Spark Energy Reports Growth In Adjusted EBITDA, Higher Unit Margins For Q1

Notes "Headwinds" From COVID-19, Says Customer Book Will Shrink From Door-to-Door Sales Suspension

Company Reviewing Dividend In Light Of Impacts From COVID-19 Pandemic

May 6, 2020

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Spark Energy, Inc. ("Spark" or the "Company") reported higher Adjusted EBITDA and unit margins for the quarter ended March 31, 2020.

"Our first quarter was an improvement compared to the first quarter of last year. Higher unit margins came close to offsetting the decrease in volumes compared to the first quarter of 2019," said Keith Maxwell, Spark's Interim President and Chief Executive Officer.

"Currently however, we are facing some headwinds associated with the COVID-19 pandemic. Our overall customer book is much healthier, but we have had to cease our door-to-door marketing efforts that will cause our customer book to continue to shrink. We are closely monitoring our bad debt exposure in the Non-POR markets in which we operate. We cannot predict the length of time we will have to endure these ongoing challenges or the economic impact we may face as we head into the ERCOT summer. We have greatly simplified our platform and will continue to look for ways to streamline the business as we deal with the effects of the COVID-19 pandemic," Maxwell said

"Although the Company ceased door-to-door sales activities and is closely monitoring bad debt as a result of the COVID-19 pandemic, for the first quarter of 2020, the Company had no material impact to its business, financial condition or results of operations," Spark said in a 10-Q

"We will continue to manage and evaluate all facets of the business including additional cost savings initiatives, efficiencies with supply management, as well as the payment of future dividends to ensure Spark emerges from the COVID-19 pandemic with ample liquidity and a platform that will allow us to return to growth," Maxwell said

In a 10-Q, Spark said, "We are currently focused on growing through organic sales channels; however, we continue to evaluate opportunities to acquire customers through acquisitions and pursue such acquisitions when it makes sense economically or strategically for the Company."

Spark's Total RCE count was 585,000 as of March 31, 2020, down from 672,000 as of December 31, 2019. The net loss of 87,000 RCEs from December 31, 2019 to March 31, 2020 compares to a net loss of 100,000 RCEs from September 30, 2019 to December 31, 2019

The net loss of 87,000 RCEs from December 31, 2019 to March 31, 2020 reflected 21,000 gross RCE additions (all organic) offset by attrition of 108,000 RCEs

During the three months ended March 31, 2020 and 2019, Spark spent a total of $1.3 million and $5.8 million, respectively, on organic customer acquisitions.

At March 31, 2020, electric RCEs were 460,000 and gas RCEs were 125,000

Spark reported average monthly attrition of 5.7%

Spark said that bad debt expense for the three months ended March 31, 2020 and 2019 was 3.3% and 4.2%, respectively, for non-purchase of receivable market ("non-POR") revenues. "An increased focus on collection efforts, timely billing and credit monitoring for new enrollments in non-POR markets in late 2019 have led to an improvement in the bad debt expense over the past several months. We have also been able to collect on debts that were previously written off, which have further reduced our bad debt expense during the three months ended March 31, 2020," Spark said

For the quarter ended March 31, 2020, Spark reported Adjusted EBITDA of $30.3 million, compared to Adjusted EBITDA of $25.1 million for the quarter ended March 31, 2019. This increase of $5.2 million was driven by a decrease of operational expenses, more than offsetting decreases in retail gross margin compared to the first quarter of 2019.

For the quarter ended March 31, 2020, Spark reported Retail Gross Margin of $55.5 million, compared to Retail Gross Margin of $56.6 million for the quarter ended March 31, 2019. This decrease of $1.1 million was primarily attributable to reduced volumes. Volumes have continually decreased due to Spark's previously reported strategy to move away from large, low margin commercial customers, the company said

Retail Gross Margin for Electricity was $30.8 million for the first quarter of 2020, up from $30.0 million a year ago

The gain reflects an $11.8 million improvement in unit margins, partially offset by a negative $11.0 million impact from lower volumes

Spark's Electricity Retail Gross Margin per MWh for the first quarter of 2020 was $28.23 per MWh, up from $17.35 per MWh a year ago.

