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GreenHunter Resources’ (GRH) CEO Gary Evans on Q2 2015 Results – Earnings Call Transcript

GreenHunter Resources, Inc. (NYSEMKT: GRH ) Q2 2015 Earnings Conference Call August 14, 2015 10:00 AM ET Executives Gary Evans – Chairman and CEO Serene Prat – Head of IR Kirk Trosclair – EVP and COO Ronald McClung – CFO Analysts Operator Good morning. My name is Kamey and I will be your conference operator today. At this time, I would like to welcome everyone to the GreenHunter Resources Second Quarter 2015 Financial and Operating Results Conference Call. All lines have been placed on mute to prevent any background noise. After the speaker’s remarks, there will be a question-and-answer session. [Operator Instructions] Thank you. Mr. Gary Evans, you may begin your conference. Gary Evans Thank you, operator and thank all of you for dialing in today. My name is Gary Evans, I’m Chairman and CEO of GreenHunter Resources and Magnum Hunter and again with me here, Kirk Trosclair our Executive Vice President and Chief Operating Officer as well as Ron McClung, our Chief Financial Officer. And before we get into the meat of the discussion today to talk about our second quarter and six months ended June 30, 2015 financial operating results, we need to let our listeners have a little forward-looking statement. So Serene Prat our Head of Investor Relations, is going to read that for us. Serene? Serene Prat Thank you. Before we begin with the content of today’s call, I’d like to advice you that Safe Harbor include forward-looking statements within the meanings of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. The following discussion provides information, which management believes is relevant to an assessment and understanding of our financial condition and results of operations. The discussion contains forward-looking statements that involve risk and uncertainties that may include statements regarding our expectation, beliefs and intentions, or strategies regarding the future. Actual events or results may differ materially from those indicated in such forward-looking statements. This discussion should be understood in conjunction with the financial statements accompanying notes and risk factors included in our SEC filings. The discussion should not be construed to imply that results contained herein will necessarily continue into the future or that any conclusion reached herein will necessarily be indicative of actual operating results in the future. Such discussion represents only the best present assessment by our management. Actual events or results may differ materially from those indicated in such forward-looking statements. This disclaimer is an effect for the duration of this conference call. Gary Evans Thank you — that was outstanding. Let’s now get started with respect to the call today. We filed our quarterly financial statement press release earlier this morning. So, hopefully, you received that. And I thought before we got into the specifics about the company and its operations for the quarter, I might talk a little bit about the macro picture that we’re all experiencing in the energy industry today and how it affects or doesn’t affect GreenHunter. So, as many of you know that are involved in energy arena, we had a change with respect to OPEC’s decision to basically flood the world market with oil beginning around Thanksgiving and that we’ve experienced a precipitous decline in crude oil prices worldwide from around $100, $105 a barrel down to in the $42 a barrel day range today. The purpose of doing this is to regain market share that OPEC lost due to the significant success that independent oil and gas companies have had in the shale plays here in the United States over the last five years. And so, it’s had a dramatic effect in the entire energy industry has called the rig count to the cut significantly down to historically low levels and is creating a huge amount of layoffs and just basically a much reduced capital spending level by all energy independence. People are in a preservation of capital mode not knowing how long these lower prices will persist. It’s also had an affect with respect to natural gas prices which is really, we’re more involved with respect to the Marcellus and Utica plays that we typically handle most of our water with up in the Appalachian Basin. The gas prices are down about $1 to $1.50 from where they were a year ago and that has also created a slowdown in drilling activity in our region not as much as other parts of the country but it’s definitely impacted it. So, we continue to stay busy but not as busy as we want to be, that’s causes to have to work a who lot harder get new accounts, we feel real good about some new prospects that we’re working on and our ability to continue to keep our wells full and we believe that this part of the country being the Marcellus and Utica in the south, West Virginia, Southeast Ohio will continue to garner a significant amount of capital. So, there is any place in the country I would rather be its this area, there is no other play I want to be active in. We continue to have the best margins, we continue to have the lion’s share of the business. And we continue to add capacity to allow us to gather and inject greater volumes of water going forward. So we’re going giving you a lot more detail as to some of this today. One thing that’s very important for you to understand Magnum Hunter has announced as of about a week ago that we have entered into a letter of intent for $430 million drilling program over in Ohio which encompasses about 50 Utica wells, that program will began in October. And GreenHunter will have a 100% of the water business there. So, while we’re having a little slack here over the next last few months and we’re continuing to fill our wells, there’s going to be a whole slug of new activity and that activity will continue for about two years. So, because of the [sister] relationship between Magnum and Green that’s going to definitely benefit GreenHunter going forward and there is more details on that if you want to look at the filings that Magnum has made publically over the past week and many analyst research reports have been written about that as well. So, with that I’m going to turn the call over to Kirk — give you specific details of our activities during the second quarter and update you on what we are working on. Kirk? Kirk Trosclair Thanks, Gary. Before we going to the specifics, I do want to add a couple of comments on the numbers in Appalachian as it relates to volumes and trucking hours and things like that across our portfolio. First the rig count decline since 2014 in Appalachia has decreased 42% in Utica and 21% in the Marcellus. The keyword across all the presentations that we’re listening to from all the E&P companies is efficiencies and efficiencies translate to price reductions across the entire service industry as it relates to service providers in the oil and gas business. The effective lower total rig count, basically equals significant reductions in flow back volumes and a slightly less, lower production volumes across the board with the most being significant reductions from flow back. Secondly the E&P capital expenditures that Gary mentioned earlier were lowered again in the second quarter and companies were voluntarily asking service companies to help by reducing rates to match the falling commodity prices. We feel that these have now hit the bottom across our industry in the Appalachia region and we should be able to maintain from here on out. On appositive side, as he mention with the Magnum Hunter JV, GreenHunter has strategic alliances with certain operators in the Appalachian Basin that will help curtail some of the overall effects of the downturn in the industry and the increased flow back volumes just from that JV and the production volumes that will come from it will help the company tremendously going forward. We probably won’t realize those affect into the GreenHunter side from flow backs to the latter part of fourth quarter of this year but we’ll see significant increases starting in the first quarter of 2016. So, what does it mean for GreenHunter for the remainder 2015, we’ll continue to fight the fight, manage our expenses and start to gain additional market share, something we haven’t — have not had to do in the past. We’re having to go out and grab new market share, enhance some operating efficiencies and be the best service provider of Oilfield Fluid Management Solutions in the industry. Our team in Appalachia has done a great job through this downturn and they are to be commended for it. So to get you to the specifics of the second quarter, on July 27, you guys remember we sent out a press release and we turned on two new disposal wells at our Mills Hunter facility located in Southeastern Ohio. These wells were — we were pleasantly surprised at some of the increased rates we had once we turned the wells on, our initial injection rates told us we were going to 3,000 to 4,000 barrels per day and with the combined two wells, we think we can push the 8,000 barrels per day limit on these two wells. The increased injection capacity basically takes our overall capacity of the company and increase it by 50% and takes us to 21,000 barrel, so permitted injection capacity. Just recently, we added some additional trucks in the latter part of July, I think it was like the last day of July our self, we took the delivery of two new Peterbilts, we sent those to the shop in West Virginia to have the 407 tanks put on the trucks and we just recently as of two days ago received four additional trucks at the shop and those are being outfitted to haul condensate and water by having those sets to DOT 407 related trucks. We plan to have the two that were in the shop first out to the out on the street and actually hauling in the next couple of weeks and then the other four will probably be two to four weeks behind as they continue to come out the shop and then that will leave us with two remaining trucks from the user proceeds from our senior lenders. And those will hit sometime in October. Some of the things to point out that we continue to improve our operating margins on quarter by quarter basis, we’re getting a lot better at doing our business in the Appalachia region and we’ve increased those from 38% in the second quarter 2014 to 49% in the second quarter of 2015. The other thing that we need to point out and it’s really is our internal trucking, we mentioned this in our first quarter call, we learned a lot by hiring third party transporters and trying to grab volumes from additional trucking companies and running it through our own services but that was not beneficial to the company and we’ve learned to utilize our own internal trucking and those numbers have jumped dramatically from 18% of second quarter of last year to 40% in second quarter of this year. Now, of