Good day, ladies and gentlemen. Welcome to the Spark Energy Incorporated First Quarter 2015 Earnings Conference Call. My name is Danielle and I will be your operator for today. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will follow at that time.

[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. Andy Davis, Head of Investor Relations for Spark Energy. Please go ahead..

Good morning and welcome to Spark Energy Incorporated’s first quarter 2015 earnings call. This morning’s call is being broadcast live over the phone and via webcast, which can be located under Events and Presentations in the Investor Relations section of our website at www.sparkenergy.com.

With us today from management is our President and CEO, Nathan Kroeker and our CFO, Georganne Hodges. 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 directly comparable GAAP measures, please refer to yesterday’s earnings release. With that, I will turn the call over to Nathan Kroeker, our President and Chief Executive Officer..

Thanks, Andy. I would like to welcome our shareholders and analysts to Spark Energy’s first quarter 2015 conference call. I will make some opening remarks about our operating results and then our Chief Financial Officer, Georganne Hodges, will provide some detail on the financial results. We will then conclude with questions from our analysts.

Georganne will give you the financial details of our first quarter results in a moment, but I will tell you that we are very pleased with the results. We saw enhanced margins in both our electricity and natural gas segments during the first quarter.

Our continued focus on maximizing customer life time value combined with favorable weather across many of our markets and a low commodity price environment were key drivers in our expanded margins.

In terms of customer account, we saw a 3% increase in our electricity customers in the quarter but this has more than offset by the decline in our gas customers as we ended the quarter with approximately 292,000 customers or 305,000 RCEs.

As signaled during our last earnings call the majority of this decline was caused by the continuing impact of high attrition in our Southern California gas market where we lost approximately 32,000 customers or 14,000 RCE.

This high attrition during the quarter is the result of our aggressive collection efforts primarily disconnection for nonpayment as we continued to reduce our exposure to bad debt expense in Southern California.

We do expect the heightened level of Southern California attrition to continue into the second quarter due to the lag [ph] of time between a timely requested disconnection and the utility processing the request.

In terms of overall customer account, I can tell you that we have already reversed the negative trend we saw in the first quarter as we ended the month of April right at 300,000 customers or 313,000 RCE.

I am very excited to announce that we signed a purchase agreement with an affiliate of our founder and majority shareholder for the acquisition of Oasis Energy for $20 million which represents approximately three times the projected adjusted EBITDA run rate.

Oasis operates in six states across 19 utilities and has about 40,000 gas and electricity customers. We intend to maintain the Oasis brand in our sales and marketing operations given a proven ability to realize strong unit margins, however, we do plan to integrate the energy supply and other back office functions over the course of the next year.

In addition to purchasing a strong customer portfolio we are also receiving the benefit of a solid brand and established vendor relationship. I’m also really excited about our ability to grow in several new markets as we expand our footprint into seven new utility service territories with this transaction.

As we mentioned on our last call, we have a supported sponsor that is committed to utilizing its balance sheet to support our growth and this transaction utilizes that framework.

The consideration for this acquisition is $15 million in cash versus $5 million in the form of rate convertibles, subordinated note to our affiliate and maybe converted into shares of our Class B common stock at a conversion price of $14 per share.

We are entitled to pick the interest and our affiliate has an 18 month hold off [ph] period before having the ability to convert. We are working on amending our credit facility to support this acquisition as well as provide additional borrowing capacity to do other transaction. We are expecting to close on the Oasis transaction in the third quarter.

And looking at our previous M&A transactions the two tuck-in acquisitions of approximately 13,400 electricity customers we purchased in Connecticut in the fourth quarter exceeded our profitability expectations in the first quarter. Additionally, the approximately 30,700 PG&E natural gas customers we purchased in March have begun coming on floor.

We expect these customers will be accretive to adjusted EBITDA as well. On March 16th, we paid our quarterly cash dividend for the fourth quarter of $0.3625 per share and more recently on April 23, we announced that our first quarter dividend of $0.3625 per share will be paid on June 15.

