Updated: Just Energy Announces Buyer For Another International Business, Discloses Proceeds

Just Energy Reports Higher Gross Margin, Base EBITDA

RCE Count Falls On Customer Profitability Focus

Reports "Very Competitive Market For Renewals"; Competitors "Pricing Aggressively"

November 6, 2019

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Copyright 2010-19 EnergyChoiceMatters.com
Reporting by Paul Ring • ring@energychoicematters.com

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Updated, 11/7:

Flogas Natural Gas Limited said that it is acquiring about 10,000 residential and commercial customers from Just Energy Ireland under the transaction first reported by EnergyChoiceMatters.com on November 6, as noted below

Earlier, 11/6:

Just Energy Group Inc. reported earnings for the three months ended September 30, 2019 (second fiscal quarter of 2020)

In doing so, Just Energy reported that, to further advance its disposal of non-core operations, Just Energy entered into a sale of operations for its wholly-owned subsidiary Just Energy (Ireland) Limited to Flogas Natural Gas Limited for up to €0.7 million ($1.0 million, all $ Canadian).

For the sale of the Ireland business, Just Energy will receive 75% of the purchase price in cash at closing and up to 25% of the purchase price five months after closing. The net consideration payable to the company is subject to an adjustment based on the actual number of accounts transferred to Flogas.

The sale of the Ireland operations and previously reported sale of the U.K. operations (story here) are expected to close by the end of 2019.

The company continues to actively market its remaining non-core operations, based on its previously reported commitment to focus on its higher margin North American operations

Just Energy said that the previously announced strategic review, "remains active and is progressing."

"Just Energy has not set a specific timeframe for the conclusion of the strategic review. The Company plans to provide an update when the Board has approved a specific course of action," the company said

"The Company has made progress in disposing of non-core, lower-margin operations, along with identifying approximately $60 million in costs savings to date in fiscal 2020," Just Energy said

"While the strategic review is ongoing, we remain focused on running our business well. We are driving performance improvements and focusing on best-in-class customer service, as we shape a brighter future for Just Energy," said Just Energy’s President and Chief Executive Officer, R. Scott Gahn. "Our objective for the remainder of the fiscal year is clear: we are focused on signing high-quality customers while we continue to lower our cost structure and drive improved profitability."

"In addition, we have implemented stringent controls and disposed of non-core operations to allow us to focus on our higher-margin North American operations," Gahn added.

"The Company has identified approximately $60 million in cost cutting initiatives in fiscal year 2020 and will continue to review its operations for additional ways to improve efficiencies and lower its cost structure," Just Energy said

Just Energy reported improved gross margin and higher Base EBITDA from continuing operations versus the year-ago quarter

"Gross margin and Base EBITDA from continuing operations increased in the current quarter despite a reduction in sales, largely due to improved margin optimization in North America, lower administrative costs and a $15.2 [sic, million] gain on the contingent consideration associated with the Filter Group acquisition, partially offset by higher selling and marketing and bad debt expenses," the company said

Gross margin increased 4% to $155.4 million for the quarter ending Sept. 30, 2019, versus $149.0 million a year ago, despite a 4% reduction in sales, "mainly due to improved margin optimization in North America, lower hedged supply costs in Texas and additional margin from the Filter Group business which was acquired in the third quarter of fiscal 2019, offsetting the 4% drop in sales caused by the decline in the customer base," the company said

Average realized gross margin for the Consumer segment for the rolling 12 months ended September 30, 2019 was $320/RCE, representing a 27% increase from $252/RCE reported in the prior comparable quarter. The increase is primarily attributable to improved margin optimization. The gross margin/RCE value includes an adjustment for bad debt expense in applicable markets.

For the Commercial segment, average realized gross margin for the rolling 12 months ended September 30, 2019 was $94/RCE, a decrease of 4% from the $98/RCE reported in the prior comparable period. The gross margin per RCE value includes an adjustment for bad debt expense in markets where Just Energy has customer credit risk.

Base EBITDA from continuing operations, which reflects the company’s decision to dispose of its business in the U.K., was $49.1 million for the quarter ending Sept. 30, 2019, 31% higher than the $37.3 million recorded in the prior comparable quarter. Improved profitability in the second quarter was driven by improvements in gross margin, lower administrative expenses and a gain on the reduction of the $15.2 million contingent consideration from the company’s acquisition of Filter Group, partially offset by higher bad debts and an increase in selling expenses to support growth in new sales channels.

The Consumer segment contributed $59.6 million to Base EBITDA for the three months ended September 30, 2019, an increase of 20% from $49.7 million in the prior comparable quarter due to improvements in gross margin, lower administrative expenses and a gain on the reduction of the contingent consideration from the Company’s acquisition of Filter Group, partially offset by increased bad debt expenses and selling expenses to support new channel growth. The Commercial segment contributed $11.5 million to Base EBITDA, which is largely consistent with the prior comparable quarter, when the segment contributed $11.3 million. The Corporate and Shared Services segment recorded negative $22 million in Base EBITDA for the three months ended September 30, 2019

Sales were $768 million for the quarter ending Sept. 30, 2019, versus $804 million a year ago

Administrative expenses decreased 7% to $41.5 million, due to savings from the restructuring actions in fiscal 2019 and as the impact of additional cost cutting initiatives began to take effect. Costs associated with the company’s strategic review of $3.6 million partly offset the impact of the Company’s improving cost structure. Excluding the impact of the strategic review costs, administrative expenses were 14% lower than the same quarter last year.

