchange (448) (87) (267) (97)
--------------------------------------
Increase in cash before
distributions 23,950 17,033 38,592 32,831
Distributions (cash payments) (22,960) (20,979) (45,589) (41,055)
--------------------------------------
Increase (decrease) in cash 990 (3,946) (6,997) (8,224)
Cash - beginning of period 8,071 35,963 16,058 40,241
--------------------------------------
Cash - end of period $9,061 $32,017 $9,061 $32,017
--------------------------------------
--------------------------------------


Operating activities

Energy Savings' generates significant cash flows from operations which are available to fund working capital requirements and distributions.

Cash flows from operating activities increased compared to the prior comparative quarter primarily due to income tax recovery position in the current year.

Investing activities

Energy Savings purchased capital assets totaling $1.3 million and $2.0 million in the three and six months ended September 30, 2005, compared with $0.7 million and $2.3 million, respectively, in the prior comparable quarter. The purchases were primarily for information technology systems supporting the Fund's expanding customer base within the various geographical segments. In addition, Energy Savings purchased the EPCOR Ontario electricity customer contracts for $6.6 million (net of adjustments).

Financing activities

The increase in finance activities for the six months ended September 30, 2005 in comparison to the prior period is directly related to the $9.3 million draw down of the credit facility to fund working capital needs in the U.S. markets.

As Energy Savings continues to expand in the United States markets, Ontario electricity and Alberta, there will be increased requirements to fund working capital and prudential requirements. These requirements are driven primarily by the number of customers aggregated and to a lesser extent by the number of new markets. Based on the new markets Energy Savings is currently in and those we expect to enter, funding requirements will be supported through the credit facility. The credit facility was renewed for an additional one year on October 31, 2005.

Distributions

Distributions amounted to $24.0 million (2004 - $22.1 million) and $47.5 million (2004 - $43.5 million) for the three and six months ended September 30, 2005, an increase of 9% from each of the prior comparable period. Energy Savings will continue to utilize its cash resources for expansion into other U.S. markets as well as distributions to its Unitholders. Management continues to target its payout ratios before marketing expenses in the range of 65% - 70%.

At the end of the quarter, the annual rate for distributions per unit was $0.915.

Balance Sheet September 30, 2005 compared to March 31, 2005

Cash decreased from $16.1 million to $9.1 million. The decrease in cash is primarily attributable to acquisition of the Ontario electricity customer contracts from EPCOR for approximately $6.6 million (net of adjustments) and payment of the $10.0 million 2005 corporate tax liability. Energy Savings utilized $9.3 million of the credit facility to assist with the working capital requirements in the U.S., as gas is injected into storage during the months of April through September.

Accounts receivable decreased from $101.6 million to $87.2 million, as a result of the lower gas consumption during the summer months than the winter months.

At the end of the quarter, Energy Savings had delivered more gas to the LDCs than customers had consumed. 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 deferred revenue amount of $68.9 million and gas delivered in excess of consumption of $56.8 million. At March 31, 2005, customers had consumed more than had been delivered to the LDCs, thereby resulting in unbilled revenues amounting to $50.5 million and accrued gas accounts payable of $40.9 million.

Gas in storage represents the gas delivered in Illinois. The balance at September 30, 2005 is $11.0 million, an increase from $0.4 million at March 31, 2005 as a result of the fact that gas consumption in the summer months is lower than deliveries to the LDCs.

The carrying values of electricity contracts increased by $14.6 million as a result of the Ontario electricity customer contract acquisition in May, 2005.

Corporate taxes payable decreased by $12.1 million from a payable of $10.0 million to a recovery of $2.1 million. The current balance reflects the current change in corporate tax structure. See "Proposed reorganization" for further details.

Other assets and liabilities represent the estimated fair value of various derivative financial instruments for which hedge accounting in accordance with Hedging Relationships "AcG-13" has not been applied. These assets and liabilities are marked to market and any changes to the fair value are recorded in other income (expense). Hedge accounting has been applied to the Fund's electricity fixed-for-floating swaps which represent the majority of derivative financial instruments in terms of notional value. The gains or losses on these swaps are recognized as a component of cost of sales when the hedged electricity costs are incurred.

Contractual obligations

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



Payments due by period Less than 1 - 3 4 - 5 After 5
--------- ----- ----- -------
(thousands of dollars) Total 1 year years years years
----- ------ ----- ----- -----
Property & equipment
lease agreements $14,675 $1,210 $4,835 $4,641 $3,989
Marketing agreement
obligations 4,082 1,361 2,721 - -
EPCOR billing,
collections
& supply commitments 10,163 2,980 6,983 200 -
Commodity supply
purchase
commitments 2,804,859 505,077 1,494,138 714,139 91,505
------------------------------------------------
$2,833,779 $510,628 $1,508,677 $718,980 $95,494
------------------------------------------------
------------------------------------------------


Other obligations

The Fund is also subject to certain contingent obligations that become payable only if certain events or rulings were to occur. The inherent uncertainty surrounding the timing and financial impact of these events or rulings 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 lawsuits, claims or proceedings. In the opinion of management, the Fund has no material pending lawsuits, claims or proceedings which have not been either included in its accrued liabilities or in the financial statements.

