ENERCARE INC. TORONTO, ONTARIO--(Marketwired - Mar 3, 2015) - EnerCare Inc. ("EnerCare") (TSX:ECI), one of Canada's leading providers of energy conservation products and services, today reported its financial results for the fourth quarter and year ended December 31, 2014.
F2014 Operational Highlights
- Strong performance in the Home Services segment driven by lower rentals attrition, a rental rate increase and HVAC growth
- Sub-metering benefits from double-digit unit growth and the achievement of operational efficiencies, which has led to a 63% increase in EBITDA
- First phase of integration of newly acquired home and small commercial services business successfully completed - reports robust fourth quarter sales from the acquired business
Q4 and F2014 Financial Highlights
Period ended December 31, 2014 versus period ended December 31, 2013
(in thousands of Canadian dollars except per unit amounts)1
| 3 months ended December 31, | Year ended December 31, | ||||||||||||||||
| 2014 | 2013 |
YoY Change | 2014 | 2013 | YoY Change | ||||||||||||
| Total revenue | $126.0 | $75.6 | 67 | % | $362.8 | $299.1 | 21 | % | |||||||||
| EBITDA2 | $ 45.6 | $38.4 | 19 | % | $164.7 | $152.5 | 8 | % | |||||||||
| Acquisition Adjusted EBITDA2 | $ 52.0 | $41.8 | 24 | % | $182.7 | $168.6 | 8 | % | |||||||||
| Net earnings | $ 5.7 | $ 4.8 | 18 | % | $ 22.3 | $ 8.8 | 153 | % | |||||||||
| Payout Ratio - Maintenance2 | 53 | % | 51 | % | 1,000bps | 51 | % | 49 | % | 200bps | |||||||
| Rentals attrition | 11,000 | 12,000 | (8 | %) | 42,000 | 49,000 | (14 | %) | |||||||||
| Contracted sub-metering units | 5,000 | 5,000 | 0 | % | 19,000 | 10,000 | 90 | % | |||||||||
"2014 was a fantastic year for us," said John Macdonald, President and CEO. "Not only did we meet our strategic priorities, we completed a transformational acquisition, namely Direct Energy's home and small commercial services business in Ontario and finished the year with record performance. Our focus on creating shareholder value is paying off. Whether you look at our total shareholder return over a one, two, three or four-year time horizon, we have outperformed the S&P/TSX Composite Index. In 2014 our total return for 2014 was 40 percentage points above the index."
Macdonald continued, "Reflecting last year's record cash flow, this morning we announced a 15.9% increase in our annual dividend, our sixth increase since 2011 and our largest single increase ever. In total, we have grown the dividend by more than 29% over the past four years."
Recent Developments
Dividend Increase
EnerCare announced an increase in its monthly dividend to $0.07 per Share, an increase of 15.9%, effective in respect of the dividend payable to shareholders of record on the applicable date in March 2015, which dividend will be paid in April 2015. The increase reflects EnerCare's strong overall performance and our confidence in the future of the Home Services and sub-metering businesses.
Acquisition of Water Heaters from Cobourg Network Inc.
On March 2, 2015, EnerCare, through a subsidiary of EnerCare Solutions, acquired the rental portfolio of Cobourg Network Inc. ("CNI"), comprised of approximately 1,380 electric water heaters, for cash consideration of $890, subject to post-closing adjustments. In connection with the acquisition, CNI and EnerCare entered into a transitional agreement pursuant to which CNI provides transitional support and billing and collection services on behalf of EnerCare.
EnerCare Included in S&P/TSX Composite Index
On December 15, 2014, EnerCare announced that S&P Dow Jones Canadian Index Services had added EnerCare to the S&P/TSX Composite Index effective after the close of trading on Friday, December 19, 2014.
EnerCare was also added to the S&P/TSX Composite Dividend Index and the S&P/TSX Composite High Dividend Index. The S&P/TSX Composite Index is the headline index in Canada and the premier indicator of performance for Canadian equity markets. It includes the largest companies on the TSX as measured by market capitalization and liquidity.