course some of that has to do with fuel pricing and things like that but our overall expenses in-house for the operations for these units has gone down. Also, at the unit in these times of tough commodity prices we’re cutting back, we’re running a lean shop here and we’ve decreased that by 1.6 million and total decrease of 21% and something that we’re very proud of, we’ve produced positive adjusted EBITDA for the first and the second quarter of 2015 and the second quarter at 316,000 of the positive EBITDA here in house. So, those are some of like the key highlights of what happened in the second quarter, obviously we have a lot of things that came out and we’ve been working on in the third quarter, we were delayed on a lot of this construction efforts for some new wells, you can see in the press release, we spoke about what contributed to those, some of it was the funding delay initially, then it was permitting and new processes and things like that that’s going on with the Ohio department of natural resources and on the West Virginia side with the [environmental] protection. It’s a new ballgame out there, which is not a bad thing for us, we’re complying with all the rules and rigs which we always have and we’re going to be a leader in that industry and learn from the past in how things transition to new rigs and responsibilities and we’ll get more efficient at that. The last couple of years — permitting of a new well would take us 45 to 50 days, now that’s gone up to about six months, we think we can get that timeframe down in the four to five month range but that will be the new norm from here going forward. So, that was some of the delays that we had at the mills Hunter facility, we’re nearing completion of that, we should have the third of the four wells additionally that we’re tuning on at mills here in next 30 to 45 days, we should begin injection into that well and then the final well which is the furthest well away from the pumping facility, will probably come online sometime in late October. I know you guys mentioned the Ritchie Hunter 2 which is the West Virginia well that we have ready to go. The well itself, the facility, the flow line everything is completed, we’re just waiting the final approval from the West Virginia Department of Environmental Protection and that’s impressive, we met with those guys at their office in Charleston two weeks ago and we should receive that final permit here in the next 30 to 45 days. So, that’s kind of the operational highlights of what’s been going in Appalachia, with that I’ll turn over to more details through Ron McClung on the financials. Ronald McClung Well, as both Gary and Kirk have said, it’s been a tough environment in the second quarter in terms of people have stopped drilling as much, flow back and so forth so, we’ve had a corresponding decrease in the revenues, a year ago our revenue in total was 6.8 million or second quarter in this year was 4.6 million. Our two main sources of revenue, water disposal revenue was down $434,000 and our trucking revenue was down $384,000, water disposal was down 13% in revenue and trucking was down 20% revenue, but also as Kirk said, we had not only corresponding decreases in our expenses for those two main lines of business but additional percentages of decrease in our expenses, so for example, where our water revenue was down 13%, our disposal expense for that related revenue was down 33%. So was that 20% more than revenue was and we so the same thing on the trucking side, where trucking was down 20% in revenue, we had a 41% decrease in trucking expense. And as Kirk said some of that was due to fuel cost being less than they were last year, but it’s also a consolidated effort on behalf of management to decrease cost and then we saw additionally as he pointed already a 20% decrease from last year in SG&A. Now what all that means to us is that we think we have a structure in place to — that’s ready for the growth that we think we’re about to experience and don’t expect any significant increases in those cost, of course there’ll be some, but we think we are setup to experience good margins on there as we’re able to put these new wells and trucks in service and not only that but because of the fact that our wells are 100% joined to current offload facilities, the incremental expense related to those will be minimal and so we expect to benefit from the savings that we’ve experienced from our cost cutting activities and benefit greatly from that as we put these new assets on loan. You’ll also note that for in the press release that our net loss per share from continuing operations was $0.08 this year compared to $0.13 last year and so we’re looking forward to seeing that even cut further and moving toward profitability because these new assets come online in the coming months. Kirk? Kirk Trosclair Thanks, Ron. So, I think we want to talk a few more about the things that we have coming and then I’ll turn the call back over to Gary and then I think we’ll take some questions. But as far as the project is concerned down at Mills, we only have two wells left to turn on there. We have the one well in West Virginia that we are just awaiting the final approval to turn on at this point. So, those are some things we can look forward to happening in the remainder of 2015, the third and fourth quarter. We received the additional trucks that are scheduled to come in, the last few in October and we’ll see those hitting the roads as well. The other thing I wanted to touch on I guess would be, we’ll have some questions later. We are making some progress with the Coast Guard efforts on the barging situation. We have not started construction of any of the docks at this point but we have had several meetings with the Coast Guard, the meetings are going very well, nothing is set in stone at this point, they haven’t approved anything, most things are still in the same status as far as the regulations go but we have made significant progress with their team on coming up to a common solution to let this happen sometime in the near future. With that I’ll turn the call back over to Gary. Gary Evans I just want to emphasize a few things that were mentioned to which I think are really, really important. Many of us here have been in this business a long time, I’ve been in it for over 30 years and we’ve recognized a downturn was coming early on back in January and so, your management here began taking the efforts to reduce our cost. We knew that to be able to survive through a down turn you got to have lower cost. So, those are reflected in the numbers that we reported today and so as we continue to add volumes which we’re doing on a weekly basis that’s going to really drive our EBITDA and while we all look for better times in the energy industry we’re counting on year, year and half down turn. So, we’re not building the business with the anticipation that all of the great things that were happening in the prior three years are going to happen now. So, by being a leaner meaner machine we will become much more competitive with our existing competition in the region. We will continue to add capacity because we know its coming and then we got these joint ventures with a number of companies that are going to continue to add new volume. So, I’m actually quite excited about our future and I’m very excited that the wells that we put on at the Mills Hunter facility have taken so much water and so that in itself drives margin because we don’t have to put as many wells on because the volume take away capacity is much greater. We do believe we’re getting close as Kirk mentioned on the Coast Guard resolution. We continue to have a number of meetings with the Coast Guard, just to get dialogue and we believe we have some actions that we can take in the near future to begin barging and we’re keeping those close to our best for competitive reasons but when we do begin barging you will hear about it. So, with that let’s turn over the call to our listeners and operator and we’ll take our first question. Question-and-Answer Session Operator Thank you. [Operator Instructions] Your first question is come from [Dan Murphy] with Shareholders. Unidentified Analyst Good morning, gentlemen. Question on your preferred stock, noticed you didn’t pay dividend in July, there was nothing in the press release. Can you update us on the status of when you plan to pay or what’s going on with the preferred shares? Gary Evans Yes. The management board decided to because this is accumulative preferred to delay dividends at this time and so, we do not have an answer for you as to when we will begin paying dividends obviously something that we’re going to address but at this point in time the dividends will accumulate and we do not plan on paying in for at least a month or two. Operator Your next question comes from [indiscernible] Securities. Unidentified Analyst Yes, Gary, what concerned me more about the suspension of the dividend is that you didn’t see fits [indiscernible] signing the dividend. I mean, that’s [our pay], why didn’t you do that? Gary Evans Send the letter? Unidentified Analyst You didn’t send the letter; we’ve called the Investor Relations, nothing. Gary Evans Well, there is a real big reason for that. We were in negotiations with our lender; we did not know what the outcome of those negotiations were going to be and those negotiations did not conclude till about 30 minutes ago, so that’s the reason. I can’t tell you something that I don’t know about. Unidentified Analyst Yes, but, so in other words, your lenders are preventing you from making the dividend payments? Gary Evans That is correct. Unidentified Analyst Okay, now as follows the [code’s part of] concern, I’ve been following you, I’ve been a shareholder from several years now, and it’s like the same story with the [cold start], encouraging next month, next week, next year and it keeps going on and on, what is the problem? Gary Evans Hey, there’s a lot of problems with it, we’re dealing with a governmental agency, things take time and it’s not just a straight forward process. Unidentified Analyst But did they give you a reason why or they just say we’re not ready to talk about it? Gary Evans We have several reason why and we’re working with the Coast Guard to establish a policy that will be regulated by the Coast Guard and that we will adhere to. The basic answer to your question is that the reason we are not barging water today like we thought we’d be doing two years ago is bureaucratic backlog and we’ve had many meetings, we’ve had U.S. senators, U.S. congressmen involved, we’ve gone to Washington, we had many-many meetings and if you want to blame anybody, you blame this administration, they’ve tried to everything they could do to interfere in our business. So, we’re taking all measures possible to resolve the situation, we think we have a path that will resolve it. The Coast Guard I believe realizes there are issues