Just Energy Group Inc. (JE) Q1 2021 Earnings Call Transcript

Just Energy Group Inc. (NYSE: JE) Q1 2021 earnings call dated Aug. 28, 2020

Corporate Participants:

Michael Cummings — Investor Relations

R. Scott Gahn — Chief Executive Officer

Jim Brown — Chief Financial Officer

Analysts:

Nelson Ng — RBC Capital Markets — Analyst

Mark Jarvi — CIBC Capital Markets — Analyst

Presentation:

Operator

Ladies and gentlemen, thank you for standing by. And welcome to the Just Energy First Quarter Fiscal 2021 Results Call. [Operator Instructions] After the speakers’ presentation, there will be a question-and-answer session. [Operator Instructions] Please be advised that this call may be recorded. [Operator Instructions]

I’d now like to hand the call over to Michael Cummings with Alpha IR Group. Please go ahead.

Michael Cummings — Investor Relations

Thank you, Michelle. Just Energy released results for the first quarter of fiscal year 2021 ended June 30, 2020 before the market opened. If you did not receive the copy of our earnings press release, you may obtain it from the Investor Relations section of our website at investors.justenergy.com.

With me on today’s call are Scott Gahn, President and Chief Executive Officer; and Jim Brown, Chief Financial Officer. This call is being webcast and will be archived in the Investor Relations section of our website. Before I turn the call over to Scott, I would like to remind listeners that certain matters discussed in today’s conference call could constitute forward-looking statements that are subject to known and unknown risks and uncertainties relating to Just Energy’s future financial or business performance, which may be beyond the control of the Company.

Actual results could differ materially from those anticipated in the forward-looking statements. Certain risk factors that may affect results are described in the public disclosure record of Just Energy, which is available on the SEDAR database at www.sedar.com, and is incorporated by reference in this call, including the most recent annual information form of Just Energy and the press release announcing financial results for the first quarter of fiscal year 2021. Additionally, some non-IFRS financial measures will be discussed.

Listeners are encouraged to refer to Just Energy’s latest MD&A for a discussion of these measures. Unless otherwise noted all figures mentioned are in Canadian dollars. I would now like to turn the call over to Scott Gahn. Scott?

R. Scott Gahn — Chief Executive Officer

Thanks, Mike. Before I jump into an update on our Q1 performance, I want to acknowledge that these have been unprecedented and difficult times for many of our valued stakeholders. For all of this, Just Energy’s mentioned — excuse me, Just Energy’s mission remains unchanged, as we continue to provide essential energy services to customers, while ensuring health and safety of all of our customers and employees. I want to thank our entire team for their tireless efforts and dedication to our vision.

Yesterday, we obtained approval from our security holders to execute the recapitalization plan we filed last month and to reconstitute our Board of Directors. This critical milestone is a significant step forward to strengthen and derisk our business, positioning the company for sustainable growth as an independent retailer and industry leader. Most importantly, the recapitalization provides the Company with a solid foundation to support current and future operations. It strengthens our balance sheet and reinforces the long-term viability of Just Energy for our employees, our customers and our vendor and supplier partners.

The implementation of the recapitalization is expected to be completed next month pending regulatory and court approvals. I look forward to working closely with our reconstituted Board as we advance our strategic initiatives and drive sustainable value over the long term for all of our valued stakeholders. Additionally, while the current Board will remain in place until we close the recapitalization, I’m going to offer my gratitude to their service and steady guidance through one of the most critical and challenging times in this Company’s history.

We appreciate our security holders support for our recapitalization plan, and I thank each of them as well. I also want to thank our dedicated employees who stepped up to ensure that through this process, there was no adverse impact on our day-to-day operations.

Turning to our results for the first fiscal quarter of 2021. We began fiscal ’21 with a strong financial and operational performance despite the ongoing challenges brought on by COVID-19, and we are on track to deliver on our guidance. Our organization has gone to great lengths to derisk, strengthened to drive operational efficiencies over the past year. Beginning with our strategic review launched last June and culminating with the approval of the recapitalization yesterday. Through these efforts, we simplified and stabilized our business with a back to basics approach that centers on our core competencies and legacy as a North American energy retailer.

