Just Energy Income Fund

Transcription

1 Institutional Equity Research Earnings Update February 12, 2010 Stock Rating: Sector Outperformer Sector Weighting: Market Weight mo. Price Target $16.50 JE.UN-TSX (2/11/10) $14.31 Key Indices: S&P/TSX Income Trust Composite Projected Total Return 24.0% 52-week Range $9.67-$14.50 Units Outstanding 133.8M Distr. Frequency Monthly Tax Deferred (Current Year) 0.0% Market Capitalization $1,914.5M DCF Value/IRR $18.16 / 10.5% Fiscal Year Ends March EV $2,170.28M 2011 EV/EBITDA 5.8X Net Debt $234.4M P/NAV 0.8X Net Debt/CF 0.8X Convertible Available No Cash Distribution Per Share Prev Current 2009 $1.40A 2010 $1.39E $1.44E 2011 $1.40E $1.24E Cash-on-Cash Yield % % 10.1% % 8.7% Income Trusts Just Energy Income Fund Strong Q3/F10 Results; Corporate Conversion Expected By The End Of 2010 Just Energy reported Q3/F10 operating cash flow (pre-selling expense) of $0.59/unit versus $0.61/unit in Q3/F09 and our $0.52/unit estimate. The outperformance was the result of higher gross margins as well as lowerthan-expected general and administrative expenses. Just Energy is planning to reorganize its structure into a high dividend paying corporation. Upon completion (expected by the end of calendar 2010), Just Energy intends to set its monthly dividend at $0.1033/share ($1.24/share annualized), equal to its current regular distribution rate. We have made minor revisions to our model mainly reflecting Q3/F10 results, partially offset by lower expectations for Q4/F10 (lower customer additions and lower expected gas margins). Our F2010E CF increases from $2.20/unit to $2.24/unit. Our F2011E CF is unchanged at $2.39/unit. Our price target remains at $16.50 and is based on an EV/2011E EBITDA (pre-selling expenses) of 6.5x (unchanged). Strong U.S. growth combined with increased margins as a result of the company's Just Green initiatives should continue to drive cash flow growth. We maintain our SO rating. Stock Price Performance CF (pre-sell) Prior Current 2009 $2.18A 2010 $2.20E $2.24E 2011 $2.39E P/CF x x 6.4x x Company Description Just Energy Income Fund, through its subsidiaries, is an energy marketer engaged in the sale of fixed-price longterm gas and electricity contracts in various North American markets. Petro Panarites, CFA Osvaldo Matias, CFA Source: Reuters All figures in Canadian dollars, unless otherwise stated CIBC World Markets does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision. See "Important Disclosures" section at the end of this report for important required disclosures, including potential conflicts of interest. See "Price Target Calculation" and "Key Risks to Price Target" sections at the end of this report, where applicable. Find CIBC research on Bloomberg, Reuters, firstcall.com CIBC World Markets Inc., P.O. Box 500, 161 Bay Street, Brookfield Place, Toronto, Canada M5J 2S8 (416) and ResearchCentral.cibcwm.com

