Universal Energy Group Ltd. Releases Second Quarter Financial Results and Operational Updates
- Press Release
- Source: Universal Energy Group Ltd.
- On 6:00 am EDT, Thursday May 14, 2009
TORONTO, ONTARIO--(Marketwire - May 14, 2009) - Universal Energy Group Ltd. ("Universal Energy Group") (TSX:UEG - News) is pleased to announce the release of its financial results for the three and six months ended March 31, 2009 including the financial results of its Gas and Electricity Marketing Division ("GEM"), its Ethanol Division ("TGF") and its Home Services Division ("NHS").
Related Quotes
| Symbol | Price | Change |
|---|---|---|
| UEG.TO | 6.15 | 0.00 |
Highlights for the three months ended March 31, 2009:
- The Commerce Energy Inc. ("Commerce") acquisition added $20.0 million operational margin and $13.0 million operational income to GEM's financial results this quarter with the reduction of approximately US$13.0 million (CAN$16.5 million) of annualized general and administrative expenses of Commerce to be realized by end of fiscal 2009.
- GEM's operational revenue up 79% to $184.4 million; YTD up 70% to $323.5 million.
- GEM's operational margin up 138% to $41.9 million; YTD up 107% to $67.9 million.
- GEM's operational income after customer acquisition costs up 277% to $24.1 million; YTD up 366% to $37.2 million.
- GEM's gross customer additions were 35,054 RCEs with ending customer base of 583,797 RCEs.
- TGF continues to improve the plant production and runtime of the Belle Plaine facility. Revenue for the quarter was $16.2 million and YTD was $28.7 million. Gross margin YTD was $4.1 million.
- NHS installed 7,900 water heaters this quarter with ending installed base of 20,000 water heaters.
GEM earned revenue for the three and six months ended March 31, 2009 of $242.6 million and $373.2 million compared to $148.6 million and $228.7 million for the 2008 periods. Gross margin for the three and six months ended March 31, 2009 was $66.2 million and $104.5 million compared to $36.5 million and $61.3 million for the 2008 periods. Net income for the three and six months ended March 31, 2009 was $0.381 million and $8.5 million compared to $26.6 million and $32.5 million for the 2008 periods.
GEM uses the concepts of "operational revenue", "operational margin", "operational income before customer acquisition costs" and "operational income after customer acquisition costs" to adjust for the differences between revenue recognition and delivery/payment that exist in its natural gas business and for the effect of the financial swaps used in its electricity business. Please refer to management's discussion and analysis ("MD&A") for an explanation of how these non-GAAP measures are calculated and for a reconciliation to the most comparable GAAP measures reported in GEM's unaudited interim consolidated financial statements for the three and six months ended March 31, 2009.
GEM earned operational revenue for the three and six months ended March 31, 2009 of $184.4 million and $323.5 million compared to $103.0 million and $190.6 million for the 2008 periods. Operational margin for the three and six months ended March 31, 2009 was $41.9 million and $67.9 million compared to $17.6 million and $32.9 million for the 2008 periods. Operational income before customer acquisition costs for the three and six months ended March 31, 2009 was $28.8 million and $46.4 million compared to $11.2 million and $21.1 million for the 2008 periods. Operational income after customer acquisition costs for the three and six months ended March 31, 2009 was $24.1 million and $37.2 million compared to $6.4 million and $8.0 million for the 2008 periods. GEM's gross customer additions for the quarter were 35,054 RCEs. Attrition during the quarter was 35,119 RCEs (representing an annualized attrition rate of 14.4% across all markets) for a total customer base at March 31, 2009 of 583,797 RCEs. Included in attrition is a large commercial contract of approximately 12,500 RCEs that GEM terminated as the margin earned on this account was lower than our margin requirements for such accounts.
TGF continues to improve plant production and runtime of the Belle Plaine facility. Sales of Dried Distiller Grains have been steady while margins for ethanol decreased in the quarter as the general economic conditions resulted in softer pricing for energy products including ethanol. TGF's wheat supply portfolio continues to provide steady feedstock supplies to meet plant requirements.
On April 15, 2009, TGF completed a series of transactions with EllisDon Design Build Inc. ("EllisDon") including the exchange of mutual releases of pending litigation and the release of the construction lien filed against the Belle Plaine ethanol facility. Under the terms of the settlement agreement, the Company has agreed to convert its existing debt in TGF, plus accrued interest, to Class E shares of TGF and EllisDon has agreed to make an equity investment in TGF of $10 million, settlement of the lien claim and provide other consideration for a one-third equity interest in TGF. Under the terms of the settlement agreement, if certain financial performance criteria are not met, EllisDon will be entitled to convert its $10 million cash investment into equity of the Company, or its successor, in December 2010 at the then prevailing market price.
NHS continues to ramp up its operations and as at March 31, 2009, NHS has installed over 20,000 water heaters in residential homes and has commenced earning revenue from its installed base.
On April 22, 2009, the Company entered into a definitive agreement (the "Arrangement Agreement") with Energy Savings Income Fund ("ESIF") pursuant to which ESIF will propose to acquire all of the outstanding common shares of the Company. The plan of arrangement will provide for a share exchange through which each outstanding share of the Company will be exchanged for 0.58 of a share (the "Exchangeable Shares") of a subsidiary of ESIF. Each Exchangeable Share will be exchangeable into one ESIF trust unit at any time at the option of the holder, for no additional consideration. The Exchangeable Shares will pay a monthly dividend equal to 66 2/3% of the monthly distribution paid on an ESIF unit. The issue of the Exchangeable Shares will allow the Company's shareholders to receive the consideration under the arrangement on a tax-deferred basis for Canadian income tax purposes. Based on the closing price of the ESIF units of $12.40 on April 21, 2009, the Company's shareholders receive approximately $7.19 per share in Exchangeable Shares pursuant to the transaction. The exchange ratio represents an approximate 42.9% premium for the UEG shares to the 30-day weighted-average trading price of such shares ending April 10, 2009, the last trading day preceding the date ESIF and the Company first announced that they were in discussions respecting a proposed acquisition. The transaction is subject to the approval of the Company's shareholders, the receipt of regulatory approvals, and other closing conditions. The Company is expected to make its quarterly dividend payment of $0.1875 per share, subject to pro-ration based upon the closing date and a corresponding adjustment to the conversion feature of the Company's outstanding 6% convertible unsecured subordinated debentures in accordance with their terms. The transaction is expected to close in late June 2009.
Universal Energy Group's unaudited interim consolidated financial statements for the three and six months ended March 31, 2009 and 2008 and MD&A attached hereto are part of this news release. See "Forward-looking information" and "Non-GAAP measures" in the attached MD&A for cautionary information regarding forward-looking statements and a discussion of "Non-GAAP measures".
Universal Energy Group's common shares and convertible subordinated debentures are listed on the Toronto Stock Exchange under the symbol "UEG" and "UEG.DB", respectively. Universal Energy Group sells natural gas and electricity to residential, small to mid-size commercial and small industrial customers in Canada and the United States, sells long-term water heater rental programs to Ontario residential customers and operates an ethanol manufacturing facility in Belle Plaine, Saskatchewan. Additional information about Universal Energy Group is available on SEDAR (www.sedar.com).
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS May 14, 2009
The following management's discussion and analysis ("MD&A") of Universal Energy Group Ltd's. (the "Company") financial condition and results of operations for the three and six months ended March 31, 2009 and 2008 should be read in conjunction with the Company's unaudited interim consolidated financial statements for the three and six months ended March 31, 2009 and 2008 as well as the Company's audited consolidated financial statements for the years ended September 30, 2008 and 2007. The financial statements of the Company are prepared in accordance with Canadian Generally Accepted Accounting Principles ("GAAP"), which requires estimates and assumptions that affect the reported amount of assets and liabilities at the date of the financial statements and the amount of revenue and expenses during the reporting period. Actual results could differ from those estimates as a result of various factors, including those discussed below and elsewhere in this MD&A, particularly under "Forward-looking information". Certain totals, subtotals and percentages may not reconcile due to rounding. Results are reported in Canadian dollars. Quarterly reports and other information related to the Company are available on SEDAR at www.sedar.com.
The Company carries on business through three operating divisions. The Gas & Electricity Marketing Division ("GEM") carries on the Company's retail natural gas and electricity marketing business through various operating subsidiaries: in Canada through Universal Energy Corporation ("Universal"), in Michigan through Universal Gas and Electric Corporation ("UGE"), in New York through Wholesale Energy New York Inc. ("WENY") and in all other markets through Commerce Energy, Inc. ("Commerce"). The Home Services Division carries on the Company's water heater rental business through National Energy Corporation operating under the trade name National Home Services ("NHS"). The Ethanol Division carries on the Company's ethanol manufacturing business in Belle Plaine, Saskatchewan through Terra Grain Fuels Inc. ("TGF").
Forward-looking information
This MD&A contains "forward-looking statements". Statements other than statements of historical fact contained in this MD&A may be forward-looking statements, including, without limitation, management's expectations, intentions and beliefs concerning the retail electricity industry, the retail natural gas industry, the ethanol industry and the home water heater industry, the competitive landscape in these industries and the general economy, statements regarding the future financial position or results of the Company, business strategies, proposed acquisitions, growth opportunities, budgets, litigation, projected costs and plans and objectives of or involving the Company. Wherever possible, words such as "may", "would", "could", "will", "anticipate", "believe", "plan", "expect", "intend", "estimate", "aim", "endeavour", "project", "continue" and similar expressions have been used to identify these forward-looking statements. These statements reflect management's current beliefs with respect to future events and are based on information currently available to management. Forward-looking statements involve significant known and unknown risks, uncertainties and assumptions. Many factors could cause the actual results, performance or achievements to be materially different from any future results, performance or achievements that may be expressed or implied by such forward-looking statements, including, without limitation, those listed in the ''Risks and Uncertainties'' section of this MD&A. Should one or more of these risks or uncertainties materialize, or should assumptions underlying the forward-looking statements prove incorrect, actual results, performance or achievements could vary materially from those expressed or implied by the forward-looking statements contained in this MD&A. These factors should be considered carefully and undue reliance should not be placed on the forward-looking statements. Although the forward-looking statements contained in this MD&A are based upon what management currently believes to be reasonable assumptions, actual results, performance or achievements may not be consistent with these forward-looking statements. The forward-looking statements contained in this MD&A are expressly qualified in their entirety by this cautionary statement. These forward-looking statements are made as of the date of this MD&A and neither the Company nor any other party intends to, or assumes any obligation to, update or revise these forward-looking statements to reflect new events or circumstances except as expressly required by applicable securities law.
Non-GAAP measures
This MD&A makes reference to certain non-GAAP measures, namely "Operational Revenue", "Operational Margin" and "Operational Income" to assist in assessing GEM's financial performance. Non-GAAP measures do not have standard meanings prescribed by GAAP and are therefore unlikely to be comparable to similar measures presented by other issuers. GEM recognizes revenue based on customer consumption, but delivers natural gas in pre-determined fixed monthly or daily amounts and is paid for such delivered amounts monthly by the local distribution companies ("LDCs"). In addition, GEM uses financial swaps to fix its operating margins in its electricity business. These swap payments are not considered a cost of sales for accounting purposes but GEM treats them as such for business planning purposes. Accordingly, GEM uses the concepts of "Operational Revenue", "Operational Margin" and "Operational Income" to adjust for the differences between revenue recognition and delivery/payment that exist in its natural gas business and for the effect of the financial swaps used in its electricity business. For a reconciliation of Operational Revenue to revenue and Operational Margin to gross margin, see "Reconciliation of Operational Revenue, Operational Margin and Operational Income" in this MD&A. For a discussion of GEM's revenue recognition policies see "Critical Accounting Estimates'' in this MD&A.
Selected Financial Highlights and Overall Performance of the Company
The following selected financial information has been derived from the unaudited interim consolidated financial statements of the Company for the three and six months ended March 31, 2009 and 2008.
Three months ended Six months ended
------------------ -----------------
March 31 March 31 March 31 March 31
2009 2008 2009 2008
Statement of Operations Highlights $ $ $ $
-------- -------- -------- -------
(Thousands of dollars except per
share amounts)
GAAP Measures
Revenue 259,331 148,568 402,658 228,670
Gross margin 67,988 36,467 109,441 61,309
Net income/(loss) (77,720) 18,170 (75,213) 16,666
Basic earnings/(loss) per share (2.14) 0.50 (2.07) 0.46
Diluted earnings/(loss) per share (2.14) 0.49 (2.07) 0.45
Cash dividends declared per share 0.1875 - 0.3750 -
Non-GAAP Measures
Operational revenue 201,091 103,039 352,989 190,588
Operational margin 43,777 17,611 72,797 32,871
Operational income before customer
acquisition costs 25,875 6,818 42,577 15,882
Operational income after customer
acquisition costs 20,433 2,014 32,121 2,760
March 31 September 30
2009 2008
Balance Sheet Highlights $ $
-------- ------------
(Thousands of dollars)
Total assets 417,092 473,909
Long-term liabilities 177,872 165,815
On December 11, 2008 the Company, through its wholly owned subsidiary, Commerce Gas and Electric Corp. ("CGE"), acquired all of the issued and outstanding shares of Commerce for approximately US$28.5 million. CGE also assumed certain letter of credit obligations totalling US$18.8 million (currently US$5.7 million after repayments) related to the existing natural gas and electricity supply arrangements required to serve the Commerce customer base. These obligations will unwind as current suppliers are replaced with new natural gas and electricity supply and credit arrangements. The acquisition of Commerce has been accounted for using the purchase method with Commerce's results of operations from the date of acquisition included in the Company's consolidated financial statements for this period.
The increase in revenue of 75% and operational revenue of 95% over the comparative period is a result of the inclusion of Commerce's operational revenue in the financial results, the continual increase in the number of flowing gas and electricity customers, consistent management of attrition and continued steady aggregation of new gas and electricity customers with gross customer additions for this quarter of 35,054 RCEs. In addition, both the Ethanol plant and the Home Services division are now starting to contribute to revenue. The net loss of $77.7 million for the quarter is primarily as a result of the goodwill impairment loss related to the ethanol plant and increase in the unrealized loss on commodity contracts due to lower wholesale natural gas and electricity prices.
Operational income after customer acquisition costs for the quarter amounted to $20.4 million compared to $2.0 million from the prior comparative period, an increase of 915%. This increase is attributable to the integration of the Commerce acquisition into the Company's financial results, continual increase in the number of flowing customers moving from an enrolled to a flowing state and continued strong growth in operational margin.
Total assets decreased to $417.1 million from $473.9 million at September 30, 2008, as a result of writing down goodwill related to the ethanol plant and offset by increases in accounts receivable and fixed asset additions primarily for the home services operations. The increase in long-term liabilities results from the increase in the unrealized loss on commodity contracts and the reclassification of the TGF senior debt from current to long term on the restructuring of this debt.
1. Gas & Electricity Marketing Division (GEM)
(a) Overview
GEM's business involves the sale of natural gas and electricity in Canada and the United States to residential, small to mid-size commercial and small industrial customers. GEM currently operates in Ontario, British Columbia, Michigan, New York, Pennsylvania, New Jersey, Maryland, Ohio, Georgia and California. GEM's customers purchase natural gas and electricity under fixed price energy contracts for terms of one, two and five years and also on a month-to-month basis under variable rates. Customers in Ontario, British Columbia and Michigan are generally under five year fixed price contracts and customers in the other markets are generally under one or two year fixed price contracts or month-to-month variable rate contracts.
By fixing the price of natural gas under GEM's gas contracts and by obtaining price protection under its electricity contracts GEM's fixed price customers eliminate or reduce their exposure to changes in natural gas and electricity prices over the period of their fixed price contracts. It is GEM's general policy to match the estimated energy requirements of its customers by purchasing offsetting volumes of natural gas and electricity or entering into offsetting electricity swaps at fixed prices for the term of its customers' energy contracts. Variable rate customers pay for their commodity supply based on an agreed upon index price which can fluctuate with each billing cycle with the underlying supply tied to a similar daily or monthly spot index. GEM derives its Operational Margin from the difference between the price it pays for electricity, electricity swaps and for natural gas supply and the price it charges its customers.
(b) Sources of Revenue
GEM earns its revenue primarily from the supply of electricity and natural gas to direct purchase customers. GEM's policy is to purchase in advance an estimate of the commodity supply required for each marketing program (either through physical supply or financial contracts). When it becomes reasonably certain that a marketing program will not exhaust the allotted commodity supply this commodity supply will generally be transferred to other marketing programs. GEM recognizes natural gas and electricity revenue based on customer consumption.
(c) Selected Consolidated Financial and Operational Data
The following selected financial information has been derived from the unaudited consolidated financial statements of GEM for the three and six months ended March 31, 2009 and 2008 and other internal financial and operational information of GEM.
