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Edited Transcript of SPKE earnings conference call or presentation 3-Aug-18 3:00pm GMT

Q2 2018 Spark Energy Inc Earnings Call

Houston Aug 16, 2018 (Thomson StreetEvents) -- Edited Transcript of Spark Energy Inc earnings conference call or presentation Friday, August 3, 2018 at 3:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Christian Hettick

Spark Energy, Inc. - IR Professional

* Nathan Kroeker

Spark Energy, Inc. - President, CEO & Director

* Robert Lawrence Lane

Spark Energy, Inc. - VP & CFO

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Conference Call Participants

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* Carter William Driscoll

B. Riley FBR, Inc., Research Division - VP & Equity Analyst

* Michael Christopher Gyure

Janney Montgomery Scott LLC, Research Division - MD of Forensic Accounting and MLPs

* Sophie Ksenia Karp

Guggenheim Securities, LLC, Research Division - Senior Analyst

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Presentation

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Operator [1]

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Good morning, ladies and gentlemen. Welcome to the Spark Energy, Inc. Second Quarter 2018 Earnings Conference Call. My name is Gigi, and I will be 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. Christian Hettick with Spark Energy, Inc. Please go ahead.

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Christian Hettick, Spark Energy, Inc. - IR Professional [2]

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Thank you, Gigi. Good morning, and welcome to Spark Energy, Inc.'s Second Quarter 2018 Earnings Call. This morning's call is being broadcast live over the phone and via webcast, which can be located under Events & Presentations in the Investor Relations Section of our website at sparkenergy.com.

With us today from our management is our President and CEO, Nathan Kroeker; and our Vice President and CFO, Robert Lane.

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. Management may make forward-looking statements concerning future expectations, projections of our operations, economic performance and financial condition. These statements are subject to risks and uncertainties that could cause actual results to differ materially from these statements.

Although we believe that the expectations reflected in such forward-looking statements are reasonable, we give no assurance that such expectations will be realized. We urge everyone to review the safe harbor statement provided in yesterday's earnings release as well as the risk factors contained in our SEC filings.

We undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise, except as required by law.

During this morning's call, we will refer to both GAAP and non-GAAP financial measures of the company's operating and financial results. For information regarding our non-GAAP financial measures and reconciliations to the most readily comparable GAAP measures, please refer to yesterday's earnings release.

We also invite you to check our website regularly because we use it to disclose material information and to comply with our obligations under Regulation FD. That web address is ir.sparkenergy.com.

With that, I'll turn the call over to Nathan Kroeker, our President and Chief Executive Officer.

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

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Thank you, Christian. I want to welcome our shareholders and analysts to today's earnings call. After I provide a summary of our results for the second quarter, I will turn the call over to our CFO, Robert Lane, who'll provide more details on the financials.

We recorded $16.1 million in adjusted EBITDA and $43.4 million in retail gross margin in the quarter, a decrease of 20% and an increase of 1%, respectively, compared to our record second quarter last year. Rob will provide a more detailed walk-through of results and impacts of operations compared to the prior year where our second quarter results were negatively impacted by a number of factors: a continuation of the impact of the full year hedges we put on in January and we discussed on our last earnings call; the increased cost of buying additional physical power as a form of insurance in ERCOT this summer; and an increase in ISO New England capacity costs for the current capacity period. Each of these factors contributed to higher per-unit electricity cost, which was the primary negative driver of our results.

Countering all of this were a number of positive factors. Our electricity and natural gas volumes both increased year-over-year, and our natural gas margins also improved. On a normalized basis, our G&A costs per RCE were down 19% year-over-year, and we continue to drive additional cost savings across our platform.

In addition, we averaged 3.7% in monthly attrition in the second quarter, which is our best attrition rate in any quarter over the last 4 years.

We remain focused on executing our ongoing integration initiatives of prior acquisitions, which will help us drive down costs and increase adjusted EBITDA.

As we've discussed previously, we are focused on simplifying our structure, streamlining our operations, derisking the business and curtailing collateral requirements. These initiatives include consolidating brands and billing systems, closing satellite offices and automating a number of manual processes, each of which we expect to result in additional cost savings and significantly reduce our G&A expenses.

