Expresses Concerns Regarding Crius’ Underperformance and Poor Capital Allocation Decisions under Current Leadership
Announces Nomination of Lalit Aggarwal, Anu Dhir, Ali Hedayat and James C. Pappas at Upcoming 2018 Annual Meeting
NOT FOR DISTRIBUTION TO UNITED STATES NEWSWIRE SERVICES OR FOR DISSEMINATION IN THE UNITED STATES
HOUSTON, March 26, 2018 (GLOBE NEWSWIRE) -- JCP Investment Management, LLC (together with its affiliates, “JCP”), a significant unitholder of Crius Energy Trust (“Crius” or the “Trust”) (TSX:KWH.UN), today issued a letter to the unitholders of Crius. In the letter, JCP expressed its concerns regarding the Trust’s underperformance and the poor capital allocation decisions under the current leadership team and informed unitholders that it intends to nominate four highly-qualified candidates, Lalit Aggarwal, Anu Dhir, Ali Hedayat and James C. Pappas, for election to the Board of Directors of the Trust’s administrator at the Trust’s upcoming 2018 Annual General Meeting. The full text of the letter follows:
March 26, 2018
Dear Fellow Crius Unitholders,
JCP Investment Management, LLC (together with its affiliates, “JCP,” “we” or “us”) is a significant unitholder of Crius Energy Trust (“Crius” or the “Trust”) with ownership of 1,173,200 units, making us one of the Trust’s top 5 largest unitholders.
We believe Crius’ units are significantly undervalued and do not reflect the true earnings power of the Trust’s 1.4 million customers. We have repeatedly attempted to privately reach an amicable resolution with Crius to address our concerns. Despite our sincere efforts to engage constructively with the Trust, we have been disappointed by the lack of urgency exhibited by the Board of Directors of the Trust’s administrator, Crius Energy Administrator Inc. (the “Board”), to adequately address the issues we have identified, including poor unitholder returns, poor capital allocation decisions and USD$100 million in debt being added to the balance sheet. Accordingly, we were left with little choice but to propose a competing slate of director candidates for election to the Board at the Trust’s upcoming 2018 Annual General Meeting.
Abysmal Unitholder Returns
Crius went public at CAD$10.00 in November 2012 and today, nearly five and a half years later, the units are trading at CAD$7.35.1
If you had invested in Crius at the time of its IPO at CAD$10.00 per unit, excluding dividends you would have experienced a negative 26% return as of March 23, 2018.2 When including dividends reinvested in the units, over that same time period your return would still have been only 5.2% compounded.
Meanwhile, over the same time period, the S&P/TSX Composite Index appreciated by 26%, yielding a return of approximately 7.5% compounded including reinvested dividends.
We believe unitholder returns since the IPO have been abysmal. If elected, implementing a strategic plan to create meaningful value for all unitholders will be our nominees’ top priority.
Poor Capital Allocation
The Trust has an extremely poor track record of managing cash flow and cash levels. In February 2014, barely a year after going public, the Trust cut its dividend by 30% (and did not increase it again until 2016). The unit price dropped to CAD$2.26, and investors in the IPO at CAD$10.00 roughly a year earlier experienced a nearly 80% loss in value of their units.
We believe that if the Board and management team had worked diligently together to develop a proper financial model which took into account operational headwinds and established an appropriate dividend from the start and had ample cash reserves for a rainy day, this would never have happened.
Now in 2018, after a questionable acquisition of U.S. Gas & Electric, Inc. (“USG&E”) in 2017, the Board has added USD$100 million in debt to the Trust’s balance sheet and has announced that it will stop increasing distributions and is comfortable nearlydoubling the amount of debt to 2x leverage.
Lack of USG&E Acquisition Synergies
In May 2017, the Trust announced the acquisition of USG&E for USD$172.5 million, the largest transaction in the Trust’s history, which closed in July 2017.
In connection with the acquisition, Crius implied that the Trust would achieve a synergy run-rate of USD$100 million Adjusted EBITDA.3 However, based on the Trust’s recent release on March 8th, it does not appear that the Trust will achieve such a run-rate in the near term, if it will ever be realized at all. This leads us to believe that the Board and management team either were wrong about the potential synergies or did not understand the business being acquired. We believe the apparent lack of planning and execution is unacceptable.
As indicated in the table below, the number of outstanding units increased by approximately 42% in order to complete the acquisition of USG&E. Assuming all things being equal, it would take a proportionate increase in EBITDA to make the acquisition accretive. Clearly, this has not been the case.
| | | | | |
| (USD$ in Millions) | 2016 | | 2017 | |
| Revenue | 743 | | 875 | |
| Gross Profits | 159 | | 184 | |
| Margin | 21 | % | 21 | % |
| | | |
| G&A | 76 | | 102 | |
| Increase in G&A | - | | 34 | % |
| | | |
| Adjusted EBITDA | 61 | | 65 | |
| Increase in EBITDA | - | | 7 | % |
| | | |
| Shares Outstanding | 40 | | 57 | |
| Increase in Shares | - | | 42 | % |
| | | |
| Source: Sedar.com |
| |
We believe it is essential for companies to make capital allocation decisions by analyzing the cost of the investment relative to what the projected returns will be on a distributable cash flow per unit basis. Based on the USG&E acquisition and the expenditures on solar described below, we are concerned that the Board does not have the appropriate processes in place to make prudent capital allocation decisions and hold management accountable.