here and for competitive reasons we don’t believe it’s an appropriate for us to disclose this or other companies would like to be doing what we’re hopefully going to be doing soon, but it is a bureaucratic mess and we have been trying to clean up the mess for two years and we have spent an ordinate amount of time in resources, in capital and trying to fix it so, if you want to pick up the phone and call the U.S. Coast Guard or call your Congressmen, I welcome it. Unidentified Analyst Now, that’s a possible thought and a final question is just short time ago, you were announcing that you had more business than you could handle, I mean you didn’t have enough capacity of salt water disposal to get all the water into the ground, has the drought been that severe in the past month? Gary Evans It is, it’s actually been that severe in the past two months, yes, a lot of our business is handling flow back water and when there’s a lack of drilling there’s a lack of water, now we do as I said believe we can fill these wells up and we’re in the process of doing that, we have many contracts and negotiations to fill these wells up, so we believe this is a short term operation but at the same time that we turned on our new wells, the same time the business dropped. Unidentified Analyst And the final question is, in the last conference call you stated that the actual flow down was actually a benefit to your company and I don’t remember exactly why but you said because the company’s behalf it was differently, they would be doing things with the water and like I said I don’t recall exactly why, but you said, we’d be actually be getting better margins, what happened to that? Gary Evans So, let’s talk about that, when drilling stops, the water that’s reused, in other words, it might go into pit, it might go in to tanks, it’s being reused for additional fracking, that can only sit there for so long and then that water has to eventually be disposed of and so, we’re beginning to see that right now, that’s just beginning to happen is that this water is stored down these areas the local state governments, the DEP, the EPA, they’re not going to allow the companies to let that water sit there, so, they have to go dispose of it, because they are not reusing it for refrack, so that’s what we’re referring to and companies have been sitting on that water a lot longer than we anticipated but we do see a whole swell of that business coming. Operator Your next question comes from Kevin [Rineheart] with [Derivates] Capital. Unidentified Analyst I’m wondering at what point is this company sustainably profitable? Gary Evans As we get these wells filled up, I mean these existing disposal wells filled up, I don’t think you saw the EBITDA reported this quarter but we reported good positive EBITDA so we’re getting there, if you look at cutting the cost that we’ve done and now if we get the water we need, we’re getting very close so, closer than we’ve been in a long-long time, is that right Kirk? Kirk Trosclair That’s absolutely right, we’re positioning ourselves for when the market does take a turn to the north to have really tremendous results, especially as it relates to EBITDA. Gary Evans I can see it’s been profitable next year just in relation to the 430 million Magnum Hunter drilling program in Ohio, I mean it’s going to keep GreenHunter extremely busy. Unidentified Analyst Another couple of questions, what is the current plan on retaining $13 million debt and the possible uses of the $3 million credit facilities still available. Gary Evans Well the $13 million debt has its own amortization schedule, so that’s how the plan is that’s outlined in the 10-Q. Additional $3 million is for predominantly the terminals that we need with respect to the barging. So, Kirk, Kirk Trosclair I mean that’s inside the $13 million that we’ve already taken in but the additional $3 million is for future projects that we have a six month window that we can go to the lender and if approved by them we can move forward with those projects. We have a list of probably $10 million to $12 million worth of projects that we have on a wish list. So we’re preparing that now, we’re prioritizing it and we’ll present that to them prior to the deadline and determine at that point if it makes sense as a management team to move forward and take the additional $3 million or to suspend that and move away from it. Operator Your next question comes from [Michael Huntsman] with [indiscernible] Unidentified Analyst Hi, Gary and Kirk. Just clarify a couple of items. There is a fair amount of production still happening in Utica, Marcellus, and it’s a pretty high water cut. So, is that the share you’re going after is to capture more produced water in the absence of the drilling activities through the first half and second half of this year, ex what Magnum Hunter is talking about doing? Gary Evans Michael this is Gary. We’ll take any order, reduced water, pull back order, whatever it is, we’re not that choosy right now but the one thing that’s kind of hurt our area is that with oil prices down that’s caused NGL and condensate prices to be down. So, Marcellus wells which were very, very active in our neck of the woods are not being drilled today and that’s because the cost of processing that condensated NGLs is today it’s a cost rather than it benefit, we used to get a $1.50 in McF uplift for McF on gas because of the rich liquids that associated with the Marcellus. Today, because of those low prices it cost money, a producer has to pay the cryogenic processing plant to process those liquids. So, that is really hurt the economics of Marcellus wells and so that’s been a huge drop in the drilling activity. On the flip side, the Utica wells, the dry Utica wells which is what Magnum just announced they’re going to be doing are very profitable, at $3 gas with no processing, with the takeaway capacities we have today, rates of return in the 40% to 50% range. So, you’re seeing a whole swell of switching from Marcellus and Utica and that’s all happening now and so you’re going to see this drilling activity pick up towards the latter part of the year with a number, there is new permits, Ontario which is one of our largest customers just permitted three new wells, two in [indiscernible] county, one in Dodgers county. So, we’re beginning to see that switch over occur and we think, that activity will definitely help us, because we have always been so full, it’s been so easy for us from the standpoint to get business as we have people waiting in line. Now we’re actually having to go out and get the business and we’re taking business from others and that’s what’s occurring, now we have two sales people, working full time in conjunction with Kirk and his team and he’s negotiating contracts every day. So, we see this as a very short-term aberration of we’ve turned on two significant wells that are doing much better we thought and guess what? The volumes weren’t there but they’re coming and you might just elaborate a little bit on that Kirk. Kirk Trosclair Yes, I don’t want to mention any specific names of the operators we’re working with Michael but we have new contracted take or pay capacity agreements out to three major E&P companies in that area, which total excess of 12,000 barrels per day, a take-or-pay capacity and one of those looks like it will probably be signed here by September 1 and the other one should be shortly after. The negotiations have been going on for a couple of weeks. It’s really tough to go out and sell something, when you don’t actually have the product in inventory. So, injection volumes was our inventory until we actually had the wells on, once we turned the wells on then we can actually hit the streets, people won’t talk to you until you actually have the volumes because it’s a one of those things where what do you have for me today. Gary Evans Yes, decisions are made today no, okay, well you have volumes on month well [indiscernible] now we got the volumes they just been turned on, we’re able to go get the new business Unidentified Analyst Okay. And I’m not trying to ask this, where I stand critical, but I’m catching the sense that the change in drilling happened so fast that, you were full for so long and not really worrying about sourcing, that when it changed so fast, your reaction time to fill it, the combination means that’s why we got this gap until — Kirk Trosclair It is somewhat of the gap Michael and one of the things that is probably to our determent at some points, but it’s also is going to a help us in the long-term, is all of that flow-back volume 75% or so of our fluids are traditionally production volumes. The 25%, or so has been flow backs and the majority of that flow back was coming from Triad. So we were saving space for Triad because of the agreements we have with them in place and then once those volumes dropped off, they dropped off the face of the earth, I mean really, really quick, we saw it coming, but yet we were still trying to chase some additional flow backs from different customers but that also dried up at the same time and then we turned on to new wells with increased capacity, so that’s why you see the utilization numbers down because of the increased capacity and we think that’s going to be short lived, we’re trying to grab additional production volumes right now, but we also have to be cognizant of the fact that this new JV program with Triad will be sending a tremendous amount of flow back volumes starting at the latter part of this year. Unidentified Analyst And then, one other things you’ve believed in the past Gary about the river of transport barging, was that — you could in fact do this despite the Coast Guard, what’s changed in that regard? Kirk Trosclair There’s a regulation out there, on the [indiscernible] 787, it’s an older regulation that was an addition to the existing rig and we had an avenue that we thought we could use and we still remain confident that we could have done that. Now would that have been the best thing to do, probably not, that’s why we kind off pulled back our horses, hey let’s all get at the same table and come to a common agreement. And we started working more diligently with the Coast Guard, being involved in meetings with those guys in DC and formulating a new angle to see this thing finally come to fruition. The rate itself that they proposed were going to see some changes to the rate that they had sent out in the latter part of 2013, and so we’re privy to some of that information , we’re not going to let it out at this point, we are doing some sampling this week for those guys of some [indiscernible] fluids and we’ll see what those results comeback and it really looks good and promising for us. I can’t tell you the timeline because obviously we don’t know that with the government, but this will happen eventually. Gary Evans I think maybe to summarize this, we had kind of gotten in because we were so frustrated