MANAGEMENT REAFFIRMS F2007 GUIDANCE - 15% - 20% GROWTH IN GROSS MARGIN AND DISTRIBUTABLE CASH
TORONTO, ONTARIO--(CCNMatthews - Feb. 8, 2007) - Energy Savings Income Fund (TSX:SIF.UN) -
Highlights for the third quarter ended December 31, 2006 included:
- 25th increase in annual distribution rate, to $1.065 payable effective
the March 2007 payment
- Solid Operating Results
- Seasonally adjusted sales - Up 27%
- Seasonally adjusted gross margin - Up 19%
- Distributable Cash after Customer Replacement(i) - Up 6%
- Distributable Cash after Marketing(i) - Up 37%
- Net Income up 7%
- Lower than Expected Customer Additions
- 65,000 customers aggregated, down from 93,000 in Q2
- Management has revised its customer aggregation target from 475,000 to
350,000 for the fiscal year
- Gross Margin per New Customer up 43% over Target Levels
- Management Reaffirms Published Financial Guidance for F2007
- 15% - 20% growth in Gross Margin
- 15% - 20% growth in Distributable Cash
In consideration of these operating results, Management announced that the
Board of Directors has approved Energy Savings 25th increase in annual
distribution rate, an increase of $0.03 annually to $1.065 per unit
($0.08875 per month) effective the distribution paid March 31, 2007.
(i) See Management's Discussion and Analysis for calculation
Energy Savings Third Quarter Results
Energy Savings is an Income Fund and it reports in the attached Management's Discussion and Analysis a detailed calculation of distributable cash both before and after marketing expenditures to expand the Fund's customer base.
Energy Savings Income Fund announced its results for the three and nine months ended December 31, 2006.
--------------------------------------------------------------------------- Three months ended December 31 F2007 Per Unit F2006 Per Unit ($ millions except per Unit) --------------------------------------------------------------------------- Sales(1) $417.2 $328.6 --------------------------------------------------------------------------- Gross Margin(1) 61.6 $0.57 51.8 $0.48 Distributable Cash(1) --------------------------------------------------------------------------- - After Customer Replacement 37.3 $0.35 35.2 $0.33 --------------------------------------------------------------------------- - After New Customer Marketing 36.5 $0.34 26.6 $0.25 --------------------------------------------------------------------------- Distributions 27.5 $0.26 24.3 $0.23 --------------------------------------------------------------------------- Long Term Customers 1,654,000 1,413,000 --------------------------------------------------------------------------- Nine months ended December 31 F2007 Per Unit F2006 Per Unit ($ millions except per Unit) --------------------------------------------------------------------------- Sales(1) $1,068.4 $862.5 --------------------------------------------------------------------------- Gross Margin(1) 153.9 $1.43 133.8 $1.25 --------------------------------------------------------------------------- Distributable Cash(1) --------------------------------------------------------------------------- - After Customer Replacement 92.5 $0.86 88.9 $0.83 --------------------------------------------------------------------------- - After New Customer Marketing 77.1 $0.72 68.9 $0.64 --------------------------------------------------------------------------- Distributions 79.9 $0.74 71.8 $0.67 --------------------------------------------------------------------------- Ending Annual Distribution per Unit $1.035 $0.915 --------------------------------------------------------------------------- (1) Seasonally adjusted
By all financial measures, Energy Savings exhibited solid growth in the third quarter. Year over year, sales increased by 27%, gross margin by 19%, post-replacement distributable cash by 6% and distributable cash after all marketing by 37%. Our distributions to Unitholders were up 13%. Driving this growth were two key factors, a 17% year over year growth in our customer base and substantially higher new customer gross margins.
Sales growth reflected both the growth in customer base and higher selling prices. Margin growth was a function of more customers and higher margin per customer offset by a record warm December (reducing customer natural gas consumption) in the Northeast.
Growth in distributable cash after customer replacement was slowed by high renewal costs and continued high attrition driven largely by customer switching in the U.S. markets. Distributable cash after all marketing was up by 37% largely due to lower expenditures on new customer additions versus the prior year.
As in the second quarter, management reaffirms the Fund's published financial guidance of 15% to 20% year over year growth in both gross margin and distributable cash. The Fund is able to provide this guidance based on the locked-in nature of its customer margins for the fourth quarter. As with all businesses, outside factors can impact expected results. The major risk to the Fund's guidance will be winter weather during the fourth quarter. Continued record warm weather may require the Fund to revise its guidance. Management believes this level of growth is higher than that of comparable business trusts.
As in past quarters, we faced challenges in Q3; foremost amongst these were customer additions. As we stated at the end of Q2, issues with customer switching and the absence of a contest period in New York limited our ability to add U.S. customers. In mid December a contest period was introduced in the ConEd territory, however the positive impact will not be realized until Q4. While strong Canadian additions in Q1 and Q2 concealed the U.S. weakness, the table below shows that this was not the case in Q3.
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Market Published F2007 Q3 F2007 YTD % of F2006 Q3
Target Additions Additions Target Additions
---------------------------------------------------------------------------
Ontario - Gas 50,000 3,000 26,000 52% 44,000
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Other provinces - Gas 60,000 10,000 50,000 83% 67,000
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Electricity - Canada 175,000 23,000 131,000 75% 126,000
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United States - Gas 100,000 18,000 55,000 55% 58,000
---------------------------------------------------------------------------
United States - Electricity 90,000 11,000 24,000 27% 17,000
---------------------------------------------------------------------------
Total 475,000 65,000 286,000 60% 312,000
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Canadian additions were weaker in Q3 largely due to tight labour markets and the resultant difficulty in attracting new and replacement sales agents. Increased competition in Ontario also reduced the available agent pool. While the Fund began the year with 600 active agents, the total had slipped below that level by the end of Q3. Management has been and remains focused on rebuilding and maintaining its sales force.
Given the level of U.S. additions, it is clear that Energy Savings will be unable to meet its customer addition target for the year. Management's best estimate is that additions in Q4 will be similar to those in Q3. Despite this, we expect to exit the year with double digit customer base growth as is expected to be the case with our financial measures.
One positive in our marketing was an intentional plan by management to increase annual gross margins per new customer added in the quarter. This was successful with new customer margins averaging 43% higher than our published target margins.
--------------------------------------------------------------------------- New Customer Annual Q3 Actual Published % of Customers Gross Margin Target Target Added --------------------------------------------------------------------------- Canada - Gas $205 $175 117% 13,000 --------------------------------------------------------------------------- Canada - Electricity $191 $110 173% 23,000 --------------------------------------------------------------------------- United States - Gas $206 $140 147% 18,000 --------------------------------------------------------------------------- United States - Electricity $132 $110 120% 11,000 ---------------------------------------------------------------------------
The financial impact of these higher margins will be seen over the coming five years. This positive benefit will largely offset the effect of lower than expected additions. Management believes that, over time, new customer margins will move back toward target levels although the target for Canadian electricity is under review.
Based on growth in the business realized to date and the prospects for the fourth quarter and beyond, Energy Savings announced today the 25th increase in annual distribution rate on its units. The increase will be $0.03 to a total of $1.065 annually ($0.08875 monthly) effective the distribution paid on March 31, 2007.
Executive Chair Rebecca MacDonald noted: "Energy Savings is a very strong business. While the entire management team is frustrated with the current trading price of our units, we are focused on delivering the growth and profitability which can only increase value for our Unitholders. Your management team will continue to work to establish and meet consistent growth targets. As our profitability and distributions continue to grow, eventually our unit price must respond. I promise Unitholders that I will personally take the Energy Savings story to the investment community to ensure that the great company we have built is completely understood."
"Within our quarterly disclosure we note that we are reviewing possible restructuring options in light of the Federal Government's proposal to tax income trust distributions. This review is proceeding and we would anticipate being able to review options to generate higher value with our Unitholders when and if the new tax is enacted."
CEO Brennan Mulcahy stated: "We are disappointed that, for the first time in Fund history, we will not meet our customer acquisition targets. That said we expect to achieve double digit growth in customers which, for most companies, would be a considerable accomplishment. We expect (subject to remaining winter weather) to realize 15% to 20% growth in gross margin and distributable cash, exactly as we forecasted at the beginning of the year. At Energy Savings, we have delivered this growth year after year and we do not anticipate changing that in the future."
"While the U.S. market has been a challenge, this is true of most new markets. We are working through the challenges gaining key regulatory changes, building market share and generating higher margins. This market is not going away. As we grow and maintain our profitability in the U.S., Energy Savings' growth will just be beginning. The U.S. provides vast opportunity for growth and deregulation is only now taking root south of the border. With new markets like B.C. residential gas and further territories in New York coming available, I am confident that we will meet the challenge of maintaining our growth in the future."
Ms. MacDonald added: "Despite challenges, this is turning out to be a very solid year for Energy Savings. As with past successes, our policy is to translate improved operating results into higher distributions for our Unitholders. The distribution increase announced today is evidence of the long term success of our business. I want to thank all our Unitholders for their continued support."
The Fund
Energy Savings' business, which is conducted in Ontario, Manitoba, Alberta, Quebec, British Columbia, Illinois, Indiana and New York, involves the sale of natural gas to residential, small to mid-size commercial and small industrial customers under long term, irrevocable fixed price contracts. Energy Savings also supplies electricity to Ontario, Alberta and New York customers. By fixing the price of natural gas or electricity under its fixed price contracts for a period of up to five years, Energy Savings' customers offset their exposure to changes in the price of these essential commodities. Energy Savings, which commenced business in July of 1997, derives its margin or gross profit from the difference between the fixed price at which it is able to sell the commodities to its customers and the fixed price at which it purchases the matching volumes from its suppliers.
Non GAAP Measures
Management believes the best basis for analyzing both the Fund's operating results and the amount available for distribution is to focus on amounts actually received ("seasonally adjusted"). Seasonally adjusted analysis applies solely to the Canadian gas market (excluding Alberta). In Canada (excluding Alberta), Energy Savings receives payment from the LDCs upon delivery of the commodity not when the customer actually consumes the gas. Seasonally adjusted analysis eliminates seasonal commodity consumption variances and recognizes amount available for distribution based on cash received from the LDCs.
Forward-Looking Statements
The Fund's press releases may contain forward-looking statements including statements pertaining to customer revenues and margins, customer additions and renewals, customer consumption levels, distributable cash and treatment under governmental regulatory regimes. These statements are based on current expectations that involve a number of risks and uncertainties which could cause actual results to differ from those anticipated. These risks include, but are not limited to, levels of customer natural gas and electricity consumption, rates of customer additions and renewals, fluctuations in natural gas and electricity prices, changes in regulatory regimes and decisions by regulatory authorities, competition and dependence on certain suppliers. Additional information on these and other factors that could affect the Fund's operations, financial results or distribution levels are included in the Fund's annual information form and other reports on file with Canadian securities regulatory authorities which can be accessed through the SEDAR website at www.sedar.com or through the Fund's website at www.esif.ca.
MANAGEMENT'S DISCUSSION AND ANALYSIS ("MD&A") - January 30, 2007
Overview
The following discussion and analysis is a review of the financial condition and results of operations of Energy Savings Income Fund ("Energy Savings" or the "Fund") for the three and nine months ended December 31, 2006. This analysis should be read in conjunction with the unaudited interim consolidated financial statements for the three and nine months ended December 31, 2006 as well as the audited consolidated financial statements and related MD&A for the year ended March 31, 2006 contained in the 2006 Annual Report. The financial information contained herein has been prepared in accordance with Canadian Generally Accepted Accounting Principles ("GAAP"). All dollar amounts are expressed in Canadian dollars. Quarterly reports, the annual report and supplementary information can be found under "reports and filings" on our corporate website at www.esif.ca. Additional information can be found on SEDAR at www.sedar.com.
Energy Savings is an open-ended, limited-purpose trust established under the laws of Ontario to hold securities and to distribute the income of its wholly owned operating subsidiaries and affiliates: Ontario Energy Savings L.P. ("OESLP"), Energy Savings (Manitoba) Corp. ("ESMC"), Energy Savings (Quebec) L.P. ("ESPQ"), ES (B.C.) Limited Partnership ("ESBC"), Alberta Energy Savings L.P. ("AESLP"), Illinois Energy Savings Corp. ("IESC"), New York Energy Savings Corp. ("NYESC") and Indiana Energy Savings Corp. ("INESC").
Energy Savings' business involves the sale of natural gas to residential and small to mid-size commercial customers under long term, irrevocable fixed price contracts. Energy Savings also supplies electricity to Ontario, Alberta and New York customers. By fixing the price of natural gas or electricity under its fixed price contracts for a period of up to five years, Energy Savings' customers offset their exposure to changes in the price of these essential commodities. Energy Savings, which commenced business in July of 1997, derives its margin or gross profit from the difference between the fixed price at which it is able to sell the commodities to its customers and the fixed price at which it purchases the matching volumes from its suppliers.
Forward-Looking Information
This MD&A contains certain forward-looking information statements pertaining to customer additions and renewals, customer consumption levels, distributable cash and treatment under governmental regulatory regimes. These statements are based on current expectations that involve a number of risks and uncertainties which could cause actual results to differ from those anticipated. These risks include, but are not limited to, levels of customer natural gas and electricity consumption, rates of customer additions and renewals, fluctuations in natural gas and electricity prices, changes in regulatory regimes and decisions by regulatory authorities, competition and dependence on certain suppliers. Additional information on these and other factors that could affect the Fund's operations, financial results or distribution levels are included in the Fund's annual information form and other reports on file with Canadian security regulatory authorities which can be accessed on our corporate website at www.esif.ca or through the SEDAR website at www.sedar.com.
Key terms:
"LDC" means local distribution company, the natural gas or electricity distributor for a regulatory or governmentally defined geographic area.
