Good morning, ladies and gentlemen. Welcome to the Spark Energy, Inc. fourth quarter 2015 earnings conference call. My name is Shannon, and I will be your operator for today. [Operator Instructions] I would now like to turn the conference over to Mr. Andy Davis, Head of Investor Relations for Spark Energy, Inc. Please go ahead..

Good morning, and welcome to Spark Energy, Inc.'s fourth quarter 2015 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 www.sparkenergy.com.

With us today from management is our President and CEO, Nathan Kroeker; our CFO, Georganne Hodges; and our Executive Vice President of Retail, Jason Garrett. 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 reconciliation 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 President and Chief Executive Officer..

Thanks, Andy. I'd like to welcome our shareholders and analysts to Spark's fourth quarter 2015 conference call. I will make a few opening remarks about our operating results; and then our Chief Financial Officer, Georganne Hodges, will provide some details on those financial results; we will then conclude with questions from our analysts.

I want to start by saying that I am very proud of our 2015 results, achieving $37 million in adjusted EBITDA for the year, and we believe adjusted EBITDA, being a cash metric, is a better measure of performance than EPS as evidenced by our cash flows from operations of $46 million for the year.

As you've seen by now, we do have a delta between adjusted EBITDA and net income, primarily driven by non-cash items, which Georganne will walk you through along with the rest of her financial review in a few minutes.

For the year ended December 31, 2015, we saw 48% year-over-year increase in retail gross margins across our natural gas and electricity segments. This growth was driven by expanded unit margins in both commodities, as we've been very proactive in managing our supply cost in this low commodity environment.

In addition, we saw increased volumes in our Retail Electricity segment, primarily as a result of our CenStar and Oasis acquisitions.

Our overall customer count is up 27% year-over-year, as we focused on acquiring and retaining higher quality customers through our organic channels, along with the successful integration of three acquisitions during the year. Our customer attrition improved by 35% over the course of 2015.

In the fourth quarter, our customer attrition was down to 5.5%, our lowest in the last five quarters, after starting 2015 at 8.5% in the first quarter. The biggest driver of this improvement is the continued focus on sales quality and call center improvements that we discussed last quarter.

While we believe, we will continue to improve on our customer attrition on a go-forward basis, we do factor these attrition levels into our sales campaigns in order to target acceptable returns over the life of the customer.

We are already seeing the benefits of our strategic relationship with retail Retailco, an affiliate our founder, as we continue to strive to reduce our overall cost-to-serve.

As we have previously mentioned, we expect to realize approximately 5% to 8% savings in overall G&A expenses as a result of this relationship, and we are seeing these savings as we move through the first quarter. Additional scale will only improve our overall cost-to-serve overtime.

On the M&A front, we've completed the integration of all back office, finance and supply functions for both CenStar and Oasis. With these acquisitions we've developed systems, process and expertise that will help us realize synergies on future acquisitions more quickly.

Both businesses have exceeded our expectations in terms of organic customer growth and profitability. On February 8 of this year, we introduced adjusted EBITDA guidance for 2016 in the range of $44 million to $48 million, based on projected customer acquisition costs of $13 million to $17 million.

Today, we are reaffirming this guidance for 2016, and I would like to point out that our guidance does not include the benefit of any potential M&A transactions we do in 2016.

On December 14 we paid a quarterly cash dividend for the third quarter of $0.3625 per share and more recently on March 14 we paid a quarterly cash dividend for the fourth quarter of $0.3625 per share. And as we've stated in the past, we expect to pay this quarterly dividend on a go-forward basis. 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..

Thank you, Nathan. 2015 was indeed a tremendous year for us. We exceeded our expectations, both from a customer growth and a profitability perspective. Our adjusted EBITDA of $37 million compared to $11 million for 2014. This $26 million increase is due to three things. First, we successfully acquired and integrated CenStar and Oasis.

Second, we expanded unit margins across both our commodities in all three of our brands. And third, we took a more disciplined approach to customer acquisition spending during our first full year as a public company. Despite the mild weather across some of our markets, the fourth quarter of 2015 was also a very strong one for us.

Strong supply optimization and margin management led to retail gross margin of $34.4 million compared to $26.8 million last year. This retail gross margin achievement, coupled with reduced customer acquisition spending, led to adjusted EBITDA of $16.3 million in 4Q compared to $5 million last year.

