Acquired 60,000 residential RCEs; on track to exceed high end of cost reduction guidance
HOUSTON, Nov. 01, 2018 (GLOBE NEWSWIRE) — Spark Energy, Inc. (“Spark” or the “Company”) (NASDAQ: SPKE), an independent retail energy services company, today reported financial results for the quarter ended September 30, 2018.
Key Highlights
- Achieved $18.6 million in Adjusted EBITDA, $45.8 million in Retail Gross Margin, and a $18.8 million in Net Income for the third quarter
- Expects to exceed upper end of cost reduction guidance range by 10 to 20 percent
- Total RCE count of 979,000 as of September 30, 2018
- Acquired 60,000 residential RCEs subsequent to the close of fiscal third quarter 2018
“Our third quarter was highlighted by continued improvement in organic customer acquisitions as well as significant strides in realizing the brand and platform consolidations that we expect to lead to stronger margins,” said Nathan Kroeker, Spark Energy’s President and Chief Executive Officer. “Efforts to improve customer mix and migrate customers to more cost-effective billing platforms are more than halfway complete and our cost saving actions are tracking ahead of our expectations.”
Kroeker continued, “Since the closing of our third quarter, we announced our acquisition of up to 60,000 residential RCEs in the Midwest and Mid-Atlantic regions. This acquisition will be immediately accretive to 2018 earnings and will require minimal integration activity.”
Summary Third Quarter 2018 Financial Results
For the quarter ended September 30, 2018, Spark reported Adjusted EBITDA of $18.6 million compared to Adjusted EBITDA of $19.6 million for the quarter ended September 30, 2017. This decrease of $1.0 million was driven by a lower Retail Gross Margin.
For the quarter ended September 30, 2018, Spark reported Retail Gross Margin of $45.8 million compared to Retail Gross Margin of $50.6 million for the quarter ended September 30, 2017. This decrease of $4.8 million is primarily attributable to lower natural gas volumes and electricity unit margins.
Net income for the quarter ended September 30, 2018, was $18.8 million compared to net income of $12.9 million for the quarter ended September 30, 2017. The increase in performance compared to the prior year was primarily the result of non-cash gains on our derivative instruments.
Liquidity and Capital Resources
| ($ in thousands) | September 30, 2018 | |
| Cash and cash equivalents | $ | 42,796 |
| Senior Credit Facility Availability (1) | 19,281 | |
| Subordinated Debt Availability (2) | 15,000 | |
| Total Liquidity | $ | 77,077 |
(1) Subject to Senior Credit Facility borrowing base and covenant restrictions.
(2) The availability of the Subordinated Facility is dependent on our Founder’s financial position and liquidity.
Dividend
Spark’s Board of Directors declared quarterly dividends of $0.18125 per share of Class A common stock payable on December 14th, 2018, and $0.546875 per share of Series A Preferred Stock payable on January 15, 2019.
Business Outlook
Kroeker concluded, “As we look to fiscal 2019, we expect to see the benefits of improved customer mix and normalized RCE counts. We expect our Adjusted EBITDA to positively reflect the success of our synergy and cost reduction initiatives. Year-to-date we have implemented significant general and administrative cost savings, and we will continue to evaluate opportunities to improve long-term profitability.”
Conference Call and Webcast
Spark will host a conference call to discuss third quarter 2018 results on Friday, November 2, 2018, at 10:00 AM Central Time (11:00 AM Eastern).
A live webcast of the conference call can be accessed from the Events & Presentations page of the Spark Energy Investor Relations website at http://ir.sparkenergy.com/events-and-presentations. An archived replay of the webcast will be available for twelve months following the live presentation.
About Spark Energy, Inc.
Spark Energy, Inc. is an established and growing independent retail energy services company founded in 1999 that provides residential and commercial customers in competitive markets across the United States with an alternative choice for their natural gas and electricity. Headquartered in Houston, Texas, Spark currently operates in 19 states and serves 94 utility territories. Spark offers its customers a variety of product and service choices, including stable and predictable energy costs and green product alternatives.
We use our website as a means of disclosing material non-public information and for complying with our disclosure obligations under Regulation FD. Investors should note that new materials, including press releases, updated investor presentations, and financial and other filings with the Securities and Exchange Commission are posted on the Spark Energy Investor Relations website at ir.sparkenergy.com. Investors are urged to monitor our website regularly for information and updates about the Company.
