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Just Energy Reports Higher Gross Margin On Improved Pricing Power

Notes Spike In Finance Costs Due To Texas Collateral-Related Costs In Texas

RCE Count Down Slightly

February 7, 2019

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Reporting by Paul Ring • ring@energychoicematters.com

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Just Energy (the "Company") reported a 10% increase in gross margin for the three months ended December 31, 2018 (third fiscal quarter of FY 2019), versus the year-ago quarter, on improved pricing power in North America

Specifically, gross margin for the three months ended December 31, 2018 was $188.5 million, versus $171.3 million a year ago (all $ Canadian), "due to improved pricing power in North America, enabled by the Company’s unique customer value enhancing product offerings coupled with loyalty rewards offered through a multi-channel approach, and margin expansion from a suite of value-added products and services, partially offset by risk management costs," the Company said

Sales revenue increased 6% to $966.7 million during the three months ended December 31, 2018

Base EBITDA for the three months ended December 31, 2018 was $58.2 million, up 11% from $52.5 million a year ago

For the three months ended December 31, 2018, administrative expenses increased by 11%, to $56.0 million, "due to upfront costs relating to process and operational efficiency improvement activities, ongoing support for business expansion including the transaction costs to acquire Filter Group and unfavourable foreign exchange fluctuations," the Company said

"The Company continues its efforts to reduce administrative expenses through greater automation and consolidation of support activities," Just Energy said

Selling and marketing expenses for the three months ended December 31, 2018 were $57.3 million, up from $55.5 million reported in the prior comparable quarter, due to the increased commission costs to acquire new customers, offset by capitalization of certain upfront incremental customer acquisition costs and a decrease in non-commission selling expense

Finance costs for the three months ended December 31, 2018 amounted to $22.8 million, an increase of 72% from $13.3 million reported for the three months ended December 31, 2017, "primarily driven by higher collateral related costs associated with Texas electricity markets, supplier credit term extension, interest expense from higher debts and higher interest rates," the Company said

Bad debt expense was $20.2 million for the three months ended December 31, 2018, an increase of 55% from $13.1 million recorded for the prior comparable quarter. The increase was partially driven by higher revenue. Bad debt expense represents approximately 2.4% of revenue in the jurisdictions where the Company bears the credit risk, up from 2.1% of revenue reported for the three months ended December 31, 2017.

As of December 31, 2018, Just Energy was serving 4.133 million residential customer equivalents (RCEs) in its commodity business, versus 4.164 million RCEs as of October 1, 2018 and 4.114 million a year ago.

The net loss of 31,000 RCEs from October 1, 2018 to December 31, 2018 compares to a net decline of 9,000 RCEs from July 1, 2018 to September 30, 2018 and net growth of 10,000 RCEs from April 1, 2018 to June 30, 2018.

At December 31, 2018, Just Energy was serving 1.754 million Consumer (mass market) RCEs and 2.379 million Commercial RCEs

Gross RCE additions for the quarter ended December 31, 2018 were 238,000, a decrease of 22% compared to RCEs added in the year-ago quarter, "reflecting the transition from a purely RCE driven focus to a greater focus on attracting and retaining strong-fit customers that will drive greater profitability," the Company said. Gross RCE additions for the period from July 1, 2018 to September 30, 2018 had been 290,000

Gross Consumer RCE additions amounted to 115,000 for the three months ended December 31, 2018, a 10% increase from 105,000 gross RCE additions recorded in the prior comparable quarter, primarily driven by winning new customers through the annual Ohio gas standard choice offer auction, offset by failed to renew U.K. residential aggregation customers. As of December 31, 2018, the U.S., Canadian and U.K. segments accounted for 68%, 17% and 15% of the Consumer RCE base, respectively.

Gross Commercial RCE additions were 123,000 for the three months ended December 31, 2018, a 38% decrease over the prior comparable quarter due to significant additions in the prior quarter coming from large commercial and industrial customers and Interactive Energy Group totaling 69,000 RCEs. The Commercial failed to renew RCEs for the three months ended December 31, 2018 improved by 42%, decreasing from 125,000 RCEs to 72,000 RCEs. As of December 31, 2018, the U.S., Canadian and U.K. segments accounted for 69%, 25% and 6% of the Commercial RCE base, respectively.

For the three months ended December 31, 2018, 52% of the total Consumer and Commercial RCE additions were generated through commercial brokers, 30% from online and other sales channels, 10% from retail channels and 8% from door-to-door sales. In the prior comparable quarter, 44% of RCE additions were generated from retail, online and other sales channels, 39% from commercial brokers, and 17% from door-to-door sales.

Overall, as of December 31, 2018, the U.S., Canadian and U.K. segments accounted for 69%, 21% and 10% of the RCE base, respectively. At December 31, 2017, the U.S., Canadian and U.K. segments represented 68%, 22% and 10% of the RCE base, respectively.

