Q2 2015 Just Energy Group Inc Earnings Call

Nov 13, 2014 AM EST
JE.TO - Just Energy Group Inc
Q2 2015 Just Energy Group Inc Earnings Call
Nov 13, 2014 / 07:00PM 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. - Co-CEO
   *  Pat McCullough
      Just Energy Group, Inc. - CFO
   *  James Lewis
      Just Energy Group, Inc. - Co-CEO

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Conference Call Participants
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   *  Nelson Ng
      RBC Capital Markets - Analyst
   *  Damir Gunja
      TD Securities - Analyst
   *  Kevin Chiang
      CIBC World Markets - 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, Inc. conference call to discuss the second-quarter 2015 results for the period ended September 30, 2014. 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. Rebecca Macdonald. Go ahead Miss Macdonald.

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 Rebecca Macdonald,  Just Energy Group, Inc. - Executive Chair   [2]
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 Good afternoon everyone. As she said, my name is Rebecca Macdonald, and I am Executive Chair of Just Energy. I would like to welcome you all to our fiscal 2015 second-quarter conference call. With me this afternoon are our co-CEOs Deb Merril and James Lewis, as well as our CFO, Pat McCullough.

 I want to welcome Pat to his first Just Energy conference call. He has an extensive resume of senior financial experience and has most recently worked in the solar industry. He brings exceptional vision and focus to our finance team and we are very excited to have him on board.

 Deb and Pat will discuss the results of the quarter and our expectations 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 may eventually prove to be inaccurate, so please read the disclaimer regarding such information at the bottom of our press releases.

 Let me turn things over to Deb Merril.

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 Deb Merril,  Just Energy Group, Inc. - Co-CEO   [3]
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 Thank you Rebecca. Our second quarter built on the strong performance seen in the first quarter and really demonstrates the health of our core energy retail business and the value proposition we bring to our growing customer base. Our management team is focused on our vision of building Just Energy as a market leader in providing targeted energy solutions to our customers. We want to utilize technology and innovation in the energy space to bring value to those customers. We are uniquely positioned to bring these opportunities to the customer on a cost-effective basis as a result of our core competencies -- sales, service, and risk management. These core capabilities will drive our future growth and profitability.

 We have a geographic footprint and product suite that can support our long-term growth, and we are already seeing that core growth in our quarterly results. The quarter continued our very strong customer aggregation with 354,000 additions, 9% more than fiscal 2014 and the most we have ever signed in a second fiscal quarter. Even more importantly, net customer additions for the quarter were 67,000, up 235% from last year. Year-to-date additions are 194,000, up 94% from a year earlier and more than the total added for all of fiscal 2014.

 Over the past 12 months, our total customer base increased 7% to 4.6 million. New additions were generated from all sales channels, in particular our online sales. We continue to be successful in our sales channels diversification efforts. Where we were once entirely dependent on the door-to-door channel, this quarter saw only 22% of our new additions from that source, down from 31% a year earlier. The remaining 78% came through commercial brokers and new channels such as online sales. This positive trend will continue going forward. As a new management team, one of our key tasks has been to profitably manage a transition to diversify our sales channels and we are proud of our success reflected in the results this quarter.

 The combined attrition rate for Just Energy was 15% for the trailing 12 months ended September 30, 2014, down 1% from attrition reported in the first quarter. Consumer attrition at 27% decreased by 1% from the first quarter while commercial attrition at 6% remained unchanged. Attrition is and will remain a key driver of the Company's financial success. Consumer attrition rates remain high. This has been highly correlated to bill shock as consumers on fixed prices saw consumption rise sharply during the cold last winter, resulting in much higher than expected bills. Current gas price volatility and expectations for higher electricity prices should both contribute to a possible reduction in attrition in future periods.

 Renewal rates improved slightly versus that reported in the first quarter with consumer renewals unchanged at 75% and commercial renewals up 1% to 64% on a trailing 12-month basis. This indicates continued satisfaction with the Company's products and services. Commercial renewals are often subject to competitive bid and will inevitably be more volatile than consumer renewals. Overall, management sees stability in renewals at around current levels.

