Good morning, ladies and gentlemen and welcome to the Spark Energy, IncorporatedFourth Quarter 2018 Earnings Conference Call. My name is Amanda, and I'll be your operator for today. At this time, all participants are in a listen-only mode. And 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 Incorporated's website. I would now like to turn the conference over to Mr. Christian Hettick with Spark Energy Incorporated. Please go ahead..

Welcome to Spark Energy's fourth quarter 2018 earnings call. This call is also being broadcast via webcast which you can be located in the Investor Relations section of our website at sparkenergy.com. With us today from management is our 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. Actual results may differ materially.We urge everyone to review the Safe Harbor statement in today's earnings release, as well as the risk factors in our SEC filings.

We undertake no obligation to update these statements as a result offuture events, except as required by law. In addition, we will refer to both GAAP and non-GAAP financial measures. For information regarding our non-GAAP financial measures and reconciliations to the most directly comparable GAAP measures, please refer to today's earnings release.

With that, I'll turn the call over to Nathan Kroeker, our CEO..

Thank you and welcome everybody to today's earnings call. I'm going to summarize our fourth quarter and full year results, and then Rob Lane, our CFO, will provide more details on our financials before we close with Q&A. Last year was transformational here at Spark.

We have made tremendous progress on integrating our acquisitions, consolidating our platforms and brands, shoring up our balance sheet and driving down costs, positioning the business for more profitable growth in 2019 and beyond. In addition, all of the full year hedges we had to put on at elevated prices last January have finally rolled off.

We achieved our key objectives for the year including reducing our extreme weather risk, dramatically simplifying our brand and operating footprint, refocusing on our mass-market business and delivering significant G&A savings across the organization.

We also executed three tuck-in acquisitions that are already fully integrated and had an immediate positive impact through our adjusted EBITDA. As a result of all these moves, we expect unit margins and adjusted EBITDA to increase significantly over the next two years.

But to take a moment to take a deeper dive into these accomplishments and what they mean for our future. We've increased the physical portion of our hedged portfolio in order to reduce the collateral exposure associated with weather events.

In addition, we have been using physical length and call options as insurance protection from extreme ERCOT summer and New England winter weather. We believe the benefits of reduced risk and a more stable earnings profile far outweigh the added cost of these protections.

While some of you may have heard that we had another Bomb Cyclone this winter, I'm very proud to say that we suffered no I'll effects from this winter's extreme cold and we expect that 2019's first quarter will be a very good start to our year.

We also committed to streamlining and simplifying our footprint which we have done through the consolidation of our brands, billing systems and office locations. We have eliminated four redundant brands and are aligning our business around our best brands going forward.

We began the year with 13 billing system instances; we've already reduced that number by half and are on our way to 3 by the end of 2019.

We've also consolidated 8 office locations into 2 locations, all of this along with the associated headcount reductions that we have done has resulted in us achieving over 75% of our targeted $22 million in G&A savings to-date.

As we move into 2019, we believe our internal initiatives to streamline the business and realize synergies are solidly in place, and will help return us to significant growth in our adjusted EBITDA and free cash flow to shareholders. And with that, I'll turn the call over to Rob for his financial review..

Thank you, Nathan. Good morning. In the fourth quarter, we achieved $20.1 million in adjusted EBITDA compared to last year's fourth quarter of $28.9 million. Retail gross margin for the quarter was $50.2 million compared with $66.2 million last year.

The decrease in retail gross margin was primarily due to lower electric unit margins, a trend we expect to reverse in 2019. Thanks to our cost saving initiatives, we saw a significant decrease in quarterly G&A year-over-year that we expect to continue this year.

Full year adjusted EBITDA was $70.7 million, compared to $102.9 million for 2017, while full year retail gross margin was $185.1 million, compared to $224.5 million.

The primary factors contributing to this decrease included decreased power unit margins attributable, both to the Bomb Cyclone and the company's liquidity position at the beginning of 2008 that we believed have been remedied.

A larger percentage of C&I customers that we are aggressively non-renewing, and an increased New England capacity costs that should roll-off at the end of May.

Our fourth quarter operating expenses improved by over 10% year-over-year, dropping from $31.7 million to $27.9 million; this is largely due to the $17 million of run rate synergies we have achieved to-date. We have realized an improvement of nearly 10% year-over-year in our G&A expenses on a normalized basis.