Gas & Electricity Marketing
Statement of Operations Data (GAAP)
(Thousands of
dollars) Three months ended March 31 Six months ended March 31
--------------------------- -------------------------
2009 2008 2009 2008
$ $ $ $
------------- ------------ ----------- ------------
Revenue
Canada
Gas 49,538 31,144 76,307 46,216
Electricity 53,166 46,638 102,880 86,703
------------- ------------ ----------- ------------
Total Canada 102,704 77,782 179,187 132,919
United States
Gas 112,309 70,786 158,567 95,751
Electricity 27,580 - 35,419 -
------------- ------------ ----------- ------------
Total United States 139,889 70,786 193,986 95,751
------------- ------------ ----------- ------------
Total revenue 242,593 148,568 373,173 228,670
------------- ------------ ----------- ------------
Gross Margin
Canada
Gas 8,185 4,691 12,584 7,032
Electricity 27,560 19,931 51,337 37,753
------------- ------------ ----------- ------------
Total Canada 35,745 24,622 63,921 44,785
United States
Gas 22,625 11,845 30,668 16,524
Electricity 7,780 - 9,943 -
------------- ------------ ----------- ------------
Total United States 30,405 11,845 40,611 16,524
------------- ------------ ----------- ------------
Total Gross Margin 66,150 36,467 104,532 61,309
------------- ------------ ----------- ------------
Customer acquisition
costs 4,661 4,804 9,140 13,122
General and
administrative 13,138 6,398 21,532 11,755
------------- ------------ ----------- ------------
Total Expenses 17,799 11,202 30,672 24,877
------------- ------------ ----------- ------------
Settlements under
commodity contracts 15,980 10,971 28,946 21,511
Gain on sale of
customer contracts 992 - 992 -
Unrealized gain/(loss)
on commodity
contracts (30,522) 25,658 (31,413) 35,282
Other 348 639 1,200 715
Finance charges (78) - (81)
Amortization (404) (143) (807) (268)
Income tax expense (2,326) (13,858) (6,330) (18,176)
------------- ------------ ----------- ------------
Net income for the
period 381 26,590 8,475 32,474
------------- ------------ ----------- ------------
------------- ------------ ----------- ------------
(d) Reconciliation of Operational Revenue, Operational Margin and Operational Income
GEM recognizes natural gas revenue based on customer consumption but delivers natural gas to the LDCs in predetermined, fixed monthly or daily amounts and is paid for such delivered amounts monthly. In markets where there are daily deliveries the variance between delivered amounts and customer consumption is minimal. Delivered amounts are set monthly for the Ontario and Michigan markets and all other gas markets are daily delivery. In addition, GEM uses financial swaps to fix its operating margins in its electricity business. These swap payments are not included in cost of sales for accounting purposes although GEM treats them as such for business planning purposes. Accordingly, GEM uses the concepts of "operational revenue", "operational margin" and "operational income" to adjust for the differences between revenue recognition and delivery/payment that exist in its natural gas business and for the effect of the financial swaps used in its electricity business.
Operational revenue, operational margin and operational income are not earnings measures recognized by GAAP and do not have standardized meanings prescribed by GAAP. GEM's method of calculating operational revenue, operational margin and operational income may differ from the methods used by other issuers and, accordingly, GEM's operational revenue, operational margin and operational income may not be comparable to similar measures presented by other issuers. Investors are cautioned that operational revenue, operational margin and operational income should not be construed as alternatives to revenue, gross margin or net income determined in accordance with GAAP as indicators of GEM's performance or to cash flows from operating activities as measures of GEM's liquidity, cash flows or profitability. GEM believes that these are useful measures as they allow GEM to assess its ongoing business and are indicators of GEM's ability to invest in its businesses and continue operations. GEM calculates operational revenue, operational margin and operational income as follows:
Operational revenue - For natural gas, operational revenue is revenue adjusted upward by the dollar amount of "gas delivered in excess of consumption" (natural gas that has been delivered to LDCs in excess of customer consumption) and adjusted downward by the dollar amount of "gas under delivered" (natural gas that has been consumed by customers in excess of that delivered to the LDCs). For electricity, operational revenue is revenue without adjustment.
Operational margin - For natural gas, operational margin is gross margin adjusted upward for the excess of "deferred revenue" over "gas delivered in excess of consumption" or adjusted downward for the excess of "unbilled revenues" over "gas under delivered". In addition, where applicable, gas gross margin is adjusted upward for swap receipts and downward for swap payments, which are not included in cost of sales for accounting purposes. For electricity, operational margin is "gross margin" adjusted upward for "swap receipts" and downward for "swap payments", which are not included in cost of sales for accounting purposes.
Operational income before customer acquisition costs - Is operational margin reduced by "general and administrative expenses" but before deduction of "customer acquisition costs".
Operational income after customer acquisition costs - Is operational margin reduced by "customer acquisition costs" and "general and administrative expenses".
The effect of making the above operational adjustments to revenue and gross margin is presented below.
Gas & Electricity Marketing
Operational Revenue,
Margin & Income Three months ended March 31 Six months ended March 31
--------------------------- -------------------------
(Thousands of dollars) 2009 2008 2009 2008
$ $ $ $
----------- ---------- --------- ----------
Revenue
Canada
Gas revenue 49,538 31,144 76,307 46,216
Revenue adjustment for
gas under delivered (18,785) (13,592) (16,353) (11,873)
----------- ---------- --------- ---------
Gas operational
revenue 30,753 17,552 59,954 34,343
Electricity revenue 53,166 46,638 102,880 86,703
----------- ---------- --------- ---------
Total Canada 83,919 64,190 162,834 121,046
United States
Gas revenue 112,309 70,786 158,567 95,751
Revenue adjustment
for gas under
delivered (39,455) (31,936) (33,316) (26,208)
----------- ---------- --------- ---------
Gas operational
revenue 72,854 38,850 125,251 69,543
Electricity revenue 27,580 - 35,419 -
----------- ---------- --------- ---------
Total United States 100,434 38,850 160,670 69,543
----------- ---------- --------- ---------
Total operational
revenue 184,353 103,040 323,504 190,589
----------- ---------- --------- ---------
Operational Margin
Canada
Gas gross margin 8,185 4,691 12,584 7,032
Margin adjustment for
gas over delivered (2,929) (2,254) (2,750) (2,020)
----------- ---------- --------- ---------
Gas operational margin 5,256 2,437 9,834 5,012
Electricity gross
margin 27,560 19,931 51,337 37,753
Settlements under
commodity contracts (14,965) (10,971) (27,236) (21,511)
----------- ---------- --------- ---------
Electricity
operational margin 12,595 8,960 24,101 16,242
Total Canada 17,851 11,397 33,935 21,254
United States
Gas gross margin 22,625 11,845 30,668 16,524
Settlements under
commodity contracts (895) - (1,484) -
Margin adjustment for
gas over delivered (5,302) (5,631) (4,948) (4,907)
----------- ---------- --------- ---------
Gas operational margin 16,428 6,214 24,236 11,617
Electricity margin 7,780 - 9,943 -
Settlements under
commodity contracts (120) - (226) -
----------- ---------- --------- ---------
Electricity
operational margin 7,660 - 9,717 -
Total United States 24,088 6,214 33,953 11,617
----------- ---------- --------- ---------
Total operational
margin 41,939 17,611 67,888 32,871
----------- ---------- --------- ---------
Customer acquisition
costs 4,661 4,804 9,140 13,122
General and
administrative 13,138 6,398 21,532 11,755
----------- ---------- --------- ---------
Operational income
after customer
acquisition costs 24,140 6,409 37,216 7,994
----------- ---------- --------- ---------
----------- ---------- --------- ---------
The following operational data for the three and six months ended March 31,
2009 and 2008 has been prepared by management based on GEM's records.
Selected Operational
Data Three months ended March 31 Six months ended March 31
--------------------------- -------------------------
2009 2008 2009 2008
--------- -------- -------- --------
Operational margin per
unit (dollars)
Canada - Gas (Cdn$/m3) 0.0709 0.0540 0.0671 0.0579
Canada - Electricity
(Cdn$/kWh) 0.0222 0.0171 0.0221 0.0167
United States - Gas
(Cdn$/Mcf) 2.7552 1.7055 2.4589 1.7535
United States -
Electricity (Cdn$/kWh) 0.0351 - 0.0345 -
Delivered Volume
Canada - Gas (m3) 74,143,835 45,145,258 146,593,219 86,530,442
Canada - Electricity
(kWh) 568,002,967 523,622,857 1,091,549,907 970,846,629
United States - Gas
(Mcf) 5,962,589 3,643,578 9,586,406 6,625,089
United States -
Electricity (kWh) 218,130,000 - 281,979,000 -
Consumed Volume
Canada - Gas (m3) 119,471,762 78,284,161 185,674,022 115,524,126
Canada - Electricity
(kWh) 568,002,967 523,622,857 1,091,549,907 970,846,629
United States - Gas
(Mcf) 9,039,151 6,671,099 12,797,720 9,093,211
United States -
Electricity (kWh) 218,130,000 - 281,979,000 -
(e) Results of Operations
Three and six months ended March 31, 2009 compared to three and six months ended March 31, 2008
(i) Revenue and Margin - Canada
Universal continues to experience steady growth in revenue and operational margin as it integrates the Commerce acquisition into its financial reporting and the number of flowing customers increase with each successive reporting period.
For the three and six months ended March 31, 2009 Canadian natural gas revenue was $49.5 million and $76.3 million, up 59% and 65% from the prior comparable periods of $31.1 million and $46.2 million. Canadian natural gas for the quarter accounted for 20.4% of total revenue on customer consumption of 119.5 million m3 of natural gas. Gross margin for the quarter was $8.2 million, an increase of 74% from the prior comparable periods. Gross margin for the six months ended March 31, 2009 was $12.6 million, an increase of 79% from the prior comparative periods.
Gas operational revenue for the three and six months ended March 31, 2009 was $30.8 million and $60.0 million, up 75% from $17.6 million and 75% from $34.3 million in the prior comparable periods on delivered volume of 74.1 million m3. Gas operational margin for the three and six months ended March 31, 2009 was $5.3 million and $9.8 million, an increase of 116% and 96% from the prior comparable periods.
For the three and six months ended March 31, 2009 Canadian electricity revenue and operational revenue was $53.2 million and $102.9 million, up 14.0% from $46.6 million and 18.7% from $86.7 million in the prior comparable periods. Canadian electricity for the quarter accounted for 21.9% of total revenue on customer consumption of 568.0 million kWh. Gross margin for the three and six months ended March 31, 2009 was $27.6 million and $51.3 million, an increase of 38.3% from $19.9 million and 36.0% from $37.8 million in the prior comparative periods. Electricity operational margin for the three and six months ended March 31, 2009 was $12.6 million and $24.1 million, up 40.6%from $9.0 million and 48.4% from $16.2 million in the prior comparable periods.
(ii) Revenue and Margin - United States
For the three and six months ended March 31, 2009 U.S. natural gas revenue was $112.3 million and $158.6 million, up 59% from $70.8 million and 66% from $95.8 million in the prior comparable periods. U.S. natural gas for the quarter accounted for 46.3% of total revenue on customer consumption of 9.0 million Mcf of natural gas. Gross margin for the three and six months ended March 31, 2009 was $22.6 million and $30.7 million, up 91% from $11.8 million and 86% from $16.5 million in the prior comparable periods.
Gas operational revenue for the three and six months ended March 31, 2009 was $72.9 million and $125.3 million, up 88% from $38.9 million and 80% from $69.5 million in the prior comparable periods. Operational margin for the three and six months ended March 31, 2009 was $16.4 million and $24.2 million, up 164% from $6.2 million and 109% from $11.6 million in the prior comparable periods.
For the three and six months ended March 31, 2009 U.S. electricity revenue and operational revenue was $27.6 million and $35.4 million. U.S. electricity for the quarter accounted for 11.4% of total revenue on customer consumption of 218.1 million kWh. Gross margin for the three and six months ended March 31, 2009 was $7.8 million and $9.9 million. Electricity operational margin for the three and six months ended March 31, 2009 was $7.7 million and $9.7 million.
(iii) Revenue and Margin - Combined
On a combined basis (Canada and the United States), GEM's total revenue earned for the three and six months ended March 31, 2009 was $242.6 million and $373.2 million, up 63% from $148.6 million and 63% from $228.7 million in the prior comparable periods. Gross margin for the three and six months ended March 31, 2009 was $66.2 million and $104.5 million, up 81% from $36.5 million and 71% from $61.3 million in the prior comparable periods.
Total operational revenue earned for the three and six months ended March 31, 2009 was $184.4 million and $323.5 million, up 79% from $103.0 million and 70% from $190.6 million in the prior comparable periods. Operational margin for the three and six months ended March 31, 2009 was $41.9 million and $67.9 million, up 138% from $17.6 million and 107% from $32.9 million in the prior comparable periods.
(iv) Selling, General and Administrative Expenses - Combined
Customer acquisition costs are commissions paid to independent sales agents for enrolling new customers, direct mail marketing costs and other direct selling expenses. For the three and six months ended March 31, 2009 these costs amounted to $5.2 million and $9.9 million excluding direct mail marketing costs and $5.4 million and $10.5 million including direct mail marketing costs. For the prior comparable periods, customer acquisition costs were $4.4 million and $12.0 million excluding direct mail marketing costs and $4.8 million and $13.1 million including direct mail marketing costs. Customer acquisition costs were down due to lower customer additions this quarter relative to the prior comparable periods.
General and administrative expenses for the three and six months ended March 31, 2009 amounted to $13.0 million and $21.4 million. The significant components of general and administrative expenses for the quarter were processing charges (principally LDC processing and other third party processing and data entry fees) - $1.6 million, salaries and benefits - $5.4 million, consulting (principally for management services and systems development) - $1.0 million, printing and design - $0.206 million and rent - $0.705 million, legal fees of $0.963 million, together totaling $9.9 million and accounting for 76% of general and administrative expenses. General and administrative expenses will reduce in future quarters as the Commerce business is transitioned onto the Company's information technology platform and as operating costs for the Commerce operations are rationalized.
(v) Other Income/(Expense)
The settlements under commodity contracts of $16.0 million and $28.9 million are payments made under gas and electricity swap contracts during the three and six months ended March 31, 2009. The non-cash unrealized loss on commodity contracts of $30.5 million and $31.4 million arises from the marked to market revaluation of the electricity swaps and results from the expansion of the spread between the fixed and variable electricity swap prices compared to the immediately preceding revaluation. See "Financial Instruments" in this MD&A.
(f) Customer Aggregation
The following table summarizes GEM's customer aggregation in the Canadian and United States markets for the three and six months ended March 31, 2009.
Opening RCEs Closing
Sept 30, Additions Additions Total RCEs Mar
2008 Q1 2009 Q2 2009 Additions Attrition 31, 2009
-----------------------------------------------------------
Canada -
Gas 111,772 10,234 6,872 17,106 (9,986) 118,892
Canada -
Electricity 214,411 11,374 10,995 22,369 (13,493) 223,287
-----------------------------------------------------------
Total Canada 326,183 21,608 17,867 39,475 (23,479) 342,179
United
States - Gas 122,722 58,596 10,880 69,476 (7,751) 184,447
United
States -
Electricity - 72,890 6,307 79,197 (22,026) 57,171
-----------------------------------------------------------
Total United
States 122,722 131,486 17,187 148,673 (29,777) 241,618
Combined 448,905 153,094 35,054 188,148 (53,256) 583,797
--------- -----------------
--------- -----------------
Less:
Attrition (18,137) (35,119) (53,256)
----------------------------
Net new RCE
additions 134,957 (65) 134,892
----------------------------
Notes:
"RCE" means a residential customer equivalent, which is a unit of
measurement equivalent to 10,000 kWh of electricity on an annual basis
or 2,815 m3 of natural gas on an annual basis which quantities management
believes to represent the approximate amounts of electricity and natural gas
used annually by a typical residential customer. Q1 2009 additions include
52,820 gas and 72,890 electricity RCEs from the acquisition of Commerce.
Total customer additions for the quarter amounted to 35,054 RCEs and for the six months ended March 31, 2009, which includes the Commerce acquisition, amounted to 188,148 RCEs. Customer additions are down slightly over the prior comparable quarter as over the past few months the Company has been focusing its management and operational resources on the Commerce transition. Now that Commerce operations has stabilized management is directing its resources to new markets and in early May 2009 commenced marketing activities in Ohio. Management expects to see customer additions return to historic growth levels over the next few quarters. Canadian gas additions accounted for 6,872 RCEs or 19.6% of additions for the quarter. Canadian electricity additions accounted for 10,995 RCEs or 31.4% of additions for the quarter. In total, Canadian additions accounted for 17,867 RCEs or 51% of additions for the quarter. United States gas additions accounted for 10,880 RCEs or 31.0% of additions for the quarter. United States electricity additions accounted for 6,307 RCEs or 18.0% of additions for the quarter. In total, United States additions accounted for 17,187 RCEs or 49.0% of additions for the quarter.
