November 14, 2017
Crius Energy Trust
Getting past the difficult quarter and focusing on strong cash flows ahead
Our view: We are reiterating our Outperform, Speculative Risk rating on the units of Crius, and believe the market sentiment has bottomed, as the company reported results that were not as bad as some feared. Going forward, we expect the realization of synergies, a faster pace of organic customer growth, and normalized weather to drive cash flow growth.
Key points:
Synergies could drive near-term upside. After acquiring USG&E in July 2017 for ~$175 million, management revealed that it expects to achieve after-tax synergies to distributable cash of $55-60 million over the the next three years. The synergies consist of $12-14 million of annual operational and financing synergies, plus an $18 million one-time cash tax savings by structuring the USG&E acquisition such that it can utilize NOLs from the Verengo acquisition. We are cautiously optimistic about the recurring synergies, as it reflects ~37% of USG&E's 12-month EBITDA ending March 31, 2017, and over 50% of its base SG&A costs.
Organic customer growth picks up. We believe the acquisition of USG&E may have driven organic customer growth materially higher to 64,000 RCEs. Looking forward, Crius is integrating its products into Comcast's core home products suite and plans to restart Comcast customer enrollments in early 2018, which could help sustain organic growth.
Weak quarter, but not as bad as some feared. Crius Energy reported Q3/17 Adjusted EBITDA of $18 million, falling short of our estimate of $26 million and consensus of $21 million (range of $19-26 million). Similar to its peers, the weak results were driven by a very mild summer, as the cooling degree days in Q3/17 were 24% lower than Q3/16, leading to a 12% reduction in electricity consumption. Management indicated that the weather in Q4 has been relatively normal to date.
Rooftop solar business remains challenged. During the quarter, 30 rooftop solar facilities were installed (0.2 MW), a modest decline from 35 installations (0.2 MW) in Q2/17. The gross sales of 179 solar rooftop units (1.4 MW) also reflects a reduction from 258 units (1.8 MW) in Q2/17. Management expects EBITDA contribution in Q4/17 to be negative, before turning positive in 2018.
Revising estimates and rolling out 2019 forecast. We have reduced our 2017 and 2018 Adjusted EBITDA forecast to $66 and $106 million, respectively (from $77 million and $109 million, respectively). Our revised 2017 EBITDA estimate mainly reflects the weak Q3/17 results, and our 2018 forecast reflects higher marketing expense. We have rolled out our 2019 Adjusted EBITDA forecast of $110 million, reflecting modest customer growth, incremental synergies, partially offset by lower margins.