into a bit of an adversarial position with the Coast Guard on this and started butting heads pretty bad and then we got some congressmen involved and things started changing so, we have a local congressmen in the West Virginia Ohio area that are having calls with the Coast Guard to try to understand why this has become such a logjam and a big issue and I think it’s a combination of some poor regulations that were written initially that were not understood and of course the Coast Guard had to sent this to the OMB, now OMB looks at it, they do their mental review and it goes back to the Coast Guard so, when I say that we’ve been tied up into a regulatory logjam, that’s a mild understatement and we have kept the pressure on and we have been using congressmen to do that and we’ve been having much more fruitful meetings off lately then we’ve had in the past. And that we think we’ve got the right people involved now, they understand the issues and it’s being addressed so, we do have some ways that we could begin barging pretty quickly that we’re working with the Coast Guard on, we’re not disclosing that for competitive reasons but we think all this talk about the Coast Guard can be put to bed for too long. Unidentified Analyst Can we talk about the price per barrel of disposal trends at the well-head and then transportation pricing as well? Kirk Trosclair Yes, sure, in the immediate onset of the downturn, everything was pretty steady and then going into the second quarter we started feeling quite a bit of a pricing pressure on transportation, that’s always the first thing that hits Michael, across the board out of any [all field] service company is on the transportation side. We’ve seen rates decline in transportation from probably $10 per hour, some places in excess of $15 per hour depending pretty much steady across the board from depending on which type of the truck it is, those have been the rate reductions that we’ve seen. Those are holding pretty steady, I think we’ve finally pretty close to the bottom on that, I don’t know if anyone can really go much further. Gary Evans There’s been some trucking companies going out of business. Kirk Trosclair The number of units out on the road have gone down, the disposal pressure really didn’t show it’s faith, so we actually opened our own wells and all this flow back material went by the wayside and we’re out their chasing production volumes, you have to make some modifications but what we’ve done to combat that is to go to the large E&P companies and even the smaller guard and offer longer term contracts for reduction in rate. So, with that being said, we’ve kind off offset those declines in pricing pressure with longer term contracts which are much beneficial to us. We’ve been offering some discounts from month or two to get them in the door and that’s worked up pretty well. Right now, with again no drilling going on of any significance. There is some pressure. We see that change, there is a dramatic shift going to this dry Utica can emphasize that enough and we think this is a very short list situation. Unidentified Analyst So, we still over $3 a barrel? Gary Evans Yes Kirk Trosclair [Indiscernible] number right here to be — but if you look in the — we were actually $3.39 a barrel for average compared to $3.14 last year. That’s probably peaked, but we raised rates just on the count spot rate to $3.75 last fall and we’re still benefiting from that. Unidentified Company Representative So, you got to see things remain pretty close to around $3 range Gary Evans We’re not talking dramatic, Michael. Unidentified Analyst Okay, alright. And then I suspect that the lender for the $13 million is — you are not paying any cash out so I make sure you’re paying me, do you have to get back to that $1 million of EBITDA, before on a LTM basis, before they would let you do this seriously? Gary Evans No, we have an amendment that’s been executed this morning that gives us flexibility and yours truly will probably be the one putting some more capital in to get back to paying the dividend. So, our goal is to get back to paying those dividends sometime before the end of the year. Unidentified Analyst Okay. And how quickly can you catch up on the accumulated part? Gary Evans We can do it tomorrow, if we wanted to. Unidentified Analyst Okay. Gary Evans There is no — we make sure that the amendment that we just executed gave us lots of flexibility and we have that. Operator Your next question comes from the line of Gene [indiscernible]. Unidentified Analyst Just a couple of questions, I think we haven’t talked about for a while. First is the MLP, is that just the financing that you’ve gotten from your senior lender take that out of the question and what is the status with the IRS? Gary Evans Good question. We definitely believe this business is conducive for an MLP, you’re seeing more and more midstream companies put water business in their portfolios, so I’d midstream, gas gathering processing company and so we are still waiting for our revenue [indiscernible] letter, we’ve had our law firm working with IRS on that, we do believe that is a much cheaper form of financing for us in the future and that will likely not happen in 2015, it will be a 2016 event. Unidentified Analyst Okay. And is there any read through, obviously, you haven’t closed anything but you have — you make it in discussions, Magnum Hunter for the sales 45% [Eureka Hunter], is there any read through that you can get from there, in terms of what the MLP appetite is for these kind of assets, I mean, obviously it’s not exactly like [Eureka Hunter] but it’s not so Gary Evans The appetite for anything in this part of the country is exceptional, we’ll be announcing the eventual winner of the [Eureka Hunter] here over the next week to 10 days hopefully. It’s been a frothy exercise with tremendous amount of interest and we’ve had companies trying to circumvent the process whatever they could do to get the assets, so, we’re obviously trying to get the most value we can and we don’t see anything different with respect to the water business going forward. So, this part of the country is where every midstream guys wants to be because it has the highest growth potential because of the raw characteristics of the region. Unidentified Analyst And I guess along this lines another, I think that you talked about before was the pipeline, you have been working with nature pipeline obviously they couldn’t get the financing, is that still an option for the future and is that the sort of — were you far enough down the road there where you have rights of ways and things like that or is that more just an idea? Gary Evans We did buy any rights to way but we continue to talk to producers about consolidating their trucking operations in certain areas. So, that is still something that we are looking at and pursuing, it’s just the slowdown in activities caused everybody to kind of pull in their reigns a little bit and look at their base of business. So for us, our main focus is to get these wells filled and then we will be looking at these other opportunities. Operator And there are no further audio questions at this time. Gary Evans Thank you operator and thank all of you for listening in. It’s been a bumpy quarter but we did get lot accomplished and we look forward to reporting our ability to fill up our disposal wells going forward and other activities we have going on again. I think the new JV that Magnum is doing with these private equity partners are going to have a huge benefit for GreenHunter in late 2015, early ’16 actually goes for two years or 24 months, so we’re going to continue to keep our costs down, continue to cut them where we can, as Kirk mentioned these new 407 trucks are coming in, we’ll have them fully utilized as they hit the streets because of the type of vehicle they are and we’ll continue to look at adding additional capacities, so you think we’ll, gosh you haven’t filled up your existing wells, why are you looking for new capacity. We know what’s coming and we know we have to have additional capacity, so we’re working hard to do that. So, with that, feel free to call if you have any specific questions to our investor relations area and we’ll get back with you. And thank you for your time today. Operator Ladies and gentlemen, this does concludes today’s conference call and you may now disconnect.

Just Energy’s (JE) CEO Deb Merril on Q1 2016 Results – Earnings Call Transcript

Just Energy Group Inc. (NYSE: JE ) Q1 2016 Earnings Conference Call August 13, 2015 2:00 PM ET Executives Deb Merril – Co-Chief Executive Officer Pat Mccullough – Chief Financial Officer James Lewis – Co-Chief Executive Officer Analysts Damir Gunja – TD Securities Nelson Ng – RBC Capital Markets Carter Driscoll – MLV & Co. Kevin Chiang – CIBC World Markets, Inc. Operator Good afternoon, ladies and gentlemen. Welcome to the Just Energy Group Incorporated Conference Call to discuss the First Quarter 2016 Results for the period ended June, 2015. At the end of today’s presentation there will be a formal Q&A session. [Operator Instructions] I would now like to turn the meeting over to Ms. Deb Merril, Co-CEO, Just Energy Group. Please go ahead, Ms. Merril. Deb Merril Thank you very much. Hi, everyone. My name is Deb Merril. I’m the Co-CEO of Just Energy and I would like to welcome you all to our fiscal 2016 first quarter conference call. I have with me this afternoon our Executive Chair, Rebecca MacDonald; my Co-CEO, James Lewis; as well as Pat McCullough, our CFO. Pat and I will discuss the results of the quarter as well as our expectations for the future. We will then open the call to questions. Before we begin, let me preface the call by telling you that our earnings release and potentially our answers to your questions will contain forward-looking financial information. This information may eventually prove to be inaccurate, so please read the disclaimer regarding such information at the bottom of our press release. Our first quarter results shows significant improvement in those operating measures we deem critical to our long-term success. During the first quarter, we delivered strong sales growth and continued to significantly improve the margin profile of our customer base, which translated to 29% year-over-year Base EBITDA growth and strong cash flow generation. Notably, we accomplished this in what is traditionally our seasonally weakest fiscal quarter. Our margin per customer improved in both the residential and commercial business throughout 2015 and that progress continued in the first quarter of 2016, as gross margin grew by 22% year-over-year. The consumer division contributed an increase of 30%, resulting from higher margin per customer earned, while the commercial division increased 2% in line with the 3% growth in customer base. The gross margin success is directly related to the ongoing commitment to the margin improvement initiative that we have