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EX-99.1 - EXHIBIT 99.1 - Spark Energy, Inc. | spkthirdquaer.htm |
8-K - 8-K - Spark Energy, Inc. | form8-k11916.htm |
Investor Presentation
November 2016
1
Safe Harbor Statement
This presentation 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 “guidance,” “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 presentation, 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 presentation 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, 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 presentation 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,
• extreme and unpredictable weather conditions,
• the sufficiency of risk management and hedging policies,
• customer concentration,
• federal, state and local regulation,
• key license retention,
• increased regulatory scrutiny and compliance costs,
• our ability to borrow funds and access credit markets,
• restrictions in our debt agreements and collateral requirements,
• credit risk with respect to suppliers and customers,
• level of indebtedness,
• changes in costs to acquire customers,
• actual customer attrition rates,
• actual bad debt expense in non-POR markets,
• accuracy of internal billing systems,
• ability to successfully navigate entry into new markets,
• whether our majority stockholder or its affiliates offer us acquisition opportunities on terms that are commercially acceptable to us,
• ability to successfully and efficiently integrate acquisitions into our operations
• changes in the assumptions we used to estimate our 2016 Adjusted EBITDA, including weather and customer acquisition costs,
• competition, and
• other factors discussed in “Risk Factors” in our Form 10-K for the year ended December 31, 2015, our Quarterly Reports on Form 10-Q for 2016 and in our other public filings
and press releases.
You should review the risk factors and other factors noted throughout or incorporated by reference in this presentation that could cause our actual results to differ materially from those
contained in any forward-looking statement. The Adjusted EBITDA guidance for 2016 is an estimate as of November 7, 2016. This estimate is based on assumptions believed to be
reasonable as of that date. All forward-looking statements speak only as of the date of this presentation. 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.
In this presentation, we refer to EBITDA and Adjusted EBITDA, which are non-GAAP financials measures the Company believes are helpful in evaluating the performance of its
business. Except as otherwise noted, reconciliation of such non-GAAP measures to the relevant GAAP measures can be found at the end of this presentation.
Spark Energy at a Glance
Spark Energy, Inc. Independent Retail Energy Services Provider
Headquartered: Houston, TX
Founded: 1999
IPO: July 2014
Ticker / Exchange: SPKE / NASDAQ Global Select Market
Market Capitalization: $421.4MM
Debt $29.8MM
Enterprise Value: $451.2MM
Annual Dividend: $1.45 (paid quarterly)
Implied Dividend Yield: 5.8%
17 Years of Dedicated Service to the Deregulated Energy Markets
Market Data as of November 7, 2016
2
3
Spark Energy Highlights
2016 annual Adjusted EBITDA guidance of $80MM - $85MM
Seven acquisitions completed since IPO, creating significant shareholder
value
Recently closed Provider acquisition and Major Energy drop-down from
sponsor, adding approximately 340,000 RCEs, 24 new markets, and two
new states
Aligned sponsor supports growth strategy while reducing risks
Sponsor owns 10,714,592 of Class A and Class B shares1, representing
approximately 64% of the Company’s outstanding capital
Sponsor plans to continue purchasing, de-risking, and dropping companies
down to Spark
Full supply desk and risk department work together to hedge portfolio and
optimize margins
Quarterly dividends of $0.3625 ($1.45 annualized) since IPO in July 2014
Highly experienced senior management team
Total Shareholder Return of ~104% since January 2015 1Shares as of November 7, 2016
4
How Spark Energy Serves its Customers
Delivering Electricity Delivering Natural Gas
GENERATION
SPARK ENERGY SPARK ENERGY
DISTRIBUTION DISTRIBUTION
PRODUCTION TRANSPORTATION TRANSMISSION
Green and Renewable
Products
Stable and Predictable
Energy Costs
Potential Cost
Savings
Our Value Proposition to the Customer
5
Opportunities for Organic and M&A Growth
Natural Gas
Electricity
39MM Eligible Customers1,2
18% Penetration
<1% Spark Share
63MM Eligible Customers2
32% Penetration
<1% Spark Share
Only 18% of eligible natural gas customers
and 32% of eligible electricity customers
have made a competitive supplier choice2
Highly fragmented competitive market of
independent energy retailers
Majority with < 300,000 customers
Spark’s corporate structure and relationship
