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Lower Gross Margin Persists In Q4 At Spark Energy, Projects Improved Unit Margins During 2019

Spark Targeting 1-3 Tuck-in Deals This Year

March 4, 2019

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Reporting by Paul Ring • ring@energychoicematters.com

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Spark Energy, Inc. ("Spark" or the "Company") today reported financial results for the year ended December 31, 2018.

For the quarter ended December 31, 2018, Spark reported Adjusted EBITDA of $20.1 million compared to Adjusted EBITDA of $28.9 million for the quarter ended December 31, 2017. The decrease was primarily due to lower Retail Gross Margin partially offset by decreased spending on G&A and Customer Acquisition Costs.

For the quarter ended December 31, 2018, Spark reported Retail Gross Margin of $50.2 million compared to Retail Gross Margin of $66.2 million for the quarter ended December 31, 2017. The decrease was due to lower electricity unit margins and lower natural gas volumes.

Net loss for the quarter ended December 31, 2018, was $15.3 million compared to net income of $46.3 million for the quarter ended December 31, 2017, primarily due to a decrease in the non-cash mark-to-market position of Spark's hedging book, the decrease in Retail Gross Margin detailed above, and the inclusion in 2017 of a reduction in Spark's Tax Receivable Agreement (TRA) liability, offset by lower income tax expense in 2018 due to the Tax Law change.

Spark reported a Total RCE count of 908,000 as of December 31, 2018, versus 979,000 as of September 30, 2018

Spark said that the decline resulted from its previously reported strategy of focusing on its mass market business and not renewing low margin larger C&I customers (see story here)

With the roll-off of costly weather-related hedges at the end of 2018, and the non-renewal of low margin (or zero margin) C&I deals, Nathan Kroeker, Spark Energy’s President and Chief Executive Officer, said that the company is projecting unit margins going back to $27-$30/MWh by mid-2019

Spark reported average monthly attrition of 4.7% for the year ended December 31, 2018

During an earnings call, Kroeker said that, as in past years, the company continues to target one-to-three tuck in acquisitions for 2019

In reporting earnings, Spark discussed various previously reported strategies executed during the year, including closing three acquisitions in 2018 and its brand consolidation. Spark said that such brand consolidation and other synergies are on track for $22 million in run-rate G&A savings

"We have significantly improved the health and stability of the business in 2018, strengthened our balance sheet, and positioned Spark to grow in 2019 and beyond," said Kroeker. "Despite a challenging first quarter, we achieved our key objectives for the year, which included reducing our exposure to extreme weather risk, simplifying our brands and operating footprint, refocusing on growing our mass market business, and delivering on significant G&A savings across the organization. We also executed three tuck-in acquisitions that required minimal integration and had an immediate positive impact to our Adjusted EBITDA."

"Looking ahead, 2019 is already off to a good start. Our hedging strategy performed very well through the first half of the winter. We continue to shed larger, lower margin C&I customers, while the last of the full year hedges we put on during 2018's Bomb Cyclone rolled off in December. As a result, we expect our electricity unit margins to increase steadily over the next couple of years. We continue to focus on our mass market book while realizing the remaining cost savings we first targeted in 2017," Kroeker said

"We recently upsized our credit facility to $217.5 million, which gives us the flexibility to continue to be opportunistic on the M&A front. When you combine this with our disciplined approach to unit margin improvement and anticipated cost savings, we have a lot to look forward to," Kroeker said

For the year ended December 31, 2018, Spark reported Adjusted EBITDA of $70.7 million compared to Adjusted EBITDA of $102.9 million for the year ended December 31, 2017. The decrease was primarily due to lower Retail Gross Margin due to full year financial impacts of the extreme weather events of the first quarter of 2018, as well as increased G&A, partially offset by a reduction in Customer Acquisition Costs.

For the year ended December 31, 2018, Spark reported Retail Gross Margin of $185.1 million compared to Retail Gross Margin of $224.5 million for the year ended December 31, 2017. The decrease was primarily due to lower electricity unit margins caused by the increase in retail costs of goods sold from full year impacts of the extreme weather experienced in the first quarter of 2018 and other factors, along with a reduction in natural gas volumes, partially offset by an increase in electric volumes.

Net loss for the year ended December 31, 2018, was $14.4 million compared to net income of $75.0 million for the year ended December 31, 2017, primarily due to a decrease in a non-cash mark-to-market position of Spark's hedging book, the decrease in Retail Gross Margin detailed above, and the inclusion in 2017 of a reduction in Spark's TRA liability, offset by lower income tax expense in 2018 due to the Tax Law change.

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