Cautionary Note Regarding Forward Looking Statements
This earnings release contains forward-looking statements that are subject to a number of risks and uncertainties, many of which are beyond our control. These forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”) and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”) can be identified by the use of forward-looking terminology including “may,” “should,” “likely,” “will,” “believe,” “expect,” “anticipate,” “estimate,” “continue,” “plan,” “intend,” “projects,” or other similar words. All statements, other than statements of historical fact included in this earnings release, regarding strategy, future operations, financial position, estimated revenues and losses, projected costs, prospects, plans, objectives and beliefs of management are forward-looking statements. Forward-looking statements appear in a number of places in this earnings release and may include statements about business strategy and prospects for growth, customer acquisition costs, ability to pay cash dividends, cash flow generation and liquidity, availability of terms of capital, competition and government regulation and general economic conditions. Although we believe that the expectations reflected in such forward-looking statements are reasonable, we cannot give any assurance that such expectations will prove correct.
The forward-looking statements in this earnings release are subject to risks and uncertainties. Important factors that could cause actual results to materially differ from those projected in the forward-looking statements include, but are not limited to:
- changes in commodity prices and the sufficiency of risk management and hedging policies;
- extreme and unpredictable weather conditions, and the impact of hurricanes and other natural disasters;
- federal, state and local regulation, including the industry’s ability to address or adapt to potentially restrictive new regulations that may be enacted by the New York Public Service Commission;
- our ability to borrow funds and access credit markets and restrictions in our debt agreements and collateral requirements;
- credit risk with respect to suppliers and customers;
- changes in costs to acquire customers and actual customer attrition rates;
- accuracy of billing systems;
- whether our majority stockholder or its affiliates offer us acquisition opportunities on terms that are commercially acceptable to us;
- ability to successfully identify and complete, and efficiently integrate acquisitions into our operations;
- significant changes in, or new charges by, the ISOs in the regions in which we operate;
- competition; and
- the “Risk Factors” in our latest Annual Report on Form 10-K, and in our quarterly reports, other public filings and press releases.
You should review the risk factors and other factors noted throughout or incorporated by reference in this earnings release that could cause our actual results to differ materially from those contained in any forward-looking statement. All forward-looking statements speak only as of the date of this earnings release. Unless required by law, we disclaim any obligation to publicly update or revise these statements whether as a result of new information, future events or otherwise. It is not possible for us to predict all risks, nor can we assess the impact of all factors on the business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements.
SPARK ENERGY, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
AS OF SEPTEMBER 30, 2018 AND DECEMBER 31, 2017
(in thousands, except share counts)
(unaudited)
| September 30, 2018 | December 31, 2017 | ||||||
| Assets | |||||||
| Current assets: | |||||||
| Cash and cash equivalents | $ | 42,796 | $ | 29,419 | |||
| Accounts receivable, net of allowance for doubtful accounts of $4,324 at September 30 and $4,023 at December 31 | 134,183 | 158,814 | |||||
| Accounts receivable—affiliates | 3,807 | 3,661 | |||||
| Inventory | 4,077 | 4,470 | |||||
| Fair value of derivative assets | 23,427 | 31,191 | |||||
