The fair value of derivative instruments is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date (i.e., an exit price). Management has estimated the value of financial swaps, physical forwards and option contracts for electricity, natural gas, carbon offsets and RECs, using a discounted cash flow method, which employs market forward curves that are either directly sourced from third parties or developed internally based on third-party market data. These curves can be volatile, thus leading to volatility in the mark to market with no immediate impact to cash flows. Gas options and green power options have been valued using the applicable market forward curves and the implied volatility from other market traded options.

The following table illustrates unrealized gains (losses) related to Just Energy’s derivative instruments classified as fair value through the Interim Condensed Consolidated Statements of Operations and recorded on the Interim Condensed Consolidated Balance Sheets as derivative instrument assets and derivative instrument liabilities, with their offsetting values recorded in unrealized gain (loss) of derivative instruments on the Interim Condensed Consolidated Statements of Operations:


	For the three months ended September 30,				For the six months ended September 30,
	2022			2021	2022			2021
Physical forward contracts and options (i)	$	(325,580)	$	106,036	$	(141,030)	$	288,567
Financial swap contracts and options (ii)		31,395		122,891		67,632		177,969
Foreign exchange forward contracts		4,411		473		6,063		1,368
Other derivative options		–		3,636		–		1,187
Unrealized gain (loss) on derivative instruments	$	(289,774)	$	233,036	$	(67,335)	$	469,091

The following table summarizes certain aspects of the derivative instrument assets and liabilities recorded in the Interim Condensed Consolidated Balance Sheet as at September 30, 2022:

Derivative

instrument

assets

liabilities

(current)

(non-current)

(current)

(non-current)

Physical forward contracts and options (i)

296,046

64,142

17,023

43,196

Financial swap contracts and options (ii)

192,558

73,874

4,934

3,577

Foreign exchange forward contracts

3,372

1,421

–

Other derivative options

2,488

1,324

–

As at September 30, 2022

494,464

140,761

21,957

46,778

The following tables summarize certain aspects of the derivative instrument assets and liabilities recorded in the Interim Condensed Consolidated Balance Sheet as at March 31, 2022:


	Derivative		Derivative		Derivative		Derivative
	instrument		instrument		instrument		instrument
	assets		assets		liabilities		liabilities
	(current)		(non-current)		(current)		(non-current)

Physical forward contracts and options (i)	$	373,268	$	81,392	$	10,195	$	5,865
Financial swap contracts and options (ii)		161,838		51,161		2,134		6,856
Foreign exchange forward contracts		–		–		841		195
Other derivative options		3,594		461		–		–
As at March 31, 2022	$	538,700	$	133,014	$	13,170	$	12,916

Individual derivative asset and liability transactions are offset and the net amount reported in the Interim Condensed Consolidated Balance Sheets if, and only if, there is currently an enforceable legal right to offset the recognized amounts and there is an intention to settle on a net basis, or to realize the assets and settle the liabilities simultaneously. Individual derivative transactions are typically offset at the legal entity and counterparty level. The impact of netting derivative assets and liabilities is presented in the table below:


	Gross basis amount		Netting impact		Net basis amount
Derivative instrument assets	$	1,069,207	$	(433,982)	$	635,225
Derivative instrument liabilities		(506,776)		438,041		(68,735)
As at September 30, 2022	$	562,431	$	4,059	$	566,490

	Gross basis amount		Netting impact		Net basis amount
Derivative instrument assets	$	910,174	$	(238,460)	$	671,714
Derivative instrument liabilities		(265,011)		238,925		(26,085)
As at March 31, 2022	$	645,163	$	465	$	645,629

Below is a summary of the derivative instruments classified through the Interim Condensed Consolidated Statement of Operations as at September 30, 2022, to which Just Energy has committed:


		Total remaining volume		Weighted average price		Expiry date
(i)	Physical forward contracts and options
	Electricity contracts	31,490,189	MWh	$50.69	/MWh	December 31, 2029
	Natural gas contracts	70,403,970	MMBtu	$5.33	/MMBtu	March 31, 2027
	RECs	4,450,234	MWh	$11.04	/REC	December 31, 2029
	Green Gas Certificates	(140,000)	tonnes	$1.39	/tonnes	June 1, 2023
	Electricity generation capacity contracts	1,209	MWCap	$4,027.58	/MWCap	May 31, 2026
	Ancillary contracts	874,520	MWh	$20.41	/MWh	December 31, 2025

(ii)	Financial swap contracts and options
	Electricity contracts	24,117,816	MWh	$59.88	/MWh	December 31, 2026
	Natural gas contracts	110,708,400	MMBtu	$4.05	/MMBtu	December 31, 2027
	Ancillary contracts	1,806,946	MWh	$20.36	/MWh	December 31, 2025

These derivative instruments create a credit risk for Just Energy since they have been transacted with a limited number of counterparties. Should any counterparty be unable to fulfill its obligations under the contracts, Just Energy may not be able to realize the derivative instruments asset balance recognized in the Interim Condensed Consolidated Financial Statements.

