Good morning, ladies and gentlemen. Welcome to the Spark Energy Inc. Third Quarter 2017 Earnings Conference Call. My name is Bruce and I'll 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. 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 third 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 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 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.

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.sparkenergy.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. Although we achieved near record adjusted EBITDA in the third quarter of $19.6 million, the quarter did not quite live up to our expectations. I will give an overview of our quarter results as well as the primary drivers.

I will also highlight some of the exciting developments we are seeing as we look ahead to 2018 before I turn the call over to our CFO, Rob Lane who will provide details on the financials. We recorded 19.6 million in adjusted EBITDA in the quarter which represents a 3% decrease over the third quarter of 2016.

Our retail gross margin reached 50.6 million for the first three months, the three months ended September 30, 2017, which represents an all-time high for the third quarter with increased volumes year-over-year due to our larger footprint and the addition of Verde and Perigee coupled with a full-quarter of provider results this year.

Mother Nature provided downward pressure on our third quarter results on two fronts. First of all the extremely mild temperatures we saw across the country throughout the quarter resulted in cooling degree days across our footprint being down approximately 27% year-over-year and down approximately 11% compared to the most recent five-year average.

And secondly, Hurricane Harvey dealt a significant blow to our Gulf Coast customers at the end of August. As previously mentioned in a press release, we are in awe of the generosity and strength of the entire community in their response to the storm.

While we had dozens of employees that experienced significant personal loss, I am proud to tell you that through the generosity of our employees and board members along with the company matching program, we were able to raise over $200,000 for our fellow employees.

This allowed us to offset the majority of the financial losses for our staff allowing them to focus on our business and care for our customers. From an operational standpoint, we were well prepared and executed on our business continuity plan 24 hours prior to the hurricane making landfall on the Gulf Coast.

Between our employees working in our emergency offsite operations center, employees working from home and our teams in Maine, Connecticut and New York who pitched in as well, we were able to operate with virtually no disruption to our customers.

Despite all of our planning and execution, Hurricane Harvey adversely affected our financial results in the third quarter.

Key drivers included selling electricity back to the grid at a loss and increase in bad debt in ERCOT as well as lost sales and loads that would otherwise have contributed to adjusted EBITDA and retail gross margin in the quarter.

We averaged 4.2% in monthly attrition in the third quarter, which is in line with historical norms and insider our forecasted range of 3.5% to 4.5%. We also continued our organic growth at a slower pace in the third quarter as we have been shifting focus to some new markets and new channels.

That being said, we were able to add a total of 108,000 RCEs organically as well as 145,000 RCEs we added with the Verde transaction compared to a total attrition of only 122,000 RCEs. Turning to M&A, as you know we've closed down ten acquisitions since our IPO in 2014.

While we continue to evaluate potential transactions, we're seeing fewer opportunities as seller’s evaluation expectations have continued to move upwards. We're very selective in our process and we'll only pursue transactions that are immediately accretive to our shareholders.

We are seeing additional opportunities on the international front and we continue to see strong growth in Japan, we're currently serving over 80,000 customers and exceeding our original investment case.

We're currently in discussions with several counter parties in a few different countries and have executed a letter of intent for an equity investment in a group that has a footprint in Canada, the UK and Ireland.

Looking ahead, I would anticipate that are international growth will be in the form of smaller equity investments, with significant growth potential. Although we will look at other creative opportunities as they arise as well. Speaking of M&A, I wanted to give you a quick update on the integration of Verde Energy which we acquired on July 1.

The Verde integration effort is currently underway and we have already successfully and seamlessly integrated our supply, accounting, treasury and risk functions. Although our ability to completely integrate the business is somewhat restricted due to the existing earn-out, we expect to continue realizing additional synergies over the coming months.

Finally, as I mentioned on the last call, we were extremely excited about rolling out Verde’s web-based opt-in channel across our family of brands and we have already begun to realize positive results.

With the expected slowdown in M&A activity I referenced earlier, we're using this opportunity to further integrate our previous acquisitions, driving additional process efficiencies and synergies.

We believe there is a significant potential uplift to our adjusted EBITDA over the next two years as a result of these integration related activities and I plan on providing an update on this initiative on our next earnings call.

With the mild weather and effects of Hurricane Harvey that we experienced in Q3, we expect annual results to come in modestly below the 2017 guidance that we had previously provided. One final note before I turn the call over to Rob. We recently amended our credit agreement to upsize our facility for 150 million to 200 million of capacity.

Additionally, we welcome two new banks Amegy Bank and Bank of Texas into our syndicated credit facility in the last three months. With this, we've now added four new banks to our credit facility this year, which is really a testament to our historical performance and the trust that the banks have put in us to be good stewards of capital.