With respect to solar, Crius has continuously spent cash to try and make its solar investment work. In 2017 alone, solar was a negative USD$4.6 million in Adjusted EBITDA.
Too Much Debt - USD$100 million
Related to our views about the poor returns and capital allocation decisions, we believe that unitholders would be better served if the Trust used its cash flow to de-lever the business while focusing on existing operations and cost savings.
In 2016, the Trust had no debt. Now, the Trust has nearly USD$100 million of debt and has stopped increasing the distributions to unitholders. Essentially, the Board and management team have increased the risk of our investment and decreased the overall return.
While in many other operating businesses 2x debt to EBITDA may be manageable, we do not believe it is prudent for the Trust due to the nature of Crius’ business.
We are concerned that the incumbent leadership team has created a situation where, due to the new debt load, the Trust could have cash flow issues…again. We fear that the current leverage of the Trust will become unsustainable and Crius should focus on paying down its debt.
Our Highly-Qualified Director Nominees
We believe that the status quo has proven untenable, which is why we intend to formally nominate four independent, highly-qualified candidates, Lalit Aggarwal, Anu Dhir, Ali Hedayat and James C. Pappas, for election at the upcoming 2018 Annual General Meeting. We believe these individuals possess the financial, operational and strategic acumen the Board urgently needs to enhance unitholder value. Our nominees are:
Lalit Aggarwal is President of Manor Park Holdings, a diversified business with operations in real estate, asset management, diagnostic healthcare and power generation. Previously, Mr. Aggarwal invested for H.I.G. European Capital Partners, Soros Fund Management, and Goldman Sachs. He is a past fellow of the C.D. Howe Institute and a former Director of Bridgepoint Health. Mr. Aggarwal holds degrees from the University of Oxford and the University of Pennsylvania. He is a current Director of the SickKids Foundation and the Centre for the Commercialization of Regenerative Medicine (CCRM).
Anu Dhir is a co-founder and executive of ZinQ Mining and is also the managing director of Miniqs Limited, a private group primarily interested in developing resource projects. Prior to these roles, Ms. Dhir served as Vice President, Corporate Development and Company Secretary at Katanga Mining Limited. Ms. Dhir is a non-executive director of Golden Star Resources Limited, Taseko Mines Limited and Trillium Health Partners. Ms. Dhir holds a BA from the University of Toronto and a law degree (Juris Doctor) from Quinnipiac University. She is currently enrolled in the General Management Program (GMP) at Harvard Business School and expects to complete her studies by April 2018. Her qualifications to serve on the Board include over 18 years of experience in the resource sector with publicly listed companies with an emphasis on corporate governance and corporate development in North America, Europe, Africa and Latin American markets.
Ali Hedayat is the founder and Managing Director of Maryana Capital in Toronto, Canada. He previously cofounded Edoma Capital in London, was a Partner at Indus Capital in London, and worked for the Goldman Sachs Group in New York and London as a Managing Director and Co-head of Americas Principal Strategies. Mr. Hedayat currently serves as a director for Restaurant Brands International Inc. and US Geothermal Inc., and has previously served as a director for companies in the cable, pharmaceutical and media industries. Mr. Hedayat holds a Bachelor of Commerce degree, with honours, earning a double major in Finance and Economics from McGill University. His qualifications to serve on the Board include over 20 years of investment banking experience with an emphasis in power, utilities, and distressed debt and equity in European, North American and Latin American markets.
James C. Pappas is the Managing Member of JCP Investment Management, LLC, an investment firm. He previously worked for Goldman Sachs, a multinational investment banking and securities firm, in its Investment Banking / Leveraged Finance Division, where he advised private equity groups and corporations on appropriate leveraged buyout, recapitalization and refinancing alternatives. Prior to Goldman Sachs, Mr. Pappas worked at Banc of America Securities, the investment banking arm of Bank of America, where he focused on Consumer and Retail Investment Banking, providing advice on a wide range of transactions including mergers and acquisitions, financings, restructurings and buy-side engagements. Mr. Pappas currently serves as a director of three public companies, including Jamba, Inc. (a leading restaurant retailer of “better-for-you” specialty beverage and food offerings), Tandy Leather Factory, Inc. (a retailer and wholesale distributor of a broad line of leather and related products) and U.S. Geothermal Inc. (a leading geothermal power company). He previously served as a director of former public companies The Pantry, Inc. and Morgan’s Foods, Inc. We believe Mr. Pappas’ financial expertise and significant public company board experience will make him a valuable addition to the Board.
