Just Energy Group Inc.
TSX : JE

Just Energy Group Inc.

November 08, 2011 10:10 ET

Just Energy Reports Second Quarter Results

Operating Results Ahead of Guidance for Second Consecutive Quarter

Margin up 9% and Adjusted EBITDA up 24% per Share Year to Date

238,000 Customers Added-Customer Base up 8% Year over Year

TORONTO, ONTARIO--(Marketwire - Nov. 8, 2011) - Just Energy Group Inc. (TSX:JE) -

Highlights for the three months ended September 30, 2011 included:

  • Gross residential customer equivalent additions through marketing of 238,000 and net additions of 45,000, up from 227,000 and 44,000 in first quarter.
  • Total customer base reached 3,403,000 residential customer equivalents, up 8% from a year earlier.
  • Gross margin of $102.6 million, up 6% (4% per share).
  • Adjusted EBITDA of $47.9 million, up 28% (25% per share) reflecting earnings before marketing expenditures to add new gross margin.
  • Base EBITDA of $38.6 million up 23% (20% per share) reflecting earnings after all marketing.
  • National Home Services' water heaters and HVAC units increased to 143,800 installed to date, 42% higher than a year prior. This growth has lead to a 73% increase in gross margin from $3.8 million to $6.5 million.
  • Payout ratio on Adjusted EBITDA was 91% for the quarter versus 113% for the three months ended September 30, 2010.

Highlights for the six months ended September 30, 2011 included:

  • Gross margin of $196.8 million, up 11% (9% per share).
  • Adjusted EBITDA of $85.3 million, up 27% (24% per share).
  • Base EBITDA of $68.5 million up 29% (26% per share).
  • Payout ratio on Adjusted EBITDA was 102% for the year to date, versus 125% for the six months ended September 30, 2010.
  • Year to date results exceed published guidance of 5% growth in Gross margin and Adjusted EBITDA.
  • In a press release dated October 3, 2011, Just Energy Management reaffirmed the 2012 Gross margin and Adjusted EBITDA growth guidance and that this will allow the Company to comfortably maintain its existing $1.24 per year dividend.

Just Energy Fiscal 2012 Second Quarter Results

Just Energy announced its results for the three months and six months ended September 30, 2011.

Three months ended September 30, ($ millions except per share/unit and customers) F2012 Per share F2011 Per unit
Sales $ 600.0 $ 4.26 $ 657.9 $ 4.78
Gross margin 102.6 0.73 96.7 0.70
Administrative costs 28.8 0.20 26.0 0.19
Finance costs 14.3 0.10 12.8(1 ) 0.09
Adjusted EBITDA 47.9 0.34 37.5 0.27
Base EBITDA 38.6 0.27 31.4 0.23
Net loss (3.5 ) (0.02 ) (133.4 ) (0.97 )
Dividends/distributions 43.7 0.31 42.3 0.31
Payout ratio - Adjusted EBITDA 91 % 113 %
Long Term RCEs 3,403,000 3,161,000
Six months ended September 30, ($ millions except per share/unit) F2012 Per share F2011 Per unit
Sales $ 1,226.2 $ 8.72 $ 1,267.6 $ 9.21
Gross margin 196.8 1.40 177.1 1.29
Administrative costs 57.1 0.41 54.8 0.40
Finance costs 28.1 0.20 22.8(1 ) 0.17
Adjusted EBITDA 85.3 0.61 67.2 0.49
Base EBITDA 68.5 0.49 53.2 0.39
Net profit 47.6 0.34 137.4 1.00
Dividends/distributions 87.3 0.62 84.3 0.62
(1) Excludes distributions paid to holders of exchangeable shares included as finance costs prior to Conversion under IFRS.

Just Energy is a TSX listed corporation and it reports in its Management's Discussion and Analysis, a detailed review of its operating results as measured by gross margin, Adjusted EBITDA and Base EBITDA. Just Energy also reports the profit for the period but Management believes that the inclusion of non-cash mark to market on future supply positions makes this measure less valuable in measuring performance as this future supply has been sold at fixed prices.

Second Quarter Operating Performance

The second quarter of fiscal 2012 shows the continued positive effects of Just Energy's diversification efforts over the last two years. Success at the Commercial division allowed the Company to add 238,000 residential customer equivalents ("RCEs"), up from 227,000 in the first quarter and caused our total RCE base to exceed 3.4 million, up 8% from a year earlier.

The acquisition of Hudson has successfully expanded Just Energy's presence in the commercial gas and electricity markets. This commercial expansion has allowed the Company to exceed its past record level of customer additions (140,000 RCE additions) for six consecutive quarters. Higher customer additions and corporate diversification have offset a difficult price environment and resultant weak renewals, maintaining gross margin and EBITDA at targeted levels.

A second diversification is the move into green commodity supply through the JustGreen and JustClean programs. Over the past 12-months, green takeup was 34% of new residential customers, who purchased an average of 90% as green supply. Our overall Green book is now 9% of residential natural gas needs (up from 3% a year ago) and 12% for electricity, up 1% from a year ago. In addition, the Hudson Solar division has made commitments of approximately $35 million to date. These projects generate very attractive returns on investment. Overall, Just Energy's commitment to Green strengthens long-term margins, builds a stronger customer relationship and allows Just Energy customers and employees to be proud of their contribution to a cleaner environment.

The National Home Services water heater and HVAC rental and sales operation has also been a successful diversification with installations growing 42% from 101,000 units to 143,800. Margin from this business was up 73% year over year.

Following quarter end, Just Energy acquired Fulcrum, a Texas marketer who specializes in affinity sales, a channel Just Energy had not previously pursued. This acquisition not only is a strategic fit but Fulcrum's existing base of customers makes the transaction immediately accretive to shareholders. The Momentis network marketing channel is now starting to see the monthly results hoped for. Network marketing does not overlap traditional sales channels and tends to generate sales to customers who would not otherwise buy from a door-to-door salesperson.

The expansions of JustGreen, JustClean and National Home Services were seen both in continued marketing success in the second quarter and operating results which so far exceed growth targets for the year. Management has set targets of 5% per share growth for both Gross margin and Adjusted EBITDA for the year.

In the second quarter, our $102.6 million gross margin was up 4% per share year over year. Year to date, gross margin is up 9% per share, well ahead of target. Administrative costs were up 8% per share to $28.8 million as a result of a one-tem reduction in accrued litigation expenses in the prior comparative period. Administrative costs were in line with those of the first quarter of fiscal 2012 and the fourth quarter of fiscal 2011. Higher margins combined with lower marketing and bad debt expenses resulted in a growth in Adjusted EBITDA to $47.9 million, up 25% per share. This is the second consecutive quarter with Adjusted EBITDA growth over 20%. Year to date, Adjusted EBITDA is up 24% per share, again well ahead of the 5% target.

Operational measures such as bad debt remained well under control. Losses were 2.5% on the 48% of our sales where we bear this risk, down from 2.6% a year ago. Our attrition rates were in line with management's expectations and down significantly from those in fiscal 2011. Canadian attrition was 10%, down from 12% a year ago. U.S. natural gas attrition (our market most affected by the housing and employment crisis) was 21%, down from the 27% rate reported a year ago. U.S. electricity attrition was 14%, lower than the 15% reported a year ago. Renewal rates remained soft averaging 64% versus a target of 70%. The current stable low commodity price environment is the worst for our core products however we have focused on renewals by giving the customer a range of options including Blend and Extend pricing, our new JustClean products and, most recently, innovative variable price offerings.

The 238,000 RCEs added in the second quarter was the sixth consecutive quarter with more than 200,000 additions. These are the only six quarters in which Just Energy has exceeded this level in its 11 year history as a publically traded entity.

New commercial RCEs made up 154,000 of the 238,000 quarterly additions. In the first quarter 148,000 of the 227,000 RCEs added were commercial. These customers have lower annual margins but their aggregation cost and annual customer service costs are commensurately lower as well. Overall, as can be seen below, the customer base is up 8% year over year. This is entirely growth through marketing with no acquired customers in the total.

July 1, 2011 Additions Attrition Failed to renew September 30, 2011 September 30, 2010
Natural gas
Canada 635,000 11,000 (18,000) (31,000) 597,000 689,000 (13%)
United States 567,000 36,000 (29,000) (4000) 570,000 569,000 0%
Total gas 1,202,000 47,000 (47,000) (35,000) 1,167,000 1,258,000 (7%)
Electricity
Canada 704,000 25,000 (17,000) (24,000) 688,000 745,000 (8%)
United States 1,452,000 166,000 (57,000) (13,000) 1,548,000 1,158,000 34%
Total electricity 2,156,000 191,000 (74,000) (37,000) 2,236,000 1,903,000 17%
Combined 3,358,000 238,000 (121,000) (72,000) 3,403,000 3,161,000 8%

During the quarter, rumours in the capital markets and, in management's belief, their adverse effect on our share price mandated that Just Energy issue a press release on October 3, 2011 reaffirming its guidance that the 5% targets for gross margin and Adjusted EBITDA growth are expected to be achieved in Fiscal 2012. As can be seen from these results, Just Energy remains ahead of the pace necessary to realize these goals after six months. The release also stated that, based on these operating results and those expected for the remainder of the year, Just Energy will be able to comfortably maintain its current $1.24 annual dividend for the foreseeable future. A second consecutive quarter of significantly lower payout ratio supports that conclusion.

Dividends for the quarter were $0.31 per share, equal to unit distributions paid in the prior comparable quarter. Payout ratio on Adjusted EBITDA was 91%, down from 113% a year ago. Management's expectation is that the annual payout ratio on our ordinary dividends will be below 100% for fiscal 2012.

As regards to the second quarter, CEO Ken Hartwick noted: "Our operating results show the benefits of diversifications we have undertaken over the past years. The past three years have seen very low stable gas and electricity prices. This makes it more difficult to convince consumers that the stability of a fixed price justifies a premium. Despite this price environment, we continue to grow our customer base quarter after quarter. This has been done through new and innovative product offerings and new businesses such as National Home Services. The result is the record levels of gross margin and EBITDA seen quarter after quarter."

"The acquisition of Fulcrum completed just after quarter end is another example of a strategic move into a new marketing channel, in this case affinity sales. Past expansions such as Hudson and National Home Services have added substantial value to Just Energy. Like these acquisitions, Fulcrum's existing customer base makes the acquisition accretive day one."

Chair Rebecca MacDonald added: "Our second quarter results show a continuation of the consistent track record of Just Energy since its inception. We target growth every year and every year we grow. We target a high dividend and every month, we pay that dividend. We have never missed, cut or delayed a dividend or distribution in the history of the Company. We have no intention of starting now."

"Our growth year to date is ahead of the 5% per share targeted for gross margin and Adjusted EBITDA. Our payout ratio in each of the first two quarters was below that of the prior year, a year in which we comfortably paid $1.24 to our shareholders. With our track record, current results and opportunities for continued growth, there is no justification for our shares yielding over 10%. I plan to work tirelessly to convince investors that Just Energy is substantially undervalued."

Just Energy

Just Energy's business primarily involves the sale of natural gas and/or electricity to residential and commercial customers under long-term fixed-price, price-protected or variable-priced contracts and green energy products. By fixing the price of natural gas or electricity under its fixed-price or price-protected program contracts for a period of up to five years, Just Energy's customers offset their exposure to changes in the price of these essential commodities. Just Energy, which commenced business in 1997, derives its margin or gross profit from the difference between the price at which it is able to sell the commodities to its customers and the matched term price at which it purchases the associated volumes from its suppliers. Just Energy also offers "green" products through its JustGreen and JustClean programs. The electricity JustGreen product offers the customer the option of having all or a portion of his or her electricity sourced from renewable green sources such as wind, run of the river hydro or biomass. The gas JustGreen product offers carbon offset credits which will allow the customer to reduce or eliminate the carbon footprint of their home or business.

JustClean products are essentially carbon offsets from carbon capture and reduction projects as well as green power renewable energy certificates from green generators. This product can be offered in all states and provinces and is not dependent on energy deregulation. Management believes that the green products will not only add to profits, but also increase sales receptivity and improve renewal rates.

In addition, through National Home Services, Just Energy sells and rents high efficiency and tankless water heaters, air conditioners and furnaces to Ontario residents. Through its subsidiary Terra Grain Fuels, Just Energy produces and sells wheat-based ethanol. Just Energy has also launched, Hudson Solar, a solar project development platform in New Jersey.

Forward-Looking Statements

Just Energy's press releases may contain forward-looking statements including statements pertaining to customer revenues and margins, customer additions and renewals, customer attrition, customer consumption levels, administrative expenses, Base EBITDA, adjusted EBITDA 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, rates of customer attrition, 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 Just Energy's operations, financial results or dividends are included in Just Energy's annual information form and other reports on file with Canadian securities regulatory authorities which can be accessed through the SEDAR website at www.sedar.com or through Just Energy's website at www.justenergygroup.com.

MANAGEMENT'S DISCUSSION AND ANALYSIS ("MD&A") – November 7, 2011

Overview

The following discussion and analysis is a review of the financial condition and results of operations of Just Energy Group Inc. ("JEGI" or "Just Energy" or the "Company") (formerly Just Energy Income Fund (the "Fund")) for the three and six months ended September 30, 2011, and has been prepared with all information available up to and including November 7, 2011. The financial information contained herein has been prepared in accordance with International Financial Reporting Standards ("IFRS"), as issued by the International Accounting Standards Board. Just Energy's date of transition to IFRS was April 1, 2010. This analysis should be read in conjunction with the unaudited consolidated financial statements for the three and six months ended September 30, 2011 as well as the interim financial statements and MD&A for the three months ended June 30, 2011 as these documents include additional disclosure related to the transition to IFRS. All dollar amounts are expressed in Canadian dollars. Quarterly reports, the annual report and supplementary information can be found on Just Energy's corporate website at www.justenergygroup.com. Additional information can be found on SEDAR at www.sedar.com.

Effective January 1, 2011, Just Energy completed the conversion from the Fund to Just Energy (the "Conversion"). As part of the Conversion, Just Energy Exchange Corp. ("JEEC") was amalgamated with JEGI and, like the unitholders of the Fund, the holders of JEEC's Exchangeable Shares received common shares of JEGI on a one for one basis. JEGI also assumed all of the obligations under the $90m convertible debentures and $330m convertible debentures.

Just Energy is a corporation established under the laws of Canada and holds securities and distributes the income of its directly or indirectly owned operating subsidiaries and affiliates: Just Energy Ontario L.P., Just Energy Manitoba L.P., Just Energy Quebec L.P., Just Energy (B.C.) Limited Partnership, Just Energy Alberta L.P., Alberta Energy Savings L.P. ("AESLP"), Just Energy Illinois Corp., Just Energy New York Corp., Just Energy Indiana Corp., Just Energy Texas L.P., Just Energy Massachusetts Corp., Just Energy Michigan Corp., Just Energy Pennsylvania Corp., Universal Energy Corporation, Commerce Energy Inc. ("Commerce" or "CEI"), National Energy Corporation (which operates under the trade name of National Home Services ("NHS")), Hudson Energy Services, LLC and Hudson Energy Canada Corp. (collectively "Hudson" or "HES"), Momentis Canada Corp. and Momentis U.S. Corp. (collectively, "Momentis"), Terra Grain Fuels, Inc. ("TGF"), Hudson Energy Solar Corp ("Hudson Solar") and Just Energy Limited ("JEL").

Just Energy's business primarily involves the sale of natural gas and/or electricity to residential and commercial customers under long-term fixed-price, price-protected or variable-priced contracts and green energy products. By fixing the price of natural gas or electricity under its fixed-price or price-protected program contracts for a period of up to five years, Just Energy's customers offset their exposure to changes in the price of these essential commodities. Variable rate products allow customers to maintain competitive rates while retaining the ability to lock into a fixed price at their discretion. Just Energy, which commenced business in 1997, derives its margin or gross profit from the difference between the price at which it is able to sell the commodities to its customers and the related price at which it purchases the associated volumes from its suppliers.

Just Energy also offers green products through its JustGreen and JustClean programs. The electricity JustGreen product offers customers the option of having all or a portion of their electricity sourced from renewable green sources such as wind, run of the river hydro or biomass. The gas JustGreen product offers carbon offset credits which allows customers to reduce or eliminate the carbon footprint of their home or business. JustClean products allow customers in certain jurisdictions to offset their carbon footprint without purchasing commodity from Just Energy. JustClean can be offered in all states and provinces and is not dependent on energy deregulation. Management believes that the JustGreen and JustClean products will not only add to profits, but also increase sales receptivity and improves renewal rates.

In addition, through National Home Services, Just Energy sells and rents high efficiency and tankless water heaters, air conditioners and furnaces to Ontario residents. Through its subsidiary Terra Grain Fuels, Just Energy produces and sells wheat-based ethanol. Just Energy has also recently launched, Hudson Solar, a solar project development platform in New Jersey.

On October 3, 2011, Just Energy completed the acquisition of Fulcrum Retail Holdings LLC ("Fulcrum") with an effective date of October 1, 2011. Fulcrum is a retail electricity provider operating in Texas and focuses on residential and small to mid-size commercial customers. Fulcrum markets primarily online and through targeted affinity marketing channels under the brands, Tara Energy, Amigo Energy and Smart Prepaid Electric. Although the acquisition was completed subsequent to September 30, 2011, the financing for the acquisition was completed on September 22, 2011. Just Energy used the proceeds from the issuance of $100 million of convertible unsecured subordinated debentures, which bear interest at a rate of 5.75% per annum payable in arrears on March 31 and September 30 each year commencing March 31, 2012, to fund the Fulcrum acquisition and for other general corporate purposes.

Forward-looking information

This MD&A contains certain forward-looking information pertaining to customer additions and renewals, customer consumption levels, EBITDA, Base EBITDA, Adjusted EBITDA 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, extreme weather conditions, rates of customer additions and renewals, customer attrition, fluctuations in natural gas and electricity prices, changes in regulatory regimes, decisions by regulatory authorities and competition, and dependence on certain suppliers. Additional information on these and other factors that could affect Just Energy's operations, financial results or distribution levels are included in the June 20, 2011 Annual Information Form and other reports on file with Canadian security regulatory authorities, which can be accessed on our corporate website at www.justenergygroup.com or through the SEDAR website at www.sedar.com.

Key terms

"Attrition" means customers whose contracts were terminated early or cancelled by Just Energy due to delinquent accounts.

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

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

"$90m convertible debentures" represents the $90 million of convertible debentures issued by Universal Energy Group Ltd. ("Universal") in October 2007. JEEC assumed the obligations of the debentures as part of the Universal acquisition on July 1, 2009. Just Energy assumed the obligations of the debentures as part of the Conversion. See "Long-term debt and financing" on page 22 for further details.

"$100m convertible debentures" represents the $100 million of convertible debentures issued by the Company to finance the purchase of Fulcrum Retail Holdings LLC, effective October 1, 2011. See "Long-term debt and financing" on page 22 for further details.

"$330m convertible debentures" represents the $330 million of convertible debentures issued by Just Energy Income Fund to finance the purchase of Hudson, effective May 1, 2010. Just Energy assumed the obligations of the debentures as part of the Conversion. See "Long-term debt and financing" on page 22 for further details.

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

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

"Large commercial customer" means customers representing more than 15 RCEs.

Non-GAAP financial measures

Just Energy's financial statements are prepared in compliance with IFRS. All non-GAAP financial measures do not have standardized meanings prescribed by IFRS and are therefore unlikely to be comparable to similar measures presented by other issuers.

Just Energy converted from an income trust to a corporation on January 1, 2011. Under the corporate structure, management believes that Adjusted EBITDA is the best basis for analyzing the financial results of Just Energy.

EBITDA

"EBITDA" represents earnings before finance costs, taxes, depreciation and amortization. This is a non-GAAP measure which reflects the pre-tax profitability of the business.

Base EBITDA

"Base EBITDA" represents EBITDA adjusted to exclude the impact of mark to market gains (losses) arising from IFRS requirements for derivative financial instruments on future supply positions. This measure reflects operating profitability as mark to market gains (losses) are associated with supply already sold at future fixed prices.

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

Adjusted EBITDA

"Adjusted EBITDA" represents Base EBITDA adjusted to deduct selling and marketing costs sufficient to maintain existing levels of gross margin and maintenance capital expenditures necessary to sustain existing operations. This adjustment results in the exclusion of the marketing that Just Energy carried out and the capital expenditures that it had made to add to its future productive capacity. Management believes this is a useful measure of operating performance for investors.