Sorry to steal thunder Rob, I'm just really proud of our new banking relationships and all of our banking partners who continue to support the organization. And with that I will now turn the call over to Rob for his financial review.

Rob?.

Thank you Dave. Good morning. In the quarter, we achieved $19.6 million in adjusted EBITDA, a decrease of 3% compared to last year's third quarter of $20.3 million. Retail gross margin for the quarter was $50.6 million compared with $45.2 million last year, an increase of 12%. There are two issues to be mindful of in this comparison to last year.

First, we have the additional load we are serving following the acquisitions our Perigee and Verde customers. However, that increase is significantly offset by the milder than expected third quarter weather and the effects of Hurricane Harvey.

On the G&A side, expenses increased 42% from last year to $25.6 million primarily due to an increase in the number of customers we serve, increased commissions paid to a larger commercial book, some one-time charges associated with Hurricane Harvey and an increase in bad debt.

This increase was partially offset by the revaluation of certain performance payments associated with our purchase of the major companies. As Nathan mentioned, we expect to manage the business to drive additional cost savings and synergies out of our existing businesses over the next two years.

We ended the third quarter with a record 957,000 RCEs, up 16% from the second quarter. The primary driver of this increase was the acquisition of the Verde Company. In addition, we spent $6.6 million to acquire 108,000 RCEs organically during the quarter.

Interest expense for the quarter rose from $1.3 million to $2.9 million primarily because of $1.1 million of noncash accretion of our earn-out liabilities and sellers note.

Income tax expense for the quarter increased to $2.5 million as compared to $1.1 million for the third quarter of 2016, primarily due to higher net income before taxes for the quarter.

Our net income for the quarter was $12.9 million or $0.11 per fully diluted share compared to $6.8 million and a loss of $0.02 per fully diluted share for the third quarter of 2016 on a split adjusted basis.

The increase 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 gain this quarter of $4.9 million compared to a mark to market loss of $10.1 million a year ago.

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

Since our last call, we have completed the exercise of our accordion on our credit facility and recently executed an amendment that allows us to increase our credit facility up to $200 million in total commitments. We are pleased to welcome two new banks to the facility, which brings our total commitments to $150 million.

As we move into the winter season and continue to grow our customer base, we believe we have the flexibility to meet our working capital needs in order to best serve our customers. On September 14, we paid the quarterly cash dividend on our Class A common stock and on October 16, we paid the quarterly cash dividend on our Series A preferred stock.

On October 18, we announced our third quarter dividend of 18.125 cents per share on our common stock to be paid on December 14 and our dividend of approximately 54.7 cents per share on the preferred stock to be paid on January 15. As we've 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. We're very proud of everyone here at Spark for their contribution and success in tripling the company's size since our IPO three years ago.

Due to our much greater scale and the diversity of our business, we're still able to generate almost $20 million in adjusted EBITDA, despite the huge hurdles that Mother Nature threw at us this quarter.

We will continue to evaluate potential acquisitions, but are fully focused on realizing significant economies of scale as well as the numerous synergies from our previous acquisitions as we go forward. And with that, we will now open up the line for questions from our analysts.

Operator?.

[Operator Instructions] And our first question comes from the line of Carter Driscoll from B. Riley..

So my first question is, can you talk about the international opportunity in terms of timing? You mentioned you have an LOI with a group and it seems like you may experience similar multiple issue in terms of the ability to be accretive internationally because multiples tend to even be higher internationally, at least they have been in the most recent past.

So maybe just dollar amount of some of the equity investments you're talking about and then maybe timing of expected contribution. I'm assuming at year, it should be second half '18, maybe even 2019.

And then maybe some additional markets that you're targeting at least broadly?.

Sure. I think you understand the strategy pretty well. We have previously looked at some international acquisitions that are of size and to your point, they tend to trade at higher multiples than domestic businesses, which is why we've kind of pulled back and changed our approach.

What we're planning to do here is identify proven management teams that have small businesses that maybe are in need of growth capital where we can share expertise, be somewhat involved in managing the business, but management teams that have a lot of skin in the game and didn't make equity type investments.

In terms of size, I'm guessing that those are going to be single digit million investments for 25% to 50% ownership interest initially with the opportunity to buy up from there. But that's an opportunity for us to get in and kind of grow with the local management team in these markets.

In terms of contribution, I mean to your point, it's going to take us a year before these things start dropping EBITDA and hit the bottom line. The other question was on markets. I mean there's -- obviously there's Canada. While it’s not a huge market, it's close and it's very similar to the US and it has a pretty healthy commercial aspect to it.

There's a handful of the markets in Europe that a lot of companies are talking about. You've got Australia and New Zealand as well. That's pretty much the footprint that we would consider..

