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After Strategic Review, Crius To Focus On Retail Energy Supply Business

Will Review Strategic Alternatives For Solar Business

Says Weather-Related Volatility Creates Opportunity For More Tuck-In Acquisitions Of Smaller Retailers

May 14, 2018

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Reporting by Paul Ring • ring@energychoicematters.com

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In reporting earnings today, Crius Energy Trust announced that, having conducted a strategic review, it will now focus on its retail energy supply business, and explore strategic alternatives for its solar business

Michael Fallquist, Chief Executive Officer of Crius Energy Trust, said, "After an extensive review of strategies to enhance Unitholder value, we've determined that focused execution on our deregulated energy business, aimed at increasing profitability through cost reduction and high-margin growth, will best position us to create value for our Unitholders. We firmly believe that our current Unit price does not accurately reflect the Company's intrinsic value and, accordingly, plan to start purchasing Units under our NCIB [Normal Course Issuer Bid] program as soon as possible."

"The decision to focus on the deregulated energy business is the culmination of an internal process, supported by a third-party advisor, initiated by the Board in the third quarter of 2017 to evaluate strategies to increase Unitholder value which included, but was not limited to, the sale of the business, transformational acquisitions, business optimization, dual-listing in the U.S. markets, a leveraged recapitalization and capital allocation changes. Through this internal process, the Board and Management ultimately determined that focused execution in our deregulated energy business, aimed at increasing profitability through cost reduction and high-margin growth, will best position the Company to deliver strong Unitholder returns," Crius said in an MD&A

Crius has engaged a third-party advisor to explore strategic alternatives for the solar business. Management expects to announce a definitive path forward for the solar business by the time it announces its results for the second quarter of 2018.

"Management is confident that the solar business has long-term potential and the assets acquired by Crius Energy provide a strong platform to compete in the residential solar market. However, solar industry volatility, potential for continued investment required by Crius Energy, and distraction from the deregulated energy business are all factors that contributed to Management's decision to engage a third-party advisor to explore strategic alternatives for the solar business," Crius said in an MD&A

As a result of Management’s decision to focus on the deregulated energy business, Crius is targeting incremental cost reductions which will bring total annual cost savings to $20-25 million including the previously announced USG&E synergies. The incremental cost reductions will result from internal restructuring that will take place over the next 18 months, Crius said

Crius said that weather-driven volatility during the first quarter will likely have an outsized impact on smaller competitors, and create potential opportunities for tuck-in acquisitions

"We absolutely expect the smaller retailers who are less sophisticated with regards to risk management probably suffered from those conditions, and ultimately creates an environment where we can see ourselves doing some more tuck-in acquisitions," Fallquist said during an earnings call

Crius Management is forecasting a moderation in net customer growth rates in 2018 as compared to prior years, due to a focus on higher-margin sales and portfolio optimization initiatives.

"Management are investing in high-margin growth in the residential and small commercial customer segments, and de-emphasizing the large commercial customer segment due to the competitive environment which has reduced margins significantly. Our focus on higher-margin sales is expected to increase near-term attrition as we enroll and renew fewer lower-margin large commercial customers as compared to prior years," Crius said

"Portfolio optimization is intended to increase margin and reduce attrition over the long-term as customers will receive differentiated products and service levels based on expected customer lifetime value. Portfolio optimization is expected to increase near-term attrition as customers below internal customer lifetime value thresholds will be returned to the utility upon product expiration if we are unsuccessful at enrolling them on products that meet or exceed our internal return thresholds," Crius said

"While the forecasted moderation in customer growth rates is expected to negatively impact 2018 full year financial and operating results, Management believe these changes will ultimately enhance performance in 2019 and beyond. This was highlighted in our first quarter of 2018 results where net customer count declined by 21,000 customers, or 1.5%, however Embedded Margin of the portfolio increased by an estimated $6.7 million or 2.9% per customer," Crius said

Crius' Residential Customer Equivalents (RCEs) stood at 1.389 million as of March 31, 2018, versus 1.410 million as of December 31, 2017 and 1.003 million a year ago

The net decline of 21,000 RCEs from December 31, 2017 to March 31, 2018 compares to a net decline of 36,000 RCEs from September 30, 2017 to December 31, 2017, and reflects the focus on higher-margin customers and the shift away from large C&Is and municipal aggregations

From December 31, 2017 to March 31, 2018, Crius added a gross of 155,000 customers (RCEs) including 140,000 organically from sales and marketing channels and 15,000 through acquisition. Organic gross adds represented a decrease from the average in the prior four quarters of 167,500, due to a focus on higher-margin residential and small commercial customers resulting in a reduced contribution from the large commercial and municipal aggregation channels which were strong contributors to gross adds over the prior four quarters.

Gross customer drops in the first quarter of 176,000 customers were higher than the average in the prior four quarters of 148,000. The increased number of customer drops reflects both the expanded size of the portfolio as a result of the acquisition of USG&E, as well as elevated end-of-term large commercial non-renewals in the quarter.

Crius reported that, "To facilitate growth in the high-margin residential customer segment, we are focused on expanding the USG&E direct-to-consumer sales channels, supporting the relaunch of Comcast, the launch of CREDO Mobile on the Energy Rewards Integrated Energy Platform ('IEP') and the expansion of Fairpoint Communications to additional markets following its acquisition by Consolidated Communications Holdings, Inc. in 2017, as well as continuing to add new exclusive partners to the Energy Rewards IEP. The Energy Rewards IEP strategy was designed to increase value from our strategic partnership channel as it increases speed-to-market for new partners, reduces the cost for Crius Energy to on-board new partners and increases operational efficiency for serving customers going forward. CREDO Mobile successfully started enrolling customers in May 2018 and Comcast remains on track to begin relaunch marketing in the second quarter."

For the three months ended March 31, 2018, Crius reported Adjusted EBITDA of $19.8 million, an increase from the $14.5 million achieved in the year-ago quarter. During the quarter, the deregulated energy business contributed $22.2 million in Adjusted EBITDA.

The improved Adjusted EBITDA was largely driven by the acquisition of USG&E in the third quarter of last year

"Management is pleased with the $22.2 million Adjusted EBITDA contribution of the deregulated energy business, particularly given the impact of certain one-time costs detailed below and the challenging weather conditions experienced in January 2018, with extreme cold temperatures and volatility in wholesale energy prices. While the weather event did impact our results, which is reflected in lower electric unit margins realized in the quarter, Management view the overall financial performance of the deregulated energy business in these volatile conditions as a testament to the Company's industry-leading risk management capabilities and diverse customer portfolio," Crius said

Net income was $4.3 million in the first quarter of 2018, compared to a net loss of $26.3 million in the first quarter of 2017, with the year-over-year increase impacted by an increased tax benefit of $29.1 million including the recognition of previously unrecognized deferred tax assets.

Gross margin for the first quarter of 2018 was $59.8 million, an increase from $37.1 million of gross margin in the first quarter of 2017, primarily driven by the incremental gross margin from the USG&E business. As a percentage of total revenue, gross margin was 18.6% in the first quarter of 2018, a decrease from 20.9% in the prior comparable quarter, with the period-over-period decrease being impacted by the above-mentioned weather conditions compounded by the commencement of service during the quarter of a large municipal aggregation of approximately 134,000 customers in Massachusetts, partially offset by the addition of the higher-margin USG&E customer portfolio.

Revenues increased 81.4% in the first quarter of 2018 to $321.8 million from $177.4 million in the prior comparable period primarily due to the addition of customers associated with the acquisition of USG&E, and increased customer usage due to temperatures being approximately 12% cooler than in the prior comparable period

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