Q4 2012 Just Energy Group Inc Earnings Conference Call

May 17, 2012 AM EDT
Thomson Reuters StreetEvents Event Transcript
E D I T E D   V E R S I O N

JE.TO - Just Energy Group Inc
Q4 2012 Just Energy Group Inc Earnings Conference Call
May 17, 2012 / 06:00PM GMT 

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Corporate Participants
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   *  Rebecca MacDonald
      Just Energy Group Inc - Executive Chair
   *  Ken Hartwick
      Just Energy Group Inc - CEO
   *  Beth Summer
      Just Energy Group Inc - CFO

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Conference Call Participants
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   *  Nelson Ng
      RBC Capital Markets - Analyst
   *  Trevor Johnson
      National Bank - Analyst
   *  Damir Gunja
      TD Securities - Analyst
   *  Rod Behan
      BMO Nesbitt & Burns - Analyst

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Presentation
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Operator   [1]
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 Good afternoon, ladies and gentlemen. Welcome to the Just Energy Group Conference Call to discuss the fourth quarter year-end results for the period ended March 31, 2012. As a reminder all phone lines are on listen-only mode and there will be time for a question-and-answer session at the end of the conference.

 (Operator Instructions)

 I would now like to turn the meeting over to Ms. Rebecca MacDonald, please go ahead.

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 Rebecca MacDonald,  Just Energy Group Inc - Executive Chair   [2]
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 I'd like to welcome you all to our fourth quarter and year-end conference call. With me this afternoon are Ken Hartwick, our CEO and Beth Summers, our CFO. Ken and I will make short presentation and then we will open the call to questions. This are our 11th annual results as Just Energy.

 We are very pleased with the year meeting or exceeding all our guidance despite an extremely warm winter impact on our gas consumption. Before we get going, let me preface the call by telling you that our earnings release and potentially our answers to 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 releases. I will have Ken go to the highlights for the quarter and the year and then I will talk about ongoing dividend policy and the future. We will then answer your questions.

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 Ken Hartwick,  Just Energy Group Inc - CEO   [3]
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 Thanks, Rebecca. Fiscal 2012 was a year of record performance with the highest gross margin, adjusted EBITDA, and customer additions in the Company's history. The results are a culmination of our efforts over the past three years to diversify our marketing channels and to broaden our product line, while maintaining a focus on the customers' energy use and price. The highlight for fiscal 2012 was again our customer additions. Two years ago we signed a record 505,000 new customers. Last year, a new record was set with 999,000 customers through marketing.

 Fiscal 2012 set a new record adding almost 1.1 million for the year, plus over 46,000 water heaters and HVAC units. Including the customers added through marketing and the customers acquired with Fulcrum in October, our customer base has reached 3.8 million customers, up 17% from a year prior. Our national home services installations have reached 165,000.

 Each of the steps we have taken to add additional channels has been successful. Our core consumer division, residential marketing, generated 429,000 new customers up 1,000 from the previous record in fiscal 2011. This increase is in addition to the significant role our sales force plays in renewing customers.

 Commercial additions were 662,000, up 16% from the previous record of 571,000 added in fiscal 2011. Our growth in commercial has far exceeded our expectations when we acquired Hudson Energy two years ago. The 1.2 million commercial additions since the purchase were on top of the more than 500,000 customers we acquired with Hudson, building our commercial division into one of the North American market leaders in just two years.

 We understand that these customers generate, by design, lower per customer margins than our traditional residential base, but their payback on aggregation costs is less than 18 months, just like a residential customer. While this results in slower margin growth than the growth in customer base, this is a very profitable business as each customer equivalent brings lower customer aggregation costs and lower ongoing customer care expenses.

 Other new marketing channels include our initial steps into internet acquisition and telemarketing. A particularly exciting vehicle is our network marketing unit Momentis. From a standing start with 3500 independent representatives at the beginning of the year, Momentis has grown to almost 48,000 independent representatives at year-end. With the rapid ramp-up, we are now only starting to see the benefit of this division in new customer contracts and sales of other products. The year also saw the acquisition of Fulcrum, which along with 240,000 new customers broadened expertise in affinity marketing, which we hope to rollout in other major markets in coming years.

