Q1 2015 Just Energy Group Inc Earnings Call

Aug 07, 2014 AM EDT
JE.TO - Just Energy Group Inc
Q1 2015 Just Energy Group Inc Earnings Call
Aug 07, 2014 / 02:00PM GMT 

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Corporate Participants
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   *  Rebecca MacDonald
      Just Energy Group, Inc. - Executive Chair
   *  Deb Merril
      Just Energy Group, Inc. - President, Co-CEO
   *  James Lewis
      Just Energy Group, Inc. - President, Co-CEO

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Conference Call Participants
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   *  Damir Gunja
      TD Securities - Analyst
   *  Nelson Ng
      RBC Capital Markets - Analyst
   *  Blair Levinsky
      Waratah Capital - Analyst
   *  Trevor Johnson
      National Bank Financial - Analyst
   *  Antoine Bourgault
      ISM Capital - Analyst

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Presentation
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Operator   [1]
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 Good morning, ladies and gentlemen. Welcome to the Just Energy Group, Inc., conference call to discuss the first-quarter 2015 results for the period ending June 30, 2014. (Operator Instructions).

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

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 Rebecca MacDonald,  Just Energy Group, Inc. - Executive Chair   [2]
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 Good morning, everyone. I am Rebecca MacDonald, Executive Chair of Just Energy, and welcome to our first-quarter conference call for 2015. With me this morning are our Co-CEOs, Deb Merril and James Lewis, as well as our CFO, Beth Summers.

 I will make a short presentation and then turn it over to Deb. Deb will discuss the results of the quarter and our expectation for the future. We will then open the call to questions.

 Before we get going, 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 eventually may prove to be inaccurate, so please read the disclaimer regarding such information at the bottom of our press releases.

 Our current focus has been clearly laid out over the past quarters. We have invested to expand our business and we have built a geographic target base that we can support our long-term growth. Just Energy has now entered the period with two priorities, reaping the benefits of our expansion to enhance cash flow and reducing leverage on our balance sheet.

 As Deb and James began to fill their roles, what you'll see from them is conservative approach to our business, conservative management of operations, conservative hedging of our supply book, conservative balance sheet.

 The sale of NHS to Reliance was announced during the quarter. We continue to work towards the closing of the transaction, working with the regulatory agency to gain necessary approvals. As we noted in the past quarterly reports, a major priority for management is the reduction of Company debt levels. We examined all of our non-core assets and concluded that the sale of NHS at the announced price will allow us to pay down approximately CAD400 million of our outstanding debt, substantially reducing our leverage.

 We are intent on further reducing our debt in the future periods to continue growth of our core energy business.

 NHS was a regional business. Our core electricity and natural gas business continues to offer growth across North America and we believe the UK market has substantial potential as well. We are committed to growing our business through innovative energy products that provide our customers with real value. We are cleaning our balance sheet and we expect to continue to reduce debt to a payout ratio of well under 100% for the coming year.

 Let me turn things over to Deb to talk about the first-quarter trends and see the market for the future period.

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 Deb Merril,  Just Energy Group, Inc. - President, Co-CEO   [3]
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 Thank you, Rebecca. James and I saw the first quarter as a success, which put us on solid footing to achieve our financial goals for the year. It was a quarter with many highlights that serve us well in progressing with our strategic priorities for the Company.

 The first quarter of fiscal 2015 took customer aggregation to a new level with 441,000 additions, 21% more than the previous record. As a point of comparison, during the first quarter last year, Just Energy signed 361,000 energy customers.

 Net additions were also at record levels with a 127,000-customer increase during the period. To put this into perspective, we added a net 188,000 customers in the entire year of fiscal 2014.

 Overall, our customer base increased 5% over the past year to 4.5 million. New additions were generated from all sales channels, led by 276,000 new commercial customers, up 43% from the 193,000 added in the first quarter of fiscal 2013. Consumer additions totaled 165,000, down slightly from the record 171,000 added in the prior comparable quarter.

 Our Green business continued to show strong growth and profitability. 29% of our new consumer customers took JustGreen for some or all of their energy needs. On average, these customers elected to purchase 85% of their consumption as Green supply.

 For comparison, as reported for the three months ended June 30, 2013, 27% of consumer customers who contracted with Just Energy chose to include JustGreen for an average of 83% of their consumption.

 Overall, JustGreen now makes up 12% of the consumer gas portfolio, compared with 9% a year ago. JustGreen makes up 18% of the consumer electricity portfolio, up from 14% a year ago.

 Green energy remains a core product for Just Energy. We continue to explore the optimal method to utilize our selling expertise as a profitable entry into the residential solar market in North America.

 Overall for Q1, our sales were up 13% and gross margin was up 16%, reflecting a more profitable customer base. Firm control of operating costs allowed us to see even higher growth in base EBITDA and base funds from operations.