| Customer acquisition costs, net | 15,600 | 22,123 | |||||
| Customer relationships, net | 18,360 | 18,653 | |||||
| Deposits | 12,631 | 7,701 | |||||
| Other current assets | 31,074 | 20,706 | |||||
| Total current assets | 285,955 | 296,738 | |||||
| Property and equipment, net | 5,383 | 8,275 | |||||
| Fair value of derivative assets | 1,873 | 3,309 | |||||
| Customer acquisition costs, net | 3,466 | 6,949 | |||||
| Customer relationships, net | 28,247 | 34,839 | |||||
| Deferred tax assets | 24,935 | 24,185 | |||||
| Goodwill | 120,343 | 120,154 | |||||
| Other assets | 11,075 | 11,500 | |||||
| Total assets | $ | 481,277 | $ | 505,949 | |||
| Liabilities, Series A Preferred Stock and Stockholders’ Equity | |||||||
| Current liabilities: | |||||||
| Accounts payable | $ | 55,496 | $ | 77,510 | |||
| Accounts payable—affiliates | 2,836 | 4,622 | |||||
| Accrued liabilities | 45,518 | 33,679 | |||||
| Fair value of derivative liabilities | 269 | 1,637 | |||||
| Current portion of Senior Credit Facility | — | 7,500 | |||||
| Current payable pursuant to tax receivable agreement—affiliates | 2,508 | 5,937 | |||||
| Current contingent consideration for acquisitions | 2,980 | 4,024 | |||||
| Other current liabilities | 856 | 2,675 | |||||
| Current portion of note payable | 10,535 | 13,443 | |||||
| Total current liabilities | 120,998 | 151,027 | |||||
| Long-term liabilities: | |||||||
| Fair value of derivative liabilities | 489 | 492 | |||||
| Payable pursuant to tax receivable agreement—affiliates | 26,067 | 26,355 | |||||
| Long-term portion of Senior Credit Facility | 112,000 | 117,750 | |||||
| Subordinated debt—affiliate | 10,000 | — | |||||
| Long-term portion of note payable | — | 7,051 | |||||
| Contingent consideration for acquisitions | — | 626 | |||||
| Other long-term liabilities | — | 172 | |||||
| Total liabilities | 269,554 | 303,473 | |||||
| Commitments and contingencies (Note 13) | |||||||
| Series A Preferred Stock, par value $0.01 per share, 20,000,000 shares authorized, 3,707,256 shares issued and outstanding at September 30 and 1,704,339 shares issued and outstanding at December 31 | 90,758 | 41,173 | |||||
| Stockholders’ equity: | |||||||
| Common Stock: | |||||||
| Class A common stock, par value $0.01 per share, 120,000,000 shares authorized, 13,493,158 issued, and 13,393,712 outstanding at September 30 and 13,235,082 issued and 13,135,636 outstanding at December 31 | 135 | 132 | |||||
| Class B common stock, par value $0.01 per share, 60,000,000 shares authorized, 21,485,126 issued and outstanding at September 30 and December 31 | 216 | 216 | |||||
| Additional paid-in capital | 25,387 | 26,914 | |||||
| Accumulated other comprehensive loss | (15 | ) | (11 | ) | |||
| Retained earnings | 2,885 | 11,008 | |||||
| Treasury stock, at cost, 99,446 shares at September 30 and December 31 | (2,011 | ) | (2,011 | ) | |||
| Total stockholders’ equity | 26,597 | 36,248 | |||||
| Non-controlling interest in Spark HoldCo, LLC | 94,368 | 125,055 | |||||
| Total equity | 120,965 | 161,303 | |||||
| Total liabilities, Series A Preferred Stock and stockholders’ equity | $ | 481,277 | $ | 505,949 | |||
SPARK ENERGY, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2018 AND 2017
(in thousands)
(unaudited)
| Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||
| 2018 | 2017 | 2018 | 2017 | ||||||||||||
| Revenues: | |||||||||||||||
| Retail revenues | $ | 258,127 | $ | 215,856 | $ | 773,616 | $ | 563,960 | |||||||
| Net asset optimization revenues/(expense) | 348 | (320 | ) | 3,798 | (681 | ) | |||||||||
| Total Revenues | 258,475 | 215,536 | 777,414 | 563,279 | |||||||||||
| Operating Expenses: | |||||||||||||||
| Retail cost of revenues | 193,409 | 160,373 | 645,954 | 420,771 | |||||||||||
| General and administrative | 25,695 | 25,566 | 83,522 | 69,405 | |||||||||||
| Depreciation and amortization | 13,917 | 11,509 | 39,797 | 30,435 | |||||||||||
| Total Operating Expenses | 233,021 | 197,448 | 769,273 | 520,611 | |||||||||||
| Operating income | 25,454 | 18,088 | 8,141 | 42,668 | |||||||||||