Embedded gross margin

"Embedded gross margin" is a rolling five-year measure of management's estimate of future contracted gross margin. It is the difference between existing customer contract prices and the cost of supply for the remainder of term, with appropriate assumptions for customer attrition and renewals. It is assumed that expiring contracts will be renewed at target margin and renewal rates.

Financial highlights
For the three months ended September 30
(thousands of dollars, except where indicated and per unit/share amounts)
Fiscal 2012 Fiscal 2011
Per share Per share change Per unit
Sales $ 600,043 $ 4.26 (11 ) % $ 657,878 $ 4.78
Gross margin 102,561 0.73 4 % 96,719 0.70
Administrative expenses 28,774 0.20 8 % 25,963 0.19
Finance costs 14,340 0.10 9 % 12,8233 0.09
Net loss1 (3,494 ) (0.02 ) (97 ) % (133,436 ) (0.97 )
Dividends/distributions 43,691 0.31 0 % 42,276 0.31
Base EBITDA2 38,604 0.27 20 % 31,441 0.23
Adjusted EBITDA2 47,894 0.34 25 % 37,497 0.27
Payout ratio on Base EBITDA 113 % 134 %
Payout ratio on Adjusted EBITDA 91 % 113 %
For the six months ended September 30
(thousands of dollars, except where indicated and per unit/share amounts)
Fiscal 2012 Fiscal 2011
Per share Per share change Per unit
Sales $ 1,226,243 $ 8.72 (5 ) % $ 1,267,562 $ 9.21
Gross margin 196,822 1.40 9 % 177,074 1.29
Administrative expenses 57,058 0.41 2 % 54,804 0.40
Finance costs 28,132 0.20 21 % 22,7603 0.17
Net income1 47,638 0.34 (66 ) % 137,353 1.00
Dividends/distributions 87,296 0.62 0 % 84,346 0.62
Base EBITDA2 68,471 0.49 26 % 53,239 0.39
Adjusted EBITDA2 85,325 0.61 24 % 67,223 0.49
Payout ratio on Base EBITDA 127 % 158 %
Payout ratio on Adjusted EBITDA 102 % 125 %
1Net income (loss) includes the impact of unrealized gains (losses), which represent the mark to market of future commodity supply acquired to cover future customer demand. The supply has been sold to customers at fixed prices, minimizing any realizable impact of mark to market gains and losses.
2See discussion of Non-GAAP financial measures on page 2.
3Excludes distributions paid to holders of exchangeable shares and equivalents prior to Conversion included as finance costs under IFRS.

International Financial Reporting Standards

Just Energy has adopted IFRS as the basis for reporting its financial results commencing with the interim financial statements of fiscal 2012 and using April 1, 2010 as the transition date. The comparative figures for fiscal 2011 have been restated in accordance with the Company's IFRS accounting policies. The interim financial statements and MD&A for the three months ended June 30, 2011 includes additional disclosure relating to the transition to IFRS and therefore, should be read in conjunction with the MD&A and financial statements for the three and six months ended September 30, 2011.

Operations

Natural gas

Just Energy offers natural gas customers a variety of products ranging from month-to-month variable-price offerings to five-year fixed-price contracts. For fixed-price contracts, Just Energy purchases gas supply through physical or financial transactions with market counterparts in advance of marketing, based on forecast customer aggregation for residential and small commercial customers. For larger commercial customers, gas supply is generally purchased concurrently with the execution of a contract.

The LDC provides historical customer usage which, when normalized to average weather, enables Just Energy to purchase the expected normal customer load. Furthermore, Just Energy mitigates exposure to weather variations through active management of the gas portfolio, which involves, but is not limited to, the purchase of options including weather derivatives. Just Energy's ability to mitigate weather effects is limited by the severity of weather from normal. To the extent that balancing requirements are outside the forecast purchase, Just Energy bears the financial responsibility for fluctuations in customer usage. Volume variances may result in either excess or short supply. In the case of under consumption by the customer, excess supply is sold in the spot market resulting in either a gain or loss compared to the weighted average cost of supply. Further, customer margin is normally lower with such a decrease in consumption. In the case of greater than expected gas consumption, Just Energy must purchase the short supply in the spot market resulting in either a gain or loss compared to the weighted average cost of supply. Consequently, customer margin can increase with this increase in consumption. To the extent that supply balancing is not fully covered through active management or the options employed, Just Energy's customer gross margin may be reduced or increased depending upon market conditions at the time of balancing. Under some commercial contract terms, this balancing may be passed onto the customer.

Ontario, Quebec, British Columbia and Michigan

In Ontario, Quebec, British Columbia and Michigan, the volumes delivered for a customer typically remain constant throughout the year. Just Energy does not recognize sales until the customer actually consumes the gas. During the winter months, gas is consumed at a rate that is greater than delivery and, in the summer months, deliveries to LDCs exceed customer consumption. Just Energy receives cash from the LDCs as the gas is delivered, which is even throughout the year.

Manitoba, Alberta and Saskatchewan

In Manitoba, Alberta and Saskatchewan, the volume of gas delivered is based on the estimated consumption for each month. Therefore, the amount of gas delivered in winter months is higher than in the spring and summer months. Consequently, cash received from customers and LDCs will be higher in the winter months.

New York, Illinois, Indiana, Ohio, California and Pennsylvania

In New York, Illinois, Indiana, Ohio, California and Pennsylvania, the volume of gas delivered is based on the estimated consumption and storage requirements for each month. Therefore, the amount of gas delivered in winter months is higher than in the spring and summer months. Consequently, cash flow received from these states is greatest during the third and fourth (winter) quarters, as cash is normally received from the LDCs in the same period as customer consumption.

Electricity

In Ontario, Alberta, New York, Texas, Illinois, Pennsylvania, New Jersey, Maryland, Michigan, California and Massachusetts, Just Energy offers a variety of solutions to its electricity customers, including fixed-price and variable-price products on both short-term and longer-term electricity contracts. Some of these products provide customers with price-protection programs for the majority of their electricity requirements. The customers experience either a small balancing charge or credit (pass-through) on each bill due to fluctuations in prices applicable to their volume requirements not covered by a fixed price. Just Energy uses historical usage data for all enrolled customers to predict future customer consumption and to help with long-term supply procurement decisions.

Just Energy purchases power supply through physical or financial transactions with market counterparties in advance of marketing for residential and small commercial customers based on forecast customer aggregation. Power supply is generally purchased concurrently with the execution of a contract for larger commercial customers. The LDC provides historical customer usage which, when normalized to average weather, enables Just Energy to purchase to expected normal customer load. Furthermore, Just Energy mitigates exposure to weather variations through active management of the power portfolio. The expected cost of this strategy is incorporated into the price to the customer. Our ability to mitigate weather effects is limited by the severity of weather from normal. To the extent that balancing requirements are outside the forecast purchase, Just Energy bears the financial responsibility for excess or short supply caused by fluctuations in customer usage. In the case of under consumption by the customer, excess supply is sold in the spot market resulting in either a gain or loss in relation to the original cost of supply. Further, customer margin is normally lower as a result of the decrease in consumption. In the case of greater than expected power consumption, Just Energy must purchase the short supply in the spot market resulting in either a gain or loss in relation to the fixed cost of supply. Customer margin generally increases proportionately to the increase in consumption. To the extent that supply balancing is not fully covered through customer pass-throughs or active management or the options employed, Just Energy's customer gross margin may be impacted depending upon market conditions at the time of balancing.

JustGreen

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

JustGreen programs for electricity customers involve the purchase of power from green generators (such as wind, solar, run of the river hydro or biomass) via power purchase agreements and renewable energy certificates. JustGreen programs for gas customers involve the purchase of carbon offsets from carbon capture and reduction projects.

JustClean

In addition to its traditional commodity marketing business, Just Energy allows customers to effectively manage their carbon footprint without buying energy commodity products by signing a JustClean contract. The JustClean products are carbon offsets purchased from carbon capture and reduction projects as well as green power renewable energy certificates purchased from green generators. This product can be offered in all states and provinces and is not dependent on energy deregulation.

Blend and Extend program

As part of Just Energy's retention efforts, electricity and natural gas customers may be contacted for early renewal of their contracts under a Blend and Extend offer. These customers are offered a lower rate, compared to their current contracted rate, but the term of their contract is extended up to five more years. Consequently, Just Energy may experience a reduction in margins in the short term but will gain additional future margins.

Consumer (Residential) Energy division

The sale of gas and electricity to customers of 15 RCEs and less is undertaken by the Consumer Energy division. The marketing of energy products of this division is primarily done door-to-door through 860 independent contractors, the Momentis network marketing operation and Internet-based and telephone marketing efforts. The total number of independent contractors increased during the quarter as a result of the expansion of sales efforts in existing offices. Approximately 56% of Just Energy's customer base resides within the Consumer Energy division, which is currently focused on longer-term price-protected and variable offerings of commodity products, JustGreen and JustClean. To the extent that certain markets are better served by shorter-term or enhanced variable rate products, the Consumer Energy independent contractors also offer these products.

Commercial Energy division

Customers with annual consumption over 15 RCEs are served by the Commercial Energy division. These sales are made through three main channels: door-to-door commercial independent contractors; inside commercial sales representatives; and sales through the broker channel using the commercial platform acquired with the Hudson purchase. Commercial customers make up about 44% of Just Energy's customer base. Products offered to commercial customers can range from standard fixed price offerings to "one off" offerings, which are tailored to meet the customer's specific needs. These products can be either fixed or floating rate or a blend of the two, and normally have terms of less than five years. Margin per RCE for this division is lower than residential margins but customer aggregation costs and ongoing customer care costs are lower as well on a per RCE basis. Commercial customers tend to have combined attrition and failed-to-renew rates which are lower than those of residential customers.

Home Services division

NHS began operations in April 2008 and provides Ontario residential customers with a long-term water heater, furnace and air conditioning rental, offering high efficiency conventional and power vented tanks and tankless water heaters and high efficiency furnaces and air conditioners. NHS markets through approximately 260 independent contractors in Ontario. See page 15 for additional information.

Ethanol division

Just Energy owns and operates TGF, a 150-million-litre capacity wheat-based ethanol plant located in Belle Plaine, Saskatchewan. The plant produces wheat-based ethanol and high protein distillers' dried grain ("DDG"). On January 4, 2011, Just Energy acquired the 33.3% interest in TGF that was previously owned by EllisDon Design Build Inc. ("EllisDon") pursuant to a put option exercised by EllisDon. See page 16 for additional information on TGF.

Network Marketing division

Just Energy owns and operates Momentis, a network marketing company operating within Canada and the U.S. Independent representatives educate consumers about the benefits of energy deregulation and sell them products offered by Just Energy as well as a number of other products. Independent representatives are rewarded through commissions earned based on new customers added. For the three months ended September 30, 2011, there were 6,200 independent representatives added, bringing the total number to 11,100.

Solar division

Hudson Solar, a solar project development platform in New Jersey, brings renewable energy directly to the consumer, enabling them to reduce their environmental impact and energy costs. Hudson Solar installs solar systems on residential or commercial sites, maintaining ownership of the system and providing maintenance and monitoring of the system for a period of up to 20 years. Hudson Solar sells the energy generated by the solar panels back to the customer. This division will contribute to operating metrics through commodity sales, renewable energy credit offset sales and tax incentives. To date, the division has made commitments of approximately $35 million with the status of the associated projects ranging from contracted to completed.

Adjusted EBITDA
For the three months ended September 30
(thousands of dollars)
Fiscal 2012 Fiscal 2011
Per share Per unit
Reconciliation to income statement
Profit (loss) attributable to shareholders of Just Energy $ (3,494 ) $ (0.02 ) $ (133,733 ) $ (0.97 )
Add (subtract):
Finance costs 14,340 15,605
Provision for (recovery of) income tax 14,925 (95,203 )
Capital tax - 26
Amortization 37,729 40,610
EBITDA $ 63,500 $ 0.45 $ (172,695 ) $ (1.25 )
Add (subtract):
Change in fair value of derivative instruments (24,896 ) 204,136
Base EBITDA 38,604 $ 0.27 31,441 $ 0.23
Add (subtract):
Selling and marketing expenses to add gross margin 10,342 7,689
Maintenance capital expenditures (1,052 ) (1,633 )
Adjusted EBITDA $ 47,894 $ 0.34 $ 37,497 $ 0.27
Adjusted EBITDA
Gross margin per financial statements $ 102,561 $ 0.73 $ 96,719 $ 0.70
Add (subtract):
Administrative expenses (28,774 ) (25,963 )
Selling and marketing expenses (35,302 ) (36,950 )
Bad debt expense (6,451 ) (6,694 )
Stock based compensation (2,925 ) (2,573 )
Amortization included in cost of sales/selling and marketing expenses 6,661 6,463
Other income/expenses 2,834 439
Base EBITDA 38,604 $ 0.27 31,441 $ 0.23
Selling and marketing expenses to add gross margin 10,342 7,689
Maintenance capital expenditures (1,052 ) (1,633 )
Adjusted EBITDA $ 47,894 $ 0.34 $ 37,497 $ 0.27
Distributions/dividends paid
Distributions and dividends $ 42,722 $ 39,756
Class A preference share distributions - 1,632
Restricted share grants/unit appreciation rights and deferred share grant/deferred unit grant distributions 969 888
Total distributions/dividends $ 43,691 $ 0.31 $ 42,276 $ 0.31
Adjusted fully diluted average number of units/shares outstanding1 140.9m 137.7m
1The per share/unit amounts are calculated on an adjusted fully diluted basis, removing the impact of the $330m, $100m and $90m convertible debentures as all will be anti-dilutive in future periods.
Adjusted EBITDA
For the six months ended September 30
(thousands of dollars)
Fiscal 2012 Fiscal 2011
Per share Per unit
Reconciliation to income statement
Profit attributable to shareholders of Just Energy $ 47,638 $ 0.34 $ 139,676 $ 1.01
Add (subtract):
Finance costs 28,132 28,360
Provision for (recovery of) income tax 22,146 (57,745 )
Capital tax - 159
Amortization 75,148 74,200
EBITDA $ 173,064 $ 1.23 $ 184,650 $ 1.34
Subtract:
Change in fair value of derivative instruments (104,593 ) (131,411 )
Base EBITDA 68,471 $ 0.49 53,239 $ 0.39
Add (subtract):
Selling and marketing expenses to add gross margin 20,473 17,070
Maintenance capital expenditures (3,619 ) (3,086 )
Adjusted EBITDA $ 85,325 $ 0.61 $ 67,223 $ 0.49
Adjusted EBITDA
Gross margin per financial statements $ 196,822 $ 1.40 $ 177,074 $ 1.29
Add (subtract):
Administrative expenses (57,058 ) (54,804 )
Selling and marketing expenses (69,856 ) (66,708 )
Bad debt expense (13,265 ) (12,443 )
Stock based compensation (4,606 ) (4,583 )
Amortization included in cost of sales/selling and marketing expenses 13,435 10,961
Other income/expenses 2,999 3,742
Base EBITDA 68,471 $ 0.49 53,239 $ 0.39
Selling and marketing expenses to add gross margin 20,473 17,070
Maintenance capital expenditures (3,619 ) (3,086 )
Adjusted EBITDA $ 85,325 $ 0.61 $ 67,223 $ 0.49
Distributions/dividends paid
Distributions and dividends $ 85,242 $ 79,348
Class A preference share distributions - 3,264
Restricted share grants/unit appreciation rights and deferred share grant/deferred unit grant distributions 2,054 1,734
Total distributions/dividends $ 87,296 $ 0.62 $ 84,346 $ 0.62
Adjusted fully diluted average number of units/shares outstanding1 140.6 m 137.5m
1The per share/unit amounts are calculated on an adjusted fully diluted basis, removing the impact of the $330m, $100m and $90m convertible debentures as all will be anti-dilutive in future periods.

Base EBITDA differs from EBITDA in that the impact of the mark to market gains (losses) from the financial instruments is removed as management believes that these short-term mark to market non-cash gains (losses) do not impact the long-term financial performance. For Adjusted EBITDA, selling and marketing expenses used for increasing gross margin are also removed along with maintenance capital expenditures being deducted. With the conversion from an income trust to a corporation effective January 1, 2011, management believes that Adjusted EBITDA is the best measure of operating performance.

Adjusted EBITDA amounted to $47.9 million ($0.34 per share) in the second quarter of fiscal 2012, an increase of 25% per share/unit from $37.5 million ($0.27 per unit) in the prior comparable quarter. This increase is attributable to the increase in gross margin as well as higher other income quarter over quarter. Gross margin increased 6% overall with higher margin contribution from NHS and TGF as gross margin attributable to gas and electricity marketing stayed constant quarter over quarter.

Administrative expenses increased by 11% from $26.0 million to $28.8 million quarter over quarter but were in line with the amount recorded in the previous two quarters. The increase over the prior comparable quarter was due to a one-time expense reduction in the prior comparative period as well as the additional $0.7 million spent on the expansion of Momentis, our network marketing sales channel, and Hudson Solar. Selling and marketing expenses for the three months ended September 30, 2011 were $35.3 million, a 4% decrease from $37.0 million reported in the prior comparative quarter. The sales and marketing expenses representing the costs associated with maintaining gross margin, which are deducted in Adjusted EBITDA, were $21.3 million for the three months ended September 30, 2011, a decrease of 15% from $25.1 million in the prior comparable quarter. Bad debt expense was $6.5 million for the three months ended September 30, 2011, a 4% decrease from $6.7 million recorded for the prior comparable quarter. In addition, other income/expense increased from $0.4 million to $2.8 million as a result of the hedging gain on the investment of the proceeds from the issuance of the $100m convertible debentures.

Dividends and distributions paid for the three months ended September 30, 2011 were $43.7 million, an increase of 3% from the prior comparative quarter as a result of the dividends paid to JEEC shareholders being only 66.67% of that which was paid to JEGI shareholders and a higher number of shares versus units outstanding. The payout ratio on Base EBITDA was 113% for the three months ended September 30, 2011, versus 134% in the prior comparative quarter. For the three months ended September 30, 2011, the payout ratio on Adjusted EBITDA was 91%, versus 113% in the prior comparative quarter.

For the six months ended September 30, 2011, Adjusted EBITDA amounted to $85.3 million ($0.61 per share), an increase of 27% (24% per share/unit) from $67.2 million ($0.49 per unit) in the prior comparable period. For the current six-month-period, gross margin increased by 11% (9% per share/unit). Dividends and distributions for the six months ended September 30, 2011 were $87.3 million ($0.62 per share), an increase of 3% from the prior comparative period. The payout ratio on Base EBITDA was 127% for the six months ended September 30, 2011, versus 158% in the prior comparative quarter. For the six months ended September 30, 2011, the payout ratio on Adjusted EBITDA was 102%, versus 125% in the prior comparative quarter.

For further information on the changes in the gross margin, please refer to "Gas and electricity marketing" on page 10 and "Administrative expenses", "Selling and marketing expenses", "Bad debt expense" and "Finance costs", which are further clarified on pages 17 through 19.

Future embedded gross margin

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

(millions of dollars) As at Sept. 30, 2011 As at June 30, 2011 Sept. 11 vs. June 11 Variance As at Sept. 30, 2010 Sept. 11 vs. Sept. 10 Variance
Canada (CAD$) $ 603.9 $ 622.1 (3 )% $ 708.8 (15 )%
United States (US$) 866.7 851.3 2 % 778.8 11 %
Total (CAD$) 1,512.4 1,443.1 5 % 1,510.9 -

Management's estimate of the future contracted gross margin amounted to $1,512.4 million at as September 30, 2011, an increase of 5% during the quarter. The future embedded gross margin for Canada decreased by 3% from $622.1 million at June 30, 2011 to $603.9 million at September 30, 2011. The embedded margins in Canada declined over the three months due to a challenging price environment for renewals and new customer additions resulting in a net customer loss of 4% during the quarter. This decline was offset by the 2% growth in U.S. future embedded gross margin from $851.3 million to $866.7 million. The growth in embedded margins is less than Just Energy's growth in customer base because commercial customers, which make up a growing percentage of new additions, have lower margins and shorter contract terms than residential customers. However, the commercial customer base also results in lower customer aggregation costs and lower annual customer servicing costs, which are not captured in embedded margin. The embedded margin calculation includes the future margin associated with the energy marketing divisions only. Any future embedded margin associated with NHS, TGF or Hudson Solar is excluded from the embedded margin outlined above.