Combined attrition for all markets for the three months ended March 31, 2009 amounted to 35,119 RCEs or 14.4% on an annualized basis. Included in attrition is a large commercial contract of approximately 12,500 RCEs that GEM terminated as the margin earned on this account was lower than our margin requirements for such accounts. The Canadian market experienced annualized attrition of 12.4% and the United States market experienced annualized attrition of 17.0%. Largely as the result of negative media coverage, increased customer complaint levels during last winter's heating season led to a review of UGE's sales and marketing practices by the Michigan Public Service Commission ("MPSC"). In response to both UGE's and the MPSC staff's request, the MPSC ordered a unified contested hearing to review complaints and concerns raised by UGE and MPSC staff. UGE and the MPSC Staff have since entered into a settlement agreement, which was approved by the MPSC on April 16, 2009. Under the terms of which UGE has agreed to pay $0.300 million to the MPSC to cover costs incurred during its investigation. GEM continues to monitor all markets to ensure regulatory compliance and to minimize attrition and follows a policy of diligently enforcing collection of liquidated damages from customers attempting to exit their contracts.
At March 31, 2009 GEM's total customer base amounted to 583,797 RCEs, net of attrition. Geographically, Canada accounts for 59% of total RCEs and the United States accounts for 41% of total RCEs. In Canada, residential customers account for 72% of RCEs and commercial customers account for 28% of RCEs. In the United States, residential customers account for 55% of RCEs and commercial customers account for 45% of RCEs. On a product distribution basis, gas customers account for 52% of total RCEs and electricity customers account for 48% of total RCEs.
2. Ethanol Division (TGF)
(a) Overview
TGF continues to improve plant production and runtime of the Belle Plaine facility. Sales of Dried Distiller Grains ("DDG") have been steady while margins for ethanol decreased in the quarter as the general economic conditions resulted in softer pricing for energy products including ethanol. TGF's wheat supply portfolio continues to provide steady feedstock supplies to meet plant requirements.
(b) Selected Financial Information
(Unaudited -
thousands
of dollars) Three months ended March 31 Six months ended March 31
----------------------------- --------------------------
2009 2008 2009 2008
$ $ $ $
------ ------ ------ ------
Revenue 16,197 - 28,662 -
Cost of sales 14,900 - 24,576 -
------ ------ ------ ------
Gross margin 1,297 - 4,086 -
General and
administrative 3,507 $2,061 6,080 $2,757
------ ------ ------ ------
(2,210) (2,061) (1,994) (2,757)
Financing charges (1,880) (145) (3,693) (313)
Amortization of
property, plant
and equipment (1,771) (43) (2,699) (61)
Investment income 216 505 235 890
Settlements under
commodity
contracts - (1,843) - (1,843)
Unrealized
gain/(loss) on
commodity contracts - (3,026) - (11,820)
Income tax
recovery - 1,577 - 4,562
------ ------ ------ ------
Net loss (5,645) (5,036) (8,151) (11,342)
------ ------ ------ ------
------ ------ ------ ------
(c) Results of Operations
For the three and six months ended March 31, 2009 TGF had revenue of $16.2 million and $28.7 million and realized gross margin of $1.3 million and $4.1 million. During the quarter the plant produced 20.7 million litres of ethanol and 15.0 metric tonnes of DDGs. For the three and six months ended March 31, 2009 TGF realized a net loss of $5.6 million and $8.2 million, incurring financing charges of $1.9 million and $3.7 million debt obligations, and general and administrative expenses of $3.5 million and $6.1 million.
3. Home Services Division (NHS)
(a) Overview
In April 2008 the Company entered the home services market operating under the trade name National Home Services. NHS provides Ontario residential customers long-term water heater rental programs offering conventional tanks, power vented tanks and tankless water heaters in a variety of sizes. NHS continues to ramp up its operations and as at March 31, 2009 had installed 20,180 water heaters in residential homes and has commenced earning revenue from its installed base.
(b) Selected Financial Information
(Unaudited -
thousands of dollars) Three months ended Six months ended
March 31 March 31
------------------ ----------------
2009 2009
$ $
------------------ ----------------
Revenue 541 823
------------------ ----------------
Customer acquisition costs 781 1,316
General and administrative 1,107 2,219
------------------ ----------------
(1,347) (2,712)
Amortization (168) (272)
Other 2 6
Income tax recovery 487 1,034
------------------ ----------------
Net loss for the period (1,026) (1,944)
------------------ ----------------
------------------ ----------------
(c) Results of Operations
For the three and six months ended March 31, 2009 NHS had revenue of $0.541 million and $0.823 million and incurred a loss of $1.0 million and $1.9 million over this period. Customer acquisition costs, which relate to sales commissions paid to independent agents, amounted to $0.781 million for the quarter and general and administrative expenses, which relate primarily to staff compensation, advertising, uniforms and warehouse expenses, amounted to $1.1 million for the quarter. Capital expenditures, including installation costs, for the three and six months ended March 31, 2009 amounted to $5.0 million and $8.0 million.
4. Summary of Quarterly Results
The following selected financial information has been derived from the interim unaudited consolidated financial statements of the Company for each of the eight most recently completed quarters.
(Thousands of dollars) 2009 2009 2008 2008
Q2 Q1 Q4 Q3
$ $ $ $
------- ------- ------- --------
GAAP Measures
Revenue 259,331 143,327 74,087 91,483
Gross margin 67,988 41,453 25,952 28,209
Net income/(loss) (77,720) 2,507 (29,061) 10,853
Basic earnings/(loss) per
share (2.14) 0.07 (0.80) 0.30
Diluted earnings/(loss)
per share (2.14) 0.07 (0.80) 0.29
Non-GAAP Measures
Operational revenue 201,091 151,898 115,212 104,017
Operational margin 43,777 29,020 21,459 18,168
Operational income/(loss)
before customer
acquisition costs 25,875 16,702 (4,525) 7,839
Operational income/(loss)
after customer
acquisition costs 20,433 11,688 (9,346) 4,560
2008 2008 2007 2007
Q2 Q1 Q4 Q3
$ $ $ $
------- ------- ------- --------
GAAP Measures
Revenue 148,568 80,102 49,338 52,385
Gross margin 36,467 24,842 20,783 20,798
Net income/(loss) 18,170 (1,504) (17,915) (24,108)
Basic earnings/(loss) per
share 0.50 (0.04) (0.61) (0.66)
Diluted earnings/(loss)
per share 0.49 (0.04) (0.61) (0.66)
Non-GAAP Measures
Operational revenue 103,039 87,549 72,805 59,607
Operational margin 17,611 15,260 13,734 10,445
Operational income before
customer acquisition costs 6,818 9,064 7,655 6,014
Operational income/(loss)
after customer acquisition
costs 2,014 746 (610) 119
The Company's gas and electricity operations are seasonal. While year over year quarterly comparisons are appropriate, comparison of sequential quarters is affected by seasonality.
Analysis of the Second Quarter - Q2 2009
The increase in revenue of 75% and operational revenue of 95% over the comparative period is a result of the inclusion of Commerce's operational revenue in the financial results, the continual increase in the number of flowing gas and electricity customers, consistent management of attrition and continued steady aggregation of new gas and electricity customers with gross customer additions for this quarter of 35,054 RCEs. In addition, both the Ethanol plant and the Home Services division are now starting to contribute to revenue. The net loss of $77.7 million for the quarter is primarily as a result of the goodwill impairment loss related to the ethanol plant and increase in the unrealized loss on commodity contracts due to lower wholesale natural gas and electricity prices.
Operational income after customer acquisition costs for the quarter amounted to $20.4 million compared to $2.0 million from the prior comparative period, an increase of 915%. This increase is attributable to the integration of the Commerce acquisition into the Company's financial results, continual increase in the number of flowing customers moving from an enrolled to a flowing state and continued strong growth in operational margin.
5. Liquidity and Capital Resources
At March 31, 2009 the Company had cash of $36.5 million, of which $18.9 million is restricted cash, and had adjusted working capital of $82.9 million. Included in adjusted working capital are certain letter of credit obligations totalling $23.2 million (US$18.8 million) related to the existing natural gas and electricity supply arrangements required to serve the Commerce customer base. These obligations will unwind and increase the Company's cash resources as current suppliers are replaced with Commerce natural gas and electricity supply and credit arrangements. Subsequent to period end, some of the letter of credit obligations have unwound and the current obligation is $7.2 million (US$5.7 million).
In addition to its cash resources and other working capital, the Company has credit facilities amounting to $5.0 million available to Universal for trade financing on electricity purchases and approximately $18.7 million available to TGF to be used primarily towards wheat growers advances and working capital. As the number of flowing GEM customers continue to increase, the Company will continue to receive larger amounts of cash from the underlying margins on these contracts and this will further contribute to the Company's cash resources. TGF has commenced production and will become a cash contributor in future quarters as it maintains a stable operating capacity. NHS at this time is not contributing cash from operating activities as it continues to use its cash resources to fund sales commission and warehouse expenses as it invests in growing its installed water heater base.
(a) Cash Flows from Operating Activities
Cash provided from operations for the three and six months ended March 31, 2009 amounted to $17.1 million and $6.5 million compared to cash used in operating activities of $15.0 million and $24.3 million for the prior comparable periods. This is primarily due to unwinding of letter of credit deposits relating to the Commerce acquisition, reductions in trade receivables, inventory, gas over delivered and trade payable and offset by reduction in deferred gas revenues.
(b) Cash Flows Used in Investing Activities
Cash used in investing activities for the three and six months ended March 31, 2009 amounted to $13.8 million and $53.3 million compared to $10.4 million and $31.9 million in the prior comparable periods. The investing activities relate primarily to the acquisition of Commerce which was completed for net consideration of $32.0 million.
(c) Cash Flows from Financing Activities
During the three and six months ended March 31, 2009 the Company made dividend payments of $6.8 million and $13.6 million pursuant to its dividend policy.
(d) Long-Term Liabilities
The unrealized loss on commodity contracts of $125.3 million (current portion - $63.8 million) is the estimated amount that the Company would pay as at March 31, 2009 to dispose of these contracts in the market. These liabilities are marked to market and any changes to the fair value are recorded in other income/(expense). See "Financial Instruments" in this MD&A for further details. The long-term debt of $177.3 million (current portion - $60.9 million) comprises $39 million of advances under the TGF debenture facility, $43.7 million of advances under the TGF senior credit facility, advances to wheat growers of $1.4 million, draw downs under the TGF working capital facility of $13.8 million and the convertible debentures of $79.4 million.
(e) Contractual Obligations
In the normal course of business, the Company is obligated to make future payments under various non-cancellable contracts and other commitments. The payments due by period are set out in the following table.
(Thousands of dollars) Less than After
Total 1 year 1-3 years 4-5 years 5 years
------- --------- --------- --------- -------
Long-term debt 177,291 60,918 7,997 29,004 79,372
Premises, vehicles,
equipment, software
and telephone 13,829 2,711 7,668 3,450 -
Natural gas purchase
commitments 641,527 112,363 380,217 148,426 521
Production contracts
financing 35,834 11,672 21,987 2,175 -
-----------------------------------------------
Total 868,481 187,664 417,869 183,055 79,893
-----------------------------------------------
-----------------------------------------------
For a description of the Company's obligations under electricity swap contracts and other hedging instruments see "Financial Instruments" in this MD&A.
(f) Contingency
Commerce is a party to proceedings commenced at the Federal Energy Regulatory Commission ("FERC") against several utilities and marketers by the Attorney General of California and the California Public Utilities Commission in connection with the disruption in the California wholesale energy markets in 2000 and 2001. At this time, the outcome of the proceedings and the ultimate financial impact on Commerce is not determinable.
(g) Debenture Offering
The convertible unsecured subordinated debentures have a face value of $90 million. The debentures mature on September 30, 2014 unless converted prior to that date and bear interest at an annual rate of 6% payable semi- annually on March 31 and September 30 of each year. Each $1,000 principal amount of the debentures is convertible at any time prior to maturity or on the date fixed for redemption, at the option of the holder, into approximately 45.76 common shares of the Company representing a conversion price of $21.85 per common share. During the three and six months ended March 31, 2009, interest expense amounted to $1.4 million and $2.7 million.
The debentures are not redeemable prior to October 1, 2010. On and after October 1, 2010, but prior to September 30, 2012, the debentures are redeemable, in whole or in part, at a price equal to the principal amount thereof, plus accrued and unpaid interest, at the Company's sole option on not more than 60 days and not less than 30 days prior notice, provided that the current market price on the date on which notice of redemption is given is not less than 125% of the conversion price. On and after September 30, 2012, but prior to the maturity date, the debentures are redeemable, in whole or in part, at a price equal to the principal amount thereof, plus accrued and unpaid interest, at the Company's sole option on not more than 60 days and not less than 30 days prior notice.
The conversion feature of the debentures has been accounted for as a separate component of shareholders' equity in the amount of $9.5 million. The remainder of the net proceeds of the debentures of $77.2 million has been recorded as long-term debt, which will be accreted up to the face value of $90.0 million over the term of the debentures. Accretion and interest paid are recorded as finance charges on the consolidated statement of operations. If the debentures are converted into common shares, the value of the conversion feature will be reclassified to share capital along with the principal amount converted.
(Thousands of dollars) $
----------------------------------------------------------------------------
Convertible debentures initially recognized, less
issue costs of $3,304 77,189
Accretion to March 31, 2009 2,183
----------------------------------------------------------------------------
Balance as at March 31, 2009 79,372
----------------------------------------------------------------------------
----------------------------------------------------------------------------
(h) Capital Disclosure
The capital structure of the Company is as follows:
March 31 September 30
2009 2008 Change
(Thousands of dollars) $ $ %
----------------------------------------------------------------------------
Total shareholders' equity 10,256 96,061 -89%
----------------------------------------------------------------------------
Total shareholders' equity as a % of
total capital 5% 35%
Short-term debt 60,918 63,221
Long-term debt 116,373 114,619
----------------------------------------------------------------------------
Total debt 177,291 177,840 0%
----------------------------------------------------------------------------
Total debt as a % of total capital 95% 65%
----------------------------------------------------------------------------
Total capital 187,547 273,901 -32%
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Shareholders' equity is defined as share capital, contributed surplus, equity component of convertible debentures and deficit. During the six months ended March 31, 2009, total shareholders' equity decreased by $85.8 million to $10.3 million due to a dividend payment of $13.6 million and net loss of $75.2 million which includes a non-cash goodwill write-down of $70.5 million.
Total debt decreased during the six months ended March 31, 2009 by $0.549 million to $177.3 million. The decrease resulted from repayments of the TGF credit facility in the amount of $1.8 million, repayments of the TGF debentures in the amount of $1.0 million, repayments of the wheat production facility in the amount of $2.4 million. This is offset by an increase in TGF's operating facility in the amount of $3.8 million and accretion of the Company's convertible debentures in the amount of $0.755 million.
The Company is not subject to any statutory requirements or any other externally imposed capital requirements. Commitments exist to issue common shares in connection with established stock option and RSU compensation plans and pursuant to the convertible debentures with such share issuances to occur from treasury.
6. Related Party Transactions and Balances
During the three and six months ended March 31, 2009, the Company entered into various transactions with related parties as follows:
(a) Universal has entered into the following agreements with Sempra, a significant shareholder of the Company:
(i) Gas purchase agreements
Universal entered into the natural gas purchase and sale agreement with Sempra on July 14, 2005 (amended and restated February 2, 2007). On February 2, 2007 UGE and Sempra also entered into an agreement pursuant to which Sempra supplies natural gas to UGE in connection with UGE's gas marketing business in Michigan ("Gas Purchase Agreements"). Pursuant to the Gas Purchase Agreements, Universal engaged Sempra to act as Universal's exclusive supplier of natural gas, subject to certain limited circumstances.
Universal's obligations to Sempra under the Gas Purchase Agreements are secured by the grant of a first priority security interest on substantially all of Universal's current and future assets, including all cash and cash equivalents, all accounts receivable and all deposit accounts. In addition, all payments received by Universal from its customers and the LDCs are paid to a specified lockbox or by wire transfer to specified Universal blocked bank accounts under the control of Sempra, from which amounts are first paid to Sempra in satisfaction of payments due to Sempra under the Gas Purchase Agreements, and all excess amounts are then paid to Universal.
If Sempra defaults in its obligations to deliver natural gas to Universal, or if Universal defaults in its obligation to accept delivery of natural gas, subject to force majeure, the Gas Purchase Agreements contain provisions requiring the payment of various amounts by the non-performing party to the performing party.