| Other (expense)/income: | |||||||||||||||
| Interest expense | (2,762 | ) | (2,863 | ) | (7,323 | ) | (8,760 | ) | |||||||
| Interest and other income (loss) | (47 | ) | 168 | 707 | 102 | ||||||||||
| Total other expenses | (2,809 | ) | (2,695 | ) | (6,616 | ) | (8,658 | ) | |||||||
| Income before income tax expense | 22,645 | 15,393 | 1,525 | 34,010 | |||||||||||
| Income tax expense | 3,818 | 2,451 | 602 | 5,265 | |||||||||||
| Net income | $ | 18,827 | $ | 12,942 | $ | 923 | $ | 28,745 | |||||||
| Less: Net income attributable to non-controlling interests | 13,218 | 10,595 | 140 | 23,049 | |||||||||||
| Net income attributable to Spark Energy, Inc. stockholders | $ | 5,609 | $ | 2,347 | $ | 783 | $ | 5,696 | |||||||
| Less: Dividend on Series A preferred stock | 2,027 | 932 | 6,081 | 2,106 | |||||||||||
| Net income (loss) attributable to stockholders of Class A common stock | $ | 3,582 | $ | 1,415 | $ | (5,298 | ) | $ | 3,590 | ||||||
| Other comprehensive income, net of tax: | |||||||||||||||
| Currency translation gain (loss) | $ | 47 | $ | (13 | ) | $ | (11 | ) | $ | (88 | ) | ||||
| Other comprehensive income (loss) | 47 | (13 | ) | (11 | ) | (88 | ) | ||||||||
| Comprehensive income | $ | 18,874 | $ | 12,929 | $ | 912 | $ | 28,657 | |||||||
| Less: Comprehensive income attributable to non-controlling interests | 13,247 | 10,587 | 133 | 22,994 | |||||||||||
| Comprehensive income attributable to Spark Energy, Inc. stockholders | $ | 5,627 | $ | 2,342 | $ | 779 | $ | 5,663 | |||||||
SPARK ENERGY, INC.
CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN EQUITY
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2018
(in thousands)
(unaudited)
| Issued Shares of Class A Common Stock | Issued Shares of Class B Common Stock | Treasury Stock | Class A Common Stock | Class B Common Stock | Treasury Stock | Accumulated Other Comprehensive Loss | Additional Paid-in Capital | Retained Earnings (Deficit) | Total Stockholders’ Equity | Non-controlling Interest | Total Equity | ||||||||||||||||||||||
| Balance at December 31, 2017 | 13,235 | 21,485 | (99 | ) | $ | 132 | $ | 216 | $ | (2,011 | ) | $ | (11 | ) | $ | 26,914 | $ | 11,008 | $ | 36,248 | $ | 125,055 | $ | 161,303 | |||||||||
| Stock based compensation | — | — | — | — | — | — | — | 3,596 | — | 3,596 | — | 3,596 | |||||||||||||||||||||
| Restricted stock unit vesting | 258 | — | — | 3 | — | — | — | (715 | ) | — | (712 | ) | — | (712 | ) | ||||||||||||||||||
| Consolidated net income | — | — | — | — | — | — | — | — | 783 | 783 | 140 | 923 | |||||||||||||||||||||
| Foreign currency translation adjustment for equity method investee | — | — | — | — | — | — | (4 | ) | — | — | (4 | ) | (7 | ) | (11 | ) | |||||||||||||||||
| Distributions paid to non-controlling unit holders | — | — | — | — | — | — | — | — | — | — | (23,701 | ) | (23,701 | ) | |||||||||||||||||||
| Dividends paid to Class A common stockholders | — | — | — | — | — | — | — | (2,381 | ) | (4,852 | ) | (7,233 | ) | — | (7,233 | ) | |||||||||||||||||
| Dividends to Preferred Stock | — | — | — | — | — | — | — | (2,027 | ) | (4,054 | ) | (6,081 | ) | — | (6,081 | ) | |||||||||||||||||
| Acquisition of Customers from Affiliate | — | — | — | — | — | — | — | — | — | (7,119 | ) | (7,119 | ) | ||||||||||||||||||||
| Balance at September 30, 2018 | 13,493 | 21,485 | (99 | ) | $ | 135 | $ | 216 | $ | (2,011 | ) | $ | (15 | ) | $ | 25,387 | $ | 2,885 | $ | 26,597 | $ | 94,368 | $ | 120,965 | |||||||||
SPARK ENERGY, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2018 AND 2017
(in thousands)
(unaudited)
| Nine Months Ended September 30, | |||||||
| 2018 | 2017 | ||||||
| Cash flows from operating activities: | |||||||
| Net income | $ | 923 | $ | 28,745 | |||
| Adjustments to reconcile net income to net cash flows provided by operating activities: | |||||||
| Depreciation and amortization expense | 38,538 | 30,584 | |||||
| Deferred income taxes | (749 | ) | 681 | ||||
| Change in TRA liability | 79 | — | |||||
| Stock based compensation | 3,707 | 4,023 | |||||
| Amortization of deferred financing costs | 1,243 | 750 | |||||
