Good morning, ladies and gentlemen. Welcome to the Spark Energy Inc. Second Quarter 2017 Earnings Conference Call. My name is Takia and I'll be the 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 be given at that time.

[Operator Instructions] As a reminder, this conference call 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..

Good morning and welcome to Spark Energy, Inc.'s second quarter 2017 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 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 today'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.

We would also like to invite you to check our website regularly because we use it to disclose material nonpublic information and to comply with our obligations under Regulation FD, that web address is ir.spark energy.com. With that, I'll turn the call over to Nathan Kroeker, our President and Chief Executive Officer..

Thank you, Christian. I want to welcome our shareholders and analysts to today's earnings call. Since we held our last call, we've been very busy here at Spark achieving some meaningful strategic, operational and financial objectives. We closed on Verde Energy, we entered into a new credit facility and we announced a 2-for-1 stock split.

On the financial and operational side, we delivered a record second quarter adjusted EBITDA for the third consecutive year. We were able to do this despite the very mild weather across our footprint during the quarter. On top of all that Spark has well over 900,000 total RCEs now, a truly remarkable milestone.

I will address these accomplishments as well as our forward outlook and then I'll turn the call over to our CFO, Robert Lane, who will provide some details on the financial results.

We recorded 20.0 million in adjusted EBITDA in the second quarter, a 28% increase over the second quarter of 2016 and the largest adjusted EBITDA we've achieved in the second quarter of any year in our history as a public company.

Similarly, our retail gross margin reached 43.1 million for the quarter, an increase of 11% over the second quarter of 2016. The primary driver of this activity was our volumes, which were up significantly year-over-year despite the mild weather, primarily as a result of the Provider Acquisition.

We averaged 4.1% in monthly attrition in the second quarter. This is in line with historical norms although slightly higher than we've seen in the previous couple of quarters, impacted by required customer notifications on the customer contracts that we acquired from the seller of Perigee.

As we have stated in the past, we expect to continue to see attrition in the 3.5% to 4.5% range going forward as we continue to focus on optimizing the lifetime value of every customer relationship. As a result of our Perigee and Verde acquisitions, we made a conscious decision to slow our organic growth during the quarter.

As a management team we've been concentrating our organic growth in our higher value markets and we're excited about rolling out Verde’s web based opt-in channel across all of our brands as well as offering traditional nonrenewable and additional gas products through this channel.

Turning to M&A, during the second quarter we began the integration of our Perigee Energy customers as well as the acquisition of additional customers that we optioned from the seller of Perigee. Unlike most of our acquisitions, we are transitioning these customers to our existing brands in order to drive additional synergies through full integration.

We're also very excited about expanding into the newly acquired Delaware market and intend to move our existing sales channels into that market in the near future. While it occurred after quarter end, the biggest update today is the acquisition of Verde Energy on July 1.

The Verde brand is recognized as a leader in the renewable energy space serving 40 utility service territories, three of which are new market opportunities to Spark. We want to welcome Verde and its employees in Connecticut and Houston to the Spark family.

Together, we have already identified a number of synergies on both the cost and the revenue side of the business and we look forward to rolling these out as we work to integrate the two companies.

I also want to give a special thank you to the Spark team that worked so diligently to close Verde by July 1 as well as our banks who helped us syndicate our new credit facility that made this transaction possible. I want to reiterate that Verde offers us more than just a new brand.

They have exciting and effective sales channels that are going to diversify and drive growth across the company. This is an important concept, we're not just buying a brand or a customer account, we're buying platforms for organic growth that aren't readily available to others in our space.

We are reaffirming our guidance for 2017 in the range of 110 to 120 million in adjusted EBITDA which assumes customer acquisition costs of 32 to 39 million. These guidance metrics include the recent Verde acquisition and have been adjusted to reflect the mild weather that we've experienced and expect to experience going into the third quarter.

And with that I will now turn the call over to Rob for his financial review.

Rob?.

Good morning, thank you Dave. In the quarter we achieved 20 million in adjusted EBITDA, an increase of 28% over last year’s second quarter of $15.7 million. Retail gross margin for the quarter was $43.1 million compared with $38.8 million last year an increase of 11%.