During the three and six months ended March 31, 2009, Universal made natural gas purchases under the agreements totaling $59.0 million (2008 - $48.3 million) and $116.6 million (2008 - $87.9 million). Included in accounts payable at March 31, 2009 is an amount owing of $20.2 million.
(ii) Electricity swap agreement
Universal entered into an electricity swap master agreement ("Electricity Swap Agreement") with Sempra on July 14, 2005 (amended and restated February 2, 2007). Pursuant to the Electricity Swap Agreement, Universal engaged Sempra to act as Universal's exclusive supplier of electricity swaps.
Universal's obligations to Sempra under the Electricity Swap Agreement are secured by the grant of a first priority security interest on substantially all of Universal's current and future assets, including all cash and cash equivalents, all accounts receivable and all deposit accounts. In addition, all payments received by Universal from its customers and the LDCs are paid to a specified lockbox or by wire transfer to specified Universal blocked bank accounts under the control of Sempra, from which amounts are first paid to Sempra in satisfaction of payments due to Sempra under the Electricity Swap Agreement, and all excess amounts are then paid to Universal.
Upon the occurrence of a contract termination event, the non-defaulting party has the right to immediately, for so long as the contract termination event is continuing: suspend its performance under electricity swaps then outstanding; or liquidate and terminate the electricity swaps then outstanding and accelerate the payment of any amounts due. Upon any such liquidation and termination, the non-defaulting party must calculate a net settlement amount in accordance with the formula contained in the Electricity Swap Agreement. The party with the net settlement amount payment obligation must pay such amount to the other party within one business day of receipt from the non-defaulting party of notice of such calculation.
During the three and six months ended March 31, 2009, Universal incurred net settlement payments under the electricity swap agreements totaling $15.0 million (2008 - $11.0 million) and $27.2 million (2008 - $21.5 million). Included in accounts payable at March 31, 2009 is an amount owing of $7.4 million.
In addition, the Gas Purchase Agreements and the Electricity Swap Agreement contain financial margin requirements that commence on February 2, 2009 as well as other covenants. These agreements terminate on June 30, 2010. As at March 31, 2009 the balance in the blocked account which is included in restricted cash amounted to $5.0 million.
(b) During the three and six months ended March 31, 2009, the Company incurred expenses amounting to $0.166 million (2008 - $0.308 million) and $0.364 million (2008 - $0.476 million) for direct mail marketing services and rental expense to Market Connections Inc. and Ajax Estates Holdings Inc. in which certain officers and directors hold an equity interest. Included in accounts payable as at March 31, 2009 is an amount owing of $0.041 million.
(c) During the three and six months ended March 31, 2009, the Company incurred expenses amounting to $0.159 million and $0.357 million for collection services to Total Credit Recovery Ltd. in which a director holds an equity interest. Included in accounts payable as at March 31, 2009 is an amount owing of $0.009 million.
(d) TGF has entered into a credit support agreement with Vertex Oil & Gas Ltd., a company controlled by an officer and director, that allows TGF to enter into hedges and swaps to mitigate risk exposure to the volatility of ethanol pricing. At September 30, 2009 the TGF hedges and swaps were closed out. Included in accounts payable as at March 31, 2009 is an amount owing of $13.6 million which includes the final settlement amount of $13.3 million for the hedges and swaps that were closed out.
These transactions were conducted in the normal course of business on terms and rates agreed to by the Company and the related parties.
7. Critical Accounting Estimates
The preparation of financial statements in conformity with GAAP requires management of the Company to make estimates that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities as at the date of the financial statements and the reported amounts of revenue and expense during the reporting period. These estimates are based on assumptions and judgments that may be affected by commercial, economic and other factors. Actual results could differ from those estimates. The following assessment of critical accounting estimates is not meant to be exhaustive.
Fair value of derivative financial instruments
Universal enters into contracts with customers to provide electricity at fixed prices. These contracts expose Universal to changes in market prices to supply these commodities. To reduce the exposure to the commodity market price changes, Universal uses derivative financial contracts to secure fixed prices in respect of commodity supply matching its delivery obligations. Universal will hedge the estimated consumption requirements of its customers with offsetting volumes of electricity at fixed prices for terms equal to those of the customer contracts. The value of electricity contracts requires judgment and is based on market prices or management's best estimates if there is no market and/or if the market is illiquid.
The fair value of Universal's derivative financial instruments (which is currently limited to electricity swaps) is significantly influenced by the variability of forward spot prices for electricity. Period-to-period changes in forward spot prices for electricity could cause significant changes in the marked to market valuation of these derivatives. This accounting estimate was first implemented for the year ended September 30, 2006.
8. Controls and Procedures
(a) Disclosure Controls and Procedures
Management has designed disclosure controls and procedures, as defined by Multilateral Instrument 52-109 Certification of Disclosure in Issuers' Annual and Interim Filing ("MI 52-109"), to provide reasonable assurance that material information relating to the Company, including its consolidated subsidiaries, is made known to the Chief Executive Officer ("CEO") and the Chief Financial Officer ("CFO") by others within those entities, particularly during the period in which the interim filings are being prepared.
(b) Internal Control over Financial Reporting
There have been no changes in the Company's internal controls over financial reporting, as defined under MI 52-109, that occurred during the quarter ended December 31, 2008, that have materially affected, or are reasonably likely to materially affect, the Company's internal controls over financial reporting.
(c) Limitations on the Effectiveness of Disclosure Controls and Internal Control over Financial Reporting
The Company's management, including the CEO and CFO, do not expect that the Company's disclosure controls and procedures and internal controls over financial reporting will prevent all error and all fraud. A control system, no matter how well designed and implemented, can provide only reasonable, not absolute, assurance that the control system's objectives will be met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Due to the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues within a company are detected. The inherent limitations include the realities that judgments in decision-making can be faulty, and that breakdowns can occur because of simple errors or mistakes. Controls can also be circumvented by individual acts of some persons, by collusion of two or more people or by management override of the controls. Due to the inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and not be detected.
9. Changes in Accounting Policies and Recent Accounting Pronouncements
The CICA Accounting Standards Board ("AcSB") has adopted a strategic plan for the direction of accounting standards in Canada. The AcSB has recently confirmed that accounting standards in Canada for public companies are to converge with International Financial Reporting Standards ("IFRS") effective for fiscal periods beginning on or after January 1, 2011. The Company has launched an internal initiative to manage the conversion process and is currently evaluating the potential impact of the conversion to IFRS on its financial statements. At this time, the impact on the Company's future financial position and results of operations is being evaluated.
On January 20, 2009, the CICA issued Emerging Issues Committee Abstract 173 ("EIC 173"), Credit Risk and the Fair Value of Financial Assets and Financial Liabilities. EIC 173 requires that a company take into account its own credit risk and the credit risk of its counterparty in determining the fair value of financial assets and financial liabilities and derivative instruments. The Company adopted EIC 173 on a retrospective basis, without restatement of prior periods, effective October 1, 2008, resulting in an increase to retained earnings of $1.6 million.
10. Financial Instruments
(a) Fair value
(i) The Company has entered into contracts with customers to provide electricity at fixed prices ("customer electricity contracts"). The customer electricity contracts expose the Company to changes in market prices of electricity and consumption levels as the Company is obligated to pay the LDCs the floating rate for electricity supplied by the LDCs to the Company's customers. To reduce its exposure to changes in commodity prices arising from the acquisition of electricity at floating or indexed rates, the Company uses electricity derivative financial contracts ("electricity derivative contracts"). These electricity derivative contracts are fixed-for-floating swaps whereby the Company agrees with a counterparty to cash settle the difference between the floating or indexed price and the fixed price on a notional quantity of electricity for a specified time frame. The cash flow from these contracts is expected to be effective in offsetting the Company's electricity price exposure and serves to effectively fix the Company's acquisition cost of electricity to be delivered under the fixed price customer contracts. The fair value of derivative financial instruments is the estimated amount that the Company would pay or receive to settle these supply contracts in the market. The Company has estimated the value of these contracts using a discounted cash flow method which employs market forward curves.
At March 31, 2009, the Company had electricity fixed-for-floating swap contracts to which it has committed with the following terms:
(Thousands of dollars except where indicated) ---------------------------------------------------------------------------- Notional volumes 2.0 to 50.0 MW/h Total remaining notional volume 5,520,600 MWh Maturity dates April 1, 2009 to December 31, 2013 Fixed price ($/MWh) $43.86 to $91.37 Fair value $122,285 unfavourable Remaining notional value $384,923 ---------------------------------------------------------------------------- ----------------------------------------------------------------------------
(ii) The Company has entered into swaps and calls to mitigate risk exposure to changes in gas pricing. At March 31, 2009, the Company had swaps and calls to which it had committed with the following terms:
(Thousands of dollars except where indicated) ---------------------------------------------------------------------------- Notional volumes - Swap 2,500 to 30,000 MMBtu/M Total remaining notional volume 1,455,000 MMBtu Maturity dates April 1, 2009 to September 30, 2010 Fixed price (US$/MMBtu) $5.07 to $13.75 Fair value $2,881 unfavourable Remaining notional value $11,381 ---------------------------------------------------------------------------- ---------------------------------------------------------------------------- ---------------------------------------------------------------------------- Notional volumes - Call 10,000 to 30,000 MMBtu/M Total remaining notional volume 730,000 MMBtu Maturity dates April 1, 2009 to July 31, 2010 Fixed price (US$/MMBtu) $3.70 to $13.75 Fair value $96 unfavourable Remaining notional value $4,117 ---------------------------------------------------------------------------- ----------------------------------------------------------------------------
(iii) The settlements under commodity contracts during the three and six months ended March 31, 2009 of $16.0 million (2008 - $12.8 million) and $28.9 million (2008 - $23.4 million) represent the net settlement payments on the Company's commodity contracts during the period.
(iv) The current and non-current components of the unrealized loss on commodity contracts are shown below:
March 31 September 30
2009 2008
(Thousands of dollars) $ $
----------------------------------------------------------------------------
Current portion of unrealized loss on commodity
contracts 63,763 42,719
Non-current portion of unrealized loss on
commodity contracts 61,499 51,196
----------------------------------------------------------------------------
Total unrealized loss on commodity contracts 125,262 93,915
----------------------------------------------------------------------------
----------------------------------------------------------------------------
(b) Additional financial instruments disclosure
The following table represents the fair values and carrying amounts of financial assets and liabilities measured at fair value or amortized cost.
(Thousands of
dollars) March 31, 2009 Setpember 30, 2008
Fair value Carrying amount Fair value Carrying amount
Asset/Liability $ $ $ $
--------------- -----------------------------------------------------
Cash and cash
equivalents 17,513 17,513 79,162 79,162
Restricted cash 18,940 18,940 17,984 17,984
Accounts receivable 141,110 141,110 52,015 52,015
Production contract
advances 1,356 1,356 3,796 3,796
Accounts payable
and accrued
liabilities 96,765 96,765 63,131 63,131
Long-term debt 154,619 177,291 173,023 177,840
The fair values of cash and cash equivalents, restricted cash, accounts receivable, production contract advances, accounts payable and accrued liabilities approximate their carrying amounts due largely to the short-term maturities of these financial instruments. The fair value of the convertible debentures is based on the market price at the balance sheet date. The carrying amount of the convertible debenture does not include the equity component of the convertible debenture in the amount of $9.5 million.
(i) Credit risk
In Maryland, Georgia and California, GEM has customer credit risk and credit review and collection processes are in place to manage customer default in these markets. If a significant number of customers were to default on their payments it could have a significant effect on the Company's cash flows from these markets. For the remaining GEM markets and NHS the LDCs provide collection services and assume the risk of any bad debts owing. GEM and NHS receive the collection of customer account balances directly from the LDCs. Management believes that the risk of the LDCs failing to deliver payment to GEM is minimal. However, there is a possibility that the NHS billing arrangement may not be renewed when it expires in June 2009. If that were to occur, and NHS could not enter into an alternative collection services agreement, NHS would have to implement direct billing to its customers which could result in increased levels of bad debt.
TGF entered into agreements with wheat producers to supply suitable grain for ethanol production and provided production advances to the farmers. The default rate from these advances is expected to be in line with that of the industry and an appropriate provision has been recorded.
(ii) Liquidity risk
GEM purchases its natural gas and enters into offsetting electricity swaps with a variety of suppliers. GEM is reliant upon the ongoing revenues from its customer base to maintain its contractual commitment under these agreements. Management believes that the potential loss of revenue from customer attrition can be managed to ensure that GEM meets its contractual commitments under its commodity supply contract.
The Company has interest and debt repayment obligations under the convertible debenture issue and TGF has interest and debt repayment obligations under the credit facilities and debentures. The Company and TGF are reliant on the cash flows generated from their operations to fund their debt repayment obligations and TGF is reliant on the continued support of its lenders.
(iii) Market risk
The fair values of the Company's financial instruments are significantly influenced by the variability of forward spot prices for electricity and gas. Period to period changes in forward spot prices could cause significant changes in the marked to market valuation ("MTM valuation") of these contracts, as shown below:
Fair Value 1% 1% 5% 5%
(Thousands of dollars) (unfavourable) increase decrease increase decrease
------------ -----------------------------------
(Percentage change in fair values)
Electricity swaps -
Universal ($120,384) (2.0%) 2.0% (10.2%) 10.2%
Electricity swaps -
Commerce ($1,901) (2.6%) 2.6% (12.7%) 12.7%
Natural gas swaps and
calls ($2,977) (4.2%) 4.2% (21.0%) 21.0%
(iv) Foreign currency risk
The Company has an exposure to foreign currency exchange rates, as a result of its investment in its United States operations.
(v) Interest rate risk
At March 31, 2009 the Company had variable rate debt in the amount of $58.9 million and the effect of a 1% change in the interest rate charged on its variable debt will impact interest expense in the amount of $0.589 million per annum.
11. Outstanding Share Data
As at March 31, 2009 and as at May 14, 2009, there were 36,299,228 common shares of the Company outstanding. In addition, as at those dates the Company had outstanding $90.0 million principal amount of 6% convertible unsecured subordinated debentures that are convertible into a total of 4,118,400 common shares and had a total of 2,515,751 common shares reserved for issuance on exercise of outstanding options and restricted share units.
12. Risks and Uncertainties
The Company 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, and the trading price of the Company's securities. A comprehensive discussion of these risks can be found in the Company's most recently filed Annual Information Form which is available from SEDAR through its website at www.sedar.com. There have been no material changes that require an update to the discussion of the applicable risks found in the Company's most recently filed Annual Information Form. These risks include:
(a) risks relating to the Company's retail electricity and natural gas business, including risks relating to: Universal's inability to contract for supply of natural gas and electricity swap agreements; Universal's reliance on Sempra; hedging, balancing and market risks relating to matching the estimated electricity and natural gas requirements of Universal's customers; volatility of commodity prices; the enforcement of Universal's energy supply contracts; the availability of credit; changes in the legislative and regulatory environment; energy trading inherent risks; Universal's dependence on its management information system; Universal's dependence on LDCs; competition; Universal's reliance on its independent contractors; Universal's ability to renew energy supply contracts at the expiration of their terms; customer attrition; customers choosing other energy sources; exposure to fluctuations in currency exchange rates and dependence on key personnel;
(b) risks relating to the Company's ethanol business, including risks relating to: the possibility that there are inaccurate assumptions in TGF's business plan; TGF's reliance on the contractor retained to construct the ethanol plant; defective material, workmanship or process engineering affecting the Ethanol plant; construction or operational delays; the condition of the construction site on which the ethanol plant has been constructed; TGF's dependence on the Ethanol plant; TGF's reliance on intellectual property rights and proprietary technology; third party claims for infringement in respect of certain proprietary technology to be used by TGF; cost overruns at the Ethanol plant; TGF's limited operating history; TGF's dependence on commodity prices, including the spread between ethanol and wheat prices, TGF's sensitivity to wheat prices and supply, TGF's sensitivity to natural gas prices and supply, TGF's sensitivity to gasoline prices and demand, sensitivity of distillers grains prices to the price of other commodity products and seasonal fluctuations affecting commodity prices; TGF's reliance on third party service providers; TGF's dependence on federal and provincial legislation and regulations; the uncertainty regarding the long term use of ethanol; the existence of excess supplies of ethanol; competition; TGF's inability to execute its expansion strategy; TGF's inability to execute future acquisitions successfully or at all; TGF's use of hedging transactions and other risk management strategies; changes to environmental, health and safety laws and regulations and potential exposure to environmental, health and safety liabilities; disruptions to infrastructure on which TGF relies or to the supply of fuel or natural gas; TGF's dependence on its key personnel; technological advances that may make the Ethanol plant less efficient or obsolete; TGF's use of leverage and obligation to comply with restrictive loan covenants; TGF's obligation to service its debt and exposure to variations in interest rates and TGF's exposure to fluctuations in currency exchange rates;
(c) risks relating to the Company's water heaters rental business, including risks relating to: billing arrangements including NHS's reliance on Enbridge Gas Distribution Inc. ("EGD") in providing billing and collection services to NHS and the risk of adverse developments in the business, affairs, management or financial strength of EGD, the pending expiry of the OBA and New Receivables Trust Agreement on June 30, 2009 and the risk that consolidated billing with EGD would cease and NHS will have to perform the billing and collection services and issue stand-alone bills in the EGD billing territory, either itself or through contracts with other third parties; regulatory changes including changes to any of the laws, rules, regulations or policies respecting the installation, servicing or billing practices in relation to water heaters or water heater design; competition; social or technological changes including changes in homeowners' rental practices the development of more economical or efficient water heating technology or changes in the economic conditions in which the current technology is applied; changes in the useful life of water heaters; the concentration of NHS's suppliers and potential product faults; the geographic concentration of NHS's business in the province of Ontario; and
(d) general risks, including risks relating to: the Company's inability to secure financing in the future; the existence of conflicts of interest pertaining to the Company's directors and officers; income tax matters; the Company's dependence on its subsidiaries; increases in operating costs; the existence of potential unknown liabilities in connection with the acquisitions pursuant to which it acquired Universal, TGF and Commerce; the Company's limited operating history as a public company; future sales of common shares by significant shareholders negatively affecting the market price of the common shares; the issuance of common shares from treasury in the future diluting investors' interest in the Company; the limited ability of the Company to recover from the selling shareholders for breaches of the acquisition agreements pursuant to which it acquired Universal and TGF; and the possibility that the market price of the common shares will be unpredictable and volatile.