The U.S. dollar strengthened against the Canadian dollar during the quarter, resulting in an increase of $72.5 million in total future embedded gross margin.

Summary of quarterly results
(thousands of dollars, except per unit/share amounts)
Fiscal 2012 Fiscal 2012 Fiscal 2011 Fiscal 2011
Q2 Q1 Q4 Q3
Sales $ 600,043 $ 626,200 $ 941,334 $ 744,296
Gross margin 102,561 94,261 172,404 132,084
Administrative expenses 28,774 28,284 28,367 26,299
Finance costs 14,340 13,792 13,646 15,6792
Net income (loss) (3,494 ) 51,132 37,119 178,468
Net income (loss) per unit/share – basic (0.03 ) 0.37 0.27 1.41
Net income (loss) per unit/share – diluted (0.03 ) 0.35 0.23 1.16
Dividends/distributions paid 43,691 43,605 43,208 42,450
Base EBITDA 38,604 29,867 109,282 68,823
Adjusted EBITDA 47,894 37,431 114,934 76,800
Payout ratio on Base EBITDA 113 % 146 % 40 % 62 %
Payout ratio on Adjusted EBITDA 91 % 116 % 38 % 55 %
Fiscal 2011 Fiscal 2011 Fiscal 2010 Fiscal 2010
Q2 Q1 Q41 Q31
Sales $ 657,878 $ 609,684 $ 838,596 $ 629,966
Gross margin 96,719 80,355 155,815 111,947
Administrative expenses 25,963 28,841 22,405 24,767
Finance costs 12,8232 9,9372 5,565 5,143
Net income (loss) (133,436 ) 270,789 (79,211 ) 97,390
Net income (loss) per unit – basic (1.07 ) 2.19 (0.59 ) 0.73
Net income (loss) per unit – diluted (1.07 ) 1.78 (0.59 ) 0.73
Distributions paid 42,276 42,070 68,1613 41,248
Base EBITDA 31,441 21,798 107,036 58,543
Adjusted EBITDA 37,497 29,726 108,962 60,564
Payout ratio on Base EBITDA 134 % 193 % 64 % 70 %
Payout ratio on Adjusted EBITDA 113 % 142 % 63 % 68 %
1Quarterly information prepared using Canadian GAAP as prior to IFRS transition date.
2Excludes distributions paid to holders of exchangeable shares prior to Conversion included as finance costs under IFRS.
3Includes special distribution of $26.7 million paid in January 2010.

Just Energy's results reflect seasonality, as consumption is greatest during the third and fourth quarters (winter quarters). While year over year quarterly comparisons are relevant, sequential quarters will vary materially. The main impact of this will be higher Base and Adjusted EBITDA and lower payout ratios in the third and fourth quarters, and lower Base and Adjusted EBITDA and higher payout ratios in the first and second quarters.

Analysis of the second quarter

Sales decreased by 9% quarter over quarter to $600.0 million from $657.9 million. Sales from gas and electricity marketing decreased by 11% quarter over quarter primarily as a result of lower commodity prices. This decrease was slightly offset by higher sales for NHS and TGF. Gross margin increased by 6% quarter over quarter due t o an increase in margin contribution from NHS and TGF. Gross margin from gas and electricity marketing did not materially change in comparison with the second quarter of fiscal 2011 as the margin was impacted by the increase in the number of commercial and variable rate customers quarter over quarter.

Net loss for the three months ended September 30, 2011 was $3.5 million, representing a loss per share of $0.03, on a basic and diluted basis. For the prior comparative quarter, net loss was $133.7 million, representing a loss of $1.07, both on a basic and diluted per unit basis. The change in fair value of derivative instruments resulted in a gain of $24.9 million for the current quarter, in comparison with a loss of $204.1 million in the second quarter of the prior fiscal year. The fair value of derivative instruments represents the mark to market of future commodity supply acquired to cover future customer demand. The supply has been sold to customers at future fixed prices, minimizing any realizable impact of mark to market gains and losses.

Adjusted EBITDA increased by 28% to $47.9 million for the three months ended September 30, 2011. This increase is attributable to the increase in gross margin and other income and lower sales and marketing costs. Base EBITDA (after all selling and marketing costs) increased by 23% (20% per share/unit) to $38.6 million for the three months ended September 30, 2011, up from $31.4 million in the prior comparable quarter.

Dividends/distributions paid were $43.7 million, a 3% increase from $42.3 million paid in the prior comparative quarter. The increase is due to the increase in outstanding shares as the annual dividend/distribution rate was unchanged at $1.24 per year. In the prior year, JEEC exchangeable shares were paid dividends equal to 66.67% of the Fund's distributions. These shares have now been exchanged for JEGI common shares and receive the $1.24 annual dividends. Payout ratio on Adjusted EBITDA was 91% for the three months ended September 30, 2011, compared with 113% in the prior comparable quarter.

Gas and electricity marketing
For the three months ended September 30
(thousands of dollars)
Fiscal 2012 Fiscal 2011
United United
Sales Canada States Total Canada States Total
Gas $54,406 $37,399 $91,805 $77,614 $55,927 $133,541
Electricity 125,662 335,972 461,634 165,578 322,075 487,653
$180,068 $373,371 $553,439 $243,192 $378,002 $621,194
Decrease (26)% (1)% (11)%
United United
Gross Margin Canada States Total Canada States Total
Gas $7,378 $2,183 $9,561 $2,936 $(461) $2,475
Electricity 19,469 59,023 78,492 27,805 57,901 85,706
$26,847 $61,206 $88,053 $30,741 $57,440 $88,181
Increase (decrease) (13)% 7% 0%
Gas and electricity marketing
For the six months ended September 30
(thousands of dollars)
Fiscal 2012 Fiscal 2011
United United
Sales Canada States Total Canada States Total
Gas $177,684 $116,571 $294,255 $207,329 $128,975 $336,304
Electricity 245,711 601,270 846,981 326,208 546,989 873,197
$423,395 $717,841 $1,141,236 $533,537 $675,964 $1,209,501
Increase (decrease) (21)% 6% (6)%
United United
Gross Margin Canada States Total Canada States Total
Gas $24,225 $10,441 $34,666 $15,067 $4,823 $19,890
Electricity 37,939 100,570 138,509 53,801 94,671 148,472
$62,164 $111,011 $173,175 $68,868 $99,494 $168,362
Increase (decrease) (10)% 12% 3%

Sales for the three months ended September 30, 2011 were $553.4 million, a decrease of 11% from $621.2 million in the prior comparable quarter. The sales decline was the result of a gradual reduction in average price within the customer base as new customers signed and customer renewals are at much lower prices than that of customers expiring or lost through attrition. Gross margins were $88.1 million for the quarter, in line with the $88.2 million earned during the three months ended September 30, 2010. The margin was flat quarter over quarter despite an 8% increase in customers reflecting the increase in the number of commercial and variable rate customers in the past year, which are replacing higher-margin customers lost through attrition and failure to renew.

For the six months ended September 30, 2011, sales were $1,141.2 million, a decrease of 6% from $1,209.5 million reported in the prior comparable period. Gross margin was $173.2 million for the six months ended September 30, 2011, an increase of 3% from $168.4 million earned in the first half of fiscal 2010.

Canada

Sales were $180.1 million for the three months ended September 30, 2011, down 26% from $243.2 million in the prior comparable quarter. Gross margins were $26.8 million in the second quarter, a decrease of 13% from $30.7 million in the prior comparable period. For the six months ended September 30, 2011, sales and gross margin were $423.4 million and $62.2 million, respectively, representing decreases of 21% in sales and 10% in gross margin over the comparative period of fiscal 2011. The number of long-term customers in Canada has decreased by 10% during the past year.

Gas

Canadian gas sales were $54.4 million, a decrease of 30% from $77.6 million in the three months ended September 30, 2010. This decrease is a result of the Canadian gas customer base falling by 13% year over year as well as the decline in commodity prices reflected in recent contract offerings. Gross margin totalled $7.4 million, up 151% from the prior comparative quarter despite the customer decline. The prior comparable quarter included significant losses on the sale of excess gas at low spot prices from the warm winter experienced in fiscal 2010.

For the six months ended September 30, 2011, sales amounted to $177.7 million, a decrease of 14% from $207.3 million recorded in the prior comparable period due to the declining customer base. Gross margin increased by 61% from $15.1 million to $24.2 million as a result of the losses on the sale of excess gas experienced in the prior comparative period.

After allowance for balancing and inclusive of acquisitions, realized average gross margin per customer ("GM/RCE") for the rolling 12-months ended September 30, 2011, amounted to $176/RCE compared to $177/RCE for the prior comparable quarter. The GM/RCE value includes an appropriate allowance for the bad debt expense in Alberta.

Electricity

Electricity sales in Canada were $125.7 million for the three months ended September 30, 2011, a decrease of 24% from the prior comparable quarter due to an 8% decline in RCEs as well as recent product offerings being at lower prices in order to remain competitive with very low current utility prices. Gross margin decreased by 29% quarter over quarter to $19.5 million versus $27.8 million in the prior three-month period. The decrease was a result of expiring higher margin customers being replaced with new lower margin customers. The customers aggregated by the Consumer Energy division continued to underperform due to competitive pressures from low utility prices in Ontario.

For the six months ended September 30, 2011, sales amounted to $245.7 million, a decrease of 25% from $326.2 million recorded in the prior comparable period due to the declining customer base. Gross margin decreased by 29% to $37.9 million for the six months ended September 30, 2011 over the prior comparable period.

Realized average gross margin per customer in Canada after all balancing and including acquisitions for the rolling 12-months ended September 30, 2011, amounted to $114/RCE, a decrease from $143/RCE in the prior comparative period primarily due to the cumulative effect of new lower margin contracts sold to compete against the very low utility price in the Ontario market. JustGreen sales had a positive impact on margins per customer but this was more than offset by pricing required to compete against the regulated utility floating rate in Ontario. Management believes that this lower margin level will remain for the foreseeable future. The GM/RCE value includes an appropriate allowance for the bad debt expense in Alberta.

United States

Sales for the second quarter of fiscal 2012 were $373.4 million, a decrease of 1% from $378.0 million in the three months ended September 30, 2010. Gross margin was $61.2 million, up 7% from $57.4 million in the prior comparable period. For the six months ended September 30, 2011, sales increased by 6% to $717.8 million over the prior comparable period. Gross margin for the six months ended September 30, 2011 was $111.0 million, an increase of 12% from $99.5 million recorded in the prior comparable period.

Gas

For the three months ended September 30, 2011, gas sales and gross margin in the U.S. totalled $37.4 million and $2.2 million, respectively, versus $55.9 million and $(0.5) million, respectively, in the prior comparable quarter. Total gas customers remained relatively unchanged year over year. The sales decrease of 33% was the result of a gradual reduction in average price within the customer base as renewals and new customers signed are at much lower prices than that of customers expiring or lost through attrition.

Despite the 33% decline in sales, gross margin increased year over year even though the number of long-term customers remaining relatively flat year over year. In the prior comparable quarter, the U.S gas markets experienced a sharp decline in consumption due the record warm winter of fiscal 2010 and high third party losses on the sale of the excess gas. The current year reflects closer to normal weather and consumption.

For the six months ended September 30, 2011, sales amounted to $116.6 million, a decrease of 10% from $129.0 million recorded in the prior comparable period due to the change in products offered to remain competitive. Gross margin more than doubled from $4.8 million to $10.4 million for the six months ended September 30, 2011 primarily as a result of closer to normal weather and consumption versus the high losses on sale of excess gas experienced in the prior comparable period.

Average realized gross margin after all balancing costs for the rolling 12 months ended September 30, 2011, was $145/RCE, a decrease from $161/RCE. This is due to the inclusion of lower margin commercial customers offsetting the lower losses on sale of excess gas. The GM/RCE value includes an appropriate allowance for bad debt expense in Illinois and California.

Electricity

U.S. electricity sales and gross margin for the three months ended September 30, 2011 were $336.0 million and $59.0 million, respectively, versus $322.1 million and $57.9 million, in the second quarter of fiscal 2011. Sales increased 4% due to a 34% increase in long-term customers year over year, attributable to the strong marketing growth by the Commercial Energy division. Sales increased less than the increase in customers due to an increase in commercial customers and lower commodity pricing. Gross margin increased by 2% due to increase in customers being offset by the lower margins on largely commercial customers added.

For the six months ended September 30, 2011, sales amounted to $601.3 million, an increase of 10% from $547.0 million recorded in the prior comparable period. Gross margin increased from $94.7 million to $100.6 million for the six months ended September 30, 2011. Customers were up sharply but with the underperformance of the Consumer Energy division, the mix of additional commercial customers limited both sales and margin growth.

Average gross margin per customer for electricity during the current quarter decreased to $131/RCE, compared to $172/RCE in the prior comparable quarter, as a result of lower margins per RCE for commercial customers added. The GM/RCE value for Texas, Pennsylvania, Massachusetts and California includes an appropriate allowance for the bad debt expense.

Long-term customer aggregation
July 1, 2011 Additions Attrition Failed
to renew
September 30,
2011
% increase
(decrease)
Natural gas
Canada 635,000 11,000 (18,000) (31,000) 597,000 (6)%
United States 567,000 36,000 (29,000) (4,000) 570,000 1%
Total gas 1,202,000 47,000 (47,000) (35,000) 1,167,000 (3)%
Electricity
Canada 704,000 25,000 (17,000) (24,000) 688,000 (2)%
United States 1,452,000 166,000 (57,000) (13,000) 1,548,000 7%
Total electricity 2,156,000 191,000 (74,000) (37,000) 2,236,000 4%
Combined 3,358,000 238,000 (121,000) (72,000) 3,403,000 1%

Gross customer additions for the quarter were 238,000, down 6% from the 254,000 customers added through marketing in the second quarter of fiscal 2011 but up 5% from the 227,000 customers added in the first quarter. Net additions were 45,000 for the quarter, resulting in a 1% growth in the customer base for the second quarter.

Consumer customer additions amounted to 84,000, a 31% decrease from the 121,000 customer additions in the prior comparable quarter, however, an increase of 6% from 79,000 customer additions in the first quarter of fiscal 2012. The quarter over quarter decrease in customer additions is a result of the decrease in the number of independent contractors from 1,100 a year ago to 860 as a result of the challenging price environment. Management continues to diversify its sales platform beyond door-to-door sales to include network, telephone and Internet-based marketing channels and responded to the current price environment with a change in product offerings to include a variable-based product.

Commercial additions were 154,000 for the quarter, a 16% increase from the 133,000 additions recorded in the second quarter of fiscal 2011 and a 4% increase from 148,000 additions in the first quarter of fiscal 2012. The broker sales channel continues to expand across Just Energy's existing markets. Commercial additions, which consists of customers representing 15 RCEs or higher, will fluctuate quarterly depending on the size of customers signed.

Total gas customers decreased by 3% during the last three months, reflecting a difficult price environment with a large disparity between utility spot prices and the five-year prices. The extended period of low, stable gas prices has reduced the customer appetite for the stability of higher priced long-term fixed contracts. As a result, Just Energy has moved to a variety of consumer products that meet the consumer's need for stability and protection against volatility. This continues to impact new customer additions and renewals. To respond, profitable new variable rate contracts are being sold while spot market prices remain stable.

Total electricity customers were up 4% during the quarter, with a 7% growth in the U.S. markets and a 2% decrease in customers in the Canadian markets. The Canadian electricity market, particularly in Ontario, continues to face competitive challenges due to low utility pricing.

JustGreen and JustClean

Sales of the JustGreen products remain strong despite premium pricing in a low-price environment. The JustGreen program allows customers to choose to purchase units of green energy in the form of renewable energy or carbon offsets, in an effort to reduce greenhouse gas emissions. When a customer purchases a unit of green energy, it creates a contractual obligation for Just Energy to purchase a supply of green energy at least equal to the demand created by the customer's purchase. A review was conducted by Grant Thornton LLP of Just Energy's Renewable Energy and Carbon Offsets Sales and Purchases report for the period from January 1, 2010, through December 31, 2010, validating the match of Just Energy's renewable energy and carbon offset purchases against customer contracts. Just Energy will have a similar review conducted following calendar 2011. Just Energy has contracts with over 25 carbon offset and renewable energy projects across North America and is actively pursuing new projects to meet our growing demand for green energy alternatives. Just Energy purchases carbon offsets and renewable energy credits for the current and future use of our customers. Our purchases help developers finance their projects.

The Company currently sells JustGreen gas in the eligible markets of Ontario, Quebec, British Columbia, Alberta, Michigan, New York, Ohio, Illinois and Pennsylvania. JustGreen electricity is sold in Ontario, Alberta, New York, Texas and Pennsylvania. Of all consumer customers who contracted with Just Energy in the past year, 34% took JustGreen for some or all of their energy needs. On average, these customers elected to purchase 90% of their consumption as green supply. In the previous comparative period, 44% of the consumer customers who contracted with Just Energy chose to include JustGreen for an average of 88% of their consumption. Overall, JustGreen supply now makes up 9% of the overall gas portfolio, up from 3% a year ago. JustGreen supply makes up 12% of the electricity portfolio, up from 11% a year ago.

In addition, JustClean products are being offered in Ontario, Quebec and Florida. JustClean products are carbon offsets from carbon capture and reduction projects as well as green power renewable energy certificates from green generators. The JustClean product can be offered in all states and provinces and is not dependent on energy deregulation. We are actively investing to expand this product offering throughout the U.S. and Canada to new markets, both regulated and deregulated.

Attrition
Trailing 12-month attrition Trailing 12-month attrition
- September 30, 2011 - September 30, 2010
Natural gas
Canada 10% 12%
United States 21% 27%
Electricity
Canada 10% 12%
United States 14% 15%

The past year saw an improvement in attrition rates across all markets. The primary contributing factor is that most customers signed in the past three years are on prices consistent with current market prices. The attrition from these customers and eventual renewal of the customer will benefit from this pricing. In addition, improved economic conditions and diligent credit reviews have resulted in lower attrition rates as well. We expect this trend in improving attrition rates to continue.

Natural gas

The annual natural gas attrition in Canada was 10% for the trailing 12-months, lower than the 12% attrition rate reported in the prior comparable quarter. In the U.S., annual gas attrition was 21%, a decrease from 27% experienced a year prior due to new product offerings and greater economic stability within the U.S customer base.

Electricity

The annual electricity attrition rate in Canada was 10%, lower than the 12% reported in the prior comparable quarter. Electricity attrition in the U.S. was 14% for the trailing 12-months, in line with management's ongoing expectations.

Renewals
Trailing 12-month renewals Trailing 12-month renewals
- September 30, 2011 - September 30, 2010
Natural gas
Canada 63% 63%
United States 78% 78%
Electricity
Canada 56% 65%
United States 68% 89%

The Just Energy renewal process is a multifaceted program that aims to maximize the number of customers who choose to renew their contract prior to the end of their existing contract term. Efforts begin up to 15 months in advance, allowing a customer to renew for an additional four or five years. Management's targeted renewal rates are to be in the range of 70% overall, assuming commodity price volatility remains low. The combined renewal rate for all gas and electricity markets was 64% for the trailing 12-month period.

Natural gas

The current trailing annual renewal rate for all Canadian gas customers was 63%, unchanged from one year prior. In the Ontario gas market, customers who do not positively elect to renew or terminate their contract receive a one-year fixed price for the ensuing year. Of the total Canadian gas customer renewals for fiscal 2012, 33% were renewed for a one-year term. The Canadian gas market continues to be challenged in renewals largely due to the current high spread between the five-year price and the utility spot price. The long period of stable low gas prices has reduced customer interest in renewing at higher fixed prices. Just Energy has introduced some enhanced variable-price offerings and products like JustGreen and JustClean to improve renewal rates.

In the U.S. markets, Just Energy had primarily Illinois and New York gas customers up for renewal. Gas renewals for the U.S. were 78%.

Electricity

The electricity renewal rate for Canadian customers was 56% for the trailing 12 months. There continues to be solid demand for JustGreen products, supporting renewals in Canadian electricity but, due to the disparity between the spot and five-year prices and low volatility in the spot prices, customers have been reluctant to again lock into fixed-priced products. Just Energy has introduced some enhanced variable-price electricity offerings and JustClean to improve renewal rates.