Transactions with related parties

On April 1, 2003, Energy Savings entered into Marketing Fee Payment Agreements ("Marketing Agreements") with three officers. The Marketing Agreements expire, at the earliest on March 31, 2007. Each person is entitled to receive annual marketing fees or commissions equal to the greater of an individual's percentage of Energy Savings' incremental gross margin and an individual's specified guaranteed amount, paid at the end of the first, second and third quarters and trued up at year end to reflect the year end financial results, as to, 50% in cash and 50% in fully paid unit appreciation rights ("UARs") which vest on the first, second and third anniversary day of the grant date when they become exchangeable for units on a one for one basis. In the event of a change of control: i) each officer is entitled to a lump sum payment declining to zero at March 31, 2007 and ii) all UARs vest and become immediately exchangeable into units on a one for one basis. For the three and six months ended September 30, 2005, cash payments made to the three officers amounted to $0.1 million (2004 - $0.4 million) and $0.2 million (2004 - $0.7 million), respectively and UAR payments amounted to $0.2 million (2004 - $nil) and $0.4 million (2004 - $nil), respectively.

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 and 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. For a detailed discussion of the significant judgments and estimates used in the preparation of the Fund's interim consolidated financial statements, refer to the Fund's annual MD&A. There are no material updates to these estimates based on events from April 1, 2005 to October 31, 2005.

Financial instruments

The Fund has entered into a variety of derivative instruments as part of the business of purchasing and selling gas and electricity. Energy Savings enters into contracts with customers to provide electricity and gas at fixed prices. These 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 matching its delivery obligations.

The Fund's business model objective is to minimize commodity risk other than consumption, usually attributable to weather. Accordingly, it is Energy Savings' policy to hedge the estimated requirements of its customers with offsetting volumes of natural gas and electricity at fixed prices for terms equal to those of the customer contracts.

The Fund is also planning further expansion into the United States market place. This will introduce foreign exchange related risks. Similar to the gas and electricity commodities, it is the intent of Energy Savings to hedge this exposure through the use of foreign exchange strategies. There are currently no derivative instruments in place as all monies generated from U.S. operations have been redeployed to fund continued operations and further expansion in the U.S. Management anticipates deploying its foreign exchange hedge strategy on U.S. receipts before the end of the fiscal year.

The estimation of the fair value of certain electricity and gas supply contracts requires considerable judgment. The estimation of the fair value is based on market prices or management's best estimates if there is no market and/or if the market is illiquid.

Adoption of new accounting policies

There have been no new accounting policies adopted by the Fund for the period April 1, 2005 to October 31, 2005, nor are there changes pending or proposed.

Risks and uncertainties

The Fund is subject to a number of risks and uncertainties that could have a material adverse effect on the results of operations, business prospects, financial condition, distributions and the trading price of the Fund. A comprehensive discussion of these risks can be found in the Fund's Annual Information Form and our 2005 Annual Report which is available on our corporate website under "reports and filings" at www.esif.ca and from SEDAR through its website at www.sedar.com. There have been no material changes for the period April 1, 2005 to October 31, 2005 that require an update to the discussion of the applicable risks.

Despite the hurricane-related rapid rise in natural gas prices, and some curtailment of supply in the southern United States, Energy Savings is experiencing no difficulty in procuring five year gas supply at marketable prices in each of its markets.

In September 2005, the Department of Finance issued a consultation paper on income trusts and limited partnerships. Subsequently, a postponement was announced on all advanced tax rulings with respect to income funds. At this time, it is not possible to predict an outcome to the Department of Finance's review of taxation policy or the impact, if any, on Energy Savings.

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. Energy Savings actively monitors the corporate governance and disclosure environment to ensure timely compliance with current and future requirements.

Based on an evaluation of the Energy Savings' disclosure controls and procedures, the Fund's Chief Executive Officer and Chief Financial Officer have concluded that these controls and procedures are effective as of September 30, 2005.

Proposed reorganization

As previously outlined in the 2005 annual report, OESC generates significant cashflows which result in taxable income. Management had proposed a revised "trust on trust on partnership" structure which received Unitholder approval on June 29, 2005. The Fund has requested a tax ruling on certain aspects of the reorganization from the Canada Revenue Agency. As an interim step, on August 1, 2005, Energy Savings began to conduct substantially all of its business in Ontario under a new limited partnership, Ontario Energy Savings L.P, which is expected to result in increased flow through of funds for the operation of the business.

As a result of the announcement made by the Department of Finance as outlined above, management cannot assess when the Fund will be able to receive the tax ruling on certain aspects of the proposed reorganization as mentioned above.

Preference shares of OESC and Trust Units

As at October 31, 2005, there were 10,168,695 preference shares of OESC outstanding and 95,880,282 units of the Fund outstanding.

Taxability of 2005 distributions

We estimate that approximately 90% of the distributions pertaining to calendar 2005 will be taxable as other income, with the remainder classified as tax-deferred return of capital. The actual taxability of the distributions will be determined and reported to Unitholders prior to February 28, 2006.

Outlook

The market price of Energy Savings units on the TSX has declined sharply since the September 2005 announcement by the Department of Finance regarding flow-through entities. Management is not aware of any business development within Energy Savings which would contribute to this decline. While this price decline would adversely affect the Fund's cost to access the capital markets, Energy Savings has been, and remains, self funding.

The Fund expects to resume marketing electricity to residential customers in Ontario in the third quarter.