13. Outlook
(a) Impact of Current Economic Conditions
It is anticipated that the current economic instability stemming from the credit markets turmoil will not have a significant impact on the Company's existing gas and electricity and home services customer bases. The revenue streams for GEM's operations in Ontario, British Columbia, Michigan, New York, Pennsylvania, New Jersey and Ohio and NHS are relatively secure as the LDCs provide collection services and assume the risk of any bad debts owing. In addition, utility bills tend to be the last to go unpaid in times of financial difficulty. In Canada while new housing activity has declined, foreclosures have not been as noteworthy as the levels seen in the United States.
In Maryland, Georgia and California the Company has credit risk, billing responsibility and collection responsibility. In these United States markets the attrition rates have been higher due to record foreclosures and utility shutoffs. However, as these customer accounts were recently acquired as part of the Commerce acquisition much of the attrition effect was already felt prior to the acquisition and higher bad debt losses were not seen since acquisition. However, there can be no assurance that bad debts will not increase during an extended recession.
Based on current analysis and enquiry performed, management has no reason to believe that the financial position of the Company's commodity and water heater suppliers and the banks securing letters of credit are not financially viable.
Present economic weakness in the global credit markets may, however, make it challenging for the Company to borrow funds or raise new equity and this could have an impact on the future growth of the business units of the Company.
(b) Gas and Electricity Marketing Division
The operational margins which GEM has secured with existing customers are expected to exceed its projected selling and administrative costs and to generate pretax profits. Operational margins are substantially fixed based on the contracted price in the energy contracts against the price payable under the natural gas supply, electricity supply and electricity swaps arranged by GEM. GEM must manage natural gas balancing arising from the difference between its hedged supply and actual usage and electricity usage in excess of the amounts that it balances under the electricity contracts. Further, it must manage customer attrition to allow it to maintain expected operational margin per unit. Management believes that balancing and attrition can be managed so as not to materially affect operational margin. Furthermore, through marketing programs GEM expects to add new customers and accordingly increase its revenues and aggregate operational margins. GEM expects that the funding requirements related to new growth including planned expansion into new markets and acquisitions will firstly be funded by cash flow from operations and working capital and as required by raising funds from the financial markets.
GEM continues to experience steady growth in revenue and operational margin as the number of flowing customers increase with each successive reporting period. Canadian attrition continues to be close to the target level of 12% and United States attrition is within the target level of 25%. GEM continues to assess growth opportunities by looking at new energy markets and will favour markets that fit with its existing sales, supply and technology infrastructure and which provide collection services. In November 2008, GEM entered the New York electricity and natural gas markets with a variable rate offering to residential and small commercial customers. Sales to date continue to meet expectations. With the completion of the Commerce acquisition management has commenced rationalization of the Commerce business, has disposed of accounts in markets that do not fit in with GEM's growth strategy and continues to transition the Commerce book of business over to GEM's technology infrastructure. Now that Commerce operations has stabilized management is directing its resources to new markets and in early May 2009 commenced marketing activities in Ohio. Management expects to see customer additions return to historic growth levels over the next few quarters. GEM will continue to focus on increasing the operational margin derived from its customers through the addition of new customers without requiring incremental overhead to support these customers.
(c) Ethanol Division
On April 15, 2009, TGF completed a series of transactions with EllisDon Design Build Inc. ("EllisDon") including the exchange of mutual releases of pending litigation and the release of the construction lien filed against the Belle Plaine ethanol facility. Under the terms of the settlement agreement, the Company has agreed to convert its existing debt in TGF, plus accrued interest, to Class E shares of TGF and EllisDon has agreed to make an equity investment in TGF of $10 million, settlement of the lien claim and provide other consideration for a one-third equity interest in TGF. Under the terms of the settlement agreement, if certain financial performance criteria are not met, EllisDon will be entitled to convert its $10 million cash investment into equity of the Company, or its successor, in December 2010 at the then prevailing market price. TGF envisions this course of action will give the Belle Plaine facility the best opportunity to maximize plant production in the shortest period of time and realize the full upside potential of the facility. EllisDon remains responsible for the cost of correcting the plant deficiencies with the main area to be addressed being the grain milling system.
(d) Home Services Division
The NHS long-term water heater program continues to expand its rental presence in Ontario. Further capital expenditures are required to continue growing NHS' install base. NHS continues to see a steady increase in installation trends as it expands its installation capacity through the addition of field representatives and the recruitment of installation and service technicians.
(e) Arrangement Agreement with Energy Savings Income Fund ("ESIF")
On April 22, 2009, the Company entered into a definitive agreement (the "Arrangement Agreement") with ESIF pursuant to which ESIF will propose to acquire all of the outstanding common shares of the Company. The plan of arrangement will provide for a share exchange through which each outstanding share of the Company will be exchanged for 0.58 of a share (the "Exchangeable Shares") of a subsidiary of ESIF. Each Exchangeable Share will be exchangeable into one ESIF trust unit at any time at the option of the holder, for no additional consideration. The Exchangeable Shares will pay a monthly dividend equal to 66 2/3% of the monthly distribution paid on an ESIF unit. The issue of the Exchangeable Shares will allow the Company's shareholders to receive the consideration under the arrangement on a tax-deferred basis for Canadian income tax purposes. Based on the closing price of the ESIF units of $12.40 on April 21, 2009, the Company's shareholders receive approximately $7.19 per share in Exchangeable Shares pursuant to the transaction. The exchange ratio represents an approximate 42.9% premium for the UEG shares to the 30-day weighted-average trading price of such shares ending April 10, 2009, the last trading day preceding the date ESIF and the Company first announced that they were in discussions respecting a proposed acquisition. The transaction is subject to the approval of the Company's shareholders, the receipt of regulatory approvals, and other closing conditions. The Company is expected to make its quarterly dividend payment of $0.1875 per share, subject to pro-ration based upon the closing date and a corresponding adjustment to the conversion feature of the Company's outstanding 6% convertible unsecured subordinated debentures in accordance with their terms, the transaction is expected to close in late June 2009.
14. Additional Information
Additional information relating to the Company including the Company's most recently filed Annual Information Form is available on SEDAR (www.sedar.com) and on the Company's website at www.universalenergygroup.ca.
Interim Consolidated Financial Statements
For the three and six months ended March 31, 2009 and 2008
----------------------------------------------------------------------------
----------------------------------------------------------------------------
UNIVERSAL ENERGY GROUP LTD.
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Consolidated Balance Sheets
(Unaudited - thousands of dollars)
March 31 September 30
2009 2008
$ $
----------------------------------------------------------------------------
ASSETS
Current Assets
Cash 17,513 79,162
Restricted cash Note 10, 15 8,940 4,984
Accounts receivable Note 6 141,110 52,015
Inventory Note 7 13,001 14,848
Gas over delivered - 36,259
Unbilled gas revenues 7,242 -
Current portion of
production contract
advances 1,356 3,796
Current portion of
future taxes 20,522 15,673
----------------------------------------------------------------------------
209,684 206,737
Restricted cash Note 10 10,000 13,000
Property, plant Note 8
and equipment 158,393 152,660
Future taxes 32,646 27,071
Intangible assets 6,369 3,981
Goodwill Note 9 - 70,460
----------------------------------------------------------------------------
417,092 473,909
----------------------------------------------------------------------------
----------------------------------------------------------------------------
LIABILITIES
Current Liabilities
Accounts payable and accrued
liabilities 96,765 63,131
Gas under delivered 5,712 -
Deferred gas revenues - 42,427
Current portion of unrealized
loss on commodity contracts Note 18 63,763 42,719
Current portion
of long-term debt Note 10 60,918 63,221
----------------------------------------------------------------------------
227,158 211,498
Unrealized loss on commodity
contracts Note 18 61,499 51,196
Long-term debt Note 10 116,373 114,619
----------------------------------------------------------------------------
405,030 377,313
----------------------------------------------------------------------------
SHAREHOLDERS' EQUITY
Share capital Note 11 248,204 248,204
Contributed surplus Note 11 5,880 4,465
Equity component of convertible
debenture Note 10 9,507 9,507
Deficit (253,335) (166,115)
Accumulated other comprehensive
income 1,806 535
----------------------------------------------------------------------------
12,062 96,596
----------------------------------------------------------------------------
Commitments and contingency Note 16
Subsequent events Note 21
417,092 473,909
----------------------------------------------------------------------------
----------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
Approved on behalf of the Board:
Gary J. Drummond, Director Mark L. Silver, Director
----------------------------------------------------------------------------
----------------------------------------------------------------------------
UNIVERSAL ENERGY GROUP LTD.
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Consolidated Statements of Deficit
For the six months ended March 31
(Unaudited - thousands of dollars)
2009 2008
$ $
----------------------------------------------------------------------------
Deficit, beginning of period (166,115) (157,767)
Adoption of new accounting standard Note 4(a) 1,605 -
----------------------------------------------------------------------------
Adjusted deficit, beginning of period (164,510) (157,767)
Net income/(loss) for the period (75,213) 16,666
----------------------------------------------------------------------------
(239,723) (141,101)
Dividends paid (13,612) -
----------------------------------------------------------------------------
DEFICIT, END OF PERIOD (253,335) (141,101)
----------------------------------------------------------------------------
----------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
----------------------------------------------------------------------------
----------------------------------------------------------------------------
UNIVERSAL ENERGY GROUP LTD.
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Consolidated Statements of Comprehensive Income/(Loss) and Accumulated
Other Comprehensive Income
For the six months ended March 31
(Unaudited - thousands of dollars)
2009 2008
$ $
----------------------------------------------------------------------------
Net income/(loss) for the period (75,213) 16,666
----------------------------------------------------------------------------
Other comprehensive income:
Unrealized gains on translating financial
statements of self-sustaining
foreign operations 1,271 96
----------------------------------------------------------------------------
Other comprehensive income/(loss) 1,271 96
----------------------------------------------------------------------------
Comprehensive income/(loss) (73,942) 16,762
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Accumulated other comprehensive income, beginning
of period 535 211
Other comprehensive income/(loss) 1,271 96
----------------------------------------------------------------------------
ACCUMULATED OTHER COMPREHENSIVE INCOME,
END OF PERIOD 1,806 307
----------------------------------------------------------------------------
----------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
----------------------------------------------------------------------------
----------------------------------------------------------------------------
UNIVERSAL ENERGY GROUP LTD.
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Consolidated Statements of Operations
(Unaudited - thousands of dollars except per share amounts)
For the three months For the six months
ended March 31 ended March 31
2009 2008 2009 2008
$ $ $ $
----------------------------------------------------------------------------
REVENUE
Gas 161,847 101,930 234,874 141,967
Electricity 80,746 46,638 138,299 86,703
Ethanol 16,197 - 28,662 -
Home services 541 - 823 -
----------------------------------------------------------------------------
259,331 148,568 402,658 228,670
----------------------------------------------------------------------------
COST OF SALES
Gas 131,037 85,394 191,622 118,411
Electricity 45,406 26,707 77,019 48,950
Ethanol 14,900 - 24,576 -
----------------------------------------------------------------------------
191,343 112,101 293,217 167,361
----------------------------------------------------------------------------
GROSS MARGIN 67,988 36,467 109,441 61,309
----------------------------------------------------------------------------
EXPENSES
Customer acquisition
costs 5,442 4,804 10,456 13,122
General and
administrative 17,902 8,950 30,220 15,146
Financing charges 3,683 1,831 7,232 3,691
Stock-based compensation 750 1,009 1,415 2,018
Amortization 2,343 186 3,778 329
----------------------------------------------------------------------------
30,120 16,780 53,101 34,306
----------------------------------------------------------------------------
Income before other
income/(expense) 37,868 19,687 56,340 27,003
OTHER INCOME/(EXPENSE)
Gain on sale of
customer
contracts 992 - 992 -
Settlements
under
commodity
contracts Note 18 (15,980) (12,814) (28,946) (23,354)
Unrealized
gain/(loss)
on commodity
contracts Note 18 (30,522) 22,632 (31,413) 23,462
Goodwill
impairment
loss Note 9 (70,460) - (70,460) -
Other Note 13 2,406 1,886 3,627 3,178
----------------------------------------------------------------------------
(113,564) 11,704 (126,200) 3,286
----------------------------------------------------------------------------
Income/(loss) before
income tax (75,696) 31,391 (69,860) 30,289
Income tax 2,024 13,221 5,353 13,623
----------------------------------------------------------------------------
NET INCOME/(LOSS) FOR
THE PERIOD (77,720) 18,170 (75,213) 16,666
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Basic earnings
/(loss)
per share Note 14 (2.14) 0.50 (2.07) 0.46
Diluted
earnings
/(loss)
per share Note 14 (2.14) 0.49 (2.07) 0.45
See accompanying notes to consolidated financial statements.
----------------------------------------------------------------------------
----------------------------------------------------------------------------
UNIVERSAL ENERGY GROUP LTD.
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Consolidated Statements of Cash Flows
(Unaudited - thousands of dollars)
For the three months For the six months
ended March 31 ended March 31
2009 2008 2009 2008
$ $ $ $
----------------------------------------------------------------------------
CASH FLOWS FROM OPERATING
ACTIVITIES
Net income/(loss) for
the period (77,720) 18,170 (75,213) 16,666
Items not affecting cash:
Amortization 2,343 186 3,778 329
Goodwill impairment loss 70,460 - 70,460 -
Stock-based compensation 750 1,009 1,415 2,018
Financing charges, non-cash
portion 375 350 758 700
Unrealized gain/(loss) on
commodity contracts 30,405 (22,632) 31,295 (23,462)
Future taxes (10,223) 11,299 (11,235) 11,694
----------------------------------------------------------------------------
16,390 8,382 21,258 7,945
Changes in non-cash working
capital items:
Accounts receivable and
production contract
advances 17,212 (8,631) (10,623) (19,806)
Inventory 8,712 (3,656) 8,655 (6,979)
Gas over delivered 50,663 37,792 45,919 31,089
Deferred gas revenues (58,988) (45,712) (54,268) (38,098)
Accounts payable and
accrued liabilities (16,915) (3,131) (4,463) 1,500
----------------------------------------------------------------------------
Cash provided by/(used in)
operating activities 17,074 (14,956) 6,478 (24,349)
----------------------------------------------------------------------------
CASH FLOWS USED IN INVESTING
ACTIVITIES
Acquisition of Commerce, net - - (32,015) -
Acquisition of gas contracts - (1,779) - (1,779)
Restricted cash 2,623 (1,662) 770 (2,619)
Deposits to secure commodity
supply (10,712) (270) (13,065) (1,289)
Property, plant and equipment (5,748) (6,681) (8,997) (26,172)
----------------------------------------------------------------------------
Cash used in investing
activities (13,837) (10,392) (53,307) (31,859)
----------------------------------------------------------------------------
CASH FLOWS FROM FINANCING
ACTIVITIES
Issuance of common shares - 14 - 14
Issuance of convertible
debenture, net of issue
costs - 52 - 86,695
Advances/(repayments) under
debt facilities, net (5,044) 12,033 (1,307) 31,896
Dividends paid (6,806) - (13,612) -
----------------------------------------------------------------------------
Cash provided by/(used in)
financing
activities (11,850) 12,099 (14,919) 118,605
----------------------------------------------------------------------------
Unrealized gain/(loss) on
foreign exchange
translation (1,021) (539) 99 (374)
----------------------------------------------------------------------------
NET INCREASE/(DECREASE)
IN CASH (9,634) (13,788) (61,649) 62,023
CASH, BEGINNING OF PERIOD 27,147 89,189 79,162 13,378
----------------------------------------------------------------------------
CASH, END OF PERIOD 17,513 75,401 17,513 75,401
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Supplemental information:
Property, plant and
equipment in
accounts payable 8,957 16,671 8,957 16,671
Interest paid 4,663 1,807 6,529 3,337
----------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
----------------------------------------------------------------------------
----------------------------------------------------------------------------
UNIVERSAL ENERGY GROUP LTD.
