0001606268-18-000072 8-K 2 20180802 2.02 9.01 20180803 20180803 Spark Energy, Inc. 0001606268 4931 465453215 DE 1231 8-K 34 001-36559 18990417 12140 WICKCHESTER LANE SUITE 100 HOUSTON TX 77079 (713) 600-2600 12140 WICKCHESTER LANE SUITE 100 HOUSTON TX 77079 8-K 1 a08032018form8-kre2q2018ea.htm 8-K EARNINGS RELEASE Q2 2018 Document UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 8-K CURRENT REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 Date of Report (Date of earliest event reported): August 2, 2018 Spark Energy, Inc. (Exact Name of Registrant as Specified in its Charter) Delaware 001-36559 46-5453215 (State or Other Jurisdiction (Commission (IRS Employer of Incorporation) File Number) Identification Number) 12140 Wickchester Ln, Ste 100 Houston, Texas 77079 (Address of Principal Executive Offices) (Zip Code) (713) 600-2600 (Registrant’s Telephone Number, Including Area Code) Check the appropriate box below if the Form 8-K filing is intended to simultaneously satisfy the filing obligation of the registrant under any of the following provisions: • Written communications pursuant to Rule 425 under the Securities Act (17 CFR 230.425) • Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR 240.14a-12) • Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR 240.14d-2(b)) • Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR 240.13e-4(c)) Indicate by check mark whether the registrant is an emerging growth company as defined in Rule 405 of the Securities Act of 1933 (§230.405 of this chapter) or Rule 12b-2 of the Securities Exchange Act of 1934 (§240.12b-2 of this chapter). Emerging growth company ? If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ? -------------------------------------------------------------------------------- Item 2.02 Results of Operations and Financial Condition. On August 2, 2018, Spark Energy, Inc. (the “Company”) issued a press release announcing second quarter 2018 earnings (the “Press Release”). The Press Release is being furnished as Exhibit 99.1 to this Current Report and is incorporated by reference herein. The information above is being furnished, not filed, pursuant to Item 2.02 of Form 8-K. Accordingly, the information in Item 2.02 of this Current Report, including the Press Release, will not be incorporated by reference into any registration statement filed by the Company under the Securities Act of 1933, as amended, or the Securities Exchange Act of 1934, as amended, unless specifically identified therein as being incorporated by reference. Item 9.01 Financial Statements and Exhibits. (d) Exhibits Exhibit No. Description 99.1 Press Release of Spark Energy, Inc. dated August 2, 2018 -------------------------------------------------------------------------------- EXHIBIT INDEX Exhibit No. Description 99.1 Press Release of Spark Energy, Inc. dated August 2, 2018 -------------------------------------------------------------------------------- SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized. Dated: August 3, 2018 Spark Energy, Inc. By: /s/ Gil Melman Name: Gil Melman Title: Vice President, General Counsel and Corporate Secretary EX-99.1 2 a2018-q2xpr_20180802xfinal1.htm EXHIBIT 99.1 EARNINGS RELEASE Exhibit Spark Energy, Inc. Reports Second Quarter 2018 Financial Results HOUSTON, August 1, 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 June 30, 2018. Key Highlights • Achieved $16.1 million in Adjusted EBITDA, $43.4 million in Retail Gross Margin, and a $23.9 million in Net Income for the second quarter • Total RCE count increased 26.9% year-over-year to 1,049,000 as of June 30, 2018 • Overall monthly attrition of 3.7% for the second quarter • Continuing to simplify, streamline, and optimize the organization to improve long-term margin profile “We made considerable progress in our synergy and brand consolidation efforts during the second quarter, achieving our target of annualized general and administrative cost savings of $15 million through facility and headcount reductions," said Nathan Kroeker, Spark Energy's President and Chief Executive Officer. "We successfully migrated a total of 110,000 customers to more cost-effective billing platforms and notified another 62,000 customers of planned platform switches that should be complete by