The fair value measurements are classified as Level 1 in the fair value hierarchy if the fair value is determined using quoted unadjusted market prices. Currently, there are no derivatives carried in this level.

Fair value measurements that require observable inputs other than quoted prices in Level 1, either directly or indirectly, are classified as Level 2 in the fair value hierarchy. This could include the use of statistical techniques to derive the fair value curve from observable market prices. However, in order to be classified under Level 2, significant inputs must be directly or indirectly observable in the market. Just Energy values its NYMEX financial gas fixed-for-floating swaps under Level 2.

Fair value measurements that require unobservable market data or use statistical techniques to derive forward curves from observable market data and unobservable inputs are classified as Level 3 in the fair value hierarchy. For the electricity supply contracts, Just Energy uses quoted market prices as per available market forward data and applies a price-shaping profile to calculate the monthly prices from annual strips and hourly prices from block strips for the purposes of mark-to-market calculations. The profile is based on historical settlements with counterparties or with the system operator and is considered an unobservable input for the purposes of establishing the level in the fair value hierarchy.

For the natural gas supply contracts, Just Energy uses three different market observable curves: (i) commodity (predominately NYMEX), (ii) basis and (iii) foreign exchange. NYMEX curves extend for over five years (thereby covering the length of Just Energy’s contracts); however, most basis curves extend only 12 to 15 months into the future. In order to calculate basis curves for the remaining years, Just Energy uses extrapolation, which leads natural gas supply contracts to be classified under Level 3.

The unobservable inputs could range from $5/MWh or $0.50/MMBtu for power and natural gas respectively. Additional disclosure regarding Level 3 derivative instruments is available below under the heading “Commodity price sensitivity – Level 3 derivative instruments”.

The main cause of changes in the fair value of derivative instruments is changes in the forward curve prices used for the fair value calculations. Just Energy provides a sensitivity analysis of these forward curves under the “Market risk” section of this note.

The following table illustrates the classification of derivative instrument assets (liabilities) in the fair value hierarchy as at September 30, 2022:

Level 1

Level 2

Level 3

Total

Physical forward contracts

–

299,969

Financial swap contracts

–

138,268

119,652

257,920

Foreign exchange forward contracts

–

4,794

4,795

Other derivative options

–

3,807

Total net derivative instrument assets

–

138,268

428,222

566,490

The following table illustrates the classification of derivative instrument assets (liabilities) in the fair value hierarchy as at March 31, 2022:


	Level 1		Level 2		Level 3		Total
Physical forward contracts and options	$	–	$	–	$	438,600	$	438,600
Financial swap contracts and options		–		124,188		79,821		204,009
Foreign exchange forward contracts		–		–		(1,036)		(1,036)
Other derivative options		–		–		4,055		4,055
Total net derivative instrument assets	$	–	$	124,188	$	521,440	$	645,628

If the energy prices associated with only Level 3 derivative instruments including natural gas, electricity, and RECs had risen by 10%, assuming that all of the other variables had remained constant, income from operations before income taxes for the three months ended September 30, 2022 would have increased by $361.8 million.

On the contrary, if the energy prices associated with only Level 3 derivative instruments including natural gas, electricity, and RECs had fallen by 10%, assuming that all of the other variables had remained constant, income from operations before income taxes for the three months ended September 30, 2022 would have decreased by $361.8 million, primarily as a result of the change in fair value of derivative instruments.

The following table illustrates the changes in net fair value of derivative instrument assets (liabilities) classified as Level 3 in the fair value hierarchy for the following periods:


		As at September 30,		As at March 31,
	2022			2022
Balance, beginning of period	$	521,440	$	(33,489)
Total gains		292,029		349,541
Purchases		(157,695)		283,394
Sales		62,491		(71,514)
Settlements		(290,043)		(6,492)
Balance, end of period	$	428,222	$	521,440

As at September 30, 2022 and March 31, 2022, the carrying value of cash and cash equivalents, restricted cash, trade and other receivables, and trade and other payables approximates their fair value due to their short-term nature.

The risks associated with Just Energy’s derivative instruments are as follows:

Market risk is the potential loss that may be incurred as a result of changes in the market or fair value of a particular instrument or commodity. Components of market risk to which Just Energy is exposed are discussed below.

