Crius Energy Trust Tr Unit CRIUF

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Their upside scenario target is $13.00. GLTA

February 1, 2017

Crius Energy Trust

Analyst day highlights strategic rationale of cross- selling rooftop solar

Our view: We view the units of Crius Energy as an attractive investment for investors with a higher risk appetite, providing upside if management executes on its rooftop solar platform. However, we remain cautious due to the macro headwinds facing the rooftop solar industry.

Key points:

Rooftop solar platform in place to deliver growth. With the recent purchase of SunEdison's solar platform and the pending acquisition of Verengo's installation business, Crius Energy will have control of the entire solar value chain (see Exhibit 2). We believe management's approach to cross-selling rooftop solar on its energy retail platform could significantly reduce origination costs and drive profitability. The results achieved over the next several quarters will be a key area of focus for investors. Management expects to significantly ramp up its solar installations (see Exhibit 3), which is supportive of its previous solar EBITDA guidance of $5–7 million. We note that Crius Energy invested less than $10 million in its solar platform, which would make it a very attractive investment if management can deliver on its business plan for the division.

Comcast partnership going well, and another partner will likely be added this quarter. Management indicated that the three-year exclusive partnership with Comcast has delivered good results over the past two years, but it did not provide any specific metrics achieved. Management is actively seeking additional partners and expects to announce a partnership with another company in Q1/17. We believe the partnerships provide Crius Energy with customers that have a lower-than-average attrition rate.

Gross margins to trend lower, but overall cost structure improving.

Management expects a higher mix of lower-margin commercial customers and low wholesale energy prices to reduce gross margin per RCE to approximately $150 over the next two years (from $188 LTM and $223 in 2015). However, the decline in gross margins per RCE will likely be more than offset by lower overhead costs and upfront selling expenses, lower attrition, and customer growth. The company has implemented a number of initiatives to retain customers and has been successful in reducing the attrition rate by almost 50% since attrition peaked in 2014 (see Exhibit 4).

Attractive yield and valuation relative to peers. Crius Energy's distribution yield of 8.7% (LTM payout ratio of ~60%) is higher than that of its closest peers, which have an average yield of approximately 6%. With respect to valuation, we estimate that Crius Energy is trading at ~4x our 2018 EBITDA forecast compared to its peers' average of ~7x. We believe the valuation gap could narrow if Crius Energy delivers on growth in its rooftop solar division and continues to organically grow its core energy retail business