| Excess tax benefit related to restricted stock vesting | (101 | ) | 179 | ||||
| Change in Fair Value of Earnout liabilities | (63 | ) | (9,423 | ) | |||
| Accretion on fair value of Earnout liabilities | — | 3,787 | |||||
| Bad debt expense | 8,480 | 3,436 | |||||
| Loss on derivatives, net | 1,371 | 34,225 | |||||
| Current period cash settlements on derivatives, net | 6,189 | (20,816 | ) | ||||
| Accretion of discount to convertible subordinated notes to affiliate | — | 1,004 | |||||
| Payment of the Major Energy Companies Earnout | — | (1,104 | ) | ||||
| Payment of the Provider Companies Earnout | — | (677 | ) | ||||
| Other | (489 | ) | 123 | ||||
| Changes in assets and liabilities: | |||||||
| Decrease in accounts receivable | 21,029 | 18,056 | |||||
| Increase in accounts receivable—affiliates | (390 | ) | (2,508 | ) | |||
| Decrease (increase) in inventory | 475 | (1,936 | ) | ||||
| Increase in customer acquisition costs | (8,949 | ) | (18,642 | ) | |||
| (Increase) decrease in prepaid and other current assets | (10,999 | ) | 1,536 | ||||
| Increase in intangible assets—customer acquisitions | (86 | ) | (32 | ) | |||
| Decrease (increase) in other assets | 92 | (664 | ) | ||||
| Decrease in accounts payable and accrued liabilities | (11,062 | ) | (9,301 | ) | |||
| (Decrease) increase in accounts payable—affiliates | (1,786 | ) | 1,165 | ||||
| (Decrease) increase in other current liabilities | (5,140 | ) | 22 | ||||
| Decrease in other non-current liabilities | (459 | ) | (1,170 | ) | |||
| Net cash provided by operating activities | 41,853 | 62,043 | |||||
| Cash flows from investing activities: | |||||||
| Purchases of property and equipment | (1,097 | ) | (1,438 | ) | |||
| Acquisitions of Perigee and other customers | — | (11,464 | ) | ||||
| Acquisition of the Verde Companies | — | (65,785 | ) | ||||
| Verde working capital settlement | 470 | — | |||||
| Acquisition of HIKO | (14,290 | ) | — | ||||
| Acquisition of Customers from Affiliate | (8,776 | ) | — | ||||
| Net cash used in investing activities | (23,693 | ) | (78,687 | ) | |||
| Cash flows from financing activities: | |||||||
| Proceeds from issuance of Series A Preferred Stock, net of issuance costs paid | 48,490 | 40,312 | |||||
| Borrowings on notes payable | 277,800 | 139,400 | |||||
| Payments on notes payable | (281,050 | ) | (119,664 | ) | |||
| Payment of the Major Energy Companies Earnout | (1,607 | ) | (6,299 | ) | |||
| Payment of the Provider Companies Earnout and installment consideration | — | (7,061 | ) | ||||
| Payments on the Verde promissory note | (6,573 | ) | (2,149 | ) | |||
| Proceeds from disgorgement of stockholders short-swing profits | 244 | 872 | |||||
| Restricted stock vesting | (2,589 | ) | (2,009 | ) | |||
| Payment of Tax Receivable Agreement liability | (3,577 | ) | — | ||||
| Payment of dividends to Class A common stockholders | (7,233 | ) | (7,137 | ) | |||
| Payment of distributions to non-controlling unitholders | (23,701 | ) | (24,270 | ) | |||
| Payment of Dividends to Preferred Stock | (4,987 | ) | (1,174 | ) | |||
| Purchase of Treasury Stock | — | (1,888 | ) | ||||
| Net cash (used in) provided by financing activities | (4,783 | ) | 8,933 | ||||
| Increase (decrease) in Cash and cash equivalents | 13,377 | (7,711 | ) | ||||
| Cash and cash equivalents—beginning of period | 29,419 | 18,960 | |||||
| Cash and cash equivalents—end of period | $ | 42,796 | $ | 11,249 | |||
| Supplemental Disclosure of Cash Flow Information: | |||||||
| Non-cash items: | |||||||
| Contingent consideration—earnout obligations incurred in connection with the Verde Companies acquisition | $ | — | $ | 5,400 | |||
| Net contribution by NG&E in excess of cash | $ | — | $ | 1,019 | |||
| Installment consideration incurred in connection with the Verde Companies acquisition | $ | — | $ | 17,851 | |||
| Property and equipment purchase accrual | $ | (123 | ) | $ | 41 | ||
| Cash paid during the period for: | |||||||
| Interest | $ | 5,955 | $ | 4,113 | |||
| Taxes | $ | 7,461 | $ | 7,769 | |||
SPARK ENERGY, INC.