The combined attrition rate for Just Energy was 13% for the trailing 12 months ended December 31, 2018, consistent with the prior comparable 12 months. The Consumer attrition rate decreased two percentage points to 20% from a year ago while the Commercial attrition rate increased one percentage point to 6%. The decrease in the Consumer attrition rate is a result of Just Energy’s focus on margin optimization while focusing on becoming the customers’ 'trusted advisor' and providing a variety of energy management solutions to its customer base to drive customer loyalty. The increase in the Commercial attrition rate reflected a very competitive market for Commercial renewals with competitors pricing aggressively, and Just Energy’s focus on improving retained customers’ profitability rather than pursuing low margin growth.

Overall, the renewal rate was 58% for the trailing 12 months ended December 31, 2018, consistent with the prior comparable period. The Consumer renewal rate stands at 72%, and the Commercial renewal rate at 48%, also consistent with the prior comparable period.

Gross margin for the three months ended December 31, 2018 for the Consumer division was $145.9 million, an increase of 10% from $132.8 million recorded in the prior comparable quarter. Gross margin from electricity customers in the Consumer division was $89.9 million for the three months ended December 31, 2018, a 16% increase from $77.3 million recorded in the prior comparable quarter. This was primarily the result of the improved pricing power, continued risk management of weather derivative costs and a positive foreign exchange impact.

Average realized gross margin for the Consumer division for the rolling 12 months ended December 31, 2018 was $241/RCE, representing a 3% decrease from $248/RCE reported in the prior comparable quarter. The decrease is primarily attributable to significant increase in bad debt expense in fiscal 2019.

For the three months ended December 31, 2018, the average gross margin per RCE for the customers added or renewed by the Consumer division was $347/RCE, an increase of 54% from $225/RCE in the prior comparable period. The average gross margin per RCE for the Consumer customers lost during the three months ended December 31, 2018 was $309/RCE, an increase from $189/RCE for customers lost in the prior comparable period. The increase in gross margin is attributed to the improved pricing power and continued risk management of the weather derivative costs.

Gross margin for the Commercial division was $42.6 million for the three months ended December 31, 2018, an increase of 11% from $38.5 million recorded in the prior comparable quarter.

Average realized gross margin for the rolling 12 months ended December 31, 2018 was $86/RCE, a decrease of 2% from the $88/RCE reported in the prior comparable period.

For the Commercial division, the average gross margin per RCE for the customers signed during the three months ended December 31, 2018 was $80/RCE, an increase of 10% from $73/RCE in the prior comparable period. Customers lost through attrition and failure to renew during the three months ended December 31, 2018 were at an average gross margin of $70/RCE, a decrease from $77/RCE reported in the prior comparable period. Management continues to focus on margin optimization by focusing on small and medium-sized customers and retaining our larger margin customers.

The average aggregation cost for the Consumer division was $222/RCE for the trailing 12 months ended December 31, 2018, an increase from $178/RCE reported in the prior comparable period. The increase in cost in the current 12-month period over the prior year is a result of the shift in the Company’s sales channels from door-to-door to retail stores, online broker and other non-door-to-door sales channels, resulting in an increase in the customer acquisition cost paid per RCE.

The average aggregation cost for the Commercial division was $48/RCE for the trailing 12 months ended December 31, 2018, an increase from $42/RCE reported in the prior comparable period.

In terms of customer count across Just Energy's commodity and value-added products and services (VAP) businesses, Just Energy's total customer count was 1.647 million as of December 31, 2018, versus 1.607 million a year ago. The December 31, 2018 total reflects 1.432 million commodity-only customers, 69,000 VAP-only customers, and 146,000 Commodity and VAP bundle customers. The total VAP customer count also includes 27,000 distinct customers from Filter Group’s water filter subscriptions, with 33,000 active assets. Just Energy’s customer base also includes 76,000 smart thermostat customers

Just Energy reiterated its previously reported strategy, stating, "Just Energy is executing a strategic shift from a retail energy provider to a consumer company focused on differentiated value-add products, unparalleled customer satisfaction and profitable customer growth. Just Energy’s strategic transformation from an era of price-based commodities sold through third parties to a future as a more customer-centric consumer company is well underway. The Company’s near-term success starts with its core business. The core commodity business continues to perform well and the embedded gross margin on its existing book of business remains at a Company record high of $2.3 billion. Just Energy’s unique offering of value-added products and services seeks to address its customers’ concerns around their families’ health and well-being, utility conservation and essential energy needs in their homes. To achieve profitability and optimize growth in the remainder of fiscal 2019 and beyond, Just Energy will drive sales, gross margin and high-quality customer growth through its multi-channel strategy by aggressively promoting these three product growth categories, while developing additional strategic, alternative channels. Just Energy will also deploy a consistent value-creation product strategy across the consumer business."

"Just Energy has undertaken several initiatives in fiscal 2019 to attract higher margin customers in conjunction with implementing margin enhancement actions across the organization. To further drive profitability, Just Energy implemented cost cutting initiatives and will continue its efforts to reduce administrative expenses through greater automation and consolidation of support activities," the Company said

Just Energy is holding an earnings call later this morning

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