Following completion of test marketing in Q2, customer aggregation in the State of New York is expected to ramp up in the second half of the fiscal year. The Fund continues to actively monitor the progress of the deregulated markets in various jurisdictions including Indiana, Virginia and Maryland.

Energy Savings has been and remains a marketing company. While the Fund has more than 1.3 million RCEs under long-term contracts at locked-in margins, its future results are dependent upon its ability to continue to add new customers both in existing and future new markets. Management believes that these growth opportunities will continue to exist.



ENERGY SAVINGS INCOME FUND

CONSOLIDATED BALANCE SHEETS
(Unaudited - thousands of dollars)
---------------------------------------------------------------------
---------------------------------------------------------------------

September 30, 2005 March 31, 2005

ASSETS

CURRENT
Cash $ 9,061 $ 16,058
Restricted cash (Note 4) 7,328 5,682
Accounts receivable 87,197 101,631
Gas delivered in excess of
consumption 56,799 -
Gas in storage 11,035 414
Unbilled revenues - 50,536
Prepaid expenses 1,930 2,108
Corporate taxes recoverable 2,087 -
---------------------------------------------------------------------
175,437 176,429
GAS CONTRACTS (less accumulated
amortization - $213,399; March 31,
2005 - $198,483) 30,530 45,446
ELECTRICITY CONTRACTS (less
accumulated amortization - $8,130;
March 31, 2005 - $3,040) 18,291 8,794
GOODWILL 94,576 94,576
CAPITAL ASSETS (less accumulated
amortization - $4,681; March 31,
2005 - $3,558) 11,149 10,279
OTHER ASSETS (Note 9a) 22,100 5,474
---------------------------------------------------------------------
$ 352,083 $ 340,998
---------------------------------------------------------------------
---------------------------------------------------------------------

LIABILITIES

CURRENT
Bank indebtedness (Note 9b) $ 9,302 $ -
Accounts payable and accrued liabilities 80,148 76,505
Customer rebates payable (Note 4) 7,328 5,682
Management incentive program
payable 1,219 1,173
Unit distribution payable 7,311 7,039
Corporate taxes payable - 10,048
Deferred revenue 68,944 -
Accrued gas accounts payable - 40,900
---------------------------------------------------------------------
174,252 141,347

DEFERRED CHARGES (Note 5) 6,216 -

OTHER LIABILITIES (Note 9a) 638 644

FUTURE INCOME TAXES 14,851 21,020
---------------------------------------------------------------------

195,957 163,011
---------------------------------------------------------------------

EQUITY
Unitholders' equity (Note 7) $ 149,415 $ 173,106
Contributed surplus 6,711 4,881
---------------------------------------------------------------------
156,126 177,987
---------------------------------------------------------------------
$ 352,083 $ 340,998
---------------------------------------------------------------------
---------------------------------------------------------------------



ENERGY SAVINGS INCOME FUND

CONSOLIDATED STATEMENTS OF UNITHOLDERS' EQUITY
(Unaudited - thousands of dollars)
FOR THE SIX MONTHS ENDED SEPTEMBER 30
---------------------------------------------------------------------
---------------------------------------------------------------------

2005 2004

UNITHOLDERS' EQUITY, BEGINNING OF PERIOD $ 173,106 $ 206,401
Trust unit options exercised (Note 8) 1,651 8,348
NET INCOME 20,521 2,894
DISTRIBUTIONS ON UNITS (42,957) (38,777)
CLASS A PREFERENCE DISTRIBUTIONS,
NET OF TAX (2,906) (2,988)
---------------------------------------------------------------------
UNITHOLDERS' EQUITY, END OF PERIOD $ 149,415 $ 175,878
---------------------------------------------------------------------
---------------------------------------------------------------------



ENERGY SAVINGS INCOME FUND

CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited - thousands of dollars except per unit amount)
---------------------------------------------------------------------
---------------------------------------------------------------------

Three months ended Six months ended
September 30 September 30

2005 2004 2005 2004

SALES $ 180,049 $ 114,290 $ 414,454 $ 300,363
COST OF SALES 156,925 92,385 354,228 246,700
---------------------------------------------------------------------
GROSS MARGIN 23,124 21,905 60,226 53,663
---------------------------------------------------------------------

EXPENSES
General and
administrative
expenses 8,500 6,382 16,801 14,513
Capital tax 207 250 414 500
Marketing expenses 10,731 10,675 21,430 19,638
Unit based compensation
(Note 8) 864 1,000 2,036 1,435
Bad debt expense 1,644 20 2,178 22
Amortization of gas
contracts 7,479 12,153 14,916 24,307
Amortization of
electricity
contracts 2,008 267 3,314 534
Amortization of capital
assets 579 377 1,123 710
---------------------------------------------------------------------
32,012 31,124 62,212 61,659
---------------------------------------------------------------------
LOSS BEFORE OTHER INCOME (8,888) (9,219) (1,986) (7,996)

OTHER INCOME (EXPENSE)
(Note 9) 14,394 (482) 16,811 100
---------------------------------------------------------------------

INCOME (LOSS) BEFORE
INCOME TAX 5,506 (9,701) 14,825 (7,896)

RECOVERY OF INCOME TAX (3,890) (6,947) (5,696) (10,790)
---------------------------------------------------------------------