"Long-term customers" represents customers that meet management's required margin thresholds and therefore expect to have the opportunity to renew at the end of their contract.
"Customers not expected to renew" are generally large volume and/or low margin customers who are not part of Energy Savings' target market.
"RCE" means residential customer equivalent or the "customer" which is a unit of measurement equivalent to a customer using, as regards natural gas 2,815 m3 (or 106 GJs) of natural gas on an annual basis and, as regards electricity, 10,000 kWh of electricity on an annual basis, which represents the approximate amount of gas and electricity used by a typical household in Ontario.
"Small volume electricity customer" represents customers that consume less than 150,000 kWh of electricity.
Non GAAP Measures
Seasonally Adjusted Gross Margin
Management believes the best basis for analyzing both the Fund's operating results and the amount available for distribution is to focus on amounts actually received ("seasonally adjusted"). Seasonally adjusted gross margin is not a defined performance measure under Canadian GAAP. Seasonally adjusted analysis applies solely to the Canadian gas market and specifically Ontario, Quebec and Manitoba.
No seasonal adjustment is required for electricity as the supply is balanced daily.
Cash Available for Distribution
Cash available for distribution is not a defined term under Canadian GAAP. It refers to the net cash received by the Fund that is available for distributions to Unitholders. Seasonally adjusted gross margin is the principal contributor to cash available for distribution. Distributable cash is calculated by the Fund as seasonally adjusted gross margin, adjusted for cash items including general and administrative expenses, marketing expenses, capital tax, bad debt expense, other income/expense items and corporate taxes. Management believes that this is the most useful measure of performance as it provides investors with an indication of the amount of cash available for distribution to Unitholders. This non-GAAP measure may not be comparable to other income funds.
"Distributable cash before marketing expenses" represents the net cash available for distribution to Unitholders prior to marketing expenses and is calculated by deducting cash expenses, including general and administrative expense, bad debts, capital tax, income taxes and other expenses, from seasonally adjusted gross margin. This calculation is not defined under Canadian GAAP. This non-GAAP measure may not be comparable to other income funds.
"Distributable cash after customer replacement" represents the net cash available for distribution to Unitholders as defined above with the deduction of marketing expenses necessary to maintain the Fund's customer base at a stable level equal to that in place at the beginning of the year. This calculation is not defined under Canadian GAAP. This non-GAAP measure may not be comparable to other income funds.
"Distributable cash after marketing expenses" represents the net cash available for distribution to Unitholders as defined above after the deduction of marketing expenses utilized to both maintain and expand the Fund's customer base. This calculation is not defined under Canadian GAAP. This non-GAAP measure may not be comparable to other income funds.
Financial Highlights
--------------------
For the three months ended December 31
(thousands of dollars except where indicated and per unit amounts)
2006 2005
$ Per Unit $ Per Unit Change
Cash available for distribution
After customer replacement 37,268 $0.35 35,245 $0.33 6%
After marketing expense to
add new customers 36,500 $0.34 26,582 $0.25 37%
Distributions 27,466 $0.26 24,333 $0.23 13%
Payout ratio
After customer replacement 74% 69%
After marketing expense to
add new customers 75% 92%
For the nine months ended December 31
(thousands of dollars except where indicated and per unit amounts)
2006 2005
$ Per Unit $ Per Unit Change
Cash available for distribution
After customer replacement 92,509 $0.86 88,885 $0.83 4%
After marketing expense to
add new customers 77,057 $0.72 68,907 $0.64 12%
Distributions 79,916 $0.74 71,839 $0.67 11%
Payout ratio
After customer replacement 86% 81%
After marketing expense to
add new customers 104% 104%
Operations
Gas - Canadian markets
Ontario, Quebec and British Columbia
In each of the markets that Energy Savings operates, it is required to deliver gas to the LDCs for its customers throughout the year. In Ontario, Quebec and British Columbia, the volumes delivered for a customer typically remain constant throughout the year. Energy Savings does not recognize sales until the customer actually consumes the gas. During the winter months, gas is consumed at a rate which is greater than delivery and in the summer months, deliveries to LDCs exceed customer consumption. Energy Savings receives cash from the LDCs as the gas is delivered which is even throughout the year.
Manitoba and Alberta
In Manitoba and Alberta, the volume of gas delivered in winter months is higher than in the spring and summer months. Consequently, cash received from customers and LDCs is higher in the winter months.
Alberta's regulatory environment is different from the other Canadian provincial markets. In Alberta, Energy Savings is required to invoice and receive payments directly from customers. Energy Savings has entered into an agreement with EPCOR Utilities Inc. ("EPCOR") for the provision of billing and collection services in Alberta. EPCOR has been and will continue to be the billing agent for customers aggregated in Alberta.
Gas - U.S. markets
Cash flow from Illinois, Indiana and New York operations is greatest during the third and fourth (winter) quarters as normally cash is received from the LDC in the same period as customer consumption.
Electricity - Canadian and U.S. markets
Cash flow from electricity operations will be greatest during the summer and winter quarters as consumption is typically highest during these periods.
Distributable cash and cash distributions
-----------------------------------------
For the three months ended December 31
(thousands of dollars except per unit amounts)
2006 2005
---- ----
Per Unit Per Unit
-------- --------
Cash available for distribution
Gross margin per financial
statements $60,319 $0.56 50,394 $0.47
Adjustments required to reflect net
cash receipts from gas sales 1,263 1,381
------- -------
Seasonally adjusted gross margin $61,582 $0.57 $51,775 $0.48
------- -------
General and administrative (10,176) (9,271)
Capital tax expense (180) (207)
Bad debt expense (3,172) (1,300)
Income tax expense (391) (714)
Interest and other bank charges (1,111) (71)
------- -------
(15,030) (11,563)
------- -------
Cash available for distribution
before marketing expenses 46,552 40,212
Marketing expenses to maintain
customer base (9,284) (4,967)
------- -------
Cash available for distribution
after customer replacement 37,268 $0.35 35,245 $0.33
------- -------
Marketing expenses to add
new customers (768) (8,663)
------- -------
Cash available for distribution $36,500 $0.34 $26,582 $0.25
------- -------
------- -------
Reconciliation to Statements of
Cash Flow
Cash inflow from operations $12,521 $1,230
Add:
Increase in non-cash working capital 18,615 24,512
Tax effect on distributions paid
to the holders of Class A
preference shares 824 840
Current income tax provision 4,540 -
------- -------
$36,500 $26,582
------- -------
------- -------
Distributions
Unitholder distributions $25,081 $21,934
Class A preference share
distributions 2,282 2,326
Unit appreciation rights
distributions 98 70
------- -------
27,461 24,330
Non-cash distributions
- deferred unit grants 5 3
------- -------
Total distributions $27,466 $0.26 $24,333 $0.23
------- -------
------- -------
Diluted average number of units
outstanding 107.3m 107.0m
For the nine months ended December 31
(thousands of dollars except per unit amounts)
2006 2005
---- ----
Per Unit Per Unit
-------- --------
Cash available for distribution
Gross margin per financial
statements $132,784 $1.24 $110,620 $1.04
Adjustments required to reflect
net cash receipts from gas sales 21,156 23,162
------- -------
Seasonally adjusted gross margin $153,940 $1.43 $133,782 $1.25
------- -------
General and administrative (31,666) (26,072)
Capital tax expense (540) (621)
Bad debt expense (6,890) (3,478)
Income tax recovery (expense) (391) 456
Interest and other bank charges (2,195) (100)
------- -------
(41,682) (29,815)
------- -------
Cash available for distribution
before marketing expenses 112,258 103,967
Marketing expenses to maintain
customer base (19,749) (15,082)
------- -------
Cash available for distribution
after customer replacement 92,509 $0.86 88,885 $0.83
------- -------
Marketing expenses to add
new customers (15,452) (19,978)
------- -------
Cash available for distribution $77,057 $0.72 $68,907 $0.64
------- -------
------- -------
Reconciliation to Statements of
Cash Flow
Cash inflow from operations $51,609 $37,932
Add:
Increase in non-cash working capital 25,926 28,492
Tax effect on distributions paid
to the holders of Class A
preference shares 2,464 2,483
Current income tax recovery (2,942) -
------- -------
$77,057 $68,907
------- -------
------- -------
Distributions
Unitholder distributions $72,793 $64,767
Class A preference share
distributions 6,821 6,875
Unit appreciation rights
distributions 290 189
------- -------
79,904 71,831
Non-cash distributions
- deferred unit grants 12 8
------- -------
Total distributions $79,916 $0.74 $71,839 $0.67
------- -------
------- -------
Diluted average number of units
outstanding 107.3m 106.9m
Sales and gross margin analysis
-------------------------------
Sales and gross margin - Per financial statements
For the three months ended December 31
(thousands of dollars)
2006 2005
---- ----
United United
Sales Canada States Total Canada States Total
-----
Gas $214,656 $54,020 $268,676 $175,366 $31,729 $207,095
Electricity 141,012 12,542 153,554 112,326 1,740 114,066
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$355,668 $66,562 $422,230 $287,692 $33,469 $321,161
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Increase 24% 99% 31%
United United
Gross Margin Canada States Total Canada States Total
------------
Gas $32,795 $8,742 $41,537 $35,021 $7,009 $42,030
Electricity 19,065 (283) 18,782 8,195 169 8,364
---------------------------------------------------------------------------
$51,860 $8,459 $60,319 $43,216 $7,178 $50,394
---------------------------------------------------------------------------
Increase 20% 18% 20%
Sales and gross margin - Per financial statements
For the nine months ended December 31
(thousands of dollars)
2006 2005
---- ----
United United
Sales Canada States Total Canada States Total
-----
Gas $436,266 $86,281 $522,547 $384,173 $44,372 $428,545
Electricity 387,439 33,921 421,360 305,292 1,778 307,070
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$823,705 $120,202 $943,907 $689,465 $46,150 $735,615
---------------------------------------------------------------------------
Increase 19% 160% 28%
United United
Gross Margin Canada States Total Canada States Total
------------
Gas $69,036 $12,329 $81,365 $74,351 $8,716 $83,067
Electricity 50,411 1,008 51,419 27,367 186 27,553
---------------------------------------------------------------------------
$119,447 $13,337 $132,784 $101,718 $8,902 $110,620
---------------------------------------------------------------------------
Increase 17% 50% 20%
Canada
Sales were $355.7 million and $823.7 million for the three and nine months ended December 31, 2006, up 24% and 19%, respectively, from the prior comparative periods. Margins were $51.9 million for the quarter, an increase of 20% over the prior comparative quarter. Margins for the nine months ended December 31, 2006 were $119.4 million, an increase of 17% from the prior comparative period. Refer to "Sales and gross margin - Seasonally adjusted" for further details.
United States
Sales and margins were $66.6 million and $8.5 million for the three months ended December 31, 2006, an increase of 99% and 18%, respectively over the prior comparable quarter. For the nine month period, sales and margins amounted to $120.2 million and $13.3 million, an increase of 160% and 50%, respectively over the prior comparable period. The increase in sales and margin reflects the growth in customer base over the past year. Refer to "Sales and gross margin - Seasonally adjusted" for further details.
Sales and gross margin - Seasonally adjusted(1)
For the three months ended December 31
(thousands of dollars)
2006 2005
---- ----
United United
Sales Canada States Total Canada States Total
-----
Gas $214,656 $54,020 $268,676 $175,366 $31,729 $207,095
Adjustments(1) (5,049) - (5,049) 7,403 - 7,403
---------------------------------------------------------------------------
209,607 $54,020 263,627 182,769 31,729 214,498
Electricity 141,012 12,542 153,554 112,326 1,740 114,066
---------------------------------------------------------------------------
$350,619 $66,562 $417,181 $295,095 $33,469 $328,564
---------------------------------------------------------------------------
Increase 19% 99% 27%
United United
Gross Margin Canada States Total Canada States Total
------------
Gas $32,795 $8,742 $41,537 $35,021 $7,009 $42,030
Adjustments(1) 1,263 - 1,263 1,381 - 1,381
---------------------------------------------------------------------------
34,058 8,742 42,800 36,402 7,009 43,411
Electricity 19,065 (283) 18,782 8,195 169 8,364
---------------------------------------------------------------------------
$53,123 $8,459 $61,582 $44,597 $7,178 $51,775
---------------------------------------------------------------------------
Increase 19% 18% 19%
Sales and gross margin - Seasonally adjusted(1)
For the nine months ended December 31
(thousands of dollars)
2006 2005
---- ----
United United
Sales Canada States Total Canada States Total
-----
Gas $436,266 $86,281 $522,547 $384,173 $44,372 $428,545
Adjustments(1) 124,481 - 124,481 126,883 - 126,883
---------------------------------------------------------------------------
560,747 $86,281 647,028 511,056 44,372 555,428
Electricity 387,439 33,921 421,360 305,292 1,778 307,070
---------------------------------------------------------------------------
$948,186 $120,202 $1,068,388 $816,348 $46,150 $862,498
---------------------------------------------------------------------------
Increase 16% 160% 24%
United United
Gross Margin Canada States Total Canada States Total
------------
Gas $69,036 $12,329 $81,365 $74,351 $8,716 $83,067
Adjustments(1) 21,156 - 21,156 23,162 - 23,162
---------------------------------------------------------------------------
90,192 12,329 102,521 97,513 8,716 106,229
Electricity 50,411 1,008 51,419 27,367 186 27,553
---------------------------------------------------------------------------
$140,603 $13,337 $153,940 $124,880 $8,902 $133,782
---------------------------------------------------------------------------
Increase 13% 50% 15%
(1) For Ontario, Manitoba and Quebec gas markets.
