Good morning, ladies and gentlemen. Welcome to the Spark Energy Inc. Fourth Quarter 2017 Earnings Conference Call. My name is Bridget 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 be given 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. Christian Hettick with Spark Energy Inc. Please go ahead..

Good morning and welcome to Spark Energy, Inc.'s fourth 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. Spark achieved another adjusted EBITDA record in 2017 with $102.9 million despite weather challenges including the mild summer, followed by Hurricane Harvey and then a surprised winter storm that hit the North East and Mid-West during the holidays.

2017 topped last year’s results by 26% and is the third straight year of double-digit adjusted EBITDA growth since our IPO in 2014. By any metric, our growth both organically and through M&A has been phenomenal and we think these opportunities will continue.

During our call today, I will discuss a few of the drivers of our financial results for the year and discuss the strategic moves that we listed in our press release last night. Then I will turn the call over to our CFO, Rob Lane, who will provide details on the financials.

We recorded full year adjusted EBITDA of $103 million compared to $82 million for 2016. This was due to additional volumes and margin from our Verde and Perigee acquisitions as well as a full year of the Major and Provider acquisitions.

For the fourth quarter adjusted EBITDA of $28.9 million compared to $24.8 million for the prior year, this was mainly driven by the increased volume from having a larger customer base.

Retail gross margin followed a similar trajectory, with full year retail gross margin of 23% year-over-year at $224.5 million for 2017, compared to $182.4 million for 2016 and fourth quarter results of $66.2 million compared to $58.8 million in the prior year.

We ended the year with over $1 million RCEs, an increase of 35% year-over-year, while monthly attrition for 2017 held steady year-over-year at 4.3%. 2017 was an extraordinary year for Spark, we closed three acquisitions highlighted by our purchase of Verde Energy, which closed on July 1st.

In the fourth quarter, we launched a number of internal initiatives design to drive additional costs out of the business. We have already begun to realize some of these savings in the first quarter of this year. Our international joint venture in Japan achieved profitability ahead of schedule and we will touch on that briefly as well.

We saw employees come together to not only help each other during Hurricane Harvey, but to serve our customers during trying times without interruption. And we replaced our credit facility with the larger more flexible facility and welcome several new lenders into our syndicate group.

As we look forward, there are a number of exciting developments that we are happy to share with you today. On the acquisition front, Spark has already closed on one acquisition this month, which is a retail electric provider, serving both electricity and natural gas customers in seven states in the North East and Mid-West.

We have also agreed to purchase a book of customers from our affiliate, National Gas and Electric. In total, we will pay approximately $18 million in cash consideration, plus some working capital on the third-party deal.

These two acquisitions should add 80,000 RCEs and both deals will be immediately accretive as we expect to generate at least $12 million in adjusted EBITDA from the transactions over the balance of 2018. While we love the RCE growth, we are focusing even more on RCE quality in 2018.

We continue to streamline our customer acquisition costs to focus on our highest return sales channel. I mentioned our internal initiatives a little earlier, these are mainly centered around integration, simplifying our structure and enhancing both our gross margin and our operating margin.

As we announced on January the 15th, we terminated the Verde earnout and are aggressively working on its full integration into Spark, which we expect to be substantially complete in the second quarter. Earlier this week, we agreed to reintegrate retail services, Retail Co. services back into Spark.

As investors may recall, we first formed the Retail Co. at the end of 2015, because we believe that there were significant costs reductions to be achieved through improvements in our systems and in how we served our customers. At the time, we estimated those annual G&A savings to be roughly $5 million achievable over a 24 month period.

Our majority shareholder Keith Maxwell, formed Retail Co. to which we moved our back office operations in exchange for pricing that allowed us to realize those savings immediately. We felt that it was time to bring the Retail Co. employees and operations back into Spark now that these improvements have been fully achieved.

We have identified a number of additional synergies in the Retail Co.

reintegration, including redundant management and third-party service provider cost that we believe will allow us to achieve as much as $2 million of additional run rate savings from this reintegration, while at the same time, simplifying the story that we communicate to our lenders and our investors.

As mentioned in the press release, Keith has agreed to facilitate this reintegration for no consideration and our special committee has approved the transaction. We expect this reintegration to be complete in the coming weeks. We also have a number of other internal initiatives that we have been working on.

These include consolidating our brands in certain markets, automating some manual processes and working to consolidate our third-party relationships in certain areas to our strongest and most efficient partners.

We believe that taken as a whole, all of these initiatives and integrations should help us to achieve $20 million or more in annual run rate savings by the end of 2019. Building on our success in Japan, we had mentioned on our last earnings call that we will be looking at additional international opportunities.

We are currently working on three separate opportunities. In each of these we would be investing in existing management teams and business that have local market experience, while working with them on enhancing product offerings, marketing and energy supply. We also did a lot this year to enhance liquidity.

We issued over $90 million of Series A Preferred Stock including $50 million in the first quarter of 2018 and put together a new credit facility that has grown to $200 million of commitments. I want to thank our banks and our investment bankers for all of their hard work.

We believe that we are well capitalized and with the exception of a large acquisition do not foresee needing any additional external capital from the public markets for the foreseeable future.