NET INCOME (LOSS) $ 9,396 $ (2,754) $ 20,521 $ 2,894
---------------------------------------------------------------------
---------------------------------------------------------------------

Net income (loss) per
unit (Note 10)
Basic $ 0.09 $ (0.03) $ 0.19 $ 0.03
Diluted $ 0.09 $ (0.03) $ 0.19 $ 0.03



ENERGY SAVINGS INCOME FUND

CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited - thousands of dollars)
---------------------------------------------------------------------
---------------------------------------------------------------------

Three months ended Six months ended
September 30 September 30

2005 2004 2005 2004

Net inflow (outflow) of
cash related to the
following activities
OPERATING
Net income $ 9,396 $ (2,754) $ 20,521 $ 2,894
---------------------------------------------------------------------

Items not affecting cash
Amortization of
gas contracts 7,479 12,153 14,916 24,307
Amortization of
electricity contracts 2,008 267 3,314 534
Amortization of capital
assets 579 377 1,123 710
Unit based compensation 864 1,000 2,036 1,435
Future income taxes (2,204) (7,780) (6,169) (12,645)
Loss on foreign
exchange (unrealized) 448 87 267 97
Other (income) expenses
(unrealized) (14,858) 541 (17,107) 75
---------------------------------------------------------------------
(5,684) 6,645 (1,620) 14,513
Adjustments required
to reflect net cash
receipts from gas
sales 16,217 17,365 21,781 21,859
---------------------------------------------------------------------
19,929 21,256 40,682 39,266
---------------------------------------------------------------------
Changes in non-cash
working capital 6,117 (3,555) (3,980) (9,257)
---------------------------------------------------------------------
Cash inflow from
operations 26,046 17,701 36,702 30,009
---------------------------------------------------------------------
FINANCING
Exercise of trust unit
options (Note 8) 157 163 1,441 5,262
Distributions paid to
Unitholders (21,490) (19,498) (42,683) (38,067)
Distributions to Class
A preference
shareholders (2,301) (2,319) (4,549) (4,678)
Tax impact on
distributions to
Class A preference
shareholders 831 838 1,643 1,690
Bank indebtedness
(Note 9b) (698) - 9,302 -
---------------------------------------------------------------------
(23,501) (20,816) (34,846) (35,793)
INVESTING
Purchase of capital
assets (1,253) (744) (1,993) (2,343)
Acquisition of
customer contracts 146 - (6,593) -
---------------------------------------------------------------------
(1,107) (744) (8,586) (2,343)
---------------------------------------------------------------------
Loss on foreign exchange
(unrealized) (448) (87) (267) (97)
---------------------------------------------------------------------
NET CASH INFLOW (OUTFLOW) 990 (3,946) (6,997) (8,224)
CASH, BEGINNING OF PERIOD 8,071 35,963 16,058 40,241
---------------------------------------------------------------------
CASH, END OF PERIOD $ 9,061 $ 32,017 $ 9,061 $ 32,017
---------------------------------------------------------------------
---------------------------------------------------------------------

Supplemental Information

Interest paid $ 168 $ 15 $ 193 $ 34
Income taxes paid $ 1,522 $ - $ 11,308 $ 500


ENERGY SAVINGS INCOME FUND

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited - thousands of dollars except where
indicated and per unit amount)


1. INTERIM FINANCIAL STATEMENTS

The unaudited interim consolidated financial statements do not conform in all respects to the requirements of Canadian generally accepted accounting principles for annual financial statements and should therefore be read in conjunction with the audited consolidated financial statements and notes thereto included in the Fund's annual report for fiscal 2005. The unaudited interim consolidated financial statements have been prepared by management in accordance with Canadian generally accepted accounting principles applicable to interim consolidated financial statements and follow the same accounting policies and methods in their applications as the most recent annual financial statements.

2. 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 wholly owned subsidiaries and affiliates: Ontario Energy Savings Corp. ("OESC"), Ontario Energy Savings L.P. ("OESLP"), ESIF Commercial Trust 1 ("Commercial Trust"), Energy Savings L.P. ("ESLP"), Energy Savings (Manitoba) Corp. ("ESMC"), Energy Savings (Quebec) L.P. ("ESPQ"), ES (B.C.) Limited Partnership ("ES (BC) L.P."), Alberta Energy Savings L.P. ("AESLP"), Ontario Energy Commodities Inc. ("Commodities") and U.S. Energy Savings Corp. ("USESC"), (collectively the "Energy Savings Group").

Ontario Energy Savings L.P.

OESLP was formed under the laws of the Province of Ontario on June 1, 2005. Effective August 1, 2005, OESLP acquired substantially all of the assets and certain related liabilities of OESC, thereby transferring operations and all future marketing efforts in Ontario to OESLP.

3. 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.

4. RESTRICTED CASH/CUSTOMER REBATES PAYABLE

Restricted cash represents rebate monies received from Local Distribution Companies (LDCs) in Ontario as provided by the Independent Electricity System Operator (IESO). OESLP is obligated to disperse the monies to eligible end-use customers in accordance with the Market Power Mitigation Agreement as part of OESLP's Retailer License conditions.

5. ACQUISITION OF CUSTOMER CONTRACTS

On May 19, 2005, Energy Savings purchased effective May 1, 2005, approximately 187,000 residential customer equivalents (RCEs) of deregulated electricity customers in Ontario from EPCOR Utilities Inc ("EPCOR").

