Common Share Dividend Suspended As Part Of Strategic Review
Further Details Texas Bad Debt, Enrollment Impairment
Customer Non-Payment Issue Led To "Material Weakness" In Internal Controls Over Financial Reporting For Prior Quarters
RCE Count Down 2%
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In announcing earnings for the quarter ending June 30, 2019 a few minutes ago, Just Energy Group Inc. said that it, "plans to dispose of its assets in the U.K. due to a decision taken during the strategic review."
The disposal of these assets is expected to occur during the strategic review process, the company said
Just Energy said that the previously announced strategic review, "is ongoing and progressing within the special committee’s expectations."
"As part of the strategic review the Board of Directors has decided to suspend its common share dividend until further notice," the company said
Just Energy said that industry veteran Walter M. Higgins III will join its Board of Directors, "to strengthen board independence and to provide deep industry expertise to support the ongoing strategic review process." Mr. Higgins is currently the Chairman of the Board of South Jersey Industries Inc. Prior to this position, Mr. Higgins served as the CEO of the Puerto Rico Electric Power Authority, President and CEO of Ascendant Group Limited in Bermuda, Chairman, President and CEO of Sierra Pacific Resources (now NV Energy) and Chairman, President and CEO of AGL Resources, the parent company of Atlanta Gas and Light.
For the quarter, Just Energy reported that Base EBITDA from continuing operations, which reflects the company’s decision to dispose of its business in the U.K., was $24.2 million (all $ Canadian), a year-over-year decrease of 31% versus the year-ago $34.8 million, with gross margin flat to the prior year, and higher amortization of customer acquisition costs in the quarter.
Gross margin from continuing operations was flat versus the year-ago at $132.3 million for the quarter, due to margin optimization in North America despite a smaller book of business, a prior period adjustment related to the winter delivery period as compared to the prior year, and the bad debt impairment, the company said
Loss for the quarter, which includes the impact of unrealized gains and losses which represent the mark to market of future commodity supply acquired to cover future customer demand as well as weather hedge contracts as part of the risk management practice, was $275 million, versus a loss of $41 million a year ago
For the quarter, "Finance costs amounted to $23.5 million, an increase of 44% due to higher interest expense from the increased utilization
of the credit facility, higher interest rates, higher premiums and fees, collateral related costs associated with Texas
electricity markets, and supplier credit term extensions," the company said
"During the first quarter, the Company took actions to significantly increase cash flow including exercising the accordion option associated with its credit facility, repaying and extending the remaining portion of the Company’s 6.5% Convertible Bond and taking operational measures to decrease negative cash flows associated with bad debt in Texas. With operational actions taken to reduce Texas bad debt and fourth fiscal quarter 2019 cost reductions beginning to take effect the Company has confidence in its ability to generate positive cash flows from the business," the company said
Just Energy further said that, "During the quarter, management identified operational issues in customer enrolment and non-payment of accounts receivable in the Texas residential market, resulting in an aggregate adjustment of $58.6 million. Management also proceeded to identify collection issues in the U.K. market, resulting in an aggregate adjustment of $74.1 million. As a result, the Company recorded additional allowances for doubtful accounts which are included in the Company’s restated third quarter and year-end financial statements for fiscal year 2019, and in the Company’s first quarter results for fiscal year 2020, as referenced within each respective management discussion and analysis."
In a restated MD&A for the period ending December 31, 2018, Just Energy said, "Subsequent to the issuance of the interim condensed consolidated financial statements for the three and nine months ended
December 31, 2018, management determined that the allowance for doubtful accounts was understated by $74.6 million."
"Management identified operational issues in customer enrolment and non-payment in the Texas residential market ('the Texas residential
enrolment and collections impairment'). Management has revisited the allowance for doubtful accounts and determined that additional
reserves of $34.5 million were required at December 31, 2018. Management also identified operational and collection issues in the United
Kingdom ('U.K.') market ('the U.K. receivables impairment') and determined that additional reserves of $40.1 million were required at
December 31, 2018," the company said
"Consequently, the Company’s management has concluded that a material weakness in its internal controls over financial reporting existed during the nine months ended December 31, 2018," the company said
"A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a
reasonable possibility that a material misstatement of the Company’s annual or interim financial statements will not be prevented or
detected on a timely basis," the company said
"The material weakness was caused by a failure to effectively operate a control to capture appropriate expected credit losses to be
reflected in the estimated allowance for doubtful accounts. This issue occurred in the Texas residential market as a result of a rapid
deterioration of the Company’s accounts receivable aging caused by operational enrolment deficiencies, and in the U.K. market as a
result of operational and customer non-payment issues, as further described in [in an MD&A]," the company said
Just Energy's Residential Customer Equivalent (RCE) count from its commodity business was 3.565 million as of June 30, 2019, versus 3.638 million as of April 1, 2019, and 3.716 million a year ago
The net loss of 73,000 commodity RCEs versus April 1, 2019 reflects, "the transition from a purely RCE driven focus to a greater emphasis on attracting and retaining strong-fit customers that will
drive greater profitability, as well as the impact of the bad debt impairment." In the year-ago period, the company had recorded net RCE additions of 24,000 RCEs
The company also cited a, "focus on renewing and signing higher quality customers, natural attrition of the customer base, and the impact of the bad debt impairment."