G&A expenses for 2015 were $61.7 million, up approximately $16 million year-over-year. This increase is primarily due to increased billing and other variable cost to serve our growing customer portfolio, which now include CenStar and Oasis.

While the acquisitions increased our customer-specific variable cost, we saw only nominal increases in other areas of the business, as the business scaled as we had expected. The relationship with our founder on Retailco began in the first quarter. So we did not see any of those savings in the fourth quarter.

We'll start seeing those savings in the first quarter. Our net income for the year was $26 million or $1.06 of fully diluted earnings per share.

The primary drivers of the difference between net income and adjusted EBITDA, as Nathan mentioned, are non-cash items, such as the amortization of customer acquisition cost and customer relationship, our stock comp expense and unrealized gains and losses on our forward hedge portfolio.

We believe that the majority of the difference between actual EPS and analyst expectations relate to these non-cash items. Specifically, for the full year, the non-cash amortization of customer acquisition cost in excess of actual cash spent on organic customer growth was $5.5 million.

When you combine that with $3.2 million of non-cash stock comp expense, which was partially driven by our increase in our stock price, we believe that explains the difference and expectations. At December 31, we had $22.5 million drawn on our working capital facility and a balance of $19.9 million on our acquisition lines.

As of today, our working capital loan balance has been reduced to $9.5 million, which reflects our very strong winter receipts. Following up on Nathan's discussion about our M&A strategy, we anticipate using Class B shares to finance potential acquisitions from our sponsor.

But also have the ability to use cash, availability on our acquisition line or primary offering of our Class A equity to finance such acquisitions. That concludes my prepared remarks. I'll turn it back over to you, Nathan..

Thanks, Georganne. As we look ahead in 2016, we believe there continues to be opportunities in the marketplace to acquire businesses that either bring new capabilities in terms of products, regions or channels or businesses that allow us to spread our fixed cost across a broader customer base, thus improving our net margins.

Our sponsor is very committed to supporting our growth and is making good progress on several opportunities, as we speak. I hope to be able to share more with you on that in the near future.

In summary, I would just like to say that not only are we pleased with how our acquisitions have performed so far, we are also very pleased with the strong adjusted EBITDA and retail gross margins we realized across the entire business in the fourth quarter.

With the first quarter nearly behind us, we continue to see these strong margins and adjusted EBITDA across all three of our brands, despite the warm winter we've experienced thus far in parts of the country. Before we open up the line for questions, I would like to introduce and welcome our Executive Vice President of Retail, Jason Garrett.

Jason joined us at the end of last year and brings a wealth of knowledge and expertise in sales leadership, operational improvements and cost reduction initiatives. And Jason will be available to answer your questions as well. And with that, we will now open up the line for questions from our analysts.

Operator?.

[Operator Instructions] Our first question is from Selman Akyol with Stifel..

A couple of quick questions for me, so first of all, just regarding the New York issue. So I know the restrictions have been stayed. But can you just say what those restrictions are? And when do you guys expect a resolution? I know you said that, it sounded like negotiations were underway.

And then any idea how it might affect adjusted EBITDA?.

First off, let me just explain it. Regulatory change is nothing new to us. I mean, we saw changes last year in the Connecticut market that required us to make changes to some of our products, and we're launching successful campaigns there, as we speak. The thing about New York that was a little different was the speed at which it came down.

I mean the announcement was relatively unexpected, and then the implementation timeline was within 10 days. So that was a little bit unusual. We are working together with a lot of our other industry participants and got the temporary restraining order that you referred to.

I would anticipate or my expectation, given everything that's going on to date, is that at the end of that CRO we get an injunction and we have a period of time, probably the majority of 2016, in which to go back and forth and working with the commission and proactively making revisions to the market that help improve the market, unsupportive of increased regulations or rules that keep bad actors out of the market and we're being very proactive with the commission in order to try to achieve that.

In terms of timing, like you asked about, I think this goes on for a good part of '16, assuming we get the injunction here in mid-April. And the other part of your question was what exactly were the restrictions? The order that came down had really put some limitations on the types of products we could offer.