As a result, we are in a stronger position to begin delivering a more predictable and stable performance and financial results. There is more work to be done, but I believe we have the right plan and the right team to execute. I’m confident we can sustain the improvements we’ve made while turning the company back to long-term growth. We saw — we saw the results from our stabilization efforts began to actualize in the past two quarters and we expect to continue to realize the benefits through this fiscal year and beyond, specifically, delivering base EBITDA improvement of 67% and base gross margin improvement of 3% year-over-year.

We continue to focus on improving the profitability of our customer base and targeted expansion of our margins despite challenges in a COVID-19 environment. We stay true to our prudent hedging strategy and taking additional measures to derisk the business as a result of COVID-19. We are also strategically investing in our green initiatives to proactively address market demand for renewables, while staying true to our focus to our commodity business.

However, the harsh realities of operating during a pandemic have impacted our results. We saw a decline in our customer base as the pandemic constrained our ability to sell at full capacity to in-person sales channels and drove our decision to proactively constrained sales and renewals for specific customer categories particularly impacting our commercial business. That said we did benefit from a shift in demand from lower margin commercial customers to higher margin residential customers as a result of stay-at-home orders in most of our markets.

Our expense control and stabilization efforts delivered ongoing cost savings across the board and we remain vigilant in identifying and capturing additional savings identified through our strategic review process and our renewed focus on driving operational efficiencies and simplifying our business. That commitment is exemplified by the actions we took in fiscal year 2020 to exit non-core markets in the UK, Ireland, Japan and Georgia.

We continue to analyze results at the market in more granular levels to ensure all operations are profitable and producing value. As a result of these efforts, we remain poised to deliver an additional CAD40 million of savings this fiscal year, in addition to realizing the full benefit of the CAD60 million we achieved in 2020. In addition, our bad debt expense continues to improve and exemplifies the increasing quality of our customer portfolio. Apart from the recapitalization, we significantly improved liquidity year-over-year, which Jim will discuss in more detail. These improvements coupled with the recapitalization will serve to further stabilize our liquidity position and add to our financial flexibility to ensure we maximize value for our stakeholders.

In total, our stabilization efforts have been critical in laying a strong foundation we need to pivot from sustaining our improved performance and structure to enhancing our growth and value longer term. Driving a bit deeper into our operations, like many businesses we have taken several difficult but necessary steps to ensure the health and safety of our employees, our customers and communities during the COVID-19 pandemic that have affected our ability to sell. We took early actions to suspend our door-to-door and in-store retail selling activity essentially suspending all face-to-face selling. That said as stay-at-home orders are lifted across our core markets, we are turning our attention to areas where we can sell across various channels and reallocating resources as appropriate.

We’ve seen proof that the quality of our customer book is improving despite the impact of COVID-19. For instance, we’ve seen substantial improvement in attrition renewals and no indication of degradation in collections and we believe we have charted a course toward unlocking additional and sustainable value from our embedded book. Notably, our customer renewal rate improved 9 percentage points on a trailing 12 month basis and 3 percentage points this quarter compared to the same quarter last year. This rivals all-time high levels at Just Energy.

We also saw our customer attrition rate improve 3 percentage points during the quarter as compared to the same quarter of last year, although the trailing 12 month attrition rate remains elevated, primarily due to the rectified Texas enrollment issues, we believe we will continue to see the recent improvements in customer attrition through fiscal 2021. We are leveraging our multi-channel sales model and the essential nature of our services to capture sales opportunities, albeit at depressed levels due to COVID-19.

We stayed agile and have been able to shift our resources to focus on customer retention and sales channels and regions open for business to deliver on our financial guidance. We continue to closely monitor the situation and we’re working diligently to reopen the sales channels that were impacted. All the while, we are progressing our initiatives to evaluate customer profitability and focusing on channels, which we believe is at the greatest opportunity for growth will produce quality customers and provide the greatest return on our investment.