with its Sponsor provides the ability to finance
and transact quickly
Potential for Accretive Transactions with
Synergies
M&A Opportunities Remain Strong
Scale / Density
Geography
Products
Synergies
Growth Engine
Strategic M&A Criteria
Source: DNV GL, EIA
1Residential customers only
2Eligible customers defined as customers in deregulated states
6
Customer Lifetime Value Strategy
Actively Managed Customer Base Drives Profitability
Multi-channel sales
Diverse sales geography
Leverage analytics to
determine market entry and
product tailoring
Contracted revenue model
with subscription-like flow
Sophisticated Customer
Acquisition Model
Attractive EBITDA margin
and cash flow conversion
Targeted payback period is
12 months
Long-standing customer
relationships
Create Long-Tenure, High
Value Customers
Analyze historical usage and
attrition data to optimize
customer profitability
Customer retention team
focused on product selection,
renewal, and cross-sell
opportunities
Win-back strategy leverages
customers across multiple
brands
Provide high-quality service
Increase Lifetime Value
7
Spark’s Geographical Diversity:
18 States and 90 Utility Territories
Residential Customer Equivalents RCEs
(In thousands) Electricity Percent Natural Gas Percent Total Percent
East 441 80% 116 58% 557 74%
Midwest 51 9% 52 26% 103 14%
Southwest 61 11% 32 16% 93 12%
Total 553 100% 200 100% 753 100%
RCE counts are as of September 30, 2016 and do not include contribution from eREX Spark Marketing joint venture in Japan
Electricity Natural Gas
CA
NV
AZ
TX
CO
IL IN
OH
MI
FL
PA
NY MA
CT
NJ
NH
ME
DC
MD
8
Proven Track Record of Acquisitions and Integration
Recent Transactions
~65,000 RCEs
13 New Markets
July 2015
~40,000 RCEs
7 New Markets
July 2015
~14,000 Customers
Connecticut
December 2014
~26,000 Customers
Northern California
March 2015
~121,000 RCEs
9 New Markets
August 2016
~220,000 RCEs
15 New Markets
August 2016
9
Multiple Brands and Sales Channels Enhance Our Ability to
Acquire Customers Organically
• Multiple brands allow for brand positioning and winback strategies not previously available
• Outsourced vendor relationships allow rapid scaling and low fixed costs while driving quality,
efficiency and flexibility
• Recently instituted organic commission structure ensures customer quality and lifetime value
73%
27%
10
Portfolio Diversification
64%
36%
Fixed
74%
Variable
26%
Commercial
Residential
Both product and customer mix, combined with geographic
diversification supports stable cash flow
Commodity Product Customer
Based on RCEs as of September 30, 2016
Electricity
Gas
11
Conservative Capitalization Minimizes Risk
Leverage Ratio1
Debt2 $29.8MM
TTM Adjusted EBITDA $73.3MM
Leverage Ratio 0.4x
$107.5 million syndicated credit facility
$82.5 million working capital line
$23.3 million drawn on $25.0 million acquisition tranche1
Low cost of capital
1As of September 30, 2016
2Includes acquisition line portion of senior credit facility & convertible subordinated notes to affiliates
12
Managing Commodity Price Risk
Proven hedging strategy that has been refined over Spark Energy’s 17 year
history
Demonstrated ability to “weather the storm” through up-and-down commodity
markets, extreme weather events, and down economies
Disciplined risk management supports aggressive growth plans
Virtually all fixed price exposure is hedged
Variable hedging policy based on individual market characteristics
Hedging policy monitored closely by CFO and CRO
Risk management policy approved by syndicate banks and Board of
Directors
Approximately $240MM in available credit with wholesale suppliers1
1As of November 7, 2016
Seasoned, in-house supply team provides a strong competitive
advantage relative to our peers while ensuring risk mitigation
13
Creating Shareholder Value
-25%
25%
75%
125%
175%
Jan-15 Apr-15 Jul-15 Oct-15 Jan-16 Apr-16 Jul-16 Oct-16
Spark Energy, Inc. NASDAQ Composite Russell 2000
As of November 7, 2016
104% Total Shareholder
Return since January 2015
Total Shareholder Return assumes an investment of $100 on January 1, 2015 and also assumes the reinvestment of dividends
Key Investment Highlights
Proven Track
Record of
Accretive
Acquisitions and
Integrations
7
Transactions in
the last
twenty-four months
Consistent
Organic Growth
~3%
Organic customer
growth last three
years (CAGR)
Conservative
Capitalization
and Risk
Management
0.4x
Leverage Ratio
Committed to
the Dividend
and Total
Shareholder
Return
$1.45
Annual Dividend
Customer &
Product
Diversification
Underpins our
Dividend
18 States
90 Utilities
2 Commodities
8 Brands
High Growth Sustainable Dividends
14
Aligned Sponsor Provides Access to Capital, Derisked M&A Opportunities,
and Streamlined Customer Operations Services to Support Aggressive Growth
Investor Relations Contact Information
Investor Relations
Spark Energy, Inc.
