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Summary

  • Created a different stock category, Class A, to receive dividends, to entice IPO buyers, and expects to pay an annual rate of 7.25%.
  • For Q1 '14 vs Q1 '13 revenue grew 7% to $107 million. Net income dropped 55% to $6.5 million. The tax rate was only 8%.
  • For Q1 '14 retail gross margin dropped to 18% of revenue, from 32%, not a healthy sign.

Based in Houston, TX, Spark Energy (Pending:SPKE) scheduled a $60 million IPO on the Nasdaq with a market capitalization of $275 million at a price range midpoint of $20 for Thursday, July 24, 2014.

The full IPO calendar is available at IPOpremium.

SEC Documents

Manager, Co-Managers: Baird, Stifel

Joint Managers: Janney Montgomery Scott, Wunderlich Securities, BB&T Capital Markets

J.J.B. Hilliard, W.L. Lyons, Inc., Drexel Hamilton, Halliday Financial, U.S. Capital Advisors, Societe Generale, Natixis, RB International Markets

End of lockup (180 days): Tuesday, January 20, 2015

End of 25-day quiet period: Monday, August 18, 2014

Summary

Created a different stock category, Class A, to receive dividends, to entice IPO buyers, and expects to pay an annual rate of 7.25%. However, SPKE says the amount of cash generated may fluctuate due to seasonal variations.

SPKE is an 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.

As of May 31,2014 SPKE had 392,500 residential customer equivalents.

SPKE added over 44,800 customers, net of attrition, during the first five months of 2014, causing a decline in earnings.

For Q1 '14 vs Q1 '13 revenue grew 7% to $107 million. Net income dropped 55% to $6.5 million. The tax rate was only 8%.

Retail gross margin dropped to 18% of revenue, from 32%, not a healthy sign.

Valuation

Glossary

Valuation Ratios

Mrkt Cap ($mm)

Price /Sls

Price /Erngs

Price /BkVlue

Price /TanBV

% offered in IPO

Annualizing Q1 '14

Spark Energy

$275

0.6

11.5

5.0

6.2

22%

Q1 '14 tax rate was only 8%

2013 year

$275

0.9

8.9

5.0

6.2

22%

Conclusion

The rating on SPKE is neutral plus.

To put the conclusions and observations in context, the following is reorganized, edited and summarized from the full S-1 referenced above.

Business

SPKE is a 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.

Two operating segments

Retail Natural Gas Segment
SPKE purchases natural gas supply through physical and financial transactions with market counterparts and supply natural gas to residential and commercial consumers pursuant to fixed-price, variable-price and flat-rate contracts.

For the year ended December 31, 2013, 40% of retail revenues were derived from the sale of natural gas.

Retail Electricity Segment
SPKE purchases electricity supply through physical and financial transactions with market counterparts and ISOs and supply electricity to residential and commercial consumers pursuant to fixed-price and variable-price contracts.

For the year ended December 31, 2013, 60% of retail revenues were derived from the sale of electricity.

Supply sources

SPKE purchases its natural gas and electricity supply from a variety of wholesale providers and bill its customers monthly for the delivery of natural gas and electricity based on their consumption at either a fixed or variable price.

Natural gas and electricity are then distributed to SPKE's customers by local regulated utility companies through their existing infrastructure.

Customers
As of May 31, 2014, SPKE operated in 46 utility service territories across 16 states and had approximately 237,600 residential customers and 17,800 commercial customers, which translates to over 392,500 residential customer equivalents ("RCEs"). An RCE is an industry standard measure of natural gas or electricity usage with each RCE representing annual consumption of 100 MMbtu of natural gas or 10 MWh of electricity.

SPKE added over 44,800 customers, net of attrition, during the first five months of 2014. For the year ended December 31, 2013, approximately 60% of SPKE's retail revenues were derived from the sale of electricity, and the remainder were derived from the sale of natural gas.

Customer attrition
Average customer attrition for the year ended December 31, 2013 and the five months ended May 31, 2014 was 3.6% and 4.3%, respectively. This attrition was primarily due to: (i) customer initiated switches; (ii) residential moves and (iii) customer payment defaults.

Customer acquisition costs
Customer acquisition costs are capitalized and amortized over a 24-month period.

