Just Energy Group Management Discusses Q2 2014 Results - Earnings Call Transcript

Nov. 8.13 | About: Just Energy (JE)

Just Energy Group (NYSE:JE)

Q2 2014 Earnings Call

November 08, 2013 11:00 am ET

Executives

Rebecca MacDonald - Co-Founder, Executive Director, and Executive Chairman

Kenneth M. Hartwick - Chief Executive Officer, President and Director

Beth Summers - Chief Financial Officer

Analysts

Damir Gunja - TD Securities Equity Research

Kevin Chiang - CIBC World Markets Inc., Research Division

Nelson Ng - RBC Capital Markets, LLC, Research Division

Kevin Wilfred Charlebois - Brookfield Soundvest Split Trust

Adam Mitchell

Operator

Good morning, ladies and gentlemen, and welcome to the Just Energy Group conference call to discuss the second quarter results for the period ended September 30, 2013. [Operator Instructions] And I would now like to turn the call over to Ms. Rebecca MacDonald. Go ahead, Ms. MacDonald.

Rebecca MacDonald

Good morning. I'd like to welcome you to our fiscal 2014 second quarter conference call. With me this morning is Ken Hartwick, our CEO; and Beth Summers, our CFO. Ken and I will make a short presentation, and then we will 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 open briefly with the highlights, then turn it to Ken for the quarterly details.

I will then talk briefly about the future before we open for questions. Second quarter showed the continued customer growth and the cash flow turnaround we forecasted when we guided the market to base EBITDA of $220 million for fiscal 2014. The highlights included the 8 straight quarters of customer additions over 300,000. We generated 341,000 new adds between commercial, residential and home services. Prior to entering the commercial market in 2011, we had never had a quarter even approaching 300,000. Ken will talk about how we translated these and past customer additions into margin growth and cash flow.

The bottom line impact is that we pay an $0.84 dividend a year, and we have committed to funding continued growth of our business and to maintaining this payment going forward. This requires free cash flow, something that over the past 2 years we have utilized to fund our expansion into 10 new geographic territories. We did this because it benefits the company long term. We diversified and broadened our customer base and in turn, we built in future growth. This is what Just Energy has done since its inception. We recognize that this growth phase has to rapidly pay for itself, and what you are starting to see this year is that it has. In the first quarter last year, we generated $1 million of funds from operations. This was our slowest seasonal quarter and the peak of our expansion period. The second quarter saw $30 million, an improvement, but still less than half of our current quarterly dividend. That was a total of $40 million FFO over 6 months. Compare that to this year-to-date, this quarter, we generated $29 million funds from operations, more than double what we generated in 6 months last year.

For the first 6 months of fiscal 2014, we have generated $42 million, more than triple the total of the year ago. Our dividend payout ratio of 146% through our seasonally slow 6 months compares to 649% last year. We are comfortably on track to reducing our payout on the 100% for the year as we promised at the last year end. We need 2 more solid quarters to finish our year, but we are off to a very strong start. Let me turn things over to Ken.

Kenneth M. Hartwick

Thanks, Rebecca. In the first quarter earnings call, I spoke about the 4 factors, which would be key in allowing us to meet the EBITDA growth we had forecast. We concentrate on this cash flow measure because it reflects our ability to fund future growth, support our debt and pay our dividend. Our goal is to reach a sustainable EBITDA level where all of these objectives are funded, and we have the flexibility to adjust to changing market parameters. The 46% growth we have forecasted for this year is a major step to this end. Let me update you on our progress on each of these 4 factors. First, we had to maintain customer aggregation at levels seen in the past 2 years. Both the first 2 quarters had new customer additions in line with the 300,000 plus seen over the past 2 years. The 341,000 customers added in the quarter left us with a 9% year-over-year growth in our customer base. More customers mean more margin. In the case of this quarter, 12% more margin. It not only adds current margin, but also future embedded margin. Our future margin was up 9% over the past year, in line with a 9% growth in customers. Second, we require a continuation of the trend of steady improvement in the attrition rates with renewals at target levels. Attrition was at 13%, down from 14% a year earlier. We still have challenges in the U.S. residential market, but we believe the general trend of attrition is positive. Commercial attrition was very low at 4%, and this contributes to what we see as a steady growth in the value of our commercial book. Our renewals were 72% for the quarter. Our objective is a long-term 70% renewal rate. This quarter is the first time renewal rates have exceeded target levels in the past 6 years.

