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Just Energy Group moves to bolster balance sheet

Rebecca MacDonald, founder of Just Energy Group Inc., left, chats with Canadian Pacific CEO Hunter Harrison in this file photo.

Fred Lum/Fred Lum/The Globe and Mail

Natural gas and electricity retailer Just Energy Group Inc. has cut its dividend and sold off one of its operating units, in moves designed to bolster its balance sheet and ensure it remains sustainable over the long term.

The Toronto-based company said Thursday it will sell its National Energy Corp. arm – which leases and services home water heaters, furnaces and air conditioning – to Reliance Home Comfort for $505-million. About $400-million of the proceeds will be used to pay down Just Energy's debt, which now stands at close to $1-billion.

But the sale will also trim the company's income, so it will make a substantial cut in its dividend. Its annual payout will drop from 84 cents to 50 cents, and be paid quarterly instead of the current monthly payments.

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While such a deep dividend cut would normally severely dent a company's stock price, Just Energy's stock rose by 6.5 per cent Thursday, closing up 40 cents at $6.55. Investors have been anticipating the dividend change since last month when the company reported disappointing financial results for the quarter ended March 31, and executive chair Rebecca MacDonald said the company would reduce its long-term debt by selling off non-core assets. At the time, several analysts reduced their targets and said a cut to the dividend was inevitable, and the stock dropped sharply.

At the moment, the asset sale and dividend cut is "taken as good news, because it now looks like the dividend is sustainable, the payout ratio is below 100 per cent, [and they've had] a pretty huge debt reduction," said John McIlveen, research director at Jacob Securities Inc. in Toronto.

Mr. McIlveen said he thinks the stock price will be volatile for some time, until the market settles on what is an appropriate dividend yield. He said an 8 per cent yield would be about right, because that is higher than the payout from independent power producers, which are considerably less risky than energy marketing firms. With the current dividend, the yield is above 13 per cent.

The unit being sold by Just Energy includes the heating, air conditioning and water heater business it operates in Ontario and Quebec. Reliance chief executive officer Sean O'Brien said in an interview that group will be highly complementary to his firm's existing operations in Alberta, Saskatchewan, Manitoba and parts of Ontario. Many Just Energy employees will join the Reliance staff, he said.

Just Energy will retain its core electricity and natural gas distribution business, which has customers in Canada, the United States and Britain.

Just Energy's co-CEO Deb Merril said in an interview that there are many growth opportunities in all those markets, particularly in Britain, where the company has been operating for only about a year and a half.

After the sale is completed – it still requires approval from the federal competition bureau – Just Energy will see its 2015 EBITDA (earnings before interest, taxes depreciation and amortization) fall by about 25 per cent, compared to its earlier guidance.

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Still, "this is a very positive thing for us," Ms. Merril said, because it will allow the company to pay down debt and focus on its core business.

While Just Energy and Reliance have come together to do this deal, the two have butted heads in the past. In 2012 Reliance sued Just Energy's National Energy arm, alleging that it used door-to-door sales practices that mislead customers, while trying to get them to switch from Reliance water heaters to ones from National. Reliance's Mr. O'Brien said the suit is on hold pending the closure of this deal, and will be dropped if the sale comes to fruition.

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About the Author
Reporter, Report on Business

Richard Blackwell has reported on Canadian business for more than three decades. At the Financial Post and the Globe and Mail he has covered technology, transportation, investing, banking, securities and media, among many other subjects. Currently, his focus is on green technology and the economy. More

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