In addition, we have turned from adding larger C&I customers to a renewed focus on adding residential and small commercial customers, which have higher unit margins.

As we detailed in yesterday evening's earnings release, we made considerable progress on our synergy and brand consolidation efforts during the second quarter, and we achieved our initial targets of annualized G&A cost savings of $15 million through process integration and headcount reductions, including the closure of 5 satellite offices. We successfully switched a total of 110,000 customers to more cost-effective billing platforms during the second quarter, and we've notified an additional 62,000 customers of planned platform switches in the current quarter. As highlighted above, this led to a near 20% decrease year-over-year in our G&A costs per RCE on a normalized basis.

We expect to drive an additional $5 million in annualized cost savings through a series of discrete projects during the remainder of this year, putting us well ahead of our initial plan of driving $20 million in annual cost savings by the end of 2019.

As I mentioned earlier, we're also focusing on organic growth using sales channels recently integrated through the Verde acquisition as well as new retail sales channels that we believe will help us increase our mass-market concentration and improve margins as we pivot away from the larger low-margin C&I customers. We're investing in this growth now and we expect these new channels to ramp up over the course of the next 2 to 3 quarters.

This expected growth, combined with our strategy to improve customer mix while concentrating on mass-market RCE growth and the impacts of synergy projects and cost-reduction initiatives, will result in stronger long-term margin and adjusted EBITDA performance.

While our total RCE count may decrease as we elect not to renew some of our larger C&I customers, we believe that the increase in unit margin will more than offset any loss in value.

On the M&A front, we continue to focus on building our book organically, but we look for small tuck-in acquisitions as well as other strategic acquisitions.

Following our strategic review, our executive team and Board of Directors believes the best way to deliver long-term value to our shareholders is to continue streamlining our operations and building our mass-market customer book. We continue to work with Morgan Stanley to review opportunities to maximize value to our shareholders.

Before I turn the call over to Rob, I want to give you an update on our business in Japan. We have profitable business over there with 107,000 customers currently on flow that have been acquired through a diverse set of sales channels. We continue to see development over the wholesale markets and corresponding new product alternatives over there. The business continues to outperform our business case, and we expect to begin taking distributions early next year.

And that concludes my prepared remarks. Rob?

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Robert Lawrence Lane, Spark Energy, Inc. - VP & CFO [4]

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Thank you, Nathan. Good morning.

In the quarter, we achieved $16.1 million in adjusted EBITDA, a decrease of 20% compared to last year's second quarter of $20 million. Total gross margin for the quarter was $43.4 million compared with $43.1 million last year, an increase of 1%.

There are a few items to be mindful of in this comparison to last year. Our volumes are higher in both our natural gas and electricity segments due to the contribution from customers we purchased in our recent acquisitions, as well as from the commercial growth we experienced over the course of last year. However, electricity unit margins have compressed compared with last year, both due to the commercial segment increasing as a portion of our overall book as well as some market movements and hedging strategies during the quarter that Nathan addressed earlier in his comments.

In our retail electricity segment, gross margin for the quarter was approximately $32.6 million, a decrease of approximately $2.2 million or 6% as a result of the impact of full year hedges we put on earlier in the year, buying more physical power in ERCOT as summer insurance, and increased capacity costs in New England.

In our retail natural gas segment, gross margin was approximately $10.8 million, an increase of $2.5 million or 30% over the second quarter last year. This increase was the result of increased volumes and increased unit margins.

For G&A, expenses increased $8.4 million from last year to $27.8 million, primarily due to variable costs associated with our increased RCE count as a result of our recent acquisition, higher broker commissions from our C&I book and certain customer acquisition costs through our new opt-in channel that we cannot capitalize.

In addition, last year we decreased the fair value of earnout liabilities, which lowered G&A expenses and which did not recur this year.

As Nathan mentioned, we've made a number of moves during the first 6 months of the year that we expect to bring our G&A numbers down over time. On a normalized basis, our G&A cost per RCE are down 17% year-over-year.

We ended the second quarter with 1,047,000 RCEs, down slightly from the first quarter but up 27% compared to the prior quarter as a result of commercial growth and acquisitions.

Interest expense for the quarter decreased from $2.5 million to $2.3 million, primarily because of a decrease in noncash accretion of our earnout liabilities and seller's note.