Results of Operations
Earnings Statement
| (000's) | Home Services | Sub-Metering | Corporate | 2014 Total | Home Services | Sub-Metering | Corporate |
2013 Total | |
| Revenues: | |||||||||
| Contracted revenue | $231,454 | $119,132 | $ - | $350,586 | $189,388 | $108,597 | $ - | $297,985 | |
| Sales and other services | 10,880 | 481 | - | 11,361 | 50 | 741 | - | 791 | |
| Investment Income | 242 | 17 | 547 | 806 | 352 | - | 21 | 373 | |
| Total revenue | $242,576 | $119,630 | $ 547 | $362,753 | $189,790 | $109,338 | $ 21 | $299,149 | |
| Expenses: | |||||||||
| Cost of goods sold: | |||||||||
| Commodity | - | 97,673 | - | 97,673 | - | 90,671 | - | 90,671 | |
| Maintenance & servicing costs | 10,600 | - | - | 10,600 | - | - | - | - | |
| Sales and other services | 7,743 | 378 | - | 8,121 | 22 | 556 | - | 578 | |
| Total cost of goods sold | 18,343 | 98,051 | - | 116,394 | 22 | 91,227 | - | 91,249 | |
| SG&A expenses | 39,604 | 13,877 | 17,497 | 70,978 | 15,189 | 13,387 | 14,818 | 43,394 | |
| Amortization expense | 97,790 | 4,800 | 2,291 | 104,881 | 94,100 | 3,993 | 1,627 | 99,720 | |
| Loss on disposal | 9,859 | - | - | 9,859 | 11,640 | - | - | 11,640 | |
| Interest expense: | |||||||||
| Interest expense payable in cash | 27,937 | 25,850 | |||||||
| Make-whole payment on early redemption of debt | - | 13,754 | |||||||
| Non-cash interest expense | 954 | 5,369 | |||||||
| Total interest expense | 28,891 | 44,973 | |||||||
| Total expenses | 331,003 | 290,976 | |||||||
| Other income | 408 | - | - | 408 | 4,447 | - | - | 4,447 | |
| Earnings before income taxes | 32,158 | 12,620 | |||||||
| Current tax expense | (27,287) | (21,852) | |||||||
| Deferred tax recovery | 17,405 | 18,050 | |||||||
| Net earnings | $ 22,276 | $ 8,818 | |||||||
| EBITDA | $174,528 | $ 7,685 | $(17,497) | $164,716 | $162,587 | $4,724 | $(14,818) | $152,493 | |
| Adjusted EBITDA | $184,795 | $ 7,685 | $(17,497) | $174,983 | $178,674 | $4,724 | $(14,818) | $168,580 | |
| Acquisition Adjusted EBITDA | $192,517 | $ 7,685 | $(17,497) | $182,705 | $178,674 | $4,724 | $(14,818) | $168,580 | |
Revenues
Total revenues of $362,753 for 2014 increased by $63,604 or 21% compared to 2013.
Home Services (the business division that provides water heater, furnaces, air conditioners and other HVAC rental products and, as of October 20, 2014, also provides protection plans, HVAC sales and related services) revenues, excluding investment income, increased by $52,896 to $242,334 compared to 2013, primarily as a result of $46,065 of additional revenue added through the acquisition of Direct Energy's Marketing Limited's ("DE") home and small commercial services business in Ontario ("OHCS") ("the Acquisition"). The remaining $6,831 increase was primarily due to a rental rate increase implemented in January 2014, improved billing completeness and changes in asset mix, partially offset by fewer installed assets. Contracted revenue in Home Services represents revenue generated by the rentals portfolio and protection plan contracts, while sales and other services revenue mainly pertains to one-time sales and installations of residential furnaces, boilers and air conditioners as well as duct cleaning and other services.
Sub-metering revenues, excluding investment income, in 2014 were $119,613, an increase of $10,275 or 9% over the comparable period in 2013, primarily as a result of increased commodity charges and billable units. Sub-metering revenue includes total pass through energy charges of $97,673 in 2014, an increase of $7,002 over the same period in 2013. Sales and other services revenue for sub-metering are earned from the sale and installation of water conservation products in apartments and condominiums.
Investment income was $806 in 2014, an increase of $433 compared to 2013. The change in investment income was primarily attributable to $531 of interest earned from the proceeds of the issuance of the subscription receipts ($319,000 of subscription receipts issued by EnerCare) in connection with the Acquisition.
Cost of Goods Sold
Total cost of goods sold were $116,394 in 2014, an increase of $25,145 or 28% compared to 2013.
Home Services cost of goods sold increased by $18,321 compared to 2013, primarily due to $18,266 of expenses resulting from the increased scope of the business following the Acquisition. Maintenance and servicing costs in Home Services primarily consist of protection plan expenses and servicing costs related to the rental portfolio, while sales and other services expenses mainly pertain to one-time sales and installations of residential furnaces, boilers, air conditioners and small commercial products as well as duct and other cleaning services.
Sub-metering cost of goods sold of $98,051 increased by $6,824 or 7%, as a result of an increase of $7,002 of pass through energy charges over the same period in 2013. Sales and other services expenses for sub-metering relate to the sale and installation of water conservation products in apartments and condominiums.