As noted above, total sales and margin for the three months ended December 31, 2006 were $417.2 million and $61.6 million, an increase of 27% and 19%, respectively, over the third quarter of fiscal 2006.
Total sales and margin for the nine months ended December 31, 2006 were $1.1 billion and $153.9 million for the quarter, up 24% and 15%, respectively, over the prior comparable period.
Canada
On a seasonally adjusted basis, sales were $350.6 million for the quarter, up 19% from $295.1 million in fiscal 2006. Margins were $53.1 million for the quarter, up 19% from the same quarter in the previous year. The increase in sales and margin was higher than the 13% increase in long-term customers primarily due to higher average sales price and higher gross margin per customer.
Gas
Gas sales increased by 15% from the prior comparable quarter to $209.6 million while margins decreased by 6% to $34.1 million. As a result of unseasonably warm weather in the month of December, particularly in Ontario, customer consumption decreased. Gross margin was reduced by $2.4 million for the three months ended December 31, 2006 as a result of the sale of excess gas. In contrast, for the third quarter of the prior comparable year, the sale of excess gas supply resulting from that year's warm winter resulted in additional gross margin of $3.8 million due to favorable spot prices.
Gas sales were $560.7 million for the nine months ended December 31, 2006, an increase of 10% over the prior comparable period. Margins were $90.2 million, a decrease of 8% over the first nine months of fiscal 2006. For the nine months ended December 31, 2006, the gross margin loss was $4.0 million. The loss resulted from the disposition of excess supply related to prior year's warm winter in the second quarter in addition to the reduced consumption from an unseasonable warm December. The loss incurred to date is consistent with management's annual estimate of a 3%-4% of gross margin loss in a record warm winter.
Electricity
Electricity sales and margins for the three months ended December 31, 2006 increased by 26% and 133%, respectively. The improved sales and gross margin are attributable to increases in the customer base and consumption. The disparity between the increase in sales and the increase in margin is directly attributable to management's ability to generate margins on recent contracts substantially above the annual target of $110 per RCE. In recent quarters, we have seen wholesale energy prices decline and liquidity return to the power market providing management with the ability to generate higher margins while providing competitive pricing to the consumer. In addition to the strong wholesale market and the related supply costs, improved profitability and the reduction in the number of acquired load following customers also contributed to the increased gross margin. In the prior comparable quarter, a loss of $0.6 million was realized on the load following portfolio versus a gain of $0.8 million in the current period. Load following results in Energy Savings bearing the risk and benefits of fluctuations in consumption from the standard customer usage profile. During the current fiscal year, there has been less volatility from the standard customer usage profile than the prior year. In addition, there were fewer load following customers than the prior comparable year due to the expiration of their contracts. At December 31, 2006, the acquired load following contracts account for approximately 7% of the electricity long-term customers and have an average remaining life of less than one year.
For the nine months ending December 31, 2006, electricity sales and margins were $387.4 million and $50.4 million, an increase of 27% and 84%, respectively.
Customers aggregated during the period generate margins well above Energy Savings' average annual target margins of $175/RCE for gas and $110/RCE for electricity. The target margins in Alberta include an allowance for anticipated bad debt expense. Average annual margins for Canadian customers signed during the period were $205 per customer for gas and $191 per customer for electricity. Management is uncertain as to whether these higher margins are sustainable and will provide an update, if required, with the release of the year end results.
United States
Sales and margins for the quarter were $66.6 million and $8.5 million, the same as on a financial statement basis, representing an increase of 99% and 18%, respectively over the prior comparable quarter. Gas sales and margins were $54.0 million and $8.7 million, respectively for the three months ended December 31, 2006. The increase in gas sales over the prior comparable period reflects a 53% increase in the customer base versus the prior comparative quarter and an increase in the average sales price. Gas margins in the U.S. were negatively impacted by the sale of excess supply generated by lower than expected consumption during a period of low spot prices. Losses during the quarter amounted to $0.8 million versus a gain of $2.1 million in the prior comparative quarter. In addition to the warm weather experienced during the quarter, high attrition continued in New York due to customer mobility which reduced net customer additions and reduced customer consumption. In mid December 2006, a contest period was introduced in the ConEdison, ("ConEd") territory of New York. It is expected that this regulatory change will reduce attrition rates and increase customer additions beginning in the fourth quarter. Refer to "Attrition" for definition of the contest period and further details.
Electricity sales and margins were $12.5 million and $(0.3) million, respectively. Although customer margins and consumption improved during the quarter, it was offset by losses on the sale of excess supply totaling $0.9 million versus a minor gain in the prior comparable quarter. Barring no further impact from warmer weather, the implementation of a contest period in ConEd, as outline above, is expected to reduce customer attrition and increase gross margin.
For the nine months ended December 31, 2006, total sales and margins for the U.S. amounted to $120.2 million and $13.3 million, respectively.
Customers aggregated during the period generate margins above Energy Savings' average annual target margins of $140/RCE for gas and $110/RCE for electricity. The $140/RCE target margin in Illinois includes an allowance for anticipated bad debt expense and working capital costs. Average annual margins for U.S. customers signed during the period were $206 per gas customer and $132 per electricity customer.
Distributable Cash
Distributable cash after customer replacement for the quarter was $37.3 million ($0.35 per unit), an increase of 6% from $35.2 million ($0.33 per unit) in the third quarter of fiscal 2006. The increase in distributable cash after customer replacement is primarily related to the increase in gross margin resulting from customer additions and improved gas and electricity margins. This increase was offset by higher general and administrative, bad debt and interest expenses incurred in the third quarter reflecting the quarter-over-quarter growth of Energy Savings. During the quarter, an income tax provision of $0.4 million was included in the calculation of distributable cash as it represents the amount estimated to be payable due to income earned in the Province of Manitoba.
Marketing expenses to maintain the customer base were $9.3 million for the quarter, 87% higher than the prior comparable quarter. The increased expenses directly correlate to the increase in customers who were lost through attrition and failure to renew at the end of their contract term as well as increased aggregation costs per customer. While attrition and failed to renew figures will vary quarter over quarter, management expects attrition to approximate 10% for Canada and 15% - 20% for the U.S. on an annual basis. The rate of customer renewal remains at 80%. Approximately 70% of the total marketing expenses represent commission paid to independent sales agents. The remaining 30% relates to other marketing expenses such as rent for sales offices, customer service sales support team and brochures. The non-commission related costs occur evenly throughout the year while customer additions vary from quarter to quarter. As a result, the aggregation cost per RCE will vary quarter by quarter. In addition, management increased its target customer aggregation costs at the beginning of the fiscal year. Management believes that aggregation costs per RCE on an annual basis will approximate the targets of $160 and $95 for gas and electricity in Canada, respectively and $110 and $100 for gas and electricity in the United States, respectively.
Distributable cash after customer replacement for the nine months ended December 31, 2006 was $92.5 million ($0.86 per unit), an increase of 4% from $88.9 million ($0.83 per unit) million in the prior comparable period.
Distributable cash after marketing expenses for the quarter was $36.5 million ($0.34 per unit), an increase of 37% from $26.6 million ($0.25 per unit) in the prior comparable quarter. For the nine months ended December 31, 2006, distributable cash after marketing expenses was $77.1 million ($0.72 per unit), an increase of 12% from $68.9 million ($0.64 per unit) in the prior comparable period. The increase is primarily due to improved sales and gross margin.
For the quarter, distributable cash was 14% in excess of the amount paid out in distributions. The Fund's results reflect greater seasonality as customer consumption is greatest during the third and fourth quarters (winter quarters). For the nine months ended December 31, 2006, total distributions were 4% higher than the cash available for distribution. The distribution level is consistent with the seasonality of the business and it is expected that distributable cash will be greater than distributions paid at the end of the fiscal year. Energy Savings' credit facility is used to support working capital needs and the cash required for distributions through the seasonal fluctuations in our business. In addition to seasonality, the Fund's liquidity requirements are driven by the delay from the time that customer contract is signed until cash flow is generated. Marketing expenses are recognized at the time the customer is signed although the customer does not begin to contribute to gross margin until two to six months later.
Payout ratios after customer replacement were 74% and 86% for the three and nine months ended December 31, 2006, respectively, compared with 69% and 81% in the prior comparable periods. Payout ratios after marketing expenses were 75% and 104% for the three and nine months ended December 31, 2006, compared with 92% and 104% in the prior comparable periods. While year over year quarterly comparisons will remain appropriate, sequential quarters will vary materially. The main impact of this will be higher distributable cash with a lower payout ratio in Q3 and Q4 and lower distributable cash with a higher payout ratio in Q1 and Q2.
Payout ratios on an annual basis are expected to be within the target ranges of 75%-80% for payout ratio after customer replacement and less than 100% for the payout ratio after the deduction of marketing expenses.
As part of its review of its MD&A disclosure of distributable cash in light of recent CICA guidance on this subject, the Fund is analyzing the allocation of marketing expenses between "Marketing expenses to maintain customer base" and "Marketing expenses to add new customers". The table below indicates that new customers added during recent periods generate higher margins than do the lost customers that they are replacing. As the intent of disclosing "Distributable cash after customer replacement" was to show the cost of maintaining Energy Savings' customer book at a "steady state", the current methodology - matching each customer lost with the costs of signing a new customer of that type regardless of relative margin - is a less accurate analysis of maintaining a "steady state" than an allocation which exactly replaces the annual margin of customers lost with the costs of replacing that margin. An update will be provided at year end.
The table below highlights the gross margin on new customers versus the gross margin on customers lost during the quarter.
Annual Gross Margin per Customer(1) Q3 Annual Target
Customers added in the Quarter F2007 F2007
- Canadian Gas $205 $175
- Canadian Electricity $191 $110
- United States Gas $206 $140
- United States Electricity $132 $110
Customers lost in the Quarter(2)
- Canadian Gas $167
- Canadian Electricity $87
- United States Gas $157
- United States Electricity $130
(1) Customer sales price less cost of matched supply and allowance for bad
debt and U.S. working capital. Annual amount is based on residential
standard annual consumption of 2,815 m3 of natural gas and 10,000 kWh
of electricity.
(2) Gross margin as calculated above for customers in place at March 31,
2006. Includes low margin acquired customers.
Net income
----------
Reconciliation to Statement Three months ending Nine months ending
of Operations December 31 December 31
2006 2005 2006 2005
--------------------------------------------
Net income $14,112 $13,217 $23,860 $33,738
Adjustments required to
reflect net cash receipts
from sales 1,263 1,381 21,156 23,162
Items not affecting cash 15,761 11,144 32,519 9,524
Tax effect on distributions
paid to holders of Class A
preference shares 824 840 2,464 2,483
Current income tax recovery 4,540 - (2,942) -
--------------------------------------------
Cash available for distribution $36,500 $26,582 $77,057 $68,907
--------------------------------------------
--------------------------------------------
Energy Savings had net income for the three and nine months ended December 31, 2006 of $14.1 million (2005 - $13.2 million) and $23.9 million (2005 - $33.7 million), respectively. Net income for the three months ended December 31, 2006 increased by 7% as a result of increase in gross margin and lower amortization expenses, offset by the change in market value of the financial instruments and the provision for income tax. Net income for the nine months ended December 31, 2006 has decreased over the prior comparative period as a result of the change in the market value of certain derivative financial instruments. An expense of $11.2 million was recognized during the nine month period versus income of $15.4 million for the prior comparative nine month period. These instruments form part of the Fund's hedge positions intended to ensure stable margins over the term of customer contracts. The financial statements are in compliance with AcG-13, which requires a determination of fair value for certain derivative financial instruments that do not meet hedge accounting requirements. This fair value is determined using market information at the end of each quarter. Management believes the Fund remains effectively hedged operationally across all jurisdictions.
Summary of Quarterly Results
----------------------------
(thousands of dollars except per unit amounts)
F2007 F2006
----------------------------------------
Q3 Q2 Q1 Q4
------- ------- ------- -------
Sales per financial statements $422,230 $236,127 $285,550 $476,699
Net income (loss) 14,112 (1,257) 11,005 17,825
Net income (loss) per unit -
basic $0.13 $(0.01) $0.10 $0.17
Net income (loss) per unit -
diluted $0.13 $(0.01) $0.10 $0.17
Amount available for distribution
After customer replacement $37,268 $24,755 $30,486(1) $41,136
After marketing expense to add
new customers 36,500 19,068 21,489(1) 32,293
Payout ratio
After customer replacement 74% 109% 84%(1) 61%
After marketing expense to
add new customers 75% 141% 119%(1) 77%
F2006 F2005
----------------------------------------
Q3 Q2 Q1 Q4
------- ------- ------- -------
Sales per financial statements $321,161 $180,049 $234,405 $406,901
Net income 13,217 9,396 11,125 27,268
Net income per unit - basic $0.12 $0.09 $0.11 $0.26
Net income per unit - diluted 0.12 0.09 0.10 0.26
Amount available for distribution
After customer replacement $35,245 $26,465 $27,175 $22,612(2)
After marketing expense to add
new customers 26,582 20,760 21,565 19,454
Payout ratio
After customer replacement 69% 91% 86% 102%
After marketing expense to
add new customers 92% 116% 109% 118%
(1) Restated to eliminate income tax recovery.
(2) Allocated based on the annual average for fiscal 2005.
The Fund's results reflect greater seasonality as consumption is greatest during the third and fourth quarters (winter quarters). While year over year quarterly comparisons will remain appropriate, sequential quarters will vary materially. The main impact of this will be higher distributable cash with a lower payout ratio in Q3 and Q4 and lower distributable cash with a higher payout ratio in Q1 and Q2.
The increase in sales, income and distributable cash for Q3, in comparison to the prior comparable quarter, is primarily a result of the increase in gross margin generated by higher per customer gross margin on new customers and a 17% growth in the customer base.