On the G&A side, expenses were down 2.3% from last year to $19.3 million primarily due to a net decrease in the fair value of earn out liabilities offset by increase going in other variable costs associated with an increase SCE count.

While billing and other variable costs are up on an overall basis, our per RCE G&A costs are down year over year, which contributes to the G&A favorability. Increased volumes from provider as well as a higher number of commercial contracts where the main drivers to the increase in overall volume.

Major Energy contributed to a lesser extent as we have included 75 days of their results in the second quarter of 2016 following the recast. We ended the second quarter with a record 826,000 RCEs, up 2% from the first quarter.

We spent $4.4 million to acquire 80,000 RCEs organically during the quarter and we also exercised an option during the quarter to acquire an additional approximately 40,000 RCEs from third party. With the acquisition of Verde, RCE count is now well over 900,000, clearly an all-time high.

Interest expense for the quarter rose from $832,000 to $2.5 million, primarily because of $1.4 million of noncash accretion of our earn-out liability. [indiscernible] interest expense from the remainder of 2017 to be higher as we entered the third quarter with a higher debt load to facilitate the Verde acquisition.

As a quick reminder, we closed on a new credit facility during the second quarter that this larger, simpler and less restrictive than our current facility. Again, thank our banks for working with us to put this new facility into place.

Income tax expense for the quarter decreased to $409,000 as compared to $4.7 million for the second quarter of 2016, primarily due to a lower effective tax rate and a lower net income for the quarter. As we've indicated previously, we do not believe that net income or EPS are meaningful metrics to use in evaluating our performance.

That being said, our net income for the quarter was $4.7 million or $0.01 per fully diluted share compared to $19 million and $0.15 per fully diluted share for the second quarter of 2016 on a split adjusted basis.

This decrease in net income is primarily driven by non-cash 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 loss this quarter of 5.7 million compared to our mark to market gain of 14.3 million a year ago.

As we have reminded investors in the past, when the commodity curve falls, all other things being equal, we expect a non-cash mark to market loss that alternately does not change the actual cash we expect to receive on those fixed price contracts.

We would also remind investors to note that our non-controlling interest and preferred dividend are deducted from net income before arriving at the net income available for our Class A shareholders in our basic EPS.

Again, we back out the non-cash mark-to-market effect from our adjusted EBITDA and retail gross margin calculations, which we believe are the most accurate indicators of the performance of our business. As Nathan mentioned, Spark closed on the acquisition of Verde on July 1.

Spark paid a total consideration of $85.8 million consisting of $45 million in cash at close and a $20 million seller's note payable over the next 18 months plus approximately $20.8 million of working capital. There is an additional earnout to the subject of Verde’s ability to achieve to find performance metrics.

We funded the acquisition utilizing a combination of cash on hand along with additional borrowings under our existing credit facility. This marks our 10th acquisitions since our IPO nearly three years ago. During the quarter, we also announced a share dividend of one share of stock for each share of stock outstanding.

That 2-for-1 stock split was effective as the close of the market on June 16. We think this should have a positive impact on the [indiscernible]. On June 14, we paid a quarterly cash dividend for the first quarter of 2017 of $0.18125 per share on a split adjusted basis.

On July 15, we paid our inaugural dividend on our Series A preferred stock of $0.72917 per share. On July 19, we announced our second quarter dividend of $0.18125 per share on our common stock to be paid on September 14 and third quarter dividend of $0.54688 per share of preferred stock to be paid on October 16.

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

Thanks Rob. In summary, we had a phenomenal record breaking second quarter generating 20 million of adjusted EBITDA along with 43 million of retail gross margin. We closed the Verde Energy acquisition on July 1 and we have already begun capitalizing on synergies.

We will continue to identify and recognize synergies not only with the Verde acquisition but with our previous acquisitions as well, as we remain focused on realizing the cost benefits of scaling up our business. And with that we will now open up the line for questions from our analysts.

Operator?.

[Operator Instructions] Our first question comes from the line of Carter Driscoll of FBR. The line is open..

First of all congratulations on those challenging quarter from a commodity price perspective, so nice job on - in 2Q.