Selling, General & Administrative Expenses
Total SG&A expenses were $70,978 in 2014, an increase of $27,584 or 64% compared to 2013.
Home Services and corporate expenses of $57,101 increased by $27,094 compared to 2013, primarily due to $27,801 of additional expenses resulting from the increased scope of the business following the Acquisition. The $27,094 increase over 2013 was primarily as a result of approximately $9,900 in wages and benefits, $7,100 in professional fees, $7,200 of billing and servicing costs, $2,000 in office expenses, $1,400 in selling expenses and $160 in bad debts, partially offset by reductions of $660 in claims expenses. During 2014, Home Services and corporate SG&A expenses included $7,722 of costs associated with the Acquisition, of which approximately $6,770 were professional fees, $620 selling expenses, $210 office expenses and $120 wages and benefits.
Sub-metering SG&A expenses were $13,877 or $490 greater in 2014 compared to 2013, primarily as a result of increased wages and benefits of approximately $2,250 and billing and servicing costs of $670, partially offset by reductions in bad debts of $2,100, selling expenses of $190 and professional fees of $140.
Amortization Expense
Amortization expense increased by $5,161 or 5% in 2014, primarily due to additional Acquisition related amortization from capital and intangible assets of $1,032 and $4,015, respectively. The remaining increase of $114 over 2013 was primarily from an increasing capital asset base from asset mix changes in the rentals portfolio and increased sub-metering capital investments, which are amortized over a shorter life than those of the Home Services business.
Loss on Disposal of Equipment
EnerCare reported a loss on disposal of equipment of $9,859 in 2014, a reduction of $1,781 or 15%, over the same period in 2013. The loss on disposal amount is influenced by the number of assets retired, proceeds on disposal of equipment, changes in the retirement asset mix and the age of the assets retired.
Interest Expense
| (000s) | 2014 | 2013 | |
| Interest expense payable in cash | $24,065 | $25,784 | |
| Interest paid on subscription receipts | 3,097 | - | |
| Equity bridge financing fees | 775 | - | |
| Make-whole payment on early redemption of debt | - | 13,754 | |
| Non-cash items: | |||
| Notional interest on employee benefit plans, net | 254 | - | |
| Amortization of OCI and financing costs | 700 | 5,435 | |
| Interest expense | $28,891 | $44,973 | |
Interest expense payable in cash decreased by $1,719 to $24,065 in 2014 compared to 2013. The decrease is primarily related to the conversion of convertible debentures to shares and reduction in interest rates with the early redemption in 2013 of the of the $270,000 6.75% Series 2009-2 Senior Notes of EnerCare Solutions, which were redeemed on March 6, 2013 ("2009-2 Notes") associated with the issuance of $225,000 of 4.60% Series 2013-1 Senior Unsecured Notes of EnerCare Solutions, which mature on February 3, 2020 ("2013 Notes"). As part of the Acquisition, Subscription Receipts were issued and subsequently converted to Shares upon the closing of the Acquisition on October 20, 2014. While the Subscription Receipts were outstanding, they were classified as a financial liability, resulting in interest expense of $3,097, which was equivalent to the dividend payments on such Subscription Receipts had they been Shares. Equity bridge financing fees of $775 were incurred as part of the Acquisition. The make-whole payment of $13,754 was incurred upon the early redemption of the 2009-2 Notes and the drawdown of the $60,000 single draw, variable rate, interest only, open loan with a maturity date of January 28, 2016. Notional interest of $254 in 2014 relates to the employee benefits plans acquired as part of the Acquisition. Amortization of other comprehensive income ("OCI") and financing costs for 2013 include the previously unamortized costs associated with the 2009-2 Notes and $4,023 of accumulated OCI which was fully reclassified to earnings in the first quarter of 2013.
Other Income
During 2014, EnerCare realized a settlement of $408 from DE on account of the reclassification of certain water heaters under the Co-ownership Agreement to EnerCare's owned portfolio, originally associated with the Toronto Hydro Energy Services Inc. portfolio acquisition. During 2013, EnerCare realized settlements from DE of $4,447, including income of approximately $2,769 on account of water heater installation costs, billing and collection deficiencies and third-party claims, and $1,678 on account of billing and collection in respect of water heater buyouts.
Income Taxes
EnerCare reported a current tax expense of $27,287 in 2014, an increase of $5,435 over 2013, primarily as a result of higher taxable income. The deferred income tax recovery of $17,405 for 2014 was $645 lower than the deferred tax recoveries of $18,050 recorded in 2013, primarily as a result of temporary difference reversals in the Home Services and sub-metering businesses, including the impact of the 2013 make-whole payment.
