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Spark Energy Announces Results Of Strategic Review

CEO Says Retail Books Not Coming To Market, As Sellers Don't Want Price Weighed By Recent Higher Capacity Costs, ERCOT Volatility

August 6, 2018

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Copyright 2010-17 EnergyChoiceMatters.com
Reporting by Paul Ring • ring@energychoicematters.com

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During an earnings call on Friday, Nathan Kroeker, Spark Energy's President and Chief Executive Officer, provided an update on the company's previously announced strategic review, stating, "Following our strategic review, our executive team and Board of Directors believe the best way to deliver long term value to our shareholders is to continue streamlining our operations and building our mass market customer book. We continue to work with Morgan Stanley to review opportunities to maximize value to our shareholders."

Spark Energy had earlier this year announced that its Board of Directors had engaged Morgan Stanley as a financial advisor to, "explore strategic alternatives," and opportunities to unlock shareholder value

"We continue to look at opportunities, but at the present time, both the management team and the Board believe the best way to deliver long-term value is just to continue to focus on driving costs out of the business and returning to growth on our mass market customer book," Kroeker said of the strategic review

Discussing M&A, Kroeker said, "On the M&A front, we continue to focus on building our book organically, but we look for small tuck-in acquisitions as well as other strategic acquisitions."

Kroeker said that valuations remain a challenge to executing acquisitions

"So this is just one man's opinion, but we're not seeing a lot of deals come to market. And I think part of the reason for that is the trailing 12-month numbers are all impacted by the extreme weather event we saw last winter. The forward 12 months either have increased capacity costs or the ERCOT volatility and nobody wants to price off of those numbers. So, I just don’t think the M&A market, it's not as many sellers out there for those reasons. I do think we will see some small books and we are seeing some small books come to market as owners get squeezed on collateral requirements or growth capital coming out of last winter. But those tend to be smaller tuck-in deals from what we've seen. And we’re looking at them, but I’m not going to overpay for them. We’re going to be very diligent in our valuations," Kroeker said

"Over the course of the last, I would say, 1.5 to 2 years, we had slowed down organic sales efforts because we were putting a lot of focus on M&A. There were a lot of M&A opportunities out in the market at what we believe to be very attractive multiples. And we were spending a lot of our focus, and our dollars frankly, on pursuing growth through that avenue. In the current environment, we're seeing less M&A opportunities out there, certainly less at attractive multiples. So we're refocusing on mass market growth, really focusing on two things. How do we get additional value out of the M&A deals we've done over the last two years. And that's a lot of what we've talked about, driving $20 million worth of cost out of the business, but then how do we ramp up those organic sales channels. Now we've got a significant focus right now both on the lead-gen channel as well as the retail sales channel, both of which we acquired through two of our acquisitions and trying to increase dollars through those channels. Also looking at our door-to-door and our telemarketing channels, again, and ramping those back up. It takes a while to ramp those channels up in a quality form. So I would say you are going to see us increase our CAC spending over the next two to three quarters," Kroeker said

Kroeker said that Spark made considerable progress on its synergy and brand consolidation efforts during the second quarter, and achieved its initial target of annualized G&A cost savings of $15 million through process integration and headcount reductions, including the closure of five satellite offices.

Spark has successfully switched a total of 110,000 customers to more cost effective billing platforms during the second quarter, and it has notified an additional 62,000 customers of planned platform switches in the current quarter. This led to a near 20% decrease year-over-year in its G&A costs per RCE on a normalized basis, Kroeker said

Spark expects to drive an additional $5 million in annualized cost savings through a series of discrete projects during the remainder of this year, "putting us well ahead of our initial plan of driving $20 million in annual cost savings by the end of 2019," Kroeker said

Kroeker also provided an update on Spark's JV in Japan

"We have a profitable business over there [in Japan] with 107,000 customers currently on flow that have been acquired through a diverse set of sales channels. We continue to see development of the wholesale markets and corresponding new product alternatives over there. The business continues to outperform our business case, and we expect to begin taking distributions early next year," Kroeker said

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