Good morning, ladies and gentlemen. Welcome to the Spark Energy, Incorporated Fourth Quarter 2016 Earnings Conference Call. My name is Liz and I will be your operator for today. At this time, all participants are in a listen-only mode. [Operator Instructions] Later, we will conduct a question-and-answer session and instructions will follow at that time.

As a reminder, today’s conference is being recorded. As a reminder, this conference is being recorded for replay purposes and this call will be posted on Spark Energy, Incorporated’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..

Thank you, Liz. And good morning and welcome to Spark Energy, Inc.’s fourth quarter 2016 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, 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 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. First of all, welcome to Spark’s fourth quarter 2016 earnings call. We had a phenomenal fourth quarter and full year 2016 where we again saw Spark produce record earnings. I'll make a few opening remarks about our operating results and then I'll turn the call over to our CFO, Robert Lane, to provide some detail on the financial results.

We’ll then conclude with questions from our analysts. We recorded 81.9 million in adjusted EBITDA in 2016, including 24.8 million in the fourth quarter alone. When you consider we finished 2015 with 37 million in adjusted EBITDA for the full year, you can really appreciate how we've successfully executed on our strategic growth initiatives in ‘16.

From a retail gross margin perspective, we finished 2016 with 182.4 million for the calendar year, an increase of 61% over last year. In the fourth quarter alone, we generated 58.8 million in retail gross margin, an increase of 71% year-over-year.

We experienced increased volumes in our electricity and natural gas segments, primarily as a result of our Major and Provider acquisitions mid-year. Warmer than normal weather in the fourth quarter had a negative impact on throughput, but this was largely offset by expanded unit margins, driven by continued low commodity price environment.

Our in-house supply and portfolio management teams have done a fantastic job in optimizing our supply costs as well as our retail pricing structures. We finished 2016 with 774,000 RCEs on flow, an increase of 359,000 RCEs over last year. This represents an astonishing 87% growth year-over-year.

The majority of this growth was fueled by our acquisitions of Major Energy and Provider Power, but we were also realizing organic growth of 5% over the course of the year.

As you may recall, we've previously signaled our intent to grow organically at single digit percentages and we're very proud to have executed on this in 2016, while closing two significant acquisitions along the way.

As I mentioned on the last call, I would like to point out that our RCE count does not include the contribution from our joint venture in Japan, which began enrolling customers almost a year ago and as of December 31, has enrolled more than 40,000 customers and is expected to turn a slight profit in its first full year of operation.

On the attrition front, we ended 2016 with a 4.3% attrition rate, an improvement of 16% over last year's 5.1% rate. We continue to have success in customer retention and now with eight different brands, we're running a multitude of cross-selling and wind back opportunities.

The biggest driver of our improved attrition has been our emphasis on sales quality and compliance in 2016. As mentioned in prior quarters, the revamping of our vendor commission structures as well as additional sales oversight and compliance has resulted in our new customer ads being both larger and stickier than what we saw in the past.

While we believe we could manage our attrition metric down further in the coming quarters, we're confident that we optimize customer lifetime value and therefore shareholder value with attrition in the current range. Turning to M&A for a moment, I'd like to give you a brief update on our two acquisitions from 2016, Provider Power and Major Energy.

We are virtually complete with the integration of Provider at this point and we are realizing the synergies we anticipated.

From a performance standpoint, Provider has outperformed our projections, both in terms of successfully renewing our customer base as well as adding both residential and commercial customers at a rate well beyond our expectations.

As you know, Major Energy has an earn-out that extends over multiple years, so our focus has been on finance and supply integration, while leaving the rest of the business to operate independently.

At the end of this month, Major's credit facility arrangement terminates, at which time we will pick up approximately 2 million to 3 million in annual synergies from our supply team taking over the major portfolio.

In terms of new transactions, we recently entered into an agreement with National Gas & Electric for the acquisition of approximately 19,000 RCEs with an option to acquire an additional 41,000 RCEs.

We will pay approximately 2.2 million in cash for this transaction, subject to working capital adjustments and we anticipate exercising the option shortly after closing. This transaction was reviewed and approved by a special committee of our board and we expect this transaction to close early next month.