The recent surge in COVID-19 cases in Texas, our biggest market has slowed the ramp up of our retail channel. However, our team has done a tremendous job of staying close to in working with our retail and sales vendor partners to provide a safe enrollment experience for our customers and remain poised to ramp up. We preserved our competitive advantage in the retail space and are confident in our ability to re-launch retailers and markets with exceptional speed of execution. Thanks to those strong relationships.

To this point, we pivoted an accelerated growth in our Mid-Atlantic and Northeast markets to combat the sales constraints resulting from the COVID-19 cases that spiked in Texas. We are aggressively sourcing additional retailer relationships, diversify our partner pool. As a result, we believe we will have a head start on the competition, and will be able to get back to faster growth as stay-at-home orders are lifted.

Additionally, we are investing in our digital and telesales channels where the selling approach has been largely unaffected by COVID-19. This includes taking significant steps to enhance our digital capabilities, bring certain digital and telesales functions to in-house, rely less on third parties to generate sales opportunities and building out our digital skill set and toolkit to capture an ever-growing subset of customers, which we have not properly focused on in the past. We believe these actions will shape the core sales competencies of Just Energy’s future and help position the Company to grow our customer book.

As we come out of COVID-19 disruptions, we believe this approach coupled with our dedication to scrutinize each dollar spent, enhanced liquidity position and strict focus on customer profitability will allow us to extract and deliver value to our stakeholders. Looking ahead to the future, the combination of our strategic review process, our dedication to driving operational efficiencies and the stakeholder approved recapitalization plan results in a more focus, stable and financially stronger Just Energy. We’re now properly positioned on the right path for long-term success as a leading North American energy retailer.

As we look ahead to the remainder of fiscal ’21 and beyond, we are committed to sustaining the improvements in our business and progressing to the next stage of our strategic plan. This includes flawlessly executing the basics of our core commodity business; identifying the strategic skills and transforming processes and perfecting them; further ingraining capital rigor into our business; staying committed to rigorously monitoring results and empowering our people to identify and create value, and growing the value of our customer book. Through adherence to these efforts, we will become a stronger business with more consistent and predictable performance.

We recognize that we must continue to grow our business, focus on our key markets and ultimately unlock value for our stakeholders. In closing, we’re off to a solid start for the year. Our business is sound and getting healthier. There are many things that are great about this business, the quality of our customer base is growing, we have a dedicated team of employees and an experienced management team, and we have strong positions in our key markets. When combined with the approved recapitalization and reconsidered Board of Directors, we have the plan and determination to forge ahead as an independent leader in our industry.

With that I’d like to turn it over to Jim Brown, who will provide some details on our financial performance. Jim?

Jim Brown — Chief Financial Officer

Thank you, Scott. Before turning to our financial results, I wanted to echo Scott’s statements regarding the hard work and dedication of our team at Just Energy. We have undertaken significant steps to reinforce — refocus on our organization on core commodity business in North America, while improving our financial health and positioning the company for future growth. I’m proud of the team and I believe we have the right leadership team in place to execute our strategic plans and initiatives.

Turning to our financial performance. First quarter base EBITDA from continuing operations increased 67% to CAD40.5 million compared to the first quarter of 2020. The increase was primarily attributable to higher base gross margin, a decrease in non-commission selling cost and decrease in bad debt. Base gross margin increased 3% to CAD136.3 million compared to the first quarter of 2020. This is due to optimization of our weather hedging costs, higher JustGreen margins and a favorable foreign exchange rate, partially offset by declining — decline in the customer base.

At a more granular level, our consumer base gross margin of CAD111 million was up 5% due primarily the margin optimization improvements in the power segment of our consumer division, while our commercial base gross margin was down 4% to CAD25 million. We are encouraged by the durability of our embedded gross margin book and the sustainability it provides to the company in these challenging times.

As Scott mentioned, the global pandemic has had a significant impact on our ability to reach new customers and retain some of our existing customers. As a result, our current customer count is 1.1 million representing a 16% decline from the comparable quarter last year, and a 4% decline compared to where we were in the fourth quarter of — fiscal 2020. However as Scott noted, we are seeing some very positive trends in attrition, renewals and the overall quality of our book. We saw a 9% increase in consumer renewals to 78% for the trailing 12 months ended June 30, 2020, while the commercial division decreased 7% to 47% compared to the prior year.