 Our Green business continued to show strong growth and profitability. 31% of our new consumer customers took JustGreen for some or all of their energy needs. On average, these customers elected to purchase 87% of their consumption as Green supply.

 Green energy remains a core product for Just Energy. One of our strategic growth levers aims to utilize our 1.5 million residential customer base and our industry leading origination channels to very strategically participate in the robust US solar opportunity. We believe we are ideally suited to pursue the right opportunity and we continue to advance our residential solar plan to leverage our core competencies for profitable entry into this exciting space. We have completed extensive due diligence and we would expect to complete a deal with a fulfillment partner or network in the near-term that will focus our capital and efforts on origination, owning the customer experience from cradle to grave, and participating in project equity returns.

 Let me turn things over to Pat McCullough to talk about the details of the quarter and then I will finish with a discussion of the trends we see in the market in future periods.

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 Pat McCullough,  Just Energy Group, Inc. - CFO   [4]
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 Thank you Deb. First of all, I am very excited to join Just Energy. I see a really amazing opportunity here to build a world-class retailer leveraging our existing customer base, our industry-leading sales channels, and an opportunity to sell new energy management solutions.

 Let me detail some of the progress towards our financial goals that we have seen in the quarter. This was a very good quarter for us, the second consecutive quarter in our fiscal year. Our sales were up 10%, reflecting our 7% increase in customers and greater realized margins. While this sales growth in a low-inflation environment is clearly positive, the real story of the quarter was our margins. Both our divisions performed strongly with our gross margin up 13% for our customer division and 27% for the commercial division. Overall quarterly gross margin was up 17% compared to the prior year. This shows improved profitability as overall customer growth was 7%.

 We benefited from lower balancing charges compared to a year ago, but the results and trend are both positive. The profitability was partly driven by higher new customer margins. We are able to do this because of our better understanding of our customers and their perception of the value that we provide. New commercial customers were signed at CAD80 annual margin, up from CAD66 last quarter and CAD72 a year ago. The higher commercial margin is a conscious decision by management to reduce low-margin commercial business and focus on more profitable customer segments. We have also benefited from the market exit of a number of smaller low-priced competitors who were unable to weather the volatility of last year's polar vortex.

 New residential customers were at CAD188 annually, up from CAD168 a year ago. Improved margin per customer has been the focus of management. Higher margin on residential customers is a particularly positive trend as these customers are largely on locked-in five-year contract terms.

 Our growth in base EBITDA was slightly less than the growth of margin at 12% year-over-year. This lower growth was due to an unanticipated provision for legal costs and possible settlement in the Hurt et al lawsuit in Ohio. Without this provision, base EBITDA growth would have been in line with margin growth.

 Selling and marketing expense increased by 13% year-over-year compared to the 9% increase in customer additions. Selling costs included amortization of tax advances to commercial agents. This amortization is not associated with the customers added during the period.

 Bad debt was within our target range at 2.3% of relevant revenue for the quarter. The number of customers largely in Texas for whom we bear credit risk is growing rapidly but maintaining the expense between 2% and 3% optimizes our profitability.

 Our second-quarter funds from operations were up 1% from fiscal 2014. The lower growth was due to two reasons. Finance costs were CAD18.7 million, up from CAD16.6 million a year earlier but down slightly from our first quarter. These charges will remain in this range until the closing of the NHS sale and related reduction in continuing debt.

 The second factor was the nonrecurring CAD2.7 million increase in income tax provision. This is due largely to the settlement of prior-period adjustments paid in the quarter. The Company expects only nominal cash taxes for the remainder of fiscal 2015.

 Overall, the second quarter showed continued growth and improved profitability. Let me turn it back to Deb to talk about where we stand after six months and trends for the future.