2 Exhibit 1. A Closer Look Funds Flow F2009A F2010E F2011E Company Profile Gross Margin - Gas Gross Margin - Electricity Gross Margin - Home Services Gross Margin - Ethanol (100%) Total Gross Margin Unit Based Compensation (4.1) (4.2) (4.9) General and Administrative (59.6) (91.0) (90.0) Interest Expense (3.9) (15.6) (24.8) Taxes and Other (incl. Non-controlling Interest) (14.3) (23.5) (50.4) Funds Flow from Operations (pre-selling expense) Selling Expense (68.1) (99.8) (99.5) Capital Expenditures (6.3) (43.3) (24.6) Acquisitions (1.8) Net Debt Issued Net Equity Issued Net Working Capital and Other (16.4) 41.0 (29.9) Distributions Average Unit Outstanding FFO/unit (pre-selling expense) Investment Thesis FFO/unit (post-selling expense) Just Energy's strong performance over the last several quarters illustrate its Distributions/unit defensive attributes. In addition, Just Energy continues to see strong take up of its Just Green program, which produces significantly higher margins. Valuations and Other Data F2009A F2010E F2011E EV/EBITDA P/CF (pre-selling expense) Distribution Yield 9.8% 10.1% 8.7% Payout Ratio 89.4% 98.8% 75.3% Net Debt/EBITDA (x) Gas Customers (RCEs) F2009A F2010E F2011E Gas Customers - Canada - Beginning of Year 761, , ,435 Gas Customers - U.S. - Beginning of Year 213, , ,532 Total Gas Customers - Beginning of Year 974, ,000 1,135,967 - Just Energy Income Fund, through its subsidiaries, is an energy marketer engaged in the sale of natural gas and electricity to residential and commercial customers under fixed-price and price-protected contracts. - Just Energy derives its margin 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 associated volumes from its suppliers. - In July 2009, Just Energy purchased Universal Energy, which added 430,000 RCEs for Just Energy in two provinces and six U.S. states. Universal had 14 U.S. state marketing licenses. - As part of the Universal acquisition, Just Energy acquired Universal's 66.7% stake in Terra Grain Fuels, a 150-million litre wheat-based ethanol plant, which commenced operations in 2008 and is making repairs to move to full capacity production. In addition, Just Energy also acquired National Home Services (NHS) through its purchase of Universal. NHS provides Ontario residential customers longterm water heater rental programs. - We view the acquisition of Universal as a strong strategic move. In addition to its large customer base, Universal brings an expanded U.S. presence which should drive growth in fiscal 2011 and beyond. Just Energy expects to realize roughly $10 million in G&A synergies within 12 months following the acquistion. F2011E Gross Margin by Segment Home Services 4% Ethanol 7% Net Organic Additions - Canada (64,000) (103,565) (78,720) Net Organic Additions - U.S. 22,000 48,532 58,184 Total Net Organic Additions (42,000) (55,033) (20,536) Gas Marketing 45% Acquired Customers - Canada 46,000 93,000 0 Acquired Customers - U.S ,000 0 Total Acquired Customers 46, ,000 0 Gas Customers - Canada - End of Year 743, , ,715 Gas Customers - U.S. - End of Year 235, , ,716 Total Gas Customers - End of Year 978,000 1,135,967 1,115,432 Electricity Marketing 44% Electricity Customers (RCEs) F2009A F2010E F2011E Electricity Customers - Canada - Beginning of Year 609, , ,862 Electricity Customers - U.S. - Beginning of Year 104, , ,911 Total Electricity Customers - Beginning of Year 713, ,000 1,167,773 Net Organic Additions - Canada (31,000) (22,138) (44,745) Net Organic Additions - U.S. 130, , ,749 Total Net Organic Additions 99, ,773 74,004 Acquired Customers - Canada 0 215,000 0 Acquired Customers - U.S. 0 2,000 0 Total Acquired Customers 0 217,000 0 Electricity Customers - Canada - End of Year 578, , ,117 Electricity Customers - U.S. - End of Year 234, , ,660 Total Electricity Customers - End of Year 812,000 1,167,773 1,241,777 Source: Company reports, Bloomberg and CIBC World Markets Inc. 2