We expect to pay this quarterly dividend on a go-forward basis and we expect 2015 adjusted EBITDA to exceed our planned 2015 dividends and all required distributions and tax payments. We continue to reaffirm this guidance and we want to reiterate that management does not anticipate any changes to this dividend policy in 2015.

Thanks for your attention and with that, I will now turn the call over to Georganne Hodges, our Chief Financial Officer for her financial review. Georganne..

Thanks, Nathan. A strong gross margin performance from both commodities led to an adjusted EBITDA of $10.2 million for the first quarter. This compares to $9.3 million for the first quarter of 2014. Retail gross margin was $27.9 million compared to $17.7 million in 2014.

This $10.2 million increase was achieved due to a combination of favorable weather conditions and the lower overall commodity price environment which allowed us to optimize our cost of revenues and unit margins across both our electricity and natural gas segments.

Keep in mind that last year’s unit margins were depressed because of the elevated supply cost during the Polar Vortex. G&A expenses for the quarter were $14.7 million compared to $8.1 million in 2014.

This increase is primarily due to an increased billing and other variable cost associated with a larger customer book and an increase in bad debt expense of $2.4 million, primarily as a result of Southern California and increased cost associated with being a public company.

Customer acquisition spending for the quarter was $5.6 million compared to $5.2 million spent in the first quarter of 2014.We added approximately 53,000 new customers both fairly evenly between our electricity and natural gas segments. Our net income for the first quarter was $12.9 million compared to $6.5 million in 2014.

Our EPS for the quarter was $0.80. With strong winter receipts, we have paid down our working capital facility by $13 million ending the quarter with a loan balance of $20 million. Our loan balance was subsequently been paid to $11 million as of today. We also have 12.5 million letters of credit outstanding. That concludes my prepared remarks.

I’ll now turn the call back to Nathan..

Thanks, Georganne. Just to recap we are very pleased with the strong gross margin and profitability we’ve realized this winter and we are very excited about the Oasis deal and the opportunity it provides us to grow in several new markets. We will now open up the line for questions from our analysts.

Operator?.

Thank you. [Operator Instructions] And your first question comes from Jay Dobson from Wunderlich Securities. Your line is now open, please go ahead..

Nathan, good morning..

Hey Jay, how are you?.

Great, thank, how are you?.

Good..

Hey wanted to talk a little bit about I think you referenced to get a sort of a NuDevco financing on the last call and I see you executed Oasis with what you obviously got done, can you give us a little sort of more granularity about sort of what the terms of this sort of financing vehicle are and sort of how much you stretched it with Oasis or not stretched it I don’t mean to sync as I’m trying to get that what are the parameters of it and how Oasis fit in that, we have sort of a idea going forward what this vehicle look like?.

Yes so couple of things Jay, it’s a fairly simple structure.

The PSA [ph] that we signed is basically a back to back transaction with NuDevco, the difference being the timing of the closing and NuDevco closed on the acquisition as we had a very motivated seller and timing was of the essence and NuDevco had the cash readily available to close on the deal.

So they have done that, they have on it and at the same time we signed a PSA, we anticipate closing the transaction early in the third quarter and we’re going to finance that approximately 75% of that is going to come from our credit facility that’s already in place so they were working on a amendment and 25% of it is going to be in the form of those convertible subordinated notes that we just talked about..

Got you. And you are buying it at roughly the same amount of margins [ph] interest cost and the things what they are carrying, but roughly the same price that they bought it at, there’s not a mark up on the drop down or be it the….

It’s the same price. The only difference would be to the extent that there were changes in working capital during their holding period..

Sure, sure obvious like.

And then how big I mean I’m not sure you want to get into a great detail but how big is the facility, I mean Oasis was $20 million is this something you could do a significantly larger transaction under the auspices of?.

What we are working on is an amendment that gives us the ability to do several transactions the exact size of the facility we are still working on, although we are getting close with our banks..

Got you, got you. Okay, great.

And then just a little more update on Southern California sort of where exactly are we in the process where was bad debt specifically that that entity and sort of how much more run-off do we have for the balance of 2015?.

I can do that.

Hey Jay, this is Georganne, how are you?.

Hey Georganne..