Selling and marketing expenses from continuing operations were $54.3 million, up 8% as the company focused on enhancing the quality of its customer base. Selling and marketing expenses increased largely as a result of higher customer acquisition costs, higher marketing charges in different channels, partially offset by the capitalization of new upfront incremental customer acquisition costs.

Bad debt expense was $29.6 million for the three months ended September 30, 2019, an increase of 46% from $20.2 million recorded for the prior comparable quarter

"The increase for the three and six months ended September 30, 2019 was driven by higher bad debt charges in the Texas residential market as customers that were historically able to exploit the Company’s sales and operational enrolment controls continued to decline and drop from the portfolio. The Company continues to see improvement in its expected credit loss experience since identifying and closing certain enrolment control gaps previously disclosed by the Company," Just Energy said

The average gross margin per RCE for the customers added and renewed by the Consumer segment was $314/RCE in the quarter ending Sept. 30, 2019, a decrease of 2% from $322/RCE in the prior comparable quarter. The average gross margin per RCE for the Consumer customers lost during the current quarter was $331/RCE, an increase from $190/RCE for customers lost in the prior comparable quarter. The increase in gross margin on customers lost is a result of the natural attrition in response to the pricing actions implemented in fiscal 2019, the company said

For the Commercial segment, the average gross margin per RCE for the customers signed during the quarter ending Sept. 30, 2019 was $87/RCE, a decrease of 6% from $96/RCE in the prior comparable quarter. Commercial Customers lost through attrition and failure to renew during the current quarter were at an average gross margin of $91/RCE, an increase from $81/RCE reported in the prior comparable quarter. This increase is a result of "competitive pricing pressures" in North America, the company said. For the Commercial segment, annual gross margin per RCE excludes margins from Interactive Energy Group and large Commercial and Industrial customers.

Just Energy's Residential Customer Equivalent (RCE) count from its commodity business was 3.500 million as of September 30, 2019, down from 3.565 million as of June 30, 2019 and 3.725 million a year ago.

The net loss of 65,000 commodity RCEs from July 1, 2019 to September 30, 2019 compares to a net loss of 73,000 RCEs from April 1, 2019 to June 30, 2019. In the year-ago quarter, Just Energy had recorded growth of 9,000 RCEs

Noting the RCE decline, Just Energy reiterated its strategy of placing a, "greater focus on attracting and retaining high quality customers with a potential for multiple product sales, that will drive greater profitability and brand loyalty."

Gross RCE additions for the quarter ending Sept 30, 2019 were 168,000, compared to 256,000 a year ago, "reflecting the transition from a purely RCE driven focus to a greater emphasis on attracting and retaining strong-fit customers that will drive greater profitability," the company said

Consumer segment gross RCE additions for the quarter ending Sept 30, 2019 amounted to 71,000, a 41% decrease from 120,000 gross RCE additions recorded in the year-ago quarter. "The variance was primarily driven by a greater focus on attracting and retaining strong-fit customers that will drive greater profitability and the natural attrition in response to the pricing actions implemented in fiscal 2019," the company said

Consumer customers-failed-to-renew RCEs for the three months ended September 30, 2019 decreased to 28,000 RCEs, from 42,000 RCEs a year ago, due to improved retention offerings including the perks points loyalty program.

Commercial segment gross RCE additions were 97,000 for the quarter ending September 30, 2019, a 29% decrease over the year-ago quarter, due to competitive pressures and the natural attrition, "in response to the fiscal 2019 pricing actions," the company said. The Commercial segment failed-to-renew RCEs in the current quarter fell to 50,000 RCEs, from 52,000 RCEs a year ago.

On a total customer count basis, including commodity customers, value-added products & service (VAPS) customers, and bundled customers, Just Energy had 1.198 million customers as of September 30, 2019, versus 1.262 million as of June 30, 2019 and 1.305 million a year ago. "The decline in customers is a result of the Company’s focus on renewing and signing higher quality and long-lasting customers, as well as the natural attrition of the customer base," the company said

The total VAPS customer count also includes 27,000 distinct customers from Filter Group’s water filter subscriptions, with 29,000 active assets and 73,000 smart thermostat customers.

The combined attrition rate was 15% for the trailing 12 months ended September 30, 2019, a 2% increase with the prior comparable quarter. The Consumer attrition rate increased one percentage point to 23% and the Commercial attrition rate increased two percentage points to 8%. The increase in the Consumer and overall attrition rate is a result of the decline and drop off of lower-quality Texas residential customers, the company said

"The increase in the attrition rates reflect a very competitive market for renewals with competitors pricing aggressively, and Just Energy’s focus on improving retained customers’ profitability," the company said

The renewal rate for the trailing 12 months ended September 30, 2019 was 59%, an increase of three percentage points from 56% as at September 30, 2018. The Consumer renewal rate decreased by two percentage points to 69%, while the Commercial renewal rate increased by six percentage points to 53% compared to the prior trailing 12 months. The increase in the overall renewal rate is driven by better retention of Commercial customers.

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