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Just Energy Group, Inc. (NYSE:JE)

Q4 2014 Results Earnings Conference Call

May 15, 2014, 10:00 AM ET

Executives

Rebecca MacDonald - Executive Chair

Deborah Merril - President and Co-Chief Executive Officer

James Lewis - President and Co-Chief Executive Officer

Beth Summers - Chief Financial Officer

Analysts

Nelson Ng - RBC Capital Markets, LLC

Damir Gunja - TD Securities

Roland Keiper - Clearwater Capital

Robert B. Poile - Polar Securities Inc.

Nathaniel August - Mangrove Partners

Christopher Chow - Park West Asset Management

Operator

Good morning, ladies and gentlemen. Welcome to the Just Energy Group Incorporated Conference Call to discuss the Fourth Quarter Year End results for the period ended March 31, 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, Ms. MacDonald.

Rebecca MacDonald

Good morning, everyone. I’d like to welcome you to our fourth quarter and year-end conference call. With me this morning are co-CEO Deb Merril and James Lewis; with Beth Summers, our CFO. Deb and I will make a short presentation, and then we will open the call to questions.

I am very pleased to introduce Deb and James to this, their first earnings conference call. They bring extensive knowledge and experience in retail energy proven out over 16 years working as partners. Since joining both Deb as Head of our Commercial business and James as Chief Operating Officer, In charge of our Residential Division have intimately involved in the operation of our business over the past seven years and the knowledge, skills and attention to detail they bring to the CEO role will be huge assets going forward.

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.

I am pleased to report our results for the year-end March 31, 2014. It was another year of growth with renewed profitability. Fiscal 2014 showed a continued receptivity of customers to our product with a record 1.431 million customers added during the year. These additions resulted in a 5% growth in our customer base over the past year. That 5% growth in customers resulted in 8% increase in margin to $566 million. The increased margin in current in turn led to 22% growth in base EBITDA to $210 million and a 17% growth in funds from operation to $110 million.

These numbers represent outstanding operating performance by Just Energy team over the past year. The results would have been even stronger if not for the extreme winter weather seen in our fourth quarter and its impact on supply, cost and margin. Anyone in Canada and Northeast knows the cold and seemingly endless winter we have just been through. Consumption of gas was up 17% on average in our markets. This demand when faced with capacity limits drove up spot gas prices sharply. This impacted the entire retailing industry with reports from our competitors showing universally negative impact.

This increase in customer gas consumption however had a minimal impact on us because most of our contracts are fixed rate matched by fixed price supply. Unlike some others this limits our exposure only to the higher than normal consumption. We enter into winter weather derivatives, collar derivatives, we call them, which protect our margins against the warm winter and lack of consumption in exchange for giving away much of the benefit if consumption is higher.

These options protected us in the warm 2011-'12 winter but reduced the favorable margin impact of higher consumptions this year. Where we felt the greatest impact of cold weather was actually seen in the electricity markets. Price spikes were seen throughout the quarter with daily Ahead prices in New York at one point hitting a high of $600 per megawatt versus normal price of $80.

Philadelphia Day Ahead prices peaked at over 1,000 per megawatt more than 20 times higher than normal price. Even a small price increase in consumption over normal levels results in a significant gross margin in this price environment. The total impact largely due to electricity during Q4 was approximately $15 million in reduced margin. This electricity price consumption combination was unprecedented in the history of Just Energy.

We believe that overall Just Energy fared better than the industry as a whole over the winter. It remains that we have always have and continue to have exposure to extreme weather. We manage as carefully as possible and we will continue to improve our hedging moving forward.

Deb Merril will take more talk more about the details of the year and our future direction in her remarks. I will finish providing out our outlook and guidance for fiscal 2015. I believe that the delivery of 22% EBITDA growth at the year was, with extremely adverse weather shows the resilience of Just Energy business. We are proud of what we have accomplished and the base we have built for the future. Let me turn things over to Deb.

Deborah Merril

Thank you, Rebecca. As Rebecca has noted we added a record 1.4 million customers during the year. Both segments of energy marketing contributed to this record. Increased sales through non-traditional channels like online marketing and geographic expansion resulted in a record 648,000 customer additions by the consumer division.

The strong commercial division sales channels also benefited from the expansion to new territories adding 729,000 new customer equivalents, up 2% from fiscal 2013. Our home services business also had a strong growth finishing the year with 297,000 customers, up 22% year-over-year. In addition to these new customer additions we also renewed 991,000 customers during the year. After all attrition and renewals net customer additions were 242,000 resulting in 5% overall growth in customers for the year. The shock of the winter bills for our variable rate customers and our focus on profitability of these customers led to a rise in attrition to 15% for the year, up from 12% a year earlier.

As Just Energy grows there is a need to replace a greater number of customers annually. Fortunately our expansions both geographic and by channel have allowed us to meet this challenge. A positive trend impacting future sales was the emergence of significant energy price volatility during the year. Higher volatility reinforces our customer value proposition to stable sized contracts by protecting consumers from unexpected energy cost. Continued volatility should contribute to another year of record additions combined with lower attrition and improved renewals.

These metrics are key to the continued increase in profitability of the business. Customer growth resulted in gross margins of $565 million, up 8% year-over-year. This was more than the growth in customers as a result of higher variable rate customer margins and elevated consumption during the winter month due to the extremely cold temperatures experienced throughout North America.

Administrative expense was a $139 million, an increase of 1% over fiscal 2013. Energy administrative costs were down reflecting economies of scale from the geographic platform build out over the past three years. Home Services cost increased year-over-year reflecting service obligations to the growing customer base.

Selling and marketing expense was $200 million, which represents a 9% year-over-year reduction. This decline occurred despite a 2% growth in customer additions. The reduced expenses reflect the use of lower cost aggregation channels and a higher proportion of consumer sales signed using the sales channels with a residual commission structure similar to the commercial broker contracts as-well-as a reduction in the network marketing sales channel.

Base EBITDA from continuing operations of $210 million increased 22% versus a $171 million recorded in fiscal 2013. Administrative, selling and marketing costs grew more slowly than margins leading to high base EBITDA growth. Base funds from operations were a $110 million, an increase of 17% compared with $94 million for fiscal 2013.

While we're encouraged by this level of growth we fell short of our base EBITDA guidance of $220 million for the year due to severe winter weather Rebecca discussed earlier. The reality is that Just Energy absorbed the price spikes inherent with the severe weather conditions, the cost of which our residential customers would otherwise have had to bear entirely on their own. This is a key component of our value proposition. We believe this volatility provides clear validation of the importance of our fixed-price products for residential customers and is a dynamic that we believe will serve to strengthen our customer aggregation in the future.

Overall we're very pleased with the 22% fiscal 2014 base EBITDA growth realized during the most challenging of weather conditions. Our goal in building Just Energy to the multi-billion dollar business it is today was to target the high growth, deregulated energy retailing industry and clearly establish our company as the market leader in this space. To create value for our shareholders we must continue to build on this position with both consistency and profitability.

Customer focus is another important factor in building long-term value. Our markets have changed since the formation of Just Energy. We've grown from the original natural gas focused Ontario only business selling fixed-price contracts to residential customers. Today we serve both residential and commercial customers across North America selling energy and energy-related products. We offer both fixed rate, variable rate and hybrid contracts. We remain laser focused on the changing needs of our customers. We want Just Energy to be at the leading edge as North America moves into a world of solar installations, electrical cars and demand response.

In addition we will continue to drive our business in fiscal 2015 and the future. Our Predict-a-Bill product closely fits the needs of a certain demographic. Our JustGreen product has made Just Energy a leading retailer of renewable energy in North America. We continue to look at new ways of delivering what our customers want as cost effectively as possible. Our move into bundling thermostats and our potential entry into residential solar are further innovative products intended to strengthen our ties with the customer.

With that I'll turn things back over to Rebecca to discuss our balance sheet and guidance for the year ahead.

Rebecca MacDonald

Thanks, Deb. We expect fiscal 2015 to be a year of solid performance. As in the past Just Energy management is providing guidance to our expectation for the year. As was the case in fiscal 2014 we expect net customer growth to drive margin growth with the results being higher base EBITDA and transformed operations. Our guidance is that base EBITDA will be in the range of $220 million to $230 million for the fiscal year. This range would equate to 5% to 9% growth over fiscal 2014. With base EBITDA in this range the payout ratio on the base funds from operation would be less than 100% for the year and that ratio should continue to decline.

This guidance was developed based on conservative assumptions regarding customer additions as-well-as allowances for other market conditions that arise in the retail energy industry. Combining solid financial performance with some of the new directions in products and customers relations described by Deb Merril Just Energy begins the year with a solid base and a great opportunity.

As regards to our balance sheet; the coming year will see continued focus on the reduction of our debt levels. The sale of our ethanol plant in fiscal 2014 and the planned sale of our Hudson Solar business will result in [remuneration] of $105 million of debt from our balance sheet. We will continue to examine all aspects of our business in attempt to identify any non-core assets which could be sold at attractive prices.

Our debt-to-EBITDA ratio has fallen from 5.6 times a year ago to 4.9 times as of March 31, 2014. Our target is to reduce the rates to four times or less and we hope to do so through a combination of higher EBITDA in a possible further sale of non-core assets. We are very focused on delivering a more conservatively structured Just Energy in the future. We think this will be on the path to a better valuation based on predictable reliable business we built. On that note I will open up for questions.

Question-and-Answer Session

Operator

(Operator Instructions). Our first question online comes from Nelson Ng from RBC Capital Markets. Please go ahead.

Nelson Ng - RBC Capital Markets, LLC

Great thanks. Deb and James, if he is there congratulations on your new role.

Deborah Merril

Thank you very much.

James Lewis

Thank you.

Nelson Ng - RBC Capital Markets, LLC

Just quick question in terms of the solar business, The -- you mentioned that the Hudson Solar is being held for sale. Can you provide some background as to why you’ve decided to sell it? And how far along the process are you with selling that business?

Deborah Merril

Well and we as a decision for us the company to kind of reduce the -- to manage the balance sheet as we talked about before. We had looked at the solar business and said it really was built for tax purposes for us to get some tax credits and to manage some of our tax obligations in the future. So we built that business over the last few years to make that occur. As we look to the future what we want to -- we don’t think it core to what we are going to be doing going forward. We are going to be looking more on the residential side instead on the commercial side. So we feel like it's not core to what we are going to be doing in the future but is been a benefit to us in the business that we built so far.

Rebecca MacDonald

And the way that we looked at that business is really most of the tax benefits have been utilized already and it's small and it's regional and we know that our expertise are on being the last mile to the residential customer, that’s a very attractive market in a different jurisdiction in United States. And we want to put most of our focus towards developing that solar business versus the commercial ones.

Nelson Ng - RBC Capital Markets, LLC

And then in terms of like how along are you in terms of the sales process?

Rebecca MacDonald

Well how long in terms of a sales process. Well you know no deal is done until it is done, the ink is dry, but I would say that we are down the road on it, we do have some prospects and as soon as we have something to announce we will.

Nelson Ng - RBC Capital Markets, LLC

Okay that’s great. And then you mentioned that you’ll continue to look for other non-core assets like I presume you are referring to the water heater business?

Rebecca MacDonald

Fair comment. Yeah that is the way I look at it. It's -- all of us look at it, it's a non-core asset business that’s only in Ontario. We do love it. I think it's a great, great business but this management team as I said in my remarks wants to go to a very conservative approach of managing the business and it starts with cleaning up our balance sheet. So if that asset gave us a fair price we will consider selling it.

Nelson Ng - RBC Capital Markets, LLC

Okay, thanks Rebecca. And then just a quick question in terms of fixed versus variable like roughly what proportion of your customers now are fixed versus variable? And also hasn't mix changed and has the term of the FX contracts changed in the past six months due to the cold?

James Lewis

Hi Nelson it's J Lewis here. Practically 30% of our customers are variable and 70% fixed and over the last six months we haven’t seen necessarily change in that.

Nelson Ng - RBC Capital Markets, LLC

Okay, that’s great. And then just one last question. I believe New York and Connecticut will be introducing a legislation that would limit the variable rate changes and standardize the bill format. I am just assuming if that gets adopted by more states and how do you think that will impact the business?

James Lewis

I think for, this is James again. For us we already had a basically self-imposed limit on variable rates, we look to protect our customers there. So from our standpoint we don’t see that as impacting us.

Nelson Ng - RBC Capital Markets, LLC

Okay, that’s great. Those are all my questions. Thank you.

Operator

(Operator Instruction). Our next question comes from Damir Gunja from TD Securities. Please go ahead.

Damir Gunja - TD Securities

Thank you, good morning.

Rebecca MacDonald

Good morning.

Damir Gunja - TD Securities

Just a question on the possible entry into the solar business perhaps on the marketing side. Can you maybe just in round terms talk about it a little bit, sort of timing of getting into the business how it potentially work? Would you get a finder’s fee for bringing in contracts or how we should think about sort of potential customers or economics?

Deborah Merril

Yeah, Damir. We are in the process of evaluating what that looks like for us. I mean, what we are really good at, we are good at a lot of things, but one that these are really good at to get customer and to explain the value proposition to a customer that can be somewhat complicated to a door-to-door sales channel. So we really think as we look at this business first of all its energy its green energy which we are very good at selling and maintaining for customers and then we also as we look at solar has -- it's got a great fit with our sales channel. So strategically it makes a lot of sense for us but as far as the business plan and how it would work I mean we would want to be in this business to benefit on the upside not just from a finder’s fee on sales side. This is really a business that we think is core to us and we’ll look at structures that help us getting on that way.

Rebecca MacDonald

And just to add to that Damir micro generation is going to be part of our energy solution on going forward basis. It’s not there to disappear, it’s here to stay. We recognize that and you know we look at companies south of the border as much as everyone else. We know our strength and we know our weaknesses. The weakness is really around shoring our balance sheet and the board’s decision is lower debt, leverage not increase it but residential serve is expensive business. So it’s very safe to say that the likely scenario will be some type of a joint venture agreement between ourselves and possibly companies that are already installing and have a capacity to install and the lender for the panels.

We do not want to get in the position an agent for one of the solar companies because we feel the customer base that we already have it’s a great mix. So it’s not just about having panels on the roof, it can help with our load profiles and we know how we will be in a better position to maximize the value out of that customer then those pure solar companies that just put the panel on the roof.

Damir Gunja - TD Securities

Okay. So I guess given the value of a typical solar installation whatever plan you come up with the margin is probably going to be multiple times of what you will get on a typical energy confront?

Rebecca MacDonald

You’re absolutely right. And you know what we all know valuation that SolarCity has, one may need to debate whether it’s too high or low but it is what it is. I don’t want everyone on this call to remember that every year if you look at year that we just passed we have signed 180,000 customers that are green customers that are paying premium for green energy and they want to contribute to betterment of the planet. SolarCity has 88,000 customers installed. So we are very confident that we can be relatively quickly a major player in that field.

Damir Gunja - TD Securities

Okay. May be a second one for me, may be a little bit tougher here, the gross margins coming in versus the margins coming out on I guess from attrition and lost renewals. There is still a healthy gap there on the consumer and the commercial side. Can you maybe just talk a little bit about what you see there going forward and is there going to be inflection point at some point may be the better natural gas environment is going to help or is commercial stabilizing?

Beth Summers

Yeah, Damir, it's Beth I think as you look at it we would view as we go forward the consumer margins probably getting a little better than what you've seen through time as we've seen that increased volatility et cetera in the market. Again balancing off more so with the customers that are leading with the customers that are being added. On the commercial side we had competitive challenges. In the Northeast in particular et cetera which had put some pressure on those margins.

I think our view from the commercial side is they should remain in and around that range we're seeing now for those customers added as we look going forward.

Deborah Merril

I would also say that on the commercial side we've seen a lot of competition over the last several quarters and last few years. And I think we're seeing after this winter a lot of people have experienced some heartache on the commercial side in energy as a whole. So I think we're seeing a little bit of a pull back. So we're hoping that may be a little bit less aggressive competition will lead to margins stabilizing may be turning around in the future.

Damir Gunja - TD Securities

Okay, thanks.

Operator

(Operator Instructions). Our next question comes from Roland Keiper from Clearwater Capital. Please go ahead.

Roland Keiper - Clearwater Capital

Hi good morning. Just a question on the solar business that's been earmarked for sale. I noticed disclosure that the year-over-year change in loss of operations is approximately $13 million that is there is a loss of $12 million in fiscal '14 versus a profit of 1 million in the prior year. What is the shift year-over-year in EBITDA for that particular business please?

Deborah Merril

As you look at on a year-over-year basis it's been influenced certainly as we have been building and financing that business. We do have the financing charges coming in and rolling what occurs as you go forward it is 15 year asset. So you see that gross margins starting to rolling in the future years. So it's reflective of that growth in that business where you get the margins in future years and you have a lot of the expenses upfront as you build that infrastructure.

Roland Keiper - Clearwater Capital

Thank you for that. I think it was just trying to get a picture of obviously you folks provided guidance of 2020 last year the weather is going to be like including the cold weather was experienced here in the third and fourth quarter, it appeared to benefit you in the third quarter, it appeared to hurt you in the fourth quarter.

But obviously you are not predicting the weather, normalize weather is what you are basing here, your guidance I presume on. And I am just trying to see what the impact on your actual result of 210 base result is and what it would have been had this not been classified as discontinued. That's what I am trying to get.

James Lewis

So Roland this is James here. You say excluding the solar or just on the weather impact itself?

Roland Keiper - Clearwater Capital

Just the discontinued asset, if it were I assume that the base would be something like, had this not been classified as discontinued had you made the decision in March that the base EBITDA would be something less than $200 million for fiscal '14, may be.

Deborah Merril

There is two things actually impacting it as well. When you discontinue an operation you actually go through the process also of fair valuing the assets et cetera. So I mean if you took out that pure EBITDA as it sort of reflected there, yeah it would have had an impact on the 220 or the 210.

Operator

Thank you. Our next question on line comes from Mr. Robert Poile from Polar Securities. Please go ahead.

Robert B. Poile - Polar Securities Inc.

Good morning. Rebecca I'd just like to circle back a little bit to the idea of right sizing the balance sheet and getting the debt under control a little bit. When you forecast $220 million in EBITDA for next year and I take off a 120 million for dividends and interest cost approaching a $100 million it doesn’t leave really any money left for significant debt repayment. So beyond the solar, if I believe that’s 50 million net based on the disclosure between assets and liabilities, so approximately $50 million in net proceeds assumed there. And then the -- even if we do the water heater business which is possibly worth based on some of the public companies may be $300 million you’ve already got 250 of debt against that. So may be another 50 million there.

It just doesn’t seem to add up to a significant improvement in the debt ratios. So just wondering how think you are going to get there?

Rebecca MacDonald

You know what, I appreciate your comment. And I would only say that we believe that we will be able to lower our debt and how much is certain business worked or not that’s obviously up for the debate. So we will see how things will progress in a quarter or two. I think we are approaching a very conservative outlook for the company and we do have a plan of lowering that and I think that is much as I can tell you right now. I don’t think I would be in position to reveal anything more. You will have to wait and see.

Robert B. Poile - Polar Securities Inc.

But the point being you are committed to that?

Rebecca MacDonald

Absolutely. Company is very committed in lowering our debt and we will do everything in our power to do it even if it means selling the assets that we love and what’s the sales price of that asset I guess is a matter of opinion. And I can tell you company is going to be going forward with very conservative assumptions. We use to manage the business like that and now we are going back to with all conservative assumptions. But commitment to lowering the debt is there and that’s our priority. And I am quite confident that we would be able to do that.

Robert B. Poile - Polar Securities Inc.

Thank you.

Rebecca MacDonald

You are welcome.

Operator

Our next question online is from Mr. [Tom Novak]. Please go ahead.

Unidentified Analyst

Yeah hi a related question. If I look at your LTM cash from operations and I look at it before working capital because working capital comes and goes, and I also net against that your contract initiation cost you are not covering your dividends, just in cash from operations excluding CapEx. So same question as before how do you reduce that when you can’t cover the difference [inaudible]?

Rebecca MacDonald

Well we are not covering the dividend till we know that and we know the numbers and I would say that that’s one of the reasons we are going to be probably selling more of non-core assets that will help us clean up the balance sheet and cover our dividend. I think also as you look at it going forward with our forecast on the EBITDA numbers the guidance of between the 2020 to 2030 that would put us as you go forward to a payout ratio under 100%. And the other thing from this year’s perspective there were a couple of impacts, certainly the weather impact that we’ve talked about which would have had our funds from operations higher and resulting and then a payout ratio under 100% in combination with the adjustment for gas receipts which was more negative this year that we would typically see again as a result of that streamlining.

Unidentified Analyst

Okay. You haven’t covered it -- you didn't cover in '12 either but I guess an accounting question why do you include contract initiation cost, seems to me that clearly operating cost why you put that in the investment section of the cash flow statement versus operating?

Rebecca MacDonald

Because it is an asset with future value so it is capitalized and capitalized items get treated in investment. What we do in the maintenance CapEx is there is the portion in the maintenance CapEx that is customer initiation cost associated with maintaining the overall embedded margin of the business.

Operator

Thank you. Our next question online comes from Mr. Nathaniel August from Mangrove Partners. Please go ahead.

Nathaniel August - Mangrove Partners

Hi. I’m still sort of missing when you’re expecting to on a cash flow from operations minus CapEx and contract acquisition cost cover your dividend and I was hoping that you could just sort of guide us in what year we should expect that to happen?

Rebecca MacDonald

Yeah, in fiscal 2015 we certainly would never include growth CapEx in that calculation and the growth CapEx being the larger portion that would be the water heater business.

Nathaniel August - Mangrove Partners

But you don’t think that you covered it in 2014 but you see an improvement in 2015?

Rebecca MacDonald

Yes, from a guidance perspective as we provided our guidance is between 220 to 230 and in fiscal 2014 we are at 210 EBITDA.

Nathaniel August - Mangrove Partners

Okay, that’s fine.

Rebecca MacDonald

Let’s reminder ourselves last year we told everybody -- our payout ratio last year was very high and we told everybody that the goal is to get down under 100%. If we were not faced with prolonged winter that we settled in April this year because we had no knowledge how long that vortex would last, we would have been under 100%. Now it’s not an excuse the dog ate my homework but it has been extreme weather condition we noticed that in February that one of the reasons on our call in February we guided everybody that we had such a tremendous third quarter that we’re seeing the impact of the cold weather that we guided them down to 220 EBITDA and to the best of our knowledge at that time we thought it would be 220.

We didn’t realize that the winter won't leave till the end of March. We can’t control that I mean we can control everything but we cannot weather.

Nathaniel August - Mangrove Partners

Okay. And then just a follow-up I noticed that you include your EBITDA from the water heater business in your cash flow that’s available to pay dividends but I thought that you’re contractually restricted from receiving those cash flows I don’t understand how those are free to cover the dividend?

Rebecca MacDonald

I’m not sure why you think we’re not contractually able….

Nathaniel August - Mangrove Partners

Don't you need amortize that with that, the water heater?

Rebecca MacDonald

No, the way that's structured but you also have to think about when you look at those numbers is that we bring in more cash as we build as we install the water heaters then is actually required to install those water heaters. So there is cash coming in to cover that installation all the CapEx associated with those water heaters.

Nathaniel August - Mangrove Partners

So it’s kind of like future customers funding current customers or something like that?

Rebecca MacDonald

Well, I think I mean one of the things which I think you’re asking why when you look overall in EBITDA would you factor that in as current operational flows, well there are current operational flows. From the CapEx perspective we bringing all the CapEx associated or the costs associated with installing those in addition to incremental dollars. So if you’re looking at it from pure cash perspective there is more cash coming in than going out from the water heater business. If you want I’m happy to have a discussion with you offline and walk you through how some of different pieces of the business model works from cash inflows and outflows.

Nathaniel August - Mangrove Partners

But you are not restricted to using that cash or repaying the securitized debt that you receive upfront when you install the water heater?

Rebecca MacDonald

Well I mean we get the money upfront. What we do is we can do whatever we want with the money upfront. As we go forward we do have to pay…

Nathaniel August - Mangrove Partners

You don't need to purchase the water heater with the money that you get upfront?

Rebecca MacDonald

The water heater is already installed and the cash has been used upfront and then we get cash like it's financed and we can do whatever we want with that incremental cash which typically gets used for funding additional CapEx in that water heater business until we can do another funding. With respect to as we go forward, the cash flow is coming in we do have to pay the principal and interest associated which is equivalent to the revenue streams for a period of time. But again as I said it may be easier to do this offline.

Nathaniel August - Mangrove Partners

Okay.

Operator

(Operator Instructions). We have a follow-up question from Roland Keiper from Clearwater Capital. Please go ahead.

Roland Keiper - Clearwater Capital

Hi, sorry I got myself disconnected earlier. At quarter end what is the net liquidity position?

Rebecca MacDonald

I am sorry, I am very sorry, could you speak up please?

Roland Keiper - Clearwater Capital

Yes, can you hear, is that clear.

Rebecca MacDonald

Now that's better.

Roland Keiper - Clearwater Capital

Thank you, sorry. At quarter end the net liquidity position for Just Energy on it's -- I am looking for what is available on its credit facility what would be available at quarter end?

Rebecca MacDonald

Well at quarter end if you looked at our total draw we had $69.5 million cash drawn on the facility and our letters of credit were a $123.6 million. So the total draw would be $193.1 million. So the maximum amount of the facility is the $290 million. So that is roughly $87 million.

Roland Keiper - Clearwater Capital

Is there -- that is your borrowing based restriction that restricts that $290 million in anyway?

Rebecca MacDonald

There is an underlying borrowing base calculation in the overall facility but that wouldn't restrict, restrict the maximum amount.

Roland Keiper - Clearwater Capital

At that particular time it wasn't restricted in terms of quarter end the full $290 million is available.

Rebecca MacDonald

No.

Roland Keiper - Clearwater Capital

Right, okay.

Rebecca MacDonald

Yeah, absolutely.

Roland Keiper - Clearwater Capital

And you folks have experienced quite substantial working capital changes over between March quarter and the September quarter. Can you just speak to what your expectations are over the next six months, what type of non-cash working capital changes you expect to experience?

Rebecca MacDonald

I think typically when you look at it from a working capital perspective, when you have periods of I am going to say extreme weather et cetera you tend to have larger working capital draws because we pay for our supply. I am going to say quicker than we receive the funds from our customers. So you would typically see it -- I am going to say in the shoulder quarters as you make your way through the shoulder quarters which would typically be our Q1 and the beginning sort of end of Q2 beginning of Q3 you would see less working capital required than the extreme quarters which I am going to say as you get towards December, September and then your December quarter itself would be probably the largest draw requirement.

Roland Keiper - Clearwater Capital

Can you quantify some of that for us?

Rebecca MacDonald

Typically when you look at what happens with our line draw et cetera which is predominantly influenced by the working capital which is what it's used for an average swing in a year is probably in around range of $30 million.

Roland Keiper - Clearwater Capital

Between the high and the low?

Rebecca MacDonald

Yes.

Roland Keiper - Clearwater Capital

Okay. Thanks.

Operator

We have a question on line from Chris Chow from Park West. Please go ahead.

Christopher Chow - Park West Asset Management

Hi. This is building on an earlier question from one of the callers. But why do you guys include the EBITDA from the water heater business in your payout ratio calculation because I don't think you get any of that EBITDA for the next seven years I think that goes to your financing partner?

Rebecca MacDonald

Fundamentally we calculate the funds from operations, the payout ratio and the EBITDA calculation in accordance with GAAP results. So that would include the operating results of all of the businesses. So for purposes of looking at the payout ratio that is how we calculate it. As I mentioned before from a cash perspective, from a peer financing perspective, all of the water heater CapEx, et cetera is funded and cash [inaudible] associated with all of that CapEx.

For paying that back the revenues associated with the funded water heaters et cetera is used to pay principal and interest over the period of time that the initial financing was structured for and from peer cash perspective as I mentioned on the last call again, I’m very happy to walk through the business model and how the various cash flows works but it’s probably easier than doing it on a call, doing it individually and I can walk through it.

Christopher Chow - Park West Asset Management

What would the payout ratio look like if you took out the cash flows related to water heater business because I understand that you get more than your initiation cost, than your installation cost upfront but those seems to be one time. If I just took the water heater business out of your payout ratio calculation, what would it look like?

Rebecca MacDonald

I mean you could do that if you want it, I’m not sure that it's a particularly meaningful calculation but you could do that based on the information we would provide or we do provide segmented EBITDA, so you could take the consolidated EBITDA and take out the segmented EBITDA and then calculate it.

Christopher Chow - Park West Asset Management

So there is $40 million of EBITDA and a decent amount of capital that's related to the water heater business as well, correct?

Rebecca MacDonald

There is $43 million EBITDA for the water heater business.

Christopher Chow - Park West Asset Management

That would be $177 million -- or $210 million less $43 million, sorry.

Rebecca MacDonald

It would be $167 million.

Christopher Chow - Park West Asset Management

$167 million? And then you have the purchase of intangible assets, I would just add software development or something?

Rebecca MacDonald

There is some software development, you have to be careful when you, yeah there would be software development.

Christopher Chow - Park West Asset Management

Okay, and then you have about $10 million of CapEx and about $10 million of contract initiation cost related to your energy business, correct?

Rebecca MacDonald

Yes, roughly.

Christopher Chow - Park West Asset Management

And then you have about $50 million of interest related to your non-water heater interest, your non water heater debt?

Rebecca MacDonald

Yeah, that’s roughly in the range.

Christopher Chow - Park West Asset Management

And then you pay a little bit of cash taxes or something?

Rebecca MacDonald

Cash taxes, yes it would be very little, roughly in the range I believe for the year you see it in the current taxes payable I believe it’s roughly $3 million.

Christopher Chow - Park West Asset Management

So when I get to real free cash flow available to services, your dividend and everything out so it’s a little less than $90 million and your dividend is about $120 million, is that the right way to calculate and think about it?

Rebecca MacDonald

No, I don’t think that’s the right way to think about it. I think you should fundamentally look at the business as a whole and what the operation cash flows look like for the business as oppose to excluding portions of the operational cash flows I think you have look at all of the operational if you are doing an operational metric or a measurement.

Christopher Chow - Park West Asset Management

But the minute you stop selling incremental water heaters, you have no cash flow from that business for seven years, right?

Rebecca MacDonald

For only for the water heaters which would be currently financed there is water heaters which were financed previously. So we will start generating free cash flows.

Christopher Chow - Park West Asset Management

Have you guys thought about maybe breaking that all out so people can just see it because there is obviously tons of questions about whether you can sustain your dividend?

Rebecca MacDonald

We provide the segmented EBITDA information and again that’s something that we can take away and consider but to-date we have not.

Christopher Chow - Park West Asset Management

Got it, and have you thought of the most obvious step to delever by just not having to payout as much cash, I mean certain you would find a lot more new buyers for your stock once people felt comfortable that you could sustain your dividend?

Rebecca MacDonald

We get that a lot and we get a lot of comments around it and trust me we look at and we listen to everybody and companies does have a plan on delevering and on the dividend basis we are committed to the dividend for now and board looks at the dividend policy every quarter. So we have – anything that we would like to change we were communicate that to the marketplace. You have to appreciate and give us some credit we have the people that are running business and creating the cash flows. So we are intimately involved and we do not want to make any decisions that are based on general opinion of some that the easiest way to do anything is cut the dividend that’s an easy decision and that will be a very easy step to make. But we feel strongly that we want to look at overall businesses. That said we want to de-lever and we want to look at prudently at overall business over the next 12 months and that will be through the dividend assessment.

Christopher Chow - Park West Asset Management

Thanks.

Rebecca MacDonald

You are welcome.

Operator

(Operator Instructions). Our next question online comes from Alex [Batuskon] from Centurion Investments. Please go ahead.

Unidentified Analyst

Hi, thanks for taking the question. I was just hoping that you could talk about how you see trends in…

Rebecca MacDonald

Would you mind speaking up for some reason we have a difficultly hearing some people.

Unidentified Analyst

No problem. Thanks for taking the question, I was just hoping you could speak about your consumer energy business into next year. It seems like over the last couple of quarters the trends again a little bit worse. Do you expect those to reaccelerate in terms of your net customer additions into next year or how you are thinking about that business apart from the commercial business? Thanks.

James Lewis

Thanks for the question. I think when you look at our gross adds have been up, very well I think Rebecca and Deb mentioned that we saw a record number of additions where we seem to have a downfall in the attrition and we expected to improve with the volatility that we've spoken of earlier. As we see volatility increase our parts become more favorable for consumers so we are really excited about the opportunities for next year.

Operator

Thank you. (Operator Instructions).

Rebecca MacDonald

Well if there are no other questions I would like to thank you very much for joining us on this call and thank you for the support. If there are any questions that you would like to take offline I am available Deb, James and Beth so feel free to call us directly. And I would like because it is for last quarter that we are talking about, I would like to thank very much all our employees that here worked extremely hard through a very, very difficult winter to deliver the results they have.

And when you are analyst and when you sit you look at the numbers we provide sometimes people in the trenches are forgotten and we said earlier if you compare our size to some others in the industry that have gone through this vortex, we delivered these results only because of unbelievable work that our staff has done. So I would like to applaud them and publically thank them. Hopefully we will all hear from you on the next call reporting our first quarter of fiscal ’15. Thank you very much.

Operator

Thank you, ladies and gentlemen. This concludes today’s conference. Thank you for participating. You may now disconnect.

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