We throughout the course of the first quarter we took a lot of aggressive efforts, both on the collection side and on the disconnect for non pay side, really the clean up the So Cal situation. So I think the total bad debt that we incurred in the first quarter on So Cal is something like 1.2 million.

That number dropped significantly in the second quarter. We have now effectively disconnected or initiated a disconnect with the utility all customers that have never paid off, so we are just waiting for some other disconnections to come off if there is a lag between the notice and the actual removal of the customer.

So that’s why we being there, we’ll be a little [Indiscernible] over in the second quarter. But at this point, we are getting close to being wrapped with paying customer..

That’s perfect, Georganne. And thanks so much Nathan, I appreciate the insight..

All right. Thanks Jay. We’ll talk you soon..

Yes..

Thank you. And your next question comes from Selman Akyol from Stifel. Your line is now open. Please go ahead..

Thank you. Good morning..

Hi, Selman. Good morning..

So, just going back on in terms of the Oasis acquisition, you guys said it was three multiple, I just kind of wondering can you talk about the assumptions behind that and how you see this growing and going forward..

Yes. I’ll give you a couple of high level comments Selman and then if you want to get down into more granularity maybe we take that offline. But keep in mind that what we bought here is really a standalone business.

Its bringing us a separate brand, it’s got a complete set of systems, processes, management team as well as access to a number of new markets. We’re very happy with evaluation in terms of an EBITDA multiple at three times especially when you consider that not is it bringing us the run rate, but we’ve got the growth opportunity in there as well.

We did touch on the unit margins in that business and especially on the power side, the book is predominantly power and on the power side they have a history of realizing unit margins that are significantly higher than what we’ve seen in this Spark business and they are doing that with only slightly higher attrition rates than what we’ve had historically..

Got you. So, and that’s what I was going to ask you sort of next about the seasoning of their customer base.

Is there any way to put some parameters around how long they’ve had their average customer or what the churn rate is there?.

I mean their churn rate is like I said just slightly higher than ours, so on average their customers would be with them slightly shorter than ours have, but in terms of those specifics of breaking that down that any further we’re not prepared to do that on this call..

All right. Well, thank you very much..

Thanks, Selman..

Thank you. And your next question comes from Dave Parker from Robert W. Baird. Your line is now open. Please go ahead..

Good morning and congratulations on a good quarter and the acquisition [Indiscernible]..

Thanks, Dave..

Obviously in our fourth quarter chat, you talk about a good market for these kind of opportunities, I mean, my first question are there opportunities of this size or do you think that all acquisition kind of goes back to historic trend maybe some color there would be great?.

I think there is still opportunity to do additional transactions whether they be this size or tuck-in acquisitions. I mean, we’re continuing to look at both. Our focus is obviously been on this deal for the last couple of weeks and will be as we start to work on integration, but we are still actively looking at other opportunities as well..

With this – with Oasis being an acquisition of a company like you had identified, are there synergies that opportunities that we should – we should number one kind of countdown and then secondly when we look at the kind of products they offer versus what Spark offers, is there opportunity to cross-sell or sell additional green products, those kind of things that you’re looking as an opportunity?.

Yes. Dave, good question. Couple of things, from an integration standpoint, because of their brand and because of their track record with the unit margins we expect to keep the brand, the sales and marketing functions, the customer care functions, we’re going to keep all of those separate, we’re going to keep the teams separate at that level.

But we do expect to integrate the energy supply and the treasury and accounting and those back office functions over the course of the first year. In terms of the synergies, we still have quantifying the exact value of those synergies but I will tell you those were not a key component of our valuation on the deal.

And then the other question is in terms of cross-selling your products and opportunities, I think the biggest thing that they bring to us is really access to new markets. We have a fairly long lead time on getting license and setup operationally in new markets.

So overnight, we’ve got access to seven new markets that we can immediately begin focusing on organic growth there. So I’m very excited about that piece of it..

Okay. Sounds good.

And there are trading and back office operations that located at the northeast or where is that this basically located?.

No. it’s about a mile south of us on the bell way [ph] here in Houston..