 Administrative expenses were up 11% versus the 16% growth in margin. Selling and marketing expense increased by 9% year over year, compared to the 21% increase in customer additions. By maintaining administrative and selling cost growth at a rate lower than growth in margins, we were able to increase our base EBITDA to CAD30.2 million, up 46% from a year ago.

 Our funds from operations in what is seasonally our slowest quarter was up 50% to CAD13.5 million this year.

 As Rebecca pointed out, we entered this year intent on building upon the foundation established throughout very rapid expansion in fiscal 2012 and 2013. We then began to reap the benefit of this plan with our 22% EBITDA growth last year.

 Our fiscal 2015 plan would see us solidify these gains and allow us to significantly delever the balance sheet. This will give us a base for the stability and profitability seen in our financial results in the past.

 We have provided fiscal 2015 guidance of CAD163 million to CAD173 million in base EBITDA, pro forma the sale of NHS. This is based on the 188,000 net customer additions seen last year.

 To achieve the guidance, we need to realize four objectives in fiscal 2015. Let us look and see where we stand with each after the first quarter.

 First, we have to maintain customer aggregation at the level seen in the past two years. The first quarter was our highest aggregation quarter ever, beating the previous record by 21%. We are clearly on track to achieve this goal.

 Second, we are working toward a decline in the attrition rates from the 15% seen last year. While the fundamentals appear strong for lower attrition with winter bill shocks over and greater volatility in gas and electricity prices, we have not seen a decline, but rather a small increase to 16% from 15%, based on the first quarter. We will closely monitor attrition and anticipate gradual improvement in coming periods.

 Thirdly, we would require residential renewals to remain stable around last year's average of 75%. They came in right on this number after Q1. Commercial renewals are normally a function of our willingness to accept the margin required to win the business. Management is focused on maintaining overall commercial profitability and our renewal rates will reflect these margin decisions.

 Finally, we had to maintain administrative and selling cost growth at a rate lower than the growth in margin. As I pointed out, we achieved that goal in the first quarter.

 It is important to note that the first quarter is seasonally the slowest for our business and we will maintain our existing guidance. We will carefully track attrition rates in coming quarters and will update our shareholders as to any changes to our guidance.

 Our payout ratio is another important target for us. Our trailing 12-month payout ratio is based on our current CAD0.50 annual dividend -- at our current CAD0.50 annual dividend is 77%, moving toward our long-term target level of 60% to 65%, expected by the end of fiscal 2016. This payout ratio of less than 100% will allow for further debt reduction on our balance sheet.

 Overall, Just Energy had solid operating performance in the first quarter.

 Let's now talk about trends for the future. It is important that we recognize that this is just one quarter. As we noted in past calls, the vast majority of our EBITDA comes in the third and fourth quarters, so regardless of the results you see, they were only a good start to a potentially good year.

 We would expect slower EBITDA growth in the second quarter, more in line with our annual guidance than the 46% seen in Q1. Our highest bad debt quarter is now the second, as our fast-growing Texas base is in the peak of its cooling season. Accordingly, many more credit cutoffs occurred during this period.

 Residential margins were strong in the quarter as we saw annual margin on new and renewing customers higher than that of customers lost. Commercial margins continued to face competitive pressure as strong growth in commercial additions more than offset lower margin for RCE.

 For the year, an examination of our book of contacts and supply indicates that we remain on track to meet our guidance range of CAD163 million to CAD173 million base EBITDA for the year. There remains the usual winter weather risk, as well as normal business variance, but we see nothing to date that would throw us off track.

 While we carefully manage our business day to day, management is focused on the bright, high-growth future for the retailing industry and how to maintain Just Energy's leadership in that industry. [TEMA], an independent research firm, shows the utility commodity retailing industry continuing to grow at high single digits and sees no reason why that growth will slow in the future.

 We will keep our position in the market through continued innovation with not only fixed-rate contracts, but also JustGreen offerings, flat bills, capped variable rates, and shared savings through smart service apps.

 Continuing to achieve these results will require a tremendous effort from the entire Just Energy team. We are willing and able to make that effort. We are committed to Just Energy's success.

 We are only one quarter in, but it was a good quarter. Just Energy has built a solid base to ensure that we will remain a leader, and the first quarter is clear evidence of that. We are on track for that objective.

 On behalf of James and I, we want to thank our shareholders for their continued support. 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). Damir Gunja, TD Securities.

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 Damir Gunja,  TD Securities - Analyst   [2]
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 Very strong net customer adds. Just wondering if there is anything you could point to there. Is there a bit of a seasonal element or is the sales force, I guess, just motivated or what (multiple speakers) driving that?

