Risk Management Overview May 2016
Disclosure
The Company’s presentations may contain forward-looking statements including statements pertaining to customer revenues and margins, customer additions and renewals, customer consumption levels, dividends, 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, impact of weather, 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 Company's operations, financial results or distribution levels are included in the Company’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, on the U.S. Securities Exchange Commission’s website at www.sec.gov or through the Company's website at www.justenergygroup.com
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Who is Just Energy? Just Energy is an energy management solutions provider with diverse geographic, product and end-market mix, leadership positions in green energy sales and product innovation Overview
Key Statistics
With headquarters in Houston and Toronto, Just Energy (“Just” or “JE”) is an international energy management solutions provider with a diverse geographic, product and end-market mix
Listing:
Operates in two end markets, Consumer and Commercial
Market Capitalization(2): Enterprise Value:
C$mm C$mm
$1,217 $1,800
LTM Revenue(3): LTM EBITDA(3): Dividend Per Share:
C$mm C$mm C$/Sh
$4,240 $219 $0.50
Holds leadership positions in green energy sales and product innovation Energy retailer with no direct commodity price exposure Segment Gross Margin (4)
Sales Channel Mix (5)
TSX: JE (2001) | NYSE: JE (2012)
Number of Employees: Number of Customers:
# #
Number of RCEs(1):
# 45%
Markets (6)
1,300 2mm
Residential
4.6mm
Geographies (5,6) U.K., 6%
Door-to-Door, 26%
Gas, 33% Electricity, 67%
(1)
Online & Telemarket, 30%
Commercial Brokerage, 44%
Consumer, 41%
Canada, 23% Commercial, 59%
U.S. , 71%
“RCE” means residential customer equivalent, which is a unit of measurement equivalent to a customer using, as regards natural gas, 2,815 m3 (or 106 GJs or 1,000 Therms or 1,025 CCFs) of natural gas on an annual basis and, as regards electricity, 10 MWh (or 10,000 kWh) of electricity on an annual basis, which represents the approximate amount of gas and electricity, respectively, used by a typical household in Ontario, Canada. (2) TSX Market capitalization based on $8.09 as of 04/28/16; 147.1mm basic shares outstanding (3) LTM as of 12/31/2015, EBITDA excludes prepaid commission expense of $10.5mm (4) Gross Margin contribution in FY’15 3 (5) Based on Q3 FY’16 customer additions (6) Based on residential customer equivalents as at Q3 FY’16
Risk Management Policy Overview Just Energy’s world class risk management policy mitigates all of the material risks the company faces Corporate Risk Management Policy JE has adopted a world class risk management policy that mitigates all of the material risks the Company faces, these risks include:
Key Risks
Commodity
Commodity price Volume (weather-driven) Foreign exchange
Volume (Weather-driven)
Description
Mitigating factors
Commodity price risk associated with customer supply contracts
Continuous monitoring, combined with value-at-risk limits (99% confidence interval) and volume exposure limits
Volume risk driven by differences in actual versus forecast consumption
Use of weather-related derivatives to hedge away the majority of weather-related consumption risk
Foreign exchange risk associated with international jurisdictions
Balance sheet and financial hedges to mitigate up to 90% of forward 12-month FX exposure
Interest rate risk associated with floating rate credit facility
Does not economically warrant the use of derivative instruments
Diversification between gas and electricity and across various operating regions
Geographic diversification mitigates the impact of weather risk
Interest Credit All employees governed by the risk policy undergo mandatory annual training
Foreign Exchange
Interest Rate
Counterparty Credit
Credit risk associated with customer receivables and supplier agreements
Canada, 24%
JE consistently manages its liquidity position with the business’ needs A thorough customer review process mitigates credit risk in addition to broad customer diversification Counterparty limits established by JE’s risk policy
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Risk Management Organization Structure Our risk management division is governed by two oversight committees, one at the Board level and one at the Management level both with a direct line to the Board Governance Overview Just Energy’s Board of Directors, Executive Management team and Risk Committee are all charged with ensuring that all of the significant risks of the organization are addressed and mitigated
Simplified Organization Structure Board of Directors
Board Risk Committee & Oversight Comprised of 4 independent directors; meets every quarter (sometimes ad-hoc) to review JE’s risk management practices, policies and quarterly compliance reports Chair of the Board Risk Committee discusses the company’s risk policy with the Head of Risk (Management Committee) directly and on an ongoing basis
Board Risk Committee President and Co-CEO Management Risk Committee