Okay. That makes it a little easier, excellent. Last, but not least, when we look at third quarter when those acquisition closes, how does that look like on the balance sheet. I mean, maybe little bit follow-up on Jay’s question, I mean I guess kind of where the convertible that piece will show up.

What should we expect to see when that closes in the third quarter?.

Let me try to it Dave, this is Georganne.

I mean we -- it is going to look like a subordinated loan on our balance sheet so it is a five-year subordinated loan, so it will look like long-term debt frankly, again subordinated to south [Indiscernible].Can you give me a little more about your question what you’re looking for?.

Yes. That’s part of it, I guess, so we got $20 million plus adjustment acquisition price So I figure out I think -- shows up in the cash flow..

The rest, okay good question about what we’re buying.

So the assets that we’re buying, when you buy a retail company, the assets that you really evaluating or the customer list itself and then sort of the opportunities to grow that customer listing to something else, so what you will actually see is you will see both the current and a long term asset on our book, they will look like intangible assets, but they will represent the value that we ascribe to the customer list, the brand, those of the two bigger things that you’ll see.

So it will be an asset, both long term and then it will be an asset that does get amortized, so there will be a short term portion as well. And they’ll be amortized over the – for the life of our cash flows, life of the cash flows that we’re projecting for the deal..

Right. So you’ll have two different amortization rates based upon the shorter term and the longer term, as the shorter term I assume kind of similar with what you’re amortizing your profit business [Indiscernible].

What it’s going to be a little longer than that some of this work, it happens through, I just thought it’s called the purchase accounting that we haven’t done completely yet. But it’s looking like when we apply the churn curve that we used for the valuation that the intangible will be amortized somewhere between four and five years.

And we can, as we move forward that something Andy and I can take you guys through from a modeling perspective to give you some similar details around that..

Good. That will be kind of very helpful. Fantastic. All right. Well you answered my question, again congratulations. Appreciate the color..

Thank you..

[Operator Instructions] And you next question comes from Dan Fidell from U.S. Capital Advisors. Your line is now open. Please go ahead..

Good morning..

Hi, Dan..

Hey, first my congrats as well on the Oasis acquisition, it looks good. I guess, just a couple of questions on my side. First housekeeping. Can you just kind of breakout the Oasis customer concentration in the states they serve.

Is that something you can provide us to?.

Yes. Not on this call, Dan, but we can follow up with you afterwards..

Okay..

The customers are all concentrated up in the Northeast markets in the lot of the states that we already operate up in the northeast. It’s just that they are adding additional utility service territories within those states that we don’t currently have licenses in..

Got it..

But broadly speaking, it is markets that we are familiar with..

Okay. Right. I guess just the following question to that is sort of talking about the, if you see additional kind of incremental margin opportunities by going into these new markets. I think, if I’m not mistaken the states that they serve you’re kind of in half of them and half of them are kind of new markets.

Can you just talk a little bit about the flavor for the organic growth into the new market?.

Yes. So one of the challenges that we have in this business is there is a fairly long lead time in terms of getting license and then getting all of our testing EDI testing completed with the utility service territories and being ready to actually operationalize a sales campaign.

So Oasis has done that in the number of states that we don’t hear, a number of utilities service territories that we don’t currently operate in. So this basically jumps starts us by probably 12 months and being able to add customers organically in those new markets otherwise we would have to do that on our own and it would take a lot longer.

So I think the growth opportunity for us is just having the ability to deploy sales teams in those new territories immediately not having to wait and go into them on our own organically..

That’s great.

Just a last question from me then, just, you mentioned that you are still looking at more M&A, just interested a little bit on the time table would you prefer to sort of fully close on Oasis first or just how might we see additional M&A layer in?.

I’m not putting anything on hold because of Oasis, I’m continuing on the process and anything that we are currently working on, but I don’t have anything specific to announce at this time..

Appreciate the color, thanks very much and congrats again on Oasis..

All right. Thanks a lot..

Thank you. And Mr. Kroeker I’m not showing any further questions at this time..

All right. Well I’d like to thank everybody for joining us this morning and you guys have a great weekend..