OPERATING SEGMENT RESULTS
FOR THE THREE AND NINE MONTHS ENDED September 30, 2018 AND 2017
(in thousands, except volume and per unit operating data)
(unaudited)
| Three Months Ended September 30, |
Nine Months Ended September 30, |
||||||||||||||
| 2018 | 2017 | 2018 | 2017 | ||||||||||||
| (in thousands, except volume and per unit operating data) | |||||||||||||||
| Retail Electricity Segment | |||||||||||||||
| Total Revenues | $ | 246,182 | $ | 202,259 | 676,528 | $ | 467,861 | ||||||||
| Retail Cost of Revenues | 186,449 | 153,594 | 587,949 | 364,518 | |||||||||||
| Less: Net gains (losses) on non-trading derivatives, net of cash settlements | 19,481 | 4,170 | (4,034 | ) | (12,786 | ) | |||||||||
| Retail Gross Margin (1) — Electricity | $ | 40,252 | $ | 44,495 | $ | 92,613 | $ | 116,129 | |||||||
| Volumes — Electricity (MWhs) | 2,432,314 | 2,063,894 | 6,784,345 | 4,828,629 | |||||||||||
| Retail Gross Margin (2) — Electricity per MWh | $ | 16.55 | $ | 21.56 | $ | 13.65 | $ | 24.05 | |||||||
| Retail Natural Gas Segment | |||||||||||||||
| Total Revenues | $ | 12,293 | $ | 13,277 | $ | 100,886 | $ | 95,418 | |||||||
| Retail Cost of Revenues | 6,960 | 6,779 | 58,005 | 56,253 | |||||||||||
| Less: Net Asset Optimization Revenues (Expenses) | 348 | (320 | ) | 3,798 | (681 | ) | |||||||||
| Less: Net gains (losses) on non-trading derivatives, net of cash settlements | (558 | ) | 743 | (3,243 | ) | (2,344 | ) | ||||||||
| Retail Gross Margin (1) — Gas | $ | 5,543 | $ | 6,075 | $ | 42,326 | $ | 42,190 | |||||||
| Volumes — Gas (MMBtus) | 1,395,377 | 1,706,132 | 11,913,180 | 12,554,497 | |||||||||||
| Retail Gross Margin (2) — Gas per MMBtu | $ | 3.97 | $ | 3.56 | $ | 3.55 | $ | 3.36 | |||||||
(1) Reflects the Retail Gross Margin attributable to our Retail Natural Gas Segment or Retail Electricity Segment, as applicable. Retail Gross Margin is a non-GAAP financial measure. See “Other Performance Measures” in our Form 10-Q for a reconciliation of Adjusted EBITDA and Retail Gross Margin to their most directly comparable financial measures presented in accordance with GAAP.
(2) Reflects the Retail Gross Margin for the Retail Natural Gas Segment or Retail Electricity Segment, as applicable, divided by the total volumes in MMBtu or MWh, respectively.
Reconciliation of GAAP to Non-GAAP Measures
Adjusted EBITDA
We define “Adjusted EBITDA” as EBITDA less (i) customer acquisition costs incurred in the current period, (ii) net gain (loss) on derivative instruments, and (iii) net current period cash settlements on derivative instruments, plus (iv) non-cash compensation expense, and (v) other non-cash and non-recurring operating items. EBITDA is defined as net income (loss) before provision for income taxes, interest expense and depreciation and amortization. We deduct all current period customer acquisition costs (representing spending for organic customer acquisitions) in the Adjusted EBITDA calculation because such costs reflect a cash outlay in the period in which they are incurred, even though we capitalize such costs and amortize them over two years in accordance with our accounting policies. The deduction of current period customer acquisition costs is consistent with how we manage our business, but the comparability of Adjusted EBITDA between periods may be affected by varying levels of customer acquisition costs. For example, our Adjusted EBITDA is lower in years of customer growth reflecting larger customer acquisition spending. We do not deduct the cost of customer acquisitions through acquisitions of business or portfolios of customers in calculated Adjusted EBITDA. We deduct our net gains (losses) on derivative instruments, excluding current period cash settlements, from the Adjusted EBITDA calculation in order to remove the non-cash impact of net gains and losses on derivative instruments. We also deduct non-cash compensation expense as a result of restricted stock units that are issued under our long-term incentive plan.