end of the third quarter. “Despite strong operating cost controls, our second-quarter results were negatively impacted by lower electricity unit margins. This was a result of the hedges we had to purchase during the first few weeks of the year, additional hedges we used to insure against adverse weather in ERCOT this summer, and increases in capacity costs in New England. While we are disappointed with our first half performance, we are implementing the appropriate strategies that we expect will improve profitability and Adjusted EBITDA performance. "As we enter the second half of the year, we expect to drive an additional $5 million in annualized cost savings through a series of targeted projects. We are also focusing on organic growth through recently integrated Verde sales channels, as well as new retail sales channels that we believe will help us increase our mass-market concentration and improve margins as we pivot away from larger, lower-margin C&I customers." Summary Second Quarter 2018 Financial Results For the quarter ended June 30, 2018, Spark reported Adjusted EBITDA of $16.1 million compared to Adjusted EBITDA of $20.0 million for the quarter ended June 30, 2017. This decrease of $3.9 million is primarily attributable to lower electricity unit margins as well as higher G&A due to a larger customer portfolio. For the quarter ended June 30, 2018, Spark reported Retail Gross Margin of $43.4 million compared to Retail Gross Margin of $43.1 million for the quarter ended June 30, 2017. Spark attributes this increase of $0.3 million primarily to higher electricity volumes, primarily as a result of acquisitions completed over the prior twelve months, largely offset by lower electricity margins. Net income for the quarter ended June 30, 2018, was $23.9 million compared to net income of $4.7 million for the quarter ended June 30, 2017. The increase in performance compared to the prior year was primarily the result of unrealized mark to market hedge gain in the second quarter. -------------------------------------------------------------------------------- Liquidity and Capital Resources ($ in thousands) June 30, 2018 Cash and cash equivalents $ 35,702 Senior Credit Facility Availability (1) 36,281 Subordinated Debt Availability (2) 15,000 Total Liquidity $ 86,983 (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 September 13th, 2018, and $0.546875 per share of Series A Preferred Stock payable on October 15, 2018. Conference Call and Webcast Spark will host a conference call to discuss second quarter 2018 results on Friday, August 3, 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 JUNE 30, 2018 AND DECEMBER 31, 2017 (in thousands) (unaudited) June 30, 2018 December 31, 2017 Assets Current assets: Cash and cash equivalents $ 35,702 $ 29,419 Accounts receivable, net of allowance for doubtful accounts of $3.6 million and $4.0 million as of June 30, 2018 and December 31, 2017, respectively 132,011 158,814 Accounts receivable—affiliates 3,427 3,661 Inventory 1,860 4,470 Fair value of derivative assets 11,526 31,191 Customer acquisition costs, net 17,123 22,123 Customer relationships, net 20,669 18,653 Prepaid assets 3,575 1,028 Deposits 12,109 7,701 Other current assets 18,863 19,678 Total current assets 256,865 296,738 Property and equipment, net 7,190 8,275 Fair value of derivative assets 595 3,309 Customer acquisition costs, net 5,315 6,949 Customer relationships, net 31,600 34,839 Deferred tax assets 27,581 24,185 Goodwill 120,343 120,154 Other assets 11,360 11,500 Total assets $ 460,849 $ 505,949 Liabilities, Series A Preferred Stock and Stockholders' Equity Current liabilities: Accounts payable $ 59,393 $ 77,510 Accounts payable—affiliates 2,373 4,622 Accrued liabilities 32,330 33,679 Fair value of derivative liabilities 2,079 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 1,282 2,675 Current portion of note payable 13,921 13,443 Total current liabilities 116,866 151,027 Long-term liabilities: Fair value of derivative liabilities 4,380 492 Payable pursuant to tax receivable agreement—affiliates 26,067 26,355 Long-term portion of Senior Credit Facility 102,000 117,750 Subordinated debt—affiliate 10,000 — Contingent consideration for acquisitions — 626 Other long-term liabilities 1 172 