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 James Lewis,  Just Energy Group, Inc. - President, Co-CEO   [3]
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 I think what you have seen here, with the polar vortex, you have more customers shopping, especially on the commercial side, so we saw a pick-up there. And on the residential side, you see consumers looking for stability and pricing there. Those two factors helped drive that record number of those adds.

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 Damir Gunja,  TD Securities - Analyst   [4]
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 Okay.

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 Rebecca MacDonald,  Just Energy Group, Inc. - Executive Chair   [5]
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 And just to add to that, we have been saying that we want to focus on the core business, and I think this is one of the indications that the management is getting back to basics and focusing on our strengths and not spending too much time on businesses that are not core to us.

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 Damir Gunja,  TD Securities - Analyst   [6]
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 Okay. Maybe just a second one. Is there anything or any update you can give us with respect to the timing of the NHS sale, or have you had any indications from the competition tribunal of requests for additional information or anything of that nature?

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 Deb Merril,  Just Energy Group, Inc. - President, Co-CEO   [7]
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 We are working through the process. All of our indications so far is it's going along exactly as we expected, so we see no red flags or anything that will push that beyond what our current -- our expectation was to close it, hopefully, by the end of September.

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 Damir Gunja,  TD Securities - Analyst   [8]
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 Okay, okay. I will get back in the queue. Thank you.

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Operator   [9]
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 Nelson Ng, RBC Capital Markets.

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 Nelson Ng,  RBC Capital Markets - Analyst   [10]
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 Congratulations on a good quarter. Quick question on the margins. You saw some margin improvement on your consumer side. I was just wondering whether some of that improvement was due to -- have you seen any impacts from the polar vortex in terms of energy retailers leaving the market and has that led to higher margins? Has there been less competition on that front?

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 James Lewis,  Just Energy Group, Inc. - President, Co-CEO   [11]
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 Nelson, what we are seeing -- you are seeing some impact with retailers leaving the marketplace as customers look for other places to provide their business. We are one of the beneficiaries of that.

 I think what you have also seen is the [bounce in copper] that you normally see in our first quarter was lower, which we were able to benefit from as well. Across the board, we have seen margins (technical difficulty)

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 Nelson Ng,  RBC Capital Markets - Analyst   [12]
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 Okay. And then, I think Deb mentioned that attrition remains high in the past quarter. I presume that is just due to the lag from the polar vortex, and I was just wondering whether there is any improvement in the past month or so? I presume you expect attrition levels to moderate going forward?

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 James Lewis,  Just Energy Group, Inc. - President, Co-CEO   [13]
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 I think when we look at the attrition, you are exactly right on the hangover from the polar vortex, but we expect it to improve in the coming quarters as we look at customers are very -- are receiving our product very well. The flat bill, the fixed-price products, we are happy about the way customers are receiving our products, and we expect attrition to return back down to normal levels.

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 Nelson Ng,  RBC Capital Markets - Analyst   [14]
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 Okay, and then just one last question. In terms of the guidance, I think Rebecca mentioned that you guys are taking a pretty conservative approach to everything, so is it fair to say that the EBITDA guidance is conservative as well?

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 Rebecca MacDonald,  Just Energy Group, Inc. - Executive Chair   [15]
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 Everything that we have said is conservative and we are staying with conservative. And we are at -- this time around, we are letting you guys get optimistic if you would like to.

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 Nelson Ng,  RBC Capital Markets - Analyst   [16]
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 Okay, thanks. Thanks for that clarification. Those are all my questions.

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Operator   [17]
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 (Operator Instructions). Blair Levinsky, Waratah Capital.

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 Blair Levinsky,  Waratah Capital - Analyst   [18]
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 I just wanted to ask about the NHS and more details around the regulatory process. I think you have answered. If you have anything else to add, then that would be great.

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 Deb Merril,  Just Energy Group, Inc. - President, Co-CEO   [19]
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 No, I don't think so. Like I said, we have to go through the Competition Bureau approval process, which we are working diligently to go through at this point, and, like I said, all very on track for all that stuff. So it's as expected so far.

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Operator   [20]
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 Damir Gunja, TD Securities.

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 Damir Gunja,  TD Securities - Analyst   [21]
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 You had a nice inflection point on the residential margins, now coming in higher than customers lost. On the commercial side, I guess you are still seeing a headwind there. Are you seeing any stability in the market or any sense of where margins may stabilize there?

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 James Lewis,  Just Energy Group, Inc. - President, Co-CEO   [22]
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 Yes, we are. When we look at the next quarter coming, what we have seen in the marketplace is our margin coming back on that commercial side, so we would expect margins to go back to our normal levels on the commercial side in the future.

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 Damir Gunja,  TD Securities - Analyst   [23]
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 Okay.

