Crius Energy Trust Reports Third Quarter 2018 Results

Source Press
Company Crius Energy Trust 
Tags Deals, Debt Financing, Corporate Deals, Refining & Marketing Activities
Date November 14, 2018

Strong performance from the deregulated energy business with $20.9 million in normalized Adjusted EBITDA

 Crius Energy Trust ("Crius Energy" the "Company" or the "Trust") (TSX: KWH.UN) today announced its financial results as at and for the three and nine month periods ended September 30, 2018. All figures are in U.S. dollars unless otherwise noted."

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. "We also expect our results in future quarters to benefit from the growth in our embedded margin, up over $20 million since the beginning of 2018, which reflects our view on the value of our customer portfolio. The strategic changes we've made, combined with the increased value of our customer portfolio, give me confidence that we have a solid foundation capable of producing more than $100 million of Adjusted EBITDA annually which supports the sustainability of our distribution."

Financial Highlights

  • Revenue of $359.4 million in the third quarter of 2018, representing a 33.2% increase from $269.9 million in the third quarter of 2017.
  • Gross margin of $52.9 million for the third quarter of 2018, compared to gross margin of $54.9 million in the third quarter of 2017.
  • Net income of $7.7 million in the third quarter of 2018, compared to a net income of $25.0 million in the third quarter of 2017.
  • Adjusted EBITDA of $15.2 million in the third quarter of 2018, compared to $18.3 million achieved in the third quarter of 2017. During the quarter, the deregulated energy business contributed Adjusted EBITDA of $20.9 million after normalizing for non-recurring costs and the negative contribution from the solar business.
  • Cash flows used in operating activities of $3.8 million in the third quarter of 2018, compared to cash flows provided by operating activities of $5.3 million in the third quarter of 2017.
  • Distributable Cash of $4.4 million in the third quarter of 2018, representing a decrease from $13.2 million for the third quarter of 2017. Distributable Cash for the last twelve months was $24.8 million, representing a Payout Ratio of 147.3%, which is elevated over recent levels due to the impacts of the negative contribution from the solar business and certain non-recurring costs as described below. Normalizing for these impacts, the Distributable Cash and Payout Ratio for the last twelve months were $42.1 million and 86.7%, respectively.
  • Total Cash and Availability at the end of the third quarter of 2018 of $30.1 million, compared to $49.4 million as of the end of 2017.

Operational Highlights

  • Net customer attrition of 35,000 in the third quarter of 2018, with customer count totaling 1,352,000 at the end of the third quarter of 2018
    • Added 103,000 customers organically from sales and marketing channels in the third quarter of 2018 compared to the average in the prior four quarters of 161,000. Third quarter customer additions compare to the average in the prior four quarters, excluding municipal aggregations, of 93,000.
    • Gross customer drops in the third quarter of 138,000 customers compare to the average in the prior four quarters of 166,000.
  • Embedded Margin of the customer portfolio increased by $9.2 million, or 1.9%, in the quarter to $495.4 million.

Growth and Corporate Highlights

  • Consolidated supplier agreement and credit facilities and added an expanded syndicated working capital credit facility
    • In August 2018, the Company announced the combining of its existing credit facilities into a single consolidated credit facility("Credit Facility") for the Company's wholesale energy supply requirements with a limit of $140 million, and adding a syndicated working capital facility with an initial limit of $110 million for cash advances and letters of credit.
    • The Credit Facility, which has a three-year term ending in August 2021, benefits Crius through improved trading terms and pricing, with lower volumetric energy fees and the interest rate on working capital advances of LIBOR plus 5.5% changing to a tiered pricingstructure of between 1.75% and 4.25% plus the applicable LIBOR or prime rate, in the case of cash advances, based on leverage levels. 

  • Continued positive results from the integration of the U.S. Gas & Electric, Inc. business and broader cost-reduction initiatives
    • Based on activities achieved through the end of the third quarter of 2018, the Company has achieved an annualized run-rate of $22.3 million in cumulative cost-synergies and has plans in place to achieve $25.1 million in cumulative cost-synergies by the end of the year.

  • Exiting the Solar business
    • 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.
    • 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. 

  • Normal Course Issuer Bid
    • As of September 30, 2018, the Company had re-purchased 449,445 trust units of the Trust ("Units") at an average price of C$7.23 per Unit under its normal course issuer bid, which became effective in March 2018.
    • As of the end of the third quarter of 2018, Crius had 56,605,607 Units outstanding.

  • Implemented a Distribution Re-Investment Plan
    • In October 2018, the Company announced the implementation of a distribution re-investment plan ("DRIP"), which offers Canadian resident unitholders an opportunity to increase their investment in the Trust by receiving distribution payments in the form of Units, without paying additional transaction costs, broker commissions, administrative costs or other service charges.
    • Units available for the reinvestment of distributions under the DRIP may, at the discretion of the Trust, be (i) issued from treasury, or (ii) purchased on the open market at the applicable best efforts open market purchase price.
    • Initially, Units available for reinvestment of distributions under the DRIP will be purchased on the open markets at the applicable best efforts purchase price.