We believe that the presentation of Adjusted EBITDA provides information useful to investors in assessing our liquidity and financial condition and results of operations and that Adjusted EBITDA is also useful to investors as a financial indicator of our ability to incur and service debt, pay dividends and fund capital expenditures. Adjusted EBITDA is a supplemental financial measure that management and external users of our condensed consolidated financial statements, such as industry analysts, investors, commercial banks and rating agencies, use to assess the following:
- our operating performance as compared to other publicly traded companies in the retail energy industry, without regard to financing methods, capital structure or historical cost basis;
- the ability of our assets to generate earnings sufficient to support our proposed cash dividends; and
- our ability to fund capital expenditures (including customer acquisition costs) and incur and service debt.
Retail Gross Margin
We define retail gross margin as operating income (loss) plus (i) depreciation and amortization expenses and (ii) general and administrative expenses, less (i) net asset optimization revenues, (ii) net gains (losses) on non-trading derivative instruments, and (iii) net current period cash settlements on non-trading derivative instruments. Retail gross margin is included as a supplemental disclosure because it is a primary performance measure used by our management to determine the performance of our retail natural gas and electricity business by removing the impacts of our asset optimization activities and net non-cash income (loss) impact of our economic hedging activities. As an indicator of our retail energy business’ operating performance, retail gross margin should not be considered an alternative to, or more meaningful than, operating income (loss), its most directly comparable financial measure calculated and presented in accordance with GAAP.
We believe retail gross margin provides information useful to investors as an indicator of our retail energy business’s operating performance.
The GAAP measures most directly comparable to Adjusted EBITDA are net income (loss) and net cash provided by operating activities. The GAAP measure most directly comparable to Retail Gross Margin is operating income (loss). Our non-GAAP financial measures of Adjusted EBITDA and Retail Gross Margin should not be considered as alternatives to net income (loss), net cash provided by operating activities, or operating income (loss). Adjusted EBITDA and Retail Gross Margin are not presentations made in accordance with GAAP and have important limitations as analytical tools. You should not consider Adjusted EBITDA or Retail Gross Margin in isolation or as a substitute for analysis of our results as reported under GAAP. Because Adjusted EBITDA and Retail Gross Margin exclude some, but not all, items that affect net income (loss) and net cash provided by operating activities, and are defined differently by different companies in our industry, our definition of Adjusted EBITDA and Retail Gross Margin may not be comparable to similarly titled measures of other companies.
Management compensates for the limitations of Adjusted EBITDA and Retail Gross Margin as analytical tools by reviewing the comparable GAAP measures, understanding the differences between the measures and incorporating these data points into management’s decision-making process.
The following tables present a reconciliation of Adjusted EBITDA to net income (loss) and net cash provided by operating activities for each of the periods indicated.