Third, we need to reduce our administrative cost per customer as we grow. Again, this quarter, we saw admin costs down from Q1 and Q4 despite the increase in our customer base. We have worked very hard to reduce costs, and we think we have established a run rate which both supports our business and reflects economies of scale. We remain very focused on driving further cost efficiencies. Finally, we knew we would have to significantly lower our selling and marketing expense. This is the single largest line item expense we have. It is a key to our continued growth, but it's also the key to cost control. We were aware that to both maintain customer growth and maintain cost competitiveness, we would have to broaden our use of lower-cost channels to aggregate customers. We have committed investments to the building of our network marketing arm and have similarly worked to build our Internet sales presence. Combined with our first steps in the telemarketing, we have net new lower-cost channels, which are only now contributing significant customer additions.

In the quarter, our traditional door-to-door channel generated 31% of our new customers, with commercial brokers and some of the nontraditional channels, like Internet, generating the vast majority of new sales. The result has been that in the second quarter, we saw selling and marketing costs decline 5% year-over-year.

For 6 months, they are down 8% from last year despite record additions. This operating leverage is key to our profitable growth going forward. You will see us aggressively pursue the sale of new products to our existing customer base, further reducing our average cost of sale. Anyone who has followed Just Energy over the years has seen that we have constantly been adjusting to changing market realities. Remember when we went public, we only had -- only sold natural gas and only door-to-door to households and only in Ontario. Today, we are in 19 different jurisdictions, marketing gas, electricity, smart thermostats, water heaters and HVAC equipment. We sell more to commercial customers than residential. We are a North American leader in green supply. When we went public, few of this -- a few on this call were even contemplating investing in green. We have adjusted our business model, and these adjustments have been successful. Let me provide you with some more relevant data on the key numbers within our results.

Our margin was up 12%, although our customer base was only up 9%. Our natural gas book benefited from a weak comparable quarter last year as we faced little in reconciliation cost again -- against last year's normal weather. Our realized margin from the residential customers was an annual $170, up from $163 a year earlier.

On the commercial side, we saw a continued effect of competition driving margin compression with realized annual margins of $70 per RCD -- RCE, down from $103 a year ago. Our new customer margins in commercial strengthened a bit, rising to $72 from $66 in the first quarter. It is our belief that the commercial margins will stabilize in and around the current levels. We have built our planning for fiscal 2014 and the future based on these current levels of margin. Administrative costs were up 5% from a year ago, but our run rate is down from both Q1 and Q4 last year. We believe that we can continue current growth rates without a material increase in our G&A base. Bad debt was well controlled at 2.1% of our relevant sales, comfortably within our 2% to 3% target range. Our expense was up 54% year-over-year, reflecting higher growth particularly in Texas, where we have to bill and collect from our customers. We would not like to see bad debt fall below 2% because this would indicate that our credit screening has denied too many good customers. Selling and marketing was down 5% against the second quarter of fiscal '13. This was a function of 2 factors: our customer additions of 341 was slightly down from 354,000 a year ago; and lower cost per customer added, with residential customers costing on average of onetime $160 down from $163 a year ago and commercial customers flat at an annual $32 per RCE. The result was 37% EBITDA growth for the quarter, in line with the 26% required to meet our guidance.

Our financing costs were $22 million for the quarter, and we would expect them to remain very close to this figure in coming quarters. Funds from operations was $29 million for the quarter, up 129% from a year earlier. As I read through the numbers, you can clearly see how adding margin growth with relatively flat cost below that line results in highly leveraged growth in FFO. This is as we anticipated when we set our guidance for both EBITDA and payout ratios. Rebecca will comment on how this leverage will impact fiscal '15 and beyond. Before I turn it back to Rebecca, let me finish with 2 key areas. The past year has caused us to carefully analyze all of our products to assess their contribution towards profitability. We have seen commercial attrition decline to the point where lifetime margin from a commercial customer is almost that of a resident. We look, however, at the same -- at some very large low-margin commercial accounts, which are won through competitive bids. And while on the surface these customers appear to be meaningfully profitable, we have seen that some significant changes in the market, whether it be increased capacity charge in the Northeast or heat spikes in Texas, can eliminate foreseen profit. As we have always done, discipline will be applied to the quality and profitability of this market segment. This will have the short-term effect of reducing our renewal rate slightly, but this will increase profit in the medium and long term. Just Energy is traditionally focused on the areas where our market strengths bring most value, usually to higher-margin segments of the market. One of these higher-margin segments is green. Our JustGreen products continues to be in high demand from our customer division. This quarter, 20% of new sign ups are green supply. Today, 9% of our gas book and 18% of our electricity supply are part of green bundles. This bundling has been key to maintaining our margins at a time of competition and falling commodity prices. As we move forward, we are looking for more bundling opportunities. We want to increase the number of points of contact with the residential customer, hoping over time to own the basement through commodity sales, water heaters, furnaces, air conditioners and smart thermostats. I will talk more in future calls about our bundling opportunities, in particular our plans for demand response through thermostats. It is very early going with only 19,000 thermostats installed, but we are working hard to make this another profit center for the business. Let me turn things back to Rebecca to talk about the future.