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Notes to Interim Consolidated Financial Statements
For the three and six months ended March 31, 2009 and 2008
(Unaudited - thousands of dollars except as indicated and per share amounts)
1. Interim financial statements
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. These interim financial statements do not include all the note disclosures required for annual financial statements and therefore should be read in conjunction with Universal Energy Group Ltd.'s audited consolidated financial statements for the years ended September 30, 2008 and 2007.
2. Organization
Universal Energy Group Ltd. (the "Company") is incorporated under the Canada Business Corporations Act. The Company carries on business through three operating divisions. The Gas & Electricity Marketing Division ("GEM") carries on the Company's retail natural gas and electricity marketing business through various operating subsidiaries: in Canada through Universal Energy Corporation ("Universal"), in Michigan through Universal Gas and Electric Corporation ("UGE"), in New York through Wholesale Energy New York Inc. ("WENY") and in all other markets through Commerce Energy, Inc. ("Commerce"). The Home Services Division carries on the Company's water heater rental business through National Energy Corporation ("NEC") operating under the trade name National Home Services ("NHS"). The Ethanol Division carries on the Company's ethanol manufacturing business in Belle Plaine, Saskatchewan through Terra Grain Fuels Inc. ("TGF").
3. Business acquisition
On December 11, 2008 the Company, through its wholly owned subsidiary, Commerce Gas and Electric Corp. ("CGE"), acquired all of the issued and outstanding shares of Commerce for cash consideration $35,121 (US$28,468). The acquisition of Commerce will be accounted for using the purchase method with Commerce's results of operations from the date of acquisition included in the Company's consolidated financial statements for this period.
The Company has made a preliminary purchase price allocation based on management's best estimate of the fair value of the assets and liabilities acquired. The fair value of the net assets acquired exceed the acquisition cost resulting in negative goodwill which has been used to reduce the value of the non-monetary assets acquired. Accordingly the intangible assets have been recorded at $2,839. The final purchase price allocation may differ and will be finalized in future periods.
Net assets acquired: $
------------------- --------
Cash 3,106
Accounts receivable 59,925
Gas inventory 6,792
Gas and electricity customer contracts 2,839
--------
72,662
Less: Accounts payable and other current liabilities (37,541)
--------
35,121
--------
--------
4. Summary of significant accounting policies
(a) Change in accounting policies and recent accounting pronouncements
The CICA Accounting Standards Board ("AcSB") has adopted a strategic plan for the direction of accounting standards in Canada. The AcSB has recently confirmed that accounting standards in Canada for public companies are to converge with International Financial Reporting Standards ("IFRS") effective for fiscal periods beginning on or after January 1, 2011. The Company has launched an internal initiative to manage the conversion process and is currently evaluating the potential impact of the conversion to IFRS on its financial statements. At this time, the impact on the Company's future financial position and results of operations is being evaluated.
On January 20, 2009, the CICA issued Emerging Issues Committee Abstract 173 ("EIC 173"), Credit Risk and the Fair Value of Financial Assets and Financial Liabilities. EIC 173 requires that a company take into account its own credit risk and the credit risk of its counterparty in determining the fair value of financial assets and financial liabilities and derivative instruments. The Company adopted EIC 173 on a retrospective basis, without restatement of prior periods, effective October 1, 2008, resulting in an increase to retained earnings of $1,605.
(b) Principles of consolidation
The consolidated financial statements have been prepared in accordance with Canadian generally accepted accounting principles and include the accounts of the Company and its subsidiaries, Universal, UGE, WENY, Commerce, TGF and NEC. Intercompany balances and transactions are eliminated on consolidation.
(c) Use of estimates
The preparation of the financial statements requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates. In particular, valuation techniques such as those used in the preparation of fair values are significantly affected by the assumptions used and the amount and timing of estimates. The aggregate fair value amounts represent point in time estimates only and should not be interpreted as being realizable in an immediate settlement.
(d) Cash
Cash comprises cash on hand and cash equivalents. Cash investments with an original maturity of three months or less when purchased are considered to be cash equivalents.
(e) Inventory
Natural gas in storage, ethanol, ethanol in process and grain inventory are valued at the lower of cost and net realizable value with cost being determined on a weighted average basis. Water heaters held for installation are valued at the lower of cost and net realizable value, with cost determined on a first in, first out basis.
(f) Gas over delivered/Deferred gas revenues and Unbilled revenues/Gas under delivered
Natural gas is delivered to local distribution companies ("LDCs") in pre-determined fixed monthly or daily amounts. Natural gas delivered to LDCs in excess of consumption by customers (gas over delivered) is stated as an asset at the lower of cost and net realizable value. Collections from LDCs in advance of customer consumption of natural gas result in a liability shown as deferred gas revenues.
Unbilled revenues arise when customers consume more natural gas than has been delivered to LDCs and is stated as an asset at realizable value. Gas under delivered represents an obligation to the LDCs with respect to natural gas consumed by customers in excess of that delivered to the LDCs. Natural gas under delivered is valued at the average cost of natural gas purchases made during the period in which the under delivery occurs.
(g) Property, plant and equipment
Property, plant and equipment are recorded at cost less accumulated amortization. Amortization is provided for over the estimated useful lives of the assets, as follows:
Asset Basis Rate ----- ----- ---- Computer hardware Declining balance 30% Computer software Straight line 5 years Furniture and fixtures Declining balance 20% Office equipment Declining balance 20% Leasehold improvements Straight line Term of lease Ethanol plant Straight line 15 to 25 years Water heaters Straight line 14 years
Property, plant and equipment are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of long-lived assets to be held and used is measured by a comparison of the carrying amount of an asset to estimated undiscounted future cash flows expected to be generated by the asset. If the carrying amount of an asset exceeds its fair value, an impairment charge is recognized by the amount by which the carrying amount of the asset exceeds the fair value of the asset. Long-lived assets to be disposed of are separately presented in the consolidated balance sheet and reported at the lower of the carrying amount or fair value, less costs to sell, and are no longer amortized. The assets and liabilities of a group classified as held for sale would be presented separately in the appropriate asset and liability sections of the consolidated balance sheet.
All direct and start-up costs, including interest costs, incurred in the construction of the ethanol plant to August 1, 2008 were capitalized.
Water heaters are carried at cost less accumulated depreciation. Cost includes the purchase price of the equipment and the cost of installation. For water heaters, the Company applies the group depreciation method and determines depreciation based on the original installed cost of the rental asset on a straight-line basis over the estimated remaining useful life of the group of assets.
(h) Goodwill
Goodwill represents the price paid for acquisitions in excess of the fair market value of net tangible and intangible assets acquired. Goodwill is carried at cost, less impairment losses if any. The Company uses a two-step impairment test on an annual basis, or when significant business changes have occurred that may have had an adverse impact on the fair value of goodwill. To determine whether impairment has occurred, the fair value of the reporting unit is compared to its carrying amounts, including goodwill. When the fair value is in excess of its carrying amount, goodwill is not considered to be impaired, and the second step of the impairment test is not necessary. When the carrying amount of the reporting unit as determined in the first step exceeds the fair value, then the fair value of goodwill is determined in the same manner as followed on a business combination. The excess of the fair value of the reporting unit over the amounts assigned to its assets and liabilities is the fair value of goodwill. An impairment loss is recognized when the carrying amount of the goodwill of a reporting unit exceeds its fair value. It is not reversed in the event that the fair value subsequently increases.
Effective October 1, 2008, the Company has adopted Section 3064, "Goodwill and Other Intangible Assets". The adoption of the new standard has not had a material impact on the Company's unaudited interim consolidated financial statements.
(i) Intangible assets
The Company uses the provisions of CICA Handbook Section 1581, "Business Combinations" and Section 3064, "Goodwill and Other Intangible Assets" to determine the value of intangible assets acquired in an acquisition. In determining the value, the Company considers the expected impact on cash flows of the asset, the inherent uncertainty of estimates, and the time value of money. Intangible assets that have a definite life are amortized on a straight line basis over the life of the underlying asset and are further tested for impairment if events or circumstances indicate that the assets might be impaired.
Intangible assets represent the fair value of customer natural gas and electricity contracts acquired. These contracts are amortized over their average estimated remaining life.
(j) Convertible debenture
Convertible debentures are classified as long-term debt and equity at their respective fair values. The fair value of the debt component has been determined based on the Company's incremental borrowing cost for similar debt without a conversion feature. The amount of the equity component is the residual after deducting the amount of the debt component from the face value of the issue.
(k) Derivative instruments
Unrealized changes in the fair value of swaps generally referred to as marked to market gains/(losses), are recognized as unrealized gain/(loss) on commodity contracts in the consolidated statement of operations. The gas purchase contracts, the gas and electricity customer contracts and the ethanol sales contracts are accounted for as executory contracts.
(l) Foreign currency translation
The Company's currency of measurement in its consolidated financial statements is the Canadian dollar. Its United States subsidiaries are considered self-sustaining foreign operations. Assets and liabilities are translated into the reporting currency at the exchange rate in effect at the consolidated balance sheet date. Revenue and expense items are translated into the reporting currency at the average rates of exchange in effect for the period. Gains or losses on translation are deferred and reported as a component of accumulated other comprehensive income.
(m) Revenue recognition
The Company delivers electricity and/or natural gas to end-use customers who have entered into variable rate and long-term fixed price or price protected contracts and recognizes revenue when the electricity and/or natural gas is consumed by the end-use customer. For ethanol and dried distillers grain, revenue is recognized upon delivery to customers at terminals or other locations. Revenue on water heater rentals is recognized based on monthly rental income.
(n) Customer acquisition costs
Commissions and other direct selling expenses incurred to acquire customers are charged to income in the period in which the customer is acquired. Other direct selling expenses are charged to income as incurred.
(o) Stock-based compensation
(i) Stock options
The Company uses the fair value method to account for the cost of stock options granted. The fair value of these stock options is determined using the Black-Scholes options-pricing model. The Company determines the fair value of stock options on their grant date and records the fair value as compensation expense on a straight line basis over the period the stock options vest, with a corresponding increase to contributed surplus. When these stock options are exercised, the amounts of the proceeds, together with the amounts recorded in contributed surplus, are recorded in share capital.
(ii) Restricted share units
For equity-settled restricted share units ("RSUs"), stock-based compensation, representing the underlying value of the common shares of the Company at the date of grant of the RSUs, is recognized on a straight line basis over the vesting period. The measurement of the compensation costs for these awards is based on the fair value of the award at the grant date and is recorded as a charge to income on a straight line basis over the vesting period of the award.
(p) Income taxes
The Company uses the asset and liability method of accounting for income taxes. Under the asset and liability method, future tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Future tax assets and liabilities are measured using enacted or substantively enacted tax rates expected to apply to taxable income in the periods in which those temporary differences are expected to be recovered or settled. The effect on future tax assets and liabilities of a change in tax rates is recognized in income in the period of enactment or substantive enactment of such tax rates.
5. Seasonality of operations
The Company's 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.
6. Accounts receivable
March 31 September 30
2009 2008
$ $
----------------------------------------------------------------------------
Trade receivables 77,336 41,784
Utility holdbacks 7,678 2,705
Security deposits 45,586 3,696
Other accounts receivable 10,510 3,830
----------------------------------------------------------------------------
141,110 52,015
----------------------------------------------------------------------------
----------------------------------------------------------------------------
The security deposits relate primarily to cash deposits to secure commodity
supply for GEM.
7. Inventory
March 31 September 30
2009 2008
$ $
----------------------------------------------------------------------------
Gas in storage 1,778 -
Grain inventory 8,069 11,867
Ethanol and ethanol in process 2,109 2,333
Water heaters held for installation 1,045 648
----------------------------------------------------------------------------
13,001 14,848
----------------------------------------------------------------------------
----------------------------------------------------------------------------
8. Property, plant and equipment
Accumulated Net
Cost amortization book value
March 31, 2009 $ $ $
----------------------------------------------------------------------------
Computer hardware and software 2,300 878 1,422
Furniture, fixtures and equipment 1,933 744 1,189
Leasehold improvements 731 287 444
Water heaters 11,211 364 10,847
Ethanol plant and land 148,418 3,927 144,491
----------------------------------------------------------------------------
164,593 6,200 158,393
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Accumulated Net
Cost amortization book value
September 30, 2008 $ $ $
----------------------------------------------------------------------------
Computer hardware and software 1,948 680 1,268
Furniture, fixtures and equipment 1,755 623 1,132
Leasehold improvements 615 221 394
Water heaters 3,585 128 3,457
Ethanol plant and land 147,390 981 146,409
----------------------------------------------------------------------------
155,293 2,633 152,660
----------------------------------------------------------------------------
----------------------------------------------------------------------------
9. Goodwill
CICA Handbook section 3062 requires goodwill to be tested for impairment on an annual basis or more frequently if events or circumstances indicate that the carrying amount may not be recoverable. During this quarter, certain events and circumstances arose that indicated that a further test for impairment was required as the ethanol facility continued to face operating challenges and an arrangement to sell one-third of the ethanol facility was entered into (see Note 21).
The impairment test requires the Company to estimate the fair value of the Ethanol reporting segment and compare it to the segment's carrying value. The estimated fair value of the Ethanol reporting segment was lower than its carrying value, indicating a potential impairment, which required the Company to perform an additional analysis. Based on this analysis it was determined that the carrying value of goodwill exceeded the fair value and a non-cash write-down of $70,460 was required for goodwill related to the Ethanol reporting segment.
10. Financing facilities
March 31 September 30
2009 2008
$ $
----------------------------------------------------------------------------
Credit facility (a)(i) 43,699 45,457
Debentures (a)(ii) 39,000 40,000
Wheat production financing (a)(iii) 1,385 3,766
Operating facilities (a)(iv) 13,835 10,000
Convertible debentures (b) 79,372 78,617
Commodity trade financing (c) - -
----------------------------------------------------------------------------
177,291 177,840
Less: current portion (60,918) (63,221)
----------------------------------------------------------------------------
116,373 114,619
----------------------------------------------------------------------------
----------------------------------------------------------------------------
(a) The following credit facilities were arranged to finance the construction of the ethanol plant, to provide advances to wheat growers under production contracts and to meet working capital needs:
(i) Credit facility
A credit facility of up to $50,000 with a syndicate of Canadian lenders which was revised on March 18, 2009. The facility was converted to a fixed repayment term of 10 years commencing March 1, 2009 and bears interest at a rate of prime plus 2%, with principal repayments commencing on October 1, 2009. The credit facility is secured by a demand debenture agreement, a first priority security interest on all assets and undertakings of TGF and a general security interest on all other current and after acquired assets of TGF. The credit facility includes certain financial covenants the more significant of which relate to working capital, debt to equity ratio, debt service coverage and minimum shareholder's equity. As at March 31, 2009 the amount owing under this facility amounted to $43,699 (2008 - $35,412). During the three and six months ended March 31, 2009 interest costs under this facility amounted to $559 (2008 - $620) and $1,264 (2008 - $922). The facility also provides for $2,000 of cash to be held for debt servicing shortfalls.
(ii) Debentures
A debenture purchase agreement with a number of private parties providing for the issuance of up to $40,000 aggregate principal amount of debentures. The interest rate is 10.5% per annum, compounded annually and payable quarterly. Interest is to be paid quarterly with quarterly principal payments commencing October 1, 2009 in the amount of $24.99 per $1,000 of principal advanced with a lump sum payment of all outstanding amounts payable sixty months after the date of the initial advance. Security for the credit facility includes a security interest in all of TGF's present and after acquired property, second in priority to the lenders in Note 10(a)(i). The credit facility includes certain financial covenants the more significant of which relate to working capital, debt service coverage and minimum shareholder's equity. As at March 31, 2009 the amount owing under this facility amounted to $39,000 (2008 - $40,000). During the three and six months ended March 31, 2009, interest costs under this facility amounted to $1,015 (2008 - $1,044) and $2,046 (2008 - $2,103).
