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EXCEL - IDEA: XBRL DOCUMENT - Spark Energy, Inc.Financial_Report.xls
EX-32 - EXHIBIT 32 CERTIFICATION BY CEO AND CFO - Spark Energy, Inc.certificationbytheceoandcf.htm
EX-10.5 - EXHIBIT 10.5 MEMBERSHIP INTEREST PSA - Spark Energy, Inc.exhibit105membershipintere.htm
EX-31.1 - EXHIBIT 31.1 CERTIFICATION BY CEO - Spark Energy, Inc.certificationceoexh311-q12.htm
EX-31.2 - EXHIBIT 31.2 CERTIFICATION BY CFO - Spark Energy, Inc.certificationcfoexh312-q12.htm

UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
 
FORM 10-Q
 
 
 
ý      QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 
For the quarterly period ended March 31, 2015,
 
o         TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the transition period from          to          
 
Commission File Number: 001-36559
Spark Energy, Inc.
(Exact name of registrant as specified in its charter)
 
 
 
 
 
Delaware
 
 
 
46-5453215
(State or other jurisdiction of
incorporation or organization)
 
 
 
(I.R.S. Employer
Identification No.)
2105 CityWest Blvd., Suite 100
Houston, Texas 77042

(Address of principal executive offices)
 
(713) 600-2600
(Registrant's telephone number, including area code)
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes x    No o
 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
Yes x    No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.        
Large accelerated filer    o                                        Accelerated filer o 

Non-accelerated filer x (Do not check if a smaller reporting company)          Smaller reporting company o
    
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes o    No x

There were 3,097,193 shares of Class A common stock and 10,750,000 shares of Class B common stock outstanding as of May 11, 2015.




PART I. FINANCIAL INFORMATION
 
 
ITEM 1. FINANCIAL STATEMENTS
 
 
 
 
 
CONDENSED COMBINED AND CONSOLIDATED BALANCE SHEETS AS OF MARCH 31, 2015 AND DECEMBER 31, 2014 (unaudited)
 
 
 
 
CONDENSED COMBINED AND CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE THREE MONTHS ENDED MARCH 31, 2015 AND 2014 (unaudited)
 
 
 
 
CONDENSED COMBINED AND CONSOLIDATED STATEMENT OF CHANGES IN EQUITY FOR THE THREE MONTHS ENDED MARCH 31, 2015 (unaudited)

 
 
 
 
CONDENSED COMBINED AND CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE THREE MONTHS ENDED MARCH 31, 2015 AND 2014 (unaudited)
 
 
 
 
NOTES TO THE CONDENSED COMBINED AND CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
 
 
 
 
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
 
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
 
ITEM 4. CONTROLS AND PROCEDURES
 
PART II. OTHER INFORMATION
 
ITEM 1. LEGAL PROCEEDINGS
 
ITEM 1A. RISK FACTORS
 
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
 
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
 
ITEM 4. MINE SAFETY DISCLOSURES
 
ITEM 5. OTHER INFORMATION
 
ITEM 6. EXHIBITS
 
APPENDIX A
 
SIGNATURES
 
EXHIBIT INDEX
 


1


PART 1. — FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

SPARK ENERGY, INC.
CONDENSED COMBINED AND CONSOLIDATED BALANCE SHEETS
AS OF MARCH 31, 2015 AND DECEMBER 31, 2014
(in thousands)
(unaudited)
 
March 31, 2015
 
December 31, 2014
 

 
 
Assets

 

Current assets:

 

Cash and cash equivalents
$
5,179


$
4,359

Restricted cash


707

Accounts receivable, net of allowance for doubtful accounts of $3.2 million and $8.0 million as of March 31, 2015 and December 31, 2014, respectively
58,926


63,797

Accounts receivable—affiliates
1,025


1,231

Inventory
511


8,032

Fair value of derivative assets
57


216

Customer acquisition costs, net
13,762


12,369

Intangible assets - customer acquisitions, net
739


486

Prepaid assets
1,208


1,236

Deposits
8,128


10,569

Other current assets
2,787


2,987

Total current assets
92,322

 
105,989

Property and equipment, net
4,263


4,221

Customer acquisition costs
3,499


2,976

Intangible assets - customer acquisitions
1,253


1,015

Deferred tax assets
24,206


24,047

Other assets
148


149

Total Assets
$
125,691

 
$
138,397

Liabilities and Stockholders' Equity

 

Current liabilities:

 

Accounts payable
$
31,534

 
$
38,210

Accounts payable—affiliates
1,432

 
1,017

Accrued liabilities
7,743

 
7,195

Fair value of derivative liabilities
8,472

 
11,526

Note payable
20,000

 
33,000

Other current liabilities
2,541


1,868

Total current liabilities
71,722

 
92,816

Long-term liabilities:


 


Fair value of derivative liabilities
487

 
478

Payable pursuant to tax receivable agreement—affiliates
20,767


20,767

Other long-term liabilities
315


219

Total liabilities
93,291

 
114,280

Commitments and contingencies (Note 10)





Stockholders' equity:





       Common Stock:





Class A common stock, par value $0.01 per share, 120,000,000 shares authorized, 3,000,000 issued and outstanding at March 31, 2015 and 3,000,000 issued and outstanding at December 31, 2014
30


30

Class B common stock, par value $0.01 per share, 60,000,000 shares authorized, 10,750,000 issued and outstanding at March 31, 2015 and 10,750,000 issued and outstanding at December 31, 2014
108


108

        Preferred Stock:





Preferred stock, par value $0.01 per share, 20,000,000 shares authorized, zero issued and outstanding at March 31, 2015 and December 31, 2014



        Additional paid-in capital
9,635


9,296

        Retained earnings (deficit)
546


(775
)
       Total stockholders' equity
10,319


8,659

Non-controlling interest in Spark HoldCo, LLC
22,081


15,458

       Total equity
32,400


24,117

Total Liabilities and Stockholders' Equity
$
125,691


$
138,397


The accompanying notes are an integral part of the condensed combined and consolidated financial statements.

2


SPARK ENERGY, INC.
CONDENSED COMBINED AND CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED MARCH 31, 2015 AND 2014
(in thousands, except per share data)
(unaudited)

Three Months Ended March 31,

2015

2014
Revenues:



Retail revenues (including retail revenues—affiliates of $0 and $1,489 for the three months ended March 31, 2015 and 2014, respectively)
$
99,874


$
104,352

Net asset optimization revenues (expenses) (including asset optimization revenues—affiliates of $489 and $2,500 for the three months ended March 31, 2015 and 2014, respectively, and asset optimization revenues—affiliates cost of revenues of $3,093 and $8,089 for the three months ended March 31, 2015 and 2014, respectively)
1,929


1,624

Total Revenues
101,803


105,976

Operating Expenses:



Retail cost of revenues (including retail cost of revenues—affiliates of less than $0.1 million for both the three months ended March 31, 2015 and 2014)
69,085


88,121

General and administrative (including general and administrative expense—affiliates of $0 and $0.1 million for the three months ended March 31, 2015 and 2014, respectively)
14,704


8,113

Depreciation and amortization
4,278


2,959

Total Operating Expenses
88,067


99,193

Operating income
13,736


6,783

Other (expense)/income:



Interest expense
(381
)

(313
)
Interest and other income
135


70

Total other expenses
(246
)

(243
)
Income before income tax expense
13,490


6,540

Income tax expense
561


32

Net income
$
12,929


$
6,508

Less: Net income attributable to non-controlling interests
10,520



Net income attributable to Spark Energy, Inc. stockholders
$
2,409


$
6,508





Net income attributable to Spark Energy, Inc. per share of Class A common stock



       Basic
$
0.80




       Diluted
$
0.80









Weighted average shares of Class A common stock outstanding




       Basic
3,000




       Diluted
3,000





The accompanying notes are an integral part of the condensed combined and consolidated financial statements.


3


SPARK ENERGY, INC.
CONDENSED COMBINED AND CONSOLIDATED STATEMENT OF CHANGES IN EQUITY
FOR THE THREE MONTHS ENDED MARCH 31, 2015
(in thousands)
(unaudited)

Issued Shares of Class A Common Stock
Issued Shares of Class B Common Stock
Issued Shares of Preferred Stock
Class A Common Stock
Class B Common Stock
Additional Paid In Capital
Retained Earnings (Deficit)
Total Stockholders Equity
Non-controlling Interest
Total Equity
Balance at 12/31/14:
3,000

10,750


$
30

$
108

$
9,296

$
(775
)
$
8,659

$
15,458

$
24,117

Stock based compensation





339


339


339

Consolidated net income






2,409

2,409

10,520

12,929

Distributions paid to Class B non-controlling unit holders








(3,897
)
(3,897
)
Dividends paid to Class A common shareholders






(1,088
)
(1,088
)

(1,088
)
Balance at 3/31/15:
3,000

10,750


$
30

$
108

$
9,635

$
546

$
10,319

$
22,081

$
32,400

The accompanying notes are an integral part of the condensed combined and consolidated financial statements.


4


SPARK ENERGY, INC.
CONDENSED COMBINED AND CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED MARCH 31, 2015 AND 2014
(in thousands)
(unaudited) 
  
Three Months Ended March 31,
  
2015

2014
Cash flows from operating activities:



Net income
$
12,929


$
6,508

Adjustments to reconcile net income to net cash flows provided by operating activities:



Depreciation and amortization expense
4,278


2,959

Deferred income taxes
(159
)


Stock based compensation
550



Amortization of deferred financing costs
50


113

Bad debt expense
2,947


565

Gain (loss) on derivatives, net
1,305


(5,460
)
Current period cash settlements on derivatives, net
(4,191
)

10,197

Changes in assets and liabilities:



Decrease in restricted cash
707



Decrease (increase) in accounts receivable
1,924


(25,257
)
Decrease (increase) in accounts receivable—affiliates
207


(535
)
Decrease in inventory
7,521


4,322

Increase in customer acquisition costs
(5,629
)

(5,227
)
Decrease (increase) in prepaid and other current assets
2,621


(1,316
)
Increase in intangible assets - customer acquisitions
(676
)


Increase in other assets


(31
)
Increase (decrease) in accounts payable and accrued liabilities
(6,226
)

18,335

Increase in accounts payable—affiliates
415



Increase (decrease) in other current liabilities
673


1,036

Net cash provided by operating activities
19,246


6,209

Cash flows from investing activities:



Purchases of property and equipment
(441
)

(787
)
Net cash used in investing activities
(441
)

(787
)
Cash flows from financing activities:



Borrowings on notes payable
3,000


24,500

Payments on notes payable
(16,000
)

(18,000
)
Member contributions (distributions), net


(14,356
)
Payment of dividends to Class A common shareholders
(1,088
)


       Payment of distributions to Class B unitholders
(3,897
)


Net cash used in financing activities
(17,985
)

(7,856
)
Decreases in cash and cash equivalents
820


(2,434
)
Cash and cash equivalents—beginning of period
4,359


7,189

Cash and cash equivalents—end of period
$
5,179


$
4,755

Supplemental Disclosure of Cash Flow Information:



Non cash items:
 
 
 
       Property and equipment purchase accrual
$
19

 
$

Cash paid during the period for:
 
 
 
Interest
$
366


$
267

The accompanying notes are an integral part of the condensed combined and consolidated financial statements.

5


SPARK ENERGY, INC.
NOTES TO CONDENSED COMBINED AND CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. Formation and Organization
Organization

Spark Energy, Inc. (the “Company”) is an independent retail energy services company that provides residential and commercial customers in competitive markets across the United States with an alternative choice for natural gas and electricity. The Company is a holding company whose sole material asset consists of units in Spark HoldCo, LLC (“Spark HoldCo”). Spark HoldCo owns all of the outstanding membership interests in each of Spark Energy, LLC (“SE”) and Spark Energy Gas, LLC (“SEG”), the operating subsidiaries through which the Company operates. The Company is the sole managing member of Spark HoldCo, is responsible for all operational, management and administrative decisions relating to Spark HoldCo’s business and consolidates the financial results of Spark HoldCo and its subsidiaries.
The Company is a Delaware corporation formed on April 22, 2014 by Spark Energy Ventures, LLC (“Spark Energy Ventures”) for the purpose of succeeding to Spark Energy Ventures’ ownership in SE and SEG. Spark Energy Ventures, a single member limited liability company formed on October 8, 2007 under the Texas Limited Liability Company Act (“TLLCA”) is an affiliate of NuDevco Retail Holdings, LLC (“NuDevco Retail Holdings”), a single member Texas limited liability company formed by Spark Energy Ventures on May 19, 2014 under the Texas Business Organizations Code (“TBOC”). NuDevco Retail Holdings was formed by Spark Energy Ventures to hold its investment in Spark HoldCo, LLC, our subsidiary and the direct parent of SEG and SE. NuDevco Retail Holdings is currently a direct wholly owned subsidiary of Spark Energy Ventures, which is wholly owned by NuDevco Partners Holdings, LLC, which is wholly owned by NuDevco Partners, LLC (“NuDevco Partners”), which is wholly owned by W. Keith Maxwell III. NuDevco Retail Holdings formed NuDevco Retail, LLC (“NuDevco Retail” and, together with NuDevco Retail Holdings, “NuDevco”), a single member limited liability company, on May 29, 2014 and it holds a 1% interest in Spark HoldCo formerly held by NuDevco Retail Holdings.
Prior to the closing of the Company’s initial public offering of 3,000,000 shares of Class A common stock, par value $0.01 per share (the “Class A common stock”), representing a 21.82% interest in the Company, on August 1, 2014 (the “Offering”) Spark Energy Ventures contributed all of its interest in each of SE and SEG to NuDevco Retail Holdings. NuDevco Retail Holdings in turn contributed all of its interest in each of SE and SEG to Spark HoldCo. The contribution of the interests in SE and SEG to Spark HoldCo is not considered a business combination accounted for under the purchase method, as it was a transfer of assets and operations under common control, and accordingly, balances were transferred at their historical cost. The Company’s historical condensed combined financial statements prior to the Offering are prepared using SE’s and SEG’s historical basis in the assets and liabilities, and include all revenues, costs, assets and liabilities attributed to the retail natural gas and asset optimization and retail electricity businesses of SE and SEG.
SE is a licensed retail electric provider in multiple states. SE provides retail electricity services to end-use retail customers, ranging from residential and small commercial customers to large commercial and industrial users. SE was formed on February 5, 2002 under the Texas Revised Limited Partnership Act (as recodified by the TBOC) and was converted to a Texas limited liability company on May 21, 2014.