During the three months ended September 30, 2011, Just Energy had Texas, Illinois and New York electricity customers up for renewal. The electricity renewal rate was 68%, with strong renewals in Texas being offset by weaker renewals in Illinois and New York. In each of these markets, our green products are being developed for renewing customers, which should strengthen the profitability and the renewal rates.

Gas and electricity contract renewals

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

Canada – gas Canada - electricity U.S. - gas U.S. - electricity
2012 13% 12% 31% 29%
2013 32% 36% 22% 15%
2014 19% 18% 11% 14%
2015 17% 11% 14% 19%
Beyond 2015 19% 23% 22% 23%
Total 100% 100% 100% 100%

All variable and month-to-month customers are included in the current period, 2012.

Just Energy continuously monitors its customer renewal rates and continues to modify its offering to existing customers in order to maximize the number of customers who renew their contracts. To the extent there is continued customer take-up on blend and extend offers, some renewals scheduled for 2012 and 2013 will move to 2015 and beyond.

Gross margin earned through new marketing efforts

Annual gross margin per customer for new and renewed customers

The table below depicts the annual margins on contracts of residential and commercial customers signed during the quarter. This table reflects all margin earned on new additions and renewals including both the brown commodity and JustGreen. Customers added through marketing or renewed were lower than the margins of customers lost through attrition or failure to renew due to the competitive price environment. However, JustGreen is being aggressively marketed for renewals, with the expectation that rates similar to those for new customers can be achieved. Sales of the JustGreen products remained strong, with approximately 34% of all residential customers added in the past 12-months taking some or all green energy supply. Customers that have purchased the JustGreen product elected, on average, to take 90% of their consumption in green supply. For large commercial customers, the average gross margin for new customers added was $85/RCE. The aggregation cost of these customers is commensurately lower per RCE than a residential customer.

Annual gross margin per customer1
Q2 fiscal
2012
Number of
customers
Residential and small commercial customers added in the quarter
- Canada – gas $ 174 7,000
- Canada - electricity 119 12,000
- United States - gas 189 26,000
- United States – electricity 157 39,000
Average annual margin 167
Residential and small commercial customers renewed in the quarter
- Canada - gas $ 180 16,000
- Canada - electricity 107 17,000
- United States - gas 190 12,000
- United States – electricity 158 4,000
Average annual margin 148
Residential and small commercial customers lost in the quarter
- Canada – gas $ 192 38,000
- Canada – electricity 148 32,000
- United States – gas 212 30,000
- United States – electricity 180 40,000
Average annual margin 183
Large commercial customers added in the quarter $ 85 154,000
Large commercial customers lost in the quarter $ 125 53,000
1Customer sales price less cost of associated supply and allowance for bad debt.

Home Services division (NHS)

NHS provides Ontario residential customers with long-term water heater rental programs that offer conventional tanks, power vented tanks and tankless water heaters in a variety of sizes as well as high efficiency furnaces and air conditioners. NHS had continued strong customer growth and with installations for the quarter amounting to 12,200 water heaters, air conditioners and furnaces, compared to 13,000 units installed in the prior comparable quarter. The installations for the current quarter consisted of 10,400 water heaters and 1,800 HVAC units, opposed to 12,300 water heaters and 700 HVAC units installed in the prior comparative quarter. Although there were fewer installations in the current quarter, the overall contribution to future EBITDA is greater as the average rental revenue for HVAC products is more than double that of a water heater. As of September 30, 2011, the cumulative installed customer base was 143,800 units, an increase of 42% from one year prior. Management is confident that NHS will continue to contribute to the long-term profitability of Just Energy. NHS currently markets through approximately 260 independent contractors.

As NHS is a high growth, relatively capital-intensive business, Just Energy's management believes that, in order to maintain stability of dividends, separate non-recourse financing of this capital is appropriate. NHS entered into a long-term financing agreement with Home Trust Company ("HTC") for the funding of the water heaters, furnaces and air conditioners in the Enbridge Gas (January 2010) and Union Gas (July 2010) distribution territories. Under the HTC agreements, NHS receives funds equal to the amount of the five-, seven- or ten-year cash flow (at its option) of the water heater, furnace and air conditioner contracts discounted at the contracted rate, which is currently 7.99%. HTC is then paid an amount that is equal to the customer rental payments on the water heaters for the next five, seven or ten years as applicable. The funding received from HTC up to September 30, 2011, was $155.4 million.

Management's strategy for NHS is to self-fund the business through its growth phase, building value within the customer base. This way, NHS will not require significant cash from Just Energy's core operations nor will Just Energy rely on NHS's cash flow to fund dividends. The result should be a valuable asset, which will generate strong cash returns following repayment of the HTC financing.

Selected financial information
(thousands of dollars, except where indicated)
Three months Three months Six months Six months
ended ended ended ended
Sept. 30,
2011
Sept. 30,
2010
Sept. 30,
2011
Sept.
30, 2010
Sales per financial statements $ 8,372 $ 5,172 $ 16,178 $ 9,613
Cost of sales 1,827 1,386 3,401 2,995
Gross margin 6,545 3,786 12,777 6,618
Selling and marketing expenses 578 850 1,878 1,664
Administrative expenses 3,574 2,996 6,337 5,881
Finance costs 2,366 1,490 4,517 2,831
Capital expenditures 9,025 9,152 18,551 17,306
Amortization 440 525 877 1,046
Total cumulative number of water heaters, furnaces and air conditioners installed 143,800 101,000 143,800 101,000

Results of operations

For the three months ended September 30, 2011, NHS had sales of $8.4 million for the quarter, up 62% from $5.2 million reported in the second quarter of fiscal 2011. Gross margin amounted to $6.5 million for the three months ended September 30, 2011, up 73% from $3.8 million reported in the comparable period. The cost of sales for the three months ended September 30, 2011 was $1.8 million, of which $1.6 million represents the non-cash amortization of the installed water heaters, furnaces and air conditioners for the customer contracts signed to date. Administrative costs, which relate primarily to administrative staff compensation, warehouse expenses and the opening of additional warehouses to support expansion throughout Ontario, were $3.6 million for the three months ended September 30, 2011, an increase of 19% quarter over quarter. The increase in administrative expenses was a result of additional spending in order to support the continued expansion of this division.

Finance costs amounted to $2.4 million as a result of the financing arrangement with HTC. Capital expenditures, including installation costs, amounted to $9.0 million for the three months ended September 30, 2011.

For the six months ended September 30, 2011, sales were $16.2 million, an increase of 68% over $9.6 million in sales recorded for the same period in fiscal 2011, consistent with the increase in number of units installed. Gross margin was $12.8 million for the six months ended September 30, 2011, a 93% increase over margins of $6.6 million from the prior comparable period as a result of the increase in installation base. Selling and marketing and administrative expenses for the first half of fiscal 2012 increased by 13% and 8%, respectively, over the prior comparable period due to the continued growth in customer base. Capital expenditures increased by 7% to $18.6 million for the six months ended September 30, 2011.

The growth of NHS has been rapid and, combined with the HTC financing, is expected to be self-sustaining on a cash flow basis.

Ethanol division (TGF)

TGF continues to remain focused on improving the plant production and run time of the Belle Plaine, Saskatchewan, wheat-based ethanol facility. For the three months ended September 30, 2011, the plant achieved an average production capacity of 80%, an increase from average production capacity of 67% in the first quarter of fiscal 2012 as a result of less downtime in the quarter and improved access to wheat supply. In the first quarter of fiscal 2012, the plant completed scheduled maintenance, resulting in production downtime and also experienced wheat shortages requiring production slowdowns as a result of unusually wet conditions in Saskatchewan.

Ethanol prices were, on average, $0.77 per litre and wheat prices averaged $207 per metric tonne for the three months ended September 30, 2011. For the prior comparable quarter, ethanol prices were depressed and averaged $0.57 per litre and wheat prices were $168 per metric tonne. As at September 30, 2011, ethanol was priced at $0.68 per litre. The Ethanol division has separate non-recourse financing in place such that capital requirements and operating losses will not impact Just Energy's core business and its ability to pay dividends.

Selected financial information
(thousands of dollars, except where indicated)
Three months Three months Six months Six months
ended ended ended ended
Sept. 30,
2011
Sept. 30,
2010
Sept. 30,
2011
Sept. 30,
2010
Sales per financial statements $ 36,379 $ 31,191 $ 66,571 $ 47,997
Cost of sales 30,167 26,726 57,814 46,321
Gross margin 6,212 4,465 8,757 1,676
Administrative expenses 2,150 3,162 4,823 5,629
Finance costs 1,606 1,902 3,293 3,609
Capital expenditures 95 65 122 179
Amortization 349 297 647 593

Results of operations

For the second quarter of fiscal 2012, TGF had sales of $36.4 million, a 17% increase from $31.2 million in the prior comparable quarter. Cost of sales amounted to $30.2 million, an increase of 13% from $26.7 million in the three months ended September 30, 2010. During the quarter, the plant produced 29.8 million litres of ethanol and 30,078 metric tonnes of DDG. In the prior comparable quarter, TGF produced 30.6 million litres of ethanol and 28,386 metric tonnes of DDG and experienced an average production capacity of 81%. For the three months ended September 30, 2011, TGF incurred $2.2 million in administrative expenses and $1.6 million in finance costs.

For the six months ended September 30, 2011, TGF increased sales by 39% from $48.0 million to $66.6 million over the prior comparable period. Gross margin was $8.8 million for the current six-month-period, a substantial increase over the prior comparable period due to a loss experienced in the first quarter of fiscal 2011 as a result of plant inefficiency and low ethanol and DDG prices.

TGF receives a federal subsidy related to the ecoEnergy for Biofuels Agreement signed on February 17, 2009, as amended from time to time, based on the volume of ethanol produced. The subsidy is $0.08 per litre for fiscal 2012. The subsidy amount declines through time to $0.05 per litre of ethanol produced in fiscal 2015, the last year of the agreement.

Overall consolidated results – Just Energy

Administrative expenses

Administrative costs were $28.8 million for the three months ended September 30, 2011, representing an 11% increase from $26.0 million in the second quarter of the prior fiscal year but in line with the first quarter of the fiscal year as well as the fourth quarter of fiscal 2011. For the six months ended September 30, 2011, administrative expenses were $57.1 million, an increase of 4% from $54.8 million in the prior comparable period.

Three months ended Sept. 30, 2011 Three months ended Sept. 30, 2010 % Increase (Decrease) Six months ended Sept. 30, 2011 Six months ended Sept. 30, 2010 % Increase (Decrease)
Energy marketing $21,732 $19,215 13% $43,376 $42,360 2%
NHS 3,574 2,996 19% 6,337 5,881 8%
TGF 2,150 3,162 (32)% 4,823 5,629 (14)%
Other 1,318 590 123% 2,522 934 170%
Total administrative expenses $28,774 $25,963 11% $57,058 $54,804 4%

Energy marketing administrative costs were $21.7 million in the second quarter of fiscal 2012, an increase of 13% from $19.2 million for the three months ended September 30, 2010. This increase is primarily attributable to the one-time reduction in expenses experienced in the prior comparable quarter with litigation settlements costs being lower than what had been previously accrued. For the six months ended September 30, 2011, administrative expenses for energy marketing were $43.4 million, an increase of 2% over the prior comparable period.

Other administrative costs were $1.3 million and $2.5 million for the three and six months ended September 30, 2011. These expenses represent costs associated with the establishment of Hudson Solar and the expansion of network marketing through Momentis.

Selling and marketing expenses

Selling and marketing expenses, which consist of commissions paid to independent sales contractors, brokers and independent representatives for signing new customers, as well as sales-related corporate costs, were $35.3 million, a decrease of 4% from $37.0 million in the second quarter of fiscal 2011. New customers signed by our sales force were 238,000 during the second quarter of fiscal 2012, down 6% compared to 254,000 customers added through our sales channels in the prior comparable quarter. For the six months ended September 30, 2011, selling and marketing expenses amounted to $69.9 million, an increase of 5% from $66.7 million recorded in the prior comparable period.

Commissions related to obtaining and renewing Hudson commercial contracts are paid all or partially upfront or as residual payments over the life of the contract. If the commission is paid all or partially upfront, the amortization is included in selling and marketing expenses as the associated revenue is earned. If the commission is paid as a residual payment, the amount is expensed as earned. Of the current total commercial customer base, approximately 60% are commercial broker customers and approximately 60% of these commercial brokers are being paid recurring residual payments. During the three months ended September 30, 2011, $3.1 million in commission-related expenses were capitalized to contract initiation costs. Of the capitalized commissions, $0.7 million represents commissions paid to maintain gross margin and therefore, is included in the maintenance capital deducted in the Adjusted EBITDA calculation.

Selling and marketing expenses to maintain gross margin are allocated based on the ratio of gross margin lost from attrition as compared to the gross margin signed from new and renewed customers during the period. Selling and marketing expenses to maintain gross margin were $21.3 million for the three months ended September 30, 2011, a decrease of 15% from $25.1 million in the second quarter of fiscal 2011. For the six months ended September 30, 2011, selling and marketing expenses to maintain gross margin amounted to $41.9 million, a decrease of 3% from $43.4 million in the prior comparable period.

Selling and marketing expenses to add new gross margin are allocated based on the ratio of net new gross margin earned on the customers signed, less attrition, as compared to the gross margin signed from new customers during the period. Selling and marketing expenses to add new gross margin in the three months ended September 30, 2011, totalled $10.3 million, an increase from $7.7 million in the second quarter of fiscal 2011. For the six months ended September 30, 2011, sales and marketing expenses to add new gross margin were $20.5 million, an increase of 20% from $17.1 million in the prior comparable period.

Selling and marketing expenses included in Base EBITDA exclude amortization related to the contract initiation costs for Hudson and NHS. For the three months ended September 30, 2011, the amortization amounted to $3.6 million, a decrease of 13% from $4.2 million reported in the prior comparable quarter. The amortization related to the contract initiation costs for the six months ended September 30, 2011 and 2010 was $7.5 million and $6.3 million, respectively.

The actual aggregation costs per customer for the six months ended September 30, 2011, for residential and commercial customers signed by independent representatives and commercial customers signed by brokers were as follows:

Residential customers Commercial customers Commercial broker customers
Natural gas
Canada $211/RCE $138/RCE $62/RCE
United States $210/RCE $101/RCE $27/RCE
Electricity
Canada $200/RCE $146/RCE $34/RCE
United States $197/RCE $94/RCE $34/RCE
Total aggregation costs $203/RCE $119/RCE $34/RCE

The actual aggregation per customer added for all energy marketing for the six months ended September 30, 2011, was $100. The $34 average aggregation cost for the commercial broker customers is based on the expected average annual cost for the respective customer contracts. It should be noted that commercial broker contracts are paid further commissions averaging $34 per year for each additional year that the customer flows. Assuming an average life of 2.8 years, this would add approximately $61 (1.8 X $34) to the quarter's $34 average aggregation cost for commercial broker customers reported above. For the prior comparable six months, total aggregation costs per residential, commercial and commercial brokers were $197/RCE, $92/RCE and $34/RCE, respectively, with a combined cost of $110/RCE.

Bad debt expense

In Illinois, Alberta, Texas, Pennsylvania, California, Massachusetts and Georgia, Just Energy assumes the credit risk associated with the collection of customer accounts. In addition, for commercial direct-billed accounts in British Columbia, New York and Ontario, Just Energy is responsible for the bad debt risk. NHS has also assumed credit risk for customer account collection for certain territories within Ontario. Credit review processes have been established to manage the customer default rate. Management factors default from credit risk into its margin expectations for all of the above-noted markets. During the three months ended September 30, 2011, Just Energy was exposed to the risk of bad debt on approximately 48% of its sales.

Bad debt expense is included in the consolidated income statement under other operating expenses. Bad debt expense for the three months ended September 30, 2011 was $6.5 million, down 4% from $6.7 million expensed for the three months ended September 30, 2010. The bad debt expense decrease was despite a 9% increase in total revenues for the current three-month period to $286.5 million, due to incremental commercial customers in the markets where Just Energy assumes the risk for accounts receivable collections.

Management integrates its default rate for bad debts within its margin targets and continuously reviews and monitors the credit approval process to mitigate customer delinquency.

For the six months ended September 30, 2011, the bad debt expense of $13.3 million represents approximately 2.5% of revenue, slightly lower than the 2.6% reported for the prior comparable period with $12.4 million of bad debt expense.

Management expects that bad debt expense will remain in the range of 2% to 3% for the fiscal year assuming that the housing market in the U.S. continues to show signs of improvement. For each of Just Energy's other markets, the LDCs provide collection services and assume the risk of any bad debt owing from Just Energy's customers for a regulated fee.

Finance costs

Total finance costs for the three months ended September 30, 2011 amounted to $14.3 million, a decrease from $15.6 million recorded in the second quarter of fiscal 2011. Excluding the $2.8 million of dividend payments made to holders of exchangeable shares and equivalents classified as finance costs under IFRS in the prior comparable quarter, finance costs increased by 12%. The increase in costs primarily relates to the increase in credit facility and NHS financing.

For the six months ended September 30, 2011, finance costs amounted to $28.1 million, an increase of 24% from $22.8 million in finance costs for the prior comparable period, excluding $5.6 million in dividend payments classified as finance costs. In addition to the increase in interest paid relating to the credit facility and NHS financing, finance costs relating to the $330m convertible debentures were higher in the current period. The $330m convertible debentures were issued in May 2010 to fund the Hudson acquisition, resulting in only five months of related costs in the prior comparable period.

Foreign exchange

Just Energy has an exposure to U.S. dollar exchange rates as a result of its U.S. operations and any changes in the applicable exchange rate may result in a decrease or increase in other comprehensive income. For the three months ended September 30, 2011, a foreign exchange unrealized gain of $19.3 million was reported in other comprehensive income (loss) versus a $5.6 million loss reported in the prior fiscal year. For the six months ended September 30, 2011, a foreign exchange unrealized gain of $15.5 million was recorded versus a gain of $9.2 million in the prior comparable period.

Overall, a weaker U.S. dollar decreases the value of sales and gross margin in Canadian dollars but this is partially offset by lower operating costs denominated in U.S. dollars. Just Energy retains sufficient funds in the U.S. to support ongoing growth and surplus cash is repatriated to Canada. U.S. cross border cash flow is forecasted annually, and hedges for cross border cash flow are entered into. Just Energy hedges between 25% and 90% of the next 12 months' cross border cash flows depending on the level of certainty of the cash flow.

Provision for income tax
(thousands of dollars) For the three For the three For the six For the six
months ended months ended months ended months ended
Sept. 30, 2011 Sept. 30, 2010 Sept. 30, 2011 Sept. 30, 2010
Current income tax recovery $(1,923 ) $(2,734 ) $(4,161 ) $(3,198 )
Future tax provision (recovery) 16,848 (92,469 ) 26,307 (54,547 )
Provision for (recovery of) income tax $14,925 $(95,203 ) $22,146 $(57,745 )

Just Energy recorded a current income tax recovery of $1.9 million for the second quarter of fiscal 2012, versus $2.7 million of recovery in the same period last year. A tax recovery of $4.2 million has been recorded for the six-month period of fiscal 2012, versus a recovery of $3.2 million for the same period last year. The change is mainly attributable to a U.S. income tax recovery generated by slightly higher operating losses incurred by the U.S. entities during the first half of this fiscal year.

During the first half of this fiscal year, the mark to market losses from financial instruments decrease as a result of a change in fair value of these derivative instruments during this period and, as a result, a deferred tax expense of $26.3 million was recorded for this period. During the same period of fiscal 2011, Just Energy was an income trust and only included timing differences that were going to reverse subsequent to conversion when assessing its future tax position, as a result of fluctuations in mark to market losses on contracts that were to settle subsequent to January 1, 2011. In addition, there were additional deferred tax recoveries arising from adopting IFRS. The combined effect of such is that a deferred tax recovery of $54.5 million was recorded during that period.

After the Conversion on January 1, 2011, Just Energy has been taxed as a taxable Canadian corporation. Therefore, the deferred tax asset or liability associated with Canadian liabilities and assets recorded on the consolidated balance sheets as at that date will be realized over time as the temporary differences between the carrying value of assets in the consolidated financial statements and their respective tax bases are realized. Current Canadian income taxes are accrued to the extent that there is taxable income in Just Energy and its underlying corporations. Canadian corporations under Just Energy are subject to a tax rate of approximately 28% after the Conversion.

