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Spark Energy Inc (SPKE) Q4 2019 Earnings Call Transcript

By Motley Fool Transcribers - Mar 5, 2020 at 5:01PM

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SPKE earnings call for the period ending December 31, 2019.

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Spark Energy Inc (SPKE 1.14%)
Q4 2019 Earnings Call
Mar 5, 2020, 11:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good morning ladies and gentlemen. Welcome to the Spark Energy Inc. Fourth Quarter 2019 Earnings Conference call. My name is Doug and I'll be your operator for today. [Operator Instructions] I would now like to turn the conference over to Mr. Mike Barajas with Spark Energy Inc. Please go ahead.

Mike Barajas -- Investor Relations

Good morning, and welcome to Spark Energy's fourth quarter 2019 earnings call. This call is also being broadcast via webcast, which can be located in the Investor Relations section of our website at sparkenergy.com. With us today from management is our CEO, Nathan Kroeker; and our CFO, Jim Jones. Please note that today's discussion may contain forward-looking statements, which are based on assumptions that we believe to be reasonable as of this date. Actual results may differ materially. We urge everyone to review the safe harbor statement in yesterday's earnings release as well as the risk factors in our SEC filings.

We undertake no obligation to update these statements as a result of future events, except as required by law. In addition, we'll refer to both GAAP and non-GAAP financial measures. For information regarding our non-GAAP financial measures and reconciliations to the most directly comparable GAAP measures, please refer to yesterday's earnings release.

With that, I'll turn the call over to Nathan Kroeker, our CEO.

Nathan Kroeker -- Director, President and Chief Executive Officer

Thank you, and welcome, everyone, to today's earnings call. I'm going to summarize our full year results and accomplishments, and then Jim Jones, our CFO, will provide more detail on our financials at a more granular level. Last year was strong here at Spark. We are in the final steps of our brand and system consolidation. We have continued to use our summer and winter insurance hedging strategy to mitigate weather risk, which has performed very well again this year.

Through 2019, we have continued to focus on improving our mass market business, while shedding low margin, large commercial customers. We are continuing to refine our organic sales channels in response to regulatory changes. We are striving to grow affinity and high-quality, third-party vendor relationships, along with an increased focus on in-house sales channels as we try to optimize our go-to-market strategy.

This will allow us to lower CAC spending in 2020 and capitalize on the increased M&A opportunities we are seeing. As we finalize these initiatives, we expect to continue seeing significant improvements in the quality of our customer portfolio.

With regard to the brand and system consolidation efforts, we began 2019 with seven billing systems and have now reduced that down to our goal of two billing systems, declaring victory on this two-year long initiative. These efforts to consolidate and simplify our platform have allowed us to hit our G&A run rate savings goal for the year.

These major accomplishments had a direct impact on achieving $92.4 million in adjusted EBITDA, a 31% increase year-over-year. The increase was not only attributable to our brand and system consolidation, but also the continual shed of low-margin C&I customers, which is now complete.

Retail gross margin was $220.7 million for 2019 compared to $185.1 million at year end 2018, a 19% increase over last year. We want to highlight that despite seeing some of the highest price volatility we've ever seen in ERCOT this past summer, our hedging strategy performed very well, which protected and enhanced the margins on our fixed-price contracts. As we move into 2020, we believe our initiatives to streamline the business and continue to simplify our systems and platform, accompanied by an overall healthier book, will lead to enhanced margins and profitability in 2020.

With that I will turn the call over to Jim for his financial review. Jim?

James G. Jones -- Chief Financial Officer

Thank you, Nathan. Good morning. In the fourth quarter of 2019, we achieved $25.7 million in adjusted EBITDA, a 28% increase compared to last year's fourth quarter of $20.1 million. Retail gross margin for the quarter -- for 2019, was $64.3 million compared to $50.2 million last year. The 28% increase in retail gross margin was primarily due to higher electric unit margins, a trend we expect to continue through 2020.

Full year adjusted EBITDA was up 31% at $92.4 million compared to $70.7 million for 2018, while full year retail gross margin was up 19% at $220.7 million for 2019 compared to $185.1 million in 2018.

The primary factors driving this increase were our successful efforts to simplify our platform through the year, allowing us to achieve our G&A run rate savings target, combined with an overall healthier customer book, which contributed to increased unit margins.

Our fourth quarter G&A expenses increased by 41% year-over-year, increasing from $27.9 million in 2018 to $39.2 million in 2019 due to onetime charges for litigation settlements, bad debt and legal fees. When you normalize these items, fourth quarter 2019 G&A was approximately $29 million, demonstrating the run rate savings we've achieved. We fully expect to see further reductions to G&A relative to historical run rates going forward.

We ended the year with 672,000 RCEs as a result of proactively nonrenewing some of our less profitable C&I customers.

For the year, we spent $18.7 million in customer acquisition costs compared to $13.7 million in the prior year. Meanwhile, our monthly average customer attrition was 5% for the year.

Interest expense for the year fell from $9.4 million in 2018 to $8.6 million in 2019, primarily because of repayments of long-term indebtedness, which decreased from $140 million at the year -- at the end of 2018 to $123 million at the end of 2019. Income tax expense increased to $7.3 million in 2019 from $2.1 million in 2018 driven by an increase in taxable income due to improved financial results.

Our net income for the year was $14.2 million despite a $24.9 million mark-to-market loss compared to a net loss of $14.4 million in 2018, which included a $28.8 million mark-to-market loss.

As we have reminded investors in the past, when the commodity curve falls as it has done since the elevated curve of December 31, 2017, we experience noncash mark-to-market losses that ultimately do not change the actual cash we expect to receive on our fixed-price contracts.

Looking at our balance sheet, we had net debt of $66.3 million and total liquidity of $138.7 million at the end of 2019. On December 16 and January 15, we paid the quarterly cash dividend on our Class A common stock and our Series A preferred stock, respectively. On January 21, we announced our fourth quarter dividend of $0.18125 per share on our common stock and $0.54688 per share of preferred stock to be paid on March 16 and April 15, respectively. As we stated in the past, we expect to pay these quarterly dividends on a go-forward basis.

That's all I have. Back to you, Nathan.

Nathan Kroeker -- Director, President and Chief Executive Officer

Thanks, Jim. I am proud of everyone here at Spark for the work they put in to continue the success of our business over the course of the last year. We are excited about 2020 as we continue to see the benefits of our simplified platform and increased focus on our mass market business. I want to thank our employees and suppliers for their hard work, producing a good quarter and a strong year. And I want to thank Spark's customers for choosing us as their energy provider. We are excited about the future, and we look forward to connecting with you all on our next call.

Operator

[Operator Closing Remarks]

Questions and Answers:

Duration: 10 minutes

Call participants:

Mike Barajas -- Investor Relations

Nathan Kroeker -- Director, President and Chief Executive Officer

James G. Jones -- Chief Financial Officer

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