 Clearly energy marketing is seeing exciting returns from all of its channels. With our continued confidence in these sales channels we intend to invest to grow each to its potential. We are asked repeatedly about the competitiveness of our retail customer proposition in the face of very low natural gas prices. In fiscal 2012 we added 198,000 new gas customers at good margins, a solid performance which should improve in the coming year. A second area of growth is National Home Services. Our water heater and HVAC rental division saw installed units increase by 39% year-over-year.

 Revenue and gross margin are up 58% and 78% respectively. This product is a natural extension of our focus on the customers energy needs, and tremendous value is being built daily within this division, with steps being taken to expand outside of Ontario. Other aspects of our Business also showed improvement. Our level of attrition in the customer base again declined to an annual rate of 13% down from 15% in fiscal 2011. Improving economic conditions and higher numbers of more stable commercial customers cause us to believe this trend will continue.

 Renewal rates slipped slightly, falling to an average of 64% this year from 65% in fiscal 2011. Renewals are challenging in a market where customers are coming off very high cost contracts to new market pricing which is often half of what they had been paying. Once these high price contracts roll off, we expect an improvement in renewal rates. We invested in a number of future expansions which increased administrative costs during the year. Excluding these, and back office costs associated with the Fulcrum acquisition, these costs grew by far less than the growth in our customer base. Bad debt expense also saw an improvement falling to 2.4% of relevant sales from 2.7% a year ago.

 A very important measure of our operating success is embedded margin, a calculation of the cash flow which will be generated by existing contracts over their life. At the end of fiscal 2011, our embedded margins stood at CAD1.726 million. During the year, CAD484 million of margin was realized. Our successful sales and marketing efforts both replaced realized margin and added new embedded margin ending the year with CAD1.977 million up 15% in the year. Despite these excellent results the year was not without its challenges. The largest of these was highlighted in the fourth quarter results we reported today.

 As most on the call will be aware, the January/February/March winter period was approximately 15% warmer than normal, and 45% warmer than normal in March alone. The result was sharply lower natural gas consumption in our biggest winter quarter. This meant lower sales, less gas margin, and through that, lower adjusted EBITDA. For the fourth quarter, our sales were down 13% versus fiscal 2011. This despite an increase of 17% in our customer base. Our gross margin was up 1% as other areas of the Business grew to offset the lower gas returns.

 Our adjusted EBITDA was down 5% as the administrative costs of Fulcrum were added to Just Energy while we received predictably much lower winter seasonal electricity margins. Our pay-out ratio on adjusted EBITDA for the quarter was 40%, up slightly from the 38% the year prior. At this time last year, we guided the market to expect growth of 5% per share in both gross margin and adjusted EBITDA. We realized the gross margin guidance growing by 5% per share. We exceeded our adjusted EBITDA growth target growth 7% per share for the year.

 Fiscal 2012 saw another year of record customer growth and the realization of 5% growth targets at a time where the economy and low inflation challenges many companies to grow at all. We did so while paying our CAD1.24 dividend just as we have in past years. The result of this growth and income should be excellent returns for patient owners of our shares. Overall, Just Energy had a solid operating performance in fiscal 2012.

 Let me turn it over to Rebecca.

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 Rebecca MacDonald,  Just Energy Group Inc - Executive Chair   [4]
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 Thank you, Ken.

 I'm also very pleased at the results for the year. As Ken pointed out, it was a year of success with our customer growth, and expenditure control aligned us to outpace the challenges of another extremely warm winter and meet or exceed all our published financial targets. I'll now conversion to a corporation in January 2011. Our Board implemented a dividend policy where monthly dividends can be set to CAD1.24 annually, equal to our former distribution rate as an income trust. This allows many of our shareholders to benefit from a more attractive tax treatment on the dividends, as opposed to the previous distributions.

