Greetings, and welcome to Spark Energy's Second Quarter 2019 Earnings Conference Call. [Operator Instructions]. As a reminder, this conference is being recorded. I'd now like to turn the conference over to Christian Hettick with Spark Energy Inc. Thank you. Please go ahead..

Welcome to Spark Energy's Second Quarter 2019 Earnings Call. This call is also being broadcast via webcast. It 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, Jim Jones.

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 cautionary statement in yesterday's earnings release as well as the risk factors in our SEC filings.

We undertake no obligation to update these statements as a result of future 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 yesterday's earnings release. With that, I'll turn the call over to Nathan Kroeker, our CEO..

Thank you, Christian. I want to welcome everyone to today's earning call. I will begin by providing a summary of our results, then our CFO, Jim Jones, will provide more details on the financials.

In the second quarter, we reported adjusted EBITDA of $13.6 million compared with $16.1 million in the second quarter of last year, reflecting increased investment in organic customer acquisitions as part of our strategic focus on mass market customer growth.

Retail gross margin was $41.7 million for the quarter, a decrease from the second quarter last year driven by milder-than-normal temperatures across much of our footprint, which led to decreased volumes in both of our commodity segments. These decreases were mostly offset by increased electricity and natural gas unit margins.

We are pleased to see unit margins continuing to improve, and we want to highlight for investors that our unit margins are returning to normal rate of $27 to $30 per megawatt hour on an annual basis. Our G&A has increased from last year's second quarter primarily due to a nonrecurring charge associated with the settlement of significant litigation.

Settling these cases enables us to reduce litigation cost on a go-forward basis, and we believe resolves the majority of our potential litigation exposure. Absent these nonrecurring items, our quarterly G&A is down 5% from the second quarter of 2018. We are nearing the end of our brand and systems consolidation project.

Most recently, we completed all of the customer migrations needed to retire another one of our acquired billing system. And we have a clear path to consolidating down the two billing systems by the first quarter of 2020. We are pleased to see our G&A costs trending down on a normalized basis.

And as we've talked about on the last few calls, we expect to achieve over $22 million in run rate savings by the end of this year. Our RCE count is down as we continue to optimize our customer mix, focusing on acquiring smaller commercial and residential customers and being more disciplined on pricing across all customer segments.

Our attrition improved 30% from the first quarter of this year and is back in line with last year's second quarter as we've accomplished the majority of our planned reduction in large commercial customers.

We want to remind investors that the second quarter is typically our lowest quarter from both the retail gross margin and adjusted EBITDA perspective, as the throughput from both commodities is at seasonal low points.

Given this normal seasonality and the milder weather we experienced in May and June, coupled with our increased customer acquisitions and the resolution of outstanding legal cases, we are extremely pleased with the quarter. That concludes my prepared remarks. And with that, I will now turn the call over to Jim for his financial review.

Jim?.

Thank you, Nathan. Good morning. In the second quarter, we achieved $13.6 million in adjusted EBITDA compared to last year's second quarter of $16.1 million. Retail gross margin for the quarter was $41.7 million compared with $43.4 million last year.

In our retail electricity segment, gross margin was $33.6 million compared to $32.6 million in the second quarter of last year. Volumes were lower due to a reduction in our customer base.

We ended the second quarter with 673,000 RCEs compared with 883,000 RCEs a year ago primarily as a result of our pivot away from larger, lower-margin commercial customers. Milder weather across several of our key markets impacted our volumes.

These impacts were more than offset by our electricity unit margins, which were up 42% over second quarter 2018 as a result of improvements in our customer mix and a soft commodity price environment. In our retail natural gas segment, gross margin was $8.1 million compared to $10.8 million in the second quarter last year.

Volumes were 28% lower from the second quarter 2018 partially offset by unit margin increase of 4%. Lower volumes are attributable to our natural gas customer portfolio [indiscernible] 166,000 RCE to 145,000 RCE year-over-year driven by our commercial gas [indiscernible] as well as milder weather in several of our key markets.

G&A expenses of $37.2 million were higher as compared to last year's second quarter due to nonrecurring legal charges of $10.8 million in the quarter. As Nathan mentioned, we believe these charges enabled us to [indiscernible].

Given our more recent acquisitions to our customer portfolios rather than platform [indiscernible] and our increased focus on sales quality, we expect that our G&A related to legal and regulatory matters will be back to historical levels in 2020.

Total RCE count in the second quarter was 818,000 RCEs, reflecting our continued shift away from low-margin large commercial customers. Our attrition of 3.8% improved 30% from the first quarter of this year and is back in line with 3.7% a year ago. Interest expense for the quarter was flat compared to last year to $2.3 million.

Income tax expense was a benefit of $4.6 million as compared to an expense of $3.3 million for the second quarter of 2018. Our net loss for the quarter was $25.5 million or $0.73 per fully diluted share compared to net income of $23.9 million or $0.51 per fully diluted share for the second quarter of 2018.

The decrease in net income was driven by 2 factors. First was a nonrecurring legal charge. Second was a noncash mark-to-market accounting associated with changes we have made [indiscernible]. We had a mark-to-market loss this quarter of $22.7 million compared to mark-to-market gain of $25.4 million a year ago.

As we've reminded investors in the past, the noncash market mark-to-market movements do not affect the actual cash we expect to receive on our fix-priced contracts. This is why we don't believe net income is a good indicator for our business performance as we continue to guide investors away from net income and towards adjusted EBITDA.

On June 14 and June -- July 15, we paid quarterly cash dividend on our Class A common and Series A preferred stock, respectively. On July 17, we announced second quarter dividend of $0.18125 per share on our common stock to be paid September 16 and $0.54688 per share on our preferred stock to be paid on October 1.

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

Thanks, Jim. Midway through the year, we've taken a couple of steps to clean up the story. We put several pieces of legacy litigation behind us and we've settled the tax receivable agreement. We see our unit margins continuing to expand as we have indicated they would and our normalized G&A continuing to trend down due to our cost savings initiative.

We believe that we have taken the initiatives necessary to produce stable earnings growth, and we expect the second half of this year to begin to show the full effects of all the work that we've done over the last 12 months.

Finally, we are laser-focused on investing in sales and marketing activities that we believe will further solidify our future and grow our mass market customer base. I want to thank our employees and our suppliers for their hard work producing a good quarter, and I want to thank Spark's customers for choosing us as their energy provider.

We're very excited about the future and we look forward to connecting with you on our next call..

Thank you. This concludes today's teleconference. Thank you for your participation..

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