Long-term Customers
-------------------
------------------------------------------------------------
Failed To
Beginning Additions Attrition(5) Renew(6) Ending
------------------------------------------------------------
Canada
Gas
Ontario 608,000 3,000 (14,000) (7,000) 590,000
Other
markets(1) 226,000 10,000 (5,000) (3,000) 228,000
---------------------------------------------------------------------------
Total - Gas 834,000 13,000 (19,000) (10,000) 818,000
Electricity(2) 648,000 23,000 (15,000) (3,000) 653,000
---------------------------------------------------------------------------
Total
- Canada 1,482,000 36,000 (34,000) (13,000) 1,471,000
---------------------------------------------------------------------------
United States
Gas(3) 133,000 18,000 (6,000) - 145,000
Electricity(4) 32,000 11,000 (5,000) - 38,000
---------------------------------------------------------------------------
Total - United
States 165,000 29,000 (11,000) - 183,000
---------------------------------------------------------------------------
Combined 1,647,000 65,000 (45,000) (13,000) 1,654,000
---------------------------------------------------------------------------
---------------------------------------------------------------------------
(1) Includes Quebec, British Columbia, Manitoba and Alberta.
(2) Includes Ontario and Alberta.
(3) Includes Illinois, New York and Indiana.
(4) Includes New York only.
(5) Attrition - Customers whose contracts were terminated primarily due to
relocation or death, or canceled by Energy Savings due to delinquent
accounts.
(6) Failed to Renew - Customers who did not renew expiring contracts at
the end of their term.
Customers not expected to renew
In addition to the long-term customers, Energy Savings has an additional 62,000 electricity customers which were acquired through various acquisitions of customer contracts. These customers generate substantially less margin than is typically realized on customers aggregated by Energy Savings and on average have less than one year remaining until the end of their contracts.
Attrition
On a rolling 12-month basis, attrition has been 8%. Realized attrition in Canada has been 7%, which is below the 10% rate used for internal purposes.
Attrition in the U.S. was 23%, which is currently above management's target annual range of 15% to 20% and is directly attributable to the higher attrition level experienced to date in New York. The regulatory environment in New York provided for higher customer mobility.
In mid December 2006, a contest period was introduced in the ConEd territory of New York and although it had no impact in the third quarter, based on positive results to date, attrition rates are expected to reduce in the fourth quarter. This contest period will enable ConEd to advise retailers of any pending switch of a customer to a competing supplier. Prior to the implementation of the contest period, customers were automatically switched to the competing supplier with no ability to consult their existing supplier prior to the switch, and no ability to seamlessly remain with that supplier. Management continues to promote the implementation of a State-wide contest period with the New York regulators as well as the local utilities.
Management continues to monitor attrition and is actively pursuing measures to minimize attrition in all markets.
Failed to renew
The renewal rate for Ontario gas customers who have completed the term of their contract remains above 80%. The renewal process is multi-faceted and aims to maximize the number of customers which renew prior to the end of their contract term. Efforts begin up to fifteen months in advance with contracts providing for renewal for an additional five years. In the Ontario gas market, customers who do not positively elect, either renewal or termination, receive a one-year fixed price for the ensuing year. The 80% renewal rate is a blend of both one and five-year fixed price contracts.
To date, less than 3% of Ontario electricity customers aggregated by Energy Savings have reached their first renewal date. The renewal rate for electricity will be impacted as the current regulatory environment in Ontario does not provide for effortless one-year renewals. Currently, customers must positively elect to renew their existing contract. There is no opportunity to renew a residential or small volume electricity customer for a one-year term should the customer fail to positively renew or terminate their contract. Management has been in discussions with the regulators in Ontario and remains optimistic that the current rules will be altered in the near term to provide for one-year effortless renewals.
Energy Savings continuously monitors its customer renewal rates with the expectation of maximizing the number of customers who renew their contracts. Management continues to be pleased with the success of its renewal program.
Gross Additions (excluding acquisitions)
Energy Savings' published targets for fiscal 2007 were gross customer additions, excluding acquisitions of 475,000. The following table shows the aggregation to date compared with these targets. Overall, Energy Savings aggregated 286,000 RCEs for nine months of the fiscal year. For the quarter, gross additions and net additions were 65,000 and 7,000 respectively. Overall, Energy Savings' customer base reached 1,654,000, up 17% from the year prior.
In the second quarter, management confirmed that the U.S. target of 190,000 for the year would not be achieved as a result of various operational challenges experienced in the U.S. and in order to achieve the 475,000 combined annual gross target, the Canadian additions had to continue well ahead of pace in order to compensate for the shortfall in the U.S. Unfortunately the current employment market has made it difficult to attract and train the new agents necessary to offset the shortfall in the U.S. In addition, the emergence of several new competitors in Ontario has increased agent attrition. Historically, as new competitors come in to the marketplace, the initial result is competition for agents. Over time, as evidenced throughout the history of Energy Savings, many of these competitors fail and exit the marketplace. This enhanced competition in addition to a tightening sales force market has reduced our overall sales force by more than 10%. Given that the number of sales agents is the principal driver of gross customer additions, reduced agent totals have created suboptimal sales penetration results. With total active independent agents now below 600, management is focused on ensuring that Energy Savings remains as the most attractive choice for potential agents. Plans for the addition of new marketing channels are also underway.
Given the inability to generate sufficient Canadian additions to offset the New York shortfall, Energy Savings will not be able to meet its customer aggregation target for the year. Management expects that gross additions in the fourth quarter will be similar to those realized in the third quarter, reaching a total of approximately 350,000 customer additions. While the negative impact of lower customer additions is offset by significantly higher gross margin per new customer, management's focus is on renewing the growth of the sales force and returning the level of customer additions to that experienced in Q1 and Q2. Management is confident that this will occur in fiscal 2008.
Annual Real-
Gross Pub- ized Increase
Customer Q1 Q2 Q3 YTD lished To YTD (Decr-
Additions F2007 F2007 F2007 F2007 Target Date F2006 ease)
---------------------------------------------------------------------------
Canada
Gas
Ontario 14,000 9,000 3,000 26,000 50,000 52% 44,000 (41%)
Other
markets(1) 23,000 17,000 10,000 50,000 60,000 83% 67,000 (25%)
---------------------------------------------------------------------------
Total - Gas 37,000 26,000 13,000 76,000 110,000 69% 111,000 (32%)
Electricity(2) 67,000 41,000 23,000 131,000 175,000 75% 126,000 4%
---------------------------------------------------------------------------
Total Canada 104,000 67,000 36,000 207,000 285,000 73% 237,000 (13%)
---------------------------------------------------------------------------
United States
Gas(3) 17,000 20,000 18,000 55,000 100,000 55% 58,000 (5%)
Electricity(4) 7,000 6,000 11,000 24,000 90,000 27% 17,000 41%
---------------------------------------------------------------------------
Total United
States 24,000 26,000 29,000 79,000 190,000 42% 75,000 5%
---------------------------------------------------------------------------
Combined 128,000 93,000 65,000 286,000 475,000 60% 312,000 (9%)
---------------------------------------------------------------------------
---------------------------------------------------------------------------
(1) Includes Quebec, British Columbia, Manitoba and Alberta.
(2) Includes Ontario and Alberta.
(3) Includes Illinois, New York and Indiana.
(4) Includes New York only.
Canada
Gas
Total gross gas customer additions in Canada for the third quarter were 13,000, bringing the total additions to 76,000 for the nine months ended December 31, 2006 (69% of the published annual target). The number of customers added in the Ontario gas market during the quarter was less than the number of customers lost through attrition and failure to renew. RCE additions in Ontario were also impacted by agent turnover during the quarter due to increased competition and a very tight employment market generally. Management is taking steps to increase our independent sales agent base and also to control further attrition levels. Other markets in Canada exceeded the target pace with 83% of the published annual target being achieved after the third quarter.
The Canadian gas customers added through marketing efforts during the period were matched with supply to generate margins of $206 per year over the life of the contract, above Energy Savings' average annual target margin of $175/RCE.
Electricity
Total electricity additions were 23,000 for the quarter, bringing the total additions to 131,000 for the nine months ended December 31, 2006. Total additions to date represent 75% of the published annual target.
The Canadian electricity customers added through marketing efforts during the period were matched with supply to generate margins of $191 per year over the life of the contract, above Energy Savings' average annual target margin $110/RCE.
United States
Natural gas customer additions in the Illinois, Indiana and New York gas markets were 18,000 for the quarter, bringing the total additions to 55,000 for the nine months ended December 31, 2006, representing 55% of the published annual target. Customer additions in the New York electricity market were 11,000, bringing the total number of additions to 24,000, representing 27% of the published annual target.
While management is pleased with the progress being made in New York regarding customer mobility and related issues, the high attrition and loss of signed customers before flow experienced to date has significantly reduced the sales force and hampered customer aggregation. Energy Savings does not count a customer until it has been enrolled with the LDC and confirmed by the internal customer service department. This issue is clearly recognized by management and the rebuilding of the New York sales force is well underway. The new contest period implemented in the ConEd territory as well as our entrance into the Natural Fuel Gas ("NFG" - Buffalo area) territory should improve the customer additions in the fourth quarter.
In Illinois, U.S. Energy Savings Corp. ("USESC"), a subsidiary of the Fund, settled a complaint on December 6, 2006 with the Citizen's Utility Board ("CUB") filed before the Illinois Commerce Commission concerning USESC's marketing practices. As part of the settlement with CUB, Energy Savings agreed to provide certain customers who mistakenly believed that USESC was affiliated with their local utility the opportunity to cancel their contracts without penalty and to be eligible for a limited refund. The window for customer cancellations ends effective February 11, 2007. Management's current estimate of total RCEs that will cancel is approximately 9,000 which represents approximately 7% of the total customer base in Illinois.
It should be noted that, since the date of signing for these customers, the local utility price for Illinois gas has fallen by more than 50%. Energy Savings views the cancellation level in this price environment to be a clear indication of the Illinois customer's acceptance of the need for and legitimacy of a long term, fixed price option. The impact of the settlement will not be material to Energy Savings' operations. Gas purchased for these customers has been reallocated to newly signed customers.
The U.S. customers added through marketing efforts during the quarter were matched with supply to generate margins of $206 per year for gas and $132 per year for electricity over the life of the contract above Energy Savings' average annual target margin of $140/RCE for gas customers and $110/RCE for electricity customers.
General and administrative expenses
General and administrative costs were $10.2 million for the three months ended December 31, 2006 representing an increase of 10% from the third quarter of the previous fiscal year. The increase in general and administrative costs over the prior comparable quarter was primarily driven by the additional salaries associated with the increase in the number of employees and systems necessary to support the Fund's continued customer growth, as well as the further expansion into another territory, NFG, in New York and Indiana.
General and administrative expenditures for the nine months ended December 31, 2006 were $31.7 million, an increase of 21% from $26.1 million in the prior comparable period primarily as a result of the additional costs listed above.
Unit based compensation
Compensation in the form of units (non-cash) granted by the Fund to the directors, officers, full-time employees and service providers of its subsidiaries and affiliates pursuant to the 2001 Unit Option Plan, the 2004 Unit Appreciation Rights Plan and the Directors' Deferred Compensation Plan amounted to $0.9 million (2005 - $1.9 million) and $2.5 million (2005 - $3.9 million) for the three and nine months ended December 31, 2006, respectively.
Marketing expenses
Marketing expenses, which consist of commissions paid to independent sales agents for signing new customers as well as corporate overhead, were $10.1 million for the three months ended December 31, 2006 versus $13.6 million in the prior comparable quarter. Marketing expenses decreased due to the lower number of customers aggregated for the current quarter. The amount of the decrease in commission due to lower customer aggregation was also partially offset by an increase in the aggregation costs per customer. The increase in rates is as follows:
Fiscal 2006 Fiscal 2007
Gas
Ontario $160/RCE $160/RCE
Other markets - Canada $140/RCE $160/RCE
United States $90/RCE $110/RCE
Electricity
Canada $85/RCE $95/RCE
United States $90/RCE $100/RCE
For the nine months ended December 31, 2006, the marketing expense amounted to $35.2 million, a slight increase from $35.1 million in the prior comparable period reflecting lower customer additions and higher per customer commission expense.
Bad debt expense
In Illinois and Alberta, Energy Savings assumes the credit risk associated with the collection of its customers' accounts. Credit review processes have been established to manage the customer default rate. Management factors default from credit risk in its margin expectations for both Illinois and Alberta.
Bad debt expense for the three months ended December 31, 2006 was $3.2 million, compared with $1.3 million in the prior comparative quarter. For the nine month period, the bad debt expense was $6.9 million, an increase from $3.5 million in the prior comparable period. The increase in bad debts during the current periods reflects the increased customer base in both Alberta and Illinois. Based on results to date, management anticipates that bad debt expense for the year will approximate 4.0% of revenue earned in both Illinois and Alberta. Management has increased the default rate in its margin expectations to ensure target gross margins per RCE continue to be achieved including the higher levels of bad debt. Management continuously reviews and monitors the credit approval process in order to mitigate customer delinquency.
For Energy Savings' other markets, the LDCs provide collection services and assume the risk of any bad debt owing from Energy Savings' customers.
Bank indebtedness
As at December 31, 2006, Energy Savings had utilized $67.1 million of its operating line for working capital needs and $33.3 million in letters of credit were issued, primarily as security for commodity supply commitments. The operating line bears interest at bank prime plus 0.5% and letters of credit bear interest at 1.5%. Total interest expense for the three and nine months ended December 31, 2006 amounted to $0.9 million (2005 - $0.3 million) and $1.9 million (2005 - $0.4 million), respectively. Energy Savings is required to meet a number of financial covenants under the credit facility agreement. As at December 31, 2006, all of these covenants have been met.