 Many of our shareholders look to Just Energy as an important source of steady, predictable income. This will not change. While the past years saw the worst weather conditions for operating results, we had record gross margin in adjusted EBITDA and continue to comfortably pay our CAD1.24 dividend. Our pay out ratio on adjusted EBITDA declined for the third straight year reaching 62%, down from 66% in the fiscal 2011 and 72% in fiscal 2010. This declining ratio and the growth in embedded margin Ken talked about are the most important measures of the sustainability and health of both our Business and our dividend.

 Some in the capital markets look at our overall pay-out ratio, including its expenditures to grow the business, and think that a rising trend threatens our dividend. Nothing could be further from the truth. Our growth expenditures generally pay back in less than 18 months, resulting in a very high return on invested capital, for which Just Energy is known. We do not believe that these sales efforts should be curtailed, even if small amounts need to be borrowed to finance them. We have access to financing necessary to fund any realistic level of accelerated growth without impacting our ability to fund dividends.

 Continued profitable growth and high income will be the result. Just Energy has always grown and will continue to grow. As we are able to continue to grow our customer base through continued expansion of our sales channels and product suite, we will see cash flow in excess of that needed to pay CAD1.24 in the future. As regards the future, Just Energy is not in the business of standing still. Three years ago, we saw the growing demand for green energy from our consumer division customers, and developed our JustGreen and JustClean product.

 These products have been tremendous success with green sources now making up to 12% of our current consumer electricity portfolio and 10% of our consumer natural gas portfolio. While take up by new customers on green slowed slightly this year due to the pricing pressures in a challenging economy, green products remain a focus of the Company. We continue to initiate new products and options for green-oriented customers.

 Our new Hudson Energy Solar business has committed to more than CAD90 million in capital projects, installing large scale solar arrays for corporate and public buildings. We expect that this business will double in the coming year. Today, we continue to look to the future and see many changes coming in how customers use energy. Time of use metering makes control of home consumption an important goal of homeowners. This is an opportunity for Just Energy to provide products which assist customers in using energy effectively.

 Looking further out, we see growth in the sales of electric cars and other vehicles as a major driver of North American power consumption. Again, our executive team is looking for ways to have Just Energy products at the forefront of this growth factor.

 As in the past year, we are providing guidance for the fiscal 2013. We expect gross margin growth in the range of 10% to 12%, and adjusted EBITDA growth of 8% to 10% for the coming years. This is substantially higher growth than forecast and realized last year, and is off a larger base. We remain in a low inflation world and we believe this represents solid operating performance, particularly combined with our high dividend. We remain comfortable with our level of dividends, and expect to maintain the current CAD1.24 per year going forward.

 I would like to personally thank Ken Hartwick and his team for an excellent year. Our efforts and expenditures to broaden our sales channel and geographic footprint have resulted in renewed growth without sacrificing the stability Just Energy is known for. Just Energy has become a North American leader in the deregulated commodity supply in green energy markets. The future has never been brighter for your Company.

 We will now open for questions.

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Questions and Answers
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Operator   [1]
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 (Operator Instructions)

 Nelson Ng, RBC Capital.

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 Nelson Ng,  RBC Capital Markets - Analyst   [2]
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 Great, thanks. Good afternoon, everyone. Just a quick question on the Canadian electricity division. I think it increased by roughly 50% year-over-year and also quarter-over-quarter. What were the main reasons for the growth in the gross margin? I know there was a good pick up in the JustGreen product but were there any ongoing or one-time factors that explains the large increase?

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 Beth Summer,  Just Energy Group Inc - CFO   [3]
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 Part of the reason for that is there are some new products that have been introduced that are generating higher margins than you would have seen historically.

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 Ken Hartwick,  Just Energy Group Inc - CEO   [4]
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 We talked about the products related to smart meters that are in place in Ontario specifically, that again is one of the things Rebecca referred to in her comments around adapting the product to technology as it evolves into the house. And we do think there is some additional margin that can be realized where smart meters are put in. So I would not characterize it as a one-off activity.