So first question is from the -- certainly, there have been a lot of development in New York State, so I was hoping you could give us an update on the New York regulatory environment, specifically the low income prohibition that went to effect and the broader initiative as to whether ESCOs are going to be able to continue to operate in New York and if you could quantify, a, your exposure to low income, either in New York or across portfolio and just maybe the back and forth you have between yourself and the Public Utility Commission and the agencies that you are also participating in and just give us some color on where you think it's headed over the next several months? I appreciate it and then I have a follow-up..

Okay. Thanks, Carter. Really three different components when you look at New York. The first one was a specific show cause order that related to the Spark business. That's been resolved a number of weeks ago and ultimately we're going to have to implement the slightly different compliance program, which we've already done. So that's behind us.

There was no financial impact from that. The second piece, as you alluded to, is the low income. All retailers in the state received listings of their low income customers several weeks ago and with the expectation that if those low income customers are not on compliant products, they have to be turned back over to the state.

So we're working through that list. I will tell you it's a relatively small number for us, it's somewhere in the range of 10,000 to 12,000 RCEs across all of our brands. A lot of those customers are on fixed price contracts today that roll off in the next 12 to 18 months.

So over the course of the next 12 to 18 months, we'll be working through new products to get compliant and ultimately we may end up turning some of those customers back over to the utilities.

The third component of this is the broader resetting order and that's the one where you alluded to, we have been working very closely with other ESCOs in the space through a couple of industry organizations, working very cooperatively with the commission to come up with a set of rule changes that I think ultimately improves the overall quality of the market.

It's too early for us to know what those real changes are going to be.

I’m anticipating there are going to be things that we've seen before in other markets in which we operate and I’m anticipating it’s going to require us to either change some of our sales practices, our disclosures, maybe our product suite, but ultimately I think we end up with a healthy business in New York going forward long term.

It's going to be well into the third quarter, maybe the fourth quarter, as late as first part of ’18 before we know exactly what that's going to look like, but we continue to work through that process..

Could you talk about, obviously, you’ve done 10 acquisitions since the IPO. You were very focused on that in the first half of this year. Certainly, you start to see some multiples appear to me kind of creeping up.

Do you anticipate this inhibiting your ability to conduct future M&A and do you feel you have sufficient liquidity in the different resources available to do, let’s say, a size of a deal of Verde or something to buy other books, and then just maybe a competitive environment with, you’ve seen a lot of the IPPs and some of your direct competitors start to do some more acquisitions, just overall landscape picture from an acquisition perspective..

You hit on a couple of things here. From a financing perspective, I think we have a lot of options, right. We've got the preferred, we've got common equity obviously, although we haven't used it in a while, we've got term debt and we have a business that's generating cash flow.

So I mean I think, we definitely have alternatives when it comes to financing M&A transactions.

The second point I would say is I think we've demonstrated that we can be creative and come up with deal structures that include earnouts, seller financing, the timing of when we close these deals in order to work through some challenging situations and create transactions that end up being very accretive to our shareholders.

In terms of the overall landscape, I mean, yeah, I would say, we've seen multiples creep up a little bit. There are still definitely opportunities out there in the marketplace. We continue to talk to a number of different companies, but really don't have anything more that we're ready to discuss at this time..

And then maybe my last question is internationally, you guys have talked in the past about that being an opportunity to expand, can you talk about your plans there and then maybe some territories and/or the forms of potential expansion that you would be looking at?.

Yeah. We’re very, very happy with the way our Japanese startup is going. So we've been in that market for a little over a year now. We're in it as a joint venture partner. We've got a very good partner there that has local knowledge, local access to generation, local -- understands the way to do business over there.

We’re over 70,000 customers in that business today. It's turning to small profit at this point, although not material to our overall business yet. We really like that structure and we think that's a good way to enter new markets and we're looking to do that in several other countries in the future.

I would like to partner with local -- either local management teams or acquire small businesses and grow that way. As far as which markets we would look to enter, we have not made a decision on that, although we're evaluating some of the obvious ones that have healthy competitive markets..

Thank you. Our next question comes from the line of Sophie Karp of Guggenheim. Your line is open..

Couple of questions from me.