Income tax expense for the quarter increased to $3.3 million as compared to $400,000 for the second quarter of 2017, primarily due to an increase in pretax income.

Our net income for the quarter was $23.9 million or $0.41 per fully diluted share compared to net income of $4.7 million or $0.01 per fully diluted share for the second quarter of 2017 on a split-adjusted basis. The increase in net income is primarily driven by noncash mark-to-market accounting associated with the hedges we put in place to lock in margins on our retail contracts.

We had a mark-to-market gain this quarter of $25.4 million compared to a mark-to-market loss of $6.2 million a year ago.

On June 14, we paid a quarterly cash dividend on our Class A common stock, and on July 16, we paid a quarterly dividend on our Series A preferred stock.

On July 19, we announced our third quarter dividend of $0.18125 per share on our common stock to be paid on September 13 and $0.54688 per share of preferred stock to be paid on October 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 Kroeker, Spark Energy, Inc. - President, CEO & Director [5]

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Thanks, Rob. While this year will be down as compared to last from an adjusted EBITDA standpoint, the outlook for our business remains strong, and we're confident that we're implementing the appropriate strategies to maximize shareholder value.

We made meaningful progress during the second quarter that will help us achieve stronger margins and adjusted EBITDA performance longer term. Efforts to consolidate office space and lower overhead costs have already begun to positively impact performance in the current quarter, and our other ongoing initiatives to maximize the synergy potential of our acquisitions will continue materializing in our financial performance throughout the next year. These actions, combined with the strategies we're implementing to migrate our customers toward higher-margin, mass-market customers, will contribute to stronger improvements in profitability next year as we grow our acquired and new organic sales channels.

We have an excellent team in place, and we're confident that the consolidated platform that we're establishing will emerge as the clear leader within the industry.

With that, I would now like to open up the line for questions from our analysts. Operator?

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question is from Sophie Karp from Guggenheim Securities.

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Sophie Ksenia Karp, Guggenheim Securities, LLC, Research Division - Senior Analyst [2]

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Maybe -- could you help us understand a little bit what's happening in the hedge book -- in your hedge book at this point? Because I think you've said that you've put in a lot of hedges in January, but also had to buy power in ERCOT during the summer. So can you give us some color about how that worked out together?

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

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Sure. Thanks, Sophie. So 2 very discrete issues that you just highlighted. Let's recap of what we talked about last quarter in terms of the January hedges. In January, we had a significant amount of financial hedges in the book that had significant collateral costs associated with them. And we did 2 things in January: we unwound some of those financial hedges and replaced them with physical hedges in order to reduce the collateral requirements and in some cases, in many cases, those physical hedges were put back on at a higher cost or a premium for being physical.

The second component of it, in order to avoid paying the extremely high day-ahead prices for the incremental load associated with the colder weather, we deferred some of that short-term pain by buying longer-term hedges for the balance of the quarter and the balance of the year. And because the whole market was elevated at that time, we ended up buying hedges through calendar '18 that were at an elevated level. So those hedges are still in the book and are still actualizing today and will continue to actualize through the balance of the year. The majority of that was in the first quarter and in the second quarter. So every quarter, that impact becomes less and less, but it is there through calendar '18. The second part of your question was around ERCOT. And as you saw with the extreme change in the weather up in New England last winter, we were short in a high-priced environment. That's the exact scenario that we are trying to avoid in ERCOT this summer. Reserve margins are tighter than they've been the last several years. As you know, price caps in ERCOT are high, and we want to avoid any of the extreme events that could result in that scenario. So as a way to mitigate that, we've been biased long in ERCOT this summer, recognizing that, in all likelihood, we're going to sell that excess length back at a loss, but it protects us from any extreme price blowouts that may happen should there be plant outages or any other unexpected events in the market. So it's an incremental cost to the business, but it's really -- the way we look at it, it's an insurance cost to avoid any of the extreme price spikes that are potentially out there.

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Sophie Ksenia Karp, Guggenheim Securities, LLC, Research Division - Senior Analyst [4]

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So you actually did not have to buy any power in the market in ERCOT at these prices.

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

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We -- every day, we're buying a few hours just to shape it to our exact book. But we are generally a seller in a real-time market, not a buyer in a real-time market.