The purchase price has been allocated as follows (subject to adjustments):



Net assets acquired:
Electricity contracts $ 14,585
Deferred charges (including amortization - $1,776) (7,992)
---------

$ 6,593
---------
---------
Consideration:

Cash $ 6,593
---------
---------


The entire purchase price will be amortized over the average remaining life of the contracts, which at the time of the acquisition was 1.5 years.

Cash consideration was determined by valuing the margin remaining on contracts acquired at their associated fixed prices, and is subject to adjustments. These fixed prices were not reflective of the market price of electricity at the time of acquisition. Canadian GAAP requires financial instruments to be fair valued upon acquisition. Customer contracts are not considered financial instruments, while supply contracts are. Deferred charges relate to the fair value associated with the acquired supply contracts.

6. RELATED PARTY TRANSACTION

On April 1, 2003, Energy Savings entered into Marketing Fee Payment Agreements ("Marketing Agreements") with three officers, through its subsidiary OESC (see Note 13(b)). The Marketing Agreements expire, at the earliest, on March 31, 2007. Each person is entitled to receive annual marketing fees or commissions equal to the greater of an individual's percentage of Energy Savings' incremental gross margin and an individual's specified guaranteed amount, payable on March 31 in each year, as to, 50% in cash and 50% in fully paid unit appreciation rights ("UARs"), which vest on the first, second and third anniversary day of the grant date when they become exchangeable into units on a one for one basis. In the event of a change of control; i) each officer is entitled to a lump sum payment declining to zero at March 31, 2007 and ii) all UARs vest and become immediately exchangeable into units on a one for one basis. For the three and six months ended September 30, 2005, cash payments amounted to $113 (2004 - $356) and $226 (2004 - $712), respectively, while payments made in the form of UARs amounted to $244 (2004 - $nil) and $488 (2004 - $nil), respectively.

7. UNITHOLDERS' EQUITY

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.

Preference Shares of OESC

Unlimited Class A preference shares, non-voting for OESC, non-cumulative, exchangeable into trust units in accordance with the OESC shareholders' agreement, 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 which they would receive if they exercised their shareholder exchange rights. Class A preference shareholders have equal entitlement to distributions from the Fund as Unitholders.



Issued and 2005 2004
Outstanding Units/Shares Units/Shares
Trust units
Balance, beginning of
period 95,515,617 $ 147,684 91,093,142 $ 177,323
Options exercised 303,330 1,651 2,066,656 8,348
Exchanged from Class
A preference shares - - 1,462,483 3,656
-----------------------------------------------
Balance before income
and distributions 95,818,947 149,335 94,622,281 189,327
-----------------------------------------------
Class A preference
shares
Balance, beginning
of period 10,168,695 25,422 11,631,178 29,078
Exchanged into units - - (1,462,483) (3,656)
-----------------------------------------------
Balance, end of
period 10,168,695 25,422 10,168,695 25,422
-----------------------------------------------
Combined balance,
end of period 105,987,642 174,757 104,790,976 214,749
-----------------------------------------------
Net Income - 20,521 - 2,894
Distributions (1) - (45,863) - (41,765)
-----------------------------------------------
Unitholders' equity,
end of period 105,987,642 $ 149,415 104,790,976 $ 175,878
-----------------------------------------------
-----------------------------------------------

(1) Unitholders are entitled to receive distributions. The holders
of Preference A shares, unit appreciation rights and deferred
unit grants are also entitled to receive distributions equal to
the amount receivable if their shares/rights were exchanged into
units of the Fund.

Pre-tax distributions for the three and six months ended September
30, 2005 and 2004 are as follows:

Three months ended Six months ended
September 30 September 30

2005 2004 2005 2004

Unitholders $ 21,675 $ 19,804 $ 42,833 $ 38,756
Class A preference share
distributions 2,301 2,319 4,549 4,678
Unit appreciation rights 64 13 119 21
---------------------------------------
24,040 22,136 47,501 43,455
Deferred unit grants 3 - 5 -
---------------------------------------
$ 24,043 $ 22,136 $ 47,506 $ 43,455
---------------------------------------
---------------------------------------


8. 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 its subsidiaries and affiliates. In accordance with the unit option plan and as a result of the unit splits which took effect July 29, 2002 and January 30, 2004, the Fund may grant options to a maximum of 11,300,000 units. As at September 30, 2005, there were 859,166 options still available for grant under the plan. Of the options issued, 1,797,505 options remain outstanding at quarter 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 unit option plan during the six month period and status at September 30, 2005 is outlined below:



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

Balance,
beginning
of period 1,825,835 $2.50 - $18.70 $ 8.99
Granted 275,000 $15.63 - $15.90 $15.65 $2.20
Exercised (303,330) $2.50 - $11.25 $ 4.75
----------
Balance, end
of period 1,797,505 $2.50 - $18.70 $10.72
----------
----------

(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.


