Risk Management Overview. May 2016

Transcription

1 Risk Management Overview May 2016

2 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 on the U.S. Securities Exchange Commission s website at or through the Company's website at 2

3 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 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 Operates in two end markets, Consumer and Commercial Holds leadership positions in green energy sales and product innovation Energy retailer with no direct commodity price exposure Key Statistics Listing: TSX: JE (2001) NYSE: JE (2012) Number of Employees: # 1,300 Number of Customers: # 2mm Residential 45% Number of RCEs (1) : # 4.6mm Market Capitalization (2) : C$mm $1,217 Enterprise Value: C$mm $1,800 LTM Revenue (3) : C$mm $4,240 LTM EBITDA (3) : C$mm $219 Dividend Per Share: C$/Sh $0.50 Segment Gross Margin (4) Sales Channel Mix (5) Markets (6) Geographies (5,6) U.K., 6% Gas, 33% Electricity, 67% Door-to-Door, 26% Online & Telemarket, 30% Commercial Brokerage, 44% Consumer, 41% Commercial, 59% Canada, 23% U.S., 71% (1) RCE means residential customer equivalent, which is a unit of measurement equivalent to a customer using, as regards natural gas, 2,815 m 3 (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

4 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 Key Risks Description Mitigating factors JE has adopted a world class risk management policy that mitigates all of the material risks the Company faces, these risks include: Commodity price Volume (weather-driven) Foreign exchange Interest Credit All employees governed by the risk policy undergo mandatory annual training Commodity Volume (Weather-driven) Foreign Exchange Interest Rate Commodity price risk associated with customer supply contracts Volume risk driven by differences in actual versus forecast consumption Foreign exchange risk associated with international jurisdictions Interest rate risk associated with floating rate credit facility Continuous monitoring, combined with value-at-risk limits (99% confidence interval) and volume exposure limits Diversification between gas and electricity and across various operating regions Use of weather-related derivatives to hedge away the majority of weather-related consumption risk Geographic diversification mitigates the impact of weather risk Balance sheet and financial hedges to mitigate up to 90% of forward 12-month FX exposure Does not economically warrant the use of derivative instruments Canada, 24% JE consistently manages its liquidity position with the business needs Counterparty Credit Credit risk associated with customer receivables and supplier agreements A thorough customer review process mitigates credit risk in addition to broad customer diversification Counterparty limits established by JE s risk policy 4

5 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 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 Board Risk Committee Management Risk Committee Head of Risk Risk Management Department President and Co-CEO 5

6 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 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 Daily monitoring 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 Remediation 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 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

7 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 7

8 Commodity price Managing Commodity, Volume, and Weather Risk (cont d) Overview of Hedges in Place JE will forecast a designed margin that the Company is expected to achieve under normal weather conditions 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 $6.00 Volumes: Consumption < Forecast JE earns design margin on actual consumption and recoups supply cost on excess supply Just Energy effectively creates a collar on its weather exposure so that it is protected from volatility 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 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 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 $4.00 $3.00 Customer price Design margin Supply cost $2.00 JE design margin $1.00 Warmer than forecasted Colder than forecasted JE incremental margin Reinsurer downside $0.00 JE forecast Volumes Marginal Revenue 8

9 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 Value-at-Risk (VAR) Long-term Portfolio: <C$2.5mm across the entire portfolio Prompt 3 Delivery Monthly Periods: <$300,000 to mitigate the impact of short-term volatility Over the past 5 years, Just Energy has not materially exceeded these policy limits which resulted in a financial loss to the Company Volume Volume Thresholds: The Company has established limits on electricity (basis, volume, peak hour exposure), natural gas (volume, basis), and carbon and renewable energy credits (volume) Weather Weather Exposure: JE will implement weather hedges to ensure that the portfolio has less than <C$10mm in exposure for each season; Due to the cost-benefits associated with implementing Just Energy's weather hedges, the Company has hedged its weather exposure to levels well below the C$10mm threshold in recent years Other Foreign Exchange: The Company will hedge up to 90% of its foreign exchange exposure over the next twelve months Counterparty Limit: Limit sub-investment grade counterparties to <10% of the aggregate portfolio and will required parties to post collateral when mark-to-market positions exceed C$15mm 9