We expect to see continued improvement in our G&A as we fully realize $22 million of G&A savings over our 2017 normalized run rate by the end of 2019. We ended the year with 908,000 RCEs as a result of proactively non-renewing some of our less profitable C&I customers, as well as reducing our CAC spend, partially offset by the three acquisitions.

For the year we spend $13.7 million on customer acquisition costs compared to $25.9 million the prior year. Meanwhile, our monthly average customer attrition was 4.7%. Interest expense for the year fell from $11.1 million to $9.4 million, primarily because of less accretion on our earn outliabilities and [indiscernible].

Income tax expense decreased $2.1 million -- to $2.1 million from $38.8 million in 2017 driven by a reduction in taxable income due to lower gross margin and a non-cash loss on our hedging portfolio.

Our net income for the year was a loss of $14.4 million or a loss of $0.69 per fully diluted share compared to net income of $75 million and $1.21 for fully diluted share for 2017. 2018 was negatively affected by $28.8 million mark-to-market loss while 2017 was positively affected by $21.3 million mark-to-market gain.

As we have reminded investors in the past, when the commodity curve falls, as it is done since the elevated curve of December 31, 2017, we experienced a non-cash mark-to-market loss that ultimately does not change the actual cash we expect to receive on our fixed price contracts.

Looking at our balance sheet, we had net debt of $98 million and total liquidity of $60 million at year end. Since the end of the year, we have increased our total lender commitments on our senior credit facility by $25 million to $217.5 million, which brings our full formal liquidity to $103 million.

On December 14 and January 15, we paid the quarterly cash dividend on our Class A common stock and our Series A preferred stock respectively. On January 17 we announced our fourth dividend of $0.18125 per share on our common stock and $0.54688 per share of preferred stockto be paid on March 15 and April 15 respectively.

As we've stated in the past, we expect to pay these quarterly dividends on a go-forward basis. Back to you Nathan..

Thanks, Rob. I'm very proud of everyone here at Spark for the work they've put in to improve our business over the course of the last year. We're excited about 2019 as we continue to see the benefits of rationalizing our cost structure and returning our margins to normal levels. 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 B. Riley FBR..

So first question, you've done a lot of -- as you said, lot of behind the scenes work in preparing -- you have a much improved outlook for 2019-2020; can you talk about some of the puts and takes? You talked about significant growth in adjusted EBITDA which is right metric to value guys on, in terms of things like your expectations for price increases, customer growth, attrition, that margin expansion with a little bit more depth and just talking about the factors that you need to occur versus what is already in place.

So trying to get a sense of what's left to be done this year? You've obviously articulated on the cost side, but particularly to position yourselves where other aspects that will drive that adjusted EBITDA growth? Thank you..

I guess, first thing I would say, you've always had a very good understanding of this business and done a good job of modeling it going forward; so thanks for that.

I would point out the two -- probably two biggest things, one is, all of the hedges that we've put on at elevated prices last year have rolled off through the end of '18, so all of the things being equal, margins will expand in '19 and '20.

The second thing is, we are aggressively non-renewing or appropriately pricing all these C&I contracts on renewal, so you will continue to see our C&I portfolio shrink.

A lot of that C&I load was in at zero or slightly negative margins, so as that portion of the book falls off, net unit margins increase which you'll see in our investor data [ph] later today is that, we're projecting unit margins going back to $27 to $30 a megawatt hour. What I would highlight is, nothing has to change in order for that to happen.

If we just continue with our existing pricing strategy, the natural evolution of the hedges falling off and the change in the mix of the portfolio that we anticipate get us to those unit margins by the middle of 2019..

So it's -- and I'm assuming that's a relatively benign pricing environment, you don't need to increase prices to realize that either, the free [ph] function?.

Yes, so when we sell new contracts we target a specific unit margin or specific return on our upfront investment. The strategy doesn't change, obviously our retail pricing changes with changes in the underlying commodity curve but there is no fundamental shift in our strategy..

And then, just within the context of the hedge that you had to put in place for 2018 so full year doesn't roll-off.

But you did talk about some increased weather hedges, it just reminds -- just quantify again, and is that part -- those already have been taken into account in terms of the expectations of significant growth in adjusted EBITDA, is that correct?.

Yes. So summer of '18 we spent a couple of million dollars putting some insurance in place for ERCOT. In November we put -- you spend $1 million putting some insurance in place for New England, all that's already in the portfolio.