Improving retention offers kept our customers engaged while decline in the renewal rates in the consumer commercial business is based on the competitive pricing. Consumer attrition rates for the trailing 12 months ended June 30 was 27%. This includes the effect of now rectified Texas enrollment issue. On an RC basis, first quarter consumer attrition decreased by 59% to 40,000 reflecting a flattening of departures from the comparable period in the prior year where pricing actions drove RCs to trade at higher rates.

Our embedded gross margin decreased 21% year-over-year to CAD1.6 billion due to the decline in North American commodity customer base. As I mentioned before, despite this decline, we are observing positive trends in the underlying customer book and expect these trends to continue. Moving to costs, as we discussed on our last earnings call, we are keenly focused on streamlining — streamlining our organization, reducing our expenses, so we can operate in a more efficient manner. Addressing the administrative cost first. These expenses decreased 2% year-over-year to CAD40 million. Excluding the impact of strategic review and the recapitalization, which totaled CAD3.6 million for the quarter, administrative expenses decreased 11%.

As a result of suspending our door-to-door sales channel as well as prior-year restructuring actions, selling non-commission costs were down 58% to CAD11 million. Bad debt expenses for the quarter improved 31% to CAD11.9 million as a result of step — significant steps taken to improve enrollment controls and oversight. Specifically, we re-engineered the criteria for assessing customer credit worthiness and our operational processes around enrolling customers. Looking forward, we expect to sustain these improvements in the expected credit loss as a result of identifying and closing certain enrollment gaps. This is an area we are keenly focused on and are applying similar levels of evaluation rigor to other aspects of controls throughout the business.

Turning to cash flow. For the quarter ended, June 30, 2020, unlevered free cash flow was CAD25.3 million, compared to negative CAD5 million for the comparable prior quarter. The improvement was primarily due to a reduction in cash disbursements as a result of overhead cost savings realized from the restructuring actions implemented at the end of fiscal 2019 and 2020 operational efficiencies. It’s also related to improvements in the residential customer collections due to reinforcement of our enrollment controls in Texas market and a decrease in capital expenditures due to more rigorous controls surrounding return on invested capital.

Addressing our total available liquidity, at June 30, we had CAD80 million of liquidity, consisting of CAD20 million of cash on hand and CAD60 million available under our credit facility. Comparatively, total liquidity available at June 30 2019 was CAD16 million consisting of CAD2.5 million of cash on hand and CAD13.5 million available on our credit facility. Most importantly we are addressing the health of our balance sheet through stakeholder approved recapitalization. This is an important milestone for Just Energy because it provides the Company with sufficient liquidity to support our operations, progress our strategic initiatives, maintain financial flexibility and most of all, it’s an affirmation from our stakeholders that we are on the right path forward.

I want to thank all our stakeholders for voting in favor of the plan. If you think about what Just Energy will look like once we close the transaction, you’ll have a company with an equity injection of over CAD100 million, a reduction in net debt and preferred shares of approximately CAD520 million. The result is a financially stable company that our employees, customers, vendors and suppliers can be confident doing business with.

Looking forward to fiscal for the remainder of fiscal 2020, I’ll reiterate that we are keenly focused on controlling our costs and significantly improving the quality of our customer book. I’m pleased to report that we have begun to see positive results from these efforts. We are also expecting to benefit from full run — full-year run rate savings from our cost savings achieved in the fiscal 2020. As a result, we are reaffirming our fiscal full-year 2021 guidance of between CAD130 million to — CAD130 million to CAD160 million of base EBITDA and we are still expecting to achieve CAD70 million to CAD100 million of unlevered free cash flow.

With that, I’ll turn it back to Scott. Scott?

R. Scott Gahn — Chief Executive Officer

Thanks, Jim. We are encouraged by the progress we made within our core business and the early signs indicating our ability to sustain the improvements in our performance. We look forward to updating you on our progress on our next earnings call later this fall. Thank you for joining us. I would like to turn the call over to the operator to open the line for questions. Operator?

Questions and Answers:

Operator

Thank you. [Operator Instructions] Our first question comes from Nelson Ng of RBC Capital, your line is open.