Foreign currency risk is created by fluctuations in the fair value or cash flows of derivative instruments due to changes in foreign exchange rates and exposure as a result of investments in Canadian operations.

The performance of the U.S. dollar relative to the Canadian dollar could positively or negatively affect Just Energy’s Interim Condensed Consolidated Statements of Operations, as a significant portion of Just Energy’s income or loss is generated in Canadian dollars and is subject to currency fluctuations upon translation to U.S. dollars. Just Energy has a policy to economically hedge between 50% and 100% of forecasted cross-border cash flows that are expected to occur within the next 12 months and between 0% and 50% of certain forecasted cross-border cash flows that are expected to occur within the following 13 to 24 months. The level of economic hedging is dependent on the source of the cash flows and the time remaining until the cash repatriation occurs.

Just Energy may, from time to time, experience losses resulting from fluctuations in the values of its foreign currency transactions, which could adversely affect its operating results. Translation risk is not hedged.

Just Energy is only exposed to interest rate fluctuations associated with its floating rate Credit Facility.

A 1% increase (decrease) in interest rates would have resulted in a decrease (increase) of approximately $0.3 million in income from operations before income taxes in the Interim Condensed Consolidated Statements of Operations for the six months ended September 30, 2022.

Just Energy is exposed to market risks associated with commodity prices and market volatility where estimated customer requirements do not match actual customer requirements. Management actively monitors these positions on a daily basis in accordance with its risk management policy. This policy sets out a variety of limits, most importantly thresholds for open positions in the gas and electricity portfolios, which also feed a value at risk limit. Should any of the limits be exceeded, they are closed expeditiously or express approval to continue to hold is obtained. Just Energy’s exposure to market risk is affected by a number of factors, including accuracy of estimation of customer commodity requirements, commodity prices, volatility and liquidity of markets. Just Energy enters into derivative instruments in order to manage exposures to changes in commodity prices. The derivative instruments that are used are designed to fix the price of supply for estimated customer commodity demand and thereby fix margins. Derivative instruments are generally transacted over the counter. The inability or failure of Just Energy to manage and monitor commodity price risk could have a material adverse effect on the operations and cash flows of Just Energy. Just Energy mitigates the exposure to variances in customer requirements that are driven by changes in expected weather conditions through active management of the underlying portfolio, which involves, but is not limited to, the purchase of options including weather derivatives. Just Energy’s ability to mitigate weather effects is limited by the degree to which weather conditions deviate from normal.

If all the energy prices associated with derivative instruments including natural gas, electricity and RECs had risen by 10%, assuming that all of the other variables had remained constant, income from operations before income taxes for the three and six months ended September 30, 2022 would have increased by $419.7 million.

On the contrary, a fall of 10% in the energy prices associated with derivative instruments including natural gas, electricity and RECs, assuming that all of the other variables had remained constant, income from operations before income taxes for the three and six months ended September 30, 2022 would have decreased by $418.1 million, primarily as a result of the change in fair value of Just Energy’s derivative instruments.

Just Energy purchases the majority of the gas and electricity delivered to its customers through long-term contracts entered into with various suppliers. Just Energy has an exposure to supplier risk as the ability to continue to deliver gas and electricity to its customers is reliant upon the ongoing operations of these suppliers and their ability to fulfill their contractual obligations.

Counterparty credit risk represents the loss that Just Energy would incur if a counterparty fails to perform under its contractual obligations. This risk would manifest itself in Just Energy replacing contracted supply at prevailing market rates, thus impacting the related customer margin. Counterparty limits are established within the risk management policy. Any exceptions to these limits require approval from the Risk Committee of the Board of Directors of Just Energy. The risk department and Risk Committee of the Board of Directors monitor current and potential credit exposure to individual counterparties and also monitor overall aggregate counterparty exposure. However, the failure of a counterparty to meet its contractual obligations could have a material adverse effect on the operations and cash flows of Just Energy.

As at September 30, 2022, Just Energy has applied an adjustment factor to determine the fair value of its derivative instruments in the amount of $2.1 million (March 31, 2022 – $2.3 million) to accommodate for its counterparties’ risk of default.

As at September 30, 2022, the estimated net counterparty credit risk exposure amounted to $424.2 million (March 31, 2022 – $580.5 million) representing the risk relating to Just Energy’s exposure to derivatives that are in an asset position, of which the Company held collateral (cash and letters of credit) against those positions of $56.9 million (March 31, 2022 – $103.2 million), resulting in a net exposure of $367.3 million (March 31, 2022 – $477.3 million).

As at September 30, 2022, the Company recorded $4.9 million (March 31, 2022 - $20.3 million) of cash collateral posted on its Interim Condensed Consolidated Balance Sheets in other current assets.