On December 20, 2006, a new lending partner joined the banking syndicate for our credit facility at a commitment level of $30.0 million, resulting in an increase of the credit facility to $150.0 million.
Foreign exchange
Energy Savings has an exposure to U.S. dollar exchange rates as a result of its U.S. operations. Changes in the applicable exchange rate may result in a decrease or increase in income. A non-cash gain of $0.01 million (2005 - $0.4 million loss) was recognized for the nine months ended December 31, 2006.
Energy Savings has entered into foreign exchange forward contracts in order to hedge its exposure to fluctuations in cross border cash flow.
Class A preference share distributions
Each of the holders of the Ontario Energy Savings Corp. ("OESC") Class A preference shares (which are exchangeable into units on a 1:1 basis) is entitled to receive, on a quarterly basis, a payment equal to the amount paid or payable to a Unitholder on a comparable number of units. The total amount paid during the three and nine months periods ended December 31, 2006 amounted to $2.3 million (2005 - $2.3 million) and $6.8 million (2005 - $6.9 million), respectively. These payments are reflected in the "Statement of Unitholders' Equity" of the Fund's consolidated financial statements, net of tax.
Provision for (recovery of) income taxes
----------------------------------------
Income Tax Breakdown Three months ended Nine months ended
(thousands of dollars) December 31 December 31
2006 2005 2006 2005
------------------------------------------
Income tax provision (recovery)
anticipated to be reversed by
fiscal year end $4,540 $- $(2,942) $-
Income tax provision (recovery) 391 716 391 (455)
Amount credited to
Unitholders' equity 824 840 2,464 2,483
------------------------------------------
Current income tax provision
(recovery) 5,755 1,556 (87) 2,028
Future tax provision (recovery) 547 (2,625) (658) (8,793)
------------------------------------------
Provision for (recovery of)
income tax $6,302 $(1,069) $(745) $(6,765)
------------------------------------------
------------------------------------------
For the three and nine months ended December 31, 2006, there was an income tax provision (recovery) in the amount of $4.5 million and $(2.9) million, respectively, which is anticipated to be reversed at fiscal year end based on the fourth quarter income. For the three and nine months ended December 31, 2006, the income tax provision was $0.4 million. It is anticipated that there will be minimal income taxes owing at the end of the fiscal year as a result of taxable income in the Province of Manitoba.
Management expects to receive a ruling from the Canada Revenue Agency in the upcoming quarter in order to complete the final stage of the tax reorganization. As a result of the reorganization, Energy Savings will move from a "trust on corporation" structure to a "trust on trust on partnership" structure.
The change in the future tax provision of $0.5 million for the current quarter versus the recovery of $0.7 million for nine months ended December 31, 2006 is attributable to the difference between the tax and accounting cost bases for the acquired gas and electricity contracts. The majority of these assets are deducted for tax at a rate greater than that for accounting purposes.
Liquidity and Capital Resources
-------------------------------
Summary of Cash Flows Three months ended Nine months ended
(thousands of dollars) December 31 December 31
2006 2005 2006 2005
------------------------------------------
Operating activities $12,521 $1,230 $51,609 $37,932
Investing activities (1,166) (793) (2,995) (9,379)
Financing activities,
excluding distributions 27,517 26,713 42,666 37,456
Gain (loss) on foreign exchange 327 (214) 18 (481)
------------------------------------------
Increase in cash before
distributions 39,199 26,936 91,298 65,528
Distributions (cash payments) (26,397)(23,486) (76,601) (69,075)
------------------------------------------
Increase (decrease) in cash 12,802 3,450 14,697 (3,547)
Cash - beginning of period 13,558 9,061 11,663 16,058
------------------------------------------
Cash - end of period $26,360 $12,511 $26,360 $12,511
------------------------------------------
------------------------------------------
Operating activities
For the three and nine months ended December 31, 2006, cash flows from operating activities were $12.5 million and $51.6 million, an increase from $1.2 million and $37.9 million, respectively. The increase is primarily a result of the increase in gross margin.
Investing activities
Energy Savings purchased capital assets totaling $1.2 million during the quarter, compared with $0.8 million in the prior comparable quarter. Capital asset purchases amounted to $3.0 million for the nine months ended December 31, 2006, compared with $2.8 million in the prior comparable period. The purchases were primarily for information technology systems supporting the Fund's expanding customer base within the various geographical segments. In the prior comparable period, Energy Savings also purchased the EPCOR Ontario electricity customer contracts for $6.6 million (net of adjustments).
Financing activities
Financing activities excluding distributions relate primarily to the drawdown or repayment of the operating line for working capital requirements. During the three months ended December 31, 2006, Energy Savings had drawn an additional $27.5 million of the operating line compared with $26.4 million during the prior comparative quarter. During the nine months ended December 31, 2006, the drawdown of the credit facility amounted to $41.9 million, compared to $35.7 million in the prior comparable period.
As Energy Savings continues to expand in the United States markets and Alberta, the need to fund working capital and security requirements will increase driven primarily by the number of customers aggregated and to a lesser extent by the number of new markets. Based on the new markets in which Energy Savings currently operates and those it expects to enter, funding requirements will be supported through the credit facility. The credit facility was increased from $120.0 million to $150.0 million effective December 20, 2006 with the addition of a new partner into the lending syndicate.
The Fund's liquidity requirements are driven by the delay from the time that a customer contract is signed until cash flow is generated. Approximately 60% of an independent agent's commission payment is made following reaffirmation of the customer contract with the remaining 40% being paid after the energy commodity begins flowing to the customer.
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 six months. These periods reflect the time required by the various LDCs to enroll, flow the commodity, bill the customer and remit the first payment to Energy Savings. In Alberta, Energy Savings receives payment directly from the customer.
Distributions (cash payments)
The Fund made distributions of $26.4 million compared to $23.5 million in the prior comparative quarter, an increase of 12%. For the nine months ended December 31, 2006, Energy Savings distributed $76.6 million, an increase of 11% from the prior comparable period. Energy Savings will continue to utilize its cash resources for expansion into new markets including growth in its customer base as well as distributions to its Unitholders. Management continues to target its payout ratios after customer replacement to be 75%-80%.
During the quarter, Energy Savings announced an increase to the distribution rate by $0.03 effective the December 2006 distribution. As at the end of the quarter, the annual rate for distributions per unit was $1.035.
With the release of these quarterly results, the Fund announced a further increase in annual distribution rate to $1.065 ($0.08875 per month) effective the distribution paid March 31, 2007.
Balance Sheet December 31, 2006 compared to March 31, 2006
Cash increased from $11.7 million to $26.4 million. The increase in cash is a result of a supply invoice in the amount of $12.8 million which had a delayed due date of the first week of January as a result of the holiday season in December. The operating line of credit increased from $25.2 million to $67.1 million as a result of additional working capital requirements in the U.S as well as the electricity business segment. Working capital in the U.S. results from the timing difference between customer consumption and cash receipts as receipts lag consumption and injections of gas into storage for the Illinois segment from April through November, a period of low customer consumption. For electricity, working capital is required to fund the lag between settlements with the supplier and settlement with the LDC.
The increase in accounts receivable from $149.4 million to $171.5 million is primarily attributable to the improved margin and increased customers for both gas and electricity. Accounts payable has also increased from $113.1 million to $137.9 million relating to increased customer consumption.
At the end of the quarter, Energy Savings had delivered more gas to the LDCs in Ontario and Quebec than customers had consumed. Since Energy Savings is paid for this gas when delivered yet recognizes revenue when the gas is consumed by the customer, the result on the balance sheet is the deferred revenue amount of $88.1 million and gas delivered in excess of consumption of $73.9 million. In Manitoba, customers had consumed more gas than had been delivered to the LDC resulting in unbilled revenues of $0.6 million and accrued gas accounts payable of $0.5 million. At March 31, 2006, customers had consumed more than had been delivered to the LDCs, thereby resulting in unbilled revenues amounting to $37.0 million and accrued gas accounts payable of $29.9 million.
Gas in storage primarily represents the gas delivered to the LDCs in the State of Illinois and has increased from $4.8 million to $29.8 million. Injection season is typically from April through November; therefore gas in storage is the highest in the third quarter. In addition to the inventory balance in Illinois, a portion of the gas in storage relates to operations in the Province of Alberta. There is a month to month carryover which represents the difference between the gas delivered and the customer consumption.
Corporate taxes recoverable increased from $4.3 million at March 31, 2006 to $7.4 million as at December 31, 2006 as a result of the lower gross margin and higher expenditures experienced to date. Management anticipates that the income from the fourth quarter will continue to offset the recovery booked to date, resulting in small income tax payable position as a result of operations in Manitoba.
Contractual obligations
In the normal course of business, the Fund is obligated to make future payments. These obligations represent contracts and other commitments that are known and non-cancelable.
Payments due by period Total Less 1 - 3 4 - 5 After 5
(thousands of dollars) ----- than 1 years years years
year ----- ----- ------
------
Property and equipment
lease agreements $29,359 $831 $8,659 $7,880 $11,989
EPCOR billing,
collections &
supply commitments 22,986 2,051 15,717 5,218 -
Commodity supply
purchase
commitments 3,717,205 344,143 2,050,575 1,163,924 158,563
------------------------------------------------------
$3,769,550 $347,025 $2,074,951 $1,177,022 $170,552
------------------------------------------------------
------------------------------------------------------
Other obligations
The Fund is also subject to certain contingent obligations that become payable only if certain events or rulings were to occur. The inherent uncertainty surrounding the timing and financial impact of these events or rulings prevents any meaningful measurement, which is necessary to assess any material impact on future liquidity. Such obligations include potential judgments, settlements, fines, and other penalties resulting from lawsuits, claims or proceedings. In the opinion of management, the Fund has no material pending lawsuits, claims or proceedings which have not been either included in its accrued liabilities or in the financial statements.
Transactions with Related Parties
The Fund does not currently have any transactions with any individuals or companies that are not considered independent to the Fund or any of its subsidiaries and/or affiliates.
Critical accounting estimates
The consolidated financial statements of the Fund have been prepared in accordance with Canadian GAAP. Certain accounting policies require management to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues, cost of sales and marketing and general and administrative expenses. Estimates are based on historical experience, current information and various other assumptions that are believed to be reasonable under the circumstances. The emergence of new information and changed circumstances may result in actual results or adjustments to the estimated amounts that differ materially from current estimates. For a detailed discussion of the significant judgments and estimates used in the preparation of the Fund's interim consolidated financial statements, refer to the Fund's annual MD&A. There are no material updates to these estimates based on events from April 1, 2006 to January 30, 2007.
Derivative Financial instruments
The Fund has entered into a variety of derivative financial instruments as part of the business of purchasing and selling gas and electricity. Energy Savings enters into contracts with customers to provide electricity and gas at fixed prices. These contracts expose Energy Savings to changes in market prices to supply these commodities. To reduce the exposure to the commodity market price changes, Energy Savings uses derivative financial and physical contracts to secure fixed price commodity supply matching its delivery obligations.
The Fund's business model objective is to minimize commodity risk other than consumption, usually attributable to weather. Accordingly, it is Energy Savings' policy to hedge the estimated requirements of its customers with offsetting volumes of natural gas and electricity at fixed prices for terms equal to those of the customer contracts.
Energy Savings' entry into Illinois, New York and Indiana, as well as the intention for further expansion in the U.S. has introduced foreign exchange related risks. As a result, Energy Savings entered into foreign exchange forwards in order to hedge the exposure to fluctuations in cross border cash flow.
The estimation of the fair value of certain electricity and gas supply contracts and foreign exchange risks requires considerable judgment and is based on market prices or management's best estimates if there is no market and/or if the market is illiquid.
Adoption of new accounting policies
There have been no new accounting policies adopted by the Fund for the period April 1, 2006 to January 30, 2007. Commencing April 1, 2007, Energy Savings will be required to comply with three new standards: Hedge Accounting, Financial Instruments and Other Comprehensive Income. These standards will require all derivative financial instruments to be fair valued and recognized in Other Assets as opposed to recognizing only the fair value of derivative financial instruments that do not meet hedge accounting requirements as is currently the case. Changes in the fair value will flow through the new Statement of Other Comprehensive Income if hedges are effective. Due to the size of the electricity derivative financial instruments, which are not currently recognized in Other Assets or Other Liabilities, these new standards will have a significant impact on the Other Assets or Other Liabilities caption of the balance sheet. Due to the volatility of market prices, it is expected that there will be significant changes flown through Other Comprehensive Income on a quarterly basis. There will be no change to management's hedge strategy as the plans are effective; the change in measurement is simply the adoption of the new accounting standards.
Risks and uncertainties
The Fund is subject to a number of risks and uncertainties that could have a material adverse effect on the results of operations, business prospects, financial condition, distributions and the trading price of the Fund. A comprehensive discussion of these risks can be found in the Fund's Annual Information Form and the 2006 Annual Report which is available on our corporate website under "reports and filings" at www.esif.ca and from SEDAR through its website at www.sedar.com. There have been no material changes for the period April 1, 2006 to January 30, 2007 that require an update to the discussion of the applicable risks.
Tax Related Risks
On October 31, 2006 the Minister of Finance (Canada) announced a Tax Fairness Plan that proposes to enact legislation that will amend the taxation of Flow Through Entities ("FTE's") including trusts. This plan proposes to tax distributions from existing trusts starting in 2011. In addition, the plan proposes to tax distributions from trusts received by foreign investors and tax-exempt entities differently than they are currently taxed. The release from the Minister of Finance (Canada) states "The FTEs that will be subject to these new rules will be fully defined in the legislation to implement these measures. As a practical matter, however, it can be assumed that the rules will apply to any publicly-traded Income Trust (or publicly-traded partnership), other than one that only holds passive real estate investments".