And as drafted, or as issued, it said that we had to offer customers either a guaranteed savings product, and there was some flexibility on how you do that for both gas and power. And in the case of power, you could issue a variable price product that was not guaranteed savings, if it met certain renewable energy criteria.

The good news for us is we do have green products, both gas and power. We are working very proactively with the commission to see if we can get the same exemption in place for renewable products on the gas side.

Like I said, we're doing a number of different things to react to that order in anticipation of rule changes, but I think it's beyond 2016 before we see anything.

Couple of other things I do want to highlight, because of our geographic footprint, we're shifting some of our focus to other markets even now in anticipation of all these rule changes, and I think long-term we just shift our growth to the markets that are most attractive to us.

And I do not believe that this order will have a significant impact on our adjusted EBITDA numbers for 2016.

Longwinded answer, Selman, but does that answer your question?.

Yes, I appreciate the insight there.

I guess, I know you guys gave the attrition in terms of a percentage, but do you have the actual numbers for attrition during the quarter? And then can you break out the customers between electric and natural gas of the 347?.

Yes, it's all going to be in our K this afternoon, but we can follow-up with you directly offline..

And then, I know you alluded to it, I mean, your margins look pretty strong, pretty healthy in the quarter, I mean those really do translate going into 2016 as well?.

Yes, we have a very strong start to the year. We've seen a very similar situation in Q1 to what we saw in Q4, and that is fairly mild weather in parts of the country, so there has been a really no price spikes anywhere. We've been able to buy or supply at a very low cost.

We anticipated warmer weather, so we made sure that we weren't sitting on a bunch of hedged length that we had to unwind. And as a result, our unit margins looked very strong for the first quarter. I think we're going to be happy with it..

Do you have any thoughts on where dropdowns would be done at from your affiliate up at NuDevco?.

Where -- like which markets or?.

No, which multiples, just multiples on EBITDA?.

Listen, I think there is opportunities to go out and buy companies in this marketplace; smaller books at 2x to 3x EBITDA, larger books at 3x, 4x, possibly as much as 5x EBITDA. And our whole strategy around this dropdown is to really have a period of time for de-risking and extended due diligence and planning for synergies.

It's not a game of increasing that multiple, so I would anticipate the dropdowns occur at pretty much the same valuation at which our parent buys them..

Our next question is from Mike Gyure with Janney..

Can you just talk a little bit about the CenStar and Oasis transactions, kind of what you've done from a customer growth perspective since you guys have actually closed those acquisitions? And sort of how that trend is working as you move here into 2016?.

So sure, I'm happy to do that. We've actually kept the sales and marketing functions of those business separate from Spark. So when we talk about integration, we fully integrated virtually everything else, but sales and marketing, and kept their sales channels alive.

What we've done in the course of the last year is we really just looked at where is the best opportunity across the three brands to go out and acquire customers. And we've seen pretty strong growth in New York -- probably not New York, in Oasis, through some of their web marketing efforts. They had a pretty good model there, they were using on that.

Lot of that is in Pennsylvania and other parts of the Northeast. For CenStar, we've continued to see them add commercial customers. That was primarily a broker-based commercial book. But what we've done is really jumpstarted their organic sales activities as well.

CenStar was licensed in several markets that we were not previously in, and we've taken some of our Spark historical sales vendors and launched them on CenStar organic marketing activities and we're seeing some good growth on the mass-market side under the CenStar brand.

So does that answer your question?.

Yes. Thank you..

Actually, Mike, one thing I will add. The other thing that we've done proactively is launch win-back campaigns across the brands. So when we see customers leaving one brand, we proactively reach out to them under another brand that's licensed in the same jurisdiction in order to win them back. And we've seen a pretty good success on that.

And more importantly, we've seen success at a very low cost of reacquisition. So we're very excited about that as well..

And maybe can you touch on how the attrition rates are going, I guess, specific to those acquisitions compared to your overall attrition rates? Are they better or worse, about the same?.

We don't publish specific attrition rates across the board, but what I will tell you is that CenStar is generally always lower than Spark, and Oasis is about in line with Spark..

Thank you. I'm showing no further questions at this time. I'd like to turn the call back over to Nathan Kroeker for closing remarks. End of Q&A.

Well, all I want to do it just wrap up by saying thanks everybody. We're very happy with the quarter, and I look forward to seeing many of you in the near future. Thanks, everybody..