12140 Wickchester Lane, Suite 100
Houston, TX 77079
http://ir.sparkenergy.com/
Contact: Andy Davis
ir@sparkenergy.com
832-200-3727
15
Appendix
17
Spark by the Numbers
$36.9
$82.5
$5.6
$20.3
$-
$5.0
$10.0
$15.0
$20.0
$25.0
$-
$25.0
$50.0
$75.0
$100.0
2015 2016E 3Q15 3Q16
Adjusted EBITDA ($MM)
($ in millions) 2015 20161 3Q15 3Q16
Revenue $358.2 - $91.3 $158.1
Retail Gross Margin $113.6 - $26.7 $45.2
Adjusted EBITDA $36.9 $82.5 $5.6 $20.3
Customer Acquisition Costs $19.9 - $5.8 $8.2
401
753
-
250
500
750
1,000
September 30, 2015 September 30, 2016
3Q15 3Q16
RCEs (000s)2 401 753
RCE Attrition 5.0% 3.8%
Electricity Volume (MWh) 719,758 1,451,182
Natural Gas Volume (MMBtu) 1,672,120 1,775,174
Electricity Unit Margin ($/MWh) $26.29 $27.01
Natural Gas Unit Margin ($/MMBtu) $4.64 $3.40
Residential Customer Equivalents (000s)
1This data reflects the midpoint of the range given for the applicable period; 2As of the last day of the quarter
1
2016 Adjusted EBITDA Guidance of $80.0 – $85.0 Million
18
Proven Leadership
Robert Lane • Vice President and Chief Financial Officer
• Former CFO of Emerge Energy Services LP (NYSE:EMES)
• Experienced in M&A, integration and capital markets throughout the energy sector
• Certified Public Accountant and Chartered Financial Analyst
Jason Garrett • Executive Vice President
• Served in leadership roles, including M&A, for various deregulated energy companies
including SouthStar Energy, Just Energy, and Continuum
• Proven success and expertise in sales leadership, call center management,
operational improvements and cost reduction initiatives
Gil Melman • Vice President, General Counsel and Corporate Secretary
• Former general counsel to Madagascar Oil Limited (LSE:MOIL) and lawyer at
Vinson & Elkins LLP
• Proficient in representing public and private companies, investment funds and
investment banking firms on M&A and capital markets transactions
Nathan Kroeker • CEO and President
• Veteran leader in sales strategy, global energy supply, and M&A across the upstream,
downstream, and midstream energy sectors
• Extensive international experience; board member of ESM (a Japanese retail energy
company); previously worked for Macquarie and Centrica
Extensive M&A Experience Across the Team Ensures Value Creation
Senior Management has over 35 Years of Retail Energy Experience
19
Board of Directors
W. Keith Maxwell III • Chairman of the Board of Directors
Mr. Maxwell serves as non-executive Chairman of the Board of Directors, and was appointed to this position in connection with the IPO. Mr. Maxwell also serves as Chief Executive Officer of
NuDevco Partners, LLC and National Gas & Electric, LLC, each of which is affiliated with us. Prior to founding the predecessor of Spark Energy in 1999, Mr. Maxwell was a founding partner
in Wickford Energy, an oil and natural gas services company, in 1994. Wickford Energy was sold to Black Hills Utilities in 1997. Prior to Wickford Energy, Mr. Maxwell was a partner in Polaris
Pipeline, a natural gas producer services and midstream company sold to TECO Pipeline in 1994. In 2010, Mr. Maxwell was named Ernst & Young Entrepreneur of the Year in the Energy,
Chemicals and Mining category. A native of Houston, Texas, Mr. Maxwell earned a Bachelor’s Degree in Economics from the University of Texas at Austin in 1987. Mr. Maxwell has several
philanthropic interests, including the Special Olympics, Child Advocates, Salvation Army, Star of Hope and Helping a Hero. We believe that Mr. Maxwell’s extensive energy industry
background, leadership experience developed while serving in several executive positions and strategic planning and oversight brings important experience and skill to our board of directors.