We believe that unitholders will benefit from the fresh perspectives that Messrs. Aggarwal, Hedayat and Pappas and Ms. Dhir will bring to the boardroom and we look forward to providing unitholders with an alternative to the status quo at the upcoming 2018 Annual General Meeting.
Sincerely,
James C. Pappas
Managing Member
JCP Investment Management, LLC
About JCP Investment Management:
JCP Investment Management, LLC is an investment firm headquartered in Houston, TX that engages in value-based investing across the capital structure. JCP follows an opportunistic approach to investing across different equity, credit and distressed securities largely in North America.
Investor Contact:
James C. Pappas
JCP Investment Management, LLC
(713) 333-5540
Disclaimers
JCP has not sought or obtained consent from any third party to the use herein of previously published information. Any such information should not be viewed as indicating the support of such third party for the views expressed herein.
Except for the historical information contained herein, the matters addressed in these materials are forward-looking statements that involve certain risks and uncertainties. You should be aware that actual results could differ materially from those contained in the forward-looking statements. JCP does not assume any obligation to update the forward-looking information.
Information in Support of Public Broadcast Solicitation
JCP is relying on the exemption under section 9.2(4) of National Instrument 51-102 –Continuous Disclosure Obligations to make this public broadcast solicitation. The following information is provided in accordance with securities laws applicable to public broadcast solicitations.
This solicitation is being made by JCP, and not by or on behalf of the management of Crius Energy Administrator Inc. and Crius Energy Trust (collectively, “Crius”). The registered address of Crius is Suite 3400, One First Canadian Place, P.O. Box 130, Toronto, Ontario, M5X 1A4. The mailing address of Crius is 535 Connecticut Avenue, 6th Floor, Norwalk, CT, 06854.
JCP has filed an information circular containing the information required by Form 51-102F5 – Information Circular in respect of its proposed nominees (the “JCP Nominees”), which is available under Crius’ profile on SEDAR at www.sedar.com.
Proxies for the Crius 2018 unitholders' meeting (the “Meeting”) may be solicited by mail, telephone, email or other electronic means as well as by newspaper or other media advertising, and in person by managers, directors, officers and employees of JCP, who will not be specifically remunerated therefor. In addition, JCP may solicit proxies in reliance upon the public broadcast exemption to the solicitation requirements under applicable Canadian securities laws, conveyed by way of public broadcast, including through press releases, speeches or publications, and by any other manner permitted under applicable Canadian laws.
JCP has entered into an agreement with Saratoga Proxy Consulting LLC (“Saratoga”) pursuant to which Saratoga has agreed that it will act as JCP’s proxy agent should JCP commence a formal solicitation of forms of proxy. Pursuant to this agreement, Saratoga will receive a fee not to exceed US$72,500 (a portion of which being a success fee), plus an additional fee of US$4.00 for each call to or from Unitholders. All costs incurred for the solicitation will be borne by JCP.
JCP is not requesting that Crius unitholders submit a proxy at this time. Once JCP has commenced a formal solicitation of proxies, a registered holder of units of Crius that gives a proxy may revoke it: (a) by completing and signing a valid proxy bearing a later date and returning it in accordance with the instructions contained in the form of proxy to be provided by JCP, or as otherwise provided in the final proxy circular, once made available to unitholders; (b) by depositing an instrument in writing executed by the unitholder or by the unitholder's attorney authorized in writing, as the case may be: (i) at the registered office of Crius at any time up to and including the last business day preceding the day the Meeting or any adjournment or postponement of the Meeting is to be held, or (ii) with the chairman of the Meeting prior to its commencement on the day of the Meeting or any adjournment or postponement of the Meeting; or (c) in any other manner permitted by law. A non-registered holder of units of Crius will be entitled to revoke a form of proxy or voting instruction form given to an intermediary at any time by written notice to the intermediary in accordance with the instructions given to the non-registered holder by its intermediary.
To the knowledge of JCP, neither JCP nor any of its managers, directors or officers, or any associates or affiliates of the foregoing, nor any of the JCP Nominees, or their respective associates or affiliates, has: (i) any material interest, direct or indirect, in any transaction since the beginning of Crius' most recently completed financial year or in any proposed transaction that has materially affected or would materially affect Crius or any of its subsidiaries; or (ii) any material interest, direct or indirect, by way of beneficial ownership of securities or otherwise, in any matter currently known to be acted upon at the Meeting, other than the election of directors of Crius Energy Administrator Inc.
1 Closing price as of March 23, 2018.
2 Calculated from November 13, 2012 to March 23, 2018.
3 See press release issued by Crius on May 30, 2017.
There are some real and valid concerns in this letter.
Investors should do their due diligence.