Our Board has elected not to provide quantitative guidance at this time for 2018, but as we look at how 2018 is shaping up, we believe results will be largely in-line with 2017. January was impacted by the bomb cyclone that hit our Northeast and Midwest markets in late December and early January.

During that time we experienced higher than normal volumes and cost for that incremental load. That being said, this is not the first adverse weather event we've experienced in our 19 year history.

Our long-term outlook continues to be a combination of organic growth and taking advantage of additional M&A opportunities, whenever we find deals that are accretive to our shareholders. And if history repeats itself, we will see additional consolidation opportunities over the coming months as small retailers look for an exit opportunity.

One last thing, before I turn the call over to Rob for his financial review, as we highlighted in our press release last night, our Board has retain Morgan Stanly to evaluate strategic alternatives.

Since the time of our IPO, our management team and Board have been focused on ensuring that we are always making decisions to maximize long-term shareholder value. And we believe that the current stock price does not accurately reflect the growth we've achieved or the underlying value of the business.

We will provide further updates on this as information becomes available.

Rob?.

Thank you, Nathan. Good morning, everyone. In the fourth quarter, we achieved $28.9 million in adjusted EBITDA, an increase of 16% compared to last year's fourth quarter of $24.8 million. Retail gross margin for the quarter was $66.2 million, compared with $58.8 million last year, an increase of 13%.

Both of these increases were primarily due to the increased volumes from our Verde and Perigee transactions. Full year adjusted EBITDA was $102.9 million, compared to $81.9 million for 2016, an increase of 26%, while full year retail gross margin was $224.5 million, compared to $182.4 million, an increase of 23%.

This was due to the effect of Verde and Perigee as well as full year contributions from both Provider and Major Energy. Turning to G&A, operating expenses increased 19% from last year to $101.1 million, primarily due to an increase in the number of customers we serve, increased commissions paid to a larger commercial book and an increase in bad debt.

As Nathan mentioned, we continue to drive additional operating synergies through a number of initiatives including the early termination of the Verde earnout and the reintegration of retail gross services. We ended the year with over 1 million RCEs again as a result of Verde and Perigee acquisitions and our larger C&I book.

For the year we spent $25.9 million in customer acquisition costs, compared to $24.9 million the prior year. Meanwhile, our monthly average customer attrition held steady year-over-year at 4.3%.

Interest expense in the year rose from $2.3 million to $11.1 million, primarily because of accretion of our earnout liabilities and sellers note, and greater utilization of our credit facility over the course of the year.

Other non-operating income of $22.5 million included non-cash income of $22.3 million related to the revaluation of the tax receivable liability as a result of the Tax Legislation passed in December of 2017. Income tax expenses increased to $37.5 million as compared to $10.4 million for 2016.

The biggest factor here was the non-cash tax effects of the revaluation of the tax receivable liability, non-cash taxes paid on our non-cash derivative gains and additional tax as a result of the strong financial performance.

Turning for a moment to the most recent tax legislation passed by the federal government, we expect the change to have a positive effect on our net income, as well as our cash position going forward.

Our estimation is that the new tax laws will cut our tax rate, as well as our tax related distributions by roughly 35% taking into account both the new federal rates and rules, as well as the state taxes we have to pay.

Our net income for the year was $76.3 million or $1.19 per fully diluted shares, compared to $65.7 million and $1.11 per fully diluted share for 2016 on a split adjusted basis.

2017 was positively affected by a $21.3 million mark-to-market gain, as well as a non-cash after tax income of $13.7 million from the revaluation of the tax receivable liability. While 2016 was positively affected by a $20.3 million mark-to-market gain.

As we have reminded investors in the past, when commodity curves rise, all other things being equal we experience a non-cash mark-to-market gain that ultimately does not change the actual cash position we expect to receive on those fixed price contracts. Looking at our balance sheet, we now have total in our commitments of $200 million.

We also recently raised an additional $50 million of Series A Preferred Stock in January, which we planned to use to help fund our acquisitions and international expansions. Looking at our position at the end of the year, we had total liquidity of $67 million.

On December 14th, we paid a quarterly cash dividend on our Class A common stock and on January 15th, we paid the quarterly cash dividend on our Series A Preferred Stock.

On January 18, we announced our fourth quarter dividend of $0.18125 per share no our common stock to be paid on March 16th, and fourth quarter dividend of $0.54688 per share of preferred stock to be paid on April 16th. As we've stated in the past, we expect these quarterly dividends to grow on a go-forward basis. That's all I have. Back to you, Nathan.

.

Thanks, Rob. We are very proud of everyone here at Spark for helping us to break the $100 million adjusted EBITDA and $1 million RCE thresholds. As we look towards 2018 and beyond, we will continue to focus on growing both our top and bottom-line through continued acquisitions, organic sales, integration and international expansion.

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 with B. Riley FBR..

Good morning gentlemen and nice job in 2017..

Thank you. .

First question, just a trying to understand guidance and I recognize a lot of moving factors this year, but [indiscernible] positive so I would assume that it doesn’t include any M&A, does it exclude the two announcement you made today obviously it probably exclude anything that you can announce? And then you talked about potentially $20 million annualized cost savings I would assume that maybe the bulk of that is pushed into 2019? Help me understand the different moving parts.