Review of Q3 2018 Results

Management is pleased with the progress that has been made in the quarter in advancing our strategic initiatives to exit solar and improve the profitability of our deregulated energy business through cost-reduction, high-margin customer growth, and portfolio optimization.  Management view the normalized Adjusted EBITDA achieved in our deregulated energy business in the quarter of $20.9 million as demonstrative of the progress made to date and as evidence of strong future performance.

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 (as defined in the MD&A) on a customer-weighted basis across our geographic footprint.

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. As a percentage of total revenue, gross margin was 14.7% in the third quarter of 2018, a decrease from 20.4% of total revenue in the prior comparable quarter. The quarter-over-quarter reduction of $2.0 million was impacted by the reduced contribution from the solar business of $1.6 million, attributable to community solar revenues received in the prior comparable quarter, as well as the negative impact in the third quarter of $1.7 million (or $0.52/MWh) resulting from the deferral of wholesale electric capacity costs following the implementation of the new IFRS-15 accounting standard, which was implemented effective from the beginning of 2018. This new accounting standard impacts the timing of when certain fulfillment costs, including wholesale electric capacity costs, are expensed, and results in increased capacity costs in higher-usage periods (summer and winter) and decreased capacity costs in lower-usage periods. Adjusting for these two impacts, gross margins in the third quarter were up by $1.3 million, or 2.5%, over the prior comparable quarter.

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.

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 EBITDA contribution from the deregulated energy business in the prior comparable quarter.

Net income in the third quarter of 2018 was $7.7 million, representing a decrease from net income of $25.0 million in the third quarter of 2017, with the year-over-year decrease primarily attributable to the benefit from income taxes in the third quarter of last year of $20.3 million, which was impacted by the recognition of $18.5 million in previously unrecognized deferred tax assets, primarily related to net operating losses of Verengo that are expected to be utilized against current and future taxable income as a result of the Trust's acquisition of U.S. Gas and Electric Inc.

Distributable Cash was $4.4 million in the third quarter of 2018 compared to $13.2 million in the third quarter of 2017, with the period-over-period decrease impacted by the $2.4 million in non-recurring charges, $3.4 million in continued negative performance from the solarbusiness as well as $5.2 million in increased upfront selling costs in the third quarter of 2018, reflecting the channel mix of new sales in the quarter with increased contribution from residential customer-focused direct-to-consumer marketing channels which have higher upfront costs to acquire. The Company expects to benefit in future quarters from these increased upfront selling cost investments which are focused on higher-margin customers, as reflected in the $9.2 million increase in Embedded Margin during the quarter.

Distributable Cash for the last twelve months was $24.8 million, representing a Payout Ratio of 147.3%, which is elevated over recent levels due to the impacts of the negative contribution from the solar business and the above-mentioned non-recurring costs. Normalizing for these impacts, the Distributable Cash and Payout Ratio for the last twelve months were $42.1 million and 86.7%, respectively. Management are comfortable with a temporarily elevated Payout Ratio as the Company implements its strategic initiatives to refocus on the core deregulated energy business and achieve its stated cost-reduction targets.

Cash flows used in operating activities of $3.8 million in the third quarter of 2018, compared to cash flows provided by operating activities of $5.3 million in the third quarter of 2017, with the quarter-over-quarter reduction being driven by changes in net operating assets and liabilities, which is impacted by both the seasonality in our business, as well as settlement payments made with respect to the litigation reserve booked in 2017.

At September 30, 2018, the Trust had Total Cash and Availability of $30.1 million, consisting of $15.8 million of cash and cash equivalents, and $14.3 million available under the Company's Credit Facility. This compares to the Total Cash and Availability as at December 31, 2017 of $49.4 million, and $40.8 million as at the end of the last quarter. Crius Energy ended the quarter with net debt of $118.8 million, representing a leverage ratio of 1.7x based on net debt to last twelve months Adjusted EBITDA. Both liquidity and leverage metrics were impacted by ongoing solar losses, the non-recurring restructuring costs as well as settlement payments related to the legal reserve booked in 2017.

As at September 30, 2018, Crius Energy had 1,352,000 customers, representing a net customer decline of 35,000 in the third quarter of 2018. The gross additions of 103,000 customers, 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.

The interim condensed consolidated financial statements of the Trust as at and for the three and nine month periods ended September 30, 2018 and accompanying management's discussion and analysis ("MD&A") have been filed with the securities regulators and are available on SEDAR at  under the Trust's issuer profile, and are available on the Trust's website at  .

Source: EvaluateEnergy® ©2019 EvaluateEnergy Ltd