SEG is a retail natural gas provider and asset optimization business competitively serving residential, commercial and industrial customers in multiple states. SEG was formed on January 17, 2001 under the Texas Revised Limited Partnership Act (as recodified by the TBOC) and was converted to a Texas limited liability company on May 21, 2014.

As a company with less than $1.0 billion in revenues during its last fiscal year, the Company qualifies as an “emerging growth company” as defined in the Jumpstart Our Business Startups Act of 2012, or the JOBS Act. An emerging growth company may take advantage of specified reduced reporting and other regulatory requirements.

6



The Company will remain an “emerging growth company” for up to five years, or until the earliest of (i) the last day of the fiscal year in which the Company has $1.0 billion or more in annual revenues; (ii) the date on which the Company becomes a “large accelerated filer” (the fiscal year-end on which the total market value of the Company’s common equity securities held by non-affiliates is $700 million or more as of June 30); (iii) the date on which the Company issues more than $1.0 billion of non-convertible debt over a three-year period; or (iv) the last day of the fiscal year following the fifth anniversary of the Offering.
As a result of the Company's election to avail itself of certain provisions of the JOBS Act, the information that the Company provides may be different than what you may receive from other public companies in which you hold an equity interest.
Initial Public Offering of Spark Energy, Inc.

On August 1, 2014, the Company completed the Offering of 3,000,000 shares of its Class A common stock for $18.00 per share, representing an approximate 21.82% voting interest in the Company.

Net proceeds from the Offering were $47.6 million, after underwriting discounts and commissions, structuring fees and offering expenses. The net proceeds from the Offering were used to acquire units of Spark HoldCo (the “Spark HoldCo units”) representing approximately 21.82% of the outstanding Spark HoldCo units after the Offering from NuDevco Retail Holdings and to repay a promissory note from the Company in the principal amount of $50,000 (the “NuDevco Note”). The Company did not retain any of the net proceeds from the Offering. The Company recorded $2.7 million of previously deferred incremental costs directly attributable to the Offering as a reduction in equity at the Offering date, which were funded by the Offering proceeds.

The Company also issued 10,750,000 shares of Class B common stock, par value $0.01 per share (the “Class B common stock”) to Spark HoldCo, 10,612,500 of which Spark HoldCo distributed to NuDevco Retail Holdings, and 137,500 of which Spark HoldCo distributed to NuDevco Retail.

Each share of Class B common stock, all of which is held by NuDevco, has no economic rights but entitles its holder to one vote on all matters to be voted on by shareholders generally. Holders of Class A common stock and Class B common stock vote together as a single class on all matters presented to our shareholders for their vote or approval, except as otherwise required by applicable law or by our certificate of incorporation.

At the consummation of the Offering, the Company's outstanding common stock is summarized in the table below:


Shares of


common stock


Number

Percent Voting Interest
Publicly held Class A common stock

3,000,000


21.82
%
Class B common stock held by NuDevco

10,750,000


78.18
%
Total

13,750,000


100.00
%
Credit Facility
Concurrently with the closing of the Offering, the Company entered into a new $70.0 million senior secured credit facility. See Note 4 “Long-Term Debt” for further discussion.
Exchange and Registration Rights
NuDevco has the right to exchange (the “Exchange Right”) all or a portion of its Spark HoldCo units (together with a corresponding number of shares of Class B common stock) for Class A common stock (or cash at Spark Energy,

7


Inc.’s or Spark HoldCo’s election (the “Cash Option”) at an exchange ratio of one share of Class A common stock for each Spark HoldCo unit (and corresponding share of Class B common stock) exchanged. In addition, NuDevco has the right, under certain circumstances, to cause the Company to register the offer and resale of NuDevco's shares of Class A common stock obtained pursuant to the Exchange Right.

Tax Receivable Agreement

Concurrently with the closing of the Offering, the Company entered into a Tax Receivable Agreement with Spark HoldCo, NuDevco Retail Holdings and NuDevco Retail. See Note 11 “Transactions with Affiliates” for further discussion.
2. Basis of Presentation
The accompanying interim unaudited condensed combined and consolidated financial statements (“interim statements”) of the Company have been prepared in accordance with accounting principles generally accepted in the United States (“GAAP”) and pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC").
The preparation of the financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent liabilities at the date of the interim financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Effects on the business, financial condition and results of operations resulting from revisions to estimates are recognized when the facts that give rise to the revision become known. The information furnished herein reflects all normal recurring adjustments which are, in the opinion of management, necessary for a fair presentation of the condensed combined and consolidated financial statements. Operating results for the three months ended March 31, 2015 are not necessarily indicative of the results which may be expected for the full year or for any interim period. 
The accompanying interim unaudited condensed combined and consolidated financial statements have been prepared in accordance with Regulation S-X, Article 3, General Instructions as to Financial Statements and Staff Accounting Bulletin (“SAB”) Topic 1-B, Allocations of Expenses and Related Disclosures in Financial Statements of Subsidiaries, Divisions or Lesser Business Components of Another Entity on a stand-alone basis and are derived from SE’s and SEG’s historical basis in the assets and liabilities before the Offering and Spark Energy Inc.'s financial results after the Offering, and include all revenues, costs, assets and liabilities attributable to the retail natural gas and asset optimization and retail electricity businesses of SE and SEG for the periods prior to the Offering that are specifically identifiable or have been allocated to the Company. Management has made certain assumptions and estimates in order to allocate a reasonable share of expenses to the Company, such that the Company’s consolidated financial statements reflect substantially all of its costs of doing business. The Company also enters into transactions with and pays certain costs on behalf of affiliates under common control in order to reduce risk, reduce administrative expense, create economies of scale, create strategic alliances and supply goods and services to these related parties. The Company direct bills certain expenses incurred on behalf of affiliates or allocates certain overhead expenses to affiliates associated with general and administrative services based on services provided, departmental usage, or headcount, which are considered reasonable by management. The allocations and related estimates and assumptions are described more fully in Note 11 “Transactions with Affiliates”. These costs are not necessarily indicative of the cost that the Company would have incurred had it operated as an independent stand-alone entity prior to the Offering. Affiliates have also relied upon Spark Energy Ventures as a participant in the credit facility for periods prior to the Offering as described more fully in Note 4 “Long-Term Debt”. As such, the Company’s interim unaudited condensed combined and consolidated financial statements do not fully reflect what the Company’s financial position, results of operations and cash flows would have been had the Company operated as an independent stand-alone company prior to the Offering. As a result, historical financial information prior to the Offering is not necessarily indicative of what the Company’s results of operations, financial position and cash flows will be in the future. The Company's unaudited condensed consolidated financial statements subsequent to the Offering are presented on a consolidated basis and include all wholly-owned and controlled subsidiaries.

8


Transactions with Affiliates

The Company enters into transactions with and incurs certain costs on behalf of affiliates that are commonly controlled by NuDevco Partners Holdings in order to reduce risk, reduce administrative expense, create economies of scale, create strategic alliances and supply goods and services to these related parties. These transactions include, but are not limited to, certain services to the affiliated companies associated with the Company’s debt facility prior to the Offering, employee benefits provided through the Company’s benefit plans, insurance plans, leased office space, and administrative salaries for accounting, tax, legal, or technology services. As such, the accompanying condensed combined and consolidated financial statements include costs that have been incurred by the Company and then directly billed or allocated to affiliates and are recorded net in general and administrative expense on the condensed combined and consolidated statements of operations with a corresponding accounts receivable—affiliates recorded in the condensed combined and consolidated balance sheets. Additionally, the Company enters into transactions with certain affiliates for sales or purchases of natural gas and electricity, which are recorded in retail revenues, retail cost of revenues, and net asset optimization revenues in the condensed combined and consolidated statements of operations with a corresponding accounts receivable—affiliate or accounts payable—affiliate in the condensed combined and consolidated balance sheets. See Note 11 “Transactions with Affiliates” for further discussion.

Subsequent Events

Subsequent events have been evaluated through the date these financial statements are issued. Any material subsequent events that occurred prior to such date have been properly recognized or disclosed in the condensed combined and consolidated financial statements. See Note 13 “Subsequent Events” for further discussion.

Recent Accounting Pronouncements

In May 2014, the Financial Accounting Standards Board (“FASB") issued Accounting Standards Update (“ASU”) No. 2014-09, Revenue from Contracts with Customers, which requires an entity to recognize the amount of revenue to which it expects to be entitled for the transfer of promised goods or services to customers. ASU 2014-09 will replace most existing revenue recognition guidance in GAAP when it becomes effective on January 1, 2017. Early application is not permitted. The standard permits the use of either the retrospective or cumulative effect transition method. The Company is evaluating the effect that ASU 2014-09 will have on its financial statements and related disclosures. The Company has not yet selected a transition method nor has it determined the effect of the standard on its ongoing financial reporting.

In August 2014, the FASB issued ASU No. 2014-15, Presentation of Financial Statements - Going Concern(Subtopic 205-40): Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern (“ASU 2014-15”). The new guidance clarifies management’s responsibility to evaluate whether there is substantial doubt about an entity’s ability to continue as a going concern and to provide related footnote disclosure. ASU 2014-15 is effective for annual periods ending after December 15, 2016 and for annual periods and interim periods thereafter. Early adoption is permitted. The Company does not expect the adoption to have a material effect on the combined or consolidated financial statements.

In November 2014, the FASB issued ASU No. 2014-16, Derivatives and Hedging, which clarifies how current GAAP should be interpreted in evaluating the economic characteristics and risks of a host contract in a hybrid financial instrument that is issued in the form of a share. The amendments in this update are effective for public business entities for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2015. Early adoption, including adoption in an interim period, is permitted. The update does not change the current criteria in GAAP for determining when separation of certain embedded derivative features in a hybrid financial instrument is required. The Company does not believe the adoption of this ASU to have a material impact on the combined and consolidated financial statements.


9


In February 2015, the FASB issued ASU No. 2015-02, Consolidation (Topic 810) (“ASU 2015-02”). The new guidance changes the analysis that a reporting entity must perform to determine whether it should consolidate certain types of legal entities. ASU 2015-02 is effective for fiscal years, and for interim periods within those fiscal years, beginning after December 15, 2015. Early adoption is permitted, including adoption at an interim period. The Company has not yet determined the effect of the standard on its ongoing financial reporting.

In April 2015, the FASB issued ASU No. 2015-03, Interest - Imputation of Interest (Subtopic 835-30) (“ASU 2015-03”). The new guidance requires that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability, consistent with debt discounts. ASU 2015-03 is effective for fiscal years, and for interim periods within those fiscal years, beginning after December 15, 2015. Early adoption is permitted for financial statements that have not been previously issued. The Company has not yet determined the effect of the standard on its ongoing financial reporting.

3. Property and Equipment
Property and equipment consist of the following amounts as of:

Estimated 
useful
lives

March 31, 2015

December 31, 2014
 
(years)
 
(In thousands)
Information technology
2 – 5

$
26,010


$
25,588

Leasehold improvements
2 – 5

4,568


4,568

Furniture and fixtures
2 – 5

998


998

Total


31,576


31,154

Accumulated depreciation


(27,313
)

(26,933
)
Property and equipment—net


$
4,263


$
4,221

Information technology assets include software and consultant time used in the application, development and implementation of various systems including customer billing and resource management systems. As of March 31, 2015 and December 31, 2014, information technology includes $0.3 million and $0.4 million, respectively, of costs associated with assets not yet placed into service.
Depreciation expense recorded in the condensed combined and consolidated statements of operations was $0.4 million and $0.9 million for the three months ended March 31, 2015 and 2014, respectively.
4. Long-Term Debt
In October 2007, Spark Energy Ventures and all of its subsidiaries (collectively, the “Borrowers”), entered into a credit agreement, consisting of a working capital facility, a term loan and a revolving credit facility (the “Credit Agreement”), with SE and SEG as co-borrowers under which they were jointly and severally liable for amounts Borrowers borrowed under the Credit Agreement. The Credit Agreement was secured by substantially all of the assets of Spark Energy Ventures and its subsidiaries.
The Credit Agreement was amended on May 30, 2008 to provide for a $177.5 million working capital facility, a $100 million term loan, and a $35 million revolving credit facility. On January 24, 2011, the Borrowers amended and restated the Credit Agreement (the “Fifth Amended Credit Agreement”) to decrease the working capital facility to $150 million, to increase the term loan to $130 million and to eliminate the revolving credit facility.
On December 17, 2012, the Borrowers amended and restated the Fifth Amended Credit Agreement to decrease the working capital facility to $70 million, to decrease the term loan to $125 million and to reinstate the revolving credit facility in the amount of $30 million (the “Sixth Amended Credit Agreement”).