Rebecca MacDonald

Thank you, Ken. Yes, I would like to talk to you about near-future and long-term prospects. For the remainder of our fiscal 2014, we remain intent on delivering operating performance consistent with our guidance. As most of you would be aware, the customers we signed after New Year's will generate little or no cash flow in fiscal 2014. Accordingly, we are quite confident that we can accurately forecast coming margins. The numbers in our book tell us we should not expect 25%-plus EBITDA growth for the next 2 quarters, but we do not need that growth to meet guidance. The margins we see coming are in line with our expectations. That said, our guidance always comes with one major caveat: the weather. The vast majority of our gas sales take place between now and March 31. Even though gas only makes up 24% of our business today, the total absence of winter across our markets will impact our margin by approximately 5%. Even after the weather options we have purchased against this event. This is why we qualify our continued confidence in our guidance with the fact that we cannot guess the weather any more that we can guess gas or electricity prices. As we stand today, we feel very good about fiscal 2014. We will spend the next 2 quarters building our base for next year and years to come. We are adding customers and building value every day. To look out to 2015 and beyond, for our prospects, investors need to look at our embedded margin. As Ken detailed, we expect our major cost lines, administration, finance cost and selling and marketing to be relatively flat going forward. Combine that with the growth we should build into our book and you have the story of coming EBITDA growth. With our additions over the past 8 quarters, we see that embedded margin is up 9% year-over-year.

Given that we should have added 43% to EBITDA over our first 6 months with 9% margin growth, translating embedded margin growth into annual margin will be the driver in our goal of reducing our FFO payout ratio to 65% by the end of fiscal 2016.

We believe that if we generate this cash flow growth and continue to build for the future, we will bring our debt-to-EBITDA ratio down to a reasonable level over these 2 fiscal years. This will be done in 2 ways: first, by growing our annual EBITDA; and a second, by using excess cash to pay down our operating line and repurchase existing debt maturities. I would also briefly mention that 2 shareholder groups have filed their ownership of Just Energy Group in the past 2 months. The Ron Joyce Group with 8.9% and the Pattison Group with 10.2%. We welcome them as a shareholder. I want to thank all the employees and salespeople of Just Energy for an excellent start to the year. J. Lewis, our COO; Deb Merrill, leader of our Hudson business; and Darren Pritchett, who runs sales, have each led their teams to the strong results we have seen these past 2 quarters. Just Energy has a deep solid management team that goes well beyond Ken, Beth and myself. Our shareholder returns have been volatile in the past 2 years. It is our hope that solid growth and improved cash flow will reduce that volatility in the future. Just Energy is and remains a growth company paying a significant dividend. We are in a high-growth industry and have taken the necessary steps to be a major player. We believe that positions us very well for the future. On that note, I will open up for questions.

Question-and-Answer Session

Operator

[Operator Instructions] And our first question is from Laurence Schreiber from Gemstone Holdings.

Laurence Schreiber

My name is Laurence Schreiber. I'm an investor in the company. I appreciate the discussion about EBITDA and margin, but I'm surprised or confused that there was no discussion about the net income and net loss that you've shown. If I read the numbers correctly, you've shown a net loss of $111 million for the quarter and a net loss of $42 million for the previous quarter. So net losses of $153 million in the past 6 months. How -- where is that loss coming from? And how do we think about that as investors?