Net Earnings
Net earnings in 2014 were $22,276 or $13,458 higher than in 2013, as previously described.
EBITDA, Adjusted EBITDA and Acquisition Adjusted EBITDA
The following table summarizes comparative quarterly results for the last eight quarters, and reconciles net earnings, an IFRS measure, to EBITDA, Adjusted EBITDA and Acquisition Adjusted EBITDA.
| (000s) | Q4/14 | Q3/14 | Q2/14 | Q1/14 | Q4/13 | Q3/13 | Q2/13 | Q1/13 | |||||||||
| Net earnings/(loss) | $ 5,672 | $ 2,133 | $ 7,457 | $ 7,014 | $ 4,793 | $ 6,931 | $ 7,482 | $(10,388 | ) | ||||||||
| Deferred tax (recovery) | (3,222 | ) | (6,852 | ) | (3,810 | ) | (3,521 | ) | (3,552 | ) | (3,134 | ) | (3,640 | ) | (7,724 | ) | |
| Current tax expense | 5,949 | 8,924 | 6,335 | 6,079 | 6,148 | 5,525 | 4,591 | 5,588 | |||||||||
| Amortization expense | 30,319 | 25,186 | 24,870 | 24,506 | 25,792 | 25,228 | 24,344 | 24,356 | |||||||||
| Interest expense | 7,129 | 9,827 | 5,963 | 5,972 | 6,002 | 6,022 | 5,976 | 26,973 | |||||||||
| Other (income) | - | - | - | (408 | ) | (769 | ) | (2,000 | ) | (1,678 | ) | - | |||||
| Investment (income) | (211 | ) | (478 | ) | (80 | ) | (37 | ) | (35 | ) | (21 | ) | (49 | ) | (268 | ) | |
| EBITDA | 45,636 | 38,740 | 40,735 | 39,605 | 38,379 | 38,551 | 37,026 | 38,537 | |||||||||
| Add: Loss on disposal of equipment | 2,180 | 2,304 | 2,371 | 3,004 | 2,666 | 2,633 | 3,449 | 2,892 | |||||||||
| Add: Other income | - | - | - | 408 | 769 | 2,000 | 1,678 | - | |||||||||
| Adjusted EBITDA(1) | 47,816 | 41,044 | 43,106 | 43,017 | 41,814 | 43,184 | 42,153 | 41,429 | |||||||||
| Add: Acquisition SG&A | 4,138 | 2,882 | 702 | - | - | - | - | - | |||||||||
| Acquisition Adjusted EBITDA | $51,954 | $43,926 | $43,808 | $43,017 | $41,814 | $43,184 | $42,153 | $41,429 |
- Historical Adjusted EBITDA has been conformed to the current presentation which includes other income and expense.
Outlook
The forward-looking statements contained in this section are not historical facts but, rather, reflect EnerCare's current expectations regarding future results or events and are based on information currently available to management.
EnerCare continues to experience improved results in Home Services through improved customer retention and increased average monthly rental rates as a result of our rental HVAC strategy. We continue to believe that the factors contributing to the decline in attrition over the last five years, including improved customer awareness and Bill 55, will create a favourable environment for further improvement in customer retention. EnerCare is pleased that Bill 55 will come in effect on April 1, 2015. Although it continues to assess the operational impact of the new bill, it believes that any operational changes will be implemented before the deadline.
Our key priorities and initiatives for 2014 in the rentals business were to grow revenue in excess of our annual rate increases, increase the number of unit additions, continue to improve attrition and increase Adjusted EBITDA, and successfully integrate the OHCS business. We are pleased to report that we have exceeded our targets with respect to these objectives.
The purchase of OHCS has been transformative for EnerCare. The Acquisition has allowed EnerCare to have direct access to its customers, control over all aspects of its operations and larger financial scale. Our priority for the first twelve months remains the reunification of the two businesses, which has been successful to-date.
Our re-branding initiatives commenced in early 2015 with co-branding on customer invoices, sales literature and advertising. Re-branding initiatives will continue throughout 2015.
The Transition Services Agreement regarding the de-coupling from DE's information technology platform is progressing well. The first phase of de-coupling is scheduled to be completed during the first half of 2015.
Going forward, EnerCare expects that the revenue and cost of goods sold will be impacted as a result of the costs incurred for protection plans sold by DE prior to the Acquisition. EnerCare estimates that the results of operations were negatively impacted by $1.500 in 2014 and will be further impacted in 2015 by an additional $1.500. Similar impacts are not expected to impact 2016.