The Department of Finance released draft legislation on December 21, 2006 to implement its October 31, 2006 announcement of a new tax on distributions from publicly traded income trusts and limited partnerships, referred to as "specified investment flow-throughs" (SIFTs). The draft legislation appears to be generally consistent with details included in the October 31 announcement outlined above.
Corporate governance
Energy Savings is committed to transparency in its operations and its approach to governance meets all recommended standards. Full disclosure of its compliance with existing corporate governance rules is available on our website at www.esif.ca. Energy Savings actively monitors the corporate governance and disclosure environment to ensure timely compliance with current and future requirements.
Class A preference shares of OESC and Trust Units
As at January 30, 2007, there were 8,902,512 Class A preference shares of OESC outstanding and 97,876,872 units of the Fund outstanding.
Taxability of 2006 Unitholder distributions
Management estimates that substantially all of the distributions paid to Unitholders during calendar 2006 will be taxable as interest and other income.
Outlook
While the October 31st announcement to tax Income Trusts does not affect existing Income Trusts until 2011, the announcement has had a material impact on the trading value of the Energy Savings' units. While the price declines have been felt across the entire Income Fund sector, the current unit price is not representative of the financial strength and sustainability inherent in the Energy Savings model. Management is presently investigating alternative corporate forms and is committed to reinstating value to Unitholders.
In December, Energy Savings opened a new sales office and began test marketing in NFG, a second territory in the State of New York. NFG covers the western area of upstate New York area and has approximately 500,000 customers in Energy Savings' target market. Results to date indicate receptivity to the five-year product offering. Ramp-up to full scale marketing will begin in the fourth quarter.
In December, Energy Savings gained a pivotal change with ConEd with the implementation of a contest period. Management expects a broader decision State-wide from the New York regulators which will allow us to substantially reduce switching of our customers. While the ConEd change will not improve customer net additions until the fourth quarter, management is confident that the eventual result will be additions in line with our growth expectations on a go forward basis. The newly elected State administration adds a level of uncertainty to the regulatory regime in New York.
Despite this year's marketing shortfall, management continues to affirm its published guidance of between 15% and 20% growth in both gross margin and distributable cash for fiscal 2007 subject to the impact of winter weather in the fourth quarter. While there have been significant challenges during the year to date with respect to customer aggregation and weather, as in the case of past challenges, Energy Savings has delivered growth and profitability in line with expectations. Energy Savings remains a growth income fund.
Consistent with the Fund's policy to increase distributions as distributable cash grows, the Fund announced an increase in annual distribution rate to $1.065 ($0.08875 per month) effective the distribution paid March 31, 2007.
In the ordinary course of its business, Energy Savings regularly reviews possible acquisition or merger opportunities. To the extent that management believes that such transactions are accretive to Unitholders in the near and long term, acquisitions may be used to expand the Fund's customer base or to add other strategic assets.
In conjunction with its suppliers, Energy Savings regularly reviews opportunities to reduce the cost of and ensure long term access to five year commodity supply. Stable, long term relationships with its suppliers are a core aspect of Energy Savings' business model.
Energy Savings continues to actively monitor the progress of the deregulated markets in various jurisdictions, including Virginia, Maryland, New Jersey, Michigan, Texas, the electricity market in Illinois as well as the residential gas market in British Columbia.
ENERGY SAVINGS INCOME FUND
CONSOLIDATED BALANCE SHEETS
(Unaudited - thousands of dollars)
---------------------------------------------------------------------------
---------------------------------------------------------------------------
DECEMBER 31, 2006 MARCH 31, 2006
ASSETS
CURRENT
Cash $ 26,361 $ 11,663
Restricted cash (Note 4) 1,920 4,452
Accounts receivable 171,512 149,424
Gas delivered in excess of consumption 73,888 -
Gas in storage 29,783 4,796
Unbilled revenues 595 36,982
Prepaid expenses 2,012 1,479
Corporate taxes recoverable 7,406 4,308
---------------------------------------------------------------------------
313,477 213,104
GAS CONTRACTS (less accumulated
amortization $239,892;
March 31, 2006 - $228,314) 4,036 15,615
ELECTRICITY CONTRACTS (less accumulated
amortization - $24,043;
March 31, 2006 - $14,810) 2,379 11,611
GOODWILL 94,576 94,576
CAPITAL ASSETS (less accumulated
amortization $8,258; March 31, 2006
- $6,054) 12,058 11,263
OTHER ASSETS (Note 9a) - 4,056
---------------------------------------------------------------------------
$ 426,526 $ 350,225
---------------------------------------------------------------------------
---------------------------------------------------------------------------
LIABILITIES
CURRENT
Bank indebtedness (Note 5) $ 67,127 $ 25,184
Accounts payable and accrued liabilities 137,948 113,137
Customer rebates payable (Note 4) 1,920 4,452
Management incentive program payable 1,209 1,260
Unit distribution payable 8,442 7,591
Corporate taxes payable - 382
Deferred revenue 88,094 -
Accrued gas accounts payable 464 29,901
---------------------------------------------------------------------------
305,205 181,907
DEFERRED CHARGES - 3,552
OTHER LIABILITIES (Note 9a) 9,024 1,499
FUTURE INCOME TAXES (Note 6) 15,730 16,388
---------------------------------------------------------------------------
329,958 203,346
---------------------------------------------------------------------------
EQUITY
Unitholders' equity $ 88,266 $ 138,443
Contributed surplus (Note 8d) 8,302 8,436
---------------------------------------------------------------------------
96,568 146,879
---------------------------------------------------------------------------
$ 426,526 $ 350,225
---------------------------------------------------------------------------
---------------------------------------------------------------------------
ENERGY SAVINGS INCOME FUND
CONSOLIDATED STATEMENTS OF UNITHOLDERS' EQUITY
(Unaudited - thousands of dollars)
FOR THE NINE MONTHS ENDED DECEMBER 31
---------------------------------------------------------------------------
---------------------------------------------------------------------------
Unitholders' Accumulated
Capital Earnings Distributions 2006 2005
(Note 7)
Unitholders'
equity,
beginning of
period $324,650 $143,890 $(330,097) $138,443 $173,106
Trust units
exchanged 3,166 - - 3,166 -
Trust units
issued on
exercise/exc-
hange of unit
compensation
(Note 8d) 3,415 - - 3,415 2,165
Class A
preference
shares
exchanged (3,166) - - (3,166) -
Net income - 23,860 - 23,860 33,738
Distributions - - (73,095) (73,095) (64,964)
Class A
preference
share
distributions
- net of
tax - - (4,357) (4,357) (4,391)
---------------------------------------------------------------------------
Unitholders'
equity, end
of period $328,065 $167,750 $(407,549) $88,266 $139,654
---------------------------------------------------------------------------
---------------------------------------------------------------------------
ENERGY SAVINGS INCOME FUND
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited - thousands of dollars except per unit amount)
---------------------------------------------------------------------------
---------------------------------------------------------------------------
THREE MONTHS ENDED NINE MONTHS ENDED
DECEMBER 31 DECEMBER 31
2006 2005 2006 2005
SALES $ 422,230 $ 321,161 $ 943,907 $ 735,615
COST OF SALES 361,911 270,767 811,123 624,995
---------------------------------------------------------------------------
GROSS MARGIN 60,319 50,394 132,784 110,620
---------------------------------------------------------------------------
EXPENSES
General and administrative
expenses 10,176 9,271 31,666 26,072
Capital tax 180 207 540 621
Marketing expenses 10,052 13,630 35,201 35,060
Unit based compensation
(Note 8d) 889 1,876 2,547 3,912
Bad debt expense 3,172 1,300 6,890 3,478
Amortization of gas contracts 3,859 7,457 11,578 22,373
Amortization of electricity
contracts 1,650 2,000 5,681 5,314
Amortization of capital assets 767 629 2,204 1,752
---------------------------------------------------------------------------
30,745 36,370 96,307 98,582
---------------------------------------------------------------------------
INCOME BEFORE OTHER INCOME
(EXPENSE) 29,574 14,024 36,477 12,038
OTHER INCOME (EXPENSE) (Note
9a) (9,160) (1,876) (13,362) 14,935
---------------------------------------------------------------------------
INCOME BEFORE INCOME TAX 20,414 12,148 23,115 26,973
PROVISION FOR (RECOVERY OF)
INCOME TAX (Note 6) 6,302 (1,069) (745) (6,765)
---------------------------------------------------------------------------
NET INCOME $ 14,112 $ 13,217 $ 23,860 $ 33,738
---------------------------------------------------------------------------
---------------------------------------------------------------------------
Net income per unit (Note 10)
Basic $ 0.13 $ 0.12 $ 0.22 $ 0.32
Diluted $ 0.13 $ 0.12 $ 0.22 $ 0.32
ENERGY SAVINGS INCOME FUND
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited - thousands of dollars)
---------------------------------------------------------------------------
---------------------------------------------------------------------------
THREE MONTHS ENDED NINE MONTHS ENDED
DECEMBER 31 DECEMBER 31
2006 2005 2006 2005
Net inflow (outflow) of cash
related to the following
activities
OPERATING
Net income $ 14,112 $ 13,217 $ 23,860 $ 33,738
---------------------------------------------------------------------------
Items not affecting cash
Amortization of gas contracts 3,859 7,457 11,578 22,373
Amortization of electricity
contracts 1,650 2,000 5,681 5,314
Amortization of capital assets 767 629 2,204 1,752
Unit based compensation 889 1,876 2,547 3,912
Future income taxes 547 (2,623) (658) (8,792)
Loss (gain) on foreign
exchange (unrealized) (397) 88 (7) 355
Other (income) expenses
(unrealized) 8,446 1,717 11,174 (15,390)
---------------------------------------------------------------------------
15,761 11,144 32,519 9,524
---------------------------------------------------------------------------
Adjustments required to reflect
net cash receipts from gas
sales 1,263 1,381 21,156 23,162
---------------------------------------------------------------------------
31,136 25,742 77,535 66,424
---------------------------------------------------------------------------
Changes in non-cash working
capital (18,615) (24,512) (25,926) (28,492)
---------------------------------------------------------------------------
Cash inflow from operations 12,521 1,230 51,609 37,932
---------------------------------------------------------------------------
FINANCING
Exercise of trust unit options
(Note 8d) 38 307 723 1,748
Distributions paid to
Unitholders (24,939) (22,001) (72,244) (64,684)
Distributions to Class A
preference shareholders (2,282) (2,325) (6,821) (6,874)
Tax impact on distributions to
Class A preference
shareholders 824 840 2,464 2,483
Bank indebtedness (Note 5) 27,479 26,406 41,943 35,708
---------------------------------------------------------------------------
1,120 3,227 (33,935) (31,619)
---------------------------------------------------------------------------
INVESTING
Purchase of capital assets (1,166) (793) (2,995) (2,786)
Acquisition of customer
contracts - - - (6,593)
---------------------------------------------------------------------------
(1,166) (793) (2,995) (9,379)
---------------------------------------------------------------------------
Gain (loss) on foreign exchange
(unrealized) 397 (88) 7 (355)
Other income foreign exchange
(unrealized) (70) (126) 11 (126)
---------------------------------------------------------------------------
NET CASH INFLOW (OUTFLOW) 12,802 3,450 14,697 (3,547)
CASH, BEGINNING OF PERIOD 13,558 9,061 11,663 16,058
---------------------------------------------------------------------------
CASH, END OF PERIOD $26,360 $12,511 $26,360 $12,511
---------------------------------------------------------------------------
---------------------------------------------------------------------------
Supplemental Information
Interest paid $908 $251 $1,921 $444
Income taxes paid $360 $974 $1,401 $12,282
ENERGY SAVINGS INCOME FUND
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited - thousands of dollars except where indicated and per unit
amount)
1. INTERIM FINANCIAL STATEMENTS
The unaudited interim consolidated financial statements do not conform in all respects to the requirements of Canadian generally accepted accounting principles for annual financial statements and should therefore be read in conjunction with the audited consolidated financial statements and notes thereto included in the Fund's annual report for fiscal 2006. The unaudited interim consolidated financial statements have been prepared by management in accordance with Canadian generally accepted accounting principles applicable to interim consolidated financial statements and follow the same accounting policies and methods in their applications as the most recent annual financial statements.
2. ORGANIZATION
Energy Savings Income Fund ("Energy Savings" or the "Fund")
Energy Savings is an open-ended, limited-purpose trust established under the laws of the Province of Ontario to hold securities and to distribute the income of its directly or indirectly wholly owned operating subsidiaries and affiliates: Ontario Energy Savings L.P. ("OESLP"), Energy Savings (Manitoba) Corp. ("ESMC"), Energy Savings (Quebec) L.P. ("ESPQ"), ES (B.C.) Limited Partnership ("ESBC"), Alberta Energy Savings L.P. ("AESLP"), Illinois Energy Savings Corp. ("IESC"), New York Energy Savings Corp. ("NYESC") and Indiana Energy Savings Corp. ("INESC").
3. SEASONALITY OF OPERATIONS
Energy Savings' operations are seasonal. Gas consumption by customers is typically highest in October through March and lowest in April through September. Electricity consumption is typically highest in January through March and July through September. Electricity consumption is lowest in October through December and April through June.
4. RESTRICTED CASH/CUSTOMER REBATES PAYABLE
Restricted cash represents rebate monies received from Local Distribution Companies ("LDCs") in Ontario as provided by the Independent Electricity System Operator ("IESO"). OESLP is obligated to disperse the monies to eligible end-use customers in accordance with the Market Power Mitigation Agreement as part of OESLP's Retailer License conditions.