So on Verde, obviously the platform that they have is pretty unique to your portfolio and I was wondering if that’s something that you will be able to deploy and monetize across all of your brands and what kind of uptick should we see from that?.

So the piece of it that's truly unique is really their sales channel. We expect to be able to see synergies across a lot of the other areas of the business, whether it be finance, energy, supply, operations, some of that immediately and some of that once the earn-out is over.

So those areas, I think, there's a lot of commonality and opportunities for cost savings. The area that we're really excited about from a growth perspective is they have a web based opt-in sales channel that really allows us to get access to customers that were previously very challenging to get either through door-to-door or telemarketing.

Today, they sell primarily renewable electricity through that channel. So our expectation is we'll take that channel, we’ll roll it out across our existing brands.

We'll be able to offer traditional non-renewable products through that channel, we’ll be able to sell and cross-sell gas products through that channel and also be able to sell the renewable electricity across a lot of our other brands and markets through that channel.

So we're currently working with them to fully understand it and to begin the plans to roll that out across the broader space. Ultimately, how that translates into our financials is, we get better quality customers for the same cost of acquisition or it drives the cost per acquisition down over time..

And then as a quick follow-up on the debt, so you have slightly higher debt level because of the acquisition and is that a priority to pay that down or not necessarily at this stage and if yes, how long do you think it will take you to bring it down?.

The debt that you see today is really on our working capital facility and that facility was designed to flex up and then pay down and continue to support our working capital needs. So we're absolutely expecting that, either through operating cash flows, we will get that paid down over time.

If we do another acquisition, we'll have to get additional sources of capital to come in to support that, but I think the facility -- that facility as well as our subordinated debt facility are both working exactly as they were designed to work..

[Operator Instructions] Our next question comes from the line of Mike Gyure of Janney. Your line is open..

Can you talk a little bit on the retail gross margins kind of maybe your expectations for gas and electricity for the remainder of the year, if you’re kind of still within that range you thought at the beginning of the year? I think, gas was $3 and electricity was $27..

Yeah. Our outlook really hasn't changed much from that, Mike. I would call your attention to, if you look at our unit margins year-over-year, which we've disclosed, the second quarter of ’16 was an anomaly in terms of the unit margins, both on the gas and the power. There was a one-time optimization in prior period adjustments in both of those numbers.

On a more normalized level, they would have been, call it, $27 and $3, which is right in line with where we've been this quarter. Our long term view really hasn't changed much in terms of overall unit margins. We're going to be $25, $27 on the power side, high-2s, low-3s on the gas side..

And then maybe on the customer acquisition cost guidance, the break out -- I guess you talked a little bit about maybe lowering the expectation for organic growth.

Can you talk a little bit about, I guess the mix of where you’re spending the dollars and where you think you’re going to get the returns there?.

The mix is really about the same as it was in the first quarter of the year. We slowed a little bit just as we were focusing on acquisitions in the second quarter. The overall range that we intend to spend hasn’t changed from where we started the year.

You got to layer in the Verde and Verde comes along with its own customer acquisition cost, which is how we get to the 32 million to 39 million today. We expect to continue kind of normal levels of organic customer adds in the second half of the year.

Anytime you slow down a little bit, you do see -- you see slight improvements in the cost per add because you continue to run your most efficient channels, right. So you see a little bit of that, but overall, what you saw in the first half of the year should not change dramatically in the second half of the year..

Thank you. And we have a follow-up question from the line of Carter Driscoll of FBR. Your line is now open..

Just a quick question on maybe one of the potential outcomes in New York State is they've been talking about increasing or maybe requiring the retailers to sell, say, smart energy management solutions.

Can you talk about your progress there, your plans, if that is where the pending negotiations head over time, how you plan to address that if that is the case?.

One of our brands has already been very active in selling a bundled product in New York for the last couple of years. We've also had bundled offers that we have tried in the Midwest in the past.

We’ve not rolled those out to New York yet, but we're looking at home securities and other protection plans that we could bundle with our energy contracts in New York and those are some of the things that I alluded to earlier, things that we're going to implement once we understand what the requirements are in that market going forward..

Thank you. We have no further questions at this time..

I'd like to thank everybody for participating in today's call and we look forward to talking to you soon..