Electricity volumes were 1,091,425 MWhs for the first quarter of 2020, versus 1,728,083 MWhs a year ago

Retail Gross Margin for Natural Gas was $24.7 million for the first quarter of 2020, versus $26.6 million a year ago

Spark's Gas Retail Gross Margin per MMBtu was $4.67 per MMBtu for the first quarter of 2020, up from $3.83 per MMBtu a year ago

Natural Gas volumes were 5,282,299 MMBtus for the first quarter of 2020, versus 6,951,610 MMBtus a year ago

For the quarter ended March 31, 2020, Spark reported total revenues of $167 million, versus $243 million a year ago

Net income for the quarter ended March 31, 2020, was $10.1 million, compared to net income of $2.7 million for the quarter ended March 31, 2019. The increase in performance compared to the prior year was primarily the result of the decrease in G&A, CAC and the non-cash mark-to-market accounting associated with hedges put in place to lock in margins on retail contracts. Spark had a mark-to-market loss this quarter of $7.9 million, compared to a mark-to-market loss of $11.7 million a year ago.

Spark reported Liquidity and Capital Resources as follows:

Liquidity and Capital Resources
($ in thousands)
                                    March 31, 2020
Cash and cash equivalents                  $54,466
Senior Credit Facility Availability(1)      72,356
Subordinated Debt Facility Availability(2)  25,000

Total Liquidity                           $151,822
($ in thousands)

Notes:
(1) Reflects amount of Letters of Credit that 
could be issued based on existing covenants as of 
March 31, 2020.

(2) The availability of the Subordinated Debt 
Facility is dependent on Spark's Founder's 
willingness and ability to lend

During an earnings call, Spark Energy executives noted that the company has paid a quarterly dividend since the company's public offering, but said that the company is evaluating the impact of the COVID-19 pandemic and, as such, the company will review the common and preferred dividend, along with all facets of the business. Business conditions and future financial results will drive all decisions concerning the continued payment of the dividend, the company said

In a 10-Q, Spark said, "Our primary sources of liquidity are cash generated from operations and borrowings under our Senior Credit Facility. Our principal liquidity requirements are to meet our financial commitments, finance current operations, fund organic growth and/or acquisitions, service debt and pay dividends. Our liquidity requirements fluctuate with our level of customer acquisition costs, acquisitions, collateral posting requirements on our derivative instruments portfolio, distributions, the effects of the timing between the settlement of payables and receivables, including the effect of bad debts, weather conditions, and our general working capital needs for ongoing operations. We believe that cash generated from operations and our available liquidity sources will be sufficient to sustain current operations and to pay required taxes and quarterly cash distributions, including the quarterly dividends to the holders of the Class A common stock and the Series A Preferred Stock, for the next twelve months. Estimating our liquidity requirements is highly dependent on then-current market conditions, including impacts of the COVID-19 pandemic, weather events, forward prices for natural gas and electricity, market volatility and our then existing capital structure and requirements."

In a 10-Q, Spark said, "Our ability to pay dividends in the future will depend on many factors, including potential impacts of COVID-19, the performance of our business and restrictions under our Senior Credit Facility. If our business does not generate sufficient cash for Spark HoldCo to make distributions to us to fund our Class A common stock and Series A Preferred Stock dividends, we may have to borrow to pay such amounts or temporarily suspend the dividends. Further, even if our business generates cash in excess of our current annual dividend (of $0.725 per share on our Class A common stock), we may reinvest such excess cash flows in our business and not increase the dividends payable to holders of our Class A common stock. Our future dividend policy is within the discretion of our Board of Directors and will depend upon the results of our operations, our financial condition, capital requirements and investment opportunities."

In a 10-Q, Spark said, "Due to the COVID-19 pandemic, we may have liquidity needs that would prevent us from continuing our historical practice as it relates to the payment of dividends on our Class A common stock and Series A Preferred Stock. The primary factors that would lead to a change in the dividend policy would be decreased liquidity due to a decreasing customer book, bad debt associated with the policies adopted by state and regulatory authorities, and increased collateral requirements from suppliers. At this time, we cannot predict the impact the pandemic will have on our ability to continue to pay shareholder dividends."

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