10


On July 31, 2013 and in conjunction with the initial public offering of Marlin Midstream Partners, LP (“Marlin”), which was formerly a wholly owned subsidiary of Spark Energy Ventures, the Sixth Amended Credit Agreement was amended and restated to increase the working capital facility to $80 million and eliminate the term loan and revolving credit facility (the “Seventh Amended Credit Agreement”) and to remove Marlin as a party to the Credit Agreement. The Seventh Amended Credit Agreement was scheduled to mature on July 31, 2015. The Seventh Amended Credit Agreement continued to be secured by the assets of Spark Energy Ventures and its subsidiaries through completion of the Offering.
Although SE and SEG, as wholly owned subsidiaries of Spark Energy Ventures, were jointly and severally liable for Marlin’s borrowing under the Sixth Amended Credit Agreement prior to the Marlin initial public offering, SE and SEG did not historically have access to or use the term loan and the revolving credit facility utilized by Marlin. SE and SEG were the primary recipients of the proceeds from the working capital facility.
The Company adopted ASU 2013-04, which prescribes the accounting for joint and several liability arrangements early and applied the accounting in the guidance condensed combined and consolidated financial statements prior to the Offering as required by the standard. This guidance requires an entity to measure its obligation resulting from joint and several liability arrangements for which the total amount under the arrangement is fixed at the reporting date, as the sum of the amount the reporting entity agreed to pay on the basis of its arrangement among its co-obligors and any additional amount the reporting entity expects to pay on behalf of its co-obligors. Based on the Sixth Amended Credit Agreement prior to the Marlin initial public offering and understanding among the Borrowers, the term loan and the revolving credit facility were assigned specifically to Marlin. The Company has recognized the proceeds from the working capital facility in its condensed combined and consolidated financial statements prior to the Offering, which represented the amounts the Company with the other Borrowers agreed to pay, and the amounts the Company expected to pay.
Working Capital Facility
The working capital facility was $150 million in 2012 under the Fifth Amended Credit Agreement and was later amended to $70 million on December 17, 2012 under the Sixth Amended Credit Agreement. On July 31, 2013, and in conjunction with the Seventh Amended Credit Agreement, the working capital facility was increased to $80 million.
The working capital facility was available for use by Spark Energy Ventures and its affiliates to finance the working capital requirements related to the purchase and sale of natural gas, electricity, and other commodity products not related to the retail natural gas and asset optimization and retail electricity businesses of the Company. The Company’s condensed combined and consolidated financial statements include the total amounts outstanding under the working capital facility of $27.5 million as December 31, 2013, which is classified as current in the condensed combined balance sheet as the working capital facility was drawn upon and repaid on a monthly basis to fund working capital needs. Portions of the borrowings were used to fund equity distributions to the sole member of the Company to fund unrelated operations of an affiliate under the common control of the sole member prior to the Offering. The total amounts outstanding under the facility as of December 31, 2013 and through the Offering date included $29.0 million that was retained and paid off by an affiliate in connection with the Offering.
Further, through the issuance of letters of credit, the Company was able to secure payment to suppliers. No obligation is recorded for such outstanding letters of credit unless they are drawn upon by the suppliers and in the event a supplier draws on a letter of credit, repayment is due by the earlier of demand by the bank or at the expiration of the applicable Credit Agreement. Letters of credit issued and outstanding as of December 31, 2013 were $10.0 million.
Under the working capital facility, the Company paid a fee with respect to each letter of credit issued and outstanding. The Company incurred fees on letters of credit issued and outstanding totaling $0.1 million for both of the three months ended March 31, 2015 and 2014, respectively, which is recorded in interest expense in the condensed combined and consolidated statements of operations.

11


Under the Sixth Amended Credit Agreement, the Company was able to elect to have loans under the working credit facility bear interest either (i) at a Eurodollar-based rate plus a margin ranging from 3.00% to 3.75% depending on the Company’s consolidated funded indebtedness ratio then in effect, or (ii) at a base rate loan plus a margin ranging from 2.00% to 2.75% depending on the Company’s consolidated funded indebtedness ratio then in effect. The Company also paid a nonutilization fee equal to 0.50% per annum.
Under the Seventh Amended Credit Agreement, the Company was able to elect to have loans under the working capital facility bear interest (i) at a Eurodollar-based rate plus a margin ranging from 3.00% to 3.25%, depending on the Spark Energy Ventures’ aggregate amount outstanding then in effect, (ii) at a base rate loan plus a margin ranging from 2.00% to 2.25%, depending on Spark Energy Ventures’ aggregate amount outstanding then in effect or (iii) a cost of funds rate loan plus a margin ranging from 2.50% to 2.75%, depending on Spark Energy Ventures’ aggregate amount outstanding then in effect. Each working capital loan made as a result of a drawing under a letter of credit bears interest on the outstanding principal amount thereof from the date funded at a floating rate per annum equal to the cost of funds rate plus the applicable margin until such loan has been outstanding for more than two business days and, thereafter, bears interest on the outstanding principal amount thereof at a floating rate per annum equal to the base rate plus the applicable margin, plus two percent 2.00% per annum. The Company incurred interest expense related to our revolving credit facilities of $0.2 million and less than $0.1 million for the three months ended March 31, 2015 and 2014, respectively, which is recorded in interest expense in the condensed combined and consolidated statements of operations.
The Company also paid a commitment fee equal to 0.50% per annum. The Company incurred commitment fees totaling less than $0.1 million for each of the three months ended March 31, 2015 and 2014, which is recorded in interest expense in the condensed combined and consolidated statements of operations.
Deferred Financing Costs
Deferred financing costs were $0.2 million and $0.3 million as of March 31, 2015 and December 31, 2014, respectively. Of these amounts, $0.2 million is recorded in other current assets in the condensed combined and consolidated balance sheets as of March 31, 2015 and December 31, 2014, and $0.1 million is recorded in other assets in the condensed combined and consolidated balance sheet as of December 31, 2014, based on the terms of the working capital facilities.
Amortization of deferred financing costs was $0.1 million for both the three months ended March 31, 2015 and 2014, which is recorded in interest expense in the condensed combined and consolidated statements of operations.
NuDevco Note
NuDevco Retail Holdings transferred Spark HoldCo units to the Company for the $50,000 NuDevco Note, and the limited liability company agreement of Spark HoldCo was amended and restated to admit Spark Energy, Inc. as its sole managing member. This promissory note was repaid in connection with proceeds from the Offering.
New Credit Facility

Concurrently with the closing of the Offering, the Company entered into a new $70.0 million senior secured revolving credit facility (“Senior Credit Facility”), which matures on August 1, 2016. If no event of default has occurred, the Company has the right, subject to approval by the administrative agent and each issuing bank, to increase the commitments under the Senior Credit Facility up to $120.0 million. The Company borrowed approximately $10.0 million under the Senior Credit Facility at the closing of the Offering to repay in full the outstanding indebtedness under the Seventh Amended Credit Agreement that SEG and SE agreed to be responsible for pursuant to an interborrower agreement between SEG, SE and an affiliate. The remaining $29.0 million of indebtedness outstanding under the Seventh Amended Credit Agreement at the Offering date was paid down by our affiliate with its own funds concurrent with the closing of the Offering pursuant to the terms of the interborrower agreement. Following this repayment, the Seventh Amended Credit Agreement was terminated. The Company had $15 million in letters of credit issued under the Senior Credit Facility at inception. As of March 31, 2015, the

12


Company had $20.0 million outstanding under the Senior Credit Facility and $12.5 million in letters of credit issued. The Senior Credit Facility is available to fund expansions, acquisitions and working capital requirements for operations and general corporate purposes.

At our election, interest is generally determined by reference to:
the Eurodollar-based rate plus a margin ranging from 2.75% to 3.00%, depending on the overall utilization of the working capital facility;
the alternate base rate loan plus a margin ranging from 1.75% to 2.00%, depending on the overall utilization of the working capital facility; or
a cost of funds rate loan plus a margin ranging from 2.25% to 2.50%, depending on the overall utilization of the working capital facility.

The interest rate is generally reduced by 25 basis points if utilization under the Senior Credit Facility is below fifty percent.

Each working capital loan made as a result of a drawing under a letter of credit or a reducing letter of credit borrowing bears interest on the outstanding principal amount thereof from the date funded at a floating rate per annum equal to the base rate plus the applicable margin until such loan has been outstanding for more than two business days and, thereafter, bears interest on the outstanding principal amount thereof at a floating rate per annum equal to the base rate plus the applicable margin, plus two percent (2.00%) per annum. Additionally, the Company is charged a letter of credit fee for letters of credit outstanding. Our fee is from 2.00% to 2.50% per annum, depending on the overall utilization of the working capital facility and what type of transaction it supports.

We pay an annual commitment fee of 0.375% or 0.5% on the unused portion of the Senior Credit Facility depending upon the unused capacity. The lending syndicate under the Senior Credit Facility is entitled to several additional fees including an upfront fee, annual agency fee, and fronting fees based on a percentage of the face amount of letters of credit payable to any syndicate member that issues a letter a credit. Commitment fees were immaterial for the three months ended March 31, 2015 and 2014.

The Company incurred total interest expense related to prior and current credit facilities of $0.4 million and $0.3 million for the three months ended March 31, 2015 and 2014.

The Senior Credit Facility is secured by the capital stock of SE, SEG and Spark HoldCo (the “Co-Borrowers”) present and future subsidiaries, all of the Co-Borrowers’ and their subsidiaries’ present and future property and assets, including accounts receivable, inventory and liquid investments, and control agreements relating to bank accounts.
The Senior Credit Facility contains covenants which, among other things, require the Company to maintain certain financial ratios or conditions. At all times, the Company must maintain net working capital, tangible net worth and a leverage ratio to a certain threshold. The Senior Credit Facility also contains negative covenants that limit our ability to, among other things, make certain payments, distributions, investments, acquisitions or loans.
In addition, the Senior Credit Facility contains affirmative covenants that are customary for credit facilities of this type. The covenants include delivery of financial statements (including any filings made with the SEC, maintenance of property and insurance, payment of taxes and obligations, material compliance with laws, inspection of property, books and records and audits, use of proceeds, payments to bank blocked accounts, notice of defaults and certain other customary matters.
5. Fair Value Measurements
Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability (exit price) in an orderly transaction between market participants at the measurement date. Fair values are based on assumptions that market participants would use when pricing an asset or liability, including assumptions about risk and the risks

13


inherent in valuation techniques and the inputs to valuations. This includes not only the credit standing of counterparties involved and the impact of credit enhancements but also the impact of the Company’s own nonperformance risk on its liabilities.
The Company applies fair value measurements to its commodity derivative instruments based on the following fair value hierarchy, which prioritizes the inputs to valuation techniques used to measure fair value into three broad levels:

Level 1—Quoted prices in active markets for identical assets and liabilities. Instruments categorized in Level 1 primarily consist of financial instruments such as exchange-traded derivative instruments.
Level 2—Inputs other than quoted prices recorded in Level 1 that are either directly or indirectly observable for the asset or liability, including quoted prices for similar assets or liabilities in active markets, quoted prices for identical or similar assets or liabilities in inactive markets, inputs other than quoted prices that are observable for the asset or liability, and inputs that are derived from observable market data by correlation or other means. Instruments categorized in Level 2 primarily include non-exchange traded derivatives such as over-the-counter commodity forwards and swaps and options.
Level 3—Unobservable inputs for the asset or liability, including situations where there is little, if any, observable market activity for the asset or liability.
As the fair value hierarchy gives the highest priority to quoted prices in active markets (Level 1) and the lowest priority to unobservable data (Level 3), the Company maximizes the use of observable inputs and minimizes the use of unobservable inputs when measuring fair value. In some cases, the inputs used to measure fair value might fall in different levels of the fair value hierarchy. In these cases, the lowest level input that is significant to a fair value measurement in its entirety determines the applicable level in the fair value hierarchy.
Non-Derivative Financial Instruments
The carrying amount of cash and cash equivalents, accounts receivable, accounts receivable-affiliates, accounts payable, accounts payable-affiliates, and accrued liabilities recorded in the condensed combined and consolidated balance sheets approximate fair value due to the short-term nature of these items. The carrying amount of long-term debt recorded in the condensed combined and consolidated balance sheets approximates fair value because of the variable rate nature of the Company’s long-term debt. The fair value of the payable pursuant to tax receivable agreement-affiliate is not determinable due to the affiliate nature and terms of the associated agreement with the affiliate.
Derivative Instruments
The following table presents assets and liabilities measured and recorded at fair value in the Company’s condensed combined and consolidated balance sheets on a recurring basis by and their level within the fair value hierarchy as of (in thousands): 

Level 1

Level 2

Level 3

Total
March 31, 2015
 

 

 

 
Non-trading commodity derivative assets
$


$
49


$


$
49

Trading commodity derivative assets


8




8

Total commodity derivative assets
$


$
57


$


$
57

Non-trading commodity derivative liabilities
$
(4,205
)

$
(4,675
)

$


$
(8,880
)
Trading commodity derivative liabilities
(14
)

(65
)



(79
)
Total commodity derivative liabilities
$
(4,219
)

$
(4,740
)

$


$
(8,959
)

14



Level 1

Level 2

Level 3

Total
December 31, 2014







Non-trading commodity derivative assets
$


$
80


$


$
80

Trading commodity derivative assets


136




136

Total commodity derivative assets
$


$
216


$


$
216

Non-trading commodity derivative liabilities
$
(6,810
)

$
(5,017
)

$


$
(11,827
)
Trading commodity derivative liabilities
(32
)

(145
)



(177
)
Total commodity derivative liabilities
$
(6,842
)

$
(5,162
)

