Hated Spark Energy Releases Earnings

Energy reseller (or fake utility as Gridbird would call them) Spark Energy (NASDAQ:SPKE) announced earnings last night after market close and all in all the numbers were relatively good.

The company had already declared dividends on their common and preferred shares on October 18th at levels unchanged from last quarter so we suspected there wouldn’t be a disaster in the financials.

We are looking to add some preferred shares this morning if the price is right.  We have to be out of the office when the market opens, but will be back an hour after opening.  Our price to buy is in the $21-$22 area (it closed at $21.08 yesterday).  This is not a recommendation for anyone else to buy.

Spark Energy fixed-to-floating rate preferred shares (NASDAQ:SPKEP), which carries a current coupon of 8.75%, has been the worst pick of mine for many, many years (see the chart below) .

This issue had been trading around $27 earlier in 2018 until the company issued 2 million more shares in late January. This set off a tumble in the share price to the $23 area where we began buying. We kept buying until we had near 1000 shares which is a overweight position for us. Fortunately we had a chance to unload some shares at prices that allowed a tiny profit with dividends included, but we kept part of our shares as we did (and do) believe that the risk/reward is pretty decent for the shares. Unfortunately other investors have not agreed with us.

Taking a quick look at the earnings report last night we see that revenue was up sharply-way above estimates.  They report revenue of $245 million which was 20% higher than a year ago.  Additionally net income was $18.5 million which was 50% above a year ago–but was mainly caused by gains on derivatives used for hedges for power purchases.

Margins on the reselling of electricity and natural gas are tighter than a year ago, but the company started a cost reduction programs 2 quarters ago after a poor quarterly report and this has allowed them to operate successfully with these tight margins.  Additionally we believe they are starting to address customer service issues by concentrating on ‘organic’ growth of the customer base instead of just continually purchasing customers through acquisition.  It really should be common sense that it cost less to keep customers than to have to find new ones—but this company and others like it (Just Energy) seem to think it makes sense to buy versus keep—it has taken them 20 years to figure this out.

Additionally the company has started to back away from some commercial accounts which provided little to no margin and in fact caused large losses in the past when power costs to the company spiked and they were unable to hedge their costs appropriately.

All in all we think the company is doing ok—recovered nicely from earlier in the year and they seem to have the right leadership in place to drive the business in the right direction.

They will have an earnings conference call this morning at 10 a.m. central time and we plan to listen in, although likely they will say little that is noteworthy.

30 thoughts on “Hated Spark Energy Releases Earnings”

  1. Just an FYI. This is from Richard Lejeune’s chat:

    Hi. $SPKEP looks ok. A lot of issues in the retail energy provider (REP sector ) are out of favor. I have $CRIUF in the picks which is larger, less leveraged and pays a higher dividend as compared to $SPKE or the $SPKEP preferred. SPKE is a US company, so you avoid the Canadian with holding issue. $GNE-PA is also a US company (preferred with GNE) in the same sector with far less balance sheet leverage / risk than SPKEP. JE is a much larger company (which tends to reduce risk) than SPKE, but both have some leverage. $JE and $JE-PA are subject to Canadian with holding. I’m sticking with $CRIUF. $GNE-PA is a good conservative choice with less yield. I think JE-PA and SPKEP are probably ok.

    1. Hey Amy! Guess what my simpleton thought of the day is… Richard is Rida at the risk level of dumpster dives. But unlike Rida, he actually understands what he is talking about because he seriously researches it. Trouble is, his definition of “safe” and my version arent on the same page, lol. I actually respect his thought process though. But for me, I have never found GNE to fit my safe mode. But he has liked it for years.

    2. I am considering the new issue from Algonquin Power, symbol AQNA. Trying to get Fidelity to confirm that if held in an IRA no Canadian withholding will occur. Pays 6.875% and floats after 5 years.

      Anybody else considering this company ? It is rated BB+ by S&P

  2. Thanks for the article. I think they should formally change their name to “Hated Spark Energy”. (We all hate our real utilities anyway. Maybe a fake utility needs to give us a little reminder.) Also, it would be so much easier for their employees who field irate calls from customers. I mean, what kind of service can you realistically expect from a company called Hated Spark Energy?

    1. Roger–I think they have been hated as most of these companies are not as customer friendly as common sense would dictate they should be. Maybe they will ‘get the message’ and run the business right.

    2. I love my utility. I give them a small sub $100 payment for heatand AC. And in return they dutifully pay me 6.25% QDI every 3 months! Plus I may be getting on their insurance plan in next year or so…$200 a month, couple hundo deductible, with vision and dental included. That will work nicely until I hit 65, a decade from now!