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

$2.50 - $3.24 40,000 0.58 $2.50 40,000 $2.50
$4.24 - $6.09 524,006 1.33 $5.02 216,006 $5.03
$7.29 - $10.68 82,666 2.40 $9.17 51,334 $8.81
$11.25 - $12.17 693,333 7.19 $12.05 460,002 $12.06
$14.25 - $18.70 457,500 4.11 $16.24 20,500 $16.68
--------- -------

Balance, end
of period 1,797,505 4.33 $10.72 787,842 $9.55
--------- -------
--------- -------

Options available for grant

Available for grant 11,300,000
Less: granted in prior years (11,083,000)
Add: cancelled/forfeited in prior years 917,166
------------
Balance, beginning of period 1,134,166
Less: granted during the period (275,000)
------------
Balance, end of period 859,166
------------
------------


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 valuations:



Risk free rate 3.53 - 3.65%
Expected volatility 25.57% - 25.62%
Expected life 5 years
Expected distributions $0.885 - $0.915 per year


(b) Unit appreciation rights

The Fund grants awards under its 2004 unit appreciation rights ("UARs") plan to senior officers or 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 1,000,000. As at September 30, 2005 there were 699,914 UARs still available for grant under the plan. Except as otherwise provided, (i) the UARs vest up to one to five years from the grant date, (ii) 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

Available for grant 1,000,000
Less: granted in prior years (240,426)
-----------
Balance, beginning of period 759,574
Less: granted during the period (59,660)
-----------
Balance, end of period 699,914
-----------
-----------


(c) Deferred unit grants

The Fund grants awards under its 2004 Directors' deferred compensation plan to all independent directors. In accordance with the deferred compensation plan, the Fund may grant deferred unit grants ("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 September 30, 2005, there were 86,670 DUGs available for grant under the plan.



Deferred unit grants

Available for grant 100,000
Less: granted in prior years (9,365)
-----------
Balance, beginning of period 90,635
Less: granted during the period (3,965)
-----------
Balance, end of period 86,670
-----------
-----------


Total amounts credited to contributed surplus in respect of unit-based compensation awards, UARs and DUGs amounted to $864 for the three months ended September 30, 2005 (2004 - $1,435), and $2,036 for the six months ended September 30, 2005 (2004 - $1,000).

Total amounts charged to units in respect of awards exercised during the three months ended September 30, 2005 amounted to $18 (2004 - $3,086) and $210 (2004 - $16) for the six months ended September 30, 2005.

Cash received from options exercised for the three and six months ended September 30, 2005 amounted to $157 (2004 - $163) and $1,441 (2004 - $5,262), respectively.

9. FINANCIAL INSTRUMENTS

(a) Fair value

The Fund has a variety of gas and electricity supply contracts that are considered derivative financial instruments. The fair value of derivative financial instruments is the estimated amount the Energy Savings would pay or receive to dispose of these supply contracts in the market. Management has estimated the value of electricity and gas swap contracts using a discounted cash flow method which employs market forward curves as well as a forward curve compiled by management for Alberta electricity (electricity information is based on market). 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.

(i)(a) At September 30, 2005, Energy Savings had electricity fixed-for-floating swap contracts in Ontario designated as hedges of Energy Savings' anticipated cost of sales to which it has committed with the following terms:



Notional volumes (peak, flat, off peak
and weekend) 5.0-50.0 MW/h
Total remaining notional volume
(peak, flat off peak and weekend) 11,820,820 MWh
Maturity dates October 31, 2005
- September 30, 2010
Fixed price per MWh (in dollars) $39.25 - $95.05
Fair value $312,432 favourable
Notional value $714,775


(i)(b) At September 30, 2005, Energy Savings had electricity fixed-for-floating swap contracts in Alberta designated as hedges of Energy Savings' anticipated cost of sales to which it has committed with the following terms:



Notional volumes (peak and off peak) 2.4-7.9 MW/h
Total remaining estimated notional volume
(peak, off peak and load following) 2,449,377 MWh
Maturity dates October 31, 2005
- September 30, 2011
Fixed price per MWh (in dollars) $55.80 - $67.95
Fair value $57,740 favourable
Notional value $143,365


(i)(c) At September 30, 2005, Energy Savings had electricity fixed-for-floating swap contracts in New York designated as hedges of Energy Savings' anticipated cost of sales to which it has committed with the following terms:



Notional volumes (peak and off peak) 0.2-3.6 MW/h
Total remaining notional volume
(peak and off peak) 179,177 MWh
Maturity dates October 31, 2005
- October 31, 2010
Fixed price per MWh (in dollars) $108.62 - $132.49
(US $93.42 - $113.95)
Fair value $527.87 (US $454
unfavourable)
Notional value $21,888 (US $18,825)


Since hedge accounting has been applied to these swaps, no recognition of the mark to market gain has been recognized in these financial statements. 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 and New York wherein the quantity of electricity is established but varies throughout the term of the contracts.

(ii) At September 30, 2005, Energy Savings has a fixed-for-floating gas swap contract in Ontario which has been marked to market with the following terms:



Notional volume 1,000 GJ/day
Total remaining notional volume 61,000 GJ
Maturity date November 30, 2005
Fixed price per GJ (in dollars) $5.23
Fair value $572 favourable
Notional value $319


The gain of $224 (2004 - $164 loss) and loss of $144 (2004 - $658 gain) for the three and six months ended September 30, 2005 respectively has been recorded in other assets with its offsetting value being recorded in other income.