$


$
(12,004
)
The Company had no financial instruments measured using level 3 at March 31, 2015 and December 31, 2014. The Company had no transfers of assets or liabilities between any of the above levels during the three months ended March 31, 2015 and the year ended December 31, 2014.
The Company’s derivative contracts include exchange-traded contracts fair valued utilizing readily available quoted market prices and non-exchange-traded contracts fair valued using market price quotations available through brokers or over-the-counter and on-line exchanges. In addition, in determining the fair value of the Company’s derivative contracts, the Company applies a credit risk valuation adjustment to reflect credit risk which is calculated based on the Company’s or the counterparty’s historical credit risks. As of March 31, 2015 and December 31, 2014, the credit risk valuation adjustment was not material.
6. Accounting for Derivative Instruments
The Company is exposed to the impact of market fluctuations in the price of electricity and natural gas and basis costs, storage and ancillary capacity charges from independent system operators. The Company uses derivative instruments to manage exposure to these risks, and historically designated certain derivative instruments as cash flow hedges for accounting purposes. For derivatives designated in a qualifying cash flow hedging relationship, the effective portion of the change in fair value is recognized in accumulated other comprehensive income (“OCI”) and reclassified to earnings in the period in which the hedged item affects earnings. Any ineffective portion of the derivative’s change in fair value is recognized currently in earnings. As of March 31, 2015 and 2014, the Company had not designated any derivative instruments as cash flow hedges.
The Company also holds certain derivative instruments that are not held for trading purposes but are also not designated as hedges for accounting purposes. These derivative instruments represent economic hedges that mitigate the Company’s exposure to fluctuations in commodity prices. For these derivative instruments, changes in the fair value are recognized currently in earnings in retail revenues or retail cost of revenues.
As part of the Company’s strategy to optimize its assets and manage related risks, it also manages a portfolio of commodity derivative instruments held for trading purposes. The Company’s commodity trading activities are subject to limits within the Company’s Risk Management Policy. For these derivative instruments, changes in the fair value are recognized currently in earnings in net asset optimization revenues.
Derivative assets and liabilities are presented net in the Company’s condensed combined and consolidated balance sheets when the derivative instruments are executed with the same counterparty under a master netting arrangement. The Company’s derivative contracts include transactions that are executed both on an exchange and centrally cleared as well as over-the-counter, bilateral contracts that are transacted directly with a third party. To the extent the Company has paid or received collateral related to the derivative assets or liabilities, such amounts would be presented net against the related derivative asset or liability’s fair value. As of March 31, 2015 and 2014, the Company had not paid or received any collateral amounts. The specific types of derivative instruments the Company may execute to manage the commodity price risk include the following:

Forward contracts, which commit the Company to purchase or sell energy commodities in the future;
Futures contracts, which are exchange-traded standardized commitments to purchase or sell a commodity or financial instrument;

15


Swap agreements, which require payments to or from counterparties based upon the differential between two prices for a predetermined notional quantity; and
Option contracts, which convey to the option holder the right but not the obligation to purchase or sell a commodity.
The Company has entered into other energy-related contracts that do not meet the definition of a derivative instrument or qualify for the normal purchase or normal sale exception and are therefore not accounted for at fair value including the following:

Forward electricity and natural gas purchase contracts for retail customer load, and
Natural gas transportation contracts and storage agreements. 

Volumetric Underlying Derivative Transactions
The following table summarizes the net notional volume buy/(sell) of the Company’s open derivative financial instruments accounted for at fair value, broken out by commodity, as of:
Non-trading 
Commodity
Notional

March 31, 2015

December 31, 2014
Natural Gas
MMBtu

6,361


9,690

Natural Gas Basis
MMBtu

1,833


2,710

Electricity
MWh

665


607

Trading
Commodity
Notional

March 31, 2015

December 31, 2014
Natural Gas
MMBtu

1,501


(155
)
Natural Gas Basis
MMBtu



(56
)

Gains (Losses) on Derivative Instruments
Gains (losses) on derivative instruments, net and current period settlements on derivative instruments were as follows for the periods indicated (in thousands):

Three Months Ended March 31,
  
2015

2014
Gain (loss) on non-trading derivatives, net (including loss on non-trading derivatives—affiliates, net of $0 and $157 for the three months ended March 31, 2015 and 2014, respectively)
(1,200
)

11,448

Gain (loss) on trading derivatives, net (including loss on trading derivatives—affiliates, net of $0 and $217 for the three months ended March 31, 2015 and 2014, respectively)
(105
)

(5,988
)
Gain (loss) on derivatives, net
$
(1,305
)

$
5,460

Current period settlements on non-trading derivatives
4,115


(12,901
)
Current period settlements on trading derivatives (including current period settlements on trading derivatives—affiliates, net of $0 and $217 for the three months ended March 31, 2015 and 2014, respectively)
76


2,704

Total current period settlements on derivatives
$
4,191


$
(10,197
)

16


Gains (losses) on trading derivative instruments are recorded in net asset optimization revenues and gains (losses) on non-trading derivative instruments are recorded in retail revenues or retail cost of revenues on the condensed combined and consolidated statements of operations.
Fair Value of Derivative Instruments
The following tables summarize the fair value and offsetting amounts of the Company’s derivative instruments by counterparty and collateral received or paid as of (in thousands):
  
March 31, 2015
Description
Gross Assets

Gross
Amounts
Offset

Net Assets

Cash
Collateral
Offset

Net Amount
Presented
Non-trading commodity derivatives
$
1,384


$
(1,335
)

$
49


$


$
49

Trading commodity derivatives
15


(7
)

8




8

Total Current Derivative Assets
1,399


(1,342
)

57




57

Non-trading commodity derivatives
371


(371
)






Total Non-current Derivative Assets
371


(371
)






Total Derivative Assets
$
1,770


$
(1,713
)

$
57


$


$
57


March 31, 2015
Description
Gross 
Liabilities

Gross
Amounts
Offset

Net
Liabilities

Cash
Collateral
Offset

Net Amount
Presented
Non-trading commodity derivatives
$
(9,728
)

$
1,335


$
(8,393
)

$


$
(8,393
)
Trading commodity derivatives
(86
)

7


(79
)



(79
)
Total Current Derivative Liabilities
(9,814
)

1,342


(8,472
)



(8,472
)
Non-trading commodity derivatives
(858
)

371


(487
)



(487
)
Total Non-current Derivative Liabilities
(858
)

371


(487
)



(487
)
Total Derivative Liabilities
$
(10,672
)

$
1,713


$
(8,959
)

$


$
(8,959
)
  
December 31, 2014
Description
Gross Assets

Gross
Amounts
Offset

Net Assets

Cash
Collateral
Offset

Net Amount
Presented
Non-trading commodity derivatives
$
3,642


$
(3,562
)

$
80


$


$
80

Trading commodity derivatives
234


(98
)

136




136

Total Current Derivative Assets
3,876


(3,660
)

216




216

Non-trading commodity derivatives
313


(313
)






Total Non-current Derivative Assets
313


(313
)






Total Derivative Assets
$
4,189


$
(3,973
)

$
216


$


$
216


December 31, 2014
Description
Gross Liabilities

Gross
Amounts
Offset

Net
Liabilities

Cash
Collateral
Offset

Net Amount
Presented
Non-trading commodity derivatives
$
(14,911
)

$
3,562


$
(11,349
)

$


$
(11,349
)
Trading commodity derivatives
(275
)

98


(177
)



(177
)
Total Current Derivative Assets
(15,186
)

3,660


(11,526
)



(11,526
)
Non-trading commodity derivatives
(791
)

313


(478
)



(478
)
Total Non-current Derivative Assets
(791
)

313


(478
)



(478
)
Total Derivative Liabilities
$
(15,977
)

$
3,973


$
(12,004
)

$


$
(12,004
)


17


7. Equity

Class A Common Stock

The Company has a total of 3,000,000 shares of its Class A common stock outstanding at March 31, 2015. Each share of Class A common stock holds economic rights and entitles its holder to one vote on all matters to be voted on by shareholders generally.

Class B Common Stock

The Company has a total of 10,750,000 shares of its Class B common stock outstanding at March 31, 2015. Each share of Class B common stock, all of which is held by NuDevco, has no economic rights but entitles its holder to one vote on all matters to be voted on by shareholders generally.

Holders of Class A common stock and Class B common stock vote together as a single class on all matters presented to our shareholders for their vote or approval, except as otherwise required by applicable law or by our certificate of incorporation.

Preferred Stock

The Company has 20,000,000 shares of authorized preferred stock of which there are no issued and outstanding shares at March 31, 2015.

Earnings Per Share

Basic earnings per share (“EPS”) is computed by dividing net income attributable to shareholders (the numerator) by the weighted-average number of Class A common shares outstanding for the period (the denominator). Class B common shares are not included in the calculation of basic earnings per share because they have no economic interest in the Company. Diluted earnings per share is similarly calculated except that the denominator is increased (1) using the treasury stock method to determine the potential dilutive effect of the Company's outstanding unvested restricted stock units and (2) using the if-converted method to determine the potential dilutive effect of the Company's Class B common stock. The Company's unvested restricted stock units were not recognized in dilutive earnings per share as they would have been antidilutive. The Class B common stock conversion to Class A common stock was not recognized in dilutive earnings per share as the effect of the conversion would be antidilutive.


















18


The following table presents the computation of earnings per share for the three month period ended March 31, 2015 (in thousands, except per share data):

For the Three Months Ended

March 31, 2015
Net income attributable to shareholders of Class A common stock
$
2,409

Basic weighted average Class A common shares outstanding
3,000

Basic EPS attributable to shareholders
$
0.80



Net income attributable to shareholders of Class A common stock
$
2,409

Effect of conversion of Class B common stock to shares of Class A common stock

Diluted net income attributable to shareholders of Class A common stock
2,409

Basic weighted average Class A common shares outstanding (1)
3,000

Effect of dilutive Class B common stock

Effect of dilutive restricted stock units

Diluted weighted average shares outstanding
3,000



Diluted EPS attributable to shareholders
$
0.80


Non-controlling Interest

The Company owns a 21.82% economic interest in Spark HoldCo, and is the sole managing member in Spark HoldCo. NuDevco owns a 78.18% economic interest in Spark HoldCo. As a result, the Company has consolidated the financial position and results of operations of Spark HoldCo and reflected the economic interest owned by NuDevco as a non-controlling interest.
8. Stock-Based Compensation

Restricted Stock Units

In connection with the Offering, the Company adopted the Spark Energy, Inc. Long-Term Incentive Plan (the “LTIP”) for the employees, consultants and directors of the Company and its affiliates who perform services for the Company. The purpose of the LTIP is to provide a means to attract and retain individuals to serve as directors, employees and consultants who provide services to the Company by affording such individuals a means to acquire and maintain ownership of awards, the value of which is tied to the performance of the Company's Class A common stock. The LTIP provides for grants of cash payments, stock options, stock appreciation rights, restricted stock or units, bonus stock, dividend equivalents, and other stock-based awards with the total number of shares of stock available for issuance under the LTIP not to exceed 1,375,000 shares.

On August 1, 2014, the Company granted restricted stock units to our employees, non-employee directors and certain employees of our affiliates who perform services for the Company. The restricted stock unit awards vest over a nine month period for non-employee directors and ratably over approximately three or four years for officers, employees, and employees of affiliates, depending on years of service at the grant date, with the initial vesting date occurring on May 4, 2015 and each subsequent vesting date occurring each May 4 thereafter. Each restricted stock unit is entitled to receive a dividend equivalent when dividends are declared and distributed to shareholders of Class A common stock. These dividend equivalents entitle the holder to additional restricted stock units effective as of the record date of such dividends and vested upon the same schedule as the underlying restricted stock unit. In accordance with ASC 718, Compensation - Stock Compensation (“ASC 718”), the Company measures the cost of awards classified as equity awards based on the grant date fair value of the award and the Company measures the cost of awards classified as liability awards at the fair value of the award at each reporting period. The Company has utilized an estimated 6% annual forfeiture rate of restricted stock units in determining the fair value for all awards excluding those issued to executive level recipients and non-employee directors, for which no forfeitures are estimated to occur. The Company has elected to recognize related compensation expense on a straight-line basis

19


over the associated vesting periods. Although the restricted stock units allow for cash settlement of the awards at the sole discretion of management of the Company, management intends to settle the awards by issuing shares of the Company’s Class A common stock.

Equity Classified Restricted Stock Units

Restricted stock units issued to employees and officers of the Company are classified as equity awards. The fair value of the equity classified restricted stock units was based on the Company’s Class A common stock price as of the grant date, and the Company recognized stock based compensation expense of $0.3 million for the three months ended March 31, 2015 in general and administrative expense and a corresponding increase to additional paid in capital. No compensation expense was recorded for the same periods in 2014 as there were no LTIP awards outstanding.

The following table summarizes equity classified restricted stock unit activity and unvested restricted stock units for the three months ended March 31, 2015:

Number of Shares
Weighted Average Grant Date Fair Value
Unvested at December 31, 2014
256,884

$
17.93

Granted


Dividend reinvestment issuances
6,475

14.31

Vested


Forfeited
(2,001
)
17.90

Unvested at March 31, 2015
261,358

$
17.84


As of March 31, 2015, there was $3.8 million of total unrecognized compensation cost related to the Company's equity classified restricted stock units, which is expected to be recognized over a weighted average period of approximately 2.9 years.

Liability Classified Restricted Stock Units

Restricted stock units issued to non-employee directors of the Company and employees of certain of our affiliates are classified as liability awards in accordance with ASC 718 as the awards are either to a) non-employee directors that allow for the recipient to choose net settlement for the amount of withholding taxes dues upon vesting or b) to employees of certain affiliates of the Company and are therefore not deemed to be employees of the Company. The fair value of the liability classified restricted stock units was based on the Company’s Class A common stock price as of the reported period ending date and the Company recognized stock based compensation expense of $0.2 million for the three months ended March 31, 2015 in general and administrative expense and a corresponding increase to liabilities. As of March 31, 2015, the Company's liabilities related to these restricted stock units were recorded in other current liabilities and other non-current liabilities of $0.1 million and $0.1 million, respectively. No compensation expense was recorded for the same periods in 2014 as there were no LTIP awards outstanding.