Okay.

And then can you talk about the impact that Harvey may or may not have on 4Q? And maybe very practically, what were some of the effects from the latter part of, obviously, 3Q? And then maybe your expectations for what you had built it for 4Q for weather? Obviously, it was a very mild summer in particular for Northeast, where you have a high profile, maybe just your expectations that have led you to believe that you're going to -- you're probably not going to come in towards the lower end of the guided range?.

So just talking about Harvey and I'm going to give you some firsthand experience since my house actually flooded and my meter was under water. What you had going on for a week to two weeks was customers were getting electricity turned back on in their homes, but the meters were not yet functioning.

So we lost out on revenue associated with that, while we continue to have to provide COGS or supply for that. So that was one piece of it. The other piece of it was just the overall load in Houston went down and as a result, we were slightly long on our hedges since we hedge to normal weather.

So we were having to sell back some of that supply and then typically selling it back into a low commodity environment, taken a loss on the hedges. That was the second piece of it. We had some G&A impacts, just associated with deploying our folks out to the disaster recovery location. And then the last piece of it is bad debt.

We've seen slight delays and our receivables are aging out a little bit longer following the event. We think we've done a good job of estimating what we think that incremental bad debt expense is going to be and we booked that in the third quarter.

So I believe we've captured all the negative effects of the storm in Q3 and would not expect any significant items to bleed over into Q4. Your second part of that question was on weather. October seemed to be fairly normal. November started off okay.

We're supposed to get some cold weather over the next few days, but long term, I mean, the next six weeks, our weather forecasting models are telling us that unfortunately it’s predicted to be mild in Q4. All of that is what’s kind of factored in when I say I think we’re going to be a little below the range for the full year..

Right, right. Obviously, you have the 3Q impact, Harvey, mild weather, it continues a little bit into 4Q, it's not from an operational perspective, it's -- but onetime effects that should be kept within 3Q, it sounds like that, largely, the hurricane will be sequestered in 3Q.

Maybe just lastly, as you continue to integrate Verde and finish up Perigee, are there any kind of onetime -- I shouldn't say onetime -- ongoing effects to the different line items in OpEx and/or customer acquisition cost that we should be thinking about from a modeling perspective on a go-forward basis?.

Yeah. So one of the things that we had previously communicated was that we were going to spend between $33 million and $37 million on customer acquisition costs for the full year. I don't think that was a bad number.

But when you get to the end of the year, you're going to say, well, why is the number less than that? Well, the sales channel that Verde utilizes have a slightly different payment structure and from a technical accounting standpoint, we have to capture those costs within G&A instead of CAC.

So it may look like my CAC numbers are down this year relative to what we had communicated at the beginning of the year. But in effect, some of those acquisition costs are rolling through the G&A line now as opposed to the CAC line.

So one of the things that we're thinking about internally is okay, how do we pull that out, how do we clarify that and explain it, make it easier for you guys to model, but we're not there yet..

[Operator Instructions] And our next question comes from the line of Sophie Karp from Guggenheim..

A couple of questions for me.

First, could you tell us what is your thinking at these levels on share buybacks potentially? And secondly, is there any update on the regulatory proceeding in New York that you think is meaningful that you'd like to share?.

Okay. So first off on the share buyback, I mean, we obviously think the stock is currently undervalued. But that said, I mean we're also being very cognizant of the fact to be good stewards of our working capital for anticipated collateral requirements as we head into the winter.

It tends to be our highest collateral requirement season, so we're watching that closely and we'll provide updates every quarter in terms of how we're progressing along that share buyback. On the New York regulatory front, there are two pieces there. The first one is the low income moratorium.

There's currently a stay on that and the courts are going to revisit that here in November. Whatever the outcome of that is and I fully anticipate that we're going to have to turn a few low income customers back over to the utility over the next 6 to 8 months, but that's less than 2% of our overall business. So relatively insignificant to us.

The bigger piece of this is the broader resetting order and there's currently hearing scheduled for late November on this piece.

In the meantime, a group of ESCOs have gotten together and filed a motion to dismiss requesting to enter into settlement discussions with the commission and at the end of the day, my position on this really hasn't changed from where it was nearly two years ago.

I think what you're going to end up with is you're going to have ESCOs, ourselves included that are going to work proactively with the commission and get a set of rule changes or disclosure requirements or financial commitments overall that will improve the health of the market, but will allow retailers to continue to have healthy ongoing businesses in that marketplace.

So, we're continuing to work cooperatively with them and I'm hopeful that we'll have a good business one, two, three, four, five years from now in New York..

[Operator Instructions] At this time, I'm showing no further questions..

All right. Well thanks again everybody for participating in today's call and we look forward to talking to you soon..