Long-term portion of note payable — 7,051 Total liabilities 259,314 303,473 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 June 30, 2018 and 1,704,339 shares issued and outstanding at December 31, 2017 90,758 41,173 Stockholders' equity: Common Stock (1) : 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 June 30, 2018 and 13,235,082 issued and 13,135,636 outstanding at December 31, 2017 135 132 Class B common stock, par value $0.01 per share, 60,000,000 shares authorized, 21,485,126 issued and outstanding at June 30, 2018 and December 31, 2017 216 216 Additional paid-in capital 28,846 26,914 Accumulated other comprehensive loss (33 ) (11 ) Retained earnings (2,678 ) 11,008 Treasury stock, at cost, 99,446 shares at June 30, 2018 and December 31, 2017 (2,011 ) (2,011 ) Total stockholders' equity 24,475 36,248 Non-controlling interest in Spark HoldCo, LLC 86,302 125,055 Total equity 110,777 161,303 Total liabilities, Series A Preferred Stock and stockholders' equity $ 460,849 $ 505,949 (1) Outstanding shares of common stock reflect the two-for-one stock split, which took effect on June 16, 2017. See 5 "Equity" in our 10-Q for further discussion. (2) See Note 5 "Equity" in our 10-Q for disclosure of our variable interest entity in Spark HoldCo, LLC. SPARK ENERGY, INC. CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2018 AND 2017 (in thousands) (unaudited) -------------------------------------------------------------------------------- Three Months Ended June 30, Six Months Ended June 30, 2018 2017 2018 2017 Revenues: Retail revenues $ 231,488 $ 151,604 $ 515,489 $ 348,104 Net asset optimization revenues/(expense) (1) 763 (168 ) 3,450 (361 ) Total Revenues 232,251 151,436 518,939 347,743 Operating Expenses: Retail cost of revenues 162,669 114,637 452,545 260,398 General and administrative (2) 27,780 19,346 57,827 43,839 Depreciation and amortization 12,861 9,656 25,880 18,926 Total Operating Expenses 203,310 143,639 536,252 323,163 Operating income (loss) 28,941 7,797 (17,313 ) 24,580 Other (expense)/income: Interest expense (2,316 ) (2,452 ) (4,561 ) (5,897 ) Interest and other income 553 (265 ) 755 (66 ) Total other expenses (1,763 ) (2,717 ) (3,807 ) (5,963 ) Income (loss) before income tax expense (benefit) 27,178 5,080 (21,120 ) 18,617 Income tax expense (benefit) 3,251 409 (3,216 ) 2,814 Net income (loss) $ 23,927 $ 4,671 $ (17,904 ) $ 15,803 Less: Net income (loss) attributable to non-controlling interests 16,427 3,592 (13,078 ) 12,454 Net income (loss) attributable to Spark Energy, Inc. stockholders $ 7,500 $ 1,079 $ (4,826 ) $ 3,349 Less: Dividend on Series A preferred stock 2,027 991 4,054 1,174 Net income (loss) attributable to stockholders of Class A common stock $ 5,473 $ 88 $ (8,880 ) $ 2,175 Other comprehensive income (loss), net of tax: Currency translation gain (loss) $ 25 $ (26 ) $ (58 ) $ (75 ) Other comprehensive income (loss) 25 (26 ) (58 ) (75 ) Comprehensive income (loss) $ 23,952 $ 4,645 $ (17,962 ) $ 15,728 Less: Comprehensive income (loss) attributable to non-controlling interests 16,442 3,576 (13,114 ) 12,407 Comprehensive income (loss) attributable to Spark Energy, Inc. stockholders $ 7,510 $ 1,069 $ (4,848 ) $ 3,321 (1) Net asset optimization revenues (expenses) includes asset optimization revenues—affiliates of $340 and $0 for the three months ended June 30, 2018 and 2017, respectively, and asset optimization revenues—affiliates cost of revenues of $24 and $0 for the three months ended June 30, 2018 and 2017, respectively, and asset optimization revenues—affiliates of $988 and $0 for the six months ended June 30, 2018 and 2017, respectively, and asset optimization revenue—affiliates cost of revenues of $36 and $0 for the six months ended June 30, 2018 and 2017, respectively. (2) General and administrative expense includes general and administrative expense—affiliates of $1,600 and $6,100 for the three months ended June 30, 2018 and 2017, respectively, and $8,000 and $13,400 for the six months ended June 30, 2018 and 2017, respectively. -------------------------------------------------------------------------------- SPARK ENERGY, INC. CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN EQUITY FOR THE SIX MONTHS ENDED JUNE 30, 2018 (in thousands) (unaudited) Issued