Gross RCE additions for the quarter were 196,000, compared to 290,000 RCEs in the year ago period.
Consumer segment gross commodity RCE additions amounted to 75,000 for the quarter, a 36% decrease from 117,000 gross RCE additions in the year ago period. The variance was primarily driven by the bad debt impairment, the exit of the California market, the addition of customers through Ohio gas standard choice offer auction in the prior quarter and the natural attrition in response to the pricing actions implemented in fiscal 2019. Just Energy's closing of several California sales offices had been previously reported, but its exit from California had not been disclosed previously
Commercial segment commodity RCE additions were 121,000 for the first fiscal quarter, a 30% decrease over the prior comparable
quarter in fiscal 2019 due to competitive pressures and the natural attrition in response to the fiscal 2019 pricing actions.
The commercial segment failed to renew RCEs in the quarter fell from 114,000 RCEs to 72,000 RCEs.
The combined attrition rate was even at 14% for the trailing 12 months ended June 30, 2019, consistent with the prior
comparable quarter. The Consumer attrition rate decreased one percentage point to 22% while the Commercial attrition
rate increased two percentage points to 7%.
The decrease in Consumer attrition rate is a result of Just Energy’s focus on
margin optimization while working to become the customers’ 'trusted advisor' and providing a variety of energy
management solutions to its customer base to drive loyalty, the company said
"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," the company said
The average gross margin per RCE for the customers added and renewed by the Consumer segment was $357/RCE in the quarter, an increase of 56% from $229/RCE in the prior comparable period. The increase in gross margin is attributed to the improved pricing power and continued risk management of the weather derivatives costs.
For the Commercial segment, the average gross margin per RCE for the customers signed during the quarter was $76/RCE, a decrease of 6% from $81/RCE in the prior comparable period
The renewal rate for the trailing 12 months ended June 30, 2019 was 59%, an increase of four percentage points from
55% as at June 30, 2018. The Consumer renewal rate decreased by four percentage points to 69%, and the Commercial
renewal rate increased by eight percentage points to 54% as compared to the trailing 12 months.
Concerning its Balance Sheet & Liquidity, Just Energy said, "Cash and short-term investments decreased from $9.9 million to net balance of negative $0.4 million as at June 30, 2019."
"The decrease in cash is due to the seasonality of the payments relating to the commodity business moving from winter to
spring, the impact of the Texas Residential enrollment and collections impairment, the U.K. receivables impairment and the
payments related to the Filter Group acquisition," the company said
"Total long-term debt of $774.9 million increased from $725.4 million. This increase is a result of additional drawings on
credit facility of $54.2 million and unfavorable foreign exchange fluctuations on the U.S. dollar debt," the company said
"Just Energy’s book value of net debt to the fiscal year’s base EBITDA was 4.1x, higher than the 3.2x reported as at March
31, 2019," the company said
"Since June 30, 2019 the Company has taken actions to improve liquidity. Actions include exercising the $17.5M accordion
option associated with the credit facility and the extension of the remaining portion of the Company’s 6.5% Convertible
Bond. In addition, cash flow from operations continues to improve as bad debt decreases and the impact of cost reductions
begin to take effect," the company said
"While Just Energy remains focused on best in class service to its customers, the strategic review has provided insights into how best to unlock value
from the business through a comprehensive review of capital expenditures, streamlining the organization, enhance internal controls, and further
refinement of the geographic footprint. As part of this process the Company has decided to dispose of the U.K. business," the company said
"Due to the reclassification of the U.K. business, the accounts receivable impairment, and first quarter fiscal 2020 performance, management is
revising its fiscal year 2020 base EBITDA from continuing operations to now be in the range of $180 million to $200 million, as well as fiscal 2020 free
cash flow guidance of between $50 million to $70 million, defined as cash flow from operating activities minus cash flow from investing activities and
excluding U.K. discontinued operations," the company said