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Sophie Ksenia Karp, Guggenheim Securities, LLC, Research Division - Senior Analyst [6]

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Got it.

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Nathan Kroeker, Spark Energy, Inc. - President, CEO & Director [7]

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And we're also a seller in most hours in the day-ahead market. If we are buying in the day-ahead market, we're just buying on the super peaks just to account for whatever the weather forecast change is in the last couple of days. But we're biased long right now in ERCOT, I would say.

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Operator [8]

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(Operator Instructions) Our next question is from Mike Gyure from Janney.

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Michael Christopher Gyure, Janney Montgomery Scott LLC, Research Division - MD of Forensic Accounting and MLPs [9]

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Can you talk a little bit about your customer acquisition costs spending sort of this quarter, and I guess, sort of maybe your outlook for the rest of the year and maybe how we should think about that trend going forward? It seems like you're spending a little bit less than I had expected. So can you just kind of talk about that a little bit?

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Nathan Kroeker, Spark Energy, Inc. - President, CEO & Director [10]

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Sure, Mike. Happy to do that. Over the course of the last, I would say 2 -- 1.5 to 2 years, we had slowed down organic sales efforts because we were putting a lot of focus on M&A. There were a lot of M&A opportunities out in the market at what we believed to be very attractive multiples and we were spending a lot of our focus and our dollars, frankly, on pursuing growth through that avenue. In the current environment, we're seeing less M&A opportunities out there, certainly less at attractive multiples. So we're refocusing on mass-market growth, really focusing on 2 things: how do we get additional value out of the M&A deals we've gone over the last 2 years, and that's a lot of what we talked about driving $20 million worth of cost out of the business, but then how do we ramp-up those organic sales channels. And we've got a significant focus right now both on the lead gen channel as well as the retail sales channel, both of which we acquired through 2 of our acquisitions and trying to increase dollars through those channels, also looking at our door-to-door and our telemarketing channels again and ramping those back up. It takes a while to ramp those channels up in a quality form. So I would say you're going to see us increase our CAC spending over the next 2 to 3 quarters.

And then the other thing just to highlight, Rob's passed me a note here, the way the accounting works for the opt-in sales channel, that all flows through G&A. So there's actually some customer acquisition costs that are buried within the G&A line now that we're ramping up that lead gen channel.

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Michael Christopher Gyure, Janney Montgomery Scott LLC, Research Division - MD of Forensic Accounting and MLPs [11]

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Okay, great. And then maybe you can touch on, I think you just highlighted sort of the M&A activity. Why do you think sort of the market is, I would say, softening as far as M&A deals? Is it just the sellers are asking too high prices? Or, I guess, what's going on there, you think?

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Nathan Kroeker, Spark Energy, Inc. - President, CEO & Director [12]

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So this is just one man's opinion. But we're not seeing a lot of deals come to market, and I think part of the reason for that is the trailing 12-month numbers are all impacted by the extreme weather event we saw last winter. The forward 12 months either have increased capacity costs or the ERCOT volatility, and nobody wants to price off of those numbers. So I just don't think the M&A market -- there's just not as many sellers out there for those reasons. I do think we will see some small books, and we are seeing some small books come to market as owners get squeezed on collateral requirements or growth capital coming out of last winter. But those tend to be smaller tuck-in deals from what we've seen. And we're looking at them, but I'm not going to overpay for them. We're going to be very diligent in our valuation.

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Michael Christopher Gyure, Janney Montgomery Scott LLC, Research Division - MD of Forensic Accounting and MLPs [13]

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Okay. And then maybe one more. Are you seeing anything, I guess, new or different that changed your thought process on what's going on in New York? And I guess what are you hearing there from that perspective?

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Nathan Kroeker, Spark Energy, Inc. - President, CEO & Director [14]

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New York, no. I mean, the New York Commission is really requiring the entire ESCO community to complete the administrative process, which has been ongoing for a while and will continue to play out, before they are willing to enter into any settlement negotiations with us. So that's what we're doing. I mean, we're with all the other market participants going through that administrative process. I expect at some point in the future, we will get into settlement discussions with them as we've been saying for probably 2 years now.

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Operator [15]

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Our next question is from Carter Driscoll from B. Riley FBR.