Issued Shares of Shares of Accumulated Other Comprehensive Additional Paid-in Retained Earnings Total Stockholders' Non-controlling Class A Class B Treasury Stock Class A Common Stock Class B Common Stock Treasury Stock Loss Capital (Deficit) Equity Interest Total Equity Common Common Stock Stock 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 — — — — — — — 2,647 — 2,647 — 2,647 Restricted stock unit vesting 258 — — 3 — — — (715 ) — (712 ) — (712 ) Consolidated net loss — — — — — — — — (4,826 ) (4,826 ) (13,078 ) (17,904 ) Foreign currency translation adjustment for equity method investee — — — — — — (22 ) — — (22 ) (36 ) (58 ) Distributions paid to non-controlling unit holders — — — — — — — — — — (19,501 ) (19,501 ) Dividends paid to Class A common stockholders — — — — — — — — (4,805 ) (4,805 ) — (4,805 ) Dividends to Preferred Stock — — — — — — — — (4,055 ) (4,055 ) — (4,055 ) Acquisition of NG&E Customers — — — — — — — — — (6,138 ) (6,138 ) Balance at June 30, 2018 13,493 21,485 (99 ) $ 135 $ 216 $ (2,011 ) $ (33 ) $ 28,846 $ (2,678 ) $ 24,475 $ 86,302 $ 110,777 -------------------------------------------------------------------------------- SPARK ENERGY, INC. CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE SIX MONTHS ENDED JUNE 30, 2018 AND 2017 (in thousands) (unaudited) Six Months Ended June 30, 2018 2017 Cash flows from operating activities: Net (loss) income $ (17,904 ) $ 15,803 Adjustments to reconcile net income to net cash flows provided by operating activities: Depreciation and amortization expense 24,639 18,411 Deferred income taxes (3,396 ) 3 Change in TRA liability 79 — Stock based compensation 2,686 2,905 Amortization of deferred financing costs 614 531 Excess tax benefit related to restricted stock vesting (101 ) 179 Change in Fair Value of Earnout liabilities (63 ) (2,568 ) Accretion on fair value of Earnout liabilities — 2,660 Bad debt expense 5,725 919 Loss on derivatives, net 19,487 31,473 Current period cash settlements on derivatives, net 7,170 (11,828 ) 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 (555 ) 224 Changes in assets and liabilities: Decrease in accounts receivable 25,957 18,072 Increase in accounts receivable—affiliates (10 ) (1,925 ) Decrease in inventory 2,693 310 Increase in customer acquisition costs (6,254 ) (12,074 ) (Increase) decrease in prepaid and other current assets (59 ) 5,394 Decrease (increase) in other assets 97 (788 ) Decrease in accounts payable and accrued liabilities (20,140 ) (18,422 ) (Decrease) increase in accounts payable—affiliates (2,249 ) 313 Decrease in other current liabilities (1,545 ) (2,862 ) Decrease in other non-current liabilities (461 ) (328 ) Net cash provided by operating activities 36,410 45,625 Cash flows from investing activities: Purchases of property and equipment (1,163 ) (371 ) Acquisitions of Perigee and other customers — (9,353 ) Deposit for Verde Acquisition — (65,785 ) Acquisition of HIKO (15,041 ) — Acquisition of NG&E customers (7,796 ) — Net cash used in investing activities (24,000 ) (75,509 ) Cash flows from financing activities: Proceeds from issuance of Series A Preferred Stock, net of issuance costs paid 48,490 37,937 Borrowings on notes payable 146,800 121,000 Payments on notes payable (160,050 ) (93,789 ) Payment of the Major Energy Companies Earnout (1,607 ) (6,299 ) Payment of the Provider Companies Earnout and installment consideration — (6,676 ) Payments on the Verde promissory note (6,573 ) — Proceeds from disgorgement of stockholders short-swing profits 244 666 Restricted stock vesting (2,589 ) (2,009 ) Payment of Tax Receivable Agreement liability (3,577 ) — Payment of dividends to Class A common stockholders (4,805 ) (4,754 ) Payment of distributions to non-controlling unitholders (19,501 ) (19,822 ) -------------------------------------------------------------------------------- Payment of Dividends to Preferred Stock (2,959 ) — Purchase of Treasury Stock — (1,285 ) Net cash (used in) provided by financing activities (6,127 ) 24,969 Increase (decrease) in Cash and cash equivalents 6,283 (4,915 ) Cash and cash equivalents—beginning of period 29,419 18,960 Cash and cash equivalents—end of period $ 35,702 $ 14,045 Supplemental Disclosure of Cash Flow Information: Non-cash