20


The following table summarizes liability classified restricted stock unit activity and unvested restricted stock units for the three months ended March 31, 2015:

Number of Shares
Weighted Average Reporting Date Fair Value
Unvested at December 31, 2014
124,093

$
14.09

Granted


Dividend reinvestment issuances
3,144

14.75

Vested


Forfeited


Unvested at March 31, 2015
127,237

$
14.75


As of March 31, 2015, there was $1.3 million of total unrecognized compensation cost related to the Company's liability classified restricted stock units, which is expected to be recognized over a weighted average period of approximately 2.0 years.

9. Taxes

Income Taxes

The Company accounts for income taxes using the assets and liabilities method. Deferred tax assets and liabilities are recognized for future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and those assets and liabilities tax bases. The Company applies existing tax law and the tax rate that the Company expects to apply to taxable income in the years in which those differences are expected to be recovered or settled in calculating the deferred tax assets and liabilities. Effects of changes in tax rates on deferred tax assets and liabilities are recognized in income in the period of the tax rate enactment.

The Company periodically assesses whether it is more likely than not that it will generate sufficient taxable income to realize its deferred income tax assets. In making this determination, the Company considers all available positive and negative evidence and makes certain assumptions. The Company considers, among other things, its deferred tax liabilities, the overall business environment, its historical earnings and losses, current industry trends, and its outlook for future years. The Company believes it is more likely than not that the deferred tax assets will be utilized.

Prior to the Offering, the business of the Company was not subject to U.S. federal income tax as the Company's operations were conducted in flow-through entities. As a result of the Offering, the Company now operates as a corporation and is subject to U.S. federal income taxation on our allocable share of taxable income from Spark HoldCo.

As of March 31, 2015, the Company recorded a net deferred tax asset of approximately $15.6 million related to the step up in tax basis resulting from the purchase by the Company of Spark HoldCo units from NuDevco during 2014. In addition, as of March 31, 2015, the Company recorded a long-term liability of $20.8 million for the effect of the Tax Receivable Agreement liability (See Note 11 “Transactions with Affiliates” for further discussion) and a corresponding long-term deferred tax asset of approximately $7.8 million.

The effective U.S. federal and state income tax rate for the three months ended March 31, 2015 is 4.2% with respect to pre-tax income attributable to the Company's stockholders. Total income tax expense for the three months ended March 31, 2015 differed from amounts computed by applying the U.S. federal statutory tax rates to pre-tax income due primarily to state taxes and the impact of permanent differences between book and taxable income, most notably the income attributable to noncontrolling interest.


21


10. Commitments and Contingencies
From time to time, the Company may be involved in legal, tax, regulatory and other proceedings in the ordinary course of business. Management does not believe that we are a party to any litigation, claims or proceedings that will have a material impact on the Company’s condensed combined and consolidated financial condition or results of operations.
11. Transactions with Affiliates
The Company enters into transactions with and pays certain costs on behalf of affiliates that are commonly controlled in order to reduce risk, reduce administrative expense, create economies of scale, create strategic alliances and supply goods and services to these related parties. The Company also sells and purchases natural gas and electricity with affiliates. The Company presents receivables and payables with the same affiliate on a net basis in the condensed combined and consolidated balance sheets as all affiliate activity is with parties under common control.
Accounts Receivable and Payable-Affiliates
The Company recorded current accounts receivable-affiliates of $1.0 million and $1.2 million as of March 31, 2015 and December 31, 2014, respectively, and current accounts payable-affiliates of $1.4 million and $1.0 million as of March 31, 2015 and December 31, 2014, respectively for certain direct billings and cost allocations for services the Company provided to affiliates and sales or purchases of natural gas and electricity with affiliates.
Revenues and Cost of Revenues-Affiliates
Beginning on August 1, 2013, the Company and another affiliate entered into an agreement whereby the Company purchased natural gas from the affiliate at the tailgate of the Marlin plant. Cost of revenues-affiliates, recorded in net asset optimization revenues in the condensed combined and consolidated statements of operations for the three months ended March 31, 2015 and 2014 related to this agreement were $3.1 million and $8.1 million, respectively.
The Company also purchased natural gas at a nearby third party plant inlet which was then sold to the affiliate. Revenues-affiliates, recorded in net asset optimization revenues in the condensed combined and consolidated statements of operations for the three months ended March 31, 2015 and 2014 related to these sales were $0.5 million and $2.5 million, respectively.
Additionally, the Company entered into a natural gas transportation agreement with Marlin, at Marlin’s pipeline, whereby the Company transports retail natural gas and pays the higher of (i) a minimum monthly payment or (ii) a transportation fee per MMBtu times actual volumes transported. The current transportation agreement was set to expire on February 28, 2013, but was extended for three additional years at a fixed rate per MMBtu without a minimum monthly payment. Included in the Company’s results are cost of revenues-affiliates, recorded in retail cost of revenues in the condensed combined and consolidated statements of operations related to this activity, which was less than $0.1 million for both the three months ended March 31, 2015 and 2014, respectively.
Prior to the Offering, the Company also purchased electricity for an affiliate and sold the electricity to the affiliate at the same market price that the Company paid to purchase the electricity. There were no sales of electricity to the affiliate for the three months ended March 31, 2015 and $1.5 million in sales of electricity to the affiliate for the three months ended March 31, 2014, which is recorded in retail revenues-affiliate in the condensed combined and consolidated statements of operations.
Also included in the Company’s results are cost of revenues-affiliates related to derivative instruments, recorded in net asset optimization revenues in the condensed combined and consolidated statements of operations. There was no cost of revenues-affiliates related to derivative instruments for the three months ended March 31, 2015 and a gain of $0.2 million for the three months ended March 31, 2014.

22


Cost allocations
The Company paid certain expenses on behalf of affiliates, which are reimbursed by the affiliates to the Company, including costs that can be specifically identified and certain allocated overhead costs associated with general and administrative services, including executive management, facilities, banking arrangements, professional fees, insurance, information services, human resources and other support departments to the affiliates. Where costs incurred on behalf of the affiliate could not be determined by specific identification for direct billing, the costs were primarily allocated to the affiliated entities based on percentage of departmental usage, wages or headcount. The total amount direct billed and allocated to affiliates was $1.0 million and $1.9 million for the three months ended March 31, 2015 and 2014, respectively, which is recorded as a reduction in general and administrative expenses in the condensed combined and consolidated statements of operations.
The Company pays residual commissions to an affiliate for all customers enrolled by the affiliate who pay their monthly retail gas or retail electricity bill. No commissions were paid to the affiliate for the three months ended March 31, 2015 and less than $0.1 million commissions were paid to the affiliate for the three months ended March 31, 2014, which is recorded in general and administrative expense in the condensed combined and consolidated statements of operations. This agreement with the affiliate was terminated in May 2014.
Member Distributions and Contributions
During the three months ended March 31, 2015, the Company made distributions to NuDevco in connection with its holdings of units of Spark HoldCo of $3.9 million in conjunction with the payment of its fourth quarter 2014 dividend. During the three months ended March 31, 2014, the Company made net capital distributions to W. Keith Maxwell III of $14.4 million. In contemplation of the Company’s initial public offering, the Company entered into an agreement with an affiliate in April 2014 to permanently forgive all net outstanding accounts receivable balances from the affiliate through the Offering date. As a result, the accounts receivable balances from the affiliate have been eliminated and presented as a distribution to W. Keith Maxwell III for 2014.

Tax Receivable Agreement

Concurrently with the closing of the Offering, the Company entered into a Tax Receivable Agreement with Spark HoldCo, NuDevco Retail Holdings and NuDevco Retail. This agreement generally provides for the payment by the Company to NuDevco of 85% of the net cash savings, if any, in U.S. federal, state and local income tax or franchise tax that the Company actually realizes (or is deemed to realize in certain circumstances) in future periods as a result of (i) any tax basis increases resulting from the purchase by the Company of Spark HoldCo units from NuDevco Retail Holdings in connection with the Offering, (ii) any tax basis increases resulting from the exchange of Spark HoldCo units for shares of Class A common stock pursuant to the Exchange Right (or resulting from an exchange of Spark HoldCo units for cash pursuant to the Cash Option) and (iii) any imputed interest deemed to be paid by the Company as a result of, and additional tax basis arising from, any payments the Company makes under the Tax Receivable Agreement. The Company retains the benefit of the remaining 15% of these tax savings. See Note 9 “Taxes” for further discussion of amounts recorded in connection with the Offering.

In certain circumstances, the Company may defer or partially defer any payment due (a “TRA Payment”) to the holders of rights under the Tax Receivable Agreement, which are NuDevco Retail Holdings and NuDevco Retail. No TRA Payment will be made during 2014, and any future TRA Payments due with respect to a given taxable year are expected to be paid in December of the subsequent calendar year.

During the five-year period commencing October 1, 2014, the Company will defer all or a portion of any TRA Payment owed pursuant to the Tax Receivable Agreement to the extent that Spark HoldCo does not generate sufficient Cash Available for Distribution (as defined below) during the four-quarter period ending September 30th of the applicable year in which the TRA Payment is to be made in an amount that equals or exceeds 130% (the “TRA Coverage Ratio”) of the Total Distributions (as defined below) paid in such four-quarter period by Spark HoldCo. For purposes of computing the TRA Coverage Ratio:
 

23


“Cash Available for Distribution” is generally defined as the Adjusted EBITDA of Spark HoldCo for the applicable period, less (i) cash interest paid by Spark HoldCo, (ii) capital expenditures of Spark HoldCo (exclusive of customer acquisition costs) and (iii) any taxes payable by Spark HoldCo; and
“Total Distributions” are defined as the aggregate distributions necessary to cause the Company to receive distributions of cash equal to (i) the targeted quarterly distribution the Company intends to pay to holders of its Class A common stock payable during the applicable four-quarter period, plus (ii) the estimated taxes payable by the Company during such four-quarter period, plus (iii) the expected TRA Payment payable during the calendar year for which the TRA Coverage Ratio is being tested.

In the event that the TRA Coverage Ratio is not satisfied in any calendar year, the Company will defer all or a portion of the TRA Payment to NuDevco under the Tax Receivable Agreement to the extent necessary to permit Spark HoldCo to satisfy the TRA Coverage Ratio (and Spark HoldCo is not required to make and will not make the pro rata distributions to its members with respect to the deferred portion of the TRA Payment). If the TRA Coverage Ratio is satisfied in any calendar year, the Company will pay NuDevco the full amount of the TRA Payment.

Following the five-year deferral period, the Company will be obligated to pay any outstanding deferred TRA Payments to the extent such deferred TRA Payments do not exceed (i) the lesser of the Company's proportionate share of aggregate Cash Available for Distribution of Spark HoldCo during the five-year deferral period or the cash distributions actually received by the Company during the five-year deferral period, reduced by (ii) the sum of (a) the aggregate target quarterly dividends (which, for the purposes of the Tax Receivable Agreement, will be $0.3625 per share per quarter) during the five-year deferral period, (b) the Company's estimated taxes during the five-year deferral period, and (c) all prior TRA Payments and (y) if with respect to the quarterly period during which the deferred TRA Payment is otherwise paid or payable, Spark HoldCo has or reasonably determines it will have amounts necessary to cause the Company to receive distributions of cash equal to the target quarterly distribution payable during that quarterly period. Any portion of the deferred TRA Payments not payable due to these limitations will no longer be payable.

12. Segment Reporting
The Company’s determination of reportable business segments considers the strategic operating units under which the Company makes financial decisions, allocates resources and assesses performance of its retail and asset optimization businesses.
The Company’s reportable business segments are retail natural gas and retail electricity. The retail natural gas segment consists of natural gas sales to, and natural gas transportation and distribution for, residential and commercial customers. Asset optimization activities, considered an integral part of securing the lowest price natural gas to serve retail gas load, are part of the retail natural gas segment. The Company recorded asset optimization revenues of $69.9 million and $132.9 million and asset optimization cost of revenues of $68.0 million and $131.3 million for the three months ended March 31, 2015 and 2014, respectively, which are presented on a net basis in asset optimization revenues. The retail electricity segment consists of electricity sales and transmission to residential and commercial customers. Corporate and other consists of expenses and assets of the retail natural gas and retail electricity segments that are managed at a consolidated level such as general and administrative expenses.
To assess the performance of the Company’s operating segments, the Chief Operating Decision Maker analyzes retail gross margin. The Company defines 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 derivative instruments, and (iii) net current period cash settlements on derivative instruments. The Company deducts net gains (losses) on derivative instruments, excluding current period cash settlements, from the retail gross margin calculation in order to remove the non-cash impact of net gains and losses on derivative instruments.
Retail gross margin 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

24


non-cash income (loss) impact of our economic hedging activities. As an indicator of our retail energy business’ operating performance, retail gross margin should not be considered an alternative to, or more meaningful than, operating income, as determined in accordance with GAAP.
Below is a reconciliation of retail gross margin to income before income tax expense (in thousands):
  
Three Months Ended March 31,
  
2015

2014
Reconciliation of Retail Gross Margin to Income before taxes



Income before income tax expense
$
13,490


$
6,540

Interest and other income
(135
)

(70
)
Interest expense
381


313

Operating Income
13,736


6,783

Depreciation and amortization
4,278


2,959

General and administrative
14,704


8,113

Less:



Net asset optimization revenue
1,929


1,624

Net, Gains (losses) on non-trading derivative instruments
(1,200
)

11,448

Net, Cash settlements on non-trading derivative instruments
4,115


(12,901
)
Retail Gross Margin
$
27,874


$
17,684


The Company uses retail gross margin and net asset optimization revenues as the measure of profit or loss for its business segments. This measure represents the lowest level of information that is provided to the chief operating decision maker for our reportable segments.