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 Deb Merril,  Just Energy Group, Inc. - Co-CEO   [5]
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 Thank you, Pat. We are in a very solid financial position after six months of fiscal 2015. Our core business is healthy and growing. We are generating record numbers of new customers. Customer margins continue to improve as reflected in year-to-date EBITDA of CAD61.9 million, up 26% from a year earlier. Our funds from operations are up 16% from the first six months of last year.

 Our fiscal 2015 plan is to deliver on our growth expectations and significantly delever the balance sheet. The combination of these two actions will put the Company on solid footing to realize profitability going forward.

 One key to our planned balance sheet improvement is the sale of NHS. While the closing of the Hudson Solar sale allowed us to reduce debt by CAD47 million, the greater impact on debt will be seen when NHS closes. We do not control the timing of the Competition Bureau approval but appears to us that the transaction is progressing towards close. We have provided fiscal 2015 guidance of CAD163 million to CAD173 million in base EBITDA pro forma the sale of NHS. We have had strong results to date but as you are aware, the third and fourth quarters contribute the large majority of our EBITDA. As we continue to make successful progress along our financial guidance, we will provide you updates on any changes to our expectations for the fiscal year.

 Our payout ratio is another important target for us. For the quarter, it was 78%, down from 131% last year. Our trailing 12-month payout ratio based on our current CAD0.50 annual dividend is 79%, moving toward our long-term target of 60% to 65%. Continuing to improve the payout ratio will allow for further debt reduction on our balance sheet. Overall, Just Energy had solid operating performance for two consecutive quarters.

 Let me provide a bit more color on trends for the immediate future. We would expect EBITDA growth in the third quarter to be more in line with our annual guidance and less than the 26% improvement seen year-to-date. We have a leading market position in all our geographic territories. Our experience and marketing expertise allows us to stay in step with evolving needs of our target customers. As customer awareness and demands change, we are uniquely positioned to rapidly meet the growing need for energy solutions through our leading market position in retail energy and access to the best technologies and innovative products in the marketplace today.

 We have strong gross additions driven by low-cost sales channels and strong net additions based on improving attrition and renewals. Margin and EBITDA growth should continue for the for seeable future.

 Achieving our expected results will require tremendous effort from the entire Just Energy team. Management is committed to delivering our strategy of both building our core business and bringing new, exciting products to our customers. This will ensure the continued success of Just Energy. And on behalf of Rebecca, James, Pat, and myself, I want to thank our shareholders for their continued support. We will now open up for questions.

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Questions and Answers
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Operator   [1]
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 (Operator Instructions). Nelson, RBC Capital Markets.

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 Nelson Ng,  RBC Capital Markets - Analyst   [2]
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 Just a quick question on the NHS sale. I believe your view is it will close within the coming months. How quickly can you close the transaction after you receive regulatory approval?

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 Deb Merril,  Just Energy Group, Inc. - Co-CEO   [3]
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 Nelson, we would target one to two weeks to close it after the approval gets made public.

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 Nelson Ng,  RBC Capital Markets - Analyst   [4]
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 Okay. And then I guess the other question is in terms of the agreement reached between Reliance and the Competition Bureau, in your view, does that pave the way to receiving approval?

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 Deb Merril,  Just Energy Group, Inc. - Co-CEO   [5]
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 I think I can't necessarily comment on what that might do for that. I know that we continue to progress and look toward our part of things. So, I really can't comment on what that might mean for the approval.

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 Nelson Ng,  RBC Capital Markets - Analyst   [6]
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 Okay. And then just kind of switching over to the Hurt litigation, so the CAD4 million of costs that you have provisioned for, should that cover all of the costs going forward, or do you expect some costs to be incurred in future quarters?

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 Pat McCullough,  Just Energy Group, Inc. - CFO   [7]
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 Nelson, this is Pat. Thanks for the question. What we have done is followed the IFRS standards in accounting for the possible settlement amount and the future legal costs.