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 Nelson Ng,  RBC Capital Markets - Analyst   [5]
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 Okay, got it. And then just for your Momentis networking division, you added about 22,500 during the quarter and that's like a 90% increase from last quarter. What are your expectations going forward? Was the recent growth due to promotions and do you expect the level of growth to continue or do you expect the base to level out?

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 Ken Hartwick,  Just Energy Group Inc - CEO   [6]
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 I think we certainly made investments through the last couple of quarters to grow a solid base for Momentis which is what we've done to get to the level we're at. While we'll always take as much growth as we think is prudent, now that we've established that base I think we would be very comfortable with additions in that range from a representative and the associated customers that come along with it in and around that level.

 Part of it was the investment to get the good solid base leaders which we now think we have and now it's adding. That pace of growth is one that we would be very happy with quarter after quarter.

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 Rebecca MacDonald,  Just Energy Group Inc - Executive Chair   [7]
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 When we started this position, we did want to be a relevant player in that marketing effort in the States it send a very clear message to any other MLM companies in the United States and I think we have successfully done so. Energy is sold to MLM networks way more in the States; we have not seen that in Canada.

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 Nelson Ng,  RBC Capital Markets - Analyst   [8]
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 For your solar division, you have about CAD91 million of commitments signed up to date. How much of that has been incurred and when do you expect to invest the remaining amount?

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 Beth Summer,  Just Energy Group Inc - CFO   [9]
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 We have roughly completed at the end of the year CAD20 million. That we would by the time you hit the end of the year, roughly those projects take three to four months to install. So over the next six months, the whole CAD90 million should be installed.

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 Nelson Ng,  RBC Capital Markets - Analyst   [10]
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 Okay, thanks, Beth. I'll get back into the queue.

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Operator   [11]
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 Trevor Johnson, National Bank.

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 Trevor Johnson,  National Bank - Analyst   [12]
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 Ken, you mentioned that the high-priced contracts as they roll off, you might be able to see a bit of an uptick in non-renewals. Just curious what your time frame is on that front with regards to what pricing contracts you're speaking of.

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 Ken Hartwick,  Just Energy Group Inc - CEO   [13]
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 I think there's two parts. Firstly, we saw the same thing. Some of the improvement in attrition rates we talked about a year ago that we would see as more of the book got onto what is now current market-rates has helped our attrition rates and we have approximately 18 more months of, relatively speaking, higher priced contracts that are coming up for renewal.

 So you could say over the course of the next year I think we will again be challenged to improve renewal rates significantly over where they are right now. But within that 12-month to18-month time span my expectation is that renewal rates will show a similar improvement that we saw happen to our attrition rates.

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 Trevor Johnson,  National Bank - Analyst   [14]
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 And is it spread between both gas and electricity? Where do you find most of the sticker shock is coming from?

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 Ken Hartwick,  Just Energy Group Inc - CEO   [15]
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 A bit more so on gas. Because, again, electricity is somewhat more volatile as a commodity, seasonality, and other things but it's -- gas is definitely a bigger issue.

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 Trevor Johnson,  National Bank - Analyst   [16]
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 And in terms of the non-renewals broken out between gas and electricity, you are seeing it more challenged on the gas side?

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 Ken Hartwick,  Just Energy Group Inc - CEO   [17]
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 Yes. And just from the customer conversation, it requires a longer conversation with that customer to ensure they want to renew for a second or third five-year term.

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 Trevor Johnson,  National Bank - Analyst   [18]
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 Okay, great. The fiscal 2013 guidance is quite good, almost double or double-plus what we saw in 2012. Can you just maybe highlight two or three things that you see here this year versus maybe a year ago that gives you the enthusiasm to be a bit more aggressive with your forward guidance?

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 Ken Hartwick,  Just Energy Group Inc - CEO   [19]
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 Yes. I think it's the predominant one that Rebecca and I referred to is really our sales channels that we've always had a lot of confidence in our sales channels and really what we've done the last couple of years is expand those channels out. So you look at our core which has been our door-to-door, you look at what we've built in Hudson in the commercial side, Momentis, some of the Internet marketing we're doing.