Financial data for business segments are as follows (in thousands): 
Three Months Ended March 31, 2015
Retail
Electricity
 
Retail
Natural Gas
 
Corporate
and Other
 
Eliminations
 
Total Spark Retail
Total Revenues
$
44,449

 
$
57,354

 
$

 
$

 
$
101,803

Retail cost of revenues
35,619

 
33,466

 

 

 
69,085

Less:
 
 
 
 
 
 
 
 
 
Net asset optimization revenues

 
1,929

 

 

 
1,929

Gains (losses) on non-trading derivatives
(633
)
 
(567
)
 

 

 
(1,200
)
Current period settlements on non-trading derivatives
(99
)
 
4,214

 

 

 
4,115

Retail gross margin
$
9,562

 
$
18,312

 
$

 
$

 
$
27,874

Total Assets
$
49,967

 
$
103,299

 
$
30,644

 
$
(58,219
)
 
$
125,691


Three Months Ended March 31, 2014
Retail
Electricity

Retail
Natural Gas

Corporate
and Other

Eliminations

Total Spark Retail
Total revenues
$
43,448


$
62,528


$


$


$
105,976

Retail cost of revenues
37,499


50,622






88,121

Less:









Net asset optimization revenues


1,624






1,624

Gains (losses) on non-trading derivatives
9,889


1,559






11,448

Current period settlements on non-trading derivatives
(11,034
)

(1,867
)





(12,901
)
Retail gross margin
$
7,094


$
10,590


$


$


$
17,684

Total Assets
$
46,364


$
111,472


$
1,080


$
(31,083
)

$
127,833


25


Significant Customers
For the three months ended March 31, 2015 and 2014, we had one significant customer that individually accounted for more than 10% of the Company’s consolidated net asset optimization revenues.
Significant Suppliers
For the three months ended March 31, 2015, no individual supplier accounted for more than 10% of the Company’s consolidated net asset optimization revenues cost of revenues. For the three months ended March 31, 2014, we had one significant supplier that individually accounted for more than 10% of the Company’s consolidated net asset optimization cost of revenues.
For the three months ended March 31, 2015 and 2014, the Company had four and one significant suppliers, respectively, that individually accounted for more than 10% of the Company’s consolidated retail electricity retail cost of revenues.
13. Customer Acquisitions

On March 3, 2015, the Company entered into a purchase and sale agreement for the purchase of approximately 30,700 residential and commercial natural gas contracts in Northern California for a purchase price of approximately $2.6 million. The transaction closed in April 2015. The purchase price will be capitalized as intangible assets - customer acquisitions to be amortized over a three year period as customers begin using natural gas under a contract with the Company.
14. Subsequent Events

On April 22, 2015, the Company declared a dividend of $0.3625 to holders of record of our Class A common stock on June 1, 2015 and payable on June 15, 2015.
On May 12, 2015, Spark Holdco, LLC entered into a Membership Interest Purchase Agreement (the “Oasis Purchase Agreement”) with Retailco Acquisition Co, LLC, an affiliate of NuDevco, our majority shareholder, for the purchase of all the membership interests of Oasis Power Holdings, LLC (“Oasis”). Oasis is a retail energy company with approximately 40,000 customers in six states. Oasis serves these customers across 19 utilities. The purchase price of $20 million, subject to working capital adjustments, will be paid $15 million in cash and $5 million in the form of a convertible subordinated note of the Company bearing interest at an annual rate of 5% (the “Convertible Note”). Spark Holdco, LLC will have the right to pay-in-kind any interest at its option. The Convertible Note will be convertible into shares of Class B Common stock of the Company and related membership units in Spark Holdco at a conversion rate of $14.00 per share. The Convertible Note matures in five years and the holder cannot exercise any conversion rights for the first eighteen months after the Convertible Note is issued. The Convertible Note will be expressly subordinated to our Senior Credit Facility. The shares of Class B common stock (along with the related Spark Holdco units) may be converted into shares of Class A Common Stock of the Company on a one-for-one basis. Shares of Class A Common Stock resulting from the conversion of the shares of Class B common stock issued as a result of the conversion right under the Convertible Note will be entitled to registration rights identical to the registration rights currently held by NuDevco on shares of Class A Common Stock it receives upon conversion of its existing shares of Class B Common Stock. The acquisition is subject to certain conditions to closing, including regulatory approvals and the Company’s ability to obtain financing on commercially reasonable terms.


26


ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The following discussion and analysis of our financial condition and results of operations should be read in conjunction with the unaudited condensed combined and consolidated financial statements and the related notes thereto included elsewhere in this report and the audited combined and consolidated financial statements and notes thereto and management's discussion and analysis of financial condition and results of operations included in our Form 10-K for the year ended December 31, 2014 that was filed with the Securities and Exchange Commission (“SEC”). In this report, the terms “Spark Energy,” “Company,” “we,” “us” and “our” refer collectively to (i) the combined business and assets of the retail natural gas business and asset optimization activities of Spark Energy Gas, LLC and the retail electricity business of Spark Energy, LLC before the completion of our corporate reorganization in connection with the initial public offering of Spark Energy, Inc., which closed on August 1, 2014 (the “Offering”) and (ii) Spark Energy, Inc. and its subsidiaries as of the Offering and thereafter.
Cautionary Note Regarding Forward-Looking Statements

This report contains forward-looking statements that are subject to a number of risks and uncertainties, many of which are beyond our control. These 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 “may,” “should,” “likely,” “will,” “believe,” “expect,” “anticipate,” “estimate,” “continue,” “plan,” “intend,” “project,” or other similar words. All statements, other than statements of historical fact included in this report, 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 report 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 and 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 report are subject to risks and uncertainties. Important factors which 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 shareholder or its affiliates offers us acquisition opportunities on terms that are commercially acceptable to us,
competition, and
other factors discussed in “Risk Factors” in our Form 10-K for the year ended December 31, 2014.


27


You should review the risk factors and other factors noted throughout or incorporated by reference in this report that could cause our actual results to differ materially from those contained in any forward-looking statement. All forward-looking statements speak only as of the date of this report. 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.
Overview

We are 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. We purchase our natural gas and electricity supply from a variety of wholesale providers and bill our 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 our customers by local regulated utility companies through their existing infrastructure. As of March 31, 2015, we operated in 46 utility service territories across 16 states.

We operate these businesses in two operating segments:

Retail Natural Gas Segment. We purchase 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 three months ended March 31, 2015, approximately 55% of our retail revenues were derived from the sale of natural gas. We also identify wholesale natural gas arbitrage opportunities in conjunction with our retail procurement and hedging activities, which we refer to as asset optimization. 

Retail Electricity Segment. We purchase 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 three months ended March 31, 2015, approximately 45% of our retail revenues were derived from the sale of electricity. 

Spark Energy, Inc. was formed in April 2014, and, as a result, has historical financial operating results only for the portions of the periods covered by this report that are subsequent to the closing of the Offering on August 1, 2014. The following discussion analyzes our historical combined financial condition and results of operations before the Offering, which is the combined businesses and assets of the retail natural gas business and asset optimization activities of Spark Energy Gas, LLC (“SEG”) and the retail electricity business of Spark Energy, LLC (“SE”), and the consolidated results of operations and financial condition of Spark Energy, Inc. and its subsidiaries after the Offering. SE and SEG are the operating subsidiaries through which we have historically operated our retail energy business and were commonly controlled by NuDevco Partners, LLC prior to the Offering.

The following table shows our customer count activity during the first quarter of 2015:
Customer Rollforward:
 
 
 
 
 
(In thousands)
12/31/2014
Additions
Attrition
3/31/15
% Increase (Decrease)
Retail Electricity Customers
145
28
(24)
149
3%
Retail Natural Gas Customers
173
25
(55)
143
(17)%
Total Retail Customers
318
53
(79)
292
(8)%




28


The following table details our Residential Customer Equivalents ("RCE's") by geographical location as of March 31, 2015:
RCE's by Geographic Location:
 
 
 
 
 
 
(In thousands)
Electricity
 % of Total
Natural Gas
 % of Total
Total
 % of Total
East
56
36%
22
15%
78
25%
Midwest
42
27%
67
45%
109
36%
Southwest
58
37%
60
40%
118
39%
Total
156
100%
149
100%
305
100%

The geographical regions noted above include the following states:

East - New York, New Jersey, Pennsylvania, Connecticut, Massachusetts, Maryland and Florida;
Midwest - Illinois, Indiana, Michigan and Ohio; and
Southwest - Texas, California, Nevada, Colorado and Arizona.

Total retail gross margin of $27.9 million in the first quarter of 2015 resulted primarily from a combination of favorable weather conditions along with the lower overall supply cost environment. These conditions resulted in strong unit margins for both commodities. See “—Operating Segment Results”.
Recent Developments
On May 12, 2015, Spark Holdco, LLC entered into a Membership Interest Purchase Agreement (the “Oasis Purchase Agreement”) with Retailco Acquisition Co, LLC, an affiliate of NuDevco, our majority shareholder, for the purchase of all the membership interests of Oasis Power Holdings, LLC (“Oasis”). Oasis is a retail energy company with approximately 40,000 customers in six states. Oasis serves these customers across 19 utilities, several of which present additional organic growth opportunities as they are new markets for the company. The purchase price of $20 million, subject to working capital adjustments, will be paid $15 million in cash and $5 million in the form of a convertible subordinated note of the Company bearing interest at an annual rate of 5% (the “Convertible Note”). Spark Holdco, LLC will have the right to pay-in-kind any interest at its option. The Convertible Note will be convertible into shares of Class B Common stock of the Company and related membership units in Spark Holdco at a conversion rate of $14.00 per share. The Convertible Note matures in five years and the holder cannot exercise any conversion rights for the first eighteen months after the Convertible Note is issued. The Convertible Note will be expressly subordinated to our Senior Credit Facility. The shares of Class B common stock (along with the related Spark Holdco units) may be converted into shares of Class A Common Stock of the Company on a one-for-one basis. Shares of Class A Common Stock resulting from the conversion of the shares of Class B common stock issued as a result of the conversion right under the Convertible Note will be entitled to registration rights identical to the registration rights currently held by NuDevco on shares of Class A Common Stock it receives upon conversion of its existing shares of Class B Common Stock. The acquisition is subject to certain conditions to closing, including regulatory approvals and the Company’s ability to obtain financing on commercially reasonable terms. In order to consummate this transaction the Company must amend its Senior Credit Facilities. There can be no assurance that the Company will successfully obtain such financing. The acquisition, including the terms of the Convertible Subordinated Note, was reviewed and approved by a special committee of the Board of Directors consisting solely of the Company’s independent directors. The special committee obtained a fairness opinion from an independent third party appraiser as to the fairness from a financial point of view to the holders of the Class A common stock of the consideration to be paid by Spark Holdco, LLC in the transaction.    
A copy of the Oasis Purchase Agreement has been filed as an exhibit to this Report on Form 10-Q.





29


Drivers of our Business

Customer Growth

Customer growth is a key driver of our operations. We attempt to grow our customer base by offering customers competitive pricing, price certainty or green product offerings. We manage growth on a market-by-market basis by developing price curves in each of the markets we serve and comparing the market prices to the price the local regulated utility is offering. We then determine if there is an opportunity in a particular market based on our ability to create a competitive product on economic terms that satisfies our profitability objectives and provides customer value. We develop marketing campaigns using a combination of sales channels, with an emphasis on door-to-door marketing and outbound telemarketing given their flexibility and historical effectiveness. We identify and acquire customers through a variety of additional sales channels, including our inbound customer care call center, online marketing, email, direct mail, affinity programs, direct sales, brokers and consultants. Our marketing team continuously evaluates the effectiveness of each customer acquisition channel and makes adjustments in order to achieve desired growth and profitability targets.

Our customer count decreased by 8% in the first quarter of 2015 from the prior quarter due primarily to the continuing impact of high attrition in our Southern California gas market where we lost approximately 32,000 customers, or 14,000 RCE's. This high attrition during the first quarter of 2015 is the result of our aggressive collection efforts (primarily disconnection for non-payment) as we continue to reduce our exposure to customer bad debt expense in this market. We expect the heightened level of Southern California attrition to continue into the second quarter due to the lag time between the time we request a disconnection and the utility processing of such disconnect request.

Customer Acquisition Spending

Management of customer acquisition costs is a key component to our profitability. We attempt to maintain a disciplined approach to recovery of our customer acquisition costs within defined periods. We capitalize and amortize our customer acquisition costs over a two year period, which is based on the expected average length of a customer relationship. We factor in the recovery of customer acquisition costs in determining which markets we enter and the pricing of our products in those markets. Accordingly, our results are significantly influenced by our customer acquisition spending.
Customer acquisition spending in the first quarter of 2015 was $5.6 million. New customer spending and additions during the quarter were split evenly between electric and natural gas. Electric customers were primarily added in the Northeast and Midwest, and natural gas customers were primarily added in Northern California and the Midwest.
Our Ability to Manage Customer Attrition

Customer attrition for the first quarter of 2015 was 8.5% (5.9% excluding attrition in Southern California). Customer attrition is primarily due to: (i) customer initiated switches; (ii) residential moves and (iii) disconnection for customer payment defaults. Our rate of attrition during 2015 remained high due to high early tenure attrition and disconnects for non-payment in the Southern California gas market as we continue our efforts to reduce our exposure in that market. Management expects that customer attrition will continue to be negatively impacted in the second quarter of 2015 by our efforts in Southern California.

Customer Credit Risk

Our bad debt expense for the three months ended March 31, 2015 was approximately 5.8% of non-POR market retail revenues (3.6% of non-POR market retail revenues excluding Southern California). Southern California bad debt expense has remained high during the first quarter of 2015 as we continued to aggressively manage our credit risk in this market.