talked about publically over the course of the past year. To add some color on how far we’ve come along in this initiative, we’re now signing consumer margins at $204 per RCE, which compares to $184 one year ago. Additionally, commercial margins are being added at $80 per RCE in Q1, as compared to $66 dollars one year ago. We were able to drive these improvements in margin, because our innovative new products are gaining more appeal and presenting more value for customers. This is allowing us to price our energy management solutions at more premium points and drive sustainable profitability for the future. Most of the gains we are driving through the sales in gross margin improvements are being realized in our Base EBITDA. Base EBITDA grew 29% during the quarter as a small portion of the gains were offset by increased administrative cost to support our large customer base, as well as increased selling and marketing costs. Overall, the results for the first quarter exceeded management’s expectations and provided a great – with great confidence we can deliver a very strong fiscal 2016. Before I go any further, let me pause for a moment to make sure everyone picked up on the change in commercial commission terms we announced in conjunction with these first quarter results. We are pleased to be able to announce that we have made a change to the commercial commission terms, better aligning with the realities of today’s commercial business. We believe this change will help the company better manage costs and cash flows, as well as provide greater alignment between base EBITDA and our results of operations for investors. Pat will cover the details of this change shortly, and we’ve also covered this in our press release and MD&A. While this change in commercial commission terms moved more cost into the Base EBITDA metric, the profitability profile of the company is improving to a degree that management is able to still commit to the previously provided fiscal 2016 Base EBITDA guidance of $193 million to $203 million. We believe this is a strong testament to the validity and sustainability of the improvement initiatives we see for the company, most notably the margin per customer initiatives. Now, let me turn to our customer base activity and provide some color on what we witnessed in the recent quarter. During the quarter, we did see a decline in year-over-year gross customer additions, as well as negative net additions. These customer declines were driven by a couple of things. First, more difficult market conditions marked by lower commodity prices and thus more competitive pricing across all markets, compared to the conditions we faced one year ago during the polar vortex, a time when we thrived in adding customers due to our unique value proposition. Additionally, our commitment to only accepting and renewing new customers that meet our profitability profile also impacted our results. As I discussed previously, Just Energy is not willing to participate in irrational pricing activity, nor do we feel we have to in order to remain competitive or increase our long-term profitability. In fact, Just Energy continues to become significantly more profitable and we are expanding our reach into our 2 million existing customers in a way that allows us to grow as they demand new innovative ways to meet their changing energy consumption needs. For example, our consumer customer base includes almost 50,000 smart thermostat customers today. These smart thermostats are bundled with a commodity contract and our experience indicates that customers with bundled products have lower attrition and higher overall profitability. Further expansion of smart thermostat is a key driver for continued growth of Just Energy, and we will keep adding new innovative products bundled with technology to drive continued improvement in the profitability of the business. Overall, we are very pleased with the business performance this quarter, as well as the prospects for future. With that, I’ll turn it over to Pat. Pat Mccullough Thank you, Deb. We’re very pleased with this quarter financially, especially as you focus on profit and cash. One of the things that I noticed is very significant, about the P&L this quarter, especially as you compare it to year ago Q1, we grew the top line revenue by 14%. And while doing that, we’re able to grow gross margin by an even higher amplified percentage of 22%. As you go down to Base EBITDA, again, we’ve grown the percentage increase year-over-year by 29%, a higher figure, and ultimately, Base FFO by 91%. That amplification of year-over-year percentage increase as we trip down, the P&L is very important to us, this means that we’re doing more with every dollar of sales that we bring into the company. So we’re pretty excited about that. Let me cover some of the highlights of the first quarter and then provide some added color in certain areas. First quarter sales were up 14%, as I mentioned to $933 million, reflecting the growth in customer base, price increases, and higher U.S. selling prices after currency conversion to Canadian dollars. The Consumer division’s sales increased by 12%, while the Commercial division’s sales increased by 15%, primarily as a result of currency conversion impact on U.S. dollar denominated sales. Gross margin was up 22% to $150.9 million, driven by higher sales, the impact of foreign translation of stronger U.S. dollar, and higher realized margin per customer in the current period, due to more disciplined pricing strategies. The Consumer division contributed an increase of 30%, resulting from higher margins per customer earned primarily on variable rate products and JustGreen contributions, while the Commercial division increased by 2%, primarily in line with the 3% growth in customer base. Base EBITDA was $38.9 million, up 29% from last year. This was driven by sharply higher margins, partially offset by higher operating expenses. The Consumer division contributed $30.9 million to Base EBITDA, an increase of 37% year-over-year. The Commercial division contributed $7.9 million to Base EBITDA from continuing operations, an increase of 5% year-over-year. The Commercial division saw higher gross margin being offset by higher operational expenses. Effective fiscal 2016 with management’s change to limit the upfront payment of commissions to an average term of 12 months, the capitalized commission will be classified as a current asset and the amortization of contract initiation cost is expected to decrease with no new additions going forward. Let me take a minute to make sure this is clear, and then I’ll answer any questions you might have during the Q&A. Beginning this quarter, capitalized commissions will be classified as a current asset, a prepaid expense essentially, instead of a non-current asset as it was previously recognized for those contract initiation costs. As the capitalized commission is expensed into selling and marketing costs over the term for which the associated revenue is earned, it will no longer be recognized as amortization and will therefore be included in the Base EBITDA calculation. Just Energy implemented this change to the commercial commission terms to lessen the period of prepayment term to an average of 12 months to help the company better manage costs and cash flows. We believe, this change will provide greater alignment between Base EBITDA and our results of operations for investors. There is no expected impact on the selling and marketing costs going forward, but it will result in a decrease in the amortization portion of the expense. As a result of this change in fiscal 2016, Just Energy expects to include approximately $20 million of incremental deductions in Base EBITDA. Despite this increase headwind, Just Energy expects to offset this with continued strong gross margin performance building upon the strong performance in the first quarter. After careful consideration, we have elected to hold to our originally projected full-year fiscal 2016 Base EBITDA guidance of $193 million to $203 million. In other words, we’re effectively raising guidance by $20 million for the full-year. As you think about the effect of this change moving forward in fiscal year 2017, Just Energy expects to include incremental deductions and Base EBITDA of approximately $40 million of prepaid commercial commissions, which would previously have been included in amortization within the selling and marketing expense. This $40 million is more indicative of the full-year effect of this change moving forward. Moving back to the quarterly results. As Deb mentioned, we did see a decline in year-over-year gross customer additions, as well as negative net additions. Gross customer additions for the quarter were $302,000, a decrease of 32%, compared to $441,000 customers added in the first fiscal quarter of 2015. Consumer customer additions amounted to $140,000 for the quarter, a 15% decrease from $165,000 gross customer additions recorded last year. The customer additions in the period – in the prior period benefited from the volatility experienced during the polar vortex as commodity prices increased dramatically. The combined attrition rate was 17% for trailing 12 months, a slight increase from the 16% reported a year prior. While consumer attrition rates remained consistent at 28%, the commercial rate increased to 9%, the increase in commercial attrition as a result of increased competition. Let’s step back and look at profitability per customer, the initiative that was referenced earlier. Over the last quarter, we have added or renewed 238,000 new consumer customers at an average gross margin of $204 per RCE. This compares to 167,000 consumer customers lost at an average gross margin of $187 per RCE, that’s an increase of $17 per RCE on average in the Consumer division. The higher margin on consumer customers is an important positive trend as these customers are largely locked into multi-year contract terms. Turning to the commercial side of the business, over the last 12 months we added or renewed 390,000 commercial customers at an average gross margin of $80 per RCE, whereas we lost 217,000 commercial customers that were locked in at only $68 per RCE of gross margin. So there you’re seeing a much more dramatic percentage increase to the margin profile we’re creating. Also worth noting is that, if you look back one year, you see the exact opposite taking place. We were losing customers at $80 per RCE and adding customers at only $66 per RCE. Let me close with an update on some metrics in balance sheet items. The payout ratio for Base Funds from continuing operations was 63% for the three months ending June 30, 2015, compared to a 198% reported in the first quarter of fiscal 2015. The payout ratio on Base FFO for the trailing 12 months ending June 30, 2015, is 70%. We ended the quarter with $105.1 million in cash and equivalents, an increase from $25.1 million, or 318% improvement from last