Nelson Ng — RBC Capital Markets — Analyst

Great, thanks. Congratulations on a strong quarter and getting stakeholder approval on the recap. Before I jump into questions, could you just touch on the next steps to complete the recapitalization next month?

Jim Brown — Chief Financial Officer

Yeah Nelson and thanks for the thanks. The next step is to get the final court order, which will happen on the 2nd, and then we expect the transaction to close in September — mid to late September, the contingencies within that are regular — regulatory approval.

Nelson Ng — RBC Capital Markets — Analyst

Okay. And then my first question just relates to the guidance for the year. So Q1 was pretty good and I believe Q1 is usually the weakest — seasonally weakest quarter. So I’m just wondering whether you’re being very conservative on your guidance for the year or do you expect to see some headwinds going forward?

Jim Brown — Chief Financial Officer

And just to clarify on the prior question, the 2nd with the court approval, we will be seeking court approval on the 2nd, just to make that more clear than what I said before. You know, Nelson when it comes to our guidance, I don’t think that necessarily being conservative is a bad thing. We wanted to set the tone with a guidance that is achievable. And the first quarter has generally been a weaker quarter but this quarter is more in line with what you’ve seen in prior years going back several years. Last year’s first quarter was — had a lot of negative headwinds coming into it and some adjustments from the prior periods as well that hampered us. So I think we are — we did gear this quarter, but we’re still maintaining the guidance of CAD132 million to CAD160 million.

Nelson Ng — RBC Capital Markets — Analyst

Okay, thanks. And then just moving on, I think in some of the commentary, the optimization of weather hedge costs were like that was one factor and contributing to some of the strong results. Could you just give a bit more color on the optimization of weather hedges, like has there been a change in your approach to hedging now that you have — you have no dividends to fund and your balance sheet will be looking better next month?

Jim Brown — Chief Financial Officer

No, no, we still are sticking to the fundamentals of our hedging program. Yeah, the way our program works is basically we’ve got base layer of hedges of blocks that are the underlying hedge for the load. We have hedges which addresses the shape and then the part you’re talking about with respect to the weather hedges is the flex. That’s the potential for positive load price correlation. We just got, we just get — have gotten better at our supply team has been executing the strategy for many years. So we still have the same basic approach to risk management, but we [indecipherable] better ways to achieve the thing better.

Nelson Ng — RBC Capital Markets — Analyst

Okay. Thanks, Jim. And then just moving to customer additions, I think Scott touched on it a bit on your prepared remarks that with some states reopening. Can you just give a bit more details on which sales channels are open, close and reopening?

R. Scott Gahn — Chief Executive Officer

Yes. So throughout the COVID-19 difficulties our digital and telesales channel has been opened and growing, and we see that as a — as potentially the most significant sales channel for the company going forward. But especially in the COVID-19 environment because the sales are taking place online or over the phone, we’ve got a new team, new executive leadership of that team and we are bringing in-house a significant amount of that telesales activity, building out the skill set internally, we view that as strategic for the company.

So that is an area where we’ve done really well and continue to do well and that channel is at or exceeding plan currently. The more difficult channels door-to-door and retail where face-to-face selling has been limited is on the way back. On retail, we are beginning to get permission from retailers who were reluctant to allow us to sell in an effective way in their stores. And now are allowing us back in. So, I see that team as bringing their sales run rates up to where they need to be. Again, what’s going to be important to me is what we call exit velocity and in order for us to be where we need to be for this year and coming years, I’ve got to have exit velocity in fiscal ’21 that will set me up for the fiscal ’22 targets that we have that are significantly higher.

So that is the effort that’s underway right now and again we have a very, very strong retail team. We have very strong relationships with sales vendors and with retailers and we are expanding those as I said. So, I do expect that they will get their sales rates in the current environment and an improving environment up to the numbers that we needed to be at.

Nelson Ng — RBC Capital Markets — Analyst

Okay because I think there was roughly three quarters reduction in customer additions this past quarter. So the bulk of those customer additions were on the digital and telesales side. Is that — that’s fair to assume?