      1. Speaking of Health Insurance, I recently moved to TN and this state as well as several others, has Farm Bureau Insurance which offer Major Medical policies as well as PPO type policies which are not ACA policies. 2019 has no penalty. I only pay $315 for a family of 4 and I’m 52 years old with no material health issues. A great option for somebody who is healthy enough to get thru underwriting and no major pre-existing conditions. Before I moved from WA state which didn’t have any non ACA options I paid almost $1900/month for a similar policy

        1. Thanks for the tip, George. I have been fruitlessly trying to find an off exchange plan that would have an HSA. My forced on me ACA plans are high dollar, high deductible, and no HSA anymore. I am willing to pay more to capture that HSA deduction because I am now eligible next year for a bonus $1k deduction on the HSA. I wont get on my GFs cheap Cadillac plan for probably 2 years because we have to cohabitate for an entire year to qualify. I have a local Farm Bureau agent and they said they do have health plans. So I will go next week to see what they have.

        2. I have had a Farm Bureau policy in TN for maybe 18 years or so now. They work fine, although I like the plans where they use BC/BS better than the other providers if you have an option.

          My plan was grandfathered in as being ACA compatible so I don’t want to drop it, but I pay close to what you quoted for just one person because I haven’t tried to swap it around any for fear I would lose the grandfathered status and have to get on one of the massively overpriced ACA plans. The price went up with the ACA but not so much as actual ACA plans.

          I would be interested to know the name of the plan you end up with just for comparison purposes. BTW, I was paying about $300 for a family of three here in TN before the ACA came along. It is all very screwed up now and it is impossible to plan for the future, or to even know what you will pay for insurance if you can’t control or predict your income with any certainty. I always know when it is time to re-enroll because my wife is on an ACA plan and I can hear her cussing the web-site from across the house in between bouts of her coming to ask me to predict the future so that she can fill out her form.

          1. Scott, I am not holding my breath. The secretary said they offerred health plans after asking someone, but agent was out. I will go find out next week. When I googled MO Farm Bureau health plans, I got a vague hit saying they do. But I found all sorts of Tennesse articles with detailed info about their plans, under my MO search. That is a telling sign I suspect. FB obviously links with health insurance carriers and most have left the individual market in my area. I have called brokers and they said they had none that were not the ACA issues. Mo also only allows 6 month underwritten short term health plans, so that defeats the purpose risk wise… I will be very surprised if this has a satisfactory solution, and I will have to remain with the full rack rate ACA plan.

            1. Geography matters. We’re in CA and very best we can get for the two of us is $1,400/month, w a $3.5K ded, no dental or vision, under 60 years, zero meds, zero health issues, wife and I can both run a ten minute mile. Oh, and Grid, our utility rates are about double national average and utility pays zero divs since the fires. Don’t buy CA utilities anyway as there semi slush funds for the state capital.

              1. Alpha, yes state boundaries and even regional boundaries matter. Have you tried an insurance broker for off exchange or underwritten plans? I told my friend who was needing to get insurance in Illinois that his ACA plan was about $750 a month with the massivie $5000 plus initial deductible. So he went looking yesterday and through a broker he got a Cigna 15 month (needs to be applied for renewal then) for $500 a month which includes some dental and vision insurance, and a $3500 initial deductible. Signicant savings for him and he is 55 years old.

            2. Sorry Grid, I was trying to ask George which plan he got but I was distracted by my daughter and ended up phrasing my sentence in the future tense instead of the past. We are buying her first car so lots of activity in the household now. I just have to find an investment that will pay enough to fund car insurance for a teenager!!

              I wish you luck on your insurance hunt. MO sounds like a tough nut to crack.

              1. I got a Major Medical policy, $5,000 Deductible for family of 4 80/20 Coinsurance. $315.00/month. thru Farm Bureau which uses United Healthcare providers for In Network. They also have a PPO style plan but I chose the Major Medical. It’s great that I can transport this policy anywhere I live in the future, even in a State that doesn’t have Farm Bureau, albeit out of Network if not a United Healthcare provider. My policy is toast if the ACA penalty comes back again of course. I’ll be doing lots of cursing if it does.
                I just got a letter in mail today for 2019 rates, and my type of policy has a rate increase for 2019 of ZERO !! Gotta love that. I really love Tennessee; The land of Liberty…

              2. Scott it was great until ACA laws eventually shut down the plans here. From 2010 to 2016 my robust network, $5000 HSA deductible plan went from about $70 a month to $80 a month. Allowing for the tax break on HSA, My insurance plan actually netted me a small profit!!!
                From 2016 until this coming year it will now be $550, $7500 deductible, narrow network, and added sand kicked in the face, no HSA option!
                The good news is I am healthy on no meds, and any minor health issue I have, I ignore the problem and it eventually goes away. Im the type that probably wouldnt go even if I had a no deductible, lol.
                I did great a great free physical this summer from insurance company and passed with flying colors. They were working me over good to make sure I wasnt going to die quick and force them to dole out life insurance money.