TGF has entered into an Agreement ("Covenant Modification Agreement") with its lenders to defer the compliance with the financial covenants and the scheduled principal payments owing under the Debenture until October 1, 2009.
(iii) Wheat production financing
A credit facility under which wheat growers receive a cash advance under the production contracts from a third party lender (see Note 16(d)). Each wheat grower is limited to advances totaling $300 per signed production contract. TGF will repay the cash advances to the lender upon delivery of wheat to TGF by the grower. Should the grower fail to deliver the wheat as specified in the production contract, TGF is obligated to repay any outstanding cash advances plus interest to the lender. As at March 31, 2009 $1,385 (2008 - $5,946) was outstanding under this facility. TGF is also required to pay the interest cost of the advances at a rate of prime plus 3%. During the three and six months ended March 31, 2009, interest expense under this facility amounted to $99 (2008 - $145) and $229 (2008 - $313).
(iv) Operating facilities
A working capital facility for $10,000 with a third party lender bearing interest at prime plus 1% due in full on December 31, 2010. This facility is secured by liquid investments on deposit with the lender. As at March 31, 2009 the amount owing under the facility amounted to $10,000. A further operating facility of $7,000 bearing interest at prime plus 1% was arranged which is secured by inventory and accounts receivable. As at March 31, 2009, the amount owing under this facility amounted to $3,835. In addition, unsecured letters of credit amounting to $1,700 were issued by the third party lender on behalf of TGF. During the three and six months ended March 31, 2009, interest expense under these facilities amounted to $128 (2008 - $Nil) and $290 (2008 - $Nil).
(b) The convertible unsecured subordinated debentures have a face value of $90,000. The debentures mature on September 30, 2014 unless converted prior to that date and bear interest at an annual rate of 6% payable semi- annually on March 31 and September 30 of each year. Each $1,000 principal amount of the debentures is convertible at any time prior to maturity or on the date fixed for redemption, at the option of the holder, into approximately 45.76 common shares of the Company representing a conversion price of $21.85 per common share. During the three and six months ended March 31, 2009, interest expense amounted to $1,350 (2008 - $1,335) and $2,700 (2008 - $2,678).
The debentures are not redeemable prior to October 1, 2010. On and after October 1, 2010, but prior to September 30, 2012, the debentures are redeemable, in whole or in part, at a price equal to the principal amount thereof, plus accrued and unpaid interest, at the Company's sole option on not more than 60 days and not less than 30 days prior notice, provided that the current market price on the date on which notice of redemption is given is not less than 125% of the conversion price. On and after September 30, 2012, but prior to the maturity date, the debentures are redeemable, in whole or in part, at a price equal to the principal amount thereof, plus accrued and unpaid interest, at the Company's sole option on not more than 60 days and not less than 30 days prior notice.
The conversion feature of the debentures has been accounted for as a separate component of shareholders' equity in the amount of $9,507. The remainder of the net proceeds of the debentures of $77,189 has been recorded as long-term debt, which will be accreted up to the face value of $90,000 over the term of the debentures. Accretion and interest paid are recorded as finance charges on the consolidated statement of operations. If the debentures are converted into common shares, the value of the conversion feature will be reclassified to share capital along with the principal amount converted.
$
----------------------------------------------------------------------------
Convertible debentures initially recognized, less issue
costs of $3,304 77,189
Accretion to March 31, 2009 2,183
----------------------------------------------------------------------------
Balance as at March 31, 2009 79,372
----------------------------------------------------------------------------
----------------------------------------------------------------------------
(c) Sempra Energy Trading Corp. ("Sempra") is a related party through which Universal purchases its natural gas supply and enters into electricity swap agreements. In addition, Sempra provides commodity trade financing to Universal. The commodity financing includes a facility of $5,000 for amounts deemed due for payment under electricity swap contracts, which bears interest at LIBOR plus 2%. The amount owing under this facility as at March 31, 2009 is $Nil (2008 - $Nil).
11. Share capital and contributed surplus
(a) Authorized
An unlimited number of common shares and an unlimited number of first preferred and second preferred shares issuable in series and one special share.
(b) Issued
Common shares $
----------------------------------------------------------------------------
Share capital at September 30, 2008 36,299,228 248,204
----------------------------------------------------------------------------
Share capital at March 31, 2009 36,299,228 248,204
----------------------------------------------------------------------------
----------------------------------------------------------------------------
(c) Contributed surplus
The net increase in contributed surplus of $1,415 relates to the amortization of stock option and RSU compensation expense and transfers to share capital on the exercise of stock options.
12. Stock-based compensation plans
(a) Stock option plan
The Company provides a stock option plan (amended February 13, 2008), for the benefit of officers, directors, employees and other eligible service providers. The maximum number of common shares issuable on exercise of outstanding stock options at any time is limited to 10% of the issued and outstanding common shares, less the number of common shares issuable pursuant to outstanding RSUs pursuant to the restricted share unit plan (the "RSU Plan"). Any increase in the issued and outstanding common shares will result in an increase in the number of common shares that may be issued on exercise of stock options outstanding at any time and any increase in the number of stock options granted, upon exercise, makes new grants available under the stock option plan. Stock options that are cancelled, terminated or expire prior to the exercise of all or a portion thereof shall result in the common shares that were reserved for issuance thereunder being available for a subsequent grant of stock options pursuant to the stock option plan to the extent of any common shares issuable thereunder that are not issued under such cancelled, terminated or expired stock options. Stock options granted pursuant to the stock option plan have a term not exceeding five years and vest in such manner as determined by the Board. The exercise price of stock options granted is determined by the Board at the time of grant. The status of the Company's stock option plan as at March 31, 2009 is shown below.
Stock Range of Weighted average Grant date
options exercise exercise fair
out- prices price value
standing $ $ $
----------------------------------------------------------------------------
(dollars) (dollars) (dollars)
Beginning
of period 1,899,875 4.95 to 18.05 11.97
Granted 52,500 5.00 5.00 0.91
Cancelled (1,625) 11.00 11.00
------------------------------------------------------------------
End of
period 1,950,750 4.95 to 18.05 11.78
------------------------------------------------------------------
------------------------------------------------------------------
As at March 31, 2009, the range of exercise prices for stock options
outstanding and exercisable (vested) are as follows:
Stock options outstanding Stock options exercisable
------------------------------------------------ --------------------------
Weighted Weighted Weighted
Range of Stock average average average
exercise options remaining exercise exercise
prices out- contractual price Number price
$ standing life $ exercisable $
------------------------------------------------ --------------------------
(dollars) (dollars) (dollars)
4.95 to
5.00 77,500 4.83 years 4.98
8.88 to
11.00 1,532,250 2.90 years 10.94 349,438 11.00
14.28 to
17.85 174,000 3.14 years 16.19 45,375 16.21
18.05 167,000 3.78 years 18.05 38,250 18.05
------------------------------------------------ --------------------------
1,950,750 3.07 years 11.78 433,063 12.17
------------------------------------------------ --------------------------
------------------------------------------------ --------------------------
The fair value of each stock option granted was estimated as at the grant date using the Black-Scholes options-pricing model. The following weighted average assumptions were used in arriving at the grant-date fair value associated with stock options for which compensation costs were recognized.
---------------------------------------------------------------------------- Risk-free interest rate 2.01 % to 4.55% Expected dividend yield 0% to 7.36% Expected forfeitures per year 0% to 1% Expected share price volatility 40% Expected option life 2.84 to 4.88 years ---------------------------------------------------------------------------- ----------------------------------------------------------------------------
Stock option compensation expense is recognized during the period in which entitlement to the compensation vests. During the three and six months ended March 31, 2009, compensation expense of $554 (2008 - $548) and $996 (2008 - $1,097) was recognized as a result of stock options granted under the plan.
(b) Restricted Share Units
The Company's RSU Plan (amended February 13, 2008) is a discretionary incentive compensation plan to provide officers, directors, employees and other eligible service providers of the Company with the opportunity to acquire common shares of the Company through an award of RSUs. Each RSU represents a right to receive one common share. Each RSU awarded conditionally entitles the participant to the delivery of one common share upon attainment of the RSU vesting period. RSUs awarded to participants vest in accordance with terms determined by the Board from time to time, which terms may include certain performance criteria in which the number of common shares to be delivered to a participant in respect of each RSU awarded is dependent upon the Company's operational performance, market price of the common shares and/or other performance measures, as determined by the Board. The RSU Plan provides that the maximum number of common shares reserved for issuance from time to time pursuant to outstanding RSUs shall not exceed a number of common shares equal to 10% of the aggregate of the number of issued and outstanding common shares, less the number of common shares issuable on exercise of outstanding stock options pursuant to the stock option plan. To the extent that RSUs are terminated or cancelled prior to the issuance of any common shares, such common shares underlying such award shall be added back to the number of shares reserved for issuance under the RSU Plan and will become available for grant again under the RSU Plan. RSUs granted generally vest over a three year period from the date of grant and are settled through the issuance of common shares from treasury. As at March 31, 2009 there were 565,000 RSUs awarded and outstanding. During the three and six months ended March 31, 2009, compensation expense of $196 (2008 - $461) and $419 (2008 - $921) was recognized as a result of RSUs granted under the plan.
(c) Stock options and RSUs available for grant
----------------------------------------------------------------------------
Stock options and RSUs available for grant, beginning of period 1,165,047
Less: stock options granted during the period (52,500)
Add: stock options and RSUs cancelled/forfeited during the period 1,625
----------------------------------------------------------------------------
Stock options and RSUs available for grant, end of period 1,114,172
----------------------------------------------------------------------------
----------------------------------------------------------------------------
13. Other income/(expense)
Three months ended March 31 Six months ended March 31
2009 2008 2009 2008
$ $ $ $
----------------------------------------------------------------------------
Investment income 419 1,156 724 2,362
Foreign exchange
gain/(loss) 1,987 640 2,903 557
Unrealized gain on
production contracts - 90 - 259
----------------------------------------------------------------------------
2,406 1,886 3,627 3,178
----------------------------------------------------------------------------
----------------------------------------------------------------------------
14. Earnings per share
Three months ended March 31 Six months ended March 31
2009 2008 2009 2008
----------------------------------------------------------------------------
Net income/(loss)
for the period ($77,720) $18,170 ($75,213) $16,666
----------------------------------------------------------------------------
Weighted average
common shares
outstanding -
Basic 36,299,228 36,272,811 36,299,228 36,272,769
Dilutive effect of
stock options - 455,000 - 406,667
Dilutive effect of
RSUs 182,108 170,000 182,108 170,000
----------------------------------------------------------------------------
Weighted average
common shares
outstanding -
Diluted 36,481,336 36,897,811 36,481,336 36,849,436
----------------------------------------------------------------------------
Basic
earnings/(loss)
per share ($2.14) $0.50 ($2.07) $0.46
Diluted
earnings/(loss)
per share ($2.14) $0.49 ($2.07) $0.45
----------------------------------------------------------------------------
----------------------------------------------------------------------------
The effect of the conversion of convertible debentures into the Company's shares was not included in the computation of fully diluted earnings per share as the effect of conversion would be anti-dilutive.
15. Related party transactions and balances
During the three and six months ended March 31, 2009, the Company entered into various transactions with related parties as follows:
(a) Universal has entered into the following agreements with Sempra, a significant shareholder of the Company:
(i) Gas purchase agreements
Universal entered into the natural gas purchase and sale agreement with Sempra on July 14, 2005 (amended and restated February 2, 2007). On February 2, 2007 UGE and Sempra also entered into an agreement pursuant to which Sempra supplies natural gas to UGE in connection with UGE's gas marketing business in Michigan ("Gas Purchase Agreements"). Pursuant to the Gas Purchase Agreements, Universal engaged Sempra to act as Universal's exclusive supplier of natural gas, subject to certain limited circumstances.
Universal's obligations to Sempra under the Gas Purchase Agreements are secured by the grant of a first priority security interest on substantially all of Universal's current and future assets, including all cash and cash equivalents, all accounts receivable and all deposit accounts. In addition, all payments received by Universal from its customers and the LDCs are paid to a specified lockbox or by wire transfer to specified Universal blocked bank accounts under the control of Sempra, from which amounts are first paid to Sempra in satisfaction of payments due to Sempra under the Gas Purchase Agreements, and all excess amounts are then paid to Universal.
If Sempra defaults in its obligations to deliver natural gas to Universal, or if Universal defaults in its obligation to accept delivery of natural gas, subject to force majeure, the Gas Purchase Agreements contain provisions requiring the payment of various amounts by the non-performing party to the performing party.
During the three and six months ended March 31, 2009, Universal made natural gas purchases under the agreements totaling $58,993 (2008 - $48,264) and $116,592 (2008 - $87,896). Included in accounts payable at March 31, 2009 is an amount owing of $20,200.
(ii) Electricity swap agreement
Universal entered into an electricity swap master agreement ("Electricity Swap Agreement") with Sempra on July 14, 2005 (amended and restated February 2, 2007). Pursuant to the Electricity Swap Agreement, Universal engaged Sempra to act as Universal's exclusive supplier of electricity swaps.
Universal's obligations to Sempra under the Electricity Swap Agreement are secured by the grant of a first priority security interest on substantially all of Universal's current and future assets, including all cash and cash equivalents, all accounts receivable and all deposit accounts. In addition, all payments received by Universal from its customers and the LDCs are paid to a specified lockbox or by wire transfer to specified Universal blocked bank accounts under the control of Sempra, from which amounts are first paid to Sempra in satisfaction of payments due to Sempra under the Electricity Swap Agreement, and all excess amounts are then paid to Universal.
Upon the occurrence of a contract termination event, the non-defaulting party has the right to immediately, for so long as the contract termination event is continuing: suspend its performance under electricity swaps then outstanding; or liquidate and terminate the electricity swaps then outstanding and accelerate the payment of any amounts due. Upon any such liquidation and termination, the non-defaulting party must calculate a net settlement amount in accordance with the formula contained in the Electricity Swap Agreement. The party with the net settlement amount payment obligation must pay such amount to the other party within one business day of receipt from the non-defaulting party of notice of such calculation.
During the three and six months ended March 31, 2009, Universal incurred net settlement payments under the electricity swap agreements totaling $14,965 (2008 - $10,971) and $27,236 (2008 - $21,511). Included in accounts payable at March 31, 2009 is an amount owing of $7,364.
In addition, the Gas Purchase Agreements and the Electricity Swap Agreement contain financial margin requirements that commence on February 2, 2009 as well as other covenants. These agreements terminate on June 30, 2010. As at March 31, 2009 the balance in the blocked account which is included in restricted cash amounted to $5,006.
(b) During the three and six months ended March 31, 2009, the Company incurred expenses amounting to $166 (2008 - $308) and $364 (2008 - $476) for direct mail marketing services and rental expense to Market Connections Inc. and Ajax Estates Holdings Inc. in which certain officers and directors hold an equity interest. Included in accounts payable as at March 31, 2009 is an amount owing of $41.
(c) During the three and six months ended March 31, 2009, the Company incurred expenses amounting to $159 and $357 for collection services to Total Credit Recovery Ltd. in which a director holds an equity interest. Included in accounts payable as at March 31, 2009 is an amount owing of $9.
(d) TGF has entered into a credit support agreement with Vertex Oil & Gas Ltd., a company controlled by an officer and director, that allows TGF to enter into hedges and swaps to mitigate risk exposure to the volatility of ethanol pricing. At September 30, 2009 the TGF hedges and swaps were closed out. Included in accounts payable as at March 31, 2009 is an amount owing of $13,633 which includes the final settlement amount of $13,266 for the hedges and swaps that were closed out.
These transactions were conducted in the normal course of business on terms and rates agreed to by the Company and the related parties.
16. Commitments and contingency
(a) The Company's commitments for premises, vehicles, equipment, software and telephone under lease obligations for each of the next five years are as follows:
Year $
---------------------------------
2009 2,711
2010 4,363
2011 3,305
2012 2,065
2013 1,385
---------------------------------
13,829
---------------------------------
---------------------------------
(b) The Company's commitments under long-term natural gas contracts with Sempra for each of the next five years and thereafter are as follows:
Year $
---------------------------------
2009 112,363
2010 206,259
2011 173,958
2012 124,891
2013 23,535
Thereafter 521
---------------------------------
641,527
---------------------------------
---------------------------------
The above commitments have been entered into to meet delivery requirements for currently enrolled and flowing natural gas customers under long-term natural gas supply contracts.
(c) Universal is also committed under long-term contracts with customers to supply natural gas and electricity. These contracts have various expiry dates and renewal options.
