Spark Energy Reports Higher Earnings, Stronger Average Unit Margins, Offsetting Decreased Volumes

Expects Customer Count To Continue To Shrink From COVID Sales Restrictions

August 5, 2020

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Reporting by Paul Ring • ring@energychoicematters.com

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Spark Energy, Inc. ("Spark" or the "Company") reported financial results for the quarter ended June 30, 2020.

Spark reported $23.8 million in Adjusted EBITDA for the second quarter of 2020, up from $13.6 million a year ago. This increase of $10.2 million was driven by a decrease of operational expenses, "along with decreased CAC spend while we re-evaluate our sales strategies as we move forward through the pandemic compared to the second quarter of 2019."

For the quarter ended June 30, 2020, Spark reported Retail Gross Margin of $45.0 million compared to Retail Gross Margin of $41.7 million for the quarter ended June 30, 2019. This increase of $3.3 million was primarily attributable to the company's portfolio mix shifting towards more mass market customers and fewer large commercial customers.

Retail Gross Margin for the Retail Electricity Segment was $35.6 million for the second quarter, versus $33.6 million a year ago.

Retail Gross Margin in the Electricity segment per MWh was $36.36 per MWh in the second quarter of 2020, versus $22.17 per MWh a year ago

Electricity volumes for the quarter ending June 30, 2020 were 978,297 MWh, versus 1,516,139 MWh a year ago

Retail Gross Margin for the Retail Natural Gas Segment was $9.4 million for the second quarter, versus $8.1 million a year ago

Retail Gross Margin in the Gas segment per MMBtu was $4.79 per MMBtu in the second quarter of 2020, versus $3.94 per MMBtu a year ago

Natural gas volumes for the quarter ending June 30, 2020 were 1,967,439 MMBtus, versus 2,057,121 MMBtus a year ago

Revenues were $128 million for the second quarter, versus $177 million a year ago

Net income for the quarter ended June 30, 2020 was $26.8 million compared to net loss of $25.5 million for the quarter ended June 30, 2019. The increase compared to the prior year was primarily the result of the decrease in G&A, depreciation and amortization, and the non-cash mark-to-market accounting associated with the hedges put in place to lock in margins on retail contracts. Spark had a mark-to-market gain in the 2020 quarter of $18.0 million, compared to a mark-to-market loss of $22.7 million a year ago.

Spark's total RCE count was 534,000 as of June 30, 2020, versus 585,000 as of March 31, 2020, and 818,000 as of June 30, 2019. The net loss of 51,000 RCEs from March 31, 2020 to June 30, 2020 compares to a net loss of 87,000 RCEs from December 31, 2019 to March 31, 2020

At June 30, 2020, electric RCEs were 420,000 and gas RCEs were 114,000

From March 31, 2020 to June 30, 2020, gross RCE additions were 8,000, and gross RCE attrition was 59,000

"During the three months ended June, 30, 2020, we added approximately 8,000 RCEs primarily through organic web sales and telemarketing activities. This amount was significantly lower than historical periods due to the marketing limitations discussed above, as well as an active decision to slow sales activities as we focus our efforts to improve our organic sales channels, including vendor selection and sales quality. As most markets continue to enforce a ban on door-to-door activities, and we are focused on rebuilding our sales infrastructure, we do not anticipate any large scale door-to-door campaigns until late fourth quarter of 2020, but we will continue to market in the manners that are permitted," Spark said

Spark reported that customer acquisition cost for the three months ended June 30, 2020 was approximately $0.2 million, a decrease of approximately $3.2 million, or 95%, from approximately $3.4 million for the three months ended June 30, 2019. "This decrease was primarily due to limitation on our ability to use door-to-door marketing as a result of COVID-19 and a reduction in targeted organic customer acquisitions as we focus our efforts to improve our organic sales channels, including vendor selection and sales quality," Spark said

Spark reported average monthly attrition of 3.5%

"Our second quarter results were an improvement compared to the second quarter of last year. Pivoting away from high usage, lower margin C&I contracts has led to stronger average unit margins, offsetting the decrease in volumes compared to the second quarter of 2019. Currently however, we continue to deal with the sales impact associated with the COVID-19 pandemic. Our overall customer book is much healthier, but we are currently unable to reinstate several of our marketing channels, which will likely cause our customer book to continue to shrink. We are also closely monitoring our bad debt exposure in the Non-POR markets in which we operate. We will continue to simplify our platform and look for ways to streamline the business during this pandemic," said Keith Maxwell, Spark's Interim President and Chief Executive Officer.

"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

Spark reported that, "Our bad debt expense for the three months ended June 30, 2020 and 2019 was 1.5% and 3.6%, respectively, and our bad debt expense for the six months ended June 30, 2020 and 2019 was 2.5% and 4.4% 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, including the three months ended June 30, 2020. 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 and six months ended June 30, 2020."

"Although the Company noted no significant impact as a result of the COVID-19 pandemic as related to credit risk for the three months ended June, 30, 2020, because of the time lag between the delivery of electricity and natural gas, the issuance of an invoice, and the customer’s payment due date, there may be a substantial lag in time before we are able to determine specific trends in bad debt expense as a result of COVID-19," Spark said

Spark reported that it amended and extended its Senior Credit Facility with a Working Capital Commitment of $187.5 million

Spark stated, "The amendment and extension of the Senior Credit Facility on July 31, 2020 to $187.5 million, down from $217.5 million, will affect liquidity in future quarters."

Spark said that Total Liquidity as of June 30, 2020 was $186,248,000

Spark stated, "Our contractual agreements with certain local regulated utilities and our supplier counterparties require us to maintain restricted cash balances or letters of credit as collateral for credit risk or the performance risk associated with the future delivery of natural gas or electricity. Due to the COVID-19 pandemic, certain local regulated utilities and our supplier counterparties have contacted us inquiring about our financial condition and the impact the pandemic is having on our operations. These inquiries may lead to additional requests for cash or letters of credit in an effort to mitigate the risk of default in paying our obligations related to the future delivery of natural gas or electricity. As of June 30, 2020, we have not been required to post additional collateral as a result of COVID-19."

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