                1. Grid, I am glad you are in good health. Hopefully, that means we can expect to profit from your experience and posts for many years to come ;o)

                  BTW, did you ever own any of the Cobank stuff? I have had a bunch of the preferred that is past its call date for a while now and intend to hold it as long as they will let me. I also picked up a Regions Bank issue past its call that I should be in the black with right about now.

                  1. Scott, I have owned CBKLP, and flipped for a divi capture. These are in VERY loose terms quasi Federal affiliated due to their original set up. I like and would have no problem owning again.
                    CBKPP if it would drop a buck or two with its adjustable is an appealing one also. They are like the CHS preffereds in that there is no common stock to track. Doesnt cause me to lose any sleep when I own. This bank confederation has been around in some form a long time.
                    My biggest challenege is making sure I am not overexposed in general in bank/financials as its easy to find issues in this segment.

                    1. Their financials looked really good last I checked. I own some of the CKNQP as well, which is the variable rate issue. Those shares are pretty thinly traded.

                      I probably have too much in financials all told across my different types of investments. But it is spread pretty evenly among different banks etc… so any one going down won’t hurt me too badly. And if they all go down there was probably nowhere to hide anyway. A sterno and ammo investment portfolio would be about the only thing to help under those conditions. I should still probably do some re-balancing though.

                  2. Scott, you must have a more “tolerant” brokerage. I have only been able to ever buy CBKLP. The other CBK issues were blocked. I suspect if price is right for other 2 I could call and raise hell to get the bid in though.

  3. Very strong up volume in SPKEP shares this morning…volume already over the 30dma. The question is whether “the street” continues to buy or fades this rally.

    1. Yes Citidel–hopefully it holds a bit, but I think a slow ‘creep’ higher is more likely than anything quick and big. Lots of nervous nellie small holders sell into these rallies.

  4. I have made a little money on Spark on a flip. But that is it, I don’t have as much feeling as Gridbird on these companies. However, I agree they are just brokers of energy and have little to do with the producing it. In essence, they are the middle man and if they hedge right they can make profits. If they hedge wrong they lose money. Frankly, its not the type of company I would want hold.

  5. Tim, Just and Sparks should marry and have children! They are as much a utility as a custodian at a nuclear plant is involved in “nuclear energy”.
    They market and lie to people and they get pissed off and drop them and are fighting turnover all the time. Its amazing how many T&D utilities who by law are “last resort providers” for customers wind up being the provider anyways because customers just dont want to mess with it, or tired of being jerked around with false promises.
    Now this doesnt mean money cant be made owning and trading them. In fact I trade with same principal but only in companies I personally trust.
    Never let emotions get in ones way of investing, I know, but I hate these companies and cant help it. Distrust and avoidance wont cause loss of capital, but misdirected love can though.
    I am not in a proper frame of mind to trade or own these issues. But that doesnt mean they cant make money for someone else!

    1. Hi Grid–fully understand–but I also see Chicken Soup preferred trading at 25.59.

      1. Tim, great point exactly! As long as capital markets dont shut the door, and economy stays fine, many of these are very good buy or trade possibilities. I just tend to stay away. Not that I am right, just staying within my personal guide lines.

        1. I know Grid–and this is a little out of my wheelhouse but I have to do that on occasion.

  6. You mentioned JE (Just Energy) which I have a position in (trade). Their preferred JE-A has fallen off a cliff in the last 2 months and now yields over 11 percent. I obviously initiated a position too soon, but does anyone have thoughts on the preferred at this level? Trying to decide whether to double down or wait for a bump to cut my losses. Thanks.

    1. Hi BrianZ—I hadn’t been watching it lately–just know the business a little. I am heading out of the office shortly and can’t check closer now, but will later. Historically these businesses are misunderstood (and honestly the companies do a poor job of selling themselves) which ends up hurting the investors and traditional financial analysis just doesn’t work.

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