5. BANK INDEBTEDNESS
An operating credit facility, which increased during the quarter from $100,000 to $150,000, is available to Energy Savings to meet working capital requirements. The operating line of credit bears interest at bank prime plus 0.5% and the letters of credit bear interest at 1.5%. As at December 31, 2006 the Canadian prime rate was 6.0% and the U.S. prime rate was 8.25%. As at December 31, 2006, Energy Savings had drawn $67,127 against the facility and total letters of credit outstanding amounted to $33,295. Energy Savings has $49,578 of the facility remaining for future working capital and security requirements. Energy Savings' obligations under the credit facility are supported by guarantees of certain subsidiaries and affiliates and secured by a pledge of the assets of Energy Savings and the majority of its operating subsidiaries and affiliates. Energy Savings is required to meet a number of financial covenants under the credit facility agreement. As at December 31, 2006 and 2005, all of these covenants have been met.
6. INCOME TAXES
The Fund is taxed as a "mutual fund trust" for income tax purposes. Pursuant to the Declaration of Trust, the trustees will distribute all taxable income directly earned by the Trust to the Unitholders and deduct such distributions for income tax purposes.
Canadian based corporate subsidiaries are subject to tax on their taxable income at a rate of 36% (2005 - 36%).
The following table reconciles the difference between the income taxes that would result solely by applying statutory tax rates to the pre-tax income for Energy Savings and the income tax provision in the financial statements.
Three months ended Nine months ended
December 31 December 31
2006 2005 2006 2005
Net income before income tax $ 20,414 $ 12,148 $ 23,115 $ 26,973
-------- ---------- --------- ---------
-------- ---------- --------- ---------
Income tax expense at the
combined basic rate of 36%
(2005-36%) 7,349 4,373 8,321 9,710
Taxes on income attributable to
Unitholders (1,608) (3,594) (14,945) (16,670)
Large corporations tax - 25 - 120
Benefit (Utilization) of U.S.
accounting losses not
recognized 266 (2,214) 4,955 (889)
Non-deductible expenses 295 341 924 964
-------- ---------- --------- ---------
Provision for (recovery of)
income tax $ 6,302 $ (1,069) $ (745) $ (6,765)
-------- ---------- --------- ---------
-------- ---------- --------- ---------
Components of Energy Savings'
income tax provision are as 2006 2005 2006 2005
follows:
Income tax provision (recovery)
to be reversed by end of fiscal
year $ 4,540 $ - $ (2,942) $ -
Income tax provision (recovery) 391 716 391 (455)
Amount credited to Unitholders'
equity 824 840 2,464 2,483
-------- ----------- ---------- ----------
Current income tax provision
(recovery) 5,755 1,556 (87) 2,028
Future tax provision (recovery) 547 (2,625) (658) (8,793)
-------- ----------- ---------- ----------
Provision for (recovery of)
income tax $ 6,302 $ (1,069) $ (745) $ (6,765)
-------- ----------- ---------- ----------
-------- ----------- ---------- ----------
Components of Energy Savings'
net future income tax liability
are as follows: 2006 2005
Carrying value of gas and
electricity contracts in excess
of tax value $ 5,224 $ 8,063
Partnership income deferred for
tax purposes 6,790 -
Other 3,716 4,165
--------- ---------
$ 15,730 $ 12,228
--------- ---------
--------- ---------
7. UNITHOLDERS' CAPITAL
Trust units of the Fund
An unlimited number of units may be issued. Each unit is transferable, voting and represents an equal undivided beneficial interest in any distributions from the Fund whether of net income, net realized capital gains or other amounts, and in the net assets of the Fund in the event of termination or winding-up of the Fund.
Class A preference shares of OESC
Unlimited Class A preference shares, non-voting for OESC, non-cumulative, exchangeable into trust units in accordance with the OESC shareholders' agreement, with no priority on dissolution. Pursuant to the amended and restated Declaration of Trust which governs the Fund, the holders of Class A preference shares are entitled to vote in all votes of Unitholders as if they were the holders of the number of units which they would receive if they exercised their shareholder exchange rights. Class A preference shareholders have equal entitlement to distributions from the Fund as Unitholders.
2006 2005
Issued and Outstanding Units/Shares Units/Shares
Trust units
-----------
Balance, beginning of
period 96,391,991 $ 299,228 95,515,617 $ 147,684
Options exercised 65,166 817 364,665 2,112
Deferred unit grants
exercised - - 3,206 53
Unit appreciation rights
exchanged 153,532 2,598 - -
Exchanged from Class A
preference shares 1,266,183 3,166 - -
----------------------------------------------
Balance, end of period 97,876,872 305,809 95,883,488 149,849
----------------------------------------------
Class A preference shares
-------------------------
Balance, beginning of
period 10,168,695 25,422 10,168,695 25,422
Exchanged into units (1,266,183) (3,166) - -
----------------------------------------------
Balance, end of period 8,902,512 22,256 10,168,695 25,422
----------------------------------------------
Balance, end of period 106,779,384 $ 328,065 106,052,183 $ 175,271
----------------------------------------------
----------------------------------------------
8. UNIT BASED COMPENSATION PLANS
(a) Unit option plan
The Fund grants awards under its 2001 unit option plan to directors, officers, full-time employees and service providers (non-employees) of Energy Savings. In accordance with the unit option plan, the Fund may grant options to a maximum of 11,300,000 units. As at December 31, 2006, there were 798,999 options still available for grant under the plan. Of the options issued, 1,222,668 options remain outstanding at quarter end. The exercise price of the unit options equals the closing market price of the Fund's units on the last business day preceding the grant date. The unit options will vest over periods ranging from three to five years from the grant date and expire after five or ten years from the grant date.
A summary of the changes in the Fund's unit option plan during the nine month period and status at December 31, 2006 is outlined below:
Outstanding Range of Exercise Weighted Weighted
Options prices average average
exercise grant
price(1) date fair
value(2)
Balance, beginning
of period 1,227,667 $6.09 - $18.70 $13.44
Granted 140,000 $16.65 - $17.47 $17.01 $2.62
Forfeited/canceled (79,833) $14.25 - $17.70 $16.88
Exercised (65,166) $8.75 - $16.58 $11.09
----------
Balance, end
of period 1,222,668 $6.09 - $18.70 $13.75
----------
----------
(1) The weighted average exercise price is calculated by dividing the
exercise price of options granted by the number of options granted.
(2) The weighted average grant date fair value is calculated by dividing
the fair value of options granted by the number of options granted.
Options outstanding Options exercisable
---------------------------------------------------------------------------
Range of exercise Number Weighted Weighted Number Weighted
prices outstanding average average exercisable average
remaining exercise exercise
contractual price price
life
$6.09 - $8.75 34,168 0.92 $7.91 34,168 $7.91
$10.68 - $12.01 73,333 1.47 $11.09 73,333 $11.09
$12.17 600,000 1.25 $12.17 600,000 $12.17
$14.25 - $18.70 515,167 3.34 $16.35 124,167 $16.43
---------- ----------
Balance, end of
period 1,222,668 2.14 $13.75 831,668 $12.53
---------- ----------
---------- ----------
Options available for grant
Available for grant 11,300,000
Less: granted in prior years (11,358,000)
Add: canceled/forfeited in prior years 917,166
---------------
Balance, beginning of period 859,166
Less: granted during the period (140,000)
Add: canceled/forfeited during the period 79,833
---------------
Balance, end of period 798,999
---------------
---------------
The Fund uses a binomial option pricing model to estimate the fair values. The binomial model was chosen because of the yield associated with the units. Fair values of employee unit options are estimated at grant date. Fair values of non-employee unit options are estimated and revalued each reporting period until a measurement date is achieved. The following weighted average assumptions have been used in the valuations for fiscal 2007:
Risk free rate 4.10 - 4.48%
Expected volatility 25.50% - 25.60%
Expected life 5 years
Expected distributions $0.945 - $1.005 per year
(b) Unit appreciation rights
The Fund grants awards under its 2004 unit appreciation rights ("UARs") plan to senior officers or service providers of its subsidiaries and affiliates in the form of fully paid UARs. In accordance with the unit appreciation rights plan, the Fund may grant UARs to a maximum of 1,000,000. As at December 31, 2006, there were 489,094 UARs still available for grant under the plan. Except as otherwise provided, (i) the UARs vest from one to five years from the grant date, (ii) expire no later than ten years from the grant date, (iii) a holder of UARs is entitled to distributions as if a UAR were a unit, and (iv) when vested, the holder of a UAR may exchange one UAR for one unit.
UARs Available for Grant
Available for grant 1,000,000
Less: granted in prior years (501,209)
----------
Balance, beginning of period 498,791
Less: granted during the period (82,070)
Add: forfeited/canceled during the period 72,373
----------
Balance, end of period 489,094
----------
----------
(c) Deferred unit grants
The Fund grants awards under its 2004 Directors' deferred compensation plan to all independent directors. In accordance with the deferred compensation plan, the Fund may grant deferred unit grants ("DUGs") to a maximum of 100,000. The DUGs vest the earlier of the date of the Director's resignation or three years following the date of grant and expire ten years following the date of grant. As of December 31, 2006, there were 75,154 DUGs available for grant under the plan.
Deferred unit grants
Available for grant 100,000
Less: granted in prior years (17,219)
--------
Balance, beginning of period 82,781
Less: granted during the period (7,627)
--------
Balance, end of period 75,154
--------
--------
(d) Contributed surplus
Amounts credited to contributed surplus include option awards, UARs and DUGs. Amounts charged to contributed surplus are awards exercised during the year.
Three months ended Nine months ended
December 31 December 31
Contributed Surplus 2006 2005 2006 2005
---- ---- ---- ----
Balance, beginning of period 7,564 6,711 8,436 4,881
Add: unit based compensation awards 889 1,876 2,547 3,912
Less: unit based awards exercised (151) (240) (2,681) (446)
--------- ------ --------- -----
Balance, end of period 8,302 8,347 8,302 8,347
--------- ------ --------- -----
--------- ------ --------- -----
Total amounts credited to Unitholders' capital in respect of options and UARs exercised or exchanged during the three and nine months ended December 31, 2006 amounted to $194 (2005 - $514) and $3,415 (2005 - $2,165), respectively.
Cash received from options exercised for the three and nine months ended December 31, 2006 amounted to $38 (2005 - $307) and $723 (2005 - $1,748), respectively.
9.FINANCIAL INSTRUMENTS
(a) Fair value
The Fund has a variety of gas and electricity supply contracts that are considered derivative financial instruments. The fair value of derivative financial instruments is the estimated amount that Energy Savings would pay or receive to dispose of these supply contracts in the market. Management has estimated the value of electricity and gas swap contracts using a discounted cash flow method which employs market forward curves as well as a forward curve compiled by management for Alberta electricity (electricity information is based on market). Gas options have been valued using the Black option value model using the applicable market forward curves and the implied volatility from other market traded gas options.
(i)(a) At December 31, 2006, Energy Savings had electricity fixed-for-floating swap contracts in Ontario designated as hedges of Energy Savings' anticipated cost of sales to which it has committed with the following terms:
Notional volumes (peak, flat, off peak and weekend) 5.0-50.0 MW/h
Total remaining notional volume
(peak, flat off peak and weekend) 14,676,289 MWh
Maturity dates January 31, 2007 -
July 31, 2012
Fixed price per MWh (in dollars) $45.00 - $118.00
Fair value $177,624 unfavourable
Notional value $1,075,554
(i)(b) At December 31, 2006, Energy Savings had electricity fixed-for-floating swap contracts in Alberta designated as hedges of Energy Savings' anticipated cost of sales to which it has committed with the following terms:
Notional volumes (peak and off peak) 0.1 -11.4 MW/h
Total remaining estimated notional volume
(peak, off peak and load following) 3,211,786 MWh
Maturity dates January 31, 2007 -
May 31, 2012
Fixed price per MWh (in dollars) $55.80 - $81.48
Fair value $41,885 favourable
Notional value $231,088
(i)(c) At December 31, 2006, Energy Savings had electricity fixed-for-floating swap contracts in New York designated as hedges of Energy Savings' anticipated cost of sales to which it has committed with the following terms:
Notional volumes (peak and off peak) 0.1 -14.7 MW/h
Total remaining notional volume
(peak and off peak) 1,317,960 MWh
Maturity dates January 31, 2007 -
January 31, 2012
Fixed price per MWh (in dollars) $103.08 - $132.80 (US$88.45 -
$113.95)
Fair value $34,977 (US$30,013 unfavourable)
Notional value $166,700 (US$143,041)
Since hedge accounting has been applied to these swaps, no recognition of the mark to market gain/loss has been recognized in the financial statements. The electricity fixed-for-floating contracts related to the Province of Alberta are predominantly load following, wherein the quantity of electricity contained in the supply contract "follows" the usage of customers designated by the supply contract. Notional volumes associated with these contracts are estimates and subject to change with customer usage requirements. There are also load shaped fixed-for-floating contracts in Ontario and New York wherein the quantity of electricity is established but varies throughout the term of the contracts.
(ii) At December 31, 2006, Energy Savings had other gas puts and calls in Manitoba which have been marked to market with the following terms:
Notional volume 450 - 51,750 GJ/month
Total remaining notional volume 1,373,475 GJ
Maturity dates January 31, 2007 - September 30,
2011
Fixed price per GJ (in dollars) $5.48 - $9.18
Fair value $617 unfavourable
The loss of $556 (2005 - $239 gain) and the gain of $60 (2005 - $245 gain) for the three and nine months ended December 31, 2006, respectively, have been recorded in other liabilities with its offsetting value being recorded in other income (expense). The fair value of the options is net of the present value of premiums which have yet to be paid.