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Carter William Driscoll, B. Riley FBR, Inc., Research Division - VP & Equity Analyst [16]

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So just kind of following up on maybe different tack on Sophia's question. Obviously, you had just extreme weather in ERCOT, and I mean, not just -- higher peak prices that have shot up, not just the spikes. Are you -- do you feel you're properly hedged for some other exogenous potential weather events? Let's say you had a milder summer last year that was fairly unpredictable, obviously, you can't predict Hurricane Harvey. How are you thinking about potential exogenous events in the latter part of this year, obviously as summer winds up and then heading into the winter season. Just trying to get a sense of your thought process given the volatility you've already experienced to date.

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Nathan Kroeker, Spark Energy, Inc. - President, CEO & Director [17]

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So my thought process is to protect ourselves from the catastrophic events. So if I'm weighing between the risks of a mild, or a -- yes, mild August in ERCOT versus a planned outage on a hot day in ERCOT, I always want to be protected for the planned outage on the hot days because I can calculate the downside risk if it comes in mild, right, because the risk of the price spikes is so much more significant than the risk of me selling back power at $0. So we're positioned long in ERCOT for the month of August and the month of September just to protect against any of those sort of extreme unexpected weather events. If it comes in mild and we continue to see rain in ERCOT for the next 6 weeks, yes, I'm going to be long and I'm going to be selling power back and I'm going to be crystallizing some losses, but those are much less significant than if I'm caught short in a price blowout. And that's generally how we think about ERCOT in the summertime and that's generally how we think about the Northeast in January, February.

Not to keep rehashing what we went through last winter because I think we're all tired of talking about it, but we had such an extreme weather event that showed up in late December, I was sort of flat to slightly short anticipating very mild weather, I hadn't yet put all that length on, which we had the length in February, we didn't have it in December last year. So we're not always going to get it exactly right. But that's the thinking in how we look at those types of risks and managing those types of risks.

Going forward for next winter, at this point for next winter, we're doing everything just based on normal weather and it won't be until we get closer that we'll decide how much additional length. I mean, we'll look at sales growth, we'll look at the attrition numbers and we'll continue to refine our hedge position as we get ready to go into next winter. But as of right now, everything's just set up for normal.

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Carter William Driscoll, B. Riley FBR, Inc., Research Division - VP & Equity Analyst [18]

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So let me ask maybe a slightly different way. Have you explored the potential of a comprehensive, almost an insurance policy or reinsurance policy for hedges? I mean, some of your competitors have talked about pursuing a blanket type of policy on an annual basis to protect against this. Obviously, I don't necessarily can speak to the fine print in terms of the pricing or the cost to do so, but is that something that you're considering or you think that could be effective rather than kind of doing it almost on a daily basis?

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Nathan Kroeker, Spark Energy, Inc. - President, CEO & Director [19]

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So I've heard my competitors refer to this as well. We've looked at it, I would tell you probably every 6 months or so we have this conversation with a couple of potential providers. And to date, I have -- or in the last 3 to 5 years -- years ago I think it was cost effective. In the last 3 to 5 years, I have not found a product that I think effectively mitigates that risk in a cost-efficient manner. So the products are there, but they're really expensive or the cheaper products don't properly mitigate the risk. I've not seen one that I think is a good, cost-effective way to mitigate the risks we're talking about. But I will absolutely continue to look at them.

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Carter William Driscoll, B. Riley FBR, Inc., Research Division - VP & Equity Analyst [20]

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Okay. All right. Maybe just getting back to ERCOT for a second because there's really unprecedented, these spikes. I mean, do you feel now that we're in August that the positions you put on, you're able to survive the extremes in July, would that be reasonable?

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Nathan Kroeker, Spark Energy, Inc. - President, CEO & Director [21]

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Yes. Yes. Nothing -- we saw some very high prints in the day-ahead market in July, but nothing blew out in the real-time market. And so, for me, what happened in July -- what happened in June and what happened in July is I was buying a couple of megawatt hours in the day-ahead market just to match my exact load. I was selling the ramp hours into the day-ahead market, all of that was kind of a wash and nothing blew up in a big way. So the additional length that I've put on kind of materialized in a small loss and that was the cost of the insurance, but it worked.