(iii) At September 30, 2005, Energy Savings has a floating-for-fixed gas swap contract in Ontario which has been marked to market with the following terms:



Notional volume 1,000 GJ/day
Total remaining notional volume 61,000 GJ
Maturity date November 30, 2005
Fixed price per GJ (in dollars) $7.26
Fair value $390 unfavourable
Notional value $443


The loss of $411 (2004 - n/a) and loss of $218 (2004 - n/a) for the three and six months ended September 30, 2005 respectively has been recorded in other assets with its offsetting value being recorded in other income.

(iv) At September 30, 2005, Energy Savings had other gas puts and calls in Manitoba which have been marked to market with the following terms:



Notional volume 750 - 60,450 GJ/day
Total remaining notional volume 1,623,080 GJ
Maturity dates October 31, 2005
- January 31, 2011
Fixed price per GJ (in dollars) $5.48 - $9.18
Fair value $638 unfavourable


The loss of $1,022 (2004 - $533 loss) and the gain of $6 (2004 - $1,037 loss) for the three and six months ended September 30, 2005 respectively have been recorded in other liabilities with its offsetting value being recorded in other income. The fair value of the options is net of the present value of premiums which have yet to be paid.

(v) At September 30, 2005, Energy Savings had other gas puts and calls in Alberta which have been marked to market with the following terms:



Notional volume 500 - 95,500 GJ/month
Total remaining notional volume 4,567,500 GJ
Maturity dates October 31, 2005
- February 28, 2011
Fixed price per GJ (in dollars) $5.50 - $11.50
Fair value $5,760 favourable


The gain of $5,449 and $5,759 for the three and six months ended September 30, 2005 (2004 - n/a) has been recorded in other assets with its offsetting value being recorded in other income. The fair value of the options is net of the present value of premiums which have yet to be paid.

(vi) At September 30, 2005, Energy Savings had other gas put and call options in Illinois which have been marked to market with the following terms:



Notional volume 500 - 45,000 Mm BTU/month
Total remaining notional volume 8,573,000 MmBTU
Maturity dates November 30, 2005
- November 30, 2010
Fixed price per MmBTU (in dollars) $6.74 - $11.63 (US $5.50
- $10.00)
Fair value $13,906 favourable (US
$11,960)


The fair value is net of prepaid premiums of $2,095 (US$1,865). These premiums are included in other assets. The gain of $10,583 (US$9,149) and $11,639 (US$10,010) for the three and six months ended September 30, 2005 (2004 - gain of $157 (US $124) and $305 (US $239) has been recorded in other assets with its offsetting value being recorded in other income.

(vii) At September 30, 2005, Energy Savings had gas put and call options in New York which have been marked to market with the following terms:



Notional volume 173- 1,440 Mm BTU/month
Total remaining notional volume 179,250 MmBTU
Maturity dates October 31, 2005
- October 31, 2010
Fixed price per MmBTU (in dollars) $10.93 (US $9.40)
Fair value $157 favourable (US $135)


The gain of $157 (US $135) for the three and six months ended September 30, 2005 (2004 - n/a) has been recorded in other assets with its offsetting value being recorded in other income. The fair value of the options is net of the present value of premiums which have yet to be paid.

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.

Energy Savings' physical gas supply contracts are not considered derivative financial instruments and a fair value has therefore not been assessed.

The carrying value of cash and cash equivalents, 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.

(b) Bank indebtedness

Energy Savings has available a $60,000 operating credit facility. As at September 30, 2005 Energy Savings had drawn $9,302 against the facility to assist with working capital requirements. In addition, outstanding letters of credit at September 30, 2005 amounted to $6,224. Energy Savings has $44,474 of the facility remaining for future working capital and security requirements. The operating line of credit bears interest at bank prime plus 0.5% and letters of credit bear interest at 1.5%. The credit facility was renewed for an additional one year term on October 31, 2005.

(c) Customer credit risk

In Illinois and Alberta, Energy Savings assumes the credit risk associated with the collection of its customers. Credit review processes have been put in place for these markets where Energy Savings has credit risk. If a significant number of customers were to default on their payments, it could have a material adverse effect on Energy Savings' operations and cash flow.

For the remaining markets in which Energy Savings operates, the LDCs provide collection services and assume the risk of any bad debts owing from Energy Savings' customers. Therefore, Energy Savings receives the collection of customer account balances directly from the LDCs. Management believes that the risk of the LDCs failing to deliver payment to Energy Savings is minimal.

(d) Foreign currency risk

The Fund has an exposure to foreign currency exchange rates, as a result of its investment in U.S. operations. Changes in the applicable exchange rate may result in a decrease or increase in income. A non-cash loss of $448 (2004 - $87) and $267 (2004 - $97) for the three and six months ended September 30, 2005 has been recorded in other income (expense).