3 Q3/F10 Results Just Energy Income Fund (JE.UN-SO) reported Q3/F10 results (September- December) that were above expectations. Operating cash flow (pre-selling expenses) came in at $0.59/unit, down from $0.61/unit in Q3/F09, but above our $0.52/unit estimate. The variance from our estimate was the result of slightly better gross margins and lower general and administrative expenses than we had been anticipating. The decline on y/y basis reflects the higher share count in Q3/F10 as a result of the issuance of shares as part of the Universal Energy acquisition completed on July 1, Q3/F10 Highlights Gross Margin Total gross margin for the quarter came in at $111.9 million, up from $89.8 million in Q3/F09 and above our $109.1 million estimate. Gas: Gas gross margins totaled $57.6 million in the quarter, down from $61.0 million in Q3/F09, and below our $60.6 million estimate. The variance from our estimate and lower y/y results reflect slightly lower-than-expected margins in Canada. Looking ahead, management expects lower margins y/y in Q4/F10, as extremely cold weather in Q4/F09 led to excess gas consumption at high margins, a situation which is unlikely to repeat itself this year. In addition, results from the U.S. will be negatively impacted by the weaker US$ on a y/y basis. Electricity: Electricity gross margins totaled $50.4 million in Q3/F10, up from $28.9 million in the same quarter last year, and above our $41.2 million estimate. Better-than-expected electricity margins were due to strong results in the U.S. which experienced high margins per customer from strong takeup of Just Green (the green energy option which allows customers to source all or a portion of their electricity sourced from renewable sources), high consumption supplied with low commodity costs in Texas, and greater profitability in New York due to improvements in supply management. Home Services: Home Services gross margins came in at $2.2 million, below our $3.5 million estimate as a result of lower-than-expected per unit margins. During the quarter, National Home Services (NHS) installed 11,997 water heaters and had a cumulative installed base of 67,641 as of December 31, Ethanol: Terra Grain Fuels (TGF) produced gross margins of $1.7 million versus our estimate of $3.8 million as a result of higher-than-expected costs. During the quarter, the plant operated at 63% of capacity as a result of production challenges in grain milling. New grain milling equipment is being installed to address the production bottleneck and enable production to reach the design capacity of 150 million litres annually. General And Administrative Expenses General and administrative expenses totaled $24.8 million in Q3/F10, up from $14.8 million in Q3/F09, but below our $27.4 million estimate. The y/y increase reflects the additional costs associated with the acquired Universal Energy marketing, water heater and ethanol business, as well as the integration costs associated with the acquisition, and professional fees related to the planned corporate conversion. Just Energy expects that cost synergies related to the acquisition will be fully realized commencing in Q1/F11. 3

4 Exhibit 2. Gross Margins Gross Margin ($ mlns.) FQ3/10A FQ3/10E FQ3/09A Gas Electricity Home Services Ethanol Total Cash Flow (Pre-Selling Expense) / Unit $0.59 $0.52 $0.61 Source: Company reports and CIBC World Markets Inc. Special Distribution Just Energy declared a special distribution of $0.20/unit for the calendar year 2009, above our estimate of a $0.15/unit special distribution. The distribution of all of Just Energy s taxable income to its unitholders is required to ensure that the fund will not be liable to pay income taxes for the 2009 tax year. Customer Aggregation Gross customer additions totaled 137,000 in the quarter, up from 94,000 in Q3/F10, and just below the record quarter of 140,000 in Q2/F10. Gross additions were driven by strong growth in the U.S., particularly in the New York and Texas electricity markets. In Canada, the disparity between spot prices and five year prices continue to negatively impact sales and renewal rates. As a result of this, Just Energy s marketing force has concentrated on the sale of the higher margin Just Green products. In addition, a large number of independent sales contractors previously marketing gas and electricity have been redeployed to water heater marketing. Net customer additions totaled 13,000 in the quarter, below the 23,000 added in Q3/F09 and our 42,000 estimate. The variance from our estimate is the result of lower additions and renewal rates in Canada (as discussed above). The y/y decline is the result of higher U.S. gas attrition as the company employed an aggressive customer cut off policy on customer s who have not paid their winter gas bill. 4