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Carter William Driscoll, B. Riley FBR, Inc., Research Division - VP & Equity Analyst [22]

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Okay. Maybe shifting...

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Nathan Kroeker, Spark Energy, Inc. - President, CEO & Director [23]

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And I would tell you just to preempt, July is -- that's kind of how July behaved as well.

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Carter William Driscoll, B. Riley FBR, Inc., Research Division - VP & Equity Analyst [24]

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Okay, okay. Maybe shifting gears, so you've been engaged with Morgan Stanley for a while and it sounds as though maybe some of the options that they were presenting to you, you didn't feel probably reflected fair value. And it sounds like the decision’s been made by your management and the board that you want to continue to run the business and probably aren't going to pursue some of the alternatives they talked about, maybe even a company sale. Is that the right read on what you put in the Q?

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Nathan Kroeker, Spark Energy, Inc. - President, CEO & Director [25]

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Yes, that's -- I mean, I'm just going to reiterate what we've already said, which is we continue -- we've not terminated anything with Morgan Stanley. We continue to have them engaged. We continue to look at opportunities. But at the present time, both the management team and the board believe the best way to deliver long-term value is just to continue to focus on driving cost out of the business and returning to growth on our mass-market customer book.

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Carter William Driscoll, B. Riley FBR, Inc., Research Division - VP & Equity Analyst [26]

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Okay. Right. So I mean, if I look at the opportunities you've talked about traditionally for M&A and why they're not necessarily working today, if one of those alternatives with Morgan Stanley was to sell yourselves, it might apply to your own book, right? You're not necessarily being valued for you've had some exogenous weather events and that probably doesn't be reflected in the long-term volume of your business?

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Nathan Kroeker, Spark Energy, Inc. - President, CEO & Director [27]

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I mean, that's how I'm looking at it.

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Carter William Driscoll, B. Riley FBR, Inc., Research Division - VP & Equity Analyst [28]

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Okay, okay. Let's see, I just had a couple of others, if I may. So obviously, you talked about New York. Can you talk about ISO New England a little bit? Maybe it doesn't get quite the same level of discussion sometimes as ERCOT and obviously New York. But there have been some changes in that marketplace. Has that at all either changed the way you think about your presence in that territory or growth opportunities there? Or even potentially maybe opening up some smaller books, maybe that might be more prevalent in ERCOT given that heat spikes. Is it a similar type of opportunity with the new capacity requirements in ISO New England?

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Nathan Kroeker, Spark Energy, Inc. - President, CEO & Director [29]

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Yes. So 6 months ago, what we saw was a change to their collateral requirements, which we talked about on the last call. The most recent thing that we saw was this methodology change in the capacity cost and that methodology change or changes resulted in a significant increase in the capacity multipliers specifically. And the way that market works, you know what the clearing price is, you know what the cap tags are, but you kind of don't know what the multiplier is until the start of the capacity period. So that was what we saw here in June and early July. That went into effect June 1 for the current capacity period. It's an industry-wide issue, it affects everybody. But what I will tell you is it's more obvious in the thinner-margin C&I contracts. And the reason why we always price in some risk around those capacity multipliers just because we can't know them too far in advance. And on a mass-market contract, you've got more room in that margin to absorb that. On a thinner-margin C&I contract, you just don't have as much room in there to absorb that. So I think the takeaway for me from what we've learned in New England is -- ties right in to the broader strategy, which is, yes, I'm very interested in that market from a residential, small commercial standpoint. But with this latest increase in capacity costs, I mean, it's difficult for me to make any money there on the C&I side. So we're going to not renew a lot of those contracts and refocus on the mass-market piece of the business, whether that be New England or any of the other ISOs in which we operate.

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Carter William Driscoll, B. Riley FBR, Inc., Research Division - VP & Equity Analyst [30]

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All right. So because if I remember correctly, you had talked about maybe a bit of a shift towards the smaller commercial segment, and so you're saying that it's beyond just some of the changes to the ISO in New England that have caused you to refocus away from commercial and back to mass market, is that fair?