APPENDIX TABLES A-1 AND A-2
ADJUSTED EBITDA RECONCILIATIONS
(in thousands)
(unaudited)
| Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||
| (in thousands) | 2018 | 2017 | 2018 | 2017 | |||||||||||
| Reconciliation of Adjusted EBITDA to Net Income: | |||||||||||||||
| Net income | $ | 18,827 | $ | 12,942 | $ | 923 | $ | 28,745 | |||||||
| Depreciation and amortization | 13,917 | 11,509 | 39,797 | 30,435 | |||||||||||
| Interest expense | 2,762 | 2,863 | 7,323 | 8,760 | |||||||||||
| Income tax expense | 3,818 | 2,451 | 602 | 5,265 | |||||||||||
| EBITDA | 39,324 | 29,765 | 48,645 | 73,205 | |||||||||||
| Less: | |||||||||||||||
| Net, Gain (losses) on derivative instruments | 18,117 | (2,752 | ) | (1,371 | ) | (34,225 | ) | ||||||||
| Net, Cash settlements on derivative instruments | 922 | 7,457 | (5,823 | ) | 18,808 | ||||||||||
| Customer acquisition costs | 2,695 | 6,568 | 8,949 | 18,642 | |||||||||||
| Plus: | |||||||||||||||
| Non-cash compensation expense | 1,021 | 1,118 | 3,707 | 4,023 | |||||||||||
| Adjusted EBITDA | $ | 18,611 | $ | 19,610 | $ | 50,597 | $ | 74,003 | |||||||
| Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||
| (in thousands) | 2018 | 2017 | 2018 | 2017 | |||||||||||
| Reconciliation of Adjusted EBITDA to net cash provided by operating activities: | |||||||||||||||
| Net cash provided by operating activities | $ | 5,443 | $ | 16,418 | $ | 41,853 | $ | 62,043 | |||||||
| Amortization of deferred financing costs | (631 | ) | (219 | ) | (1,243 | ) | (750 | ) | |||||||
| Allowance for doubtful accounts and bad debt expense | (2,755 | ) | (2,517 | ) | (8,480 | ) | (3,436 | ) | |||||||
| Interest expense | 2,762 | 2,863 | 7,323 | 8,760 | |||||||||||
| Income tax expense | 3,818 | 2,451 | 602 | 5,265 | |||||||||||
| Changes in operating working capital | |||||||||||||||
| Accounts receivable, prepaids, current assets | 16,248 | 4,457 | (9,640 | ) | (17,084 | ) | |||||||||
| Inventory | 2,218 | 2,246 | (475 | ) | 1,936 | ||||||||||
| Accounts payable and accrued liabilities | (5,946 | ) | (12,857 | ) | 17,988 | 8,114 | |||||||||
| Other | (2,546 | ) | 6,768 | 2,669 | 9,155 | ||||||||||
| Adjusted EBITDA | $ | 18,611 | $ | 19,610 | $ | 50,597 | $ | 74,003 | |||||||
| Cash Flow Data: | |||||||||||||||
| Cash flows provided by operating activities | $ | 5,443 | $ | 16,418 | $ | 41,853 | $ | 62,043 | |||||||
| Cash flows provided by (used in) investing activities | $ | 307 | $ | (3,178 | ) | $ | (23,693 | ) | $ | (78,687 | ) | ||||
| Cash flows provided by (used in) financing activities | $ | 1,344 | $ | (16,036 | ) | $ | (4,783 | ) | $ | 8,933 | |||||
The following table presents a reconciliation of Retail Gross Margin to operating income (loss) for each of the periods indicated.
APPENDIX TABLE A-3
RETAIL GROSS MARGIN RECONCILIATION
(in thousands)
(unaudited)
| Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||
| (in thousands) | 2018 | 2017 | 2018 | 2017 | |||||||||||
| Reconciliation of Retail Gross Margin to Operating Income: | |||||||||||||||
| Operating income | $ | 25,454 | $ | 18,088 | $ | 8,141 | $ | 42,668 | |||||||
| Depreciation and amortization | 13,917 | 11,509 | 39,797 | 30,435 | |||||||||||
| General and administrative | 25,695 | 25,566 | 83,522 | 69,405 | |||||||||||
| Less: | |||||||||||||||
| Net asset optimization revenues (expenses) | 348 | (320 | ) | 3,798 | (681 | ) | |||||||||
| Net, gains (losses) on non-trading derivative instruments | 17,888 | (2,568 | ) | (2,223 | ) | (34,146 | ) | ||||||||
| Net, Cash settlements on non-trading derivative instruments | 1,035 | 7,481 | (5,054 | ) | 19,016 | ||||||||||
| Retail Gross Margin | $ | 45,795 | $ | 50,570 | $ | 134,939 | $ | 158,319 | |||||||
| Retail Gross Margin – Retail Electricity Segment | $ | 40,252 | $ | 44,495 | $ | 92,613 | $ | 116,129 | |||||||
| Retail Gross Margin – Retail Natural Gas Segment | $ | 5,543 | $ | 6,075 | $ | 42,326 | $ | 42,190 | |||||||
Contact: Spark Energy, Inc.
Investors:
Christian Hettick, 832-200-3727
Media:
Kira Jordan, 832-255-7302
Source: Spark Energy, Inc.