The exchange rate of the U.S. dollar to the Canadian dollar will have an impact to our 2015 capital spend and our cost of goods sold as a result of increased equipment and part costs which are sourced from the United States. However, most of the increased costs can be passed through to the customer.
Home Services has seasonal impacts on its revenue recognition and sales activities. Revenue, costs of services and Adjusted EBITDA are expected to primarily increase during the cooling and heating season, which typically fall in the third and fourth quarter of the year.
In January 2015, EnerCare increased its weighted average rental rate by 3%.
In respect to Sub-metering, our priorities in 2014 were to grow the business by increasing new contract sales, improve productivity and operational efficiencies and enhance our customer value proposition through outstanding customer service. We are pleased to report that we have met or exceeded all of these targets. In particular, we continue to make improvements in productivity and operational efficiencies through our LEAN program. In the fourth quarter of 2014, the revenue assurance program, which was initiated in the third quarter, yielded improvements. We anticipate that this will contribute more than $2M of incremental margin in 2015.
EnerCare estimates that it will pay approximately $10,000 to $14,000 in current taxes for the fiscal year ending December 31, 2015. This estimate is based on taxable income comparable to current levels, shielded by unrestricted tax losses and a corporate tax rate of approximately 26.5%. Current taxes for 2015 are lower than anticipated due to an $11,000-$15,000 one-year timing issue of when EnerCare will pay taxes on the income earned in EHCS LP. EnerCare's current tax for 2014 was $27,287. Taxable income is principally impacted by changes in revenue, operating expenses, potential acquisitions or divestitures, appropriate tax planning and capital expenditures through the capital cost allowance deduction.
EnerCare announced an increase in its monthly dividend to $0.07 per Share, an increase of 15.9%, effective in respect of the dividend payable to shareholders of record on the applicable date in March 2015, which dividend will be paid in April 2015. The increase reflects EnerCare's strong overall performance and our confidence in the future of the Home Services and sub-metering businesses.
EnerCare has set its annual general meeting of shareholders for April 30, 2015. Jim Pantelidis, Chair of the Board, and management will provide an update to shareholders on EnerCare's achievements in 2014 and strategy.
Financial Statements and Management's Discussion & Analysis
EnerCare's financial statements and management's discussion and analysis for the fourth quarter and year ended December 31, 2014 are available on SEDAR at www.sedar.com or on EnerCare's investor relations website at www.enercareinc.com.
Conference Call and Webcast
Management will host a conference call and live audio webcast to discuss EnerCare's financial results for the fourth quarter and year ended December 31, 2014 this morning, at 10:00 a.m. John Macdonald, President and CEO, and Evelyn Sutherland, CFO, will review EnerCare's results and discuss the quarter's operating highlights. Details of the call and webcast are as follows:
| Date: | Tuesday, March 3, 2015 |
| Time: | 10:00 a.m. - 11:00 a.m. ET |
| By telephone: | 647.788.4922 or 1.877.223.4471 |
| Please allow 10 minutes to be connected to the conference call. | |
| Webcast: | http://www.gowebcasting.com/6188 |
| Note: this is a listen-only audio webcast. Media Player or Real Player is required to listen to the broadcast. | |
| Replay: | An archived audio webcast will be available at: www.enercareinc.com for one year following the original broadcast. |
| Note: | A slide presentation intended for simultaneous viewing with the conference call will be available the morning of Tuesday, March 3, 2015 at: www.enercareinc.com. |
To automatically receive EnerCare's news releases electronically, visit the Investor Relations section of EnerCare's website at http://investor.shareholder.com/enercare/alerts.cfm? and subscribe to email alerts.
About EnerCare Inc.
EnerCare is one of Canada's largest home and commercial services companies with more than 900 employees. EnerCare provides water heaters, furnaces, air conditioners and other HVAC rental products, protection plans and related services to approximately 1.1 million customers. EnerCare also owns EnerCare Connections Inc., a leading sub-meter provider, with metering contracts for condominium and apartment suites in Ontario, Alberta and elsewhere in Canada.
Additional information regarding EnerCare is available on SEDAR at www.sedar.com or through EnerCare's investor relations website at www.enercareinc.com or www.enercare.ca.
- Unless otherwise noted, amounts are reported in thousands, except customers, units, shares and per share amounts and percentages. Dollar amounts are expressed in Canadian currency.
- EBITDA, Adjusted EBITDA, Acquisition Adjusted EBITDA, Payout Ratio-Maintenance, are non-IFRS financial measures. Refer to the non-IFRS Financial and Performance measures section in the MD&A.