10. INCOME (LOSS) PER UNIT

Three months ended Six months ended
September 30 September 30

2005 2004 2005 2004
Basic income (loss) per unit
Net income (loss) available
to unitholders $ 9,396 $ (2,754) $ 20,521 $ 2,894
Weighted average number of
units outstanding 95,798 93,325 95,746 92,792
Weighted average number of
Class A preference shares 10,169 11,421 10,169 11,525
------- -------- --------- -------
Basic units and shares
outstanding 105,967 104,746 105,915 104,317
------- -------- --------- -------
Basic income (loss)
per unit $ 0.09 $ (0.03) $ 0.19 $ 0.03
------- -------- --------- -------
------- -------- --------- -------

Diluted income (loss) per unit

Net income (loss) available to
unitholders $ 9,396 $ (2,754) $ 20,512 $ 2,894
Basic units and shares
outstanding 105,967 104,746 105,915 104,317
Dilutive effect of:
Unit options 657 1,429 695 1,740
Unit appreciation rights 269 34 255 34
Deferred unit grants 11 - 10 -
------- -------- --------- -------
Units outstanding on a
diluted basis 106,904 106,209 106,875 106,091
------- -------- --------- -------
Diluted income (loss) per unit $ 0.09 $ (0.03) $ 0.19 $ 0.03
------- -------- --------- -------
------- -------- --------- -------


11. 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 from continuing operations by geographic segment:



Three months ended September 30, 2005


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

Sales $ 173,980 $ 6,069 $ 180,049
---------------------------------------------------------------------
Gross margin $ 22,341 $ 783 $ 23,124
Amortization of gas contracts 7,479 - 7,479
Amortization of electricity
contracts 2,008 - 2,008
Amortization of capital assets 564 15 579
Other expenses 14,684 7,262 21,946
Other income (4,221) (10,173) (14,394)
Recovery of income tax (3,893) 3 (3,890)
---------------------------------------------------------------------
Net income $ 5,720 $ 3,676 $ 9,396
---------------------------------------------------------------------
---------------------------------------------------------------------

Additions to capital assets $ 1,216 $ 37 $ 1,253
---------------------------------------------------------------------
---------------------------------------------------------------------


Three months ended September 30, 2004

Canada United States Consolidated
--------- ------------- ------------
Sales $ 113,325 $ 965 $ 114,290
---------------------------------------------------------------------
Gross margin $ 21,719 $ 186 $ 21,905
Amortization of gas contracts 12,153 - 12,153
Amortization of electricity
contracts 267 - 267
Amortization of capital assets 366 11 377
Other expenses 16,313 2,014 18,327
Other income (expenses) 547 (65) 482
Recovery of income tax (6,947) - (6,947)
---------------------------------------------------------------------
Net loss $ (980) $ (1,774) $ (2,754)
---------------------------------------------------------------------
---------------------------------------------------------------------

Additions to capital assets $ 733 $ 11 $ 744
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---------------------------------------------------------------------


Six months ended September 30, 2005

Canada United States Consolidated
--------- ------------- ------------
Sales $ 401,773 $ 12,681 $ 414,454
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Gross margin $ 58,502 $ 1,724 $ 60,226
Amortization of gas contracts 14,916 - 14,916
Amortization of electricity
contracts 3,314 - 3,314
Amortization of capital assets 1,095 28 1,123
Other expenses 31,111 11,748 42,859
Other income (5,406) (11,405) (16,811)
Recovery of income tax (5,699) 3 (5,696)
---------------------------------------------------------------------
Net income $ 19,171 $ 1,350 $ 20,521
---------------------------------------------------------------------
---------------------------------------------------------------------

Additions to capital assets $ 1,944 $ 49 $ 1,993
---------------------------------------------------------------------
---------------------------------------------------------------------

Total goodwill $ 94,576 $ - $ 94,576
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---------------------------------------------------------------------

Total assets $ 317,202 $ 34,881 $ 352,083
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Six months ended September 30, 2004

Canada United States Consolidated
--------- ------------- ------------
Sales $ 299,019 $ 1,344 $ 300,363
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Gross margin $ 53,402 $ 261 $ 53,663
Amortization of gas contracts 24,307 - 24,307
Amortization of electricity
contracts 534 534
Amortization of capital assets 683 27 710
Other expenses 33,306 2,802 36,108
Other income (100) (100)
Recovery of income tax (10,790) (10,790)
---------------------------------------------------------------------
Net income (loss) $ 5,462 $ (2,568) $ 2,894
---------------------------------------------------------------------
---------------------------------------------------------------------

Additions to capital assets $ 2,274 $ 69 $ 2,343
---------------------------------------------------------------------
---------------------------------------------------------------------

Total goodwill $ 94,576 $ - $ 94,576
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---------------------------------------------------------------------

Total assets $ 297,088 $ 7,906 $ 304,994
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12. 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 have entered into agreements that include guarantees in favor 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 $15,000.

13. COMMITMENTS

(a) Commitments for premises and equipment under operating lease obligation for each of the next five years are as follows:



2006 $ 1,210
2007 2,418
2008 2,417
2009 2,397
2010 2,244
--------
$ 10,686
--------
--------


(b) Commitments under the Marketing Agreements for each of the next two years are as follows:



2006 $ 1,361
2007 2,721
--------
$ 4,082
--------
--------


(c) Commitments under the Master Service agreement with EPCOR for each of the next four years are as follows:



2006 $ 2,980
2007 5,459
2008 1,524
2009 200
--------
$ 10,163
--------
--------


(d) Commitments under long-term gas and electricity contracts with various suppliers for each of the next five years are as follows:



2006 $ 505,077
2007 852,852
2008 641,286
2009 437,735
2010 276,404
-----------
$ 2,713,354
-----------
-----------


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.

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. Brennan Mulcahy
    Chief Executive Officer
    (905) 795-4200
    or
    Energy Savings Income Fund
    Mr. Ken Hartwick, C.A.
    Chief Financial Officer
    (905) 795-3557
    www.esif.ca