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Edited Transcript of SPKE earnings conference call or presentation 6-Nov-19 4:00pm GMT

Q3 2019 Spark Energy Inc Earnings Call

Houston Nov 12, 2019 (Thomson StreetEvents) -- Edited Transcript of Spark Energy Inc earnings conference call or presentation Wednesday, November 6, 2019 at 4:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* James G. Jones

Spark Energy, Inc. - CFO & Principal Accounting Officer

* Mike Barajas;Director of Finance & Investor Relations

* Nathan G. Kroeker

Spark Energy, Inc. - President, CEO & Director

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Presentation

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Operator [1]

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Good morning, ladies and gentlemen. Welcome to Spark Energy's Third Quarter 2019 Earnings Conference Call. My name is Devin, and I'll be your operator for today.

(Operator Instructions) As a reminder, this conference is being recorded for replay purposes, and this call will be posted on Spark Energy, Inc.'s website. I would now like to turn the conference over to Mr. Mike Barajas with Spark Energy. Please go ahead.

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Mike Barajas;Director of Finance & Investor Relations, [2]

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Thank you, Devin. Good morning, and welcome to Spark Energy's Third Quarter 2019 Earnings Call. This call is also being broadcast via webcast, which can be located in the Investor Relations section of our website at sparkenergy.com. With us today from management is our CEO, Nathan Kroeker; and our CFO, Jim Jones. Please note that today's discussion may contain forward-looking statements, which are based on assumptions that we believe to be reasonable as of this date. Actual results may differ materially. We urge everyone to review the safe harbor statement in yesterday's earnings release as well as the risk factors in our SEC filings. We undertake no obligation to update these statements as a result of future events, except as required by law.

In addition, we'll refer to both GAAP and non-GAAP financial measures. For information regarding our non-GAAP financial measures and reconciliations to the most directly comparable GAAP measures, please refer to yesterday's earnings release.

With that, I'll turn the call over to Nathan Kroeker, our CEO.

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Nathan G. Kroeker, Spark Energy, Inc. - President, CEO & Director [3]

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Thank you, Mike. I want to welcome everyone to today's earnings call. I'll begin by providing a summary of our results from the third quarter, and then our CFO, Jim Jones, will provide more details on the financials.

In the third quarter, we reported adjusted EBITDA of $21.8 million, an increase of 51% over last year driven by increased unit margins, our strategic focus on improved hedging strategies as well as higher-value residential and small commercial customers. Retail gross margin was $58.2 million for the quarter, a 27% increase from the third quarter last year, which was $45.8 million. We are pleased to see unit margins continuing to improve as we have discussed for the past several quarters. And we want to highlight for investors that our unit margins are returning to normal run rates of $27 to $30 per megawatt hour on an annual basis. I want to highlight that despite seeing some of the highest price volatility we've ever seen in ERCOT this summer, our hedging strategy performed very well, protecting, even enhancing the margin on our fixed-price contracts. Our customer attrition improved by 26% from the first quarter of this year and is back in line with last year's third quarter, attributable to our overall customer book being much healthier. Our continued focus on acquiring smaller commercial and residential customers combined with disciplined pricing across all customer segments has resulted in our RCE count being down for the quarter as we continue to optimize our customer mix. We have now accomplished the majority of our planned reduction in large commercial customers, and we are approaching the final steps of our brand and system consolidations. We are still expecting over $22 million in run rate savings by year-end 2019.

We have over $120 million in liquidity at the end of the third quarter, which is 56% and 197% higher than it was at this time in 2018 and 2017, respectively. This reflects all the hard work that we've done over the past 2 years to improve our balance sheet, and we feel very comfortable heading into this winter with this level of credit support for our business.

In summary, our ERCOT summer hedging strategy, combined with an increased percentage of residential customers in the overall customer book contributed to the successful quarter. That concludes my prepared remarks, and now I will turn the call over to Jim for his financial review. Jim?

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James G. Jones, Spark Energy, Inc. - CFO & Principal Accounting Officer [4]

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Thank you, Nathan. Good morning. In the quarter, we achieved $28.1 million in adjusted EBITDA compared to last year's third quarter of $18.6 million. Retail gross margin for the quarter was $58.2 million compared with $45.8 million last year. In our retail electricity segment, gross margin was $53.1 million compared to $40.3 million in the third quarter last year. Volumes were lower due to a reduction in customer base, primarily due to our pivot away from larger lower margin commercial customers. These impacts were more than offset by our electricity margins, which were up 78% over third quarter 2018 as result of improvements in our customer mix and a soft commodity price environment.

In our retail natural gas segment, gross margin was $5 million compared to $5.5 million in the third quarter last year. This decrease was attributable to lower margins due to lower RCE count, which was offset by the increased unit margins, which are up 13% from last year. G&A expenses of $27.6 million was slightly higher as compared to the prior year quarter, driven by some one-time severance, legal and SOX implementation costs. I want to highlight that the G&A increase was more than offset by our increased unit margins.

Total RCE count in the third quarter was 772,000 RCEs, down as a result of the continued strategic shift away from low-margin large commercial customers. Our attrition of 4% is down 26% from the first quarter of this year and is back in line with 4% a year ago. Our net income for the quarter was $37.7 million or $0.93 per fully diluted share compared to net income of $18.8 million or $0.35 per fully diluted share for the third quarter of 2018. The increase in net income is driven by the noncash mark-to-market accounting associated with hedges we've put in place to lock in margins on our retail contracts. We had a mark-to-market gain this quarter of $25.3 million compared to a mark-to-market gain of $18.9 million a year ago.

As we've reminded investors in the past, the noncash mark-to-market movements do not affect the actual cash we expect to receive on our fixed-price contracts. On September 16 and October 15, we paid the quarterly cash dividend on our Class A common stock and Series A preferred stock, respectively. On October 21, we announced third quarter dividends of $0.18125 per share on our common stock to be paid on December 16, and $0.54688 per share on the preferred stock to be paid January 15.

As we've stated in the past, we expect to continue to pay these quarterly dividends on a go-forward basis. That's all I have. Back to you, Nathan.

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Nathan G. Kroeker, Spark Energy, Inc. - President, CEO & Director [5]

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Thanks, Jim. As 2019 comes to a close, we continue to see strong unit margins. Our focus on mass-market customer growth continues to improve our portfolio and expect the G&A run rate savings are over $22 million. We believe we have taken the actions necessary to produce stable earnings growth and combined with our increased liquidity, we expect the close of 2019 to be strong and show the full effects of all the work that we've done over the last 2 years.

I want to thank our employees and suppliers for their hard work producing a good quarter, and I want to thank Spark's customers for choosing us as their energy provider. We are excited about the future, and we look forward to connecting with you on our next call.

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Operator [6]

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This concludes today's teleconference. You may now disconnect your lines at this time. Thank you for your participation, and have a wonderful day.