Results of operations are significantly influenced by customer acquisition spending. For example, increased customer acquisition spending in 2011 was a factor that led to increased profitability in 2012.

However, 2013 results were negatively impacted by a strategic initiative in 2012 to reduce customer acquisition spending and to optimize the customer base, following a determination by the owner to invest excess cash flows from retail operations in other affiliated businesses.

Similarly, since the third quarter of 2013, SPKE has spent significant amounts on customer acquisition costs and expects to realize the benefit of this spending beginning in 2014.

Scalable
SPKE believes its business model is scalable, and its objective is to maximize profitability while proactively managing the risks inherent in its business.

To achieve this objective, SPKE actively manages its customer base to allocate retail energy sales between natural gas and electricity based on existing or developing market dynamics.

In addition, the diversity in SPKE's customer base across geography, commodity and product offerings allows SPKE to mitigate risk and react to changes in the retail energy environment so that SPKE can quickly shift its focus and redirect its customer acquisition plan towards more profitable opportunities, resulting in enhanced cash-flow stability.

SPKE believes that its management team has developed an effective proprietary customer acquisition and retention model. SPKE identifies and acquires customers on a cost-effective basis through a variety of sales channels, including door-to-door vendors, outbound telephone marketing vendors, its inbound customer care call center and online marketing.

SPKE also uses email, direct mail, affinity programs, direct sales, brokers and consultants. SPKE's marketing team continuously evaluates the effectiveness of each customer acquisition channel and makes adjustments in order to achieve its targeted growth and returns.

SPKE strives to attract new customers with competitive product offerings that are tailored to particular customer demographics.

Once a customer is acquired, SPKE applies a proprietary evaluation and segmentation process to optimize value both to SPKE and the customer.

SPKE analyzes historical usage, attrition rates and consumer behaviors to specifically tailor competitive products that aim to maximize the total expected return from energy sales to a specific customer, which SPKE refers to as customer lifetime value.

Dividend Policy

SPKE intends to pay a regular quarterly dividend to holders of its Class A common stock to the extent it has cash available for distribution to do so. SPKE's targeted quarterly dividend will be $0.3625 per share of Class A common stock ($1.45 per share on an annualized basis, or 7.25% on an annualized basis), which amount may be increased or decreased in the future without advance notice.

The amount of cash that Spark HoldCo generates from its operations is likely to fluctuate from quarter to quarter, in some cases significantly, as a result of the seasonality of consumption patterns, the impact of supply cost volatility on our unit margins, the effectiveness of hedging program and the ability to enroll new customers and manage customer attrition along with asset optimization activities.

Competition

In markets that are open to competitive choice of retail energy suppliers, SPKE's primary competition comes from the incumbent utility and other independent retail energy companies.

In the electricity sector, these competitors include larger, well-capitalized energy retailers such as Direct Energy, Inc., FirstEnergy Solutions Inc., Just Energy Group Inc. and NRG Energy.

SPKE also competes with small local retail energy providers in the electricity sector that are focused exclusively on certain markets.

Each market has a different group of local retail energy providers. With respect to natural gas, SPKE's national competitors are primarily Direct Energy and Constellation Energy.

SPKE's national competitors generally have diversified energy platforms with multiple marketing approaches and broad geographic coverage similar to us.

Competition in each case is based primarily on product offering, price and customer service.

The competitive landscape differs in each utility service area and within each targeted customer segment.

5% stockholders (GET THIS)

NuDevco Partners, LLC, 100%

Use of proceeds

SPKE intends to use the proceeds of $52 million from its IPO as follows:

to acquire Spark HoldCo units representing approximately 21.82% of the outstanding Spark HoldCo units after this offering from NuDevco Retail Holdings and to repay the NuDevco Note.

Accordingly, SPKE will not retain any of the net proceeds from this offering. The NuDevco Note has an initial principal amount of $50,000, bears interest at a rate of 3.0% per annum, and was issued by SPKE as consideration for NuDevco Retail Holdings' transfer to SPKE of 2,500 Spark HoldCo units.

Disclaimer: This SPKE IPO report is based on a reading and analysis of SPKE's S-1 filing, which can be found here, and a separate, independent analysis by IPOdesktop.com. There are no unattributed direct quotes in this article.

Source: IPO Preview: Spark Energy