5 Exhibit 3. Customer Aggregation Customer Aggregation (RCE's) 2007 Q1/08 Q2/08 Q3/08 Q4/ Q1/09 Q2/09 Q3/09 Q4/ Q1/10 Q2/10 Q3/ E 2011 E Gross Customer Adds Gas - Canada - Organic 86,000 19,000 10,000 8,000 8,000 45,000 9,000 17,000 16,000 7,000 49,000 9,000 12,000 14,000 50,180 58,595 Gas - US - Organic 77,000 35,000 34,000 33,000 17, ,000 20,000 28,000 25,000 17,000 90,000 27,000 52,000 44, , ,413 Gas - Canada - Acquired 46,000 46,000 93,000 93,000 Gas - US - Acquired 120, ,000 Electricity - Canada - Organic 153,000 21,000 32,000 25,000 17,000 95,000 18,000 17,000 18,000 12,000 65,000 15,000 23,000 18,000 75,425 77,086 Electricity - US - Organic 32,000 20,000 18,000 13,000 12,000 63,000 55,000 29,000 35,000 49, ,000 46,000 53,000 61, , ,455 Electricity - Canada - Acquired 215, ,000 Electricity - US - Acquired 20,000 20,000 2,000 2,000 Total - Organic 348,000 95,000 94,000 79,000 54, , ,000 91,000 94,000 85, ,000 97, , , , ,549 Total - Acquired 20,000 20,000 46,000 46, , ,000 - Total 348,000 95,000 94,000 99,000 54, , , ,000 94,000 85, ,000 97, , , , ,549 Attrition + Failure to Renew Gas - Canada (83,000) (24,000) (23,000) (24,000) (21,000) (92,000) (29,000) (34,000) (30,000) (20,000) (113,000) (25,000) (41,000) (46,000) (153,745) (137,315) Gas - US (35,000) (11,000) (9,000) (13,000) (22,000) (55,000) (20,000) (15,000) (13,000) (20,000) (68,000) (24,000) (25,000) (36,000) (121,628) (103,229) Electricity - Canada (55,000) (37,000) (43,000) (41,000) (27,000) (148,000) (39,000) (26,000) (16,000) (15,000) (96,000) (19,000) (27,000) (26,000) (97,563) (121,831) Electricity - US (18,000) (4,000) (4,000) (6,000) (5,000) (19,000) (4,000) (7,000) (12,000) (15,000) (38,000) (18,000) (11,000) (16,000) (62,269) (79,706) Total (191,000) (76,000) (79,000) (84,000) (75,000) (314,000) (92,000) (82,000) (71,000) (70,000) (315,000) (86,000) (104,000) (124,000) (435,205) (442,081) Net Customer Adds Gas - Canada 3,000 (5,000) (13,000) (16,000) (13,000) (47,000) (20,000) 29,000 (14,000) (13,000) (18,000) (16,000) 64,000 (32,000) (10,565) (78,720) Gas - US 42,000 24,000 25,000 20,000 (5,000) 64,000-13,000 12,000 (3,000) 22,000 3, ,000 8, ,532 58,184 Total Gas 45,000 19,000 12,000 4,000 (18,000) 17,000 (20,000) 42,000 (2,000) (16,000) 4,000 (13,000) 211,000 (24,000) 157,967 (20,536) Electricity - Canada 98,000 (16,000) (11,000) (16,000) (10,000) (53,000) (21,000) (9,000) 2,000 (3,000) (31,000) (4,000) 211,000 (8,000) 192,862 (44,745) Electricity - US 14,000 16,000 14,000 27,000 7,000 64,000 51,000 22,000 23,000 34, ,000 28,000 44,000 45, , ,749 Total Electricity 112,000-3,000 11,000 (3,000) 11,000 30,000 13,000 25,000 31,000 99,000 24, ,000 37, ,773 74,004 Total Net Adds 157,000 19,000 15,000 15,000 (21,000) 28,000 10,000 55,000 23,000 15, ,000 11, ,000 13, ,740 53,469 Source: Company reports and CIBC World Markets Inc. 5