Kenneth M. Hartwick

Thanks, Laurence. And the reason we do not talk about the net income GAAP number, net loss or net gain, is that it is directly impacted by our requirement to mark-to-market our supply contracts, our natural gas and electricity contracts, which is a noncash item for us. We've sold all of that supply to a customer, whether it's a residential customer or commercial customer, and we'll liquidate the supply contracts and collect revenue from the customer based on the customer contract price. So we will have periods of time where we have a massive net income gain, which we did in Q4, or a net income loss, which we do in this quarter. Both of which are meaningless because that supply, we've already sold to a customer. So our focus is very much on FFO and EBITDA, and we recognize that there's a lot of earnings volatility because of the mark-to-market requirement, but it doesn't reflect in any way on the actual economic performance of the business, whether it's positive or negative.

Rebecca MacDonald

And I would just like to add, I think your question is a very, very valid question because it does -- when that line shows up, it confuses particularly a retail investor that doesn't get an opportunity to sit across from us on one-to-one presentation. The unfortunate thing for us is that we are not allowed to book the revenue against the mark-to-market. And with -- as Ken pointed out, that revenue is locked in over the length of the contract that we have with the customer because, just to repeat myself one more time, we do have purchased contracts that are sold to the customer for the locked-in margin over the length of that contract. So that mark-to-market, we have to show quarter-to-quarter, but the other side, we are not allowed because of the GAAP rules.

Laurence Schreiber

Sure. If I'm still on the line, can I just make a suggestion then?

Beth Summers

Sure.

Laurence Schreiber

Could you add an additional line or 2 about the -- you should define at least in the statements that you're releasing in your press release where that's coming from because I think that would avoid some confusion in the marketplace. I would at least have a line that would say "mark-to-market gains or losses on existing contracts" and show the number as opposed to -- I don't believe that shows in the statements you've released at least on the website or in your press releases, and perhaps have a footnote at the bottom describing the mark-to-market process, the average life of your contracts, a little more detail so that investors understand what is going on, who may not participate on this call.

Beth Summers

Yes, this is Beth. We do in spots flag that, and we do have it on the reconciliation charts for base EBITDA, et cetera, but we take your point and as we go forward, we will consider that and try and make it a little more clear for investors that may not be as familiar with the company.

Operator

Our next question is from Damir Gunja from TD Securities.

Damir Gunja - TD Securities Equity Research

Can you comment on how the weather may have shaped up so far in October and November across all your jurisdictions?

Kenneth M. Hartwick

Sure. I think October, in general, it was a just marginally warmer in the sort of northeast side into Canada. It was marginally colder in Alberta and marginally warmer, which is good for us, in Texas. So if you look across all the jurisdictions, we'd say probably for October, there's nothing that really concerns us one way or the other. I think when Rebecca mentioned the impact on weather, the real months that -- where the heavier potential exposure exists is really January, February and March, but -- so we haven't seen anything so far in the first 5 weeks of the quarter that is problematic.

Damir Gunja - TD Securities Equity Research

Okay. And maybe tying into that, I'm just looking at the contribution of Q3 and Q4 in previous years. And it looks like, based on historical numbers anyway, Q3 is typically 40% of the second half results and Q4, 60%. I'm just trying to make sure we have appropriate seasonal expectations for the upcoming quarters? Is it 40%...

Kenneth M. Hartwick

Yes. So maybe a couple of points lower on Q3 historically, but that's -- you're at a range that's reasonable.

Damir Gunja - TD Securities Equity Research

Okay. And just one more, and I'll get back in the queue. I guess, the margins coming in the door versus the margins leaving, you're still a little bit underwater there, I guess, about $10 on the consumer side, $5 on the commercial. Do you see that flipping over at some point in the coming quarters?

Kenneth M. Hartwick

Yes. Well I think you have -- 2 things, Damir. I think your characterization is right that there's been a closing of that gap. These are -- look, and say we have stability now in margins across both of the big segments, which is the important part, so we have not -- if anything, we've seen a little bit of a move back up, which is good. And it's really the tail end on some of the higher margins that are dropping off are sort of almost the last group of customers that are coming off of very high gas prices and maybe corresponding electricity prices from 5 years ago. So it's a -- so yes, I think you've seen that gap closed because the number of high-priced customers is less. And then as importantly, the trend moving forward is something that we like.