year. We reported no debt outstanding on the credit facility at quarter end as compared to $136 million drawn last year. The increase in cash balances and decrease in credit facility withdrawals over the past year have resulted in $216 million of additional buying power. At quarter end, long-term debt was $676 million, compared to $774 million one year-ago. Our book value net debt was three times our trailing 12 months Base EBITDA. This is down from 4.2 times one year ago. We do have the ability to make a normal course issuer bid to purchase for cancellation a portion of our convertible debentures, as of June 30, we repurchased $2.7 million of those. One of the next steps in further delevering is renewing the credit facility. We are in advanced discussions with our syndicate of lenders for the credit facility. Based on commitments to-date, we’re optimistic that once finalized the credit facility available will increase from the current capacity of $210 million with the term of the agreement spanning a longer period than the previous credit facility. The renewal on the credit facility is expected to be completed during the second quarter of this fiscal year. In summary, we are off to a great start to fiscal 2016 and making tremendous strides along our strategic initiatives. We’re operating from a greatly improved overall financial position, a position we intend to further improve. This increased financial flexibility combined with our commitment to maintaining a capital-light model supports our ability to pursue our growth strategy which focuses on new geographies, innovative products that meet customer’s changing demands and new energy management solutions that will continue to disrupt the traditional utility model. With that, I’ll turn it over to Deb for some concluding remarks. Deb Merril Thank you, Pat. As Pat said, we are off to a great start of this fiscal 2016. And we have aggressive goals laid out for the coming quarters. I like to shift the focus a bit more to the critical elements of our strategy that will be the platform for our sustainable long-term success. Let me start with our overseas business. The UK business continues to thrive. Today, that market has grown to become 5% of our customer base, adding 233,000 million RCEs in total. This is a significantly profitable piece of business for our company. And we are seeing growth both on the commercial and the consumer side. We believe this early success validates our model and our ability to compete outside of North America. Taking the lessons learned and evaluating new avenues for growth in new markets that will benefit from our innovative approach to energy management solutions, as such, we will continue evaluating new market opportunities that offers strong demographics, clear participation and industry trends, and a favorable regulatory landscape in Continental Europe. Now, moving over to solar. Just Energy Solar program remains on track. The feedback has been very positive and the door-to-door efficiencies are proving to support strong growth in this platform. We commenced our initial pilot phase in southern California during the quarter with a volume of customer signed during this initial pilot resulting in higher-than-expected profit. Based on the success of Just Energy’s pilot launch in Southern California, operations will continue to grow with further expansion in California and the Northeast U.S in the near term. While pushing the industry forward to develop more value-add customer friendly products. As you may know, our solar partner, Clean Power Finance recently merged with Kilowatt Financial to create Elevate Power. And we view this as a very positive development. Just Energy will continue its partnership with Elevate Power, which will be one of the largest providers of third-party residential solar financing and loans in the United States. In summary, Just Energy’s objectives remain unchanged. As a company we strive to deliver outstanding financial results, and made significant progress toward achieving our objective of becoming a premier world-class provider of energy management solutions. Management is encouraged by a stronger – by the stronger profitability in the business and remains confident. It is delivering the appropriate dividend strategy that is supported by our continued ability to generate strong cash flows consistently. We foresee continued sustainable growth that will be driven by an expanded geographical footprint, continued product innovation, and bringing new energy management solutions to market that align with customer demands. With that, we will now open for questions. Question-and-Answer Session Operator Thank you. We will now begin the question-and-answer session. [Operator Instructions] And our first question comes from Damir Gunja from TD Securities. Your line is open. Please go ahead. Damir Gunja Oh, thanks. Good morning. I’ve got two, just a quick one to begin. So the change with the treatment of the amortization, so that – I just wanted to be clear. Does that start with the second quarter results? Pat Mccullough No Damir, this is Pat. That began effective April 1. Damir Gunja Okay. So, the amortization that I see in the financials here is related to something else. Pat Mccullough Fiscal 2015. Damir Gunja Right, okay. Pat Mccullough So, we’ll continue to amortize outside of Base EBITDA the previously capitalized long-term assets, which I believe have a balance of about $10 million at the end of Q1. And then, every commercial commission will be a prepaid expense within Base EBITDA from April 1, 2015 going forward. Damir Gunja Okay. And just on the – I guess, on the margin side, the one thing I’m trying to reconcile is you mentioned a relatively competitive environment, I guess, on the pricing side. I’m trying to wrap my head around that, versus sort of the higher margins that you’re seeing in both consumer and commercial. Deb Merril Yes. And, I think, what you see is in our net additions. We’re tending to walk away from business that we don’t deem is profitable enough. So we’re increasing that average margin, and sales may be slowing down a bit, but overall the profitability of the businesses in a better profile. Damir Gunja Okay. And are you able to give us even a rough idea of the year-over-year benefit from FX, that’s in the gross margins? Pat Mccullough Yes. In gross margin, it was almost $12 million about a third of the gross margin improvement came from FX, about two-thirds of it remaining from performance. EBITDA, we saw a $2.7 million of FX, good guide year-over-year. So that $9 million increase, $2.7 million of it is from FX, the remainder from performance. Damir Gunja Perfect. Thanks. Operator Thank you. And our next question comes from Nelson Ng from RBC Capital Markets. Your line is open. Please go ahead. Nelson Ng Great, thanks. Deb, I was wondering whether you can provide a bit more color, in terms of the solar rollout. You mentioned that you’re looking to expand in California and the U.S. Northeast. But I was just wondering are we still in like very early stages or could you give some idea of how like many sales people would be pitching solar in this quarter or the next quarter and how that would increase? Deb Merril Yes. So we – as we said before, we’re in California. We actually launched New York last week. And we’re leading up to that, doing some work, but actually hit the street in New York last week as well. So we’re now in two states, and continuing to kind of probably pick up the pace here. In the last few weeks our sales have increased on a kind of week-over-week basis, so we’re certain to see some momentum on that. So we expect that now over the next few months we’ll be able to increase and start to maybe have it be meaningful enough, where we can start to communicate that to the market as well. Nelson Ng Okay. Thanks. And then just on competition and just following on Damir’s question, in terms of the level of competition, have you seen a – like competition has picked up, I think you mentioned; but you’re also kind of walking away from business. So could you remind us how – like just a rough comparison of level of competition now compared to, I guess, a year-ago when – I think the polar vortex put a number of energy retailers out of business, like have you seen a big pickup in the number of firms competing for business and how things changed? James Lewis Nelson, this is Jay Lewis. I think what we’ve seen here is some of the bigger players you – like FirstEnergy, you mentioned they were getting now a dominion. And then what we’ve seen having is some smaller players come back into the market that maybe aren’t familiar with the polar vortex or the summer pricing that can happen in archived [ph] here. And so, when we see things like that, we understand the marketplace, and so we walk away from, let’s say, deals there, but we see other opportunities, which is why we’ve seen our profitability grow. Nelson Ng Okay. And then, just one quick question on FX, I presume it’s for Pat. Can you just remind us of what your current FX strategy is? And, I guess, given the weak Canadian dollar, is that a good time to increase or reduce hedges? Pat Mccullough Yes. So right now, we do not take any forward contracts or hedges around the translation exposure that we think about in the earnings call. We do take positions on a 12-month forward basis for the transactional risk associated with the U.S. dollars that we’ll have to bring back to Canada to service dividend payments, interest payments et cetera. As we go forward, one of our strategies is to reduce the amount of Canadian dollar base debt, and get more of natural hedge alignment between our debt and the rest of the book. If you think about our gross margin, the translation risk around gross margin is largely neutralized by the footprint of SG&A, which fits where our gross margin is incurred. So about 71%, 72% of the business happens in the U.S., very similar ratio of the SG&A. So the translation exposure that we have is really only on the EBITDA values and we do take positions for the transactional movement of U.S. dollars back to Canadian dollars, but not the translational risk. Nelson Ng Okay. Got it. Thanks. Those are my questions for now. James Lewis Thank you. Operator Thank you. And our next question comes from Carter Driscoll with FBR. Your line is open, please go ahead. Carter Driscoll Good afternoon. First of all, congratulations on a very strong start to fiscal 2016. Deb Merril Thank you very much. Carter Driscoll – MLV & Co First question, obviously, you’ve taken a very specific strategy of kind of pruning the less profitable customers. Would it be fair to say that you expect very minimal net addition growth, maybe even flat growth for this year as you continue to prune that portfolio? Or maybe I’d ask it in a different way, how long do you expect this to continue to show such noticeable changes on a quarterly basis in terms of your net RCEs? Pat