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Nathan Kroeker, Spark Energy, Inc. - President, CEO & Director [31]

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It's the -- I mean, one of the big drivers is the changes in New England. New England is where we saw a lot of the C&I growth, particularly the large C&I growth over the course of the last 18 months. So then you get a change like this, it impacts us. So we're shifting back to resi and small comm. But I don't -- I've never had as big of a shift towards large comm in any of the other parts of the business as I did in New England. So when we shift back to where we were a couple of years ago, you're going to see the biggest change in New England.

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Carter William Driscoll, B. Riley FBR, Inc., Research Division - VP & Equity Analyst [32]

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Okay. And I mean, between the -- and maybe at a high level, between the weather volatility and the changes in ISO New England, it sounds as though you're trying to optimize the business, shift back to a strategy, but take a little time to reengage in mass market, which seems to be the impetus why you don't feel you can outgrow last year's EBITDA. Is that a fair summation?

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Nathan Kroeker, Spark Energy, Inc. - President, CEO & Director [33]

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Yes, one of the things that I want to -- not sure -- I'm trying to be careful to answer your question accurately. One thing that we've talked about a lot, particularly in our investor meetings, is diversification being a key component of risk management. And right now, I've got a disproportionate share of my business in electricity, C&I, New England. And so I'm taking deliberate steps to get back to a more balanced book, whether it's gas and power, mass and C&I, geography. And I think over time, that's going to result in more predictable, stable earnings and growth. So that's kind of broad, high level how I think about it. and when we post our new investor deck later day, you'll see us talk about that a little bit in there. I mean, it's a deliberate shift on those 3 different metrics. In terms of...

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Carter William Driscoll, B. Riley FBR, Inc., Research Division - VP & Equity Analyst [34]

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I was just going to say. So that mimics, your hedging policy shifts, right? So you're trying to mitigate the volatility, if nothing else, and become more predictable in the business. Is that reasonable?

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Nathan Kroeker, Spark Energy, Inc. - President, CEO & Director [35]

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Yes, yes. Exactly right. Exactly right. And I will tell you, if you look ahead, '19 and '20, our view is that this business returns back to the unit margin levels and the attrition levels and the OpEx levels that we've seen historically. We will walk you through the specifics, but when you're building your long-term models, I mean, we should be in the high 20s for power unit margins over the next couple of years. We should be in the high 3s for gas unit margins in the next couple of years. And then our G&A expenses, we should be down less than 50% G&A to gross margin over time as well given all the costs we're driving out of the business this year.

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Carter William Driscoll, B. Riley FBR, Inc., Research Division - VP & Equity Analyst [36]

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And this last one for me. So how do you think about capital allocation right now given some near-term headwinds as you reposition for diversification, balancing the dividend policy you currently have, maybe some small book opportunities opportunistically? What are the priorities? And what do you think is feasible and the cushion you'd like to have for the base business as you reposition it? How do you feel about it all?

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Nathan Kroeker, Spark Energy, Inc. - President, CEO & Director [37]

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We don't anticipate any change to the dividend policy, we'll start there.

And then the second one, in terms of capital allocation, we're committed to -- we'll have to spend a little bit of money, not a lot, in order to drive some of these additional $5 million of cost savings that we're chasing. There's some process automation projects we're working on that require a little capital investment. So there'll be a few dollars going to stuff like that, but the lion's share of our capital now is going to be on mass-market organic growth, and if the opportunities are out there, some tuck-in acquisitions.

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Carter William Driscoll, B. Riley FBR, Inc., Research Division - VP & Equity Analyst [38]

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How effective will the Verde's channels be in terms of that mass market? Are you expecting a disproportionate resumption of that growth in your historical channel -- or your historical segment from Verde? Or is it are they just a contributing factor to that?

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Nathan Kroeker, Spark Energy, Inc. - President, CEO & Director [39]

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It's a contributing factor. You're going to see us operate on 3 or 4 different sales channels and we're trying to ramp all of them at the same time. The one thing about the channels through -- whether it's the channels we acquire through Major or Verde or anybody else, I want to roll those out broadly across the whole business. And so that requires some systematic changes and we're currently working on that, so we can roll those out in other markets or on other billing platforms.

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Operator [40]

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We have no further questions at this time.

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Nathan Kroeker, Spark Energy, Inc. - President, CEO & Director [41]

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All right. Well, I just want to say thanks to everybody for joining us on the call. And we'll talk to you next quarter.