In addition, the NG&E and Spark business development teams are working on several additional transactions, but we're not ready to provide much color at this time.

I can tell you that we have a couple of deals under LOI and if we were to close on all of these, we would increase our adjusted EBITDA annual run rate by approximately $20 million to $30 million. We are reaffirming our guidance for 2017 in the range of 90 million to 100 million in adjusted EBITDA.

This is based off of an anticipated 27 million to 33 million spend in customer acquisition costs. While I cannot say too much about 2017 results, I can share with you that our extremely strong performance in 2016 has carried over into ‘17, both in terms of organic sales as well as strong unit margins in the face of mild weather.

Given this fact along with the pending acquisition I just highlighted and potential transactions currently under LOI, we will be updating our guidance in the near future.

In summary, I could not be more pleased with how hard our company has worked, along with our new acquisitions in Major and provider to produce $82 million in adjusted EBITDA in 2016. Thanks for your attention and with that, I will now turn the call over to Rob for his financial review..

Good morning and thank you, Nathan. As Nathan mentioned, we are extremely pleased with our 2016 and fourth quarter results. For the year ended December 31, 2016, we produced 81.9 million of adjusted EBITDA compared to 36.9 million last year, an increase of 122%.

In the fourth quarter, we achieved 24.8 million in adjusted EBITDA, an increase of 52% over last fourth quarter’s $16.3 million. While the primary driver of these increases was the acquisitions of Major and Provider, we continue to optimize our unit margin and maintain a low cost highly scalable operating structure.

Retail gross margin for the quarter was 58.8 million compared to 34.4 million last year, an increase of 24.4 million.

On the G&A side, expenses were up 12 million over last year to 30 million, primarily due to variable costs associated with the larger RCE portfolio as well as some one-time charges associated with the termination of certain contracts at the Major Energy company.

Absent the one-time charges related to the acquisitions, our G&A for the quarter increased only 44% compared to the much larger 71% increase in retail gross margin, which attests to the strong scalability of our platform. This increase was offset by a significant reduction in bad debt expense.

As we mentioned last quarter, we have brought our collection efforts now fully in house and have even been able to collect on accounts previously written off. We spent 9.7 million to acquire customers during the quarter. This resulted in us adding a 21,000 RCEs after replacing attrition.

Our RCE count of 774,000 at the end of the year represents an increases of 87% over our position at the end of 2015, a result not only of our M&A activity, but also strong organic growth, especially in the second half of the year. Interest expense for the year rose from 2.3 million to 8.9 million.

As we mentioned in the last quarterly update, this is a result of the increase in debt we experienced due to our acquisitions coupled with increased working capital requirements associated with higher collateral posting requirements as we continue to grow the portfolio.

Income tax expense for the year increased to 10.4 million as compared to 2 million for 2015, primarily due to our strong operating and financial results. Our net income for the most recent quarter was 24.1 million or a $1.04 per diluted share compared to 3.1 million and a negative $0.01 per fully diluted share for the fourth quarter of 2015.

For the full year ended December 31, 2016, our net income was 65.7 million or $2.23 per fully diluted share compared to 26 million and a $1.06 per fully diluted share for 2015.

As we have mentioned before, our management team focuses more on our non-GAAP measures of adjusted EBITDA and retail gross margin, both of which were adjusted to remove the non-cash effect of our supply hedges and captured the as incurred expense organic customer acquisition in replacement.

On December 14, we paid a quarterly cash dividend for the third quarter of 36.25 cents per share. More recently, on January 19, we announced that our fourth quarter dividend of 36.25 cents per share will be paid on March 16, 2017. As we've stated in the past, we expect to continue paying this quarterly dividend on a go forward basis. That's all I have.

Back to you Nathan..

Thanks, Rob. So just to recap, we saw phenomenal growth over the course of 2016 and a very strong finish to the year, driven by our two successful acquisition, supply and pricing optimization impacts on unit margins, organic growth and realizing scale against our cost structure.