And then maybe the interplay of commodity prices and how you may be adjusted your hedge book going forward for some of the [indiscernible] and events this year if at all? Thank you. .

Okay, great question. Couple of things, we referenced the weather event in January, we believe that will have a negative impact on the first quarter.

And then the two acquisitions those are factored into our projections, but any incremental M&A that we anticipate doing as a result of the weather event is not factored in, whether it’s international or domestic.

And then the $20 million run rate cost savings we are working on achieving those now, but the majority of those will show up in the beginning of 2019..

Okay.

And then moving on just so I understand liquidity position today obviously you resized credit facility last year and added syndication partners, I think I heard you say you have approximately $200 million outstanding between the different facilities; A, is that correct? And then, obviously you had some from the preferred raise do you feel this gives you sufficient liquidity if you found a big M&A opportunity maybe of the size of Verde, would you be able to act on that quickly or how you would be able to facilitate something if it were north of what your current liquidity position is?.

Hey, Carter, this is Rob. Let me answer the first part of the question, Nathan and I will tackle second part together. We have $200 million of commitment as you know a lot of that is actually with our LCs. So it’s not available to draw, but it’s not drawn.

And then the other piece of that is and what’s actually drawn is I believe at the end of the year is a little of our $100 million that’s actually lower than that now.

So from a capacity utilization standpoint we are not utilizing that full $200 million right now, we have got some good room on that, plus cash available plus if there is also that short-term liquidity that our sponsor provides us as well. And then we have the preferred as well.

If we look and say how would we finance another acquisition, we probably look to use some sort of combination of cash on hand and the preferred stock that we have, we might look to do some stuff on the debt side as well.

At this point I don’t believe that there would really be any utilization of the common stock to be able to do that and that’s really not something we anticipate..

Okay. And then related to that, so you feel comfortable because preferred is obviously pays a nice dividend you feel comfortable with your payout ratio with the moving parts at least for 2018 obviously there is more cost savings as Nathan alluded to impacting 2019 just want to make sure you feel comfortable with the payout ratio.

And then I just have one last follow-up..

We are very comfortable with that, and that’s something that our Broad is very tightly focused on and they spend time on as well. So we do feel comfortable there..

Okay.

And then just lastly obviously the big question in the room with the engagement of Morgan Stanley, just give me an idea of how the engagement was broached, are there other parties like maybe IPPs with your balance sheets coming to you looking to buy a book and seeing maybe depressed stock prices an opportunity to be opportunistic much like you guys have been over the past several years, is it to facilitate international expansion and or change in your business strategy, just maybe characterized what you envision engagement could it be some or all those aforementioned?.

Yes, Carter, I mean, we have had some interest over the last several months and I think management as I said earlier management and the Board both believe that the current stock price does not reflect the underlying value of the business. And as such we’ve engaged Morgan Stanley to assist us. We’ve just recently engaged them.

So really don’t have anything else to report at this time, but we will be happy to do so, as information becomes available..

Okay, I appreciate answering my questions, I’ll get back in the queue gentlemen. Thank you. .

Thank you. .

Our next question comes from the line of Mike Gyure with Janney. Your line is open. .

Yes, I was wondering if you guys could maybe give us an update on kind of the New York regulatory environment, and I guess, what’s your thinking there? And I guess, I get questions everyday about it and maybe just to get your perspective?.

Sure Mike. Really our view hasn’t changed on New York in two years and we continue to work with the group of other large retailers, trying to get an audience with the commission, with the governor’s office.

At this point, the commission has said they don’t really want to do anything until the court process plays out and we anticipate sometime this summer, we’ll be able to get in there and enter into some sort of settlement, negotiations with them.

When I say settlement, I am talking about settling on what are the potential rule changes, not any sort of dollars. And by the end of the year, maybe early 2019, I anticipate a set of rule changes or disclosure requirements or other things that we are familiar with from other markets and we’ll adapt to it, and we’ll continue to operate our business.

The other thing I would highlight is that with -- as we’ve continued to grow and expand in other markets, New York, today is only about 15% of our overall business both top and bottom-line, and we continue to focus on growing in other geographies. So, we’re kind of where we have been for two years on that issue..

Okay, great. And then maybe one more on the customer acquisition costs.

I guess what are you thinking as far as spending for 2018, maybe just directionally compared with 2017, if you view it as same, more, what are you looking at there?.

So the one think I will highlight is part of this internal initiatives to drive down costs have been very focused on reducing the amount we spend on certain sales channels. And one of the big areas for us to realize costs savings, as we integrate these acquisitions is to get the cost of customer adds down.

On a consolidated basis, we reduced the costs by 3% year-over-year in terms of adding customers and I think there’s significantly more that we can do now that Verde’s earnout is behind us, and as we get near the end of the Major earnout. Those were two large pools of CAC dollars.

So I will tell you that underlying our 2018 view, the CAC dollars go down, but the number of customer adds are consistent. .

Great, thanks very much. .

[Operator Instructions] And I not showing any further questions at this time..

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