Under IFRS, Just Energy recognized income tax liabilities and assets based on the estimated tax consequences attributable to the temporary differences between the carrying value of the assets and liabilities on the consolidated financial statements and their respective tax bases, using substantively enacted income tax rates. A deferred tax asset will be recognized for the carry forward of unused tax losses and unused tax credits to the extent that it is probable that future taxable profit will be available against which the unused tax losses and unused tax credits can be utilized. The effect of a change in the income tax rates used in calculating deferred income tax liabilities and assets is recognized in income during the period in which the change occurs.

Liquidity and capital resources
Summary of cash flows
(thousands of dollars)
For the three For the three For the six For the six
months ended months ended months ended months ended
Sept. 30, 2011 Sept. 30, 2010 Sept. 30, 2011 Sept. 30, 2010
Operating activities $33,680 $11,061 $49,374 $33,937
Investing activities (19,873 ) (19,787 ) (42,411 ) (283,373 )
Financing activities, excluding
distributions/dividends 111,124 10,023 130,298 309,451
Effect of foreign currency translation (198 ) 2,344 144 7,045
Increase in cash before distributions/dividends 124,733 3,641 137,405 67,060
Distributions/dividends (cash payments) (35,968 ) (33,598 ) (70,865 ) (66,841 )
Increase (decrease) in cash 88,765 (29,957 ) 66,540 219
Cash – beginning of period 76,241 108,958 98,466 78,782
Cash – end of period $165,006 $79,001 $165,006 $79,001

Operating activities

Cash flow from operating activities for the three months ended September 30, 2011, was $33.7 million, an increase from $11.1 million in the prior comparative quarter. The increase is a result of the increase in gross margin and other income and lower sales and marketing expenses quarter over quarter. For the six months ended September 30, 2011, cash flow from operating activities was $49.4 million, an increase of 45% from $33.9 million reported for the prior comparable period.

Investing activities

Just Energy purchased capital assets totalling $10.4 million during the second quarter of the fiscal year, a slight decrease from $10.8 million in the second quarter of the prior fiscal year. Just Energy's capital spending related primarily to the home services business and Hudson Solar. Contract initiation costs relating to Hudson and NHS amounted to $7.0 million for the three months ended September 30, 2011, an increase over $3.6 million recorded in the prior comparable quarter.

Financing activities

Financing activities, excluding distributions/dividends, relates primarily to the issuance and repayment of long-term debt. During the three months ended September 30, 2011, $179.1 million in long-term debt was issued, with the majority relating to the $100m convertible debentures issued on September 22, 2011 for funding the Fulcrum acquisition on October 3, 2011. The remaining increase is primarily related to the credit facility and NHS financing with repayments of long-term debt amounting to $65.7 million for the quarter. In the prior comparable quarter, $17.8 million was issued in long-term debt relating to the credit facility and NHS financing with $0.8 million being repaid.

For the six months ended September 30, 2011, $248.1 million was issued in long-term debt with repayments amounting to $119.4 million, resulting in net borrowing of $128.6 million. In addition to the $100 million issued, there were increases to the borrowings related to the credit facility and NHS financing. For the six months ended September 30, 2010, $367.0 million was issued in long term debt with $50.2 million being repaid. The issuance of long-term debt is primarily related to the $330m convertible debentures issued to finance the Hudson acquisition in May 2010.

As of September 30, 2011, Just Energy had a credit facility of $350 million. In connection with the Conversion on January 1, 2011, Just Energy increased its credit facility with the term of the facility expiring on December 31, 2013. As Just Energy continues to expand in the U.S. markets, the need to fund working capital and collateral posting requirements will increase, driven primarily by the number of customers aggregated, and to a lesser extent, by the number of new markets. Based on the markets in which Just Energy currently operates and others that management expects the Company to enter, funding requirements will be fully supported through the credit facility.

Just Energy's liquidity requirements are driven by the delay from the time that a customer contract is signed until cash flow is generated. For residential customers, approximately 60% of an independent sales contractor's commission payment is made following reaffirmation or verbal verification of the customer contract, with most of the remaining 40% being paid after the energy commodity begins flowing to the customer. For commercial customers, commissions are paid either as the energy commodity flows throughout the contract or partially upfront once the customer begins to flow.

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

Distributions/dividends (Cash payments)

During the three months ended September 30, 2011, Just Energy made cash distributions/dividends to its shareholders and holders of restricted share grants or deferred share grants in the amount of $36.0 million, compared to $33.6 million in the prior comparable period. For the six months ended September 30, 2011, cash dividends were $70.9 million, an increase from $66.8 million paid in distributions in the prior comparable period.

Just Energy maintains its annual dividend rate at $1.24 per share, the same rate that was previously paid for distributions. Investors should note that due to the dividend reinvestment plan ("DRIP"), a portion of dividends (and prior to January 1, 2011, distributions) declared are not paid in cash. Under the program, shareholders can elect to receive their dividends in shares at a 2% discount to the prevailing market price rather than the cash equivalent. For the three and six months ended September 30, 2011, dividends paid in shares under the DRIP amounted to $7.7 million and $16.4 million, respectively.

Just Energy will continue to utilize its cash resources for expansion into new markets, growth in its existing energy marketing customer base, JustGreen and JustClean products, Solar and Home Services division, and also to make accretive acquisitions of customers as well as dividends to its shareholders.

At the end of the quarter, the annual rate for dividends per share was $1.24. The current dividend policy provides that shareholders of record on the 15th of each month receive dividends at the end of the month.

Balance sheet as at September 30, 2011, compared to March 31, 2011

Cash increased from $98.5 million as at March 31, 2011, to $165.0 million. The increase is cash was primarily due to the $100m convertible debentures issued on September 22, 2011 that were utilized to fund the Fulcrum acquisition and other general corporate items on October 3, 2011. The utilization of the credit facility increased from $53.0 million to $67.2 million as a result of normal seasonal working capital requirements. Working capital requirements in the U.S. and Alberta are a result of the timing difference between customer consumption and cash receipts. For electricity, working capital is required to fund the lag between settlements with the suppliers and settlement with the LDCs.

As at September 30, 2011, trade receivables and unbilled revenue amounted to $252.1 million and $98.4 million, respectively, compared to six months earlier when the trade receivables and unbilled revenue amounted to $281.7 million and $112.1 million, respectively. Trade payables have decreased from $275.5 million to $252.0 million in the past six months. Both decreases in accounts receivable and payable are related to the seasonality of energy marketing, with consumption being higher during the fourth quarter as opposed to the second quarter.

As at September 30, 2011, Just Energy had delivered more gas to the LDCs than had been consumed by customers in Ontario, Manitoba, Quebec and Michigan, resulting in gas delivered in excess of consumption and deferred revenue of $66.6 million and $74.1 million, respectively. This build-up of inventory at the LDCs is in the normal course of operations and will decrease over the winter months when consumption by customers is greater than deliveries. At March 31, 2011, Just Energy had accrued gas receivable and payable amounting to $26.5 million and $19.4 million, respectively. In addition, gas in storage increased from $6.1 million as at March 31, 2011 to $50.5 million as at September 30, 2011 due to the seasonality of the customer gas consumption.

Other assets and other liabilities relate entirely to the fair value of the financial derivatives. The mark to market gains and losses can result in significant changes in net income and, accordingly, shareholders' equity from quarter to quarter due to commodity price volatility. Given that Just Energy has purchased this supply to cover future customer usage at fixed prices, management believes that these non-cash quarterly changes are not meaningful.

Intangible assets include the goodwill, acquired customer contracts as well as other intangibles such as brand, broker network and information technology systems, primarily related to the Hudson and Universal purchases. The total intangible asset balance decreased to $531.6 million, from $640.2 million as at March 31, 2011, primarily as a result of amortization.

Long-term debt (excluding the current portion) has increased from $507.5 million to $629.0 million in the six months ended September 30, 2011 primarily as a result of the issuance of the $100m convertible debentures during the quarter as well as an increase in HTC financing.

Long-term debt and financing
(thousands of dollars)
As at Sept. 30, 2011 As at March 31, 2011
Just Energy credit facility $67,223 $53,000
TGF credit facility 34,363 36,680
TGF debentures 35,942 37,001
NHS financing 128,438 105,716
$90m convertible debentures 85,390 84,706
$330m convertible debentures 289,136 286,439
$100m convertible debentures 85,261 -

Just Energy credit facility

Just Energy holds a $350 million credit facility to meet working capital requirements. The syndicate of lenders includes Canadian Imperial Bank of Commerce, Royal Bank of Canada, National Bank of Canada, Société Générale, Bank of Nova Scotia, Toronto Dominion Bank and Alberta Treasury Branches. Under the terms of the credit facility, Just Energy was able to make use of Bankers' Acceptances and LIBOR advances at stamping fees that vary between 3.25% and 3.75%, prime rate advances at rates of interest that vary between bank prime plus 2.25% and 2.75%, and letters of credit at rates that vary between 3.25% and 3.75%. Effective October 3, 2011, pricing on the credit facility has been reduced by 0.375%. Interest rates are adjusted quarterly based on certain financial performance indicators.

Just Energy's obligations under the credit facility are supported by guarantees of certain subsidiaries and affiliates, excluding among others, TGF and NHS, and secured by a pledge of the assets of Just Energy and the majority of its operating subsidiaries and affiliates. Just Energy is required to meet a number of financial covenants under the credit facility agreement. As at September 30, 2011 and 2010, all of these covenants had been met.

TGF credit facility

A credit facility of up to $50 million was established with a syndicate of Canadian lenders led by Conexus Credit Union and was arranged to finance the construction of the ethanol plant in 2007. The facility was revised on March 18, 2009, and was converted to a fixed repayment term of ten years commencing March 1, 2009, which includes interest costs at a rate of prime plus 3%, with principal repayments commencing on March 1, 2010. The facility was further revised on April 5, 2010, postponing the principal payments due for April 1, 2010 to June 1, 2010, and to amortize them over the six-month period commencing October 1, 2010, and ending March 31, 2011. The credit facility is secured by a demand debenture agreement, a first priority security interest on all assets and undertakings of TGF, and a general security interest on all other current and acquired assets of TGF, all of which have no recourse to the Company or any other Just Energy entity. The credit facility includes certain financial covenants, the more significant of which relate to current ratio, debt to equity ratio, debt service coverage and minimum shareholders' equity. The covenants will be measured as of March 31, 2012, and non-attainment may result in a non-compliance fee up to 0.25% of the loan balance as of March 31, 2012.

TGF debentures

A debenture purchase agreement with a number of private parties providing for the issuance of up to $40 million aggregate principal amount of debentures was entered into in 2006. TGF was in recent negotiations with the lender and adjusted the covenant levels. In addition, the interest rate was increased to 12% and quarterly blended principal and interest payments of $1.1 million were established. The agreement includes certain financial covenants, the more significant of which relate to current ratio, debt to capitalization ratio, debt service coverage, debt to EBITDA and minimum shareholders' equity. Compliance with the new covenants, which are more favourable than the original covenants, will be measured annually beginning with the fiscal 2012 year end. The maturity date was extended to May 15, 2014, with a call right any time after April 1, 2012. The debenture holders have no recourse to the Company or any other Just Energy entity.

NHS financing

In fiscal 2010, NHS entered into a long-term financing agreement with HTC for the funding of new and existing rental water heater and HVAC contracts in the Enbridge Gas distribution territory. In July, 2010, the financing arrangement was expanded to the Union Gas territory. Pursuant to the agreement, NHS will receive financing of an amount equal to the net present value of the first five, seven or ten years (at its option) of monthly rental income, discounted at the agreed upon financing rate of 7.99%, and is required to remit an amount equivalent to the rental stream from customers on the water heater and HVAC contracts for the first five, seven or ten years, respectively. Under the agreement, up to one third of rental agreements may be financed for each of the seven- or ten-year terms. As at September 30, 2011, the average term of the HTC funding was 6.1 years.

The financing agreement is subject to a holdback provision, whereby 3% in the Enbridge territory and 5% in the Union Gas territory of the outstanding balance of the funded amount is deducted and deposited to a reserve account in the event of default. Once all of the obligations of NHS are satisfied or expired, the remaining funds in the reserve account will immediately be released to NHS. HTC holds security over the contracts and equipment it has financed. NHS is required to meet a number of covenants under the agreement and, as at September 30, 2011, all of these covenants have been met.

$90m convertible debentures

In conjunction with the acquisition of Universal on July 1, 2009, Just Energy assumed the obligations of the convertible unsecured subordinated debentures issued by Universal in October 2007, which have a face value of $90 million. The fair value of the convertible debenture was estimated by discounting the remaining contractual payments at the time of acquisition. This discount will be accreted using an effective interest rate of 8%. These instruments mature on September 30, 2014, unless converted prior to that date, and bear interest at an annual rate of 6%, payable semi-annually on March 31 and September 30 of each year. As at September 30, 2011, each $1,000 principal amount of the $90m convertible debentures is convertible at any time prior to maturity or on the date fixed for redemption, at the option of the holder, into approximately 31.53 JEGI shares, representing a conversion price of $30.97 per share. Pursuant to the $90m convertible debentures, if JEGI fixes a record date for the making of a dividend on its shares, the conversion price shall be adjusted in accordance therewith.

On and after October 1, 2010, but prior to September 30, 2012, the $90m convertible debentures are redeemable, in whole or in part, at a price equal to the principal amount thereof, plus accrued and unpaid interest, at Just Energy's sole option on not more than 60 days' and not less than 30 days' prior notice, provided that the current market price on the date on which notice of redemption is given is not less than 125% of the conversion price. On and after September 30, 2012, but prior to the maturity date, the $90m convertible debentures are redeemable, in whole or in part, at a price equal to the principal amount thereof, plus accrued and unpaid interest, at Just Energy's sole option on not more than 60 days' and not less than 30 days' prior notice.

$330m convertible debentures

To fund the acquisition of Hudson, Just Energy entered into an agreement with a syndicate of underwriters for $330 million of convertible extendible unsecured subordinated debentures issued on May 5, 2010. The $330m convertible debentures bear an interest rate of 6.0% per annum payable semi-annually in arrears on June 30 and December 31 of each three months, with maturity on June 30, 2017. Each $1,000 of principal amount of the $330m convertible debentures is convertible at any time prior to maturity or on the date fixed for redemption, at the option of the holder, into approximately 55.6 shares of JEGI, representing a conversion price of $18 per share.

The $330m convertible debentures are not redeemable prior to June 30, 2013, except under certain conditions after a change of control has occurred. On or after June 30, 2013, but prior to June 30, 2015, the debentures may be redeemed by JEGI, in whole or in part, on not more than 60 days' and not less than 30 days' prior notice, at a redemption price equal to the principal amount thereof, plus accrued and unpaid interest, provided that the current market price on the date on which notice of redemption is given is not less than 125% of the conversion price. On or after June 30, 2015, and prior to the maturity date, the debentures may be redeemed by JEGI, in whole or in part, at a redemption price equal to the principal amount thereof, plus accrued and unpaid interest.

$100m convertible debentures

On September 22, 2011, Just Energy issued $100 million of convertible unsecured subordinated debentures to fund the acquisition of Fulcrum and other corporate purposes on October 3, 2011. The $100 million convertible debentures bear interest at an annual rate of 5.75%, payable semi-annually on March 31 and September 30 in each year, commencing March 31, 2012 and have a maturity date of September 30, 2018. Each $1000 principal amount of the $100 million convertible debentures is convertible at the option of the holder at any time prior to the close of business on the earlier of the maturity date and the last business day immediately preceding the date fixed for redemption, into 56.0 common shares of Just Energy, representing a conversion price of $17.85.

The $100 million convertible debentures are not redeemable at the option of the Company on or before September 30, 2014. After September 30, 2014 and prior to September 30, 2016, the $100 million convertible debentures may be redeemed in whole or in part from time to time at the option of the Company on not more than 60 days and not less than 30 days prior notice, at a price equal to their principal amount plus accrued and unpaid interest, provided that the weighted average trading price of the common shares of Just Energy on the Toronto Stock Exchange for the 20 consecutive trading days ending five trading days preceding the date on which the notice of redemption is given is at least 125% of the conversion price. On or after September 30, 2016, the $100 million convertible debentures may be redeemed in whole or in part from time to time at the option of the Company on not more than 60 days and not less than 30 days prior notice, at a price equal to their principal amount plus accrued and unpaid interest.

Contractual obligations

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

Payments due by period
(thousands of dollars)
Total Less than
1 year
1 – 3
years
4 – 5
years
After 5
years
Accounts payable and accrued liabilities $251,958 $251,958 $- $- $-
Bank indebtedness 3,981 3,981 - - -
Long-term debt (contractual cash flow) 785,966 95,210 213,401 27,521 449,834
Interest payments 290,093 46,731 85,898 66,256 91,208
Property and equipment lease agreements 30,120 8,056 11,375 6,726 3,963
EPCOR billing, collections and supply commitments 838 838 - - -
Grain production contracts 9,836 9,143 693 - -
Commodity supply purchase commitments 2,979,474 1,383,826 1,329,121 260,291 6,236
$4,352,266 $1,799,743 $1,640,488 $360,794 $551,241

Other obligations

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

Transactions with related parties

Just Energy does not have any material transactions with any individuals or companies that are not considered independent of Just Energy or any of its subsidiaries and/or affiliates.

Critical accounting estimates

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

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

Unbilled revenues/Accrued gas accounts payable

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

Gas delivered in excess of consumption/Deferred revenues

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

Allowance for doubtful accounts

Just Energy assumes the credit risk associated with the collection of all customers' accounts in Alberta, Illinois, Texas, Pennsylvania, California and Massachusetts. In addition, for large direct-billed accounts in B.C., New York and Ontario, Just Energy is responsible for the bad debt risk. NHS has also assumed credit risk for customer accounts within certain territories in Ontario. Management estimates the allowance for doubtful accounts in these markets based on the financial conditions of each jurisdiction, the aging of the receivables, customer and industry concentrations, the current business environment and historical experience.

Goodwill

In assessing the value of goodwill for potential impairment, assumptions are made regarding Just Energy's future cash flow. If the estimates change in the future, Just Energy may be required to record impairment charges related to goodwill. An impairment review of goodwill was performed as at March 31, 2011, and as a result of the review, it was determined that no impairment of goodwill existed.

Fair value of derivative financial instruments and risk management

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

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

Just Energy's expansion in the U.S. has introduced foreign exchange-related risks. Just Energy enters into foreign exchange forwards in order to hedge its exposure to fluctuations in cross border cash flows.

The financial statements are in compliance with IAS 32, Financial instruments: Presentation, IAS 39, Financial instruments: Recognition and measurement and IFRS 7, Financial Instruments: Disclosure. Up to June 30, 2008, the financial statements also applied Section 3865 of the CICA Handbook, which permitted a further calculation for qualified and designated accounting hedges to determine the effective and ineffective portions of the hedge. This calculation permitted the change in fair value to be accounted for predominantly in the consolidated statements of comprehensive income. As of July 1, 2008, management decided that the increasing complexity and costs of maintaining this accounting treatment outweighed the benefits. This fair value (and when it was applicable, the ineffectiveness) was determined using market information at the end of each quarter. Management believes Just Energy remains economically hedged operationally across all jurisdictions.

JEGI common shares

As at November 7, 2011, there were 138,579,323 common shares of JEGI outstanding.

Recently issued accounting standards

New accounting pronouncements adopted

Fiscal 2012 is Just Energy's first fiscal year reporting under IFRS. Accounting standards effective for annual reporting periods ended on March 31, 2011 have been adopted as part of the transition to IFRS.

Recent pronouncements issued

IFRS 9 Financial Instruments

As of April 1, 2013, Just Energy will be required to adopt IFRS 9, "Financial Instruments", which is the result of the first phase of the IASB's project to replace IAS 39, "Financial Instruments: Recognition and Measurement". The new standard replaces the current multiple classification and measurement models for financial assets and liabilities with a single model that has only two classification categories: amortized cost and fair value. The Company has not yet assessed the impact of the standard or determined whether it will adopt the standard early.

IFRS 10 Consolidated Financial Statements

As of April 1, 2013, IFRS 10, "Consolidated Financial Statements" will replace portions of IAS 27 "Consolidated and Separate Financial Statements" and interpretation SIC-12, "Consolidation — Special Purpose Entities". The new standard requires consolidated financial statements to include all controlled entities under a single control model. The Company will be considered to control an investee when it is exposed, or has rights to variable returns from its involvement with the investee and has the current ability to affect those returns through its power over the investee.

