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As Part Of Ending Municipal Aggregation Business, Crius May "Divest" Current Municipal Aggregation Book

Crius Announces Results Of Review Of Strategic Alternatives For Solar Business

Crius Reports Lower Customer Count, Adjusted EBITDA

November 14, 2018

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

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Note: This story was first published the evening of Nov. 14 with an alert to our email subscribers

In announcing earnings today, Crius Energy Trust announced the results of the strategic review for alternatives for its solar business

Crius said that, "A third-party adviser was engaged to explore the strategic alternatives for the solar business, and as a result of this process, the decision was made to wind-down the solar business, with the temporary exception of the Verengo new home installation business in California, which operates at a near break-even basis. Verengo will continue operating during the final stages of our strategic review, which is now expected to conclude in the fourth quarter of 2018."

"As of the end of the third quarter of 2018, the Company has substantially wound down its solar business, such that it does not expect a continued meaningful negative financial impact from the solar business in the fourth quarter of 2018 and beyond," Crius said

Crius further said, "The Company is in the final stages of a multi-step process to divest the solar business and expect minimal ongoing losses from this business during the remainder of the year. While the initial expectation was that the process would be complete in the third quarter of 2018, we now expect the process to be completed by the end of the year. Solar related losses have been substantially eliminated due to the discontinuation of solar sales and marketing activities, with the temporary exception of the Verengo Solar platform in California, which continues to operate on a near break-even basis. Excluding any proceeds from a sale of the solar business, the Company estimates one-time costs of up to $2 million to be incurred in the fourth quarter of 2018," Crius said

"Our strategic shift to exit the solar business and redouble focus on the deregulated energy business is expected to result in a cumulative $35 million annual improvement to our Adjusted EBTIDA, commented Michael Fallquist, Chief Executive Officer of Crius Energy.

Crius also further discussed its exit from the municipal aggregation business, which had been first reported by EnergyChoiceMatters.com in August

Crius said that it, "intends to run-off and/or divest," the municipal aggregation business. Crius had previously said in August that it, "decided not to pursue future municipal aggregations and we will be evaluating our options related to our portfolio of approximately 300,000 customers acquired through this channel," but had not previously used the term "divest" in discussing its exit plans for municipal aggregation

"As signaled last quarter, Management are evaluating strategic alternatives for its municipal aggregation portfolio of approximately 300,000 customers, including a potential divestiture of the portfolio. Regulatory changes have negatively impacted the value of our municipal aggregation portfolio as wholesale costs factors have increased in New Jersey and Massachusetts, namely due to RTEP and RPS costs that the Company has not been able to fully pass through to customers as a result of how the customer contracts are structured," Crius said

"Assuming the municipal aggregation portfolio is not sold, Management expect gross margin and net customer growth to be negatively impacted in 2019. Management expect roll-off of our current portfolio of municipal aggregation portfolio will negatively impact our reported net customer growth, with approximately 140,000 customers scheduled to drop from the portfolio as a result of non-renewal from the fourth quarter of 2018 through the end of 2019, subject to normal course attrition prior to contract expiration. Crius is actively working to wind-down or restructure these contracts and in the fourth quarter to date, has terminated two aggregations, amounting to approximately 17,000 customers," Crius said

The municipal aggregation channel negatively impacted gross margins for the quarter ending September 30, 2018 (third quarter)

Gross margin for the third quarter of 2018 was $52.9 million, representing a decrease from $54.9 million of gross margin in the third quarter of 2017.

"Gross margins in the quarter were negatively impacted by our municipal aggregation portfolio, which Crius intends to run-off and/or divest, as regulatory changes resulted in significant incremental wholesale cost factors in New Jersey and Massachusetts, namely Regional Transmission Expansion Plan (RTEP) and Renewable Portfolio Standards (RPS) costs, which the Company was not able to fully pass through to customers as a result of how the customer contracts are structured. These regulatory changes impacted expected gross margin by negative $4.4 million in the quarter, and negatively impacted electric gross margins per unit by $1.32 per MWh. Additionally, the warmer-than-normal summer weather conditions experienced in the quarter, impacted gross margins, driving both increased customer usage and revenues as well as increased wholesale costs, particularly impacted by increased volatility in the Texas electric market (ERCOT). These offsetting impacts of higher customer usage and increased costs offset such that weather did not impact overall gross margins in the quarter on a net basis, demonstrating the benefits of geographic and commodity diversification in our customer portfolio," Crius said

