Gross margin and Adjusted EBITDA are tracking below targeted levels with margin up 9% and Adjusted EBITDA down 6% year to date. On a quarterly basis, the operating costs deducted in Adjusted EBITDA are relatively unaffected by margin fluctuations. Accordingly, the lower level of realized margin has a significantly larger percentage impact on Adjusted EBITDA.
Just Energy has taken several steps toward creating value through targeted growth expenditures over the last two years. As announced last week, the signing of a five year supply agreement with Shell gives our new U.K. platform a base to add profitable growth. The work to establish smart thermostats as a long term access point to consumer's commodity needs requires capital financing and will bring the solid returns Just Energy investments have traditionally generated. Hudson Solar creates profitable, tax advantaged green projects raising the Company's profile. The success and return on capital from continued investment in NHS is reflected in its results. These businesses do not require large amounts of capital (or, in the case of NHS and Hudson Solar, are non-recourse funded) and the future of Just Energy will benefit from focused profitable investments like these.
Management believes that a broadening of the customer relationship is the next step in the evolution of Just Energy. While the funding platform for NHS supports this growth in Canada, there is a need to provide the capital to expand the business in the U.S. This step will contribute to an increasingly profitable customer relationship less impacted by natural gas prices.
Past growth expenditures have created clear tangible long term value for shareholders. Management believes that a key measure of this value is embedded gross margin. Embedded margin is an estimate of cash flow from existing contracts based on the spread between contract price and underlying supply. The table below shows the increase in this value over the quarter and the last year.
EMBEDDED GROSS MARGINManagement's estimate of the future embedded gross margin is as follows:(millions of dollars) Dec. 2012 As at As at vs. As at Dec. vs. Dec. 31, Dec. 31, Dec. 2011 Sept. 30, Sept. 2012 2012 2011 variance 2012 variance --------------------------------------------------------------Canada energy marketing (C$) $ 547.8 $ 587.7 (7)% $ 571.0 (4)% --------------------------------------------------------------Home Services division (C$) 574.0 352.0 63% 510.7 12%----------------------------------------------------------------------------Canada total (C$) 1,121.8 939.7 19% 1,081.7 4% --------------------------------------------------------------U.S. energy marketing (US$)(1) 1,081.1 973.4 11% 1,065.7 1%----------------------------------------------------------------------------Total (C$) $ 2,197.4 $ 1,929.7 14% $ 2,129.5 3%--------------------------------------------------------------------------------------------------------------------------------------------------------
Dividend Policy
Dividends were $0.31 per share in the quarter, unchanged from those paid a year earlier. Payout ratio on Adjusted EBITDA increased to 62%, up from 50% a year ago. The Company's dividend obligations will exceed Funds from Operations for the year.