Beth Summers

Damir, by and large, I can tell you we are extremely happy with the margins that we are generating right now. Particularly, in the last couple of years of a relatively -- not even relatively, but flat price environment. Stable price environment still is giving us the margin that we target in our budget. So that is giving us a lot of confidence on going-forward basis. By and large, I can tell you we are very, very happy how customer behavior is around those margins.

Operator

[Operator Instructions] We have one from Kevin Chiang from CIBC.

Kevin Chiang - CIBC World Markets Inc., Research Division

Just a question on -- it looks like your net additions in your energy -- your core Energy Marketing business was down to roughly 20,000 RCEs, if I've got my math correct here. Is that just as a function -- and it seems to be one of the lower levels over the past few years. Is that just a function of some of the stuff you were talking about earlier in terms of being more focused on the profitable customer, not necessarily buying market share? Or is that an anomaly within the quarter? Or how should we be thinking about net additions coming out of that segment?

Kenneth M. Hartwick

Yes, I'd look at it with 2 specific items on it. First, it was we did look across the book and really on the attrition side within the residential sector and say there are some customers that we don't think supported the profitability level that we would want and, therefore, effectively let them atrip out of the book. And then secondly, and I think this will be -- I referenced in -- towards the end of my conversation, was as we start to look to bundle more of our products together and a good example is the thermostat program, which, again, we're up to 19,000 installed thermostats. The economic profile of a customer changes as does the duration of time it takes our salesperson to make the sale. Now that's a good thing. So we might have a little bit of a lower customer addition, but the overall value of the customer will be higher, and we believe the attrition profile of that customer then is very different. So like, say, you're sort of seeing more as we move forward around the profitability of the customer being a greater focus than just adding customers at the pace we've been doing. So -- which we think is better long-term economics for the company.

Rebecca MacDonald

So I would say what you mentioned, Ken and I definitely agree with your comment. I think that we should become much more critical of what group of customers we want to keep, and we have made that decision consciously, and we prefer to have -- very, very profitable customer with number of products from us than 3 customers that don't give us a high profitability. So it is conscious decision on our part.

Kevin Chiang - CIBC World Markets Inc., Research Division

Okay. And I think that makes total sense strategically. Just on the bundling side of things, how should we be thinking about margins evolving, I guess, as you add this bundling feature? And I guess, my question is if the margin on RCE is $168, if someone chooses one of your traditional energy products and then also chooses the thermostat, assuming that's also $168 RCE -- per RCE, is that through $100-plus margin you're earning on that customer? Or should we be thinking of margins potentially accelerating here because as you bundle, I would imagine the cost base doesn't move significantly, if you can speak to that, I guess, longer term?

Kenneth M. Hartwick

Sure. Yes, and again, there's a couple elements that we'll want to address. And I think over time, what we'll begin to do is, as we've done with the dollars per RCE, we'll start to equate the value created by that customer addition with whatever the bundle might be, and so I think margins are better. I wouldn't say they're double. That might be stretching -- we might hope for that, but that's not what we'll achieve. And -- but as importantly, on the margin side is the attrition profile because again, if you look across our attrition rates in our residential business, moving those down by a few percentage points is actually more economically advantageous than just adding another $10 or $20 to the margin profile. And that's really -- so it will be a combination of the 2, higher margins, for sure, which we'll guide as we get further down the road on this, but that changes and what we start to talk about as far as our expected attrition on those bundled customers, which again, we think is a -- will be a meaningful change from what you've seen in the past.

Rebecca MacDonald

And you remember we said time and time again on these calls that bundling strategy is the future, and retailers will only stay relevant if they are bundling. And this is not a new conversation we are having. We started thinking about it over a year ago and talking to you about it. Now we are starting to execute on it.

Kevin Chiang - CIBC World Markets Inc., Research Division

And I know you have a toehold in one of those smart thermostat companies. Is that an eventual acquisition target? Are you happy with the current relationship you have? Or do you need to expand it further as you grow this bundling offering you have here?

Kenneth M. Hartwick

So -- and I think our ownership position in -- and ecobee is the name of the company. Our ownership position is where we want to be and really what it's allowed us to do in conjunction with company and the management team there is help drive product innovation and features that we think customers are going to find valuable, both in terms of their own home and as well as in markets whether our demand response capabilities as that develops. So it's really about a very collaborative effort with the company on, let's say, product innovation and the things that we want to be able to do.