Adjusted EBITDA in the third quarter of 2018 was $15.2 million, representing a decrease from the $18.3 million reported in the third quarter of 2017. In the third quarter of 2018, Adjusted EBITDA results were comprised of a $18.6 million contribution from the deregulated energy business and a negative $3.4 million contribution from the solar business, which was elevated over recent prior quarters due to certain non-recurring costs incurred to wind-down the solar business. The deregulated energy contribution to Adjusted EBITDA in the third quarter was adversely impacted by $2.3 million in non-recurring general and administrative expenses incurred in the quarter primarily related to the achievement of cost-synergies. Normalizing for these non-recurring costs, Adjusted EBITDA from the deregulated energy business was $20.9 million for the third quarter of 2018, representing 6% growth over the $19.8 million normalized Adjusted EBTIDA contribution from the deregulated energy business in the prior comparable quarter, Crius said

Revenues increased 33.2% in the third quarter of 2018 to $359.4 million from $269.9 million in the prior comparable period, with the increase being primarily due to summer temperatures being approximately 23% higher than the prior comparable period as measured in Cooling Degree Days on a customer-weighted basis across Crius's geographic footprint.

As at September 30, 2018, Crius Energy had 1.352 million RCEs, representing a net customer decline of 35,000 RCEs from the June 30, 2018 total of 1.387 million RCEs, and compared to 1.446 million RCEs a year ago

The net decline of 35,000 RCEs from June 30, 2018 to September 30, 2018 compares to a net decline of 2,000 RCEs from March 31, 2018 to June 30, 2018

The gross additions of 103,000 customers during the third quarter of 2018 were lower than the average in the prior four quarters of 161,000, primarily due to the decision to not participate in the municipal aggregation segment, which was a key contributor to customer additions. The average customer additions in the prior four quarters, excluding municipal aggregations, was 93,000 customers. Gross customer drops in the third quarter of 2018 totaled 138,000 customers compared to the average in the prior four quarters of 166,000.

"While the Company experienced net attrition of 35,000 customers, or 2.5%, during the quarter, Embedded Margin of the customer portfolio increased by an estimated $9.2 million or 1.9% in the quarter, which is a direct result of our focus on higher-margin customer growth and portfolio optimization," Crius said

"While we continue to invest in growth of our direct-to-consumer channel, Management expect our overall net customer count to decline in the coming quarters due to fewer large commercial enrollments and renewals, and the decision to no longer participate in the municipal aggregation segment," Crius said

Crius said that during the third quarter, it made significant progress on all of our key strategic priorities, which include:

• Exiting the solar business;

• Focusing on growth in the higher-margin residential and small commercial customer segments;

• Increasing customer-base profitability through customer portfolio optimization; and

• Executing on continued cost reduction activities.

Electricity volumes for the three month period ended September 30, 2018 were 3,357,000 MWh representing an increase of 24.7% from 2,691,000 MWh for the three month period ended September 30, 2017, with the increase being primarily due to summer temperatures being approximately 23% higher than the prior comparable period as measured in Cooling Degree Days on a customer-weighted basis across Crius's geographic customer footprint.

"Electricity gross margin for the three month period ended September 30, 2018 was $49.1 million, representing an increase of 1.2% from $48.6 million for the three month period ended September 30, 2017. For the three month period ended September 30, 2018, electricity gross margin per unit was $14.64/MWh and electricity gross margin was 14.1% of electricity revenues, representing decreases from $18.05/MWh and 18.8% respectively, for the three month period ended September 30, 2017. Gross margins and gross margins per unit variances compared to the prior comparable quarter, were impacted by the increased mix of commercial and municipal aggregation customers in the portfolio, including the commencement of service of a large municipal aggregation in Massachusetts in January 2018. Specifically, gross margins in the third quarter were negatively impacted by our municipal aggregation portfolio, which Crius intends to run-off and/or divest, as regulatory changes resulted in significant incremental wholesale cost factors in New Jersey and Massachusetts, namely RTEP and RPS costs, which the Company was not able to fully pass through to customers as a result of how the customer contracts are structured. These regulatory changes impacted expected gross margin by negative $4.4 million in the quarter (or by $1.32 per MWh)," Crius said

Natural gas volumes for the three month period ended September 30, 2018 were 1,034,000 MMBtu, representing a decrease of 26.0% from 1,397,000 MMBtu for the three month period ended September 30, 2017.

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