(iii) At December 31, 2006, Energy Savings had other gas puts and calls in Alberta which have been marked to market with the following terms:
Notional volume 500 - 48,000 GJ/month
Total remaining notional volume 7,668,500 GJ
Maturity dates January 31, 2007 - December 31,
2011
Fixed price per GJ (in dollars) $5.50 - $12.40
Fair value $3,581 unfavourable
The loss of $2,243 (2005 - $884 loss) and $3,010 (2005 - $4,875 gain) for the three and nine months ended December 31, 2006, respectively, has been recorded in other liabilities with its offsetting value being recorded in other income (expense). The fair value of the options is net of the present value of premiums which have yet to be paid.
(iv) At December 31, 2006, Energy Savings had other gas put and call options in Illinois and Indiana which have been marked to market with the following terms:
Notional volume 500 - 134,000 MmBTU/month Total remaining notional volume 7,908,000 MmBTU Maturity dates January 31, 2007 - November 30, 2011 Fixed price per MmBTU (in dollars) $6.41 - $12.12 (US$5.50 - $10.40) Fair value $3,172 unfavourable (US$2,722)
The fair value is net of prepaid premiums of $1,644 (US$1,411). These premiums are included in other liabilities. The loss of $2,597 (US$2,228) (2005 - loss of $780 (US$671)) and $5,178 (US$4,443) (2005 - gain of $10,862 (US$9,340)) for the three and nine months ended December 31, 2006, respectively, has been recorded in other assets with its offsetting value being recorded in other income (expense).
(v) At December 31, 2006, Energy Savings had gas put and call options in New York which have been marked to market with the following terms:
Notional volume 5 - 1,755 Mm BTU/month Total remaining notional volume 899,800 MmBTU Maturity dates January 31, 2007 - December 31, 2011 Fixed price per MmBTU (in dollars) $9.44 - $13.24 (US$8.10 - $11.36) Fair value $944 unfavourable (US$810)
The loss of $449 (US$376) (2005 - $23 loss (US$20))and loss $695 (US$596) (2005 - $134 gain (US$115)) for the three and nine months ended December 31, 2006, respectively, has been recorded in other liabilities with its offsetting value being recorded in other income (expense). The fair value of the options is net of the present value of premiums which have yet to be paid.
(vi) The Fund has foreign exchange forwards that are considered derivative financial instruments. The fair value of derivative financial instruments is the estimated amount that Energy Savings would pay or receive to dispose of these forwards at market. Management has estimated the value of its foreign exchange forwards using a discounted cash flow method which employs market forward curves. Hedge accounting was applied to most of these forwards up to September 30, 2006. However, the required hedge accounting effectiveness was not fully achieved during the current quarter and resulted in $2,353 loss being booked to the Statement of Operations at December 31, 2006. The remaining mark to market gain of $1,933 has been deferred and will be recognized in the Statement of Operations over the remaining term of each hedging relationship. At December 31, 2006, Energy Savings had foreign exchange forwards designated as hedges of Energy Savings' anticipated cross border cash flows which it has committed with the following terms:
Notional amount $2,258-$2,276 (US$2,000) Total remaining notional amount $54,408 (US$48,000) Maturity dates May 7, 2008 - April 7, 2010 Exchange rates $1.1289 - $1.1381 Fair value $420 unfavourable
These derivative financial instruments create a credit risk for Energy Savings since they have been transacted with a limited number of counterparties. Should any counterparty be unable to fulfill its obligations under the contracts, Energy Savings may not be able to realize the other asset balance recognized in the financial statements.
Energy Savings' physical gas supply contracts are not considered derivative financial instruments and a fair value has therefore not been assessed.
The carrying value of cash and cash equivalents, accounts receivable, accounts payable and accrued liabilities, management incentive program payable and unit distribution payable approximates their fair value due to their short term liquidity.
(b) Customer credit risk
In Illinois and Alberta, Energy Savings assumes the credit risk associated with the cash collection from its customers. Credit review processes have been put in place for these markets where Energy Savings has credit risk to manage the customer default rate. If a significant number of customers were to default on their payments, it could have a material adverse effect on Energy Savings' operations and cash flow. Management factors default from the credit risk in its margin expectations for both Illinois and Alberta.
For the remaining markets in which Energy Savings operates, the LDCs provide collection services and assume the risk of any bad debts owing from Energy Savings' customers. Therefore, Energy Savings receives the collection of customer account balances directly from the LDCs. Management believes that the risk of the LDCs failing to deliver payment to Energy Savings is minimal.
(c) Supplier risk
Energy Savings purchases the majority of the gas and electricity delivered to its customers through long-term contracts entered into with various suppliers. Energy Savings has an exposure to supplier risk as the ability to continue to deliver gas and electricity to its customers is reliant upon the ongoing operations of these suppliers, and their ability to fulfill their contractual obligations. A significant portion of these gas and electricity purchases is from Coral Energy, an affiliate of Shell Trading.
(d) Foreign currency risk
The Fund has an exposure to foreign currency exchange rates, as a result of its investment in U.S. operations. Changes in the applicable exchange rate may result in a decrease or increase in income. A non-cash gain of $397 (2005 - $88 loss) and $7 (2005 - $355 loss) for the three and nine months ended December 31, 2006 has been recorded in other income (expense).
Energy Savings has entered into foreign exchange forward contracts in order to hedge its exposure to fluctuations in cross border cash flow (see Note 9(a) (vi)).
10. NET INCOME PER UNIT
Three months ended Nine months ended
December 31 December 31
2006 2005 2006 2005
Basic income per unit
---------------------
Net income available to
Unitholders $ 14,112 $ 13,217 $ 23,860 $ 33,738
--------- --------- --------- ---------
Weighted average number
of units outstanding 97,877 95,879 97,374 95,791
Weighted average number
of Class A preference shares 8,902 10,169 9,322 10,169
--------- --------- --------- ---------
Basic units and shares
outstanding 106,779 106,048 106,696 105,960
--------- --------- --------- ---------
Basic net income per
unit $ 0.13 $ 0.12 $ 0.22 $ 0.32
--------- --------- --------- ---------
--------- --------- --------- ---------
Diluted income per unit
-----------------------
Net income available to
Unitholders $ 14,112 $ 13,217 $ 23,860 $ 33,738
--------- --------- --------- ---------
Basic units and shares
outstanding 106,779 106,048 106,696 105,960
Dilutive effect of:
Unit options 122 688 231 692
Unit appreciation
rights 346 300 389 270
Deferred unit grants 19 13 16 11
--------- --------- --------- ---------
Units outstanding on a
diluted basis 107,266 107,049 107,332 106,933
--------- --------- --------- ---------
Diluted net income per
unit $ 0.13 $ 0.12 $ 0.22 $ 0.32
--------- --------- --------- ---------
--------- --------- --------- ---------
11. REPORTABLE BUSINESS SEGMENTS
Energy Savings operates in two reportable geographic segments, Canada and the United States. Reporting by geographic region is in line with Energy Savings' performance measurement parameters. Both the Canadian and the U.S. operations have gas and electricity business segments.
Energy Savings evaluates segment performance based on gross margin.
The following tables present Energy Savings' results from continuing operations by geographic segment:
Three months ended December 31, 2006
Canada United States Consolidated
------ ------------- ------------
Sales - gas $ 214,656 $ 54,020 $ 268,676
Sales - electricity 141,012 12,542 153,554
---------------------------------------------------------------------------
Sales $ 355,668 $ 66,562 $ 422,230
---------------------------------------------------------------------------
Gross margin $ 51,860 $ 8,459 $ 60,319
Amortization of gas contracts 3,859 - 3,859
Amortization of electricity
contracts 1,650 - 1,650
Amortization of capital assets 629 138 767
Other operating expenses 18,748 5,720 24,468
Other expense 5,825 3,335 9,160
Provision for income tax 6,303 - 6,303
---------------------------------------------------------------------------
Net income (loss) $ 14,846 $ (734) $ 14,112
---------------------------------------------------------------------------
---------------------------------------------------------------------------
Additions to capital assets $ 1,104 $ 62 $ 1,166
---------------------------------------------------------------------------
---------------------------------------------------------------------------
Three months ended December 31, 2005
Canada United States Consolidated
------ ------------- ------------
Sales - gas $ 175,366 $ 31,729 $ 207,095
Sales - electricity 112,326 1,740 114,066
---------------------------------------------------------------------------
Sales $ 287,692 $ 33,469 $ 321,161
---------------------------------------------------------------------------
Gross margin $ 43,216 $ 7,178 $ 50,394
Amortization of gas contracts 7,457 - 7,457
Amortization of electricity
contracts 2,000 - 2,000
Amortization of capital assets 511 118 629
Other operating expenses 21,530 4,754 26,284
Other expense 689 1,187 1,876
Recovery of income tax (1,066) (3) (1,069)
---------------------------------------------------------------------------
Net income $ 12,095 $ 1,122 $ 13,217
---------------------------------------------------------------------------
---------------------------------------------------------------------------
Additions to capital assets $ (1,239) $ 2,032 $ 793
---------------------------------------------------------------------------
---------------------------------------------------------------------------
Nine months ended December 31, 2006
Canada United States Consolidated
------ ------------- -------------
Sales - gas $ 436,266 $ 86,281 $ 522,547
Sales - electricity 387,439 33,921 421,360
---------------------------------------------------------------------------
Sales $ 823,705 $ 120,202 $ 943,907
---------------------------------------------------------------------------
Gross margin $ 119,447 $ 13,337 $ 132,784
Amortization of gas contracts 11,578 - 11,578
Amortization of electricity
contracts 5,681 - 5,681
Amortization of capital assets 1,815 389 2,204
Other operating expenses 57,149 19,695 76,844
Other expense 6,345 7,017 13,362
Recovery of income tax (745) - (745)
---------------------------------------------------------------------------
Net income (loss) $ 37,624 $ (13,764) $ 23,860
---------------------------------------------------------------------------
---------------------------------------------------------------------------
Additions to capital assets $ 2,414 $ 581 $ 2,995
---------------------------------------------------------------------------
---------------------------------------------------------------------------
Total goodwill $ 94,576 $ - $ 94,576
---------------------------------------------------------------------------
---------------------------------------------------------------------------
Total assets $ 352,678 $ 73,848 $ 426,526
---------------------------------------------------------------------------
---------------------------------------------------------------------------
Nine months ended December 31, 2005
Canada United States Consolidated
------ ------------- -------------
Sales - gas $ 384,173 $ 44,372 $ 428,545
Sales - electricity 305,292 1,778 307,070
---------------------------------------------------------------------------
Sales $ 689,465 $ 46,150 $ 735,615
---------------------------------------------------------------------------
Gross margin $ 101,718 $ 8,902 $ 110,620
Amortization of gas contracts 22,373 - 22,373
Amortization of electricity
contracts 5,314 - 5,314
Amortization of capital assets 1,606 146 1,752
Other operating expenses 52,641 16,502 69,143
Other income (4,717) (10,218) (14,935)
Recovery of income tax (5,699) - (6,765)
---------------------------------------------------------------------------
Net income $ 31,266 $ 2,472 $ 33,738
---------------------------------------------------------------------------
---------------------------------------------------------------------------
Additions to capital assets $ 705 $ 2,081 $ 2,786
---------------------------------------------------------------------------
---------------------------------------------------------------------------
Total goodwill $ 94,576 $ - $ 94,576
---------------------------------------------------------------------------
---------------------------------------------------------------------------
Total assets $ 332,596 $ 56,379 $ 388,975
---------------------------------------------------------------------------
---------------------------------------------------------------------------
12. GUARANTEES
(a) Officers and Directors
Corporate indemnities have been provided by the Fund to all directors and certain officers of its subsidiaries and affiliates for various items including, but not limited to, all costs to settle suits or actions due to their association with the Fund and its subsidiaries and/or affiliates, subject to certain restrictions. The Fund has purchased directors' and officers' liability insurance to mitigate the cost of any potential future suits or actions. Each indemnity, subject to certain exceptions, applies for so long as the indemnified person is a director or officer of one of the Fund's subsidiaries and/or affiliates. The maximum amount of any potential future payment cannot be reasonably estimated.
(b) Operations
In the normal course of business, the Fund and/or the Fund's subsidiaries and affiliates have entered into agreements that include guarantees in favour of third parties, such as purchase and sale agreements, leasing agreements and transportation agreements. These guarantees may require the Fund and/or its subsidiaries to compensate counterparties for losses incurred by the counterparties as a result of breaches in representation and regulations or as a result of litigation claims or statutory sanctions that may be suffered by the counterparty as a consequence of the transaction. The maximum payable under these guarantees is estimated to be $29,000.
13. COMMITMENTS
(a) Commitments for premises and equipment under operating lease obligation for each of the next five years are as follows:
2007 $ 831
2008 4,150
2009 4,508
2010 4,268
2011 3,613
--------
$ 17,370
--------
--------
(b) Commitments under the Master Service agreement with EPCOR for each of
the next four years are as follows:
2007 $ 2,051
2008 7,890
2009 7,827
2010 5,218
-------
$22,986
-------
-------
(c) Commitments under long-term gas and electricity contracts with various
suppliers for each of the next five years are as follows:
2007 $ 344,143
2008 1,145,944
2009 904,631
2010 700,493
2011 463,431
----------
$3,558,642
----------
----------
Energy Savings is also committed under long-term contracts with customers to supply gas and electricity. These contracts have various expiry dates and renewal options.
FOR FURTHER INFORMATION PLEASE CONTACT:
Energy Savings Income Fund
Ms. Rebecca MacDonald
Executive Chair
(416) 367-2872
Energy Savings Income Fund
Mr. Brennan Mulcahy
Chief Executive Officer
(905) 795-4200
Energy Savings Income Fund
Ms. Mary Meffe, C.A.
Chief Financial Officer
(905) 795-4206
Website: www.esif.ca