Kevin Chiang - CIBC World Markets Inc., Research Division

Okay. And just a last one for me here. Looks like you are still inactive on your NCIB for your converts. I know the back half, as you pointed out, is seasonally stronger, I guess, part of the year for you. How should we be looking at the buyback? As you generate more cash flow in the back half of your fiscal year, would you look to buy back some of these converts? Or is there a better use of this cash elsewhere from your perspective?

Kenneth M. Hartwick

Yes, I think what balanced the couple of items is certainly the growth that we're seeing tempered, as Rebecca and I mentioned, as far as the profitability of the customer profile. So that remains there. We have a very strong commitment to the deleveraging process, and we've given the guidance as to where we want to get to over the next 3 years. So -- but you're right on your timing. As we've had the dividend change in place for a while now, we head into our 2 bigger quarters and I think as we go through that, we will look to see about the use of proceeds to delever whatever piece of the capital structure we choose to reduce. And again, but that's something where it's more into the bigger quarters for us.

Operator

The next question is from Nielsen Ng from RBC Capital Markets.

Nelson Ng - RBC Capital Markets, LLC, Research Division

Just a quick question on the U.K. business. I think there has been some talks about capping the energy prices, like, in terms of I think the government was talking about implementing energy caps, but I also noticed that some companies have announced price increases anyways. So I'm just wondering whether you can comment on the U.K. energy environment in terms of price changes and competition.

Kenneth M. Hartwick

Sure. Yes, I think for -- as we've mentioned, we're primarily, right now, working on the commercial side in our Commercial segment in the U.K., and that's really not subject to the price cap discussions that are going on between the 2 parties over there. So it doesn't directly impact our business in our segments. So that part of the business from a market standpoint is going very well. We're, let's say, achieving all of our internal objectives there as far as type of customers, aggregation, building our relationship with brokers over there. So the price capping is not really something of direct issue to us. We have started to accumulate small numbers of residential customers strictly online. So with almost 1/3 coming to us and wanting to enroll. But what we see even within the price caps and this is where I think we've been able to differentiate ourselves in North America, as well as what we will do in the U.K., is really offering the customers something that is a bit more innovative than what they have got from the traditional big 6 over there. But it's a -- residential right now is a -- something we're doing, but we want to continue to build out our commercial platform, so we have a good base to then compete on the residential side as we move forward. But we like the market. We like the decision. The team over there is doing well. The sales channels are doing well. So we like what we see so far.

Rebecca MacDonald

And I would just like to add, Nelson, we are very, very happy with all our teams in North America, but particularly with that -- with the team in U.K. And Nelson, we are incredibly happy with our quarterly results.

Nelson Ng - RBC Capital Markets, LLC, Research Division

Okay. And then just on -- you mentioned that, I guess, a fewer -- like a smaller portion of your customer additions are coming from door-to-door. Is Momentis becoming a larger part of the -- like the growth driver? And I was just wondering I think in the past, you have reported how many reps you have in Momentis. I'm just wondering whether you have an update on the number of, like, active reps for the Momentis sales channel.

Kenneth M. Hartwick

Sure. I think, first, going back to just your comment about the relative percentage of door-to-door and there's -- again, one very important point is that is a great sales channel. So the fact that the percentage is down, I don't want anyone of the call to think that the company is in any way moving away from it. It is a great channel for us and really, the decline percentage-wise is just simply a function of the performance of the other sales channels that we've been building. And Nelson, it is Momentis, it is online, it is from telemarketing, which we will continue to do. And I think as you look forward, I do believe that the door-to-door side will be in that 30% range almost on a permanent basis because we have the other channels growing, but door-to-door has also grown over the last year. So that's an important clarification. On Momentis, again, we've continued to add reps to it, and the exact number I don't have, but we would be in the 20-ish thousand reps within the base. And again, they -- like our other sales channels, they tend to come and go. But again, it is a contributor along with the other sales channels that we have, and each of these channels will, we think, grow in absolute terms as we look forward.

Rebecca MacDonald

We always -- Nelson, just a reminder, we always said that the Momentis will be filling up to -- customers that traditionally do not buy from a door-to-door sales reps. But the most cost-effective way of selling to our customer is door-to-door, and we love that model. We have executed on it for all these years. And Ken emphasized and I want to reemphasize how strongly we feel that, that is the primary sales channel for our residential additions. Obviously, where the numbers get skewed is because of the success of our commercial channel, so the commercial business is growing to the brokerage network a great deal, and that kind of -- that might confuse you somewhat.

Nelson Ng - RBC Capital Markets, LLC, Research Division

Okay. So just one last question. I think this might be more for Rebecca. But in terms of the, I guess, the 2 largest shareholders that you mentioned, they've built their position kind of in the past 6 months. I'm just wondering whether what prompted them to, like, invest at this time, and also whether they've been supportive of the strategy or whether they've been advocating for any changes in the strategy.

Rebecca MacDonald

Okay. And first of all, I do believe that Ron Joyce has been a shareholder over a longer period of time than 6 months, but he just filed recently. Mr. Pattison's group, I cannot -- I think you're much better off asking him directly. I do believe that they invested because they like our business model. They like how we execute on it. They like the returns. They look at the numbers. They look at the financial parameters around those numbers, and I'm sure nobody invests because they do not like the company. So there was no indication by either one of them that they would like us to change anything. The only indication that I've got from them, like, yes, from every single shareholder, including myself as a shareholder, is that they want us to execute on our plan and stay focused and disciplined, and we've earned $220 million, which we intend to do.

Operator

Our next question is from Kevin Charlebois from Brookfield.

Kevin Wilfred Charlebois - Brookfield Soundvest Split Trust

My question is just on your debt structure. I think you gave clear guidance on in terms of where you want to be on a debt-to-EBITDA basis. On an absolute basis, as of the end of the quarter, just for clarity, what's the total number? And do you expect that to change materially over the next few quarters before you have the ability to pay it down in a bigger way going forward?

Beth Summers

Yes. At the end of the quarter, we would've been sitting at $1,024,000,000. As you look at it, the one thing to recall from the cyclical nature of our business that the largest draw of our credit revolver occurs in the third and fourth quarter. So as you look at it going further, as you hit that sort of at the end of the year and into Q1, the expectation would be that would be decreasing. And in addition, the one thing that I do want to flag is the number that I quoted excludes our discontinued operation of Terra Grain Fuels.

Rebecca MacDonald

And I would just like to add one thing, Beth. When we look at our debt regarding the NHS water heater business, that is securitization around water heaters, but does not have the recourse to the company. It's only around the specific product that we securitize.

Kevin Wilfred Charlebois - Brookfield Soundvest Split Trust

Right. And what's the breakdown between the nonrecourse and the recourse?

Kenneth M. Hartwick

So the -- yes, I think on...

Kevin Wilfred Charlebois - Brookfield Soundvest Split Trust

[indiscernible] around $270 million?

Kenneth M. Hartwick

Yes, that's exactly right.

Rebecca MacDonald

You're absolutely right. $270 million is nonrecourse.

Beth Summers

Yes. It's outlined specifically, but the way to split it is when you look in the notes to financial statements, the nonrecourse portions of the business is the solar financing and National Home Services financing, as well as the discontinued operation of Terra Grain Fuels' financing. So those 3 pieces of debt, which we do specifically isolate when you look at the notes of the financials, are the nonrecourse pieces.

Kevin Wilfred Charlebois - Brookfield Soundvest Split Trust

Great. And lastly, is there -- has there been any progress with the Terra Grain sale?

Kenneth M. Hartwick

Yes. I think we -- like I said, we made a commitment that we would look to exit that business in this fiscal year, and I think that we are heading towards the path to be able to accomplish that. So it's progressing and we think in a constructive manner for the company and the facility.

Operator

Our next question is from Damir Gunja from TD Securities.

Damir Gunja - TD Securities Equity Research

Just want to follow up on the thermostats. Are you offering that in multiple jurisdictions or only in specific markets at the moment?

Kenneth M. Hartwick

Yes. So right now, we are actively installing in Ontario and in Texas. And it is our intention to bring that into the PJM zone probably early in the new calendar year. So -- and again, it's something where we will go at a very measured pace on it to fit it in to what the product offerings that we're trying to accomplish, but like I say, we like the results in the 2 jurisdictions that we have been actively installing them in right now. And just for those who don't know, PJM is just the -- is basically Pennsylvania, Jersey, Maryland and a big chunk of Illinois.

Damir Gunja - TD Securities Equity Research

What are the mechanics of doing that? Are you calling, I guess, your existing customers by phone and offering the installations?