We also have a great start to 2017 with several acquisition targets on the radar, continued refinement of our sales and marketing strategy and strong unit margins as a result of the continued soft commodity market. And with that, we will now open the line for questions from our analysts.

Operator?.

[Operator Instructions] Your first question comes from line of Carter Driscoll with FBR..

So I appreciate all the details and obviously an excellent job on 2016.

Maybe my first question I really can't say a lot about your LOIs, but is there a way you could characterize maybe the number of targets you're looking at that would compromise that range of incremental EBITDA as you're talking about, is it one or is it a couple, I’m just trying to get a sense of the magnitude of the book and/or companies you're looking at?.

Look, we're very comfortable with where the pipeline is at this point. I mean there's a handful of different target that we're talking to, there are only - there's you know three that are under contract for LOI at this point.

And I'm not going to give you specifics on those three, but when you look at the handful of targets that we’re in various stages of discussion on, I will tell you that they range from several million of EBITDA up to 20, 30 million of EBITDA. I mean there are some sizable companies that we are talking to..

And your preferred method of capital to, if you execute on say one of the larger ones could be what mix, and there is one more follow-up if I may..

So we're very comfortable where our capital structure is right now, I mean with our 90 to 100 million for next year, we've got a lot of free cash flow from operations. We've got the $25 million credit facility with our parent that’s a very attractive 5% which you know there's nothing drawn on that today.

We also have some additional room under our existing credit facility and we're currently evaluating both debt and equity options as well. So I mean we have a number of tools in the tool chest in order for continuing to grow through M&A..

Could you talk just about the - to a better understanding of the write-up to G&A from the major contract terminations, can you just give me a little color on the mechanics of that. I’m sorry, and then I have one last follow up..

Sure. I'll try to answer your question. If I'm not doing it, let me know. But basically these are just some contracts that were terminated as a result of our integration with Major and the change of control provisions. That total charge was 4.1 million it's actually getting paid out over the next couple of years.

Whatever detail I can give you I’m happy to do so, but normal course of business [indiscernible]..

So specifically the change of control that triggered the ability for certain customers to opt out is that the way to characterize it?.

It wasn't actually customers, it was more some employees and some other people like that so, it wasn’t customers that had opted out at all and that's why we ran into the G&A line and not to reach our gross margins..

And maybe just, a bit of a spike in DSOs and payables this quarter, something characterized, particular color, what bucket, whether they came from the acquisitions or just running a larger book now?.

It’s two things, one obviously we brought on a whole bunch of those two big acquisitions and it’s just seasonality, we had some really cold weather going to be end of the year and especially in New England and New York and so because of that just cost of our power was and natural gas was a little higher..

And then just last question, Nathan maybe you can characterize obviously very public ongoing dispute with the state of New York, not just yourself, with other retailers, just give us an update where that stands in characterization of what you envision the potential [indiscernible] could be from what's going on in the state of New York..

Sure, I mean as you pointed out, it’s an interesting time in the industry in New York, we're very happy that the court cited with us earlier in 2016.

The commission is asking for additional information from all of us, which we're happy to provide, we're working closely with them, but basically at this point in time I mean we are appealing the Commission of Jurisdiction over rate setting and pricing and we want to know the outcome of that appeal for a number of months, but if that appeal wins, I would say that really cut the legs out from underneath the commission in terms of what impact they can have on retail energy space and specific retailers and products and pricing.

If we lose that appeal then we get into the alternative scenario that I described on prior calls where we’ll work very collaboratively with the commission to come up with a set of supposed rule changes or market changes that weed out some of the bad actors but leave a healthy market for good companies to participate in.

And I'm not anticipating you know I'm fully expecting that we're going to have a healthy market beyond 2016 or beyond ‘17 and ‘18 and going forward. And we'll be able to comply with whatever changes we collectively determine we need to make in that market..

Your next question comes from Liam Burke with Wunderlich..

Nathan, you talked about a fairly decent backlog of acquisitions.

Do you see any pricing changes out there or any additional competition for potential purchases?.

In the last few quarters, I mean, we've seen Calpine look at a few transactions, but that's really the only new buyer that we've seen and my sense is Calpine might be full up on acquisitions now based on what I'm reading. So other than that really no, I mean most of these are what we've been doing in the past which are bilateral negotiations.