6 Corporate Developments Corporate Conversion: On February 3, Just Energy announced that it plans to reorganize its income trust structure into a high dividend paying corporation. Upon completion of the reorganization, Just Energy intends to implement a dividend policy where monthly dividends will be initially set at $0.1033/share ($1.24/share annualized) equal to the current distributions paid to Just Energy unitholders. Management stated previously that it intended to maintain dividends at current distribution levels. The reorganization is subject to two-thirds unitholder approval at vote to be held at the annual and special meeting of unitholders to be held on June 29, Units will be exchanged for common shares of the corporation on a one-for-one basis. It is expected that the reorganization will be completed on a tax-free rollover basis. Just Energy expects to complete the conversion by the end of calendar Water Heater Financing: On January 18, Just Energy entered into a longterm financing agreement with Home Trust Company (HCG-TSX) for the funding of water heaters for NHS. Under the agreement, NHS will receive an amount equal to the five-year cash flow of the water heater contract discounted at an agreed upon rate. Home Trust will then in return receive the customer payments on the water heaters for the next five years. The residual rental payments over the life of the asset will revert to NHS (the expected life of a water heater is 15 years). This agreement allows for the water heater business to be self financing. The initial funding will be for approximately $45 million and total funding is expected to be approximately $90 million over the next year. Revising Estimates We have made minor revisions to our model mainly reflecting Q3/F10 results, partially offset by lower expectations for Q4/F10 due to lower customer additions and the company s commentary around lower expected gas margins. As a result, our F2010E cash flow increases from $2.20/unit to $2.24/unit (pre-selling expenses). Our F2011E cash flow is unchanged at $2.39/unit. Our F2010 distribution estimate increases from $1.39/unit to $1.44/unit reflecting the higher-than-expected special distribution announced by the fund. Our F2011 distribution/dividend estimate declines from $1.40/unit to $1.24/unit, reflecting Just Energy announcement that upon conversion to a corporation, Just Energy will pay an annual dividend of $1.24/share. Price Target Calculation We are maintaining our price target of $16.50, which is based on an EV/2011E EBITDA (pre-selling expense) multiple of 6.5x (unchanged). Outlook And Investment Summary Overall, our outlook on Just Energy has not changed. The Universal Energy acquisition has given the company a presence in markets in the U.S. where it is now generating the majority of its growth. In addition, Just Green, the company s green energy option continues to see strong take-up, with approximately 43% of all customers added in Q3 taking 86% of their supply from green energy. Just Green customers generate significantly higher margins (in the neighborhood of 40% higher) than typical brown energy customers. The maintenance of the dividend rate at current distribution levels when Just Energy converts to a corporation should alleviate yield-oriented investor s concerns. We maintain our Sector Outperformer rating. 6

7 Key Risks To Price Target Key risks to our price target and estimates include: 1) lower and less volatile commodity prices; 2) regulatory risk; 3) competition; 4) dependence on Coral Energy; and 5) valuation risk. 7