30


We recorded accounts receivable, net of allowance, for non-POR markets of $23.8 million for the three months ended March 31, 2015. As of March 31, 2015, we had recorded accounts receivable, net of allowance, of $0.2 million for Southern California.

Weather Conditions

Weather conditions directly influence the demand for natural gas and electricity and affect the prices of energy commodities. Our hedging strategy is based on forecasted customer energy usage, which can vary substantially as a result of weather patterns deviating from historical norms. We are particularly sensitive to this variability because of our current substantial concentration and focus on growth in the residential customer segment in which energy usage is highly sensitive to weather conditions that impact heating and cooling demand. Colder than anticipated weather positively impacted our first quarter 2015 earnings. In addition, within our risk limits, we managed our hedge position to allow us to take advantage of decreasing spot market prices.

Asset Optimization

Our natural gas business includes opportunistic transactions in the natural gas wholesale marketplace in conjunction with our retail procurement and hedging activities. Asset optimization opportunities primarily arise during the winter heating season when demand for natural gas is the highest. As such, the majority of our asset optimization profits are made in the winter. Given the opportunistic nature of these activities we experience variability in our earnings from our asset optimization activities from year to year. As these activities are accounted for using mark to-market accounting, the timing of our revenue recognition often differs from the actual cash settlement.

During 2015, we are obligated to pay demand charges of approximately $2.6 million under certain long-term legacy transportation assets that our predecessor entity acquired prior to 2013. Net asset optimization results were a gain of $1.9 million for the three months ended March 31, 2015, primarily due to arbitrage opportunities we captured during the first quarter offset by the portion of our legacy demand charges allocated to the quarter.

Factors Affecting Comparability of Historical Financial Results

Tax Receivable Agreement. The Tax Receivable Agreement between us and NuDevco Retail Holdings, LLC, NuDevco Retail, LLC and Spark HoldCo provides for the payment by Spark Energy, Inc. to NuDevco Retail Holdings of 85% of the net cash savings, if any, in U.S. federal, state and local income tax or franchise tax that Spark Energy, Inc. actually realizes (or is deemed to realize in certain circumstances) in periods after the Offering as a result of (i) any tax basis increases resulting from the purchase by Spark Energy, Inc. of Spark HoldCo units from NuDevco Retail Holdings prior to or in connection with the Offering, (ii) any tax basis increases resulting from the exchange of Spark HoldCo units for shares of Class A common stock pursuant to the exchange right set forth in the limited liability company agreement of Spark HoldCo (or resulting from an exchange of Spark HoldCo units for cash pursuant to the Cash Option) and (iii) any imputed interest deemed to be paid by us as a result of, and additional tax basis arising from, any payments we make under the Tax Receivable Agreement. In addition, payments we make under the Tax Receivable Agreement will be increased by any interest accrued from the due date (without extensions) of the corresponding tax return. We have recorded 85% of the estimated tax benefit as an increase to amounts payable under the Tax Receivable Agreement as a liability. We will retain the benefit of the remaining 15% of these tax savings.

Executive Compensation Programs. On August 1, 2014, we granted restricted stock units to our employees, non-employee directors, and certain employees of our affiliates who perform services for us under our long-term incentive plan. The initial restricted stock unit awards will generally vest ratably over approximately one, three or four years commencing May 4, 2015 and include tandem dividend equivalent rights that will vest upon the same schedule as the underlying restricted stock unit.

Financing. The total amounts outstanding under our Seventh Amended Credit Agreement as of December 31, 2013 and until the Offering included amounts used to fund equity distributions to our common control owner, which,

31


subsequent to the Offering, we no longer make. Concurrently with the closing of the Offering, we entered into a new $70.0 million Senior Credit Facility, and the Seventh Amended Credit Agreement was terminated.
As such, historical borrowings under our Seventh Amended Credit Agreement may not provide an accurate indication of what we need to operate our natural gas and electricity business.

How We Evaluate Our Operations
 
Three Months
Ended March 31,
(in thousands)
2015
 
2014
 
 
 
 
Adjusted EBITDA
$
10,184

 
$
9,322

Retail Gross Margin
27,874

 
17,684


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 before provision for income taxes, interest expense and depreciation and amortization. We deduct all current period customer acquisition costs in the Adjusted EBITDA calculation because such costs reflect a cash outlay in the year 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. 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 were issued under our long-term incentive plan subsequent to the close of the Offering.

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 combined and consolidated financial statements, such as industry analysts, investors, commercial banks and rating agencies, use to assess the following, among other measures:
 
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.

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. As an indicator of our retail energy business’ operating performance, retail gross margin should not be considered an alternative to, or more meaningful than, operating income, its most directly comparable financial measure calculated and presented in accordance with GAAP.
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

32


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.

The following table presents a reconciliation of Adjusted EBITDA to net income for each of the periods indicated.
  
Three Months Ended March 31,
(in thousands)
2015
 
2014
Reconciliation of Adjusted EBITDA to Net Income:
 
 
 
Net Income
$
12,929

 
$
6,508

Depreciation and amortization
4,278

 
2,959

Interest Expense
381

 
313

Income Tax Expense
561

 
32

EBITDA
18,149

 
9,812

Less:
 
 
 
Net, Gains (losses) on derivative instruments

(1,305
)
 
5,460

Net, Cash settlements on derivative instruments

4,191

 
(10,197
)
Customer acquisition costs
5,629

 
5,227

       Plus:
 
 
 
       Non-cash compensation expense
550

 

Adjusted EBITDA
$
10,184

 
$
9,322


The following table presents a reconciliation of Adjusted EBITDA to net cash provided by (used in) operating activities for each of the periods indicated.
  
Three Months Ended March 31,
(in thousands)
2015
 
2014
Reconciliation of Adjusted EBITDA to net cash provided by operating activities:
 
 
 
Net cash provided by operating activities
$
19,246

 
$
6,209

Amortization and write off of deferred financing costs
(50
)
 
(113
)
Allowance for doubtful accounts and bad debt expense
(2,947
)
 
(565
)
Interest expense
381

 
313

Income tax expense
561

 
32

Changes in operating working capital
 
 
 
Accounts receivable, prepaids, current assets
(4,783
)
 
27,108

Inventory
(7,521
)
 
(4,322
)
Accounts payable and accrued liabilities
5,811

 
(18,335
)
Other
(514
)
 
(1,005
)
Adjusted EBITDA
$
10,184

 
$
9,322





33


The following table presents a reconciliation of Retail Gross Margin to operating income for each of the periods indicated.
  
Three Months Ended March 31,
(in thousands)
2015
 
2014
Reconciliation of Retail Gross Margin to Operating Income:
 
 
 
Operating Income
$
13,736

 
$
6,783

Depreciation and amortization
4,278

 
2,959

General and administrative
14,704

 
8,113

Less:
 
 
 
Net asset optimization revenue
1,929

 
1,624

Net, Gains (losses) on non-trading derivative instruments
(1,200
)
 
11,448

Net, Cash settlements on non-trading derivative instruments
4,115

 
(12,901
)
Retail Gross Margin
$
27,874

 
$
17,684


Combined and Consolidated Results of Operations

Three Months Ended March 31, 2015 Compared to Three Months Ended March 31, 2014

(In Thousands)
Three Months Ended March 31,



2015
 
2014
 
Change
Revenues:

 

 

Retail revenues
$
99,874

 
$
104,352

 
$
(4,478
)
Net asset optimization revenues
1,929

 
1,624

 
305

Total Revenues
101,803

 
105,976

 
(4,173
)
Operating Expenses:


 


 


Retail cost of revenues
69,085

 
88,121

 
(19,036
)
General and administrative
14,704

 
8,113

 
6,591

Depreciation and amortization
4,278

 
2,959

 
1,319

Total Operating Expenses
88,067

 
99,193

 
(11,126
)
Operating income
13,736

 
6,783

 
6,953

Other (expense)/income:


 


 


Interest expense
(381
)
 
(313
)
 
(68
)
Interest and other income
135

 
70

 
65

Total other expenses
(246
)
 
(243
)
 
(3
)
Income before income tax expense
13,490

 
6,540

 
6,950

Income tax expense
561

 
32

 
529

Net income
$
12,929

 
$
6,508

 
$
6,421

Adjusted EBITDA (1)
$
10,184

 
$
9,322

 
$
862

Retail Gross Margin (1)
27,874

 
17,864

 
10,010

Customer Acquisition Costs
5,629

 
5,227

 
402

Customer Attrition
8.5
%

4.1
%
 
4.4%


(1) Adjusted EBITDA and Retail Gross Margin are non-GAAP financial measures. See “—How We Evaluate Our Operations” for a reconciliation of Adjusted EBITDA and Retail Gross Margin to their most directly comparable financial measures presented in accordance with GAAP.


34


Total Revenues. Total revenues for the three months ended March 31, 2015 were approximately $101.8 million, a decrease of approximately $4.2 million, or 4%, from approximately $106.0 million for the three months ended March 31, 2014. This decrease was primarily due to a decrease in natural gas pricing, which resulted in a decrease of approximately $5.2 million as well as a decrease in customer volumes due to milder weather, which resulted in a decrease of $1.6 million. This decrease was offset by an increase of $2.3 million due to higher electricity pricing and a $0.3 million increase in our net asset optimization revenues.

Retail Cost of Revenues. Total retail cost of revenues for the three months ended March 31, 2015 was approximately $69.1 million, a decrease of approximately $19.0 million, or 22%, from approximately $88.1 million for the three months ended March 31, 2014. This decrease was primarily due to overall decreased pricing of our commodities, which resulted in a decrease of $13.3 million as well as lower customer sales volumes, which resulted in a decrease of total retail cost of revenues of $1.3 million. Prices in the first quarter of 2015 were lower because weather had returned to normal as compared to pricing in the first quarter of 2014, which was high due to the extreme weather conditions in the Northeast. Additionally, we had a decrease of $4.4 million due to a change in the value of our retail derivative portfolio used for hedging.

General and Administrative Expense. General and administrative expense for the three months ended March 31, 2015 was approximately $14.7 million, an increase of approximately $6.6 million, or 81%, as compared to $8.1 million for the three months ended March 31, 2014. This increase was primarily due to increased billing and other variable costs associated with increased customers, an increase in bad debt expense of approximately $2.4 million, and increased costs associated with being a public company.

Depreciation and Amortization Expense. Depreciation and amortization expense for the three months ended March 31, 2015 was approximately $4.3 million, an increase of approximately $1.3 million, or 43%, from approximately $3.0 million for the three months ended March 31, 2014. This increase was primarily due to the increased amortization expense associated with our increased customer acquisition cost.

Customer Acquisition Cost. Customer acquisition cost for the three months ended March 31, 2015 was approximately $5.6 million, an increase of approximately $0.4 million from approximately $5.2 million for the three months ended March 31, 2014.
Operating Segment Results 
 
Three Months
Ended March 31,
  
2015
 
2014
 
(in thousands, except volume and per unit operating data)
Retail Natural Gas Segment
 
 
 
Total Revenues
$
57,354


$
62,528

Retail Cost of Revenues
33,466


50,622

Less: Net Asset Optimization Revenues
1,929


1,624

Less: Net Gains (Losses) on non-trading derivatives, net of cash settlements
3,647


(308
)
Retail Gross Margin—Gas
$
18,312


$
10,590

Volumes—Gas (MMBtu's)
6,564,045


6,593,580

Retail Gross MarginGas ($/MMBtu)
$
2.79


$
1.61

Retail Electricity Segment



Total Revenues
$
44,449


$
43,448

Retail Cost of Revenues
35,619


37,499

Less: Net Gains (Losses) on non-trading derivatives, net of cash settlements
(732
)

(1,145
)
Retail Gross Margin—Electricity
$
9,562


$
7,094

Volumes—Electricity (MWh's)
372,851


384,275

Retail Gross Margin—Electricity ($/MWh)
$
25.65


$
18.46


35


Three Months Ended March 31, 2015 Compared to Three Months Ended March 31, 2014
Retail Natural Gas Segment
Total revenues for the Retail Natural Gas Segment for the three months ended March 31, 2015 were approximately $57.4 million, a decrease of approximately $5.2 million, or 8%, from approximately $62.5 million for the three months ended March 31, 2014. This decrease was due to reduced natural gas pricing which resulted in a decrease in total revenues of $5.2 million. Additionally, the Retail Natural Gas Segment revenues decrease by $0.3 million due to lower customer sales volumes. These decreases were partially offset by an increase in revenues related to our asset optimization activities of $0.3 million.
Retail cost of revenues for the Retail Natural Gas Segment for the three months ended March 31, 2015 was approximately $33.5 million, a decrease of approximately $17.1 million, or 34%, from approximately $50.6 million for the three months ended March 31, 2014. This decrease was due to decreased supply costs, which resulted in a decrease of $12.9 million and lower customer sales volumes, which resulted in a decrease of $0.2 million. The decrease in cost of revenues for the Retail Natural Gas Segment was driven predominantly by changes in the underlying price of natural gas during the quarters ended March 31, 2015 and 2014. In the first quarter of 2014 prices were high due to the extreme weather experienced in the Northeast, while in the first quarter of 2015 prices returned to normal. During the first quarter of 2015 we were able to lower our overall cost of revenues through active management of our hedge portfolio, within risk limits, to take advantage of decreasing spot prices. Additionally, we had a change in the value of our retail derivative portfolio used for hedging, which resulted in a decrease of $4.0 million.
Retail gross margin for the Retail Natural Gas Segment for the three months ended March 31, 2015 was approximately $18.3 million, an increase of approximately $7.7 million, or 73%, from approximately $10.6 million for the three months ended March 31, 2014, as indicated in the table below (in millions).
Change in volumes sold
$

Increase in unit margin per MMBtu
7.7

Increase in retail natural gas segment retail gross margin
$
7.7

The volumes of natural gas sold decreased from 6,593,580 MMBtu during the three months March 31, 2014 to 6,564,045 MMBtu during the three months ended March 31, 2015 due to milder weather conditions in the first quarter of 2015 offset partially by increased customer count.
Retail Electricity Segment
Retail revenues for the Retail Electricity Segment for the three months ended March 31, 2015 were approximately $44.4 million, an increase of approximately $1.0 million, or 2%, from approximately $43.4 million for the three months ended March 31, 2014. This increase was primarily due to higher customer pricing resulting in an increase of $2.3 million, partially offset by a decrease in volumes resulting in a decrease of $1.3 million.
Retail cost of revenues for the Retail Electricity Segment for the three months ended March 31, 2015 was approximately $35.6 million, a decrease of approximately $1.9 million, or 5%, from approximately $37.5 million for the three months ended March 31, 2014. This decrease was primarily due to a decrease in volumes, which decreased cost of revenues by $1.1 million as well as decreased commodity prices, which resulted in a decrease in retail cost of revenues of $0.4 million. The decrease in cost of revenues for the Retail Electricity Segment was primarily due to changes in the underlying price of electricity from quarter to quarter. We experienced lower pricing in the first quarter of 2015, and we were able to lower our overall cost of revenues through active management of our hedge portfolio, within risk limits, to take advantage of decreasing spot prices. Additionally, there was a decrease of $0.4 million due to a change in the value of our retail derivative portfolio used for hedging.