Nathan Kroeker • Director, President and Chief Executive Officer
Nathan Kroeker, appointed President of Spark Energy in April 2012, is responsible for overseeing the day-to-day operations and help shape the overall strategy of the company. Nathan is a
15-year industry veteran with diverse experience in public accounting, M&A, and both retail and wholesale energy. Nathan first joined the company in July 2010 as Executive Vice President
and Chief Financial Officer of Spark Energy Ventures. Prior to Spark, Nathan held senior finance and leadership roles with Macquarie and Direct Energy. He began his career in public
accounting, including both audit and M&A advisory functions. Nathan holds a Bachelor of Commerce (honors) degree from the University of Manitoba, and has both a CPA (Texas) as well as
a CA (Canada).
James G. Jones II • Independent Director
Mr. Jones has served on Spark Energy’s Board of Directors since our initial public offering in July 2014. Mr. Jones is a partner at Padgett Stratemann & Co, a regional CPA with over 230
professionals. Mr. Jones is the leader of the Houston office which opened in May 2014. Prior to Padgett Stratemann & Co, Mr. Jones worked at Ernst & Young LLP from 1998 to March 2014,
where he was a tax partner. Mr. Jones holds a Doctor of Jurisprudence from Louisiana State University and a Bachelor of Science in Accounting from the University of Louisiana at Monroe.
Mr. Jones was selected as a director because of his extensive tax and financial background as well as his management expertise.
Nick W. Evans, Jr. • Independent Director
Mr. Evans began his career at the Georgia Railroad Bank and then joined Abitibi Southern Corporation. He began his television career in sales at WATU-TV and WRDW-TV in Augusta and
then moved to WNEP-TV, Wilkes-Barre/Scranton, Pennsylvania. He returned to WAGT-TV in Augusta and eventually became president and general manager. From 1987 to 2000, he was
President and CEO of Spartan Communications, Inc., headquartered in Spartanburg, South Carolina. He currently serves as chairman of ECP Benefits and ECP/Trinity, partner of Toast
Wine & Beverage, and is involved in business development for Group CSE in Atlanta. Mr. Evans is a former board member of numerous civic, community, business and industry
organizations. While a Rotarian he was selected as a Paul Harris Fellow. Currently, he holds board positions with Wells Fargo (Augusta Advisory Board), Forest Hills Golf Association, Azalea
Capital (Advisory Board) and Coca-Cola Bottling Company United, Inc. Mr. Evans served as a director of Marlin Midstream GP, LLC, the general partner of Marlin Midstream Partners, LP,
each of which is affiliated with us, from September 2013 through February 2015. Mr. Evans holds a B.B.A degree from Augusta College. Mr. Evans was selected to serve as a director
because of his leadership and management expertise.
Kenneth M. Hartwick • Independent Director
Mr. Hartwick has served on Spark Energy’s Board of Directors since our initial public offering in July 2014. Mr. Hartwick served in various roles for Just Energy Group Inc., a retail natural gas
and electricity provider, most recently serving as President and Chief Executive Officer from 2004 through 2014. Mr. Hartwick also served for Just Energy Group Inc. as President from 2006
to 2008, as Chief Financial Officer from 2004 to 2006 and as a director from 2008 to 2014. Mr. Hartwick also served as the Chief Financial Officer of Hydro One, Inc., an energy distribution
company, from 2001 to 2004. Mr. Hartwick currently serves as a director of Atlantic Power Corporation, a power generation plant operator, a position he has held since 2004. Mr. Hartwick
also serves as a director of MYR Group Inc., an electrical contractor specializing in transmission, distribution, and substation projects, a position he has held since 2015. Mr. Hartwick holds
an Honours of Business Administration degree from Trent University. Mr. Hartwick was selected as a director because of his extensive knowledge of the retail natural gas and electricity
business and his leadership and management expertise.
20
Up-C Structure
Public
Spark Energy,
Inc.
Sponsor
Spark
HoldCo
Operating Subsidiaries
Class A Common Stock
6,496,599 Shares1,2
• Publicly traded
• 100% of economic interest in
Spark Energy, Inc.
Class B Common Stock
10,224,742 Shares1
• Not publicly traded
• No economic rights
1Shares as of November 7, 2016
2Includes 489,850 shares held by our sponsor and his affiliate(s)
21
Spark in the Community
Through our work with the Arbor
Day Foundation, we are able to
extend our environmental efforts far
beyond green energy.
We help Lemonade Day introduce youth
to the concept of starting and operating
their own lemonade stand businesses
while teaching the real-world skills they
need to achieve their dreams.
1.6 million people around the world lack
proper access to electricity. Through our
relationship with LuminAID, we are
developing programs to distribute solar-
powered inflatable lights to areas that need it
the most.