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 Rebecca MacDonald,  Just Energy Group, Inc. - Executive Chair   [24]
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 I would just add that the management, led by James, has done a very, very good job in starting to move that target margin up and getting way more selective of the customers that we are taking on. Future quarters are going to be a reflection of that.

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 Damir Gunja,  TD Securities - Analyst   [25]
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 So we may see that spread start to narrow and turn positive at some point?

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 James Lewis,  Just Energy Group, Inc. - President, Co-CEO   [26]
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 Yes.

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 Damir Gunja,  TD Securities - Analyst   [27]
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 Okay. And maybe just a final one from me, on the Green side, 29%, I guess, of new customers are taking some green. Is there a level at which you think you can push that number to or is that the current state of the market?

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 Deb Merril,  Just Energy Group, Inc. - President, Co-CEO   [28]
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 We have seen an increase over the last several years, and I think there is a certain customer that likes to buy green and feels it is their duty to the environment. We want to provide those products to them. I don't think it will ever be 100%, but I think the steady increase in that, we will continue to see that, as well.

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 Damir Gunja,  TD Securities - Analyst   [29]
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 Okay, thank you.

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Operator   [30]
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 Trevor Johnson, National Bank.

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 Trevor Johnson,  National Bank Financial - Analyst   [31]
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 You mentioned that you are exploring methods of offering residential solar without incurring material additional debt. Just curious if you can give us a bit of a flavor as to what avenues you might be pursuing to try to target that venture.

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 Deb Merril,  Just Energy Group, Inc. - President, Co-CEO   [32]
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 We are looking at joint ventures with existing solar players. We are pursuing other avenues as well, so it is one of the things -- we have to find the right partner for us and the right structure that is going to work for our goals to deliver value to our shareholders.

 We're in the process of trying to nail down exactly what the best structure and the right partner for us looks like.

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 Trevor Johnson,  National Bank Financial - Analyst   [33]
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 And partners will be attracted to JE given, obviously, your existing book of business. Is that the reciprocity that we could expect in terms of getting something done without incurring a lot of debt?

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 Deb Merril,  Just Energy Group, Inc. - President, Co-CEO   [34]
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 Yes, I think so. And the joint venture structure would keep that debt off our balance sheet, but we also -- what we bring to the table is we bring, obviously, sales prowess. We bring commodity expertise, and I do think there is some benefit and some real play here to have a retailer with a solar provider so that we can get full benefit of what that distributed generation at that house looks -- can actually deliver value in.

 I think there are a lot of good scenarios that we are working through to make a structure that will give us the best value.

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 Trevor Johnson,  National Bank Financial - Analyst   [35]
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 Great, thank you.

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Operator   [36]
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 Antoine Bourgault, ISM Capital.

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 Antoine Bourgault,  ISM Capital - Analyst   [37]
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 A quick one for me on the financing. I was just a bit surprised by the usage on the credit facility for the first quarter. That's probably a bit higher than I expected. And if you could give us a bit of color on the working capital movement for the quarter as well, that would be much appreciated. Thank you.

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 Deb Merril,  Just Energy Group, Inc. - President, Co-CEO   [38]
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 I think during the quarter, as a result of the strong quarter, we did see higher working capital. Probably offsetting a little bit with the working capital was positive or was probably less than you typically would have seen because of the timing of the year-end.

 As a result of those items, you are absolutely correct. The working capital has resulted in the line of credit being a little higher than you may have expected.

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 Antoine Bourgault,  ISM Capital - Analyst   [39]
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 And does that leave you with sufficient headroom, considering the general cyclicality of the business? If you are still seeing growth in the remainder of the year or would you have to go back to the banks and renegotiate, then?

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 Deb Merril,  Just Energy Group, Inc. - President, Co-CEO   [40]
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 Yes, the working capital line is sufficient for the business. As far as working capital goes, the reality is as you move through time, the working capital, depending on the particular timing, will release itself and turn into the cash. So, yes.

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 Antoine Bourgault,  ISM Capital - Analyst   [41]
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 So you're happy with the headroom you have at the moment?

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 Deb Merril,  Just Energy Group, Inc. - President, Co-CEO   [42]
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 Yes.

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 Antoine Bourgault,  ISM Capital - Analyst   [43]
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 Okay, thank you.

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Operator   [44]
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 Thank you. At this moment, we show no further questions. I would like to turn the meeting over to you for any final remarks.

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 Rebecca MacDonald,  Just Energy Group, Inc. - Executive Chair   [45]
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 If there are no more questions, I would like to thank all of you for attending our conference call. Deb, Jay, Beth, and myself are available. If you have any follow-up questions, do not hesitate to call us, and we do look forward to having you at our second conference call that will take place in November. Thanks for your support. Bye-bye.

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Operator   [46]
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 Thank you, ladies and gentlemen. This concludes today's conference. We thank you for participating.




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