As required by this standard, control is reassessed as facts and circumstances change. All facts and circumstances must be considered to make a judgment about whether the Company controls another entity; there are no 'bright lines'. Additional guidance is given on how to evaluate whether certain relationships give the Company the current ability to affect its returns, including how to consider options and convertible instruments, holding less than a majority of voting rights, how to consider protective rights, and principal-agency relationships (including removal rights), all of which may differ from current practice. The Company has not yet assessed the impact of the standard or determined whether it will adopt the standard early.

IFRS 11 Joint Arrangements

On April 1, 2013, Just Energy will be required to adopt IFRS 11, "Joint Arrangements", which applies to accounting for interests in joint arrangements where there is joint control. The standard requires the joint arrangements to be classified as either joint operations or joint ventures. The structure of the joint arrangement would no longer be the most significant factor when classifying the joint arrangement as either a joint operation or a joint venture. In addition, the option to account for joint ventures (previously called jointly controlled entities) using proportionate consolidation will be removed and replaced by equity accounting.

Due to the adoption of this new section, the Company will transition the accounting for joint ventures from the proportionate consolidation method to the equity method by aggregating the carrying values of the proportionately consolidated assets and liabilities into a single line item. The Company has not yet assessed the impact of the standard or determined whether it will adopt the standard early.

IFRS 12 Disclosure of Interests in Other Entities

On April 1, 2013, Just Energy will be required to adopt IFRS 12, "Disclosure of interests in Other Entities", which includes disclosure requirements about subsidiaries, joint ventures, and associates, as well as unconsolidated structured entities and replaces existing disclosure requirements. Due to this new section, the Company will be required to disclose the following: judgements and assumptions made when deciding how to classify involvement with another entity, interests that non-controlling interests have in consolidated entities, and nature of the risks associated with interests in other entities. The Company has not yet assessed the impact of the standard or determined whether it will adopt the standard early.

IFRS 13 Fair Value Measurement

On April 1, 2013, Just Energy will be required to adopt IFRS 13, "Fair Value Measurement." The new standard will generally converge the IFRS and CGAAP requirements for how to measure fair value and the related disclosures. IFRS 13 establishes a single source of guidance for fair value measurements, when fair value is required or permitted by IFRS. Upon adoption, the Company will provide a single framework for measuring fair value while requiring enhanced disclosures when fair value is applied. In addition, fair value will be defined as the 'exit price' and concepts of 'highest and best use' and 'valuation premise' would be relevant only for non-financial assets and liabilities. The Company has not yet assessed the impact of the standard or determined whether it will adopt the standard early.

IAS 27 Separate Financial Statements

On April 1, 2013 Just Energy will be required to adopt IAS 27, "Separate Financial Statements." As a result of the issue of the new consolidation suite of standards, IAS 27 has been reissued to reflect the change as the consolidation guidance has recently been included in IFRS 10.

In addition, IAS 27 will now only prescribe the accounting and disclosure requirements for investments in subsidiaries, joint ventures and associates when the Company prepares separate financial statements. The Company has not yet assessed the impact of the standard or determined whether it will adopt the standard early.

IAS 28 Investments in Associates and Joint Ventures

On April 1, 2013, Just Energy will be required to adopt IAS 28, "Investments in Associates and Joint Ventures."

As a consequence of the issue of IFRS 10, IFRS 11 and IFRS 12, IAS 28 has been amended and will further provide the accounting guidance for investments in associates and will set out the requirements for the application of the equity method when accounting for investments in associates and joint ventures.

This standard will be applied by the Company when there is joint control, or significant influence over an investee.

Significant influence is the power to participate in the financial and operating policy decisions of the investee but does not include control or joint control of those policy decisions. When determined that the Company has an interest in a joint venture, the Company will recognize an investment and will account for it using the equity method in accordance with IAS 28. The Company has not yet assessed the impact of the standard or determined whether it will adopt the standard early.

Legal proceedings

Just Energy's subsidiaries are party to a number of legal proceedings. Just Energy believes that each proceeding constitutes a routine legal matter incidental to the business conducted by Just Energy and that the ultimate disposition of the proceedings will not have a material adverse effect on its consolidated earnings, cash flows or financial position.

In addition to the routine legal proceedings of Just Energy, the State of California has filed a number of complaints to the Federal Energy Regulatory Commission ("FERC") against many suppliers of electricity, including Commerce with respect to events stemming from the 2001 energy crisis in California. Pursuant to the complaints, the State of California is challenging the FERC's enforcement of its market-based rate system. Although CEI did not own generation facilities, the State of California is claiming that CEI was unjustly enriched by the run-up in charges caused by the alleged market manipulation of other market participants. On March 18, 2010, the Administrative Law Judge in the matter granted a motion to strike the claim for all parties in one of the complaints, holding that California did not prove that the reporting errors masked the accumulation of market power. California has appealed the decision. CEI continues to vigorously contest this matter which is not expected to have a material impact on the financial condition of the Company.

Controls and procedures

At September 30, 2011, the Chief Executive Officer ("CEO") and Chief Financial Officer ("CFO")of the Company, along with the assistance of senior management, have designed disclosure controls and procedures to provide reasonable assurance that material information relating to Just Energy is made known to the CEO and CFO, and have designed internal controls over financial reporting to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements in accordance with IFRS. During the interim period, there have been no changes in Just Energy's policies and procedures that comprise its internal control over financial reporting that have materially affected, or are reasonably likely to materially affect, the Company's internal control over financial reporting.

Corporate governance

Just Energy 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.justenergygroup.com and is included in Just Energy's May 20, 2011, management information circular. Just Energy actively monitors the corporate governance and disclosure environment to ensure timely compliance with current and future requirements.

Outlook

The second quarter of fiscal 2012 demonstrates the continued effects of Just Energy's ongoing diversification beyond its core business of five-year fixed-price residential gas and electricity contracts. Over the past three years, Just Energy's management has taken a number of steps intended to use new products and markets to provide growth as the current commodity price environment, which has been an extended period of stable low prices, is not conducive to the sale of long-term fixed-price offerings.

In the energy marketing business, the acquisition of Hudson and the expansion of Just Energy's commercial offering continues to be a major success. This profitable business segment has grown from 33% of Just Energy's customer base to 44% based on marketing success since the acquisition. In addition to commercial growth, new residential products based on variable price options are being offered and JustGreen and JustClean product additions are becoming more accepted, benefiting the Company with a larger, more sustainable and faster growing customer base. As a result, this business will generate lower margins than the current fixed price offerings but as the past quarters have shown, the overall business can continue to grow the total number of customers, total gross margin and EBITDA while this transition takes place.

The post quarter-end addition of Fulcrum and its affinity marketing focus will add another marketing channel previously not pursued by Just Energy. As well as being strategic, this acquisition is immediately accretive to shareholders. Recently developed telemarketing and Internet sales as well as the Momentis network marketing unit are also further diversifications of the Company's sales platform.

Green products continued to grow as a portion of the residential base. JustGreen as a percentage of the natural gas residential book tripled year over year to 9% while JustGreen currently makes up 12% of the electricity residential book. These profitable products are saleable to a broad spectrum of the residential market and contribute to improve renewals rates at the end of the contracts. Just Energy has contracts with 25 green energy projects across the Company's markets and continues to look for more opportunities as the business expands.

National Home Services was another diversification that contributed to growth this quarter. The number of installed units was up 42% year over year with margin from those units up 73% to $6.5 million in the quarter. This growth, along with improved results at the Company's ethanol plant, more than offset lower margins in the energy marketing business. Just Energy expects continued contribution from these businesses, particularly as NHS expands into new geographic territories.

Overall, the second quarter of fiscal 2012 showed the compound impact of past diversifications. Gross margin was up 6% (4% per share) versus the prior comparable quarter. For the six months ended September 30, 2011, gross margin is up 11% (9% per share), ahead of the published fiscal 2012 guidance of 5% per share. Adjusted EBITDA, which management believes is the best measure of operating performance, was up 28% (25% per share) for the quarter, the second consecutive quarter with greater than 20% per share growth. Year to date, Adjusted EBITDA is up 27% (24% per share), again, ahead of the Company's 5% guidance for fiscal 2012 and consistent with management's expectation over the quarters in fiscal 2011 that were impacted by the warm 2010 winter. Adjusted EBITDA reflects the business profit after maintenance capital and before selling and marketing costs to grow future embedded gross margin. Base EBITDA (after all selling and marketing costs) was up 23% (20% per share) for the quarter and 29% (26% per share) for the year to date.

Operating results were also strong on every measure, although they are being measured against quarters with weather-related losses in fiscal 2011. Payout ratio on Adjusted EBITDA was 91% versus 113% in the prior comparable period, the second consecutive quarter where Just Energy's payout ratio has been down significantly.

The 238,000 customers added in the quarter are consistent with the additions seen in recent quarters. Net additions were sufficient to result in an 8% increase the customer base year over year. With new products and improving results from NHS and Terra Grain Fuels, this level of customer growth will allow continued growth in line with the Company's 5% margin and Adjusted EBITDA targets. This, in turn, will allow Just Energy to comfortably maintain its current $1.24 annual dividend.

The Company continues to actively monitor possible acquisition opportunities within its current business segments.

JUST ENERGY GROUP INC.
INTERIM CONSOLIDATED STATEMENTS OF FINANCIAL POSITION
AS AT
(thousands of Canadian dollars)
Notes September 30, 2011 March 31, 2011
ASSETS
Non-current assets
Property, plant and equipment $ 247,549 $ 234,002
Intangible assets 531,557 640,219
Contract initiation costs 36,889 29,654
Other non-current financial assets 6 5,311 5,384
Non-current receivables 5,394 4,569
Deferred tax asset 86,827 121,785
$ 913,527 $ 1,035,613
Current assets
Inventories $ 10,606 $ 6,906
Gas delivered in excess of consumption 66,646 3,481
Gas in storage 50,471 6,133
Current trade and other receivables 252,121 281,685
Accrued gas receivables 763 26,535
Unbilled revenues 98,437 112,147
Prepaid expenses and deposits 8,651 6,079
Other current assets 6 8,293 3,846
Corporate tax recoverable 9,643 9,135
Cash and cash equivalents 165,006 98,466
670,637 554,413
TOTAL ASSETS $ 1,584,164 $ 1,590,026
DEFICIT AND LIABILITIES
Deficit attributable to equity holders of the parent
Deficit $ (1,389,586 ) $ (1,349,928 )
Accumulated other comprehensive income 7 109,682 123,919
Shareholders' capital 8 981,071 963,982
Equity component of convertible debentures 9(e)(f) 25,795 18,186
Contributed surplus 56,670 52,723
TOTAL DEFICIT (216,368 ) (191,118 )
Non-current liabilities
Long-term debt 9 628,963 507,460
Provisions 3,654 3,244
Deferred lease inducements 1,439 1,622
Other non-current financial liabilities 6 271,235 355,412
Deferred tax liability 8,982 22,919
914,273 890,657
Current liabilities
Bank indebtedness 3,981 2,314
Trade and other payables 251,958 275,503
Accrued gas payable 773 19,353
Deferred revenue 74,075 -
Income taxes payable 1,612 9,788
Current portion of long-term debt 9 95,210 94,117
Provisions 4,264 4,006
Other current financial liabilities 6 454,386 485,406
886,259 890,487
TOTAL LIABILITIES 1,800,532 1,781,144
TOTAL DEFICIT AND LIABILITIES $ 1,584,164 $ 1,590,026
Commitments (Note 15) Subsequent event (Note 16)
See accompanying notes to the interim consolidated financial statements
JUST ENERGY GROUP INC.
INTERIM CONSOLIDATED INCOME STATEMENTS
(thousands of Canadian dollars)
THREE MONTHS ENDED SIX MONTHS ENDED
SEPTEMBER 30 SEPTEMBER 30
Notes 2011 2010 2011 2010
SALES 10 $ 600,043 $ 657,878 $ 1,226,243 $ 1,267,562
COST OF SALES 497,482 561,159 1,029,421 1,090,488
GROSS MARGIN 102,561 96,719 196,822 177,074
EXPENSES
Administrative expenses 28,774 25,963 57,058 54,804
Selling and marketing expenses 35,302 36,950 69,856 66,708
Other operating expenses 11(a ) 40,444 43,625 79,584 81,708
104,520 106,538 206,498 203,220
Operating loss (1,959 ) (9,819 ) (9,676 ) (26,146 )
Finance costs 9 (14,340 ) (15,605 ) (28,132 ) (28,360 )
Change in fair value of derivative instruments 6 24,896 (204,136 ) 104,593 131,411
Other income 2,834 921 2,999 2,703
Income (loss) before income tax 11,431 (228,639 ) 69,784 79,608
Provision for (recovery of) income tax 12 14,925 (95,203 ) 22,146 (57,745 )
PROFIT (LOSS) FOR THE PERIOD $ (3,494 ) $ (133,436 ) $ 47,638 $ 137,353
Attributable to:
Shareholders/
Unitholders
of Just
Energy
$ (3,494 ) $ (133,733 ) $ 47,638 $ 139,676
Non-controlling interests - 297 - (2,323 )
PROFIT (LOSS) FOR THE PERIOD $ (3,494 ) $ (133,436 ) $ 47,638 $ 137,353
See accompanying notes to the interim consolidated financial statements
Profit (loss) per share/unit 13
Basic $(0.03 ) $(1.07 ) $0.35 $1.12
Diluted $(0.03 ) $(1.07 ) $0.35 $0.99
JUST ENERGY GROUP INC.
INTERIM CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(thousands of Canadian dollars)
THREE MONTHS ENDED SIX MONTHS ENDED
SEPTEMBER 30 SEPTEMBER 30
Notes 2011 2010 2011 2010
Profit (loss) for the period $ (3,494 ) $ (133,436 ) $ 47,638 $ 137,353
Other comprehensive income (loss) 7
Unrealized gain on translation of foreign operations 19,272 (5,634 ) 15,527 9,247
Amortization of deferred unrealized gain of discontinued hedges net of income taxes of $861 (2010 - $4,589) and $6,514 (2010 - $10,439) for the three and six months ended September 30, respectively 6 (16,747 ) (23,195 ) (29,764 ) (51,918 )
Other comprehensive income (loss) for the period, net of tax 2,525 (28,829 ) (14,237 ) (42,671 )
Total comprehensive income (loss) for the period, net of tax $ (969 ) $ (162,265 ) $ 33,401 $ 94,682
Total comprehensive income (loss) attributable to:
Shareholders/Unitholders of Just Energy $ (969 ) $ (162,562 ) $ 33,401 $ 97,005
Non-controlling interest - 297 - (2,323 )
Total comprehensive income (loss) for the period, net of tax $ (969 ) $ (162,265 ) $ 33,401 $ 94,682
See accompanying notes to the interim consolidated financial statements
JUST ENERGY GROUP INC.
INTERIM CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIT)
FOR THE SIX MONTHS ENDED SEPTEMBER 30
(thousands of Canadian dollars)
Notes 2011 2010
ATTRIBUTABLE TO THE SHAREHOLDERS/UNITHOLDERS
Accumulated deficit
Accumulated deficit, beginning of period $ (315,934 ) $ (671,010 )
Profit for the period, attributable to the Shareholders/Unitholders 47,638 139,676
Accumulated deficit, end of period (268,296 ) (531,334 )
DISTRIBUTIONS /DIVIDENDS
Distributions and dividends, beginning of period (1,033,994 ) (885,659 )
Distributions and dividends (87,296 ) (78,989 )
Distributions and dividends, end of period (1,121,290 ) (964,648 )
DEFICIT $ (1,389,586 ) $ (1,495,982 )
ACCUMULATED OTHER COMPREHENSIVE INCOME 7
Accumulated other comprehensive income, beginning of period $ 123,919 $ 221,969
Other comprehensive loss (14,237 ) (42,671 )
Accumulated other comprehensive income, end of period $ 109,682 $ 179,298
SHAREHOLDERS'/UNITHOLDERS' CAPITAL
Shareholders' /Unitholders' capital, beginning of period $ 963,982 $ 777,856
Share units exchanged - 8,884
Share units issued on exercise/exchange of unit compensation 728 461
Dividend reinvestment plan 16,361 11,012
Shareholders'/Unitholders' capital, end of period $ 981,071 $ 798,213
EQUITY COMPONENT OF CONVERTIBLE DEBENTURES 9
Balance, beginning of period $ 18,186 $ -
Allocation of new convertible debentures issued 10,188 33,914
Future tax impact on convertible debentures (2,579 ) (15,728 )
Balance, end of period $ 25,795 $ 18,186
CONTRIBUTED SURPLUS
Balance, beginning of period $ 52,723 $ -
Add: Share-based compensation awards 4,606 -
Non-cash deferred share grant distributions 69 -
Less: Share-based awards exercised (728 ) -
Balance, end of period $ 56,670 $ -
See accompanying notes to the interim consolidated financial statements
JUST ENERGY GROUP INC.
INTERIM CONSOLIDATED STATEMENTS OF CASH FLOWS
(thousands of Canadian dollars)
THREE MONTHS ENDED SIX MONTHS ENDED
SEPTEMBER 30 SEPTEMBER 30
Net inflow (outflow) of cash related to the following activities 2011 2010 2011 2010
OPERATING
Income (loss) before income tax $ 11,431 $ (228,639 ) $ 69,784 $ 79,608
Items not affecting cash
Amortization of intangible assets and related supply contracts 29,633 32,255 58,937 59,427
Amortization of contract initiation costs 3,627 4,183 7,498 6,271
Amortization included in cost of goods sold 3,034 2,280 5,937 4,690
Amortization of property, plant and equipment 1,435 1,892 2,776 3,812
Share-based compensation 2,925 2,573 4,606 4,583
Financing charges, non-cash portion 2,017 2,162 3,940 3,643
Transaction costs - 185 - 1,284
Other (102 ) 162 (187 ) 74
Change in fair value of derivative instruments (24,896 ) 204,136 (104,593 ) (131,411 )
17,673 249,828 (21,086 ) (47,627 )
Adjustment required to reflect net cash receipts from gas sales 12,084 18,527 15,192 26,963
Changes in non-cash working capital (5,246 ) (23,125 ) (9,295 ) (17,021 )
35,942 16,591 54,595 41,923
Income tax paid (2,262 ) (5,530 ) (5,221 ) (7,986 )
Cash inflow from operating activities 33,680 11,061 49,374 33,937
INVESTING
Purchase of property, plant and equipment (10,406 ) (10,785 ) (22,001 ) (20,392 )
Purchase of intangible assets (1,897 ) (533 ) (3,494 ) (895 )
Acquisitions of a subsidiary, net of cash acquired - (4,791 ) (2,223 ) (256,763 )
Transaction costs on acquisitions - (185 ) - (1,284 )
Proceeds of long-term receivables (525 ) 105 (786 ) 3,233
Contract initiation costs (7,045 ) (3,598 ) (13,907 ) (7,272 )
Cash outflow from investing activities (19,873 ) (19,787 ) (42,411 ) (283,373 )
FINANCING
Dividends paid (35,968 ) (33,598 ) (70,865 ) (66,841 )
Increase (decrease) in bank indebtedness (2,272 ) (6,990 ) 1,667 (7,373 )
Issuance of long-term debt, net of debt issuance costs 179,118 17,785 248,059 366,982
Repayment of long-term debt (65,722 ) (772 ) (119,428 ) (50,158 )
Cash inflow (outflow) from financing activities 75,156 (23,575 ) 59,433 242,610
Effect of foreign currency translation on cash balances (198 ) 2,344 144 7,045
Net cash inflow (outflow) 88,765 (29,957 ) 66,540 219
Cash, beginning of period 76,241 108,958 98,466 78,782
Cash, end of period $ 165,006 $ 79,001 $ 165,006 $ 79,001
See accompanying notes to the interim consolidated financial statements
JUST ENERGY GROUP INC.
NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS
FOR THE SIX MONTHS ENDED SEPTEMBER 30, 2011
(thousands of Canadian dollars, except where indicated and per unit/share amounts)

1. ORGANIZATION

Effective January 1, 2011, Just Energy completed the conversion from an income trust, Just Energy Income Fund (the "Fund"), to a corporation (the "Conversion"). The plan of arrangement was approved by unitholders on June 29, 2010, and by the Alberta Court of the Queen's Bench on June 30, 2010, and going forward operates under the name, Just Energy Group Inc. ("JEGI", "Just Energy" or the "Company"). JEGI was a newly incorporated entity for the purpose of acquiring the outstanding units of the Fund, exchangeable shares of Just Energy Exchange Corp. ("JEEC") and the Class A preference shares of Just Energy Corp. ("JEC") in each case on a one for one basis for common shares of JEGI. There was no change in the ownership of the business, and therefore, there is no impact to the consolidated financial statements except for the elimination of unitholders' equity and the recording of shareholders' equity in the same amount.