R. Scott Gahn — Chief Executive Officer

That is correct.

Nelson Ng — RBC Capital Markets — Analyst

Okay, got it. And then just moving over to bad debt expense. There was a large improvement on the consumer side, but on the commercial side, which is obviously a smaller part of the bad extent — bad debt expense, there was actually an increase from roughly CAD1.1 million last year, up to CAD3.5 million this year. I’m just wondering what drove the increase. Whether it was like one or two or a few customers shutting down permanently or is it — it was a bit of a one-off?

R. Scott Gahn — Chief Executive Officer

Yeah, the bulk of that increase is one customer. We had a customer that — that defaulted. We are in collections. We do believe we will be able to collect it but it is the customer that was slow paid us and then stopped paying. So commercial, if you were to look at the part of our business that’s most impacted, it’s definitely the commercial side, our small business in our Hudson Energy business have been impacted.

Nelson Ng — RBC Capital Markets — Analyst

Okay and then just one last question. There was a — I think CAD21.5 million share swap payout during the quarter. Can you give a bit more detail on what that financial instrument is?

Jim Brown — Chief Financial Officer

Yeah, sure, Nelson. That was online of a swap associated with a hedge that’s been on with the company for many, many years. I think you’ll see a similar online, I think it was — I can’t remember what quarter last year, but last year as well. But it’s that — it’s come to the end of its term and we unwound that. It didn’t have a significant impact on liquidity for the company because it was a fully collateralized swap. But there was cash that moved out in exchange for an LC that came back in.

Nelson Ng — RBC Capital Markets — Analyst

Okay, thanks. I’ll get back in the queue.

Jim Brown — Chief Financial Officer

Thanks, Nelson.

Operator

[Operator Instructions] Our next question comes from Mark Jarvi of CIBC Capital Markets, your line is open.

Mark Jarvi — CIBC Capital Markets — Analyst

Thanks. Good morning, everyone. Maybe just walk through COVID benefits in the quarter from work from home, obviously you guys have a higher residential mix. Maybe just — anyway to quantify what that might be and then given the inability to sell face-to-face, how much of a lag we might see from that drop in customer count that flows in to Q2 and Q3.

R. Scott Gahn — Chief Executive Officer

Yes, so on the — on the work from home benefit on the consumer residential side of our business, we’ve seen around an 8% increase in load on the residential side and our — at its low point which has improved since the low point. Our commercial business, the load was down somewhere between 15% and 20%. That has improved. It’s about half that now, but the residential margins as you know are significantly greater than our commercial margins. So the net improvement has shown up in our results.

Mark Jarvi — CIBC Capital Markets — Analyst

Any way to put a dollar value around that or percentage impact on gross margin on a consolidated basis?

Jim Brown — Chief Financial Officer

Yeah, it’s single-digit millions shift between one to the other. I will mention that we are seeing a little bit of in there, we know that difference too, as the pandemic started, we saw a stark increase in residential load and commercial load in the opposite direction. That seems to be narrowing as time goes on. That will be good for our commercial business. The commercial business has gone through a period where it is very difficult to find customers because commercial customers are very uncertain about the future.

We feel like as the commercial load comes back, signing new commercial load will also increase as well. So that’s kind of tangential to your question, but we do feel that well, the benefit — the overall benefit is responsive of more commercial load or more residential load and less commercial load at the moment. We’re anxious for the commercial load to come back as we want that business to get re-engaged in signing new customers.

Mark Jarvi — CIBC Capital Markets — Analyst

And then, any thoughts on whether or not there is a lag from that decline in customers or that delaying especially the C&I customer signing given especially the early stage of the pandemic, as you kind of worked through the current quarter or are you — how do you see it’s going to manifest and how the results are going to come through [indecipherable]

Jim Brown — Chief Financial Officer

Well, you know, there’s two dynamics to that. One is the fact that commercial customers do tend to buy quite a way down in the future. So there is a delay in the impact, but we also feel like there is going to be a — and we saw a little bit of this in Canada over the last quarter, a resurgence of buying as there is — whether there has been a gap, and there’ll be an acceleration as we come out of the COVID. It’s too early to tell on that, but you do have — as opposed to the residential book where the customer is basically signing and flow right away.