Management Risk Committee & Oversight Headed by the Head of Risk and comprised of seven senior members of management (excluding President and Co-CEOs) who meet monthly to discuss the company’s risk management policies and oversees the company’s risk function Head of Risk also oversees the risk compliance division which comprises of eight employees who monitor the company’s daily compliance
Head of Risk
Risk Management Department
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Role of the Risk Management Department Just Energy’s Risk Management Department independently reports directly to both the Senior Management team and the Board of Directors
Validation
Daily monitoring
Risk Management Department serves as an “independent auditor” to ensure Just Energy’s procurement, pricing / structuring, and load forecasting divisions are all compliant with it’s Board-approved Risk Management Policy The group provides daily reports on risk compliance including: 1) outstanding positions; 2) mark-to-market positions; and 3) counterparty credit exposure for review by the Management Risk Committee Any violations are communicated within three business days to the Chair of the Board Risk Committee
Ongoing Communication with Management & BOD
Senior Management Risk Committee is provided with risk reports and meets on a monthly basis to discuss the Company’s risk management practices Head of Risk also constantly communicates with the Chair of the Board Risk Committee to provide regular updates; the Board Risk Committee will also meet on a quarterly basis to review JE’s risk management practices The Board Risk Committee has final authority on any compliance violations and remediation requirements
Remediation
Head of Risk will undertake all remedial actions at the direction of the Board There have been no material violations over the past 5 years despite extreme weather events such as the Polar Vortex, Texas 2011 heat wave, and El-Nino winters 6
Managing Commodity, Volume, and Weather Risk Just Energy’s commodity and volume forecasts are a function of historical data and current market conditions; and have been meticulously tested and analyzed under a number of potential scenarios Just Energy’s forecasting methodology
Historical consumption
Price Environment
Other
Detailed review of historical consumption on a customer-by-customer basis over the past 20 years under normal weather conditions
Review of the current pricing environment and impact on consumption – underpinned by historical consumption / price correlations
The team also monitors the markets for short- and long-term changes that could impact consumption (i.e., regulatory, consumer habits etc.)
Scenario Analysis & Mitigation JE’s current portfolio and forecasts are stressed against multiple scenarios to estimate a range of revenue and supply outcomes Scenarios are constructed using historical consumption, weather, load, and price patterns adjusted for known and expected market changes Scenarios includes events such as Polar Vortex, Texas 2011 heat wave, El-Nino winters, extreme weather events etc. Based on the Company’s forecasts, the Company will then layer in its hedging strategy under JE’s risk management policy which reduces net weather exposure to under C$10mm (risk limit) per season
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Managing Commodity, Volume, and Weather Risk (cont’d) Just Energy effectively creates a collar on its weather exposure so that it is protected from volatility Overview of Hedges in Place JE will forecast a designed margin that the Company is expected to achieve under normal weather conditions
Just Energy will then enter into a derivative with various reinsurance companies that ensures its downside (and upside) risk is mitigated to within a 99% confidence interval based on historical degree days
From there, the biggest risks in every winter season is volume and commodity price risk – which is driven by weather and only relevant to JE’s fixed-price contracts (~60% of total contracts)
Weather Variance Dynamics $7.00
Volumes: Consumption < Forecast JE earns design margin on actual consumption and recoups supply cost on excess supply
A warmer Winter is protected so that JE will always realize (at a minimum) its supply cost on excess supply over actual consumption A colder Winter will result in additional consumption of which JE will capture a portion of the incremental consumption up to its fixed revenues at which point the reinsurance agent is responsible for any excess consumption
Volumes: Forecast < Consumption < Marginal Revenue JE earns design margin on forecasted consumption and incremental margin on excess consumption
$6.00
Volumes: Consumption > Marginal Revenue JE earns design margin on forecasted consumption and incremental margin on excess consumption up to the marginal revenue line (reinsurer covers consumption beyond) Spot price
$5.00 Commodity price
Customer price
$4.00
Design margin
$3.00
Supply cost
$2.00 $1.00
JE design margin Warmer than forecasted
JE incremental margin
Colder than forecasted
Reinsurer downside
$0.00 JE forecast
Volumes
Marginal Revenue
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Managing Commodity, Volume, and Weather Risk (cont’d) Just Energy’s risk management policy has established risk limits that mitigate any material downside Key Risk Policy Limits Long-term Portfolio:
