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Just Energy Says Dividend Safe Amid Expansion Plans

Just Energy Group Inc. (JE) said rising cashflow means it won’t have to make further cuts to its dividend, the second-highest among Canada’s largest companies.

“We changed it in February so we think it is very safe for a long period of time,” Ken Hartwick, chief executive officer of North America’s second largest residential energy-retailer, said in an interview in Bloomberg’s Toronto office on April 4.

Just Energy’s shares have plunged 31 percent since the Mississauga, Ontario-based company announced the 32 percent dividend cut on Feb. 7. Some investors are concerned the company won’t be able to fund both its expansion and a dividend yield that still stands at 12 percent, behind only Chorus Aviation Inc. (CHR/B) in the Standard & Poor’s/TSX Composite index, data compiled by Bloomberg show.

If things don’t go according to plan, Just Energy may have to “sacrifice growth to fix the balance sheet, sacrifice growth to fund the dividend, or decide to slash the dividend and focus on balance sheet and growth,” said Trevor Johnson, a Toronto- based analyst at National Bank Financial Group, who rates the company the equivalent of a hold, said by phone on April 5.

Just Energy, fell 0.4 percent to C$6.79 at the close in Toronto yesterday for a market value of C$962.1 million ($951.8 million). It has declined 28 percent this year. The share price drop and speculation of further payout reductions prompted the company to issue a March 25 statement that it didn’t expect further dividend changes, despite “rumors in the market.”

Adding Customers

Just Energy’s expansion is the path to future dividend, Hartwick, 50, said. The company has added customers during the past two years at more than twice the pace of five years ago, according to a company presentation at Bloomberg’s office.

Its 4.3 million residential and commercial customers in six Canadian provinces and 13 U.S. states have locked in multiyear natural gas and electricity prices. Most contracts become profitable after the first year, the CEO said. Including the average amount of people who opt out of their contracts early, the company predicted at the end of the last quarter it would have C$2.2 billion coming in so-called embedded margin during the next five years.

“That is margin we’re just going to realize by work we’ve already done,” Hartwick said. “We don’t have to grow any more, we don’t have to do anything.”

With about 4 percent market share in North America, Just Energy has plenty of room to grow, including in the U.K. where it had 10,000 customers at year-end and is expanding, Hartwick said. The company can boost its customer base in the “high single digits, low-double digits for the foreseeable future,” he said.

Payout Ratio

“We could double the business and we don’t have to worry about running out of customers in the next 10 years,” the CEO said. Just Energy is the second biggest energy retailer in North America after Direct Energy, a unit of Centrica Plc. (CNA)

In February, it said that dividend payments exceeded funds from operations for the 2013 fiscal year ended March 31. Cutting the dividend would reduce the payout ratio to between 60 and 65 percent by 2016 from 172 percent, the company said.

Just Energy has C$1.06 billion of debt outstanding, including C$126 million of bonds coming due in 2014. The company reported a loss of C$126.5 million in 2012 compared with profit of C$355.1 million in 2011 as sales fell 5.6 percent to C$2.79 billion.

The current payout ratio, or the percentage of the company’s earnings shareholders receive in cash dividends, is 108 percent, according to data compiled by Bloomberg. That compares with 127 percent at Chorus, 404 percent at Canadian Pacific Railways Ltd. and and 1,552 percent at Pengrowth Energy Corp. (PGF), the highest in the S&P/TSX Composite index.

Cash Flow

Just Energy is expected to maintain its dividend at 84 cents for the next three years, according to estimates compiled by Bloomberg.

The company has the cash flow to support the current dividend and will need to increase its net customer base by about 6 percent to achieve the 65 percent target payout ratio, Nelson Ng, a Vancouver-based analyst for RBC Capital Markets LLC, said in a March 14 note.

Just Energy’s high dividend is a legacy of the company’s previous incarnation as an income trust, a tax structure that allowed it to distribute most of its funds to shareholders in monthly payouts. The Canadian government shut down the structure in 2006, forcing companies to convert to dividend-paying corporations.

Income Seekers

“Their historic shareholder base is one which is often a retail client and pensions and has a very strong desire to receive a dividend,” said David Lieberman, who helps manage $500 million including Just Energy stock at Hasbrouck Heights, New Jersey-based Advisors Capital Management LLC.

Lieberman said he’d like to see further dividend cuts by Just Energy to boost growth “but frankly if they did that it would probably hurt the share price.” He doesn’t predict another dividend cut any time soon.

Just Energy requires upfront capital to fuel growth, as most of the costs associated with a new contract come at the signing date, according to a company presentation. Marketing costs are incurred to sell new contracts and the company has a practice of buying all the electricity or natural gas needed for the life of a contract at the outset to make margins immune to shifting commodity prices. A new residential customer contract takes a year to break even and turns a profit in the following years, according to a company presentation.

Four Percent

Just Energy is expanding into other businesses, selling energy from renewable resources and offering customers the ability to rent energy efficient water heaters, furnaces and air conditioners.

With North American gas prices reaching a 10-year low last year, customers may be less inclined to lock in a long-term supply contract, said Barry Schwartz, who helps manage C$500 million as a Toronto-based fund manager for Baskin Financial Services Inc.

“This business model works in a high-inflation, high- input-price environment and we’re not in that type of environment,” said Schwartz, who doesn’t own Just Energy’s stock and has been a customer of the company.

Hartwick said low gas prices are not ideal. The contracts become more attractive as commodity prices get volatile, he said.

“We’re very comfortable with the business strategy, very comfortable with our growth,” said Hartwick. “The market says, ok, just show us that.”

To contact the reporter on this story: Ari Altstedter in Toronto at aaltstedter@bloomberg.net

To contact the editors responsible for this story: Jacqueline Thorpe at jthorpe23@bloomberg.net; David Scanlan at dscanlan@bloomberg.net

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