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Retail gross margin for the Retail Electricity Segment for the three months ended March 31, 2015 was approximately $9.6 million, an increase of approximately $2.5 million, or 35%, from approximately $7.1 million for the three months ended March 31, 2014, as indicated in the table below (in millions). 
 
 
Decrease in volumes sold
$
(0.2
)
Increase in unit margin per MWh
2.7

Increase in retail electricity segment retail gross margin
$
2.5

The volumes of electricity sold decreased from 384,275 MWh during the three months ended March 31, 2014 to 372,851 MWh during the three months ended March 31, 2015, primarily related to weather conditions experienced during the periods.
Liquidity and Capital Resources

Our liquidity requirements fluctuate with our customer acquisition costs, acquisitions, collateral posting requirements on our hedge portfolio, distributions, the effects of the timing between payments of payables and receipts of receivables, including bad debt receivables, and our general working capital needs for ongoing operations. Our credit facility borrowings are also subject to material variations on a seasonal basis due to the timing of commodity purchases to satisfy required natural gas inventory purchases and to meet customer demands during periods of peak usage. Moreover, estimating our liquidity requirements is highly dependent on then-current market conditions, including forward prices for natural gas and electricity, and market volatility.

Our primary sources of liquidity are cash generated from operations and borrowings under our Senior Credit Facility (defined below). We believe that cash generated from these sources will be sufficient to sustain operations, to finance anticipated expansion plans and growth initiatives, and to pay required taxes and quarterly cash distributions for the foreseeable future. However, in the event our liquidity is insufficient, we may be required to limit our spending on future growth or other business opportunities or to rely on external financing sources, including additional commercial bank borrowings and the issuance of debt and additional equity securities, to fund our growth.

Based upon our current plans, level of operations and business conditions, we believe that our cash on hand, cash generated from operations, and available borrowings under our Senior Credit Facility will be sufficient to meet our capital requirements and working capital needs for the foreseeable future.

The following table details our total liquidity as of the date presented:
(In thousands)
3/31/2015
Cash and cash equivalents
$
5,179

Senior Credit Facility Availability (1)
37,500

Total Liquidity
$
42,679

(1) Subject to Senior Credit Facility borrowing base restrictions. See “—Cash Flows—Credit Facility.”

Capital expenditures for the first three months of 2015 included approximately $5.6 million on customer acquisitions and $0.4 million related to information systems improvements.
The Spark HoldCo, LLC Agreement provides, to the extent cash is available, for distributions pro rata to the holders of Spark HoldCo units such that we receive an amount of cash sufficient to cover the estimated taxes payable by us, the targeted quarterly dividend we intend to pay to holders of our Class A common stock, and payments under the Tax Receivable Agreement we have entered into with Spark HoldCo, NuDevco Retail Holdings and NuDevco Retail.


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In March 2015, we paid our fourth quarter 2014 dividend on our Class A common stock of $0.3625 per share, or approximately $1.45 per share or $4.4 million on an annualized basis. Our ability to pay dividends in the future will depend on many factors, including the performance of our business in the future and restrictions under our Senior Credit Facility. In order to pay these dividends to holders of our Class A common stock and corresponding distributions to holders of our Class B common stock, we expect that Spark HoldCo will be required to distribute approximately $19.9 million on an annualized basis to holders of Spark HoldCo units. If our business does not generate enough cash for Spark HoldCo to make such distributions, we may have to borrow to pay our dividend. If our business generates cash in excess of the amounts required to pay an annual dividend of $1.45 per share of Class A common stock, we currently expect to reinvest any such excess cash flows in our business and not increase the dividends payable to holders of our Class A common stock. However, our future dividend policy is within the discretion of our board of directors and will depend upon various factors, including the results of our operations, our financial condition, capital requirements and investment opportunities. On April 22, 2015, our Board of Directors declared a quarterly dividend for the first quarter of 2015 to holders of the Class A common stock on June 1, 2015. This dividend will be paid on June 15, 2015.

In addition, we expect to make payments pursuant to the Tax Receivable Agreement that we have entered into with NuDevco Retail Holdings, NuDevco Retail and Spark HoldCo in connection with the Offering. Except in cases where we elect to terminate the Tax Receivable Agreement early (the Tax Receivable Agreement is terminated early due to certain mergers or other changes of control) or we have available cash but fail to make payments when due, generally we may elect to defer payments due under the Tax Receivable Agreement for up to five years if we do not have available cash to satisfy our payment obligations under the Tax Receivable Agreement or if our contractual obligations limit our ability to make these payments. Any such deferred payments under the Tax Receivable Agreement generally will accrue interest. If we were to defer substantial payment obligations under the Tax Receivable Agreement on an ongoing basis, the accrual of those obligations would reduce the availability of cash for other purposes, but we would not be prohibited from paying dividends on our Class A common stock. See “Risk Factors—Risks Related to our Class A Common Stock” in our Annual Report on Form 10-K for the year ended December 31, 2014 for risks related to the Tax Receivable Agreement.

Cash Flows
Our cash flows were as follows for the respective periods (in millions):
  
Three Months
Ended March 31,
 
 
  
2015
 
2014
 
Change
Net cash provided by operating activities
$
19.2

 
$
6.2

 
$
13.0

Net cash used in investing activities
$
(0.4
)
 
$
(0.8
)
 
$
0.4

Net cash used in financing activities
$
(18.0
)
 
$
(7.9
)
 
$
(10.1
)
Three Months Ended March 31, 2015 Compared to the Three Months Ended March 31, 2014

Cash Flows Provided by Operating Activities. Cash flows provided by operating activities for the three months ended March 31, 2015 increased by $13.0 million compared to the three months ended March 31, 2014. The increase was primarily due to an increase in working capital from increased retail gross margin in 2015, which was not impacted by the high cost of supply in the first quarter of 2014 as a result of the extreme weather conditions in the Northeast during that period.

Cash Flows Used in Investing Activities. Cash flows used in investing activities decreased by $0.4 million for the
three months ended March 31, 2015, which was due to decreased capital expenditures on capitalized software in 2015.




38


Cash Flows Used in Financing Activities. Cash flows used in financing activities increased by $10.1 million for the
three months ended March 31, 2015 due primarily to a $19.5 million decrease in our net borrowings under our credit facilities, which was lower in the first quarter of 2015 due to winter cash receipts being immediately used to pay down our facility. These winter cash receipts also funded a $5.0 million distribution and dividend paid in March 2015. These decreases in cash used in financing activities were offset by a $14.4 million decrease in net member contributions.

Credit Facility

Prior to the Offering, SE and SEG were co-borrowers under an $80 million revolving working capital credit facility with a maturity date of July 31, 2015. The total amounts outstanding under this facility prior to the Offering include distributions to the common control owner to fund unrelated operations of an affiliate.

In connection with the Offering, Spark HoldCo, SE and SEG (the “Co-Borrowers”) and Spark Energy, Inc., as guarantor, entered into a new $70.0 million senior secured revolving working capital credit facility (the “Senior Credit Facility”). The Senior Credit Facility has a maturity date of August 1, 2016. If no event of default has occurred, the Co-Borrowers have the right, subject to approval by the administrative agent and certain lenders, to increase the borrowing capacity under the new Senior Credit Facility to up to $120.0 million, which is available to fund expansions, acquisitions and working capital requirements for our operations and general corporate purposes, including distributions.
We borrowed approximately $10.0 million under the new Senior Credit Facility at the closing of the Offering to repay in full the outstanding indebtedness under our previous credit facility that SEG and SE had agreed to be responsible for pursuant to the interborrower agreement. The remainder of indebtedness outstanding under our previous credit facility was paid off by our affiliate with its own funds in connection with the closing of the Offering pursuant to the terms of the interborrower agreement. Following this repayment, our previous credit facility was terminated. We had $20.0 million outstanding on the Senior Credit Facility at March 31, 2015 and had approximately $12.5 million in letters of credit issued as of March 31, 2015.
At our election, interest is generally determined by reference to:
the Eurodollar rate plus an applicable margin of up to 3.0% per annum (based upon the prevailing utilization);
the alternate base rate plus an applicable margin of up to 2.0% per annum (based upon the prevailing utilization). The alternate base rate is equal to the highest of (i) Société Générale’s prime rate, (ii) the federal funds rate plus 0.5% per annum, or (iii) the reference Eurodollar rate plus 1.0%; or
the rate quoted by Société Générale as its cost of funds for the requested credit plus 2.25% to 2.50% per annum.
The interest rate is generally reduced by 25 basis points if utilization under the Senior Credit Facility is below fifty percent. The Senior Credit Facility allows us to issue letters of credit, which reduce availability under Senior Credit Facility, at a cost of 2.00% to 2.50% per annum of aggregate letters of credit issued.
We pay an annual commitment fee of 0.375% or 0.5% on the unused portion of the Senior Credit Facility depending upon the unused capacity. The lending syndicate under the Senior Credit Facility is entitled to several additional fees including an upfront fee, annual agency fee, and fronting fees based on a percentage of the face amount of letters of credit payable to any syndicate member that issues a letter a credit.
The Senior Credit Facility is secured by the capital stock of SE, SEG and the Co-Borrowers’ present and future subsidiaries, all of the Co-Borrowers’ and their subsidiaries’ present and future property and assets, including accounts receivable, inventory and liquid investments, and control agreements relating to bank accounts.


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The Senior Credit Facility contains covenants that, among other things, require the maintenance of specified ratios or conditions as follows:
Maximum Leverage Ratio. Spark Energy, Inc. must maintain a consolidated maximum senior secured leverage ratio, consisting of total liabilities to tangible net worth of not more than 7.0 to 1.0, at any time.
Minimum Net Working Capital. Spark Energy, Inc. must maintain minimum consolidated net working capital at all times equal to the greater of (i) 20% of the aggregate commitments under the Senior Credit Facility, and (ii) $12,000,000.
Minimum Tangible Net Worth. Spark Energy, Inc. must maintain a minimum consolidated tangible net worth at all times equal to the net book value of property, plant and equipment as of the closing date of the Senior Credit Facility plus the greater of (i) 20% of aggregate commitments under the Senior Credit Facility and (ii) $12,000,000.
The borrowing base, which is recalculated and reported monthly, is calculated primarily based on 80 to 90% of the value of eligible accounts receivable and unbilled product sales (depending on the credit quality of the counterparties) and inventory and other working capital assets. The Co-borrowers under the Senior Credit Facility must prepay any amounts outstanding under the Senior Credit Facility in excess of the borrowing base (up to the maximum availability amount).
In addition, the Senior Credit Facility contains customary affirmative covenants. The covenants include delivery of financial statements and other information (including any filings made with the SEC), maintenance of property and insurance, maintenance of holding company status at Spark Energy, Inc., payment of taxes and obligations, material compliance with laws, inspection of property, books and records and audits, use of proceeds, payments to bank blocked accounts, notice of defaults and certain other customary matters. The Senior Credit Facility also contains additional negative covenants that limits our ability to, among other things, do any of the following:

incur certain additional indebtedness;
grant certain liens;
engage in certain asset dispositions;
merge or consolidate;
make certain payments, distributions (as noted below), investments, acquisitions or loans;
enter into transactions with affiliates;
make certain changes in our lines of business or accounting practices, except as required by GAAP or its successor;
store inventory in certain locations;
place certain amounts of cash in accounts not subject to control agreements;
amend or modify billing services agreements and documents;
engage in certain prohibited transactions;
enter into burdensome agreements; and
act as a transmitting utility or as a utility.
Certain of the negative covenants listed above are subject to certain permitted exceptions and allowances.
Spark Energy, Inc. is entitled to pay cash dividends to the holders of the Class A common stock and Spark HoldCo is entitled to make cash distributions to NuDevco and us so long as: (a) no default exists or would result from such a payment; (b) the Co-Borrowers are in pro forma compliance with all financial covenants (as defined above) before and after giving effect to such payment and (c) the outstanding amount of all loans and letters of credit does not exceed the borrowing base limits. Spark HoldCo’s inability to satisfy certain financial covenants or the existence of an event of default, if not cured or waived, under the Senior Credit Facility could prevent us from paying dividends to holders of our Class A common stock.
The Senior Credit Facility contains certain customary representations and warranties and events of default. Events of default include, among other things, payment defaults, breaches of representations and warranties, covenant