 And all of those channels now are functioning the way we think they should and performing well which we've seen over the last number of quarters, so I think it's really just confidence that we have the product suite right for customers and we have the sales channels on multiple levels, now that we've invested in them working very well.

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 Rebecca MacDonald,  Just Energy Group Inc - Executive Chair   [20]
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 And the only other thing that would be fair to comment as well is that we obviously have consolidated a number of players and the competitive landscape has changed over the years and with our size and as I mentioned in my remarks, we are going from a larger customer base with a higher projection than we achieved last year because we feel very confident that we've got processes and people in place that can deliver organic growth in these areas.

 And this is a network that has been put in place by Ken and his team, not within the last year. They've been working on it for the last four years and now we are starting to reap the fruit of it.

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 Trevor Johnson,  National Bank - Analyst   [21]
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 Great. And then just finally maybe for Beth. There was commentary with regards to guidance on tax levels, might see a bit of a benefit in 2013 on some credits. Can you just elaborate a little bit on whatever color you can provide?

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 Beth Summer,  Just Energy Group Inc - CFO   [22]
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 From a tax perspective, there will be tax losses generated from the solar business. So if you're looking at it from an effective tax rate perspective in the US, not bad to think of it as roughly 10% on the US basis and Canadian basis, the effective rate probably somewhere between 20% and 25%.

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 Trevor Johnson,  National Bank - Analyst   [23]
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 Thanks for the answers folks, appreciate it.

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Operator   [24]
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 Damir Gunja, TD Securities.

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 Damir Gunja,  TD Securities - Analyst   [25]
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 Just wanted to touch on weather. I guess some of the weather models are forecasting a long, hot summer and just thinking about your electricity business and how if any potential impact would be felt there.

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 Ken Hartwick,  Just Energy Group Inc - CEO   [26]
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 I can't say we give much credence to the weather forecasters on whether summer's going to be hot or cold given that last winter was supposed to be record cold before it got here. But we took the same approach that we did last summer where we had a series of weather hedges in place predominantly in our Texas market but scattered a little bit into a couple of others to cover ourselves really for extreme weather over an extended period of time which served us very well in Texas particularly last year.

 And we've put similar hedges in place for this year, a little bit more because we're a little bit bigger and again, if the weather is really hot through the summer we think we'll mitigate similar to what we did last year, which was exceptionally hot and exceptionally volatile through that Texas market last year which we came through relatively unimpacted.

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 Damir Gunja,  TD Securities - Analyst   [27]
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 And it's probably too early to think about next winter but do you think you'll have, will there be a market or will you be able to put in a similar product for next winter or is it too early to think about that? Or is it going to get too expensive?

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 Ken Hartwick,  Just Energy Group Inc - CEO   [28]
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 It's a good question. It's too early to get pricing from people at this point so we're definitely thinking about it and different approaches to being able to mitigate the exposure for next winter. And again whether it's a warm winter or cold winter, we think in both directions but it is too early yet to get pricing signals from suppliers on what they will do. A lot of them are in the midst of doing what they're doing through the summer period but it's just too early to get pricing. But we have our thoughts on what we'll do for next winter.

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 Rebecca MacDonald,  Just Energy Group Inc - Executive Chair   [29]
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 It's fair to say we are hoping we are going to get one cold winter so it would be nice if it is next year, this coming winter but you never know.

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 Damir Gunja,  TD Securities - Analyst   [30]
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 Okay, and back at the Analyst and Investor Days you talked about a potential expansion into the UK. Just wondering if you could update us on that or any other relevant markets that you're maybe looking at near term.

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 Ken Hartwick,  Just Energy Group Inc - CEO   [31]
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 So I think near term we continue to build out some of the US markets and it's really utilities we're not in. We've entered Maryland recently; we've added Illinois Power, which we started in last week; so a few others. But your question on the UK, we have a team on the ground which we've hired there. It's under Deb Merril's direction in our Hudson business. We will be up and launched in late July, early August.