Kenneth M. Hartwick

So there's 2 approaches: one is the sale to our existing customer base, which is very cost-effective from a sales aggregation standpoint; the second process is our door-to-door sales channel, which is now selling it as a bundle, with your commodity contract with the SmartStat at the same time. So like I said, it's very consistent with what Rebecca has been describing and we've been talking about for a year is the integration of products into the house. And like I say if the customers are receptive to it and it's allowing the customer now to deal with both fixing their price, as well as perhaps using energy at different times of the day that might be economically advantageous to the customer and to Just Energy.

Rebecca MacDonald

What is interesting to me, what we are finding out with the second group that Ken just mentioned, door-to-door, there is a group of customer that originally did not want to have a conversation around commodity, but when they were approached with the thermostat, it's a completely different conversation. And -- so what we -- our salespeople are finding out is that they're able to reach customers that traditionally would not buy or would not be interested in just the commodity, but like this bundled product.

Damir Gunja - TD Securities Equity Research

And are you comfortable giving any long-term targets at this time, maybe absolute numbers or even percentage of residential customers that you see eventually buying into the thermostat offering?

Kenneth M. Hartwick

I think what we think is probably better for us to do is, like I say, we indicated how many we have installed now, which is in a very short period of time, the 19,000. As we expanded in the markets, we'll give more clarity on both 2 things: the pace of sales and installation, as well as the economic performance of both the margins around it, the demand response benefits that would be associated with it and the attrition rates. So like I say, 19,000 won't tip anybody's model one way or the other, but this is something we are very, very confident that is going to become a material part of our business over the upcoming years.

Rebecca MacDonald

I think just maybe a year -- Damir, maybe a year from now, we would feel a little more comfortable talking numbers, but we just want to -- this get stabilized and launched in couple of other states, and then we can talk to you more about our projections. We share them in our minds. We just don't want to share them with you.

Damir Gunja - TD Securities Equity Research

Okay, that's great. And just a final one for me. I guess, Ken, you alluded to weeding out some lower-margin commercial contracts. And if I understood correctly, I think at one point, you mentioned on the residential side, too, what percentage of your existing books do you think would represent sort of lower economic deals that you would, over time, want to sort of weed out? Is it 5%, 10%?

Kenneth M. Hartwick

Yes. It's some 5%. So it's on -- if you combine the 2 segments. I think we just want to be, let's say, I think we want to -- what customers can we have multiple products into their house and/or business to some degree and are just going to -- you will just see us do more around maximizing the customer benefit and our benefit from a smaller base. So yes, it's some 5%. So it's not a big number, but it's an important one to call out because they probably are -- could be the most expensive to serve as well.

Operator

We have a question from Adam Mitchell from Scotiabank.

Adam Mitchell

Just a couple of quick questions. First one, how do you guys intend to refinance the 2014 convertible debenture maturity? And are you able to draw under the new credit facility to refinance that particular instrument?

Beth Summers

With respect to that maturing $90 million, I mean, we've made a commitment to the market that, over time, we're going to deleverage. How we address that is it'll be factored into that longer-term method by which we're going to do it. With respect to the new credit facility, it is structured such that we have the ability to use and to draw that credit facility subject to certain debt-to-EBITDA ratios.

Adam Mitchell

So do you think you'll end up using that or you think you'll end up potentially issuing another convert or unsecured debt? Or when do you think you'll make the decision on that particular maturity because, I guess, it's callable now at par, right?

Kenneth M. Hartwick

Yes. So it's -- let's say, it's due in September, and I think we'll do something that will sort of be able to add a bit of clarity to exact mechanism and how much of it we are going to deal with via cash versus other options in there. But we want to do it also looking then at the other converts that exist there as well towards -- heading towards what the target payout ratio is. So let's say we have in mind what -- how we will refinance and/or pay off the $90 million, but it'll be done in conjunction with some of the other pieces of convert, i.e., debt that we have on the balance sheet as well.

Operator

And we have no further questions at this time.

Rebecca MacDonald

Well thank you very much for attending our conference call. In case you have any additional questions, please feel free to contact Ken, Beth or myself, and look forward having you at our third quarter conference call in 3 months. Thanks very much.

Operator

Thank you, ladies and gentlemen. That concludes today's webcast. Thank you for joining. You may disconnect at this time.

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