Just Energy is a corporation established under the laws of Canada to hold securities and to distribute the income of its directly or indirectly owned operating subsidiaries and affiliates: Just Energy Ontario L.P., Just Energy Manitoba L.P., Just Energy Quebec L.P., Just Energy (B.C.) Limited Partnership, Just Energy Alberta L.P., Alberta Energy Savings L.P. ("AESLP"), Just Energy Illinois Corp., Just Energy New York Corp., Just Energy Indiana Corp., Just Energy Texas L.P., Just Energy Massachusetts Corp., Just Energy Michigan Corp., Just Energy Pennsylvania Corp., Universal Energy Corporation, Commerce Energy Inc. ("Commerce" or "CEI"), National Energy Corporation (which operates under the trade name of National Home Services ("NHS")), Hudson Energy Services, LLC, and Hudson Energy Canada Corp. (collectively "Hudson" or "HES"), Momentis Canada Corp. and Momentis U.S. Corp. (collectively, "Momentis"), Terra Grain Fuels Inc. ("TGF"), Hudson Energy Solar Corp. ("Hudson Solar") and Just Energy Limited ("JEL").

The registered office of Just Energy is First Canadian Place, 100 King Street West, Toronto, Ontario, Canada. The consolidated financial statements consist of Just Energy, its subsidiaries and affiliates. The financial statements were approved by the Board of Directors on November 8, 2011.

2. OPERATIONS

Just Energy's business primarily involves the sale of natural gas and/or electricity to residential and commercial customers under long-term fixed-price, price-protected or variable-priced contracts and green energy products. By fixing the price of natural gas or electricity under its fixed-price or price-protected program contracts for a period of up to five years, Just Energy's customers offset their exposure to changes in the price of these essential commodities. Variable rate products allow customers to maintain competitive rates while retaining the ability to lock into a fixed price at their discretion. Just Energy, which commenced business in 1997, derives its margin or gross profit from the difference between the price at which it is able to sell the commodities to its customers and the related price at which it purchases the associated volumes from its suppliers. Just Energy also offers green products through its JustGreen and JustClean programs. The electricity JustGreen product offers the customer the option of having all or a portion of his or her electricity sourced from renewable green sources such as wind, run of the river hydro or biomass. The gas JustGreen product offers carbon offset credits that will allow the customer to reduce or eliminate the carbon footprint of their home or business. JustClean products allow customers in certain jurisdictions to offset their carbon footprint without purchasing commodity from Just Energy. JustClean can be offered in all states and provinces and is not dependent on energy deregulation. Management believes that the JustGreen and JustClean products will not only add to profits but will also increase sales receptivity and improve renewal rates.

In addition, through National Home Services, Just Energy sells and rents high efficiency and tankless water heaters, air conditioners and furnaces to Ontario residents. Through its subsidiary, Terra Grain Fuels, Just Energy produces and sells wheat-based ethanol. Just Energy has also launched Hudson Solar, a solar project development platform in New Jersey.

3. BASIS OF PREPARATION AND ADOPTION OF INTERNATIONAL FINANCIAL REPORTING STANDARDS

In 2010, the Canadian Institute of Chartered Accountants ("CICA") Handbook was revised to incorporate International Financial Reporting Standards ("IFRS") and requires publicly accountable enterprises to apply such standards effective for years beginning on or after January 1, 2011. Accordingly, the Company commenced reporting on this basis for the interim financial statements for fiscal 2012.

These consolidated financial statements have been prepared in accordance with IFRS applicable to the preparation of interim financial statements, including International Accounting Standard ("IAS") 34, Interim Financial Reporting, and IFRS 1, First-time Adoption of International Financial Reporting Standards. Subject to certain transition elections, the Company has consistently applied the same accounting policies in its opening IFRS consolidated balance sheet at April 1, 2010, and throughout all periods presented, as if these policies had always been in effect. Note 17 discloses the impact of the transition to IFRS on the Company's reported financial position, financial performance and cash flows, including the nature and effect of significant changes in accounting policies from those used in the Company's audited annual consolidated financial statements for the year ended March 31, 2011, prepared under Canadian generally accepted accounting principles ("CGAAP").

The policies applied in these consolidated financial statements are based on IFRS issued and outstanding as of September 30, 2011. Any subsequent changes to IFRS pertaining to the Company's annual consolidated statements of financial position, income and comprehensive income for the year ending March 31, 2012, could result in a restatement of these consolidated financial statements, including the transition adjustments recognized on changeover to IFRS.

The consolidated financial statements should be read in conjunction with the Company's CGAAP audited annual consolidated financial statements for the year ended March 31, 2011, as well as the Company's first IFRS unaudited interim consolidated financial statements for the three-month period ended June 30, 2011. Note 17 of these financial statements discloses the impact of the transition to IFRS on the Company's reported financial position.

(a) Basis of presentation

The consolidated financial statements are presented in Canadian dollars, the functional currency of Just Energy, and all values are rounded to the nearest thousand. The statements are prepared on an historical cost basis except for the derivative financial instruments, which are stated at fair value.

(b) Principles of consolidation

The consolidated financial statements include the accounts of Just Energy and its directly or indirectly owned subsidiaries and affiliates as at September 30, 2011. Subsidiaries and affiliates are consolidated from the date of acquisition and control, and continue to be consolidated until the date that such control ceases. The financial statements of the subsidiaries and affiliates are prepared for the same reporting period as Just Energy, using consistent accounting policies. All intercompany balances, income, expenses, and unrealized gains and losses resulting from intercompany transactions are eliminated on consolidation.

4. (i) SIGNIFICANT ACCOUNTING JUDGMENTS, ESTIMATES AND ASSUMPTIONS

The preparation of the consolidated financial statements requires the use of estimates and assumptions to be made in applying the accounting policies that affect the reported amounts of assets, liabilities, income, expenses and the disclosure of contingent liabilities. The estimates and related assumptions are based on previous experience and other factors considered reasonable under the circumstances, the results of which form the basis of making the assumptions about carrying values of assets and liabilities that are not readily apparent from other sources.

The estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to accounting estimates are recognized in the period in which the estimate is revised. Judgments made by management in the application of IFRS that have significant impact on the consolidated financial statements relate to the following:

Impairment of non-financial assets

Just Energy's impairment test is based on value-in-use calculations that use a discounted cash flow model. The cash flows are derived from the budget for the next five years and are sensitive to the discount rate used as well as the expected future cash inflows and the growth rate used for extrapolation purposes.

Deferred taxes

Significant management judgment is required to determine the amount of deferred tax assets that can be recognized, based upon the likely timing and the level of future taxable income realized, including the usage of tax-planning strategies.

Development costs

Development costs are capitalized when the product or process is technically and commercially feasible and sufficient resources have been allocated to complete development. Initial capitalization of costs is based on management's judgment that technical and economical feasibility is confirmed, usually when a project has reached a defined milestone according to an established project management model. At September 30, 2011, the carrying amount of capitalized development costs was $16,056 (September 30, 2010 - $17,986). This amount primarily includes costs for the internal development of software tools for the customer billing and analysis in the various operating jurisdictions. These software tools are developed by the internal information technology and operations department for specific regional market requirements.

Useful life of key property, plant and equipment and intangible assets

The amortization method and useful lives reflect the pattern in which management expects the asset's future economic benefits to be consumed by Just Energy.

Provisions for litigation

The State of California has filed a number of complaints to the Federal Energy Regulatory Commission ("FERC") against many suppliers of electricity, including Commerce, a subsidiary of Just Energy, with respect to events stemming from the 2001 energy crises in California. Pursuant to the complaints, the State of California is challenging FERC's enforcement of its market-based rate system. At this time, the likelihood of damages or recoveries and the ultimate amounts, if any, with respect to this litigation are not certain; however, an estimated amount has been recorded in these consolidated financial statements as at September 30, 2011. In the general course of operations, Just Energy has made additional provisions for litigation matters that have arisen.

Trade receivables

Just Energy reviews its individually significant receivables at each reporting date to assess whether an impairment loss should be recorded in the consolidated income statement. In particular, judgment by management is required in the estimation of the amount and timing of future cash flows when determining the impairment loss. In estimating these cash flows, Just Energy makes judgments about the borrower's financial situation and the net realizable value of collateral. These estimates are based on assumptions about a number of factors. Actual results may differ, resulting in future changes to the allowance.

Fair value of financial instruments

Where the fair value of financial assets and financial liabilities recorded in the consolidated statement of financial position cannot be derived from active markets, they are determined using valuation techniques including discounted cash flow models. The inputs to these models are taken from observable markets where possible, but where this is not feasible, a degree of judgment is required in establishing fair values. The judgment includes consideration of inputs such as liquidity risk, credit risk and volatility. Changes in assumptions about these factors could affect the reported fair value of financial instruments. Refer to Note 6 for further details about the assumptions as well as sensitivity analysis.

Acquisition accounting

For acquisition accounting purposes, all identifiable assets, liabilities and contingent liabilities acquired in a business combination are recognized at fair value on the date of acquisition. Estimates are used to calculate the fair value of these assets and liabilities as at the date of acquisition.

(ii) ACCOUNTING STANDARDS ISSUED BUT NOT YET APPLIED

IFRS 9, Financial Instruments

As of April 1, 2013, Just Energy will be required to adopt IFRS 9, Financial Instruments, which is the result of the first phase of the IASB's project to replace IAS 39, Financial Instruments: Recognition and Measurement. The new standard replaces the current multiple classification and measurement models for financial assets and liabilities with a single model that has only two classification categories: amortized cost and fair value. The Company has not yet assessed the impact of the standard or determined whether it will adopt the standard early.

IFRS 10, Consolidated Financial Statements

As of April 1, 2013, IFRS 10, Consolidated Financial Statements will replace portions of IAS 27, Consolidated and Separate Financial Statements, and interpretation SIC-12, Consolidation: Special Purpose Entities. The new standard requires consolidated financial statements to include all controlled entities under a single control model. The Company will be considered to control an investee when it is exposed, or has rights to variable returns from its involvement with the investee, and has the current ability to affect those returns through its power over the investee.

As required by this standard, control is reassessed as facts and circumstances change. All facts and circumstances must be considered to make a judgment about whether the Company controls another entity; there are no clear lines. Additional guidance is given on how to evaluate whether certain relationships give the Company the current ability to affect its returns, including how to consider options and convertible instruments, holding less than a majority of voting rights, how to consider protective rights, and principal-agency relationships (including removal rights), all of which may differ from current practice. The Company has not yet assessed the impact of the standard or determined whether it will adopt the standard early.

IFRS 11, Joint Arrangements

On April 1, 2013, Just Energy will be required to adopt IFRS 11, Joint Arrangements, which applies to accounting for interests in joint arrangements where there is joint control. The standard requires the joint arrangements to be classified as either joint operations or joint ventures. The structure of the joint arrangement would no longer be the most significant factor when classifying the joint arrangement as either a joint operation or a joint venture. In addition, the option to account for joint ventures (previously called "jointly controlled entities") using proportionate consolidation will be removed and replaced by equity accounting.

Due to the adoption of this new section, the Company will transition the accounting for joint ventures from the proportionate consolidation method to the equity method by aggregating the carrying values of the proportionately consolidated assets and liabilities into a single line item. The Company has not yet assessed the impact of the standard or determined whether it will adopt the standard early.

IFRS 12, Disclosure of Interests in Other Entities

On April 1, 2013, Just Energy will be required to adopt IFRS 12, Disclosure of Interests in Other Entities, which includes disclosure requirements about subsidiaries, joint ventures and associates, as well as unconsolidated structured entities, and replaces existing disclosure requirements. Due to this new section, the Company will be required to disclose the following: judgments and assumptions made when deciding how to classify involvement with another entity, interests that non-controlling interests have in consolidated entities, and nature of the risks associated with interests in other entities. The Company has not yet assessed the impact of the standard or determined whether it will adopt the standard early.

IFRS 13, Fair Value Measurement

On April 1, 2013, Just Energy will be required to adopt IFRS 13, Fair Value Measurement. The new standard will generally converge the IFRS and CGAAP requirements for how to measure fair value and the related disclosures. IFRS 13 establishes a single source of guidance for fair value measurements, when fair value is required or permitted by IFRS. Upon adoption, the Company will provide a single framework for measuring fair value while requiring enhanced disclosures when fair value is applied. In addition, fair value will be defined as the "exit price" and concepts of "highest and best use" and "valuation premise" would be relevant only for non-financial assets and liabilities. The Company has not yet assessed the impact of the standard or determined whether it will adopt the standard early.

IAS 27, Separate Financial Statements

On April 1, 2013, Just Energy will be required to adopt IAS 27, Separate Financial Statements. As a result of the issue of the new consolidation suite of standards, IAS 27 has been reissued to reflect the change as the consolidation guidance has recently been included in IFRS 10.

In addition, IAS 27 will now only prescribe the accounting and disclosure requirements for investments in subsidiaries, joint ventures and associates when the Company prepares separate financial statements. The Company has not yet assessed the impact of the standard or determined whether it will adopt the standard early.

IAS 28, Investments in Associates and Joint Ventures

On April 1, 2013, Just Energy will be required to adopt IAS 28, Investments in Associates and Joint Ventures. As a consequence of the issue of IFRS 10, IFRS 11 and IFRS 12, IAS 28 has been amended and will further provide the accounting guidance for investments in associates and will set out the requirements for the application of the equity method when accounting for investments in associates and joint ventures.

This standard will be applied by the Company when there is joint control or significant influence over an investee. Significant influence is the power to participate in the financial and operating policy decisions of the investee but does not include control or joint control of those policy decisions. When determined that the Company has an interest in a joint venture, the Company will recognize an investment and will account for it using the equity method in accordance with IAS 28. The Company has not yet assessed the impact of the standard or determined whether it will adopt the standard early.

5. SEASONALITY OF OPERATIONS

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.

6. FINANCIAL INSTRUMENTS

(a) Fair value

Fair value is the estimated amount that Just Energy would pay or receive to dispose of these supply contracts in an arm's length transaction between knowledgeable, willing parties who are under no compulsion to act. Management has estimated the value of electricity, unforced capacity, heat rates, heat rate options, renewable and gas swap and forward contracts using a discounted cash flow method which employs market forward curves that are either directly sourced from third parties or are developed internally based on third party market data. These curves can be volatile thus leading to volatility in the mark to market with no impact to cash flows. Gas options have been valued using the Black option value model using the applicable market forward curves and the implied volatility from other market traded gas options.

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

The following tables illustrate gains/(losses) related to Just Energy's derivative financial instruments classified as held-for-trading and recorded on the balance sheet as other assets and other liabilities with their offsetting values recorded in change in fair value derivative instruments for the three months ended September 30, 2011:

Change in Fair Value of Derivative Instruments
For the three months ended September 30, 2011 For the three months ended September 30, 2011 (USD) For the three months ended September 30, 2010 For the three months ended September 30, 2010 (USD)
Canada
Fixed-for-floating electricity swaps (i) $ 32,805 n/a $ (4,605 ) n/a
Renewable energy certificates (ii) (9 ) n/a (3 ) n/a
Verified emission-reduction credits (iii) (10 ) n/a (1,189 ) n/a
Options (iv) (122 ) n/a 1,692 n/a
Physical gas forward contracts (v) 31,991 n/a (61,473 ) n/a
Transportation forward contracts (vi) 1,569 n/a (1,433 ) n/a
Fixed financial swaps (vii) 1,742 n/a - n/a
United States
Fixed-for-floating electricity swaps (viii) 488 498 (24,172 ) (23,263 )
Physical electricity forwards (ix) (8,625 ) (8,799 ) (28,881 ) (27,795 )
Unforced capacity forward contracts (x) (1,682 ) (1,716 ) (209 ) (201 )
Unforced capacity physical contracts (xi) (4,301 ) (4,388 ) (255 ) (246 )
Renewable energy certificates (xii) 1,560 1,591 (1,159 ) (1,116 )
Verified emission-reduction credits (xiii) (24 ) (24 ) (331 ) (318 )
Options (xiv) 431 439 749 721
Physical gas forward contracts (xv) (1,053 ) (1,075 ) (11,315 ) (10,890 )
Transportation forward contracts (xvi) 417 425 (365 ) (351 )
Heat rate swaps (xvii) 3,624 3,697 (4,464 ) (4,296 )
Fixed financial swaps (xviii) (10,063 ) (10,266 ) (33,107 ) (31,862 )
Foreign exchange forward contracts (xix) (2,521 ) n/a 524 n/a
Ethanol physical forward contracts (xx) (40 ) n/a - n/a
Amortization of deferred unrealized gains on discontinued hedges 15,886 n/a 27,784 n/a
Amortization of derivative financial instruments related to acquisitions (37,167 ) n/a (39,042 ) n/a
Liability associated with exchangeable shares & equity based compensation - $ - (22,882 ) n/a
Change in Fair Value of Derivative Instruments $ 24,896 $ (204,136 )

The following tables illustrate gains/(losses) related to Just Energy's derivative financial instruments classified as held-for-trading and recorded on the balance sheet as other assets and other liabilities with their offsetting values recorded in change in fair value derivative instruments for the six months ended September 30, 2011:

Change In Fair Value of Derivative Instruments
For the six months ended September 30, 2011 For the six months ended September 30, 2011 (USD) For the six months ended September 30, 2010 For the six months ended September 30, 2010 (USD)
Canada
Fixed-for-floating electricity swaps (i) $ 72,896 n/a $ 134,236 n/a
Renewable energy certificates (ii) 545 n/a (146 ) n/a
Verified emission-reduction credits (iii) (29 ) n/a (1,189 ) n/a
Options (iv) 4,201 n/a 855 n/a
Physical gas forward contracts (v) 60,467 n/a 22,155 n/a
Transportation forward contracts (vi) 2,230 n/a 11,917 n/a
Fixed financial swaps (vii) (430 ) n/a - n/a
United States
Fixed-for-floating electricity swaps (viii) 15,993 16,521 72 255
Physical electricity forwards (ix) (9,188 ) (9,381 ) (6,199 ) (5,833 )
Unforced capacity forward contracts (x) (3,021 ) (3,100 ) (369 ) (357 )
Unforced capacity physical contracts (xi) (4,197 ) (4,280 ) (899 ) (872 )
Renewable energy certificates (xii) 2,393 2,452 (1,839 ) (1,777 )
Verified emission-reduction credits (xiii) (348 ) (359 ) (333 ) (321 )
Options (xiv) 1,100 1,131 929 896
Physical gas forward contracts (xv) 4,792 4,966 19,319 18,921
Transportation forward contracts (xvi) 667 683 (208 ) (199 )
Heat rate swaps (xvii) 2,569 2,607 (7,522 ) (7,271 )
Fixed financial swaps (xviii) (4,870 ) (4,900 ) (25,741 ) (24,701 )
Foreign exchange forward contracts (xix) (3,069 ) n/a 247 n/a
Ethanol physical forward contracts (xx) (85 ) n/a - n/a
Amortization of deferred unrealized gains on discontinued hedges 36,278 n/a 62,357 n/a
Amortization of derivative financial instruments related to acquisitions (74,301 ) n/a (74,520 ) n/a
Liability associated with exchangeable shares & equity based compensation - n/a (1,711 ) n/a
Change In Fair Value of Derivative Instruments $ 104,593 $ 131,411

The following table summarizes certain aspects of the financial assets and liabilities recorded in the consolidated financial statements as at September 30, 2011:

Other assets Other assets Other liabilities Other liabilities
(current) (long term) (current) (long term)
Canada
Fixed-for-floating electricity swaps (i) $ - $ - $ 94,540 $ 57,242
Renewable energy certificates (ii) 762 201 162 441
Verified emission-reduction credits (iii) 10 - 322 660
Options (iv) 844 461 - -
Physical gas forward contracts (v) - - 146,928 94,087
Transportation forward contracts (vi) - - 3,690 2,214
Fixed financial swaps (vii) - 1,095 2,261 481
United States
Fixed-for-floating electricity swaps (viii) - 1,309 27,802 15,190
Physical electricity forwards (ix) 81 - 66,978 43,229
Unforced capacity forward contracts (x) 1,086 - 1,197 3,369
Unforced capacity physical contracts (xi) - - 4,209 2,848
Renewable energy certificates (xii) 1,627 223 630 1,411
Verified emission-reduction credits (xiii) 21 - 395 778
Options (xiv) 50 8 144 47
Physical gas forward contracts (xv) - - 36,327 14,895
Transportation forward contracts (xvi) - - 1,816 502
Heat rate swaps (xvii) 3,762 2,014 24 62
Fixed financial swaps (xviii) - - 65,318 33,745
Foreign exchange forward contracts (xix) - - 1,643 34
Ethanol physical forward contracts (xx) 50 - - -
As at September 30, 2011 $ 8,293 $ 5,311 $ 454,386 $ 271,235

The following table summarizes certain aspects of the financial assets and liabilities recorded in the consolidated financial statements as at March 31, 2011:

Other assets Other assets Other liabilities Other liabilities
(current) (long term) (current) (long term)
Canada
Fixed-for-floating electricity swaps (i) $ - $ - $ 131,279 $ 93,397
Renewable energy certificates (ii) 194 196 158 417
Verified emission-reduction credits (iii) - - 315 628
Options (iv) 815 692 4,403 -
Physical gas forward contracts (v) - - 166,634 134,847
Transportation forward contracts (vi) - 24 5,301 2,858
Fixed financial swaps (vii) - 1,037 2,235 19
United States
Fixed-for-floating electricity swaps (viii) 125 45 29,028 25,719
Physical electricity forwards (ix) - 310 55,548 37,535
Unforced capacity forward contracts (x) 309 177 581 118
Unforced capacity physical contracts (xi) 100 410 1,606 1,280
Renewable energy certificates (xii) 44 49 1,037 1,610
Verified emission-reduction credits (xiii) 13 36 275 491
Options (xiv) 1 - 1,056 165
Physical gas forward contracts (xv) 40 - 32,883 19,354
Transportation forward contracts (xvi) - - 1,526 1,281
Heat rate swaps (xvii) 639 2,408 180 131
Fixed financial swaps (xviii) 40 - 51,361 35,562
Foreign exchange forward contracts (xix) 1,391 - - -
Ethanol physical forward contracts (xx) 135 - - -
As at March 31, 2011 $ 3,846 $ 5,384 $ 485,406 $ 355,412

The following table summarizes financial instruments classified as held-for-trading as at September 30, 2011, to which Just Energy has committed:

Contract type Notional volume Total remaining volume Maturity date Fixed price Fair value favourable/
(unfavourable)
Notional value
Canada
(i) Fixed-for-floating electricity swaps * 0.0001-48 MW h 8,843,178 MW h October 31, 2011 - August 01, 2017 $28.75-$128.13 ($151,782) $535,555
(ii) Renewable energy certificates 10-90,000 MW h 1,133,558 MW h December 31, 2011 - December 31, 2015 $3.00-$26.00 $360 $7,284
(iii) Verified emission reduction credits 3,000-55,000 Tonnes 590,667 Tonnes December 31, 2011 - December 31, 2014 $4.00-$11.50 ($972) $5,342
(iv) Options 119-28,500 GJ/month 2,348,816 GJ October 31, 2011 - February 28, 2014 $7.16-$12.39 $1,305 $4,398
(v) Physical gas forward contracts 1-7,412 GJ/day 85,028,915 GJ October 31, 2011 - March 31, 2016 $2.95-$10.00 ($241,015) $593,930
(vi) Transportation forward contracts 45-20,000 GJ/day 40,627,728 GJ October 31, 2011 - May 31, 2015 $0.0025-$1.59 ($5,907) $25,029
(vii) Fixed financial swaps 14,000-157,387 GJ/month 18,533,887 GJ October 31, 2011 - December 31, 2016 $3.21-$8.79 ($1,647) $84,824
United States
(viii) Fixed-for-floating electricity swaps * 0.10-80 MW h 9,039,488 MW h October 31, 2011 - September 30, 2016 $25.47-$143.34 (US$24.30-$136.75) ($41,683) (US($39,766)) $510,614 (US$487,134)
(ix) Physical electricity forwards 1-165 MW h 9,664,148 MW h October 31, 2011 - September 30, 2016 $15.76-$115.56 (US$15.04-$110.25) ($110,126) (US($105,062)) $506,550 (US$483,257)
(x) Unforced capacity forward contracts 5-150 MW Cap 146,641 MW Cap October 31, 2011 - May 31, 2014 $1,905-$8,386 (US$1,817-$8,000) ($3,480) ((US$3,320)) $11,401 (US$10,877)
(xi) Unforced capacity physical contracts 2-200 MW Cap 2,932 MW Cap October 31, 2011 - May 31, 2014 $1,048-$9,172 (US$1,000-$8,750) ($7,057) ((US$6,732)) $12,862 (US$12,271)
(xii) Renewable energy certificates 300-160,000 MW h 2,780,696 MW h December 31, 2011 - December 31, 2016 $1.021-$44.55 (US$0.975-$42.50) ($191) (US($182)) $18,303 (US$17,461)
(xiii) Verified emission-reduction credits 8,000-50,000 Tonnes 900,948 Tonnes December 31, 2011 - December 31, 2016 $3.14-$9.17 (US$3.00-$8.75) ($1,152) (US$(1,099)) $5,888 (US$5,617)
(xiv) Options 5-90,000 mmBTU/month 2,758,820 mmBTU October 31, 2011 - December 31, 2014 $8.12-$14.47 (US$7.75-$13.80) ($133) (US($127)) $3,891 (US$3,712)
(xv) Physical gas forward contracts 4-4,300 mmBTU/day 12,735,868 mmBTU October 03, 2011 - July 31, 2014 $3.67-$12.45 (US$3.50-$11.88) ($51,222) (US($48,867)) $110,675 (US$105,586)
(xvi) Transportation forward contracts 2-16,000 mmBTU/day 28,803,358 mmBTU October 31, 2011 - August 31, 2015 $0.0026-$0.9014 (US$0.0025-$0.8600) ($2,318) (US($2,211)) ($51,649) (US$49,274)
(xvii) Heat rate swaps 1-25 MW h 3,341,878 MW h October 31, 2011 - June 30, 2016 $22.48-$78.58 (US$21.45-$74.97) $5,690 (US$5,428) $134,983 (US$128,776)
(xviii) Fixed financial swaps 930-1,150,000 mmBTU/month 53,859,757 mmBTU October 31, 2011 - May 31, 2017 $4.01-$9.85 (US$3.83-$9.40) ($99,063) (US($94,508)) $356,295 (US$339,911)
(xix) Foreign exchange forward contracts ($524-$3,669) (US$500-$3,500) n/a October 03, 2011 - October 01, 2012 $0.969-$1.037 ($1,677) $34,516 (US$34,389)
(xx) Ethanol forward physical contracts 396,258 Gallons 2,377,548 Gallons October 01, 2011 - December 01, 2011 $2.28-$2.48 $50 $5,642

* Some of the electricity fixed-for-floating contracts related to the Province of Alberta and the Province of Ontario are 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 are subject to change with customer usage requirements. There are also load shaped fixed-for-floating contracts in these and the rest of Just Energy's electricity markets wherein the quantity of electricity is established but varies throughout the term of the contracts.

The estimated amortization of deferred gains and losses reported in accumulated other comprehensive income that is expected to be amortized to net income within the next 12 months is a gain of $52,461.

These derivative financial instruments create a credit risk for Just Energy since they have been transacted with a limited number of counterparties. Should any counterparty be unable to fulfill its obligations under the contracts, Just Energy may not be able to realize the other asset balance recognized in the consolidated financial statements.

Fair value ("FV") hierarchy

Level 1

The fair value measurements are classified as Level 1 in the FV hierarchy if the fair value is determined using quoted, unadjusted market prices. Just Energy values its cash and cash equivalent, accounts receivable, unbilled revenue, bank indebtedness, accounts payable and accrued liabilities, unit distributions payable, and long-term debt under Level 1.

Level 2

Fair value measurements that require inputs other than quoted prices in Level 1, either directly or indirectly, are classified as Level 2 in the FV hierarchy. This could include the use of statistical techniques to derive the FV curve from observable market prices. However, in order to be classified under Level 2, inputs must be substantially observable in the market. Just Energy values its New York Mercantile Exchange ("NYMEX") financial gas fixed-for-floating swaps under Level 2.

Level 3

Fair value measurements that require unobservable market data or use statistical techniques to derive forward curves from observable market data and unobservable inputs are classified as Level 3 in the FV hierarchy. For the electricity supply contracts, Just Energy uses quoted market prices as per available market forward data and applies a price shaping profile to calculate the monthly prices from annual strips and hourly prices from block strips for the purposes of mark to market calculations. The profile is based on historical settlements with counterparties or with the system operator and is considered an unobservable input for the purposes of establishing the level in the hierarchy. For the natural gas supply contracts, Just Energy uses three different market observable curves: 1) Commodity (predominately NYMEX), 2) Basis and 3) Foreign Exchange. NYMEX curves extend for over five years (thereby covering the length of Just Energy's contracts); however, most basis curves only extend 12 to 15 months into the future. In order to calculate basis curves for remaining years, Just Energy uses extrapolation, which leads natural gas supply contracts to be classified under Level 3.

Fair value measurement input sensitivity

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

The following table illustrates the classification of financial assets/(liabilities) in the FV hierarchy as at September 30, 2011:

September 30, 2011
Level 1 Level 2 Level 3 Total
Financial assets
Cash and short term deposits $ 165,006 $ - $ - $ 165,006
Loans and receivable 353,855 - - 353,855
Derivative financial assets - 1,095 12,509 13,604
Financial liabilities
Derivative financial liabilities - (101,805 ) (623,816 ) (725,621 )
Other financial liabilities (980,110 ) - - (980,110 )
Total net derivative liabilities $ (461,249 ) $ (100,710 ) $ (611,307 ) $ (1,173,266 )

The following table illustrates the changes in net fair value of financial assets/(liabilities) classified as Level 3 in the FV hierarchy for the three months ended September 30, 2011:

September 30, 2011
Opening balance, April 1, 2011 $ (743,488 )
Total gain/(losses) - Profit for the period 32,793
Purchases (10,728 )
Sales 1,118
Settlements 108,998
Transfer out of Level 3 -
Closing Balance, September 30, 2011 $ (611,307 )

(b) Classification of financial assets and liabilities

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

As at September 30, 2011 Carrying amount Fair value
Cash and cash equivalents $ 165,006 $ 165,006
Current trade and other receivables 252,121 252,121
Unbilled revenues 98,437 98,437
Non-current receivables 5,394 5,394
Other assets 13,604 13,604
Bank indebtedness, trade and other payables 255,939 255,939
Long-term debt 724,173 753,785
Other liabilities 725,621 725,621
Three months ended Six months ended
September 30 September 30
2011 2010 2011 2010
Interest expense on financial liabilities not held-for trading $ 14,340 $ 15,605 $ 28,132 $ 28,360

The carrying value of cash and cash equivalents, current trade and other receivables, unbilled revenues, and trade and other payables approximates the fair value due to their short-term liquidity.

The carrying value of long-term debt approximates its fair value as the interest payable on outstanding amounts is at rates that vary with Bankers' Acceptances, LIBOR, Canadian bank prime rate or U.S. prime rate, with the exception of the $90 million, $330 million and $100 million convertible debentures, which are fair valued, based on market value.

(c) Management of risks arising from financial instruments

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

(i) Market risk

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

Foreign currency risk

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

A portion of Just Energy's income is generated in U.S. dollars and is subject to currency fluctuations. The performance of the Canadian dollar relative to the U.S. dollar could positively or negatively affect Just Energy's income. Due to its growing operations in the U.S., Just Energy expects to have a greater exposure to U.S. fluctuations in the future than in prior years. Just Energy has hedged between 25% and 90% of certain forecasted cross border cash flows that are expected to occur within the next year. The level of hedging is dependent on the source of the cash flow and the time remaining until the cash repatriation occurs.

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

With respect to translation exposure, as at September 30, 2011, if the Canadian dollar had been 5% stronger or weaker against the U.S. dollar, assuming that all the other variables had remained constant, profit for the period would have been $420 higher/lower and other comprehensive income would have been $960 higher/lower.

Interest rate risk

Just Energy is also exposed to interest rate fluctuations associated with its floating rate credit facility. Just Energy's current exposure to interest rates does not economically warrant the use of derivative instruments. Just Energy's exposure to interest rate risk is immaterial and temporary in nature. Just Energy does not currently believe that this long-term debt exposes it to material financial risks but has set out parameters to actively manage this risk within its Risk Management Policy.

A 1% increase (decrease) in interest rates would have resulted in a decrease (increase) in income before income taxes for the three and six months ended September 30, 2011, of approximately $264 and $489.

Commodity price risk

Just Energy is exposed to market risks associated with commodity prices and market volatility where estimated customer requirements do not match actual customer requirements. Management actively monitors these positions on a daily basis in accordance with its Risk Management Policy. This policy sets out a variety of limits, most importantly thresholds for open positions in the gas and electricity portfolios, which also feed a Value at Risk limit; should any of the limits be exceeded, they are closed expeditiously or express approval to continue to hold is obtained. Just Energy's exposure to market risk is affected by a number of factors, including accuracy of estimation of customer commodity requirements, commodity prices, volatility and liquidity of markets. Just Energy enters into derivative instruments in order to manage exposures to changes in commodity prices. The derivative instruments that are used are designed to fix the price of supply for estimated customer commodity demand and thereby fix margins such that shareholder dividends can be appropriately established. Derivative instruments are generally transacted over the counter. The inability or failure of Just Energy to manage and monitor the above market risks could have a material adverse effect on the operations and cash flow of Just Energy.

Commodity price sensitivity – all derivative financial instruments

As at September 30, 2011, if the energy prices including natural gas, electricity, verified emission reduction credits, and renewable energy certificates, had risen (fallen) by 10%, assuming that all the other variables had remained constant, income before taxes for the quarter ended September 30, 2011, would have increased (decreased) by $194,198 ($192,671) primarily as a result of the change in the fair value of Just Energy's derivative instruments.

Commodity price sensitivity – Level 3 derivative financial instruments

As at September 30, 2011, if the energy prices including natural gas, electricity, verified emission reduction credits, and renewable energy certificates, had risen (fallen) by 10%, assuming that all the other variables had remained constant, income before taxes for the quarter ended September 30, 2011, would have increased (decreased) by $173,349 ($171,851) primarily as a result of the change in the fair value of Just Energy's derivative instruments.

(ii) Credit risk

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

Customer credit risk

In Alberta, Texas, Illinois, Pennsylvania, California, Maryland, New York and New Jersey, Just Energy has customer credit risk and, therefore, credit review processes have been implemented to perform credit evaluations of customers and manage customer default. If a significant number of customers were to default on their payments, it could have a material adverse effect on the operations and cash flows of Just Energy. Management factors default from credit risk in its margin expectations for all the above markets.

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

September 30, 2011 March 31, 2011
Current $ 64,796 $ 61,695
1–30 days 16,649 15,088
31–60 days 6,322 5,533
61–90 days 4,108 5,652
Over 91 days 10,992 10,322
$ 102,867 $ 98,290

For the six months ended September 30, 2011, changes in the allowance for doubtful accounts were as follows:

Balance, beginning of period $ 25,115
Provision for doubtful accounts 13,265
Bad debts written off (10,590 )
Other 844
Balance, end of period $ 28,634

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

Counterparty credit risk

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

As at September 30, 2011, the maximum counterparty credit risk exposure amounted to $116,471, representing the risk relating to its derivative financial assets and accounts receivable.

(iii) Liquidity risk

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

The following are the contractual maturities, excluding interest payments, reflecting undiscounted disbursements of Just Energy's financial liabilities as at September 30, 2011.

Carrying amount Contractual cash flows Less than 1 year 1 to 3 years 4 to 5 years More than 5 years
Trade and other payables $ 251,958 $ 251,958 $ 251,958 $ - $ - $ -
Bank indebtedness 3,981 3,981 3,981 - - -
Long-term debt * 724,173 785,966 95,210 213,401 27,521 449,834
Derivative instruments 725,621 2,979,474 1,383,826 1,329,121 260,291 6,236
$ 1,705,733 $ 4,021,379 $ 1,734,975 $ 1,542,522 $ 287,812 $ 456,070

* Included in long-term debt is $330,000, $100,000 and $90,000 relating to convertible debentures, which may be settled through the issuance of shares at the option of the holder or Just Energy upon maturity.

In addition to the amounts noted above, at September 30, 2011, net interest payments over the life of the long-term debt and bank credit facility are as follows:

Less than 1 year 1 to 3 years 4 to 5 years More than 5 years
Interest payments $ 46,731 $ 85,898 $ 66,256 $ 91,208

(iv) Supplier risk

Just Energy purchases the majority of the gas and electricity delivered to its customers through long-term contracts entered into with various suppliers. Just Energy has an exposure to supplier risk as the ability to continue to deliver gas and electricity to its customers is reliant upon the ongoing operations of these suppliers and their ability to fulfill their contractual obligations. Just Energy has discounted the fair value of its financial assets by $2,596 to accommodate for its counterparties' risk of default.

7. ACCUMULATED OTHER COMPREHENSIVE INCOME

For the six months ended September 30, 2011
Foreign
currency
translation Cash flow
adjustment hedges Total
Balance, beginning of period $29,033 $94,886 $123,919
Unrealized foreign currency translation adjustment 15,527 - 15,527
Amortization of deferred unrealized gain on discontinued hedges net of income taxes of $6,514 - (29,764 ) (29,764 )
Balance, end of period $44,560 $65,122 $109,682
For the six months ended September 30, 2010
Foreign
currency
translation Cash flow
adjustment hedges Total
Balance, beginning of period $ 28,584 $ 193,385 $ 221,969
Unrealized foreign currency translation adjustment 9,247 - 9,247
Amortization of deferred unrealized gain on discontinued hedges net of income taxes of $10,439 - (51,918 ) (51,918 )
Balance, end of period $ 37,831 $ 141,467 $ 179,298

8. SHAREHOLDERS' CAPITAL

Details of issued shareholders' capital are as follows for the six months ended September 30, 2011.

Issued and outstanding Shares Amount
Balance, beginning of period 136,963,726 $ 963,982
Share-based awards exercised 48,210 728
Dividend reinvestment plan (i) 1,237,430 16,361
Balance, end of period 138,249,366 $ 981,071

(i) Dividend reinvestment plan

Under Just Energy's dividend reinvestment plan ("DRIP"), shareholders holding a minimum of 100 common shares can elect to receive their dividends in common shares rather than cash at a 2% discount to the simple average closing price of the common shares for five trading days preceding the applicable dividend payment date, providing the common shares are issued from treasury and not purchased on the open market.

9. LONG-TERM DEBT AND FINANCING

September 30, 2011 March 31, 2011
Credit facility (a) $ 67,223 $ 53,000
Less: Debt issue costs (a) (1,580 ) (1,965 )
TGF credit facility (b)(i) 34,363 36,680
TGF debentures (b)(ii) 35,942 37,001
NHS financing (c) 128,438 105,716
$90 million convertible debentures (d) 85,390 84,706
$330 million convertible debentures (e) 289,136 286,439
$100 million convertible debentures (f) 85,261 -
724,173 601,577
Less: current portion (95,210 ) (94,117 )
$ 628,963 $ 507,460

Future annual minimum principal repayments are as follows:

Less than 1 year 1 to 3 years 4 to 5 years More than 5 years Total
Credit facility (a) $ - $ 67,223 $ - $ - $ 67,223
TGF credit facility (b)(i) 34,363 - - - 34,363
TGF debentures (b)(ii) 35,942 - - - 35,942
NHS financing (c) 24,905 56,178 27,521 19,834 128,438
$90 million convertible debentures (d) - 90,000 - - 90,000
$330 million convertible debentures (e) - - - 330,000 330,000
$100 million convertible debentures (f) 100,000