You do have the ability to catch up in the commercial book if customers were — for example to move to — just sign on a three-month forward start basis versus a six months forward start basis. So definitely focused on the commercial business, and as Scott said, it’s been one of the most effective groups and we’re — yeah, we’re fortunate to have a good very solid base of customers in Texas on the commercial — sorry, on the residential side, drive sustainability through the pandemic period.

Mark Jarvi — CIBC Capital Markets — Analyst

Certainly, to follow up on that. So is there a target in mind of sort of optimal customer mix between consumer and commercial. It seems like gross margins is about maybe 75%, 80% coming from residential now, where do you think you’d like to see that mix shake over the next couple of years.

R. Scott Gahn — Chief Executive Officer

We don’t — we don’t target a — necessarily a mix between commercial and residential. We — our supply chain optimizes for the total supply load, but we don’t really have an optimal mix between residential, commercial, I mean from our perspective, the commercial market is contestable, it is very competitive. We try to get as much business — commercial business as we can get and when pricing requests are low like they are now because commercial businesses are not interested in contracting until they have more certainty about the future. There are — the number of customer — commercial customers we sign is going to be down, but there really is no, we don’t, we don’t optimize to mix between residential and commercial.

Mark Jarvi — CIBC Capital Markets — Analyst

Okay. And then, this question is for Jim, but longer term debt target is obviously pretty big impact from the recapitalization and bringing down leverage and just where do you think as you’ve gone through some of this pain in our last year to work through that longer-term target, steady state where you think leverage should set and where you define kind of holding some debt relative to, for the businesses right now?

Jim Brown — Chief Financial Officer

Yeah, no, I mean obviously the recapitalization was a monumental step in reducing leverage for the company and under the plan, we’ll be paying down the credit facility by $70 million on a calendar year basis. So you know, we still feel like our leverage is a little above the average for the sector. So we’ll be working to bring that down through that — through the next year — year or two with respect to the pay down from the facility. I don’t really have a number to give you in terms of our optimal debt to EBITDA ratio. But I do know that we will be reducing over next couple of years.

Mark Jarvi — CIBC Capital Markets — Analyst

Okay. And then maybe my last question before I jump in the queue. Just here on the comment that obviously a real focus on bringing back to the core business here and as mentioned that you guys would still consider some sale of non-core assets, including the value added products, how do you guys define core today relative to like even geographies or sort of the gas versus electricity business. And so how much smaller would you be willing to shrink your sort of core focus and so what’s still out there for you guys in terms of business lines or assets that you would look at selling over the next year or so?

R. Scott Gahn — Chief Executive Officer

So core — I’ll touch on core products and core product remains power and gas. Certain markets selling both power and gas to customers is critical to supporting the sales channel. In other words, there’s not enough margin in just power for a customer or in just gas. But the combination of the two makes it profitable. So that power and gas remains important to the company. In addition, our — we are working to renew our focus on renewables, as well as our budding in carbon offset business TerraPass, those — that area of renewable and sustainable energy we believe has got a durable demand going forward.

Digital traffic is not as great on that as it is now because of COVID-19 and other issues, but I think when we come out of it, that demand will show up and we are going to be ready to take advantage of it. So those are the products that I would call are within the core and then when you look at our geographies. We are, you know all the geographies we are in right now are core, but we continue to evaluate them and if things change which would prevent us from getting contribution margin or value out of a particular region or market we will exit that market. But right now we are — what we’re at now is core.

Mark Jarvi — CIBC Capital Markets — Analyst

So really just comes down to some of the sort of my peripheral value added stuff whether it’s HVAC things and like just electrical efficiency that kind of stuff is where you guys would be thinking to — to maybe shed a little bit some.

R. Scott Gahn — Chief Executive Officer

We’re looking at all the options for those — those activities, but you know, in terms of what we view as core that we are attempting to grow, it’s going to be gas, power and renewable product in the regions where we sell those things.

Mark Jarvi — CIBC Capital Markets — Analyst

All right, Scott. Thanks for that.

Operator

[Operator Closing Remarks]