Mccullough Yes. So we do believe to support the long-term profit picture here that we need to focus on growing customer base, which will then obviously turn into sales growth and profit growth over the long-term. Having said that we’re going to be very determined to creating a level of profitability that’s acceptable for the amount of risk and frankly value that we provide. As you look at our three growth areas that we talk about quite a bit, the geographic expansion that we’re looking for in both Ireland and Continental Europe is one place that we’re going to see some customer growth. As you look at product innovation with flat bill or other bundle type solutions you’re going to see some nice customer growth and product per customer growth, which is something we’re going to have to think about presenting to you in an articulate way in the future. And then the last one is these adjacent energy management solutions like residential rooftop solar or energy storage at some point in our future, these are areas of customer growth that we expect to put on the board. We don’t think this is going to be a tremendous hit to our scale in the short-term. But we’re proving that we really are willing to ensure that we have accretive cash and profit coming in on new deals, not just chasing market share. Carter Driscoll Got it. And then, maybe following up on that, the CPF merger with KW Financial, I’m assuming that will help the scale, obviously, [some incentives and buy dividend] [ph]. What else does this do for you, that merger potentially? I’m assuming it opens up new territories and maybe some new financing possibilities in terms of maybe your smart thermostats. Could you address that for me, please? Pat Mccullough Yes. We’re pretty excited about this. Clean Power Finance and Kilowatt Financial coming together now puts $1.6 billion of assets under management, so it almost doubles the capacity of the Clean Power Finance add. This also takes Clean Power Finance’s footprint and expands it dramatically. So over 45 states where they offer residential rooftop solar programs, both PPA lease and loan products, which we’re excited about this puts the loan products in their portfolio directly. And then Kilowatt Financial has been in the energy efficiency financing business. This is a huge coup for Just Energy as well, as we attempt to respect and protect our CAPEX light or no CAPEX model. We can start to think about accelerating smart thermostat deployments or other energy efficient devices potentially through the use of our partner’s financing. Carter Driscoll Okay. Next question is in terms of the pruning of the commercial profile, was there any particular type of commercial customers that you found to be less profitable in any regional area, where you found maybe pockets of weakness that you pruned, or has it been uniform across your territories? James Lewis Carter, this is Jay Lewis. I think when you look at it for this past quarter, Texas and Illinois, for example, are two markets there where the margins didn’t seem to probably [ph] with the rest level for us. They have – those markets tend to come back at certain times. We did have some weather here in the last week or so. Prices didn’t prink [ph] like they we have historically, but you are seeing some pricing run up there. Carter Driscoll Okay. And I think you originally talked about and I realized it’s very early in your forays into solar, but you talked about north of $65 of kilowatt hour, maybe you talk about what you’re experiencing, at least, in the early days, and why do you think that’s sustainable as you scale, I don’t know, if you can put a specific number around it, or maybe talk about percentage versus your initial expectations from a pricing perspective? Deb Merril Yes. I mean, I can tell you that we are seeing margins and profit higher than what we initially expected, which was – we’re very pleased by, and we’re starting to see some of that the expertise in sales and talking to customers about these products is taking shape as well. So, I think, we’re seeing a positive trend on that. Carter Driscoll Okay. Maybe could you compare – maybe compare and contrast, because I think your initial foray into the UK was focused more on the commercial side and that you mentioned more or maybe evenly balanced between consumer and commercial. Is it a different product set that you’re selling versus the U.S., I mean, is it more adoption of JustGreen, or anything – any type of color you can compare in this territory as to why you are getting such a higher margin, or maybe discuss your initial penetration steps, help me understand a little bit better? Deb Merril Sure, Carter. Yes, we actually started in the UK on the commercial side taking our platform, our portal, and our pricing platform over there to make it easy to get deals done and do business with us. We quickly, within a year to probably 16 months moved into the residential side, as well. And really in the last, I would say, probably this last quarter was when we were starting to see a lot of pickup on the residential side, we’re starting to go into, using a few more channels to more online channels and affinity, as well as one of the things, I think, is really exciting for us is that, we have the ability to start using some of the products we have in the U.S. and taking them over to the UK. And I think they tends to be maybe less because of very limited, the number of products they can offer, each retail can only offer four. So you’ve seen less product innovation in the UK than you have probably in the U.S. and markets like Texas and other Illinois and all the other markets we operate in. So over time, what we’re seeing now is, we’re bringing over some of our innovative products in the U.S. over to the UK. And I really think that that will continue to help drive a lot of margin, as well as customer growth on outside as well. Carter Driscoll Okay. And then last question for Pat. The credit facility, if I understand correctly, it’s more about extending the term than it is necessarily increasing the size of facility. And then follow-up to that is, kind of what priorities are in terms of recapping? Pat Mccullough Yes, we’re looking at the capacity actually going up from the present $210 million capacity. We’re expecting to get north of $250 million. We’ll close at a level that allows us to support our intra-month working capital needs, and we’re expecting to have a longer-term on that. This allows us to really unlock the divestiture net cash proceeds that we’ve been holding onto on our balance sheet to really attack the long-term debt. So as we can get this credit facility behind us, the immediate next step is to focus on the longer-term convertibles and bonds on our books. Carter Driscoll Okay. All right. I’ll get back in the queue. I appreciate all the time. Thank you. Deb Merril Thank you. Operator Thank you. And our next question comes from Kevin Chiang with CIBC. Your line is open. Please go ahead. Kevin Chiang Hi. Thanks for taking my question, and congrats on a good start of the year here. Just on your net attritions – the negative net attritions in Q1, it seems like some of this was due to, as you mentioned, like the steps you’ve taken to remove less profitable customers. And, I guess, as you looked at your contract renewal schedule, I’m just trying to get a sense of how much more of a headwind is going to be as you look to rebase your gross profit per customer higher here. Are we in for, say, a few quarters of headwind until this rolls over, or do you view this as more of a one quarter impact? James Lewis Kevin, I think when you look at it what we’re saying is that on the renewal side, we decided not to go after that low, let’s say, gross margin which then translate to low to no EBITDA unless everything goes according to plan. What you see on the attrition side, especially around the commercial, as commercial customers comes in, ended [ph] their contracts, and they haven’t seen any volatility there. Sometimes they let those roll over, and then when they decide to renew at these low margins, that becomes attrition. So when we say the pruning and it’s more along the lines of being selective about which customers we sign up on a gross adds perspective, and then which customers we go after on a net perspective. So, I think, what we’re doing today we have better data analytics to understand which customers are – we’re making money with, not just on average. And so as long as we’re making money on the customers, you’ll see us on as and there, so that’s the way we look at it going forward. Kevin Chiang Okay. That’s helpful. And just a point of clarification, Pat, on the FX comments you provided in terms of the tailwind, if I were to look at customers added and renewed the gross margin per customer, they are up roughly $20. Should I also be thinking that is roughly, call it, two-thirds related to internal initiatives to improve profitability and one-third being FX related, or those are piece of the pie different when I look at that specific metric? Pat Mccullough Yes, you’re correct, Kevin, that’s a fair observation. Kevin Chiang Okay. That’s helpful. And then lastly from me, I know you are transitioning from independent contractors to employees. And just trying to get a sense of how that’s coming along? Are you seeing any impact on worker productivity; impact on some of your better sales members; just trying to get a sense of how that transition is going through this period? James Lewis Kevin, when we look at it, it’s really market by market. In the markets where we have converted, we’ve seen success there, but we also had success with that independent contractor model. So we – in certain market it makes sense to have that model in place. And other markets where it doesn’t and we think we need to have more control to get that value proposition out. It’s been successful as well. So I think we’re open to making sure we have the right sales-force going forward, but that independent contractors are employee based. Kevin Chiang Perfect. That’s it for me. Thank you very much. Operator Thank you. We have no further questions at this time. I would now like to turn the call back over to Ms. Deb Merril for closing remarks. Deb Merril Perfect. Thank you very much. And we appreciate everybody’s participation on the call, as well as your support of the company. And like we said, we’re very excited about our first quarter. We are looking forward to a great fiscal 2016. I also like to quickly thank our employees. We have a lot of people in a lot of different offices across three countries that really make this happen and we couldn’t – we wouldn’t be here without them. So definitely take the time to thank them for their efforts and we’ll talk you guys again in a couple of months. Thank you. James Lewis Thank you. Operator Thank you, ladies and gentlemen. This concludes today’s conference. Thank you for participating. You may now disconnect.

