Updated: Spark Energy Sells Japanese Joint Venture; Reports Electricity Unit Margins Returning To Normal Versus Year-Ago

March 5, 2020

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Updated, 3:10 p.m.:

Spark Energy in a 10-K further disclosed details of the sale of its Japanese joint venture

Spark Energy said in the 10-K that, "Prior to November 2019, we, together with eREX Co., Ltd., a Japanese company, were party to an agreement ('eREX JV Agreement') for a joint venture, eREX Spark Marketing Co., Ltd ('ESM'). As part of this agreement, we made contributions of 156.4 million Japanese Yen, or $1.4 million, for a 20% ownership interest in ESM. We were entitled to share in 30% of the dividends distributed by ESM for the first year a qualifying dividend was paid and for the subsequent four years thereafter. After this period, dividends were to be distributed proportionately with the equity ownership of ESM. ESM's board of directors consists of four directors, one of whom was appointed by us. In November 2019, Spark HoldCo, LLC entered into a share purchase agreement with eREX Co., Ltd. In accordance with the agreement, Spark HoldCo, LLC sold its shares which represented 20% ownership interest in ESM for $8.4 million. The disposal of ESM resulted in a non-recurring gain of $4.9 million for the year ended December 31, 2019. Based on our significant influence, as reflected by the 20% equity ownership and 25% control of the ESM board of directors, we recorded the investment in ESM as an equity method investment."

"Our investment in ESM was $3.1 million as of December 31, 2018, reflecting contributions made by us through December 31, 2018 and our proportionate share of earnings as determined under the HLBV method as of December 31, 2018, and recorded in other assets in the consolidated balance sheet. There were no basis differences between our initial contribution and the underlying net assets of ESM. We recorded our proportionate share of ESM's earnings of $0.8 million and $0.5 million in our consolidated statement of operations for the years ended December 31, 2019 and 2018, respectively," Spark Energy said

Earlier:

Spark Energy, Inc. ("Spark" or the "Company") said in reporting earnings today that it sold its Japanese joint venture for a pre-tax gain of $4.9 million, not included in Adjusted EBITDA

Spark Energy's total RCE count was 672,000 as of December 31, 2019, versus 772,000 as of September 30, 2019, and 908,000 as of December 31, 2018 as the company continued its strategy of shedding low margin, large C&I customers

Average monthly attrition was 5.0% for the year ended December 31, 2019

For the quarter ended December 31, 2019, Spark reported Adjusted EBITDA of $25.7 million compared to Adjusted EBITDA of $20.1 million for the quarter ended December 31, 2018. This increase was primarily due to the higher Retail Gross Margin partially offset by lower customer counts.

For the quarter ended December 31, 2019, Spark reported Retail Gross Margin of $64.3 million compared to Retail Gross Margin of $50.2 million for the quarter ended December 31, 2018. "This increase is due to electricity unit margins and volumes returning to normal after a downturn in 2018, offset by lower customer counts," the company said

Net loss for the quarter ended December 31, 2019, was $0.7 million, heavily impacted by mark to market losses in the last few days of the year, driven by a warm front at year end in Spark's primary markets. This compares to a net loss of $15.3 million for the quarter ended December 31, 2018.

For the full year ended December 31, 2019, Spark reported Adjusted EBITDA of $92.4 million compared to Adjusted EBITDA of $70.7 million for the year ended December 31, 2018. The increase was primarily due to higher Retail Gross Margin despite an increase in G&A related to non-recurring litigation settlements, bad debt and legal fees.

For the year ended December 31, 2019, Spark reported Retail Gross Margin of $220.7 million compared to Retail Gross Margin of $185.1 million for the year ended December 31, 2018. The increase was primarily due to higher electricity unit margins, offset by a smaller customer count.

Net income for the year ended December 31, 2019, was $14.2 million compared to net loss of $(14.4) million for the year ended December 31, 2018, driven by higher retail gross margins, effective summer hedging, and the gain on the sale of Spark's joint venture in Japan.

"2019 was a strong year for Spark and we have continued to improve the quality of our customer book by continuing to shed low margin, large C&I customers. We see the significant increase in unit margins from last year as a result of our winter and summer insurance hedging strategy. With a strong push to simplify our platform in 2019, we completed the final steps of our brand and system consolidations and achieved our goal of G&A run-rate savings. Despite record price volatility in ERCOT this summer, our insurance hedging strategy continues to prove successful supporting our expanded electricity and natural gas unit margins. Earlier in the year we terminated our Tax Receivable Agreement on very favorable terms, amended and extended our senior credit and subordinated debt facilities, and we also resolved four significant litigation and regulatory cases," said Nathan Kroeker, Spark's President and Chief Executive Officer.

Spark said that it, "settled several significant legacy litigation items," during 2019

Spark reported that approximately 70% of all new sales in 2019 were fully renewable electricity or carbon neutral natural gas

For the year 2019, Spark's Electricity Retail Gross Margin was $160.5 million, up from $124.7 million a year ago. Electricity volumes were 6,416,568 MWhs in 2019, versus 8,630,653 MWhs a year ago

Spark's Electricity Retail Gross Margin per MWh for the year 2019 was $25.02 per MWh, up from $14.44 per MWh a year ago

For the year 2019, Spark's Natural Gas Retail Gross Margin was $60.2 million, versus $60.4 million a year ago. Natural Gas volumes were 14,543,563 MMBtus in 2019, versus 16,778,393 MMBtus a year ago

Spark's Natural Gas Retail Gross Margin per MMBtu for the year 2019 was $4.14 per MMBtu, versus $3.60 per MMBtu a year ago

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