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 Nelson Ng,  RBC Capital Markets - Analyst   [8]
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 Okay. Thanks Pat. And then one, I guess one related question probably for Deb is if the ruling was upheld for that case, does it have any other potential implications on how you run the business, whether you have to start paying minimum wage to a larger number of employees or independent reps?

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 James Lewis,  Just Energy Group, Inc. - Co-CEO   [9]
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 It is James here. I think, when we look at it, we think we are going to appeal here across the board. As we look to go forward, we are always looking to improve here on our sales process, but we feel good on appeal.

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 Nelson Ng,  RBC Capital Markets - Analyst   [10]
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 Okay. But if it was upheld, would you have to change the way you do business?

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 James Lewis,  Just Energy Group, Inc. - Co-CEO   [11]
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 We don't see a material change in our cost structure if we had a change anything.

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 Nelson Ng,  RBC Capital Markets - Analyst   [12]
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 Okay. All right. Thanks, James. And then I guess just one last question. In terms of the cold winter we experienced last year and the last few days have been cold in Vancouver, but have customers changed their behaviors in terms of have they started locking in rates in advance of the winter or how have they chosen their product? Is there a much larger proportion on the fixed contracts?

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 James Lewis,  Just Energy Group, Inc. - Co-CEO   [13]
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 Yes, Nelson. We have seen the fixed-price contracts pick up, which is our bread and butter.

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 Nelson Ng,  RBC Capital Markets - Analyst   [14]
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 Okay, thanks. Those are all my questions.

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Operator   [15]
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 (Operator Instructions). Damir of TD Securities.

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 Damir Gunja,  TD Securities - Analyst   [16]
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 Thanks. Good afternoon. You saw a nice pickup on the commercial margins. I'm just wondering if you could comment on the sustainability of that in coming quarters.

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 James Lewis,  Just Energy Group, Inc. - Co-CEO   [17]
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 I think we feel good about that. We are analyzing our customer base, basically looking at the data here and making sure we are going out to the customers that we think are most profitable for us in that profile. So we feel really good about that.

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 Damir Gunja,  TD Securities - Analyst   [18]
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 Okay, thanks. Maybe a second one from me. Just make sure I understood correctly the potential entry into the solar business, is there going to be any capital requirements in how you are considering structuring that business?

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 Pat McCullough,  Just Energy Group, Inc. - CFO   [19]
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 This is Pat. One of the things we have been talking about as a board and a management team is finding those low to no CapEx type of opportunities to leverage our channels. And in the case, what we are trying to put together here is something that would have no CapEx up front, would have some modest operating expense to build out our ability to support it.

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 Damir Gunja,  TD Securities - Analyst   [20]
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 Okay, thank you. And maybe just a final one, perhaps for yourself, Pat. Are you able to give us any initial guidance on the tax line for next year? I know this year you're going to be negligible. Are we going to see a little bit of tax start to creep in?

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 Pat McCullough,  Just Energy Group, Inc. - CFO   [21]
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 You know, not in the foreseeable future. We have been talking about five to six quarters out we will start to see some modest cash taxes paid at the federal level.

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 Damir Gunja,  TD Securities - Analyst   [22]
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 Okay. Thanks very much.

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Operator   [23]
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 Kevin Chiang, CIBC.

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 Kevin Chiang,  CIBC World Markets - Analyst   [24]
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 Thanks for taking my question. I guess first off, I know you highlighted you are seeing a little bit of pressure on your attrition rates and you made some comments on it in your MD&A. I am just wondering. Have you targets for attrition rates changed just given some of the geographic concentration you have in some of the markets that seem to have a higher level of attrition, or are you still aiming towards some of the historical targets you used to put up?

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 James Lewis,  Just Energy Group, Inc. - Co-CEO   [25]
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 We are aiming for the historical targets there. We think, once we get out of this cycle with the polar vortex, we will return.