8 8 Exhibit 4. Summary Financial Model Current Prior Q1-08 Q2-08 Q3-08 Q Q1-09 Q2-09 Q3-09 Q Q1-10 Q2-10 Q E 2011E 2010E 2011E Funds Flow ($mlns. unless otherwise noted) Gross Margin Gas Gross Margin Electricity Gross Margin Home Services Gross Margin Ethanol (100%) Total Gross Margin Unit Based Compensation (6.0) (3.5) (6.5) (3.9) (1.2) (1.4) (0.6) 0.2 (3.1) (0.9) (0.9) (1.1) (1.2) (4.1) (0.7) (1.0) (1.0) (4.2) (4.9) (5.4) (6.3) General and Administrative (19.7) (28.9) (34.3) (41.9) (10.9) (11.1) (12.4) (17.1) (51.6) (13.4) (13.2) (14.8) (18.2) (59.6) (15.6) (25.6) (24.8) (91.0) (90.0) (93.7) (90.0) Interest Expense (3.9) (0.9) 0.0 (1.4) (1.5) (5.3) (0.9) (1.0) (1.1) (0.9) (3.9) (0.5) (4.9) (5.1) (15.6) (24.8) (15.4) (22.5) Taxes and Other (incl. Non-controlling Interest) (1.1) (11.4) (5.4) (11.5) (3.8) (2.7) (0.8) (0.5) (6.2) (1.5) (1.9) (4.7) (6.1) (14.3) (3.1) (7.0) (2.9) (23.5) (50.4) (30.1) (59.5) FFO (Pre-Selling Expense) per unit $1.01 $1.17 $1.32 $1.58 $0.33 $0.27 $0.50 $0.84 $1.94 $0.35 $0.25 $0.61 $0.96 $2.18 $0.41 $0.32 $0.59 $2.24 $2.39 $2.20 $2.39 Selling Expense (30.2) (40.0) (48.2) (43.0) (14.5) (15.6) (13.9) (12.1) (56.1) (13.6) (17.3) (18.8) (18.5) (68.1) (19.4) (27.1) (26.5) (99.8) (99.5) (100.2) (99.0) FFO (Post-Selling Expense) per unit $0.71 $0.79 $0.86 $1.17 $0.19 $0.12 $0.37 $0.73 $1.42 $0.23 $0.09 $0.44 $0.80 $1.57 $0.24 $0.12 $0.39 $1.46 $1.65 $1.42 $1.65 Maintenance Capital Expenditures (4.02) (5.6) (3.5) (3.7) (0.5) (3.8) (3.8) 0.2 (7.8) (0.2) (1.1) (1.7) (3.4) (6.3) Growth Capital Expenditures (7.4) (14.9) (12.6) (43.3) (24.6) (43.3) (26.7) Acquisitions (10.65) (10.3) (6.6) 0.0 (33.4) (33.4) 0.0 (2.3) (1.8) Net Debt Issued (28.6) 29.0 (5.1) (33.1) 2.0 (11.5) Net Equity Issued Net Working Capital and Other (14.3) (27.0) (30.1) 2.8 (13.5) (18.6) (18.3) (16.4) (15.4) 41.0 (29.9) 39.4 (6.5) Distributions - Total per unit $0.74 $0.84 $0.91 $1.02 $0.28 $0.29 $0.30 $0.51 $1.38 $0.30 $0.31 $0.47 $0.31 $1.40 $0.31 $0.31 $0.51 $1.44 $1.24 $1.39 $1.40 Normal Distributions - per unit $0.74 $0.84 $0.91 $1.02 $0.28 $0.29 $0.30 $0.30 $1.17 $0.30 $0.31 $0.47 $0.31 $1.23 $0.31 $0.31 $0.31 $1.24 $1.24 $1.24 $1.40 Special Distributions - per unit $0.21 $0.21 $0.17 $0.20 $0.15 Weighted Average Units Outstanding (millions) End of Period Units Outstanding (millions) Financial Leverage ($Millions) Long Term Debt Source: Company reports and CIBC World Markets Inc. Strong Q3/F10 Results; Corporate Conversion Expected By The End Of February 12, 2010

9 Our CD estimates are shown below: 1 Qtr. 2 Qtr. 3 Qtr. 4 Qtr. Yearly 2009 Current $0.30A $0.31A $0.48A $0.31A $1.40A 2010 Prior $0.31A $0.31A $0.46E $0.31E $1.39E 2010 Current $0.31A $0.31A $0.51A $0.31E $1.44E 2011 Prior $1.40E 2011 Current $1.24E 9

10 IMPORTANT DISCLOSURES: Analyst Certification: Each CIBC World Markets research analyst named on the front page of this research report, or at the beginning of any subsection hereof, hereby certifies that (i) the recommendations and opinions expressed herein accurately reflect such research analyst's personal views about the company and securities that are the subject of this report and all other companies and securities mentioned in this report that are covered by such research analyst and (ii) no part of the research analyst's compensation was, is, or will be, directly or indirectly, related to the specific recommendations or views expressed by such research analyst in this report. Potential Conflicts of Interest: Equity research analysts employed by CIBC World Markets are compensated from revenues generated by various CIBC World Markets businesses, including the CIBC World Markets Investment Banking Department. Research analysts do not receive compensation based upon revenues from specific investment banking transactions. CIBC World Markets generally prohibits any research analyst and any member of his or her household from executing trades in the securities of a company that such research analyst covers. Additionally, CIBC World Markets generally prohibits any research analyst from serving as an officer, director or advisory board member of a company that such analyst covers. In addition to 1% ownership positions in covered companies that are required to be specifically disclosed in this report, CIBC World Markets may have a long position of less than 1% or a short position or deal as principal in the securities discussed herein, related securities or in options, futures or other derivative instruments based thereon. Recipients of this report are advised that any or all of the foregoing arrangements, as well as more specific disclosures set forth below, may at times give rise to potential conflicts of interest. Important Disclosure Footnotes for Just Energy Income Fund (JE.UN) 2a 2e 2g 3a Just Energy Income Fund is a client for which a CIBC World Markets company has performed investment banking services in the past 12 months. CIBC World Markets Inc. has received compensation for investment banking services from Just Energy Income Fund in the past 12 months. CIBC World Markets Inc. expects to receive or intends to seek compensation for investment banking services from Just Energy Income Fund in the next 3 months. Just Energy Income Fund is a client for which a CIBC World Markets company has performed non-investment banking, securities-related services in the past 12 months. 10