It's a function of us being able to come up with creative deal structure that works for the sellers and we can execute quickly. I mean one of the things about it is we're flexible, we're nimble and we can get deals done that maybe others can't and that's very attractive to sellers.

In terms of where deals are pricing, I really haven't seen a change in the last few quarters. I still think that every one of these deals that we're talking about are deals that we could get done in a three to four times range that would be immediately accretive to earnings..

And Rob, on the free cash flow, given fairly tight guidance on EBITDA, customer acquisition costs which would all go into the mix, there wasn’t seasonality in working capital which would probably affect cash flows in 2017.

Do you anticipate any material changes, any of those variables?.

We still expect to see some seasonality, pretty much goes with the gas curve. I think that drives both our power prices and our natural gas prices. Generally, I think we’re just going to see the same, but more of it as we go forward into ‘17..

Your next question comes from Mike Gyure with Janney..

Can you guys touch a little bit more on your customer acquisition cost spending for next year and guess where you're targeting I guess that money to be spent maybe markets or kind of in the mix of industry kind of what you're looking for there?.

We’ve signaled that we're going to spend $27 million to $33 million in CAC. I still think that's a good number. We're really looking at where the opportunities are, right now this part of the year I’d say it’s pretty well spread across our footprint in the US.

But we're going to continue to look at where the opportunities are and the good news is we can shift those dollars from one market to another if the supply situation changes or regulatory environment changes or customer opportunity changes. So, pretty flexible in terms of what we're going to do in 2017..

An then maybe lastly on the joint venture in Japan, can you talk a little bit of I guess about that market and then maybe the market potential for other international markets you guys are looking at?.

So Japan is the single - it's essentially it's a PJM under one common set of rules. So it’s the largest electricity market ever to be regulated under one common set of rules in the history of the world. So you have to pay attention to it. That's the good news. The bad news is it's a difficult market to get into if you're not from Japan.

So we're very fortunate to have a good joint venture partner that we've developed a relationship with over the last number of years that owns generation that has experience on the large DNI retail and we bring a lot of sales and marketing and energy management expertise to the table, while they have a lot of the local relationships and culture.

And together I think it's a very effective partnership. There's just a tremendous amount of interest in Japan right now in terms of consumers looking at alternatives switching as well as market entrants eager to get into that market. So we're very optimistic about what that could translate into over the next several years.

But as I said on some of the prior quarters, we're not going to spend a lot of time talking about it until it becomes material to our overall financials and we're not there yet. In terms of other markets, we are looking at the UK and looking at Germany but we don't have anything that we are ready to announce just yet..

Your next question comes from the line of Tanner James with Ladenburg Thalmann..

Just a quick question, how should we think about the accounting impact and income statement impact from the recently announced acquisition from NG&E?.

Just from the accounting impact, we’ll probably have some period where we end up having to do a recast given when they bought it but it’s probably going to be immaterial at least for that time period and anything that we do have which is full rights to the non-controlling interest. Same as the Major..

[Operator Instructions] Your next question comes from the line of Sophie Karp with Guggenheim..

Hi guys. Thank you for taking my question. Congrats on a strong quarter. Just real quick to confirm your - you reiterated the guidance of 90 million to 100 million for this year for the EBITDA, does that include the current LOIs or is that the LOIs are going to be additive to that..

Thanks for asking Sophie and welcome to our call, I'm glad you asked that note, just to be clear the 90 to 100 is for our existing business only.

The deal that we just announced that we expect to close in the next several weeks would be additives to that number and then the other LOIs that we've currently signed and are working at closing would also be added to that number. So that's why we're going to come back in the next several weeks and update the guidance..

Great, great, thanks for confirming that. And then could you maybe comment on, I was amused that the Spark spread report that basically said that you may be looking at some statistic alternatives for your business..

We really can't comment on market speculation at this point..

We have no further questions at this time; I’d like to turn the call back to Mr. Kroeker for any closing remarks..

I just want to thank everybody again for participating in today's call and we look forward to talking to you soon..