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Retail Supplier Signs LOI With Retail Supply Counterparty Active In UK, Ireland, and Canada

Spark Energy: Seeing Fewer Opportunities For M&A As Sellers' Valuations Increase

Spark Energy: Shifting M&A Focus To International Equity Investments In Smaller Suppliers

Spark Energy Reports Financial Impact From Hurricane Harvey

November 2, 2017

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Copyright 2010-17
Reporting by Paul Ring •

Spark Energy said in reporting earnings on Friday that it is under a letter of intent with a retail supplier counterparty active in the UK, Ireland, and Canada

Spark did not disclose the identity of the counterparty

Additionally, Spark said that it is currently in discussions with several counterparties in various countries.

"We're currently in discussions with several counterparties 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 U.K. and Ireland. Looking ahead, I would anticipate that our international growth will be in the form of smaller equity investments, with significant growth potential," said Nathan Kroeker, Spark Energy’s President and Chief Executive Officer.

Spark is turning its attention to equity investments in smaller, international retail suppliers due to challenging valuations for domestic suppliers and large international suppliers

"While we continue to evaluate potential transactions, we are seeing fewer opportunities as sellers' valuation expectations have continued to move upwards. We are 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, where we're currently serving over 80,000 customers and exceeding our original investment case," Kroeker said

"We have previously looked at some international acquisitions that are out-sized and ... they tend to trade at higher multiples than domestic businesses, which is why we've kind of pulled back and changed our approach," Kroeker said

"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 [where the existing] management teams that have a lot of skin in the game, and then 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," Kroeker said

Kroeker identified Canada, a handful of European markets, and Australia and New Zealand as the international footprint Spark would consider for these types of equity investments

While Kroeker expects most of the focus will be on these international equity investments, Kroeker said that Spark will look at other accretive opportunities as they arise as well.

In a 10-Q, Spark detailed the financial impact from Hurricane Harvey

"We recorded estimated losses of approximately $1.1 million (including $0.4 million of additional estimated bad debt expense)," Spark Energy said of the impact from Hurricane Harvey

"The Company has not completed the final accumulation of total estimated losses attributable to lost revenues due to these [hurricane-related] power outages," Spark said in its 10-Q

However, Kroeker said during an earnings call that the company believes it has captured all the negative effects of the storm in Q3 (including estimating incremental bad debt expense) and would not expect any significant items to bleed over into Q4.

Spark was serving 957,000 RCEs as of September 30, 2017, versus 826,000 as of June 30, 2017 and 753,000 a year ago

Spark saw organic growth at a slower pace in the third quarter as it has been shifting focus to some new markets and new channels.

Gross organic growth was 108,000 RCEs from June 30, 2017 to September 30, 2017. The previously reported Verde acquisition contributed 145,000 RCEs on an inorganic basis to Spark's total RCE count as of September 30, 2017

Gross attrition was 122,000 RCEs from June 30, 2017 to September 30, 2017

Spark averaged 4.2% in monthly attrition in the third quarter, which is in line with historical norms and inside the company's forecasted range of 3.5% to 4.5%.

Spark bad debt expense for the three and nine months ended September 30, 2017 was 3.4% and 1.8%, respectively, of non-POR market retail revenues. As Spark's geographic and acquisition channel mix has changed, its bad debt expense has increased. "In order to manage this, we are placing an increased focus on collection efforts and timely billing along with tighter credit requirements for new enrollments in non-POR markets during three and nine months ended September 30, 2017," Spark said

For a further discussion regarding Spark's financial results, see our Friday story

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