10 Managing Commodity, Volume, and Weather Risk (cont d) Throughout recent extreme weather phenomena, Just Energy s differentiated risk management program has significantly reduced the impact on the bottom line Winter scenario Time frame Volume actual vs. forecast variance (Dth) Net impact ($mm) The Winter that Wasn t Winter of (7,928) (15%) ($27) ($4) $23 Retail portfolio margin impact Hedging impact Net impact Polar Vortex Winter of ,222 14% ($30) ($4) $26 Retail portfolio margin impact Hedging impact Net impact El-Nino Winter of (7,347) (14%) ($24) ($4) $21 Retail portfolio margin impact Hedging impact Net impact 10

11 % 14.0% 12.0% 10.0% 8.0% 6.0% 4.0% 2.0% 0.0% % 18.0% 16.0% 14.0% 12.0% 10.0% 8.0% 6.0% 4.0% 2.0% 0.0% 12.0% 10.0% 8.0% 6.0% 4.0% 2.0% 0.0% -2.0% -4.0% 20.0% 18.0% 16.0% 14.0% 12.0% 10.0% 8.0% 6.0% 4.0% 2.0% 0.0% Risk Management Policies and Diversification Dramatically Reduce Business Volatility Just Energy s best in class risk management policies and diversification have protected cash flows in periods of extreme weather Just Energy EBITDA Margins Select Peers Performance in Periods of Extreme Weather (mm) $186 $ % 6.6% $142 $168 $180 $219 (1) 4.7% 4.7% 4.6% 4.9% Centrica (Direct Energy) Residential & Business Energy Supply Prior year's quarterly Operating Profit Quarterly Operating Profit LTM 12/31/15 Just Energy EBITDA in Periods of Extreme Weather ($mm) $57 Prior year's quarterly EBITDA $68 Polar Vortex (CY Q1 '14) Quarterly EBITDA $51 $56 El Nino (CY Q4 '15) Polar Vortex (CY Q1 '14) Just Energy s hedging policies have delivered stable and growing EBITDA and margins over the past 5 years Even in tail-risk periods of extreme weather volatility, Just Energy has maintained growing EBITDA El Nino (CY Q4 '15) Hedging practices insulate JE s performance from large swings driven by weather that directly impact profitability the of peers $6 Crius Energy Prior year's quarterly EBITDA $(4) Polar Vortex (CY Q1 '14) Spark Energy Prior year's quarterly EBITDA $19 $9 Polar Vortex (CY Q1 '14) Quarterly EBITDA $14 $8 El Nino (CY Q4 '15) Quarterly EBITDA $5 $16 El Nino (CY Q4 '15) (1) EBITDA of $219mm excludes prepaid commission expense of $10.5mm 11

12 Risk Management Policies Dramatically Reduce Business Volatility (cont d) Through commodity price swings & extreme weather, embedded gross margin per customer has increased over time GM per RCE Electricity Prices (PJM West) $/MWh Natural Gas Prices (NYMEX HH Hub) $/MMBtu $443 $409 $392 $390 $400 $ % 100% 71% 57% FY2011 FY2012 FY2013 FY2014 FY2015 LTM 12/31/15 Note: Electricity & Gas prices indexed to March 31 st, 2010 price as 100% 12

13 $2,500 $2,000 $1,500 $1,000 $500 $0 Significant collateral pool provides ample coverage of senior obligations Just Energy s business model provides significant excess coverage for all senior creditors Commentary Overview of collateral pool Just Energy s future contracted margins provide ~$3.4bn of collateral to cover all senior obligations including both credit facility drawings and the mark-to-market value of commodity hedges Currently, the company would have >$2.0bn of excess collateral to cover all of the company's senior obligations Customer contracts Collateral Pool Supply contracts CAD $277.5mm credit facility Collateral position ($mm) 213% 209% 327% 355% 251% 263% $1,448 $1,549 $1,605 $1,653 $1,988 $2,131 Just Energy LC 8 Commodity Suppliers Customer contracts 6 Lenders Credit Facility Fees: Cash Advance Rate Letter of Credit Rate Standby Rate Q3/16 (Dec.) Collateral less senior obligations 1,2 Collateral / Senior Obligations Alternative Supplier Collateral Agent manages the pool (1) Total collateral includes embedded GM (at market price), receivables, unbilled amounts, and cash (2) Total senior obligations includes payables, M2M (undiscounted value of commodity hedges), and credit facilities unutilized 13