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Just Energy: Margins, Pricing Power May Come Back As "Bottom Feeders" Shook Out Of Market Due To Volatility

February 14, 2018

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Copyright 2010-17 EnergyChoiceMatters.com
Reporting by Paul Ring • ring@energychoicematters.com

Recent volatility may provide an opportunity for higher margins for commercial retail energy accounts as "bottom feeders" may get "shook out" from the market, Just Energy CFO Patrick McCullough said last week during an earnings call.

An analyst asked about Just Energy's annual gross margin per RCE signed in the quarter for its Commercial segment, which, for the quarter ending December 31, 2017, was $73 per RCE for Commercial customers added or renewed in the quarter, versus $77/RCE for Commercial customers lost in the quarter

McCullough attributed the decline to the competitive environment for commercial accounts.

"[T]he challenge, as you look at the outgoing margin on the Commercial accounts, is that $77 is the design margin we held at the point of previous sale, and when it comes up for renewal, some of those larger customers are really pushing pricing down. They're doing a good job at negotiating and commoditizing the retail energy space. Hence, you hear us talking so much about management solutions, which provide more value. So that $77 margin that's falling off of our book, it's probably being quoted at near break-even. And that's the reason that we're letting that customer go to our competition and not renewing them," McCullough said

"Now with the volatility we're seeing in the markets in January and potentially February, that could change. The pricing power may come back to us, as the bottom feeders get shook out of the space a little bit," McCullough said

McCullough also noted that, as opposed to the "designed" margins (e.g. at contract signing) reported about, Just Energy's average realized gross margin in the Commercial segment for the rolling 12 months ended December 31, 2017 was $88/RCE, an increase of 7% from the $82/RCE reported in the prior comparable period. "And the reason we've been running with the slightly higher actualized margin versus that incoming design margin is frankly the folks have done a better job with these customers, or the supply and trading desk has made a little bit more money than we had conservatively planned in the design margin. So we actually feel very good about margins right now in the Commercial business because of our selectivity with customers," McCullough said

Co-CEO Deb Merril added that the Commercial margin per new RCE depends on the size of customers added, with smaller commercial customers having higher margins and larger customers having lower margins per RCE, "but overall, very profitable."

Merril noted that the company had good traction in signing medium and larger customers in the Commercial segment for the quarter ending December 31, 2017, which weighed down the average margin per RCE, "but all very profitable customers."

As previously reported, Just Energy Commercial gross RCE additions were 199,000 for the quarter ending December 31, 2017, a 41% increase versus the quarter ending September 30, 2017, as a result of increased additions from large natural gas Commercial and Industrial RCEs in Canada.

"So we'll see that fluctuate a little bit, but the discipline is still there around ensuring we're getting the right return," Merril said

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