11 Companies Mentioned in this Report that Are Not Covered by CIBC World Markets Inc.: Stock Prices as of 02/12/2010: Home Capital Group (HCG-TSX, $43.30, Not Rated) 11

12 CIBC World Markets Inc. Price Chart HISTORICAL PERFORMANCE OF CIBC WORLD MARKETS INC. RECOMMENDATIONS FOR JUST ENERGY INCOME FUND (JE.UN) Date Change Type Closing Price Rating Price Target Coverage 05/18/ SO Petro Panarites, CFA 11/12/ SO Petro Panarites, CFA 05/16/ SO Petro Panarites, CFA 11/10/ SO Petro Panarites, CFA 04/03/ SO Petro Panarites, CFA 04/13/ R - Petro Panarites, CFA 06/12/ SO Petro Panarites, CFA 07/05/ SO Petro Panarites, CFA 12

13 CIBC World Markets Inc. Stock Rating System Abbreviation Rating Description Stock Ratings SO Sector Outperformer Stock is expected to outperform the sector during the next months. SP Sector Performer Stock is expected to perform in line with the sector during the next months. SU Sector Underperformer Stock is expected to underperform the sector during the next months. NR Not Rated CIBC World Markets does not maintain an investment recommendation on the stock. R Restricted CIBC World Markets is restricted*** from rating the stock. Sector Weightings** O Overweight Sector is expected to outperform the broader market averages. M Market Weight Sector is expected to equal the performance of the broader market averages. U Underweight Sector is expected to underperform the broader market averages. NA None Sector rating is not applicable. **Broader market averages refer to the S&P 500 in the U.S. and the S&P/TSX Composite in Canada. "Speculative" indicates that an investment in this security involves a high amount of risk due to volatility and/or liquidity issues. ***Restricted due to a potential conflict of interest. Ratings Distribution*: CIBC World Markets Inc. Coverage Universe (as of 12 Feb 2010) Count Percent Inv. Banking Relationships Count Percent Sector Outperformer (Buy) % Sector Outperformer (Buy) % Sector Performer (Hold/Neutral) % Sector Performer (Hold/Neutral) % Sector Underperformer (Sell) % Sector Underperformer (Sell) % Restricted 7 2.8% Restricted % Ratings Distribution: Income Trusts Coverage Universe (as of 12 Feb 2010) Count Percent Inv. Banking Relationships Count Percent Sector Outperformer (Buy) % Sector Outperformer (Buy) % Sector Performer (Hold/Neutral) % Sector Performer (Hold/Neutral) % Sector Underperformer (Sell) 0 0.0% Sector Underperformer (Sell) 0 0.0% Restricted 0 0.0% Restricted 0 0.0% Income Trusts Sector includes the following tickers: ARF.UN, BRE.UN, DHF.UN, JE.UN, SPB, VIC.UN, WTE.UN. *Although the investment recommendations within the three-tiered, relative stock rating system utilized by CIBC World Markets Inc. do not correlate to buy, hold and sell recommendations, for the purposes of complying with NYSE and NASD rules, CIBC World Markets Inc. has assigned buy ratings to securities rated Sector Outperformer, hold ratings to securities rated Sector Performer, and sell ratings to securities rated Sector Underperformer without taking into consideration the analyst's sector weighting. Important disclosures required by IIROC Rule 3400, including potential conflicts of interest information, our system for rating investment opportunities and our dissemination policy can be obtained by visiting CIBC World Markets on the web at under 'Quick Links' or by writing to CIBC World Markets Inc., Brookfield Place, 161 Bay Street, 4th Floor, Toronto, Ontario M5J 2S8, Attention: Research Disclosures Request. 13

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