In what has become a continuing parade of companies stepping up and selling fixed-to-floating rate preferreds, energy retailer Spark Energy Inc (NASDAQ:SPKE) has joined with a new offering. The company has sold a 8.75% fixed-to-floating rate preferred issue that has a very lucrative base rate starting in 2022 when the coupon beings to float.
Spark Energy Inc. was formed in 1999 in Houston by W. Keith Maxwell to take advantage of deregulation of the energy markets in many large states and so far they have turned it into a business with $546 million in revenue, primarily from electricity and natural gas sales. In many large states including California, New York and Texas customers are allowed to choose their own supplier for electricity and natural gas which opens opportunities for companies to come to the marketplace and compete for business. This has spawned dozens of smaller companies that have garnered minor market shares in many markets and Spark Energy is now rolling up many of these small companies into a company with more market heft. The company ended 2016 with 774,000 customers which is an increase of 359,000 year over year.
It should be noted by investors that companies competing in the utility arena can have complicated financial statements and SPKE is no exception. We have reviewed the financials fairly well and Spark looks like a fairly strong company, but the complicated financial statements and the large risks that they undertake competing against larger and stronger regulated utilities causes the coupon of this new issue to be large. The reward you receive on this issue means that there is substantial risk in holding these shares, but just the same we are pondering taking a very small stake in the company. We expect shares to potentially trade down to $24-$24.25 after the Fed rate hike so we will be waiting before making a purchase
The new preferred shares carry a fixed coupon of 8.75% until 4/14/2022 at which time the coupon will “float” at 3 month Libor plus a fixed base of 6.578%. This a solid enough base rate to help insure that in 2022 and after investors will be rewarded at a very nice rate. Shares will be cumulative in respect to dividends and the dividend payment will be qualified for preferential tax treatment. This particular issue has a “call protected” time frame of 5 years.
Shares are now trading on the OTC Grey Market under the symbol SKYQP and have been quoted at prices from $24.42 to $24.62.
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