Spark Energy Developing Framework to Support Additional Growth Through M&A, Reports Earnings

Spark Energy announced that it is developing a framework with NuDevco Partners Holdings, LLC, which is owned by Spark's founder, that would enable Spark to pursue additional growth through M&A.

"We continue to have strong organic customer growth which is funded by our existing cash sources. At the same time, we continue to see M&A opportunities in the market. In order to take advantage of these opportunities, we are developing a framework with NuDevco that could enable us to utilize NuDevco's balance sheet to acquire and consolidate energy retailers with certain guaranteed earnings protections and debt financing in the form of convertible subordinated debt bearing interest at market rates. We are in various stages of due diligence with several potential targets. Any transaction with NuDevco would be subject to the review and approval of a special committee of our independent directors," Spark said.

Late last year, Spark acquired two books of Connecticut electric customers (from Town Square Energy and Discount Power Inc.) and more recently entered into an agreement to acquire a book of natural gas customers at Pacific Gas & Electric from Entrust Energy.

"Initial financial results of the two customer portfolio acquisitions completed last year have exceeded management's expectations," Spark said.

For 2014, Spark reported that Adjusted EBITDA was $11.3 million, and Retail Gross Margin was $76.9 million on revenue of $322.9 million, compared to Adjusted EBITDA of $33.5 million and Retail Gross Margin of $81.7 million for 2013.

This decrease of $22.2 million in Adjusted EBITDA is primarily attributable to increased customer acquisition spending of $17.9 million and increased bad debt of $7.1 million, of which $4.8 million was in Southern California.

Spark invested $26.2 million in organic customer acquisition costs in 2014 compared to $8.3 million in 2013.

In 2014, "we increased our net customer count by 51% and we continue to realize strong unit margins in both gas and electricity," said Nathan Kroeker, Spark Energy, Inc.'s President and Chief Executive Officer. Customer growth was 26% exclusive of growth in Southern California

"While this growth was primarily organic, we did acquire two small portfolios in Connecticut totaling approximately 13,400 customers and we continue to see attractive acquisition opportunities. Our 2014 results were negatively impacted by increased supply costs and higher attrition, primarily in our large commercial segment, as a result of the Polar Vortex, as well as our market entry into Southern California. We were successful in adding customers in Southern California, however, we underestimated the impact the dual billing structure would have on consumer behavior in this market, and as a result we realized significantly higher customer attrition and bad debt expense than we anticipated. We are no longer adding customers in Southern California and have refocused our efforts on mitigating the attrition and aggressively managing collections in this market. We are seeing enhanced opportunities to grow organically in some of our Midwest and Northeast markets and have increased our marketing efforts in these areas," Kroeker said