We fully anticipate doing something similar for summer of '19 and winter of '19, '20; all of that is baked into our go-forward projections..

So if I were to keep the book relatively flattish or a bit of a roll-off because of the natural attrition you're going to have in the C&I side, and apply those rough -- unit margins to let's see a 75-25 electricity, natural gas book; I mean you could -- I mean, just my back of the envelope calculation, you're talking at least 20% growth in EBITDA this year.

Is that unreasonable to assume?.

No, it's not unreasonable at all. Like we said, I think this business reverts back to the historical numbers that we had prior to that storm in January of '18. [Crosstalk]..

Yes, I understood.

Within that context, so -- there was obviously, one of your competitors taking out in terms of an M&A with KLIA [ph] being taken out just a few weeks ago; could you -- in the context of what your traditional M&A strategy has been and could you comment on whether you thought there was a reasonable multiple and/or talk about some of the opportunities that you're still seeing? I'm assuming that you're looking at kind of small book opportunities and tuck-in acquisitions similar to last year? Do you have a number in mind or an additional kind of range of RCEs you're looking to target this year? I'm trying to get a sense of what you think the business could be worth once you demonstrate you can grow your EBITDA double-digit? I mean, this is 5x to 5.5x reasonable multiple on trailing 12 months in your estimate?.

Yes, I think it's definitely north of 5x, maybe 6x. I think the previous acquisition says there is still room for consolidation in this space. We believe our platform is every bit as attractive as anybody else's in the industry. So I think we've got a very good business platform here.

KLIA's [ph] trading doesn't change our strategy at all; I mean, we're focused on a multi-year return to sustainable profitability and growth, and that includes both organic growth, as well as tuck-in acquisitions.

Tuck-in's specifically, our goal is to do one or two or three tuck-in deals everywhere, kind of like we've been doing for the last five years. So it really doesn't change our strategy at all in terms of continuing to grow and generate shareholder value..

Are you seeing -- I mean, obviously after that occurred, I would imagine that a lot of the players on the sides of yours maybe were getting some investor interest or even potentially some interest in the organization itself; could you comment upon that specifically? And/or at what point you think it would make sense assuming you got a bit in that range; do you think you need to demonstrate the growth before you would consider something or it would all depend on price?.

I'm going to say we do continue to see a lot of interest in our business but not going to comment any further on that..

All right, I had to try.

And then, maybe just last question for me; in terms of the cause [ph] left to do, can you just quantify -- I didn't mean quantify -- can you qualify that kind of remaining 25%? Is it little bit of all what you had cited that you have achieved to-date in terms of brand consolidation systems? Is that the remaining -- is there anything you haven't highlighted that you still need to achieve to reach that target of $22 million?.

No, it's just finishing all the stuff that we've started. So I still have several more billing systems to eliminate, there is a little bit of indirect cost associated with that, we just have to finish everything that we started. So it's well in hand, it's really -- several more months of hard work and we'll be there.

There is no steep change assumptions in that..

And maybe last one for me; so we've talked a fair amount about electricity which obviously has a much bigger effect on your financial performance because of the contracts you've added into and the composition of your customer base.

But looking on the natural gas side, can talk about maybe what your targets are there on a unit margin perspective? And is it a similar type of timeframe that you expect to get back at historical range?.

Yes. We're $3.7 to $4 a dekatherm. Gas hasn't really fluctuated that much, we've been in the mid-to-high $3's for several years, we see that continuing. Maybe expanding a little bit, some of the gas contracts we're selling now have more attractive unit margins on them than what we've done historically.

But we'll be in the high $3 to $4 a dekatherm going forward..

I'm sorry, one more.

Any territories in which you're expecting either of maybe go into with a new acquisition or will your M&A still be kind of tuck-in along your existing territory? Just trying to get a sense of any new opportunities that you're betting, at least domestically?.

We're in all the key markets today. M&A for us is really about consolidation in economies of scale; and so there is not a specific market that we're not in that we feel we need to be. And I think we've got the right footprint in order to realize the growth that we're projecting..

Thank you. And we have no further questions at this time. I'd like to turn the call back over to Mr. Nathan Kroeker..

All right. Thanks everybody for participating in today's call, and we'll talkto you next quarter..

Ladies and gentlemen, thank you for participation in today's conference. This does conclude the program, and you may now disconnect. Everyone, have a great day..