Spark Energy’s (SPKE) CEO Nathan Kroeker on Q2 2015 Results – Earnings Call Transcript

Spark Energy (NASDAQ: SPKE ) Q2 2015 Earnings Conference Call August 13, 2015, 11:00 AM ET Executives Andy Davis – Head of Investor Relations Nathan Kroeker – Director, President and Chief Executive Officer Georganne Hodges – Chief Financial Officer Analysts Selman Akyol – Stifel Operator Good morning, ladies and gentlemen. Welcome to the Spark Energy, Inc.’s second quarter 2015 earnings conference call. My name is Shannon, and I’ll be your operator for today. [Operator Instructions] I would now like to turn the conference over to Mr. Andy Davis, Head of Investor Relations for Spark Energy, Inc. Please go ahead. Andy Davis Good morning and welcome to Spark Energy, Inc. second quarter 2015 earnings call. This morning’s call is being broadcast live over the phone and via webcast, which can be located under Events and Presentations in the Investor Relations section of our website at www.sparkenergy.com. With us today from management is our President and CEO, Nathan Kroeker; and our CFO, Georganne Hodges. Please note that today’s discussion may contain forward-looking statements, which are based on assumptions that we believe to be reasonable as of this date. Management may make forward-looking statements concerning future expectations, projections of our operations, economic performance and financial condition. These statements are subject to risks and uncertainties that could cause actual results to differ materially from these statements. Although we believe that the expectations reflected in such forward-looking statements are reasonable, we give no assurance that such expectations will be realized. We urge everyone to review the Safe Harbor statement provided in yesterday’s earnings release as well as the risk factors contained in our SEC filings. We undertake no obligation to publicly update or revise any forward-looking statements whether as a result of new information, future events or otherwise except as required by law. During this morning’s call, we will refer to both GAAP and non-GAAP financial measures of the company’s operating and financial results. For information regarding our non-GAAP financial measures and reconciliations to the most directly comparable GAAP measures, please refer to yesterday’s earnings release. With that, I’ll turn the call over to Nathan Kroeker, our President and Chief Executive Officer. Nathan Kroeker Thank you, Andy. I’d like to welcome our shareholders and analysts to Spark’s second quarter 2015 conference call. I will make a few opening remarks about our operating results and the two acquisitions we closed recently. And then our Chief Financial Officer, Georganne Hodges, will provide some detail on the financial results. We will then conclude with questions from analysts. Georganne will give you the financial details of our second quarter results in a moment, but I will tell you that we are very pleased with these results. We saw enhanced unit margins in both our Retail Natural Gas and Retail Electricity segments during the second quarter. This was a result of margin expansion, coupled with declining wholesale prices and our ability to capture higher margins on our variable book. In terms of customer count, we saw organic growth of 4% in the second quarter, driven by strong success with our electric sales campaigns in PPL and NSTAR as well as consumers in PG&E on the natural gas side and dual fuel offerings in [indiscernible]. I will discuss our two recent acquisitions in a moment, but I will say that I’m very excited about the addition of 20 new markets from these acquisitions. In the first few weeks, we have launched several dual fuel products where, for example, we are now selling Oasis electricity combined with Spark gas in the same customer sales experience. In addition, we are in the process of broadening our broker relationships, providing brokers new electric and gas markets, leveraging our suite of brand. As we signaled last quarter, we continued to see the heightened level of attrition in Southern California, as a result of our more aggressive collection efforts in that market. In line with our expectations with the closing of the Entrust acquisition, we saw higher attrition as a result of required customer communications, as those customers came on flow in the second quarter. We have taken a series of steps, aimed at reducing attrition, and we are already seeing success. If you dig into the second quarter, attrition was at its highest point in April, and has been trending down through June, and we’re seeing this trend continue in the early part of the third quarter. While I expect our attrition to continue to improve over the next few quarters, I don’t expect it to return to the levels of a few years ago, as the composition of our business has shifted overtime at higher-margin lower-volume customers that tend to experience higher attrition levels. All of this attrition is factored into our pricing strategies and our customer likes on value analysis. On July 8, we acquired CenStar Energy, a retail energy company with approximately 75,000 RCEs across 20 utilities in New York, New Jersey and Ohio. CenStar provides us with the access to 13 new utilities service territories as well as several new products to support our continued organic growth efforts. Censtar has a strong brand as well as a number of broker infinity relationships that we intend to leverage, as we grow this business. On July 31, we completed our Oasis Energy acquisition. Oasis operates in six states across 18 utilities and has approximately 40,000 natural gas and electricity customers. Oasis provides the seven new utilities, providing additional organic growth opportunities for Spark. As discussed on the last call, we intend to maintain the Oasis brand in sales and marketing operations, given their ability to add customers at a competitive cost, and realize electricity unit margin that are significantly higher than our historical margins, while only experiencing slightly higher attrition rates. We expect both businesses to be accretive through adjusted EBITDA in 2015, inclusive of integration costs expected in the third and fourth quarters. On June 15, we paid a quarterly cash dividend for the first quarter of $0.3625 per share. More recently, on July 23, we announced that our second quarter dividend of $0.3625 per share will be paid on September 14. We expect to pay this quarterly dividend on a go-forward basis. And as we have previously communicated, we expect 2015 adjusted EBITDA to exceed our planned 2015 dividends and all required distributions and tax payments. And now with our two recent acquisitions, our adjusted EBITDA should be further increased by a meaningful amount. And I want to reiterate that management does not anticipate any changes to the dividend policy in 2015. Thanks for your attention. And with that, I will now turn the call over to Georganne Hodges, our Chief Financial Officer, for more financial review. Georganne? Georganne Hodges Thank you, Nathan. Strong unit margins underpinned by lower supply costs across several of our market led to an adjusted EBITDA of $4.6 million for the second quarter. This compared to $1.4 million for the second quarter of 2014. Retail gross margin was $23.1 million compared to $17.9 million in 2014. This increase was driven by increased unit margins across both our retail natural gas and electricity segments. Although, customer account was 17% higher in the second quarter of 2015 as compared to 2014, our gas volumes were slightly lower reflecting a shift in our overall geographic mix. G&A expenses for the quarter were $13 million compared to $9.7 million in 2014. This increase is primarily due to increased billing and other variable costs associated with customer account growth and increased costs associated with being a public company. Customer acquisition spending for the quarter was $6.2 million compared to $6.4 million spent in the second quarter of ’14. Approximately, 82,000 new customers came on flow in the quarter, which includes approximately 25,000 from our Entrust acquisition, which we closed in the first quarter. Our net income for the quarter was $4.6 million compared to $200,000 in 2014. Our EPS for the quarter was $0.23, which was positively impacted $0.02 by an unrealized gain on our hedges of future supply positions. In the second quarter, we paid down our working capital facility by $11 million, ending the quarter with a loan balance of $9 million. On July 8, we amended and restated our senior credit facility to include a $25 million secured revolving line of credit to be used specifically for the financing of permitted acquisitions, along with our revolving working capital facility of $60 million. As of today, the loan balance on the revolving acquisition tranche is $21.2 million, while the balance on the working capital facility is $20.3 million. I would point out that the balance on the working capital facility reflects the purchase of working capital for both CenStar and the Oasis acquisitions. Additionally, on July 8 and July 31, in conjunction with the closing of these acquisitions, we executed a total of $7.1 million of convertible subordinated debt with an affiliate of our founder. That concludes my prepared remarks. I’ll now turn the call back over to Nathan. Nathan Kroeker Thanks, Georganne. In summary, we are very pleased with the strong adjusted EBITDA and retail gross margin we realized in the second quarter. As we move through the third quarter, we are very focused on the integration of our two new acquisitions, taking advantage of the new market opportunities for organic customer acquisitions. We will now open up the line for questions from our analysts. Operator? Question-and-Answer Session Operator [Operator Instructions] Our first question comes from Selman Akyol with Stifel. Selman Akyol As we sit there and look at the gross margin, and I know represented in your early comments that you had, I guess, favorable supply contracts on as well. How long do those — is the gross margin due to the acquisitions, higher selling prices? Is it due more to the favorable acquisition prices of energy? And if so, how long do those contracts run for? Just trying to get a feel for how durable those margins are? Nathan Kroeker Let me make sure I understand your question, Selman. So you’re asking how much of it is due to us increasing revenue and how much of it is due to us having lower costs and how long can we expect that to continue for? Selman Akyol That’s a very good summary of it, yes. Nathan Kroeker It’s really a combination of both. So on the supply side, we saw commodity prices coming down through the quarter. And when we see commodity prices coming down like that, it gives us the opportunity to expand our unit margins in that period of time. Similarly, we do have a pretty significant portion of our book that’s on variable price contracts. With milder weather in the quarters, smaller builds for consumers, we were able to have slightly higher variable margins, raise the revenue on those customers. So it’s really a combination of both. I don’t think it has much to do with the supply hedges out into the future as it is the situation in the quarter. That said, I mean I think we’ve proven that we can achieve higher unit margins than what we had last year, and we expect to continue to manage the business in a similar way going forward. So I definitely think you’re going to see higher unit margins even through the balance of the year than we had last year. Selman Akyol And then, can you talk about attrition within the quarter? Georganne Hodges We saw attrition numbers — you saw attrition numbers, they were higher than we would like. Within that, it has been trending down throughout the second quarter. And as I said a moment ago, I mean also trend it down even in the first part of the third quarter. Full quarter number was 7.7. Our June attrition, on a standalone basis for the month of June, was actually 6.8, and we see that trend continuing in July. I don’t necessarily see attrition getting all the way back down to the historical levels that we had a couple of years ago, because the makeup of our customer book has changed, really shifted a lot of our focus to higher margin, lower volume customers. And those customers tend to have inherently higher attrition. But as I also said a moment ago, I mean all of that attrition is factored into our pricing decisions, our pricing models and our lifetime value strategies. So I think we have done a pretty good job of managing it. Selman Akyol And then last one from me, just on sort of the acquisition outlook. So are you seeing lot of opportunities out there? Nathan Kroeker Absolutely, I mean I will say the management team is very focused on integrating the two deals we just did in July. But we do have a founder that’s very committed to helping us grow through M&A, willing to continue to leverage his balance sheet in order to do that. So we’re absolutely continuing to look at additional opportunities. Whether there would be something we do directly in Spark or whether it’s something that we do with the parent company and then leverage subordinated debt in order to drop those down at a later date, but we’re willing to look at pretty much anything that we think is on strategy for us. Operator We have no further questions at this time. I would now like to turn the call back over to Nathan Kroeker for closing remarks. End of Q&A Nathan Kroeker Thanks everybody for participating in today’s call. And we look forward to talking to you soon. Operator Ladies and gentlemen, this concludes today’s conference. Thanks for your participation and have a wonderful day. Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. 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