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 Kevin Chiang,  CIBC World Markets - Analyst   [26]
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 Okay. No, that's helpful. And then secondly, I know there has been a lot of volatility in natural gas prices I guess over the past year, from the past winter, and it looks like this winter we are seeing a little bit of pressure on natural gas prices, I guess upward pressure on natural gas prices. When I look at your customer aggregation, I guess it is surprising to me that I guess your gas customers are effectively flat. Is there a lag we should be thinking about in terms of that volatility eventually trending into higher net adds or is it maybe that the customer booking is so large that maybe we don't see that large year-over-year increase that maybe I'm expecting?

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 James Lewis,  Just Energy Group, Inc. - Co-CEO   [27]
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 We will expect to see, as customers get into the winter time, more customers looking to switch away. And as you said, the price volatility, we like price volatility. Customers switch more to our fix price product.

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 Kevin Chiang,  CIBC World Markets - Analyst   [28]
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 Okay. And then maybe more of a housekeeping question. The CAD163 million that you have drawn down on your credit facility, is that inclusive of the letter of credit, the CAD120 million letter of credit, or would the CAD120 million be on top of that?

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 Pat McCullough,  Just Energy Group, Inc. - CFO   [29]
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 The CAD120 million is on top of that.

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 Kevin Chiang,  CIBC World Markets - Analyst   [30]
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 Okay. Just when I look at that, it looks like you are bumping up close to the CAD290 million limit. I guess thoughts on working capital as we get to the back half of the year, especially with the expected closure of NHS? It seems like you would be presuming a pretty positive working capital through the back half to pay down that credit facility?

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 Pat McCullough,  Just Energy Group, Inc. - CFO   [31]
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 Yes, that's true. Even without the NHS closure, if you take that out of the equation for just a second, we have got tailwinds helping working capital that include things like natural gas that we have built inventories over the last six months, we start to release that as we go forward. We are also getting into our higher profitability months. And then we have closed the Solar deal, so we have the net proceeds supporting us there as well. So we think we are appropriately sized, but obviously when the NHS deal closes, we've got quite a bit of support.

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 Kevin Chiang,  CIBC World Markets - Analyst   [32]
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 Any general -- how should I be thinking about working capital for your company kind of on an annual basis? Are you targeting kind of neutral as you kind of exit four quarters, or is it a modest lift or maybe a modest negative? I'm just trying to get a sense for how things should be shaping up though your continuing operations.

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 Pat McCullough,  Just Energy Group, Inc. - CFO   [33]
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 Yes, the continuing operations will act the way they have in the past, but as we grow topline customers, we will be growing our working capital needs at roughly the same rate.

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 Kevin Chiang,  CIBC World Markets - Analyst   [34]
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 Okay. And just the fact that you kind of bumped up -- or close to it this past quarter, thoughts on the limit overall, CAD290 million, is there a sense you would like to lift that when you have a chance to renew it, or is CAD290 million a number you are pretty comfortable with?

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 Pat McCullough,  Just Energy Group, Inc. - CFO   [35]
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 No, we feel we are right sized at that level. This is the point where liquidity feels the most pressure in the annual cycle, so we are actually through that pressure cycle and now into the more comfortable period of the winter months.

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 Kevin Chiang,  CIBC World Markets - Analyst   [36]
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 Perfect. That's it for me. Thank you.

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Operator   [37]
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 We have no further questions at this time. I will now turn the call back to management for closing remarks.

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 Deb Merril,  Just Energy Group, Inc. - Co-CEO   [38]
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 All right. Thank you. We appreciate everybody joining us. Just a couple of closing comments. One is we would be remiss if we, Jay, myself, Pat, and Rebecca, didn't thank all of the Just Energy employees. We have a lot of great people in three different countries that help us achieve these results and we couldn't be prouder of all the efforts that everybody put in place to make this happen. And also let you know that, as a management team, we are truly excited about the prospects of this business and really enjoy -- looking forward to everything that we are going to be able to achieve in the future.

 If anybody has any further questions, feel free to reach out to any of us individually. We'd be happy to talk. Thank you very much.

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Operator   [39]
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 This concludes today's conference. Thank you for participating. You may now disconnect.




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