items: Property and equipment purchase accrual $ (123 ) $ 50 Cash paid during the period for: Interest $ 3,884 $ 1,395 Taxes $ 5,399 $ 7,232 SPARK ENERGY, INC. OPERATING SEGMENT RESULTS FOR THE THREE AND SIX MONTHS ENDED June 30, 2018 AND 2017 (in thousands, except per unit operating data) (unaudited) Three Months Ended Six Months Ended June 30, June 30, 2018 2017 2018 2017 (in thousands, except volume and per unit operating data) Retail Electricity Segment Total Revenues $ 209,447 $ 131,908 430,346 $ 265,602 Retail Cost of Revenues 151,953 102,079 401,500 210,923 Less: Net gains (losses) on non-trading derivatives, net of cash settlements 24,852 (5,034 ) (23,515 ) (16,955 ) Retail Gross Margin (1) — Electricity $ 32,642 $ 34,863 $ 52,361 $ 71,634 Volumes — Electricity (MWhs) 2,100,007 1,379,051 4,352,031 2,764,165 Retail Gross Margin (2) — Electricity per MWh $ 15.54 $ 25.28 $ 12.03 $ 25.92 Retail Natural Gas Segment Total Revenues $ 22,804 $ 19,528 $ 88,593 $ 82,141 Retail Cost of Revenues 10,716 12,558 51,045 49,475 Less: Net Asset Optimization Revenues (Expenses) 763 (168 ) 3,450 (361 ) Less: Net gains (losses) on non-trading derivatives, net of cash settlements 542 (1,148 ) (2,685 ) (3,088 ) Retail Gross Margin (1) — Gas $ 10,783 $ 8,286 $ 36,783 $ 36,115 Volumes — Gas (MMBtus) 2,840,721 2,629,087 10,517,802 10,848,366 Retail Gross Margin (2) — Gas per MMBtu $ 3.80 $ 3.15 $ 3.50 $ 3.33 (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 “How We Evaluate Our Operations” 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 June 30, Six Months Ended June 30, (in thousands) 2018 2017 2018 2017 Reconciliation of Adjusted EBITDA to Net Income: Net income (loss) $ 23,927 $ 4,671 $ (17,904 ) $ 15,803 Depreciation and amortization 12,861 9,656 25,880 18,926 Interest expense 2,316 2,452 4,561 5,897 Income tax expense (benefit) 3,251 409 (3,216 ) 2,814 EBITDA 42,355 17,188 9,321 43,440 Less: Net, Gain (losses) on derivative instruments 17,054 (9,677 ) (19,488 ) (31,473 ) Net, Cash settlements on derivative instruments 8,792 3,996 (6,745 ) 11,351 Customer acquisition costs 1,980 4,384 6,254 12,074 Plus: Non-cash compensation expense 1,555 1,538 2,686 2,905 Adjusted EBITDA $ 16,084 $ 20,023 $ 31,986 $ 54,393 Three Months Ended June 30, Six Months Ended June 30, (in thousands) 2018 2017 2018 2017 Reconciliation of Adjusted EBITDA to net cash provided by operating activities: Net cash provided by operating activities $ 45,950 $ 22,331 $ 36,410 $ 45,625 Amortization of deferred (319 ) (283 ) (614 ) (531 ) financing costs Allowance for doubtful accounts (3,302 ) (563 ) (5,725 ) (919 ) and bad debt expense Interest expense 2,316 2,452 4,561 5,897 Income tax expense (benefit) 3,251 409 (3,216 ) 2,814 Changes in operating working capital Accounts receivable, prepaids, (38,516 ) (19,159 ) (25,888 ) (21,541 ) current assets Inventory 1,377 3,012 (2,693 ) (310 ) Accounts payable and accrued liabilities 7,618 7,895 23,934 20,971 Other (2,291 ) 3,929 5,217 2,387 Adjusted EBITDA $ 16,084 $ 20,023 $ 31,986 $ 54,393 Cash Flow Data: Cash flows provided by operating activities $ 45,950 $ 22,331 $ 36,410 $ 45,625 Cash flows used in investing $ (75,397 ) $ (24,000 ) $ (75,509 ) activities $ (8,205 ) Cash flows (used in) provided by financing activities $ (23,108 ) $ 42,162 $ (6,127 ) $ 24,969 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 June 30, Six Months Ended June 30, (in thousands) 2018 2017 2018 2017 Reconciliation of Retail Gross Margin to Operating Income (loss): Operating income (loss) $ 28,941 $ 7,797 $ (17,313 ) $ 24,580 Depreciation and amortization 12,861 9,656 25,880 18,926 General and administrative 27,781 19,346 57,827 43,839 Less: Net asset optimization 763 (168 ) 3,450 (361 ) revenues (expenses) Net, gains (losses) on non-trading derivative instruments 16,601 (10,202 ) (20,111 ) (31,578 ) Net, Cash settlements on non-trading derivative instruments 8,793 4,020 (6,089 ) 11,535 Retail Gross Margin $ 43,425 $ 43,149 $ 89,144 $ 107,749 Retail Gross Margin - Retail Electricity Segment $ 32,642 $ 34,863 $ 52,361 $ 71,634 Retail Gross Margin - Retail Natural Gas Segment $ 10,783 $ 8,286 $ 36,783 $ 36,115 Contact: Spark Energy, Inc. Investors: Christian Hettick, 832-200-3727 Media: Kira Jordan, 832-255-7302