Child Advocates volunteers help to prevent neglected and
abused children from getting lost in the system. For the past
four years, Spark has assisted Child Advocates with their
annual Childspree program to buy back-to-school clothes and
supplies. Spark also does various fund raising projects
throughout the year to support the organization.
Helping a Hero provides specially adapted
homes — and other much-needed services and
resources — for severely-injured military combat
veterans. We’re proud to play our part in helping
America’s heroes transition back to normal lives
in their communities by donating electricity to
these warriors for the first year they own their
new homes.
Empower What Matters Most
We partner with organizations that:
• Raise the quality of life for children and military veterans
• Make communities better places to live and work
• Drive America’s economic future through
entrepreneurship education
• Provide an avenue for our employees to get involved in our
community and to support our green values
Appendix: Reg. G Schedules
23
Reg. G
($ in thousands) 2015 3Q15 3Q16
Net income $25,975 $5,875 $6,801
Depreciation and amortization 25,378 7,557 8,295
Interest expense 2,280 800 1,270
Income tax expense 1,974 580 1,129
EBITDA 55,607 14,812 17,495
Less:
Net, Gains (losses) on derivative instruments (18,497) 61 (609)
Net, Cash settlements on derivative instruments 20,547 4,163 (8,869)
Customer acquisition costs 19,869 5,825 8,242
Plus:
Non-cash compensation expense 3,181 838 1,585
Adjusted EBITDA $36,869 $5,601 $20,316
Appendix Table A-1: Adjusted EBITDA Reconciliation
The following table presents a reconciliation of Adjusted EBITDA to net income for each of the periods indicated.
24
Reg. G
($ in thousands) 2015 3Q15 3Q16
Net cash provided by operating activities $45,931 $(15,887) $(48,157)
Amortization and write off of deferred financing costs (412) (194) (231)
Allowance for doubtful accounts and bad debt expense (7,908) (1,903) (381)
Interest expense 2,280 800 1,270
Income tax expense (benefit) 1,974 580 1,129
Changes in operating working capital
Accounts receivable, prepaids, current assets (18,820) (3,677) 4,475
Inventory 4,544 2,103 1,672
Accounts payable and accrued liabilities 13,008 21,690 54,299
Other (3,728) 2,089 6,240
Adjusted EBITDA $36,869 $5,601 $20,316
Cash flows provided by operating activities $45,931 $(15,887) $(48,157)
Cash flows used in investing activities (41,943) (22,057) 17,976
Cash flows used in financing activities (3,873) 40,284 34,242
Appendix Table A-2: Adjusted EBITDA Reconciliation
The following table presents a reconciliation of Adjusted EBITDA to net cash provided by operating activities for each of the periods indicated.
25
Reg. G
($ in thousands) 2015 3Q15 3Q16
Operating income $29,905 $7,250 $8,960
Depreciation and amortization 25,378 7,557 8,295
General and administrative 61,682 15,493 18,009
Less:
Net asset optimization revenue 1,494 (545) 108
Net, Gains (losses) on non-trading derivative instruments (18,423) 132 (1,183)
Net, Cash settlements on non-trading derivative instruments 20,279 4,035 (8,889)
Retail Gross Margin $113,615 $26,678 $45,228
Appendix Table A-3: Retail Gross Margin Reconciliation
The following table presents a reconciliation of Retail Gross Margin to operating income for each of the periods indicated.
26
Reg. G
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 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 periods of organic customer growth reflecting larger organic customer acquisition spending. We do not deduct the cost of customer acquisitions through acquisitions of
businesses 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 a company’s 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.
Reconciliation of Spark’s estimate of Adjusted EBITDA for the year ended December 31, 2016 to the relevant GAAP line items is not being provided as Spark is not providing 2016
guidance for net income (loss), net cash provided by operating activities, or the reconciling items between these GAAP financial measures and Adjusted EBITDA, as it is not
possible to forecast the future non-cash impacts of net gains and losses on derivative instruments and non-cash compensation expense attributable to grants of equity under our
Long Term Incentive Plan. Accordingly, a reconciliation to net income (loss) or net cash provided by operating activities is not available without unreasonable effort.
Retail Gross Margin
We define retail gross margin as operating income 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. 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 and net cash provided by operating activities. The GAAP measure most directly comparable to
Retail Gross Margin is operating income. Our non-GAAP financial measures of Adjusted EBITDA and Retail Gross Margin should not be considered as alternatives to net income,
net cash provided by operating activities, or operating income. 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 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.