(d) TGF entered into a number of contracts with various growers (the "production contracts") to purchase wheat at fixed prices. The production contracts are for one or two year periods and provide the grower with the option to extend the production contract for a further one year term upon written notice. Total commitments under these production contracts to March 31, 2009 are as follows:
Year $
---------------------------------
2009 11,672
2010 18,956
2011 3,031
2012 2,175
---------------------------------
35,834
---------------------------------
---------------------------------
(e) Commerce is a party to proceedings commenced at the Federal Energy Regulatory Commission ("FERC") against several utilities and marketers by the Attorney General of California and the California Public Utilities Commission in connection with the disruption in the California wholesale energy markets in 2000 and 2001. At this time, the outcome of the proceedings and the ultimate financial impact on Commerce is not determinable.
17. Capital disclosure
The capital structure of the Company is as follows:
March 31 September 30
2009 2008 Change
$ $ %
----------------------------------------------------------------------------
Total shareholders' equity 10,256 96,061 -89%
----------------------------------------------------------------------------
Total shareholders' equity as a %
of total capital 5% 35%
Short-term debt 60,918 63,221
Long-term debt 116,373 114,619
----------------------------------------------------------------------------
Total debt 177,291 177,840 0%
----------------------------------------------------------------------------
Total debt as a % of total capital 95% 65%
----------------------------------------------------------------------------
Total capital 187,547 273,901 -32%
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Shareholders' equity is defined as share capital, contributed surplus, equity component of convertible debentures and deficit. During the six months ended March 31, 2009, total shareholders' equity decreased by $85,805 to $10,256 due to a dividend payment of $13,612 and net loss of $75,213 which includes a non-cash goodwill write-down of $70,460.
Total debt decreased during the six months ended March 31, 2009 by $549 to $177,291. The decrease resulted from repayments of the TGF credit facility in the amount of $1,758, repayments of the TGF debentures in the amount of $1,000, repayments of the wheat production facility in the amount of $2,381 and offset by an increase in TGF's operating facility in the amount of $3,835 and accretion of the Company's convertible debentures in the amount of $755.
The Company is not subject to any statutory requirements or any externally imposed capital requirements. Commitments exist to issue common shares in connection with established stock option and RSU compensation plans and pursuant to the convertible debenture with such share issuances to occur from treasury.
18. Financial instruments
(a) Fair value
(i) The Company has entered into contracts with customers to provide electricity at fixed prices ("customer electricity contracts"). The customer electricity contracts expose the Company to changes in market prices of electricity and consumption levels as the Company is obligated to pay the LDCs the floating rate for electricity supplied by the LDCs to the Company's customers. To reduce its exposure to changes in commodity prices arising from the acquisition of electricity at floating or indexed rates, the Company uses electricity derivative financial contracts ("electricity derivative contracts"). These electricity derivative contracts are fixed-for-floating swaps whereby the Company agrees with a counterparty to cash settle the difference between the floating or indexed price and the fixed price on a notional quantity of electricity for a specified time frame. The cash flow from these contracts is expected to be effective in offsetting the Company's electricity price exposure and serves to effectively fix the Company's acquisition cost of electricity to be delivered under the fixed price customer contracts. The fair value of derivative financial instruments is the estimated amount that the Company would pay or receive to settle these supply contracts in the market. The Company has estimated the value of these contracts using a discounted cash flow method which employs market forward curves.
At March 31, 2009, the Company had electricity fixed-for-floating swap contracts to which it has committed with the following terms:
----------------------------------------------------------------------- Notional volumes 2.0 to 50.0 MW/h Total remaining notional volume 5,520,600 MWh Maturity dates April 1, 2009 to December 31, 2013 Fixed price ($/MWh) $43.86 to $91.37 Fair value $122,285 unfavourable Remaining notional value $384,923 ----------------------------------------------------------------------- -----------------------------------------------------------------------
(ii) The Company has entered into swaps and calls to mitigate risk exposure to changes in gas pricing. At March 31, 2009, the Company had swaps and calls to which it had committed with the following terms:
----------------------------------------------------------------------- Notional volumes - Swap 2,500 to 30,000 MMBtu/M Total remaining notional volume 1,455,000 MMBtu Maturity dates April 1, 2009 to September 30, 2010 Fixed price (US$/MMBtu) $5.07 to $13.75 Fair value $2,881 unfavourable Remaining notional value $11,381 ----------------------------------------------------------------------- ----------------------------------------------------------------------- ----------------------------------------------------------------------- Notional volumes - Call 10,000 to 30,000 MMBtu/M Total remaining notional volume 730,000 MMBtu Maturity dates April 1, 2009 to July 31, 2010 Fixed price (US$/MMBtu) $3.70 to $13.75 Fair value $96 unfavourable Remaining notional value $4,117 ----------------------------------------------------------------------- -----------------------------------------------------------------------
(iii) The settlements under commodity contracts during the three and six months ended March 31, 2009 of $15,980 (2008 - $12,814) and $28,946 (2008 - $23,354) represent the net settlement payments on the Company's commodity contracts during the period.
(iv) The current and non-current components of the unrealized loss on commodity contracts are shown below:
March 31 September 30
2009 2008
$ $
----------------------------------------------------------------------------
Current portion of unrealized loss on
commodity contracts 63,763 42,719
Non-current portion of unrealized
loss on commodity contracts 61,499 51,196
----------------------------------------------------------------------------
Total unrealized loss on commodity
contracts 125,262 93,915
----------------------------------------------------------------------------
----------------------------------------------------------------------------
(b) Additional financial instruments disclosure
The following table represents the fair values and carrying amounts of financial assets and liabilities measured at fair value or amortized cost.
March 31, 2009 September 30, 2008
Fair Carrying Fair Carrying
value amount value amount
Asset/Liability $ $ $ $
--------------- ---------------------------------------------
Cash and cash equivalents 17,513 17,513 79,162 79,162
Restricted cash 18,940 18,940 17,984 17,984
Accounts receivable 141,110 141,110 52,015 52,015
Production contract
advances 1,356 1,356 3,796 3,796
Accounts payable and
accrued liabilities 96,765 96,765 63,131 63,131
Long-term debt 154,619 177,291 173,023 177,840
The fair values of cash and cash equivalents, restricted cash, accounts receivable, production contract advances, accounts payable and accrued liabilities approximate their carrying amounts due largely to the short-term maturities of these financial instruments. The fair value of the convertible debentures is based on the market price at the balance sheet date. The carrying amount of the convertible debenture does not include the equity component of the convertible debenture in the amount of $9,507.
(i) Credit risk
In Maryland, Georgia and California, GEM has customer credit risk and credit review and collection processes are in place to manage customer default in these markets. If a significant number of customers were to default on their payments it could have a significant effect on the Company's cash flows from these markets. For the remaining GEM markets and NHS the LDCs provide collection services and assume the risk of any bad debts owing. GEM and NHS receive the collection of customer account balances directly from the LDCs. Management believes that the risk of the LDCs failing to deliver payment to GEM is minimal. However, there is a possibility that the NHS billing arrangement may not be renewed when it expires in June 2009. If that were to occur, and NHS could not enter into an alternative collection services agreement, NHS would have to implement direct billing to its customers which could result in increased levels of bad debt.
TGF entered into agreements with wheat producers to supply suitable grain for ethanol production and provided production advances to the farmers. The default rate from these advances is expected to be in line with that of the industry and an appropriate provision has been recorded.
(ii) Liquidity risk
GEM purchases its natural gas and enters into offsetting electricity swaps with a variety of suppliers. GEM is reliant upon the ongoing revenues from its customer base to maintain its contractual commitment under these agreements. Management believes that the potential loss of revenue from customer attrition can be managed to ensure that GEM meets its contractual commitments under its commodity supply contract.
The Company has interest and debt repayment obligations under the convertible debenture issue and TGF has interest and debt repayment obligations under the credit facilities and debentures. The Company and TGF are reliant on the cash flows generated from their operations to fund their debt repayment obligations and TGF is reliant on the continued support of its lenders.
(iii) Market risk
The fair values of the Company's financial instruments are significantly influenced by the variability of forward spot prices for electricity and gas. Period to period changes in forward spot prices could cause significant changes in the marked to market valuation ("MTM valuation") of these contracts, as shown below:
Fair Value 1% 1% 5% 5%
(unfavourable) increase decrease increase decrease
------------ -----------------------------------
(Percentage change in fair values)
Electricity swaps -
Universal ($120,384) (2.0%) 2.0% (10.2%) 10.2%
Electricity swaps -
Commerce ($1,901) (2.6%) 2.6% (12.7%) 12.7%
Natural gas swaps
and calls ($2,977) (4.2%) 4.2% (21.0%) 21.0%
(iv) Foreign currency risk
The Company has an exposure to foreign currency exchange rates as a result of its investment in its United States operations.
(v) Interest rate risk
At March 31, 2009 the Company had variable rate debt in the amount of $58,919 and the effect of a 1% change in the interest rate charged on its variable debt will impact interest expense in the amount of $589 per annum.
19. Reportable business segments
The Company has three reportable business segments, gas and electricity marketing, ethanol, and home services. The Company evaluates segment performance based on gross margin. The following tables present the Company's results from continuing operations by business segment for the three and six months ended March 31, 2009 and 2008.
Gas and
Three months Electricity Home
ended March 31, Marketing Ethanol Services Corporate Total
2009 $ $ $ $ $
----------------------------------------------------------------------------
Revenue 242,593 16,197 541 - 259,331
Cost of sales 176,443 14,900 - - 191,343
----------------------------------------------------------------------------
Gross margin 66,150 1,297 541 - 67,988
----------------------------------------------------------------------------
Income/(loss)
before undernoted
items 49,265 (4,090) (1,347) (2,625) 41,203
Amortization (404) (1,771) (168) - (2,343)
Settlements
under commodity
contracts (15,980) - - - (15,980)
Unrealized loss
on commodity
contracts (30,522) - - - (30,522)
Goodwill impairment
loss - (70,460) - - (70,460)
Other 348 216 2 1,840 2,406
Income tax
(expense)/recovery (2,326) - 487 (185) (2,024)
----------------------------------------------------------------------------
Net income/(loss) 381 (76,105) (1,026) (970) (77,720)
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Capital expenditures 172 603 4,973 - 5,748
----------------------------------------------------------------------------
Gas and
Three months Electricity Home
ended March 31, Marketing Ethanol Services Corporate Total
2008 $ $ $ $ $
----------------------------------------------------------------------------
Revenue 148,568 - - - 148,568
Cost of sales 112,101 - - - 112,101
----------------------------------------------------------------------------
Gross margin 36,467 - - - 36,467
----------------------------------------------------------------------------
Income/(loss) before
undernoted items 25,266 (2,206) - (3,187) 19,873
Amortization (143) (43) - - (186)
Settlements under
commodity contracts (10,971) (1,843) - - (12,814)
Unrealized
gain/(loss) on
commodity contracts 25,658 (3,026) - - 22,632
Other 639 505 - 742 1,886
Income tax
(expense)/recovery (13,858) 1,577 - (940) (13,221)
----------------------------------------------------------------------------
Net income/(loss) 26,591 (5,036) - (3,385) 18,170
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Capital expenditures 488 6,193 - - 6,681
----------------------------------------------------------------------------
Gas and
Six months Electricity Home
ended March 31, Marketing Ethanol Services Corporate Total
2009 $ $ $ $ $
----------------------------------------------------------------------------
Revenue 373,173 28,662 823 - 402,658
Cost of sales 268,641 24,576 - - 293,217
----------------------------------------------------------------------------
Gross margin 104,532 4,086 823 - 109,441
----------------------------------------------------------------------------
Income/(loss) before
undernoted items 74,771 (5,687) (2,712) (5,262) 61,110
Amortization (807) (2,699) (272) - (3,778)
Settlements under
commodity contracts (28,946) - - - (28,946)
Unrealized loss on
commodity contracts (31,413) - - - (31,413)
Goodwill impairment
loss - (70,460) - - (70,460)
Other 1,200 235 6 2,186 3,627
Income tax
(expense)/recovery (6,330) - 1,034 (57) (5,353)
----------------------------------------------------------------------------
Net income/(loss) 8,475 (78,611) (1,944) (3,133) (75,213)
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Capital expenditures 276 751 7,970 - 8,997
----------------------------------------------------------------------------
Gas and
Six months Electricity Home
ended March 31, Marketing Ethanol Services Corporate Total
2008 $ $ $ $ $
----------------------------------------------------------------------------
Revenue 228,670 - - - 228,670
Cost of sales 167,361 - - - 167,361
----------------------------------------------------------------------------
Gross margin 61,309 - - - 61,309
----------------------------------------------------------------------------
Income/(loss) before
undernoted items 36,433 (3,070) - (6,031) 27,332
Amortization (268) (61) - - (329)
Settlements under
commodity contracts (21,511) (1,843) - - (23,354)
Unrealized
gain/(loss) on
commodity contracts 35,282 (11,820) - - 23,462
Other 715 890 - 1,573 3,178
Income tax
(expense)/recovery (18,176) 4,562 - (9) (13,623)
----------------------------------------------------------------------------
Net income/(loss) 32,475 (11,342) - (4,467) 16,666
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Capital expenditures 598 25,574 - - 26,172
----------------------------------------------------------------------------
Gas and
Electricity Home
Marketing Ethanol Services Corporate Total
Total Assets $ $ $ $ $
----------------------------------------------------------------------------
March 31, 2009 211,352 171,203 15,896 18,641 417,092
September 30, 2008 140,793 251,156 7,068 74,892 473,909
----------------------------------------------------------------------------
----------------------------------------------------------------------------
The Company operates in two geographic segments, Canada and the United States. The Canadian operations include electricity, natural gas, ethanol, and home services and the United States operations include natural gas and electricity.
Three months ended March 31 Six months ended March 31
2009 2008 2009 2008
Revenue $ $ $ $
----------------------------------------------------------------------------
Canada 119,442 77,782 208,672 132,919
United States 139,889 70,786 193,986 95,751
----------------------------------------------------------------------------
259,331 148,568 402,658 228,670
----------------------------------------------------------------------------
----------------------------------------------------------------------------
March 31 September 30
Property, plant and equipment, intangible 2009 2008
assets, and goodwill $ $
----------------------------------------------------------------------------
Canada 161,860 227,101
United States 2,902 -
----------------------------------------------------------------------------
164,762 227,101
----------------------------------------------------------------------------
----------------------------------------------------------------------------
20. Comparative figures
Certain of the comparative figures have been reclassified to conform to the current period's presentation.
21. Subsequent events
On April 15, 2009, TGF completed a series of transactions with EllisDon Design Build Inc. ("EllisDon") including the exchange of mutual releases of pending litigation and the release of the construction lien filed against the Belle Plaine ethanol facility. Pursuant to the terms of the settlement agreement, the Company has agreed to convert its existing debt in TGF, plus accrued interest, to Class E shares of TGF and EllisDon has agreed to make an equity investment in TGF of $10,000, settlement of the lien claim and provide other consideration for a one-third equity interest in TGF. Under the terms of the settlement agreement, if certain financial performance criteria are not met, EllisDon will be entitled to convert its $10,000 cash investment into equity of the Company, or its successor, in December 2010 at the then prevailing market price.
On April 22, 2009, the Company entered into a definitive agreement (the "Arrangement Agreement") with Energy Savings Income Fund ("ESIF") pursuant to which ESIF will propose to acquire all of the outstanding common shares of the Company. The plan of arrangement will provide for a share exchange through which each outstanding share of the Company will be exchanged for 0.58 of a share (the "Exchangeable Shares") of a subsidiary of ESIF. Each Exchangeable Share will be exchangeable into one ESIF trust unit at any time at the option of the holder, for no additional consideration. The Exchangeable Shares will pay a monthly dividend equal to 66 2/3% of the monthly distribution paid on an ESIF unit. The issue of the Exchangeable Shares will allow the Company's shareholders to receive the consideration under the arrangement on a tax-deferred basis for Canadian income tax purposes. Based on the closing price of the ESIF units of $12.40 on April 21, 2009, the Company's shareholders receive approximately $7.19 per share in Exchangeable Shares pursuant to the transaction. The exchange ratio represents an approximate 42.9% premium for the UEG shares to the 30-day weighted-average trading price of such shares ending April 10, 2009, the last trading day preceding the date ESIF and the Company first announced that they were in discussions respecting a proposed acquisition. The transaction is subject to the approval of the Company's shareholders, the receipt of regulatory approvals, and other closing conditions. The Company is expected to make its quarterly dividend payment of $0.1875 per share, subject to pro-ration based upon the closing date and a corresponding adjustment to the conversion feature of the Company's outstanding 6% convertible unsecured subordinated debentures in accordance with their terms, the transaction is expected to close in late June 2009.
Contact:
Stephen Plummer, CA
Universal Energy Group Ltd.
Chief Financial Officer
(416) 673-1160
Email: splummer@uegl.ca
Shawn Dym
Universal Energy Group Ltd.
Senior Vice President, Business Development
(416) 673-4761
Email: sdym@universalenergy.ca
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