 The way the process works in the UK is you're allowed to sign up a relatively small number of customers and then you need to go through a couple billing cycles and then the regulator gives you your operating license once you demonstrate you can bill effectively. So from a load standpoint, we'll be operating in July and August but realistically, we'll be running that business to grow it towards the end of the calendar year when we get our full approval by the various regulatory bodies.

 And we're very excited about the market. It's a big market. We think we can be very competitive in that market. It's similar to Texas in many of its attributes, so it's one we're familiar with and are very excited to be there. But like everything we're going to go slow, make sure we're getting it right, and will become big in that market over the next two or three years.

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 Rebecca MacDonald,  Just Energy Group Inc - Executive Chair   [32]
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 And the only time that we would consider another country in Europe is when we really have a strong foothold in the UK. Before you even ask are there any other markets in Europe, absolutely, but we are not considering going anywhere else until we are up and operating at certain levels in the UK.

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 Damir Gunja,  TD Securities - Analyst   [33]
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 Makes sense. And just a final one for me. The National Home Services, you're still seeing nice momentum there. I take it there was no real impact on you from the expiry of the consent order; that business continues to make nice headway?

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 Ken Hartwick,  Just Energy Group Inc - CEO   [34]
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 We had a really solid year both on the water heaters side as well as the other two big pieces of HVAC equipment. The consent order dropped off with direct and for those that live in Ontario got to read all the press about how that went for them. So we're very enthusiastic about the business in Ontario and at the same time, as we've indicated before, we are making our steps to now expand it outside of Ontario as well. So we like it and really no impact from the direct consent order disappearing.

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 Rebecca MacDonald,  Just Energy Group Inc - Executive Chair   [35]
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 I'd like to say as well, Mark Silver and his team did a very, very good job this year with that business and they have executed very, very well.

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 Damir Gunja,  TD Securities - Analyst   [36]
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 Will you be offering product in the states in the near term here or should we think about that later this year.

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 Ken Hartwick,  Just Energy Group Inc - CEO   [37]
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 Yes, I would think if you were to think into what is our third quarter, I think we will launch in Quebec in this quarter, but into the US in a meaningful way if we're taking September/October is a good time frame.

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 Damir Gunja,  TD Securities - Analyst   [38]
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 Okay, thanks very much.

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Operator   [39]
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 Rod Behan, BMO Nesbitt & Burns.

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 Rod Behan,  BMO Nesbitt & Burns - Analyst   [40]
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 I'm hoping one of you might be able to go through a little exercise for me. What I'd like you to do is if you could take the GAAP reported earnings loss per share of CAD0.55 and then maybe break out a couple of the key items that were unusual or non-cash.

 And I'm thinking specifically weather-related loss that resulted from lower customer demand at a time of low gas prices and secondarily the requirement under GAAP for you guys to report on a mark-to-market basis gains or losses on your gas purchase contracts. And so if we could start from CAD0.55 and back out the per share hits on those two items which are either non-cash or unusuals, I'd appreciate it.

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 Ken Hartwick,  Just Energy Group Inc - CEO   [41]
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 Okay, and that's something where Beth will give you a call back. We have a schedule that walks through the GAAP earnings back through to what we like to term adjusted EBITDA which is one that we guide off of.

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 Rod Behan,  BMO Nesbitt & Burns - Analyst   [42]
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 Yes. That's fine.

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Operator   [43]
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 (Operator Instructions)

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 Rebecca MacDonald,  Just Energy Group Inc - Executive Chair   [44]
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 Well any other questions? If there are no other questions I would like to thank you very much for the support in the last year. We really appreciate it. If you think of any other additional questions you can call Ken, Beth, or myself and look forward being on this call reporting our first quarter. Thank you very much.

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Operator   [45]
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 Thank you very much, ladies and gentlemen. Today's conference is now concluded.




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